Definition. Nature & Characteristics of Entrepreneurship.. Types of Entrepreneurship. Functions of Entrepreneurs. Barriers in entrepreneurship Development. Qualities of an Entrepreneur.

Concept of Small Scale Industries. Growth of SSI in Developing Countries. Position of SSI.

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Definition of Entrepreneurship
“Entrepreneurship is the purposeful activity of an individual or group of individual to initiate, maintain or generate profit by production or distribution of goods or services.”
“Entrepreneurship is an attempt to create value through recognition of business opportunity, risk taking through the communicative and management skills to mobilize human, financial & material resources for a project.”

 Managerial Skills.Nature & Characteristics  Innovation.  Leadership.  High Achievement.  Limited Resources.  Risk Taking. .

Types of Entrepreneurs  Innovative Entrepreneurs. .  Fabian Entrepreneurs.  Drone Entrepreneurs.  Adoptive Entrepreneurs.

Purchasing Input. licences) Upgrading Production Process & Product Quality. Dealing with Public officials ( Taxes.Functions of Entrepreneur            Perceiving market Opportunities. . Marketing of products. Industrial Engineering. New product Development. Command over resources. Managing Production. Managing Customers. Managing Finance.

 Time pressure.Barriers to Entrepreneurship  Lack of market knowledge.  Monopoly. .  Lack of Technical Skills.  Legal Obligation/Regulation.  Lack of Capital.  Social Stigma.  Lack of Business Know how.

 Problem Solving skills.Qualities of an Entrepreneur  Total Commitment & Determination.  Low need for status & power.  Drive to achieve & grow.  Sense of humour.  Risk taker. .  Good decision maker.  Seeking & using feedback.  Innovative.

6. Manufacturing Wholesaling Retailing Services Franchising Outsourcing . 3.OPPORTUNITIES FOR ENTREPRENEURS 1. 5. 4. 2.

The value of annual turnover. it is no longer classified as small. The amount of capital employed 3. 1.SMALL SCALE INDUSTRIES A SSI may be defined in terms of size. Once an enterprise or unit goes beyond the size. The number of person employed 2. The size limit for small firm may be laid down in any one or more of the following criteria. .

TYPES OF SSI SMALL SCALE INDUSTRY: Industrial undertaking. Investment limit is not exceed rupees five crore. wherein the investment limit in fixed assets of plant and machinery does not exceed rupees five crore. 2. ANCILLARY SMALL UNIT: This type of unit is engaged in production of various components and spare parts to be used by a large industrial enterprises to produced the goods for consumer. 1. TINY INDUSTRIES: It is defined as an industrial or business enterprises whose investment in plant and machinery is not more than rupee 25 lakh. 3. .

3. 4. 6. 8. 5. Employment Balanced regional Development Use of local Skills Variety of products Equal Distribution of income Economical Operation Customized products Support to Large scale industries. . 7. 2.ROLE OF SSI IN ECONOMY 1.

86 3626.70 2416.70 392.96 .58 1997-98 1998-99 1999-00 2000-01 4626.87 6454.56 4118.26 16.56 4118.87 6454.65 15.56 444.50 5728.85 18.Growth of SSI In Developing Countries Year Production (Billion ) Employment (Million) Exports (Billion ) Production (Billion) 1993-94 1994-95 1995-96 1996-97 2416.96 16.68 364.15 17.00 253.50 5728.41 5206.58 13.86 3626.42 489.48 2988.72 17.07 290.93 14.79 542.41 5206.48 2988.78 4626.00 599.

Limited Demands Flexibility Personalized services Good relations with employees Support to large industries. 3. 5. 2. Introduction to new product.Reason for Growth of SSI 1. 6. . Development of Entrepreneurship. 7. 4.

It has contributed to the overall growth or the Gross Domestic Product as well as in terms of employment generation and export. Reservation/De-reservation of items for manufacture in the small scale sector is a continuing process regularly monitored by an Advisory committee on Reservation constituted under the IDR Act. One of the measure of the policy support for promoting small scale industries is the policy of reservation of economically viable and technically feasible items for exclusive manufacture in the small scale sector.06. The policy of reservation initiated in 1967 primarily as promotional and protective measure vis-a-vis the large scale sector.2001 . 1984 empowering Government to reserve items for the small scale sector. at present the total number of items reserved for small scale sector are 799 as on 29.The IDR Act was amended in March.Position of SSI The phenomal growth of industries in the Small Scale sector has been striking feature in the economic development of the country since independence. the only exception being the case of large units which undertake minimum level of exports as 75 per cent of their total roduction. grants protection to small scale sector.

70.16% respectively. there has been a steady increase over the previous years ranging between 7%-10% during the period 1990-91 to 1994-95.43%. has direct impact on the growth of the national economy. employment and exports over the years. and 8. On the production front also. from 19. In 199798 the increase over the previous year was registered at 8. their production. The estimated increase for 2000-01 is 8.7%.4% and11.000 units in the year 200001. There has been a steady increase in the number of SSI units. The increase in the year 1998-99 & 1999-2000 were 7.Position of SSI The small scale sector has acquired a prominent place in the socio-economic development of the country during the past four and a half decades.58.000 units in 1990-91.09%. .3% in 1995-96 and 1996-97 respectively. therefore. the increase was 11. Performance of the small scale sector. the number of units has increased to 33. which forms a part of total industrial sector.

e.INVESTMENT LIMITS FOR SSI Small Scale Industrial Undertakings The following requirements are to be complied with by an industrial undertaking to be graded as Small Scale Industrial undertaking w. (Subject to the condition that the unit is not owned. controlled or subsidiary of any other industrial undertaking . An industrial undertaking in which the investment in fixed assets in plant and machinery whether held on ownership terms on lease or on hire purchase does not exceed Rs 5 Crore. 21.12.f.1999.

sub-assemblies. as the case may be. tooling or intermediates.INVESTMENT LIMIT FOR ANCILLARY UNITS Ancillary Industrial Undertakings The following requirements are to be complied with by an industrial undertaking for being regarded as ancillary industrial undertaking: An industrial undertaking which is engaged or is proposed to be engaged in the manufacture or production of parts. components. or the rendering of services and the undertaking supplies or renders or proposes to supply or render not less than 50 per cent of its production or services. to one or more other industrial undertakings and whose investment in fixed assets in plant and machinery whether held on ownership terms or on lease or on hire-purchase. does not exceed Rs 5 Crore. .

.INVESSTMENT LIMIT FOR TINY INDUSTRIES The Enterprises Investment limit in plant and machinery in respect of tiny enterprises is Rs 25 lack irrespective of location of the unit.

They also provide employment to agriculturists who remain idle during a part of the year. In fact. For every worker employed in large scale industries about three workers are engaged in small scale and cottage industries with regard to large scale industry. they have high potential to provide employment to a larger number of people per unit of capital. the healthy growth of small scale industries can be an effective approach to the pressing problem of unemployment in the country. Several empirical studies have revealed that the employment generating capacity of small scale industries in about in times more than that of the large scale industries.ROLE OF SSI IN NATIONAL ECONOMY Employment: Small scale firms use labour-intensive techniques and. therefore. Small firms promote self-employment particularly among the educated and professional class. . Next to agriculture small business constitutes the most popular occupation of people in India.

By providing employment in rural areas they help to check migration and overcrowding in urban areas. Development of decentralized sector also improves the standard of living of people in backward regions.ROLE OF SSI IN NATIONAL ECONOMY Balanced Regional Development: small scale industries promote decentralized development and help to remove regional disparities in industrialization. Small scale firms can be a useful means of rural reconstruction and development. . Decentralized development contributes to the process of self-sustained growth and avoids concentration of industries in particular areas.

small scale industries are very suitable. greater output can be obtained with small investment. In India where the rate of capital formation is low. 27.ROLE OF SSI IN NATIONAL ECONOMY Optimization of Capital: Small scale firms require less capital per unit of output and.706 as compared to Rs. The Annual Surveys of industries reveal that fixed capital per employee in case of small scale industry was Rs. . Small firms also provide quick returns after their establishment on account of short gestation period.757 in case of large scale industry. therefore. 3.

Small business promotes a new cadre of small entrepreneurs and selfemployed and encourages local talent. Small business helps to protect technical skills and handicrafts. The growth of small enterprises helps in tapping talent resources like entrepreneurial skills and small savings specially in rural areas. .ROLE OF SSI IN NATIONAL ECONOMY Mobilization of Local Resources: Small scale industries facilitate Mobilization and utilization of local resources and family skills which might otherwise remain talent or utilized.

About 90 per cent of its exports are of non-traditional items. The exports of small scale industries increased from Rs. 2785 crores in 1985-86. they do not require imports of sophisticated machinery and equipment.ROLE OF SSI IN NATIONAL ECONOMY Exchange Earnings: Small scale industries help in reducing pressure on the country's balance of payments in two ways. Secondly. they earn valuable foreign exchange through exports of their products. . Small scale sector accounts for 40 percent of the exports of non-traditional items and about 25 per cent of the country's total exports. 637 crores in 1975-76 to Rs. First.

Feeder to Large industries: small scale sector is complementary to the large scale industries. Small scale industries manufacture various types of components, spare parts, tools and accessories which are required by the large scale sector.

Social Advantage: Small scale units offer opportunity for an independent way of life to people with small means. They offer savings in social overheads like education, housing and medical facilities by taking industry nearer to the people. They help to raise per capita income an standard of living in the country. A system of widely diffused ownership permits wider participation of people in the process of economic development. Small scale sector provides a base for democracy, socialism and selfgovernment. At present there are about 16 lakh small scale units in India producing more than 500 times. The Seventh Fiver Year Plan envisages a growth rate of 10 per cent in the small scale sector. By the end of 1990 the production of small scale sector is expected to be Rs. 8,000 crores and employment 1.19 crore persons.

Labour intensive Small-scale industries are fairly labour-intensive. They provide an economic solution by creating employment opportunities in urban and rural areas at a relatively low cost of capital investment.

Flexibility Small-scale industries are flexible in their operation. They adopt quickly to various factors that play a large part in daily management. Their flexibility makes them best suited to constantly changing environment.

the activities are mainly carried out by one of the partners or directors. . the decision making process is fast and at times more innovative. As they are their own boss.CHARECTERSTICS OF SSI One-man show A small-scale unit is generally a one-man show.' they provide an outlet for expression of the entrepreneurial spirit. It is mostly set up by individuals. Even some small units are run by partnership firm or company. Therefore.

CHARECTERSTICS OF SSI Use of indigenous raw materials Small-scale industries use indigenous raw materials and promote intermediate and capital goods. They cannot enlarge their business activities due to limited resources. They contribute to faster balanced economic growth in a transitional economy through decentralization and dispersal of industries in the local areas. Localized operation Small-scale industries generally restrict their operation to local areas in order to meet the local and regional demands of the people. .

CHARECTERSTICS OF SSI Lesser gestation period Gestation period is the period after which the return or investment starts. It is the time period between setting the units and commencement of production. Capital will not be blocked for a longer period. . Smallscale industries usually have a lesser gestation period than large industries. This helps the entrepreneur to earn after a short period of time.

CHARECTERSTICS OF SSI Lower Educational level The educational level of the employees of small industries is normally low or moderate. Hardly there is any need of specialized knowledge and skill to operate and manage the SSI. .

CHARECTERSTICS OF SSI Profit motive The owners of small industries are too much profit conscious. . This is one of the reason for which the unit may lead to closure. They always try to keep high margins in their pricing.

food processing industries etc. . For example : Power looms. Ancillary Industries: The industries which are producing parts and components and rendering services to large industries are called as ancillary industries. engineering industries. coin industries.TYPES OF SSI Manufacturing Industries Those units which are producing complete articles for direct consumption and also for processing industries are called as manufacturing industries. khadi industries.

Cottage. Feeder Industries Feeder industries are those which are specializing in certain types of products and services.g. . casting. Handicraft etc.TYPES OF SSI Service Industries Service industries are those which are covering light repair shops necessary to maintain mechanical equipments. welding. Tiny Industries It consists village. e. electro-plating. etc. These industries are essentially machinebased.

 Book Binding.T. .  Automobile repairing workshop.  Screen Printing.DEMEND BASED ANCILLARIES UNIT  I.  Electronic spare parts repair unit. Centre  Cyber Café.  STD/ ISD/ Xerox Centre  Computer Hardware repairing/ servicing.

 Tyre Retreading unit.  Hotel/ Motel.  Computer Paper/ Sheets.  Repairing/ Hiring of earth moving machine.  Packaged Drinking Water.  Spray Painting/ denting.DEMEND BASED ANCILLARIES UNIT  Truck/ Bus Building. .  Ball Point pen.

DEMEND BASED ANCILLARIES UNIT  Infant Food.  Dry Cleaning/ Laundry. .  Phenyle manufacturing.  File Covers/ Folders.  Hair Dresser.

Cattle Feed/ Poultry Feed manufacturing Jelly. Cup & plate making. .RESOURCE BASED ANCILLARY UNITS          Paddy Processing Churn/ Poha making. Badi & Papad making. Oil Mill. Jam & Squash. Spices Grinding Honey Processing.

Industrial policies over the year have focused to promote SSIs through various incentives related to financial. its small size. POLICY FOR SSI After attaining independence in 1947 India adopted mixed economic planning as a method to achieve economic development. employment intensity and its suitability for rural area with limited techno-economic structure. along with a heavy industrial base.GOVT. fiscal and infrastructure measure. . use mainly indigenous technology. Along with the Large Scale sector the thrust was on Small Scale sector because of it decentralized.

.  The primary responsibility for developing small industries by creating infrastructure has been provided to state government .  Central government frame the broad policies and coordinates the efforts of State Government for development of SSIs.INDUSTRIAL POLICY RESOLUTION 1948  SSIs are particularly suited for the utilization of local resources and creation of employment opportunities .

the aim of state policy would be that the development of this sector is integrated with that of large scale industry. To achieve this 128 items were exclusively reserved for production in SSIs. village and small industries by differential taxation or directsubsidies.INDUSTRIAL POLICY RESOLUTION 1956   It stated that besides continuing the policy support to cottage. and 166 items were reserved for exclusive purchase by government from this sector. The focus was to improve the competitive strength of SSIs.  .

market survey.  Technological up gradation was emphasized in traditional sector .INDUSTRIAL POLICY RESOLUTION 1977  504 items were reserved for exclusive production in the small scale industries . such as. were laid down. quality control. production standardization. .  Special marketing arrangement through the provision of services.  The concept of District Industrial Centers (DICs) was introduced to that in each district a single agency could meet all the requirement of SSIs under one roof.

Also. . Small Industries Development Bank of India was established to ensure adequate flow of credit to SSIs. Special emphasis was laid on training of woman and youth under Entrepreneurial Development Programme. assistance was granted to woman entrepreneurs for widening the entrepreneurial base. It created central investment subsidy for this sector in rural and backward area.INDUSTRIAL POLICY RESOLUTION 1990  It raised the investment ceiling in plant and machinery for        SSIs. Stress was reiterated to upgrade technology to improve competitiveness. Reservation of items to be produced by SSIs was increased to 836. Activities of Khadi and Village Industries Commission and Khadi and Village Industrial Board were to expand.

Priority was accorded to small and tiny units in allocation of indigenous and raw materials. Market promotion of products was emphasized through co-operatives.INDUSTRIAL POLICY RESOLUTION 1991  SSIs were exempted from licensing for all articles of      manufacture. Equity participation by other industrial undertaking was permitted up to a limit of 24% of shareholding in SSIs. public institutions and other marketing agencies and corporations. .25 lacs irrespective of location. Factoring services were to launch to solve the problem of delayed payment to SSIs. The investment limit for tiny enterprises was raised to Rs.

. The equity participation by large sector will stimulate technology flow to small sector. Small business houses will be given opportunity for improvement of technology.  Technological development cell in the small industries development organization will be set up.

. 51 item were dereserved in 2002. 75 item in 2003 and 85 items in 2004. 108 in March 2005 and 180 in May 2006.39 items were dereserved           in four phases viz. Now 298 items stand reserved for this sector.subsequently.. 14 item on 2001. 15 items in 1997’ 9 items on 1999 1 item on 2001 and.RESERVATION POLICY  Out of 836 items reserved in 1989.

PURCHASE PREFERENCE POLICY  Under the Store Purchase Policy of the Government 409 items of store were reserved for exclusive purchase from KVIC/Women’s Development Corporation/Small Scale units in 1989. .  This list also includes 8 handicraft items reserved for purchase from the Handicraft Sector. the Committee (set up to consider the question of inclusion of additional items) revised list and 358 items were approved .  In February2004. after deleting items having common nomenclature and addition of some new ones.

 No registration fee.  A consortium to channelize and identify for the production of SSIs both in India and abroad. .PRICE PREFERENCE POLICY  Price preference up to 15%in case of selected items.

Technology acquisition . Classroom and practical training for skill up gradation. Material testing facilities through accredited laboratories. .TECHNICAL ASSISTENCE           Technology audits and benchmarking Technology needs assessment Technology sourcing Application of new acquisition. Common facility support in machining Energy and environment services at selected centers. Product design including Computer Aided Designs.

NEW INITIATIVES  Advisory and Mentoring services  Technology Business Incubators  > Information technology.  > Production design.  > Energy and Environment  > Bio-Technology .  > Electronics and Communications  Suppliers Rating Accreditation Services. .

Product Renewal 2. Product scope and advantages 1. .

3. Generation of Employment. Promotion of Industrialization in rural areas. 2. 5. Support to Large Industries. Cultural Heritage. Better Standard of life. 4.ROLE OF SSI 1. 6. . Removal of Poverty.

10. 2. . Old Technology. 6. 5. 9. Industrial Sickness Global Competition. 7. Difficulties in Marketing. Inadequate Capital. 8.Problems Faced By SSI 1. 3. Storage of Raw Material. Low Quality. Lack of Trained Person. 4. Low productivity. Lack of Management.

 Preference by government department in purchase of items.Measures taken by Government 1. Protective measures  Reservation of items for exclusive production by SSI. .  Giving concession in excise. sales tax etc.

Promotional Measures  Supply of material to all SSI at reasonable prices and setting up of raw material depots to effect quick supply of such material.  Setting up common testing facility centre.  Preference in land allocation and power connection to SSI. .  Provision for concessional finance through commercial banks and other financial institutions.  Setting up industrial estates and provisions of industrial sheds to enterprises on installment basis.2.

silk board to provide technical.  All India coir board. Institutional Measures  Small scale industrial development organization to provide training to SSI.  National small industrial corporation to supply to provide machinery on hire purchase basis.  Khadi and village industries commission for encouraging the production and marketing of handicraft items. .3. financial and marketing facilities.  DIC in all district to serve as the local point of development of SSI.

 Industrial parks for infrastructural development of SSI. Establishment of SIDBI for smooth financing to SSI. .

SETTING UP A SMALL SCALE INDUSTRY Following are the considerations in setting up a small scale industries/enterprises. Choice of form of ownership. Location of plant. 3. Selection of industry. 1. 5. 2. 4. Size of firm. . Financing the proposition.

Tax Planning 11. Human Resources. Plant Layout. 9. 7. Machines and equipment. 10. . 8. Procedural Formalities. Launching the industrial enterprise.6.

7. 5. Appraisal by financial institution. 4. 2.STAGES IN SETTING UP SSI 1. Scanning the environment for identification of business opportunities. Development of product/service idea. Assessment of feasibility of idea. 3. Resource mobilization. 6. . Preparation of business plan. Project launching.

Does the idea fire up your motivation? . ideas need to be filtered through a multi-layer sieve. However.Does it match the needs of your clientele? .IDENTIFICATION OF BUSINESS OPPROTUNITY Before launching an industrial establishment. entrepreneur has to study all the possible factors which may influence the selection of the type of business.Is it a viable business proposition in your area? . This model is shown in the following flow: .Check it out with basic market research .

Consult with the experts .Project conceptualization .Is it a sunrise industry? .Test it out at market place .Look out for competition in the field ..Your business opportunity .

It originates from the real demand for any product or service that an entrepreneur should have a keen and open mind to look for opportunities and generates business idea. This involves a lot of creativity on the part of the entrepreneur.DEVELOPMENT OF IDEA The foremost task of a dynamic entrepreneur is the generation of an idea that is new and appears to be worthwhile for further use. The business idea arises from the opportunity in the market. .

4.While selecting a business idea. It should enable the entrepreneur to solve a current problem existing in the market. 2. . 3. It should enable the use of available raw material. 1. The business idea should enable the entrepreneur to utilize his skills. It should ensure making products that have a demand in market. the following points need adequate consideration.

Environment 4. Society 5. Area study .Following are the sources of business ideas: 1. 2. Researches 3. Survey reports.

Practical steps in setting SSI 1. 3. 5. Project report No objection Certificate Formal sanction of loan Construction of building & installation of machinery. 2. 7. 4. . 6. Detailing manpower Establishing market Network Application for permanent application.

State financial Corporation Registration Finance National Small Industries Corporation Director General of Foreign Trade State trading Corporation State financial Corporation Industrial Development Corporation SIDBI Directorate of drug control Central institute of plastic & eng. Technology Training Infrastructure Raw Material Plant & machinery Marketing Product Standardization SFC Technical Consulting Organization Directorate of Export promotion BIS Directorate of Export promotion Registrar of Trade mark . Electricity board. Local authority Mineral Dev.Institutional Support to SSI Selection of Project DIC. EDI( Entrepreneurship Dev. Corporation Small Ind. Of India National Institute of Small Industry Extension Training DIC. Corporation Mineral & Metal Trading Cor. Tool. Ins.

a project will involve allocation and use of resources and generation of specific results. A project may involve establishment of new plant or it may also involve the provision of additional facilities or ventures. .Project & its Nature A project is the combination of human and nonhuman recourses pooled together in a temporary organization to achieve a specific purpose. Whatever the purpose. The objectives and set of activities differ from one project to another .

Specific Purpose/Objectives 2. Elements of risk 5. Single entity 3. Life cycle . Team Work 4.Project Characteristics 1. Uniqueness 6.

A good business idea must be capable of being converted into feasibility. . He should identify.Project Identification It is concerned with the collection. An entrepreneur is an opportunity seeker. Opportunity is an attractive idea which an entrepreneur accepts as a basis for his investment decision. compilation and analysis of economic data for eventual purpose of locating possible opportunities for the investment and with the development of the characteristics of such opportunities. explore and select the right opportunities.

A good business opportunity must have two major ingredients. 2. . An acceptable return on investment ( ROI). 1. Good market scope.

2. 5. Business opportunity may be for manufacturing a product or a service. 3. limitations and preferences. Understanding own strength. capabilities. Comparative analysis of opportunities available.Process for Selection of Project 1. Start the project. . 4. Exploring all opportunities.

its components.Population. CURRENT SCENE .Exploring Opportunities The process of exploring the opportunities requires intensive efforts and specialized skills. ENVIRONMENT . occupational pattern.Present pattern of trading . Following guideline can help us in opportunity identification.New demands . .Local needs .Emerging trends . 2. 1.Basic features of an area and its resource inventory.

2. change in life cycle. 4. 3. Import and export related ideas Market shift such as change in demand. agricultural. wasted items such as ago waste. 5. Household repair and maintenance. wood waste and metal waste. purchasing power. Special product ideas such as BPO. NGO. KPO. . Resource based idea such as mineral. 6. Government policy.Sources of opportunity 1. marine. change in population.

5. 4.Criteria for selecting a project 1. Location Technology Equipment & Machinery Marketing . 3. Investment. 2.

3. Lack of project management. Non availability of non physical resources such as patents. Non availability of sufficient physical resources. Improper preparation of feasibility report. . Unrealistic project objectives. 2.Problems in Project Identification (A) Internal Constraints 1. 4. 5. unique skills and experience. secret process.

External Constraints
The project may not fulfill socio-economic objectives of country. 2. NOCs, approvals, licenses, foreign collaboration, foreign exchange and other government policies. 3. The procedure and documents of financial institutions and banks may delay the implementation of the project.

Assessment of Viability
It means whether some idea will work or not. Viability is a multivariate concept, i.e., a project has to be viable not only in technical terms but also in economic and commercial terms. Moreover, There is always a possibility that a project that is technically feasible may not be economically viable. The decision to implement a project will be based on the expected revenues that the investment is going to generate. The project can be considered feasible only if it is expected to generate sufficient revenues and profit to justify the investment in it.

Evaluation of Project
Following are the techniques to evaluation of project profitability: 1. Benefit Cost Analysis 2. Discounted Cash Flow method 3. Net Present Value (NPV) 4. Internal Rate of Return(IRR)

the ratio of benefits to cost associated with a particular project producing the product is ascertained and decision is made either to accept or reject the proposal. . A product is considered to be attractive only when the benefits to be derived from its production are much more than the cost associated with it. The net value shall be compared with the total cost associated with project less the salvage value. one has to calculate the benefits as well as disbenefits likely to arise from a product in financial terms. For the purpose of analysis.Benefit Cost Analysis method Under this method.

Benefit Cost Ratio is equal to Benefits.Disbenefits. such a project is economically viable .Maintenance and operation cost Total cost of project-Salvage Value If the value is less then or equal to 1.

The basis of discounted cash flow method is presence of time factor in evaluating the future returns of a project. The time value of money means that the money received in present has more value than an equal amount of money received in future. These drawbacks are removed in DCF. they do not evaluate the time value of money and secondly. Firstly. IRR and NPV methods. . they do not evaluate project profitability over its full life.Discounted Cash Flow Method The traditional methods of evaluating profitability like the accounting rate of return and the payback method suffer from two major deficiencies.

he would prefer to receive 100 Rs today because of increasing value of money and after one year he will get Rs 110 if he invest these money with 10 percent interest.If A is offered the two alternatives of either receiving 100 Rs today or 100 Rs after one year. Under this techniques. . one can get discount value of his money over a long future time.

If the net present value is positive its means project is earning Higher rate of return but if the net present value is negative its means rate of return is lower and some better investment opportunities are required.Net Present Value This method is also recognize the time value of money for evaluating investment proposal. The present value of cash inflow less the present value of cash out flow gives the net present value. . It is similar to IRR method.

Internal Rate Of Return This method uses the discounted cash flow rate which equates the present value of the future cash inflows with the initial investment. . The internal rate of return is the discounted rate which makes the net present value equal to zero. It is a type of discounted cash flow techniques which takes into account the time factor to value the future cash flow. The cash flows through out the life of the project are forecasted and the discount rate is calculated.

IRR= CF0 + CF1 + CF2 + CF3 + ………. CFn (1+r)0 (1+r)1 (1+r)2 (1+r)3 (1+r)n .

2. 3. It involves step by step investigation and development of the project idea. 4. Market Analysis. Management expert. Industrial economist. 1. . A team of the following expertise is informed to investigate the project idea.Project formulation Project formulation is the systematic development of a project idea for the final decision of investment. It is needed to safeguard against risk and difficulties in the implementation of the project. Engineer.

4. 3. Feasibility Analysis Techno-economic analysis Project design and network analysis Input analysis Financial analysis Social cost benefit analysis Project appraisal . 5. 2. 7.Elements of Project Formulation 1. 6.

Feasibility Analysis
It is a process of evaluating the acceptability of a project idea within the limitation of project management and constraints imposed by the environment. The analysis is undertaken to analyzes the desirability of investing in future development of project idea. At the stage of project formulation three alternative can raise. Firstly, the project may appear to be positive and in such case the entrepreneur can proceed to invest further. Secondly, the project may turn out to be not feasible and, therefore, further investment in project idea is ruled out.

Thirdly, the idea is not adequate for arriving at a decision about the feasibility of the project. In such situation, additional information must be collected for taking an appropriate action/decision. Feasibility analysis has two type. Pre-feasibility analysis It refers to preliminary assessment of the project idea which helps in accepting or rejecting it. Normally, this study should be completed within the period of three months to enable entrepreneur to decide weather to accept the new venture or not. It enables to examine the potential demand, size of market, number of competitors, plant, machinery, location, size manpower etc.

Feasibility Analysis It is carried out to get a detailed information on different aspects relating to a project such as economic, technical, managerial, organizational, commercial and financial aspect of project. As compared to pre feasibility analysis with feasibility analysis, this analysis involve more specialized skills and more complicated. Further, the feasibility study is based on additional and more reliable data collected through research. The information gathered in feasibility study and analysis presented in various tables, reports or statement is consolidated into one single report which is called project report or feasibility report.

An optical size of the and adoption of appropriate technology would help in deriving the economies of scale. . It produces necessary information on which the project design can be based.Techno Economic Analysis Techno-economic analysis is primarily concerned with 1)identification of the project demand potential. and 2) selection of the optimal technology suitable for achieving the project objectives. It also indicates weather the economy is in a position to absorb the output of the project.

The interrelationship presented with the help of a network design. .Project Design & Network Analysis It is highly useful for identification and quantification of the project inputs which are very much required for developing the financial and cost benefit analysis. Network design and analysis help in executing the project within the minimum time and ensuring effective utilization of the available resources. This plan is presented in the form of network diagram. Project design defines the individual activities comprising a project and inter-relationship between those activities. Network analysis is concerned with development of the detailed work plan of the project.

quantification and evaluation of project inputs. The resources required for the project are classified as human and non-human resources. The objectives of input analysis are to identify the nature of the resources that a project will consume to estimate the magnitudes of the required resources and to evaluate the possibility of uninterrupted supply of inputs. Human resources refer to manpower and its management while nonhuman resources refers to material. money and machinery.Input Analysis Input analysis involves identification. .

These cost estimates are very much required for developing the financial requirements and cost benefit profile of the project. .Input requirement constitute the basis of cost estimates of the project.

.Financial Analysis The purpose of financial analysis is to identify the financial characteristics of an investment proposition which would determine its financial feasibility. It also helps in examine the feasibility of the project in terms of generating revenues to attain the objectives of the project. This analysis involves the estimates of project costs and revenues and funds required for the project.

It reduce the investment proposition to one common scale so as to permit comparison and eventually investment decision. . profit analysis and fund flow analysis etc to determine the estimated financial performance of the project.Financial analysis uses analytical tools like ratio analysis. It generates data for computing different profitability criteria with a view to establish the project’s worth to the enterprise.

Improvement in domestic resources capacity. increase in foreign exchange earning.Social Cost Benefit Analysis It is an assessment of expected total cost to be incurred and benefits derived out of the project that is under consideration from community point of view. possibility of import substitution. Social benefits includes possibility of financial and out of pockets reduction in service costs. employment generation. . availability of increased resources.

Improvement in living standards and environment etc. reduction in foreign exchange. .Improvement in industrial development. These social cost include financial and out of pocket cost. pollution costs and other spontaneous and instant cost. on the other hand. society is expected to incur scarifies in favour of expected benefits.

It brings out quantitative data which help in project appraisal. economic and financial aspects of a proposal. input analysis.Project Appraisal Appraisal is an independent examination of technical. In fact. . techno-economic analysis. design and network analysis. cost benefit analysis are consolidated to give a final shape to a project which is presented in the form of a project report. commercial. managerial. the outcome of feasibility analysis.

entrepreneur proceeds to prepare a detailed project report. The project report also serves as an important document to process assistance from financial institutions and to fulfill other formalities for implementation of the project.Project Report After feasibility analysis. 2. Estimates for manpower required and material input needed. A project report contains the following information: 1. . competition. Information on technology. It may be noted that project report serves as an action plan in case the entrepreneur proceeds with the implementation of the project. prices etc.

4. Plans for procurement of material input. Projection: production. land lease deed. sales. Documents: Quotations. and profitability 6. arrangement with suppliers of material and machinery.3. . Manpower plans 5.

Financing the project Financing is a critical element for success of a business or industry. Finance facilitates an entrepreneur to bring together the factors of production and produce the desired level of goods or services. . The entrepreneur has to decide the need and sources of finance as per the projection in the project report.

transport etc. water. Sufficient capital to support the operation of the business for initial three months such as purchase of raw material. land. power. . plant & machinery.. 2.e. i. furniture. finished goods. work-in-process. Margin for unplanned expenses called contingencies.Need for Finance The amount of finance depends upon the following factors: 1. building. Adequate money to purchase the fixed assets. 3. tools etc. salary to employee.

.Classification of Financial Needs 1. 2. Fixed capital or Long term capital This is money invested in some fixed assets which are required for long period of time for permanent use. Working Capital or Short term Capital This is the money invested in current assets and is required for short period to meet day to day expenses.

2. Internal Sources The funds which are raised from within the enterprise. 3. . Life Insurance. Deposits and loan given by owner. Owner’s capital called equity.Sources of Finance The sources of finance can be broadly classified into two category: 1. mortgage of building. Personal loan of entrepreneur from PF. partners. etc. directors etc. and may include1.

Subsidies from government department 7. Hire purchase from government department 6. Term loan from financial institutions 5. Credit facilities from financial institutions 4. Borrowing from relatives 2. Borrowing from commercial banks 3. Venture Capital of such institutions ( Money invested by investors ) .External Sources The funds which are raised from external sources and is called debts. This may include1.

Capital Structure The funds raised from internal sources are the ownership capital and called equity. Capital structure is the ratio between debt and equity capital and is expressed as debt-equity ration. The funds raised from external sources are borrowed capital and called debts. The capital structure should have the following features: . The optimum capital structure is the financing mix incurring the least cost out but yielding maximum returns.

. 4.Involve minimum cost and ensure maximum yield. Debts should be within repaying capacity of the enterprise. 1. Should ensure proper control over the operations of enterprise. Flexible to fulfill future requirements of funds. 2. 3.

. recording and analyzing necessary data to judge the marketability of a product.Field Study : Collection of Information The entrepreneur requires a lot of information for taking various decisions and preparation of project report. For collecting the necessary information. methods of marketing and aspect of distribution of products from production to consumer. a detailed field study or market survey is required. Field study involves gathering. The data or information relates to nature of demand. nature of competition.

trade journals etc.The sources of information for field study can be: 1. wholesalers and retailers. 2. . 4. Prospective Customers.. Government publications 3. 5.e. news paper. Industrial Consultations. i. Distributors. Published literature.

1. . It promotes soundness of marketing decision. It provides an effective basis of sales forecast. 2.Benefits of Field Study It helps in having advance idea of consumer acceptance of the production before it is produced on a commercial scale. It gathers data and carries out analysis to discover the market share of the product and location and types of consumers. 4. 3.

Information Relating to Raw Material 1. Price fluctuations in the market. price. tax etc. 4. Lead time required to get the material after ordering. List of manufacturers and suppliers of material required. packing. 2. 3. Discount. Minimum order quantity. 5. .

2. control equipment.Information Relating to Machines & Equipment 1. Requirement of motors. switches. Annual repair and maintenance List of spare parts. 4. . 5. List of manufacturers & suppliers. 3. starters. Availability of machines and equipment.

Information Relating to Competitions 1. 5. 2. 4. 3. Future plan for expansions Market share Strengths and weaknesses. Range of products. Prices Terms & Conditions of competitors. 6. .

2. Annual consumption of customers. Consumption pattern of customers. Purchasing power of supply. 3. 6. Present sources of supply. Customers preferences Degree of satisfaction . 4. 5.Information Relating to Customers 1.

management have to be forward-looking and carry out market and demand analyses of products and develop strategic business policies.DEMAND ANALYSIS Emerging competition in market place is propelling managements to hear the voice of their customers. As an essential part of project formulation and appraisal. . To survive in the market. A major error in demand forecast can throw painstaking capita expenditure on plant capacity and other hardware facility totally out of gear. market and demand analysis is vital so that capacity and facility location can be planned and implemented in line with the market requirements.

FORECAST VERSUS PREDICTION Forecast is an estimate of future events and trends and is arrived at by systematically combining past data and projecting it forward in a predetermine a manner. The subjective considerations may not emerge from any predetermined analysis or approach. . Prediction is an estimate of future events and trends in a subjective manner without taking into account the past data.

. Even in a batch type production. any major mismatch between forecast and manufacture will lead to higher capital tied up in finished products which are slow in selling.NEED FOR DEMAND FORECASTING All business planning starts with forecasting Capital investment. has to relate to demand forecasting. like procurement of raw materials and production planning. High volume high technology mass production systems have further high-lighted the importance of accurate demand forecasts.

Demand forecasting is the estimate of future demand. As the future is always uncertain, forecasting cannot be completely fool proof and correct. However, the very process of forecasting demand in future involves evaluating various forces and factors which influence demand. This exercise is very rewarding in itself as it enables the personnel to know about various market forces, currents, cross-currents and under-currents relevant to the demand behavior.

 Firm Level If the exercise aims at forecasting demand

of firm's products locally at state, region or national level, it is a micro-level of demand forecasting. Sometimes, forecasts are required for company's products in specific industry or market segment.
 Industry Level such a demand forecasting exercise

focuses on an industry as a whole for the region and/or national level. These forecasts may be undertaken by a group of companies or by industry/trade associations.

 National Level Demand forecasts at national level

include parameters like national income, expenditure, index of industrial and/or agricultural production etc. Estimating aggregate demand of products at national level facilitates governmental decisions for imports, exports, pricing policy etc.

Managerial Economists play a leading role in masterminding these forecasts at firm. industry. . Time horizon of these demand forecasts usually varies from 1 to S years and in rare instances upto 10 years. International Level Companies operating in multinational markets would require similar forecasting of demands for its products. trends in consumption etc at international level. national and international levels.

reviewed and revised to take into account changes in design/features of products.METHODS OF FORECASTING. Thus they are most suited to assess consumers reaction to company's products. promotion and place. Opinions of all managers involved at various levels of sales organization are also included in the survey. people. territory. Thus "collective opinion survey forms the basic of market analysis and demand forecasting. changes in selling prices. Herein each salesperson makes an estimate of the expected sales in their respective area. state and/or region.DEMAND  Collective Opinion Survey Sales personnel are closest to the customers and have an intimate feel of the market. price. These estimates are collated. projected advertising and sales promotion campaigns and anticipated changes in competitors :marketing policies covering product. .

direct. usually in their employment.Although this method is simple. salesperson may not have the requisite knowledge and experience .  Salesperson may not prepare the demand estimates with the requisite seriousness and care.  Owing to limited experience. first hand and most acceptable.  Adding together demand estimates of individual salespersons to obtain total demand of the country maybe risky as each person has knowledge about a small portion of market only. it suffers from following weaknesses:  Estimates are based on personal judgment which may not be free from bias.

It is neither realistic nor desirable to query all consumers either through direct contact or through printed questionnaire by mail. survey would involve interviewing them.Survey of Customers Intention Another method of demand forecasting is to carry out a survey of what consumers prefer and intend to buy. a sample survey is carried out for questioning a few representative consumers about what they are planning or intending to buy. If it is a consumer durable product. These surveys serve useful purpose in establishing relationships between:  demand and price  demand and income of consumers  demand and expenditure on advertisement etc . If the product is sold to a few large industrial buyers.

Herein experts in the field of marketing research and demand forecasting are engaged in analyzing economic conditions  carrying out sample surveys of market  conducting opinion polls .Delphi Method of Demand Forecasting Delphi method is a group process and aims at achieving a `consensus' of the members.

demand forecast is worked out in following steps: Coordinator sends out a set of questions in writing to all the experts co-opted on the panel who are requested to write back a brief prediction. Steps 3 and 4 are repeated by the Coordinator to experts with diverse backgrounds until consensus is reached. Based on the summary. edited and summarized together by the Coordinator. .     Based on the above. editing and summarizing the responses. Coordinator designs a new set of questions and gives them to the same experts who answer back again in writing. Written predictions of experts are collated. Coordinator repeats the process of collating.

 Experts give ideas in rotation until all of them are written on the `flip chart'. A panel of seven to ten experts is formed and allowed to interact. . No discussion takes place in this phase and usually 15 to 25 ideas emerge from this format. The idea shared is written on the `flip chart' which everyone can see.  After everyone has written down their ideas. Facilitator asks each expert to share one idea out of own list with the group. discuss 'and rank all the suggestions in descending order as per the following procedure:  Experts sit around a table in full view of one another and are asked to speak to each other.  Facilitator hands over copies of questionnaire needing a forecast and each expert is expected to write down a list of ideas about the questions.Nominal Group Technique This is a further modification of Delphi method of forecasting.

. experts are asked to give in writing ranks to ideas according to their perception of priority. This reduces the number of ideas. experts discuss ideas presented by them. In the next phase.  After completing group discussions. During discussions similar ideas are combined and paraphrased appropriately. Facilitator ensures that all ideas have been adequately discussed.

we take simple average of all past periods .Simple Average Method Among the quantitative techniques for demand analysis. Herein.simple monthly average of all consumption figures collected every month for the last twelve months or simple quarterly average of consumption figures collected for several quarters in the immediate past. simple Average Method is the first one that comes to one's mind. Thus. Simple Average : Sum of Demands of all periods Number of periods .

we must continue with same number of periods. Moving Average Method takes a fixed number of periods and after the elapse of each period. Whatever the period selected. Simple Average : Sum of Demands of Chosen periods Number of chosen periods . four or twenty periods by once it decided.Moving Average Method Method of Simple Average is faulted on account of the fact that all past periods are given same importance whereas it is justifiable to accord higher importance to recent past periods. data for the oldest time period is discarded and the most recent past period is included.it may be three. it must be kept constant .

. bricks etc is dependent upon value of construction contracts at any time. demand for tractors is linked to the agriculture income and demand for cement. For example. demand for consumer goods has a relationship with disposable income of individuals and family.Regression Analysis Past data is used to establish a functional relationship between two variables.

+ Wn x Dn .Weighted Moving Average In Moving Average Method. Depending upon the age of the period. weighted given to the selected number of periods is same.. withage can be varied: Weighted Moving Average = W1 x D1 + W2D2 + ………. This has been refined to include the Weighted Moving Average which allows varying weightages for demands in old periods.

The rationale of project appraisal lies in the fact that the number of project to satisfy the identified needs always exceeds the availability of resources and a choice among alternative projects is to be made.PROJECT APPRAISAL Project appraisal is the analysis of cost and benefits of a proposed project with the purpose of ensuring a rational allocation of limited funds among alternative investment opportunities in view of the specified goals. . Project appraisal is carried out by the financial institutions before financing any project.

. To identify the expected costs and benefits of the project.Project appraisal is undertaken with the following objectives: 1. To arrive at specific and predicted results of the project. To lay down the benchmarks to determine the success or failure of a project. 3. 2.

Appraisal is a conscious scrutiny which helps to design a conceptual framework to monitor and evaluate the project after its execution. Project appraisal is an preinvestment decision making technique whereas the project evaluation is an post analysis of executed project. Project appraisal is done by the financing institution before the project is approved and implemented whereas project evaluation is done after the project has been implemented. .Project Appraisal V/S Project Evaluation Project appraisal is different from project evaluation which is basically an analysis and examination of an executed project.

3. . 2. 4. 1. 5.ASPECTS/TYPES OF PROJECT APPRAISAL FINANCIAL ANALYSIS Following are the methods of assessing firm’s profitability of capital investment proposal: Payback Period Accounting rate of return NPV IRR Profitability Index 1.

In other words it represents the number of years in which the investment is expected to pay itself. Pay back period= original cost of project/Investment Annual cash flow .PAY BACK PERIOD It is defined as the number of years requires for the saving of cost or net cash flow ( after tax but before depreciation) to recoup the original cost of project. A pay back period locate the break even point or period between outgo and income.

This techniques is suitable when: 1. Project carries high risk. Cost is small 2. . 4. Project is productive so soon as investment is made. Project is expected to complete in short period 3.

5. 2. . It is suitable for high risk project. It is useful for the firm which is eager to get back the cash invested in the project as early as possible. It is simple to operate and understand.MERITS OF PAY BACK PERIOD 1. 3. It enable the entrepreneur to select an investment proposal which would yield quick return of funds invested. 4. It is highly suitable when project has shortest gestation period.

2. It does not take into account the cash inflow after pay back period.Limitations 1. 5. 3. . 4. It fails to examine shortest period of payback. It suits to only small project. It avoids the cost of capital. It ignore the time value of money.

This method is also known as average rate of return or return on investment. . This ratio relates project earning to investment. This techniques is based on accounting profits rather than cash inflows. It is defined as the percentage of average profit after tax to capital employed.ACCOUNTING RATE OF RETURN This method is considered to be an improvement over the payback period method as it is considers the earning of a project during its entire economic life.

The following formula is used to calculate the ARR ARR = Average profit after taxes Average Investment .

MERITS OF ARR It is simple to calculate ARR and this method is easily understandable. 2. It is based on readily available accounting information. It considered total benefits during the entire life of the project. 1. 3. .

4. 3.Demerits 1. It places more emphasis on profit and not on cash flows. It fails to differentiate between the size of the investment required for each project. . It ignore time value of money 2. It does not considered the reinvestment of profits earned over a period of time.

It is an assessment of the expected total cost to be incurred and benefits derived out a project that is under consideration from society point of view.ECONOMIC APPRAISAL Economic appraisal is done with a view point of society and economy. The economic appraisal should cover weather it fits into national priorities and contribution to the development of society. . Thus it is done from a wider angle not merely in financial terms. Economic appraisal is also called social cost benefit analysis ( SCBA). A project is considered to be socially viable if the benefits which accrue from the project serve the larger social purpose.

saving and foreign exchange etc. So the acceptance or rejection of a project is depends upon total social or national benefit like impact on planning. SCBA is also relevant to private investment which have to be approved by various government and quasi government agencies which bring to bear larger national consideration in their decision.SCBA is primarily used for evaluating public investment to be financed by the government. employment. .

facilities like transport. airway. location. Following are the determinants of technological appraisal: 1. sources of raw material. Location 4. Type of technology 2. production capacities. process of manufacturing. Scale of operation 3. manpower requirement. size. Layout plan . engineering know how and technical collaboration. railway. latest technology to be adopted etc.TECHNOLOGICAL ANALYSIS It refers to the review of product mix.

9. Construction schedule 6. Effluents and disposal 10. Supply of Fuel.5. Cost estimate . Waste. Supply of water 7. Supply of power 8.

requirement of raw material. To know the commercial viability of the project. the demand and availability of the product to be manufactured of the demand should also be examine. insurance facilities etc. . transportation.COMMERCIAL APPRAISAL The proposed project should be commercially viable. selection of market place. Among all the aspect are examined. banking. it is necessary to examine the demand and availability of the product in the market.

skills and reliability of management. . accounting etc. This would also involve review of their past track record and competence. it is not expected that an entrepreneur should have experience in a particular industry. marketing. Generally. quality of management affects the success of an industrial project to a large extent. but he is supposed to appoint adequate experience personnel in the area of production. Actually.MANAGERIAL APPRAISAL It deals with the evaluation of competencies. finance.

assessment.ENVIRONMENTAL ANALYSIS It refers to environment planning. research. There are two technique of environmental analysis: 1. a wide network of legislation is also in force. Environment Impact Assessment 2. conservation and substantial use of resources. For effective environmental analysis. education. Environment Impact Statement . protection. monitoring.

interpret and communicate information about the impact of an action on human health and well being. Environmental impact statement is a report based on studies. disclosing the likelihood of certain environmental consequences of a proposed project. . predict.Environment impact assessment is defined as a process designed to identify.

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