Unit IV

• Entrepreneurship is the practice of starting new organizations or revitalizing mature organizations, particularly new businesses generally in response to identified opportunities.

• Entrepreneurship is the process of creating value by bringing together a unique package of resources to exploit an opportunity. Entrepreneurship is the pursuit of opportunity without regard to resources currently controlled.

• Is a dynamic process of creating incremental wealth. This wealth is created by individuals who assume the major risks in terms of equity, time and career commitment of providing value for some product or service.

Theories of motivation-

Abraham Maslow’s “Need Hierarchy Theory” :

One of the most widely mentioned theories of motivation is the hierarchy of needs theory put forth by psychologist Abraham Maslow. Maslow saw human needs in the form of a hierarchy, ascending from the lowest to the highest, and he concluded that when one set of needs is satisfied, this kind of need ceases to be a motivator.As per his theory this needs are :(i) Physiological needs :These are important needs for sustaining the human life. Food, water, warmth, shelter, sleep, medicine and education are the basic physiological needs which fall in the primary list of need satisfaction. Maslow was of an opinion that until these needs were satisfied to a degree to maintain life, no other motivating factors can work.(ii) Security or Safety needs :These are the needs to be free of physical danger and of the fear of losing a job, property, food or shelter. It also includes protection against any emotional harm.(iii) Social needs :Since people are social beings, they need to belong and be accepted by others. People try to satisfy their need for affection, acceptance and friendship.(iv) Esteem needs :According to Maslow, once people begin to satisfy their need to belong, they tend to want to be held in esteem both by themselves and by others. This kind of need produces such satisfaction as power, prestige status and self-confidence. It includes both internal esteem factors like self-respect, autonomy and achievements and external esteem factors such as states, recognition and attention.(v) Need for self-actualization : Maslow regards this as the highest need in his hierarchy. It is the drive to become what one is capable of becoming, it includes growth, achieving one’s potential and self-fulfillment. It is to maximize one’s potential and to accomplish something.

Abraham Maslow’s “Need Hierarchy Theory” :

Entrepreneurial Motivation

Motivation and entrepreneurship: important motivational concepts from prior quantitative research-

Previous research has explored several motivations and their effects on entrepreneurship. In this section, we discuss several of these concepts. However, we do not provide a complete review of prior empirical research for two reasons. First, the definitions of entrepreneurship used in previous empirical research on motivation and entrepreneurship are inconsistent withour definition, making it impossible to draw direct implications of prior work for Research using our definition.5 Second, prior research has suffered fromsignificant methodological problems that we discuss below, making prior findings suggestive rather than conclusive, even for research that employs the same definition of entrepreneurship as was used in those studies. Therefore, we discuss previous empirical research only to illustrate the ways in whichmotivation can influence different aspects of the entrepreneurial process.

• Need for achievement-

Within the research domain of personality traits and entrepreneurship, the concept of need for achievement (nAch) has received much attention. McClelland (1961) argued that individuals who are high innAch are more likely than those who are low in nAch to engage inactivities or tasks that have a high degree of individual responsibility for outcomes, require individual skill and effort, have a moderate degree of risk, and include clear feedback on performance. Further, McClelland argued that entrepreneurial roles are characterized ashaving a greater degree of these task attributes than other careers; thus, it is likely that people high in nAch will be more likely to pursue entrepreneurial jobs than other types of roles.

McClelland Acquired Need theory

• Description• Need are shaped over time by our experiences over time. Most of these fall into three

general categories of needs:• Achievement (nAch) • Affiliation (nAff) • Power (nPow) • Acquired Needs Theory is also known as the Three-Need Theory or Learned Need

Theory.• We have different preferences• We will tend have one of these needs that affects us more powerfully than others and

thus affects our behaviors:• Achievers seek to excel and appreciate frequent recognition of how well they are

doing. They will avoid low risk activities that have no chance of gain. They also will avoid high risks where there is a significant chance of failure.

• Affiliation seekers look for harmonious relationships with other people. They will thus tend to conform and shy away from standing out. The seek approval rather than recognition.

• Power seekers want power either to control other people (for their own goals) or to achieve higher goals (for the greater good). They seek neither recognition nor approval from others -- only agreement and compliance.

Kakinada Experiment

• David McClelland (1961), who conducted famous KAKINADA Experiment in Andhra Pradesh, emphasized that "entrepreneur is an energetic, moderate risk taker with high need for achievement".

• Kakinada is an industrial town In Andhra Pradesh. The experiment started in January 1964. Its main objective was to break the barriers of limited aspirations by i9nducing achievement motivation. Total 52 persons were sleeted from business and industrial community. They were given an orientation program at Small Industry Extension

Training Institute (SIET) at Hyderabad. The participants were grouped in 3 batches. They were put under tainting for 3 months. Program was designed in such a manner that it could help the participants to improve imagination and help to motivate them.

The impact of the training program on participants was observed after a period of 2 years. They were assessed by Thematic Assessment Test (TAT). In this TAT ambition related pictures were displayed to the trainees and they were asked to interpret the pictures. It has been observed that participants were positively influenced by the training.

Some successful entrepreneurs in India

1. Dhirubhai Ambani (1933-2002), founder of Reliance Industries 2. Ghanshyam Das Birla (1894-1983), prominent member of the

Birla family 3. Jamsetji Tata (1839-1904), pioneering Indian industrialist, founder

of the Tata Group of companies 4. J.C. Mahindra, co-founder of the Mahindra Group 5. Karsanbhai Patel (1945- ), founder of the Nirma Group 6. Sunil Mittal (1957- ), chairman and managing director of Bharti

Enterprises 7. Narayan Murthy founder of Infosys8. Azim Prmchand founder of Wipro technologies9. Vijay Mallya (1955- ), chairman of the United Breweries Group

and Kingfisher Airlines, member of the upper house of the Indian Parliament, and owner of several sports franchises and teams

Small Scale Industry

Small Scale Industries may sound small but actually plays a very important part in the overall growth of an economy. Small Scale Industries can be characterized by the unique feature of labor intensiveness. The total number of people employed in this industry has been calculated to be near about one crore and ninety lakhs in India, the main proponents of Small scale industries.

The importance of this industry increases manifold due to the immense employment generating potential. The countries which are characterized by acute unemployment problem especially put emphasis on the model of Small Scale Industries. It has been observed that India along with the countries in the Indian continent have gone long strides in this field.

The small scale industries are playing an important role in the GDP of India. The small scale industries have nearly 40% share in the total industrial output and 35% share in exports. The definition of small scale industries have changed from time to time. Earlier they were classified under two categories:

Using power with less than 50 employees. Using no power, but strength of employees is more than 50, less than 100. However according to the latest definition a industry is said to be a small scale industry

if its investment in fixed assets like plants and equipments either held on ownership terms or on lease or on hire purchase is less than Rs 10 million. And it is also essential that the unit is not controlled by any other industrial unit.

• Traditional and Modern Small Scale Industries and Their ProductsThe traditional small scale industries are more labor intensive than capital intensive whereas the modern small scale industries are more capital intensive. The traditional small scale industries use old machinery and their output is also very low. But the modern small scale industries use the modern machinery and the quality of their output is also very good. Some of the traditional small scale industries are that of Khadi and Handloom, coir, village industries etc. The modern small scale industries are that of garments, leather products etc. But in today's scenario, most of the small scale industries in India are modern small scale industries. The products manufactured by these small scale industries are electrical items, hardware, sports goods, stationary items, clocks, watches, automobile parts, chemical products etc. They are also helped by the business enterprises in India in their production.

Need to Boost Small Scale IndustriesRealizing the importance of small scale industries in Indian economy, the government is trying to develop this industry keeping in mind the following aims:

1. To increase employment. 2. To prevent unequal distribution of income. 3. To develop capital investment.

Advantages of Small Scale Industry

1. This industry is especially specialized in the production of consumer commodities.

2. Small scale industries can be characterized with the special feature of adopting the labor intensive approach for commodity production. As these industries lack capital, so they utilize the labor power for the production of goods. The main advantage of such a process lies in the absorption of the surplus amount of labor in the economy who were not being absorbed by the large and capital intensive industries. This, in turn, helps the system in scaling down the extent of unemployment as well as poverty.

• It has been empirically proved all over the world that Small Scale Industries are adept in distributing national income in more efficient and equitable manner among the various participants in the process of good production than their medium or larger counterparts.

• Small Scale Industries help the economy in promoting balanced development of industries across all the regions of the economy.

1. This industry helps the various sections of the society to hone their skills required for entrepreneurship.

2. Small Scale Industries act as an essential medium for the efficient utilization of the skills as well as resources available locally.

Types of small scale Industry

1. Manufacturing Industries- Industries producing complete articles for direct consumption and also processing industries

2. Feeder industries- specializing in certain types of products and services like casting, welding etc.

3. Serving industries- Covering light repairs and maintenance

4. Ancillary industries- producing parts and components and rendering services

5. Mining and quarrying

OBJECTIVES FOR PERIODIC CHANGES IN DEFINITION

• To facilitate growth of this sector with changing economic scenario• To facilitate growth within the framework of social and economic

policy of the country• To encourage technology modernization• To promote entrepreneurship among technically qualified persons• To improve product standards• To create opportunities for in house R&D• To provide greater export thrust

PERFORMANCE OF SSI SECTOR IN INDIA

YearNo. of Registered SSI working Units (Million)No. of Unregistered SSI working Units (Millions)Total SSI working Units (Millions)

Production (Rs. Billion)

Employment (Million Persons)At current pricesAt constant prices (1993-94 prices)

1990-1991 0.79 6.00 6.79 635.18 682.95 15.834

1991-1992 0.87 6.19 7.06 730.72 791.80 16.599

1992-1993 0.99 6.36 7.35 855.81 935.23 17.484

1993-1994 1.06 6.59 7.65 988.04 988.04 18.264

1994-1995 1.16 6.80 7.96 1222.10 1091.16 19.140

1995-1996 1.16 7.12 8.28 1482.90 1216.49 19.793

1996-1997 1.20 7.42 8.62 1684.13 1353.80 20.586

1997-1998 1.20 7.77 8.97 1891.78 1478.24 21.316

1998-1999 1.20 8.14 9.34 2129.01 1594.07 22.055

1999-2000 1.23 8.48 9.71 2342.55 1707.09 22.910

2000-2001 1.31 8.80 10.11 2612.89 1844.28 23.909

2001-2002 1.37 9.15 10.52 2822.70 1956.13 24.909

2002-2003 1.59 9.36 10.95 3119.93 2106.36 26.021

2003-2004 1.70 9.70 11.40 3514.27 2265.81 27.142

2004-2005 1.85 10.11 11.86 4182.63 2515.11 28.257

2005-2006 1.87 10.47 12.34 4762.01 2776.68 29.491

Source : SIDO’s Half Century y DCSSI, Govt. of India, 2004, and Economic Survey, Govt. of India, 2006-2007, Feb. 2007

Procedure to set up SSI

• For starting a Small Scale Industry (Other than Chemical, Chemical based industries and highly polluting industries), entrepreneurs have to first apply to the Directorate of Industries at Pondicherry. Branch Office at Karaikal, Sub Office at Mahe and Yanam, depending on the location of the unit for Provisional SSI Registration, in the form prescribed by the Development Commissioner (SSI), New Delhi.

In case of Chemical and Chemical based industries, entrepreneurs have to first get clearance from the Committee for Chemical Industries through the Directorate of Industries and then approach for provisional SSI registration after its clearance.

All the entrepreneurs irrespective of their size of investment, may approach the 'Single Window Committee' (Functioning in the District Industries Centre) for getting the said clearances expeditiously.

• The District Industries Centre will forward the complete set of applications received from the entrepreneurs to the concerned Municipality/Commune Panchayat. In turn, the Municipality/Commune Panchayat after getting clearances from the concerned Departments/ Organisations, will issue permission for establishment of the industrial units. The Municipalities/Commune Panchayat will obtain the following clearances depending upon the nature of the manufacturing activities:-

(a) NOC on pollution angle from the Department of Science, Technology and Environment (Second working day of every month is earmarked for environmental clearances meeting);

(b) Approval of Factory Building and Machinery lay out from the Inspectorate of Factories;

(c) Site clearance from Town and Country Planning Department;

(d) Permission for land use conversion and ground water clearance from Agricultural Department;

(e) Power feasibility Certificate from Electricity Department;

(f ) Building Plan approval from Pondicherry Planning Authority;

(g) Clearance from Health Department;

(h) Clearance from Fire Service Department;

(i) Clearance from Revenue Department;

(j) License from Food and Drugs Administration;

(k) License from Civil Supplies Department.

• In order to help the entrepreneurs to get the above clearances, procedures are being simplified. Single Window Committee, under the Chairmanship of the Secretary to Government (Industries) is being given a new vigor with meaningful "Single Point Deliberation" with the concerned decision making departments/authorities right in the presence of the promoters of the industries.

High degree of earnestness and transparency is being instilled into the process.

First working day of every month has been earmarked for this meeting.

After installing machinery, entrepreneurs have to get licenses from the concerned Municipality/Commune Panchayat.

License from Inspectorate of Factories and consent orders from the Department of Environment for operation of the unit.

After commencement of regular production, the entrepreneurs have to apply for Permanent SSI Registration to the Directorate of Industries.

Policies governing SSI

• The Small Scale Industrial Sector has emerged as a dynamic and vibrant sector of the economy during the eighties. At the end of the Seventh Plan period, it accounted for nearly 35 percent of the gross value of output in the manufacturing sector and over 40 percent of the total exports from the country. It also provided employment opportunities to around 12 million people.The primary objective of the Small Scale Industrial Policy during the nineties would be to impart more vitality and growth-impetus to the sector to enable it to contribute its mite fully to the economy, particularly in terms of growth of output, employment and exports. The sector has been substantially delicensed. Further efforts would be made to deregulate and debureaucratise the sector with a view to remove all fetters on its growth potential, reposing greater faith in small and young entrepreneurs.All statutes, regulations and procedures would be reviewed and modified, wherever necessary, to ensure that their operations do not militate against the interests of the small and village enterprises.

1.0 TINY ENTERPRISES

1.1 Government have already announced increase in the investment limits in plant and machinery of small scale industries, ancillary units and export – oriented units to Rs 6 million, Rs 7.5 million, and Rs 200 thousand respectively. Such limits in respect of "TINY" ENTERPRISES would now be increased from the present Rs 200 thousand to Rs. 500 thousand, irrespective of location of the unit. Limit in plant and machinery for determining the status of SSI/Ancillary units as on date is Rs 10 million. For tiny it is Rs 2.5 million and for SSSBE Rs 500 thousand.

1.2 Service sub-sector is a fast growing area and there is need to provide support to it in view of its recognized potential for generating employment. Hence all Industry-related service and business enterprises, recognized as small scale industries and their investment ceilings would correspond to those of Tiny enterprises.

1.3 A separate package for the promotion of Tiny Enterprises is now being introduced. This constitutes the main thrust of Government’s new policy.

1.4 While the small scale sector (other than ‘Tiny Enterprises’) would be mainly entitled to one-time benefits (like preference in land allocation/power connection, access to facilities for skill/technology up gradation), the ‘Tiny’ enterprises would also be eligible for additional support on a continuing basis, including easier access to institutional finance, priority in the Government Purchase Programme and relaxation from certain provisions of labour laws.

1.5 It has also been decided to widen the scope of the National Equity Fund Scheme to cover projects up to Rs. 1 million for equity support (up to 15 per cent). Single Window Loan Scheme has also been enlarged to cover projects up to Rs 2 million with working capital margin up to Rs 1 million. Composite loans under Single Window Scheme, now available only through State Financial Corporations (SFCs) and twin function State Small Industries Development Corporation (SSIDCs), would also be channelised through commercial banks. This would facilitate access to a larger number of entrepreneurs.

• 2.0 FINANCIAL SUPPORT MEASURES

2.1 Inadequate access to credit – both short term and long term – remains a perennial problem facing the small scale sector. Emphasis would henceforth shift from subsidized/cheap credit, except for specified target groups, and efforts would be made to ensure both adequate flow of credit on a normative basis, and the quality of its delivery, for viable operations of this sector. A special monitoring agency would be set up to oversee that the genuine credit needs of the small scale sector are fully met.

2.2 To provide access to the capital market and to encourage modernization and technological up gradation, it has been decided to allow equity participation by other industrial undertakings in the SSI, not exceeding 24 per cent of the total shareholding. This would also provide a powerful boost to ancillarisation & sub-contracting, leading to expansion of employment opportunities.

2.3 Regulatory provisions relating to the management of private limited companies are being liberalized. A Limited Partnership Act will be introduced to enhance the supply of risk capital to the small scale sector. Such an Act would limit the financial liability of the new and non-active partners/entrepreneurs to the capital invested.

2.4 A beginning has been made towards solving the problem of delayed payments to small industries by setting up of ‘factoring’ services through Small Industries Development Bank of India (SIDBI). Network of such services would be set up throughout the country and operated through commercial banks. A suitable legislation will be introduced to ensure prompt payment of Small Industries’ bills.

• 3.0 INFRASTRUCTURAL FACILITIES3.1 To facilitate location of industries in rural/backward areas and to promote stronger linkages between agriculture and industry, a new Scheme of Integrated Infrastructural Development (including Technological Back-up Services) for Small Scale Industries would be implemented with the active participation of State Governments and financial institutions. A beginning in this direction will be made this year itself.

3.2 A Technology Development Cell (TDC) would be set up in the Small Industries Development Organization (SIDO) which would provide technology inputs to improve productivity and competitiveness of the products of the small scale sector. The TDC would coordinate the activities of the Tool Rooms, Process-cum-Product Development Centers (PPDCs), existing as well as to be established under SIDO, and would also interact with the other industrial research and development organizations to achieve its objectives.

3.3 Adequacy and equitable distribution of indigenous and imported raw materials would be ensured to the small scale sector, particularly the tiny sub-sector. Policies would be so designed that they do not militate against entry of new units. Based on the capacity needs, Tiny/Small Scale units would be given priority in allocation of indigenous raw materials.

3.4 A proper and adequate arrangement for delivery of total package of incentives and services at the District level will be evolved and implemented.

4.0 MARKETING AND EXPORTS

4.1 In spite of the vast domestic market, marketing remains a problem area for small and tiny enterprises. Mass consumption labor intensive products are predominantly being marketed by the organized sector. The tiny/small scale sector will be enabled to have a significant share of such markets. In addition to the existing support mechanism, market promotion would be undertaken through cooperative/public sector institutions, other specialized/professional marketing agencies and consortia approach, backed up by such incentives, as considered necessary.

4.2 National Small Industries Corporation (NSIC) would concentrate on marketing of mass consumption items under common brand name and organic links between NSIC and SSIDCs would be established.

4.3 Government recognizes the need to widen and deepen complementarily in production programmes of large/medium and small industrial sectors. Parts, components, sub-assemblies, etc. required by large public/private sector undertakings would be encouraged for production in a techno-economically viable manner through small scale ancillary units. Industry associations would be encouraged to establish sub-contracting exchanges, in addition to strengthening the existing ones under the SIDO. Emphasis would also be laid on promotion of a viable and competitive ‘component’ market.

4.4 Though the Small Scale Sector is making significant contribution to total exports, both direct and indirect, a large potential remains untapped. The SIDO has been recognized as the nodal agency to support the small scale industries in export promotion. An Export Development Centre would be set up in SIDO to serve the small scale industries through its network of field offices to further augment export activities of this sector.

• 5.0 MODERNIZATION, TECHNOLOGICAL AND QUALITY UP GRADATION

5.1 A greater degree of awareness to produce goods and services conforming to national and international standards would be created among the small scale sector.

5.2 Industry Associations would be encouraged and supported to establish quality counseling and common testing facilities. Technology Information Centers to provide updated knowledge on technology and markets would be established.

5.3 Where non-conformity with quality and standards involves risk to human life and public health, compulsory quality control would be enforced.

5.4 A reoriented Programme of modernization and technological up gradation aimed at improving productivity, efficiency and cost effectiveness in the small scale sector would be pursued. Specific industries in large concentrations/clusters would be identified for studies in conjunction with SIDBI and other banks. Such studies will establish commercial viability of modernization prescriptions, and financial support would be provided for modernization of these industries on a priority basis.

5.5 Indian Institutes of Technology (IITs) and selected Regional/other Engineering Colleges will serve as Technological Information, Design and Development Centers in their respective command areas.

• 6.0 PROMOTION OF ENTREPRENEURSHIP

6.1 Government will continue to support first generation entrepreneurs through training and will support their efforts. Large number of EDP trainers and motivators will be trained to significantly expand the Entrepreneurship Development Programmes (EDP). Industry Associations would also be encouraged to participate in this venture effectively.

6.2 EDP would be built into the curricula of vocational and other degree level courses.

6.3 Women entrepreneurs will receive support through special training Programme. Definition of "Women Enterprises" would be simplified. The present stipulation regarding employment of majority of women workers would be dispensed with and units in which women entrepreneurs have a majority shareholding and management control, would be defined as "Women Enterprises".

• 7.0 SIMPLIFICATION OF RULES AND PROCEDURES7.1 The persistent complaint of small scale units of being subjected to a large number of Acts and Laws, being required to maintain a number of registers and submit returns, and face an army of inspectors, would be attended to within a specified time frame of three months.

7.2 Procedures would be simplified, bureaucratic controls effectively reduced, unnecessary interference eliminated and paper work cut down to the minimum to enable the entrepreneurs to concentrate on production and marketing functions.

Unit V

Factors governing selection of site

• Availability of raw materials• Availability of labors• Availability of water• Availability transport facilities• Nearness of market• Availability of land• Supply of power • Availability of banks• Availability of ancillary materials and services

• PREPARATION OF PROJECT REPORT1. After the market survey and final selection of the products a project profile is to be

prepared. This is a brief description of the project and would include the following details:

• Introduction about the promoter, giving his complete Bio-data(i.e. age, educational and professional qualification, Past experience, Present activity and relationship with each other in case of partnership concerns).

2. Manufacturing process. All operations, which are to be carried out from the Raw Material stage to be finished stage, are to be explained in detail.

3. Market Survey report that has already been prepared, is to be included. 4. Installed capacity of the plant, capacity utilization, during initial 1-3years and Annual

Sales. 5. Complete details about the land and building (e.g. cost, area etc.). These are to be

supposed by documentary evidence and building plans prepared by an approved Architect.

6. Details of the Plant Machinery. To be supported with quotations from three different suppliers. This should include expenses incurred on taxes, transportation, installation, accessories etc.

7. Details of the Annual requirement of Raw Material and consumables, also to be supported with quotations.

8. All annual expenses (e.g. Utilities, Administrative expenses, Repair and Maintenance, Salaries, Selling expenses, packing and forwarding expenses etc).

9. Working capital requirement, showing the margin on working capital and Bank finance required. Items considered for working capital are:

• Raw material stock • Finished Goods stock • Work in process • Bills receivable • Working expenses 10. Cost of the project : The items to be included in this area as follows: • Land • Building • Plant and Machinery • Misc. Fixed Assets • Contingencies • Pre-operative Expenses • Margin on Working Capital Means of Finance• Term loan • Promoters Contribution • Subsidy (if applicable) • Special Capital Assistance (if applicable) (or seed capital) • Following Annexure are to be included in the Feasibility Report.11. Calculation of Interest and Repayment of Term Loan: • The repayment schedule is prepared in equal Annual installments according to the repayment

period allowed by the financial institution. Along with this, the interest for each year is calculated at the rate applicable in the financial institution.

12. Calculation of Depreciation: • The depreciation of Building, Machinery and

miscellaneous fixed assets is calculated for the complete repayment period

13. The cost of production and profitability:• This is calculated for the repayment period and would

include all direct and indirect annual recurring expenses. 14. Debt Service Coverage Ratio:• the method for calculation the D.S.C.R. is given below:

Calculate the total (A), of • Profit after Tax • Depreciation • Interest on term loan• Then the total (B), of• Repayment of term loan and interest on term loan• Average D.S.C.R. is A/B

15. Cash Flow Statement:• Sources of funds is calculated by adding up the following for the complete repayment period: • Profit before tax with interest added back • Depreciation • Increase in Term Loan • Increase in Bank Finance • Increase in Promoters Contribution • Then calculate disposition of funds by totalling• Increase in Fixed Assets • Decrease in Term Loan • Increase in Current Assets • Interest on Term Loan and Working Capital • Income Tax• Total of sources of funds - total of Disposition of funds = Surplus/Deficit Opening Balance +

Surplus = Closing Balance (Starting from nil doing 1st year)• This is completed for the complete repayment period16. Projected Balance Sheet:• Preparation of project balance sheet as follows: • Reserves and Surplus • Term Loan • Promoter's Contribution • Bank Borrowing (Bank Finance of working Capital) • Assets : Total of-• Net Block Assets • Fixed assets- Depreciation (cumulate Depreciation over the operating years) • Current Assets • Cash and bank Balance • The total of liabilities and total Assets should tally for each operating year individually, for a correct

Balance Sheet.

17. Break Even Point:• This is the level of production at which the unit is running

at no profit no loss. Hence , it is essential to calculate the BEP to ascertain the level of production at which the units starts earning profits. It is calculated as follows:BEP=( Fixed Cost * Percentage of optimum cap. Utilization) * 100/ contributionContribution = Sales - Variable CostThis is calculated for the year during which the unit reaches optimum capacity utilization.

• After preparation of the project Report the Entrepreneur is required to get the provisional Registration Certificate from the concerned District Industries Center, and the Application for the Term loan and Working Capital with the Financial Institution/ Bank Depending upon the scheme under which he wishes to apply.

• Check List of Document to be submitted along with the loan application• The number of documents shall depend upon product size, nature and location of project • Prescribe application form in Duplicate • Project Report in Duplicate • List of total movable and immovable Assets of the promoters. • Income Tax and Wealth Tax details of last three years, with copies of Assessment / Return if

applicable. • Provisional Registration Certificate from the concerned District Industries Centre. • Memorandum of Articles of Association and Certificate of in corporation (in case of Company). • Certified copy of Registration Certificate issued by the Registrar of firms ( if partnership concern)

if forms 'A' and 'C'. • Registration with the Tourism Department, and the license for eating house in case of Hotel

Industry. • Permission/license from Competent Authority (in case of Textile, Drugs, Foods etc.). • Certified copy of sale deed in respect of land. (The land should be in the name of sole

proprietor/partner/company whichever applicable

OR

• Rent agreement in case of rented premises. • Three quotation in respect of each item of plant and machinery and raw material, proposed to be

purchased. • Details of power requirement and tie-up with State Electricity Board. • Copy of instructions to your Bankers to give full information about the concern on request to State

Financial Corporation. • Permission from Water Pollution Control Board. • Approved Building plan from Competent Authority with cost estimates

Ratio Analysis• Compare the performance of the company for

three successive years

• The absolute numbers change so compare ratios

• Compare two companies of differing size but from the same industry, e.g, Infosys and Mastek

• Calculate industry-wide numbers (net profit margins for automobile companies)

Lenders’ need it for carrying out the following

• Technical Appraisal• Commercial Appraisal• Financial Appraisal• Economic Appraisal• Management Appraisal

It’s a tool which enables the banker or lender to arrive at the following factors :

• Liquidity position• Profitability• Solvency• Financial Stability• Quality of the Management• Safety & Security of the loans & advances to

be or already been provided

As Percentage - such as 25% or 50% . For example if net profit is Rs.25,000/- and the sales is Rs.1,00,000/- then the net profit can be said to be 25% of the sales.

As Proportion - The above figures may be expressed in terms of the relationship between net profit to sales as 1 : 4.

As Pure Number /Times - The same can also be expressed in an alternatively way such as the sale is 4 times of the net profit or profit is 1/4th of the sales.

Balance Sheet RatioP&L Ratio or Income/Revenue Statement RatioBalance Sheet and Profit & Loss Ratio

Financial Ratio Operating Ratio Composite Ratio

Current RatioQuick Asset RatioProprietary RatioDebt Equity Ratio

Gross Profit RatioOperating RatioExpense RatioNet profit RatioStock Turnover Ratio

Fixed Asset Turnover Ratio, Return on Total Resources Ratio, Return on Own Funds Ratio, Earning per Share Ratio, Debtors’ Turnover Ratio,

• Current Ratio : It is the relationship between the current assets and current liabilities of a concern.

Current Ratio = Current Assets/Current Liabilities If the Current Assets and Current Liabilities of a concern are

Rs.4,00,000 and Rs.2,00,000 respectively, then the Current Ratio will be : Rs.4,00,000/Rs.2,00,000 = 2 : 1

The ideal Current Ratio preferred by Banks is 1.33 : 1

• Net Working Capital : This is worked out as surplus of Long Term Sources over Long Tern Uses, alternatively it is the difference of Current Assets and Current Liabilities.

NWC = Current Assets – Current Liabilities

3. ACID TEST or QUICK RATIO : It is the ratio between Quick Current Assets and Current Liabilities.

Quick Current Assets : Cash/Bank Balances + Receivables upto 6 months + Quickly realizable securities such as Govt. Securities or quickly marketable/quoted shares and Bank Fixed Deposits

Acid Test or Quick Ratio = Quick Current Assets/Current Liabilities

Example : Cash 50,000Debtors 1,00,000Inventories 1,50,000 Current Liabilities 1,00,000Total Current Assets 3,00,000

Current Ratio = > 3,00,000/1,00,000 = 3 : 1Quick Ratio = > 1,50,000/1,00,000 = 1.5 : 1

• DEBT EQUITY RATIO : It is the relationship between borrower’s fund (Debt) and Owner’s Capital (Equity).

Long Term Outside Liabilities / Tangible Net Worth

Liabilities of Long Term Nature

Total of Capital and Reserves & Surplus Less Intangible Assets

For instance, if the Firm is having the following :

Capital = Rs. 200 Lacs Free Reserves & Surplus = Rs. 300 Lacs Long Term Loans/Liabilities = Rs. 800 Lacs

Debt Equity Ratio will be => 800/500 i.e. 1.6 : 1

5. PROPRIETARY RATIO : This ratio indicates the extent to which Tangible Assets are financed by Owner’s Fund.

Proprietary Ratio = (Tangible Net Worth/Total Tangible Assets) x 100 The ratio will be 100% when there is no Borrowing for purchasing of Assets.

6. GROSS PROFIT RATIO : By comparing Gross Profit percentage to Net Sales we can arrive at the Gross Profit Ratio which indicates the manufacturing efficiency as well as the pricing policy of the concern.

Gross Profit Ratio = (Gross Profit / Net Sales ) x 100

Alternatively , since Gross Profit is equal to Sales minus Cost of Goods Sold, it can also be interpreted as below : Gross Profit Ratio = [ (Sales – Cost of goods sold)/ Net Sales] x 100 A higher Gross Profit Ratio indicates efficiency in production of the unit.

7. OPERATING PROFIT RATIO : It is expressed as => (Operating Profit / Net

Sales ) x 100

Higher the ratio indicates operational efficiency

1. NET PROFIT RATIO :

It is expressed as => ( Net Profit / Net Sales ) x 100

It measures overall profitability.

9. STOCK/INVENTORY TURNOVER RATIO :

(Average Inventory/Sales) x 365 for days (Average Inventory/Sales) x 52 for weeks

(Average Inventory/Sales) x 12 for months

Average Inventory or Stocks = (Opening Stock + Closing Stock) ----------------------------------------- 2 . This ratio indicates the number of times the inventory is rotated during the relevant accounting period

10. DEBTORS TURNOVER RATIO : This is also called Debtors Velocity or Average Collection Period or Period of Credit given .

(Average Debtors/Sales ) x 365 for days (52 for weeks & 12 for months)

11. ASSET TRUNOVER RATIO : Net Sales/Tangible Assets

12. FIXED ASSET TURNOVER RATIO : Net Sales /Fixed Assets

13. CURRENT ASSET TURNOVER RATIO : Net Sales / Current Assets

14. CREDITORS TURNOVER RATIO : This is also called Creditors Velocity Ratio, which determines the creditor payment period.

(Average Creditors/Purchases)x365 for days (52 for weeks & 12 for months)

15. RETRUN ON ASSETS : Net Profit after Taxes/Total Assets 16. RETRUN ON CAPITAL EMPLOYED :

( Net Profit before Interest & Tax / Average Capital Employed) x 100 Average Capital Employed is the average of the equity share capital and long term funds provided by the owners and the creditors of the firm at the beginning and end of the accounting period.

Composite Ratio

17. RETRUN ON EQUITY CAPITAL (ROE) : Net Profit after Taxes / Tangible Net Worth

• EARNING PER SHARE : EPS indicates the quantum of net profit of the year that would be ranking for dividend for each share of the company being held by the equity share holders.

Net profit after Taxes and Preference Dividend/ No. of Equity Shares

19. PRICE EARNING RATIO : PE Ratio indicates the number of times the Earning Per Share is covered by its market price.

Market Price Per Equity Share/Earning Per Share

20. DEBT SERVICE COVERAGE RATIO : This ratio is one of the most important one which indicates the ability of an enterprise to meet its liabilities by way of payment of installments of Term Loans and Interest thereon from out of the cash accruals and forms the basis for fixation of the repayment schedule in respect of the Term Loans raised for a project. (The Ideal DSCR Ratio is considered to be 2 )

PAT + Depr. + Annual Interest on Long Term Loans & Liabilities --------------------------------------------------------------------------------- Annual interest on Long Term Loans & Liabilities + Annual Installments payable on Long Term Loans & Liabilities ( Where PAT is Profit after Tax and Depr. is Depreciation)

LIABILITES ASSETSCapital 180 Net Fixed Assets 400Reserves 20 Inventories 150Term Loan 300 Cash 50Bank C/C 200 Receivables 150Trade Creditors 50 Goodwill 50

Provisions 50

800 800

EXERCISE 1

• What is the Net Worth : Capital + Reserve = 200• Tangible Net Worth is : Net Worth - Goodwill = 150 • Outside Liabilities : TL + CC + Creditors + Provisions = 600

• Net Working Capital : C A - C L = 350 - 250 = 50 • Current Ratio : C A / C L = 350 / 300 = 1.17 : 1• Quick Ratio : Quick Assets / C L = 200/300 = 0.66 : 1

EXERCISE 2

LIABILITIES 2005-06 2006-07 2005-06 2006-07

Capital 300 350 Net Fixed Assets 730 750

Reserves 140 160 Security Electricity 30 30Bank Term Loan 320 280 Investments 110 110Bank CC (Hyp) 490 580 Raw Materials 150 170Unsec. Long T L 150 170 S I P 20 30Creditors (RM) 120 70 Finished Goods 140 170Bills Payable 40 80 Cash 30 20Expenses Payable 20 30 Receivables 310 240

Provisions 20 40 Loans/Advances 30 190

Goodwill 50 50

Total 1600 1760 1600 1760

1. Tangible Net Worth for 1st Year : ( 300 + 140) - 50 = 390

2. Current Ratio for 2nd Year : (170 + 20 + 240 + 2+ 190 ) / (580+70+80+70) 820 /800 = 1.02

3. Debt Equity Ratio for 1st Year : 320+150 / 390 = 1.21

Exercise 3.

LIABIITIES ASSETSEquity Capital 200 Net Fixed Assets 800Preference Capital 100 Inventory 300Term Loan 600 Receivables 150

Bank CC (Hyp) 400 Investment In Govt. Secu. 50

Sundry Creditors 100 Preliminary Expenses 100Total 1400 1400

1. Debt Equity Ratio will be : 600 / (200+100) = 2 : 1

2. Tangible Net Worth : Only equity Capital i.e. = 200

3. Total Outside Liabilities / Total Tangible Net Worth : (600+400+100) / 200 = 11 : 24. Current Ratio will be : (300 + 150 + 50 ) / (400 + 100 ) = 1 : 1

LIABILITIES ASSETSCapital + Reserves 355 Net Fixed Assets 265P & L Credit Balance 7 Cash 1Loan From S F C 100 Receivables 125Bank Overdraft 38 Stocks 128Creditors 26 Prepaid Expenses 1Provision of Tax 9 Intangible Assets 30

Proposed Dividend 15

550 550

• What is the Current Ratio ? Ans : (125 +128+1+30) / (38+26+9+15) : 255/88 = 2.89 : 1

Q What is the Quick Ratio ? Ans : (125+1)/ 88 = 1.43 : 11

Q. What is the Debt Equity Ratio ? Ans : LTL / Tangible NW = 100 / ( 362 – 30) = 100 / 332 = 0.30 : 1

Exercise 4.

LIABILITIES ASSETSCapital + Reserves 355 Net Fixed Assets 265P & L Credit Balance 7 Cash 1Loan From S F C 100 Receivables 125Bank Overdraft 38 Stocks 128Creditors 26 Prepaid Expenses 1Provision of Tax 9 Intangible Assets 30

Proposed Dividend 15

550 550

Q . What is the Proprietary Ratio ? Ans : (T NW / Tangible Assets) x 100 [ (362 - 30 ) / (550 – 30)] x 100 (332 / 520) x 100 = 64%Q . What is the Net Working Capital ? Ans : C. A - C L. = 255 - 88 = 167

Q . If Net Sales is Rs.15 Lac, then What would be the Stock Turnover Ratio in Times ? Ans : Net Sales / Average Inventories/Stock 1500 / 128 = 12 times approximately

Exercise 4. contd…

LIABILITIES ASSETSCapital + Reserves 355 Net Fixed Assets 265P & L Credit Balance 7 Cash 1Loan From S F C 100 Receivables 125Bank Overdraft 38 Stocks 128Creditors 26 Prepaid Expenses 1Provision of Tax 9 Intangible Assets 30

Proposed Dividend 15

550 550

A. What is the Debtors Velocity Ratio ? If the sales are Rs. 15 Lac.

Ans : ( Average Debtors / Net Sales) x 12 = (125 / 1500) x 12 = 1 month

Q. What is the Creditors Velocity Ratio if Purchases are Rs.10.5 Lac ? Ans : (Average Creditors / Purchases ) x 12 = (26 / 1050) x 12 = 0.3 months

Exercise 4. contd…

Unit VI

District Industries Center

• Main Activity- • To develop and promote Cottage and Small Scale Industries in the district. The Small

Scale Industries (SSI) means the Industries with investment upto Rs 1 (one) crore in plant & machinery

• FINANCIAL ASSISTANCE SCHEMES (DEPARTMENTAL) • 1) Prime Minister Rozgar Yojona (PMRY)

It is a self-employment scheme for educated unemployed youth with eligibility...a) Class VIII passedb) Age – 18 to 35 years (relaxable upto 45 years for SC / ST / Women / Physically handicapped / Ex-Servicemen)c) Project upto Rs 2.00 lakh for Industries/Service and Rs 1.00 lakh for Businessd) Annual family income – Rs 40,000/- (Max)

• 2) Normal Bank Finance SchemeIf is one of the major schemes for setting up SSI unit. The Projects/Schemes for the purpose should have sufficient equity participation.

• 3) Loan Under BSAI ActThis assistance is mainly for Handicrafts Sector. Limit of loan upto Rs 10,000/-. The rate of interest is 8% with a rebate of 2.5% on regular re-payment.

• INCENTIVE SCHEME FOR SSI-West Bengal Incentive Scheme 2000 – SSI units commenced after 01.01.2000 will be entitled for this scheme. The features of this scheme are...a) 25% subsidy on fixed capital investment (Land, Building, Plant & Machinery)b) 50% (60% in case of agro and food processing units, IT, Electronics industry) subsidy on paid interest on Bank/FI loan for consecutive 7 years and 9 yearsc) Remission of Stamp Duty and Registration Fee on purchase of Land or Buildings.

• FACILITIES AND OTHER SERVICES • 1. S.S.I. Registration

a) Provisional/Temporary Registration : Before starting the SSI Unit, this registration is issuedb) Permanent/Final Registration : After commencement of production of SSI Unit, this registration is issued

• 2. Preference for power connection     Priority is given for WBSEB electric power connection to registered SSI Unit

• 3. Project/Scheme Vetting     Project Scheme of SSI unit is vetted for technical feasibility

• 4. Marketing Assistance to Handicraft Products    Given through participation in WB Handicrafts Expo'

• 5. Special Assistance rendered    For setting up Haldia Petrochemicals Downstream Units.

• 6. National Project of Bio-Gas Development (NPBD)    Construction of Bio-gas plant (family size 1-cum to 10-cum). Main usage are...    a) Domestic cooking and lighting    b) Production of organic manure (enriched with NPK) for better yield in agricultural, horticultural & pisicultural sectors    c) Helps to maintain ecological balance. Provision of Govt. subsidy to all categories of beneficiaries

• Pollution Clearance for SSI Units     Pollution Clearance Certificate (consent for starting all categories, viz. Green, Orange, Red of SSI units) is issued on behalf of WBPCB and also the consent to operate for Green category only

• 8. Training Programme Some training programmes on different trades as mentioned below are organised from time to time for prospective entrepreneurs and handicraft artisans 

• Entrepreneurship Development Programme • Special Training Programmes for Women/Physically Handicapped and Backward Classes

(plumbing, pump-set repair, umbrella repair, batik print, etc.) • Transfer of Skill and Service Centres (terracotta) • Design Development/Craft Development for Handicraft Industries, Cane and Bamboo

Products, Wood Carving, Solapith work • 9. REGP/BSKP/Minority Loans

Technical vetting of project/scheme is done here for these Extra departmental financial assistance schemes...

• a) REGP (Rural Employment generation programme)It is launched by Khadi and Village Industries Commission. The main features are...

- Meant only for rural areas of population (less that 20,000) and for viable village-industry projects.- Maximum limit – projects upto Rs 10.0 lakhs and Rs 25.0 lakhs for institution @ 30% project cost upto Rs 10.00 lakhs will be provided as Margin Money in the form of backend subsidy after 2 years.

• b) BSKP:  Bangla Swanirbhar Karma Sangthan PrakalpaThis Scheme is promoted by Youth Welfare Department. The key features are... 

• For municipal areas only • Projects on industry, service & business sectors • Projects upto Rs 10.0 lakhs for individual @ 20% Govt. Subsidy on

the project cost • c) MINORITY: 

Self-employment Project for Minority Communities only. Scheme is financed and promoted by West Bengal Minorities Development & Finance Corporation (WBMDFC). The main features are...  

• Age – 18 to 45 years • Annual family income – Rs 42,142/- for urban area and Rs 31,952/-

for rural areas • Generation of Govt. or Semi Govt. employee upto 53 years • Interest – 7.5% pa

• Role of consultancy organization in entrepreneurship development-

• The scheme envisages providing financial assistance to State-level existing/proposed institutions meant for supporting entrepreneurship development and self-employment activities. Under this scheme, grant is given for setting up of new entrepreneurship development institutions (EDIs) and also for up-gradation and modernisation of existing EDIs in the country. Under the scheme, a matching grant of 50 per cent, subject to a ceiling of Rs.100 lakh, is provided for building, equipment, training aids etc., the balance being contributed by the State/Union Territory Governments and other agencies. The financial assistance provided under this scheme is only catalytic and supportive to the contribution and efforts of State/Union Territory Governments and other agencies. Under no circumstances

• grant funds provided under the scheme can be used to meet the recurring expenditure of the institute.

• 7.2.2 The institutions/organizations seeking assistance under this scheme should be registered as not-for-profit organization with entrepreneurship development as its main objective, should possess a clear title of the land required for setting up of the proposed/existing institution, have a separate bank account in a scheduled bank in which all receipts/funds received by the institute should be credited and payments made on the basis of authorization by the Governing Council of the institute.

• 7.2.3 All the proposals under this scheme are required to be recommended by and routed through the concerned State/UT Government.

• 7.3 NATIONAL INSTITUTE FOR MICRO, SMALL AND MEDIUM ENTERPRISES (NI-MSME), HYDERABAD

• 7.3.1 NI-MSME, formerly known as National Institute of Small Industry Extension Training (NISIET), was set up in 1960 at New Delhi as a Department of Central Government under the Ministry of Commerce and Industry and was initially known as Central Industrial Extension Training Institute (CIETI). Subsequently, in 1962, it was shifted to Hyderabad and converted into an autonomous society. In 1984, the Institute was renamed as National Institute of Small Industry Extension Training (NISIET). After enactment of the MSMED Act, 2006, the Institute has been renamed as National Institute for Micro, Small and Medium Enterprises (NI-MSME), w.e.f. 11th April 2007. The Institute has benefited not only the Indian micro, small and medium enterprises (MSMEs) but also those in other developing countries through a plethora of activities and thus helped in promoting self-employment and enterprise development. The Institute is constantly evolving in accordance with the changing times, modifying its focus with the emerging needs of MSMEs and providing solutions in the form of consultancy, training, research, and education. NI-MSME’s programmes are designed to have universal relevance for successfully training the entrepreneurs to face challenges and emerging competition in the era of globalisation.

• 7.3.2 The academic activities of the Institute are organized through centres of excellence focusing on specific needs of the MSMEs. The Academic Council of the Institute is the central coordinating body for benchmarking, formulation and evaluation of academic activities and programmes.