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5.1 Introduction
In the previous lesson you have learnt that one can start a business of ones own. A person can choose any business as a career. A small business is a profitable economic activity which can become an avenue of employment. You may think that it is easy to start a business if you have necessary money required to establish a business. But actually it is not an easy task howsoever small the business may be. It requires so many decisions and steps to be taken at various stages. At first you have to prepare a plan. You have to take decisions about the nature of business location and sources of raising necessary capital. You have also to take a decision regarding physical and material resources. Though the procedure for setting up a business is not the same for all types of business, there are certain steps which you have to take to start any business. In this lesson you will learn how to establish a business and how to expand its activities whenever opportunity arises.
5.2 Objectives
After studying this lesson you will be able to :
appreciate the role of Small Industries Service Institutes in establishing a small business unit;
prepare a plan for setting up a small business unit, identify various factors that affect the decision regarding location; identify the various sources of raising fixed capital and working capital; prepare a project for loan to be submitted to an agency which grants loans; describe the methods of obtaining regular and adequate supply of raw materials and man power; keep in view the legal and other formalities required to be complied with to establish a business unit; evaluate business performance within a short period after its commencement; identify the various measures of quality control; and decide the time and scope of expansion of business.
5.3 Role of SISIs (Small Industries Service Institutes) relating to establishing a small business unit
Dear learner, in case you decide to establish a business unit of your own and manage its affairs, you can take the help of any SISI. SISIs have been set up by the government in state capitals and other big cities all over the country. There are 28 SISIs and 30 branches set up in state capitals and other places SISIs render assistance in the following areas:
1.
2.
3.
Project Reports:
SISIs help in preparing project reports which are to be submitted to licensing authorities or to banks and other financial institutions for loans and credit facilities.
4.
Training Programme:
SISIs organise training programmes regarding establishment of a business and running it. It also arranges training in various fields of manufacturing, such as electroplating and power coating, heat treatment, die and tool making, electronics, repair works, cane and bamboo works etc.
5.
Modernisation:
They also help existing units in the modernisation of manufacturing techniques by giving advice regarding its possibilities and the steps to be taken.
Thus, once you decide to start a business, you can go to SISI unit of your area. You can seek advice from the experts and select the type of business you can start. These institutes help in selecting the line of business, explain legal formalities to be complied with, prepare project reports and give such advice which may help one in establishing a business. If necessary you can get technical training also. Suppose you decide to establish a unit of Die and Tool making, you can attend the training programmes in which you can learn how to make dies and machine-tools. With that technical knowledge you can easily start a business.
(iv)
They organise _______________ programmes regarding establishment of a business and running it.
1.
2.
3.
Financial Planning:
A business cannot be started and run without sufficient amount of capital. Capital is required to buy fixed assets like land, building, machines and equipment. Capital is also required to buy raw material and meet day to day expenses of the business like wages, electricity charges, carriage, etc. Decision has to be
taken in advance regarding the amount of capital required for the various purposes and regarding the sources of raising it, what amount is to be contributed by the owners and the amount to be borrowed from financial institutions, banks, etc.
4.
Location of business:
Where to establish a business is also to be decided in advance. A business established at a particular location cannot be shifted to other location easily. Decision regarding location of the business unit consists of decision regarding the choice of locality and selection of site. The deciding factors are nearness to the source of supply of raw material, nearness to the market, availability of labour, transportation and banking facilities. Selection of the site depends on cost of land, development cost, etc.
5.
Physical facilities:
Decisions have to be taken regarding plant and machinery and equipments to be provided for the business, building and other physical facilities like water and power supply, transportation, etc. The factors that may affect the decisions in this regard are the size of business, techniques of production to be used, availability of funds, etc.
6.
Plant layout:
After selecting the machinery and equipments required, it is necessary to decide about their installation in a proper manner. This is called plant layout. A good layout makes the operations efficient and economical. It reduces the costs of material handling, storage of inventory, use of space, etc. It helps in optimum utilisation of all resources.
7.
Raw material is also very important for producing goods. To maintain continuity of production, raw materials must be available in adequate quantity and at regular intervals . Quantity and quality of materials to purchased and sources of supply should be decided in advance.
8.
(b)
Line of business
(ii)
(c)
Financial planning
(iii)
(d)
Location of business
(iv)
(e)
Physical facilities
(v)
Location of business:
Once the nature of business has been decided upon the decision will have to be taken regarding the location of the place of business. Special care should be taken while making such selection because the place of business cannot be changed easily. In case of a manufacturing unit the factors that determine location are: (i) Nearness to the source of raw material particularly when the cost of transporting the raw material is high and these are bulky or heavy in relation to their value. Examples of such raw materials are timber, sugar cane, jute, iron ore, etc. Availability of rail or road transport facilities. This will make it convenient to bring raw materials to the factory and transporting finished goods to the market. Availability of banking facilities and postal and other communication facilities. Business cannot be run smoothly without communication with buyers and suppliers. Banks help in transmitting money which is necessary to receive payments and make payments Adequate supply of power and water is another requirement of a factory. Availability of power and water is also a deciding factor. Business unit should be located near the market, particularly when
(ii)
(iii)
(iv)
(v)
the finished product is expensive to carry because of its bulk, weight and perishability. (vi) Availability of labour at low cost and at ease is also a factor to be kept in view while deciding the location.
In case of a trading business, the best location is the main market area of a commercial city or town. It should have its own godowns preferably near the railway station. There should be enough scope of selling the products.
(iii)
Capital is required to buy fixed assets like: (a) (b) ____________________ ____________________
(iv)
A good plant layout will make the operations: (a) (b) ____________________ ____________________
(B)
Write True and False against the following statement as the case may be : (i) Place of business is changed frequently
(ii)
Availability of power and water is an important determinant of location of business Opportunities to grow and expand explain the nature of business A trading business can be established anywhere. While deciding about the location of your business you will care least for the cost of labour.
(iii)
(iv) (v)
(a)
Nature of Business:
The business may be a manufacturing concern or a service undertaking or a trading concern. In a manufacturing firm larger amount of fixed capital is required for building, machine etc. which require more funds to be invested. In a trading concern fixed capital required is smaller as the fixed assets like furniture etc. do not involve large investment.
(b)
Size of business:
The amount of fixed capital required depends upon the size of business i.e. larger the size greater will be the need for fixed capital.
(c)
(d)
Production Technology :
In a capital intensive production unit the amount of fixed capital required will be more while it will be less if labour intensive technology is used.
(e)
1.
Ownership Capital:
The entrepreneur or partners may invest their own savings as capital. This amount of capital is not returnable. In case of a company, share holders contribute the capital as owners.
2.
Borrowed Capital:
Long term loans may be arranged from different sources, such as (i) Commercial banks, and (ii) financial institutions. Banks grant term loans for two to ten years as per the governments credit policy for small scale industries. The banks exntend credit to such industries as part of priority sector lending.
Then there are allIndia and statelevel financial institutions. Besides there is the Small Industries Development Corporations and Small Industries Development Bank of India which extend long term loans on easy terms to small scale units.
1.
2.
Cost of labour:
If labour intensive methods of production are used more working capital will be required.
3.
4.
will be involved. On the other hand, if raw material is to be purchased for cash and goods produced are sold on credit, larger working capital will be necessary.
5.
6.
Cash requirements:
Needs for cash to meet the operating expenses like wages, rent, freight, taxes etc, also determine the amount of working capital.
7.
Seasonal operations:
Business units engaged in manufacturing seasonal goods are required to have a relatively larger amount of working capital. The recovery of working capital through sales of such products is limited to a particular period, and hence a large amount of working capital is required to meet offseason requirements.
1.
Trade credit:
It is the credit extended by sellers to the buyers. Raw material in case of manufacturing business and finished goods in case of trading business may be purchased on credit. The period of credit
depends upon the prevailing custom and trade practices and terms of supply , but it generally ranges from 15 days to 3 months. No security is required for availing of trade credit.
2.
Bank credit:
Commercial banks are the most important sources of short term finance. The various types of short term credit facilities that banks provide are: (a) outright loans to be paid back in one single instalment, (b) Cash credit which is a facility of borrowing upto a certain limit, (c) Overdraft which is a facility given to firms having current accounts to overdraw, (d) Discounting of bills implying procurement of cash from a bank in exchange for credit instruments like bills of exchange, promissory notes hundis, etc.
3.
2. 3.
4. 5.
6.
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Manufacturing process:
This clause contains the basic raw material to be used and the whole process of converting it into finished product.
4.
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7.
The project report is an important document and should be prepared carefully. On the basis of this report banks and other financial institutions decide whether loan should be granted, and if granted, the amount that should be sanctioned.
(c)
Project profitability
(iii)
(d)
Assumptions and
(iv)
(e)
Manufacturing
(v)
The owner should find out the going rate of wages and decide about the wages, particularly of the skilled workers. It should be satisfactory, lest they leave the job as soon as they get a better paid job elsewhere. However some workers may also be employed on trial basis. If found suitable they may be made permanent later. As a regular and adequate supply of manpower is necessary, so is the regular supply of raw materials necessary. Depending on the nature of products, there may be need for different types of raw material. For example, furniture making requires timber, for making ready made garments cloth is required and so on. To maintain continuity of production, raw materials must be available in adequate quantity at regular intervals. Suppliers should be identified and enquiries made regarding price, cost of transport and terms of payment. Keeping in view the time taken by the suppliers to supply raw material, adequate stock has to be maintained. If there is apprehension of rise in price of raw materials, quantity of purchase can be increased. But some factors are to be kept in view while deciding on the quantity to be held in stock. These are (1) Storage cost, (2) working capital, (3) risk of loss or damage of materials held in stock, (4) insurance premium to be paid, (5) discount available if purchased in bulk and so on.
2. 3.
4.
5.
(A)
Form of organisation:
Sole Proprietorship There is no legal formality necessary to set up a sole proprietorship business. Partnership An agreement between the persons who want to form a partnership firm is necessary. As far as possible it should be in writing. A partnership firm should be registered with the Registrar of firms. Joint Hindu Family No legal formality is required. A Joint Hindu Family business is run as per Hindu Law. Joint Stock Company It must be registered under the Indian Companies Act. It may be a Private Limited Company or a Public Limited Company. Cooperative Society If the business is organised as a cooperative society, it is required to be registered with the Registrar of Cooperative Societies of the State in which societies registered office is to be situated.
B.
Other legal requirements and formalities which are applicable to all forms of organisations:
1. License is to be obtained from the Ministry of Industries if manufacturing activities are taken up. However industrial units employing less than 50 workers with power or less than 100 worker without power, have been given exemption.
2.
Registration with the Registrar of Small Scale Industries of the state in which the unit is to be set up is compulsory. Registration with the Labour Commissioner of the state in which the unit is set up is also compulsory. This is necessary so that there is compliance of various labour laws and the Factories Act. Environmental clearance certificate has to be obtained from the state Pollution Control Board. However except for 17 categories of heavily polluting industries, such as fertilizer, sugar, chemicals, etc., sending an application is sufficient. The industrial unit has to get it registered with the excise department so that it can get concession under General Excise Duty exemption scheme. The firm has to be registered with Sales Tax Authorities and a Sales tax number is to be obtained. If it is a trading concern it is to be registered with the Shop and Establishment Authorities.
3.
4.
5.
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7.
4.
5.
to be provided should be us per the standards laid down in the plan. (d) Volume of Sales : This is to determine whether sales in terms of quantity and revenue are as per estimates or not. (e) Expenses incurred : This is to find out whether expenses under various heads such as labour, raw material, etc. are as estimated or not.
(ii)
(iii)
(iv)
appliances it is the durability and safety, and in case of ready-made garments it is the design and the fastness of colours and so on. Basically, quality means conformity with standards set on the basis of customers requirements. It is not simply glitter or gloss or beauty. Quality control refers to the use of operational techniques and activities to maintain the standard quality of product or service that will satisfy the needs of users.
4.
5. 6.
1.
Inspection : It is a simple and direct method in which each and every item produced is inspected as per the specifications laid down. Those found not in conformity with specifications are rejected. This may include inspection of raw materials or the goods in process of manufacturing.
2.
Statistical Quality Control : It is an application of the statistical methods in controlling, the quality of manufactured products. In this method, sampling and tests of significance are carried out. The characteristics of the product are noted and compared with the specifications. The variations are then shown in a chart. It is called a control chart. A tolerance limit is decided by the management in advance. Say it is 5%. If the variation is within this limit the entire lot is taken to be in conformity with the standard quality. If it exceeds the tolerance limit the whole lot is rejected.
3.
Quality Circles : This method originated in Japan and is widely used now. It is a method of involving workers in quality analysis and quality improvement. It is a voluntary group of workers who have a shared area of responsibility. They meet at short intervals to discuss, analyse and resolve the quality problems.
(b)
Inspection
(ii)
(c)
Quality Circles
(iii)
conformity with standards or requirements. physical verification of products to ascertain whether the same are according to specifications or not.
(d)
(iv)
(B)
Fill in the blanks : (i) A ____________ chart contains the variation between the characteristics of a product and the specifications. In case of medicines quality means _____________ BIS stands for _____________ Quality Control helps in __________ which is necessary to build up a brand image for the product.
Need of expansion :
1. It is a universal truth that survival depends upon growth. It is very difficult to keep your operations at a particular level because all the factors may not always be available in desired quantities for an ideal combination.
2.
The volume may be increased so that the machinery, building and other resources can be utilised to the maximum extent. A true entrepreneur is never satisfied with what he has achieved. He sets new targets and accepts new challenges. So he either takes up intensive growth of business or extends his operations in other spheres. Expansion is also done to exploit new opportunities of business and to increase profits. Proper planning is required before taking the decision of expansion. Following points are to be considered to determine the scope of expansion: (i) Market Potential:
3.
4.
The scope to increase sales is found out through market research. To what extent sales can be increased either in the same market or in new markets can be estimated on the basis of potential demand. (ii) Scope of increase in production:
To increase production new machines must be installed, more workers will have to be employed more capital will be required both for fixed assets and for working capital. Generally the area of factory is limited and it limits the scope of expansion. (iii) Management capability: Management capability is another factor that is to be kept in mind. With the expansion of business, management problems increase. (iv) Favourable conditions:
Generally the boom period is the best period for expansion of business activities. Supply of labour, of raw material and of electricity should be adequate. Various state agencies also come forward with assistance for expansion programmes of the existing business units during periods of rising demand.
(ii)
(iii)
(iv)
Since the area of factory is generally___________, it limits the scope of expansion. It is an universal truth that survival depends upon _________.
(v)
through (i) trade credits, (ii) Bank Credit, (iii) discounting of bills, (iv) advances from customers. A Project report contains the estimates and course of action for some years regarding (a) items to be manufactured, assumptions and production capacity, (b) uses of products, (c) manufacturing process, (d) status of the project, (e) total cost of the product, (f) expected sales revenue and (g) projected profitability. Sufficient man power & raw material of the right quality is to be made available. The various sources of recruitment are employment exchange, technical institutes and advertisement for skilled workers and recruitment at factory gate, through contractors and reference of the exhisting employees for unskilled workers. Wages should be satisfactory. Adequate stock of raw material is to be maintained. More purchases can be made to bear the impact of expected rise in price of raw materials. Legal formalities may divided into two categories, viz., (A) As regard form of organisation (B) Those that apply to all organisations. No legal formalities are required for sole proprietorship and Joint Hindu Family business. As for as possible agreement for partnership should be in writing and is to be registered with Registrar of Partnership, where as joint stock company should be registered under Companies Act and a cooperative society under the Co-operative Societies Act. Other legal formalities which are required to be fulfilled for all forms of organisation are: (i) License from Ministry of Industries, (ii) Registration with the Registrar of Small Scale Industries, (iii) Registration with the Labour Commissioner, (iv) Environmental clearance from State Pollution Control Board, (v) Registration with excise department, sales tax department and income tax department, (vi) A trading concern is to be registered with Shop and Establishment Authorities. Evaluation of business is required to ascertain whether the performance of the business is as per plans or not. In case of deviations either targets are revised or methods of production and marketing are changed. Quality Control means use of operational techniques and activities to maintain the given quality of a product. It helps in (i) increasing sales, (ii) making the products competitive, (iii) reducing the cost of
production. In case of certain products it is legally compulsory to maintain a particular standard. Methods of quality control are: (a) Inspection (b) Statistical quality control (c) Quality Circles. Extending or broadening the operation or area of business is called expansion. Expansion in necessary (i) for survival, (ii) to make full use of building, machinery etc., (iii) to be a true entrepreneur, (iv) to exploit new opportunities in business. Factors determining the scope of expansion are: (i) Potentiality of the market, (ii) scope of increase in production, (iii) limits to management capabilities, (iv) favourable conditions.
5.5
(a) & (iv); (b) & (v); (c) & (i); (d) & (iii); (e) & (ii);
5.6
unskilled, semiskilled & skilled skilled unskilled quantity Timber True False True True True performance plans profitability Quality of product and services. (a) & (iii); (b) & (iv); (c) & (i); (d) & (ii);
5.7
5.8
5.9
(A)
(B)