A Manual For Entrepreneurs - Trainee Manual

A Manual for Entrepreneurs: Food Processing Industry
A Manual for Entrepreneurs: Food Processing Industry

Dinesh Awasthi Raman Jaggi V Padmanand
Entrepreneurship Development Institute of India Ahmedabad
Sponsored by
Ministry of Food Processing Industries Government of India New Delhi
Tata McGraw-Hill Publishing Company Limited

NEW DELHI
McGraw-Hill Offices New Delhi New York St Louis San Francisco Auckland Bogot Caracas Kuala Lumpur Lisbon London Madrid Mexico City Milan Montreal San Juan Santiago Singapore Sydney Tokyo Toronto
Tata McGraw-Hill
2006, Entrepreneurship Development Institute of India No part of this publication can be reproduced in any form or by any means, without the prior written permission of the publishers. This edition can be exported from India only by the publishers, Tata McGraw-Hill Publishing Company Limited ISBN 0-07-058580-6 Published by Tata McGraw-Hill Publishing Company Limited, 7 West Patel Nagar, New Delhi 110 008 Typeset in Times New Roman at Emboss, 9, 3rd A Cross, Nagarabhavi, Bangalore 560 072. Cover Design: Mesmerizers, Bangalore
The McGraw-Hill Companies
Foreword
eduction of unacceptable level of wastages of the farm produce and providing remunerative prices to farmers are major problems for the Indian agriculture which carries about 2/3rd of the population. The problem is likely to aggravate if the planned doubling of agri-production is realized. The problem could be addressed substantially if farm produce like fruits, vegetables, milk, fish, meat, poultry, grain, etc., are processed and marketed aggressively including through exports. Food processing adds value, enhances shelf life and encourages crop diversification. Moreover, it is employment intensive and generates 1.8 direct employment per ten lakh rupee of investment and 6.4 employment indirectly. Food processing, coupled with marketing, has thus the potential of solving the major problems of agriculture surpluses, wastages, unemployment and uncertain prices to the farmers. India is world's third largest farm producer even at the present level of productivity due to diverse agro-climatic conditions and large tracts of arable and irrigated land. In fact, India produces 50% of world's mango, 19% of banana, 36% of cashew nut, 11% of onion, 38% of cauliflower, 28% of green peas and has 53% of world's buffalo, 23% of sheep, 17% of goat, vast marine resource (8000 km of coastline) etc. There would be large farm surpluses if the productivity increases to global levels. Further, the proposed agri-diversification will mainly lead to shift from non-perishable cereals to perishable non-cereals like fruit, vegetable, meat, dairy, etc. Storage, processing and marketing of perishables, therefore, is going to be a much bigger problem. On the other hand, India's share in global food trade of over $520 billion is likely to grow exponentially (from the existing 1.5%) if the expected market access in the developed world materialises in the new WTO regime. Thus the threat and opportunity co-exist. Rapid growth of food processing sector is inevitable since urbanisation with globalisation is changing life-style and food habits, rising prosperity is increasing demand for value added food products, more and more women joining work force need sheer convenience of processed food, and large export opportunities exist globally where price realization is much better. Accordingly, the vision 2015 set out is to realise the vast potential Indian agriculture by trebling the size of the processed food sector so as to enhance
farmer income, generate employment opportunities, provide choice to the consumer at affordable price and contribute to overall national growth by increasing a) the level of processing of perishables from 6% to 20%. b) value addition from 20% to 35%, and c) Increase in global food trade from 1.5% to 3%. In the early 90s, the sector grew rapidly and large domestic and foreign investments and IEM's were made. However, growth in the late 90s slowed among others due to relatively high cost and low quality of food products. While cost and quality are partly attributable to the farm gate, obsolete/inappropriate technology and inefficient conception and management of food processing units are the major factors. It is often complained that financial institutions are unwilling to finance food processing units because of risk factors such as seasonality, perishability and high term loan requirements. Financial institutions, however, attribute it to lack of good projects and perceived lack of ability of such promoters to manage the business ventures professionally. With a view to bridge this critical gap, this Ministry has been running EDPs through various institutions. The objective has been to enable trainees to establish commercially viable enterprises in food processing sector by providing knowledge of project formulation and management including technology and marketing, motivating them and instilling confidence, showing them opportunities and providing escort services. However, results are not very satisfactory. Lack of training institutions and trainers dedicated to EDP in food processing sector, absence of reference manuals for trainers and trainees, sustained monitoring and guidance by trainers to enable EDP trainers to actually set up units, etc have hindered realization of the objective. EDI, Ahmedabad, who showed keen interest and capability in doing these, attracted our attention and they were given the tasks of preparing manuals for trainers and trainees separately, conducting training for master trainers and closely monitoring actual conduct of EDP by the select institutions. As one of the outcomes, this manual is before you. It is expected that both the government and non-government institutions particularly state EDIs, will use these manuals and facility for training master trainers at EDI, Ahmedabad and conduct quality EDPs at state and district level so that a large number of food processing units are established throughout the country adding value to farm produce at every stage in the food chain. Prospective entrepreneurs will, in particular, find this manual very useful in preparing project and business plan, starting and managing a business venture, assessing and managing risks, understanding market and enhancing profitability.
vi
Foreword
Vast opportunities are opening up in food processing sector as stated above. But the country needs opportunity seekers, and that also in large numbers, who have grit, knowledge and competitive spirit to succeed and who enabled through EDP training, would derive full benefits from the various schemes of the Ministry. Suggestions for improvement in the manual would be highly appreciated. A.N.P. SINHA Joint Secretary Ministry of Food Processing Industries Government of India New Delhi
Foreword
vii
Acknowledgements
India has achieved significant growth in food production as a result of the Green Revolution. It is equal to that of USA and is second only to China. Government of India has rightly been giving major thrust to this sector. Therefore, the criticality of adequate supply of competent and competitive entrepreneurs could hardly be over stated. This calls for major investments in developing human resources who could stand up to the challenges of global competition. However, it might be difficult for new entrepreneurs to launch and manage their enterprises, due to inexperience. They, not only need motivation but also need to acquire skills to launch and subsequently manage their ventures. Since the strategy was to promote young potential entrepreneurs in the food processing sector, through EDPs, it was thought all the more important to develop basic material on management of new ventures as well as material related to soft skills. The objective was that after the EDP, the trainees should carry with them a ready reckoner that they could use in solving some of their teething troubles. We are happy that at the end of the day, we have something tangible to offer to our budding entrepreneurs, in the shape of this Ready Reckoner. At the outset, we would like to express our gratitude towards Shri ANP Sinha, IAS, Jt. Secretary, Ministry of Food Processing Industries (MoFPI), Government of India, who reposed confidence in assigning the task to us. His constant encouragement and constructive comments have helped us in improving the Reckoner a great deal. We are also grateful to Shri RC Sachdeva, Deputy Secretary (MoFPI), Shri KK Maheshwari, Assistant Industrial Advisor (MoFPI) and Shri Kothari, Under Secretary (MoFPI) for all their help, support and useful comments on the earlier draft of the Reckoner. My predecessor, Dr. VG Patel, the then Vice President and Director, EDI, was a source of immense encouragement to us, while we were preparing this Reckoner. He virtually relieved us of all responsibilities to carry out this assignment. We are extremely grateful to him for all his support and kindness. We would like to put on record our appreciation for Mr. Debmuni Gupta for editing our loosely written draft and making it readable. We would like to acknowledge the help extended by Mr. Manish Damani, Deputy Manager (Systems) and Mr. Chirag Shah of our Computer Centre for doing a good job of formatting the text.
We will be failing in our duty if we don't acknowledge the contribution of our secretary Mr. A Sivan, who worked tirelessly to see that we are able to meet our deadlines. He has probably worked the hardest in typing manuscripts again and again, without looking at his wristwatch and without any complaint (his spouse would have!). We sincerely hope young and dynamic potential entrepreneursthe EDP trainees will find this effort worthwhile and useful.
EDI, Ahmedabad
DINESH AWASTHI RAMAN JAGGI V PADMANAND
Acknowledgements
Contents
Foreword v
Acknowledgements ix 1. The Food Processing Sector in India: An Overview 2. The Impact of Policy on Enterprises 3. Who is an Entrepreneur? 4. Soft Skills for Entrepreneurs 5. Planning a Small-Scale Unit: Whom to Approach for What 6. Business Opportunity Identification 7. Market Survey Tools, Preparation of Schedule and Techniques of Data Collection 8. Production Programme, Plant Capacity, Manpower Requirements and Layout 9. Business Plan Format for Tiny and Small Enterprises 10. The Financials of a Project Report 11. Assessing Financial Viability of the Project 12. Bookkeeping and Accounting and Financial Statements 13. Costing and Pricing of Products 14. Working Capital Management 1 21 33 37 41 49
53
65 71 73 115 119 139 145
15. Marketing Management 16. Applied Management in Business: Learning from Existing Businesses 17. Legal Requirements 18. Support Institutions for Promotion of Food Processing Sector Annexure I Annexure II Annexure III Annexure IV References and Suggested Readings
155
165 187 191 195 203 205 207 211
xii
Contents
chp-1.qxd
10/18/05
9:03 AM
Page 1
CHAPTER
1
An Overview
The Food Processing Sector in India
INTRODUCTION
he food processing sector is critical to Indias development, for it establishes a vital linkage and synergy between the two pillars of the economyIndustry and Agriculture. India is the worlds second largest producer of food and holds the potential to acquire the numero uno status with sustained efforts. The enormous growth potential of this sector can be understood from the fact that food production in the country is expected to double in the next 10 years, while the consumption of value-added food products will also correspondingly grow. The growth of this industry will bring immense benefits to the economy, raising agricultural yields, enhancing productivity, creating employment and raising life-standards of a large number of people across the country, especially those in rural areas. The liberalisation of the Indian economy and world trade and rising consumer prosperity has thrown up new opportunities for diversification in the food-processing sector and opened new vistas for growth. A recent study has revealed that there is tremendous potential in India to build a profitable business in the sector. This industry ranks fifth in the country and employs 16 lakh workers, comprising 19% of the countrys industrial labour force. It accounts for 14% of the total industry output with 5.5% of the GDP. Its turnover is estimated at Rs.1,44,000 crore, of which Rs.1,11,200 crore is in the unorganised sector. The industry has started producing many new items like ready-to-eat food, beverages, processed and frozen fruit and vegetable products, marine and meat products, IQF products, etc. The Indian consumer is being fast introduced to newer high quality food products made by using the latest state-of-the-art technology, that is also giving the industry a competitive edge.
chp-1.qxd
10/18/05
9:03 AM
Page 2
Table 1.1 Status of Food Processing Industry in India Sr. No. 1. 2. 3. 4. 5. 6. 7. Rank of Industry Employment in lakhs % of total Industrial Labour Force Total Industry Output in percentage Output as % of GDP Estimated Turnover (rupess in crores) Unorganised Sector (rupees in crores) 5th 16 19 14 5.5 1,44,000 1,11,200
BROAD CATEGORISATION OF FOOD PROCESSING ENTERPRISES AND THEIR PRESENT STATUS (i) Fruits and Vegetables
Horticultural crops in India are currently grown on 12 million hectares representing 7% of the countrys total cropped area. Annual horticultural production is estimated at 100 million metric tonnes, which is over 18% of Indias gross agricultural output. India is the third largest producer of fruits after Brazil and the United States, while its vegetable production is exceeded only by China. Mango, Banana, Citrus fruits, Guava and Apple account for 7580% of fruit production, which was around 37 million metric tonnes in 19971998. Vegetable production was 65 m tonnes in the same period. Indias share of world trade in this sector is still around one per cent. In 19971998, processed fruits and vegetables exported, valued Rs.5,240 million. Indias major exports are fruit pulp, pickles, chutneys, canned fruits and vegetables, concentrated pulps and juices, dehydrated vegetables and frozen fruits and vegetables. This sector has attracted a total investment of Rs.75,000 million in the last six years i.e. since the initiation of the liberalisation process, including a rise in Foreign Investment from Rs.46.9 million to about Rs.102 million between 1993 and 1998.
2 Chapter One
chp-1.qxd
10/18/05
9:03 AM
Page 3
The following statistics presents the growth in the number of fruit and vegetable processing units, their production and installed capacity.
Table 1.2 Fruit and Vegetable Processing Units Year F&VP Units Installed Capacity (lakh tonnes) 1994 4270 12.60 1995 4368 14.02 6.79 1996 4674 17.50 8.50 1997 4932 19.10 9.50 1998 5112 1999 5198
20.40 21.00 9.10 9.40
Production 5.59 (in million metric tonnes)
Out of the 5198 F&VP enterprises in 1999, 2002 (38%) were home-scale (household) units, 1083 (21%) cottage, 834 (16%) small-scale, 598 (12%) large-scale and the remaining 681 (13%) were only relabellers.
Distribution of Fruit and Vegetable Processing Enterprises by Scale of Industry
Cottage 21% Small Scale 16% Large Scale 12%
Home Scale 38%
Home Scale Relabellers : Large Scale : Small Scale :
: 2002 Units 681 Units 598 Units 834 Units 1083 Units 5198 Units
Relabellers 13%
Cottage Total
: :
The growth trend from 1994 to 1997 remained upward, being 21.8% in the first year, 25.2% in the second and 11.76% in the third. During 19971998, this sector showed a negative trend of 4.2% over the preceding year and 19981999 registered a positive growth of 3.3%. Though the detailed reason for this trend could be ascertained by ground-level research, the factor responsible for negative growth in 19971998 was excise duty of 8% on processed (Fruit and Vegetables) F&V products, as against no duty in the preceding years.
The Food Processing Sector in India: An Overview 3
chp-1.qxd
10/18/05
9:03 AM
Page 4
(ii) Meat and Poultry

Meat Processing: India has the worlds largest livestock population, accounting for 50% of buffaloes and 1/6th of the goat population. Such a large population represents a challenge to retain existing productivity traits by application of modern science and technology. Rigorous efforts are being made to improve the condition of livestock by providing basic infrastructure and latest technology. FAO has estimated the existing production of meat and poultry products at 4.42 million tonnes. Only 11% of the buffalo population, 6% of cattle, 33% of sheep and 38% of the goat population is culled for meat. Source: Composition of Estimated Meat Production
Buffalo 11% Cattle 6% Sheep 33% Buffalo Cattle Sheep Goat 38% Goat Others
Others 12%
At present, only a small percentage of the meat produced is converted into value added products and most meat is purchased by consumers in the fresh/frozen form for conversion into products at home, restaurants, etc. Maximum conversion takes place in pork products. With growing urbanisation and increasing quality consciousness, the market for scientifically produced meat products is expected to grow rapidly. Demand is growing for ready-to-eat and semi-processed meat products because of changing life styles and increase in exports to neighbouring countries, especially the Middle East. India exports meat products worth Rs.8,000 million mainly to countries in the Middle East and South East Asia. Meat processing is the new thrust sector for Indian industry with many processing centres being set up with advanced technology. Animals render
4 Chapter One
chp-1.qxd
10/18/05
9:03 AM
Page 5
extremely useful service in out-transport system and agriculture. India needs technical cooperation to build up organised facilities for rearing meat producing animals, proper storage and refrigerated transport system. This sector has attracted an investment of Rs.9000 million, including foreign investment of Rs.5000 million, in the last six years since the initiation of the liberalisation process. Poultry India ranks fifth in the world in egg production with a yield of 1.61 million tonnes a year. Yet the per capita availability is low. Now, with changing food habits and increasing availability of eggs, the demand is increasing and growing at 10% a year. Egg production has grown during the last 30 years at an annual average of 16%, while that of broilers, by 27%. During this period, Indian poultry industry made spectacular progress transforming itself from backyard farming to a dynamic and sophisticated agri-based industry. The increasing awareness about balanced nutrition has effected changes in eating habits with vegetarians accepting eggs as part of their diet. Simultaneously, purchasing power has increased and more money is allocated for food. Despite this, the egg industry experiences periodic slumps. There are five modern integrated poultry processing plants in the country, besides a good number of not-very-modern small plants. These plants produce dressed frozen chicken and cut parts. While poultry industry is gradually taking shape, poultry dressing and processing is still in its infancy in the country. There are about 15 pure-line and grandparent franchise projects in India. There are 115 layer and 280 broiler hatcheries both in the private and public sector, producing 1.3 million layer parents and 2.6 million broiler parents, which, in turn, supply about 95 million hybrid layer and 275 million broiler, day-old chicks. Please refer to Table 1.3. In India, five egg powder plants have also been set up to produce whole egg, yolk and albumen powders. Demand for egg powder is increasing every year. Each project will process a million eggs daily. Only one egg powder plant has been in operation in Mumbai since the 1970s. Other such plants will help boost egg production. Table 1.3 Status of Pureline & Grandparent Franchise Projects in India Sr. No. Hatcheries 1. 2. Layer Broiler No. of Hatcheries 115 280 Parents (in Million) 1.3 2.6 Supply (in Million) 95 275
The Food Processing Sector in India: An Overview
chp-1.qxd
10/18/05
9:03 AM
Page 6
(iii) Milk and Milk Products

India has the largest livestock population with milch cows and buffaloes being its main constituent. India is the worlds largest milk producer (72 million tonnes annually) and the dairy industry has been recognised the world over as its most successful development programme. Going by FAO estimates, while world milk production fell by 2% in the last three years, the Indian production galloped by 4%. While consumption of liquid milk accounts for 46% of the total production, the rest is converted into milk products. Of this, the share of the organised sector is less than 10%. The products manufactured by the organised sector are ghee, butter, cheese, ice creams, milk powders, malted milk food, condensed milk, infant foods, etc. The products also include casein, lactose and dairy whiteners. The value of Indian dairy produce is expected to rise from Rs.2,88,000 million in 1999 to Rs.10,00,000 million by 2005.(Please see the chart below). In the last six years, investment in this sector has been to the tune of Rs.16,000 million with foreign investment of Rs.3,600 million.
Value of Dairy Products
1200000 1000000
1000000
Rs. Millions
800000 600000 400000 288000 200000
1999
2005 (est.)
Year
(iv) Consumer Products

This comprises product groups like confectionery, chocolates, cocoa products, soya-based products, ready-to-eat foods, mineral water, high protein foods
6 Chapter One
chp-1.qxd
10/18/05
9:03 AM
Page 7
etc. This sector has attracted a whopping investment of Rs. 1,28,000 million, including foreign investment of Rs.50,000 million, since liberalisation. Soft drinks enjoy the biggest share in this. The Indian soft drinks market is worth Rs.22,000 million a year. Statistically, this implies three bottles per Indian. Cola, orange and lemon are some of the accepted tastes in India. It is estimated that 65% prefer non-carbonated drinks. Lemon drinks continue to be very popular in the country. India produces a large range of cocoa and non-cocoa based confectionery items, besides other cocoa-based products. The production of confectioneries, except chocolates, is reserved for the small-scale sector. However, there are several large companies with an established market presence and brands in cocoa and non-cocoa confectionery markets. Confectionery output grew at a compound rate of 6 to 7% in recent years. Chocolate production is growing at the rate of 10 to 15% a year. Among the ready-to-eat products, the installed capacity in the organised sector is 33,400 tonnes for manufacture of pasta products like noodles, macaroni, vermicelli, etc. Besides, there are 10 units with an annual capacity of 9,340 tonnes for corn flakes, oat flakes and pearl barley.
(v) Alcoholic Beverages

Liquor made in India is categorised as beer, country liquor and Indian Made Foreign Liquor (IMFL). Country liquor is made from a variety of raw materials and has different names in different parts of the country. IMFL production comprises wine, vodka, whisky, gin, rum, brandy, etc. Pre-mixed drinks like gin and lime, rum and cola are being introduced in India now. Draught beer is another recent introduction and has done well where introduced. Canned beer is also a recent introduction. There are 36 breweries with a licensed capacity of 160 million litres per annum. Current production is over 300 million litres. In all, Rs. 11,000 million including Rs. 7,000 million of foreign investment, has been made in this sector in the last six years. The Indian beer market, currently at Rs.7,000 million a year, has been growing by 15% and now all world famous brands of liquor are available in India. The country has 212 distilleries with a yearly installed capacity of 1,933 million litres. However, there are only 24 units producing IMFL and 31 making country liquor. Alcohol produced by the rest is either sold as industrial alcohol
chp-1.qxd
10/18/05
9:03 AM
Page 8
or in bulk as potable alcohol to other distilleries for bottling or for making bottled alcohol (estimated 927.82 million litres). Raw material like Molasses, barley, maize, potatoes, grapes, yeast and hops for beer and alcoholic products industry are abundantly available in India.
(vi) Fisheries and Sea Food

India boasts of the seventh largest marine landing base in the world with an extensive 7,500 km coastline and an Exclusive Economic Zone (EEZ) of 2 million sq km, largely untapped, and a 29,000 km stretch of rivers and canals, 145 million hectares of reservoirs and 0.75 million hectares of tanks and ponds. Though Indias fish potential from the EEZ has been estimated at 3.9 million tonnes, the harvest is only of 2.87 million tonnes. This can be increased to 3.37 million tonnes by intense tapping in offshore and deep-sea grounds using modern technology. There is also a good scope to improve fish harvest from inland waters which, at present is 2.7 million tonnes. Besides, the fish potential in aquaculture and shrimp farming has also largely remained untapped. Though, traditionally, only local fishermen have tapped the vast marine and inland water resources to meet domestic demand, the organised corporate sector has become involved in preservation and export of coastal fish since the last decade. Marine fish found in India include prawns, shrimps, tuna, cuttlefish, squids, octopus, red snappers, ribbon fish, mackerel, lobsters, cat fish and countless other varieties. Domestic per capita consumption of fish is only 5 kg per annum against the world average of 12 kg. Indias per capita consumption is much lower than the Asian maritime countries (e.g. Japan86 kg). Indias 60% fish production is from marine sources. However, coastal fishing i.e. from the continental shelf constitutes the bulk of the marine catch. It is estimated that only 10% of the marine catch is accounted by deep-sea resources. Processing of produce into canned and frozen form is done almost exclusively for the export market. Totally, there are 258 freezing units with a capacity of 2,170 tonnes, 23 canning units of 84.5 tonnes capacity, 131 ice-making units of 1820 tonnes, 24 fish meal units with a capacity of 419 tonnes and 297 cold storage units with a capacity of 2,03,448 tonnes. This sector has attracted domestic and foreign investment to the tune of Rs.30,000 million in the last six years, of which the foreign component is around Rs.7,000 million.
8 Chapter One
chp-1.qxd
10/18/05
9:03 AM
Page 9
Please see Table 1.4 which compares the investment pattern in different sectors. Table 1.4 Investment Pattern in Different Sectors Sr, No. Sector Total Investment (in Million) 16,000 1,28,000 11,000 30,000 Foreign Investment (in Million) 3,600 50,000 7,000 7,000
1. 2. 3. 4.
Milk & Milk Products Consumer Products Alcoholic Beverages Fisheries/Sea Food
(vii) Grain Processing

The countrys current foodgrain production (including rice, jowar, bajra, maize, ragi, wheat, barley, gram and pulses) has been put at 225 million tonnes a year. Food processing industries play a crucial role in reducing post-harvest losses. Since most operations of this industry are rural based, it has the potential to generate high employment at low investment. Promotion of food processing also helps in energy conservation by reducing energy wastages in home cooking. Grain processing, with a share of 40%, is the biggest component of the food sector. Its basic feature is pre-dominance of the primary processing sector, sharing 96% of the total value, with the secondary and tertiary sectors adding about 4%. This area needs to be viewed as a high growth potential area. Indian Basmati rice commands a premium in the international market. The export of Basmati and non-Basmati rice has been steadily increasing. From Rs.3538.3 million in 19881989, the exports increased to Rs.62,000 million in 19981999. The country has a total paddy milling capacity of 186 million tonnes, of which 85 m tonnes is of traditional mills and 101 of modern mills.
(viii) Plantation
Tea, coffee, cashew, cocoa, etc. are the countrys major plantation crops, which are grown in different parts for they require specific agro-climatic conditions. Indias principal plantation crops account for around 5 to 6% of the countrys aggregate export earnings. Production and domestic consumption of major plantation crops have increased considerably during the last three decades.
chp-1.qxd
10/18/05
9:03 AM
Page 10
India continues to be the worlds largest producer, consumer and exporter of black tea. Cashew is also an important crop and earns foreign exchange worth Rs.16,000 million. India is the worlds leading producer and exporter of cashew kernels (75,000 tonnes annually) and shares 31% of the worlds production of raw cashew and nearly 48% of the worlds cashew kernel export. Coffee is the oldest plantation crop of India.
POLICY INITIATIVES
THUS
FAR
The food processing sector has been identified as a thrust area for development. This industry has been included in the priority lending sector. Most food processing enterprises have been exempted from industrial licensing under the Industries (Development and Regulation) Act, 1951, with the exception of beer and alcoholic drinks and items reserved for Small Scale Sector. For foreign investment, automatic approval is given even to 100% equity for majority of the processed foods. Since economic liberalisation in 1991, 5875 Industrial Entrepreneur Memoranda (IEMs), involving an investment of Rs.53,736 crore and envisaging employment for 10.23 lakh persons, were filed between July 1991 and December 1999. Of these, 673 IEMs with investment of Rs.7,517 crore and jobs for 0.87 lakh persons have been implemented. Moreover, 1,120 approvals for investment of Rs.19,100 crore and employment of 2.75 lakh have been given. From these, 248 proposals with investment of Rs.4,225 crore and 0.95 lakh jobs have been implemented. The kind of units, which have come up, include: Fruit and Vegetable Beverages, Juices, Concentrates, Pulps, Slices, Frozen & Dehydrated products, Wine, Potato wafers/chips etc. Fisheries Frozen and canned products mainly in fresh form Meat and Poultry Frozen and packed mainly in fresh form, egg powder (only a couple of units) Milk and Dairy Whole milk powder, Skimmed milk powder, Condensed milk, Ice cream, Butter and Ghee Grain and Cereals Flour, Bakeries, Biscuits, Starch, Glucose, Cornflakes, Malted foods, Vermicelli, Pasta foods, Beer and Malt extracts, Grain-based Alcohol Consumer Industry Chocolates, Confectionary, Soft/Aerated Beverages/ Drinks
10 Chapter One
chp-1.qxd
10/18/05
9:03 AM
Page 11
The policy initiatives of the government also include automatic approvals for Foreign Technology Agreements, sale of 50% in domestic tariff area of agro-based 100% EOUs, zero duty EPCG scheme extended to Food Processing sector with a reduced threshold limit of Rs.1 crore in the Exim Policy, declaration of the industry for priority lending by banks, the Plan schemes envisaging grant of loans at a very low rate of 4% and grant-in-aid to select cooperatives and NGOs, assistance for upgrading standards to international level and assistance for R&D activities.
CHALLENGES, CONSTRAINTS
AND
CONCERNS
Despite policy initiatives, growth potential and significant achievements, there are several disturbing trends as delineated here: In India, the value addition to food fortification is only 7% compared to as much as 23% in China, 45% in Phillipines and 188% in the UK. Further, there are few large or medium sized companies in the organised sector against many small ones. The small-scale and unorganised sectors account for 75% of the total industry. Despite its importance to Indias well-being, the food industry has in the past been neglected. Food is usually the first industry to develop and has importance in most economies. In India, it is still relatively small and not regarded attractive. External liberalisation opens up new export avenues and seeks to integrate the economy with the global market. But it also poses threats of stiffer competition under a new world trade order with WTO agreements relaxing quantitative restrictions and non-tariff/sanitary barriers on importing countries. This exposes the Indian farmer to world market forces. Strategies to convert the potential disadvantage, on account of the new import regime, into advantage are needed. The inherent strength of high raw material production and large domestic market base has to be buttressed and energised by evolving the right international-level infrastructure and growing suitable raw material. This, coupled with operating processing units at optimum capacity levels as per economies of scale, would enable achieving a competitive edge over imported products. The food sector will be confronted by challenges of trade related Intellectual Property Rights, comprising patent laws, copyrights, trade links, etc.
chp-1.qxd
10/18/05
9:03 AM
Page 12
Advances in bio-technology have enabled production of Genetically Modified (GM) foods. These have already appeared in some countries. GM foods need be critically examined on their good and adverse impacts on human health. India is the second largest producer of food in the world but its share in worlds exports is very low despite its inherent strength in tea, spices and rice. The share of agricultural exports in the countrys total export basket has been fluctuating, from 27% in 19851986 to 16% in 19941995 and to 20% in 19961997. In 19961997, India exported Rs.24,618 crore worth of agro products. During 19971998, marine products, rice, coffee, oil and spices were major export items. The share of horticulture crops, plantation crops, meat and meat preparations and sugar in the countrys agri exports is much less than its competitive potential. Taxes on processed food in India are among the highest in the world. No other country imposes excise duty on processed food. No country distinguishes between branded and unbranded food sectors for taxation. There is excise duty of 16% in the form of CENVAT levied on food products and then there is sales tax, octroi, mandi samiti, entry tax and customs duty on material, levied by the Central/State/Local bodies. The net effect ranges from 21% to 30% on various food items. India is the only country to have levied excise duty on machinery and equipment for processed foods. Indian consumers are very price-sensitive and cost reductions are imperative to raise demand and consumption of food products. Since the net effect of various taxes falls directly on the price, the off-take of processed food items remains low. Consider the Food and Vegetable sector, where against the installed capacity of 21 lakh tonnes (of the units registered under FPO), present production is only 9.4 lakh tonnes or about 45%. Assuming a value of Rs.10 per kg, the receipts on account of 16% CENVAT would be around Rs.150 crore in the first year, and looking at past experience of negative growth, the receipts will reduce by 5 to 10% in every succeeding year. Reduction of excise duty by say 5% might result in less receipts in the first year but would more than make up in the subsequent years i.e. at 100% capacity utilisation, the first year receipt would be Rs.100 crore, but with annual growth rate of 25%, the receipts would Rs.125 crore in the second year, Rs.156 crore in third and after five years, it would cross Rs.200 crore at the present price index. Moreover, the National Savings because of reduction in wastage would run into thousands of crores (the present level because of 30% wastage in Fruit and Vegetable Sector alone results in an estimated wastage of Rs.25,000 to Rs.30,000 crore).
12 Chapter One
chp-1.qxd
10/18/05
9:03 AM
Page 13
India is viewed as an unpredictable and unreliable source of food and agro products despite its world class production measures for ensuring supply to the international markets and increased production and quality of food products specific to exports. Food processing enterprises in organised and unorganised sectors are in private hands. Though there has been certain growth in the food industry because of domestic demand, the demand itself remained low due to policies pursued earlier. Majority of the food units are in primary processing and since production base of secondary and tertiary processed foods is low, there is lower value addition. Commercial R&D activities in the food industry have remained confined to only a few areas. R&D activities have scarcely emerged from the laboratory to be extensively adopted on the field. Indian brands have yet to acquire an image in the international markets because of poor global marketing. Poor awareness of most of Indian agri produce, seed constraints and Indias image and identity of a low quality, unreachable producer of food items ensure that Indian food items are not the most preferred ones. Financial institutions do not have the capacity to appraise hi-tech export-oriented projects. There are no suitable insurance schemes for such projects, most of which deal in export of perishables. In financing projects like high density farming, greenhouse floriculture, controlled environment livestock farming, bio-technology, tissue culture, embryo transfer technology, bio-pesticides and bio-fertilizer, etc., the banks face considerable risk like credit risks. With new technology, the risk perception is higher than the existing one. Since it has not been tested in actual situations, the chances of failure of new technology are higher. For risk of rejection by consumer or by sovereign intervention foreign exchange risks, ECGC cover is available only in cases of insolvency/default of importers. Branded food items attract higher sales tax and excise duty as against the unbranded ones. It is reasonable to expect that any meaningful investment in this sector will necessitate branding of products. It is noteworthy that no country treats branded food differently for levying duties. The exemption to unbranded and unorganised sector from excise and sales tax leads to low quality consciousness among manufacturers and consumers.
chp-1.qxd
10/18/05
9:03 AM
Page 14
There is a growing disparity between the actual and potential results in the food industry, exposing the gulf between research and extension agencies. There have been instances of ban imposed by the European Union on all seafood exports originating from India. This was after detection of salmonella in some EU-bound consignments and of V Cholera in consignments to Denmark. These consignments mostly had fish, prawns and frozen squids. The sector is capital starved. Investments in infrastructure and research have been far from adequate. The sector has been characterised by poor marketing, transport and communication infrastructure. The market density of fruits and vegetables is low and facilities for storage and cold chains in the hinterlands are woefully inadequate. Erratic and inadequate power supply, lack of roads, education and health facilities and no or low rural industrialisation accentuate the problems. There is lack of integration of local markets with national and global ones to support faster and more diversified growth. Lack of maintenance of infrastructure because of limited and declining public resources and the absence of community involvement in the protection of community assets and poor cargo facilities at airports and ports are other bottlenecks. Infrastructure for extension of food technology is hampered. Moreover, there is lack of organised marketing system in meat and poultry products. The system is obsolete, with primitive methods of sale of live birds or unhygienic slaughtered birds. A similar poor system exists in towns and small cities in the case of pork and pork products. Cooperatives and other semi-government organisations are weak and peoples participation, either through Panchayat Raj institutions, NGOs, farmer organisations or industries associations in food sector remains extremely inadequate. Multiple and complicated tax regimes have rendered the food industry uncompetitive. Regulations on the entry operations of private sector in trade, post-harvest facilities and food processing have restricted private sector investment in the agricultural sector. Then, the current land tenancy regulations have frozen the land-lease market and discouraged tenant farmers and share-croppers from investing in the land they till. With the signing of the GATT and the coming up of World Trade Organisation, this sector is facing internal and external pressures stemming from policies of economic liberalisation.
14 Chapter One
chp-1.qxd
10/18/05
9:03 AM
Page 15
NEED FOR INITIATIVE
COMPREHENSIVE PAN-INDIAN
The present scenario has resulted from the lack of cohesive and integrated planning of the industry, keeping in mind specific needs of various regions, their produce and special industries, which could be energised to work at optimum capacity. The policy initiatives thus far have gone by the assumption that this industry has high risk and low return and that seasonalities of produce dictates the levels of capacity utilisation; that any multi-line projects will become unviable, for there is paucity of marketing outlets and lack of other infrastructural facilities. These problems cannot be viewed in isolation nor can they be tackled by a single department/ministry. It is important to adopt a holistic approach in formulating any viable policy for this nascent sector. The planning should be bottom up and not top down, for in India, the initiative has to come from the rural sector constituting 70% of the population. This is where tapping of Panchayat Raj institutions and networking of cottage, small and medium industries can viably provide the primary and secondary processing for take-off by large-scale industries. What is envisaged is an integrated model wherein cottage, small and medium enterprises act as input factors for further development of products by larger enterprises, by creating primary/secondary processing facility centres within a radius of 15 to 25 km from the farm. These centres will provide appropriate packing techniques for farmers. Other facilities that could be envisaged at these centres include treatment, washing, sorting and grading, packaging and cold storage. Adequate system will be evolved to transport these processed products for use by larger industries as well as for sale in wholesale markets. This process will ensure backward and forward links between farmers, markets (domestic and international) and larger industries. This way, each unit would be viable and independent and at the same time, be linked with higher players in the market. The sectoral deficiencies and advantages in each spatial segment will be attended to since investment will not be higher. Thus, imbalances, which were a built-in variable, could either be corrected or converted into an advantageous variable. This is possible only if all Panchayat institutions in the country are networked with leading market outlets, including the top players in the industry. Such a synergy cannot evolve in a short time unless the government initiates many Centrally-sponsored direct assistance to Panchayat institutions, including allocations for infrastructure like roads and transport. This way, the WTO restriction on subsidies could be overcome and within a couple of years the entire gamut of functioning of these industries could be re-oriented. This will also wean away the thinking process of planners to view the food processing industry only as a means to reduce wastages. In fact, this Pan-Indian Model will ensure a proactive industry-oriented approach enabling the industrys growth in a modern,
chp-1.qxd
10/18/05
9:03 AM
Page 16
scientific and planned manner. This will increase productivity at minimum costs improving the products competitiveness in any economy. On a larger scale, this will make the economy vibrant and prevent unnecessary migration of population and unplanned urbanisation.
STRATEGIES AND INITIATIVES PROPOSED NEW POLICY

These are discussed below:
IN THE
There are various strategies and initiatives proposed in the new policy.
Creating an Enabling Environment

a. The Central and State Governments will work closely and evolve joint efforts to provide an enabling environment to entrepreneurs to set up food processing enterprises. b. Fiscal initiatives/interventions like rationalisation of tax structure on fresh food as also processed foods and machinery are a must. This is necessary to provide processed food at reasonable prices as well as to stimulate domestic demand. The aims of the National Policy on food enterprises are sought to be achieved by adopting initiatives and practices congenial to industrial development in the processed food sector. A concentrated promotion campaign is vital to create market for processed foods. Multinational companies can take care of their products for they have large funds for promotional campaigns. The Department will continue to provide financial assistance to industry associations, NGOs/Cooperatives, private sector units, state government organisation for market promotion and brand formation. c. Going by projections of the Working Group on Food Processing Industries for the 9th Plan, investment requirement of Rs.24,315 crore from the private sector, Rs.2,275 crore from the Central Government, Rs.1,660 crore from the State Government, totalling upto Rs.28,250 crore, have been identified for the entire food processing sector in a five-year plan period. d. Efforts will be made to expand the availability of raw material and improve their quality for agro-based processing activities round the year by increasing production, improving productivity and yield. e. The information/database for the industry will be strengthened to ensure greater reliability and thus help in planning and policy making. This is
16 Chapter One
chp-1.qxd
10/18/05
9:03 AM
Page 17
proposed to be achieved through studies and surveys in various states. The information will be vital for the industry to plan investments in appropriate sector matching availability of resources and market conditions.
Intensive and Extensive Awareness

a. Extensive training will be provided to farmers and cooperatives in postharvest management of agro-produce to encourage creating pre-processing facilities near farms. Facilities may include provision for washing, fumigation, packaging, etc. Efforts will be made to encourage the setting up of agro-processing facilities as close to the area of production as possible to avoid wastages in transporting raw materials to far away places and to ensure increased value addition, specially for horticultural produce. b. Efforts will be made to improve general awareness about the advantages of consuming processed foods to stimulate domestic demand. Unfounded apprehensions about consuming processed food will also be removed.
Infrastructural Development
a. Establishment of cold chain and provision of low cost pre-cooling facilities for farmers, entrepreneurs, traders and consumers would be encouraged and they will be trained to bring about attitude changes. Efforts will be made to disseminate market intelligence to enable farmers to fetch higher value for their produce. b. Efforts will be made to motivate farmers/industries to use insulated/refrigerated vehicles for transporting raw materials from the place of production/harvest to the point of consumption, to avoid wastage and quality deterioration. c. Establishment of cold storages and cold chain facilities would be encouraged. d. The interactive mesh between technology, economy, environment and society will be promoted for quicker development of agro-processing industries and to build up a substantial base for production of value-added products for domestic and export market with special emphasis on food safety and quality, taking into account all aspects of Total Quality Management (TQM) and Hazard Analysis and Critical Control Points (HACCP) to achieve international standards. Sustained R&D activities will be encouraged through recognised institutions having expertise in respective fields.
chp-1.qxd
10/18/05
9:03 AM
Page 18
e. Application of bio-technology, remote sensing technology, pre and post harvest technologies, energy saving and environmental protection technologies through National Research System or any other mode will be encouraged.
Backward LinkageRaw Material Supply

a. The concept of backward linkage between farmers and industry would be promoted to encourage and enable farmers to grow products of appropriate quality. This will help the poorest of the poor farmers as well as marginal and medium farmers fetch appropriate and remunerative return for their produce. The scheme for providing assistance under the 9th Plan is already in operation and will be strengthened further to cover majority of farmers/producers. It would be ideal to dovetail this scheme with similar schemes offered by local bodies like Panchayats to provide the required fillip to this significant programme in the best interests of farmers and processors. b. The existing institutions like local bodies, cooperatives and self-help groups, which have been in operation for over four decades in different contexts, would be utilised to strengthen the backward linkage. This way the skill and expertise acquired by these institutions would be constructively used, while this mechanism would help quickly create the bridge of trust between farmers and processors. This would ensure smooth supply of raw material to the processors and help the farmers (poor, marginal and big) in getting remunerative prices for their products. Thus, a complete network of farmers and processors will be created cutting across their status.
Forward LinkageMarketing
a. There is an urgent need to develop forward linkages for fresh and processed food. Presently, there are a large number of intermediaries operating between the farmers/processors and the consumers, resulting in high cost to the latter and low return to the former. The efforts to cut intermediaries would be made in such a way that the special skill and expertise required to operate the intermediate links in the system like transportation and market distribution are not jeopardized. To achieve this, attempts will be made to provide appropriate tax incentives and holidays for setting up food processing industries, taking care of expenses on market promotion and ancillary activities. b. The North Eastern Region, the Hilly States (J&K, HP and Western UP), the Islands (A&N, Lakshadweep) and the Integrated Tribal Development
18 Chapter One
chp-1.qxd
10/18/05
9:03 AM
Page 19
Projects (ITDP) areas in the country need to be given special consideration. Fiscal incentives like excise duty/sales tax concessions and tax holidays should be given not only to the units being established here, but also to those set up outside but processing the produce from these areas. This is because the high cost involved in transporting raw material and packaging material makes the product expensive, and thus uncompetitive, in the markets outside. Providing fiscal incentives to units located outside but operating as a part of the primary processing unit in one of these areas would facilitate cutting down the double transportation cost and help the products from these areas become marketable at competitive rates. The consumer would also have the advantage of buying quality products from these areas at affordable prices. c. Special attention is to be laid towards setting up regulated markets with the primary objective to improve market efficiency and achieve equitable distribution of benefits between producers, traders and consumers. This will be possible by evolving strategies to strengthen regulated market yields and equipping them with grading, cleaning and packaging facilities, along with market information systems. d. Efforts are to be made to develop packaging technologies for individual products to increase their shelf life and improve consumer acceptance, both in the domestic and international markets. e. Efforts are to be made to harmonise food laws to encourage production of high quality products with minimum intervention from regulatory authorities. The complexity of multiple administering authorities for food processing enterprises is also required to be simplified by developing an integrated and unified system.
The Food Processing Sector in India: An Overview
19
chp-2.qxd
10/18/05
9:02 AM
Page 21
CHAPTER
The Impact of Policy on Enterprises

FRUIT AND VEGETABLE PROCESSING SECTOR: AN ELABORATE PROFILE IN TERMS OF GENERIC
AND INTERNAIONAL MARKETING
lthough India is the largest producer of fruit and vegetables, their processing has largely remained in primary forms like pickling, sun drying and/or making preserves. Commercial processing is rather poor. Indians largely prefer fresh fruit and vegetables over processed foods because of economic reasons and food habits. High packaging costs make them expensive. Therefore, the Ministry has offered specific support for the marketing and generic promotion of processed food. Since India has varied agro-climatic conditions, some products are available throughout the year. Fruits and vegetables like banana are non-seasonal, while apples, oranges, potatoes, etc. are put in the cold storages and made available in the off-season as well. Fruits like guavas and oranges have two seasons and so are available fresh almost half the year. Units registered under the Fruit Products Order, 1955, are distributed across the country and most are in cottage and small-scale sector. Liberalisation of the countrys economic policies has attracted a few modern processing plants to produce mango pulp and tomato paste in aseptic packing and freeze drying of fruit and vegetables including mushroom. Joint ventures with USA, UK, Netherlands, Switzerland and Germany are on, focussing on technology transfer, financial and marketing tie-ups. Such projects focus on production of canned mushrooms, banana and mango puree, fruit concentrates, dehydration of vegetables and frozen fruits/vegetables. The policy has been supporting such options. Items already being produced in the country include, pulps, particularly of tomatoes and mangoes, ready-to-serve juices, canned fruits, jam, squashes etc, while carbonated fruit drinks, dehydrated and freeze-dried fruits, fruit juice concentrate are poised to pick up. There is varied potential for the demand of processed food. The markets for mango pulp are Saudi Arabia, Kuwait, UAE, Netherlands and Hong Kong, while pickles and chutneys go to the USA, UK and Germany, besides Saudi Arabia and UAE. Products like tomato paste, jams, jellies and juices are exported to the USA, Russia, UK, UAE and Netherlands.
chp-2.qxd
10/18/05
9:02 AM
Page 22
The Ministry of Commerce and the Ministry of Food Processing Industries have been giving specific support to international marketing initiatives.
Policy to bridge the gap between resource base and value addition
India is among the worlds major producers of food products. It ranks first in the production of cereals, livestock population and milk; is the second largest fruit and vegetable producer; and among the top five producers of rice, wheat, groundnut, tea, coffee, tobacco, spices, sugar and oilseeds. And yet, Indias share in international food trade is less than two per cent. Value addition to food by processing is poor. This has encouraged a policy thrust on the sector and enlarged the Food Processing Industry Ministrys scope to promote it. It includes developing fruit/vegetable processing, food grain milling, dairy products and processing of poultry, eggs and meat products and fish, including canning and freezing. This is in addition to developing enterprises in bread, oilseeds, breakfast food, biscuits, confectionary, non-alcoholic beer and aerated drinks. While the Ministry supports investment in R&D and product development, the Agricultural and Processed Food Products Export Development Authority (APEDA) offers subsidy to upgrade laboratory facilities. The Development Commissioner of Small Scale Industries (DCSSI) offers subsidy for implementation of ISO systems in business. The production quality as also hygienic and sanitary improvement in manufacture are accorded priority. Simultaneously, the production base is being enlarged by modern methods of cultivation to improve yield and productivity. A cold chain is also being developed to reduce post-harvest losses and maintain freshness. With new hybrid varieties being added, the production season is getting extended. Thrust is being given to enhance productivity with better raw material. Since liberalisation, several policy measures have come for regulation and control, fiscal changes, export and import, taxation, exchange and interest rate control, export promotion and several incentives to high priority industry, including food processing.
Deregulation and Decontrol

The policy initiatives include an important incentive that industrial license is not required for most food processing enterprises, except for products like
22 Chapter Two
chp-2.qxd
10/18/05
9:02 AM
Page 23
beer, potable alcohol and wines, cane sugar, hydrogenated animal fat and oils, etc, and some items reserved for exclusive manufacture in the SSI sector, like pickles, chutneys, bread, confectionary, mustard, sesame and groundnut oil, ground and processed spices, other than spice oil and oleoresin, sweetened cashew nut products and tapioca flour. Price controls have been removed. Automatic investment approval up to a certain percentage of foreign equity or cent per cent NRI equity is allowed for most of the sector, except in the case of malted food, alcoholic beverages, etc. Use of foreign brand names is freely permitted. Most items can be freely imported and exported. Capital goods may also be freely imported, including second-hand ones. These initiatives are likely to encourage entrepreneurship in the field.
Fiscal Incentives with Additional Encouragement for Export

Under this, excise and import duty rates have been reduced. Many processed food items are exempted from excise duty. There are limited-period tax incentives for new manufacturing units, except for beer, wine, aerated water using flavouring concentrates, confectionery, chocolate, etc. A high capital investment subsidy is available for new processing units. Food processing is one of the thrust areas identified for exports. Free Trade Zones (FTZs) and Export Promotion Zones (EPZs) have been set up with necessary infrastructure. Capital goods, including spares, can be imported at concessional customs duty, subject to export obligations under the Export Promotion Capital Goods (EPCG). Export-linked duty-free imports are also allowed. Enterprises in EPZs and FTZs may retain a percentage of foreign exchange receipts in foreign currency accounts and a percentage of output is saleable domestically. Profit from export sales are, however, being progressively brought under the corporate tax bracket. Effective capital structuring of projects has therefore become more critical.
The WTO Agreement and the Sector

Trade liberalisation under the World Trade Organisation (WTO) is expected to improve scope for exports for the Indian food processing industry, while smoothening import barriers on inputs and making enterprises cost competitive. Enterprises will, however, need to improve safety and quality standards to reap the benefits of the new world order and avoid being penalised for nontariff barriers. They will have to progressively follow a food quality management system called Hazard Analysis and Critical Control Points (HACCP). Many developed countries have already made this mandatory. The seafood processing enterprises have already faced the brunt of related bans from importing countries asking them to implement the costly requirements. Be it
23
chp-2.qxd
10/18/05
9:02 AM
Page 24
with regard to the aflatoxin content in groundnut, lead in milk or sulphur in sugar, it is safer to meet the more stringent international norms. Quality, safety and health are the buzzwords for the food enterprise of tomorrow.
IMPACT OF POLICY IN TERMS OF INTEREST RATES AND INCOME TAX ON THE STRUCTURING OF A PROJECT
Policy incentives in terms of investment subsidies and duty relief have an obvious impact on project viability. Policy-related variables, such as interest rates on term loans and the working capital, also affect project viability. Similarly do variables, such as income tax on profit or net earnings of an enterprise. These variables have serious implications on the structuring of a project in terms of debt or loan and equity (promoters contribution or investment) in either fixed assets such as equipment, land, and buildings or with regard to current assets or working capital (or money required for operating a business). The latter may imply cash, stock and receivables for credit sale. The structuring of a business in terms of capital basically involves decisions on the debt and equity mix. Policy variables also have implications on the structuring of costs.
Implication of policy variables on the structure of capital of an enterprise

Consider a mixed fruit jam project Manjunath Enterprises that is to be sanctioned in Mysore, Karnataka. The enterprise requires an investment (project cost) of Rs.50 lakh. The project expects to earn a Return On Investment (ROI) of about 24 per cent every year. The enterprise plans to manufacture juice concentrates and jams. The interest rate on loan (debt) is about 15 per cent. If the project were structured in terms of wholly equity investment by the promoter, it would yield a much lower return on equity. For illustration, assume the tax on earnings is 50 per cent. An ROI of 24 per cent implies a net profit of Rs.6 lakh after tax. In the case of an alternative option assume that half the investment is financed by equity and one half (Rs.25 lakh) by debt. In this case it will be observed that net profit after payment of interest on loan and tax will be Rs.4,12,500. By investing an equity of Rs.50 lakh on this project, the net profit works out to Rs.6 lakh and alternatively, investing equity of only Rs.25 lakh net profit works out to Rs.4.125 lakh. In terms of return on money invested by the entrepreneur, return on the second case is about 33 per cent higher! This benefit is due to the tax shield on interest paid on debt. Therefore, the structure of investment is dependent on tax rates. If they
24 Chapter Two
chp-2.qxd
10/18/05
9:02 AM
Page 25
are low or negligible or not `declared, it does not make a difference if the business is financed by high debt or high equity. Similarly, the structuring of a project should be based on interest rates on debt. If interest rates are higher than the ROI, going in for debt will kill an enterprise, as repayment will not be possible. It is, therefore, necessary to understand past trends and make a judgement on future trends on these two parameters before taking a decision on the structuring of a business in terms of capital. In fact, there is yet another critical impact on debt-equity mix on a business. Consider Tables 2.1 and 2.2 below. The Tables consider profit after taxes for a given increase in the ROI in two circumstances. A project that entails an investment of Rs.50 lakh is considered. Table 2.1 considers an option of 25 per cent equity in capital structure while Table 2.2 considers 100 per cent equity investment. The Tables indicate the impact of the structure of capital of the enterprise on Profit before Tax (PBT) and Profit after Tax (PAT). Table 2.1 Capital Structure of Manjunath Enterprises: (75% debt, 25% equity) (Rs.in lakhs) 8% (Rs.4 lakhs) 12% (Rs.6 lakhs) 3 1 0.5 0.5 3 3 1.5 1.5
ROI Interest PBT Taxes PAT
Table 2.2 Structure of Capital of Manjunath Enterprises: (100% equity) (Rs.in lakhs) ROI PDBIT Interest PBT Taxes PAT 8% 4 4 2 2 12% 6 6 3 3
25
chp-2.qxd
10/18/05
9:02 AM
Page 26
The tables above illustrate a similar benefit with regard to the rate of increase in profit with similar increase in return on investment. The ROI increases by 50 per cent in both cases but profit after taxes increases by the same amount in a self-financed project (Table 2.2) but by 200 per cent if highly debt financed (Table 2.1). Therefore the rate of increase in profit is much higher for a unit increase in the ROI, if the project is highly debt financed.
Implication of policy variables on structuring project costs

Compare the proposed cost structure of Arundhati Enterprises in Ahmedabad with another proposed enterprise ABC Food Products. The latter plans to focus on largely outsourced manufacture of pickles, while Arundhati Enterprises plans on largely in-house processing of pickles. In the case of Arundhati Enterprises fixed costs are higher while in the case of ABC Food Products, variable costs are higher. The fixed cost in operation includes costs such as rent that do not vary with output, while variable costs such as raw-material purchase costs do. As the table below indicates, Arundhati Enterprises could make more profit than the outsourcing packager (ABC Enterprises). This indicates that scale economies operate on the manufacturing front. Nevertheless, in the case of Arundhati Enterprises, the extent Table 2.3 Cost Structure of Enterprises ABC Enterprises 80,000 Rs.40 Rs.30 Rs.10 Rs.32,00,000 Rs.24,00,000 Rs.8,00,000 Rs.1,60,000 Rs.6,40,000 Arundhati Enterprises 80,000 Rs.40 Rs.10 Rs.30 Rs.32,00,000 Rs.8,00,000 Rs.24,00,000 Rs.10,00,000 Rs.14,00,000
Production (Jars) Selling price (per jar) Variable price (per jar) Contribution (per jar) Sales revenue (Total) Variable cost (Total) Contribution (Total) Fixed cost (Total) Profit (Total)
26
Chapter Two
chp-2.qxd
10/18/05
9:02 AM
Page 27
of fall in profits with fall in sales or sales margins is likely to be higher. The interest cost on term loan is a fixed cost, while the interest cost on the working capital is a variable cost. Arundhati Enterprises is likely to operate with a substantial term loan while ABC enterprises is likely to be operating more with mere working capital. It may be estimated that a 20 per cent fall in sales will lead to about 25 per cent fall in profit in the case of ABC Enterprises. There is a much greater fall (about 34 per cent) in the case of Arundhati Enterprises. The reverse operates in the case of an increase in sales. Therefore, studying potential for interest rate change on the working capital and term loans and market demand which in turn may be affected by policy variables such as customs duties on finished products (market protection) remains critical either in terms of reducing business risk or enhancing profitability. Therefore, particularly for those who declare profit realistically such as exporters, interest rates and income tax rates critically determine the extent of debt finance to be sought for a project. This benefit occurs due to the tax shield on interest on loan or debt finance. Similarly the trend falls in interest rates as indicated by fall in the Prime Lending Rate (PLR) of lending institutions as also increased implementation of income tax rules may encourage going in for debt finance. The cost structure in a business, which in effect helps decide on the size of an enterprise in terms of fixed investment, is affected by interest rates and customs duties, among other variables. Further, customs duties on inputs used by food processing manufacturers, for instance, may initially help on deciding on the structuring of a project. For instance, customs duties on oranges as raw material may be rather stagnant at 35 per cent, while customs duties on squashes as finished product may be progressively reducing at a higher rate. In this case, the manufacture of a standard product (with little scope for differentiation) like a squash may warrant export orientation as to import inputs sans duty (as per the export-import policy) and remain competitive.
27
chp-2.qxd
10/18/05
9:02 AM
Page 28
THE IMPORTANCE OF POLICY: THE CASES OF PURSHOTTAM ENTERPRISES MAHILA UDHYAM SANSTHA
AND
The case of Purshottam Enterprises in Patna exemplifies the importance of sourcing and production management, including purchase decisions and channel motivation, to serve as critical success determinants of projects in the sector. Purshottam Enterprises was launched in 1985. It initially started off as a flourmill, which set up a retail outlet. The enterprise has graduated from a turnover of about Rs.40 lakh to about Rs.3 crore. The enterprise, which started off as a tiny unit, has now become a flourishing small-scale enterprise. This has happened without its availing support in the form of any incentive or schemes. In fact, the promoter has been blissfully ignorant of such schemes. Investment in equipment over the years has been done by the promoter out of the surplus generated by the business. Further, the enterprise uses formal finance of only about Rs.10 lakh in the form of a cash credit facility from a bank. It uses about Rs.60 lakh of own funds as the working capital. The enterprise is involved in the manufacture of spices, viz. chilly powder and various types of spices. The enterprise operates through 183 distributors. Raw material is sourced from various parts of India directly viz. chillies from Andhra Pradesh, for instance. The working capital is largely locked up in credit sales. About 25 per cent of output is sold on cash basis and 75 per cent on credit sales of 2 months. A cash discount of 3 per cent is offered for cash purchase. The enterprise has not availed itself of any bills discounting facility from agencies such as the National Small Industries Corporation (NSIC) or commercial banks. As a matter of fact, blocking on own funds on equipment and fixed assets and on the working capital has affected potential growth prospects of the enterprise. Policy and support system incentives have not been effectively availed of. There is a virtual dearth of information on support schemes. Policy and support seems to have hardly played any role in the current success of this enterprise. The enterprise proposes to attempt at exporting its spices-based masalas to target NRIs viz. ethnic Biharis in particular. However, information on the Market Development Assistance Schemes of the Ministry of Commerce or the Development CommissionerSmall Scale Industry (DCSSI) is not known. The enterprise would like to go in for ISO implementation but is ignorant of sources such as the Indian Statistical Institute and the Small Industries Service Institute. The enterprise, therefore, plans its growth as it had operated since inceptionabsolutely self-driven and not policy or support driven. Though, a costly proposition, the case of Purshottam
28 Chapter Two
chp-2.qxd
10/18/05
9:02 AM
Page 29
Enterprises highlights that effective management of a business is the key to performance. Policy support may be required to augment and not substitute this requirement. Handholding needs to be coupled with business acumen and drive: Policy and support alone will hardly suffice. Consider the enterprises established by the support system in the 1990s. These include enterprises established by the Khadi and Village Industry Board in different states. The cottage industries department in Tamil Nadu had established a self-help group of 200 women under the leadership of Neelavalli who acts as the President of Mahila Udhyam Sanstha. The enterprise had secured about Rs.1 lakh for equipment with a significant amount of subsidy and reaps interest subsidy as to secure C.C. facility at the rate of only about 9 per cent. Support agencies such as the State Export Promotion Corporation have helped them indirectly export their papads to Europe. Support in the form of entrepreneurship and management skill development training has been received and financial support in terms of soft loans and marketing support offered. But since the beginning the enterprises turnover has remained stagnant. Despite support right from the conception stage, the enterprise has hardly even taken off despite a decade of operation.
Policy with Regard to Sales Tax and Customs Duties

A masala manufacturer in Guwahati makes chilli powder and sells it in an average lot size of 1 kg. He gives his distributor a margin of 15 per cent and his retailer a margin of 30 per cent on the MRP. He also offers various schemes for retailers such as a one kg pack for every 10 kg of material paid for. He essentially uses retailer or channel motivation at the point of sale as a tool to push his products. Bigger masala manufacturers and suppliers are believed to offer a margin of only 7 per cent to distributors and 5 per cent to retailers. The net margin on chillies is believed to be about 10 per cent. His own costing of the product is as follows: for one kg. of chilliraw material cost works out to Rs.4, labour about Rs.1.5, packaging about Rs.2.5, marketing (advertising/hoardings) Rs.3 and transport (raw material and finished products) Rs.2. The product is offered to distributors at Rs.19, viz. he believes he makes a net profit of about Rs.6. He does not consider interest or opportunity on own cost of capital under which circumstance margins may vary. Large Indian
29
chp-2.qxd
10/18/05
9:02 AM
Page 30
business houses are believed to enjoy economy of scale advantages (in terms of lower per unit cost) of even 15-20 per cent on various products. It is their marketing expenses in terms of TV commercials, etc., that are believed to be high. It is believed that larger enterprises focus on a consumer-pull strategy, while smaller enterprises lay emphasis on a customer-push strategy. The latter seems to work better! It is believed that masalas and chilli powders, for instance, have to be blended to suit the palate of different communities in India. Hence, large enterprises do not manufacture many masala varieties; cottage and small units do well. It is, therefore, efficient marketing that serves as a critical success determinant. Yashwant Bakery in Patna has a turnover of Rs.1.25 crore. The equipment utilised include semi-automatic mixers. The promoter had taken an NSIC loan of Rs.25 lakh. Equipment was sourced from an Indian agent of the machinery manufacturer. The enterprises main competitor is a medium-sized manufacturer. The competitor, who has a turnover of over Rs.10 crore and a market share of about 50 per cent in the region, uses fully automatic equipment. Yashwant Bakery seems to have not realised the value of using the push strategy to enhance market reach. Perhaps, this is why both enterprises, which started at about the same time with similar investment, have different performances. For instance, in the 400 gm. sandwich bread that he manufactures, the retailer is offered a margin of Rs.2 and distributor a margin of 80 paise. He sells at Rs.7.20 to distributors. He makes a net margin of about 8 per cent on sale price. Price has been about the same for over a 3 year period. Unlike his competitor, he gives exclusive agency or distributorships and low customer or middleman margins. The larger enterprise, which has the bulk of the market share in the region, offers 50 per cent higher margins to dealers (wholesalers) and retailers. No wonder Yashwant Bakery has a 5 per cent market share of Patna city, while his competitor is believed to have an over 50 per cent market share. What is also obvious is that market growth in the case of chilli powder and bread, for instance, is more likely to be merely related to population growth. Setting up new projects in such relatively saturated markets could only affect the performance of existing enterprises, while affecting the sustainability of new enterprises. Existing enterprises in the sector would, in fact, have to look for options such as technology upgradation to further reduce costs and enhance performance. Further, with regard to new projects, a focus on value added and newer products such as bread with soya etc. would benefit. New value added products may
30
Chapter Two
chp-2.qxd
10/18/05
9:02 AM
Page 31
be considered by new projects and technology upgradation options may be pursued by existing enterprises as to reduce costs and increase margins in new markets. Technology upgradation may be in terms of incorporating high-speed mixers and kneading machinery. Policy is often skewed towards protecting raw material providers. For example, in 400 gms. of sandwich bread offered at Rs.7.20, raw material cost (maida, wheat flour, yeast) is about 65 per cent, labour 10 per cent, electricity 5 per cent and chemicals and salt and oil about 12 per cent. Raw material costs in India are skewed towards the higher side in the international perspective due to lower productivity in agriculture. With regard to surviving even in the context of high domestic raw material costs, enterprises may do well if they focus on ethnic and traditional products. South East Asian competitors cannot afford to focus on masala powders targeted at the region specific taste and preference segments! Sickness in the industry is believed to be largely due to problems in credit realisation and inefficient speculation in raw material prices, both of which affect performance. Efficient management is the key. A masala powder and confectionery manufacturer in Chennai has the Agmark label and is also involved in intra-state trade. He believes that while bread has no sales tax, items like masala and cakes and pastries have tax fixed at 2 per cent on Masalas and 12 per cent on cakes and pastries. Supplying beyond a state could imply payment of local sales tax in a state plus octroi at the rate of, say, 2 per cent for entry into different regions as also sales tax in the target state. This effectively keeps away efficient competition from other states, a sort of tariff barrier to protect local manufacturers in a state. Further, food inspectors in other states are believed to be a source of harassment in terms of pulling up intra-state suppliers under the Weights and Measures Act, ingredient content and mix, labelling norms, etc. While the various acts are necessary, filing cases in local courts by authorities proves to be expensive for entrepreneurs. This entrepreneur in Chennai has been going to court in Andhra Pradesh for the last 25 years to resolve a relevant dispute. A promoter needs to understand such aspects before planning and implementing a business. The margins secured by entrepreneurs in some sectors are believed to be phenomenal. In the manufacture of confectionery products such as pedas, for instance, for the manufacturing enterprises in Pune, which are integrated into own retail outlets, returns on cost of production are expected to be 200 per cent. Cottage and
31
chp-2.qxd
10/18/05
9:02 AM
Page 32
smaller enterprises do well if they operate in fragmented markets. Markets may be fragmented either due to the perishable nature of the product with low shelf life such as bread or due to regional variations in preferred taste or choice. Pickles and certain spices are all examples. Further, in some products such as rotis, which are convenience products that are tending towards becoming necessities, pricing has to be low. MNCs are not likely to enter into such products, as it is difficult to charge premium prices for their brand image. Hence, small enterprises have their own opportunities in the sector, while larger enterprises have theirs. Regional characteristics of demand are also critical. In cities like Mumbai and Pune, the fast pace of life and palate of local consumers have encouraged a wide range of processed enterprises to be established. In a city like Ahmedabad, however, convenience foods have not made as much an entry. Hence, such aspects also play a critical role in determining the success of a project. An example of regional variation is that of chilli preferred in Gujarat which is less pungent than in other states. Consumers stress more on colour, i.e. in terms of dark red. Bigger enterprises may find it difficult to enter into such fragmented markets by reaping scale economies in manufacturing or purchase as their production run may not be optimised, particularly if such fragmented markets are relatively small as also price conscious. Exchange rates are critical policy related factors for price competitiveness. Basmati rice from Pakistan has an advantage over that from India, currently, given their lower rupeedollar rates. The cases of different enterprises presented in this section indicate the importance of management along with the need for incorporating possible policy trends such as regulatory norms, sales tax, customs duties, etc., while planning a project and implementing it.
32
Chapter Two
chp-3.qxd
10/18/05
9:04 AM
Page 33
CHAPTER
3
Who is an Entrepreneur?
ithout entrepreneurship and growing number of entrepreneurs, an economy is certain to become sluggish in growth. Entrepreneurial dynamism forms the cornerstone of a progressive society as it is a purposeful activity that attempts to create value through recognition of business opportunity, management of risk appropriate to opportunity and through communicative and management skills to mobilise human, financial and material resources necessary to bring a project to fruition. This gives a definite upsurge to the economic growth of a nation. Economic growth is an upward change whereby the per capita income increases over a long period of time. If economic growth is the effect, entrepreneur is the cause. Entrepreneurs are the ones who explore opportunities, scan the environment, mobilize resources, convert ideas into viable business proposition and provide new products and services to the society by bringing together and combining various factors of production. An entrepreneurial individual has a distinct concept, vision and a dream, which he/she is able to convert into products. Such individuals are driven by task, challenge and opportunity with very high achievement orientation. If you wish to start and succeed in your enterprise, you need to play different roles at different stages. Some essential qualities of entrepreneurs are: 1. A strong desire to win. (NEED FOR ACHIEVEMENT) Most people dream of success, but seldom do anything to implement it. In contrast, entrepreneurs have a strong desire to continuously hit new goals and do not rest till they win. 2. An approach of never-say-die. (PERSEVERANCE) Once committed to a goal and a course of action, entrepreneurs never retract. Difficulties do not deter them and they work hard till the entire project is successfully accomplished.
chp-3.qxd
10/18/05
9:04 AM
Page 34
3. Entrepreneurs prefer a middle-of-the-road strategy while handling tricky situations. (MODERATE RISK BEARING) They dont take high risks; they are not gamblers. They prefer a moderate risk to a wild gamble, high enough to be exciting and containing a reasonable winning chance. 4. Alert to opportunities and seizing them to their advantage. (ABILITY TO FIND AND EXPLORE OPPORTUNITY) Entrepreneurs are innovative and can convert crises into opportunities. But they are realistic enough to ensure that the opportunity suitably dovetails into realising their goals. 5. They have a dispassionate approach to problems. (ANALYTICAL ABILITY) Entrepreneurs will not let personal likes or dislikes come in the way of their taking a business decision. They seek out experts for assistance rather than friends and relatives. Their decisions are objective and not emotional or impulsive. 6. It is important for them to know how they are faring when they work on their goals. (USING FEEDBACK) Entrepreneurs take immediate feedback on performance and prefer prompt and accurate data, irrespective of whether these are favourable or not. Unfavourable news spurs them into making amends to attain their goals. 7. Entrepreneurs do not get deterred by unfamiliar situations. (FACING UNCERTAINTY) Achievement-driven people are optimistic even in unfamiliar situations. Even if they find the odds daunting, they see no reason why they cant succeed with their treasure of abilities. They march undeterred, making the best of fine opportunities that come their way, even without guidelines. They quickly come to grips with the new environment and present a picture of boldness and prudence. They apply their special insight and skill to quickly understand the environment and adapt to it. 8. They dislike working for others. (INDEPENDENCE) Entrepreneurs do not like to work for others and therefore start off on their own. They wish to be their own masters and be responsible for their own decisions.
34 Chapter Three
chp-3.qxd
10/18/05
9:04 AM
Page 35
9. They are flexible. (FLEXIBILITY) Successful entrepreneurs have an open mind and do not hesitate to change their decisions. 10. Entrepreneurs think ahead of others and plan for the future. (PLANNING) Most successful people set goals for themselves and plan to realise them in a time frame. 11. Entrepreneurs can deal with people at all levels. (INTERPERSONAL SKILLS) An entrepreneur comes across all kinds of people. He has to make them work for him and with him to help realise his objectives. He likes working with people and has skills to deal with them. 12. They can influence others. (MOTIVATION) Successful entrepreneurs can influence others and motivate them to think and act in their way. 13. They can work for long hours and simultaneously tackle different problems. (WITHSTANDING STRESS) As a key figure in his enterprise, the entrepreneur has to cope with several situations simultaneously and take the right decisions, even if it involves physical and emotional stress. This is only possible if one has the capacity to work long hours and still keep cool. 14. They know themselves. (POSITIVE SELF-CONCEPT) An achiever channelises his fantasies into worthwhile, achievable goals and sets standards for excellence. He can do this for he knows his strengths and weaknesses, and so adopts a positive approach. He is seldom negative. 15. Entrepreneurs think ahead. (ORIENTATION FOR FUTURE) They have the ability to look into the future. They wont allow the past to bother them and think only of the present and the future. Bygones are bygones, what of now? This is their usual response. An individual may not have all these qualities, but most will have many. The first step for a person aspiring to become an entrepreneur is to make an inventory of his traits. This self-awareness and analysis will help him define his strengths and overcome weaknesses.
Who is an Entreprenuer? 35
chp-4.qxd
10/18/05
9:05 AM
Page 37
CHAPTER
Soft Skills for Entrepreneurs
COMMUNICATION SKILLS
ommunication is the process of exchanging ideas, facts or opinions by two or more persons. For communicating, we use different modes, like oral, written or non-verbal. The process is explained by using this diagram: Who? Through which channel? Medium To whom? Impact
Say what? Message
Communicator
Receiver
Effect
Major vehicles for communication: Speech Face to face (oral) Writing Formal long (reports, documents, etc) Non-verbal Facial expression, body language In life, we use several methods to communicate effectively (i.e. gestures/ watch for response/ words/ pictures). Successful communication depends on correct receipt of the message and receiving is an active element. Communication vehicles will be effective only if both parties are involved in the process. Good communicators listen and observe. They are alert receivers of response signals while they are also communicating. This helps them tailor their communication style to make it easier for the receiver to absorb or accept the message.
chp-4.qxd
10/18/05
9:05 AM
Page 38
There are certain rules for communication: i. Fitness of purpose: Will it achieve the objective? What, why, when, where, how? Select the most effective way to achieve the objective. ii. Quality of the message: Always maintain clarity, accuracy and simplicity. Dont leave the important part of the message merely implied. We all transmit personal, non-verbal signals continuously, mostly reflecting our attitudes and responses to communication systems. By observing and responding to signals appropriately, we can build on the positives and weed out the negatives. To some extent, most people respond to non-verbal communication, but often only to the obvious, well-known signals. The table below gives examples of such signals and their implications:
Sr. No. Behaviour
1 Leaning Forward Leaning Back
Reason
Concentration Increased emphasis Taking time to think Inviting expansion Looking for conclusion Extreme confidence Relaxation Failing attention Dislike what is communicated Lack of cooperation Disapproval Disbelief Dislike
Circumstances
Important meeting Negotiation After a proposition/explanation Towards end of meeting
Responses
Make points clearly State your own case Allow silence thought Wait for others to speak first
Clasping both hands behind neck Straight gaze No head movement
Non-threatening situations In charge of situations Disputed occasions Unwelcome instructions
Maintain openness of situatiuon Be positive about your own case Ask for reactions/ feelings Ask for suggestions
Narrowing eyes
Expects to challenge Patience may be short
Allows expression of opinion Shows that you acknowledge difference Give your reasons
Source: Adapted from Communication Skills, 1996 by Carter Wendy
38
Chapter Four
chp-4.qxd
10/18/05
9:05 AM
Page 39
CREATIVITY
AND
PROBLEM SOLVING
An entrepreneur has to be creative. He has to arouse and enhance creativity and experience competition not only with others but also the standards of excellence set for himself. Certain pre-conceived ideas create barriers in the growth of creative thinking. The barriers are: 1. Self-imposed 2. Restricted mindset 3. Nature of compliance 4. Backtracking to obvious challenge 5. Jumping to conclusion 6. Fear of being ridiculed It calls for a positive attitude, an open mind, insight and right perception to remove these barriers and arouse and enhance creativity. Everyone faces problems of different nature and magnitude. Sometimes in daily life, we encounter problems so often that we dont even notice them and this is because of our monotonous experience in dealing with them and hence the spontaneous reactions result in solutions. But we do get stuck when faced with unusual and difficult problems, as our routine reactions fail to produce solutions. In such cases, different approaches and ways have to be tried out. Similarly, as an entrepreneur you may face several problems while managing your small-scale enterprise. If you develop an appropriate system, approach and methodology to solve problems, it will prepare you to manage your affairs and problems smoothly and without tension. There are several qualitative and quantitative approaches evolved in management science to help solve problems. The right strategy would be to understand your own environment, resources, capacities, limitations, strengths and weaknesses in order to design the right approach. This approach will help you, initially, in working on problems and, later, in formulating your own strategy to solve them. These steps help you have a problem-solving attitude and mechanism: Create a desire to solve problems Recognise the problem Formulate the possible causes
Soft Skills for Entrepreneurs 39
chp-4.qxd
10/18/05
9:05 AM
Page 40
Specify the problem Test each cause Explain each cause with minimum assumptions Verify your explanation and determine the cause Establish objectives about the resources to be produced and resources used Classify objectives into MUST, DESIRABLE and CAN BE IGNORED categories Generate alternative solutions Choose one solution Compare each solution in terms of positive and adverse consequences Make a decision to implement Internalise the process
40
Chapter Four
chp-5.qxd
10/18/05
9:06 AM
Page 41
CHAPTER
Planning a Small-Scale Unit: Whom to Approach for What
he speed with which you implement your project is critical during these days of competition. If you have planned in advance and evaluated resources required, your project will be implemented in the shortest possible time. The first step to initiate planning is to identify a suitable project.
PROJECT IDENTIFICATION
There are no set rules to identify a suitable project, though this is one decision on which the success of your entire venture hinges. So, dont take hasty decisions. Most prospective entrepreneurs tend to display the herd tendency and go for a project, which people have already ventured into. This is not a healthy attitude as success of one in a particular field does not guarantee success of the other. While identifying a suitable project, you should make a SWOT analysis of your own strengths and weaknesses. There are more details in a separate chapter. The next step, after you have selected your project, is to collect all information about it. The most important information is about the potential market of the items you selected. There are several ways for this. You may go for a basic desk survey, a snap survey or a detailed market survey. A separate chapter provides guidelines to assess the market potential.
PROJECT REPORT: A FORECAST PLAN

Now, you will need to prepare a feasibility report about your project. A feasibility report will broadly contain:
chp-5.qxd
10/18/05
9:06 AM
Page 42
a. Background of the entrepreneur and constitution of the business b. Market potential and marketing strategy c. Selection of location d. Requirements of land and building e. Manufacturing process f. Requirements of plant and machinery g. Requirement of utilities h. Requirement of raw material i. Estimated cost of the project j. Proposed means of finance k. Cost of production and profitability l. Break-even point m. Cash flow statement n. Internal rate of return
REQUIREMENTS
TO
START
BUSINESS
Selection of Location: A Vital Decision

This is extremely important. Usually, small-scale entrepreneurs are found to have a predetermined location. The location should be decided according to the proximity to sources of raw materials, consumption centers, availability of infrastructure, necessary skills in surrounding areas and availability of incentives. Sometimes the requirements conflict with one another and a particular location may not match all. Such situations want you to balance out the requirements, while also ensuring that they do not affect the viability of the project. Experience shows most entrepreneurs attaching more importance to available financial incentives and ignoring other important aspects guiding the selection of the location. Such misplaced emphasis may run the project into unviability in the long run. Your decision on the location,
42 Chapter Five
chp-5.qxd
10/18/05
9:06 AM
Page 43
therefore, should not just be based on incentives, but more on availability of infrastructure and skills.
Land and Building: Make Correct Assessment

Before assessing land requirements, you must draw up a plant layout based on the type of facilities proposed to be installed. Normally, the land should not exceed five to six times the built-up area; but it all finally depends upon the project. Land in excess of the requirement will block up funds, which could otherwise be utilised for productive purposes. The land should be free from any encumbrances and should be non-agricultural.
Select the Right Manufacturing Process

Suitable manufacturing processes have to be identified for production. Some products may need a particular process depending upon raw material availability, the prices and the quality requirement of the end product. A detailed flow chart may also be drawn with all operating parameters.
Government Formalities and Procedures

The process of planning also includes planning for execution of various government formalities. Though the government in the post-liberalisation era intends to reduce permissions/clearances to free the industry from bureaucratic controls, you need to clear specific formalities to avail certain benefits. The following formalities need to be considered for small-scale units:
i) SSI Registration: Required for the Records

Though SSI registration is not mandatory according to recent changes in the rules, it is advisable that you register your small-scale unit with the District Industries Centre (DIC) of the district where your project will be located. The government requires this registration to plan for future needs of the industry and it is in your interest to register your unit.
ii) Acquisition of Infrastructure Facilities

If you plan to locate your project in an industrial estate promoted by a government agency, you may apply for a built-up shed or a plot of land. You can start your activities once the shed/plot is offered. If you have been allotted a
Planning a Small-scale Unit: Whom to Approach for What 43
chp-5.qxd
10/18/05
9:06 AM
Page 44
plot, you can start construction after your building plans are approved. In either case, you have to apply for power connection to the State Electricity Board and for water to the authorities concerned.
iii) Pollution Control Clearance: Obtain NOC or Consent

You should also apply for obtaining an NOC from the State Pollution Control Board (PCB). If your unit is likely to be a pollution hazard or may discharge effluents, the PCB first issues an NOC with certain conditions to install facilities to check air or water pollution to specific levels. After you have installed the necessary facilities and they are satisfied, the PCB gives its consent to start operations.
iv) Constitution of the Business

You should decide on the organisational form of your business, viz. if it should be a proprietorship, partnership or a private limited company, according to the size of its operations and the degree of risk involved. In proprietorship, the gains and losses of the business rest with the proprietor, while in partnership, all the partners share the gains and the losses except the minor partners, who are exempt from bearing the losses. In a private limited company, the members take the gain or losses as per their holding in the company, for it is considered to be a separate legal entity. Once the business constitution is decided, you may undertake necessary formalities for registering the firm accordingly.
v) Arrangement of Finance for Fixed Assets and Current Assets

After taking these clearances, you may apply for a term loan either to a statelevel financial institution or a commercial bank, with a techno-economic feasibility report, including market survey, and all documentary evidence justifying your claim for the project being feasible. Once the loan is sanctioned, you may have to execute necessary legal documents mortgaging your assets. The disbursement of the term loan usually starts after you have fulfilled all the conditions and also after 50 per cent of your own capital is raised and invested in the project. The institutions generally disburse 75 per cent of the loan sanctioned on a matching basis. Thereafter, you should raise and invest the rest of your contribution to stake your claim for disbursal of the balance term loan. Simultaneously, you can also negotiate with your bankers to sanction the working capital requirements. The bankers would, however, consider the working
44 Chapter Five
chp-5.qxd
10/18/05
9:06 AM
Page 45
capital loan only after the term loan is sanctioned. If you propose to locate your project in developing areas eligible for state incentives, you will need to apply for registration and sanction with the state authority to avail the incentives. Only after you get the sanctions can you start implementing your project.
vi) Government Formalities Need to be Viewed in Proper Perspective

Experience shows that many people do not give adequate weightage to complying with various government formalities. Utmost care should be taken in this connection during the planning stage itself, as in the case of ignorance the project implementation gets delayed and incurs cost overruns, and sometimes derails the entire project. You must also be aware of the sequence of steps to be followed while planning a small-scale unit. There are no rigid rules, but experience reveals that nothing important will be missed if you follow the sequence. Some activities can be handled simultaneously. The sequence may vary according to the needs and size of your project. You may decide basing on ground realities. The steps above will help you develop an insight into project planning. Finetuning project implementation activities at the planning stage will help you coordinate resources appropriately in keeping with the project needs and avoid slippage in implementation and cost overruns. Whom to Approach for What? New entrepreneurs must know where to go for a particular piece of information as this knowledge will help them avoid a lot of running around. For this, they must know clearly what they are looking for. Some may be completely ignorant, a few may know about marketing or production or finance, etc. The completely ignorant will require initial desk work and discussions with knowledgeable persons like the EDP trainer, extension officers, businessmen, small-scale industrialists, etc. This will help you accelerate the process of enterprise establishment. Those with some knowledge will require specific information. It will be useful for them to list the various things to be completed to set up their enterprise. This desk work will give them a clear idea about the assistance they need to fulfill their activities. Various development agencies assist entrepreneurs: a. Some agencies provide only general information and you yourself have to collect specific information.
Planning a Small-scale Unit: Whom to Approach for What 45
chp-5.qxd
10/18/05
9:06 AM
Page 46
b. Some provide technical/marketing expertise in specialised areas. c. Some provide guidance in technical and financial matters, besides taking up turnkey responsibility (implementation assistance). But government formalities will have to be completed by the entrepreneurs themselves. They can contact the concerned departments/offices for information. You should only retain the relevant information/data while collecting information. You must keep important information at a proper place to find them when needed. The compilation and segregation of information will need table work and it should be compared with the checklist prepared earlier to ensure all data has been collected before actual commencement of work. Expert guidance will help in decision-making process. It will be useful to acquire first-hand information from institutions to get a clear picture of the entire exercise. A table below shows various sources of information for a new entrepreneur. They need not contact all agencies except the relevant ones. However, they must contact at least the following agencies to have knowledge about smallscale industries and the procedures: District Industries Centre Directorate/Commissioner of Industries Office State Financial Corporation Technical Consultancy Organisation and Agencies Conducting Entrepreneurship Development Programmes
46
Chapter Five
chp-5.qxd
10/18/05
9:06 AM
Page 47
Whom to contact and for what information Sr. No. 1 2 3 4 5 6 7 8 9 Area of Assistance For Selection of a Project Registration Finance Technical Guidance Training Infrastructure Raw Materials Plant & Machinery Marketing Information Sources SISI, DIC, TCOs, SFCs DIC Banks, SFCs, NSIC DIC, TCOs, CFTRI, SISI, NSIC, DFRI ED Inst., SISI, TCOs, DICs, CFTRI, NGOs DIC, IDCs, LA DIC DIC, NSIC, SISI DIC, TCOs, EPC (APEDA, MPEDA)
DIC = District Industries Centre SISI = Small Industries Service Institute TCOs = Technical Consultancy Organisations SFCs = State Financial Corporations NSIC = National Small Industries Corporation DFRI = Defence Food Research Laboratory ED Inst. = Entrepreneurship Development Organisations CFTRI = Central Food Technology Research Institute IDCs = Infrastructure Development Corporations LA = Local Authorities like Municipalities EPC (APEDA, MPEDA) = Export Promotion Council (Agriculture and Processed Food Export Development Authority, Marine Products Export Development Authority)
Planning a Small-scale Unit: Whom to Approach for What
47
chp-6.qxd
10/18/05
9:20 AM
Page 49
CHAPTER
Business Opportunity Identification

good business opportunity is that which is a techno-economically and commercially viable and feasible and environmentally sustainable proposition. Every entrepreneur needs to identify a sound opportunity. To identify an opportunity, one needs to: i. Collect basic information on local resource base, e.g. agriculture, forest and mines ii. Collect information on Opportunity Identification (OI) exercise done earlier (if any), by DIC, banks, other financial institutions, etc. iii. Discuss the potential business opportunities with existing entrepreneurs iv. Discuss with octroi and sales tax officials about the inflow of goods v. Collect information on new major investment going to materialise in the area vi. Collect negative list of banned items for financing vii. List out poor performing industries viii. Collect information on skill baseespecially on handicrafts, etc. ix. Collect information on availability of infrastructure like power, water and transport, etc. The opportunities in the food-processing sector may be classified on the basis of the following parameters: 1. Natural Resource-Based Opportunities: such as the ones based on cereals, cash crops, fruits and vegetables, agro-wastes, animals, marine-based, processing of food products like cereals and pulses,
chp-6.qxd
10/18/05
9:20 AM
Page 50
fruit preservation, pickles, honey, etc. 2. Local Industry Based: those dealing in supply of intermediary raw material, ancillarisation, job-work, recycling of industrial wastes, by-products, etc. 3. Local Demand Based: which may include products like bread, biscuits, flour, spices, etc. 4. Export Based: any local product, which is being exported; or resources available locally to manufacture the items, which have good export potential
Following the above method, will offer a large number of business opportunities. However, please remember, these opportunities are location and time specific. An opportunity today may not remain an opportunity tomorrow. Or an opportunity in a forest area may not hold good in the deserts of Rajasthan, as the resource base will change. Moreover, one would also need to assess the viability and feasibility of the opportunities before pronouncing them as business opportunities. An opportunity may be absolutely viable but may not be feasible if it is mismatched. For example, although setting up a large flourmill may be a perfectly viable proposition, it may not be feasible to set up one in Sunderbans for an illiterate rural or tribal man. Therefore, one needs to consider the following facts before deciding upon an opportunity: Ones Education Experience Economic Background Investment Capacity Family Background Managerial Capabilities Market Competition with other Producers/Size of Market Location of the Unit Availability of Technology and Process Know-how
50
Chapter Six
chp-6.qxd
10/18/05
9:20 AM
Page 51
Availability of Raw Material Availability of Skilled Workforce Availability of Required Infrastructure Project Cost Export Potential Life-cycle of the Product and Future Growth of the Product Shelf-life of the Product (highly perishable like milk or long-term like capital goods or consumer durables, etc,) Profitability of the Product Degree of Risk Gestation Period Government Policy After ascertaining these factors, a SWOT analysis of the entrepreneur vis-vis the identified opportunity should be conducted. If both match, one can proceed for a preliminary feasibility study through market survey. It is advisable to zero in two to three opportunities to finalise one. A set of introspective questions while deciding upon an opportunity: How comfortable are you with the technology? Will you be able to handle it? What is the situation of competition? How will you withstand the competition? Will you be able to muster enough resources (especially finance)? Will you be able to manage investment from your own resources? If not, how do you plan to get funds? How critical is the government support for your product? Is raw material easily available? If not, how will you manage regular supply of raw material? Will you get adequate skilled manpower? If not, how will you manage?
Business Opportunity Identification
51
chp-7.qxd
10/18/05
9:23 AM
Page 53
CHAPTER
Market Survey Tools, Preparation of Schedule and Techniques of Data Collection
arket survey is a valuable tool to help minimise risks and increase the probability of success. However, that doesnt mean it is a sure-shot way to eliminate risk and guarantee complete success. You should undertake market assessment with a survey before you finalise marketing plans for your product or service. This chapter aims to explain what a market survey is and how to conduct it. Markets are changing rapidly, becoming complex and competitive. It is difficult to keep pace with the rapidly changing demand and supply patterns as an entrepreneur is unable to respond quickly to a new environment. He needs better market understanding and a market survey puts him in contact with the market. A systematic use of this tool can reduce risks in decision-making.
WHAT
IS A
MARKET SURVEY?
A market survey is an objective and systematic collection, recording, analysis and interpretation of data about existing or potential markets for a product/service. This definition will be better understood by looking at the objectives of a market survey. During a market survey, one needs to focus on: Size of the market and the anticipated market share in terms of volume and value Pattern of demandseasonal or fluctuating in time (in a month, day, etc) Market structure
chp-7.qxd
10/18/05
9:23 AM
Page 54
Buying habits and motives of buyers Unique selling proposition of certain products/services Past and present trends affecting the selected product or similar product
PROCESS
OF
CONDUCTING
MARKET SURVEY
A systematic 5-point process is involved in a market survey: 1. Defining objectives and specific information needed: Identifying source to obtain information Assessing time and cost for the study Working methodology and action plan 2. Selecting a sample size by determining whom to contact and when 3. Preparing questionnaires for the survey 4. Collecting data and analysing it 5. Preparing a report, based on analysed data
PRIMARY AND SECONDARY SOURCES INFORMATION
OF
Conducting a market survey does not always mean contacting people directly. There may be information in the form of reports, published material or documents of trade/industry associations. Data may be collected from two sources: Primary data sources: Information coming straight from those in the specified market, e.g. in the toy market, information obtained from toy manufacturers and traders. Secondary data sources: Data existing in reports or in a published form and may not have been collected for specific purpose. Such information can also be had from census office, banks, traders and manufacturers association or published anywhere.
54 Chapter Seven
chp-7.qxd
10/18/05
9:23 AM
Page 55
SCHEDULE
FOR
MARKET SURVEY
A market survey is not restricted to collecting information on the market for a product, but also about marketing infrastructure and existing market conditions. Designing a market survey schedule could fetch a lot of data. Questions may be designed on these areas: Existence of competitors, their products and marketing strategies Information on all consumer groups Information on competing products/ similar products Attitude of existing/potential consumers, including buying preferences, behaviour etc.
DON'TS
OF
CONDUCTING
MARKET SURVEY
Do not be prejudiced. As an entrepreneur, you must be open-minded and confident. Do not be impatient or argumentative. Your objective is to get information. Do not reveal privileged information to others, for you may lose the trust of your sources. Avoid taking notes while discussing. Make notes immediately after an interview. People are not comfortable if one writes while talking. Dont interview without preparation and sequencing of questions. Ensure that the interviewee has time for you. Dont approach competitors as likely competitors but meet them as potential clients to get best results.
MARKET RESEARCH: 10 TIPS EFFECTIVE
TO BE
MORE
1. Clearly identify the issue/problem that needs to be investigated. See if any published/secondary sources of information are available for this problem.
Market Survey Tools, Preparation of Schedule and Technique of Data Collection 55
chp-7.qxd
10/18/05
9:23 AM
Page 56
2. Based on existing information, check if the problem can be defined or narrowed down. Further, with this as your basis, write down terms of reference for any subsequent study. 3. Try to look at the problems from different angles: your own point of view as producer or seller customers/consumers viewpoint as buyer and end users of products/services competitors viewpoint for they may have addressed similar problems 4. Try to remain objective throughout the market research process and check impulses/gut feeling from totally influencing the research. 5. Prepare schedule in as simple and clear a form as possible. 6. Maintain a tight control on the subject. If other subjects surface during the research, give them the attention they deserve. 7. Complete the research promptly and maintain confidentiality lest the competitors hear of it and forge ahead in the market. 8. Be prepared to take necessary action, which the research identifies. 9. Use the research immediately for the good of the enterprise. 10. Review all market research exercise and processesthe lessons learnt and areas to improve next time.
MODEL QUESTIONNAIRE For Market Potential
FOR
MARKET SURVEY
Collect data about sources of market information like consumers, suppliers and manufacturers. A. Consumers What is their annual consumption and requirement? What is their present source of supply?
56
Chapter Seven
chp-7.qxd
10/18/05
9:23 AM
Page 57
What is the customers brand loyalty and preferences about price, quality, payment terms, etc? Are they satisfied with the present product and supply? What is their purchasing criteria and purchasing power? What is the consumption pattern? (basis to calculate their requirements) What could be the future consumption pattern, in quantity and quality due to technological changes, etc? What is the size of the average order, specifications and time and frequency of their placement? Will any government institutions/departments or any company/industry buy the products? Is it possible to establish linkages with them, and how? What is the life of your potential buyer? Their age group, sex? What geographical area they live in? Urban, village and which part of the country? B. Suppliers (Traders) Who are the principal traders in the item, their range of products and business terms/commissions, etc? What are the possibility to trade with them and on what business terms? What is the normal stock level maintained and problems in stocking? What are future predictions on business conditions? C. Manufacturers and Competitors What are their products range, installed capacity, selling price? What are their normal business terms about payment, price, etc? What are their salient features, like technical skill, finance, other resources, etc.?
Market Survey Tools, Preparation of Schedule and Technique of Data Collection
57
chp-7.qxd
10/18/05
9:23 AM
Page 58
What are their strengths and weaknesses? (Try to do their SWOT analysis) Where do they get information regarding market and consumer profiles from? For Information on Raw Materials Who are the major manufacturers/suppliers? What is the time required to get raw material after order placement? Supply terms (tax structure, price, packing, payment, etc)? Cost of transportation? What is the standard or minimum order quantity? Is raw material freely available or is there a quota system? Will any decision/policy affect its availability or price? For Information on Machinery and Equipment Who are the manufacturers/suppliers? What capacity, specifications and brands are available in market? What is the price of the machine? (Consider all coststaxes, transport, accessories, etc.) Which electrical equipments, like motors, starters, switches, are needed? What performance guarantees/warranties are given? Is the supplier/manufacturer reputed and reliable? What is the normal repair/maintenance cost per year? What spare parts would be frequently required? What quality and maximum output (production) a machine can give? Does the supplier train you/staff to acquire skills to operate machinery?
58
Chapter Seven
chp-7.qxd
10/18/05
9:23 AM
Page 59
Suggested Sources of Technology and List of Machinery Manufacturers and Suppliers

A K G FOOD PRODUCTS 168 B B Chatterjee Road KOLKATA 700 042 Pr: Food Processing Equipments A M B AGROTECH Ashvini Layout Nr. Sahakar Nagar AKOLA 444 004 Pr: Mini Dal Mill A V ENGINEERING WORKS 12-A, Adj.Hira Automobile Factory Area PATIALA 147 001 Pr: Automatic Biscuit making plant ADVANCE EQUIPMENT CO. Navjivan Society Building No.3/2/7 Bombay Central MUMBAI - 400 008 Pr: Bakery Equipments, Meat/Fish, Poultry Processing/Packaging plant AERO THERM SYSTEMS PVT.LTD. Plot No.1517, Phase III GIDC (Vatva) AHMEDABAD 380 445 Pr: Hot Water Generators, Steam Boilers, Fluid Bed Dryers, Tray Dryers AGARAM INDUSTRIES 126, Nelson Road Aminjikarai CHENNAI 600 029 Pr: Milk Analytical Instruments, Pasta Making Machines, Food Analytical Instruments AGRITECH INDIA FOODS 8, Manilaxmi Apts. Daxini Society Maninagar AHMEDABAD 380 008 Pr: Processed Food Machinery, Beverage Processing Machinery AGRO THERMODYNE CO. 8/4, Shamanna Layout B/h. Mangaram Factory Gorugunte Palya BANGALORE 560 002 Pr: Bakery/Biscuit making Equipments BAHUBALI ENGINEERING 5, Parekh Nagar, S.V. Road Kandivali (W) MUMBAI 400 067 Pr: S S Food Processing Equipments BAJAJ MECHANICALS C-582, New Friends Colony NEW DELHI 110 065 Pr: Food Processing Equipments
chp-7.qxd
10/18/05
9:23 AM
Page 60
BAKER ENTERPRISES 23, Bhera Enclave Nr. Peera Garhi NEW DELHI 110 087 Pr: Bakery Machines, Machines for Buns, Hotdogs, Cookies, Rusk & Cakes BANSAL FLOUR MILL ENGINEERS 4/5-B, Asaf Ali Road Gr. Floor NEW DELHI 110 002 Pr:Grading/Sizing/Cleaning Machinery, Spices Cleaning Machines CENTRAL ENGINEERING WORKS 380, Patel Roadways COIMBATORE 641 009 Pr: Commercial Kitchen Grinders CHALLENGER PRODUCTS 12, Devaki Niketan 396,402 Kitchen Garden Lane B/h. Lohar Chawl MUMBAI 400 002 Pr: Pizza Ovens, Sandwich Grillers, Idli Steamers CHEMICAL CONSTRUCTION CO. PVT.LTD. Br: 956/57 T.H.Road CHENNAI 600 019 Pr: Poultry Feed Plant, Coconut Processings, Oil Refinining Plant, Solvent Extraction Plant, Vanaspati Plant, Veg. Oil Refining Plant CONGAS FOOD SERVICES EQUIPMENTS (PVT.) LTD. 4, Krishanapur Road, Dum Dum KOLKATA 700 028
60
Pr: Bakery Equipments, Commercial Kitchen Equipments Refrigeration Equipments DAIRY DEN LTD. A-29, GIDC Electronic Estate Sector 25 GANDHINAGAR 382 044 Pr: Soft Ice-cream Machines, Juice Dispensing Machines, Fast Food Vans DANDEKAR BROTHERS Factory Area, Shivajinagar (N) Sangli 416 416 MAHARASHTRA Pr: Knit Grinding Machines, Groundnut Decorators, Grinding Mills, Chaffcutters, Sugarcane Crushers DELHI INDUSTRIES 4, Paharganj Lane NEW DELHI 110 055 Pr: Fruit & Vegetable Processing, Canning/Bottling Equipments and Machinery DELTA CORPORATION 201, Wadala Udyog Bhavan Naigaum Cross Road Wadala MUMBAI 400 031 Pr: Internal Gear S.S. Pumps for Food Processing EASTEND ENGINEERING CO. 173/1, Gopal Lal Thakur Road KOLKATA 700 035 Pr: Fruits & Vegetables Processing Machinery & Equipments ELMEC INDIA P B No.7624,
Chapter Seven
chp-7.qxd
10/18/05
9:23 AM
Page 61
No.37/38, Goodshet Road BANGALORE 560 053 Pr: Packaging Machines, Heat Sealing Shrink Packaging, Seal Machines, Bottling Machines, Bag Closures EMERGE SYSTEMS & SERVICES PVT.LTD. A-2/4, Arjun Towers Satellite Road AHMEDABAD 380 015 Pr:Waste Food Disposers EMERSION ENGG. ENTERPRISES Nr. Gate Station SURENDRANAGAR 363 001 Pr: Cookers, Vacuum Batch, Packaging Machinery, Break/Biscuits Machinery, Cutting & Wrapping Machines, Bubble Gum ESS EMM CORPORATION 205-H, Vivekanand Road Ramnagar COIMBATORE 641 009 Pr: Baking Equipments, Ovens, Deep Fat Fryers, Bread Slicers, Meat Mixers, Juicers, Coffee Grinders, Vegetable Cutters, Cutter/Mixers, Veg. Processing Machines EUROTECH FOOD & PACKAGING MACHINES K-17, Ghirongi, Malanpur Ind. Area Dist. Bhind, GWALIOR, M.P. Pr: Nut Roasting Plant, Form-FillSeal Packaging Machines, Namkeen Frying Plant
FLORA ENGINEERING CO. A-4, Laghu Udyog Kendra I.B. Patel, Goregaon (E) MUMBAI 400 063 Pr: Industrial Ovens (for Dehydrating Roasting, Drying of Food Products) FOOD TECH ENGINEERS 31/A, Ghanshyam Ind. Estate Veera Desai Rd., Andheri (W) MUMBAI 400 058 Pr: Machinery for Fish/Meat, Veg. Fruits, Frozen, Pulps, Juices FOODMAC ENGINEERS (PVT.) LTD. Bassi Road Sirhind 140 406 PUNJAB Pr: Automatic Machinery for Biscuits Cookie/Crackers Cream Sandwiching FORAM FOODS PVT.LTD. 397, Swami Vivekanand Road Vile Parle (W) MUMBAI 400 056 Pr: Lug Cap Sealing Machines, RTE Snack Food Plant, Pickle/Jam making plant, Packaging Machines GADEKAR & ASSOCIATES PVT.LTD. 304, Sector 21A FARIDABAD 121 001 Pr: URSCHEL Food Cutting machinery, Snack Food Fryers GAYATRI FABRICATION WORKS Tarun Plastic Ind. Estate Gali No.10, Mogra Road,
61
chp-7.qxd
10/18/05
9:23 AM
Page 62
Andheri (E) MUMBAI 400 069 Pr: Kitchen Equipments Pizza Ovens, Potato Peelers, Bulk Cookers, Deep Fat Fryers, Griddle Plates GENERAL MECHANICAL INDUSTRIES National Tankiwala Ind. Estate Steelmade Compound Marol Maroshi road Andheri (E) MUMBAI 400 059 Pr: Confectionery Equipments GOLDEN ENGINEERING INDUSTRIES A-87, Naraina Ind. Area Phase I NEW DELHI 110 028 Pr: Sealing & Cutting machinery, Pouch/Bag Making Machinery, Veg. Oil Refining Plant H P INDUSTRIES 2, Hoaquim Cottage, Vazir Glass Works Rd. J B Nagar, Opp. Tata Infotech Ltd. Andheri (E) MUMBAI 400 059 Pr: Conveyors, Automatic Pickle/Chutney/ Jam Filling & Capping Machines HARI OM INDUSTRIES Dhebar Road (South) Atika Ind. Area Str.No.3, Nr. Jaydev Foundry RAJKOT 360 002 Pr: Potato Cutting Machines, Dry Fruit Cutting Machines, Banana Wafer Machines, Other Food Processing Machines
62
HEATRAN SERVICES 180-A/131, NSP Complex (Opp Royal Agencies) Dr. Nanjappa Road COIMBATORE 641 108 Pr: Pizza Ovens, Bread Baking Ovens, Heaters for Steam Boilers INDIAN DAIRY EQUIPMENTS CO. 364, Azad Market DELHI 110 006 Pr: Milk Testing equipments, Cream Separators INDO STAINLESS FABTECH PVT.LTD. 439, Sidco Ind. Estate Ambatur CHENNAI 600 098 Pr: Milk Coolers, Milk Chillers, Cooling Tanks, Milking Machines INDUSES FOOD PRODUCTS & EQUIPMENTS LTD. 238/B, Acharya J.C. Bose Road KOLKATTA 700 020 Pr: Paddy Processing, Parboiling, Drying equipments INDUSTRIAL AIDERS BD-135/1, Tagore Gardens NEW DELHI 110 027 Pr: Dairy/Food Chemical Equipments INTERNATIONAL FOOD MACHINERY A-13, Kailash Colony NEW DELHI 110 048 Pr: Blanches, Groundnut, Hammer Mill Dehydration Machinery for Onion & Garlic
Chapter Seven
chp-7.qxd
10/18/05
9:23 AM
Page 63
J K ENGINEERING WORKS Bus Stand Road RAJPURA PUNJAB Pr: Bread/Biscuits Machinery Bakery machinery JWALA ENGINEERING COMPANY 12, Survey Industrial Estate Sonawala Cross Road No.1 Goregaon (E) MUMBAI 400 063 Pr: Fruit & Vegetable Processing & Packing Machinery such as Fruit & Vegetable Preparatory, Fruit Juice Concentration Equipments, Mushroom Processing & Canning line, Peas Preparatory
& processing line Potato Chips Line, Pulp Concentration Plant K.S. ENGINEERING WORKS Factory Area, Nr. Ranjit Press Patiala 147 001 PUNJAB Pr: Biscuit Plant, Papad Plant & Bread Plant KAG FABRICARES PVT. LTD. A-26N, Gali No.4 Anand Parbat Ind. Area NEW DELHI 110 005 Pr: Bread/Bakery Plant LARSEN & TOUBRO LIMITED Plot No.101, GIDC Ranoli DIST. BARODA Pr: Food Processing Machinery
63
chp-8.qxd
10/18/05
9:24 AM
Page 65
CHAPTER
Production Programme, Plant Capacity, Manpower Requirements and Layout

PRODUCTION PROGRAMME
roduction programme of a food processing unit is based on several parameterslocal conditions, market access and technology. Your programme should be justified in relation to: Market requirement and marketing strategy, e.g. fruits/vegetables are perishable. Input requirements and supply scheduleseasonal nature. Technology and economy of scalelow BE, cottage, small and medium scale in food processing. Minimum economic size and equipment constraints. Resource and input constraints. Performance of staff/labour.
PLANT CAPACITY
Consider these to determine the plant capacity: Project cost corresponding to various sizes and whether one has financial resources to meet the cost and whether one is prepared to run a risk commensurate with the project cost
chp-8.qxd
10/18/05
9:24 AM
Page 66
Minimum economically viable size of plant Popular plant size of existing small-scale enterprises making similar products Comparative capital cost of major plant sizes, within the maximum of the project cost one has estimated, offered by machinery producers and their operating income/expenditure implications. A comparison of net financial impact of individual plant sizes. Market size and growth prospects (biscuit market in India is growing rapidly and a well-organised promoter may find himself unable to meet the demand, if he chooses too small a market size) SSI in India gets benefit in excise duty and interest rate concessions. But there is a legal ceiling on the investments in plant and machinery to avail these concessions. No wonder, most plants are priced just around that ceiling. You may choose a size matching the ceiling, for exceeding it will deprive you of excise/interest benefits. The cost of expanding the plant capacity vis--vis setting up a larger plant must be considered for it might be cheaper to establish a larger plant of 5 MT per day than to expand capacity from 2 MT to 5 MT.
MANPOWER REQUIREMENT
You will need manpower for: Production (Workers) Supervision (Technicians) Administration, sales, miscellaneous work (Staff) In a small unit, it is possible that the entrepreneur handles administration, sales and technical supervision, and thus have limited manpower needs. It is, however, important to analyse workload and arrive at a gross manpower need. Manpower requirements will be decided by manufacturing operations, material handling and packing jobs. It is useful to classify your manpowerneed in three categoriesskilled, semi-skilled and unskilled. The wage rate for each category varies. Special attention should be paid for hiring and retaining skilled workers.
66 Chapter Eight
chp-8.qxd
10/18/05
9:24 AM
Page 67
Look at the availability of skills at the selected location and plan for their recruitment. It may be, for instance, difficult for a biscuit manufacturing unit in Himachal Pradesh being established at Parwanoo to source biscuit machine operators locally. They may have to be brought from Delhi/Chandigarh. It is difficult to find skilled people in industrially backward areas and may have to be scouted for in nearby towns. Arrangements will have to be made for technical and other staff also. Such employees expect better living conditions or compensation and wont move in otherwise.
SELECTION
OF
LOCATION
Ideally one may want to locate the project in ones home town or native place, but there may be a problem of high land price if that place is a large city. Usually, the government offers investment subsidy and tax concessions to enterprises in specified areas. One must be aware of various physical and commercial facilities to run an enterprise. The hometown or native place may not be an ideal choice. Various parameters need to be considered while deciding a location. One will then have to select a sitea specific piece of land in a given town where the enterprise will be located. Sometimes, one may also have to drop a location for want of a good site. How should one go about location/site selection? We recommend a twostage procedure. Practically, only a few locations will merit consideration. In the first stage, identify two-three such locations. Identify one or two sites at each location. In the second stage, examine each location/site according to a six-dimension selection checklist: Basic consideration (development status of the town and its location vis--vis enterprise needs) Status of physical infrastructure (power, water, etc.) Status of commercial infrastructure (telecom, banking, etc.) Status of social infrastructure (housing, health, etc.) Financial incentive position (investment subsidy, tax concessions etc.) Site-specific considerations (land price, contours, etc.)
The findings of each parameter will help decide a location.

Production Programme, Plant Capacity, Manpower Requirements and Layout 67
chp-8.qxd
10/18/05
9:24 AM
Page 68
Sources of Information on Location

How do we get answers to the checklist? We try to tap the right sources of information: Industrial Estate Officials Local Authorities Revenue Department State Electricity Board Public Works Department Office-bearers of Local Industry Associations Local knowledgeable Persons/Businessmen Banks/State Financial Corporations District Industries Centre Landowners, Residents of Nearby Villages/Towns, Local Opinion Leaders, etc. It is important to visit the location, armed with the checklist and to put down answers to each point. One may also get water and soil tests done. One must review the data objectively and then decide.
PLANT LAYOUT PLAN

One needs to develop a factory layout plan to decide on location of each facility like raw material, storage, individual machines, packaging, finished goods storage and quality control unit and work out the space for each. The distance between one facility and another or one machine and another should meet technical requirements. Usually, the flows of production process and space requirements for material handling and manpower determine the layout. It calls for considerable technical knowledge. Without the layout plan, it is not possible to decide the gross built-up area of the enterprise. For a food processing industry, statutory requirements like FPO and by-laws of the local authority issuing food production license have to be fulfilled in the layout plan. Where HACCP or GMP is required, additional care must be taken as per the rules and regulations.
68
Chapter Eight
chp-8.qxd
10/18/05
9:24 AM
Page 69
Following is a model layout plan for a jelly and jam manufacturing unit:
A Preliminary Layout Plan

20 MT BOILER ROOM QC LAB OFFICE
RAW MATERIAL 12 & OTHER STORE MT
PACKING
2 FRUIT JUICE EXTRACTION

(Note: Layout is not to scale)
1 JUICE EVAPORATION & JAMS/JELLY MAKING
Production Programme, Plant Capacity, Manpower Requirements and Layout
69
chp-9.qxd
10/18/05
9:26 AM
Page 71
CHAPTER
Business Plan Format for Tiny and Small Enterprises

business plan helps the entrepreneur set out objectives, targets and benchmarks. It is also a prerequisite to get credit from lending agencies like banks and State Financial Corporations, etc. It is a blueprint or a road map for your business. The purpose of a business plan is: to arrange thoughts logically to highlight resource needs and their sources to raise funds from a bank or other source to demonstrate viability of the business proposition and potential to repay credit to stimulate reality and anticipate pitfalls before they occur The business plan must answer these questions: What do you intend to do/how do you intend to do it/when do you intend to do it? How much do you wish to borrow? When will you repay it? Will you be able to pay the interest? Can your business survive a setback in its plans? What is the security available for lending?
chp-9.qxd
10/18/05
9:26 AM
Page 72
How many jobs will be created? Is the business proposal commercially viable? Will the business be profitable? Can the business cope with inflation? The business plan must include the following in sequential order: Summary of the Project/ Project at a Glance (The purpose of the business plan, location, resource needs, volume of business, brief note on market, customers, promoters and financial highlights) General Information (About the business and promoters qualification, training and relevant experience) Details of the Proposed Project (Requirement of fixed and working capital, project cost and means of finance) Market Potential (A note on marketing strategy, potential customers, competition, market size and future prospects) Manufacturing Process (Step-by-step description of the manufacturing process, plant capacity, expansion plans and quality control procedures, etc.) Production Programme/Sales Revenue (Plant capacity, capacity utilisation, quantity produced/sold and sale realisation) Cost of Manufacturing (Cost of raw material, utilities, manpower, repairs and maintenance, selling and distribution expenses, administrative overheads, interest on loans availed, depreciation and any other expenses) Profitability Projects (Sales, cost of manufacturing, tax liabilities, repayments, retained profit/loss)
72
Chapter Nine
chp-10.qxd
10/18/05
9:31 AM
Page 73
CHAPTER
10
The Financials of a Project Report
A SCAN OF FACTORS PRIOR OF A PLAN
TO
PREPARATION
efore preparing a business plan, one must analyse various factors and related actors. This manual stresses this aspect repeatedly. This chapter analyses factors existing in a district, including other enterprises, particularly relating to institution-information-enterprise gaps and problems. The findings about raw material stocking and market issues are to be incorporated in the financials of a business plan in the context of dehydrated vegetable unit and a grain processing enterprise. Consider Patna district in Bihar, where the crops grown are vegetables, grains and grams. A study of enterprises in the region shows that the food processing sector is less developed than the agricultural sector. There are several rice and flourmills. The agricultural resources are vital raw material for such enterprises. Milling activities include paddy milling. The by-products are rice, bran and husk. Several dal mills are also there. Their main activity is green and bengal gram milling. The State Government encourages self-help groups to set up small food processing units making pickles, spice powder, papads etc. and these enterprises and others dominate the local market. Institutions/associations at local level include industry associations, District Rural Development Agency (DRDA) and financial institutions. According to Government of Indias capital investment criteria, units with investment up to Rs.1 crore in plant and machinery are small-scale units. Tiny units have investment below Rs.25 lakh, while cottage or household enterprises are those operating largely out of households.
chp-10.qxd
10/18/05
9:31 AM
Page 74
Lacunae in Information and Support System Linkages

The main activity of the units here is processing of jams, pickles, papads, spices and rice and dal milling. Within similar product mix, medium and smaller units cater to the brand and quality conscious affluent sections. Packaging quality is better and prices are higher. In the lower end, tiny and cottage units vie with each other for their market share through lower price and margins. Their market comprises low income group consumers, who buy nonbranded and low priced products. Units without their own marketing outlets undertake distribution through local outlets. The State Government is encouraging Self Help Groups (SHGs) to sell their products through exhibitions. Most products have simple packing material with the manufacturers name on the pack. Unorganised enterprises are hardly aware of food related norms. Rice and dal mills procure raw material through commission agents. Rice millers used to sell rice to the Food Corporation of India (FCI) and in the open market through commission agents. In the processing sector, rice millers face problems like high percentage of brokens and need upgraded technology. The milling and polishing of paddy require electricity. Consumption of electricity is high in this case. The reason is use of rewound and higher HP motors. Most milling units face problems with institutional finance. Local suppliers largely meet the machine and equipment needs of the units. Also, the main weakness of enterprises here is the lack of testing facilities and access to information on advanced technology, quality and food-related norms. Few SSI units are aware of the Mysore-based CFTRI, which has excellent infrastructure to provide consultancy on technology, equipment design etc. Yet, options like value-added products or reducing brokens by involving agencies like CFTRI are unexplored. There is a dearth of information on packaging to improve shelf life with the support of agencies like DRDA, while the latter has backed such initiatives in other regions.
Can Policy Incentives Substitute for such Gaps?

The Bihar Government offers several special fiscal concessions like sales tax relief/exemption on purchase of raw material/exemption in excise duty. Fiscal incentives include investment subsidy upto 25 % of fixed investment, subsidy between 20% and 25% on cost of installing captive power generators, subsidy on cost of preparing feasibility/project reports, subsidy on technical knowhow, etc. The Bihar State Industrial Development Corporation offers equity participation in ventures.
74 Chapter Ten
chp-10.qxd
10/18/05
9:31 AM
Page 75
The State Governments five-year policy, effective from 1.1.90, had, in fact decided to continue capital investment subsidy to all new units set up in all districts at a rate of 15% of the equity (maximum Rs.1.5 million). This facility is also available for expansion programmes of existing units, provided the capacity is raised by atleast 50% of the installed capacity. Additional 5% (limited to Rs.5 lakh) capital investment subsidy is given to units located in notified growth centers, units promoted by NRIs and cent percent exportoriented units. Additional 10% subsidy (maximum Rs.1 million) is for investment on energy saving schemes based on energy audit reports or otherwise for small and medium units. Subsidy on power, water and such utilities is also available. However, although incentives are important, there are other aspects also which are crucial. Be it Bihar or Assam, other critical parameters like raw material availability and their prices/quality/domestic market potential/labour availability need to be considered before structuring the project costs, means of finance and working capital requirements. On this basis, financial statements may be developed with profitability analysis. Such structuring is presented in the form of a pulse processing enterprise in Patna in sub-section 5 of this chapter. First, two cases of grain processing units are given here to help understand how not to structure your project costs/means of finance.
INTERNAL FACTORS KILL AN ENTERPRISE: SINHA RICE MILLS, PATNA, BIHAR

Established in 1997 near Patna, the mill was engaged in dehusking paddy and rice shelling with an installed capacity of 2,400 MT paddy per annum. The target market was Patna city. A term loan was provided by the SFC and working capital by a commercial bank. But by 2001, the unit became unviable.
Depressed Project Cost and Working Capital Finance and hence Means of Finance: The Culprit
The enterprise was doomed since inception due to underfinance. It faced a problem in the first two years because of poor monsoon with the failure of paddy crop. The paddy prices in other regions were high, while payments were getting delayed. This resulted in a cash crunch. Then, the bank discontinued its
The Financials of a Project Report 75
chp-10.qxd
10/18/05
9:31 AM
Page 76
cash credit. Written assurances by the promoter to liquidate overdrawal of CC limit in monthly instalments and application for relief were not entertained. The bankers later froze the account and the unit was tied for working capital. As a cumulative effect of delayed payments and high input costs, the unit worked at a very low capacity and incurred huge losses. With no institutional support for working capital, poor capacity utilisation contributed to the tragedy. The enterprise closed for three months. But later, bumper harvests of paddy made purchase easier and cheaper. The promoter borrowed money from friends in the form of unsecured loans and re-started operations. The main problems were the failure of paddy crop for two years and subsequent increase in input costs. The problem seems external and not internal. In fact, even during a good year input prices fluctuate up to 200 per cent depending on the season or non-season timing of purchase. In his project report, the promoter simply took the average of purchase price trends of previous years. Had he taken the weighted average purchase price of the months when a price level prevails, he would have projected a purchase price and working capital double than what he had asked. It was his fault that he did not project his working capital needs and margin higher. Besides, he had also misjudged the importance of a credit strategy to push sales. In other grain milling enterprises in the region, 70% sales were on two-month credit. His was only 50%, but he had not even considered credit sale necessary while projecting working capital nor had included the relevant margin in his report submitted to and sanctioned by the term lender and banker.
Infuse Funds as Working Capital and Focus on the Procurement front to Revive
Manufacturing facilities of the enterprise were good, while the main raw material, paddy, was available locally. But, resources and equipment do not make an enterprise. He would need, in future, to reinvest all surplus earnings in business as working capital to enable him to procure and stock raw material when prices are low and use it over a period of time. Sustainable management is all about taking timely decisions and procuring adequate raw material inputs. At 60% capacity utilisation, sales of basmati, husk, rice barn etc. and paddy milling could have touched Rs.150 lakh. At this level of operation, the enterprise could earn Rs.20 lakh profit by incurring Rs.130 lakh expenditure. These expenses also cover the liabilities on term loan and working capital. In two years, it could have earned Return on Investment (RoI) of 29%. For a few months, the enterprise could mobilise funds from friends and relatives and regularise repayment of dues of term loan and working capital.
76 Chapter Ten
chp-10.qxd
10/18/05
9:31 AM
Page 77
Over two years, the surpluses generated could replace such support. The irregularity in existing term loan and interest since its disbursement could be corrected during this period. With additional doses of working capital, the unit could have become viable. Offering cash discount for cash purchase and identifying alternative sources of procurement to avoid adverse input problems in the region are other options the enterprise could have pursued for revival.
INGTY DAL MILLS, ASSAM: EXTERNAL FACTORS LIKE BAD DEBTS COULD ALSO AFFECT PERFORMANCE
Ingty Dal Mills, a sole proprietory firm, was promoted by Ingty to manufacture dal, besan and flour with an installed capacity of 12 MT/day for dal, 4 MT for besan and 8 MT for flour. This capacity is based on 300 working days in one shift of 8 hours. The Department of Industries and Commerce (DIC) granted permission to the unit to grind wheat in 1997. There are other Roller flour mills in the district for wheat milling. All are operational. This is the only unit engaged in processing of grams and other gram products i.e. dal and besan. The enterprise had potential for the local market and was doing well till 2000 and could repay interest and principal obligations to institutions in time. Later, payments were blocked owing to recessionary conditions and the enterprise had to be closed down due to non-recovery of receivables.
An Analysis of the Enterprises Performance: Indicators of Unsustainability

The financial statements of the enterprise for the last two-three years showed that in 20012002 and 20022003 it made cash losses. An analysis of the structural strength and liquidity viz. ability to meet short-term liabilities, profitability and performance of the enterprise is revealing. (Annexure II to this chapter elaborates on definitions of various management and accounting terms and ratios). Structural strength: The unit had promoters fund of Rs.10 lakh in 20012002. However, the accumulated losses by 20022003 were Rs.6.62 lakh. Total outside liabilities had been rising because of non-payment of interest liabilities. Liquidity: The current ratio viz. current assets over current liabilities was 0.76 in 20012002 and it declined to 0.52 in 20022003, showing that current
chp-10.qxd
10/18/05
9:31 AM
Page 78
assets were insufficient to meet current liabilities. Current assets largely included stock and debtors while current liabilities were creditors. Though the promoters infused Rs.8 lakh into the business in the last three years, the liabilities of creditors remained high. Turnover: Stock of finished goods and receivables for credit sales were high in 20012002 and 20022003. Profitability: Since the unit was near Guwahati and the local market had good potential, the unit did well initially and the dues were regularly paid upto 2000. Performance deteriorated rapidly due to repayment problems from two major traders (debtors). A revival plan could have been evolved based on analysis of past performance and future projections on various parameters. Evolving cost of project and means of finance for revival was possible in the past when financial institutions were not finicky about reducing their Non-Performing Asset (NPA) portfolio. Today, most institutions prefer one-time settlement of dues. The only option for evolving, implementing and managing a sustainable project is to structure the cost of project and means of finance by properly estimating the cost of raw material procurement, working capital etc, as well as income, and deciding on the optimal means of finance through a capital structure analysis.
FINANCIAL VIABILITY ANALYSIS
OF
PREPARATION
AND
The analysis of financial feasibility of a project or business plan helps study a projects potential from financial angle. It also helps understand investment requirements and its sources. Some major components of financial viability are: Cost of establishing a project Means of finance or sources contributing to project cost Capacity utilisation and income and expenditure estimates on an annual basis Profitability projections on an annual basis Income, expenditure and profit projections are made till the period of repayment to financial institutions. An eight-year period could be ideal. Projections may be made in such a manner that capacity utilisation improves over the years. Parameters such as, selling price and cost of raw material may be changed every year. It is obviously difficult to project the direction or extent of such change. It
78 Chapter Ten
chp-10.qxd
10/18/05
9:31 AM
Page 79
is normally assumed that increase in costs over time will be matched with increase in selling price. And so, they can be assumed constant over the years. The following sub-sections introduce major components of financial viability preparations and assessment.
Project Cost
Project cost comprises investment for establishing an enterprise. The significant elements of project cost are land and site development, building, machinery, other fixed assets, technical know-how expenses, preliminary and preoperative expenses, including interest during construction period, working capital margin and contingency costs. Certain administrative and financial expenses are incurred before production starts. These are Preliminary and Pre-operative (P&P) expenses. They include rent, interest during construction, Pollution Board licence, collateral related expenses like stamp duty, trial production expenses, deposits for utilities and processing fees of financial institutions. Contingency is a provision made for escalation of cost of equipment, for instance, in the lag between plan preparation and project implementation. These are the key components of project cost: 1. LAND AND SITE DEVELOPMENT: Cost of land, legal charges, levelling and developing charges, fencing etc. 2. CIVIL WORKS: Factory building, office, warehouse, drainage facilities, etc. 3. PLANT AND MACHINERY: Price of machinery/equipment and excise duty, sales tax, freight, octroi and installation costs. 4. OTHER FIXED ASSETS: Furniture, office equipment like fax machines, vehicles, laboratory and pollution control equipment, diesel generating sets, etc.
Comparative quotations from several suppliers may be invited to convince lending institutions about cost of plant and machinery. Institutions, sometimes, specify acceptable suppliers. For valuation of land and building, lender offers loan against the book price as per documents and not market price. A promoter should know these aspects and work closely with lending institutions.
chp-10.qxd
10/18/05
9:31 AM
Page 80
Means of Finance
The common means of finance are term loan, subsidy or equity. State financial or industrial development corporation and even commercial banks offer term loan against project cost. Repayment terms vary with institutions and with schemes. The MoFPI offers subsidy on a proportion of the cost of fixed assets. Equity capital is promoters contribution or monetary contribution by others in terms of deposits and unsecured loans. The minimum amount of promoter contribution, irrespective of such private participation, could be specified at a minimum 17.5 per cent of project costs by lending institutions.
Working Capital, Relevant Margin and its Assessment

Funds required to operate an enterprise is Working Capital. A certain minimum amount of working capital is permanently invested in business. The entrepreneur will have to contribute this fund initially. Working capital margin, which is included in the project cost, is estimated on the basis of the year when the enterprise breaks even. The estimation of this margin depends on projections of working capital needs: Projecting output over different years of operation. Projecting raw material input needed and unit price of each input required to produce output and the amount of material an enterprise must carry, given first year production targets. For the latter, the lead time between order placement and receipt should be considered. Enterprises in the food processing sector need to carry high raw material inventory, given the seasonality of production. Price of inputs vary drastically and enterprises need to stock up to reap advantage of favourable prices. The value of raw material, to be stocked, should be ascertained, as also that of other consumables and packing material to be stocked up. Projecting value of goods under production. This will depend on the length of the manufacturing cycle. For such valuation, direct costs of raw material, wages and utilities should be considered. You may ignore depreciation, administrative and marketing expenses. Projecting the level of stock of finished goods. An enterprise producing in anticipation of demand, as do most processing enterprises, may carry substantial stock of processed/semi-processed finished goods. The quantity of such stock should be valued at cost, viz. direct and indirect, sans depreciation.
80
Chapter Ten
chp-10.qxd
10/18/05
9:31 AM
Page 81
Projecting total sales on credit in terms of duration or amount of outstanding receivables. Only production cost of sales is considered. Projecting the monthly wages and salary expenses, power/fuel, other utility related costs, administrative expenses, selling, repair/maintenance expenses. The sum total of the value of investment forecasted for each of the components of raw materials as indicated in the second bullet point for one operating cycle, should be considered while projecting the requirement.
Working Capital Requirement for Priya Foods, Chennai

1. Even at 30% utilisation of its capacity, the enterprise should be generating profits. As per product-mix annual capacity amounts to 745.4 tonnes. 2. Annual raw material stock in the first year of carrots, onion, potato, garlic and ginger amounts to 223.6 tonnes. Raw material stocking period is projected at two months. This is valued at Rs.5.41 lakh (viz. Rs.32.43 lakh divided by 12 months and the resultant estimate multiplied by 2). 3. Value of Consumables and / Packing Material Stock in terms of one month stocking period: Consumables: Rs.5,000 Packing material: Rs.19,000 4. Value of Stock of Goods in Process in the first year a) Manufacturing cycle b) Quantity of goods in process in the first year c) Price of Goods in Process = 1 day = 0.745 tonnes = Rs.17000 per tonne
d) Working capital on account of Goods in Process equals approximately Rs.13,000 5. Value of stock of Finished Goods in the first year: a) Carrying of Finished Goods b) Price of Finished Goods d) Price of Finished Goods = 1/2 month = Rs.26000/= Rs.24,000 per tonne
c) Quantity of Finished Goods to be carried = 9.32 tonnes
81
chp-10.qxd
10/18/05
9:31 AM
Page 82
e) Working capital on account of finished Goods
= Rs.2.24 lakh
6. No Working Capital is required on account of credit sale as all sales are assumed to be on cash basis. 7. Wages and Salary for one month (first year) 8. Fuel, light, power, utilities for one month (first year) 9. Administrative and selling expenses and repairs and maintenance for one month (first year) 10. Working Capital requirement (total 4 to 9) = Rs.70,000/= Rs.1,00,000/= Rs.32000/-
= Rs.10.04 lakh/-
A financial institution may refuse working capital support for expenses either on wages/salary or administrative expenses. Such policy may change with time. Around 6070% support for most working capital components may be secured. Anticipated institutional support and working capital margin for Priya Foods is presented in the following table: Table 10.1 Working Capital Contributors for Priya Foods, Chennai Approximate Estimates (rounded off).
(Rs. in lakhs in first year) Sr. No. Component
1. 2. 3. 4. Raw Material Consumables Packing Material Stock of Goods in Process @ Rs.17,000 per tonne Stock of Finished Goods @ Rs.24,000 per tonne Wages & Salary Utilities Production and Administrative Expenses Repairs and Maintenance Total
No. of days
60 30 30
Amount
5.41 0.05 0.19
Margin
50% 30% 30%
Bank Loan Margin

2.71 0.03 0.13 2.70 0.02 0.06
0.13
30%
0.09
0.04
5.
15 30 30
2.24 0.70 1.00
30% 100% 100%
1.57 -
0.67 0.70 1.00
6. 7. 8.
30 -
0.25 0.07 10.04
100% 100%
4.53
0.25 0.07 5.51
9.
82
Chapter Ten
chp-10.qxd
10/18/05
9:31 AM
Page 83
Support for Working Capital and Term Loans

To sanction a term loan, a term lender may ask the promoter to submit a sanction letter of a bank approving, in principle, a working capital facility for a project. The project appraisal pursued by a term lender is considered prior to such in-principle sanction. A bank may still disagree on projections on capacity utilisation or profitability, and hence on support. Many enterprises are still-born despite receiving working capital support as they receive and accept less than requirements. SFCs and institutions like NSIC and many banks offer both term and working capital loans. They offer composite loans. An enterprise may also secure deposits or private loans at a certain interest but a lending institution invariably insists that such private loans remain unsecured in terms of assets of the project as they will be mortgaged to the lending institution. Agencies like NSIC also support hire purchase financing of machinery. Special assistance is also available under several schemes for women entrepreneurs. Agencies offering venture finance for risky projects with new technology also exist. For instance, there is the Technology Development and Information Company of India (TDICI), an ICICI-sponsored company in Bangalore. They remain partners in profits and losses. Conventional financial norms are not followed under this financing pattern.
Extent of Loan or Debt Financing: Norms and its Sanction and Disbursement
The extent of term loan that can qualify depends on norms of Debt-Equity Ratio, minimum Promoter Contribution, policy of lending institutions about margin against specific components of project costs and the fixed asset coverage security margin for the lender. A 2:1 Debt-Equity Ratio may be acceptable to a lender. The term lender has a policy on contribution pegged between 15% to 22.5%. Component-wise norm policy about margin against project cost may vary over time between institutions. Land, building, machinery, equipment and other assets may be mortgaged with the term lender as security. Lenders accept no security for working capital margin or preliminary/pre-operative expenses. The promoter may have to contribute as these assets cannot be disposed off to recover dues. The term loan is pegged at 3040% less than the value of fixed and saleable assets. While a lender may offer extra loan against a cost overrun, assuming project viability is not affected, it is not responsible for delay in receipt of subsidy.
chp-10.qxd
10/18/05
9:31 AM
Page 84
A loan application of a lender will include standard questions about the components of a project report. There could be questions about promoter-profile and experience, financial strength, personal assets/liabilities. Homework on the project should be thorough. Also, the loan is disbursed in stages. It is necessary to study disbursement procedures and fund-position of the lender. The term lender may need collateral security besides the mortgage of assets and may include personal residence or other personal assets. SIDBI supports term loans without collateral in certain schemes.
Financial Viability of Priya Foods, Chennai

The project cost as well as means of finance for the company is given below: Table 10.2 Project CostPriya Foods, Chennai Particulars 1. Land (6000 sq. m. @ Rs.50 per sq. m) 2 Site Development 3. Civil Works 4. Plant and Machinery 5. Other Fixed Assets 6. Preliminary and Pre-operative Expenses 7. Working Capital Margin 8. Contingency and Escalation @ 10% of (1) to (5) Total Cost(Rs. in lakh) 3.00 0.12 20.20 72.51 2.80 5.40 5.50 9.68 119.21
Means of FinancePriya Foods, Chennai Sources of Finance Promoters Equity Term Loan Investment Subsidy Total Amount (Rs. in lakh) 26.82 62.39 30.00 119.21
84
Chapter Ten
chp-10.qxd
10/18/05
9:31 AM
Page 85
The structuring of a projects finances should consider the cost of capital. The cost of capital is the minimum return expected by its suppliers. The expected return depends on the degree of risk assumed by the investor. The cost of capital from different sources varies depending on risk level. In the case of a promoters own investment, cost of capital is the opportunity cost or the rate of return foregone on an alternative project/ investment option of similar business risk.
Capacity Utilisation and Income Estimate

The table 10.3 below shows capacity and product-mix for Priya Foods, Chennai. Table 10.3 Capacity, Product-mix and Income at Full Capacity: Priya Foods, Chennai Vegetable Onions Garlic Potatoes Peas Carrots Ladys fingers Ginger Output (tonnes) 360.00 228.60 92.30 20.00 17.00 15.00 12.50 745.40 Price (Rs./tonne) 35000 30000 32000 75000 90000 80000 100000 Amount (Rs. in lakh) 126.00 68.58 29.54 15.00 15.30 12.00 12.50 278.92
The installed capacity based on product mix is 745.4 tonnes/year. High capacity utilisation cannot be achieved in the first year. Market constraints and teething technical problems always exist. Table 10.4 shows year-wise capacity utilisation and income estimates of Priya Foods. Table 10.4 Projected Production and IncomePriya Foods, Chennai
Year Installed capacity Capacity utilisation Production (tonnes) Income 1 745.4 30% 223.6 83.68 2 745.4 40% 298.16 111.57 3 745.4 50% 373.7 139.46 4 745.4 60% 447.24 167.35 5 745.4 60% 447.24 167.35 6 745.4 60% 447.24 167.35 7 745.4 60% 447.24 167.35 8 745.4 60% 447.24 167.35
85
chp-10.qxd
10/18/05
9:31 AM
Page 86
Sale prices may be fixed at the rate the competitors charge. Production estimates and sale price are considered to project income. After this, expenditures are projected. Expenditures and their basis are: Raw material: Proportional to production quantity. Consumables and packing materials: Depend on production quantity but not proportionately. Power, fuel and utilities: Depend on production quantity but not proportionately. Wages and salary: Partially related to production quantity. Repairs and maintenance: Expenses on plant, building and other assets increase over time. Rent, taxes and insurance: These are fixed expenses. Administrative expenses: Fixed. Selling expenses: Include fixed expenses as advertising and salesmens salary as well as variable expenses like commission to dealers. Interest on term loan: Outstanding loan due. Loan repayment plan is fixed by the term-lending agency and interest on working capital fixed by working capital provider. Interest rates depend on working capital requirement, which in turn depends on sale/production quantity and working capital margin. There are cash and non-cash expenses. Cash expenses have to be projected annually for raw material, packing, utilities, wages/salary, repairs/maintenance, administrative and selling expenses, interest on loan, rent, etc. Income minus such cash expenses is cash profit. To account profit, both cash and noncash expenses are deducted from income. Non-cash expenses include depreciation, amortisation of P&P expenses and write-off of technical know-how expenditure. Value of fixed assets like building, machinery and office equipment depreciates every year. Depreciation in accounting measures such reduction in the asset value. It also helps build a cash reserve for replacement of the existing asset later. Lands value does not depreciate and no depreciation is provided for it. Amortisation or gradual write-off of intangible assets are stipulated in income tax rules, viz. how and by how much every year. One may write off P&P and technical know-how expenditures in 10 and 6 years respectively. Contingency/escalation expenditures may be added to estimate asset cost and depreciation is provided on the resultant amount.
86 Chapter Ten
chp-10.qxd
10/18/05
9:31 AM
Page 87
Depreciation can be provided by two methods, straight line (SL) and written down value (WDV). Depreciation rates are stipulated by law and vary according to asset and industry. The WDV method enables making substantial provisions in the initial years, thereby increasing expenditure and reducing accounting profit, and hence, income tax. The SL method may be used to prepare a projected profit statement, while the WDV may be used to estimate income-tax obligations.
Income Tax Projections

The tax burden can be estimated as follows: The WDV depreciation amount is subtracted from profit before tax. A percentage of preliminary and know-how related expenditure may be deducted every year as per norms to correspondingly reduce taxable profit before tax. It is also possible to carry forward losses. Losses incurred in a particular year may be offset against profit in the following years. Tax incentives offered for enterprises in a region or sub-sector should be incorporated and subtracted. Tax calculation depends on tax rate, which depends on assessee status and legal form of an enterprises constitution. It may be a sole proprietary, a Hindu Undivided Family (HUF), a private or public limited company or a cooperative society. Tax rates vary accordingly. Tax is deducted from profit before tax (PBT) to arrive at profit after tax (PAT).
Financial Viability and Cash Flow of an Enterprise

Viability from the lenders point of view is the ability to repay the term loan. A financial ratio measures the enterprises capacity to meet term loan and interest. Related obligation is the Debt Service Coverage Ratio (DSCR). A DSCR of 1 implies that the enterprise will earn cash to exactly meet all term loan and interest obligations. DSCR of about 2 is considered adequate. The higher the DSCR, the better the project. There are various ratios like income-capital ratio, PBT to turnover ratio and Return on Investment (RoI) ratio, which reflect profitability: A turnover capital ratio shows annual income as against project cost. A small enterprise may earn only low levels of profit or even incur loss with slightest of adversity.
chp-10.qxd
10/18/05
9:31 AM
Page 88
PBT to turnover ratio indicates profitability of enterprise operations. A 0.08 ratio implies that even a small adverse movement in selling price may result in a loss. Interest on term loan added back to PBT is the RoI. Return divided by investment gives RoI. RoI may be estimated every year. The projects and estimates over above sub-section 4.1 to 4.8 are the basis to estimate cash flow. Table10.5 presents the cash flow of Priya Foods. As there is no cash deficit, there will be no need to generate it to fill it. Table 10.5 Priya Foods, ChennaiCash flow
Year 0 1 2 3 4 5 6 7 8
Inflow
Equity Subsidy Term loan Bank loan Profit before tax Depreciation Total inflow 26.83 30.00 62.39 119.22 4.50 1.17 9.96 15.63 1.50 15.64 9.96 27.10 1.50 32.44 9.96 43.90 1.50 47.87 9.96 59.33 48.32 9.96 58.28 48.77 9.96 58.73 -
49.22 48.67 9.96 9.96
59.18 58.63
Outflow
Capital expenditure Working capital Term loan repayment Tax Dividend Total outflow Net inflow 113.71 113.71 5.51 10.00 0.07 10.07 5.56 13.33 12.39 0.90 4.02 30.64 (3.54) 16.67 10.00 1.87 5.36 33.90 10.00 20.00 10.00 2.75 5.36 38.11 21.22 10.00 2.78 5.36 18.14 40.14 10.00 2.80 5.36 18.16 40.57 -
10.00 10.00 2.83 5.36 18.19 40.99 2.80 5.36 8.16 -
Risk and Sensitivity Analysis of an Enterprise

This analysis is the means to study business risk. Each level has a break-even point. The higher the break-even in terms of capacity utilisation, the greater the degree of risk. Break-even for Priya Foods is about 27.7%.
88 Chapter Ten
chp-10.qxd
10/18/05
9:31 AM
Page 89
At break-even level of capacity utilisation, surplus or contribution or income minus total variable expenses equals to total fixed costs. The break-even analysis thus implies risk analysis indicating the extent of possibility to reduce expenses. Limited ability to do so implies a high break-even and risk level. Through sensitivity analysis, it is possible to study the impact of changes in the assumptions on enterprise performance and viability. The impact of adverse changes in a few variables may be studied. The risk is low if viability sustains despite significant changes in variables. In contrast, if a negligible fall in selling price reduces DSCR to an unacceptable level, it means a heavy risk. A sensitivity analysis for Priya Foods is presented below. Table 10.6 considers a 10% possible fall in capacity utilisation. Table 10.6 Sensitivity Analysis: (Priya Foods, Chennai) 10 per cent fall in capacity utilisation throughout projected period 1. Drop in Profit Before Tax Rs.95.36 lakh 2. Drop in Profit After Tax 3. Profit After Tax over 8 years Rs.8999 lakh Rs.185.42 lakh
4. Return on Investment (after tax) 24.66% 20 per cent rise in raw material cost throughout the projected period 1. Drop in Profit Before Tax Rs.90.80 lakh 2. Drop in Profit After Tax 3. Profit After Tax over 8 years 4. Return on Investment (after tax) Rs.85.58 lakh Rs.188.72 lakh 25%
A sensitivity analysis helps isolate variables critically determining the extent of profits.
89
chp-10.qxd
10/18/05
9:31 AM
Page 90
Financial Viability: A Summary

Installed capacity is 745.4 tonnes/year (based on product-mix). Financial viability of Priya Foods is given below: Particulars Project cost Means of finance Promoters equity Term-loan Investment subsidy Capacity utilisation 1st year 2nd year 3rd year 4th year onwards Average turnover (Rs.) Debt service coverage ratio Turnover capital ratio Profit before tax to turnover ratio Cash balance at the end of 8 years (Rs.) Break-even point 30% 40% 50% 60% 145.18 3.21 1.22 0.257 168.60 27.76% 26.82 62.39 30.00 Amount (Rs. in lakh) 119.21
The following sub-section elaborates the financial scheme of a project report.
A CASE ON DEVELOPING THE FINANCIAL SCHEME OF A PROJECT REPORT OR BUSINESS PLAN

An entrepreneur plans to establish a minipulse processing unit. Advanced Durham quality pulse is to be processed. The enterprise, to be established in an industrial estate in Guwahati, is to have an installed capacity of 24,000kg per annum working in double shifts (16 hours) for 310 days a year. It is to operate at 60% of installed capacity in the first year, 70% the second year and 80% in future years. The project expense of land cost, site development and
90 Chapter Ten
chp-10.qxd
10/18/05
9:31 AM
Page 91
fencing is Rs.17,000. One thousand and fifty kg of whole pulse yields 1,000 kg of processed dal. The price of whole-pulse is Rs.62 a kg. It is considered sufficient to carry raw material and finished goods stock for 30 days. The production cycle time is two days. The cost of constructing buildings, including warehouse, office and factory is Rs.2 lakh, while that of stores, consumables and packing is estimated at Rs.2 per kg of output. The stocking period of these items is believed to be the same as that of raw material. The cost of machinery and equipment is Rs.4.6 lakh and includes excise duty. Besides, sales tax and freight, insurance and octroi are estimated at 5%, each, of post-excise duty of machinery. Machinery and equipment related installation expenses are around Rs.30,000. The average finished goods inventory is estimated at one month and 50 per cent of total sale is expected to be on credit basis, while balance will be cash sales. The credit sale will carry credit at an average of 30 days. Rs.4,000 is required as expense on office furniture, while other such miscellaneous assets are likely to cost Rs.6,000 more. A provision of 10% each, against possible price escalation/contingencies in fixed/miscellaneous assets can be made. The term lender is expected to offer loan up to 75% of project cost. The State Bank of India, the potential working capital provider, gives assistance up to 75% for goods in process and finished goods. The bank supports up to 70% for raw material, stores, packing material and 60% of value of sundry debtors or accounts receivables. The rate of interest on working capital is 17%. Salary and wages are estimated at Rs.7,000 a month, while administrative expenses at Rs.3,000. The power consumption will be 15 units a day. The subsidised power tariff is Rs 3 per unit. The selling commission to be paid is Rs.2.50 per kg of output. Repairs and maintenance are likely to touch Rs.30,000 per annum for the first year and rise by Rs.2,000 thereafter. Construction period of factory is 6 months from sanction of term loan. Term loan interest is 12%. First registration and other preliminary expenses are put at Rs.4,000. Rs.1,000 will be needed in trial production. The selling price of dal is Rs.110 a kg. The income tax rates for taxable profit is in the range of Rs.0.75 to Rs.1.0 lakh, Rs.1.00 to Rs.1.25 lakh, Rs.1.25 lakh to Rs.1.75 lakh is 10%, 13% and 15% respectively. To estimate the financial viability of the project, various statements are needed: project cost, working capital, means of finance, capacity utilisation and income projections, expenditure projections, profit and tax projections,
chp-10.qxd
10/18/05
9:31 AM
Page 92
debt service coverage, profitability indicators, cash flow projections and break-even levels. The sub-sections below present relevant statements. The values have been rounded off for easy comprehension.
Project Cost
Table 10.7 Project Cost Estimates (Approximate Estimates) (Rs. in '000) (I) Land and Fencing 17 200
(II) Building (III) Machinery and Equipment (M & E) * Price inclusive of duty * Sales-tax @5% * Freight, Insurance, Octroi @ 5% * M & E installation related expenditure
460 23 23 30 536
Miscellaneous (IV) Assets (total) (V) Escalation & Contingencies (10 percent of above total) (VI) Preliminary & Pre-operative Expenses * Firm-registration andtrial-production * Interest during project implementation period (construction and installation of machinery) (VII) Working Capital Margin 18 91 10 76 5
92
Chapter Ten
chp-10.qxd
10/18/05
9:31 AM
Page 93
Table 10.8 and Table 10.9 below indicate calculations of two components: interest during implementation and working capital margin. Their values are incorporated in Table 10.7.
Table 10.8 Interest During Period of Implementation Item Particulars No. (I) Land and Site Development Building Plant & Machinery Miscellaneous Assets Preliminary and pre-operative expenses (Excluding interest during construction) Escalation and Contingency Total of (1) above (II) Term loan @ 70% of (I) (Rounded off) (III) Implementation Period (IV) Average period for which interest during construction period on term loan should be computed is 3 months. Interest during construction period is (approximately) Cost Rs. 17,000 2,00,000 5,36,000 10,000 5,000 76,000 8,44,000 5,91,000 6 months from sanction of term loan
18,000
93
chp-10.qxd
10/18/05
9:31 AM
Page 94
Table 10.9 Working CapitalEstimation i ii iii iv v Capacity utilisation and output: 60%, or 14,400 kgs. per annum. Annual raw material requirement: 15,120 kgs @ Rs.62 per kg. Desirable raw material carrying level: one month (15,120 12 viz. 1260 kgs.) Value of raw material which will be kept in stock (1260 kgs. Rs.62 viz. Rs.78,120) Annual value of stores, consumables, packing-material (Rs.2 14,400 kgs) is Rs.28,800. Desirable carrying level: one month value of stores, consumables and packing material (Rs.28,800 12) as stock equal Rs 2,400 Goods in Process: Manufacturing Cycle: 2 days Quantity under manufacturing cycle 14400 2 300 c) = 96 kgs
* a) b)
Direct cost of 14,400 kgs. of output 9,37,440 28,800 84,000 13,500 10,63,740
Raw Material (15120 62) Stores, Consumables, Packing (14400 2) Wages (Rs.7000 per month 12) Power (15 units per day 300 days Rs.3.00 per Unit)
d) e) * i) ii) iii)
Direct cost of one kg. of output: Direct cost of goods in process (96 Kgs.): Finished goods: Desirable carrying level: One month (1200 kgs)
Rs. 73.87 Rs. 7,092
Direct cost of 1200 kgs. of output (1200 kgs. Rs. 73.87): Rs. 89,000 (approximately) Other Indirect Cost (one month) Administration: Rs. 3,000
94
Chapter Ten
chp-10.qxd
10/18/05
9:31 AM
Page 95
Selling Expenses: Interest on Term Loan (Adhoc) Interest on Working Capital Loan (Adhoc)
Rs. 6,000 Rs. 6,000 Rs. 3,000 Rs. 18,000
iv)
Total (direct + indirect) cost of 1200 kgs of output excluding depreciation Account Receivables:
Rs. 1,07,000
* i) ii) * * *
Cost of a month's sale The cost of credit sales (50 per cent) Wages and Salary (one month) Electricity (one month approximated) Administrative, Selling Expenses, Repairs and Maintenance
Rs. 1,07,000 Rs. Rs. Rs. Rs. 54,000 7,000 1,000 9,000
Gross Working Capital Requirement (approximately) Component Raw Materials Store, Consumables & Packing Materials Goods in Process Finished Goods Account Receivables Wages and Salary Electricity Administrative and Selling Expenses, Repairs and maintenance Total 9,000 2,65,000 Rs. 78,000 2,000 7,000 1,07,000 54,000 7,000 1,000
95
chp-10.qxd
10/18/05
9:31 AM
Page 96
The working capital requirement and margin that may have to be contributed by promoters is in Table 10.10 below: Table 10.10 Working CapitalContributors
(Amount in Rs.)
Sr. No. 1 2 Requirement Quantity Total Norm for Amount of Promoter's Bank Bank Contribution Assistance Assistance (Margin) 70% 70% 54600 1400 23400 600
Raw material (@ Rs. 62 per Kg.) Store, Consumables and Packing Materials Goods in Process Finished Goods Account Receivables Other Expenses (Wages 7000, Power 1000, Admn. 3000, Selling 3000, Repair & Maintenance 3000) Approximate Total
1260 kgs
78000 2000
3 4 5 6
2 days 1200 600 kgs 1 month
7000 107000 54000 17000
75% 75% 60% None
5250 80250 32400 None
1750 26750 21600 17000
265000
174000
91000
The project cost is summarised in the following Table 10.11: Table 10.11 Project Cost
(Rs. in 000)
Land and Fencing Building Machinery and Equipment Miscellaneous Assets P & P Expenses Escalation & Contingency Working Capital Margin Total
17 200 536 10 23 76 91 953
96
Chapter Ten
chp-10.qxd
10/18/05
9:31 AM
Page 97
Means of Finance
Financial institutions expect promoters to contribute a minimum of 17.5% of total project cost, irrespective of extent of subsidy. Subsidy, therefore, reduces equity required to such extent and balance goes to reduce debt. For the purpose of illustration, subsidy is not considered. Hence, at 3:1 debtequity ratio, the term loan is about Rs.7.15 lakh while equity contribution is Rs.2.38 lakh.
Capacity Utilisation and Income Estimate

A capacity utilisation and income estimate statement is in Table 10.12 below: Table 10.12 Capacity Utilisation and Income Estimate Installed capacity is 24000 kgs / year. Capacity utilisation and output estimates in this circumstance are:
Year I II Capacity Utilisation Output 1 60% 14400 2 70% 16800 3 80% 19200 4 80% 19200 5 80% 19200 6 80% 19200 7 80% 19200 8 80% 19200
Selling Price: Rs.110 per kg. Income Estimates given selling price of Rs.110 per kg. is
I II Year Income 1 1584 2 1848 3 2112 4 2112 5 2112 6 2112
(Rs in 000)
7 2112 8 2112
Expenditure Estimates
The expenses, raw materials, power, fuel and utilities, stores, consumables and packing material are considered proportional to production levels. The expenses also include salary and wages. The term lender offers a moratorium period of 2 years when interest payments alone have to be made. The estimates the promoter needs to incorporate in the case of depreciation is given below. It is necessary to consult an updated tax manual to incorporate prevailing rates.
chp-10.qxd
10/18/05
9:31 AM
Page 98
Table 10.13 Depreciation Rate (Indicative) Assets Buildings Machinery and Equipment Miscellaneous Assets WDV Rate 10% 33.33% 10% Sl. Rate 2.3% 8.33% 2.3%
1 2. 3
Table 10.14 below, proportionately allocates about Rs.76,000 of contingency and escalation @ about 10% to various assets.
Table 10.14 Allocation of Contingency And Escalation To Various Depreciable Assets

(Rs. in 000)
Item Building Machinery and Equipment Miscellaneous Assets
Value 200 536 10
Allocation 20 54 1
Value of assets for depreciation purposes 220 590 11
98
Chapter Ten
chp-10.qxd
10/18/05
9:31 AM
Page 99
Calculation of Depreciation [WDV]

(Rs. in 000)
Item Value Rate [%] 1 Building 220 10.00% Dp. Val 220 Depn W.D.V. Machinery 550 33.33% 22 198 2 198 20 178 367 122 245 Year wise Depreciation
3 178 18 160 245 82 163 -
4 160 16 144 163 54 109 8 1 7
5 144 14 130 109 36 73 7 1 6
6 130 13 117 73 24 49 6 1 5
7 117 14 105 49 16 38 5 1 4
8 105 11 95 38 11 22 4 0 3
Dp. Val 550 Depn W.D.V. 183 367
Equipment
40
100.00%
Dp. Val 39.6 Depn W.D.V. 39.6 0 10 1 9 9 1 8
Miscellaneous Assets
11
10.00%
Dp. Val 11 Depn W.D.V. 1 10
The income and the expenditure statements help get a statement of profit before tax. To compute tax obligations, depreciation levels also need to be estimated. Depreciation rules may change with time. Section 32 of the Income Tax Act lays down income tax rates. Under the SL method, depreciation rate is applied to the assets annual acquisition value every year. Under WDV, it is computed on the written down value or an assets balance value. Further, 8.33% SL method rate and 33.33% WDV rate is almost the same, as both reduce the asset value to almost nil in 12 years. While preparing income, expenditure and profit statement, the SL method is used. Under this, the annual depreciation value remains constant and hence it is possible to judge the impact of annual improvement in capacity utilisation on profit. To compute taxable profit, it is necessary to use WDV.
chp-10.qxd
10/18/05
9:31 AM
Page 100
Profit is income less direct and indirect expenses during production. Depreciation is an amortised expense and written off. Other expenses have also to be deducted to assess profit before tax. Fixed assets entail depreciation. P&P expense requires amortisation. This is for preliminary and not pre-operative expenses like on establishment and interest during construction, which can be added to fixed asset value and then depreciation computed. For business plan purposes, P&P expenses may be amortised or deducted from profit in 10 equal annual instalments as amortisable. All preliminary and prospective expenses, including interest during construction, are amortised at 10% p.a. in this project. The term loan repayment is made over the year. Repayment is not made in the beginning of the year. Therefore, half repayment amount is deducted from the outstanding term loan at the beginning of the year and the interest is computed on the balance amount. Table 10.15 The Solution Interest Burden And Loan Repayment Term Loan Working Capital loan (First Year) I. Interest on Term Loan
Year Outstanding Term Loan Term Loan Repayment During the Year Interest @ 12% p.a. 1 715 2 715 65 3 650 130 4 520 130 5 390 130 6 260 130 7 130 130
: :
715 174
(Rs. in 000)
8 Nil Nil
86
82
70
55
39
23
Nil
II. Interest on Working Capital Loan

Year Working Capital Loan Interest @ 17%p.a. 1 174 30 2 203 35 3 232 39 4 232 39 5 232 39 6 232 39 7 232 39 8 232 39
III. Total Interest (Term-Loan and Working Capital)

Year Total Interest Payment 1 116 2 117 3 109 4 94 5 78 6 62 7 47 8 39
100
Chapter Ten
chp-10.qxd
10/18/05
9:31 AM
Page 101
Table 10.16 Expenditure Statement: The Solution

(Rs. in 000)
YEAR/ EXPENDITURE Raw Material Year 1 987.4 Year 2 1093.7 33.6 189 96 32 Year 3 1249.9 38.4 216 108 34 Year 4 1249.9 38.4 216 116 36 Year 5 1249.9 38.4 216 124 38 Year 6 1249.9 38.4 216 132 40 Year 7 Year 8
1249.9 1249.9 38.4 216 140 42 38.4 216 146 44
Stores, Consumables & 28.8 Packing Materials Power Wages and Salaries Repairs and Maintenance Rent, Taxes & Insurance Dt. Admn. Expenses Selling Exp. Interest on Term Loan Interest on Working Capital Depreciation P&P Amortisation Total (approximate) 162 84 30
12
13
14
15
16
17
18
19
24 36 86 30
26 42 82 35
28 48 70 39
30 48 55 39
32 48 39 39
34 48 23 39
36 48 0 39
38 48 0 39
92 2 1524
52 2 1696
52 2 1899
52 2 1897
52 2 1894
52 2 1891
52 2 1889
52 2 1894
Tax Computation for the Project

Tax computation for the project is shown in the following table: Table 10.17 Tax Computation (Illustrative) (Rs. in 000)
YEAR Profit before tax Excess of WDV over SL Depreciation carry forward loan 80 HHA Deduction 80 I Deduction Taxable Profit Tax Profit After Tax 1 60 (154) (94) (94) 60 2 152 (91) (94) (33) 152 3 213 (49) (33) (26) (21) (84) (8) 205 4 215 (19) (39) (31) (126) (19) 196 5 218 (44) (35) (139) (23) 197 6 221 (14) (47) (38) (150) (23) 198 7 223 (23) (49) (39) (158) (25) 198 8 218 (30) (50) (40) (158) (25) 193
101
chp-10.qxd
10/18/05
9:31 AM
Page 102
Table 10.18 The Solution: Profit Statement

(Rs. in 000)
YEAR Income Expenditure Profit before Tax Tax Profit after Tax 1 1584 1524 60 60 2 1848 1696 152 152 54 3 2112 1899 213 (8) 205 54 4 2112 1897 215 (19) 196 54 5 2112 1894 218 (23) 197 54 6 2112 1891 221 (23) 198 54 7 2112 1889 223 (25) 198 54 8 2112 1894 218 (25) 193 54 Total 16104 --1520 ------
Non-cash 94 Expenditure (Depreciation and P&P Amortization) Cash Profit 154
206
259
250
251
252
252
247
---
Debt Service Coverage Ratio

The single most important parameter is an enterprises ability to repay termloan in terms of principal and interest. A financial ratio, which measures enterprise capacity to meet term-loan-cum-interest and other long-term commitments/obligations, is called Debt Service Coverage Ratio (DSCR). The term lender prefers a project in which even if there is some slide back in projected performance, it will generate enough cash surplus to meet the dues. A DSCR of 1.7 may be considered as minimum. Table 10.19 The Solution: Debt Service Coverage Ratio
(Rs. in lakh)
YEAR i. Cash Accrual ii. Interest on Termloan (pre-tax) iii. Term-loan Repayment (post tax) iv Debt-service Coverage Ratio (i+ii/ii+iii) v Average Ratio Need be Estimated 1 154 86 2 206 82 65 3 259 70 130 4 250 55 130 5 251 39 130 6 252 23 130 7 252 8 130 8 247 Total 1624 363 715
2.79
1.96
1.60 1.66
1.72
1.80
1.88 1.83 -
102
Chapter Ten
chp-10.qxd
10/18/05
9:31 AM
Page 103
Loan Repayment is Post-Tax, but interest is tax deductable. Hence all inflows/outflows be shown uniformly on pre-tax or post-tax basis.
Profitability Indicators
Table 10.20 Profitability Ratios For The Project
YEAR Turnover Capital Ratio
1 1.66
2 1.94 0.08
3 2.22 0.19
4 2.22 0.10
5 2.22 0.19
6 2.22 0.19
7 2.22 0.19
8 2.22 0.10
Total 2.11 0.09
Profit Before 0.44 Tax to Turnover
Cash Flow Statement

Cash Flow Projection for the Project is presented in the next table. There is a cash surplus every year. And, the enterprise will have a cash balance of Rs.12,58,800 at the end of seven years upon meeting loan-repayment and interest liability.
103
chp-10.qxd
10/18/05
9:31 AM
Page 104
Risk or Break-even Analysis

The projected cash-flow statement and break-even analysis for the project is presented below. Table 10.21 Projected Cash Flow Statement
(Rs. in 000)
Details CASH INFLOW Prom. Cap. Term Loan Working Cap. Prof. B.T. Depreciation P&P Amortn. Other Total CASH OUTFLOW Increase in Working Cap. Cap. Exp. Tax Repmt. of TL Dividends Total Surplus/Deficit Cum. Surplus 862 91 91 0 63 154 65 141 249 138 129 424 149 120 544 151 121 665 153 122 787 155 122 909 25 247 1156 862 265 65 8 130 19 130 21 130 23 130 25 130 25 238 715 953 174 60 92 2 328 152 52 2 206 213 52 2 267 215 52 2 269 218 52 2 272 221 52 2 275 223 52 2 277 218 52 2 272 238 715 Constn. 1 2 3 4 5 6 7 8 9
130 -
104
Chapter Ten
chp-10.qxd
10/18/05
9:31 AM
Page 105
Table 10.22 The Break-even Analysis I. Variable Cost per Unit (kg) of Output Raw Material Consumption Stores, Consumables and Packing Materials Power Wages and Salary (50% of total annual bill) Selling Expense Interest on Working Capital Total II. Fixed Cost Wages and Salary (50% of total annual bill) Repairs and Maintenance Rent, Taxes and Insurance Other Administrative Expenses Interest on Term Loan Depreciation P&P Amortisation Total III. IV. V. Selling Price per Unit (kg) of Output Contribution per Unit (kg) of Output (Selling price less variable cost) Break-even Point (Unit of Output) Fixed Cost (Rs.) Contribution per Unit of Output VI. Break-even Point (Capacity) 2,88,000 (Rs.) 24.15 (or)11590 Units (kg) 11,590 kgs. (48.3%) (Rs.) 65.10 2 11.25 2.92 2.50 2.08 85.85 (Rs.) 42,000 30,000 12,000 24,000 86,000 92,000 2,000 2,88,000 Rs. 110 Rs. 24.15
105
chp-10.qxd
10/18/05
9:31 AM
Page 106
Table 10.23 The Sensitivity Analysis

(Rs. in 000)
Possibility No.1: Drop of 5% in selling price with costs remaining unchanged (i) Income under basic plan (8 years) (ii) Revised income estimate (8 years) (iii) Revised profit before tax (iv) Revised tax burden (ad hoc) (v) Revised profit after tax (vi) Revised cash profit (vii) Revised debt service coverage ratio (same loan repayment schedule) 1142 + 363 = 715 + 363 1078 Possibility No. 2: Capacity-utilisation levelling off at 70% (i) Income under basic plan (8 years) (ii) Revised income estimate (8 years) (iii) Revised expenditure estimate (8 years) (iv) Revised profit before tax (v) Tax burden (vi) Revised profit after tax (vii) Revised profit after tax (viii) Revised debt service coverage ratio 1462 + 363 = 715 + 363 1078 The financial viabilities of the project therefore indicate that the project is viable. However, a five per cent drop in selling price rendered the project unviable.
106 Chapter Ten
16104 15299 715 45 670 1142 1.4
1505
16104 14520 13454 1066 70 996 1468 1.7
1825
chp-10.qxd
10/18/05
9:31 AM
Page 107
Table 10.24 Financial Viability of Project i. ii. iii. Installed capacity Project cost Means of Finance Term Loan Promoters Capital iv. Capacity Utilisation First Year Second year Third year and thereafter v. vi. vii. ix. x. xi. Average Annual Turnover Debt Service Coverage Ratio Turnover Capital Ratio Cash Balance at the end of 8 years Break-even Point Sensitivity Analysis Findings (a) 5% drop in selling price (b) Capacity utilisation levelling off at 70% DSCR of 1.4 project unviable DSCR of 1.7 project viable. 60% 70% 80% Rs. 20,13,000 1.82 2.11 0.09 Rs. 12,58,000 48.3% of Installed Capacity Rs. 7,15,000 Rs. 2,38,000 24000 kgs of yarn per year Rs. 9,53,000
viii. Profit before Tax to Turnover Ratio
BUSINESS PLAN FORMAT FOR TINY AND COTTAGE UNITS 1.0 General Name of the Firm: Project: Location: Type of the Organisation: Proprietary/Partnership Address: Name of the Chief Promoter (s): Birth Date:
107
chp-10.qxd
10/18/05
9:31 AM
Page 108
1.1 Educational Qualifications SSC or Below Degree/ Diploma Institute Major Subject Year of Passing
1.2 Special Training Training in Institute Duration Achievement/Remark
1.3 Work Experience (Past and Present) Organisation Position Nature of Work Duration
1.4
i. Promoter's Annual Income: Rs.______________(Last year) ii. Assets owned by the promoter(s): Movable Immovable Rs.----------Rs.-----------
2.0 Details of the Proposed Project: Manufacturing 2.1 Land and Building Sr. No. 1. 2. Particulars Land Building Total Area Required Total Value Remarks
108
Chapter Ten
chp-10.qxd
10/18/05
9:31 AM
Page 109
2.2 Machinery/Equipments Sr. No. Description Nos. Required Rate (Rs.) Total Value (Rs.)
Total 2.3 Misc. Fixed Assets Sr. No. Particulars Nos. Required Rate (Rs.) Total Value (Rs.)
Total 2.4 Preliminary and Pre-Operative Expenses Sr. No. Particulars 1. 2. 3. 4. Interest during Implementation Establishment Expenses Start-up Expenses Misc. Expenses Total 2.5 The Working Capital Sr. No. Item 1. 2. 3. 4. 5. Raw-material Stock Semi-finished Goods Stock Finished Goods Stock Sales on Credit Production Expenses Total Duration Total Value (Rs.) Year-I Year-II Year-III Amount (Rs.) Remarks
109
chp-10.qxd
10/18/05
9:31 AM
Page 110
2.6 Total Cost of the Project Sr. No. Particulars 1. 2. 3. Fixed Capital (Total of item nos. 2.1,2.2,2.3) Working Capital (Total of item no. 2.5) Preliminary & Pre-operative Expenses (Total of item no. 2.4) Total 2.7 Means of Finance Sr. No. Particulars 1. Own Investment 2. 3. 4. Term Loan Working Capital Loan Any Other Source Total Amount (Rs.) Remarks Total Value (Rs.)
3.0 Market Potential 3.1 Present demand and supply of the product 3.2 Competition 3.3 Target clients/selected market area 3.4 Marketing strategy (USP) 4.0 Manufacturing Process a) Technical know-how availability b) Step-by-step description of the manufacturing process (R.M-F.G) c) Attach process flow chart (if required) 5.0 Production Programme i) No. of working days per annum ii) No. of working shifts (8hrs) per day
110 Chapter Ten
chp-10.qxd
10/18/05
9:31 AM
Page 111
iii) Installed capacity (annual) iv) Utilised capacity (%): Year - I Year - II Year - III Sr. No. Items
Quantity Produced Per Year Capacity Utilisation (%)
5.1 Sales Revenue Year Items Quantity Sold Per Year Rate Per Unit (Rs.) Sales Realisation (Rs.)
Total 5.2 Raw Material (Annual Requirement) Sr. No. Items Total 5.3 Utilities Sr. No. Particulars 1. Power/Electricity 2. 3. 4. Water Coal/Oil/Steam Any Other Item Total Annual Expenditure (in Rs.) Remarks Quantity Rate (Rs.) Total Value (Rs.)
111
chp-10.qxd
10/18/05
9:31 AM
Page 112
5.4 Man Power (Salary/Wages) Sr. No. Particulars 1. 2. 3. 4. 5. Skilled Semi-skilled Unskilled Office Staff Any Other Total 5.5 Repairs and Maintenance Sr. No. Particulars Total 5.6 Selling and Distribution Expenses Sr. No. Particulars 1. 2. 3. 4. 5. Publicity Expenses Travelling Freight Commision Misc. Total 5.7 Administrative Expenses Sr. No. Particulars 1. 2. 3. 4. Stationery & Printing Post/Telephone/Telegrams Entertainment Expenses Misc. Total Amount (Rs.) Remarks Amount (Rs.) Remarks Amount (Rs.) No. Wages/Salary per Month (Rs.) Annual Expenses (Rs.)
112
Chapter Ten
chp-10.qxd
10/18/05
9:31 AM
Page 113
5.8 Interest Year Outstanding Loan Amount (Rs.) Interest (Rs.) Instalment (Rs.) Balance (Rs.)
5.9 Depreciation Sr. No. Type of Asset Cost of Asset Expected Life Depreciation
6.0 Profitability Projections Sr. No. A. B. i) ii) iii) iv) v) vi) vii) viii) ix) Particulars
Year-I
Amount (Rs.)
Year-II Year-III Year-IV Year-V
Sales Realisation Cost of Production Raw Materials Utilities Salary/Wages Repairs & Maintenance Selling & Distribution Expenses Administrative Expenses Interest Rent Misc. Expenses Total
C. D. E. F. G. H.
Less: Depreciation Gross Profit/Loss (AB) Income-tax Net Profit/Loss Repayment Retained Surplus
Debt Service Coverage Ratio* Break-even Level of Activity* Return on Investment* Larger projects require projected financial statements like projected Profit and Loss Accounts and Balance Sheets.*
* These concepts are covered in the next Chapter.
113
chp-11.qxd
10/18/05
12:36 PM
Page 115
CHAPTER
11
Assessing Financial Viability of the Project
ertain tools help us assess the financial viability of any project where investment is contemplated. We will discuss some tools in brief.
Tools that determine the adequacy of the surplus:
RETURN
ON INVESTMENT
(ROI)
What is Return?
As we know, a project collects funds from two sources for long-term investment. The amount collected is used to create assets and operation, which generates surplus for the enterprise. Surplus is required to be distributed to the contributors of the funds. Interest is the compensation given to contributors of borrowed capital, and net profit and depreciation are given to contributors of own capital. Why should one add depreciation here? Though depreciation reduces profit, it is a non-cash provision made to recover the original investment. Thus, the cash profit of the enterprise is increased to the extent of depreciation. The total surplus generated by the project over its entire life has to be averaged to find out yearly return. This yearly return, when calculated on the total investment needed for the project, tells us about the Return on Investment. Simply speaking, this ratio tells us the surplus-generating capacity of the investment. One must know how much RoI a viable project must generate. This is an important question that needs to be answered to know the financial viability. The simple rule to assess the viability is that the RoI must be greater than the cost of investment.
chp-11.qxd
10/18/05
12:36 PM
Page 116
First look at the investment cost. Investment comprises two major components: i. Borrowed Capital (Normally taken as loans from banks and financial institutions) ii. Own Capital (Normally contributed by entrepreneurs) It is simple to calculate the cost of borrowed capital. Any borrower is required to commit the fixed service charge, i.e. interest at the time of sanctioning loan. Thus, the interest becomes the cost of borrowed capital. Interest is tax-allowed expense and, therefore, its effective weight is reduced by the actual rate of tax paid by the borrower. The entrepreneurs may have more than one investment alternative and under such conditions, the opportunity cost becomes the cost of entrepreneurs capital.
Acceptance Rule
For the investment to be financially viable, the RoI should be greater than the cost of investment.
DEBT SERVICE COVERAGE RATIO (DSCR)

Running an enterprise with financial support from banks/financial institutions, requires their loans to be repaid with interest. Therefore, an entrepreneur must generate surplus, adequate to meet repayment obligations. The DSCR is a tool used to determine this. Its formula is: Net profit + Interest (on long term loans) + Depreciation Interest (on long term loans) + Principal Loan
Acceptance Rule
A project is considered financially viable if the cumulative DSCR during repayment period is at least 2:1
BREAK-EVEN POINT (BEP)

This is another important tool. The break-even point is the level of activity where the total contribution is equal to the total fixed cost. Contribution is the excess of sales over variable cost, i.e.;
116 Chapter Eleven
chp-11.qxd
10/18/05
12:36 PM
Page 117
Contribution = Sales Variable Cost Contribution is a type of surplus that the business generates after paying fully the variable cost from the sales revenue. The break-even point is the point of activity where all costs (variable as well as fixed) are recovered from the sales values. The business, therefore, does not make profit or loss. For any activity below break-even, the business will incur loss, while it makes profit when activity is above it. So, when the business fully pays for the total fixed cost from contribution, the unit can be said to have achieved the BEP. When contribution fully pays for fixed cost, the business is said to have achieved break-even. Several formulae have been evolved to calculate break-even: 1. Total Fixed Cost (In quantum of activity) Contribution per unit of activity
2. Total Fixed Cost Selling Price per unit (In sales value) Contribution per unit of activity
Acceptance Rule
The BEP indicates the risk involved in a project. Normally, enterprises achieving break-even sales level at a higher capacity utilisation, are considered to be more risky, while those achieving it at a lower level of capacity utilisation are safer. The thumb rule is lowering the break-even betters the proposition.
DEBT-EQUITY RATIO
This ratio indicates the extent to which the promoters funds are leveraged to procure loans. The formula of DER is:
Total long-term debt Total promoters funds (includes subsidy)
Assessing Financial Viability of the Project
117
chp-11.qxd
10/18/05
12:36 PM
Page 118
A higher debt equity ratio indicates more risk due to a higher fixed cost of interest. The BEP of such enterprises will go up.
Acceptance Rule
It would be desirable to maintain the DER at a judicious level, say, varying between 2:1 and 3:1 for small and micro enterprises.
118
Chapter Eleven
chp-12.qxd
10/18/05
12:45 PM
Page 119
CHAPTER
12
Bookkeeping and Accounting and Financial Statements

ny business activity, be it manufacturing, servicing or trading, involves monetary transactions. At the end, if the total money received is more than the total money spent, the business is said to have generated a surplus or `profit'. If it is otherwise, the business is said have been in deficit' or `loss'. Every business intends to generate a surplus or profit. Therefore, the promoter(s) is/are always interested in knowing the outcome of the economic activity. Several transactions take place in the course of business. To remember all of them is almost impossible. A business therefore, needs to record all such transactions to find out the outcome of the business activity. A methodical and systematic science has been developed which helps the promoter record all economic transactions properly and know the outcome of the business dealings. This science is called "Financial Accounting." Accounting is a name given to the system which measures, records, analyses and reports the effect of business transactions and events taking place in a business enterprise. Since such reporting is in financial units, the system is also known as financial accounting. It has been defined as the art and science of recording business transactions in a methodical manner so as to show (a) the true state of affairs of a business at a particular time, and (b) the surplus or deficiency, which has accrued during a specified period. Thus Financial Accounting involves (a) data recording and (b) data presenting technique used for recording various transactions. This is called Bookkeeping. The data recorded is summarised and systematically arranged and presented to various users in the form of Financial Statements.
chp-12.qxd
10/18/05
12:45 PM
Page 120
WHAT
IS
BOOKKEEPING?
Bookkeeping is one of the functions of financial accounting. Bookkeeping entails maintaining proper records and books for recording complete details of transactions made during the course of business. Business transactions can be classified into several major activities/groups e.g. sales, purchases, assets, etc. Separate books for recording transactions pertaining to these activities are maintained, registering in them the details of respective transaction. This exercise is called Bookkeeping.
Why are Books of Accounts Maintained?

It is extremely important to have the latest information about what is happening in business. This helps in taking appropriate and timely action. A doctor needs details about the physiological conditions of a patient to diagnose the illness, its causes and its remedies. Just like that the owner of the business, creditor, or banker needs to know about the latest financial health of the business for taking suitable decisions about the future course of action. Bookkeeping helps in maintaining and providing the latest financial position of the business and, therefore, assumes great significance. It is advisable to maintain books of accounts for the following reasons as well: They provide up-to-date information about the business. They reflect the outcome of transactions made during the period under review. They give information about the state of affairs of the business at regular intervals. They help governments and other authorities to decide about the incidence of various taxes. They help analyse the performance of the business. They help compare the performance of several business firms. The accounting information of business is required not only by the owner of the business but by various other parties too. They are the government, suppliers, creditors, bankers, investors, shareholders, auditors, etc. They depend on the information prepared by financial accounting for taking various decisions pertaining to their activities. This emphasises the need for writing books of accounts in a systematic and methodical way. Though, as an owner of the business one has the prime responsibility to write and maintain the
120 Chapter Twelve
chp-12.qxd
10/18/05
12:45 PM
Page 121
books of accounts, one is not free to write the accounts, the way one likes. They have to be written as per the norms and principles of techniques and systems of accounting used the world over. There are a few accounting techniques available for writing accounts but the Double Entry Bookkeeping System has universal acceptability and credibility. It is the modern and scientific accounting system designed to reflect the true and fair position of the business.
DOUBLE ENTRY BOOKKEEPING

The concept of the Double Entry Bookkeeping System is based on the principle that every economic transaction has two effects, which are exactly opposite to each other. Any transaction can have only two effects: debit and `credit', and they are always equal. As a result, at the end of the accounting period, the accounts should tally, meaning thereby that both total debits and total credits should tally with each other. Double entry bookkeeping is designed in such a way that, while entering the credit entry of a particular transaction, the details of the corresponding debit entry is also given.
Writing Accounts Under Double Entry Bookkeeping

Transactions
In business, the promoter does several transactions. The effect of these transactions on the business is recorded in the books of accounts. Only those transactions, which result in exchange of money or exchange of goods or services, whose value can be measured in monetary terms, need accounting treatment. Transactions may be of the following nature: a. Exchange of goods against cash/credit b. Exchange of services against cash/credit c. Exchange of assets against cash/credit d. Payment of cash to creditors e. Receipt of cash from debtors f. Exchange of goods against assets g. Exchange of goods against services
121
chp-12.qxd
10/18/05
12:45 PM
Page 122
Thus several types of transactions take place in business and they form the starting point of accounting. There are two types of transactions: (i) Cash transactions and (ii) Credit transactions. Cash transaction results in exchange of cash, while credit transaction results in an obligation to pay / receive cash in the future.
Accounts
Transactions involve accounts. Each transaction has to be done through an account. There are total three types of accounts: i. Personal Account or Individual account: This group of accounts includes all accounts of individuals and organisations like a firm, a corporate entity, a society, etc. ii. Assets Account: This group of accounts covers all types of assets. Assets mean all those investments made in tangible or intangible form of assets, which have utility value or use value. Moreover, these assets can also be disinvested and converted into cash. iii. Income-Expenditure Account: This group of accounts encompasses all accounts, which represent revenue income and revenue expenditure of the business.
Rules of Debit and Credit

In the Double Entry Book-Keeping System, each transaction has two effects. One is called Debit and the other is called Credit. Thus each transaction has minimum one debit effect and minimum one corresponding credit effect. There are prescribed rules for debiting and crediting various accounts, which are classified under three major groups as mentioned above. These rules form the basis of accounting under Double Entry Bookkeeping System. Below given are these rules: (i) Rule for Personal Accounts: "Debit the Receiver and Credit the Giver". Explanation: Any person involved in a transaction can either be a receiver of cash, asset or services, or be a giver of cash, asset or services, without any immediate consideration. The account of the person who receives is debited, while the account of the person who gives is credited. (ii) Rule for Assets Accounts: "Debit what comes in and Credit what goes out." Explanation: In business, goods and assets come and go. Whenever assets or goods come in the business its respective account is debited, while in the case
122 Chapter Twelve
chp-12.qxd
10/18/05
12:45 PM
Page 123
of assets or goods going out of the business as a result of a transaction, its respective account is credited. (iii) Rule for Income-Expenditure Accounts: "Debit Expenses and Losses and Credit Incomes and Gains" Explanation: This group of accounts covers all revenue income and expenditure accounts. All those revenue incomes that are generated during the course of the business are credited in their respective accounts and all such revenue expenditures incurred during the course of the business are debited in their respective accounts. Steps for Identifying Debit or Credit Effect i. Decide whether the transaction needs accounting treatment. ii. Determine which are the two accounts involved in the transaction. iii. Apply the rules of debit and credit for the identified accounts as per their classification. iv. It should be seen that there couldnt be both credits and both debits in a single transaction. Every transaction must have a debit and a corresponding credit.
The Journal Entry

A journal entry is the first noting in the books of accounts whereby debit and credit effects of each transaction on accounts are identified and noted along with proper description. Journal entries help in preparing several books of accounts. A suggestive format for maintaining a journal and writing journal entries is shown below: Journal entries in the book of M/s. ................. Particulars Ledger Debit Credit Folio No. (Amount) (Amount)
Date
Explanation: i. Date: The journal entries must be written date-wise in a chronological sequence. It is ideal to make entries of the transactions daily. The year, month and date of the transaction for which journal entry is made should be mentioned in the Date column.
Bookkeeping and Accounting and Financial Statements 123
chp-12.qxd
10/18/05
12:45 PM
Page 124
ii. Particulars: In this column, for each transaction, the account to be debited and the account to be credited is mentioned. The account, which is to be debited, is written first followed by the account to be credited. A word To precedes the name of account, which is credited. E.g. Bank Account debited to Sales Account Subsequent to debiting and crediting the appropriate accounts, a brief narration of the transaction, if possible, in one line only is written in the Particulars column. iii. Ledger Folio No.: In the third column the folio number of the respective accounts in the ledger is mentioned. This helps trace the posting of each transaction and verify it. iv. Debit and Credit: In this column the amount by which the respective account is debited and credited is mentioned. At the end of every page the total of debits and credits is made and is carried forward to the next page.
Ledger
A ledger is a book, which contains details of all accounts in which transactions are made. It contains a condensed and classified record of all business transactions transferred from the journal or subsidiary books. Ledger is the principal book under the double entry bookkeeping system. It contains up-todate information about all accounts, e.g. if an owner wants to know how much he/she owes to Mr. X, he/she can learn this from Mr. Xs account maintained in the Ledger. If such accounts were not maintained in the ledger, the owner would be required to go through each transaction involving Mr. X to find out the payment liability. This exercise is time-consuming and inconvenient. For businesses with a sizeable number of transactions, it is impossible to scan the primary books or journal every time to know the exact position of any account. It is, therefore, very important to maintain a ledger. A suggestive format for maintaining an account in the ledger is given below: Debit Side
Date
Account (Name of the Account)

Folio No. Amount Date Particulars Folio No.
Credit Side
Amount
Particulars
124
Chapter Twelve
chp-12.qxd
10/18/05
12:45 PM
Page 125
Explanation: It may be noticed from the format that a ledger account has two sides: debit side (left-hand side) and credit side (right-hand side). Each side is further divided into four sections, viz. Date, Particulars, Journal Folio Numberand Amount. i. Date: In this column, the date of a transaction as entered in the journal book from where the entry is brought to the ledger account, is mentioned. ii. Particulars: In this column the name of the account in which the corresponding credit or debit (under the double entry principle) is found, is mentioned. iii. Journal Folio Number: In this column the page number of the journal book or subsidiary book from where the transaction is brought to the account is mentioned. iv. Amount: In this column the amount, with which the account is debited or credited, is mentioned.
Transactions
Transactions are entered, as and when they occur in the journal book or subsidiary books. From there necessary records are created in the ledger. The process of transferring entries from the journal or subsidiary books to the appropriate accounts in the ledger is called posting. If an account is debited with an amount as entered in the debit column of the journal book, the same is posted to the debit side of the account in the ledger. Similarly, if an account is credited in the journal book, it is posted to the credit side of the account. While posting entries, care should be taken to see that the name of the account in which the entry is posted is not mentioned in the column of particulars. Instead the name of the other account, which is affected under the same transaction, should be mentioned. While posting, each entry to the debit side of an account should begin with the word To (in the Particulars column) and each entry to the credit side should begin with the word By.
Balancing the Account

Normally as it happens, the total of all postings to the debit side and the credit side of the account is not equal. The amount by which the total of any side (debit or credit) is greater than the total of the other side is called the balance
chp-12.qxd
10/18/05
12:45 PM
Page 126
of the account. If the total of debit side is greater, then the balance is called debit balance and if it is vice versa, it is called credit balance. For example: i. Following accounts always have debit balances: a. Cash Account/Bank Account b. Assets Account c. Debtors Account d. Stocks Account e. Revenue Expenses Account f. Losses Account g. Investment Account ii. Following accounts always have credit balances: a. Creditors Account b. Revenue Income's Account c. Gains or Profit's Account d. Bank Loan Account e. Interest Received As seen earlier, the journal book is the first book required to be kept in the business where all transactions are recorded. It is the book of original entry. Likewise, the ledger is the most important basic book, which records all accounts. So long as the transactions in the business are limited and simple, it is possible to enter all transactions first in the journal book and then in respective accounts in the ledger. But with the size of a business and the number of transactions increasing, it becomes difficult to maintain a journal book for all the transactions and post them in the ledger. Under such circumstances, it becomes necessary to divide the journal books and the ledger into some separate subsidiary books, each of which is reserved for recording one particular class of transactions, e.g. purchase book, sales book, cash book, etc.
126 Chapter Twelve
chp-12.qxd
10/18/05
12:45 PM
Page 127
BOOKS NEEDED TO BE ACCOUNTING SYSTEM
MAINTAINED FOR A
SIMPLE
For a small industrial enterprise, the usage of the simple financial accounting system is recommended. Such businesses must maintain a set of books as suggested below. By doing so, the businesses can get a correct and fair picture of the activities speedily. a. Journal: All transactions (except those which are to be recorded in subsidiary books) are properly recorded here. b. Subsidiary books (for journal) i. Purchase book: In the purchase book, all transactions pertaining to purchases, be it on credit or by cash, are recorded. Transactions of purchase returned are also recorded here separately. ii. Sales book: In the sales book, all transactions pertaining to credit or cash sales are recorded. Transactions of sales returned are also recorded separately. iii. Ledger: All accounts involved in the transactions recorded in the journal or its subsidiary books are maintained here, and necessary posting is made. iv. Cash book: The cashbook is a subsidiary book of the ledger where the account of `cash' is maintained. Transactions involving petty cash are also posted here separately. v. Bank book: The bankbook is a subsidiary book of the ledger where the account of `bank' is maintained. vi. Stock register: This is a register where the movement of stock is maintained. The formats for the journal book and the ledger accounts were discussed earlier. The formats of subsidiary books like purchase book, sales book, cashbook, bankbook and stock register are given here along with a brief explanation for its usage. Format of a Purchase Book
Date Party's Name Total Bill No. Ledger Item Folio Name Quantity Rate Amount Terms
127
chp-12.qxd
10/18/05
12:45 PM
Page 128
Explanation: i. Date: The date on which the purchase was made is mentioned here. ii. Particulars: The name of supplier of the materials and necessary details of the invoice are mentioned here. iii. Bill No.: The number of the bill of the supplier is mentioned here. iv. Ledger Folio: The folio number of the ledger, on which either the supplier's account (if credit purchase) or cash account (if cash purchase) is credited, is mentioned here. v. Amount: The net amount of purchase made is mentioned here. vi. Terms: The terms of purchase, as on cash terms or credit terms, etc., are mentioned here. Format of a Sales Book
Date Party's Name Total Bill No. Ledger Item Folio Name Quantity Rate Amount Terms
Explanation: i. Date: Date on which the sales transaction took place is mentioned here. ii. Particulars: The name of the purchaser of the goods and necessary details of the transaction are mentioned here. iii. Bill No.: The number of the bill given to the buyer is mentioned here. iv. Ledger folio: The folio number of the ledger on which either the buyer account (if credit sales) or cash account (if cash sales) is debited is mentioned here. v. Amount: The amount of sales done through this transaction is mentioned here. vi. Terms: The terms of sales transactions like, cash or credit is mentioned here.
128 Chapter Twelve
chp-12.qxd
10/18/05
12:45 PM
Page 129
Format of a Cash Book Debit side(Receipts)

Date Particulars Journal Folio Amount
Credit side (Payments)

Closing Balance Total Total
Explanation: The Cash Book is nothing but a cash account. Like other asset accounts, this account is also required to be mentioned in the ledger. However, because of the multiplicity of cash transactions and for convenience, cash account is not maintained in the general ledger but maintained as a separate account and named as cash book. All the rules of maintaining accounts in ledger apply to this account also. Format of a Bank Book Debit side(Receipts)
Credit side (withdrawals)

Closing Balance Total Total
Explanation: Like cash book, bank book is nothing but the bank account required to be maintained in the ledger. Since the transactions involving bank are increasing, it is convenient and proper to keep a separate bank account where all transactions involving the bank are posted. This account, therefore, is separately maintained and named bank book. All rules of making posting in other ledger accounts are applicable to this account as well.
chp-12.qxd
10/18/05
12:45 PM
Page 130
Format of a Stock Register

Date Particulars S.B./ P.B. Folio No. Receipts Issues Balance
Quantity Value Quantity Value Quantity Value
Explanation: The stock register is very similar to the stock account. It tells us about the actual closing stock available with the business to help the owner physically verify and place further orders. i. Date: The date of transactions resulting in movement of stock is put here. ii. Particulars: The details of transactions due to which the stock changes, are narrated here. iii. Sales Book/Purchase Book Folio number: The page number of the sales book or purchase book where the particular transaction resulting in addition or deduction of stock is put here. iv. Addition: Purchase resulting in addition of stock. The quantity of stock purchased along with its value is put here. v. Deduction: Sales result into deduction of stock. The quality of stocks sold along with its value is put here. vi. The Closing Balance: The amount that accrues, as a result of addition or deduction is calculated and put here. vii. Itemwise separate page is to be kept in Stock Register.
FINANCIAL STATEMENTS
The main objective of bookkeeping is to record all transactions according to the accepted accounting principles and practices. But only proper recording of transaction is not adequate. Unless the various accounts recorded are properly classified for summary, it becomes difficult to visualise the total picture of the business. It is, therefore, very essential to summarise all those accounting details recorded by maintaining various books and to present them in an acceptable form. Financial statements are such forms in which all accounting
130 Chapter Twelve
chp-12.qxd
10/18/05
12:45 PM
Page 131
details are presented for the use of various users like owners, bankers, creditors, tax authorities, government, suppliers, etc. With the support of the financial statements, one can understand the financial position of the business meaningfully.
Various Financial Statements

Normally at the end of the financial period for which the accounts are written, the ledger accounts are closed and balances are drawn for preparing final accounts. The statements known as final accounts are: i. Trial Balance ii. Profit and Loss Account iii. Balance Sheet (i) Trial Balance The first step in preparing final accounts is to prepare a trial balance. The main objective of the trial balance is to determine the arithmetical accuracy of the entries made in the ledger. The fundamental principle of Double-Entry Bookkeeping is that every transaction has two equal and opposite effects. It means, every debit has a corresponding credit and vice-versa. Hence the total of all those accounts having a debit balance and the total of all those accounts, which have a credit balance at the end of the accounting period, should tally. They should be equal; otherwise the accounts would be inaccurate. While preparing the trial balance, the accounts, which have debit balances, are placed in the debit column, while the accounts, which have credit balances, are placed in the credit column. In every trial balance, the total of the debit column must tally with the total of the credit column, unless some mistakes in posting, casting or compilation have been committed. The agreement of the totals of debit and credit columns of the trial balance ensures only arithmetical accuracy of the accounting, but it is not a conclusive evidence of the accounting accuracy as there are some mistakes which a trial balance cannot detect. A suggestive format of trial balance is given below: Format of a Trial Balance Trial Balance of M/s. ------------ for the year ----------Ledger Folio Name of Account Debit closing Credit balance closing balance
Total
131
chp-12.qxd
10/18/05
12:45 PM
Page 132
Explanation: i. Ledger Folio: In this column the folio number (page number) of the ledger or its subsidiary books where a particular account is maintained, is written. This helps in crosschecking the accuracy of accounts. ii. Name of Account: In this column, the name of the account whose closing balance is being brought to the trial balance is written. iii. Debit/Credit closing balance: In these columns, the amount of debit and credit closing balances of individual account is mentioned. It may be noted that a single account at a time cannot have both debit and credit balances. If an account has a debit closing balance the amount of that balance is mentioned in the debit column of the trial balance against the name of the respective account. Similarly, if an account has a credit closing balance, it is mentioned in the credit column of the trial balance. iv. Total: When the closing balances of all accounts from the ledger and its subsidiary books are brought to the trial balance one by one, the totals of account in the debit column and the credit column are made and tallied. One should remember that: a. Closing balances of all Assets Accounts, Revenue Expenses Accounts and Losses Accounts are always debit balances. b. Closing balances of all Revenue Income Accounts and Gain Accounts are always credit balances. c. Accounts of individuals to whom the business owes money always have credit balances and accounts of individuals who owe money to the business always have debit balances. d. Loan (Taken) Accounts always have credit balances. e. Cash Account always has debit balance. If the totals of debit and credit columns of the trial balance do not agree, it means there is some mistake in preparing the accounting books. The mistake/s, traced and rectified would tally the trial balance. However, there are a few mistakes, which cannot be detected by trial balance, such as: i. Errors of Principle ii. Errors of Omission
132
Chapter Twelve
chp-12.qxd
10/18/05
12:45 PM
Page 133
iii. Errors of Commission iv. Compensating Errors After the trial balance is tallied, necessary adjustment entries need to be made for closing stocks, outstanding expenses, transfer provisions, etc. (ii) Profit and Loss Account The preparation of a trial balance is a step towards preparing the remaining two more important financial statements correctly viz. profit and loss account and balance sheet. However, its use remains to a great extent limited to detecting arithmetical accuracy. From the financial accounting system, the user would like to know about the profitability of the business operations for a specified period and the position of the business at the end of the period. A statement that reveals the profitability of the business operations for the accounting period is called Profit And Loss Account' (P & L A/c.). Contents of P & L A/c. From all the balances mentioned in the trial balance, the accounts that are for revenue expenditures, revenue type of losses, revenue income and revenue type of gains, are taken to P&L A/c. By doing so, it becomes possible to learn whether the business at the end of the accounting period has generated a surplus or deficit. All accounts of revenue income and gains are brought to the credit side, whereas all accounts of revenue expenditure and losses are brought on the debit side of the P&L A/c. If the total income is more than the total expenditure, the business is said to have generated surplus or profit. But if the total expenditure exceeds the total income during the accounting period, the business is supposed to have made losses. If the P & L A/c. has a credit balance, it signifies net profit and on the other hand, if the P&L A/c. has a debit balance, it denotes net loss of the business during the accounting period. A suggestive format of the profit and loss account is given below: Format of Profit and Loss Account Profit and Loss A/c. of M/s.-------------------------; For the period ------------------------Debit side Particulars Net Profit (Balance Figure) Total: Amount Particulars Net Loss (Balance Figure) Total: Credit Side Amount
133
chp-12.qxd
10/18/05
12:45 PM
Page 134
Explanation: i. Particulars: In this column, on the debit side, names of the following accounts are mentioned individually: a. All accounts of revenue expenditure b. All accounts of revenue losses Names of the following accounts are mentioned on the credit side: a. Sales account b. Closing stock account (if it is adjustment entry) c. Accounts having credit effect of adjustment entries ii. Amount: The respective amount of debit and credit balances of the accounts, which are brought to the P&L account, is mentioned in these columns on debit and credit side against the names of their respective account head. One should also keep in mind the following: i. The P & L account contains all Income and Expenditure Accounts. Not a single account from either individual, Personal Accounts or Asset Accounts can be brought to the P & L account. All accounts of Income and Expenditure Accounts get closed when they are brought to P & L account while the balance of Personal/Individual Accounts and Asset Accounts get carried forward to the subsequent year. All income generated and expenditure incurred during the whole period is mentioned in the P & L account. ii. Subsequent to bringing all balances of the accounts to concerned debit and credit sides, the total of their balances is made. If the total of credit side is more than the total of debit side then the business is said to have made net profit. The amount by which the total of the credit side exceeds the total of the debit side of the P&L account is called the Net Profit generated during the accounting period. Similarly, the amount by which the total of the debit side exceeds the total of the credit side of the P & L account is called Net Loss generated by the business during the year. Thus both figures of net profit and net loss are balancing figures. Adding them up with the total of the debit or credit side as the case may be would make the totals of both the sides tally. This is a situation where total income is equal to total expenses.
134 Chapter Twelve
chp-12.qxd
10/18/05
12:45 PM
Page 135
Thus, if i. Total of credit side > Total of debit side of P&L A/c. of P&L A/c. ii. Total of credit side < Total of debit side of P&L A/c. of P&L A/c. iii. Total of credit side = Total of debit side of P&L A/c. of P&L A/c. = Profit = Loss = No profit/no loss
Net profit or net loss is the result of business operations during the accounting period. They are transferred to the balance sheet where the capital account representing the financial involvement of the promoter is increased or decreased appropriately by the figures of net profit or net loss. iii. Balance Sheet A balance sheet is a statement prepared for measuring the true financial position of a business at a certain point of time (normally the last day of the accounting period). It is essential to prepare the balance sheet (i) to ascertain the results of business operations during the accounting period; and, (ii) to know the financial position of the business at a particular point of time. The profit and loss account serves the former objective while the balance sheet serves the latter. As seen earlier, all the accounts pertaining to the group of Income and Expenditure Accounts are taken to the profit and loss account. The accounts pertaining to the remaining groups, viz. Personal or Individual Accounts and Assets Accounts are brought to the balance sheet. The accounts brought to the balance sheet are not closed. Their closing balances at the time of the balance sheet are carried forward to the subsequent accounting period. They are shown on the balance sheet only to apprise the users about the position of the accounts at that particular time. The balance sheet should be prepared in a prescribed format so that its understanding becomes easy. Given below is a prescribed format of the Balance Sheet.
135
chp-12.qxd
10/18/05
12:45 PM
Page 136
Balance Sheet Format Balance Sheet of M/s. ----------------------- as on -----------Liabilities Capital Reserves & Surplus Secured Loans (Received) Unsecured Loans & Deposits (Received) Current Liabilities Provisions Profit Accumulated Amount Assets Fixed assets Investments Loans and Advances (Given) Current Assests (i) Stocks -----(ii) Debtors -----(iii) Cash -----(iv) Bank -----Balance -----Accumulated Losses Total Total Amount
Explanation: It has been explained above that the balance sheet reveals the true and fair position of a business at a particular point of time. Thus, the balance sheet gives the details of what the business owns and what the business owes. Whatever the business owns is termed as Assets and whatever the business owes is termed as Liabilities. All liabilities are mentioned on the left-hand side of the balance sheet, while assets are shown on the righthand side. Assets Assets are classified under the following broad heads: i. Fixed Assets: Fixed assets are of permanent nature and the underlying motive of the business is to utilise them for value addition. The total value of fixed assets at the close of the accounting period is shown on the balance sheet. ii. Current Assets: Current assets, unlike fixed assets, do not permanently maintain the same form. In whichever form they may be, they are likely to be converted in the form of Cash or Bank Balance in the near future.
136 Chapter Twelve
chp-12.qxd
10/18/05
12:45 PM
Page 137
Normally, the following accounts are termed as Current Assets: a. Stocks: Closing stock of raw material, work in process and finished goods. b. Debtors: Individuals from whom money is to be received (as a result of business transactions) are termed as Debtors or Accounts Recei vables and are also current assets. c. Cash Balance & Bank Balance: Cash lying with the business, and balance in the bank account of the business are current assets. iii. Investments: At times, the business invests in some other businesses or companies. The value of these investments is an Asset for the business. iv. Loans & Advances (given): At times, the business gives loans or advances to third parties. The value of such loans or advances is an Asset. These are not similar to debtors (current assets) where the individual becomes liable to pay to the business due to his buying the product of the business on credit terms. v. Fictitious Assets: Fictitious assets are not real and tangible assets but are debit balances of accounts like P&L A/c., Accumulated Losses A/c., Expenses Not Written Off A/c., etc. Liabilities On the liabilities side, all Personal and Individual accounts to whom the business owes are mentioned. Liabilities can be classified in the following broad groups: i. Capital: Money invested by the promoter is a liability. Business owes that much to the owner. ii. Reserves and Surplus: Accumulated profit, which is not withdrawn and is a part of profit, which is reserved for some specific purposes, also belongs to the promoter(s). Business owes that much to the owner. They are, therefore, liabilities. iii. Secured Loans (received): Amount of loans taken by the business is a liability for the business. These loans are secured against some assets, which are offered to the institutions/person who have given loans, as security or collateral. iv. Unsecured Loans and Deposits (received): Like secured loans, these loans are also liabilities for the business. However, these loans are not secured.
chp-12.qxd
10/18/05
12:46 PM
Page 138
v. Current Liabilities: They are short-term funds taken for financing current assets. Normally, they are credits offered by suppliers of raw materials and the working capital loans given by banks. vi. Provisions: They are liabilities in which case payment provision has been made by the business from the profits, e.g. provision for tax liability. The total of the Liabilities side and the Assets side of the balance sheet must tally. If they dont, there are some mistakes in preparing the final accounts, which should be detected and rectified.
138
Chapter Twelve
chp-13.qxd
10/18/05
12:47 PM
Page 139
CHAPTER
13
Costing and Pricing of Products

realistic and comprehensive knowledge on costing and pricing is required to build the financial management capabilities of entrepreneurs. This will help in running the enterprise successfully and enable one to give due importance to costing and pricing. Costing can be defined as the process of determining how much it costs to produce and sell a product or service. Costing is very important as the cost of a product can decide its profit or loss. There are two costs involved in determining the cost of a product / service, i.e. direct cost and indirect cost. Direct Cost: The cost of those items that become part of the end-product are known as direct costs such as; raw material, labour, packing material, etc. Indirect Cost: All expenses incurred in running a business and that which cannot be directly identified with the end product are indirect costs. The following exercise could be used as an illustration for a better understanding of the concept: Costing Exercise Mr. Ramesh is processing mangoes for a pickles manufacturer, who subcontracts the work, when he has orders for processing less than 5000 Kgs of mangoes. The pickles manufacturer provides raw mangoes, but all other inputs and expenses are the responsibility of Mr. Ramesh. To process 200 Kgs of mangoes, he needs spices and oil costing Rs.400/- and fuel costing Rs.100/-. In addition, he pays Rs.2000/- to workers who work for eight hours, processing 2000 Kgs of mangoes. Calculate the price that he must quote per Kg of processing, to the pickle manufacturer if he decides to earn a minimum of Rs.20 per Kg for himself.
chp-13.qxd
10/18/05
12:47 PM
Page 140
The correct solution is: Cost of processing 200 Kgs of Mangoes i) Spices and Oil ii) Fuel iii) Labour Rs. 400.00 100.00 200.00 700.00 He wants to earn Rs.20/- per Kg. Hence for 200 Kgs targeted earning is Rs.4000/- (i.e. 200 20). Therefore, he must quote Rs.700.00 + Rs.4000 = Rs.4700/- for 200 Kgs i.e. Rs.23.50/- per Kg. Please note that more the price the higher the profitability. But then proper pricing should be done so that the product finds a place in the market. Cost reduction is the other way to earn more profit. For pricing a product/ service, an entrepreneur could exercise the following options: A desired margin may be added to the total cost to obtain the price. All possible efforts are made to make the price competitive and keep it less than the existing brands. In this option the price is kept exorbitantly high. This happens in a monopoly market.
PRICING PRICING
AND AND
COSTING: MARGINAL COST BASED CONTRIBUTION ANALYSIS
As an illustration of select costing and pricing tools, consider the case of a small enterpriseFardeen Products, making and selling sheekh-kebabs in plastic packs and casseroles to institutions and directly to consumers. The break-even level of the activity can be estimated from the data in table below. The performance of the enterprise has remained stagnant in the last four years.
140
Chapter Thirteen
chp-13.qxd
10/18/05
12:47 PM
Page 141
Indicative break-even level of activity of Fardeen Products, Ahmedabad Sr. No. 1 2 3 4 5 6 Particulars Raw Material Electricity Labour Interest Other Expenses Depreciation Total Variable Cost 10,00,000.00 64,000.00 4,80,000.00 10,000.00 15,54,000.00 Fixed Cost 3,000.00 1,80,000.00 1,000.00 1,000.00 1,85,000.00
Selling price (SP) of the product on a per kilogramme basis is about Rs. 120. The enterprise manufactured about 15,000 kg. of the product in a year on full capacity basis. It had sales of about Rs. 22 lakh a year.
Break-even point (BEP) = Total Fixed Cost (Rs. 1.85 lakh) 100=75.20% of capacity Revenue (Rs. 18 lakh)Total Variable Cost (Rs. 15.54 lakhs) Beyond break-even, viz. production of about 11,280 kg, it is on the basis of marginal costs that pricing may be made, as all fixed costs are covered at break-even level. Similarly, the ideal product mix of an enterprise may be identified by means of a contribution analysis as illustrated in the example below. Avidhoot enterprises has 6 product lines. The enterprise makes stuffed paratha, macaroni and pasta items and sells them to institutional customers viz. to private offices, foreign banks etc. in Ahmedabad, Gujarat. The table below provides line wise data on variable costs, selling price and output of the enterprise for the year 20012002.
141
chp-13.qxd
10/18/05
12:47 PM
Page 142
Avidhoot EnterprisesCurrent Product-mix & Variable Cost (VC) Statement of the Enterprise
Sr. Product - mix No. 1 2 3 4 5 6 Stuffed Paratha (Veg) Stuffed Paratha (Non-Veg.) Macaroni (Veg.) Macaroni (Non-Veg.) Pasta (Veg.) Pasta (Non-Veg.) Total
Qty. Sold (nos.) 30000 40000 10000 7000 20000 25000 132000
VC/Unit (in Rs.) 45.00 52.00 17.00 20.00 16.00 17.20
SP/Unit (in Rs.) 50.00 60.00 20.00 25.00 20.00 25.00
Total VC (Rs. lakh) 13.50 20.80 1.70 1.40 3.20 4.30 44.90
Total Sales (Rs. lakh) 15.00 24.00 2.00 1.75 4.00 6.25 53.00
The enterprise has a fixed cost of Rs.6.10 lakh per annum. Hence, profits had been Rs.2 lakh in the year 20012002. Upon study of the performance of the enterprise and customer and consumer demand pattern in the last 4 years, it was observed that there are certain market constraints. About 1,00,000 nos. of Stuffed Parathas (Vegetarian and Non-Vegetarian, each), about 25,000 nos. of Macaroni (Vegetarian and Non-Vegetarian, each) and about 50,000 nos. of Pasta (Vegetarian and Non-Vegetarian, each) is the maximum demand for respective product lines a year. Further, a minimum demand or order size of 5000 plates or numbers of each product line prevailed. The enterprise has the capacity to make and sell maximum 1,45,000 plastic packs and casseroles of all products in total. Wide variations in demand prevailed in different years. Nevertheless, the enterprise has to make and offer all the six product lines as to remain a onestop shop of its clients. How could the enterprise resolve its problem of stagnant sales performance? If the enterprise is to optimise its product mix (and profits) it should ideally sell about 1,00,000 plates of Stuffed Parathas (Non-Veg.), 30,000 plates of Pasta and 5,000 plates of other products. That is, products with maximum contribution need be sold. The table below presents the revised product mix.
142 Chapter Thirteen
chp-13.qxd
10/18/05
12:47 PM
Page 143
Avidhoot EnterprisesIdeal Potential Product-mix of the Enterprise (in Rs.)

Sr. Product-mix No. 1 Stuffed Paratha (Veg.) 2 Stuffed Paratha (Non-Veg.) 3 Macaroni (Veg.) 4 Macaroni (Non-Veg.) 5 Pasta (Veg.) 6 Pasta (Non-Veg.) SP/ VC/ Unit Unit 50 60 20 25 20 25 45 52 17 20 16 17.20 C/ Unit 5.00 8.00 3.00 5.00 4.00 7.80 Qty. 5000 1,00,000 5,000 5,000 5,000 25,000 1,45,000 Contribution 25,000 8,00,000 15,000 25,000 20,000 1,95,000 10,80,000 VC 2,25,000 52,00,000 85,000 1,00,000 80,000 4,30,000 61,20,000 SP 2,50,000 60,00,000 1,00,000 1,25,000 1,00,000 6,25,000 72,25,000
If the enterprise can restructure its product mix, it can increase its profit to Rs.4.95 lakh per yearmore than double. However, an ideal selling incentive in terms of credit and discount strategy may have to be evolved as to encourage sales of product with higher contribution and in turn encouraging such shift in the product mix. A similar analysis of the market mix with regard to marketing channels and customer or consumer segments or groups need be made and ideal strategies to encourage sales through such channels or customer or consumer segments that yield high contribution may be evolved. For instance, direct sale to consumers may yield higher contribution to a small Curry base and Instant Noodles manufacturer. In which case, a strategy of employing salespersons to directly market products to consumers with appropriate selling incentives to both the sales persons and consumers may be an ideal sales strategy than adopting the conventional dealer-retailer channel. The cases on product mix, pricing, contribution analysis presented in this chapter indicates scope for sales promotion incentives and pricing of products as also on product positioning, packaging and real differentiation. The learning from these cases may be incorporated to enhance rigour in terms of market-mix and market-plan as a part of an efficient preparation of a business or project plan.
143
chp-14.qxd
10/18/05
12:48 PM
Page 145
CHAPTER
14
Working Capital Management
n the chapters on Planning an SSI Unit and Business Plan, a discussion was made on the fixed capital and the working capital. Every business needs investment to procure fixed assets, which remain in use for a longer period. Money invested in these assets is called Long term Funds or Fixed Capital. Business also needs funds for short-term purposes to finance current operations. Investment in short term assets like cash, inventories, debtors etc., is called Short-term Funds or Working Capital. The Working Capital can be categorised, as funds needed for carrying out day-to-day operations of the business smoothly. The management of the working capital is equally important as the management of long-term financial investment. Every running business needs working capital. Even a business which is fully equipped with all types of fixed assets required is bound to collapse without (i) adequate supply of raw materials for processing; (ii) cash to pay for wages, power and other costs; (iii) creating a stock of finished goods to feed the market demand regularly; and, (iv) the ability to grant credit to its customers. All these require working capital. Working capital is thus like the lifeblood of a business. The business will not be able to carry on day-to-day activities without the availability of adequate working capital. The diagram shown on the next page clarifies it: Working capital cycle involves conversions and rotation of various constituents/components of the working capital. Initially cash is converted into raw materials. Subsequently, with the usage of fixed assets resulting in value additions, the raw materials get converted into work in process and then into finished goods. When sold on credit, the finished goods assume the form of debtors who give the business cash on due date. Thus cash assumes its original form again at the end of one such working capital cycle but in the course it passes through various other forms of current assets too. This is how various components of current assets keep on changing their forms due to value addition. As a result,
chp-14.qxd
10/18/05
12:48 PM
Page 146
Cash
Creditors
Debtors Value Addition
Raw Material Value Addition
Working Expenses
Finished Goods
Work in Process
they rotate and business operations continue. Thus, the working capital cycle involves rotation of various constituents of the working capital. While managing the working capital, two characteristics of current assets should be kept in mind viz. (i) short life span, and (ii) swift transformation into other form of current asset. Each constituent of current asset has comparatively very short life span. Investment remains in a particular form of current asset for a short period. The life span of current assets depends upon the time required in the activities of procurement; production, sales and collection and degree of synchronisation among them. A very short life span of current assets results into swift transformation into other form of current assets for a running business. These characteristics have certain implications: i. Decision regarding management of the working capital has to be taken frequently and on a repeat basis. ii. The various components of the working capital are closely related and mismanagement of any one component adversely affects the other components too. iii. The difference between the present value and the book value of profit is not significant. The working capital has the following components, which are in several forms of current assets: Stock of Cash Stock of Raw Material
146 Chapter Fourteen
chp-14.qxd
10/18/05
12:48 PM
Page 147
Stock of Finished Goods Value of Debtors Miscellaneous current assets like short term investment loans & advances The working capital needs of a business are influenced by numerous factors. The important ones are discussed in brief as given below: i. Nature of Enterprise The nature and the working capital requirements of an enterprise are interlinked. While a manufacturing industry has a long cycle of operation of the working capital, the same would be short in an enterprise involved in providing services. The amount required also varies as per the nature; an enterprise involved in production would require more working capital than a service sector enterprise. ii. Manufacturing/Production Policy Each enterprise in the manufacturing sector has its own production policy, some follow the policy of uniform production even if the demand varies from time to time, and others may follow the principle of 'demand-based production' in which production is based on the demand during that particular phase of time. Accordingly, the working capital requirements vary for both of them. iii. Operations The requirement of working capital fluctuates for seasonal business. The working capital needs of such businesses may increase considerably during the busy season and decrease during the slack season. Ice creams and cold drinks have a great demand during summers, while in winters the sales are negligible. iv. Market Condition If there is high competition in the chosen product category, then one shall need to offer sops like credit, immediate delivery of goods etc. for which the working capital requirement will be high. Otherwise, if there is no competition or less competition in the market then the working capital requirements will be low. v. Availability of Raw Material If raw material is readily available then one need not maintain a large stock of the same, thereby reducing the working capital investment in raw material stock. On the other hand, if raw material is not readily available then a large
Working Capital Management 147
chp-14.qxd
10/18/05
12:48 PM
Page 148
inventory/stock needs to be maintained, thereby calling for substantial investment in the same. vi. Growth and Expansion Growth and expansion in the volume of business results in enhancement of the working capital requirement. As business grows and expands, it needs a larger amount of working capital. Normally, the need for increased working capital funds precedes growth in business activities. vii. Price Level Changes Generally, rising price level requires a higher investment in the working capital. With increasing prices, the same level of current assets needs enhanced investment. viii. Manufacturing Cycle The manufacturing cycle starts with the purchase of raw material and is completed with the production of finished goods. If the manufacturing cycle involves a longer period, the need for working capital would be more. At times, business needs to estimate the requirement of working capital in advance for proper control and management. The factors discussed above influence the quantum of working capital in the business. The assessment of working capital requirement is made keeping these factors in view. Each constituent of working capital retains its form for a certain period and that holding period is determined by the factors discussed above. So for correct assessment of the working capital requirement, the duration at various stages of the working capital cycle is estimated. Thereafter, proper value is assigned to the respective current assets, depending on its level of completion. The basis for assigning value to each component is given below: Component of Working Capital i. ii. iii. iv. v. Stock of raw material Stock of work in process Stock of finished goods Debtors Cash Basis of Valuation Purchase cost of raw materials At cost or market value, whichever is lower Cost of production Cost of sales or sales value Working expenses
148
Chapter Fourteen
chp-14.qxd
10/18/05
12:48 PM
Page 149
Each constituent of the working capital is valued on the basis of valuation enumerated above for the holding period estimated. The total of all such valuation becomes the total estimated working capital requirement. The assessment of the working capital should be accurate even in the case of small and micro enterprises where business operation is not very large. We know that working capital has a very close relationship with day-to-day operations of a business. Negligence in proper assessment of the working capital, therefore, can affect the day-to-day operations severely. It may lead to cash crisis and ultimately to liquidation. An inaccurate assessment of the working capital may cause either under-assessment or over-assessment of the working capital and both of them are dangerous.
OF UNDER ASSESSMENT OF WORKING CAPITAL

Growth may be stunted. It may become difficult for the enterprise to undertake profitable projects due to non-availability of working capital. Implementation of operating plans may become difficult and consequently the profit goals may not be achieved. Cash crisis may emerge due to paucity of working funds. Optimum capacity utilisation of fixed assets may not be achieved due to non-availability of the working capital. The business may fail to honour its commitment in time, thereby adversely affecting its credibility. This situation may lead to business closure. The business may be compelled to buy raw materials on credit and sell finished goods on cash. In the process it may end up with increasing cost of purchases and reducing selling prices by offering discounts. Both these situations would affect profitability adversely. Non-availability of stocks due to non-availability of funds may result in production stoppage. While underassessment of working capital has disastrous implications on business, overassessment of working capital also has its own dangers.
CONSEQUENCES
chp-14.qxd
10/18/05
12:48 PM
Page 150
OF OVER ASSESSMENT OF WORKING CAPITAL

Excess of working capital may result in unnecessary accumulation of inventories. It may lead to offer too liberal credit terms to buyers and very poor recovery system and cash management. It may make management complacent leading to its inefficiency. Over-investment in working capital makes capital less productive and may reduce return on investment. Working capital is very essential for success of a business and, therefore, needs efficient management and control. Each of the components of the working capital needs proper management to optimise profit.
CONSEQUENCES
Inventory Management
Inventory includes all types of stocks. For effective working capital management, inventory needs to be managed effectively. The level of inventory should be such that the total cost of ordering and holding inventory is the least. Simultaneously, stock out costs should also be minimised. Business, therefore, should fix the minimum safety stock level, re-order level and ordering quantity so that the inventory cost is reduced and its management becomes efficient.
Receivables Management
Given a choice, every business would prefer selling its produce on cash basis. However, due to factors like trade policies, prevailing marketing conditions, etc., businesses are compelled to sell their goods on credit. In certain circumstances, a business may deliberately extend credit as a strategy of increasing sales. Extending credit means creating a current asset in the form of Debtors or Accounts Receivable. Investment in this type of current assets needs proper and effective management as it gives rise to costs such as: i. Cost of carrying receivable (payment of interest etc.) ii. Cost of bad debt losses Thus the objective of any management policy pertaining to accounts receivables would be to ensure that the benefits arising due to the receivables are
150 Chapter Fourteen
chp-14.qxd
10/18/05
12:48 PM
Page 151
more than the cost incurred for receivables and the gap between benefit and cost increases resulting in increased profits. An effective control of receivables helps a great deal in properly managing it. Each business should, therefore, try to find out average credit extended to its client using the below given formula: Average credit = Extended (in days) Average credit sales per day Total amount of receivables
Each business should project expected sales and expected investment in receivables based on various factors, which influence the working capital requirement. From this it would be possible to find out the average credit days using the above given formula. A business should continuously try to monitor the credit days and see that the average credit offered to clients is not crossing the budgeted period. Otherwise, the requirement of investment in the working capital would increase and, as a result, activities may get squeezed. This may lead to cash crisis.
Cash Management
Cash is the most liquid current asset. It is of vital importance to the daily operations of business. While the proportion of assets held in the form of cash is very small, its efficient management is crucial to the solvency of the business. Therefore, planning cash and controlling its use are very important tasks. Cash budgeting is a useful device for this purpose.
Cash Budget
Cash budget basically incorporates estimates of future inflows and outflows of cash over a projected short period of time which may usually be a year, a half or a quarter year. Effective cash management is facilitated if the cash budget is further broken down into month, week or even on daily basis. There are two components of cash budget (i) cash inflows and (ii) cash outflows. The main sources for these flows are given hereunder: Cash Inflows (a) Cash sales (b) Cash received from debtors (c) Cash received from loans, deposits, etc.
chp-14.qxd
10/18/05
12:48 PM
Page 152
(d) Cash receipt of other revenue income (e) Cash received from sale of investments or assets. Cash Outflows (a) Cash purchases (b) Cash payment to creditors (c) Cash payment for other revenue expenditure (d) Cash payment for assets creation (e) Cash payment for withdrawals, taxes (f) Repayment of loans, etc.
A suggestive format for Cash Budget is given below: Cash Budget of M/s Particulars Months January February Estimated cash inflows ---------------------I. Total cash inflows Estimated cash outflows ---------------------II. Total cash outflows III. Opening cash balance IV. Add/Deduct surplus/Deficit during the month (III) V. Closing cash balance (IIIIV) VI. Minimum level of cash balance VII. Estimated excesses or shortfall of cash (VVI) March
152
Chapter Fourteen
chp-14.qxd
10/18/05
12:48 PM
Page 153
Financing Working Capital

Now let us understand the means to finance the working capital. Working capital or current assets are those assets, which unlike fixed assets change their forms rapidly. Due to this nature, they need to be financed through short-term funds. Short-term funds are also called current liabilities. The following are the major sources of raising short-term funds:
i. Suppliers Credit
At times, business gets raw material on credit from the suppliers. The cost of raw material is paid after some time, i.e. upon completion of the credit period. Thus, without having an outflow of cash the business is in a position to use raw material and continue the activities. The credit given by the suppliers of raw materials is for a short period and is considered current liabilities. These funds should be used for creating current assets like stock of raw material, work in process, finished goods, etc.
ii. Bank Loan for Working Capital

This is a major source for raising short-term funds. Banks extend loans to businesses to help them create necessary current assets so as to achieve the required business level. The loans are available for creating the following current assets: Stock of Raw Materials Stock of Work in Process Stock of Finished Goods Debtors Banks give short-term loans against these assets, keeping some security margin. The advances given by banks against current assets are short-term in nature and banks have the right to ask for immediate repayment if they consider doing so. Thus bank loans for creation of current assets are also current liabilities.
iii. Promoters Fund

It is advisable to finance a portion of current assets from the promoters funds. They are long-term funds and, therefore do not require immediate repayment. These funds increase the liquidity of the business.
Working Capital Management
153
chp-15.qxd
10/18/05
12:49 PM
Page 155
CHAPTER
15
Marketing Management
production process acquires meaning only if it produces products which emerge out of anonymity and find a place in the market. Many small entrepreneurs produce quality products, but are unable to sell it due to poor understanding of the markets and marketing management. Most think marketing and selling to be the same and hence, face serious consequences. The fact however, remains that this is one of the most critical areas that entrepreneurs must master. You must develop the capability to understand your market and device your marketing strategies accordingly. You should be able to assess who will buy your product and why; and also your competitors and their strategies.
THE CONCEPT
OF
MARKETING
Most people think that marketing is all about selling and buying of goods and services in exchange for money. This is a very narrow view. There are three major facets of marketing. First is the production-driven approach where stress is laid on selling whatever is produced. This works during scarcity of goods. And the producers key function here is to sell goods available at affordable prices. Most small and micro enterprises follow this approach. The second is the sale-driven approach that revolves around personal selling and advertising to convince customers to buy your product. This approach is adopted when there is an abundance of supply in the market. The last is the consumer-driven approach, which focus on promoting sale by meeting the customers expectations in terms of quality, looks, aesthetics, prices and aftersales-service. The earlier two approaches where goods are tailor-made are producer-oriented and may not work satisfactorily as they require a proper understanding of the consumer behaviour, preferences, tastes and needs before undertaking production. The third being consumer-driven, lasts. This is why sales becomes a small part of an entire system called marketing that addresses planning, pricing,
chp-15.qxd
10/18/05
12:49 PM
Page 156
promotion and distribution of goods and services to satisfy customer needs. Therefore, you must understand that marketing is not just selling, but much more, and includes: i. Market Assessment ii. Market Segmentation iii. Market Targeting iv. Developing Market Mix
Market Assessment
First, there is a need to know the demand for the proposed product and this requires market assessment. With this, one would know the volume that might be bought by a defined customer-base in a defined geographical area and time-frame, under a defined marketing programme. The market demand can be estimated by multiplying the number of buyers by the average quantity bought at a given price. Though this may be difficult for small entrepreneurs to find out, they can still do a quick survey (discussed in Chapter 7) if the market is generally local or regional.
Market Segmentation
This helps in indentifying buyers. It is a process that identifies differences in basic characteristics of different customer groups, and thus helps craft an effective marketing strategy. Segmentation can be by assorting consumers like rural & urban, young-old, married-unmarried, educated-uneducated, rich-poor, etc. and analysing their needs and demand pattern.
Market Targeting
Having done the market segmentation, one should decide the target group. It is normally not possible to meet the expectations of all the customer groups in the market. Therefore, there is a need to zero in on a specific segment. One will commit a blunder if one thinks one can meet the expectation of all the segments. The risk of a major failure prevails if one tries to cater to all the segments and, therefore, one should specialize to succeed. The promotional strategies, infrastructure and manpower resources will greatly vary with the targets. Having decided the target, strategies for successful marketing can be devised.
156 Chapter Fifteen
chp-15.qxd
10/18/05
12:49 PM
Page 157
Marketing Mix
Marketing mix is the tool by which one could strategically position oneself in the market. The positioning will depend on how different will ones product be than others in terms of attractiveness for a particular customer group. It could include features of the product, performance quality, durability, reliability, style, design, repairability, etc. These factors are popularly known as 4 Ps of marketing: i. Product (or service) its quality, presentation, packaging, varieties, design, colours, styles, contents. ii. Place where it is bought, physical and social barriers, home delivery, distribution channels, transport, ambience, sanitation, decoration. iii. Promotion advertising, telemarketing, personal and promotional selling, exhibitions, mailing. iv. Price the amount, prices vs. status, quality, discounts, credit terms. There are more Ps now: People (understanding customers), Packaging (better product look), Partnership (strategic marketing alliances), Positioning (geographical, such as Punjabi or South Indian Food). Product Better Performance Improved Quality Bigger Quantities Better Finish Attractive Packaging Better Labels Attractive Colours Attractive Contours Mind-captivating Brand Promotion Proper Advertising Signboards Competitions Different Names Other Publicity Promotional Selling Place Longer Opening Hours Better Furnishing Better Decoration Different Location Home Delivery Telephone Facility Better Sanitation
Price Competitive Pricing Higher Pricing Lower Pricing Longer Credit Special Offers Quantity Discounts Cash Discounts
Marketing Management
157
chp-15.qxd
10/18/05
12:49 PM
Page 158
The famous saying, Leaders dont do different things, they do things differently, finds an apt place here. Being able to supply quality goods at competitive prices to the customers satisfaction does not take one any further. To be a market leader, one needs to market the product and create its brand loyalty, by also taking care of distribution logistics. Most entrepreneurs neglect this. Another crucial factor is to be able to make the business communicate for what it stands, which is done by effective promotional strategies.
PROMOTIONAL STRATEGY Use of Electronic Media and IT

A proper promotional strategy is needed to create a brand image of the product and this will need an effective fusion of print and electronic media. Everyday, we see brand ambassadors like Sachin Tendulkar endorsing Pepsi and Aamir Khan advocating Coke. This creates an image in the minds of the customers. The promotional strategy should suit the market. While it may be expensive to get celebrity endorsement, there are local channels to one can make use of radio and the internet, besides TV, newspapers or magazines. The best decision will be to hire a professional advertisement agency, howsoever small, for promotion. Then, there is always the word of mouth that invisibly promotes the product by the sheer strength of its quality and other features, which people will talk about and thus market. This is especially true in the food business.
Collective Marketing Approach

All these steps are good for existing or small-scale entrepreneurs but may not always apply to a large segment of micro enterprises who might find it difficult due to paucity of financial as well as human resources. Micro enterprises should evolve innovative collective strategies to reap mutual benefits.
SEVEN TIPS
FOR
SUCCESSFUL MARKETING
a) Know Your Consumers/Customers

There are two types of clients: i. BUYERS/CUSTOMERS who buy goods from you to sell to others. The customers may not be the direct users of ones products. Normally, wholesalers buy in bulk and sell to retailers, who sell to
158 Chapter Fifteen
chp-15.qxd
10/18/05
12:49 PM
Page 159
individual consumers or exporters, who in turn sell goods abroad to chain stores and retailers. ii. Users who directly consume the products, who are CONSUMERS.
b) Satisfy Your Customers/Consumers

They may be satisfied: i. When they are happy with the features and quality of the product. ii. When the price of your product is reasonable (reasonable means within the budget). iii. When one delivers on time and maintains agreed terms. iv. When extra efforts are put in to make them happy; like by working overnight to deliver on time.
c) Attract More Customers

Marketing must ensure that consumers repeatedly buy ones products and also speak well about it to others. One should always remember the four Ps discussed earlier: i. Product Consumers want the product to satisfy their needs and they may want it to last long. The product should be worth the money spent by buyers on it. The product should meet the best standards of quality and aesthetics. ii. Price Prices should be affordable and there are ways to make them acceptable also. Match your competitors prices. One could use the formula (price cost = profit) when (i) one is relatively new to the business (ii) the competition is strong and (iii) when consumers are used to prevailing prices.
Look at the costs

The price could be set by adding a reasonable profit to the cost and this can be used during (i) low competition and (ii) when the product is new.
Marketing Management 159
chp-15.qxd
10/18/05
12:49 PM
Page 160
Make the price attractive

Prices may be made attractive in other regions than ones own by different ways. Attractive prices can, for instance, be like Rs.49.95 for Rs.50.00. iii. Promotion A satisfied client is ones best promoter not only in terms of repeat orders but also for references. Some ways to promote ones product: Discount and credit offers can be publicised by placards placed in retail outlets or by distributing pamphlets to existing and potential clients. Discount and credit offers: Give limited-period discounts or credits to regular and new clients as also bulk buyers. This will attract potential customers and strengthen the existing ones. Offer high discount on high-margin products as this is likely to encourage sale and manufacture of such products without affecting profits. Also, distribute pamphlets among exporters/wholesalers, if necessary. Promotional items: Paperweights, calendars etc. with ones brand name can be good advertisements. iv. Place Determine where to sell the product and where should the client to find it.
d) Network and Reach-out to New Consumers

This helps in expanding ones customer base. There are several ways by which one can network and reach new customers and expand ones market base: i. Personal visits to potential clients ii. Participation in trade fairs where potential is found iii. Product catalogues and web pages which could be forwarded to distant customers iv. Promotion methods like selling incentives to increase sales
160 Chapter Fifteen
chp-15.qxd
10/18/05
12:49 PM
Page 161
Rather than waiting for customers to come, the entrepreneur should look for them. While i, iii and iv are means to network with new consumers, it helps one network with both new and existing customers.
Participating in trade exhibits in different regions

i. Prepare for an exhibition: Inquire about trade exhibitions from government offices and non-government organisations that organise such fairs. Participate in fairs after considering its location, the fees and products featured. Print business cards, product catalogue and price lists. Prepare samples for display. Keep a logbook to record visitors contact details. ii. During the trade exhibit: Approach visitors and talk informally about the products. Encourage them to analyse the product. Exchange business cards. Request them to fill the logbook.
e) Give Selling Incentives

Marketing starts even before business identification and often involves all management areas, while selling is about increasing sale. Selling incentives are various: Reduced price or discount Multiple products for the price of one Fixed-time discount coupons for repeat purchase Better credit terms
chp-15.qxd
10/18/05
12:49 PM
Page 162
A processor may adopt any of these incentives. The following is a case study of a price discount incentive option: Arun Processors is a tiny unit and sells Rs.5 lakh worth pickles a year. They offer 30-day credit to customers. They got an extra order of Rs.2 lakh this year. But the trader backed out after the products were made. Arun Processors, therefore, evolved a new incentive plan to dispose off the additional production, under which they offered a three per cent discount in case payment was made in cash 15 days after delivery and 90day credit otherwise. Let us do a cost analysis of this strategy. Assume 50% sale is executed by discount option and 50% by 90-day credit scheme. If the production cost of increased sales is 70%, the actual cost of locked up funds in the credit sale would be three per cent a month. This is the rate he has to pay for credit purchase. Existing promotional and credit terms: Proposed promotional terms: 30 days 3/15 (or) 90 days (Amount in Rs.) Current Sales Likely Increase in Sales Likely total sales 5,00,000 2,00,000 7,00,000 (1)
Cost of discount (Rs.1,00,000 of sales @ 3%) Cost of credit sale for 3 months (Rs.1,00,000 @ 36% per year) Total cost
3,000 9,000 12,000 (2)
Increase in cost of production (70% of Rs.2,00,000) Profit in production (1) - (3) Cost of proposed promotional terms (2) Net profit
1,40,000 60,000 12,000 48,000
(3)
(4)
Therefore the increase in profit is Rs.48,000/-. The proposed promotional stratagem could benefit the enterprise.
162
Chapter Fifteen
chp-15.qxd
10/18/05
12:49 PM
Page 163
f) Know Your Competitors

It is very important in business to know ones competitors and their strategies to remain competitive and there is a simple framework to understand them: The competitor as a food processor What is his experience in the business? What are his resources: (i) size of operation, (ii) technology, (iii) financial resources and (iv) market credibility. The competitors clients Does he have many clients? Who are they? Are his clients happy? Can he retain customers? The competitors product Is his product better? How is his product different? The Competitors price Is his price cheaper? Why? The competitors promotional strategies Does he provide better credit/discounts? The competitors place Does he directly deal with consumers? Does he have agents/distributors?
chp-15.qxd
10/18/05
12:49 PM
Page 164
g) Developing a Sustainable Marketing Advantage:

A business that does not develop any or all of the three advantages below is sure to lose out to competition: A sustainable cost advantage: This will help an enterprise offer lower prices. Cost savings can also help in offering better credits. A differentiation advantage: This offers buyers better value than that of the competitors, as the product is different by its features and services as well as by brand image. A niche market: Here consumers are delivered specially customised products in small volumes.
FINALLY, REMEMBER THE CARDINAL PRINCIPLES TO SUCCEED IN THE MARKET:

The customer is the most important person. Put yourself in customers' shoes. Good marketers sell products that never return but customers do. Successful marketing is about building and sustaining human relationships. Be flexible so as to encourage people to do business with you.
164
Chapter Fifteen
chp-16.qxd
10/18/05
12:51 PM
Page 165
CHAPTER
16
Applied Management in Business: Learning from Existing Businesses
ANMOL FOOD PRODUCTS: STRUCTURING A PROJECT EFFICIENTLY WITH THRUST ON THE MARKET PLAN
he enterprise, registered as a private limited company, has been involved in marketing processed food products. It now proposes to manufacture sauces, jams and other products. The unit is registered with the Ministry of Food Processing Industries. The key promoters include a cost accountant and a scientist who have earlier worked with CFTRI, Mysore. The cost accountant worked for a multinational and also has substantial experience in marketing confectionery in Karnataka. He also has experience in catering and has supplied packed meals to hospitals and banks in Mysore city. His enterprise had then undertaken contracts to run canteens in various large factories in Mysore. The experience of the promoters both in the catering field and in marketing products in the sector helped them evolve their project well. Several products are proposed to be manufactured by this enterprise. These include sauces, squashes, jams, masala paste, ready-to-eat products and pickles. Sauces for example, include tomato sauce, chilly sauce and soya sauce. Jams include strawberry and pineapple jam. Ready-to-eat products comprise tamarind rice mix, tomato rice mix and sambhar. Pickles include mango, mixed vegetable, lemon, garlic and green chilly. Products are offered in various packing sizes to meet purchase preferences of different customers and consumers. Squashes include mango, orange, grape, pineapple and strawberry, and masala powders largely include garam masala powder.
chp-16.qxd
10/18/05
12:51 PM
Page 166
Reducing production risk in terms of raw material price fluctuation

The main ingredients for sauces are tomato, green chilly and soya, which are to be procured in season, processed and retained, in preserved form like puree. Inputs/ingredients are to be procured fresh and the food stuff prepared and then processed under high temperature and pressure in retorts under water for 20 minutes to sometimes several hours, depending on the properties of the products. With regard to pickles, for instance, main fruits, vegetables and masala ingredients are to be procured in season. They are to be then converted into intermediaries like paste. The masala ingredients are to be thoroughly cleaned and procured for preservation. When production of various pickles is planned the fruit/vegetable and masala ingredients is processed into final products. So also with regard to masala powders, raw materials and ingredients are procured during season, thoroughly cleaned and preserved, depending on product formulation. Different ingredients are drawn and processed either separately or together to obtain the final product. The enterprise proposes to effectively reduce the risk in terms of high raw material price fluctuations and develop scope to secure high margins during off season in different products. The machinery to be used mainly are fruit mills, boiler, steam vessels, pulverizers, ovens, blenders, filling machine, etc. Past experience of the promoters helped in evolving a market plan for the enterprise. The product and market mix of the project is planned in relative detail.
Market Plan of Anmol Enterprises: Product and Market Mix

The enterprise has segmented its market and planned a product mix to target each segment. The table 16.1 below indicatively presents the relevant plan in terms of the number of customers the enterprise plans to target.
166
Chapter Sixteen
chp-16.qxd
10/18/05
12:51 PM
Page 167
Table 16.1 Proposed Product-Cum-Market Mix of Anmol Enterprises: Select Products
Market mix (as a percentage of sales) Product-Mix Jams Tomato Ketchup Tomato Sauce Chilly Sauce Soya Sauce Ready-to-Eat Products Pickles Squashes Syrups Ready-to-Serve Beverages Masala Powders
Retail Customers -Rural (33%)
Retail Customers -Urban (31%)
Institutional Customers (36%)
255 30 12 21 20 110 65 47 51 102
145 110 90 71 50 105 85 66 78 72 95
15 6 18 18 4 -
Specific marketing strategies have been planned to target each customer segment in the proposed marketing mix. Retail customer: The enterprise proposes to market its own brand in this segment. The enterprise plans to appoint distributors who may, in turn, supply to retailers on a weekly basis. The promoters realised that in some products branding is hardly critical. Jams are yet generic and consumers do not display strong brand pull. This product would provide volumes of business and facilitate penetration among distributors and retailers as it has sales potential even at tiny retail outlets. The enterprise plans to simultaneously sell its products through various categories of outlets in Tamil Nadu. Table 16.2 elaborates on points of sale and region-wise numbers.
167
chp-16.qxd
10/18/05
12:51 PM
Page 168
Table 16.2 Point of SaleRegion-wise Numbers Region Outlet Category A Supermarkets B Departmental Stores C Provision Stores D Petty Shops Chennai 9 25 55 202 Salem 2 2 11 43 Coimbatore 5 11 45 83 Total 16 38 111 328
A Consumer Pull-Seeking Strategy

The enterprise plans to initially place products in retail outlets and also create brand awareness at outlets. For the first two years, market support for providing visual displays at points of sale for brand promotion is believed important. For this, points of sale (POS) material are to be provided. The enterprise plans to lease shop shelf space and display boards to build brand awareness. The enterprise also plans to display its products at prominent trade fairs in India. Only in the third year, when sufficient profits have been generated and reserves built, does the enterprise plan to invest in media advertising and decrease focus on certain other areas. Table 16.3 below presents relevant and proposed selling expenses of Anmol Enterprises. Such expenses are not to be incurred uniformally in all outlets but selectively. Table 16.3 Planned Selling Expenses on Point of Sale of Anmol Enterprises Sr. Selling Expense No. 1. 2. Glow Sign Board Market Support for Supermarkets for Dept. stores for Provision stores POS Materials Trade Fairs Advertising through print and electronic media Amount (Rs. in lakh) 1 6 2.25 4 6 12.5 7.5 18 1.5 1 2 2 2 1.5 Year (Rs. in lakh) 2 1.5 1.25 2 4 1.5 1.5 3 1 4 1 3 2.25 6 5 1 3 2.25 6
3. 4. 5.
3 3 6
168
Chapter Sixteen
chp-16.qxd
10/18/05
12:51 PM
Page 169
Institutional Customers
The enterprise proposes to enter into an agreement with specialised chain stores in the region such as Nilgiris and Foodworld for sale of jams and other products in their brand name. The enterprise also plans to supply sauces to a re-labeller to market products in their brand name effectively, catering to a large number of buyershotels and restaurants. The selling expense indicated in the Table 16.3 excludes customer discount and margins that are considered separately in their market plan. The expenses and the plan proposed in this sub-section are to encourage consumer pull for their products. More Realistic Sales (Price) and Input Estimates Product-wise sales have been estimated by the promoters multiplying the projected output by the selling price as indicated in table 16.4 below. Table 16.4 Estimated Average Selling Price and Projected Sales Realisation of Product-mix
Products WeightedAverage Selling Price (Rs. per proposed standard unit)
36.85 38.00 60.50 53.70 38.00 75.00 38.50 64.00 60.00 118.50
Sales Realisation (Rs. in lakhs)
Year 1
13.34 22.20 23 2.10 1.98 21 3.60 5.81 3.64 14.20
Year 2 Year 3 Year 4 Year 5

14.01 23.21 24.15 2.21 2.08 22.05 3.78 6.10 3.82 14.91 15.34 25.25 26.45 2.42 2.28 24.15 4.14 6.68 4.42 16.33 16.68 27.75 28.75 2.63 2.48 26.25 4.50 7.26 4.55 17.75 16.68 27.75 28.75 2.63 2.48 26.25 4.50 7.26 4.55 17.75
Tomato Ketchup and Tomato Sauce Chilly/Soya Sauce Jams Tomato Puree Garlic Paste/Ginger Paste Ready-to-Eat products Pickles Squashes/Crush Synthetic Jellies 'Masala' Powders
The enterprise has estimated the selling price of products on the basis of the weighted average selling price over one year of other similar processors in the region. The raw material purchase price has also been similarly estimated. The prices have been weighted with the number of months the rate prevails on an annual basis. The estimates are hence more realistic.
Applied Management in Business: Learning from Existing Businesses 169
chp-16.qxd
10/18/05
12:51 PM
Page 170
The enterprise has also been conservative in projecting sales in terms of capacity utilisation. This is another factor that a lender scrutinises. As the enterprise appears to achieve sufficient Debt Service Coverage Ratio (DSCR) as indicated in table 16.5 below even at a low capacity utilisation, the project risk is believed to be low. Table 16.5 Capacity Utilisation as per Projected Profitability Statement of Anmol Enterprises Year Capacity utilisation Year 1 40% Year 2 45% Year 3 55% Year 4 75% Year 5 75%
Based on the expenses projected in the profitability statement, the break-even point of the enterprise is estimated. The enterprise is expected to operate on break-even levels from the first year itself despite its conservative projections. Given the specific analysis and projections made above, under normal circumstances, there is hardly any reason why a lender will not support the project or question its viability. DSCR is also high in this case. Table 16.6 below highlights the point. Table 16.6 Debt Service Coverage Ratio of Anmol Enterprises
(Rs. in Lakh)
Year 1 DSCR 5.22
Year 2 4.61
Year 3 4.68
Year 4 5.34
Year 5 5.84
An entrepreneur needs to accord adequate consideration to the market plan. The case in this sub-section highlighted efficient procurement and production management and indicated only some critical aspects that need be given consideration when preparing a plan. The product and market mix analysis and conservativeness are fundamental issues. The product market plan is the basis for financial plan of an enterprise.
ANALYSIS AND MANAGEMENT OF RISK IN AN ENTERPRISE: PARAG BISCUITS, AHMEDABAD

There are other critical decisions to be made in a project. These are particularly on the cost and financial structure of an enterprise. Decisions need to be made on the risk and profitability orientation of a project. Consider an adverse environment with falling demand and increased competition. An analysis of
170 Chapter Sixteen
chp-16.qxd
10/18/05
12:51 PM
Page 171
the cost structure of Parag Biscuits reveals a thrust on fixed costs. This implies an aggressive or relatively risky cost structure as the environment is adverse for this enterprise in terms of falling sales and margins in the past two years. A break-even analysis highlights the level of sales at which the profit before tax (PBT) is zero. The following information is available on the enterprise. The data presented in Table 16.7 below is for 20012002. Table 16.7 Expenses-Revenues-Profit for Parag Biscuits, Ahmedabad (20012002) Expenses-Revenues-Profit Sales (Less) Variable Costs (Interest on WC) Contribution (Less) Fixed Costs Profit before tax (PBT) Amount (in Rs.) 25,00,000 21,25,000 (70,000) 3,75,000 1,85,000 1,90,000
Break-even sales may be estimated by using the formula: Fixed costs over sales realisation minus Variable cost. Break-even sale is at about 50 per cent of current sales.
Risk Analysis of the Enterprise

Risk is estimated in terms of possible variability in profit. The variability in profits arises primarily because of variability in sales (volumes or margins or both). The impact on the PBT of Parag Biscuits if sales drop from its current level indicates a fall greater than the fall in sales. This is the Degree of Total Leverage (DTL) and measures the risk arising out of the sensitivity of profits to sales. Contribution DTL = PBT = 1,90,000 3,75,000 = 1.97
The risk includes: (i) the Degree of Operating leverage (DOL) arising from the structure of operating costs (variable costs that vary with output and fixed costs that do not) of the enterprise, (ii) the Degree of Financial Leverage (DFL) arising from the financial structure of the enterprise. This refers to debt as against the equity structure in the capital of an enterprise.
chp-16.qxd
10/18/05
12:51 PM
Page 172
The Degree of Operating Leverage (DOL) measures the percentage change in PBT for a percentage change in sales: An enterprise that has higher levels of fixed costs in operation will have a higher DOL. Contribution DOL = PBIT = 2,60,000 3,75,000 = 1.44
The Degree of Financial Leverage (DFL) on the other hand measures the percentage change in PBT for a per cent change in PBIT. An enterprise that has taken more of institutional finance vis--vis own equity will have a high DFL. PBIT DFL = PBT = 1,90,000 2,60,000 = 1.36
The Degree of Total Leverage (DTL) is the product of the DOL and the DFL: Fixed costs in operations cause a 1 per cent change in sales to lead to a more than 1 per cent change in the PBIT. Similarly, 1 per cent change in the PBIT causes profits to change by greater than 1 per cent. Fixed costs leverage the impact of changes in sales on profits. A high DTL is fine if sales have scope to increase and market growth is high in an industry. If not, it could be harmful to the enterprise as the fall in the PBT will be 1.97 per cent (DTL) for every 1 per cent fall in sales. Structuring an enterprises finance and cost is thus important to increase its returns or reduce its risk. The lessons for an entrepreneur do exist in the food-processing sector in terms of exploring, outsourcing options of some activities as to reduce interest burden on fixed investment, which is a fixed cost, for example. Further, depending on the risk-return trade-off and potential of an enterprise, greater debt financing may be availed of and/or variable costs may be selectively converted into fixed costs as a part of the revised project report.
SYSTEMS
IN
BUSINESS
Management information and control systems (MICS) are important areas in enterprise management. As an illustration, consider the following case of an enterpriseNarsis Vegetable Processors engaged in the manufacture of mango pickles in Hyderabad, Andhra Pradesh. The enterprise buys mangoes from wholesalers and undertakes processing and marketing. The enterprise markets its products in Hyderabad. Purchasing and stocking decisions are
172 Chapter Sixteen
chp-16.qxd
10/18/05
12:51 PM
Page 173
most critical in this sub-sector as the availability of products is seasonal and the contribution of raw material cost to the total annual cost of production of such an enterprise is high. Purchase on the basis of economic order quantity is critical in such business to optimise the cost and the benefit by virtue of inventory management.
Economic Order Quantity (EOQ) in Purchase

Management information and control systems for larger enterprises may include utilisation of production and scrap reports on a daily basis, batch consumption reports, material utilisation report and production report on a monthly basis and, a purchase and stores ledger. Nevertheless, most critically, the EOQ at the enterprise level has to be estimated for enterprises that are tiny and small to facilitate purchase and stocking decisions. For instance, Narsis Vegetable Processors in Hyderabad requires raw material of 90,000 kg of mangoes a year. The enterprise works at an average for 300 days a year. The cost of processing an order is Rs.30 and the carrying cost per kg. of mango is Rs.2 for one year. Lead-time for receipt of inputs upon order is five days and the enterprise may keep a reserve stock of 4 days usage. The economic order quantity and the re-order point may be estimated incorporating the formula:
EOQ = 2AO/C, where A is the annual requirement of input, O is the ordering cost (communication, transport, etc.) and C is the carrying cost (storage etc.)
The EOQ works out to 5196 kg. The re-order point may be estimated as follows: Daily usage Re-order point = = = 90,000 300 = 300 kg
Safety stock Usage rate + Lead time Usage rate 4 (300) + 5 (300) = 2,700 kg
Obviously, the variations in sale price over different months need be given due consideration and then the EOQ decided upon. (The participants may be asked to work out EOQ of purchase of a hypothetical enterprise and discuss their estimations).
chp-16.qxd
10/18/05
12:51 PM
Page 174
Maintaining Information on the Cost Structure of a Business

The table below presents the cost structure and activity levels of a food processing (jam making) enterprise for 20012002. Maintaining information in this format will facilitate decision making in an enterprise. Cost Structure and Activity of an Enterprise for 20012002 Sales (10,000 jars @Rs.75 each) Variable cost (10,000 jars @Rs.65 each) Contribution Fixed cost Profit 7,50,000 6,50,000 1,00,000 30,000 70,000
Assume that the enterprise now receives an offer from an exporter on certain specific terms. The exporter offers to buy products from this enterprise at a price 20 per cent more than his current sale price. The exporter, however, guarantees offtake of only 80 per cent of his current sale. He also insists that the manufacturer offers his product to no one else directly. Certain other expenses are likely to rise. The Table below summarizes the offer. 1. Offer of increase in prices = 20% 2. Reduction in sales = 20% (As the exporter would like the enterprise to manufacture for him alone) 4. Fixed cost increase = 10% (in terms of additional expense on upgrading equipment)
3. Variable expenses increase = 20% (in terms of better quality raw related cost)
Would the enterprises profits increase or decrease, if it accepts the offer? The cost structure and the activity of the enterprise, it accepts the offer, is presented in the table below. Production Price Variable cost 10,000 jars Rs.90 per jar Rs.78 per jar Total sales Total variable cost Fixed cost Rs.9,00,000 Rs.7,80,000 Rs.33,000
174
Chapter Sixteen
chp-16.qxd
10/18/05
12:51 PM
Page 175
Therefore, profit equals Rs.87,000. Profit, therefore, increases if the enterprise accepts this offer. The decision to accept the offer may be made quickly and approximately, if an enterprise maintains ready data on its cost structure. As a second illustration, consider the concept of a simple systems tool presented below. Systems for cash management are important. If a business runs out of cash it may not be able to pay dues on time or take advantage of opportunities because of lack of funds to finance them. A portion of profit should be saved and ploughed back to business as retained earnings. Continuous informal borrowings will put pressures on an entrepreneur to pay high interest and could affect credibility. All cash receipts and expenses should be regularly recorded. A simple but extremely utilitarian tool appropriate for business decision-making is a cash-cum-cost sheet. A cash-cum-cost sheet allows keeping records of cash and cost. But, more importantly, it helps decisionmaking on purchase and sales (discount v/s credit) and on structuring of costs to take advantage of leveraging effects of fixed costs on profits, or alternatively, reduce business risk.
A Cash-cum-Cost Sheet for Efficient Decision Making

There are many reasons why an enterprise may run out of cash. Sales may be poor or perhaps containing credit, besides the burden of paying the raw material supplier for credit purchase. Cash goes out even before it comes in. Working capital is used on personal expenses or directed to the purchase of equipment. Short-term funds are diverted to long-term investment. A cash-cum-cost sheet is a tool that allows to forecast how much cash is earned and how much is spent on every operating cycle. It also shows the structure of costs. When cash is short at the end of one operating cycle, one can take remedial measures and purchase on credit and sell on cash, perhaps by offering discounts over the next operating cycle. One can also strive to convert fixed cost into variable cost when one is confident of sales or margins for the next operating cycle or next few cycles. Even elements of cost such as raw material purchase, which is invariably a variable cost, may be converted to a fixed cost temporarily or for longer periods by means of post-dated cheque payments (with bank guarantee) or higher inventory stockpiling. One can make entries in a cash-cum-cost sheet for the period of one operating cycle as to plan on purchase and sales decisions as well as on profitability orientation on the next.
chp-16.qxd
10/18/05
12:51 PM
Page 176
An Illustration on Maintaining a Cash-cumCost Sheet

Cash transactions may be recorded on the left page. Cash received, cash disbursed, investments, revenues and costs may be recorded on the right page. Incomes are cash received and costs are cash disbursed. As an illustration, consider a papad and masala-making enterprise. The enterprise had about Rs.5,00,000 as cash balance as on February 1, 2001 and used it to buy materials worth Rs.80,000 on February 10, 2001. On February 13, the enterprise again bought raw material for Rs.50,000 and paid rental charges totalling Rs.80,000. On February 25, there was sale of products to an exporter for Rs.2,00,000. On February 27, the enterprise sold more products to another trader for Rs.8,20,000. On February 28, the enterprise bought raw material for Rs.7,00,000. These transactions are recorded in the following cash-cum-cost sheet. LEFT PAGE (CASH SHEET)
Date 2/1 2/10 2/13 Bought raw material Bought raw material Paid rent (annual lease) Arrangement paid every 6 months 2/25 2/27 2/28 Sales Sales Paid wages (piece-rate) Total Rajan Traders Mahesh Traders 80,000 50,000 80,000 Explanation To/From Cash Received Cash Disbursed Cash Balance 5,00,000 4,20,000 3,70,000 2,90,000
Alap Holds Mukesh Enterprise Employees
2,00,000 8,20,000 10,02,000
7,00,000 9,10,000
4,90,000 13,10,000 6,10,000 -
RIGHT PAGE (COST SHEET)

Start-Up/Investment 5,00,000 5,00,000 Income 2,00,000 8,20,000 10,02,000 Variable Cost 80,000 50,000 7,00,000 8,30,000 Fixed Cost 80,000 80,000 -
176
Chapter Sixteen
chp-16.qxd
10/18/05
12:51 PM
Page 177
In the cash-cum-cost sheet above, all expenses are recorded as variable or fixed costs simultaneously. As indicated earlier, such system tool facilitates decision-making on the purchase, sale and outsourcing or profitability front. For instance, measures to consider when cash balance is inadequate given the working capital requirement for the following operating cycle, include offering shorter periods for credit sales and a discount for cash sales and suppliers requested for credit. Further, if not very confident of demand in the next cycle, one may also reduce business risk by reducing the fixed cost, perhaps by discontinuing the annual lease arrangement and utilising the idle capacity of other enterprises on a monthly basis or by employing labour on contract than salary basis and by reducing the stocking of raw material and inputs. Alternatively, one may enhance the potential for increasing returns or margins by converting piece rate to salaried labour if the cash balance is relatively higher and market demand exists. Costs may hence be reduced and margins increased. That is by converting variable costs into fixed costs. Almost all variable costs may be converted into fixed costs and vice versa. Such simple systems in business could help make or break an enterprise. These decisions also affect working capital requirements for the next operating cycle. Working capital management involves estimating quantities of raw material or components, stock-in-progress, finished goods stock and bills receivable to be carried at any time so that uninterrupted production and inflow of cash are maintained. Working capital investment has a cost in terms of interest on funds invested, if they are borrowed, or if it is equity financed, there is a loss of return that could have been earned if invested alternatively. Those dealing with exporters and working on orders may require working capital only for raw material and stock in process as finished goods may be dispatched immediately upon production. The fortunate ones may also have their payments received immediately. The cycle beginning with the holding of raw material or components and ending with the carry of finished goods is known as production cycle. The cycle which extends beyond the stage of finished goods carry up to carry of receivables due from customers is called an operating cycle. A business has two kinds of assets: fixed assets such as machinery, land, building and operating assets, which are enclosed by one operating cycle. Operating assets are called gross working capital. Current liabilities such as the amount due for purchase of raw material, components and stores, viz. bills payable and credit received for other services, payment to electricity and telephone departments or money from an informal money lender, all constitute a source of working capital. The net working capital is thus the difference between these and the gross working capital. The cash credit facility is normally given by financial institutions to a business in the form of a running current account. Funds may be drawn from time
chp-16.qxd
10/18/05
12:51 PM
Page 178
to time for only working capital requirements. This account is subject to drawing power. The drawing power is the limit to which one can draw funds out of this account. The drawing power is determined on the basis of market value of stocks (raw materials, stock in process and finished goods) and book debts at a given point of time less the amount of margin contribution by the borrower (say, 20%) that is predetermined. The banker may require weekly, monthly or fortnightly certified statements of stock holdings and book debts outstanding. The bank may also insist on paying the supplier of raw material directly from out of the cash credit facility. A financial institution may also require certain documents that must be executed before provision of loan. Securities may include primary security and secondary or collateral security. Primary security includes tangible assets such as stock and book debts in the case of a cash credit facility and equipment or particular asset that is financed for a long-term use. Collateral security may include tangible assets such as property or intangibles such as guarantees from borrower or persons who are third parties.
Advantage of Cash Purchase of Raw Materials

Consider Parag Patels enterprise. He manufactures pickles at home. Raw material fruits and vegetables are available on credit. For every Rs.100 of raw material purchased, Rs.2, that is 2% is the interest for credit offered. An enterprise that buys about Rs.1 lakh worth of raw material every month and pays Rs.2,000 as interest may save this and increase their net earnings. The cost of production approximately accounts for about 20 per cent of raw material costs. Assume current earnings to be Rs.6,000 a month or about 5 per cent of the cost of production. If Rs.2,000 can be saved every month, it increases earnings for an enterprise by 33 per cent.
DAS AGENCY PVT. LTD.: A CASE ON MANAGERIAL DEFICIENCIES CONTRIBUTING TO POOR PERFORMANCE
Das Agency Pvt. Ltd. markets a wide range of processed foods. Das had launched his business in 1998. The enterprise market viz. distributes products of other brands as also outsources processing and sells products in its own brand. The enterprise operated from a rented warehouse-cum-office headquartered near Chennai. Das Agency Pvt. Ltd. is involved in procurement and sale of various products, including squash, jams and jellies and curried vegetables. The products were sold through one small leased outlet in Chennai. It was also sold through other retailers and directly to household consumers who
178 Chapter Sixteen
chp-16.qxd
10/18/05
12:51 PM
Page 179
normally gave specific orders. Table 16.8 below presents the approximated market mix of the enterprise. Table 16.8 Market mix of Das Agencies Pvt. Ltd. (20022003)
(Amount in Rs.)
Own Retail Outlet Other Retail Outlets Export (Indirect) Direct ConsumersHouseholds (Customized Orders) 3,60,000 1,40,000 Traders (Domestic sale) Total (100%)
Sales (Rs.) Gross contribution (sales minus cost of production, including finishing & packaging charges) Direct expenditure Contribution (Net)
26,00,000 10,72,000
14,72,000 3,96,000
3,76,000 1,08,000
1,44,000
49,52,000 17,16,000
4,24,000 6,48,000
1,60,000 2,36,000 2,16,000 20,000
48,000 60,000 64,000 4,000
36,000 1,04,000 60,000 44,000
20,000 20,000 24,000 44,000
6,88,000 10,28,000 8,56,000 1,72,000
Indirect expenditure 4,52,000 Net profit before tax &interest 1,96,000
Majority of sale was through own retail outlets. Retail prices in India were the same in all retail outlets. Profit margins were, therefore, lower on indirect retail sale. Sale was also through indirect exports, traders for domestic markets and direct sale to consumers. As the table above indicates, there were varying degrees of profitability in sales through different market channels or market-mix. About 50 per cent of sales were credit sales regardless of the channel. The enterprise used the services of CFTRI for developing new processes and new blends and mixes. A retired professional from the CFTRI was appointed as a consultant on monthly retainership for this purpose. Activities of the enterprise largely included procurement, packaging and sale. All products were outsourced. Developing new blends, particularly of the squash and masala products, was an area of expertise of Das. He had developed over 16 blends and mixes of squash and masalas. Each blend was to suit the taste of different ethnic communities based in Chennai. Das Agencies had a number of suppliers and manufacturers to outsource production, but were lucky to have vendors who retained quality. While the business has been earning profits, it has been lower than expected. Performance has fallen compared to turnover growth. Stocks seemed to be mismanaged as the bank overdraft often crossed limitsparticularly during peak demand. The turnover growth of the company seemed to
chp-16.qxd
10/18/05
12:51 PM
Page 180
be putting stress on availing own financial resources. Das was confident of the ability of his enterprise to improve performance despite intense and increasing competition. Das wondered on options, whether to: 1. Change the structure of capital of the enterprise to enhance profit and profitability? 2. Backward integrate into food processing than continue with mere packaging and marketing of processed food? 3. Change his pricing strategies in different marketing channels? 4. Improve management in his enterprise in terms of production, finance and marketing as, though his turnover has been increasing, his profits have not, proportionately? The financial performance of the enterprise in the last two years are summarised in the tables below. Table 16.9 DAS AGENCIES PVT. LIMITED Profit and loss account for year ending 31st March 2002 and 31st March 2003 (Estimates rounded off to the nearest 000)
(Amount in Rs.)
20022003 Rs. Sales Cost of Goods Sold Profit (Gross) Distribution Cost Administration Costs (about 70% are fixed costs) Operating Profit Interest Receivable Interest Payable PBT Tax on Profit Earned PAT Retained Profit (in the beginning of the year) Capitalisation Issue Retained Profit (at the end of year) 49,51,358 (32,34,808) 17,16,580 (3,32,180) (12,13,724) 1,70,676 (46,172) 1,24,504 37,068 87,436 1,15,976 (1,00,000) 1,03,412 20012002 Rs. 31,48,252 (20,81,684) 10,66,588 (2,27,296) (6,89,936) 1,49,356 1356 (10,980) 1,39,732 39,756 99,976 16,000 1,15,976
180
Chapter Sixteen
chp-16.qxd
10/18/05
12:51 PM
Page 181
Table 16.10 DAS AGENCIES PVT. LIMITED Balance Sheet as on 31st March 2002 and 2003 (Estimates rounded off to the nearest 000)
(Amount in Rs.)
Sr. No. 1. 2. a. b. c. Fixed Assets Stock (Current Assets) Accounts receivables (Current Asset) Cash (Current Asset) Total Current Asset 3. 4. 5. 6. 7. 8. 9. 10. Creditors (Current Liabilities) Net Current Assets Creditors Falling due beyond one accounting year Provisions Net Assets Share Capital (Fixed liability) Profit and Loss account Capital Employed (Total in business) 20022003 Rs. 2,00,932 5,20,496 4,32,132 1952 9,54,580 9,04,484 (50,096) (7532) (36,080) 2,07,416 1,04,004 1,03,412 2,07,416 20012002 Rs. 1,83,272 5,97,668 3,06,256 1512 9,05,438 9,31,376 (25,940) (37,352) 1,19,980 4,004 1,15,976 1,19,980
The sub-section below presents an indicative analysis of performance and future potential of the enterprise.
A Performance and Potential Analysis of Das Agencies Pvt. Ltd.

The enterprise has seen steady growth in sales since its inception. The promoter Das is technically well trained, having graduated from CFTRI, and very rightly utilises the retailer-push factor in promoting and selling his products, but lacks in management skills in other areas. Decisions are taken on thumbrule basis. Growth in sales and increase in activity has not been well managed. This has somewhat affected performance. The performance potential of the enterprise has not been adequately exploited. A diagnosis of the enterprise may help the present performance as shown in the statement below. The estimates are approximated, as the objective is to only pursue an indicative analysis. Sales have increased in the two periods viz. 20022003 over 20012002.
chp-16.qxd
10/18/05
12:51 PM
Page 182
The Financial Front

The net contribution to sales has been about the same over 20012002 and 20022003. The overheads have increased as a percentage of turnovers in 20022003. Operating profits have fallen in terms of sales over the two periods. The expenditure on interest has also increased. Earnings after interest as a percentage of sales have gone down. Financial Leverage: The unit did not take ideal advantage of financial leverage, as initial bank borrowings seem low. Savings on the income tax front could have been more. The enterprise has increased leverage since but not to the extent desired. Return on Capital Employed: Return on capital employed has fallen over 20012002 to 20022003. Current Ratio: The current ratio of the enterprise has always been relatively poor. The enterprise seems to have invested short-term funds for long-term purposes. Considering the current ratio, the enterprise seemed to have invested more than ideal levels of own funds in fixed assets. A term loan could have helped maintain better liquidity levels. Cash Flows and Problems: Cash balance has fallen considerably. The net contribution as a percentage of sales is almost the same in both years.
The Marketing Front

Growth Rate: The turnover of the enterprise has seen good growth over the years. Turnover has increased considerably between 20012002 and 20022003. Net profits are however, a small percentage of sales. This is a poor margin on sales performance. They may reflect a poor market or product mix with a tendency towards worsening circumstances. Debtor Turnover: Sale through own retail outlets has been on cash basis while remaining sales are on credit basis. The Debtor Turnover Ratio (viz. Credit sales to Debtors) is about the same, indicating poor focus upon market mix or discount vs. credit modes. Margins in terms of operating profits and profit before tax (PBT) to sales have dropped although sales has increased. This has occurred in
182 Chapter Sixteen
chp-16.qxd
10/18/05
12:51 PM
Page 183
spite of increase in sales as overheads (administrative expenses) have increased more than proportionately. Earnings after interest have fallen in terms of percentage of sales as interest expenses have increased several folds. Sales Mix: The sales mix in terms of product or market mix does not seem decided, considering the contribution per rupee of sales but on thumb-rule basis. The scope for efficient pricing and discount stratagem on the basis of contribution analysis seems to have been ignored. This could have reduced debtor realisation time and enhanced performance, including sales. Economies of scale do not seem effectively reaped in marketing. As sales have increased, ideally, overheads to sales ratio should have reduced. Rather, it has increased. This indicates the need for revamping product or market mix and evolving an ideal promotional stratagem perhaps in terms of credit and discount.
The Production Front

Rise in Variable Costs: The enterprise is largely outsourcing entire production. However, it has invested in equipment for packaging and labelling. Inventory Turnover: There may be mismanagement in terms of stocking raw material and finished goods inventory. Thus, inventory turnover ratios (ITOR) have fallen between the two years. This may lead to increased working capital requirements and a cash crisis. Analysis of stock turnover at the market and product mix level seem ignored. Creditors: The level of non-bank creditors seems to be high. Interest cost has increased several folds as compared to 20012002. The use of non-bank creditors could imply higher interest charges over the years. This may have also affected performance, viz. margins. Systems for planning seem to be on thumb rule basis. In essence, to enhance performance and sustainability, the enterprise could go in for higher levels of institutional debt finance, may consider integrating backwards into processing, as also develop the marketing front in terms of offering credit and discounts in channels of products, where contribution is the highest to ensure that turnover increase will be matched with profit increase even while benefiting from a higher operating and financial leverage and hence profitability. In fact, these are aspects that need to have been considered earlier even during conception and implementation of the project.
183
chp-16.qxd
10/18/05
12:51 PM
Page 184
NETWORKING OPTIONS TO MANAGEMENT EFFICIENCY
BE
CLUBBED
WITH
In fact, management efficiency at the enterprise level needs to be clubbed with efficient networking. There are many regions with established food-processing enterprises but with a weak technical knowledge base, weak information channels and limited facilities for testing and research. Legal and quality issues may be unknown. Legal compliance, support in HACCP certification and need for establishing food-testing laboratories are critical. An information portal www.foodindia.org with information on international product standards has been developed by the Mahratta Chamber (MCCIA) in Pune, for instance. But, few are aware of the facility. Information gaps need to be reduced by networking with different support institutions. The food processing enterprises at Pune produce products such as jelly, squash, pickle, dehydrated ready food mixes, bakery products, milk products such as sweets, ice creams, confectionery items, ground cereal flours, papad, processed spices, etc. A consultant was called (FICCI, Quality Forum, New Delhi) to introduce HACCP. A food-testing laboratory was established not only to carry out testing facilities but also to carry out research and provide training facilities to firms. The laboratory was established to work on the areas of product testing, (quality control & quality assurance), product development and training in an integrated manner. The Food Research and Analysis Centre (FRAC), New Delhi, signed an MOU with MCCIA to pursue initiatives. FRAC helped the Pune laboratory in the selection of right machinery, staff and in training. In essence, SIDBI and the Ministry of Food Processing Industries provided financial support. MCCIA provided finance and management. The FRAC provided finance and management and the CFTRI provided training. Such interventions for the benefit of enterprises in a region may be catalysed only if enterprises work together to ensure the same. An information centre was developed for farmers, which strengthened backward linkage of processed food units. Potential entrepreneurs in other regions should learn of such options to enhance performance.
Grameen Information Centre (GIC)

In the food-processing region of Pune, IT is used to develop linkages between food-processing units and agriculture producers around the city. The GIC is a concept developed to provide information to facilitate better linkages. Information is provided on technology, prices, demand and supply situation in
184 Chapter Sixteen
chp-16.qxd
10/18/05
12:51 PM
Page 185
the international scenario, rules and regulations for exports, import duties, standards and specifications. A pilot GIC was established near Pune. Various activities of the GIC include Rice Programmes to encourage better seeds and hybrid varieties; Organisation Farming Programmes for the development of niche products; dissemination of information on Government sponsored schemes, new technologies in agriculture, post-harvest techniques, weather forecasting and guidance on crop protection.
Development of Raw Material Purchase Consortia or Raw Material Banks

Input supplies to individual enterprises may be bought in volumes meriting discounts. Purchase consortia lend strength to small enterprises vis--vis supplies. It is necessary to secure information about raw material and input sources and quantity discount-related options. Agencies such as the NSIC may be approached for establishment of such raw material banks. For instance, in Ahmedabad for certain vegetables Rs.5 crore is believed to be the optimal size of purchase (on a quarterly basis). Networking with other enterprises to purchase together may help even smaller individual enterprises benefit sustainably in terms of cost reduction. The sub-optimal raw material purchase price of various inputs (as it is), often on a credit purchase basis and in an uneconomic quantity, affects the cost structure of many smaller enterprises in different sub-sectors. The cost of uneconomic purchase as also credit purchase need be avoided. The return on investment (pre-tax) to such common ventures (pre-tax) equals over 50 per cent. Even if partly (debt for working capital) bank-financed, the ROE is likely to be very high, depending on the extent of rotation and amount and cost of working capital secured.
Development of Common Facility Centres and Exploring Common Financing Options

Common Facility Centres (CFCs) have the objective of providing necessary services to smaller enterprises. Shared facilities may be in terms of research and development and product testing and standardisation. The Peenya Industries Association in Bangalore has, for example, established a permanent exhibition-cum-display centre for members products. Such centres may be supported by various ministries such as the Ministry of SSI and ARI, DC (SSI), etc. Common Facility Centres help smaller enterprises utilise expensive facilities which they as individual enterprises cannot afford to develop and
chp-16.qxd
10/18/05
12:51 PM
Page 186
use. Common Financing options can be explored as it benefits tiny and small enterprises that do not have access to institutional working capital due to their inability to produce necessary documents on collateral. Mutual Credit Guarantee Fund Scheme (MCGFS) implemented by SIDBI is one such option. The options of networking are several. Entrepreneurs in the sector may explore networking options among themselves as also establish a good networking with support institutions to sustain performance.
186
Chapter Sixteen
chp-17.qxd
10/18/05
12:53 PM
Page 187
CHAPTER
17
Legal Requirements
ll industrial activities are governed by certain legal provisions that come in force from time to time. A few of them are given here with brief explanation for your understanding. These could be divided into general and Food Processing Industry specific.
GENERAL LEGALITIES Factories Act, 1948

This is applicable to enterprises where the number of employees is: Ten or more and where power is used; or Twenty or more and power is not used. The enterprises covered under the Act are required to keep certain records: Muster Roll Workers Register Overtime Register Advance Register Register for Fine Register for Deductions Register of Wages Register of Accidents and Dangerous Occurrences
chp-17.qxd
10/18/05
12:53 PM
Page 188
Bond Inspection Book Register of Cleaning and White Washing Record of Examination of Parts of Machinery There is another Act known as Shops & Establishment Act which is applicable to shops and business undertakings employing 5 or more persons.
Employees Provident Fund & Miscellaneous Provisions Act, 1952

The Act applies to every factory or establishment employing 20 or more employees. It, however, exempts a factory or establishment for an initial period of 3 years from commencement of business if the number of employees is more than 50 and for an initial period of 5 years if the number of employees is less than 50. The minimum contribution payable by the employer is 12% of the basic salary contribution and Dearness Allowance. The employee also makes an equal contribution. The Act, however, does not specify a maximum contribution.
Employees State Insurance Act

It provides benefits to employees in case of sickness, maternity and employment injury and for certain other matters in relation thereto. The Act also provides for payment of contributions by employers and employees at the rates specified in the First Schedule of the Act. The existing rates of employees contribution vary according to wages and the employers contribution is exactly double the employees contribution. It shall apply to factories employing 20 or more people.
Payment of Wages Act, 1936

This Act is applicable to factories and establishments, which come under The Factories Act. The act is restricted in its application to the class of workers whose wages range upto Rs.1,600/- per month.
Minimum Wages Act, 1948

The employer has to pay minimum wages to employees in certain scheduled industries. At present the minimum wages act is applicable in 44 scheduled industries.
188 Chapter Seventeen
chp-17.qxd
10/18/05
12:53 PM
Page 189
The Indian Partnership Act, 1932

The Indian Partnership Act, which was amended in 1932, provides for rules relating to foundation of legal partnership. It states the rights and duties of the partners amongst themselves and outside and lays down rules regarding the dissolution of partnership.
Central Excise (CE)

The Central Government is empowered to levy excise on all articles manufactured in India except alcohol, alcoholic preparations and narcotics. The liability to duty starts the moment a new commodity is manufactured. There are, however, certain exemptions granted to SSI units. However, there is no CE on fruit and vegetable products.
Sales Tax
Sales tax is tax levied by state and centre. Tax charged by state is called LST or Local Sales Tax and tax charged by Centre is known as CST or Central Sales Tax. The latter is charged when goods move out of a state.
The Income Tax Act, 1911

The Act governs the levy of income tax in India. It defines various terms and expressions and states the liability of a person to pay income tax. The rates and pattern of taxation, however, are changed from time to time.
Pollution Control Act

The State Air and Water Pollution Control Board is the body responsible for implementing this Act. The act is applicable to all kinds of industry.
SPECIFIC LEGALITIES: (FOOD PROCESSING)

In addition to the general legal requirements, there are a few legal requirements that are specific to Food Processing Industries. A food processing enterprise has to comply with several compulsory legal requirements. Implementation of these norms with regard to Small and Medium Enterprises
Legal Requirements 189
chp-17.qxd
10/18/05
12:53 PM
Page 190
is relatively stringent while cottage and household level units sometimes tend to compromise on such stipulations. These laws include: a. Prevention of Food Adulteration Act (1954): which is the basic statute to protect consumers against supply of adulterated food. The Central Committee for Food Standards under the Directorate General & Health Services Ministry of Health and Family Welfare has specified the standards. b. Milk and Milk Products Order (MMPO): regulates milk and milk products production in the country. The order requires no permission for units handling less than 10,000 litres of liquid milk per day or milk solids upto 500 tpa. c. Fruit Products Order (1955): regulates manufacture and distribution of all fruit and vegetable products, sweetened aerated waters, vinegar and synthetic syrups. The license is issued by Regional Director of MoFPI located at Mumbai, Delhi, Kolkatta, Chennai and Guwahati based on the satisfaction of the concerned officer with regard to quality of production, sanitation and hygiene, machinery and equipment and work area standards. d. Standard of Weights and Measures (Packaged Commodities) Rules, 1977: lay down certain obligations for all commodities in packed form with respect to their quality declaration. The Directorate of Weights and Measures under the Ministry of Food and Civil Supplies operates these rules. e. Export (Quality Control and Inspection) Act, 1963: is operated by the Export Inspection Council and under this act many exportable commodities have been notified for compulsory pre-shipment inspection unless specifically requested by the importer not to do so. f. Voluntary Standards: are regulated by organisations involved with voluntary standardisation and certificates systems concerning quality parameters in food. They are the Bureau of Indian Standards (BIS) and Directorate of Marketing and Inspection (DMI). The food processing industries sector as a whole involves other legislations. g. Oils, Deoiled Meal and Edible Flour Control Order 1967 and Vegetables Products Control Order, 1976: control the production and distribution of solvent extracted oils, deoiled meals, edible oil seed flours and hydrogenated vegetable oils (vanaspati). h. Meat Food Products Control Order, 1973: regulates manufacture, quality, and sale of all meat products and is operated by the Directorate of Marketing and Inspection.
190 Chapter Seventeen
chp-18.qxd
10/18/05
12:54 PM
Page 191
CHAPTER
18
Support Institutions for Promotion of Food Processing Sector

THE BASIC SUPPORT INSTITUTIONAL FRAMEWORK
hile information on various sources of information is presented in this chapter, potential entrepreneurs need not contact all agencies but only the relevant ones, depending on their information needs and support. Important agencies for information on procedures and formalities include the District Industries Centres (DICs), Directorate/Commissioner of Industries, State Financial Corporations (SFCs), Technical Consultancy Organisations (TCOs), and agencies conducting Entrepreneurship Development Programmes such as State level and National level Entrepreneurship Development Institutions and Non-Government Organisations (NGOs).
Ministry of Food Processing Industries: The Key Player

The Ministry of Food Processing Industries, is the key central agency of the Government responsible for developing a strong and vibrant food processing sector with a view to creating increased job opportunities in the rural areas, enabling the farmers to reap benefit of modern technology, creating surplus for exports and stimulating demand for processed food. The sub-sectors under the purview of the Ministry are Fruits and vegetable processing; Food grain milling; Dairy products; Processing of poultry and eggs, Meat and meat products; Fish processing; Bread, oilseeds, meals (edible); Breakfast foods; Biscuits; Confectionery (including cocoa processing and chocolate); Malt extract; Protein isolate; High protein food; Weaning food and extrude other ready to eat food products; Beer, including non-alcoholic beer; Alcoholic drinks from non-molasses base; Aerated waters/soft drinks and other
chp-18.qxd
10/18/05
12:54 PM
Page 192
processed foods; Specialised packaging for food processing industries). It also provides technical assistance and advice to food processing industry. Information on schemes of the ministry is available on the website www.mofpi.nic.in.
OTHER SUPPORT INSTITUTIONS
AND THEIR
ROLES
Central Food Technological Research Institute CFTRI (www.cftri.com): The institute provides technologies for food processing enterprises. National Small Industries Corporation Ltd NSIC (www.nsicindia.com): The Corporation provides integrated technology, marketing and financial support to small scale sector. Small Industries Development Organisation SIDO (www.laghu-udyog. com): The office of the Development Commissioner (Small Scale Industries) also known as Small Industries Development Organisation (SIDO) functions as the Nodal Development Agency for small industries. Export Credit Guarantee Corporation of India Limited ECGC (www. ecgcindia.com): ECGC covers the risk of exporting on credit. Being essentially an export promotion organisation, it functions under the administrative control of the Ministry of Commerce, Government of India. It provides a range of credit risk insurance covers to exporters against loss in export of goods and services. ECGC also provides information on creditworthiness/credit ratings of overseas buyers and various countries.
Credit status information agencies abroad

Dun & Bradstreet (www.dnb.co.in): It is one of the worlds leading sources of business information, enabling business-to-business commerce for past 160 years. D&B has the largest company database available, with information on more than 66 million companies worldwide, for credit, marketing and purchasing decisions. Businesses also use D&B's information and technology to authenticate and verify potential trading partners online, increasing their trust and confidence in e-commerce transactions. Small Industries Development Bank of India SIDBI (www.sidbi.com): The Small Industries Development Bank of India Act, 1989 envisaged SIDBI to be the principal financial institution for the promotion, financing and development of industry in the small-scale sector and to co-ordinate the functions of the institutions engaged in the promotion and financing or
192 Chapter Eighteen
chp-18.qxd
10/18/05
12:54 PM
Page 193
developing industry in the small scale sector and for matters connected therewith or incidental thereto. India Trade Promotion Organisation ITPO (www.indiatradepromotion. org): This is the nodal agency of the Government of India for promoting the country's external trade. ITPO, during its existence of nearly three decades, in the form of Trade Fair Authority of India and Trade Development Authority, has played a proactive role in catalysing trade, investment and technology transfer processes. Its promotional tools include organising fairs and exhibitions in India and abroad, Buyer-Seller Meets, Contact Promotion Programmes, Product Promotion Programmes, Promotion through Overseas Department Stores, Market Surveys and Information Dissemination. Federation of Indian Export Organisations FIEO (www.fieo.com): FIEO provides the content, direction and thrust to Indias expanding international trade. It expresses all the dynamism and resurgence that are the hallmark of Indias open, liberal and progressively market-friendly economic and trade regime, representing the Indian export promotion effort in its entirety. Export-Import Bank of India EXIM Bank (www.eximbankindia.com): EXIM Bank, set up in 1982 for the purpose of financing, facilitating, and promoting foreign trade of India, is the principal financial institution in the country for co-ordinating working of institutions engaged in financing exports and imports. Websites on the services provided by some other support institutions, websites related to food processing sub-sectors (Annexure I) and country-wise profile in terms of export/import of processed food is given in Annexure II. A list of important trade fairs is provided in Annexure III. The addresses of state level nodal agencies of the Ministry of Food Processing is given as Annexure IV.
Support Institutions for Promotion of Food Processing Sector
193
Annex-1.qxd
10/18/05
12:56 PM
Page 195
ANNEXURE I
Important Websites Related to Other Support Organisations, Food Processing Sub-Sectors and Addresses of Import Promotion Agencies
1. Useful Web Sites on Important Support Organisations: Sources of technology and marketing assistance Coffee Board (http://indiacoffee.org) Spices Board of India (http://www.indianspices.com) Tea Board (http://tea.nic.in) Office of the Controller General of Patents, Design and Trade (http://patentoffice.nic.in) Directorate General of Foreign Trade (http://dgft.delhi.nic.in) Indian Institute of Packaging (www.iip-in.com) APEDA - Agricultural and Processed Products Export Development Authority (http://www.apeda.com) MPEDA - Marine Products Export Development Authority (http://www.mpeda.com) DGFT - Director General Foreign Trade & Regional Licensing Authorities (www.commin.nic.in) Central Institute for Research on Goats (http://cirg.up.nic.in) Central Institute of Agriculture Engineering (www.ciae.nic.in) Central Institute of Brackishwater Aquaculture (http://www.nic.in/ciba)
Annex-1.qxd
10/18/05
12:56 PM
Page 196
Central Institute of Fisheries Education (www.icar.org.in/cife/index.htm) Central Marine Fisheries Research Institute (www.cmfri.com) Central Plantation Crops Research Institute (www.cpcri.nic.in) Directorate of Wheat Research (www.icar.org.in/dwr/dwrmain.htm) Indian Agriculture Research Institute (www.iaripusa.org) Indian Institute of Horticulture Research (www.kar.nic.in/iihr) Indian Institute of Pulses Research (www.icar.org.in/iipr.htm) Indian Institute of Soil Science (www.iiss.nic.in) Indian Institute of Vegetable Research (www.icar.org.in/Directorate1.htm) National Bureau of Animal Genetic Resources (www.icar.org.in/nbagr/nbagr.html) National Bureau of Plant Genetic Resources (http://nbpgr.delhi.nic.in) National Dairy Research Institute (http://ndri.nic.in) National Research Centre for Cashew (http://kar.nic.in/cashew) National Research Centre for Mushroom (http://www.nrcmushroom.com) National Institute of Agriculture Extension Management (www.manage.gov.in) Agmark (http://agmarknet.nic.in) National Horticulture Board (www.hortibizindia.org) Central Institute of Fisheries Nautical and Engineering Training (http://cifnet.nic.in) Educational Institutes / Financial Institutions / Embassies / Universities (www.goidirectory.nic.in)
196
Annexure I
Annex-1.qxd
10/18/05
12:56 PM
Page 197
2. Useful Websites on Food Processing Sub-Sectors
Vegetable Oils
http://www.oilseed.org/ Topics: Information dissemination, associations, information resources, news, fats and oils, processing, storage marketing, imports, exports, transport. http://www.oelmuehlen.de/ Topics: Fats and oils, statistical tables, genetically engineered foods, association, news, FAQs, publications. http://www.corn.org/ Topics: Associations, information resources, statistics, conferences, employment, publications, education, cereals, processing, starch, fats and oils, legislation and regulations, news company information http://www.geocities.com/CapeCanaveral/Lab/1669/Index.html Topics: Associations, fats and oils, food science, food technology http://www.nopa.org/ Topics: Associations, publications, statistics, conferences, foods, soybeans, company information, exports http://www.canolainfo.org/scdc/ Topics: Information resources, health, diet, recipes, processing, education, food service, nutrition, fats and oils http://fruitsandnuts.ucdavis.edu/ Topics: Information resources, fruits and vegetables, processing, marketing, nutrition, agriculture http://www.eridania-beghin-say.com/html/gb/home.htm Topics: Company information, Sugar, starch, fats and oils, marketing, processing, animal nutrition, herbs and spices, ingredients Annexure I
197
Annex-1.qxd
10/18/05
12:56 PM
Page 198
http://www.oilworld.de/ Topics: Fats and oils, economics, markets, publication, financial information http://www.agriline.it/oil/oil_ita/default.htm Topics: Fats and oils, company information, consumer information, databases, publishers
Vitamins
http://www.bookman.com.au/vitamins/ Topics: Publishers, information resources, electronic zines, publications, vitamins, minerals, nutrition, health http://www.vitalstoffe.de/inhalt.html Topics: Consumer information, minerals, vitamins, fruits and vegetables, human nutrition, cooking, mailing lists http://ivacg.ilsi.org/ Topics: Information dissemination, information resources, publications, vitamins http://www.vita-web.com/ Topics: Education, vitamins, health, nutrition http://verlag.hanshuber.com/Zeitschriften/IJVNR/index.html Topics: Publishers, publication, vitamins, nutrition http://www.orst.edu/dept/lpi/ Topics: education, institutes, information resources, vitamins, allergies and intolerance, nutrition, health http://www.nalusda.gov/fnic/etext/fnic.html Topics: Information resources, directories, umbrella sites, food science, food composition, diet, health, nutrition, illness, databases, electronic journals, electronic zines, electronic newspapers, legislation and regulations, education, vitamins, minerals Annexure I
198
Annex-1.qxd
10/18/05
12:56 PM
Page 199
http://www.realtime.net/anr/ Topics: Vitamins, minerals dietary supplements, nutrition, diet, health http://www.medicineonline.de/ Topics: Consumer information, human nutrition, diet, foods, food composition, vitamins, health, illness http://www.cognis-us.com/cognis/verisonline/default.asp Topics: Publishers, information resources, publication, nutrition, health, vitamins, news http://www.mc.vanderbilt.edu/biolib/hc/nutrition.html Topics: Libraries, publications, nutrition, diet, health, vitamins http://www.nutritionquest.com/ Topics: Nutrition, health, diet, vitamins, minerals, fats and oils, fruits and vegetables, consumer information, publications, consumer surveys www.roche-vitamins.com/home.html Topics: Product news, history, business, research and development, marketing, product information, nutrition, careers www.cybervitamins.com Topics: Fats, nutrition
Health Foods
http://landwirtschaft.freepage.de/h.bollow/ Topics: Consumer information, education, health foods, food composition, vitamins, nutritional values, nutrition, processing, drying, minerals http://www.phytonutrition.org/ Topics: Consumer information, dietary guidelines, dietary supplements, education, food composition, foods, health, nutrition, health, foods Annexure I
199
Annex-1.qxd
10/18/05
12:56 PM
Page 200
http://www.diasan.co.jp/cha2e.htm Topics: Beverages, health, illness, functional foods http://www.sana.it/ Topics: Consumer information, marketing, trade, food technology, processing, environment and ecology, health, health foods http://www.earthfoods.co.uk Topics: Health foods, genetically engineered foods, food safety, cereal products, beverages, fats and oils, sugars http://www.naturkost.de/ Topics: Consumer information, news, publications, courses, foods, health foods, vegetarian foods, diet, recipes, health, environment and ecology http://foodsci.rutgers.edu/nci/index.htm Topics: Education, institutes, functional foods, quality assurance http://www.functionalfoods.nu/ Topics: Education, courses, databases, functional foods, dietary supplements, patents, publications, nutrition, health, legislation and regulations http://www.aaccnet.org/FuncFood/top.htm Topics: Associations, news, publications, functional foods, dietary supplements, health, nutrition http://www.ag.uiuc.edu/ffh/ Topics: Novel foods, functional foods, health, food science, news, publications, consumer information http://www.science.ulst.ac.uk/niche/ Topics: Diet, health, novel foods, functional foods, legislation and regulations, food safety, marketing, consumer response, nutrition, sensory analysis, processing, courses http://www.chfa.cu/ Topics: Associations, health foods, publications, legislation and regulations, discussion groups
200
Annexure I
Annex-1.qxd
10/18/05
12:56 PM
Page 201
Herbs and Spices

http://www.astaspice.org/ http://www.herbs.org/ http://www.kusumspices.org/ http://www.schamel.de/ http://www.fks.com/ http://www.ahpa.org http://www.todaymarket.com
Flavours
http://www.mccormick.com/index.cfm http://www.naffs.org/ http://www.duckworth.co.uk/ http://www.glutamate.org/ http://www.calchauvet.com/index.php http://www.melchersflavours.com/ http://www.leffingwell.com/
Sugar and Sweeteners

http://www.aspartame-info.com/ http://www.sugaralliance.org/ http://www.saccharin.org/ http://www.daniscosugar.com/ http://www.sucrose.com/sit/
Annexure I
201
Annex-1.qxd
10/18/05
12:56 PM
Page 202
http://www.sweeteners.org/ http://www.sugarweb.co.uk/ http://www.sugaronline.com
General
http://mofpi.nic.in/venturesetup/ Topics: Website of Ministry of Food Processing, Government of India, contains policy, procedure, incentives, guidelines, supporting institutions details etc. http://www.indiatradepromotion.org/ Topics: Information on major trade shows http://www.tradeportalindia.com/ Topics: ITPOs Business Information Centre (Bic) one stop point for varied trade information & services such as market intelligence, global importers directory, trade opportunities, trade statistics and trends, tariff & taxes, trade fairs details, etc. http://www.aaharaindia.com/ Topics: Indias biggest international food show, trade fairs and seminar organised in association with Ministry of Food Processing Industries, Government of India. http://www.soyatech.com Topics: News regarding soya technology and products all over the world
202
Annexure I
Annex-2.qxd
10/18/05
12:58 PM
Page 203
ANNEXURE II Export/Import of Processed Food: Country-Wise Profile

Sr. No.
1
Hs Code
0201
Item
MEAT OF BOVINE ANIMALS FRESH OR CHILLED MEAT OF BOVINE ANIMALS FROZEN MEAT OF SWINE, FRESH, CHILLED OR FROZEN MEAT OR SHEEP OR GOATS FRESH, CHILLED OR FROZEN EDIBILE OFFAL OF BOVINE ANIMALS, SHEEP, GOAT, ETC FISH FRESH OR CHILLED
Top 5 Countries of Export

MALAYSIA, EGYPT, UASE ANGOLA, OMAN MALAYSIA, PHILIPPINES, EGYPT, UAE, JORDAN SAUDI ARAB, SPAIN, YEMEN CONGO, GEORGIA UAE, OMAN, QATAR, SRILANKA JORDAN VIETNAM, CHINA, HONGKONG UAE, CANADA BANGLADESH, SINGAPORE, MALAYSIA, CHINESE TAIPEI, CHINA PRP. CHINA, UAE, JAPAN, USA
Top 5 Countries of Import
0202
SINGAPORE, NETHERLANDS
0203
SINGAPORE, NETHERLANDS ITALY, GERMAN F.REP, FRANCE NETHERLANDS, SINGAPORE, UAE, NEWZEALAND, AUSTRALIA GERMAN F.REP, NEW ZEALAND DENMARK, SINGAPORE BANGLADESH, NETHERLANDS, SINGAPORE, AUSTRALIA, UAE
0204
0206
0302
0303
FISH FROZEN
MAYANMAR, SINGAPORE, NETHERLANDS, UAE, UK OMAN, UAE, PORTUGAL NETHERLANDS, THAILAND BANGLADESH, OMAN, JAPAN, MALAYSIA, PORTUGAL USA, SOMALIA, MALAYSIA MYANMAR, PAKISTAN OMAN, UAE, YEMEN-REP, HONGKONG, SOMALIA NETHERLANDS
0304
FISH FILLETS AND OTHER FISH MEAT FISH DRIED, SALRED OR IN BRINE CRUSTACEANS FRESH, CHILLED FROZEN MOLUSCS FRESH, CHILLED FROZEN MILK & CREAM NOT CONCENTRATED MILK & CREAM CONCENTRATED BUTTER MILK, CURDLED MILK & CREAM, YOGURT, KEPHIER WHEY PROUDCTS
JAPAN, SPAIN, CHINESE TAIPEI LITHUANIA, CHINA SRI LANKA, HONGKONG, JAPAN CHINA, BANGLADESH JAPAN, USA, NETHERLANDS CHINA, AUSTRALIA SPAIN, USA, ITALY, CHINA, JAPAN FRANCE
0305
10
0306
11
0307
12
0401
13
0402
BANGLADESH, UAE, EGYPT OMAN, MALAGASY RP. ZAMIBIA, THAILAND, UAE, GERMAN F.REP. SAUDI ARAB CHINA, JAPAN, KOREA REP. USA, NEPAL UAE, KUWAIT, GERMAN F.REP USA, NEPAL JAPAN, USA, NEPAL, UAE MOROCCO GERMAN F.REP, MOROCCO, NEPAL, USA, UK
DENMARK, USA, GERMAN F.REP, UAE, NETHERLANDS THAILAND, NETHERLANDS FRANCE, MALAYSIA, UAE FRANCE, NETHERLANDS, CHINA F. REP, AUSTRALIA NEW ZELALAND, FRANCE, AUSTRALIA, UK, DENMARK AUSTRALIA, NEPAL, DENMARK NETHERLANDS, NEW ZEALAND NEPAL, AUSTRALIA, NEWZEALAND UAE, KYRGHYZSTAN BANGLADESH, NEPAL CHINA PRP, MALAYSIA, MYANMAR HONG KONG, CHINESE TAIPEI
14
0403
15
0404
16
0405
BUTTER AND OTHER FATS
17
0406
CHEESE AND CURD
18
0409
NATURAL HONEY
19 20
0701 0703
POTATOES, FRESH OR CHILLED ONIONS, SHALLOTS, GARLIC, LEEKS & OTHER ALLIACEOUS VEGETABLES FRESH OR CHILLED VEGETABLES COOKED OR NOT BY STEAMING/ BOILING IN WATER VEGETABLES PROVISIONALLY PRESERVED
NEPAL, UAE, SRI LANKA MALAYSIA, BANGLADESH MALAYSIA, BANGLADESH UAE, SRI LANKA, SINGAPORE
21
0710
UAE, SAUDI ARAB, MALDIVES
GERMAN F-REP, NETHERLANDS NEW ZEALAND, THAILAND, SINGAPORE NETHERLANDS, SPAIN, THAILAND, AUSTRALIA, JAPAN
22
0711
USA, BELGIUM, FRANCE NETHERLANDS
Annex-2.qxd
10/18/05
12:58 PM
Page 204
23
0712
24
0713
DRIED VEGETABLES, WHOLE CUT, SLICED, BROKEN OR IN POWDER DRIED LEGUMINOUS VEGETABLES SHELLED COCONUTS, BRAZIL NUTS & CASHEW BUTS, FRESH OR DRIED WHETHER OR NOT SHELLED OR PEELED
USA, GERMAN FRP, NETHERLANDS, SWITZERLAND CANADA BANGLADESH, SRI LANKA USA, UAE, UK USA, NETHERLANDS, UK, JAPAN, UAE
MALAYSIA, CHINA PRP, GERMAN F. REP, PADISTAN, USA, AFGHANISTAN MYANMAR, IRAN, CANADA AUSTRALIA, FRANCE IVORY COAST, GUINEA BISU, BENIN, TANZANIA-REP, INDONE-
25 SIA
0801
26
0802
OTHER NUTS FRESH OR DRIED W/N SHELLED OR PEELED BANANAS INCLUDING PLAINTAINS FRESH OR DRIED CITRUS FRUIT FRESH OR DRIED GRAPES FRESH OR DRIED
SPAIN, EGYPT, GERMAN F.REP UK, GREECE
USA, IRAN, AFGHANISTAN, INDONESIA, MYANMAR
27
0803
UAE, SAUDI ARAB, OMAN QATAR, BAHARIN BANGLADESH, UAE, OMAN SAUDI ARAB, USA UK, UAE, NETHERLANDS, OMAN SAUDI ARAB UAE, SAUDI ARAB, BAHARIN KUWAIT, QATER AUSTRALIA, USA, SINGAPORE THAILAND, NETHERLANDS AFGHANISTAN, PAKISTAN, IRAN AUSTRALIA, CHINA PRP, INONESIA AFGHANISTAN, TURKMENISTAN THAILAND, PAKISTAN, AUSTRALIA
28
0805
29
0806
30
0807
MELONS (INCLUDING WATER MELONS) & PAPAWS (PAPAYAS) FRESH APPLES, PEARS & QUINCES, FRESH APRICOTS, CHERRIES PACHES (INCL. NECTARIANS), PLUMS & SOLES FRESH OTHER FRUITS, FRESH COCOA POWDER, NOT CONTANING SUGAR CHOCOLATE & OTHER FOOD PREPARATIONS CONTAINING COCOA VEGETABLES, FRUITS, NUTS FRUIT PEEL & OTHER PARTS OF PLANTS JAMS, FRUIT JELLIES, MARMALADES, FRUIT/ NUT PUREE & FRUIT/NUT PASTES FRUIT JUCIES (INCL. GRAPE MUST)/VEGETABLE JUICES YEASTS (ACTIVE/INACTIVE)
31
0808
BANGLADESH, KUWAIT, SAUDI ARAB, MALAYSIA, SRI LANKA ITALY, YEMEN REP, USA, EGYPT, UAE BANGLADESH, SAUDI ARAB, UAE, OMAN UK, MAURITIUS, USA, CHINA
USA, AUSTRALIA, CHINA PRP, NEW ZEALAND, S. AFRICA PAKISTAN, USA, TURKEY, IRAN AUSTRALIA' PAKISTAN, ITALY, AFGHANISTAN NEW ZEALAND, INDONESIA INDONESIA, MALAYSIA, SPAIN SINGAPORE, MALI SINGAPORE, MALASIYA, USA NETHERLANDS, UAE
32
0809
33 34
0810 1805
35
1806
NEPAL, BANGLADESH, NIGERIA, SRILANKA, NIGER
36
2006
JAPAN, UAE, SAUDI ARAB GERMAN F.REP, OMAN
UAE, NETHERLANDS, THAILAND SINGAPORE
37
2007
NETHERLANDS, USA, UAE NETHERLANDS ANTIL, SAUDI ARAB NETHERLANDS, USA, CANADA SAUDI ARAB, NETHERLANDS ANTIL NEPAL, RUSSIA, BANGLADESH SRI LANKA, MYANMAR USA, UK, CANADA, SINGAPORE UAE THAILAND, ITALY, USA, UK, SINGAPORE NEPAL, BANGLADESH, MARTINIQUE, NIGERIA, OMAN THAILAND NEPAL, BHUTAN, USA, UAE SINGAPORE GERMAN F.REP, SINGAPORE SPAIN, FRANCE, ITALY
MALAYSIA, THAILAND, OMEN INDONESIA, GERMAN F.REP
38
2009
39
2102
NEPAL, SINGAPORE, NETHERLANDS, DENMARK, SLOVENIA BRAZIL, FRANCE, SWITZERLAND VIETNAM, USA USA, CHINA REP, SINGAPORE ITALY, THAILAND USA, SWITZERLAND, MALAYSIA INDONESIA, UK NEW ZELALAND, BELGIUM, USA UK, AUSTRALIA
40
2103
SAUCES & PREPARATIONS THEREOF SOUPS & BROTHS & PREPARATIONS THEREOF ICE CREAM & OTHER EDIBLE ICE
41
2104
42
2105
43
2203
BEER MADE FROM MALT
NEPAL, SINGAPORE, NETHERLANDS, DENMARK, SLOVENIA FRANCE, UK, NETHERLANDS GERMAN F.REP, CHINA PRP, AUSTRALIA BELGIUM, FRANCE, USA, GERMAN F.REP, CHINA PRP
44
2204
WINE OF FRESH GRAPES INCLUDING FORTIFIED WINES
45
2209
VIEGAR & SUBSTITUTES FOR VINEGAR OBTAINED FROM ACETIC ACID
BELGIUM, FRANCE, NETHERLANDS, USA, OMAN
204
Annexure II
Annex-3.qxd
10/18/05
12:59 PM
Page 205
ANNEXURE III
Important Trade Fairs, Exhibitions and Conferences in Food Processing

January 1315: World Food Technology Summit 2629: International Sweets and Biscuits Fair February 14: International Food Tec, Hyderabad 1315: BIOFACH 27Mar2: Genetically Modified Foods Prospects, Challenges and Safety March 45: Cheese as an Ingredient 57: Food Ingredients Asia China Exhibition 913: Ahara 2326: IFE, International Food Exhibition 30Apr 1: International Conference on Food Hydrocolloids April 811: ANUGA Food Tec 911: New Functional Ingredients and Foods 1417: Interfood / Interfood Tech / Pack and Ingredients May 2022: FiCEE, Food Ingredients Eastern and Central Europe
Annex-3.qxd
10/18/05
12:59 PM
Page 206
June 45: High Potency Sweeteners All You Need to Know July 1216: IFT Food Expo September 1617: Practical Guide to Using Gelling and Thickening Agents 2325: Fi Asia Food and Beverages, Germany October 79: Health Ingredients (Hi) Japan 911: Health Ingredients Japan 1115: ANUGA World Food Market 1516: Emulsions and Emulsifiers: Essential Guide to Stable Products 17: Food Additives Ingredients for Success? 1821: Genetic Engineering and the Intrinsic Value and Integrity of Animals and Plants 2024: SIAL 2729: CPhl Worldwide Exhibition and Conference and ICSE International Contract Services Expo 29: A Boost for Bone Health November 1820: Food Ingredients Europe and Conference 1820: Food Safety and Hygiene Arena P.S. Usually the aforestated events are organised in the months and around the dates mentioned. However it is advisable to check with the Ministry of Food Processing, Govt. of India, New Delhi.
206
Annexure III
Annex-4.qxd
10/18/05
1:00 PM
Page 207
ANNEXURE IV List of Nodal Officers of State/U.T. Governments For Food Processing Industries
Sr. No.
1. 2.
State / U. T.
Nodal Agency
Director, Agriculture, Port Blair Secretary, Agriculture & Cooperation Department Secretariat Building Hyderabad - 500 022 Chief Secretary Government of Arunachal Pradesh Itnagar Secretary Department of Industries Government of Assam Guwahati Industrial Development Commissioner, Department of Industries Government of Bihar Vikas Bhawan Patna-800 001 Director of Industries & Tourism Chandigarh Administration Chandigarh Director District Industries Centre Dadra & Nagar Haveli Collectorate Silvasa-396 210 Deputy Director of Agriculture Secretariat Moti Daman -396 220 Commissioner (Industries) C/O Commissioner of Industries, Delhi Administration Kashmiri Gate, Delhi Development Commissioner Government of Goa Panaji Managing Director Gujarat Agro Industries Corporation Ltd. Khet Udyog Bhavan, Opp. Old High Court, Navrangpura, Ahmedabad. Managing Director Haryana Agro Industries Corporation Chandigarh Director of Industries Government of Himachal Pradesh Shimla
Tel. No.
03192-33257 0842-231798
Andaman & Nicobar Islands Andhra Pradesh
3. 4.
Arunachal Pradesh Assam
03781-22595 0361-561307 Fax-561176 0612-221462
5.
Bihar
Fax-224992 0172-707343
6.
Chandigarh
7.
Dadra & Nagar Haveli
02638-42367
8. 9.
Daman & Diu Delhi
02638-54875
011-2968144 0832-223196 02712-25841
10. 11.
Goa Gujarat
12.
Haryana
0172-707343
13.
Himachal Pradesh
0177-213414
Annex-4.qxd
10/18/05
1:00 PM
Page 208
14.
Jammu & Kashmir
Jammu & Kashmir State Industrial Development Corporation Government of J&K Darbu House, Ram Bagh Srinagar Technical Consultancy Service Organisation of Karnataka (TECSOK) Directorate of Industries & Commerce, Rashtrothana Parishat Bhawan, Nrupathunga Road, Bangalore-560 002 Department of Agriculture Government of Kerala Trivandrum-695 001 Managing Director Lakshadweep Development Corporation, 40.5598 II Floor, Near Padma Junction M.G. Road, Ernakulam Cochin-682 035 Managing Director Madhya Pradesh State Agro Industries Development Corporation 'Panchanan' 3rd Floor Malviya Nagar, Bhopal Managing Director Maharashtra Agro Industries Development Corporation Ltd Rajan House, Prabha Devi, Mumbai.
0194-30036
15
Karnataka
080-2266134
16.
KeralaSecretary
0471-325992 Fax-333160 0484-361630
17.
Lakshadweep
Fax-373635 0755-551807
18.
Madya Pradesh
Fax-557305 022-4305122
19.
Maharashtra
Fax-4308618
20.
Manipur
Director of Industries Industries Department Secretariat Government of Manipur Imphal Managing Director Meghalaya Indl. Dev. Corp. Kismat, Upland Road, Shillong Managing Director Mizoram Food & Allied Industries Corporation Ltd. (MIFCO), Aizwal Secretary Department of Industries Government of Nagaland Kohima
0385-310220 Fax-310550 0364-224965 Fax-224763 0389-323680
21
Meghalaya
22.
Mizoram
Fax-323680 0370-22919
23.
Nagaland
22534
208
Annexure IV
Annex-4.qxd
10/18/05
1:00 PM
Page 209
24.
Orissa
Managing Director Agricultural Promotion & Investment Corporation of Orissa Ltd., 326, Brahmunda, Bhubaneshwar Managing Director, Punjab Agro Industries Corpn. 2-A Sector-28A, Madhya Marg Chandigarh-160 002 Director of Industries, Industries Department Thattachavady Pondicherry-605 009 Director of Industries, Department of Industries Government of Rajasthan Jaipur Director of Industries Department of Industries Government of Sikkim Gangtok-737 101 Managing Director Tamil Nadu Agro Industries Corporation Ltd. Agro House, Industrial Estate Guindy, Chennai-600 032 Director Industries & Commerce Dte Agartala, Tripura Secretary Horticulture & Food Processing Government of Uttar Pradesh Lucknow Secretary Department of Food Processing Industries Government of West Bengal Mayukh Bhawan, Bindannagar, Calcutta-700 091
0674-420526
Fax-420506 0172-651386
25.
Punjab
651576 0413-34145 35512 0141-380727
26.
Pondicherry
27.
Rajasthan
Fax-380796 03592-22853
28.
Sikkim
29.
Tamil Nadu
044-2341664
Fax-2342375 0381-223826 Fax-224432 0522-280277
30.
Tripura
31.
Uttar Pradesh
Fax-280382 033-3374244
32.
West Bengal
Fax-3372922
Annexure IV
209
Refe.qxd
10/18/05
1:01 PM
Page 211
References and Suggested Readings

1. AIFPA, (1996), All India Food Preservers Association, Investment Opportunities in India for Food Processing IndustriesNew Delhi. 2. AIFPA, (1996), All India Food Preservers Association, Legal Provisions relating to Labelling of Fruits and Vegetable Packages (as amended up to 31-3-1996)New Delhi. 3. AIFPA, (1996), All India Food Preservers Association, The Fruit Products Order 1955 (as amended up to 31-3-1996)New Delhi. 4. AIFPA, (1996), All India Food Preservers Association, The Prevention of Food Adulteration Act, 1954 (37 of 1954) and PFA Rules, 1955 (as amended up to 31-3-1996) 4th ed.New Delhi. 5. Allied, (2001), A Practical Guide for Implementation of Integrated ISO9001, HACCP System for Food Processing IndustryNew Delhi. 6. Chandra, Prasanna, (2001), Financial Management: Theory and Practice, New Delhi. 7. Chandra, Prasanna, (1995), Projects: Planning, Analysis, Selection, Implementation and Review, Tata McGraw Hill Publishing Company Limited, New Delhi. 8. Checker, Satish, (2001), Food Quality and Safety: An Overall View, Beverage & Food World. 9. Food Processing Industry Offering Scope for New Investment, (1998), Industrial Researcher. 10. GITCO, (1998), 25 Prospective Food Processing Projects Vol.1 Ahmedabad. 11. GITCO, (1998), Gujarat Industrial and Technical Consultancy Organization Limited, 24 Prospective Food Processing Projects Ahmedabad. 12. Government of India, (1993), Ministry of Food Processing in Industry, Food Processing Industries in India: Investment OpportunitiesNew Delhi.
Refe.qxd
10/18/05
1:01 PM
Page 212
13. Gulati, M. (1997), Restructuring and Modernization of Small and Medium (SME) Clusters in India, Small and Medium Enterprises, UNIDO, Vienna. 14. International Law Book Company, (1998), Prevention of Food Adulteration Act, 1954 with Prevention of Food Adulteration Rules, 1955 and Commodity Index with Short Notes.Delhi. 15. ITCOT, Opportunities in Food Processing IndustryMadras. 16. Kanji, Gopal, K. and Asher, Mike, (1996), 100 Methods for Total Quality Management, Response Books, New Delhi. 17. Kotler, Philip, Leong Siew Meng, Ang, Swee Hoon and Tan, Chin Tiong, (1996), Marketing Management: An Asian Perspective. 18. Padmanand, V and Jain, P. C., (2000), Doing Business in India: Streetsmart Entrepreneurs in an Imperfect Marketplace, Sage Publications, India. 19. Pandey, I.M. and Bhat, Ramesh, (1991), Cases in Financial Management, New Delhi. 20. Pareekh, Udai and Rao, T.V., Developing Motivation Through Experiencing, New Delhi, Oxford & IBH Publishing Co., 1982. 21. Parthasarthy, Ashok, (1998), Food Processing IndustryFuturistic View, SEDME. 22. Parthasarthy, Ashok, (1998), Food Processing Industry, SEDME. 23. Patel, J.B. and Allampally, D. G. (1991), A Manual on How to Prepare a Project Report, EDII, Ahmedabad. 24. Patel, V.G., Entrepreneurship Development Programme in India and Its Relevance to Developing Countries, Ahmedabad, Entrepreneurship Development Institute of India, 1987. 25. Patel, V.G., Innovations in Banking: The Gujarat Experiments, Bombay, Industrial Development Bank of India, Oct. 1981, pp.210. 26. Porter, M.E., (1990), The Competitive Advantage of Nations, Free Press, New York. 27. Porter, Michael E., (1980), Competitive Strategy, New York, The Free Press. References and Suggested Readings
212
Refe.qxd
10/18/05
1:01 PM
Page 213
28. Raghuramaiah, B, (2002), Indian Food Regulations in the Global Context, Beverage & Food World. 29. Ramaswamy, V.S. and Namakumari, S., (1999), Marketing Management: Planning, Implementation and Control, New Delhi. 30. SBP, (2001), SBP Consultants and Engineers Private Limited Food and Biotechnology for CorporatesNew Delhi. 31. SBP, (2001), SBP Consultants and Engineers Private Limited Handbook of Food and Agrobased Industries with High Tech ProjectsNew Delhi. 32. Shah, Narendra, (1998), Opportunities and Challenges in Agro-based Industries: Food Processing, Journal of Rural Development. 33. SIDBI, (1994), Profiles on Food Processing and Agro-based Industries Lucknow. 34. Sivasankar, B, (2002), Food Processing and PreservationNew Delhi: PHI. 35. Sohrab, (2002), Adoption of ISO 140001A New Imperative for Food Industry: A Practical Implementation Case Study, Beverage & Food World. 36. The Amalgamated Press, (2001), Processed Foods and Beverages Directory 200120034th ed.Mumbai. 37. Vyas, Jaynarayan and Shah, Girish, (1998), Saket Food Processing HandbookAhmedabad: Saket Projects Limited. 38. World Importers Directory, (1997), Process Food, Food Products, VegetablesNew Delhi: Centre of Publication.
References and Suggested Readings
213

A Manual For Entrepreneurs - Trainee Manual

Caricato da

Informazioni sul documento

Descrizione originale:

Titolo originale

Copyright

Formati disponibili

Condividi questo documento

Condividi o incorpora il documento

Opzioni di condivisione

Hai trovato utile questo documento?

Questo contenuto è inappropriato?

Copyright:

Formati disponibili

A Manual For Entrepreneurs - Trainee Manual

Caricato da

Copyright:

Formati disponibili

A Manual for Entrepreneurs: Food Processing Industry

A Manual for Entrepreneurs: Food Processing Industry

Entrepreneurship Development Institute of India Ahmedabad

Ministry of Food Processing Industries Government of India New Delhi

Tata McGraw-Hill Publishing Company Limited

The McGraw-Hill Companies

DINESH AWASTHI RAMAN JAGGI V PADMANAND

65 71 73 115 119 139 145

165 187 191 195 203 205 207 211

The Food Processing Sector in India

20.40 21.00 9.10 9.40

Production 5.59 (in million metric tonnes)

Distribution of Fruit and Vegetable Processing Enterprises by Scale of Industry

Cottage 21% Small Scale 16% Large Scale 12%

Home Scale 38%

Home Scale Relabellers : Large Scale : Small Scale :

(ii) Meat and Poultry

The Food Processing Sector in India: An Overview

(iii) Milk and Milk Products

800000 600000 400000 288000 200000

(iv) Consumer Products

(v) Alcoholic Beverages

(vi) Fisheries and Sea Food

(vii) Grain Processing

NEED FOR INITIATIVE

STRATEGIES AND INITIATIVES PROPOSED NEW POLICY

Creating an Enabling Environment

Intensive and Extensive Awareness

Backward LinkageRaw Material Supply

The Food Processing Sector in India: An Overview

The Impact of Policy on Enterprises

Deregulation and Decontrol

Fiscal Incentives with Additional Encouragement for Export

The WTO Agreement and the Sector

Implication of policy variables on the structure of capital of an enterprise

ROI Interest PBT Taxes PAT

The Impact of Policy on Enterprises

Implication of policy variables on structuring project costs

The Impact of Policy on Enterprises

Policy with Regard to Sales Tax and Customs Duties

The Impact of Policy on Enterprises

The Impact of Policy on Enterprises

Soft Skills for Entrepreneurs

Say what? Message

Clasping both hands behind neck Straight gaze No head movement

Non-threatening situations In charge of situations Disputed occasions Unwelcome instructions

Expects to challenge Patience may be short

Source: Adapted from Communication Skills, 1996 by Carter Wendy

Planning a Small-Scale Unit: Whom to Approach for What

PROJECT REPORT: A FORECAST PLAN

Selection of Location: A Vital Decision

Land and Building: Make Correct Assessment

Select the Right Manufacturing Process

Government Formalities and Procedures

i) SSI Registration: Required for the Records

ii) Acquisition of Infrastructure Facilities

iii) Pollution Control Clearance: Obtain NOC or Consent

iv) Constitution of the Business

v) Arrangement of Finance for Fixed Assets and Current Assets

vi) Government Formalities Need to be Viewed in Proper Perspective

Planning a Small-scale Unit: Whom to Approach for What

Business Opportunity Identification