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Concept of Small Scale Industries. Growth of SSI in Developing Countries. Position of SSI.
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Definition of Entrepreneurship
Entrepreneurship is the purposeful activity of an individual or group of individual to initiate, maintain or generate profit by production or distribution of goods or services.
Entrepreneurship is an attempt to create value through recognition of business opportunity, risk taking through the communicative and management skills to mobilize human, financial & material resources for a project.
Managerial Skills.
Leadership. Risk Taking. Limited Resources.
Types of Entrepreneurs
Innovative Entrepreneurs.
Adoptive Entrepreneurs. Fabian Entrepreneurs.
Drone Entrepreneurs.
Functions of Entrepreneur
Perceiving market Opportunities. Command over resources. Purchasing Input. Marketing of products. Managing Finance. Managing Production. New product Development. Managing Customers. Dealing with Public officials ( Taxes, licences) Upgrading Production Process & Product Quality. Industrial Engineering.
Barriers to Entrepreneurship
Lack of market knowledge.
Lack of Capital. Lack of Business Know how.
Legal Obligation/Regulation.
Monopoly. Lack of Technical Skills. Social Stigma. Time pressure.
Qualities of an Entrepreneur
Total Commitment & Determination.
Drive to achieve & grow. Risk taker.
Innovative.
Sense of humour. Problem Solving skills. Good decision maker. Low need for status & power. Seeking & using feedback.
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5. 6.
TYPES OF SSI
SMALL SCALE INDUSTRY: Industrial undertaking, wherein the investment limit in fixed assets of plant and machinery does not exceed rupees five crore. 2. ANCILLARY SMALL UNIT: This type of unit is engaged in production of various components and spare parts to be used by a large industrial enterprises to produced the goods for consumer. Investment limit is not exceed rupees five crore. 3. TINY INDUSTRIES: It is defined as an industrial or business enterprises whose investment in plant and machinery is not more than rupee 25 lakh.
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Employment Balanced regional Development Use of local Skills Variety of products Equal Distribution of income Economical Operation Customized products Support to Large scale industries.
1997-98
1998-99 1999-00 2000-01
4626.41
5206.50 5728.87 6454.96
16.72
17.15 17.85 18.56
444.42
489.79 542.00 599.78
4626.41
5206.50 5728.87 6454.96
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5. 6. 7.
Development of Entrepreneurship. Introduction to new product. Limited Demands Flexibility Personalized services Good relations with employees Support to large industries.
Position of SSI
The phenomal growth of industries in the Small Scale sector has been striking feature in the economic development of the country since independence. It has contributed to the overall growth or the Gross Domestic Product as well as in terms of employment generation and export. One of the measure of the policy support for promoting small scale industries is the policy of reservation of economically viable and technically feasible items for exclusive manufacture in the small scale sector. The policy of reservation initiated in 1967 primarily as promotional and protective measure vis-a-vis the large scale sector, grants protection to small scale sector, the only exception being the case of large units which undertake minimum level of exports as 75 per cent of their total roduction.The IDR Act was amended in March, 1984 empowering Government to reserve items for the small scale sector. Reservation/De-reservation of items for manufacture in the small scale sector is a continuing process regularly monitored by an Advisory committee on Reservation constituted under the IDR Act. at present the total number of items reserved for small scale sector are 799 as on 29.06.2001
Position of SSI
The small scale sector has acquired a prominent place in the socio-economic development of the country during the past four and a half decades. Performance of the small scale sector, which forms a part of total industrial sector, therefore, has direct impact on the growth of the national economy. There has been a steady increase in the number of SSI units, their production, employment and exports over the years. from 19,58,000 units in 1990-91, the number of units has increased to 33, 70,000 units in the year 200001. On the production front also, there has been a steady increase over the previous years ranging between 7%-10% during the period 1990-91 to 1994-95. the increase was 11.4% and11.3% in 1995-96 and 1996-97 respectively. In 199798 the increase over the previous year was registered at 8.43%. The increase in the year 1998-99 & 1999-2000 were 7.7%, and 8.16% respectively. The estimated increase for 2000-01 is 8.09%.
CHARECTERSTICS OF SSI
Labour intensive Small-scale industries are fairly labour-intensive. They provide an economic solution by creating employment opportunities in urban and rural areas at a relatively low cost of capital investment.
Flexibility Small-scale industries are flexible in their operation. They adopt quickly to various factors that play a large part in daily management. Their flexibility makes them best suited to constantly changing environment.
CHARECTERSTICS OF SSI
One-man show A small-scale unit is generally a one-man show. It is mostly set up by individuals. Even some small units are run by partnership firm or company, the activities are mainly carried out by one of the partners or directors. Therefore,' they provide an outlet for expression of the entrepreneurial spirit. As they are their own boss, the decision making process is fast and at times more innovative.
CHARECTERSTICS OF SSI
Use of indigenous raw materials Small-scale industries use indigenous raw materials and promote intermediate and capital goods. They contribute to faster balanced economic growth in a transitional economy through decentralization and dispersal of industries in the local areas. Localized operation Small-scale industries generally restrict their operation to local areas in order to meet the local and regional demands of the people. They cannot enlarge their business activities due to limited resources.
CHARECTERSTICS OF SSI
Lesser gestation period Gestation period is the period after which the return or investment starts. It is the time period between setting the units and commencement of production. Smallscale industries usually have a lesser gestation period than large industries. This helps the entrepreneur to earn after a short period of time. Capital will not be blocked for a longer period.
CHARECTERSTICS OF SSI
Lower Educational level The educational level of the employees of small industries is normally low or moderate. Hardly there is any need of specialized knowledge and skill to operate and manage the SSI.
CHARECTERSTICS OF SSI
Profit motive The owners of small industries are too much profit conscious. They always try to keep high margins in their pricing. This is one of the reason for which the unit may lead to closure.
TYPES OF SSI
Manufacturing Industries Those units which are producing complete articles for direct consumption and also for processing industries are called as manufacturing industries. For example : Power looms, engineering industries, coin industries, khadi industries, food processing industries etc. Ancillary Industries: The industries which are producing parts and components and rendering services to large industries are called as ancillary industries.
TYPES OF SSI
Service Industries Service industries are those which are covering light repair shops necessary to maintain mechanical equipments. These industries are essentially machinebased. Feeder Industries Feeder industries are those which are specializing in certain types of products and services, e.g. casting, electro-plating, welding, etc. Tiny Industries It consists village, Cottage, Handicraft etc.
Phenyle manufacturing.
File Covers/ Folders.
Paddy Processing Churn/ Poha making. Badi & Papad making. Cup & plate making. Spices Grinding Honey Processing. Cattle Feed/ Poultry Feed manufacturing Jelly, Jam & Squash. Oil Mill.
resources and creation of employment opportunities . The primary responsibility for developing small industries by creating infrastructure has been provided to state government . Central government frame the broad policies and coordinates the efforts of State Government for development of SSIs.
It stated that besides continuing the policy support to cottage, village and small industries by differential taxation or directsubsidies, the aim of state policy would be that the development of this sector is integrated with that of large scale industry. The focus was to improve the competitive strength of SSIs. To achieve this 128 items were exclusively reserved for production in SSIs, and 166 items were reserved for exclusive purchase by government from this sector.
small scale industries . The concept of District Industrial Centers (DICs) was introduced to that in each district a single agency could meet all the requirement of SSIs under one roof. Technological up gradation was emphasized in traditional sector . Special marketing arrangement through the provision of services, such as, production standardization, quality control, market survey, were laid down.
SSIs. It created central investment subsidy for this sector in rural and backward area. Also, assistance was granted to woman entrepreneurs for widening the entrepreneurial base. Reservation of items to be produced by SSIs was increased to 836. Small Industries Development Bank of India was established to ensure adequate flow of credit to SSIs. Stress was reiterated to upgrade technology to improve competitiveness. Special emphasis was laid on training of woman and youth under Entrepreneurial Development Programme. Activities of Khadi and Village Industries Commission and Khadi and Village Industrial Board were to expand.
manufacture. The investment limit for tiny enterprises was raised to Rs.25 lacs irrespective of location. Equity participation by other industrial undertaking was permitted up to a limit of 24% of shareholding in SSIs. Factoring services were to launch to solve the problem of delayed payment to SSIs. Priority was accorded to small and tiny units in allocation of indigenous and raw materials. Market promotion of products was emphasized through co-operatives, public institutions and other marketing agencies and corporations.
improvement of technology. The equity participation by large sector will stimulate technology flow to small sector. Technological development cell in the small industries development organization will be set up.
RESERVATION POLICY
Out of 836 items reserved in 1989,39 items were dereserved
in four phases viz., 15 items in 1997 9 items on 1999 1 item on 2001 and, 14 item on 2001.subsequently, 51 item were dereserved in 2002, 75 item in 2003 and 85 items in 2004, 108 in March 2005 and 180 in May 2006. Now 298 items stand reserved for this sector.
409 items of store were reserved for exclusive purchase from KVIC/Womens Development Corporation/Small Scale units in 1989. In February2004, the Committee (set up to consider the question of inclusion of additional items) revised list and 358 items were approved , after deleting items having common nomenclature and addition of some new ones. This list also includes 8 handicraft items reserved for purchase from the Handicraft Sector.
No registration fee.
A consortium to channelize and identify for the
TECHNICAL ASSISTENCE
Technology audits and benchmarking Technology needs assessment Technology sourcing Application of new acquisition. Technology acquisition . Material testing facilities through accredited laboratories. Product design including Computer Aided Designs. Common facility support in machining Energy and environment services at selected centers. Classroom and practical training for skill up gradation.
NEW INITIATIVES
Advisory and Mentoring services
Technology Business Incubators > Information technology.
ROLE OF SSI
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Promotion of Industrialization in rural areas. Generation of Employment. Removal of Poverty. Better Standard of life. Support to Large Industries. Cultural Heritage.
Inadequate Capital. Storage of Raw Material. Old Technology. Lack of Trained Person. Low productivity. Low Quality. Difficulties in Marketing. Lack of Management. Industrial Sickness Global Competition.
items.
2. Promotional Measures
Supply of material to all SSI at reasonable prices and
setting up of raw material depots to effect quick supply of such material. Setting up common testing facility centre. Preference in land allocation and power connection to SSI. Setting up industrial estates and provisions of industrial sheds to enterprises on installment basis. Provision for concessional finance through commercial banks and other financial institutions.
3. Institutional Measures
Small scale industrial development organization to
provide training to SSI. National small industrial corporation to supply to provide machinery on hire purchase basis. DIC in all district to serve as the local point of development of SSI. Khadi and village industries commission for encouraging the production and marketing of handicraft items. All India coir board, silk board to provide technical, financial and marketing facilities.
6. Machines and equipment. 7. Plant Layout. 8. Human Resources. 9. Procedural Formalities. 10. Tax Planning 11. Launching the industrial enterprise.
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Scanning the environment for identification of business opportunities. Development of product/service idea. Assessment of feasibility of idea. Preparation of business plan. Appraisal by financial institution. Resource mobilization. Project launching.
- Test it out at market place - Consult with the experts - Look out for competition in the field - Is it a sunrise industry? - Your business opportunity - Project conceptualization
DEVELOPMENT OF IDEA
The foremost task of a dynamic entrepreneur is the generation of an idea that is new and appears to be worthwhile for further use. This involves a lot of creativity on the part of the entrepreneur. The business idea arises from the opportunity in the market. It originates from the real demand for any product or service that an entrepreneur should have a keen and open mind to look for opportunities and generates business idea.
While selecting a business idea, the following points need adequate consideration. 1. The business idea should enable the entrepreneur to utilize his skills. 2. It should enable the use of available raw material. 3. It should ensure making products that have a demand in market. 4. It should enable the entrepreneur to solve a current problem existing in the market.
Following are the sources of business ideas: 1. Survey reports. 2. Researches 3. Environment 4. Society 5. Area study
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Project report No objection Certificate Formal sanction of loan Construction of building & installation of machinery. Detailing manpower Establishing market Network Application for permanent application.
Registration
Finance
National Small Industries Corporation Director General of Foreign Trade State trading Corporation
State financial Corporation Industrial Development Corporation SIDBI Directorate of drug control Central institute of plastic & eng. Tool. EDI( Entrepreneurship Dev. Ins. Of India National Institute of Small Industry Extension Training DIC, Electricity board, Local authority Mineral Dev. Corporation Small Ind. Corporation Mineral & Metal Trading Cor.
Technology
Training
SFC
Technical Consulting Organization Directorate of Export promotion BIS Directorate of Export promotion Registrar of Trade mark
Project Characteristics
1. Specific Purpose/Objectives 2. Single entity 3. Team Work 4. Elements of risk 5. Uniqueness 6. Life cycle
Project Identification
It is concerned with the collection, compilation and analysis of economic data for eventual purpose of locating possible opportunities for the investment and with the development of the characteristics of such opportunities. An entrepreneur is an opportunity seeker. He should identify, explore and select the right opportunities. Opportunity is an attractive idea which an entrepreneur accepts as a basis for his investment decision. A good business idea must be capable of being converted into feasibility.
A good business opportunity must have two major ingredients. 1. Good market scope. 2. An acceptable return on investment ( ROI).
Understanding own strength, capabilities, limitations and preferences. Exploring all opportunities. Comparative analysis of opportunities available. Business opportunity may be for manufacturing a product or a service. Start the project.
Exploring Opportunities
The process of exploring the opportunities requires intensive efforts and specialized skills. Following guideline can help us in opportunity identification. 1. ENVIRONMENT - Basic features of an area and its resource inventory. - Population, its components, occupational pattern. 2. CURRENT SCENE - Present pattern of trading - Local needs - Emerging trends - New demands
Sources of opportunity
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Resource based idea such as mineral, agricultural, marine, wasted items such as ago waste, wood waste and metal waste. Import and export related ideas Market shift such as change in demand, change in population, purchasing power, change in life cycle. Special product ideas such as BPO, KPO, NGO. Household repair and maintenance. Government policy.
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Improper preparation of feasibility report. Lack of project management. Unrealistic project objectives. Non availability of sufficient physical resources. Non availability of non physical resources such as patents, secret process, unique skills and experience.
External Constraints
The project may not fulfill socio-economic objectives of country. 2. NOCs, approvals, licenses, foreign collaboration, foreign exchange and other government policies. 3. The procedure and documents of financial institutions and banks may delay the implementation of the project.
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Assessment of Viability
It means whether some idea will work or not. Viability is a multivariate concept, i.e., a project has to be viable not only in technical terms but also in economic and commercial terms. Moreover, There is always a possibility that a project that is technically feasible may not be economically viable. The decision to implement a project will be based on the expected revenues that the investment is going to generate. The project can be considered feasible only if it is expected to generate sufficient revenues and profit to justify the investment in it.
Evaluation of Project
Following are the techniques to evaluation of project profitability: 1. Benefit Cost Analysis 2. Discounted Cash Flow method 3. Net Present Value (NPV) 4. Internal Rate of Return(IRR)
Benefit Cost Ratio is equal to Benefits- Disbenefits- Maintenance and operation cost Total cost of project-Salvage Value
If the value is less then or equal to 1, such a project is economically viable
If A is offered the two alternatives of either receiving 100 Rs today or 100 Rs after one year, he would prefer to receive 100 Rs today because of increasing value of money and after one year he will get Rs 110 if he invest these money with 10 percent interest. Under this techniques, one can get discount value of his money over a long future time.
IRR= CF0 + CF1 + CF2 + CF3 + . CFn (1+r)0 (1+r)1 (1+r)2 (1+r)3 (1+r)n
Project formulation
Project formulation is the systematic development of a project idea for the final decision of investment. It is needed to safeguard against risk and difficulties in the implementation of the project. It involves step by step investigation and development of the project idea. A team of the following expertise is informed to investigate the project idea. 1. Industrial economist. 2. Market Analysis. 3. Engineer. 4. Management expert.
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Feasibility Analysis Techno-economic analysis Project design and network analysis Input analysis Financial analysis Social cost benefit analysis Project appraisal
Feasibility Analysis
It is a process of evaluating the acceptability of a project idea within the limitation of project management and constraints imposed by the environment. The analysis is undertaken to analyzes the desirability of investing in future development of project idea. At the stage of project formulation three alternative can raise. Firstly, the project may appear to be positive and in such case the entrepreneur can proceed to invest further. Secondly, the project may turn out to be not feasible and, therefore, further investment in project idea is ruled out.
Thirdly, the idea is not adequate for arriving at a decision about the feasibility of the project. In such situation, additional information must be collected for taking an appropriate action/decision. Feasibility analysis has two type. Pre-feasibility analysis It refers to preliminary assessment of the project idea which helps in accepting or rejecting it. Normally, this study should be completed within the period of three months to enable entrepreneur to decide weather to accept the new venture or not. It enables to examine the potential demand, size of market, number of competitors, plant, machinery, location, size manpower etc.
Feasibility Analysis It is carried out to get a detailed information on different aspects relating to a project such as economic, technical, managerial, organizational, commercial and financial aspect of project. As compared to pre feasibility analysis with feasibility analysis, this analysis involve more specialized skills and more complicated. Further, the feasibility study is based on additional and more reliable data collected through research. The information gathered in feasibility study and analysis presented in various tables, reports or statement is consolidated into one single report which is called project report or feasibility report.
Input Analysis
Input analysis involves identification, quantification and evaluation of project inputs. The objectives of input analysis are to identify the nature of the resources that a project will consume to estimate the magnitudes of the required resources and to evaluate the possibility of uninterrupted supply of inputs. The resources required for the project are classified as human and non-human resources. Human resources refer to manpower and its management while nonhuman resources refers to material, money and machinery.
Input requirement constitute the basis of cost estimates of the project. These cost estimates are very much required for developing the financial requirements and cost benefit profile of the project.
Financial Analysis
The purpose of financial analysis is to identify the financial characteristics of an investment proposition which would determine its financial feasibility. This analysis involves the estimates of project costs and revenues and funds required for the project. It also helps in examine the feasibility of the project in terms of generating revenues to attain the objectives of the project.
Financial analysis uses analytical tools like ratio analysis, profit analysis and fund flow analysis etc to determine the estimated financial performance of the project. It reduce the investment proposition to one common scale so as to permit comparison and eventually investment decision. It generates data for computing different profitability criteria with a view to establish the projects worth to the enterprise.
Improvement in industrial development. Improvement in living standards and environment etc. on the other hand, society is expected to incur scarifies in favour of expected benefits. These social cost include financial and out of pocket cost, reduction in foreign exchange, pollution costs and other spontaneous and instant cost.
Project Appraisal
Appraisal is an independent examination of technical, managerial, commercial, economic and financial aspects of a proposal. It brings out quantitative data which help in project appraisal. In fact, the outcome of feasibility analysis, techno-economic analysis, design and network analysis, input analysis, cost benefit analysis are consolidated to give a final shape to a project which is presented in the form of a project report.
Project Report
After feasibility analysis, entrepreneur proceeds to prepare a detailed project report. It may be noted that project report serves as an action plan in case the entrepreneur proceeds with the implementation of the project. The project report also serves as an important document to process assistance from financial institutions and to fulfill other formalities for implementation of the project. A project report contains the following information: 1. Estimates for manpower required and material input needed. 2. Information on technology, competition, prices etc.
3. Plans for procurement of material input. 4. Manpower plans 5. Projection: production, sales, and profitability 6. Documents: Quotations, land lease deed, arrangement with suppliers of material and machinery.
This is money invested in some fixed assets which are required for long period of time for permanent use. 2. Working Capital or Short term Capital This is the money invested in current assets and is required for short period to meet day to day expenses.
Sources of Finance
The sources of finance can be broadly classified into two category: 1. Internal Sources The funds which are raised from within the enterprise, and may include1. Owners capital called equity. 2. Deposits and loan given by owner, partners, directors etc. 3. Personal loan of entrepreneur from PF, Life Insurance, mortgage of building, etc.
External Sources
The funds which are raised from external sources and is called debts. This may include1. Borrowing from relatives 2. Borrowing from commercial banks 3. Credit facilities from financial institutions 4. Term loan from financial institutions 5. Hire purchase from government department 6. Subsidies from government department 7. Venture Capital of such institutions ( Money invested by investors )
Capital Structure
The funds raised from internal sources are the ownership capital and called equity. The funds raised from external sources are borrowed capital and called debts. Capital structure is the ratio between debt and equity capital and is expressed as debt-equity ration. The optimum capital structure is the financing mix incurring the least cost out but yielding maximum returns. The capital structure should have the following features:
Involve minimum cost and ensure maximum yield. 2. Flexible to fulfill future requirements of funds. 3. Debts should be within repaying capacity of the enterprise. 4. Should ensure proper control over the operations of enterprise.
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The sources of information for field study can be: 1. Published literature, i.e., news paper, trade journals etc. 2. Government publications 3. Industrial Consultations. 4. Distributors, wholesalers and retailers. 5. Prospective Customers.
List of manufacturers and suppliers of material required. Lead time required to get the material after ordering. Minimum order quantity. Price fluctuations in the market. Discount, packing, price, tax etc.
Availability of machines and equipment. List of manufacturers & suppliers. Requirement of motors, starters, switches, control equipment. Annual repair and maintenance List of spare parts.
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Range of products. Prices Terms & Conditions of competitors. Future plan for expansions Market share Strengths and weaknesses.
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Annual consumption of customers. Present sources of supply. Purchasing power of supply. Consumption pattern of customers. Customers preferences Degree of satisfaction
DEMAND ANALYSIS
Emerging competition in market place is propelling managements to hear the voice of their customers. To survive in the market, management have to be forward-looking and carry out market and demand analyses of products and develop strategic business policies. As an essential part of project formulation and appraisal, market and demand analysis is vital so that capacity and facility location can be planned and implemented in line with the market requirements. A major error in demand forecast can throw painstaking capita expenditure on plant capacity and other hardware facility totally out of gear.
of firm's products locally at state, region or national level, it is a micro-level of demand forecasting. Sometimes, forecasts are required for company's products in specific industry or market segment.
Industry Level such a demand forecasting exercise
focuses on an industry as a whole for the region and/or national level. These forecasts may be undertaken by a group of companies or by industry/trade associations.
include parameters like national income, expenditure, index of industrial and/or agricultural production etc. Estimating aggregate demand of products at national level facilitates governmental decisions for imports, exports, pricing policy etc.
International
Level Companies operating in multinational markets would require similar forecasting of demands for its products, trends in consumption etc at international level. Managerial Economists play a leading role in masterminding these forecasts at firm, industry, national and international levels. Time horizon of these demand forecasts usually varies from 1 to S years and in rare instances upto 10 years.
the customers and have an intimate feel of the market. Thus they are most suited to assess consumers reaction to company's products. Herein each salesperson makes an estimate of the expected sales in their respective area, territory, state and/or region, These estimates are collated, reviewed and revised to take into account changes in design/features of products, changes in selling prices, projected advertising and sales promotion campaigns and anticipated changes in competitors :marketing policies covering product, people, price, promotion and place. Opinions of all managers involved at various levels of sales organization are also included in the survey. Thus "collective opinion survey forms the basic of market analysis and demand forecasting.
Although this method is simple, direct, first hand and most acceptable, it suffers from following weaknesses: Estimates are based on personal judgment which may not be free from bias. Adding together demand estimates of individual salespersons to obtain total demand of the country maybe risky as each person has knowledge about a small portion of market only. Salesperson may not prepare the demand estimates with the requisite seriousness and care. Owing to limited experience, usually in their employment, salesperson may not have the requisite knowledge and experience
Based on the above, demand forecast is worked out in following steps: Coordinator sends out a set of questions in writing to all the experts co-opted on the panel who are requested to write back a brief prediction. Written predictions of experts are collated, edited and summarized together by the Coordinator. Based on the summary, Coordinator designs a new set of questions and gives them to the same experts who answer back again in writing. Coordinator repeats the process of collating, editing and summarizing the responses. Steps 3 and 4 are repeated by the Coordinator to experts with diverse backgrounds until consensus is reached.
them. Facilitator ensures that all ideas have been adequately discussed. During discussions similar ideas are combined and paraphrased appropriately. This reduces the number of ideas. After completing group discussions, experts are asked to give in writing ranks to ideas according to their perception of priority.
Regression Analysis
Past data is used to establish a functional relationship between two variables. For example, demand for consumer goods has a relationship with disposable income of individuals and family; demand for tractors is linked to the agriculture income and demand for cement, bricks etc is dependent upon value of construction contracts at any time.
PROJECT APPRAISAL
Project appraisal is the analysis of cost and benefits of a proposed project with the purpose of ensuring a rational allocation of limited funds among alternative investment opportunities in view of the specified goals. Project appraisal is carried out by the financial institutions before financing any project. The rationale of project appraisal lies in the fact that the number of project to satisfy the identified needs always exceeds the availability of resources and a choice among alternative projects is to be made.
Project appraisal is undertaken with the following objectives: 1. To arrive at specific and predicted results of the project. 2. To identify the expected costs and benefits of the project. 3. To lay down the benchmarks to determine the success or failure of a project.
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This techniques is suitable when: 1. Cost is small 2. Project is expected to complete in short period 3. Project is productive so soon as investment is made. 4. Project carries high risk.
It is highly suitable when project has shortest gestation period. It is simple to operate and understand. It is suitable for high risk project. It is useful for the firm which is eager to get back the cash invested in the project as early as possible. It enable the entrepreneur to select an investment proposal which would yield quick return of funds invested.
Limitations
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It does not take into account the cash inflow after pay back period. It ignore the time value of money. It avoids the cost of capital. It suits to only small project. It fails to examine shortest period of payback.
MERITS OF ARR
It is simple to calculate ARR and this method is easily understandable. 2. It is based on readily available accounting information. 3. It considered total benefits during the entire life of the project.
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Demerits
1. It ignore time value of money 2. It places more emphasis on profit and not on cash flows. 3. It does not considered the reinvestment of profits earned over a period of time. 4. It fails to differentiate between the size of the investment required for each project.
ECONOMIC APPRAISAL
Economic appraisal is done with a view point of society and economy. Thus it is done from a wider angle not merely in financial terms. The economic appraisal should cover weather it fits into national priorities and contribution to the development of society. Economic appraisal is also called social cost benefit analysis ( SCBA). It is an assessment of the expected total cost to be incurred and benefits derived out a project that is under consideration from society point of view. A project is considered to be socially viable if the benefits which accrue from the project serve the larger social purpose.
SCBA is primarily used for evaluating public investment to be financed by the government. SCBA is also relevant to private investment which have to be approved by various government and quasi government agencies which bring to bear larger national consideration in their decision. So the acceptance or rejection of a project is depends upon total social or national benefit like impact on planning, employment, saving and foreign exchange etc.
TECHNOLOGICAL ANALYSIS
It refers to the review of product mix, production capacities, process of manufacturing, engineering know how and technical collaboration, sources of raw material, location, size, manpower requirement, facilities like transport, railway, airway, latest technology to be adopted etc. Following are the determinants of technological appraisal: 1. Type of technology 2. Scale of operation 3. Location 4. Layout plan
5. Construction schedule 6. Supply of water 7. Supply of power 8. Supply of Fuel. 9. Waste, Effluents and disposal 10. Cost estimate
COMMERCIAL APPRAISAL
The proposed project should be commercially viable. To know the commercial viability of the project, it is necessary to examine the demand and availability of the product in the market, selection of market place, requirement of raw material, banking, transportation, insurance facilities etc. Among all the aspect are examined, the demand and availability of the product to be manufactured of the demand should also be examine.
MANAGERIAL APPRAISAL
It deals with the evaluation of competencies, skills and reliability of management. This would also involve review of their past track record and competence. Actually, quality of management affects the success of an industrial project to a large extent. Generally, it is not expected that an entrepreneur should have experience in a particular industry, but he is supposed to appoint adequate experience personnel in the area of production, finance, marketing, accounting etc.
ENVIRONMENTAL ANALYSIS
It refers to environment planning, protection, monitoring, assessment, research, education, conservation and substantial use of resources. For effective environmental analysis, a wide network of legislation is also in force. There are two technique of environmental analysis: 1. Environment Impact Assessment 2. Environment Impact Statement
Environment impact assessment is defined as a process designed to identify, predict, interpret and communicate information about the impact of an action on human health and well being. Environmental impact statement is a report based on studies, disclosing the likelihood of certain environmental consequences of a proposed project.