Professional Documents
Culture Documents
PLANT LOCATION
The provinces of Laguna, Batangas and Pampanga are considered by the
researchers as their plant location. The continuous flow of raw materials is a vital
factor in choosing the most suggested location plant construction. Furthermore,
these provinces have industrial parks that are permitted by government law to
construct industrial plants making them most suitable for any industrial
manufacturing operations.
Three alternative plant locations will be discussed in this section which are
according to the following factors: 1) Availability of Raw Materials; 2) Proximity of
Market; 3) Availability of Energy Sources; 4) Climate; 5) Transportation; 6) Water
Supply; 7) Labor Supply; 8) Site Characteristics; 9) Community Factors
Factors in Plant Location Selection
Availability of Raw Materials
Sources of raw materials are one of the most important factors to be
considered in the selection of the plant site. It permits significant reduction in
transportation and storage facilities.
Proximity of Market
The location of markets or intermediate distribution centers affects the
product distribution costs and the time required for shipping. The consumers
usually find it advantageous to purchase from nearby sources.
Availability of Energy Sources
Power and steam requirements are in high amount in most industrial
plants, and normally fuel is used and it is necessity to supply these utilities. The
local costs of water and power help determine whether power should be paid for
through power distributors or self-generated.
Climate
If the plant is located in a cold climate, costs may be increased by the
necessity for construction of protective shelters around the process equipment,
and special cooling towers or air conditioning system may be required if the
prevailing temperature are high.
Transportation
Bodies of water, railroads, and highways are the common means of
transportation used by major industrial concerns. If possible, the plant site
should have access to all three types of transportation; certainly, at least two
types should be available.
Water Supply
The process industries use large quantities of water for cooling, washing,
steam generation, and as raw material. The plant must be located where a
dependable supply of water is available.
Labor Supply
Consideration should be given to prevailing pay scale, restrictions on
number of hours worked per week, competing industries that can cause
dissatisfaction or high turnover rates among the workers, and variations in the
skill and productivity of the workers.
Site Characteristics
The topography of the tract of the land and the soil structure must be
considered, since either or both may have a pronounced effect on construction
costs. The cost of the land is important as well as local building costs and living
conditions.
Community Factors
If a certain minimum number of facilities for satisfactory living of plant
personnel do not exist, it often becomes a burden for the plant to subsidize such
facilities.
PLANT LOCATION
Plant location refers to the choice of region and the selection of a particular site
for location of a plant or factory. It is an important strategic decision which
cannot be changed once it is made. An ideal location is one where the cost of the
product is kept to the minimum with the least risk and maximum market gain.
For manufacturing a commodity or a product, a set of machines are used. These
machines are installed in a building in a systematic manner, called a factory or
plant. The selection of place for manufacturing is important for all the
manufacturing and distribution activities of the product.
The performance of a firm is significantly affected by its location. A plant site is
located after consideration various selection criterions. These criterions are
based on mainly economics of manufacturing, ease of manufacturing, skill levels
required and environmental conditions. Socio-political environment also plays a
major role in deciding the site of the plant. While selecting plant location, nature
of the product is considered as the base, if the product is non-perishable, then it
can be produced away from the market but if it is perishable then its plant
location should be very near to the market. If a product consumes heavy raw
materials then it has to be located near the raw material site.
According to Dr. Visvesvrirya the decision of plant location should be based on
nine Ms, namely, Money, Material, Manpower, Market, Motive, Management,
Machinery, Means of communication and Momentum and one P : Power, to an
early start.
In particular the choice of plant location should be based on following
considerations:
1. Nature and Availability of Raw Material: An ideal location is the one
where the main raw material needed is sufficiently available. Proximity to the
source of the raw materials is also an important criterion especially when raw
material is of perishable nature. Also if a raw material is heavy, it is difficult to
transport and if it is required in large quantities, then the manufacturing plant
has to be located at the site where such material is available. Otherwise the cost
of loading and transportation can be very high. The time consumed and
managerial effort inputs due to this will also increase. As a result, the economics
of manufacturing goes out of scale and the product becomes uncompetitive. This
is the reason why Steel Mills are located at Bihar and Sugar Mills near the
sugarcane producing regions like Kolhapur and Sangli in Maharashtra.
2. Type of Workforce Requirement: Some of the manufacturing operations
require skilled workforce in its manufacturing operations. Skilled workforce itself
requires well-cultured surroundings, opportunities of advancement through
further studies and experience sharing, competition and recreational facilities.
Normally, such a facilitating environment is there in urban areas. One can
establish such an environment in rural areas also but it is a very costly and time
consuming process. Absence of these factors makes the retaining of skilled
workers a very difficult task. Skilled workforce is already available at urban
places. So such plants are located very near to cities. The software industries are
located at Banglore, Hyderabad, and Pune. These cities have good educational
and training institutions along with other promotional factors, which are
providing ample skilled workforce for the software industry. Engineering and
Automotive sector which needs skilled workforce are located in well developed
areas.
In some manufacturing operations, unskilled labor force is required in more
numbers. Normally, rural areas have larger unskilled workforce. Hence, labor
intensive plants are located away from the city in rural areas.
3. Proximity to Market: Since perishable products do not last long, the market
has to be nearby. For low cost of transport and distribution, nearness to the
markets is necessary. This is the reason for milk and milk product industries to be
near cities while non-perishable products like TV, Fridge, and Engineering
products are in Industrial Areas.
4. Availability of Infrastructure: Basic facilities of land, well connected roads,
power and water are called as infrastructure. Such facilities are not only essential
but are the backbone of the industry. Presence of these facilities makes
management of manufacturing easy and less costly, whereas the absence of
infrastructure makes manufacturing very difficult and costly.
a) Availability of Power and Fuel: Industries consume power in large
quantities. They depend on power. An industry will choose a site where there is
uninterrupted and cheap power supply available. This is what was observed in
the Industrial Development of Maharashtra, whereas West Bengal is far behind in
industrial development. In place of power, if coal or other materials are used as
the fuel their availability will locate the plants nearby. We find a thermal power
station in Chandrapur and Nagpur where coal is available cheaply.
b) Availability of Water: Chemical industries, food industries dose a lot of
water for their processing. Similarly, waste and bi-products of these industries
are hazardous and required to be discharged in flowing water after treatment.
So, one finds that chemical and pharmaceutical industries are located near to
sea or river. At Thal Yaishet in Maharashtra and Bharuch, Ankaleshwar in Gujarat
special chemical industrial zones are created and industries such as dyes,
pigments and pharmaceutical are located there.
c) Transport Facilities: Every industry requires transport of raw materials,
finished products as well as their workforce and support services. Availability of
transport network facilities decides the site selection. Cheaper transport reduces
transportation costs. One can observe that well connectivity by rail and good
roads brings in lot of industries. Water transport is the cheapest. Where there is
sea and connecting rivers/ canals then the industries are developed very fast.
Well connectivity by sea, rail, road and air along with other promotional factors
has made Mumbai , business capital of India.
d) Land: Locating a plant\ant requires land. The land must be suitable to
support the industry. It should have good natural drainage. It should be free from
all encroachments. It should be easily accessible. Land must be available not
only as per present requirements but for future expansion also. The cost factor
should also be paid attention to, as this will lead to, low capital investment.
5. Climatic and Atmospheric Conditions: The climatic conditions of the site
wrt. Humidity, temperature and other atmospheric conditions should be
favorable to the plant. Certain manufacturing processes require special or typical
climatic and atmospheric conditions. Such factories are located in that particular
climatic conditional zone. The Tea and Coffee industry needs a cold climate
hence they are situated in cold areas such as Ooty and Assam. The textile
industry requires humid atmospheric conditions. This is why one finds that textile
industries are concentrated in Mumbai and Ahmedabad.
6. Presence of Ancillaries/Related Industries: Capital goods manufacturing
require number of sub-assemblies/spares. It is practically, the existence of
ancillaries/related industries which help the selection of the location of the
factory site. In and around Pune, Tata Motors has developed number of ancillary
units; this has given boost to other engineering units.
7. Availability of Support Services and Amenities: While selecting a factory
location one must also see availability of recreational facilities, post and
telegraph facilities, hospitals etc.If these facilities are not available, these are
made available for ease of the production operation as well as to retain the
workforce.
8. Industrial Policy of State: Governments have the challenging task of
industrial development for employment generation and overall development of a
state. State forms industrial policies for attracting industries and investment in
the state. Under industrial policy, land at low cost, cheap and ample power and
water supply, exemption of stamp duty, subsidy on capital investment and other
benefits of Sales tax concession are given. This keeps the initial cost of operation
low.
information,
money,
This coordination task is complex and therefore the manager needs to create a
formal document called an Operational Plan. This document collects, organises
and communicates a great deal of information that enables the reader to know
and understand what needs to be done, by whom and when to make progress
towards creating the best value for the stakeholders of the organisation.
Generally, it is the task of the manager to create the Operational Plan but it will
usually go through an approval process by the board/committee of the
organisation.
Purpose of an Operational Plan
It is important to understand the difference between an "operational plan" and a
"strategic plan". The strategic plan is about setting a direction for the
organisation, devising goals and objectives and identifying a range of strategies
to pursue so that the organisation might achieve its goals. The strategic plan is a
general guide for the management of the organisation according to the priorities
and goals ofstakeholders. The strategic plan DOES NOT stipulate the day-to-day
tasks and activities involved in running the
organisation.
On the other hand the Operational Plan
DOES present highly detailed information
specifically to direct people to perform the
day-to-day tasks required in the running
the
organisation.
Organisation
management and staff should frequently refer to the operational plan in carrying
out their everyday work. The Operational Plan provides the what, who, when and
how much:
what - the strategies and tasks that must be undertaken
who - the persons who have responsibility of each of the strategies/tasks
when - the timelines in which strategies/tasks must be completed
how much - the amount of financial resources provided to complete each
strategy/task
The difference between and operational and strategic plans
Strategic Plan
Operational Plan
A general guide for the management A specific plan for the use of the
of the organisation
organisation's resources in pursuit of
the strategic plan.
Suggests strategies to be employed in Details specific activities and events to
pursuit of the organisation's goals
be undertaken to implement strategies
Is a plan for the pursuit of Is
a
plan
for
the
day-to-day
the organisation's mission in the longer management of the organisation (one
term (3 - 5 years)
year time frame)
A strategic plan enables management An operational plan should not be
to formulate an operational plan.
formulated without reference to a
strategic plan
The strategic plan, once formulated, Operational plans may differ from year
tends not to be significantly changed to year significantly
every year
The development of the strategic plan The operational plan is produced by
is a responsibility shared and involves the chief executive and staff of the
different categories of stakeholders.
organisation.
The purpose of the Operational Plan is to provide organisation personnel with a
clear picture of their tasks and responsibilities in line with the goals and
objectives contained within the Strategic Plan.
Basically, the Operational Plan is a plan for the implementation of strategies
contained within the Strategic Plan.
It is a management tool that facilitates the
co-ordination of the organisation's resources
(human, financial and physical) so that goals
and objectives in the strategic plan can be
ac
Developing an Operational Plan
An Operational Plan is the next step
after a Strategic Plan has been created
(see difference between strategic plan and
operational plan).
The task is to take every single
strategy
contained
within
the
Strategic Plan and allocate resources,
set
a
timeline
and
stipulate
performance indicators.
b) And in manufacturing units where plant & machinery is laid out as per
sequence of operations & there is little difference in machine capacity
for different products OPC may be sub-division of the manufacturing
department.
c) In firm where product variety is large and plant or machinery is laid out
as per function in different department not relate to each other OPC
should be set up as independent department.
2) Degree of centralisation: implies extent to which planning activities
performed by OPC. Two system there
a) Centralised planning: where the function of production planning is
controlled by staff specialist.
b) Decentralised planning: where the planning is carried out by line
executives-foreman-who direct normal work in their respective
department.
3) The internal structure:
It implies the function to be assigned to OPC which depend on nature of the
industry, size of the company and the management policies. In general company
assigned following functions to OPC department:
a) Order preparation
b) Material control
c) Tools control
d) Process planning
e) Scheduling
f) Dispatching
g) Progressing
h) Expediting
Some optional functions are:
I.
Cost Estimation
II.
Work measurement
III.
Demand forecasting
IV.
Sub-contracting
V.
Capacity planning
OPC scope in different process.
Manufacturing methods can basically classified in following types;
is
low
since
4. Installed capacity of the plant, capacity utilization, during initial 1-3years and
Annual Sales.
5. Complete details about the land and building (e.g. cost, area etc.). These are to
be supposed by documentary evidence and building plans prepared by an
approved Architect.
6. Details of the Plant Machinery. To be supported with quotations from three
different suppliers. This should include expenses incurred on taxes,
transportation, installation, accessories etc.
7. Details of the Annual requirement of Raw Material and consumables, also to be
supported with quotations.
8. All annual expenses (e.g. Utilities, Administrative expenses, Repair and
Maintenance, Salaries, Selling expenses, packing and forwarding expenses etc).
9. Working capital requirement, showing the margin on working capital and Bank
finance required. Items considered for working capital are:
o Raw material stock
o Finished Goods stock
o Work in process
o Bills receivable
o Working expenses
10.Cost of the project : The items to be included in this area as follows:
o Land
o Building
o Plant and Machinery
o Misc. Fixed Assets
o Contingencies
o Pre-operative Expenses
o Promoter's Contribution
o Bank Borrowing (Bank Finance of working Capital)
Assets : Total of
o Net Block Assets
o Fixed assets- Depreciation (cumulate Depreciation over the operating
years)
o Current Assets
o Cash and bank Balance
The total of liabilities and total Assets should tally for each operating year
individually, for a correct Balance Sheet.>/p>
17.Break Even Point:
This is the level of production at which the unit is running at no profit no loss.
Hence , it is essential to calculate the BEP to ascertain the level of production at
which the units starts earning profits. It is calculated as follows:
BEP=( Fixed Cost * Percentage of optimum cap. Utilization) * 100/
contribution
Contribution = Sales - Variable Cost
This is calculated for the year during which the unit reaches optimum capacity
utilization.
After preparation of the project Report the Entrepreneur is required to get the
provisional Registration Certificate from the concerned District Industries
Center, and the Application for the Term loan and Working Capital with the
Financial Institution/ Bank Depending upon the scheme under which he wishes
to apply.
Check List of Document to be submitted alongwith the loan application
The number of documents shall depend upon product size, nature and location of
project
1. Prescribe application form in Duplicate
2. Project Report in Duplicate
The DPR is prepared by highly qualified and experienced consultants and the market
research and analysis are supported by a panel of experts and computerised data bank.
BRIEF CONTENTS ARE AS FOLLOWS
1. Introduction
2. Properties
3. Uses & Application
4. B.I.S. Specifications
5. Market Survey
6. Raw Materials
7. Manufacturing Process
8. Process Description
9. Process Flow Diagram
10. Plant Layout
11. Details of Plant & Machinery
12. Suppliers of Raw Materials
13. Suppliers of Plant & Machinery
14. Principles of Plant Layout
15. Plant Location Factors
16. List of State Industrial Development Corporations (which provide financial and other
incentives)
17. Suggested Steps
18. Plant Economics
19. Land and Building Costs
20. Plant and Machinery Costs
21. Other Fixed Assets
22. Fixed Capital Investment
23. Raw Material Costs
24. Salaries and Wages
25. Utilities and Overheads
26. Total Working Capital
27. Cost of Project
28. Total Capital Investment
29. Cost of Production
30. Turnover per Annum
31. Profitability Analysis
32. 5-year Profit Analysis
33. Break-even Point
34. Resources of Finance
35. Interest Installment Chart
36. Depreciation Chart
37. Cash Flow Statement
Funds
INTRODUCTION
Despite all the differences among companies, there are only a few sources of
funds available to all firms.
1. They make profit by selling a product for more than it costs to produce. This is
the most basic source of funds for any company and hopefully the method that
brings in the most money.
2. Like individuals, companies can borrow money. This can be done privately
through bank loans, or it can be done publicly through a debt issue. The
drawback of borrowing money is the interest that must be paid to the lender.
3. A company can generate money by selling part of itself in the form of shares
to investors, which is known as equity funding. The benefit of this is that
investors do not require interest payments like bondholders do. The drawback is
that further profits are divided among all shareholders.
In an ideal world, a company would bring in all of its cash simply by selling goods
and services for a profit. But, as the old saying goes, "you have to spend money
to make money," and just about every company has to raise funds at some point
to develop products and expand into new markets.
When evaluating companies, it is most important to look at the balance of the
major sources of funding. For example, too much debt can get a company into
trouble. On the other hand, a company might be missing growth prospects if it
doesn't use money that it can borrow
SOURCES OF FUNDS
Grants are made to non-profit organizations by development assistance
agencies and foundations. Usually grants do not have to be repaid. Grant money
is available to enhance country institutional capacity, to support governmental
and non-governmental institutions and to finance project formulation, policy
reform and sector management and development. Grants are provided by
bilateral donors, multilateral grant aid institutions, United Nations organizations
and specialized agencies, international financing institutions, international nongovernmental organizations, the private sector, foundations and charity
organizations.
Loans, unlike grants, have to be repaid. Loans can be obtained from most
banks, but development assistance agencies may provide loans for development
priorities at preferential rates of interest, with an initial interest free period,
repayable over the long term. To justify a loan a strong business case must be
made. Loans are made to borrowing countries that are further up the
development ladder and to the private sector and development groups in all
countries. Loans are made at near-to-commercial conditions reflecting the cost of
resource mobilization on capital markets plus a small fund administration margin
to cover a donor's operational costs. Interest rates are generally variable. Loans
are generally repayable over 15 to 20 years and often include up to a five-year
grace period. There are some interest-free loans but these carry an annual
service charge and a commitment fee is usually applied. These loans are
repayable over 25 to 50 years with a maximum ten-year grace period.
Equity investments enable persons and institutions to invest in shareholding of
a company managing or implementing a sustainable forest management project.
The investment may make an enterprise viable or enable it to expand, while the
new shareholder will benefit through shareholder voting rights and dividends on
profits.
Co-funding is provided by some donor agencies to complement existing
funding. Depending on the proposal, it may be possible to find an agency that
provides the full cost of a project proposal. However, it is frequently the case
that funding is only available on the basis of shared cost. It may be necessary,
therefore, to identify perhaps as much as 50% of the project cost from other
sources of funding. If an agency requires co-funding, it is important to include a
co-funding component in the project proposal. To secure co-funding it is
necessary to identify existing matching funds. Complementary projects being
formulated by other groups may provide possible sources of co-funding.
Large corporations could not have grown to their present size without being able
to find innovative ways to raise capital to finance expansion. Corporations have
five primary methods for obtaining that money.
Issuing Bonds. A bond is a written promise to pay back a specific amount of
money at a certain date or dates in the future. In the interim, bondholders
receive interest payments at fixed rates on specified dates. Holders can sell
bonds to someone else before they are due.
Corporations benefit by issuing bonds because the interest rates they must pay
investors are generally lower than rates for most other types of borrowing and
because interest paid on bonds is considered to be a tax-deductible business
expense. However, corporations must make interest payments even when they
are not showing profits. If investors doubt a company's ability to meet its interest
obligations, they either will refuse to buy its bonds or will demand a higher rate
of interest to compensate them for their increased risk. For this reason, smaller
corporations can seldom raise much capital by issuing bonds.
Issuing Preferred Stock. A company may choose to issue new "preferred"
stock to raise capital. Buyers of these shares have special status in the event the
underlying company encounters financial trouble. If profits are limited, preferredstock owners will be paid their dividends after bondholders receive their
guaranteed interest payments but before any common stock dividends are paid.
Selling Common Stock. If a company is in good financial health, it can raise
capital by issuing common stock. Typically, investment banks help companies
issue stock, agreeing to buy any new shares issued at a set price if the public
refuses to buy the stock at a certain minimum price. Although common
shareholders have the exclusive right to elect a corporation's board of directors,
they rank behind holders of bonds and preferred stock when it comes to sharing
profits.
Investors are attracted to stocks in two ways. Some companies pay large
dividends, offering investors a steady income. But others pay little or no
dividends, hoping instead to attract shareholders by improving corporate
profitability -- and hence, the value of the shares themselves. In general, the
value of shares increases as investors come to expect corporate earnings to rise.
Companies whose stock prices rise substantially often "split" the shares, paying
each holder, say, one additional share for each share held. This does not raise
any capital for the corporation, but it makes it easier for stockholders to sell
shares on the open market. In a two-for-one split, for instance, the stock's price
is initially cut in half, attracting investors.
Borrowing. Companies can also raise short-term capital -- usually to finance
inventories -- by getting loans from banks or other lenders.
Using profits. As noted, companies also can finance their operations by
retaining their earnings. Strategies concerning retained earnings vary. Some
corporations, especially electric, gas, and other utilities, pay out most of their
profits as dividends to their stockholders. Others distribute, say, 50 percent of
earnings to shareholders in dividends, keeping the rest to pay for operations and
expansion. Still other corporations, often the smaller ones, prefer to reinvest
most or all of their net income in research and expansion, hoping to reward
investors by rapidly increasing the value of their shares.
Funds from operations: Funds from Operations (FFO) is a measure of cash
generated by a real estate investment trust (REIT). It is important to note that
FFO is not the same as Cash from Operations, which is a key component of the
indirect-method cash flow statement.
The formula for FFO is:
Funds from Operations = Net Income + Depreciation + Amortization - Gains on
Sales of Property
Issue of shares: Shares in Issue amount, is the current number of ordinary
shares in issue and it is expressed in millions.
Issue of debenture: A debenture is an instrument of debt executed by the
company acknowledging its obligation to repay the sum at a specified rate and
also carrying an interest. It is only one of the methods of raising the loan capital
of the company. A debenture is thus like a certificate of loan or a loan bond
evidencing the fact that the company is liable to pay a specified amount with
interest and although the money raised by the debentures becomes a part of the
company's capital structure, it does not become share capital.
Internal Methods of Improving Cash Flow
If a business faces ongoing cash flow problems, then if the business is in other
ways successful, it is good management to look for internal methods of solving
or reducing the problem, some of the more successful methods are outlined
below.
1. Stock management - Often cash flow problems arise because too much
capital is tied up in stock. When we talk about stock we mean raw
materials, work-in-progress and finished goods. Many firms are now
implementing practices such as Just-in Time, and Kan Ban, which are
designed to reduce capital tied up in stock and allow it to be used in more
effective ways within the business.
2. Manpower management - Examining manpower costs can reduce
outflows of cash. Is it necessary to have permanent contracts for all
workers? Can some work be sub-contracted, or can some work be
better
Stockpiling
This refers to the purchase of stock at the right time, at the right price and in the
right quantities.
There are several advantages to the stockpiling, the following are some of the
examples:
Uninsured risks
Bad debt
Changes in fashion
Time lapses between ordering and delivery
New machinery or technology
Different prices at different places
Requirements of an insurance contract
Insurable interest
The insured must derive a real financial gain from that which he is
insuring, or stand to lose if it is destroyed or lost.
The item must belong to the insured.
One person may take out insurance on the life of another if the
second party owes the first money.
Must be some person or item which can, legally, be insured.
The insured must have a legal claim to that which he is insuring.
Good faith
Uberrimae fidei refers to absolute honesty and must characterise
the dealings of both the insurer and the insured.
Shared Services
There is currently a move towards converging and consolidating Finance
provisions into shared services within an organization. Rather than an
organization having a number of separate Finance departments performing the
same tasks from different locations a more centralized version can be created.
Finance of states
Country, state, county, city or municipality finance is called public finance. It is
concerned with
Identification of required expenditure of a public sector entity
Source(s) of that entity's revenue
The budgeting process
Debt issuance (municipal bonds) for public works projects
Financial Economics
Financial economics is the branch of economics studying the interrelation of
financial variables, such as prices, interest rates and shares, as opposed to those
concerning the real economy. Financial economics concentrates on influences of
real economic variables on financial ones, in contrast to pure finance.
It studies:
Valuation - Determination of the fair value of an asset
How risky is the asset? (identification of the asset appropriate
discount rate)
What cash flows will it produce? (discounting of relevant cash flows)
How does the market price compare to similar assets? (relative
valuation)
Are the cash flows dependent on some other asset or event?
(derivatives, contingent claim valuation)
Financial markets and instruments
Commodities - topics
Stocks - topics
Bonds - topics
UNIT-3
MARKETING OF FINANCIAL SERVICES
Financial Institutions
Financial sector plays an indispensable role in the overall development of a country. The most
important constituent of this sector is the financial institutions, which act as a conduit for the
transfer of resources from net savers to net borrowers, that is, from those who spend less than
their earnings to those who spend more than their earnings. The financial institutions have
traditionally been the major source of long-term funds for the economy. These institutions
provide a variety of financial products and services to fulfill the varied needs of the commercial
sector. Besides, they provide assistance to new enterprises, small and medium firms as well as to
the industries established in backward areas. Thus, they have helped in reducing regional
disparities by inducing widespread industrial development.
The Government of India, in order to provide adequate supply of credit to various sectors of the
economy, has evolved a well developed structure of financial institutions in the country. These
financial institutions can be broadly categorised into All India institutions and State level
institutions, depending upon the geographical coverage of their operations. At the national level,
they provide long and medium term loans at reasonable rates of interest. They subscribe to the
debenture issues of companies, underwrite public issue of shares, guarantee loans and deferred
payments, etc. Though, the State level institutions are mainly concerned with the development of
medium and small scale enterprises, but they provide the same type of financial assistance as the
national level institutions.
National Level Institutions
A wide variety of financial institutions have been set up at the national level. They cater to the
diverse financial requirements of the entrepreneurs. They include all India development banks
like IDBI, SIDBI, IFCI Ltd, IIBI; specialised financial institutions like IVCF, ICICI Venture
Funds Ltd, TFCI; investment institutions like LIC, GIC, UTI; etc.
1. All-India Development Banks (AIDBs):- Includes those development banks which
provide institutional credit to not only large and medium enterprises but also help in
promotion and development of small scale industrial units.
Industrial Finance Corporation of India Ltd (IFCI Ltd):- was the first development
finance institution set up in 1948 under the IFCI Act in order to pioneer long-term
institutional credit to medium and large industries. It aims to provide financial
assistance to industry by way of rupee and foreign currency loans,
underwrites/subscribes the issue of stocks, shares, bonds and debentures of
industrial concerns, etc. It has also diversified its activities in the field of merchant
banking, syndication of loans, formulation of rehabilitation programmes,
assignments relating to amalgamations and mergers, etc.
Industrial Investment Bank of India Ltd (IIBI):- was set up in 1985 under the
Industrial reconstruction Bank of India Act, 1984, as the principal credit and
reconstruction agency for sick industrial units. It was converted into IIBI on March
17, 1997, as a full-fledged development financial institution. It assists industry
mainly in medium and large sector through wide ranging products and services.
Besides project finance, IIBI also provides short duration non-project asset-backed
financing in the form of underwriting/direct subscription, deferred payment
guarantees and working capital/other short-term loans to companies to meet their
fund requirements.
2. Specialised Financial Institutions (SFIs):- are the institutions which have been set up to
serve the increasing financial needs of commerce and trade in the area of venture capital,
credit rating and leasing, etc.
IFCI Venture Capital Funds Ltd (IVCF):- formerly known as Risk Capital &
Technology Finance Corporation Ltd (RCTC), is a subsidiary of IFCI Ltd. It was
promoted with the objective of broadening entrepreneurial base in the country by
facilitating funding to ventures involving innovative product/process/technology.
Initially, it started providing financial assistance by way of soft loans to promoters
under its 'Risk Capital Scheme' . Since 1988, it also started providing finance
under 'Technology Finance and Development Scheme' to projects for
commercialisation of indigenous technology for new processes, products, market
or services. Over the years, it has acquired great deal of experience in investing in
technology-oriented projects.
3. Investment Institutions: - are the most popular form of financial intermediaries, which
particularly catering to the needs of small savers and investors. They deploy their assets
largely in marketable securities.
Life Insurance Corporation of India (LIC):- was established in 1956 as a whollyowned corporation of the Government of India. It was formed by the Life
Insurance Corporation Act, 1956, with the objective of spreading life insurance
much more widely and in particular to the rural area. It also extends assistance for
development of infrastructure facilities like housing, rural electrification, water
supply, sewerage, etc. In addition, it extends resource support to other financial
institutions through subscription to their shares and bonds, etc. The Life Insurance
Corporation of India also transacts business abroad and has offices in Fiji,
Mauritius and United Kingdom . Besides the branch operations, the Corporation
has established overseas subsidiaries jointly with reputed local partners in Bahrain,
Nepal and Sri Lanka.
Unit Trust of India (UTI):- was set up as a body corporate under the UTI Act,
1963, with a view to encourage savings and investment. It mobilises savings of
small investors through sale of units and channelises them into corporate
investments mainly by way of secondary capital market operations. Thus, its
primary objective is to stimulate and pool the savings of the middle and low
income groups and enable them to share the benefits of the rapidly growing
industrialisation in the country. In December 2002, the UTI Act, 1963 was
repealed with the passage of Unit Trust of India (Transfer of Undertaking and
Repeal) Act, 2002, paving the way for the bifurcation of UTI into 2 entities, UTI-I
and UTI-II with effect from 1st February 2003.
State Financial Corporations (SFCs):- are the State-level financial institutions which
play a crucial role in the development of small and medium enterprises in the concerned
States. They provide financial assistance in the form of term loans, direct subscription to
equity/debentures, guarantees, discounting of bills of exchange and seed/ special capital,
etc. SFCs have been set up with the objective of catalysing higher investment, generating
greater employment and widening the ownership base of industries. They have also
started providing assistance to newer types of business activities like floriculture, tissue
culture, poultry farming, commercial complexes and services related to engineering,
marketing, etc. There are 18 State Financial Corporations (SFCs) in the country:1. Andhra Pradesh State Financial Corporation (APSFC)
2. Himachal Pradesh Financial Corporation (HPFC)
3. Madhya Pradesh Financial Corporation (MPFC)
4. North Eastern Development Finance Corporation (NEDFI)
5. Rajasthan Finance Corporation (RFC)
6. Tamil Nadu Industrial Investment Corporation Limited
7. Uttar Pradesh Financial Corporation (UPFC)
8. Delhi Financial Corporation (DFC)
9. Gujarat State Financial Corporation (GSFC)
10. The Economic Development Corporation of Goa ( EDC)
11. Haryana Financial Corporation ( HFC )
12. Jammu & Kashmir State Financial Corporation ( JKSFC)
13. Karnataka State Financial Corporation (KSFC)
14. Kerala Financial Corporation ( KFC )
15. Maharashtra State Financial Corporation (MSFC )
16. Odisha State Financial Corporation (OSFC)
17. Punjab Financial Corporation (PFC)
18. West Bengal Financial Corporation (WBFC)
State Industrial Development Corporations (SIDCs):- have been established under the
Companies Act, 1956, as wholly-owned undertakings of State Governments. They have
been set up with the aim of promoting industrial development in the respective States and
providing financial assistance to small entrepreneurs. They are also involved in setting up
of medium and large industrial projects in the joint sector/assisted sector in collaboration
with private entrepreneurs or wholly-owned subsidiaries. They are undertaking a variety
of promotional activities such as preparation of feasibility reports; conducting industrial
potential surveys; entrepreneurship training and development programmes; as well as
developing industrial areas/estates. The State Industrial Development Corporations in the
country are:1. Assam Industrial Development Corporation Ltd (AIDC)
2. Andaman & Nicobar Islands Integrated Development Corporation Ltd
(ANIIDCO)
3. Andhra Pradesh Industrial Development Corporation Ltd (APIDC)
4. Bihar State Credit and Investment Corporation Ltd. (BICICO)
5. Chhattisgarh State Industrial Development Corporation Limited (CSIDC)
6. Goa Industrial Development Corporation
7. Gujarat Industrial Development Corporation (GIDC)
Early stage financing - This is the first stage financing when the firm is undertaking
production and need additional funds for selling its products. It involves seed/ initial
finance for supporting a concept or idea of an entrepreneur. The capital is provided for
product development, R&D and initial marketing.
Expansion financing - This is the second stage financing for working capital and
expansion of a business. It involves development financing so as to facilitate the public
issue.
ii.
iii.
In India, the venture capital funds (VCFs) can be categorised into the following groups:
All these venture capital funds are governed by the Securities and Exchange Board of India
(SEBI) . SEBI is the nodal agency for registration and regulation of both domestic and overseas
venture capital funds. Accordingly, it has made the following regulations, namely, Securities and
Exchange Board of India (Venture Capital Funds) Regulations 1996 and Securities and Exchange
Board of India (Foreign Venture Capital Investors) Regulations 2000. These regulations provide
broad guidelines and procedures for establishment of venture capital funds both within India and
outside it; their management structure and set up; as well as size and investment criteria's of the
funds.
Merchant Banking
A Merchant bank is a financial institution primarily engaged in internal finance and long term
loans for multinational corporations and governments. It can also be used to describe the private
equity activities of banking. Merchant banks tend to advise corporations and wealthy individuals
on how to use their money. The advice varies from counsel on mergers and acquisitions to
recommendation on the type of credit needed. The job of generating loans and initiating other
complex financial transactions has been taken over by investment banks and private equity firms.
Thus, the function of merchant banking which originated, and grew in Europe was enriched by
American patronage, and these services are now being provided throughout the world by both
banking and Non-banking Institutions. The word Merchant Banking originated among the
Dutch and the Scottish Traders, and was later on developed and professionalized in Britain.
Securities and Exchange Board of India (Merchant Bankers) Rules, 1992 A merchant
banker has been defined as any person who is engaged in the business of issue management either
by making arrangements regarding selling, buying or subscribing to securities or acting as
manager, consultant, adviser or rendering corporate advisory services in relation to such issue
management.
Functions of merchant Banking:
(i) Corporate counseling: Corporate counseling covers counseling in the form of project
counseling, capital restructuring, project management, public issue management, loan
syndication, working capital fixed deposit, lease financing, acceptance credit etc., The scope of
corporate counseling is limited to giving suggestions and opinions to the client and help taking
actions to solve their problems. It is provided to a corporate unit with a view to ensure better
performance, maintain steady growth and create better image among investors.
(ii) Project counseling: Project counseling is a part of corporate counseling and relates to project
finance. It broadly covers the study of the project, offering advisory assistance on the viability
and procedural steps for its implementation. a. Identification of potential investment avenues. b.
A general view of the project ideas or project profiles. c. Advising on procedural aspects of
project implementation d. Reviewing the technical feasibility of the project e. Assisting in the
selection of TCOs (Technical Consultancy Organizations) for preparing project reports f.
Assisting in the preparation of project report g. Assisting in obtaining approvals , licenses, grants,
foreign collaboration etc., from government h. Capital structuring i. Arranging and negotiating
foreign collaborations, amalgamations, mergers and takeovers. j. Assisting clients in preparing
applications for financial assistance to various national and state level institutions banks etc., k.
providing assistance to entrepreneurs coming to India in seeking approvals from the Government
of India.
(iii) Capital Structure:
Here the Capital Structure is worked out i.e., the capital required, raising of the capital, debtequity ratio, issue of shares and debentures, working capital, fixed capital requirements, etc.,
(iv) Portfolio Management: It refers to the effective management of Securities i.e., the merchant
banker helps the investor in matters pertaining to investment decisions. Taxation and inflation are
taken into account while advising on investment in different securities. The merchant banker also
undertakes the function of buying and selling of securities on behalf of their client companies.
Investments are done in such a way that it ensures maximum returns and minimum risks.
On the contrary, in operating lease, risk and rewards are not transferred completely to the lessee. The term
of lease is very small compared to finance lease. The lessor depends on many different lessees for recovering
his cost. Ownership along with its risks and rewards lies with the lessor. Here, lessor is not only acting as a
financier but he also provides additional services required in the course of using the asset or equipment.
Example of an operating lease is music system leased on rent with the respective technicians.
Sale And Lease Back and Direct Lease: In the arrangement of sale and lease back, the lessee sells his
asset or equipment to the lessor (financier) with an advanced agreement of leasing back to the lessee for a
fixed lease rental per period. It is exercised by the entrepreneur when he wants to free his money, invested
in the equipment or asset, to utilize it at whatsoever place for any reason.
On the other hand, direct lease is a simple lease where the asset is either owned by the lessor or he
acquires it. In the former case, the lessor and equipment supplier are one and the same person and this case
is called bipartite lease. In bipartite lease, there are two parties. Whereas, in the latter case, there are three
different parties viz. equipment supplier, lessor, and lessee and it is called tripartite lease. Here, equipment
supplier and lessor are two different parties.
Single Investor Lease and Leveraged Lease: In single investor lease, there are two parties lessor and lessee. The lessor arranges the money to finance the asset or equipment by way of
equity or debt. The lender is entitled to recover money from the lessor only and not from the
lessee in case of default by lessor. Lessee is entitled to pay the lease rentals only to the lessor.
Leveraged lease, on the other hand, has three parties lessor, lessee and the financier or lender.
Equity is arranged by the lessor and debt is financed by the lender or financier. Here, there is a
direct connection of the lender with the lessee and in case of default by the lessor; the lender is
also entitled to receive money from lessee. Such transactions are generally routed through a
trustee.
Domestic and International Lease: When all the parties of the lease agreement reside in the
same country, it is called domestic lease.
International lease are of two types Import Lease and Cross Border Lease. When lessor and
lessee reside in same country and equipment supplier stays in different country, the lease
arrangement is called import lease. When the lessor and lessee are residing in two different
countries and no matter where the equipment supplier stays, the lease is called cross border lease.
Marketing of Insurance
Wherever there is uncertainty there is risk. We do not have any control over uncertainties which
involves financial losses. The risks may be certain events like death, pension, retirement or
uncertain events like theft, fire, accident, etc. Insurance is a financial service for collecting the
savings of the public and providing them with risk coverage. The main function of Insurance is to
provide protection against the possible chances of generating losses. It eliminates worries and
miseries of losses by destruction of property and death. It also provides capital to the society as
the funds accumulated are invested in productive heads. Insurance comes under the service sector
and while marketing this service, due care is to be taken in quality product and customer
satisfaction. While marketing the services, it is also pertinent that they think about the innovative
promotional measures. It is not sufficient that you perform well but it is also important that you
let others know about the quality of your positive contributions. The creativity in the promotional
measures is the need of the hour. The advertisement, public relations, word of mouth
communication needs due care and personal selling requires intensive care.
INSURANCE MARKETING:
The term Insurance Marketing refers to the marketing of Insurance services with the aim to create
customer and generate profit through customer satisfaction. The Insurance Marketing focuses on
the formulation of an ideal mix for Insurance business so that the Insurance organisation survives
and thrives in the right perspective.
MARKETING MIX FOR INSURANCE COMPANIES:
The marketing mix is the combination of marketing activities that an organisation engages in so
as to best meet the needs of its targeted market. The Insurance business deals in selling services
and therefore due weightage in the formation of marketing mix for the Insurance business is
needed. The marketing mix includes sub-mixes of the 7 Ps of marketing i.e. the product, its
price, place, promotion, people, process & physical attraction. The above mentioned 7 Ps can be
used for marketing of Insurance products, in the following manner:
1. PRODUCT:
A product means what we produce. If we produce goods, it means tangible product and when we
produce or generate services, it means intangible service product. A product is both what a seller
has to sell and a buyer has to buy. Thus, an Insurance company sells services and therefore
services are their product .In India, the Life Insurance Corporation of India (LIC) and the General
Insurance Corporation (GIC) are the two leading companies offering insurance services to the
users. Apart from offering life insurance, they also offer underwriting and consulting services.
When a person or an organisation buys an Insurance policy from the insurance company, he not
only buys a policy, but along with it the assistance and advice of the agent, the prestige of the
insurance company and the facilities of claims and compensation. It is natural that the users
expect a reasonable return for their investment and the insurance companies want to maximize
their profitability. Hence, while deciding the product portfolio or the product-mix, the services or
the schemes should be motivational.
2. PRICING:
In the insurance business the pricing decisions are concerned with, i) The premium charged
against the policies, ii) Interest charged for defaulting the payment of premium and credit facility,
and iii) Commission charged for underwriting and consultancy activities. With a view of
influencing the target market or prospects the formulation of pricing strategy becomes significant.
In a developing country like India where the disposable income in the hands of prospects is low,
the pricing decision also governs the transformation of potential policyholders into actual policy
holders. The strategies may be high or low pricing keeping in view the level or standard of
customers or the policyholders. The pricing in insurance is in the form of premium rates. The
three main factors used for determining the premium rates under a life insurance plan are
mortality, expense and interest.
3. PLACE:
This component of the marketing mix is related to two important facets i) Managing the
insurance personnel, and ii) Locating a branch. The management of agents and insurance
personnel is found significant with the viewpoint of maintaining the norms for offering the
services. This is also to process the services to the end user in such a way that a gap between the
services- promised and services offered is bridged over. In a majority of the service generating
organizations, such a gap is found existent which has been instrumental in making worse the
image problem.
4. PROMOTION:
The insurance services depend on effective promotional measures. In a country like India, the rate
of illiteracy is very high and the rural economy has dominance in the national economy. It is
essential to have both personal and impersonal promotion strategies. In promoting insurance
business, the agents and the rural career agents play an important role. Due attention should be
given in selecting the promotional tools for agents and rural career agents and even for the branch
managers and front line staff. They also have to be given proper training in order to create
impulse buying. Advertising and Publicity, organisation of conferences and seminars, incentive to
policyholders are impersonal communication. Arranging Kirtans, exhibitions, participation in
fairs and festivals, rural wall paintings and publicity drive through the mobile publicity van units
would be effective in creating the impulse buying and the rural prospects would be easily
transformed into actual policyholders.
5. PEOPLE:
Understanding the customer better allows designing appropriate products. Being a service
industry which involves a high level of people interaction, it is very important to use this resource
efficiently in order to satisfy customers. Training, development and strong relationships with
intermediaries are the key areas to be kept under consideration. Training the employees, use of IT
for efficiency, both at the staff and agent level, is one of the important areas to look into.
6. PROCESS:
The process should be customer friendly in insurance industry. The speed and accuracy of
payment is of great importance. The processing method should be easy and convenient to the
customers. Installment schemes should be streamlined to cater to the ever growing demands of
the customers. IT & Data Warehousing will smooth the process flow. IT will help in servicing
large no. of customers efficiently and bring down overheads. Technology can either complement
or supplement the channels of distribution cost effectively. It can also help to improve customer
service levels. The use of data warehousing management and mining will help to find out the
profitability and potential of various customers product segments.
7.PHYSICAL DISTRIBUTION:
Distribution is a key determinant of success for all insurance companies. Today, the nationalized
insurers have a large reach and presence in India. Building a distribution network is very
expensive and time consuming. If the insurers are willing to take advantage of Indias large
population and reach a profitable mass of customers, then new distribution avenues and alliances
will be necessary. Initially insurance was looked upon as a complex product with a high advice
and service component. Buyers prefer a face-to-face interaction and they place a high premium
on brand names and reliability. As the awareness increases, the product becomes simpler and they
become off-the-shelf.
Target Market
Just as a for-profit business targets a certain audience with its marketing, so should a non-profit. NPOs
should develop a picture of the person most likely to support them in their cause or benefit and create
promotion and advertising around that target. Recent television advertising campaigns reflecting a large
religious affiliation reach out to those who have walked away from their faith and those who need the support
and guidance the church can provide. A church group would probably not spend advertising dollars on those
who already regularly attend church services, but rather on attracting new church goers.
Branding
It is crucial for the non-profit to build its brand. The brand is typically a logo, wording, motto or design that
identifies the group. The look and content of all communication, events, service, leadership, alliances and the
organizations office expresses the brand of the non-profit. The experiences that clients have with the NPO
also lead to the overall brand of the organization. The brand allows donors, supporters and clients to
remember, recognize and trust the organization. It keeps the NPO separate from similar organizations by
building an identity.
Offline Practices
Typical marketing practices by a non-profit organization include large and small-scale events, print materials,
alliances and networking. Print materials are highly important for educational and promotional purposes.
Events offer fundraising opportunities in the non-profit world, whether it is a small silent auction or a fivecourse banquet offered to hundreds of potential donors. Creating alliances with other local NPOs builds a
larger mass of people who hear of the groups goals while building the brand through other philanthropists.
In addition, networking is very effective marketing for non-profits as people spread the word about the goals
of the organization.
Online Practices
A primary focus of an NPO's marketing strategies are dynamic, quality websites that are designed to allure
new donors, share the groups mission, display images, build awareness of the cause, educate the public,
reduce printing and mailing costs and establish credibility. E-mail communication with current and potential
donors builds relationships and loyalty. Many NPOs are also entering the world of social networking, with the
goal of becoming personal to donors and clients and spreading their message.
Public Relations
Non-profits are beneficial for individual groups of people, but they also benefit the community. For this
reason, public relations are a large part of marketing. The local press should know the story of the non-profit
and be aware of new programs that reach out to the community. NPOs should utilize newspaper stories to
share statistics, provide pictures and advertise fundraising events and community services. The NPO should
include media outlets in events by inviting them directly. Local news outlets should be on NPO mailing lists
for newsletters and other informational mailings.
Branding
Like any business, philanthropies have no choice but to compete for supporters money. The best way to do
so is by creating a strong brand. According to ARCH, a national resource for respite and crisis care centers, in
order to best market the business your company must identify its constituents, design programs to suit their
needs, measure the constituents' satisfaction with their programs, and use the results to fine tune their
program. Once your program is clear, you are able to present your service--your brand--to potential
supporters. One way to strengthen your brand is to develop a slogan. For example, Building community
deep in the hearts of Texans is the slogan of Texas Nonprofits.
Public Speaking
One great attribute for your non-profit is a spokesperson. According to Reis, Ideally, the founder is the best
person to take on this role. He or she has a powerful connection to the brand and can sell the story to the
media, donors, volunteers and supporters. Many supporters question how contributions are used. When you
provide them with a person who actively engages with them, answers questions, shares stories and relates
successes, they become immediately involved in who you are and what you do.
Community Outreach
In the world of community outreach, consistency is the key to success, says Reis. Determine the best
programs to suit your mission and work on those until they are stable and you do them every year. People
appreciate being able to see how their time and money are used; and it feels good to see the results of your
donation continue year after year. To figure out what programs help your constituents the best, you must ask
them, otherwise what you plan may not appropriately serve their needs. Once you implement a program,
innovate constantly, advises Non Profit Times. Always search for better ways to reach your goals, and to
allow your company to branch out in the future while continuing programs already in place.
An Online Presence
Online accessibility is an important marketing tactic. Create a web page for your non-profit and build a social
media presence. Put your cause out there, writes Network for Good, optimize your search engine
marketing. Get as many good links to your companys web page as possible and make sure all your online
outreach and presences enable two-way conversation with your supporters, fans and non-fans.
Tourism Marketing
Tourism involves travelling to relatively undisturbed or uncontaminated natural areas with the
specific objects of studying, admiring and enjoying the scenery and its wild flora and fauna, as
well as other existing cultural and historical aspects. A visit with a motto to know these areas is
nothing but tourism. Places of tourist interest are numerous and of varied nature. These include
places of archeological and historical importance, pilgrimage centres, sanctuaries, national parks,
hill resorts and sea beaches, etc. The number of foreign tourists have been increased to more than
21 lakhs by 2001. India has a minimal share of only 0.39% of the world tourism trade. India
employs nearly 10 million people in this industry making it the second largest employer of the
country. Recent political unrest, fear of violence, terrorism, strikes and epidemics etc. are
detrimental to our tourism business. However, considering the recent development, it is hoped
that India will get her due share in world tourism.
Differences between tourism marketing and other services
The marketing of services dependent much on interdependence of Marketing, Operations, and
Human Resources. The differences between tourism marketing and other services are,
(1) Principal products provided by recreation/tourism businesses are recreational experiences and
hospitality,
(2) Instead of moving product to the customer, the customer must travel to the product
(area/community),
(3) Travel is a significant portion of the time and money spent in association with recreational and
tourism experiences,
(4) Is a major factor in peoples decisions on whether or not to visit your business or community?
Components of Tourism
The place and time in tourism is providing directions and maps, providing estimates of travel
time and distances from different market areas, recommending direct and scenic travel routes,
identifying attractions and support facilities along different travel routes, and informing potential
customers of alternative travel methods to the area such as airlines and railroads.
4. Productivity and Quality
This is similar to other service industries. The quality is assessed by time taken for a service, the
promptness of the service, reliability and so on.
marketing effort. This process is continuous and it is presented at figure 1. Figure 1: Stages of Marketing
Implementation in Shipping Companies
The Airline industry came into existence during the 17th centuries.
Origin of Indian aviation industry can be traced back to the year 1912.
Air travel remains a large and growing industry. It facilitates economic growth,
world trade, international investment and tourism and is therefore central to the
globalization taking place in many other industries
One can better understand the workings of airlines by looking at its marketing triangle.
Product Mix
Consumers are demanding not products, or features of products but the benefits
they will be offered.
Price Mix
Premium pricing:- Use a high price where there is a uniqueness about the product or service.
Such high prices are charge for luxuries
Cheap-value pricing:- This approach is used where external factors such as recession or
increased competition force companies to provide 'value' products and services to retain sales
APEX fares:- Apex or advance purchase fares are special fares valid on economy class on
specified sectors. They are much lower than the normal fares.
Place mix
Online 24-hour reservation Systems.
Tour Operator
Travel Agent
Promotion Mix
Advertising- keep in mind the image of the country,
tourist attraction, cultural heritage
Publicity- Travel agent, PRO, media people
Sales promotion- Tour operators, frontline staff
Profitability
The system is quite simple
It is given for a fixed period and specific purpose.
Meaning of syndication
An association of individuals formed for the purpose of conducting a
particular business or a joint venture.
Pooling of resources by financial institutions in a financing project to
spread the risk. Individual return from the investment is proportionate to
the degree of risk or amount of funds that each has put up or
underwritten.
A syndicate is a general term describing any group that is formed to
conduct some type of business. For example, a syndicate may be formed
by a group of investment bankers who underwrite and distribute new
issues of securities or blocks of outstanding issues. Syndicates can be
organized as corporations or partnerships.
A Syndicated loan (orsyndicated bank facility) is a large loan in which a
group of banks work together to provide funds for a borrower. There is
usually one lead bank (the "Arranger" or "Agent") that takes a percentage
of the loan and syndicates the rest to other banks. A syndicated loan is
the opposite of a bilateral loan, which only involves one borrower and one
lender (often a bank or financial institution.
A syndicate only works together temporarily. They are commonly used for
large loans or underwritings to reduce the risk that each individual firm
must take on.
The cost of a syndicated loan consists of interest and a number of feesmanagement fees, participation fees, agency fees and underwriting fees
when the loan is underwritten by a bank or a group of banks. Spreads over
LIBOR depend upon borrower's credit worthiness, size and term of the
loan, state of the market (e.g. the level of LIBOR, supply of non-bank
deposits to the EURO banks,) and the degree of competition for the loan.
In loan syndication there is a leader bank who undertakes all the duties
and functions of finance. The fees charged by merchant banker for
undertaking loan syndication varies upto one percent of the total loan
amount.
A loan syndicate refers to the negotiation where borrowers and lenders sit
across the table to discuss about the terms and conditions of lending. At
present Large groups of banks are forming syndicates to arrange huge
amount of loans for corporate borrowers.
The need for syndication arises as the size of the loan is huge and a single
bank cannot bear the whole risk of lending. Also the corporate going for
the issue is not aware about the banks which are willing to lend. Hence
syndication assumes significance.
The borrower does not have to deal with a large number of lenders.
It has permitted the issuers to achieve more market-oriented and
effective financing.
cost-
PRE-MANDATE STAGE
POST-CLOSURE STAGE
2)
At this stage, the
marketplace i.e. to
the lead bank needs to
term sheet, prepare
and invite
borrower are
concerns.
PLACING THE LOAN AND DISBURSEMENT: lead bank can start to sell the loan in the
prospective participating banks. this means that
prepare an information memorandum, prepare a
legal documentation, approach selected banks
participation. A series of negotiations with the
undertaken if prospective participants raise
3)
POST-CLOSURE STAGE:- This is monitoring and follow-up phase. It has
many times done through an escrow account. Escrow account is
the account
in which the borrower has to deposit its revenues and the
agent ensures that
the loan repayment is given due priority before payments to any other parties.
happens to be one of that defaults, then the bank loses all its money. For this
reason, it is in the best interest of all banks to split, or "syndicate" their large
loans with each other, so each get a representative sample in their loan
portfolios.
A second, often criticized reason for syndicating loans is that it avoids large or
surprising losses and instead usually provides small and more predictable losses.
Smaller and more predictable losses are favored by many management teams
because of the general perception that companies with "smoother" or more
steady earnings are awarded a higher stock price relative to their earnings
(benefiting management who is often paid primarily by stock). Critics, such as
Warren Buffett however, say that many times this practice is irrational.If the
bank could still get a representative sample by not syndicating, and if
syndication would reduce their profit margins, then over the long term a bank
should make more money by not syndicating. This same dynamic plays out in
the investment banking and insurance fields, where syndication also takes place.
To avoid that the borrower has to deal with all syndicate banks individually, one
of the syndicate banks usually acts as an Agent for all syndicate members and
acts as the focal point between them and the borrower.
Syndicated loans bring the borrower greater visibility in the open market.
Bunn noted that "For commercial paper issuers, rating agencies view a
multi-year syndicated facility as stronger support than several bilateral
one-year lines of credit."
Benefits to the borrower
Raising a loan which would exceed the capacity of a single bank.
Cutting down on management capacity since the borrower communicates
only with the arranger/agent.
Broadening the financing base through the participation of other banks.
Typically less costly than numerous lines through multiple institutions.
It helps to enhance broader financial relationships.
Deals with a single bank.
Quicker and simpler than other ways of raising capital. E.g. Issue of equity
or bonds.
Benefits to the investor
Establishing direct relationships with new customers.
Enables much broader risk diversification without significant additional
marketing efforts.
Due to uniform documentation there is a better chance for a
subsequent placement on the secondary market.
Contract documents and information provided at no expense.
Benefits to the lead banks
Fund arrangement and other fees can be earned without committing
capital.
Enhancement of banks reputation.
Enhancement of banks relationship with the client.
Benefits to the participating banks
Access to lending opportunities with low marketing/ processing costs.
CHAPTER NO.3
PROJECT FINANCE AND LOAN SYNDICATION
Working Capital Finance
Working capital finance is done in order to meet the entire range of short-term
fund requirements that arise within a corporates day-to-day operational cycle.
The working capital loans can help the company in financing inventories,
managing internal cash flows, supporting supply chains, funding production and
marketing operations, providing cash support to business expansion and carrying
current assets.
The working finance products comprise a spectrum of funded and non-funded
facilities ranging from cash credit to structured loans, to meet the different
demands from all segments of industry, trade and the services sector. Funded
facilities include cash credit, demand loan and bill discounting. Demand loans
are considered also under the FCNR (B) scheme. Non-funded instruments
comprise letters of credit (inland and overseas) as well as bank guarantees
(performance and financial) to cover advance payments, bid bonds etc.
Project Finance
In general, project finance covers Greenfield industrial projects, capacity
expansion at existing manufacturing units, construction ventures or other
infrastructure projects. Capital intensive business expansion and diversification
Channel Financing
Channel financing is an innovative finance mechanism by which the bank meets
the various fund necessities along the supply chain at the suppliers end itself,
thus helping to sustain a seamless business flow along the arteries of the
enterprise.
Channel finance ensures the immediate realization of sales proceeds for the
clients supplier, making it practically a cash sale. On the other hand, the
corporate gets credit for a duration equaling the tenor of the loan, enabling
smoother liquidity management.
The lead bank and participating banks are the main parties involved in loan
syndication. In large loan amounts, sometimes there are four parties involved,
other than the borrower, in the syndication process. These are arranger {lead
manager/ bank}, underwriting Bank, Participating Banks and the facility
manager {agent. their roles are defined as follows:-
and compliance). It acts for and on behalf of the banks. In many cases the
arranging/underwriting bank itself may undertake this role. In larger
syndications co-arranger and co-manager may be used.
CHAPTER NO.4
Loan Syndicating Financial Institutions
Union Bank of India, has entered into a Memorandum of Understanding
[MOU] with IDFC, one of the leading Infrastructure Financing Institution and
Bank of India, another leading Public Sector Bank for jointly Syndicating &
Financing the large Infrastructure & core industrial projects, which are
coming up in the country.
This is the first time when a premier Infrastructure financing Institution
and two large Public Sector Banks are coming together to share the skill
sets developed over a period of time, to Syndicate/Underwrite the Debt
and extend total financial solution for large projects coming up in the
Public Private Partnership [PPP] domain as well as in the Private Sector.
IDFC (Industrial Development Financial Corporation) is a premier
Infrastructure Financing Institution having vast experience in financing
mega projects over a broad spectrum of industries. Union Bank of India &
Bank of India are amongst the large Public Sector Banks having vast
experience in providing Working Capital besides extending project finance.
LOAN DEPOT
The Loan Depot Inc was incorporated in Canada in October 1998 by a group of
Finance and Real Estate professionals with experience in the Domestic and
International Finance Markets and International Real Estate Hedge Markets for
over 10 years.
The main businesses of The Loan Depot are Domestic and International Finance,
Loan Syndication from International Funding Agencies and Major World Banks,
Project Financing, Real Estate Acquisition syndication and hedging.
In 2000 the Corporation moved its head quarters from Ontario, Canada to
Chattanooga, TN. In 2001, the company expanded its operations to include
conventional and government guaranteed lending products. The Surviving
Company is now know as "THE LOAN DEPOT, LLC", and is committed to provide
the highest level of service to our customers, borrowers and brokers.
Their Mission at The Loan Depot is to anticipate and successfully meet the
changing needs of our client and match them with the requirements of the
capital market. The standard of excellence is upheld through our innovative
thinking, our unique competitive advantage, and most importantly, our
CHAPTER NO.5
The Syndicated Loan Market
The syndicated loan market, a hybrid of the commercial banking and
investment banking worlds, is globally one of the largest and most flexible
sources of capital. Syndicated loans have become an important corporate
financing technique, particularly for large firms and increasingly for
midsized firms. The rapid development of the syndicated corporate loan
market took place in the 1990s exploring the historical forces that led to
the development of the contemporary U.S. syndicated loan market, which
is effectively a hybrid of the investment banking and commercial banking
worlds. Syndicated lending aims to increase the risks and benefits involved
in taking part in the syndicated loan market.
There has been a notable change in large corporate lending over the past
decade, as the old bilateral bank-client lending relationships have been
replaced by a world that is much more transaction-oriented and marketoriented. The Canadian syndicated loan market has been strongly
influenced by its U.S. counterpart, but it is not yet at the same level of
development. It also explores potential risk issues for the new corporate
loan market, including implications for the distribution of credit risk in the
system, risks in the underwriting process, the monitoring function, and the
potential for risk arising from asymmetric information.
The development of the market for syndicated loans, and has shown how
this type of lending, which started essentially as a sovereign business in
the 1970s, evolved over the 1990s to become one of the main sources of
negotiable debt
first. syndicated
with few
other markets,
placements.
CONSORTIUM FINANCING
Some of the important consortia and their activities will be discussed now:
INDEST-AICTE Consortium
INDEST-AICTE Consortium was set-up by the Ministry of Human Resource
Development (MHRD) in year 2003 to provide access to selected electronic
journals and databases to 38 centrally-funded technical institutions
including IISc, IITs, NITs, IIMs, IIITs, ISM, SLIT, etc.
Advantages
Disadvantages
VENTURE CAPITAL
Startup or growth equity capital or loan capital provided by private investors (the
venture capitalists) or specialized financial institutions (development finance
houses or venture capital firms). Also called risk capital.
The goal of venture capital is to build companies so that the shares become
liquid (through IPO or acquisition) and provide a rate of return to the investors (in
the form of cash or shares) that is consistent with the level of risk taken.
With venture capital financing, the venture capitalist acquires an agreed
proportion of the equity of the company in return for the funding. Equity finance
offers the significant advantage of having no interest charges. It is "patient"
capital that seeks a return through long-term capital gain rather than immediate
and regular interest payments, as in the case of debt financing. Given the nature
of equity financing, venture capital investors are therefore exposed to the risk of
the company failing. As a result the venture capitalist must look to invest in
companies which have the ability to grow very successfully and provide higher
than average returns to compensate for the risk.
Venture capital has a number of advantages over other forms of finance, such
as:
It injects long term equity finance which provides a solid capital base for
future growth.
The venture capitalist is a business partner, sharing both the risks and
rewards. Venture capitalists are rewarded by business success and the
capital gain.
The venture capitalist also has a network of contacts in many areas that
can add value to the company, such as in recruiting key personnel,
providing contacts in international markets, introductions to strategic
partners, and if needed co-investments with other venture capital firms
when additional rounds of financing are required.
The venture capital industry in India is still at a nascent stage. With a view to
promote
innovation, enterprise and conversion of scientific technology and knowledgebased ideas into commercial production, it is very important to promote venture
capital activity in India. Indias recent success story in the area of information
technology has shown that there is a tremendous potential for growth of
knowledge-based industries. This potential is not only confined to information
technology but is equally relevant in several areas such as bio-technology,
pharmaceuticals and drugs, agriculture, food processing, telecommunications,
services, etc. Given the inherent strength by way of its skilled and cost
competitive manpower, technology, research and entrepreneurship, with proper
environment and policy support, India can achieve rapid economic growth and
competitive global strength in a sustainable manner.
A flourishing venture capital industry in India will fill the gap between the capital
requirements of technology and knowledge based startup enterprises and
funding available from traditional institutional lenders such as banks. The gap
exists because such startups are necessarily based on intangible assets such as
human capital and on a technology-enabled mission, often with the hope of
changing the world. Very often, they use technology developed in university and
government research laboratories that would otherwise not be converted to
commercial use. However, from the viewpoint of a traditional banker, they have
neither physical assets nor allow-risk business plan. Not surprisingly, companies
such as Apple, Exodus, Hotmail and Yahoo, to mention a few of the many
successful multinational venture-capital funded companies initially failed to get
capital as startups when they approached traditional lenders.
However, they were able to obtain finance from independently managed venture
capital funds that focus on equity or equity-linked investments in privately held,
high-growth companies. Along with this finance came smart advice, hand-on
management support and other skills that helped the entrepreneurial vision to
be converted to marketable products. Beginning with a consideration of the wide
role of venture capital to encompass not just Information technology, but all
high-growth technology and knowledge-based enterprises, the endeavor of the
Government has been to make recommendations and work on that plan which
will facilitate the growth of a vibrant venture capital industry in India.
While making the recommendations, I felt that the following factors are critical for the
success of the VC industry in India:
The regulatory, tax and legal environment should play an enabling role. Internationally,
Venture funds have evolved in an atmosphere of structural flexibility, fiscal neutrality and
operational adaptability.
Resource raising, investment, management and exit should be as simple and flexible as
needed and driven by global trends
Venture capital should become an institutionalized industry that protects investors and
Investee firms, operating in an environment suitable for raising the large amounts of risk
capital needed and for spurring innovation through startup firms in a wide range of high
growth areas.
In view of increasing global integration and mobility of capital it is important that Indian
Venture capital funds as well as venture finance enterprises are able to have global exposure
and investment opportunities.
RECOMMENDATIONS
this regard; the mutual funds have only one set of regulations and once a mutual fund is
registered with SEBI, the tax exemption by CBDT and inflow of funds from abroad is available
automatically.
Similarly, in the case of FIIs, tax benefits and foreign inflows/outflows are automatically
available once these entities are registered with SEBI. Therefore, SEBI should be the nodal
regulator for VCFs to provide uniform, hassle free, single window regulatory framework. On
the pattern of FIIs, Foreign Venture Capital Investors (FVCIs) also need to be registered with
SEBI.
VCF are a dedicated pool of capital and therefore operates in fiscal neutrality and are treated
as pass through vehicles. In any case, the investors of VCFs are subjected to tax. Similarly,
the investee companies pay taxes on their earnings. There is a well-established successful
precedent in the case of Mutual Funds, which once registered with SEBI are automatically
entitled to tax exemption at pool level. It is an established principle that taxation should be
only at one level and therefore taxation at the level of VCFs as well as
investors amount
to double taxation. Since like mutual funds VCF is also a pool of capital of investors, it needs
to be treated as a tax pass through. Once registered with SEBI, it should be entitled to
automatic tax pass through at the pool level while maintaining taxation at the investor level
without any other requirement under Income Tax Act.
Presently, FIIs registered with SEBI can freely invest and disinvest without taking FIPB/RBI
approvals.
This has brought positive investments of more than US $10 billion. At present, foreign
venture capital investors can make direct investment in venture capital undertakings or
through a domestic venture capital fund by taking FIPB / RBI approvals. This investment
being long term and in the nature of risk finance for start-up enterprises, needs to be
encouraged.
Therefore, at least on par with FIIs, FVCIs should be registered with SEBI and having once
registered, they should have the same facility of hassle free investments and disinvestments
without any requirement for approval from FIPB / RBI. This is in line with the present policy of
automatic approvals followed by the Government. Further, generally foreign investors invest
through the Mauritius-route and do not pay tax in India under a tax treaty. FVCIs therefore
should be provided tax exemption. This provision will put all FVCIs, whether investing
through the Mauritius route or not, on the same footing. This will help the development of a
vibrant India-based venture capital industry with the advantage of best international
practices, thus enabling a jump-starting of the process of innovation.
The hassle free entry of such FVCIs on the pattern of FIIs is even more necessary
because of the following factors:
(i) Venture capital is a high-risk area. In out of 10 projects, 8 either fail or yield negligible
returns. It
is therefore in the interest of the country that FVCIs bear such a risk.
(ii) For venture capital activity, high capitalization of venture capital companies is essential
to withstand the losses in 80% of the projects. In India, we do not have such strong
companies.
(iii) The FVCIs are also more experienced in providing the needed managerial expertise and
other supports.
proceeds of fresh issue. Such purchases will be exempt from the SEBI takeover code.
A
venture-financed undertaking will be allowed to make an issue of capital within 6 months of
buying back its own shares instead of 24 months as at present. Further, negotiated deals
may be permitted in unlisted securities where one of the parties to the transaction is VCF.
(A) Incentives for Shareholders: The shareholders of an Indian company that has
venture capital funding and is desirous of swapping its shares with that of a foreign company
should be permitted to do so. Similarly, if an Indian company having venture funding and is
desirous of issuing an ADR/GDR, venture capital shareholders (holding saleable stock) of the
domestic company and desirous of disinvesting their shares through the ADR/GDR should be
permitted to do so. Internationally, 70% of successful startups are acquired through a stockswap transaction rather than being purchased for cash or going public through an IPO. Such
flexibility should be available for Indian startups as well. Similarly, shareholders can take
advantage of the higher valuations in overseas markets while divesting their holdings.
(B) Global investment opportunity for Domestic Venture Capital Funds (DVCF):
DVCFs should be permitted to invest higher of 25% of the funds corpus or US $10 million or
to the extent of foreign contribution in the funds corpus in unlisted equity or equity-linked
investments of a foreign company. Such investments will fall within the overall ceiling of 70%
of the funds corpus. This will allow DVCFs to invest in synergistic startups offshore and also
provide them with global management exposure.
A strong SRO should be encouraged for evolution of standard practices, code of conduct,
creating awareness by dissemination of information about the industry. Implementation of
these recommendations would lead to creation of an enabling regulatory and institutional
environment to facilitate faster growth of venture capital industry in the country. Apart from
increasing the domestic pool of venture capital, around US$ 50 billion are expected to be
brought in by offshore investors over 3/5 years on conservative estimates. This would in turn
lead to increase in the value of products and services adding upto US$300 billion to GDP by
2010. Venture supported enterprises would convert into quality IPOs providing over all
benefit and protection to the investors. Additionally, judging from the global experience,
this will result into substantial and sustainable employment generation of around 3 million
jobs in skilled sector alone over next five years. Spin off effect of such activity would create
other Support services and further employment. This can put India on a path of rapid
economic growth and a position of strength in global economy.
CONCEPTUAL DISCUSSIONS
The term venture capital refers to capital investment made in a business or industrial
enterprise which carries elements of risk and insecurity and the probability of business hazards.
Capital investment may assume the form of either equity or debt, or both, or a derivative
instrument. But generally the investment is made in equity form as it enables the investor to
convert the investment into cash when required. Venture Capital financing is an alternative
financing source, particularly when an industry is technology based, the entrepreneur
inexperienced and investment carries high risk of loss. In such circumstances banks and
institutions do not advance money to entrepreneurs; the only succour lies with venture
capitalists who provide risk capital.
Venture capitalists take higher risks by investing in an early-stage company with little or no
history, and they expect a higher return for their high-risk equity investment. Internationally, VCs
look at an Internal Rate of Return (IRR) of 40% plus. However, in India the ideal benchmark is in
the region of an Internal Rate of Return (IRR) of 25% for general funds and more than 30% for ITspecific funds. Most firms require large portions of equity in exchange for start-up financing.
Venture Capital financing, then, is not a passive activity like money lending where the lender is
unconcerned with the performance of the investees business. In venture capital financing the
venture capital firm takes keen interest in the business performance of the investee firm. Thus
the venture capitalist acts as a copartner in the investees business, sharing success and failures,
the gains and losses, proportionate to the equity investment. The vital difference between
venture capital financing and bought-out deals is that the latter does not involve investment on
high-risk and high-reward basis, nor does it provide equity finance at different stages of
development. Although the expectation of capital gains on investment in bought-out deals is
similar to that in venture capital investment, there is a material difference in objectives and
intents.
Sl.No.
Venture Capitalist
Conventional Financing
He is a risk avoider as protection of funds
is the prime responsibility of the financier.
eliminate risk but manages it through in- ensuring debt repayment capacity.
Depth monitoring, assisting and directing
his investee companies and through
portfolio diversification. He considers
himself a partner of the entrepreneur.
investments.
It injects long term equity finance which provides a solid capital base for future growth.
The venture capitalist is a business partner, sharing both the risks and rewards. Venture
capitalists are rewarded by business success and the capital gain.
The venture capitalist is able to provide practical advice and assistance to the company
based on past experience with other companies which were in similar situations.
The venture capitalist also has a network of contacts in many areas that can add value to
the company, such as in recruiting key personnel, providing contacts in international
markets, introductions to strategic partners, and if needed co-investments with other
venture capital firms when additional rounds of financing are required.
The venture capitalist may be capable of providing additional rounds of funding should it be
required to finance growth.
The most distinct feature of VC financing is its stage-wise financing system which is
discussed below.
Stages in venture
Name of
capital financing
stage
Stage I
Seed
Description of status of
the project
Conceptualization/Planning
Stage II
Start-up
Operational/Production
Stage III
Expansion
Expansion in Production/Marketing
Stage IV
Mezzanine
Stage V
Buy-out
Stage VI
Turnaround
Re-establishment of Business
Start-up Stage:
An entrepreneur may feel the need for finance when the business activity is just starting.
The start-up stage involves the launching of a new business. Although, the start-up stage is
exposed to high risk, more and more venture capitalists, hoping for capital gains through
equity appreciation, are eager to finance such projects. Venture capital companies, however,
assess the managerial ability and capacity of the entrepreneur before making any financial
commitment at this stage.
Second-Round Financing:
The circumstances under which second-round finance is needed by an enterprise after startup may be negative or positive. The negative reasons could be overruns in the project before
completion, a period of loss after start-up, inability to get further equity finance from other
sources. On a positive note, if a start-up is successful and the business is growing apace,
additional funding is required for expansion.
Later-Stage Financing:
This refers to post-early-stage financing when a project has established itself and business is
spreading its wings and is looking for higher growth. Later-stage funding is also called
mezzanine financing. Venture capitalists around the world, particularly in the UK and USA
prefer investing in later-stage projects in order to reap capital gains.
The various sub-divisions of later-stage financing are:
Replacement capital
Buy-outs
Turnarounds
Buy-outs: Buy-outs are a recent development in the service areas of merchant bankers and
savings institutions, and a new form of investments in the European venture capital industry.
The success of buy-outs has been so remarkable that they have become one of the principle
activities of merchant bankers/venture capitalists.
cases will start from an evaluation of the business plan of the enterprise and assessment of
the management.
The later stages of a project or an enterprise involve mezzanine finance, expansion finance,
turnaround finance or buy-out financing. The investment strategy for later stage financing is
different on account of more safety in investment. There is a shift in the expectation profile
of the venture capitalist, from huge capital gains of the early stage to solid income yield on
secured investment in the later. There must be good generation of funds depicting
successful completion of the project to meet its own working capital requirements. These
aspects are important considerations in later-stage financing.
While doing the project appraisal one important aspect is financial analysis and projections.
The norm for financial analysis differs depending upon the stage of venture financing and the
status of the enterprise. An immediate and pertinent concern for an investor in an enterprise
would be to enquire into the ownership pattern of the company and participation of other
investors, institutional and bank financing, and analysis of future projections. These aspects
are explained below:
Investment by Others: The share of other investors in the total investment would reveal
their involvement in the enterprise. Any further contribution by them would depend upon
their expectations of returns on investment in future for their past investments.
A venture capitalist would find it worthwhile to value current outside investments made in an
enterprise so as to take a decision about his share in the equity capital of the company.
Venture capitalists use different valuation methods, some of which are now discussed:
Conventional Valuation Method: This is based on the expected increase in the initial
investment which could be sold out to a third party or through public offering via the exit
route. This method does not take into account the stream of cash flows beginning from the
date of investment till the date of liquidity of investment.
Present Value Based Method: This method takes into account the stream of earnings (or
losses) generated during the entire period of the investment from the date of initial
investment till date of maturity at a presumed discount rate. This method is popularly known
as First Chicago Method. The problem with this method is that it is based more on a
value judgment by the venture capitalist than empirical consideration.
valuation figure is derived. This method is based on sales income and not on earnings.
Assuming the absence of profit in the early stages of a project, the method is useful for
valuation at the early stages.
Venture capitalists view hundreds of business plans every year. The business plan must
therefore convince the venture capitalist that the company and the management team have
the ability to achieve the goals of the company within the specified time.
The business plan should explain the nature of the companys business, what it wants to
achieve and how it is going to do it. The companys management should prepare the plan
and they should set challenging but achievable goals.
The length of the business plan depends on the particular circumstances but, as a general
rule, it should be no longer than 25-30 pages. It is important to use plain English, especially
if you are explaining technical details. Aim the business plan at non-specialists, emphasising
its financial viability.
Avoid jargon and general position statements. Essential areas to cover in your business
plan Executive Summary This is the most important section and is often best written last. It
summarises your business plan and is placed at the front of the document. It is vital to give
this summary significant thought and time, as it may well determine the amount of
consideration the venture capital investor will give to your detailed proposal.
It should be clearly written and powerfully persuasive, yet balance "sales talk" with realism
in order to be convincing. It should be limited to no more than two pages and include the key
elements of the business plan.
2. The product or service Explain the company's product or service. This is especially
important if the product or service is technically orientated. A non-specialist must be able to
understand the plan.
Describe the stage of development of the product or service (seed, early stage,
expansion). Is there an opportunity to develop a second-generation product in due
course? Is the product or service vulnerable to technological redundancy?
If relevant, explain what legal protection you have on the product, such as patents
attained, pending or required. Assess the impact of legal protection on the
marketability of the product.
3. Market analysis The entrepreneur needs to convince the venture capital firm that there
is a real commercial opportunity for the business and its products and services. Provide the
reader a combination of clear description and analysis, including a realistic "SWOT"
(strengths, weaknesses, opportunities and threats) analysis.
Define your market and explain in what industry sector your company operates. What
is the size of the whole market? What are the prospects for this market? How
developed is the market as a whole, i.e. developing, growing, mature, declining?
How does your company fit within this market? Who are your competitors? For what
proportion of the market do they account? What is their strategic positioning? What
are their strengths and weaknesses? What are the barriers to new entrants?
Describe the distribution channels. Who are your customers? How many are there?
What is their value to the company now? Comment on the price sensitivity of the
market.
Explain the historic problems faced by the business and its products or services in the
market. Have these problems been overcome, and if so, how? Address the current
issues, concerns and risks affecting your business and the industry in which it
operates. What are your projections for the company and the market? Assess future
potential problems and how they will be tackled, minimised or avoided.
4. Marketing Having defined the relevant market and its opportunities, it is necessary to
address how the prospective business will exploit these opportunities.
Outline your sales and distribution strategy. What is your planned sales force? What
are your strategies for different markets? What distribution channels are you planning
to use and how do these compare with your competitors? Identify overseas market
access issues and how these will be resolved.
What is your pricing strategy? How does this compare with your competitors?
Identify the current and potential skills gaps and explain how you aim to fill them.
Venture capital firms will sometimes assist in locating experienced managers where an
important post is unfilled - provided they are convinced about the other aspects of
your plan.
6. Financial projections
The following should be considered in the financial aspect to your business plan:
Realistically assess sales, costs (both fixed and variable), cash flow and working
capital. Produce a profit and loss statement and balance sheet. Ensure these are easy
to update and adjust. Assess your present and prospective future margins in detail,
bearing in mind the potential impact of competition.
Demonstrate the company's growth prospects over, for example, a three to five year
period. What are the costs associated with the business? What are the sale prices or
fee charging structures?
What are your budgets for each area of your company's activities?
Present different scenarios for the financial projections of sales, costs and cash flow for
both the short and long term. Ask "what if?" questions to ensure that key factors and
their impact on the financings required are carefully and realistically assessed. For
example, what if sales decline by 20%, or supplier costs increase by 30%, or both?
How does this impact on the profit and cash flow projections?
If it is envisioned that more than one round of financing will be required (often the
case with technology based businesses in particular), identify the likely timing and any
associated progress "milestones" or goals which need to be achieved.
Keep the plan feasible. Avoid being overly optimistic. Highlight challenges and show
how they will be met.
Relevant historical financial performance should also be presented. The companys historical
achievements can help give meaning, context and credibility to future projections.
7. Amount and use of finance required and exit opportunities State how much
finance is required by your business and from what sources (i.e. management, venture
capital, banks and others) and explain the purpose for which it will be applied.
Consider how the venture capital investors will exit the investment and make a return.
Possible exit strategies for the investors may include floating the company on a stock
exchange or selling the company to a trade buyer.