Establishing A Small Enterprise (Steps in setting up a Business Venture)

STEP1; THE START UP PROCESS - < called as homework >

You are choosing one option out of “SERVICE OR SELF EMPLOYMENT”

Need is to assess SLEPT features of the country before starting a new venture. The main
components of such environment are as under:
(a) Priorities and policies of the Government with respect to Entrepreneurs
LEGAL
Industry policy 2004 ,start of j&k EDI ,various R&D facilities jkdfc for subsidy for
disbursement .
\DIC reg thru single window system
3% interest subsidy on wc advanced.
100% subsidy on lab testing quality equipment
Subsidy fr brand promotion
Tax limits fr new limits upto 5 yrs in j&k
SOCIAL
Majority of pop in j&k are in middle class so r price conscious.
People have diff taste and preferences
ENV
Moderate climatic conditions avg temp is 25 deg cel
Resources easily available
TECH
R&D facilities available
(b) Assistance and facilities offered by various states for starting a business
(c) Incentives for starting industry offered from State or Central Government

Above all “Personal capabilities”

STEP2: PROJECT IDENTIFICATION

• Defined as process of identifying OPPORTUNITIES for new business ventures – based on
different marketing models. – SWOT, GE Model, Porters 5 forces Model etc.
SWOT
Strength-
Low price of prdt
Incentives and subsidies
No wastage
Not a Seasonal prdt
 Nutritious value of prdt
Narrow marketing
Weakness-
New entrance in mkt nt experienced
Not easy to arrange funds
Opportunity-
Huge mkt potential
Cheap labour available
More favourable temp for raw mat storage
Less competitive pressure
THREAT-
Competitor
Backward state category
Political and eco pressure

• PORTER MODEL
BUYER-900000 customers
NEW ENTRANT-Local vendors
SUBSTITUTE-Milk powder and tins
 SUPPLIERS- MILK SOCIETY COOPORATIVES.(KATHUA)
 JYODIYA
 GAJANSUI

• It requires defining the objectives and characteristics of the selected project.

OBJECTIVES OF THE PROJECT:

The financial assistance is extended for processing of milk with the following objectives.

I) To enhance the keeping quality of milk and also to avoid economic losses to farmers.

ii) For manufacturing various milk products to make it available for the domestic market as well as for export
markets
- Done through Environment Scanning also called as Strategic Planning Process

Every project has three dimensions—inputs, outputs and social costs and benefits. .
a) The input characteristics define what the project will consume in terms of raw materials, energy,
manpower, finance and organisational set up. The nature of these inputs is defined by objectives.

b) The output characteristics of a product define what the project will generate in the form of goods
and services, employment, revenue, etc. The quantity and quality of all these outputs should be
clearly specified.
Product Rs per Kg Kg daily sold or produced

Curd 20 15

Cheese 140 10

Ghee 220 10

Milk 6 per lt 6000lts

c) In addition to inputs and outputs, every project has an impact on the society. It is, therefore,
necessary to judge the sacrifice which the society will be required to make and the benefits that will
accrue to the society from a given project.

Zeroing in Process:
It is a process to evaluate ideas to identify the most appropriate idea / opportunity. Following factors
should he considered while selecting the product to be manufactured .
(i) Market potential-900000
(ii) Degree of competition
Competitors of SATYAM:
o Verka
o Surya
o Amul
o Snow caps
o Snow max
o Local vendors

(iii) Availability of raw material and technology

milk
(iv) Government policies and regulations concerning imports and exports, excise and sales tax,
Factories Act, foreign collaborations, etc.
(v) Licensing and registration requirements
Legal documentation
Certificates required:-
Weights and Measurement, Packaging (Municipality), ISI certificate, DIC, Labor department, Certificate of
electric department, Certificate of water department, Sales Tax department, Police, Trade mark registration

STEP3: SELECTION OF THE PRODUCT e.g. PAPER MILL

Idea Generation:
In order to select the most promising product, it is necessary to generate a few ideas about the
possible lines of business.
• Generation of business ideas or opportunities is also known as ‘opportunity scanning and
identification’ (OSI).
Idea generated internally wrt huge mkt pot and easy availability of RM
 INPUT CHRS
Easy availability of RM
Low m/c cost
Subsidy by j7K govt
Ecofrndly process
OUTPUT CHRS
Nutritious value of product
Ecofriendly transportation
SOCIAL COST BENEFITS
Employment
Quality prdt
GDP growth
The business ideas may be generated from internal and external sources.

Internal sources of product ideas:

(a) Analysis of concepts in the light of existing problems and their solutions
(b) Brain storming of employees
(c) Personal interests and hobbies of the individuals
(d) Conceiving improvements in existing products

External Sources of product ideas:

(i) List of items reserved by the Government for exclusive production in the small sector (35 nos)
(ii) Items reserved for exclusive purchase form small scale industries under the Central Store
Purchase Programme of the Government
(iii) Professional journals, trade fairs, Trade Directories etc.
(iv) Government agencies like SIDO (Small Industries Development Organization), National Small
industries Corporation (NSIC), Chamber of Commerce etc.
(v) Market surveys or Interviews etc.
(vi) Technical and management consultants, trade associations.
(vii) Government store purchase programmes

STEP4: ASSESSMENT OF PROJECT FEASIBILITY

1. Technical Feasibility:
It implies the availability or otherwise of plant and machinery and technical know-how required for
production. It consists of the following:
• Identifying the technical specifications of the product to be manufactured.
• Finding out availability of necessary inputs e.g. raw materials, (both quantity and quality),
plant and machinery, technical skills, power and water, transport and communication
facilities, service facilities like machine shop and repair shop, etc.
• If the technical knowhow to be obtained from outside (Foreign Countries) Exports,
arrangement is made should be specified in the project report.
 • Preparing an outline of the manufacturing process including flow process charts,
• Testing of the product through:
(a) Standard specifications (ISI, ISO, BIS etc)
(b) In comparison to product models and prototype
(c) Product testing through third party laboratories and field study.

2. Economic Viability: Involves:

(i) Identifying the market potential in terms of current demand for the product and potential future
demand = Demand & Supply .
Based on competition through both direct (from similar products) and in direct (from
substitutes).
(ii) Estimate potential sales volumes and profit volumes at different price levels;

3. Financial Feasibility:
It comprises the following aspects:
(a) Assessment of total financial requirements: It included
Nonrecurring expenses or fixed investment
Includes land and buildings, plant and machinery, furniture and fixtures, etc. The amount of
fixed capital will depend on the scale of operations, type of technology, tune of investment, etc.
While assessing the fixed capital requirements, the cost of assets, engineering and architectural
fees, installation and electrification charges, pre operation expenses of trial runs, etc. should be
taken into consideration.
Working capital or recurring expenses
Include raw materials, stock of finished goods, wages and salaries, etc. It will depend upon level
of operations.
a)project cost
Land = Rs 900,000
Civil Construction = Rs 400,000
Machinery = Rs 405,000
Misc. Fixed Assets = Rs 15,000
Preoperative Exp. = Rs 75,000
Contingencies on assets = Rs 279,500

(b) Determining sources and costs of funds. Once the total funds required are estimated, appropriate
sources need to be chosen to raise the required investment. Some sources of funds are:
• Equity or Preference shares
• Debentures
• Term loans
• Bank loans
b)Mean of finance
• Total Financing (Long + W.C) = Rs 1769500
 • Total Contribution from Owners = Rs 800000
• Contribution From Each Partner = Rs 2 Lacs

(c) Analysing cash flow: After estimating the amount of funds required and their costs, the
anticipated flows of cash from the project are determined. For this purpose, a cash flow statement is
prepared. (Cash inflows and Cash outflows)
1,404,000

(d) Anticipating Return on Investment:

ROI IS CALCULATED AS=
Average earnings expected from the project over a specific period of time
Investment
1404000=54.2%
2569500
4. Managerial Competence: (Matching the skills sets with Technology and Organizational Basic
Requirements)
A proper organisation structure is decided.
Then the skills and talents required to man the structure are determined.
CEO-Akash
MKTNG MGR-Akash--------
8 sales representatives
FINANCE-Divya
Computer operator-1
HR MNGR-shravani and mithila
4 workers

5. Implementation Scheme: PERT & GANT Chart

A schedule is prepared to ensure timely completion of the project.
Timely completion will help to avoid time and cost overruns.
Delays in project completion may jeopardise the financial viability of the project.
Difference between Gantt Charts & Pert Charts
Charts Project managers commonly use both Gantt and PERT charts to display tasks required for task scheduling and project
completion.

A main difference between Gantt Charts and PERT charts is that Gantt is a bar chart, while PERT is a flow chart. They are
probably the best-known project management charts.

Time and Relationships

Gantt charts emphasize the time it takes to complete tasks, while PERT charts emphasize relationships between tasks.

STEP5: MARKET SURVEY

Product selection is followed by market survey.
To anticipate the possible market for the product to measure returns.
Commonly used survey methods for anticipating the potential market for a product are as:
1. Opinion Polling Method-
In this method, the opinions of the ultimate users of the product i.e. the customers is estimated. It is
of two types:
(a) Census Survey (Complete Enumeration Survey) - In this survey, all the probable customers
of the product are approached and their probable demand for the product is estimated and
then summed. It obtains the first hand and unbiased information. Not possible to approach a
large number of customers scattered all over the market.
(b) Sample Survey - Under this method, sample is taken out of their total population is
approached and data on their probable demand for the product during the forecast period are
collected and summed. Figures are then spread over the total population. No doubt, survey
method is less costly than the complete enumeration method.
(c) Vicarious Method- Under the vicarious method, the consumers of the product are not
approached directly but indirectly through some dealers who have a feel of their customers.
The dealers’ opinions about the customers’ opinions are elicited. Being based an dealers’
 opinions, the method is bound to suffer from the bias on the part of the dealers. Then, the
results derived are likely to be unrealistic
(d) Sales Representatives Experience Method- Under this method, executives from sales
department was questioned to judge the sales of new product. Based on their views, total
demand for the product is estimated.
2. Life Cycle Segmentation Analysis (PLC): It is well established that every product has its own life
span. in practice, a product sells slowly in the beginning. Backed by sales promotion strategies over
period, its sales pick up. in due course of time, the peak sale is reached. After that point, the sales
begin to decline. After some period, the product dies. This is, in fact, a case of natural death. Thus,
every product has its own life span. That is why firms go for new products one after another to keep
the firm alive.
The product life span/cycle has been classified into five stages: (1) Introduction, (2) Growth, (3)
Maturity, (4) Saturation, and (5) Decline. The sales of the product varies from stage to stage and
follows S-shaped curve.

STEP6: INVESTMENT/RISK ANALYSIS

The basic objective of every investment is to maximise the profit. So, capital should be invested in
those opportunities which could give the maximum return on capital employed because SSI have
limited capital.
a) Ratio Analysis
Situation1
A ratio shows the arithmetical relationship between the two relevant figures i.e. 2:4 ratio is 50% or
1:2.
Situation2: Ratio against profits
E.g.: ‘X’ Co. earned a profit of RS 50,000 and ‘Y’ Co. earned a profit of RS 40,000, we conclude
that X Co. is more profitable.
Situation3: Ratio against profits in relation to capital employed.
‘X’ Co. earned profit of RS 50,000 against RS 500,000 employed as capital; and ‘Y’ Co. earned RS
40.000 against RS 2,00,000 as capital employed, we can conclude that ‘Y’ Co. is more profitable
since its net profit to capital employed is 20% as against 10% of X Co.
With the help of ratios, we can reach useful conclusions about the profitability of investments made
in tile enterprise.
‘Profitability ratios’ are calculated by relating profits either to sales or to investments. They are
usually expressed in percentages.
Types of Profitability Ratios:
a) Return on Proprietor’s Fund or Net Worth — This ratio expresses the ratio of net profit after
tax and interest to proprietor’s funds or net worth, As mentioned earlier, the major objective
of any business is to earn the maximum profits and this ratio indicates the extent to which
this objective is achieved. This ratio also suggests that whether the investment would be
worth making in terms of returns as compared to the risk involved in the business which
ultimately helps in taking business decisions for the future.
It is calculated as follows:
(Net Profit after Tax and Interest / Proprietor’s Funds or Net Worth)
Return on net worth=PAT/PROP=20/150=13.3%(FIRST YR)
 b) Return on Capital Employed - This ratio indicates the earning power of the capital employed
in the business and points out to the owner the progress or deterioration in the earning
capacity of the business. It is of great significance to the shareholders or the owners as it
shows the ratio of profit earned on invested capital.
For example, if an enterprise has Rs. 5 lakhs as equity capital and Rs. 3 lakhs as loan, its total
capital employed will be Rs. 8 lakhs (Rs. 5 lakhs + Rs. 3 lakhs). Now, suppose the enterprise
earns a profit of Rs. 80,000 in a year before interest and taxation, then Rate of Return on
Investment i.e. capital employed will be 10%.
It is calculated as follows:
(Net Profit before Interest and Tax / Capital Employed) x 100
Thus, the ratio of capital employed indicates how the management has made use of the funds
supplied by the both-owners and creditors. Obviously higher the ratio, the more efficient use
of the funds the enterprise is making and vice-versa. After comparing the ratios of the similar
business and, industry, the enterprise comes to know the relative operating efficiency of the
business which helps take investment decisions accordingly.
1404000=54.2%
2569500

c) Return on Total Investments - It is the ratio of net profit to total investment. This ratio
indicates the overall profitability of the enterprise.
It is calculated as follows:
(Net Profit after Interest and Tax / Total Assets) x 100
20/250=8%
b) Capital Budgeting
Capital budgeting involves investment decision related to balancing the sources and uses of funds for
acquiring fixed capital assets like machinery and equipment’s.
a) Payback or Payout Period: How long the investor has to wait before the invested capital is
recovered. The cash flow starts coming and accumulating. After a certain period of time the
accumulated cash inflows become equal to the original investment made. At that point of
time the payback occurs and the time it has taken for recovery is called the Payback or
Payout Period.
 It is seen from the Table that cash inflow started from the second year. At the beginning of
the fifth year, the balance of initial investment to cover was Rs. 50,000 but the total inflow
was Rs. 75,000 during the fifth year. Assuming that the inflow of Rs. 75,000 was uniformly
spread over 12 months, the recovery period for Rs. 50,000 will be: (12 x 50,000) / 75000 = 4
years 8 Months.
This method involves CHOSSING THE PROJECT THAT REPAYS INITIAL
INVESTMENT in the SHORTEST PERIOD OF TIME.
b) Average Rate of Return: In simple words, average rate of return (ARR) is just the reverse of
the payback method. While payback method is based on cash flow, average rate of return is
based upon the principles of accounting.
It is calculated as follows:
(Average Net Income after Tax / Average Investment over the life of the project) x 100
Drawback: Both the methods ignore time value of money. The value of RS 1,000 today may be less
after ten years. But, these methods ignore this fact.

STEP6: BREAK -EVEN ANALYSIS

It is stage where income exactly equals expenses.
It is an analysis of production point at which profit starts. This point is where income and expenses
are exactly equal and the point is called ‘break-even point. Thus, break-even analysis is used to find
the break-even point.
Expenses to be incurred refer to cost. Cost is broadly divided into two types viz. (1) Fixed cost, and
(2) Variable cost. What are these costs?
Fixed Cost: Fixed costs are defined as those that do not change with increase or decrease in
production. No matter what the production is the fixed cost remains the same. Examples of fixed
costs could be the monthly rent paid for the factory, interest on long term loan, administrative
expenses, etc., Even if there is zero production, the fixed cost will remain unchanged.
Variable Cost: defined as expenses that change with the volume of production. It varies
proportionately with changes in production. Thus, if production is zero, variable cost would be zero.
The absolute total variable cost increases or decreases along with increase or decrease in production.
But the variable cost per unit is constant at any level of production.
There are some variable costs that do not vary proportionately with the change in production. In fact,
these vary in varying degrees. As a result such costs are called semi-variable. The popular examples
of such costs could be telephone, electricity and gas charges if they are billed on a usage basis. In
such cases that proportion of expenses which continue even if production falls are considered as
fixed and expenses which increase or decrease as production increases or decreases are considered as
variable cost.
After knowing sales and total cost in terms of fixed cost and variable cost, now the breakeven point
can be calculated. According to the simplest method, Profit is the excess of sales over cost, i.e.
Sales-Cost = Profit.
The calculation of break-even point involves four- steps. These are:
• Segregation of fixed and variable costs
• Percentage of variable costs to sales
• Calculate the contribution or margin, i.e., the difference between 100 and the percentage of
variable cost to sales as worked out above.
• Divide the fixed cost by the percentage of contribution or margin as worked out above.
Thus, the calculated figure will be ‘break-even point.
NOTE: Break-even point can be calculated in terms of units also.
Fixed Cost
Selling Price Per Unit — Variable Cost Per Unit

Break – Even Chart

STEP7: SELECTION OF SITE (LOCATION)
Some of factors to be considered while choosing site are given below:
(i) Nearness to the source of raw materials-jewel
(ii) Nearness to the market
(iii) Availability of land at cheap rates
(iv) Availability of skilled labour
(v) Cost of labour (Prevailing wage rates) in the area
(vi) Availability of transport and communication facilities
(vii) Availability of power, water, waste disposal and other essential services
(viii) Incentives and concessions available in different States
(ix) General business climate in the region
(x) Climate and environmental factors
(xi) Availability of factory sheds in industrial estates.

STEP8: LEGAL CONSIDERATIONS

Setting up of a small scale industrial unit involves some legal formalities. These legal formalities are
discussed below:
Registration With Director of Industries: Registration of a small scale industry is not compulsory.
However, registration with the State Directorate of Industries or District Industries Centre helps in
getting assistance from the Government.
The registration of small scale units is done in two stages viz (a) provisional registration, and (b)
permanent registration.
Normally, a provisional registration is made before the unit is set up and a permanent registration is
given when the unit goes into production
Provisional Registration:
Provisional registration is possible even when one is planning to set up the unit. The issue of a
provisional certificate is automatic and given within a week unless the proposed industry is one
which needs raw materials which Government has declared nonavailable to new units because of
their scarcity.
The provisional registration is valid for one year in the first instance.
It may be reviewed for a further period of two years in four 6 monthly extensions on submission of
satisfactory proof that the entrepreneur has taken active steps to establish the new unit and needs
more time. Application for extension should be made within time, otherwise registration
automatically lapses.
The application for registration of a small scale unit should he submitted to the General Manager,
District industries Centre located in the district where the unit is to be set up.

Municipal License: The next step is to obtain the municipal license. For example in Delhi it is
necessary to obtain from the Municipal Corporation of Delhi (M.C.D.).
Registration with Central and State Sales Tax Department would also be necessary for which the
concerned department will have to be contacted.

Permanent Registration:
Provisional registration is meant to enable the entrepreneur to take the necessary steps to bring the
unit into existence.
When the entrepreneur has taken all steps to establish the unit i.e. the factory building is ready,
power connection is obtained, the machinery and pollution control equipments have been installed,
and license from municipal corporations and other local authority is obtained, one can apply for
permanent registration.
Cancellation of Registration: Registration of a small scale unit can be cancelled (after a show cause
notice) on the following grounds:
(a) The unit remains closed continuously for more than one year
(b) The unit fails/refuses/avoids to give full and true information required by the registering
authority from time to time;
(c) The unit has misutilized the raw materials allocated to it
Registration With DGS&D/NSIC: A small scale unit can get itself registered with Director General
of Supplies and Disposal (DGS&D) or National Small Industries Corporation (NSIC) if it wants to
avail of the benefit of purchases made for Government offices.
Legal documentation
Certificates required:-
Weights and Measurement, Packaging (Municipality), ISI certificate, DIC, Labor department, Certificate of
electric department, Certificate of water department, Sales Tax department, Police, Trade mark registration

STEP9: BASIC STARTUP PROBLEMS

(i) Selection of the Industry: Once a person has decided to start his own business, the first major
problem is to select the line of business. This problem can be solved by analysing:
• Person’s aptitudes,
• Propensity to take risk,
• Skills and experience,
 • Family background,
• Financial position,
• Government policy and incentives,
• Infrastructural facilities,
• Advice of consultants, etc.
(ii) Product Selection: Another start up problem is the choice of the particular product to be
manufactured. This can be decided through a comparative analysis of a few product items with
special reference to:
• Size and structure of the market
• Future demand pattern
• Competitve position
• Life cycle of the product
• Availability of raw materials
• Technical aspects of production
• Availability of required labour
• Government policy and controls
(iii) Choice of Factory Site:
(iv) Form of Organisation:
(v) Problem of Construction: Construction of factory building involves several problems e.g.
• Acquisition of land in the chosen locality
• Architectural design of the building
• Appointment of engineers and contractors
• Civil work like obtaining power and water connection
• Supervision of construction work.
• Acquisition and installation of machinery and equipment.
(vi) Supply of Raw Materials:
• Agreement need to be made with the concerned suppliers
(vii) Financing the Unit:
• Estimate both fixed capital and working capital.
• Identify the sources.
• Liaison with them.
(viii) Recruitment and Training of Staff:
• Identify and design organizational structure.
• Identify the skills sets needed at each level
• Find the quantity of staff.
• Recruit and train them.
(ix) Marketing:
Hire consultancies
 Conduct proper research.
Identify STP and other related marketing strategies.
Develop a new product.
(x) Gestation Period: Great care and efforts are required to successfully overcome the problems and
risks during the gestation period (time period before company start earning profits).
Effective control over expenses, time and cost overruns, sales pattern, etc. is necessary to ensure that
the unit survives the initial expenses and losses.

4. Marketing Plan
• The methods and data used for making estimates of domestic supply and selection of the
market areas should be presented.
• Impact of Price on Demand must be presented.
• It should contain an analysis of past trends in prices.

5. Operating Requirements and Costs

• Incurred after the commencement of commercial production.
• Operating costs relate to the cost of raw materials and intermediates, fuel, utilities,
labour, repair and maintenance, setting expenses and other expenses.

6. Financial Analysis
• A Performa Balance Sheet for the project data should be presented
• Methods of accounting.
• The feasibility report should take into account income-tax rebates for priority industries,
incentives for backward areas, accelerated depreciation, etc.
7. Economic Analysis
• Impact of enterprise on employment generation for nation.
• The enterprise should try to assess the impact of its operations on foreign trade.
• Indirect costs and benefits should also be included in the report. If they cannot be quantified
they should be analysed and their importance emphasised.

ONCE YOU ARE DONE WITH ABOVE STEPS, THEN YOU NEED TO UNDERTAKE
THE ACTIVITIES FOR IMPLMENTATION
The main steps involved in the establishment of a small business venture are as follows:
• Selection of the product
• Location of the enterprise
• Choice of form of ownership
• Registration with the authorities
• Arranging term finance
• Licenses and clearances
• Acquiring land and building
• Arranging Working capital
• Recruitment of staff
• Installation of machinery
• Procuring raw materials
• Power connection and water supply
• Starting production
• Marketing the product
• Preparation of the project report