Table of Contents
Q.1. Identify the different types of Entrepreneurs. Describe the steps involved in developing Entrepreneurial competencies. (20)
Entrepreneurs are classified into different types based on different classifications as mentioned below:
Based on the Type of Business
1. Trading Entrepreneur
As the name itself suggests, the trading entrepreneur undertake the trading activities. They procure the finished products from the manufacturers and sell these to the customers directly or through a retailer. These serve as the middlemen as wholesalers, dealers, and retailers between the manufacturers and customers.
2. Manufacturing Entrepreneur
The manufacturing entrepreneurs manufacture products. They identify the needs of the customers and, then, explore the resources and technology to be used to manufacture the products to satisfy the customers’ needs. In other words, the manufacturing entrepreneurs convert raw materials into finished products.
3. Agricultural Entrepreneur
The entrepreneurs who undertake agricultural pursuits are called agricultural entrepreneurs. They cover a wide spectrum of agricultural activities like cultivation, marketing of agricultural produce, irrigation, mechanization, and technology.
Based on the Use of Technology
1. Technical Entrepreneur
The entrepreneurs who establish and run science and technology-based industries are called ‘technical entrepreneurs.’ Speaking alternatively, these are the entrepreneurs who make use of science and technology in their enterprises. Expectedly, they use new and innovative methods of production in their enterprises.
2. Non-Technical Entrepreneur
Based on the use of technology, the entrepreneurs who are not technical entrepreneurs are non-technical entrepreneurs. The forte of their enterprises is not science and technology. They are concerned with the use of alternative and imitative methods of marketing and distribution strategies to make their business survive and thrive in the competitive market.
Based on Ownership
1. Private Entrepreneur
A private entrepreneur is one who as an individual sets up a business enterprise. He / she it’s the sole owner of the enterprise and bears the entire risk involved in it.
2. State Entrepreneur
When the trading or industrial venture is undertaken by the State or the Government, it is called ‘state entrepreneur.’
3. Joint Entrepreneurs
When a private entrepreneur and the Government jointly run a business enterprise, it is called ‘joint entrepreneurs.’
Based on Gender
1. Men Entrepreneurs
When business enterprises are owned, managed, and controlled by men, these are called ‘men entrepreneurs.’
2. Women Entrepreneurs
Women entrepreneurs are defined as the enterprises owned and controlled by a woman or women having a minimum financial interest of 51 per cent of the capital and giving at least 51 per cent of employment generated in the enterprises to women.
Based on the Size of Enterprise
1. Small-Scale Entrepreneur
An entrepreneur who has made investment in plant and machinery up to Rs 1.00 crore is called ‘small-scale entrepreneur.’
2. Medium-Scale Entrepreneur
The entrepreneur who has made investment in plant and machinery above Rs 1.00 crore but below Rs 5.00 crore is called ‘medium-scale entrepreneur.’
3. Large-Scale entrepreneur
The entrepreneur who has made investment in plant and machinery more than Rs 5.00 crore is called ‘large-scale entrepreneur.’
Based on Clarence Danhof Classification
Clarence Danhof (1949), on the basis of his study of the American Agriculture, classified entrepreneurs in the manner that at the initial stage of economic development, entrepreneurs have less initiative and drive and as economic development proceeds, they become more innovating and enthusiastic. Based on this, he classified entrepreneurs into four types:
1. Innovating Entrepreneurs
Innovating entrepreneurs are one who introduce new goods, inaugurate new method of production, discover new market and reorganise the enterprise. It is important to note that such entrepreneurs can work only when a certain level of development is already achieved, and people look forward to change and improvement.
2. Imitative Entrepreneurs
These are characterised by readiness to adopt successful innovations inaugurated by innovating entrepreneurs. Imitative entrepreneurs do not innovate the changes themselves, they only imitate techniques and technology innovated by others. Such types of entrepreneurs are particularly suitable for the underdeveloped regions for bringing a mushroom drive of imitation of new combinations of factors of production already available in developed regions.
3. Fabian Entrepreneurs
Fabian entrepreneurs are characterised by very great caution and scepticism in experimenting any change in their enterprises. They imitate only when it becomes perfectly clear that failure to do so would result in a loss of the relative position in the enterprise.
4. Drone Entrepreneurs
These are characterised by a refusal to adopt opportunities to make changes in production formulae even at the cost of severely reduced returns relative to other like producers. Such entrepreneurs may even suffer from losses but they are not ready to make changes in their existing production methods.
Following are some more types of entrepreneurs listed by some other behavioural scientists:
1. Solo Operators
These are the entrepreneurs who essentially work alone and, if needed at all, employ a few employees. In the beginning, most of the entrepreneurs start their enterprises like them.
2. Active Partners
Active partners are those entrepreneurs who start/ carry on an enterprise as a joint venture. It is important that all of them actively participate in the operations of the business. Entrepreneurs who only contribute funds to the enterprise but do not actively participate in business activity are called simply ‘partners’.
3. Inventors
Such entrepreneurs with their competence and inventiveness invent new products. Their basic interest lies in research and innovative activities.
4. Challengers
These are the entrepreneurs who plunge into industry because of the challenges it presents. When one challenge seems to be met, they begin to look for new challenges.
5. Buyers
These are those entrepreneurs who do not like to bear much risk. Hence, in order to reduce risk involved in setting up a new enterprise, they like to buy the ongoing one.
6. Life-Timers
These entrepreneurs take business as an integral part to their life. Usually, the family enterprise and businesses which mainly depend on exercise of personal skill fall in this type/category of entrepreneurs.
Entrepreneurial competencies are developed stepwise:
Step 1: Understanding and Recognising
The first step towards acquiring a new behaviour is to understand what a particular competence means. With such an understanding one would then be able to recognise the competence when someone exhibits the same.
Step 2: Self Assessment
Having understood a given competence and having been able to recognise the same when someone else exhibits a given competence, the next step is to find out where one stands with respect to a given competency. In other words, does one possess a given competence and if so how frequently one exhibit the same in one’s day-to-day activities. In order to help one identify the level of one’s competencies, enclosed herewith is a questionnaire, titled ‘Self Rating Questionnaire’ which one could answer and later on use the coding sheet attached to the questionnaire to understand one’s level of competencies.
Step 3: Practice
Having gone through the above steps, one would be in a position to decide the competencies that are not a part of one’s personality, but one would like to acquire those competencies and strengthen others. By practice, we mean exhibiting a given competence in a variety of situations, both simulated and real. Help from a trained facilitator is called for to develop the competencies through practice in simulated situations.
Step 4: Application in Real Life Situation
Any new behaviour that one acquires would become a part of one’s personality only when one applies the same on a continuous basis in various activities. In other words, there is a need to make efforts towards exhibiting all the competencies deliberately and consciously all the time even in the simplest activities that one performs.
Step 5: Feedback
One’s desire to acquire new behaviour, internalise and practice the same would be strong only when one understands the benefit of operating as per the newly acquired behaviour versus usual/old behavioural pattern. Hence, having understood a competence and having practised the same in a given situation one needs to introspect to find out how one’s new behaviour or act of exhibiting a competence has been rewarding. Greater the benefit, more will be one’s determination to continue exhibiting the competence in a variety of situations.
Q.2. Explain the factors which needs to be analysed while assessing the market for a Small Scale Enterprise (SSE) start-up. (20)
Factors –
There are eight factors or variables which must be understand while accessing the market :
1. Product
The class of product has to be clearly defined. For example, a tour operator must decide whether its product is adventure tour, cultural tour, health tour or a combination thereof. Then there are various sizes and other features in each class. Opportunities available to the manufacturer differ according to the exact nature and specifications of the product.
2. Total Volume
We have the question of how total volume is measured. It can be measured in terms of physical volume (i.e. in terms of units sold), in monetary terms, or both. It can also be measured in terms of per cent of total market, i.e., in relative terms. As an illustration, a demand analysis for tours may reveal that in one particular region, the number of tours sold is 100, valued at Rs. 50,000. In another region, the number may be 50, valued at Rs. 25,000. It is evident that depending upon our requirement, the data on total volume must be in appropriate units.
3. Bought
The third element ‘bought’ needs also to be understood. Do we have to assess the volume ordered or booked, despatched, paid for, received, or consumed? The figures may vary according to the basis used. In the case of food grains we normally refer to quantity consumed, and in the case of construction industry we refers to orders booked. The relevance of the correct understanding of the term ‘bought’ becomes clear when we look at the example of the scooter industry in India.
4. Customer group
Market demand for a product should be measured for the customer group that is of interest to the firm. Examples are an airline which estimates the volume to be bought by the high income group people, and a mass tour operator who estimates the demand for its packages from the middle income group.
5. Geographical area
The geographical boundaries within which market demand is to be measured must be clear. This is particularly true for a small enterprise since its operations are usually confined to small areas. Service establishments also have to define their geographical boundaries while estimating market demand. For example a Yoga centre enjoys considerable demand in a metropolitan city but the concept is yet to establish its utility and acceptance in smaller towns and rural areas as a paid service.
6. Time period
Demand estimation must always be for specific time-period – for the next season, for the coming year, for the Plan period, and so on. When the time frame is an year or so, we call it short range forecasting, and when it is in terms of several years ahead, long range forecasting. As we increase the time frame, the forecast becomes more tenuous as the environmental factors may change beyond our present imagination. Thus, for products like computers and fashion goods it is almost futile to make any long range forecasts.
7. Marketing environment
Market demand is influenced by many external environmental factors. These include general economic conditions, technological breakthroughs and developments, government policies, political changes, changes in consumer behaviour and competitive situation, and even natural phenomena like rainfall and weather conditions.
8. Marketing programme
Finally, there are controllable factors which the firms use to influence the demand for their products. These may be termed as marketing efforts or marketing programmes of the sellers. These include pricing strategies, advertising, sales promotion, and personal selling. The marketing efforts proposed or assumed should be specified in order to determine market demand.
Q.3. List the contents of a Standard Business Plan. (20)
Format
1. Summary
Conceptual overview
• detailed features
• competitive advantages
• track record of key people
What is being proposed
• Product/service
• Location
• Ownership
• Project cost
What is wanted
• Funding pattern including term loan and working capital loan requirement • Assistance regarding technical collaboration
2. Introduction
• Current industrial status in the country
• Current status of the industry in the international scene (if the proposed project is to operate at international level in terms of marketing)
• Rationale for project selection
3. About the Promoter
• Educational background, work experience, project related experience.
• Similar information for any other key persons associated in promoting the project.
• If the State is one of the promoters, and if the project has international ramification with respect to marketing, technology, etc. the information regarding similar projects promoted by the State is to be provided.
4. About the project
• Description of product and its use
• Installed capacity
• Operating capacity
• A write up on what will distinguish the proposed project from others already operating in the market place. • Clearances from government and other regulatory agencies for setting up of the project – what are they and what is the status with regard to obtaining such clearances.
5. About the Location
• Exact location of the project
• Various alternatives available which have been examined
• Criteria for selecting the location
• Locational advantages including infrastructural facilities available at the location.
6. Land and Building
• Area of land
• Constructed Area
• Type of Construction
• Cost
7. Plant and Machinery
• Capacity
• Equipment balancing
• Suppliers
• Cost
• Various alternatives available
• Criteria for choosing the proposed equipments amongst several alternatives
8. Miscellaneous Assets
• Nature of miscellaneous assets that form a part of the project. For example, air-conditioning systems, office automation equipments, etc.
• Itemized description of such assets along with cost and source of procuring.
9. Production Process
• Description of the production process
• Process flow chart
• Details of technology
• What are the arrangements for technical know-how?
• What are the technology alternatives available?
• How these alternatives have been evaluated?
• Various process parameters.
10. Production Programme
• Time required to make one unit of the product.
• How much/how many in one week, one month, first year, 2nd year and so on up to 10 years.
• Input-output ratio.
• Any national or international standards set for product quality? If so, how they are to be maintained with respect to production programme and production process.
11. Raw Material
• List of raw materials needed.
• Quantity required for one unit of output.
• Quantity needed in the first year, second year and so on upto 10 years.
• Quality specifications for the raw materials.
• Sources of procurement; if the raw materials are to be procured from the international market, are there any restrictions on supply.
• Cost of raw materials for the first year, 2nd year and so on upto 10 years.
• Supply position, i.e., position regarding availability of the raw materials.
• Any tie-up arrangement for procurement of raw materials.
12. Utilities
• Requirements of power, water, steam, compressed air and other consumables
• Quantity and value for the year, 2nd year and so on up to 10 years.
• Source of said materials.
• Position regarding availability of said materials.
• Any specific arrangements for electric power.
13. Personnel
• Requirement of skilled, semi-skilled personnel for production operations for the first year, second year and so on for upto first 10 years of project life.
• Requirement of administrative/managerial staff and marketing personnel.
• Cost of manpower during first year, second year and so on for 10 years.
• Position regarding availability of skilled manpower.
• Any scheme for training skilled manpower in case they are not readily available. Describe.
14. Market
A. Current market status
• What are the major end uses of the product or service?
• Are there any substitute products or services available in the market?
• Is the proposed product/service a substitute for on already existing product/service in the market?
• Who are the major buyers?
• Who influences purchase decision?
• Status regarding competitors at the regional/national level and at the international level if the project is expected to market the products/services in the international scene.
• What are the major strengths and weaknesses of the competitors?
• What are the trade practices being adopted by the competitors or those producing the product currently in the market place?
• What are the trade channels normally adopted by the competitors?
B. Proposed approach towards marketing
• The geographical area that would constitute the limit for marketing the product – regional, national, international (names)
• Distribution channel you wish to adopt.
• Trade practice.
• The strategy that you have in mind for entering the market and promoting sales
15. Working Capital Requirements
• What would be the stock levels of raw material, work-in-progress and finished goods? Why such stock levels have to be maintained?
• What is the amount involved in the stock of raw materials, work-in-progress and finished goods?
• What is the nature and extent of credit facilities available from the suppliers of raw materials? The same have to be accounted for while arriving at the working capital requirement.
16. Requirement of Funds
• Cost of the project giving a break-up of the cost of land, building, machineries, miscellaneous assets, technical know-how fees if any, preliminary/pre-operative expenses, contingencies and margin money for working capital.
• The proposed funding pattern to meet the cost of setting up the project- requirements of funds from national/international financial institutions towards capital expenditure and contribution from the promoters of the projects.
Also include any other sources of funds including subsidies available from the State.
17. Cost of Production and Profitability Projections for Ten Years
18. Cash Flow Statements
19. Break-even Analysis
20. Implementation Schedule
Q.4. Elaborate factors and procedures for deciding Business Locations. Explain locational problems for Single Facility and Multiple Facility unit. (20)
Any new organisation has to take the major strategic decision on locating its facilities. The general objective in selecting a site is to minimise total cost of production and distribution. The selected site should also maximise revenue and provide an opportunity for further growth and expansion. Regardless of the type of business, there are some general factors that will influence locating an operation. The most important factors may be:
1. Personal factors
2. Economics (Purchasing power of community, number of people employed in the area, per capita retail sales, etc.)
3. Competition
4. Geographic considerations, and
5. Local laws and regulations.
Small business can avail benefits provided by the government through its policies on licensing, locating public sectors, subsidies, financial concessions, taxes, duties and establishing industrial estates.
General procedure for making location decisions
Selecting a facility location usually involves a sequence of decisions. The general procedure proposed by William J. Stevenson for making location decisions consists of the following steps:
1. Determine the criteria that will be used to evaluate location alternatives, such as, increased revenues or community service.
2. Identify factors that are important, such as, location of markets or customers, materials and destination.
3. Develop location alternatives.
i) Identify the general region for a location.
ii) Identify a small number of community site alternatives.
4. Evaluate the alternatives and make a selection.
Factors Affecting Location Decision
• Locations of raw materials or supplies
• Location of Markets Labour
• Facilities
• Services
• Altitudes
• Taxes
• Environmental Regulations
• Utilities
• Development support
• Land
• Transportation
• Environmental/ legal
To make a thorough evaluation of pertinent factors involved in plant location it would be convenient to classify locational problems as follows:
A. Single facility location
Many locational problems like location of a manufacturing unit, a warehouse etc. which may fall under single facility location require the selection of a site. An important assumption made here is that revenue, costs and other facility characteristics of the firm do not depend on the location of other facilities of the firm or competitors. Single facility location situation can be evaluated by qualitative factor rating and locational break-even analysis.
Procedure for qualitative factor rating
1. Identify and evolve a list of relevant factors
2. Allot a weight to each factor to indicate its relative importance (weights may total 1.00) among the factors considered to take a decision
3. Establish a common numerical preference rating scale (0-100 points) to all factors
4. Score each potential location based on comparison with other potential locations
5. Multiply the preference rating by the weights and obtain resultant weighted score
6. Sum up the weighted scores for each location, and
7. The location with the maximum points is desirable.
B. The multi facility location
In the case of single facility location problem we have been concerned to select the minimum cost location, whereas in a multi facility location problem we must select the location which when added to existing locations, minimises the cost of the entire system.
Location of multiple factories and warehouses
In this type of location problem, total distribution costs and perhaps total production costs will be affected by the location decision. This problem is usually formulated by considering a production distribution network of plants and warehouses with criterion of minimising a transportation cost, subject to satisfying overall supply and demand requirements. The transportation linear programming (LP) method may be useful.
Q.5. Write short notes in about 150 words each: (5×4=20)
a. Difference between skill and competence
Competence
A competency is a broad collection of related skills, abilities, and knowledge that enable a person to perform effectively in a job or situation.
In the business world, competencies are used to define the abilities, skills, and knowledge that are needed by individuals to successfully perform job functions.
A competence essentially consists of three elements:
• Knowledge: information and experience
• Skills: highly developed physical and/or mental abilities and coordination required to perform a specific task
• Attitudes/personal traits: a person’s values as they define them as an individual and how they relate to and interact with their surroundings.
Competence = Knowledge + Skills + Abilities
Examples of competencies
• Staff development
• Managing risk
• Communication
• Customer service
• Problem solving
Skills
Skills are specific learned activities or tasks requiring proficiency or dexterity that are acquired or developed through training or experience. They can range widely in terms of complexity.
In the business world, a skill is a physical task learned in order to be able to carry out one or more job functions.
Examples of Skills
• Using a computer
• Typing a letter
• Installing an electrical outlet
Difference–
A major difference between skills and competencies is one of scope. Competencies are much broader than skills. Skills are specific to a task, while competencies incorporate a set of skills with abilities and knowledge. Skills are just one of three facets that make up a competency; the other two are knowledge and abilities.
Additionally, learning a new skill is typically quicker than learning a competency. You can learn a skill in a relatively short training class, however, a person develops competencies over time through practice and experience.
In business, competencies are the effective application of a combination of skills. Organizations create competencies by translating specific skills into on-the-job behaviours that demonstrate the ability to perform the job requirements successfully. Competencies are also used to define the requirements for success on the job in broader terms than skills do.
b. Qualities of a Successful Entrepreneur
Successful business people have many traits in common with one another. They are confident and optimistic. They are disciplined self starters. Here are ten traits of the successful entrepreneur.
1. Disciplined
These individuals are focused on making their businesses work, and eliminate any hindrances or distractions to their goals. They have overarching strategies and outline the tactics to accomplish them. Successful entrepreneurs are disciplined enough to take steps every day toward the achievement of their objectives.
2. Confidence
The entrepreneur does not ask questions about whether they can succeed or whether they are worthy of success. They are confident with the knowledge that they will make their businesses succeed. They exude that confidence in everything they do.
3. Open Minded
Entrepreneurs realize that every event and situation is a business opportunity. Ideas are constantly being generated about workflows and efficiency, people skills and potential new businesses. They have the ability to look at everything around them and focus it toward their goals.
4. Self Starter
Entrepreneurs know that if something needs to be done, they should start it themselves. They set the parameters and make sure that projects follow that path. They are proactive, not waiting for someone to give them permission.
5. Competitive
Many companies are formed because an entrepreneur knows that they can do a job better than another. They need to win at the sports they play and need to win at the businesses that they create. An entrepreneur will highlight their own company’s track record of success.
6. Creativity
One facet of creativity is being able to make connections between seemingly unrelated events or situations. Entrepreneurs often come up with solutions which are the synthesis of other items. They will repurpose products to market them to new industries.
7. Determination
Entrepreneurs are not thwarted by their defeats. They look at defeat as an opportunity for success. They are determined to make all of their endeavors succeed, so will try and try again until it does. Successful entrepreneurs do not believe that something cannot be done.
8. Strong people skills
The entrepreneur has strong communication skills to sell the product and motivate employees. Most successful entrepreneurs know how to motivate their employees so the business grows overall. They are very good at highlighting the benefits of any situation and coaching others to their success.
9. Strong work ethic
The successful entrepreneur will often be the first person to arrive at the office and the last one to leave. They will come in on their days off to make sure that an outcome meets their expectations. Their mind is constantly on their work, whether they are in or out of the workplace.
10. Passion
Passion is the most important trait of the successful entrepreneur. They genuinely love their work. They are willing to put in those extra hours to make the business succeed because there is a joy their business gives which goes beyond the money. The successful entrepreneur will always be reading and researching ways to make the business better.
c. Assets Management
Asset management is the process of developing, operating, maintaining, and selling assets in a cost-effective manner. Most commonly used in finance, the term is used in reference to individuals or firms that manage assets on behalf of individuals or other entities.
Every company needs to keep track of its assets. That way, the relevant stakeholders will know just what assets are available and what can be used to provide optimal returns. The assets owned by any business fall into two main categories: fixed and current assets. Fixed or non-current assets refer to assets acquired for long-term use, while current assets are those that can be converted into cash within a short amount of time.
The Importance of Asset Management
There are several reasons why businesses should be concerned about asset management, including:
1. Enables a firm to keep tabs on all of its assets
2. Helps guarantee the accuracy of amortization rates
3. Helps identify and manage risks
4. Removes ghost assets in the company’s inventory
Benefits of Asset Management
1. Improving Acquisition and Use
2. Improving Compliance
Individual Asset Management
Asset management for individuals is roughly synonymous with wealth management. It refers to managing an individual’s investments or estate.
d. Small Industries Development Bank of India (SIDBI)
Small Industries Development Bank of India (SIDBI) under its Charter, has been, inter alia, assigned the task of being the main purveyor of term finance to the small scale sector in the country. Small scale industrial units, small road transport operators and artisans, village and cottage industrial units in the tiny sector are extended financial assistance mainly by way of refinance through State Financial Corporations (SFCs), State Industrial Development Corporations/State Industrial Investment Corporations (SIDCs/SIICs) and banks which have wide network of branches. This way, it has been possible to reach even the tiniest industrial unit in the farthest corner of the country.
Eligible Institutions
The institutions at present eligible for availing of refinance facilities from SIDBI comprise 18 State Financial Corporations (SFCs), 26 State Industrial Development Corporations/State Industrial Investment Corporations, 76 Commercial Banks, 196 Regional Rural Banks (RRBs), 11 State Co-operative Banks and 542 Central and Urban Co-operative Banks.
Eligibility
Term loans extended by eligible institutions to small scale industrial projects irrespective of the location and form of organisation of the unit are eligible for refinance assistance. Similarly, assistance is also made available for modernisation and rehabilitations of small industries.
SIDBI provides refinance at concessional rates of interest in respect of loans to certain special category of borrowers.
Procedure for availing loan/refinance
Intending borrowers need approach only to eligible institutions for assistance. The refinance operations are fully decentralised and all offices of SIDBI process refinance proposals emanating from regions/states under their respective jurisdiction. The eligible institutions are required to first sanction assistance to industrial concerns and, after complying with certain procedures laid down, seek refinance sanctions and disbursals from SIDBI.
Some important schemes of the SIDBI are given below :
Composite Loan Scheme
The scheme covers composite loans upto Rs. 50,000 sanctioned to artisans, village and cottage industries and small scale industries in the tiny sector by eligible institutions. Assistance is provided for equipment finance or working capital or both. As the loans can be covered under the Credit Guarantee Scheme of DICGC, eligible institutions have been advised not to insist on collateral security.
Q.6. Discuss the need and major considerations for formulating ‘Implementation Schedule’ for a new hospitality unit. (20)
It is essential to draw an implementation Schedule or a time-table for an enterprise.
The task of preparing such a schedule forces to:
• enumerate the various steps which we will have to take prior to commencement of commercial production,
• appreciate the inter-dependence among these steps and hence the chain-effect of delay in carrying out one step on overall implementation schedule, and
• work out a calendar for bringing in own funds for implementation.
Implementation schedule is an aid to ensure timely implementation of your plan.
Timely implementation is important because if there is a delay, it causes, among other things, a project cost overrun. A project meant to be implemented in 12 months at a cost of Rs.15 lacs may entail an expenditure of Rs.20 lacs, if there is a delay in implementation and this may jeoparadise the financial viability of the project itself.
Hence, the need to draw up a schedule and more importantly, to adhere to it.
We will recall that project cost computation includes interest during construction period. The amount of such interest depends on the schedule for withdrawal of term-loan funds which in turn is tied up with the implementation progress. Thus, implementation schedule is required to arrive at an estimate of interest during construction period.
Major Considerations for Formulating Implementation Schedule
While working out implementation schedule, bear in mind the following:
• We need to carry out tasks involving capital expenditure only after the term-loan is sanctioned.
• Some tasks are sequential. For example, machinery can be installed only after it is received. Some tasks are not sequential and can be carried out simultaneously, e.g., electrification of factory building and recruitment of manpower.
• Remember, implementation progress is not entirely in our hands. An unhelpful official can hold up the term-loan sanction. A transport strike may delay delivery of machinery by a few weeks.
A state financial institution may claim that a loan is sanctioned in 1½ months, but enquiries with loanees may reveal that in most cases, it takes 3 months. If this is so, provide for 3 months. It is, thus, important to work out a realistic schedule and to build a sufficient margin of safety.
Q.7. What are the critical areas of concern during the Growth and Expansion stage of SSEs ? Suggest possible strategies to address them. (20)
Challenges in Growth Stage
1. Dealing with Increasing Revenue
2. Dealing with Increasing Customers
3. Accounting Management
4. Effective Management
5. Market Competition
Challenges in Expansion Stage
1. Increasing Market Competition
2. Accounting Management
3. Moving into New Markets
4. Adding New Products/Services
5. Expanding Existing Business
Strategies in Growth and Expansion stage can be clubbed as Growth Strategies –
These strategies are formulated and implemented by firms which want to grow. Such firms have to maintain sustainable competitive advantage by delivering superior value to the customer.
Although it is difficult for any firm to be an ideal growth business, it is worth attempting to reach that ideal.
Some of the strategies are –
Most small companies have plans to grow their business and increase sales and profits. However, there are certain methods companies must use for implementing a growth strategy. The method a company uses to expand its business is largely contingent upon its financial situation, the competition and even government regulation. Some common growth strategies in business include market penetration, market expansion, product expansion, diversification and acquisition.
1. Market Penetration Strategy
One growth strategy in business is market penetration. A small company uses a market penetration strategy when it decides to market existing products within the same market it has been using. The only way to grow using existing products and markets is to increase market share, according to small business experts. Market share is the percent of unit and dollar sales a company holds within a certain market vs. all other competitors.
One way to increase market share is by lowering prices. For example, in markets where there is little differentiation among products, a lower price may help a company increase its share of the market.
2. Market Expansion or Development
A market expansion growth strategy, often called market development, entails selling current products in a new market. There several reasons why a company may consider a market expansion strategy. First, the competition may be such that there is no room for growth within the current market. If a business does not find new markets for its products, it cannot increase sales or profits.
A small company may also use a market expansion strategy if it finds new uses for its product. For example, a small soap distributor that sells to retail stores may discover that factory workers also use its product.
3. Product Expansion Strategy
A small company may also expand its product line or add new features to increase its sales and profits. When small companies employ a product expansion strategy, also known as product development, they continue selling within the existing market. A product expansion growth strategy often works well when technology starts to change. A small company may also be forced to add new products as older ones become outmoded.
4. Growth Through Diversification
Growth strategies in business also include diversification, where a small company will sell new products to new markets. This type of strategy can be very risky. A small company will need to plan carefully when using a diversification growth strategy. Marketing research is essential because a company will need to determine if consumers in the new market will potentially like the new products.
5. Acquisition of Other Companies
Growth strategies in business can also includes an acquisition. In acquisition, a company purchases another company to expand its operations. A small company may use this type of strategy to expand its product line and enter new markets. An acquisition growth strategy can be risky, but not as risky as a diversification strategy.
One reason is that the products and market are already established. A company must know exactly what it wants to achieve when using an acquisition strategy, mainly because of the significant investment required to implement it.
Q.8. Elaborate how Cash Flow Schedule and Production Schedule can be used as an Evaluation and control tool in SSEs. (20)
Cash Flow Schedule
A cash flow schedule can be used as a measure of control as well as evaluation. A cash flow schedule is the projected estimate of cash receipts and expenditures which enables the payment of bills on time.
The projected cash flow schedule, in order to function as a tool of evaluation, should be compared with what you actually experience, month by month, in term of cash flow. Any shortfall in cash receipts, additions in outflow on unutilized cash balance in excess of your needs must be investigated.
How much cash do you actually need at hand? Ideally, while you would like to have enough to enable you to pay bills in time, as you would not want to have so much cash around that it lies idle and does not earn a profit for you. Two ratios have been used to give an idea of the type of liquidity of business should maintain:
a. The current ratio is a ratio of all current assets (including inventory) to all current liabilities. Conservatively, this ration should be 2:1. You can, on the basis of what you actually experience, annually, work out your current ratio to find out if you have liquidity in excess of your needs or vice versa.
b. Acid test ratio is a ratio of cash plus receivable to current liabilities. The ratio should at least be 1:1 in order to meet the acid test of paying all your current creditors.
Production Schedule
A production schedule, when formed, is the single most effective performance measurement for your production operations. It is better than a comparison with other firms, because it is designed to reflect your own work situations.
Once the production schedules are established, control can be exercised by monitoring the actual performance to see that it is on time as expected by the schedule. Any unacceptable range of variation is reported through exception reporting to take a note of the components of the operations which are not functioning well in time. Analysis can then follow to pinpoint reasons for variance from the expected schedule.
Inventory Control : Inventories form a major share of investment in most businesses, ranging from 30 to 40% of total assets in retail and wholesale trade and from 15-25% in manufacturing organisations. The very size of the investment makes it an important variable from the control perspective. What makes it an interesting exercise in control is the fact that typically the highest usage item may constitute only 10% of the items in stock but account for 70% of the usage, some 20% of the items may account for 20% of the usage and the remaining 70% may account for only 10% of the usage. This has important implications for inventory planning and specifically in deciding how much money should be tied up in particular categories of inventory. Inventory control should, therefore, assure that:
a) the active inventory items are always in stock so that there are no lost sales because of a stock-out condition and,
b) that the inactive items are carried at an essential minimum so that they do not tie up money and space.
Control of inventory comprises of two essential activities. The first consists in maintaining records to indicate clearly the major items in inventory on access cards or stock cards as they are commonly called. The second activity consists of setting up procedures for timely reordering of depleting inventory.
The stock cards are utilized to indicate the amount of inventory of a particular item on hand, the withdrawal of stocks in quantities datewise, the average usage rate and the reserve in stock at the point of reordering.
Q.9. Discuss the tax structure for various form of Business Enterprise as applicable under the Indian Income Tax Act. (20)
The different forms of organisation are subject to different tax rates under the provisions of the Indian Income Tax Act 1961. Even though these provisions keep changing, it will be useful for you to have an overview of tax structure for different forms. The following Section gives a brief explanation of tax structure applicable to sole proprietorship, partnership and companies.
1. Sole proprietorship
Under the sole proprietory form of organisation, it is not the business but the proprietor who is put to tax and it is not only the business income/loss but the total income from all the sources accruing to the proprietorship which is taxed together as one bloc. Certain incomes can accrue only to an individual such as salary. Apart from being single taxation the proprietor can set off any business losses from his or her other incomes and enjoy tax immunity to that extent. The proprietor may also get tax relief for institutionalised savings and investments. By institutionalised savings we mean investments made in paying the LIC premium, Provident Fund/Public Provident Fund contribution etc., money spent in purchase of National Savings Certificates or paying installments for acquiring a residential house from any public housing agency or investment in new shares etc. As against this the major disadvantage of this form of business is disallowance of any personal expense incurred for the benefit of proprietary.
2. Partnership
Firm is one of the most popular assessable entities under the Income Tax Act, providing perhaps the best and the least questioned tax planning device. The Income Tax Act has adopted the same definition as given by the Indian Partnership Act, 1932, which defines ‘Partnership’ as a relation between persons who have agreed to share the profits of a business carried by all or any of them acting for all.
Under the Partnership Act, a ‘Partnership’ or ‘firm’ is nothing but a group of persons (as such is not a separate independent entity or person in law) and has no legal personality apart from the partners, whereas under the Income Tax Act, the firm is a separate and distinct legal entity chargeable to income-tax and, therefore, is a taxable unit. Therefore, the provisions of the Partnership Act in this regard cannot be applied to the Income Tax Act. A firm is not entitled for various incentives provided under the Income Tax Act for Savings. Expenses and Incomes and certain payments made to partners are disallowed in computation of firm’s income.
3. Classification of firms
For the purpose of Income-tax, firms have been classified as registered and unregistered firms. ‘Registered Firm’ means a firm which has been registered under the provisions of Income Tax Act. In the case of registered firm, after assessing the total income of the firm, the income tax payable of the firm itself is determined.
Thereafter the share of each partner in the income of the firm less proportionate tax is included in his total income and assessed to tax accordingly.
Therefore, it can be said that income of a registered firm is subject to double taxation, (Income of a registered firm is taxable) first in the hands of the firm and thereafter the same income is taxable in the hands of partners. Whereas, on the other hand, an unregistered firm pays tax as its income like an individual and share in profits is included in the individual assessment of partners for the limited purpose of calculation of rate of tax. In other words, share of profits from an unregistered firm is not taxed again and included in the personal income of partners for rate purpose only.
Another classification of firms is firms carrying on profession and firms carrying on business. Section 64(1)(i) is applicable to the firms carrying on business and not to those carrying on profession. However, both ‘profession’ and ‘business’ carry a wider meaning for tax purpose than generally understood. The tax rates for firms carrying on profession is a little lower than for other firms.
As mentioned earlier an unregistered firm is liable to pay tax applicable to an individual, whereas a registered firm is taxable at concessional rates.
The maximum and minimum rate in the case of an unregistered firm for assessment every year keep changing and one must update oneself on these rates. Utilising the services of a tax consultant or a chartered account is helpful in this regard. The same is the case in relation to a registered, professional or any other firm. The rates vary in each case.
4. Company
A company has emerged as a form of business organisation and occupies a predominant place in the modern industrial era chiefly because of its superiority over other forms of business organisations such as partnership, individual ownership, etc.
Its growth has been accelerated by its prominent characteristics, namely, its identity as a legal person distinct from its members and the limited liability of its members. No wonder, therefore, the companies meet special treatment under the Income Tax Act as well.
Under the Income Tax Act, a ‘Company’ means any Indian Company or any body Corporate incorporated by or under the laws of a country outside India or any institutions, associations or body, whether incorporated or not and whether Indian or non-Indian, which is declared by general or special order of Central Board of Direct Taxes to be a Company. Therefore, any entity, not being a company within meaning of the Companies Act can be treated as a company for the purpose of Income Tax Act if so declared by the Central Board of Direct Taxes.
Tax Rates
For the purpose of levy of tax, Companies are broadly classified as:
a) Domestic and foreign company, and
b) Company in which public are substantially interested and company in which public are not substantially interested.
As mentioned earlier, these rates keep varying every year as per the financial and taxation policies of the government.
Special benefits
Certain provisions of the Income Tax Act confer benefit only to corporate assesses.
There are in respect of inter-corporate dividends and royalty etc. received by an Indian Company from certain foreign enterprises. As per provision amended by the Finance Act, 1990, dividends received by a domestic company from another domestic company are deductible from the total income up to the amount which the receiving company has distributed as dividends. Earlier the deduction was restricted up to 60% of the dividend received and balance was taxable as business income.
Similarly, if an Indian Company receives any royalty, commission, fees or any similar payment from the Government of a foreign State or foreign enterprise in consideration for the use outside Indian of any patent, model, design, formula, process, etc. provided by the Indian company. Then 50% of such consideration brought to India is deductible from the total income of the receiving company.
Q.10. Discuss issues and problems in Family Business while suggesting strategies to cope with them. (20)
Most common challenges facing family businesses today are-
1.Family problems
Physical, emotional and financial problems among family members can greatly impact the day-to-day operation of the business.
2. Informal culture and structure
For many businesses, having a laid-back culture is a positive. However, the informal structure and culture found in many family businesses can equate to a lack of documentation, policies, and defined strategy and goals.
3. Pressure to hire family members
It can be difficult to resist the pressure that comes along with requests from family members who want to join the business. This becomes especially complicated if they lack the basic skills and experience needed for the position.
4. Lack of training
The informal culture found in many family businesses can result in a lax approach to training new employees, whether they are family members or not.
5. High turnover of non-family employees
Non-family employees may feel that greater opportunities exist within the business for those who are a part of the family and may grow tired of the culture.
6. Sources for growth
A huge challenge for family businesses can be determining where and how to get the capital and resources needed to grow the business.
7. Lack of an external view
While family members may not always have the same opinions, they often have similar upbringing and life experiences which may lead to a uniform view of the business. Businesses need to have external views of their company and their competition in order to thrive.
8. Misunderstanding the value of the business and how it is to be divided
Owners of family businesses may have varying opinions on the value of their business, or even worse, they may have no knowledge about the value of the business and what things contribute to or detract from that value. Further complicating this matter is determining how to split the profits of the business or owners’ stakes.
9. Who will take over the business
It is important for family businesses to plan ahead for business succession. Many family-owned businesses do not have a plan in place and this can be a source of heated debate and intense family politics when the time arises to select new leadership.
10. No exit plan
Family businesses often lack a defined strategy for what will happen if an owner wants to retire, sell the business, or transfer responsibility. This goes hand in hand with succession plan issues. All businesses need a plan for the future.
Strategies to cope with the challenges
• Separating family and work
• Family employment policies
• Fitting jobs to family members’ skills
• Fair compensation
• Planning for the future
• Play to each family member’s strengths