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COURSE MATERIAL

OF
ENTREPRENEURSHIP
DEVELOPMENT PROGRAMME
FOR
PMEGP BENEFICIARIES

Khadi & Village Industries Commission


3 Irla Road , Vile Parle(W), Mumbai-56

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Name of the Topic

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COMMUNICATION & PRESENTATION


LEADERSHIP
ENTREPRENEURSHIP CHARMS AND CHALLENGES
QUALITY STANDARDS
MANPOWER MANAGEMENT
TIME MANAGEMENT
CHARACTERISTICS OF AN ENTREPRENEUR; A
MATTER OF ATTITUDE AND SKILL
BUSINESS PLAN PREPARATION
DESIGN AND PACKING
COSTING, PRICING AND PROFIT MAKING
RAPPORT BUILDING AND UNFREEZING MICROLAB
THEMATIC APPERCEPTION TEST (TAT )
SCORING MANUAL FOR ACHIEVEMENT MOTIVATION
(TAT)
PURCHASING INVENTORY/MATERIAL MANAGEMENT
BREAK EVEN ANALYSIS
ESTABLISHMENT OF AN ENTERRISE : SYSTEMATIC
APPROACH
LEGAL FORMALITIES FOR SETTING UP OF UNIT
MARKETING STRATEGY AND SALES TECHNIQUES
ACCOUNTS AND BOOK- KEEPING
CRISIS MANAGEMENT
CUSTOMER RELATIONSHIP MANAGEMENT
ENTERPRISE GROWTH PRODUCT DIVERSIFICATION
EXPANSION
RISK TAKING BEHAVIOUR
SUSTAINABILITY OF AN UNIT; PRECAUTIONS
NEEDED
VALUE ADDED TAX
INCOME TAX
SALES TAX
MANAGEMENT OF WORKING CAPITAL

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1.
COMMUNICATION
& PRESENTATION

1.COMMUNICATION & PRESENTATION


Introduction :
The word Communication is the art and science of conveying messages completely
and without distortion from one human being to another.
The word originates from communis, which means together common, thus
communication means sharing the ideas, information and experience with each other. Thus
communication implies interaction. The concept of communication indicates two way
process, it involves, exchange, suggests participation and adoption and includes sharing.
Therefore, communication is not complete till the message is understood.
Communication can be seen as a process of creating meaning. Meaning is not
transferable. What are transferable are the message and not the meaning. Meaning is
generated from within. Meaning is the result of interpretation of the message by the
receiver. Communication becomes effective when the sender of the message creates such
condition, that the receiver not only gets the message but also understands it and derives
the meaning intended by the sender. Thus communication is an important process in the
management of an enterprise.
Objectives of communication :
1.
2.
3.
4.
5.
6.
7.
8.

To convey ideas, opinions, views, news, data or information.


To facilitate the managerial decision-making and policy-making.
To elicit the co-operation in and out of the organization of all those concerned.
To secure co-ordination of different departments or sections within the organization.
To promote the managerial efficiency and productivity.
To achieve the organizational aims, goals and objectives.
To develop the morals and team-spirit among the staff/employees.
To improve the intra and extra organizational relationship.

Process of Communication :
It involves group activities participation and co-operation. It connects two terminals
namely (1) sender of message, (2) Receiver of message by using any media. It involves,
3

not only transmission of information but also its follow-up and feedback. Following are the
various elements involved in the process of communication.
1.
2.
3.

4.

5.

6.

7.
8.

Message
It is any peace of information relating to any fact, idea, opinion feeling, attitude or the
course of action.
Transmitter
It is the communicator or sender of message. It conceives and initiate messages, it
motivates and tries to change the behavior of the receiver.
Encoding
The message consists of certain information which will be translated / converted into
assets of figure science, symbols, words, actions, pictures, charts, graphs, diagrams,
audio-visual etc. it is called encoding.
Channelising
The transmitter selects a suitable channel of communication to transmit the encode
message to the receiver. The channels of communication includes the use of
different media like radio, video, Dictaphone, telephone, telax, fax, e-mail or face to
face conversation.
Receiver
Receiver is the person to whom the message is meant for. It is the second important
terminal. He or she has to receive interpret perceive understand and act upon the
message.
Decoding
It is the process translating /converting and uncoded message into ordinary
understandable language in day to day life. The receiver decodes the message by
converting the words, figures, science, symbols, charts, graphs etc. into
understandable substance of meaning. It is necessary for interpreting and
understanding a peace of message.
Acting / Implementing
The receiver will act and implement the message in practice according to his
understanding of the message.
Feed Back
It is the last but not least element/communication process. It involves passing of the
information about the response follow-up and implementation of message by the
receiver to the sender / transmitter.

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Characteristics of Effective Communication :


1.
Creditability
2.
Context
3.
Contents
4.
Clarity
5.
Conciseness
6.
Completeness
7.
Courteousness
8.
Correctness
9.
Channels
10. Continuity and Consistency
11. Capability
Communication Model :
Varieties of models have been put forward to explain the process of communication.
They spring from a variety of sources like psychology, philosophy, linguists, television or
electronics.
An engineering Model :
In any communication situation there are two main element the sender and the
receiver, applied to a training process the trainer is a sender and the receiver is the trainer.
The trainer has certain message in terms of some concepts principles practices or
application, which he wants trainees to understand. He encode that message in terms
language, both verbal and visual using technical term their definitions, symbols formulae,
both verbal and visual using technical term their definitions, symbols, formulae, diagrams,
graphs sketches, photographs, different methods and technique. This encoded message is
transmitted using various communication channels i.e. through senses of seeing hearing,
touching, smelling and testing. The communication will be more effective when more
channels of communication are used. This message is received by the receiver who
decodes it for himself on the basis of his intelligence.
Types of Communication :
There are two types of communication i.
Verbal
ii.
Non Verbal
The verbal communication with gestures and expressions give more meaning
to the message.
The non-verbal communication must be with proper gestures and expressions
to give more meaning to the message.
5

Role play
To understand the importance of proper communication divide batch into 5 groups.
Provide one paragraph to each group.
a.

b.

c.

d.

e.

f.
g.
h.
I

Participant A must tell the others about the paragraph contents by


 Facing away from the group.
 Speaking in 3 sentences only.
 The others cannot ask any questions.
Participants B must tell the others about the paragraph contents by
 Facing away from the group.
 Speaking in 3 sentences only.
 The others cannot ask any questions.
Participant C must tell the others about the paragraph contents by
 Facing towards the group.
 Speaking in 3 sentences only with gestures.
 The others can ask 3 questions to which the answers can only be Yes or
No.
Participant D must tell the others about the paragraph contents by
 Facing towards the group.
 Speaking in 3 sentences only.
 The others can ask 3 questions, to which the answers can only be Yes or
No.
Participant E must tell the others about the paragraph contents by
 Facing towards the group.
 Speaking in 3 sentences only.
 The others can ask 3 questions of any kind.
ii. In the above exercise ask the other participants to note down their
understanding after each round.
iii. The learning should be
Just words alone are not enough to convey a message.
Words with gestures & expressions give more meaning to the message.
Asking questions can help make understanding more effective.
Start multimedia and take them through screens 1-8. Explain where required.

2.
LEADERSHIP

2.LEADERSHIP
A leadership is one of the important aspects, which shall be developed by each and
every human being. The effective leadership is required to lead and guide the subordinate
to perform organizational task effectively and efficiently. The leadership is the activity of
influencing people to strike willingly for group objections.
The role/importance of leadership are under here :
1.
Goal Setting :
The leadership has to set the goals and objectives for his section or group.
Goal setting is one of the important functions of a leader. The goals may be set all
by himself, or he may take the help of his subordinates in setting goals.
2.
Developing Morale :
One of the important function of a leader is to develop morale in his
subordinates. He always strives to keep his subordinates in good mood or high
spirits. He always tries to develop positive attitude of his subordinates.
3.
Securing willing participation :
The leader influences the subordinates to work willingly towards group
objectives. A good leader never uses force to make the subordinates works. As a
good example on his part, he takes active part in the activities of the group.
4.
Encourages initiative :
The leader encourages initiative among his subordinates. He provides them
with freedom to come up with new innovative suggestions and ideas. He creates a
healthy environment in which subordinates take active interest in the
accomplishment of objectives.
5.
Developing Team Spirit :
The leader coordinates the activities of his subordinates. If there is any
difference of opinion among his subordinates, he strives to solve the differences. He
make s every effort to develop team spirit in his subordinates. A good leader does
not believe in divide and rule policy.
6.
Representation :
The leader is the representative of his subordinates. He represents his
subordinates when ever there is a need to express their views with higher authorities
within or outside the organization.
7.
Creating confidence :
A good leader creates confidence in his subordinates. He makes them to
accept and face challenges.
8.
Providing guidance :
An effective leader provides vital guidance and assistance to his followers
whenever it is required.

3.
ENTREPRENEUSHIP
CHARMS
AND
CHALLENGES

3.ENTREPRENEURSHIP CHARMS AND CHALLENGES


If self-help is the best help, then self-employment is the best employment and
entrepreneurship, the most exciting level of self-employment. In employment one works for
others one works as others want one to do. There is no scope for doing as you wish, doing
what you wish doing how you wish. But entrepreneurship is the opposite of employment.
You work for yourself, achieve a target or a goal set by yourself and reap the satisfaction of
having achieved the goal yourself.
Entrepreneurship is not a matter of heritage, it is entirely a manifestation of such
potentialities that any individual born in any caste, community and class can have. As such,
any person having a certain set of behavioral traits and mental aptitudes in him/her can be
come an entrepreneur. Besides, there is no need for such a person to be groomed from the
very childhood for becoming an entrepreneur. Even if he grown up has worked on a
different line and has developed these traits or aptitudes he or she can be groomed and
developed as an entrepreneur through counseling and motivational measures.
1.
Points in Your Favour :
This is applicable to a greater degree to the science and technology graduates and
diploma holders for the simple reason that during education period, due to their constant
inter-action with science and material subjects, they acquire a mentality for objective
considerations and evaluation of any issue. Given to hard work, thoroughness and
perceiving things squarely in any moment of crises, they are better qualified to face a
problem and find out a possible solution.
Secondly, the science and technology graduates and diploma holders have a natural
aptitude to pick up fast the technicalities normally involved in production process of any
enterprise.
With these plus points in their favour, entrepreneurship should naturally be an
attraction for science and technology graduates. Some more material reasons for the same
are a.
It provides them an opportunity to enter into a process which leads to the
realization of an individuals passion for innovation and development. Findings
based on a research study done in the western countries have shown that small
enterprises have been the origin of many radical innovations.
b.
It is through science and technology inputs that modern technology can be
introduced in the small scale sector and thereby a new cost effectiveness and
sophistication can be brought about in the product manufactured in the small
scale sector.
c.
To find a suitable employment one has to knock many doors and so many
shocks and even then one may not succeed. But to be an entrepreneur one has
to knock only one door, that is ones own self and if the qualities and
competencies are there, in whatever small quantity, he has the prospectus at him

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disposal to succeed as such. The shocks are there in entrepreneurship too, but
they can be absorbed if one is cast in an entrepreneurial mould.
d.
The Government of India and the States offer so many facilities incentives and
schemes to help new entrepreneurs and particularly technology graduates in
taking up entrepreneurial career. This career path is no more as thorny as it used
to be decades ago.
e.
As an entrepreneur, one is not only employed but creates employment for others
one is not only realizing the goal in his life but is also a source of livelihood for so
many. The pride of being a lord of ones own destiny is coupled with the
satisfaction
of
being
the
benefactor
of
so
many.
It is not enough to be technically qualified and experienced; one has to let the
society, nation at large to benefit from ones technical competence and
experience. Entrepreneurship provides an excellent opportunity to realize both
the goals the individual status as well as an individuals contribution to the
society.
Setting up your own enterprise is one way to achieve that double fulfillment.
The following case of Shri Ramaswamy, a technocrat, should leave no doubts in
your mind
2.
Achievements of a Technocrat Entrepreneur :
(Here is the story of a technocrat, who is now enjoying the fruits of his success after
a determined effort and hard work put in by him. An innovative product and his technical
background are key factors to his success, over and above his own entrepreneurial
characteristics.
The path to any success is slow and gradual. You can also plan your way to reach such
innovative goals, banking on your science and technology base and an entrepreneurial
spirit)

Mr. K.K.Ramaswamy is he founder of Sharp Tools a firm manufacturing light


weight pumps. Within a span of 12 years he has reached an annual business
turnover of Rs. 4 crores. He is a graduate in mechanical engineering. From his
school days onwards he had an aspiration to become an industrialist. After
completing his education, he joined one of the leading machine tool manufacturing
firms at Coimbatore. He worked there for 10 years as Shop Floor Manager, because
of his hard work and loyalty to the management, he was sent to West Germany for
training in manufacturing precision tools. He was there for two years and came back
and served the same unit for a year.
He expressed his desire to the management to start his unit and received
good encouragement from them. In 1968, with only Rs. 10,000/- from his savings,
he started his own unit. For three years he was concentrating on job orders only. In
1972 he filed a tender to BHEL for Rs. 2.5 Lakhs for a fabrication assignment. He
got the order but did not have money to execute the same. He approached State

11

Bank of India and convinced the Officer and got a loan for that particular work. He
completed the work before the schedule date which give him a profit of Rs. 1 lakh.
At that time he thought of diversifying and started searching the market. He
made a trip to Europe and some Arabian countries. In Saudi Arabia he saw a light
motor pump weighing just 10 kg. which attracted his attention. The ordinary pump
manufactured at that time in India weighed about 50 kg.
He thought that if he entered in that particular line it would have a better
future. He purchased one pump an started developing it in his factory. Within 6
months he was successful in developing the motor and gave it to a leading
educational institute. Then people gradually started asking for the light weight motor
pump for their own use. Its performance was also very good. He slowly expanded
his unit and entered the South India market through dealers.
At present he is manufacturing about 15000 motor pumps per year and has
10% of the Southern market share. He started three other units to cater to the
market needs and now he as a labour force of 120 persons. He has 4 professional
engineers looking after each factory. According, to him he plans in advance and
executes the job in consultation with the staff and finishes it at the appointed time.
Every year he arranges his dealers conference gets feed back and improves quality
constantly.
Two years back he got ISI trade mark for his motor pumps.
Mr. Ramaswamy has become one of the most respected and recognized
entrepreneurs of the region. In 1983, he was elected President of the Coimbatore
District Small Scale Industries Association and Vice-President of the Rotary Club of
Coimbatore. He was given the NATIONAL AWARD for Small Scale Industries in the
year 1983.

12

4.

QUALITY
STANDARDS

13

4 QUALITY STANDARDS
Customers pay only for what is of use to them and this gives them value. Nothing
else constitutes value Peter Drucker
In the prevailing economic situation, large and small enterprises in developing
and developed countries are discovering that the old ways of doing business do not
work any more and that new approaches are called for. Companies are adopting
new system of management for both internal and external purposes. The use of
TQM principles and quality management systems in cooperating with other
companies, entering into agreement, and developing, manufacturing and supplying
the required products and services meeting customer expectations is becoming
more and more a business imperative.
Quality management has thus become a fundamental management function.
Deliberate actions are taken to ensure that customer requirements are identified and
met through the implementation of quality planning, quality control, quality assurance
and continuous quality improvement, in such a way as to obtain maximum
advantage. Quality assurance is considered to mean all the actions taken to ensure
that the customers requirements are understood and met.
Economic studies point out that meeting quality, delivery and cost
requirements is the only effective long-term method for success in the export trade.
Furthermore, recent studies show that quality is a dynamic, ever-changing concept
that has become the business imperative of the day for enterprises of all sizes in
both their domestic and export markets and especially so for developing counties.
Export promotion is vitally linked to economic development, and unless a
country exports quality goods and services meeting customer requirements, there
can be no steady economic growth. No enterprise can afford to compromise on
quality if it is to establish a good image for its products and for its country. A single
consignment of inferior quality can tarnish the good name of the exporter and the
country as a whole.
Customer dont complain, they switch. And in most cases, they dont even let you
know that they are unhappy. Deming.
What Deming says about customers (see inset above) is true generally, and
applies to both internal and external markets. However, many importers do complain
bitterly, and stigmatize the name of the company and the name of the country of
origin in the same breath, and then switch. Some exporters have to live with this
switch for a lifetime.

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Furthermore, developing countries should realize that, while rapidly growing


markets exist abroad for their export products and services, unless energetic steps
are taken to enter them, those markets can go by default to the exporters who are
already supplying them. SMEs may require the strong and vigorous backing of their
government to penetrate new markets.
The initiative to introduce export quality management arises from market
pressures of from a conviction that a marketing advantage will be gained from
applying quality management concepts to the export cycle.
Quality as a management imperative :
Quality became the management imperative of the 1990s and will continue to
be the key to success in the next millennium. We often see the words quality first,
quality right the first time, quality right every time, and demands for quality and
service invade every sphere of activity, from the motor vehicles we drive, to the
domestic appliances we use, the food we eat, the restaurants we dine in, the doctors
we visit, and the products we import and export, reminding us that quality is the goal
of every business, and that its focus is the customer. In addition, satisfying the
requirements of the customer is a dynamic activity: both customers and their needs
change, and the supplier has to recognize this.
When it comes to trade, no exporting country can afford to compromise on
quality. The current economic climate calls for export marketing and promotion
efforts with assurances of superior and consistent quality in products and services,
associated with lower prices and delivery of the right product at the right time.
What is quality ?
Having said that quality is the management imperative of today, let us examine what
quality actually is.
The word quality, however, being a word much in fashion, has many
meanings and interpretations, many of which are subjective. Furthermore, most of
the quality gurus, and even organizations, have sometimes coined their own
definitions of the term. While the definitions may differ, what is important is that the
definition should be clear without a shadow of doubt in the mind of users.
From the many definitions being used in different contexts, it is clear that
quality is in fact a complex and multifaceted concept, embracing the sum of all the
characteristics of a product or service that contribute to its superiority and
excellence.
Product quality :
A product which may be hardware, software, processed materials or
assemblies or a service results from a series of processes transforming inputs into
outputs. How does one define product quality?

15

Many factors influence product quality: these normally cover the raw material,
production machines and equipment, production processes, and the workers. For
these reasons, it becomes difficult, if not impossible, to make two products identical
in quality, as there will always be the expected and obvious variations common to
any statistical distribution. In practice, however, the process needs to be designed
so that it results in products with small or acceptable variations in quality
characteristics, resulting in a more uniform and stable quality level meeting the
stated and implied needs of the customer. Product quality should normally meet the
requirements of the market, as well as contractual and organizational demands, and
these requirements should be expressed in functional parameters and documented.
Among the contributors to product quality are the following.
o Continuous improvement or updating of the product to meet the evolving
requirements of the market place.
o Building quality into the design of the product to meet the requirements and
opportunities of the market place.
o Providing support throughout the life cycle of the product so as to maintain its
design characteristics and value for the customer.
Needless to say, for certain products, reliability, maintainability and availability
will be important quality characteristics.
Service quality :
In recent times, services have become the fastest-growing sector of the world
economy. Excessive preoccupation with product quality and the difficulties
inherent in defining roles, functions and quality characteristics in the services
sector were responsible for the low priority given to the sector in the past.
Another important reason for negligence was that customer complaints in the
sector were taken lightly and were seen as an irritant rather than an opportunity
for improvements; any investment in quality in the services sector was viewed by
management as an unnecessary expense.
Quality standards can be more easily established for goods than for services.
Goods can be inspected and tested for conformity, defectives can be identified,
corrective actions can be taken, provided performance levels have been
established. Services are usually produced and consumed at the same time, and
service deficiencies cannot be eliminated before delivery, services being
personalized and subjective. In additional, service quality standards are difficult
to establish because measurements are subjective, and customers will have their
own expectations about what service quality is or should be.
For export of services, the usual inquiries from the buyer relate to assurance
of continuity of supply and consistency in quality. In addition, services are
usually labour-intensive, involving complex cross-functional integration of several
16

supporting systems. Thus all processes that affect a suppliers ability to provide
a quality service, such as those listed below, need to be included in the quality
assurance system.
 Quotations for client works;
 Contracting with clients;
 Developing a work plan;
 Implementing the work plan and a review of work;
 Client review
The implementation of a quality system based on the ISO 9000 series should
provide an opportunity for evaluating how an enterprise is conducting its
business, and whether or not there are further opportunities for meeting the
service needs of its clientele.
ISO 9004-2:1991, Quality management and quality system elements Part 2:
Guidelines for services, embraces all the processes needed to provide an
effective service, from marketing to delivery, which are appropriate to all sizes of
enterprise. With services, we need to:
 Define clearly the requirements of a service in terms of characteristics that
are observable and subject to customer evaluation;
 Define clearly the processes that deliver a service in terms of
characteristics that may not always be observable by the customer but
that will directly affect service performance.
Furthermore, a service or service delivery characteristic may be quantitative
or qualitative depending on the method of evaluation and who evaluates it, whether it
is the service organization or the customer. When it come to exports, it is not
necessary to emphasize that there should be a programme for the continuous
improvement of service quality. This should identify changing market demands, any
ineffective or insufficient quality system controls, and estimate and reduce costs.
All possible means of getting customer feedback needs to be explores, with
continuous evaluation of the customers needs, requirements and perception of
service quality, as these parameters and any corrective action they may require are
important for profitability and competitive survival.
This is especially important for SMEs with limited facilities, know-how and
infrastructure.
Process quality :
Before looking at process quality, we need to have a global view of the
business process to enable us to visualize the overall flow of resources and
activities and to determine the purpose and scope of the key processes. The core
business process is identified as the flow and interaction of activities concerned with
meeting customer requirements and which convert market opportunity into actual
revenue. In all businesses there are what we call supporting processes : processes
17

within the organization required to maintain the effectiveness of the core business
process. Keeping tight control of activities deemed critical for the business is
essential. Having said this, we should emphasize that all operations associated with
product or process characteristics that can have a significant effect on a product
quality needs to be identified and controlled.
In any activity, process quality, since it is an important parameter, should be :
 Planned to be attained under controlled conditions.
 Documented as work instructions, as required.
 Examined to determine the effectiveness of the process.
 Verified at key production points to minimize the occurrence and the effects of
errors and to maximize yields. For example, are the hardware of software,
processing steps, raw materials or processed inputs, processing services and
the working environment at these points conducive to obtaining process
quality.?
 Monitored and controlled in relation to finished product specifications or other
requirements as may be necessary.
 Planned and specified in relation to all in-process and final verifications with
documented procedures for testing each quality characteristic.
The development of new methods for improving process quality should be
encouraged.
Higher levels of product quality require continuous monitoring, control and
improvement of processes. The final product is simply the sum total of several
processes. Quality improvement thus starts at the process level.

18

5.
Manpower
Management

19

5.Manpower Management
You alone cant manage the show, and your will need to hire people for
various kinds of job. In a small scale unit you may need to recruit perhaps 5 to 8
persons only. But that is precisely why you must be very careful in recruiting the
right ones.
A small firm has its own style and ways. You need people who are
competent, who can understand you and work for you. But many small business
entrepreneurs recruit their own relatives, friends and others at low wages to
make more profits ! And this is the most dangerous things to do ! You may spoil
both your relations and work. You may perhaps save on salary, but then lose by
way of poor control over performance.
1. Hiring is a Commitment Activity :
It is advised that you act as a businessman and as a professional, and not as
a social worker !! Recruit people with the right approach and get what you want
from them; otherwise they can have their pleasure at your cost. Remember you
are hiring a person, for his competence and not for his life.
It is often faster, cheaper and safer to hire someone with the necessary
expertise than to experiment with developing a home-grown expert at your cost.
SSI units do not have that much time, money and resources to train and develop
their men at their own cost, at least not initially !!
Be on the look out for right kind of people, from the day you have started,
thining of your unit. You will have to identify them. So keep your eyes open and
do not think, it is too early for that. You may recruit them at a later stage but can
definitely start tapping the resources now. The sources through which you can
recruit may be many. Before that you specify :
Skills and expertise you need
Kind of experience that will help you
Benefits and remuneration you can afford to pay
2.
Sources of Recruitment :
Your own resources
Persons working in nearby factories
Employment Agencies
Advertisement in newspapers or business journals
Technical institutes and colleges
3.Process of Recruitment :
Entrepreneurs will have to adopt systematic approach for recruiting staff so as
to avoid complications. It is advisable to give a written order to the person being
employed, specifying all terms and conditions of the appointment. Specific
mention about the probation (trial) period should be made so as to ensure that

20

unsuitable and unwanted persons are not recruited for a long time. It ay also be
advisable to enter into contract with someone in case of special services required
for short time only. The recruitment procedure should involve various kinds of
tests and interviews to identify whether a person possesses necessary skills and
abilities for the required job.
It is also important to note that people working for you will need something
more over and above their salary. It will be long term interest for both employer
and employee to offer some attractive and reasonable incentives and benefits to
employees to sustain their motivation and interest in the work.
4.
Training :
During recruitment of persons, the entrepreneur should also consider the
possibility of training staff for specific skills. Though in a small-scale unit it may
not be possible to train staff members regularly due to costs involved, an
intelligent effort to train personnel in small groups should be initiated. It is only
through training that you can always update the skills and knowledge required to
perform job duties better.

21

6.
TIME
MANAGEMENT

22

6.TIME MANAGEMENT
Busy lives and work schedules can sometimes affect the way we think and make
decisions. Rushed decisions can lead to costly results. The secret to good management of
a business is good time management. Ensuring that your company runs like clockwork
must start at top level. Bad management can only decrease the morale and efficiency of
the company.
Good leadership is the key to success of any business. The decisions and future of
the company relies at Management level, but ensuring that decisions are made correctly
and action is taken promptly relies on the individuals Time Management. A delay in making
a decision or reacting to a problem can be a costly business mistake.
Time Management is something that needs to be learned and practiced, it must be
mastered and become part of your life to be truly effective. Once you have mastered good
time management skills at work, you will find that your automatically apply them to other
areas of your life.
Tools for good Time Management :
 Planning
 Prioritizing
 Being prepared
 Delegating
 Allocating Resources
 Following up
These tools are a guide to assist you in implementing Good Time Management practices
both personally and throughout your business.
Planning Time Management Skills :
Good planning is probably one of the most important aspects of good time
management. Knowing what is happening at present and what will be happening in the
future will help you to plan your time more efficiently.
Find out what is going on in your business, anything that could have an impact on
resources or become a critical issue needs to be considered. Analyse the issues and be
prepared for them. Estimate the work load required, who does what and how long it will
take. Anything that can be done earlier in preparation should be done and therefore easing
the pressures at the critical stages.
For ex. if yours business is currently quoting on a major job, then analyse the
resources that will be required if yu win the contract. Will you required any additional staff,
or perhaps your staff might need some specialized training, do systems need to be altered,
will special equipment be required, who will manage the process, what are the critical
milestones?. Knowing this information can assist you to prepare a planning schedule and
ensure that when the time comes, your company will be ready. Not only will it ease the
pressure buy it will also ensure customer satisfaction.

23

Estimating the time a task will take is extremely important. If accurate estimation is
difficult, then break down the task into smaller sections, then estimate these. It is also
important to work out who will do what, and what needs to be done in what order. Set
deadlines for each milestone and ensure everyone is aware of these.
No matter how small the job is, preparation and planning are essential so that you
can get things done properly and on time. Northing worse than leaving something to the
last minute and then finding out that it is going to take longer than you expected or worse
the deadline has been moved forward.
Keep a diary and maintain it accurately. Set deadlines for yourself on every task or
job and ensure that stick to these. If your make diary entries for everything that your need
to do everyday, you will soon be able to gauge at a glance how busy you can expect a day
to be before you commit yourself to anything extra.
Review your diary at the end of each day and if something got missed or wasnt
finalized move it to a new day and allocate a new deadline. Try and stick to your plan, there
will be times when the unforeseen happens, however with good planning this should have
minimal impact on your time.
Prioritizing Time Management Skills :
Assess your tasks for the day and work out a priority system. Critical tasks,
important tasks, essential tasks and other tasks. From your list, give each task a priority
and within each priority an order of importance. Once you have done this, you can begin
tackle each to task in order of importance. So even if your day ends up being chaotic, at
least your critical tasks would have been done.
Most busy people will tell you that it is amazing how much you can fit in a day. This
is often true, the reason is because when you have very little time, you try and get as much
done in it, whereas when you have a lot of time, you tend to relax more and therefore
achieve less.
Make each minute count, if you can manage to do a couple of things at once then
better still. If you are on hold on the phone, may be you can type a memo or letter while you
wait. If you own a mobile phone, you would be amazed at how much you can achieve on
the way to work in the morning. Dont wait to get to the office before your confirm your
appointments for the day, do it on the way in. more time saved!.
Being Prepared Time Management :
Being prepared will ensure you dont waste any valuable time. There are many ways
of being prepared from being informed to ensuring you have everything ready. Knowing
what is coming up in the future and by anticipating what might be required of your will
ensure that you are prepared adequately.
We mentioned before that knowing what is coming up in the future will help you to
allocate resources and ensure you have everything ready for when the time comes. This
applies equally on a personal basis as well as company wide. As the month progresses you
can add information and keep your notes updated. By the time your meeting comes, you
24

will be ready in just a few minutes instead of in hours. Less pressure and you will ensure
you havent forgotten anything or left out anything important.
Delegating and Allocating Resources Time Management :
Learn to delegate effectively and you will be more efficient at everything you do. It is not a
matter of getting everyone else to do your work; it is more a matter of using resources
wisely. There is no point you attempting to do something and wasting 3 hours on it, when
someone else could do it in hour.
Sometimes, we tend to waste time looking for information or trying to analyse something,
when someone else might already have this available. Get to know your staff better, find out
who does what and what each persons strengths are. Use your staffs knowledge and
abilities to their highest potential.
Consider external resources when something needs to be done. There are specialists in
just about every field, chances are they have the knowledge, equipment and a better
understanding of the work required. This would enable you to be free to handle other more
important matters.
Following up Time Management :
Following up on outstanding issues will ensure there is no last minute panic. By
ensuring that things run on track and work is progressing steadily, you will ensure that
deadlines are met comfortably. Leaving things to the last minute or finding out that
something hasnt been done at the closing of a deadline is not good time management.
Spread the tasks over a period of time and follow up to ensure that each one is
completed as per the plan. If something is running behind find out the why. The reason
could be that the task has been allocated to the wrong person, or perhaps that problems
have arisen and these were not anticipated.
If you continually follow up each task and deadline, then you can react to any
problems encountered while there is still time.
There are many tools to assist you in good time management, diaries, palm pilots,
alarms, software applications and other things, however the best time management tool is
being organized.

25

7.
CHARACTERISTIC
OF AN
ENTREPRENEUR;
A MATTER OF
ATTITUDE AND
SKILL

26

7.CHARACTERISTICS OF AN ENTREPRENEUR; A MATTER OF ATTITUDE AND SKILL


An entrepreneur is a person who takes risk of setting up his own venture for
perceived rewards. He/she is a person who initiates the idea, formulates a plan, organizes
resources and puts the plan into action to achieve his goal.
Entrepreneur have specific characteristics, qualities. They have special strengths which
they draw upon for their adventure into business. If a person want to start and succeed in
the enterprise, he/she required to play different roles at different stages of enterprise. The
characteristics which an entrepreneur must possess the following
1.
Need to Achieve :
Most people dream of success and achievement, but do not take any actions
towards achieving these dreams. Entrepreneurs, on the other hand, have a strong desire to
achieve a higher goal and make their dreams come true. For them winning is achievement.
2.
Perseverance :
Once committed to a goal and a course of action, entrepreneurs become absorbed
in it. They are not deterred by difficulties and problems that beset any project; they work
hard until the whole project is successfully accomplished.
3.
Moderate Risk Taker:
Entrepreneurs are not high risk-takers; they are not gamblers., They choose a
moderate risk rather than play wild speculative gamble. They love a moderate risk situation,
high enough to be exciting, but with a fairly reasonable chance to win.
4.
Ability to find and explore opportunity :
Entrepreneurial persons are quick to see and seize opportunities. They show an
innovative turn of mind and convert difficulties into opportunities. But they are realistic too.
They plan and anticipate carefully how to achieve their goals in realizing an opportunity.
5.
Analytical Ability :
Entrepreneurs are realistic. They have a matter of fact approach about business
undertakings. They are not likely to let personal likes and dislikes stand in their way. When
they required assistance, they select experts rather than friends and relatives to help them.
They generally do not take an emotional attitude towards their business or a problem.
6.
Using Feedback :
Entrepreneurs like to have immediate feedback of their performance. They like
prompt and accurate data and it does not make any difference whether the information they
get is favorable or unfavorable. In fact, they are stimulated by unfavorable news to pour
more energy into attaining their objectives.
7.
Facing Uncertainty :
Achievement oriented people tend to be optimistic even in unfamiliar situations. The
odds may not be clear but the circumstances may be appealing. Entrepreneurial persons in
such situations see no reason why they cannot win through their abilities. They go ahead
undeterred, sometimes even without guidelines and frequently make the best of whatever
opportunities there are. As they begin to understand their environment they begin to
27

calculate their chances very closely. Thus, paradoxically they present a picture of boldness
in the face of the unknown and prudence in the face of the familiar. They usually win by
applying their special insight and skill.
8.
Independence :
It is found that most entrepreneurs start off on their own because they do not like to
work for other people. They like to be their own masters and want to be responsible for their
own decisions.
9.
Flexibility :
Most successful people after weighing the pros and cons of a decision, tend to
change if the situation so demands. They do not hesitate in revising their decisions.
Successful entrepreneurs are persons with open minds, not rigid.
10. Planner :
Most successful people tend to set a goal for themselves and pal to achieve that
goal in a certain time limit.
11. Interpersonal Skills :
An entrepreneur is a person who during the course of his activities, comes across
many types of persons with whom he has to deal. He has to make them work for him, with
him and help him to attain his objectives. Hence he should be a person who likes working
with people and who has skills of dealing with people.
12. Motivator :
In the course of his career, an entrepreneur, will be required in many situations to
influence people and make them think in his way and act accordingly. He motivates people
to act.
13. Stress Taker :
As a central figure in your enterprise, you will have to cope up with many situations
at the same time and make right decisions which may involve a lot of physical and
emotional stress. All this can be done if you have the capacity to work long hours and keep
cool under a lot of tension.
14. Positive Self Concept :
An achiever directs his fantasies towards the accomplishment of worthwhile goals
and sets standard of excellence in what he is doing. This is based upon the awareness of
his strength and weaknesses. He uses positive knowledge to support his thinking. He is
rarely negative.
15. Orientation to Future :
Entrepreneurs show a high level of future orientation. They do not allow the past to
obsess them. They are oriented towards present and future. So it was, but now what to do;
this is their usual response.
No entrepreneur has all these qualities. But most of them will have many. So the
first step for a person aspiring for entrepreneurship is making an inventory of the traits he

28

possesses. This self-awareness and analysis will help define his strength and help
overcome his weaknesses.

29

8.
BUSINESS PLAN
PREPARATION

30

BUSINESS PLAN PREPARATION


New entrepreneurs often have a misconception that planning is essential only
for large enterprises. Usually they have following doubts
i.
Is planning in small enterprises as essential as it is in big ones ?
ii.
Can small entrepreneurs contemplate long term planning when they do not
enjoy the advantages of huge finance and expert staff as big ones do ?
iii.
Can small enterprises successfully implement long term plans ?
But planning for the small entrepreneur is critical for the very same reasons.
The entrepreneur has limited resources in terms of time, finance and manpower.
The small entrepreneur is going to put his lifes savings to start the venture and to
lose this investment is a risky and unsettling proposition. He normally puts all his
stakes in his ventures and expects the business to make reasonable profit and give
returns on his investment. The opportunity to be your own boss is part of this
return. It is of utmost importance that the enterprise succeeds as the entrepreneur
has totally committed himself to the venture.
It is, therefore, necessary that small enterprises select very carefully the
fronts for action and formulate all the strategies with due care and calculated risk as
the entrepreneur cannot afford to make mistakes which will cost him time, money
and mental peace.
1.
Why Planning ?
Planning is essentially choosing a course of action from available alternatives.
It involves detailing of the course chosen. It differs from other functions not only in
form of the activities involved but also in the faculties involved. It forces the
entrepreneur to view reflectively, analyse his environment, the enterprise, the people
involved and himself in a certain perspective.
(i).
Planning is essential to survive in the most dynamic situations:
Most small entrepreneurs tend to be controlled by the volatile environment of
today. Earlier it was possible to avoid developing or evolving your product or
process until your competitor successfully established his own product or process.
Today this is no longer valid. Such an enterprise would soon ruin itself.
To lead in a fast changing environment, an entrepreneur should plan for
aggressive strategies to shoulder the inherent risk. These risks can be reduced by
continuous planning and re-planning.
(ii). Planning strengthens the position of entrepreneurs:
If the small entrepreneurs do not adopt planning they may keep on drifting
without purpose or direction, in the belief that their survival in business depends on
the mercy of over-powering forces. This will prevent them from taking any decisive
steps for their own development. On the other hand, they may feel tempted to
indulge in reckless and blind gambling. Planning hence helps to lead them in the
right direction.
31

(iii).

Planning gives an overall picture:


Because of constraints on his various resources, it is essential for an
entrepreneur to have pre-knowledge of all the steps involved in implementing and
running his enterprise so that he will be better organized to co-ordinate his limited
resources.
(iv). Anticipation of problems:
The entrepreneur will have a clear picture of his project and the requirements
at various stages if the project is thoughtfully planned. Planning equips him with the
knowledge of the problems that are likely to arise and he can therefore, rehearse for
alternative actions to the many What ifs.
(v). Planning helps in time management:
Again, because a small entrepreneur has to play the multi-faceted role,
fulfilling various needs of his enterprise, it is essential for him to define his action in
terms of time. This will give him pointers to the areas which should claim his priority
and help him to effectively utilized and co-ordinate his resources.
Successful entrepreneurs differ from unsuccessful ones in their
method of decision making. They examine all possible options, evaluate all
arguments for or against and they keep on looking for new options or alternatives.
There is evidence in support of successful ones who adopted planning against those
who did not examine any options or alternatives. It has been proved that those who
use systematic panning and intelligent implementation are most likely to succeed.
Planning, therefore, should be integrated into the companys system and for
the small entrepreneur it should be directed more towards findings and exploiting
opportunities rather than waiting to create them.
Most small entrepreneurs are constrained in their planning because
a).
They believe planning is not needed for them;
b).
As the enterprise is small, they believe they can keep everything in their
heads;
c).
They feel that planning is a waste of time as it cannot be implemented.
2.
Areas of Planning :
For the small entrepreneur planning need not be complex. If he were to put
down on paper what is in his mind, a lot of clarity would emerge.
He should start planning by defining
a).
His present status: the resources available to him
b).
His goal: within the constraints of his resources, what can be achieved.
c).
How best to attain it:: coordinating and mobilizing the above two factors to
achieve his goal in the shortest possible time.
To plan, then, he will have to start posing a few questions:
Internal :- To analyse his personal strengths and weaknesses:
o What am I good at ?
32

o Where can I improve ?


o What are the resources available to me ?
o What is the volume of resources that I can effectively mobilize ?
Market :- To check if the plans he forsees are supported by demand:
o Will what I produce self ?
o Why will people by it ?
o How does my product compete with others in the market ?
Environment :- A small entrepreneur should always take into account the outside
factors over which he has no control but which are likely to affect
him.
o What are governments policies ?
o How do they affect me ?
o Will changing trends in social customs and culture affect my product demand ?
o Can I diversify if the need arises ?
Basically then an entrepreneur should plan for
i). Survival
ii). Profit
iii). Diversification
3. Some Principles of Planning for Small Enterprises:
Any noting, no matter how short, for planning is much better than no
noting at all.
The most difficult part of planning is to start. Once started it is then easy
to proceed ahead.
The factual basis of the venture, its customers and its environment should
be thoroughly investigated.
To make planning realistic, it is necessary to have a clear understanding
of ones business, strength and weakness. Many a time an outsider is
more objective and a keener commentator than the owner and inside
personnel. Effective planning needs creativity and constructive thinking
and many a time insiders are not able to perceive what an outsider can.
Alternative opportunities based on the resources of the venture and the
anticipated needs of the customer should be developed.
Planning is a process, not an isolated occasional act, hence plans should
always be periodically reviewed and should be kept alive through constant
updating and feedback. It should never become a ritual or mere paper
work.
For the small enterprise it is essential to have plans that can be
implemented as early as possible. Panning should take into consideration
the implementation.

33

Planning should be supplemented by performance reporting. One who


wishes to implement his plans successfully must regularly examine the
expected progress against actual progress to decide further course of
action.

34

9.
DESIGN
AND
PACKING

35

9.DESIGN AND PACKING


With globalization and free trade, the products are moving around the world
and packaging plays an important role to undergo rigorous test in the distribution
environment of the logistical chain. Apart from the protection, it also has to satisfy
different needs of the consumer in different locations. Also, it has to pass through
the stringent laws on the impact of the packaging material disposability on the
environment. Currently, these requirements vary for different products different
countries. The packaging media should be easily recyclable, reprocess able or
biodegradable so that generation of solid waste is minimized. Right type of
packaging with superior product can definitely promote export and it has t be
environmentally friendly.
Following are same of the important points to be noted in the package
design/selection.
1.
Product Requirement :
Understanding of the product is very essential to determine the extent of
packaging required for safe journey of the product from the production house to the
consumer. It needs to be analysed in a very detailed manner such as
Does the product need extra protection to preserve its taste, aroma, colour
from dryness, moisture, etc ?; if it is food item.
Does the product need extra protection against moisture, light, odours, heat,
cold, oxygen, corrosion and other chemical reactions, micro-organisms,
insects, rodents, mould, pilferage, etc. ?
Can the design or composition of the product itself be modified so that it is
economically, or technically better adapted to the consumer package, if
necessary ?
Can the same packages/designs used on the domestic market also be used
for export ?
2.
Distribution Requirement :
The logistics plays an important role in determining the packaging material
and form selection. What type of packaging methods are employed by your
competitors have to be studied before entering their market. Some of the points
which need to be studied with respect to distribution requirements are given below
What kind of consumer packages are used by the competitors, and why ?
Is there any particular trend to be observed that will entail changes in the near
future ?
Is it necessary now, or in the near future, to provide the packages/labels with
the Universal Product Code (UPC) of the European Article Numbering (EAN)
bar coding symbols ?
Have the wholesalers/retailers opinions been ascertained on
36

 Type of packages
 Quality standards
 Package sizes and dimensions
 Suitability for display
 Ease of unpacking and price marking
 General graphic layout
3.
Consumer Requirement :
The consumers world over are not the same. They differ from region
to region and their preferences with respect to shape, colour, layout of the
package need to be studied and some of the points are given below
Has the product itself been adapted/modified to the consumers tastes and
requirements on the target markets vis--vis, e.g. product design, shape,
colour, scent, sugar content, spicing, etc ? Has this been verified by field tests
among consumers in the target markets ?
Is the package convenient for the consumer to handle, open, recluse, empty,
close, reuse, destroy after use, etc.?
If the package is provided with an opening device, it this clearly indicated and
easy to use?
Is the general layout of the graphic design acceptable to the taste of
consumers in the target markets? Has this been verified by field tests among
consumers in the target markets?
Does the text on the package/label provide consumers with comprehensive
and easy-to-understand information on the special features of the product and
its use?
4.
Types of Consumer packages :
Different packaging options are available in terms of material and forms and
their selection depends on many factors and they have to be studied such as
Have these alternative types of consumer packages been thoroughly
analysed as to their
 Availability from local suppliers ?
 Their technical and promotional quality for eg. Printing ?
Has the alternative readymade packages been objectively studied ?
Has the mechanization of the packing process been studied for possible
savings in costs, or for meeting the general hygiene/exact quantity
requirements in target markets?
5.
Promotional design of consumer packages :
Promotion of the product in the consumer shelf in super markets is a very
important aspect in the packaging design requirement since it has to act as a silent
salesman. The product in the shelf will be competing with other brands of the same

37

product and your product has to have a striking appeal over other products and that
should make the consumer to select your product over other products. The general
layout and graphics of the package plays a vital role in this regard and some of the
points which need attention are discussed below
General layout :- Should the general layout/positioning of the package or label
design put emphasis on  The brand: Corporate brandmark/logotype or product brand name ?
 The product: Product designation, illustration, use, quality, Unique Selling
Proposition, etc?
 The target: Men/Women/Children, whole family, ethnic groups, age
high/medium/low income groups, etc?
Should the layout reflect only one of these concepts or consist of a
combination of two or all three of them?
ILLUSTRATION:
Does the illustration provide a true and honest picture of the product as it is
inside the package as to size, colour, degree of processing, ingredients used,
etc.?
Is the illustration in conformity with the existing laws and regulations in the
target markets ?
Is the illustration understandable, and in good taste, to the consumer in the
target market, e.g. with respect to moral or religious concepts ?
Is the illustration suitable for reproduction in black and white in advertising or
on television ?
Is it possible for the local printer to reproduce the illustration in acceptable
quality, and at reasonable cost ?
Colour :
Are there any particular colours which are preferred or should be avoided in
the selected target markets?
Have fashion trends been observed in the selection of colours?
Are the selected colours strongly associated with the type of product, and the
consumer target group?
Has the visibility and readability/ contrast of texts, and the effect of colours on
apparent package size, been taken into consideration ?
Have the technical and economic aspects of the selected number of colours
been discussed with the printer?
Is the number of colours in proportion to the desired effect of the design and
to essential commercial requirements? Is there a strong reason for each
additional colour?

38

Shape :
Does the shape of the package reinforce the brand image of the product?
Is the shape of the package convenient for the consumer to handle? Does it
cause problems in the filling line, e.g. through instability?
Is the package easy and stable to stack in retailers displays?
Does the shape and dimensions of the package conform to eventually
existing standards or trade practices in the target markets?
Text :
Is the text easy to understand, clearly visible, easily readable and does it
have a high attention value on the shelf?
Is the typography up-to-date, and consistent throughout the package/label
design?
Is the product name correctly expressed and does it stand out clearly from the
background ?
Is the text in conformity with the laws, regulations and trade practices in the
target markets.
Is the text printed correctly in the required languages, in the required size,
and positioned according to eventual regulations?
Does the text clearly state how the product should be stored? If it is food item
or medicine.
Has the brand name and logotype been correctly and uniformity used on all
packages/labels. ?
As per the recent circular of Ministry of Health and Family Welfare that all
products should carry a label of Nutrition Value / Contents of the products on
its packaging which will be mandatory wef 19-03-2009. details will include
contents of calories, proteins, carbohydrates, sugar, fibre, vitamins etc., and
also details of transfacts contents available in the products.

39

10.
COSTING,
PRICING AND
PROFIT MAKING

40

10.COSTING, PRICING AND PROFIT MAKING


How much does it cost? This is the usual question we ask when we do shopping.
What we really mean is not the cost in the strict sense of the term, but the selling price.
What then is the meaning of cost? Is it the sum of the cost of raw-material, labour, power
etc? Or is it something more than that ?
It is necessary to understand the meaning of cost and costing, its importance and
how to go about arriving at the cost of goods that we manufacture or services we provide.
1.
What is Costing ?
Professional accountants define costing as the process of classifying, recording and
appropriately allocating expenditure for determination of cost of the products or services. In
simple terms, costing is the process of determining how much it costs you to produce and
sell a given product or service.
Understanding and recording of cost and costing, is crucial for new entrepreneurs,
so that anything that happens to a unit in terms of cost, can be controlled or improved, only
if proper record and system of costing is adopted. Unfortunately many times entrepreneurs
realize this only after costs have been incurred.
2.
Types of Cost :
From the definition of costing, we can note that were are not talking of just the cost of
producing a given item, but also the cost involved in distributing/selling it. If we talk in terms
of products such as, electronic measuring devices, typewriters, washing machines etc, we
can add one more component to the cost viz., the cost of after sales service. Thus, it is
necessary for us to understand various components of costs. The two basic components of
total cost viz., Direct Cost and Indirect Cost are explained below.
Direct Cost :It refers to those items of cost that can be attributed directly to the end product.
For example, the cost of yarn in manufacturing textile is a Direct Cost. In other words, the
cost of those items that become part of the end product are termed as Direct Cost. The two
items of Direct Cost that can be readily identified with the end product are the material cost
and labour cost.
The direct material cost consists of the cost of raw materials and components. For
example, if your are manufacturing an Electronic Measuring instrument, you may yourself
manufacture Printed Circuit Board (PCBs) and decide to buy transistors, knobs and other
items from the market. So, the direct material cost includes the cost of items required to
manufacture PCBs, cost of welding electrodes used in the process, cost of bought out
items such as, transistors, capacitors etc.
The direct labour cost consists of wages and other benefits paid to the workers for
the time they spend in making a given product.
Indirect Cost
It refers to all those items of cost that are incurred in running a business and those
that cannot be identified independently with the end product directly.
41

3.

How Much One Unit of the Product Cost ?


Whether you are making tables or chairs or transistors or TV boosters, you must
know how much it costs to produce one unit of a given product apart from knowing the total
expenses of your factory as such. If you are manufacturing more than one product in your
unit, it is all the more important that you know the share of each item of the output
(production) in the total expenses of the unit (i.e. the factory or service station as the case
may be).
An illustration of Direct Costs:
Let us take the example of a unit manufacturing wooden tables and find out how to
arrive at the cost of one table.
The direct cost of producing a table is easy to calculate. The direct material cost
consists of wood, glue and fasteners which works out to be say, Rs. 300/-.
When it comes to direct labour cost, one way to arrive at the figure is to find out all
wages paid to the workers in a given month (say, Rs 12,000) and divided it by the number
of tables produced in a month. Another way is to find out for how many hours in a given
month the workers are engaged in production of tables. Then, using the figure of wages for
that month, divided the same by the number of hours worked in the month to arrive at hourly
labour cost. Then, find out how many hours it takes to make a table. Multiply this figure by
hourly labour cost to arrive at direct labour cost per table.
For the sake of illustration, let us say that the Direct Labour Cost is Rs. 144/- per
table (at a production level of 1000 tables per year and direct labour cost of Rs.1,44,000/-).
While making this sort of calculation, it is important to appropriately forecast the
labour requirement and the probable quantum of output given that level of work force. The
problem is simplified if you already have a running business since you can use the figures of
the previous accounting year. You may have to make sure that the raw-data is of
representative nature.
Thus, the direct cost per table is Rs. 444/- i.e. Rs. 300 direct material cost and Rs.
144/- direct labour cost.
How to Calculate Indirect Costs ?
In any business, many expenses cannot be directly identified with the end product.
You may repair the shed or your office building, the broken typewriter or a burnt out motor.
You may insure your factory or godowns. The telephone bills and the rent if any, the power
bills, salary to the accountant, steno and other office staff and the interest you pay on loans
are such items that cannot be directly attributed to the end product. All such items of costs
are known as Indirect Costs or overheads. The overheads form a part of the cost of the
output since they facilitate production of a part product or a service as the case may be. So,
they have to be reflected in the cost of the end product.
If you have a running business, you just have to find out al the items of the Indirect
cost from the previous years accounts. For those of you who are yet to start the business

42

operation, it is necessary to sit down and make a list of all items of costs which then can be
divided into Direct and Indirect Costs.
The next step would be to estimate how much you would spend on each of these
categories and segregate the items of Indirect Cost, which as per unit of the output can then
be calculated by dividing the total indirect cost by the number of units proposed to be
produced in that year. The calculation is not all that simple if you have more than one
product. We will later find out how to calculate Indirect Cost pr unit in a multi-product
situation.
In the illustration that we are talking of, let us say that the total Indirect Cost including
rent, insurance, repairs and maintenance, postage, telephones, stationery, salary to office
staff, watchman etc., cost of publicity/advertisement and interest on loan put together works
out to Rs. 1,20,000/- per year. At an annual production level of 1,000 tables, the Indirect
Cost per unit will come to Rs. 120/-.
Thus, the total cost of one table is Rs. 564/- which includes:
Direct material Cost -Rs. 300, Direct Labour Cost -Rs. 144,Indirect Cost Rs. 120
Let us think of a situation where the order booking in a given year is at peak and the
unit produces 1500 tables instead of 1000 tables. The Indirect Cost per table would then be
Rs. 80/- (total indirect cost amounting to Rs.1,20,000/-) instead of Rs.120/- which means, a
reduction of Rs. 40/- in the cost per table.
Likewise, if you produce only 500 tables instead of Rs. 1000, may be due to lack of
orders or non-availability of raw-material, the Indirect Cost per table would be increased to
Rs. 240/- (rs.1,20,000/500 tables) representing an increase of Rs. 120/- per table.
Thus, you might have by now noticed that the indirect cost per unit is inversely
related to the level of production i.e. an increase or decrease in product\ion level would
correspondingly decrease indirect cost per unit and ultimately, the total cost.
Thus, more you produce from the buildings, machines and office staff you have, in
other works given the same level of overheads, lesser will be the total cost of our products.
Here, we are making an assumption that with the change in the production level, there will
not be any change in the quantum of overheads or indirect expenses. This assumption is
valid in most of the cases. However, as a matter of caution, it is necessary to examine each
item of Indirect Cost closely to determine whether it remains constant and if not, to what
extent it would change given the change in the output level. For example, if you double
your production assuming that the working space and the capacity of the machinery you
already have permit the same, you may need to employ additional office staff/managerial
staff to handle the increased quantum of your business operations, in which case, the
Indirect Cost would be added to each of the product. Noted below is a brief of one such
method
At the first instance, you find out how many persons directly involved in production
activities are actually working in a given year. If your unit is not yet in operation you may
43

have to make estimates to arrive at the said figure. The, find out how many hours they work
in a day and how many days in a year, to arrive at the number of hours of Direct Labour that
goes into production in a given year. After separately calculating the total Indirect Cost per
year, divide this by the number of man-hours or the number of hours of direct labour that go
into production in that year, to arrive at the Indirect Cost per hour of Direct Labour.
Indirect Cost Per Hour
=
Total Indirect Cost
of Direct Labour
Total Hours of Direct Labour
Then, calculate the total number of hours spent on producing each of the 4 items.
This calculation becomes a bit complicated since more than one worker will be engaged in
producing a given item. A careful study of the production process would help you to make
an estimate of the number of hours required to be put in to make one piece of chair or table
or any such item right from raw-material stage to finishing. Thus, after finding out how many
hours it takes to produce a given item, you can calculate the Indirect Cost for that item by
multiplying the said figure with the hour rate i.e. the Indirect Cost per hour of Direct Labout
that you have calculated earlier.
4.
Lest You Forget :
 Add the cost of transportation and unloading charges for the raw materials that you
procure i.e. take into account landed cost of the raw material, not just the amount
you pay to the raw material supplier. It is obvious for running business but not so
obvious in proposed venture where all calculations are based on
estimates/projections.
 If you intend to manufacture an excisable item, in most of the cases you have to
pay the excise before you remove the goods from factory/warehouse. But then, you
will realize the same from the customers after sometime depending on the duration
of the credit that you intend to provide. The interest on funds so blocked is very
much a part of the cost. This again is obvious for on-going business, but not so for a
proposed venture.
 As a part of costing exercise, when you make exhaustive estimates on number of
man-hours required to produce a given product, we normally presume that the
workers would be working on-the job for the entire duration of the paid working
hours. Normally, the assumption does not hold good since by nature, people tend to
relax a few minutes now and then, and chat with fellow workers for such losses while
calculating direct man-hour cost.
 If you propose to manufacture some product that needs service or warranty, it will
involve expenses on men and materials as a part of after-sales-service. You have
to make proper estimates of such expenses right at the planning stage lest underquote your product.
 Before you go ahead implementing your project and even thereafter, there is a need
to study the production process carefully and account for the losses of materials
during production. Such losses may occur due to sub-standard raw-material,
44

improper handling of the same or due to the very nature of the production process. It
is necessary to take these into account while arriving at Direct Material Cost and
make adequate provision for the same.
 Similarly, it is possible that a part of the output may be rejected during quality tests at
your end or by the customer himself. Such rejections may or may not be avoidable.
Especially, for that portion of the rejections that are not avoidable, adequate
provision is to be made so that the loss due to rejections in the natural course of the
business is reflected as an expenditure and ultimately, as a part of the total cost.
More often than not, it may be difficult to anticipate the eventualities as
indicated above at a time when you are still planning your project. That does not
undermine the importance of the exercise. It only suggests that it is necessary to
look for indicators, clues, information from the existing manufactures in order to
arrive at cost figures as accurately as possible.

45

11.
RAPPORT
BUILDING AND
UNFREEZING
MICROLAB

46

11.RAPPORT BUILDING AND UNFREEZING MICROLAB


A microlab is a process oriented package of experience which is used to
prepare the participants to learn psychologically. It helps them to motivate, get
involved in the programme, make them aware of the importance of learning through
experience and open their vision for the programme in totality. Laboratory training
has been found to be useful as it provides a preamble to such programmes in terms
of mechanics of the participants involvement and the philosophy of experiential
learning as compared to learning through other training methods.
Objectives
 To help participants familiarize themselves with each other.
 To build up and break the participants expectations of the programme; and
 To highlight an integrated process-oriented training with different modules of
the programme.
Group size :
Unlimited
Time Required :
It depends on the objectives of the microlab. However, one hour to one-and-a half
hours may serve the purpose for an entrepreneurs training programme.
Physical Setting :
It required enough unstructured space for the participants to move around freely.
A sample Microlab for Potential Entrepreneurs :
o Walk around.
o Form into pairs with a person whom you have not met till now. Tell each other
something about yourself. (2).
o Walk around.
o Form into new pairs with someone you have not met. Share with each other
something about yourself which makes you think that you can be an entrepreneur.
o Walk around.
o Form into new pairs. Share with each other two reasons why you are here.
o Walk around.
o Form into new pairs. Talk to each other about hobbies. (2)
o Walk around.
o Form into triads. Share with each other two things you like the most and two things
you dislike the most. (2)
o Walk as fast as you can.
o Form into new pairs. Share with each other three things you consider to be your
strengths and two things you consider to be your weaknesses.
o Move around.

47

o Form into triads. Share with each other one significant experience you can recollect
from your childhood. (4)
o Walk slowly; when you walk, greet each other non-verbally.
o Form into triads. Think of an entrepreneur you came across whom you consider as very
effective. Share with each other his qualities and what impressed you about him. (5)

o Think of an entrepreneur whom you do not consider to be successful. Share with


each other what has made him unsuccessful. (5)
o Walk around.
o Form into pairs. Tell your partner two things which you like in him and two things in
which you think he can improve. (2)
o Walk around.
o Form into triads. Share with each other something you consider to be significant in
your family. (3)
o Walk around.
o Form into new pairs, share with each other two of your dreams or two of your goals in life. (3)

o Walk around.
o Form into new triads. Think of an experience where you did something wonderful or an
experience when you felt great. Share with others the details of this experience. (5).

o Walk around.
o Form into new triads. Tell a story what you learnt from your parents or in the school which
had impressed you. Share with others the story and why it had impressed you. (5).

o Form into groups of four. Discuss the general problems of entrepreneurs and make
a list of the problems. One of you may present it to the total group. (5)
o Presentation by groups on problems. (5)
o Walk around. Close your eyes while you walk. (1)
o Stop and open your eyes. Pair with the person closest to you. Share with each
other your experience of any one occasion when you faced a problem and could
solve it successfully. (3)
o Re-arrange into groups of four. Discuss the characteristics of entrepreneurs. One of
you may present them after five minutes to the total group. (4)
o Presentation by groups on characteristics. (4)
o Walk around.
o Form into pairs. Tell your partner the qualities you would like to develop in yourself
to become an entrepreneur. Share with each other how you feel being here and
participating in this exercise. (3)
o Form into groups of four. Each of you will give a new project idea to the group. When you
are doing this, this, the others will ask you one question each on the idea. (1)

(Figures in brackets indicate the duration in minute, for the activity.)

48

Some lead questions for processing Microlab :


After the activities are completed, the facilitator may help the participants to find
some meaning in them. For this, he needs to generate data and put it in such a way that
the participants develop a link between what has happened and how useful it is for further
learning. The following questions may help the facilitator to process the data generated
during the micro lab:
 How do you feel now?
 How deeply were you involved in activities?
 Why did you do it ?
 Do you consider these activities meaningful to you ?
 What did you get out of it ?
 Do you think that this session is useful for the programme ?

49

12.
THEMATIC
APPERCEPTION
TEST (TAT )

50

12.THEMATIC APPERCEPTION TEST (TAT )


This is the test for ascertaining the level and intensity of achievement motivation
through the imaginative writing produced by the participants against a set of pictures.
Objectives :
 To determine the existence and level of achievement motivation among participants.
 To help them to internalize the associative network or elements of achievement
motivation;
 To emphasize the formation and use of achievement language in day-to-day thinking
and action.
Time Required :
The data collection requires thirty minutes. The total number of sessions required
for analysis and discussion depends upon the movement of the group in terms of stated
objectives. Sessions may be taken in continuation or distributed over two to three days.
Material Required :
Slides, transparencies, pictures, instruction sheets or TAT scoring sheets.
Setting :
This would require a seating arrangement with a table or desk to enable writing.
Process :
i). The facilitator emphasizes the importance of the task by encouraging the
participants to be as imaginative as possible and look forward through the third eye, that is
beyond what they are going to see.
ii).
An instruction sheet is distributed to the participants and the facilitator asks them to
go through the instructions with undivided attention. The facilitator may even read
out from the instruction sheet and provide sufficient time to the participants to check
and re-check certain points which they would like to be clarified. The facilitator at
this point may not add anything beyond what is given in the instruction sheet.
Instructions :
1.
Before starting the exercise, the facilitator instructs the participants as follows :
For twenty seconds, you will see a picture on the screen. Then you will be
given five minutes to write a story about what you have seen. While writing, you may
consider the following questions to build up the story.
 What is happening ? who are the people ?
 What has happened in the past that led up to this situation ?
 What is being thought? What is wanted ? by whom ?
 What will happen ? what will be done ?
You should try to make the stories interesting and dramatic and relate them
to a human situation instead merely describing the picture.
Do you have any questions.?
(Detailed instruction sheet given in Appendix II)

51

2.

3.
4.
5.

6.
7.
8.

After the story writing by the participants is over, the facilitator may create an
atmosphere where the hold-up thinking and feeling may surface in the group. This
can be done by putting some lead questions like:
 What do you feel now ?
 How much involved were you?
 What do you find in this exercise ?
 Would you like to work on it ?
This creates further interest amongst the participants, to involve themselves in the
scoring and analysis of data.
The facilitator then reveals the purpose of the exercise, that is to know the
achievement thinking or achievement motivation present in the participants. Also,
the significance of using pictures to assess the need for achievement is high-lighted.
How can we tell whether one has the need for achievement in his thinking ?
We have standardized the scoring process based on which it has to be found
out whether our stories fulfill any of the following criteria :
i). Desire for success in competition with others.
ii). Desire for success in competition with a self-imposed standard of excellence.
iii). Unique accomplishment.
iv). Long-term involvement
If the stories fulfill any of the stated criteria, it would be scored as AI
(achievement imagery) and indicates, therefore, the presence of achievement
motivation. Whenever there is any doubt whether or not one of the criteria for
achievement imagery has been met, and yet the story is not totally unrelated to
achievement, it is classified as TI (task imagery). Stories in which there is no
reference to any achievement goal are scored as UT (unrelated imagery).
The concept of scoring AI, UI and TI is given with examples and the participants
doubts are clarified before they go in for the subsequent steps.
The participants are given a set of sample stories and are asked to score for
AI, UI, and TI.
A discussion is generated about the scored stories and the facilitator clarifies the
doubts of the participants. An impression is also given to the participants that they
are progressing well within the time frame.
Another set of practice stories may be given to the participants and they may be
asked to score for AI, UI and TI quickly.

The facilitator may disclose the expert scoring of the second set of practice stories and ask
them to find out the points of difference, if any. By now it is expected that the participants
will feel secure and confident to a great extent in scoring AI, UI and TI.

10.

They may be asked to score their own stories in terms of AI, UI and TI.

52

11.

The facilitator may ask them to form a group of three or four and interchange their
scored stories and discuss the difference of view points, if any. The facilitator has to
act as an expert to short out the differences.
12. At this stage, the facilitator brings forward the concept of the level or intensity of ach.
Motivation present in any story which has scored an AI. The concept may be
highlighted with the help of the following questions.
i).
Some of us/all of us/few of us have found AI in our stories. What does it
mean ?
ii).
Does it mean that all those securing AI have the same level of achievement
motivation ?
iii).
How can we know the level of achievement motivation ?
13. The facilitator explains the level of motivation in terms of an-associate net-work.
14. They are reminded of the practice stories scored as AI and are asked to score
for the presence of elements in these stories.
15. A discussion with participants on the elements scored by them and clarifying their
doubts.
16. The participants are asked to score elements in their own stories.
17. A discussion around total scores obtained by the participants.
18. The facilitator may focus on the frequently occurring elements and the absence of a
few elements.
19. At this point, a suggestion is made to write a hypothetical story incorporating all the
elements.
20. A discussion on :
 Why the presence of all elements is desirable ?
 What the elements mean to us ?
 Consciously manipulating all the elements in a story is also not easy.
 It requires a deliberate attempt to internalize the elements and reflect them in
our thinking and action.
 It is possible to acquire a high need to achieve.
A small concept session on (a) characteristics of a person with need to
achieve and (b) achievement motivation vs entrepreneurs highlight of researches
and experiences.
Trainers Guide
All the steps stated earlier are present in the following four major aspects
concerned in the exercise.
 Excitement
 Action
 Experimentation and
 Facilitation

53

1
2
3

Activities performed under four different aspects


Presenting a challenge before the participation to be as imaginative as
Excitement
possible and write interesting stories instead of merely describing the picture
Asking participants to write stories, making them serious in following
Action
instructions, and sticking to the time allotted to write the stories.
Experimentation Know what have you done, developing concept and skill of scoring AI, TI and
UI along with the element of achievement motivation, helping them to find out
the missing elements, re-writing an imaginary story incorporating all the
elements.
What did we do ? why did we do ? what do I, as an entrepreneur, find on
Facilitation
introspection ? yes. I can, and will be an achievement oriented person.

54

13.
SCORING
MANUAL FOR
ACHIEVEMENT
MOTIVATION

55

13. SCORING MANUAL FOR ACHIEVEMENT MOTIVATION


A standard procedure developed by McClelland (1958) is followed in scoring
achievement motivation. To determine the presence of achievement motivation in an
individual the person is invited to write a story relating to a series of pictures shown
to him. The contents of the stories are analysed not only to ascertain the presence
but also the level of achievement motivation.
Achievement Imagery : The Main Criterion For Scoring
If the writer involves an achievement goal, either n explicit terms or in an implied
fashion, then a story has achievement imagery. Achievement goal can be defined
as: (1) success in competition with some standard of excellence, regardless of
whether the individual may achieve the goal or not, or (2) success in competition with
a standard of excellence where the individual is in clear competition with others, and
he is determined to win, or to do better. This being his primary concern.
1.
Scoring Achievement Imagery
The AI in a story may take number of forms, but all of these are instances of a
desire to compete with a standard of excellence.
(A).
Desire for success in competition with others
Here, it is stated in explicit terms that a character affirms a desire to compete with others:
example: He wanted to win the contest; or, it may be implied using expressions of
sentiments or feelings, example: He is happy because he won the contest.

(B).
Desire for success in competition with self
In this case a standard is set which is primarily self-imposed. It could be explicit; he
wants to compete the job by the best possible technique.; or it could be implied, by
referring to sentiment or feelings; example. He is pleased that he found the best
possible technique to complete the job.
(C). Unique accomplishment
When a character in a story is working on something that is out of his line of usual
work, then he is achieving a unique accomplishment. This could be: creative work,
scientific discovery, invention, etc. Here, a unique accomplishment need not
necessarily be explicit or implied; the very fact that a person is involved in achieving
something unique, is a personal accomplishment, and hence, it is evident that the
character clearly expresses a desire to meet a high standard of excellence, without
mentioning it.
(D).
Long-term involvement
If a character in the story states that he is referring to an achievement goal, which
constitutes a lengthy time period, then it is obvious that the involvement which could be in
terms of a career or any primary goals, is in itself a standard of excellence. Examples:
Career involvement : He wants to become a manger. He has worked hard all these years
to become an entrepreneur.

56

2. Doubtful Achievement Imagery


If there is a story which is unrelated either explicitly or implicitly to any competitive
standard, but bears some reference to achievement, then it is classified as TI. The
T stands for a common task in a routine problem.
3. Unrelated Imagery
If a story fails to bear any reference, whatsoever, to any achievement or criteria
mentioned above, then it is generally classified as Unrelated imagery (UI).
I.
Scoring Sub-Categories
Achievement Imagery
If a story has AI, then it can be scored for achievement related subcategories. These are :
i).
Stated need for achievement (N)
 Desire to reach achievement goal.
 Strong indications of presence of motive/need.
 Specific accomplishment.
 Reference to personal status
 General desire
 Altruistic desire
Need is scored only once in a story, if stated explicitly, and is a
motivational statement.
ii).
Activity design to lead to an achievement goal (Act)
Mention of actual statement of activity independent of original statement of
situation and final outcome of story; should be mentioned in the beginning, inbetween or at the end; mention of past activity indicating effort.
Act + : successful activities leading to achievement goal.
Act -- : activities leading towards unsuccessful outcome.
Act ? : outcome of activity is doubtful.
3. Anticipation of success or failure in relation to the goal (Ga)
Ga + : Positive anticipation of goal achievement.
Ga -- : Positive anticipation of goal achievement.
Both these activities may be present in one story, but each can be scored only once.
4. Obstacles of blocks (Bp/Bw)
Bp: Internal or external obstacles located within the person, or personal block.
Bw: Obstacles formed as part of the environment, world, or located in a situation that
the character is dealing with; also scored when difficulty lies either in the person or in
a situation. Both these activities can occur simultaneously in any story, but each can
be scored only once.
5. Help from another person (H)
H: Help, aid, sympathy or assistance which encourages the person to strive
for achievement; to be considered from the point of view of the character in the story.
57

6. Feelings/emotions connected with attaining/failing to attain the goal (Fe)


Feelings or emotions, associated with goal attainment, positive imagery or frustration
of achievement directed activity.
Fe + : Positive feelings, imagery; direct objective, definite accomplishment;
beneficiary to others.
Fe -- : Negative feelings associated with failure; objective results of complete failure
and deprivation.
Either of the above may appear simultaneously in the same story, but they
can be scored only once.
7. Achievement theme (Th)
When AI is elaborated/enlarged to become the central theme; may or may not be an
elaboration of experiences related to striving (successful or not) for an achievement goal.
Scoring of Sub-categories
___________________________________________________________________
Sub-categories
Symbol
Score
___________________________________________________________________
1. Need
N
+1
2. Activity

3. Goal anticipation
(a) Positive goal anticipation
(b) Negative goal anticipation
4. Obstacle or blocks
(a) Personal blocks
(b) Worldly blocks
5. Help
6. Feeling
(a) Positive feeling
(b) Negative feeling
7. Achievement theme

Act +
or
Act
or
Act ?

+1

Ga +
Ga --

+1
+1

Bp
Bw
H

+1
+1
+1

Fe +
Fe -Th

+1
+1
+1

_____________________________________________________________________
Stories with AI
+1
_____________________________________________________________________
Maximum obtainable score in one story will be + 11

58

TAT SCORING FOR THE ACHIEVEMENT MOTIVE


Story AI UI
No.

N ACT+ ACT ACT GA GA Bp Bw H Fe Fe Th Total


-+
-+ --

N.B.
AI
UI
N
Act
+
ACT
Act ?
Ga+
GA --

Achievement Imagery
Unrelated Imagery
Stated Need
Successful action
towards goal
Unsuccessful Action
Doubtful Action towards the goal
Positive goal anticipation
Negative anticipation

59

Bp
Bw
H
Fe+
Fe-Th

Personal Block
Worldly Block
Help
Positive Feeling
Negative Feeling
Achievement Thema

14.
PURCHASING
INVENTORY /
MATERIAL
MANAGEMENT

60

14.PURCHASING INVENTORY/MATERIAL MANAGEMENT


A new entrepreneur always think of implementing own ideas to fulfill the dreams.
Sometimes there are chances that for fulfilling these dreams, he/she pays more and it
becomes a costly dream and it proves to be problem creating task. On the other hand
selection of cheap or less costly machineries and other material has its own problems too.
A new entrepreneur while managing the purchases has to take care of many things,
same of the clues are as follows.
 Organize your buying, make efforts to look at few alternatives rather than just
accepting what is being offered to you in the first instance.
 Compare all available Brands or Makes. For machineries, compare machinery
having same specifications. An easy way to know about this is to ask your
supplier how he is better than others. Though they have their ready answer, you
can see through them.
 Just dont believe all the smooth talk of the supplier. Move into the market and
find out how the same machinery is performing. The list of customers where the
machinery is supplied should also be obtained from the supplier, but your visit to
these customers should be independent.
 In selecting a supplier, local one should be preferred. Try to know about the
suppliers reputation.
Some sources to find this out are : Directories of Associations and Financial
Institutions which have approved suppliers list and also Black listed suppliers.
This will ensure that you are not negotiating with the not recommended
category !!
 In case advance money is to be paid, it is better to deal with a known party or a
person. Many sate governments have agencies supplying equipment and you
may decide to deal through them. The National Small Industries Corporation Ltd
(NSIC), New Delhi or the Small Industries Corporation in your state are two good
sources for purchase of machineries. Check with your supplier his payment
terms and also that of your financial institution.
 Always place order in written form, clearly mentioning specifications, conditions
and delivery dates. But just dont sit idle till the delivery date. You must regularly
follow up with your supplier, if you are keen to receive your machinery right in
time.
 Before you take the delivery of the material you must inspect it at suppliers
premises for trial run and must satisfy yourself. Some payment should be
withheld till satisfactory run is obtained.
 While purchasing the machinery capacity should be selected so as to match your
required production target as well as to match capacity of other machinery.

61

In case your require more output, the existing equipment can always be
operated on extra shift.
 In your sheer enthusiasm dont show your eagerness to buy ! You must
negotiate! Suppliers are also interested in business and there is always
competition. Try to take advantage ! !
 While purchasing the raw materials, their availability, quality and feasibility of
procuring the same regularly may be seen.
Calculation on the required raw-material stock according to availability of the same.

Total value of raw-material needed in a year (including transportation charges/octroi


charges) may be noted in the table given below.
Description of item Rate per unit
Quantity
Total value (Rs.)

Sr.
No.
Same table can be used for machineries also

62

15.
BREAK EVEN
ANALYSIS

63

15.BREAK EVEN ANALYSIS


As an entrepreneur on the threshold of setting up your own small unit, you will have to
answer several questions centered mainly around the profitability of the enterprise that you
are venturing into. In this note an attempt has been made to find answers to some of your
questions such as, ho much you must produce in a year so that after covering all the costs
you can still make some profit; if your plans are to install machinery that can produce, for
example, 100 tons per year, what would happen in case you get the market only for 60/70
tons; if worse comes to worse, what should be your minimum production level so that you
can meet all the liabilities without incurring loss and so on.
The only time you can find answers for the above questions and plan systematically for
reasonable profits is at the time of establishing the unit. As you work through this note you will find
that careful yet simple calculations can give answers to the said questions. Such calculations
would lead to a figure called Break-Even Point which we will deal with in this note.

1. What is Break Even Analysis ?


In order to carry out profit-oriented activity, may be production of goods through setting
up of a factory or provision of services by setting up an automobile workshop or hotel/repair
shop, certain costs are involved. Various items of costs may be the raw material cost,
salaries/wages, interest charges and the money you have borrowed for setting up the unit
etc. All these items of cost put together form the total cost.
The cost components can be divided into two major types viz., (i) Fixed Cost and (ii) Variable Cost.

Fixed Cost :
Fixed Cost is that cost which does not vary or change with other factors in the
production level. In other words, there are certain items of cost such as, interest on longterm loan, rent on factory shed of office if they are rented, depreciation on machinery and
building if they are owned by you etc., which are to be incurred whether your factory is
working at full capacity or whether your factory is closed.
For example, if you have borrowed Rs.1 lack from a bank or State Finance Corporation
for buying machinery for your factory to produce 100 tons of a product per year (Product A)
and the interest rate on the loan is 12.5%, you will have to pay Rs.12,500/- an interest per
year irrespective of the fact that your production is 10 tons or 15 tons or absolutely nothing.
Just to make sure that you have understood the concept of fixed cost, let us go through
another illustration. Your factory building it rented and the rent per month is Rs. 1,000/-.
The production on monthly basis is 500 units in January, 800 in February and 600 in March.
Now, the question is what is the fixed cost for your factory as such for the months of
January, February and March ? Likewise, what is the fixed cost per unit of the output in
these months ?.
The fixed cost for the factory unit as such, assuming that there are no other costs, would
be Rs. 1000.00 per month for each of these 3 months. The fixed cost per unit of the output
can be obtained by dividing fixed cost for a month by the number of units produced / to be
produced for that month as noted below:

64

Month
Fixed Cost/No of units
Fixed Cost per unit of output
January
1000/500
Rs. 2.00
February
1000/800
Rs. 1.25
March
1000/600
Rs. 1.66
Another interesting point you will note from the above example is that though the total
fixed cost for the factory as such remains constant (i.e.Rs. 1000/- per month), there is an
increase in fixed cost per unit of the output when the production decreases and likewise,
there is a decrease in the fixed cost per unit when the production increases.
Variable Costs :
Variable Cost is variable with the level of production i.e. variable cost is directly related
to the quantity of output. For example, if you need Rs. 100/- worth of raw-materials to
produce 1 ton of Product A, the variable cost can be calculated as below :
Raw-material cost per ton of output i.e.
Variable Cost per ton
=
Rs.100/Month
Output
Variable Cost
January
500 Kgs.
Rs. 50,000/February
800 Kgs.
Rs. 80,000/March
600 Kgs.
Rs. 60,000/As you will see from the above illustration, that the total variable cost for your Factory as
such increases/decreases along with the increase/decrease of production level. But the
variable cost remains constant for every unit of output.
In short, any item of cost which does not change with the level of production is fixed
cost and that item of cost which changes with the level of production is variable cost.
Fixed cost is fixed for your factory as such. But fixed cost per unit of the output varies with
change in production level. Variable cost for the factory as such is variable as per the
production level. But variable cost per unit of output may remain constant.
When we make an attempt to classify various items of cost into fixed and variable cost
we may come across certain items of costs such as, wages which remain fixed till you reach
a particular level of production but vary whenever that level is crossed. In other words,
there are certain items of cost which can be termed as semi variable. But for operational
convenience, it is sufficient if you could classify the cost components into Fixed and
Variable without going into further analysis.
Having understood the level of Fixed Cost and Variable Cost, let us now see how best
we can understand the concept of Break Even Point.

65

Calculating the Break Even :


Whenever you calculate profit for your project at the time of preparing the project report
or making projections for the coming year (when your unit is already in operation), you
normally deduct Total Cost from Total Sales Revenue to arrive at Gross profit.
Suppose, you go a step further and calculate profit at two stages by splitting the Total
Cost into Fixed Cost and Variable Cost for the project, the analysis will throw some light.
You know that Variable Cost per unit of the output remains the same. Hence, given the
same selling price, the difference between Variable Cost per unit and selling price per unit
which we call Contribution also remains the same. Thus, as sales go up, the Contribution
(difference between Sales Revenue per unit and Variable Cost per unit x No. of units) also goes
up. Given the fact that the Fixed Cost for the project remains the same, you have to at least earn
enough money to meet the Fixed Cost. In other words, if you do not want to incur loss, you must
sell enough number of units of the output so that the contribution is equal to the Fixed Cost. Your
Profit would be to the extent of the Contribution which is in excess of Fixed Cost.

Such a 2-stage analysis to identify the production level at which you make neither profit
nor loss is called Break Even Analysis. The said production level is called Break Even
Point.
We can now put it mathematically as below :
i). Total Cost as X production = Variable Cost for X No. of units (VC) + Fixed Cost.
ii). Contribution (CN) = Sales Revenue (SR) Variable Cost (VC)
iii). Profit (P) at X level of production = (Sales Revenue for X No. of Units) Total Cost.
i.e. SR (VC + FC) or SR VC FC
i.e. Profit = Contribution (SR-VC) Fixed Cost (FC)
To clarify the concept, let us now look at the illustration mentioned below. The
calculations are done at 3 different production levels to illustrate the relation between the
level of production and profit.
Selling Price per unit
Rs.
10.00
Variable Cost per unit
Rs.
4.00
Fixed Cost for the Project
Rs. 90,000.00
Production Levels :
10,000
15,000
20,000
units
units
units
Sales Revenue
1,00,000
1,50,000
2,00,00
Variable Cost
40,000
60,000
80,000
60,000
90,000
1,20,000
This Income Contribution is not profit as we have to meet Fixed Cost also.
Considering the Fixed Cost for the Project is Rs. 90,000/- then at 10,000 units production
level, the company is incurring a net loss of Rs. 30,000/- (Rs.60,000 Rs. 90,000); at
15,000 units production level, there is no profit or loss (Rs. 90,000 90,000) and at 20,000
units production level, a net profit of Rs. 30,000/- - (Rs.1,20,000 Rs. 90,000) is made.

66

Thus, Profit = Contribution (CN) Fixed Cost (FC). At 15,000 units production level, the
company is just breaking even and so, it is called Break Even Point (BEP) of production.
At this level, the Contribution = Fixed Cost i.e. CN = FC.
BEP can be expressed either in terms of number of units that you have to produce to
reach No profit No Loss Level or in terms of sales revenue. First,
i). Capacity Utilisation Indicator :
Usually, Break Even Point is expressed in terms of capacity utilization. In other
words, suppose your factory can produce a maximum of 100 tons of Products. A per year
which we can call the installed capacity, at what percentage of installed capacity you must
operate to reach the Break Even level of production ? This could be found out using the
below noted formula FC____
BEP =
SR VC
x 100 = -------- %
Where BEP = Break Even Production Level in terms of percentage.
FC = Fixed Cost per year in Rs.
VC = Variable Cost during that year
SR = Sales Revenue during that year
ii). Sales Revenue Indicator :
Break Even Point in terms of Sales Revenue could be calculated using just two figures
viz., fixed Cost and Profit Volume Ratio.
One of the important ratios to watch in business, especially in Break Even Analysis is P/V
Ratio. It expresses the relation between Contribution (Sales Revenue Variable Cost) and
Sales. This indicates the percentage of Contribution in relation to the volume of sales. In
other words, it tells you that after meeting Variable Cost, what percentage of sales revenue
is available to you to meet fixed cost and then, earn profit.
Contribution =
Sales VC
SR VC
Thus, P/V Ratio =
Sales
Sales
OR
SR
Suppose, the Sales Revenue per year is Rs. 4,000/- and the variable cost is Rs. 2,000/-,
then the P/V Ratio is calculated as under :
= 0.5
P/V Ratio = Contribution/Sales = SR VC/SR = 4000 2000 =
4000
In other words 0.5 or 1/2 % of your Sales Revenue is available to meet fixed cost.
Having understood the concept of P/V Ratio, we can now see how to calculate Break
Even Sales Revenue using the below noted Formula :
B.E. Sales Revenue =
Fixed Cost =
FC
P/V Ratio
(SR VC)/SR

67

Application of Break Even Analysis :


So far, we have understood the concepts of BEP and calculation involved in Break
Even Analysis (BEA). We now see how we can use this concept for decision making:
i). At the outset, BEA helps you in taking investment decisions. Projects with high Break
Even Production level tend to be risky in the sense that high Fixed Cost can make the
project easily susceptible to even a slight drop in sales revenue either due to low selling
price or low sales volume.
ii). In case you are producing or planning to produce more than you must produce to
optimize the profit.
iii). In case you have a multi product unit or even a single product unit and you have to
increase your production to meet the demand, BEA helps you in make or buy
decisions, i.e. Whether you should increase the production in your factory by employing
more resources or whether you should sub-contract the work or buy the product from
someone and sell it.
iv). BEA is a convenient tool for product pricing. It helps you decide how much shuld be the
ex-factory price of your product. It also helps you in deciding whether yu should allow
any discount on bulk purchase and if so, how much should be the discount. Likewise,
you can decide what price to quote when you participate in a big tender.
v). Certain calculation about profitability at various levels of production are made a lot more
simpler by BEA. We will now see how BEA can be applied in some areas. For
calculation purpose, we will use the illustration of the chemical unit described earlier.
If you want to point out the minimum number of Kgs. of the chemicals that you must
produce to reach Break Even Level, you can use the below noted formulae without
calculating Break Even production capacity in terms of percentages and then,
converting it to the number of units.
Fixed Cost
Break Even Sales Volume :
Sales Revenue Variable Per unit

Total Contribution
Production
Contribution unit

Fixed Cost
Contribution Per unit

Rs. 3,07,000

1500 Kgs.

3,07,000
1500

Break Even Sales Volume

Rs. 204,67 (Approx.)

1,16,000 (FC)
204.67

= 566.76 Kgs.

68

You must sell at least 566.76 Kgs. of your product to reach Break Even level assuming
that selling price remains the same.
Suppose, there is uncertainty in power supply or in the supply of raw material which may
prevent you from operating at full capacity, then you would like to know what would be the
profit if such problems force you to operate at say 70% or 80% of the full capacity. In other
words, you would like to know the profit at various levels of production. You can arrive at
profit figures by calculating cost of production at various levels of output. But then, this is a
lengthy and cumbersome procedure. Using BEA, you can quickly find out likely profits at
any level of output. Let us see the calculation below
o Installed capacity = 1500 Kgs, per year
o Probable operating capacity = anywhere between 50-90%
o Contribution per kg. of output = Rs. 204.67 (As per calculations shown above).
What would be the profit at 90%, 80%, 70% and 50% of the full capacity ?
When you calculate BEP you would be knowing the Fixed Cost and the Contribution per
unit. You know that Profit = Contribution Fixed Cost.. With this data for a given level of
production, say 750 Kgs, you can calculate Contribution by multiplying contribution per kg.
of the output i.e. Rs. 1,53,500. the moment you know the Contribution at a given level of
production, you can calculate the profit at that production level just by deducting Fixed Cost
from Contribution. In this case, the Contribution at 750 Kgs. is Rs. 1,53,000. the Fixed Cost
is Rs. 1,16,000. Therefore, the Profit is Rs. 37,500. Such calculations are possible because
of two principles:
i). That the Fixed Cost for the Project remains constant irrespective of production level :
ii). That the Contribution per unit of the output remains constant irrespective of production
level.

69

The detailed calculations of profit at various production capacity are given as under :
Probable
operating
capacity %

Product in kgs.

Contribution Rs.

Fixed Cost

Profit

50%
750
1,53,500
1,16,000
37,500
60%
900
1,84,200
1,16,000
68,200
70%
1050
2,14,900
1,16,000
98,900
80%
1200
2,45,600
1,16,000 1,29,600
90%
1350
2,76,300
1,16,000 1,60,300
100%
1500
3,07,000
1,16,000 1,91,000
Suppose, during the course of managing your unit, you come across a situation
where you have sufficient orders to reach break even level. You feel that by offering
some discount you can sell more or build up customer relation for that matter. Now, the
question is how to decide the amount of discount to be offered. Taking the example of
the chemical unit as described earlier, we have seen that the unit will break even at a
production of 566.7 Kgs. per year. You also know that the contribution (SR-VC) per Kg.
of the output is 204.67. This means that for every Kg. of output, after covering the
variable cost, you earn around Rs. 204.67 to cover your fixed cost. Thus, at a
production level of 566.7 Kgs., the total contribution is Rs. 1,16,000 (566.7xRs.204.67)
which is equal to fixed cost. When you reach the Break Even Production level, all your
fixed costs are covered. So, after reaching Break Even Production Level, for every
Kg. of the chemical that is produced in excess of Break Even production would earn a
profit of Rs. 204.67. In simple terms, for every unit of the output that is produced in
excess of Break Even production Level, the Contribution is equal to the Profit. In the
case of the Chemical Unit, the Break Even Product is 566.7 Kgs. and the production at
full capacity is 1500. In other words, the production at full capacity is 933.3 Kgs. in
excess of Break Even production Level (1500 566.7). With Contribution of Rs.
204.67 per kg. of output, the Contribution for 933.3 Kgs. which is in excess of Break
Even Production level is Rs. 1,91,000 (204.67 x 933.3). Going by the principle that after
Break Even Production Level whatever contribution is equal to profit, the profit for the
Chemical Unit at 100% capacity (1500 Kgs. production) should be Rs.1,91,000/Coming to the question of deciding the discount, you first decide how much you want
to earn as profit per kg. of output. In this case, let us say that you add this amount to the
variable Cost of the Unit. Total Variable Cost as per Pt. C above is Rs. 9,68,000/- at a
production level of 1500 Kg. Therefore, the Variable Cost per unit is Rs. 645.33. Adding
Rs. 100/- to this, the total Variable Cost per unit comes to Rs. 745.33. per Kg., you will
earn Rs. 100 per kg. as profit. Your original selling price is Rs. 850/- per kg. (refer Pt.
No. 11 of 8 above). So, the maximum discount you can offer if you want to earn Rs. 100
as profit per Kg. of out put is Rs. 850/- Rs. 745.33 = Rs. 104.67.

70

This works out to be around 12% of the selling price. Therefore, towards the end of
your financial year, if you have already reached break even production level, you can
announce a Special Discount of 12% and still make a profit of Rs. 100 per unit sold in
excess of break even production level.
Imagine, what would happen if your announce such a discount right at the beginning
of the financial year. You are bound to lose because the discount when offered right at
the beginning of the financial year is applicable to the entire production in that particular
year and not to that part of output which is in excess of break even production level.
You might wonder how such discount can be offered only for a part of your total
production, you might have noticed that some of the companies announce clearance
sale by offering additional discounts. They announce such sales only to clear the
stocks and that too, after making sure that they have already reached break even
production level or they are in a position to cover all the fixed costs and still make a profit
after offering a discount.
Taking the example of the chemical unit, let us assume that you have to quote for a
tender involving a supply of say, 1200 Kgs. You know that there are several other
companies sending their quotations. You have to quote a competitive price so that you
can get the tender. The question is what price you have to quote. Let us now see how
to answer this question:
You know that the order is for 1200 Kgs. and your annual production is 1500 Kgs.
You also know that the Variable Cost per Kg. is Rs. 645.33. Now, the Variable Cost per
unit x No. of units will give the total. In this case, the total Variable Cost would be Rs.
1,16,000. So the total cost for 1200 Kg. is Rs. 8,90,400 (Rs. 7,74,400 + 1,16,000). In
other words, the total cost per Kg. of the chemical is Rs. 742/- (Rs. 8,90,400 +1200).
Thus, you can quote Rs. 742/- per Kg. without the fear of incurring loss and at the same
time without making any profit.
Suppose, you have to pay Rs. 30,000/- in that year to the State Finance Corporation
towards the money you have borrowed for purchase of land, building and machinery and
suppose you need Rs. 30,000/- per year to meet your personal expenses, what price is
to be quoted ? The price should be such that must cash at least Rs. 60,000/- after
covering all the costs. In other words, you must earn Rs. 9,50,4000/- (Total cost =
Rs.8,90,000 + Rs. 60,000) to meet all the cost and then to pay your loan instalment and
also meet your personal expenses. Under such circumstances, you can quote a price
Rs. 792/- Kg. (Rs. 9,50,400 + 1200). Since you have the cost data, you can check these
calculations by actually working out the profitability at a production level of 1200 Kgs.

71

16.
ESTABLISHMENT
OF AN
ENTERPRISE:
SYSTEMATIC
APPROACH

72

16. ESTABLISHMENT OF AN ENTERPRISE : SYSTEMATIC APPROACH


Setting up of an enterprise involves several decisions and meeting procedural
requirements. The entrepreneurs have to contact concerned persons in the
agencies for upto date and correct applicable procedural requirements. In some
cases it is necessary to contact specialists or experts to avoid statutory or other
lapser. Single point contacts in some states or DICs are good places to start with.
1. Procedures And Contact Points
Procedural Requirement
Constitution
i). Proprietorship
ii).Partnership

Concerned office or contact address


Legal Advisor
- Legal Advisor
Registrar of firms

iii)Company (Pvt. Ltd.)


- CA/Company Secretary
- Registrar of firms
Registration
i). For SSI or Ancillary
unit. For Cottage
industry
ii).For Subsidy

iii)For Sales Tax


(State & Central
iv)For Production Licence
v) Under Excise
vi)Under Factory Act
vii)Under Shop &
Establishment Act.
viii)Patents & Trademark
No Objection Certificate
i). For location and
construction

ii). For water & Air


pollution Control

Remarks
- No Legal obligation
- Agreement to be
Registered with Registrar
of firms.
- Incorporation of company
with Registrar of
Companies in the State.

- District Industries Centre


of Deptt. of Industries
- Dist. Khadi & V.Industries

Temporary
Registration
&
Permanent Registration after
establishment of the unit.
Registration for subsidy for State
D.I.C. or I.C. Office.
level and central level both,
whichever applicable.
Registration for Sales Tax No. for
interstate & state transaction.
Sales Tax Deptt. Legal Advisor
For units other than SSI.
Registration for Excise for
DGTD
scheduled industries.
Dept.of Excise or Customs
For more than 9 workers, under
Factory Act Registration.
Factory Inspector in the State or Legal For non-manufacturing activities
Advisor
registration for Gumastas.
For exclusive right over use of
Office of Shop & Establishment Local mark or design.
Authorities
Legal Advisor or Trade Mark Registry.
Local authorities Municipal, Panchayat
Collector etc. Ind. Dev. Corpn.
Water & Air Pollution Control Board or
Authorities

73

Unit located under jurisdiction of


these authorities, needs No.
objection
Certificates
for
manufacturing.
Clearance or no objection from
these authorities, where ever
required.

Licences & permissions


i). For Production
Programme

ii). For Raw Material &


Machinery
- STC/MMTC
- Controller of Import.
iii).Building Plans &
Construction
iv).Special Permission
a). Storage
b). Maintenance

Dept. of Inds.
- SISI
- DIC
- Drug & Cosmetic
Dept of Indus. or
- DIC
- Small Inds. Dev. Corpns.
Industrial Dev. Corporations
- Local Authorities
Explosive, Police Dept. Fire Brigade
Chief Inspector of Boilers
- Inspector for Weight & Measures
(Dept of Inds.)
Legal Advisor

c). For Specified


Industries for
regulation of raw
material, price,
distribution etc.

For some specified industries like


electronics, approval of Devep.
Commissioner for Production
Plans
needed
before
establishment
Registration for necessary quota,
after SSI registration.
For Import Licences.
Approval of Building plans from
respective authorities
Permission for explosive and
highly inflammable goods.
For operating Boilers
All weights to be stamped &
verified before use.
Specified mfg. activities need
various permissions & licences
like Flour Mill, Salt, Wood, Food,
Fertilizers, Oils, Rubber, Rice
Mills, Insecticides, Jute Mining,
Arms etc.

2. Application Forms and Agencies


Entrepreneurs will have to comply with some formalities before, during
establishment and also during operational stage. Some of the application forms
required to be filled up by new entrepreneurs are listed below. The requirement of
forms is classified into planning, implementation and operational stage.
Type of Form
Where to contact
(A)
AT PLANNING STAGE
1
Provisional Registration No.
District Industries Centres
2
Application for Shed or Plot
State Industries Development Corporation
3
No Objection Certificate from Local self-Government agencies such as
local authorities
Panchayat, Nagar Palika, Municipal
Corporation.
4
No Objection Certification from District Health Officer
Health Department
5
No Objection Certificate from Electricity Department
Electricity Department
74

6
7
8
9
10
11
12
13
14
15
16
17
18
19

Loan Application form for Term


Loan
Subsidy Registration Form
Application for Building Plan
and Estimates
Application
for
Bank
Account/Hypothecation/Cash
Credits/Working Capital Loan
Application for Air & Water
pollution
No
Objection
Certificate
Application for the approval of
production programme for
certain restricted items
Registration of Partnership
deed
Application for Ancillary Units
Registration of firm
Application for the Boilers and
Plant lay-out of the Unit
Application for the production
of petroleum based products
Application
for
Excise
Registration Number
Application for Latex in rubber
based products
No Objection Certificate from
Forest Department for wood
based Products

State Finance Corporation/Nationalised


Bank/National Small Industries Corporation
District Industries Centre
Approval of Architect/Contractor
Nationalised Banks
State Pollution Control, Authorities
District Industries Centre
Central Ministry and SISI
Registrar of firms
Parent Companies
Registrar of firms
Inspector of Factories
Director of Industries
Ministry of Petroleums
Excise Department
Rubber Board
State Conservator of Forests

20

Application for essential commodity District Collector/District Civil supply Department


items as raw-materials

21

Application for imported raw- District


materials
Boards
Application for Import of M/cs. District
Boards
Application for raw materials
District
Boards

22
23

75

Industries

Centres/Export-Import

Industries

Centre/Export-Import

Industries

Centre/Export-Import

(B)
24
25
26
27
28
29
30
31
(C)
32
33
34
35
36

37

DURING IMPLEMENTATION

Application
for
power
connection
Application for Water
Application for C Form-SalesTax
Application for State Sales Tax
Registration
Application for Central Sales
Registration
Application for Exemption from
Sales-Tax
Application for Exemption from
Octroi Duty
Application for storing rawmaterials
AT OPERATIONAL STATE
Application for permanent
Registration Number
Application for Subsidy Claim
Application for Power Subsidy
Application for FPO Licence

Local Electricity Department


Local Authorities
Sales Tax Department
Sales Tax Department
Sales Tax Department
Sales Tax Department,
District Industries Centres
Local Authorities,
District Industries Centre
Director for Explosive

District Industries Centre /


Directorate of Industries
District Industries Centre
Local Self Government Agencies
Food Preservation Ordinance,
Food Controller
Application for Registration in Labour Welfare Board/
case of more than 20 Employment Exchange, Provident Fund
employees without power use
more than 10 in power
oriented units.
Application
for
product Directorate of Industries or Director General
marketing to the Central of Supply.
Government Departments

76

17.
LEGAL
FORMALITIES
FOR
SETTING UP OF
UNIT

77

17.LEGAL FORMALITIES FOR SETTING UP OF UNIT


Before setting-up of the units/ventures the following Legal obligations should be
followed at operational stage, which are enlisted as below
Sl.
Applicable Acts
Remarks
No.
1 Labour Legislation/Acts
Applicable to regulate employment of labour
for exploitation & maintenance of good
working conditions.
2 Employee State Insurance Act For 20 or more Employee, to provide certain
benefits Registration with ESIA.
3 Minimum Wages Act
Applicable to specified employment to ensure
minimum wages payable to workers
4 Payment of Bonus Act
For more than 20 workers, minimum amount
of Bonus payable at 8.33% of salary, whether
or not employer has any allowable surplus in
the accounting year.
5 Workmen Compensation Act
Obligation
on Employees
to
pay
compensation to workers in case of injury or
accidents
6 Employees Provident Fund Act For 20 or more persons in schedule
industries, Employers obligation to pay P.F.
7 Exchange Control Act
For using foreign exchange, special
permissions required, controlled by R.B.I.
8 Customs Clearance
For inter-country transactions, Custom
Clearance at the port of land needed.

78

18.
MARKETING
STRATEGY AND
SALES
TECHNIQUES

79

18.MARKETING STRATEGY AND SALES TECHNIQUES


When entrepreneur start the unit, there is some idea in the mind considering
the position of that particular product in the market. Some times the unit is started
considering the heavy demand of that product in the market. Some times it is
taken into account that one unit is very successful in a particular field or when
there is a shortage of a particular item and market demand is more. Then very
important aspect with which an entrepreneur came across is marketing. Marketing
involves following activities.
1. Research :
This would be a never ending activity throughout the existence of the SSI unit.
It starts with a market survey to establish the demand and supply position in order
to determine the feasibility of setting up a unit for the manufacture of a particular
item. One has to see the product as the consumer sees it and consumer
satisfaction must be the main criteria for evaluation of all policies and actions.
Even after the unit has gone into production, research must continue on how to
improve the product, packaging, distribution, improvements, in the packaging etc.
2. Planning :
This activity starts at the project stage and is extremely necessary throughout
the life of the project. At the project stage this would include activities such as
planning, market development, development of packing, setting up distribution
networks, warehousing, short-term and long term sales planning. After the unit is
in production it will include sales planning. The sales plan will include a forecast of
sales for the future, a plan for territorial coverage, a programme to achieve the
forecasted sale and a sale promotion plan if required.
3. Branding :
Branding is absolutely essential in consumer products as well as consumer
durables and industrial products. This is so because the same product having
widely diverse qualities is available from different manufacturers. However, it
helps the manufacturer, retailer and consumer in the following ways
 It enables the consumer in effective and easy identification of the product of a
particular manufacturer.
 The manufacturer benefits since the consumer also asks for his specific brand.
 It enables the manufacturer to have a better control over the sales outlet and
price of the product.
 If the brand is popular it benefits the retailer by attracting consumers to his
sales outlet enabling him to sell other products as well.

80

4. Pricing :
The price is usually associated with
i). Value
ii). Status
iii). Quality
iv). Durability
The point to remember is that a consumer is more sensitive to price when the
purchase frequency is high or when the quality of competing products is more or less
the same. Examples of this are hardware, matches, gums, stationery, chemicals,
petroleum products, etc.
There are five different methods that can be employed in pricing products.
1. Pricing in line with similar products already in the market.
2. Pricing slightly higher than the price leader in the market.
3. Pricing slightly lower than the price leader in the market.
4. Pricing on a cost plus basis.
5. Pricing on the basis of profit yield at different sales levels.
Before fixing the price of your products always ask yourself the following questions
1. At what range of price will the product be economically attractive to the
consumer?
2. What sales volume can you expect at different price levels ?
3. What will be the competitors reaction to your price.
Attempts at answering these questions will help the entrepreneurs in price
fixing.
5. Distribution :
The objective of a distribution network is to conveniently make available
goods to the largest number of consumers in required quantities where and
when they are needed. This can be achieved through
1. Agents
2. Stockiest
3. Whole-Sales
4. Distribution
5. Manufactures Shops
6. Retailers
7. Street Vendors
8. Mail Order
The selection of sale outlets will depend on nature of product, number of
consumers and the financial resources.
81

6. Selling :
A sale can be described as converting goods into cash. Most people confuse
a sale to be booking of an order. However, no sale is complete till the goods have
been delivered and their value recovered. This must be kept in mind when assessing
the performance of your own sales staff and also when finalizing terms with agents,
distributors etc.
The most effective method of selling is personal selling, i.e. through your own
trained staff. This is so since no agent, distributor, stockist or dealer would know your
product or its plus points as well as your own sales staff would. However, it is seldom
possible for a SSI unit to resort to personal selling since it cannot afford a large sales
organization to cover the vast geographical area of our country.
Wherever personal selling is resorted to compensation to salesman can be in terms of
1. Salary
2. Salary-cum-commission
3. Commission-cum-retainer
4. Commission
While commission on sales is one of the biggest motivational factors, other
motivational methods are
1. Merit awards
2. Salesmens meetings
3. Contests
In case of operating through your own sales force the different methods for
maintaining effective control are
1. Sales reports
2. Personal meetings
3. Field Visits
4. Fixing of sales quotas
5. Evaluation on basis of compensation earned
6. Territorial development
However, where selling through outside agencies is involved it is essential that the
sales staff of such agencies be given suitable product training and also sufficient
sales aids to make them more effective.
To motivate outside agencies methods that can be employed are
1. Volume discount in addition to normal discounts
2. Contests
3. Dealer Meetings.
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7. After Sales Services :


This is a very important activity which is completely ignored by many
organizations. Most of our new SSI units are set up by traders who have made
money in trading, decided to enter manufacturing field. In trading each transaction is
an individual deal and once the value of the sales has been recovered the matter is
treated as closed. However, a manufacturer cannot afford to take this attitude since
he has to manufacture the same product continuously and make repeat sales to the
same consumers. Hence, any dissatisfaction of the consumer will seriously affect his
further sales. Always remember that a dissatisfied consumer will be very vociferous
and adverse reports spread very fast. In case of any complaint by a customer prompt
action in solving the complaint will usually result in the customer singing praises and
forgetting the initial complaint.
8. Sales Promotion :
This activity is normally resorted to in order to create a temporary spurt in sales.
This situation may arise when certain financial commitments make it necessary to
raise finances in a short time. the methods usually employed are as follows
1. In case where there are more than one products and one of them happens to enjoy a
sellers market, tying up sales of the product in demand with slow moving items.

2. Offering a special discount for a particular time period.


3. Offering some other manufacturers fast moving product at a concessional price
tied to the purchase of your product.
4. Starting a contest with attractive prizes for the winners and the entry fee being the
cash memo, wrappers etc of your product.
5. Affixing identification numbers on our products and holding a raffle where lucky
numbers are picked and the winning buyer as well as the dealer who sold the
winning numbered article are both given attractive prizes.
9. Advertising :
There is a misguided impression in the minds of most people that advertising is an
expensive proposition and can only be resorted to by large units. This impression
arises because most people associate advertising with dailies and magazines and
radio and television. There are, however, other less expensive avenues as well.
The different media are as follows
News Papers and Magazines
 Radio
 Television
 Hoardings and Neon Signs
 Bus and Train Panels
83

 Bill-boards
 Cinema slides and short film advertisements
 Stalls at exhibitions and fairs.
 Internet web-site.
 Direct mailing of literature
 Demonstrations
10. Research :
1. Planning
2. Branding
3. Pricing
4. Distribution
5. Selling
6. Packaging
7. After-Sales service
8. Sales promotion
9. Advertising
10. Credit Control

84

19.
ACCOUNTS
AND
BOOK- KEEPING

85

19. ACCOUNTS AND BOOK- KEEPING.


A man is a social animal. He acts and interacts with other human beings. Part of
this action and interaction is regarding financial matters. Detailed record of these financial
matters should be maintained. The records help the person to:
a) Keep track of each transaction.
b) Determine the effect of each transaction on the relationship of the
person with others.
c) Measure the impact of the transaction on:
i) The property belonging to the persons.
ii) The obligation owing by the person
iii)The income of the person
iv)The expenses of the person
d) Judge his financial health.

1. Why Accounts ?
This question has been asked to many persons. You will be surprised to know that
99% of the people are not aware of the benefits which result from maintaining systematic
and regular accounts.
The chief of a world renowned Bank was once asked, what would be your only
advice to industrialist and businessmen? his reply was, The person who is setting up any
industry or business, should form a system of maintaining books of accounts from the
beginning. If he cannot afford the cost of forming such a system, he should not start a
business. Inadequate system of maintaining accounts is one of the important reasons of
failure of newly set-up business units.
Accounts can be defined as a mirror of trade or industry. Accounts shoe the
economic condition of any business or industry.
Definitions:
Book Keeping:
It is an art of recording business transaction in a set of books.
It is an art of keeping accounts in a regular and systematic manner.
Accountancy:
Accounting is the art of recording classifying and summarizing the transactions.
Difference between Book-Keeping and Accountancy:
Book- Keeping is a very primary stage in accounting. It includes only recording function.
Accountancy is a very broad term which includes besides recording of transaction
summarizing analyzing and interpreting the figures recorded.

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It is said that maintenance of accounts can be used effectively for the following purposes:
1) To ascertain whether the business is making profit or loss.
2) To get information regarding amounts payable to others and amounts receivable
from others.
3) To find out whether income or expenditure have increased or decreased in
comparison with those in previous years ( in this manner, account can be used
as means to control expenditure).
4) To ascertain the financial position of the business.
5) To arrive at accurate planning of the business.
6) To meet the requirements of various statutes like Income Tax, Sales Tax, Excise
Duty and Labour Legislations.
7) For deriving cost of the product.
8) For calculating the rate of return from business.
9) For readily obtaining figures of investments and type of capital investment in
business.
10) To get a comparative picture of your business in relation to other similar
business.
11) For avoiding shortfall of funds.
12) For developing qualities such as accuracy and methodology.
Some steps an entrepreneur must take to derive these advantages from accounts:
a) First of all a good accounting system should be designed. This is a specialists job.
b) An expert in the field or a trained person should be employed.
c) Accounts should be written regularly.
d) Accounts should be supervised periodically.
e) The entrepreneur must discipline himself to give regular and accurate information.
The following methods are commonly used in India for maintaining accounts:
1) Deshi Nama System( traditional system in which accounts can be
written in all regional languages).
2) Double Entry Book- Keeping.
Attend to the Following Matters :
Whatever method you adopt for maintaining accounts, the following matters should
be carefully attended to:
 Account books, statements and other stationery as required should be maintained.
 All entries should be recorded on a daily basis.
 The Accountant should submit the collection list everyday before leaving the office.
 Similarly the list of creditors should be submitted regularly at least a week in
advance. List of major payments should be submitted at least 15 days in advance.
 Trial Balance , Trading Account and Profit and Loss Account should be prepared by
the end of every month.

87

 Cash Flow statement of the firm or unit for the next six months should be always
kept ready in advance.
 Bank Balances should be reconciled periodically with your books.
 The owner should frequently call on his tax consultant and keep him informed
regarding his business.
 Similarly he should also regularly see the head of the financial institution or Bank
which has advanced the loan to his business and keep him informed regarding his
progress and plans.
 Arrangement should be made for receiving the figures of income and expenditure
and purchase and sales daily.
 Comparison of actual expenditure should be made with the estimated amounts and
the owners attention should be drawn by the accountant if the difference is high.
 Bills, receipts etc. should be prepared with complete description and details.
Similarly, vouchers should also show all necessary details.
 Purchasing Fixed Assets:
The following points should be considered before taking any decision for the purpose
of a fixed asset.
a) Whether the surplus funds equivalent to the cost of the assets are
available.
b) If the surplus funds are not available whether necessary loans can be acquired.








If no surplus funds are available and a long term loan is not possible for
the acquisition of an asset, then the idea should be dropped. For, if the
asset is purchased out of the current liabilities, there is every likelihood of
the business getting into serious problems in the near future.
Just as money transactions are recorded in Accounts, the fixed assets and stock
of goods should also be entered systematically. Stock Register should be checked
frequently. Any goods which are lying for a long period are not only occupying
valuable space for along period but also lead to loss of interest.
Care should be taken to despatch the required return forms to Banks or Government
/ Semi- Government Organisations.
Amounts payable should always be paid before due dates.
If it is not possible to make timely payment, the creditor should be advised
accordingly.
Care should be taken to ensure that no cheque is dishonoured by the bank. Postdated cheques should never be issued.
Accounts for every paisa should be tallied.
Payments should not be made without recording the same and receipts should be
prepared immediately on receiving the payments. There should be a receipt every
income and voucher for every payments. The expenditure which requires the owners
sanction should be cleared by the owner before it is paid.
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If these principles are adopted then:


- Shortfall of funds can be prevented.
- Undue tension and stress can be avoided.
- Reputation in the society can be enhanced.
- Success in your venture can become a reality.
All this is possible by maintaining systematic and regular accounts.
Selecting An Accountant :
The person who maintains accounts is an accountant. Adequate care should be taken
selecting him/her. Some important qualities that he/she must possess are as below.
Knowledge of accounts
Honesty
Good handwriting
Ability to work for long hours
Accuracy
Regularity
Books required to be Maintained in Business :
1. Cash Book with Bnak Column
2. Ledger
3. Purchase Register
4. Sales Register
5. Journal Proper
6. Salary Register
7. Stock Register
8. Dead Stock Register
Stationery for Accounts :
1.Receipt Book.2.Cash Memo Book, 3.Bill Book,4.VoucherBook,5.Delivery Challan Book
Classification of accounts:
An account is summarized record of transactions or dealing with one person or relating
to one type of asset or property or relating to any one type of income or expenditure.
Basically accounts are of two types:
ACCOUNT

PERSONAL
ACCOUNT

IMPERSONAL
ACCOUNT

REAL / PROPERTY
ACCOUNT

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NOMINAL ACCOUNT

Personal accounts are those accounts which relate to or pertain to any person. The
person may be a customer or a supplier, lender or a borrower, banker or owner.
Impersonal accounts are those accounts which are other than personal account.
These impersonal accounts may relate to the property or asset or income or expenditure.
Impersonal accounts can further divided into two categories.
1. Real account : relate to any property or asset
2. Nominal account : relate to expense or income.
The Golden Rules of Debit and Credit:

ACCOUNT
1) Personal
2)Real
3)Nominal

RULE
the receiver
What comes in
Expenses or losses

the giver
What goes out
Incomes or gains

90

20.
CRISIS
MANAGEMENT

91

20.CRISIS MANAGEMENT
Crisis management is a business plan of action that is implemented quickly when a
negative situation occurs. The Institute for Crisis Management defines a business crisis as a
problem that: 1) disrupts the way an organization conducts business, and 2) attracts
significant new media coverage and/or public scrutiny. Typically, these crises have the
capacity to visit negative financial, legal, political, or governmental repercussions on the
company, especially if they are not dealt with in a prompt and effective manner.
Over the past several years, high-profile public relations disasters (the Firestone tire
problems on Ford sport utility vehicles, various product recalls, disturbing product tampering
incidents) have thrown an intense spotlight on the issue of crisis management. Indeed, as
companies have witnessed the damage that poor crisis management can wreak on
business fortunes, a growing percentage of firms have intensified their efforts to put
effective crisis management strategies in place.
Hundreds of potential threats exist for every organization. Corporate crises can take
the form of plant fires, loss of competitive secrets, workplace violence, product defects,
embezzlement and extortion, industrial accidents, sabotage, and natural disasters. Any of
these eventsas well as numerous otherscan cause an immediate and prolonged
financial loss to a company, require an intensive communications effort directed to
investors, employees, consumers and other entities, and may present a series of regulatory,
community relations and competitive challenges.
To assess whether a particular company has a higher exposure than others to
categories of crisis, a company may employ a risk or crisis manager who may prepare
statistical models, review industry data, or work with consultants to understand how one or
more crises could impact the organization. Once this process of risk is completed, many
companies then design a Crisis Management Plan (CMP) to determine how negative events
can be avoided or reduced in scope. But business consultants and public relations experts
counsel all companies to put CMPs in place, no matter how remote such threats seem.
Indeed, many businesses are able to secure lower insurance premiums if they have written
crisis management procedures in place, which is a sure indication of the importance of such plans.

Sudden Crisis and Smoldering Crisis :


Robert B. Irvine, president of the Institute for Crisis Management, noted in Communication
World that the Institute characterizes most business crises as one of two types: sudden
crisis or smoldering crisis. "We define a sudden crisis as a disruption in the company's
business that occurs without warning and is likely to generate new coverage," he said.
Examples of such events include business-related accidents, natural disasters, sudden
death or disability of a key person, or workplace violence.
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Smoldering crises, meanwhile, are defined by the Institute as "any serious business
problem that is not generally known within or without the company, which may generate
negative news coverage if or when it goes 'public' and could result in more than U.S.
$250,000 in fines, penalties, legal damage awards, unbudgeted expenses, and other costs."
Examples of smoldering business crises include indications of significant regulatory action,
government investigations, customer allegations, media investigations. "In some instances,"
Irvine added, "crisis situations may be either sudden or smoldering, depending on the
amount of advance notice and the chain of events in the crisis."
According to Irvine, while companies need to make sure that they prepare as best
they can for sudden crises, it is often the slow-burning smoldering crisis that causes the
most damage to a company's image and bottom line. "You really need to be focused on the
less dramatic, more complicated, and ultimately more costly smoldering crises that are likely
to be brewing in your business. The problem is that these smoldering crises often are the result of
management decisions, or indecisions. They may be caused be shortcuts to win contracts,
questionable actions by top producers or someone who has had an unblemished record with your
organization and is close to retirement. In short, they often are tough to detect and then to resolve
because they directly or indirectly involve management decisions, and management has a tough
time admitting errors because it reflects on their egos and abilities."

Small Businesses and Crisis Management :


"A good image is a terrible thing to lose!" noted Bill Patterson in Public Relations
Journal. "It has been said that 30 years of hard work can be destroyed in just 30 seconds."
This grim truth is especially evident among small businesses that are rocked by crises,
since they are less likely to have the deep financial pockets to weather unpleasant public
relations developments. After all, business crises often throw multiple financial blows at
companies. Diminished sales as a result of unfavorable publicity, boycotts, etc. are the most
widely recognized of these blows, but others can have a significant cumulative impact as
well. Added expenses often come knocking in the areas of increased insurance premiums,
recall/collection programs, reimbursements, attorneys' fees, and the need to retrieve lost
customers through additional advertising.
But business consultants and public relations professionals agree that small
business enterprises can do a lot to minimize the damage done by sudden flare-ups of bad
news, provided they adhere to several fundamental rules of behavior.

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PREPARATION BEFORE THE CRISIS :


Small businesses that are faced with public relations crises are far more likely to
escape relatively unscathed if they can bring two weapons to bear: 1) a solid record as a
good citizen, and 2) an already established crisis management strategy.
"Before the crisis, it is important to build good will and good relations on a daily
basis," said media consultant Virgil Scudder in an interview with Communication World.
"The way you are treated in a crisis, by the media and the public, will be determined in part
by what they think of you at the beginning of the crisis situation." Writing in Public Relations
Journal, Bill Patterson offered a similar assessment of the importance of building a
"reservoir of good will" in the community: "The most important rule in defending, preserving,
or enhancing a reputation is that you work at it all year long, regardless of whether or not a
crisis strikes."
The other vital component of crisis management preparation is the creation of an
intelligent and forceful strategy for dealing with various crises if they do occur. "For many
executives, a crisis is something that happens to someone else," wrote Patterson. "It is a
distant thought that can quickly be relegated to the back of the mind, replaced by concern
for profit and productivity." But business owners and managers who choose to put off
assembling a CMP do so at significant risk. Indeed, the hours and days immediately
following the eruption of a crisis are often the most important in shaping public perception of
the event. A company that has a good CMP in hand is far more likely to make good use of
this time than one that is forced into a pattern of response by on-the-spot improvisation, or
one that offers little response at all in the hopes that the whole mess will just go away.
In an article for Entrepreneur, Kim Gordon outlined several steps small businesses
can take to be prepared in the event of a crisis. First, companies should perform an
assessment to determine their most likely sources of vulnerability. Second, they should
select a company spokesperson in advance. "Pick someone who is cool under pressure,
credible, good on camera, and adept at presenting a positive image for your business,"
Gordon stated. It may be helpful for this person to attend media training in order to practice
interview techniques. Third, small businesses should prepare positive messages about their
operations that can be disseminated to media contacts in the event of a crisis. These
messages may include any points you want the public to keep in mind during the negative
publicity, such as an impressive safety or environmental record. Finally, Gordon suggested
that companies prepare a list of key people to contact in case of an emergency.

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RESPONDING DURING THE CRISIS :


When a crisis does erupt, prompt and proactive communication should be a
cornerstone of any business's crisis containment strategy. As Stephanie Smith and Kim
Hunter pointed out in Communication World, "in the throes of a crisis, effective
communication is crucial to a favorable public perception. Actions taken by a communicator
during the first moments of a crisis can affect perceptions of an individual or company well
after the crisis is resolved."
In order to ensure that your company's perspective is heard, it is vital that you do all
you can to make sure that your message is accurately presented to any media providing
coverage of the crisis. "Perception is truth," wrote Patterson. "And, even though most
executives don't like it, the media establishes the perception of your organization. So, in this
new public relations discipline of reputation management, dealing with the media in an
organized, aggressive, and timely fashion is mandatory." In addition, Scudder suggested
that effective interaction with various mediaradio, newspaper, televisionis often
predicated on realizing that representatives of those media outlets are not infallible. "There
are two things you should not assume on the part of any journalist," he said. "Knowledge
and perspective. Do not assume they know the facts. Tell them the facts. And if they know
the facts, do not assume they know what the facts add up to."
Effective communication with media, then, is an essential element of any CMP. But
consultants offer other tips as well. Following are a list of other actions that small
businesses should take when confronted with a crisis management situation:
1. Be open and honest with media and customers alikeSuch a stance may well
garner sympathy with customers and consumers, particularly if the crisis is one over
which the company has little control, such as malicious product tampering. "Take the
perspective of the people who are out there," said Scudder. "Be candid, be truthful,
and give people what they want to know."
2. React quickly Scudder noted that a company's actions in the early stages of a
crisis "will determine how the coverage of the client and the crisis goes and whether
you are perceived as good guys who had an accident or bad guys."
3. Utilize only one spokesperson Consultants can cite countless instances in which
companies faced with a business crisis compounded their problems by using
multiple spokespeople who gave conflicting statements. "Only one story must come
from the company, and it must always be consistent," contended Patterson. "When
you have several people talking to the media during a crisis, several versions of what
happened usually end up in the various media. This confuses the public, often
leading them to believe what you are saying is untrue."

95

4. Arm yourself with the factsCompanies can hurt themselves terribly


when they make public statements based on incomplete knowledge of
events.

5. Stay on messageEngaging in speculation and/or rambling discourses does not


help your company's cause. Spokespeople should be candid without being unduly
negative.
6. Do not lie or mislead the media, the public, or investigating agencies The
discovery of one single lie casts every statement that your company makes into
doubt.
7. Establish and maintain contact with other important groups Depending on the
nature of the crisis, communication with employee, industry, and community groups
can be a valuable part of a crisis response plan. Is the crisis likely to have an impact
on the company's labor union or general work force? If so, arrange a meeting with
representatives so that they can be kept informed and ask questions, and so that
you can get your message across. Is your company faced with an embarrassing
allegation of racial discrimination or harassment? Perhaps a meeting with local
religious and/or civil leaders would help (provided, of course, that your company
signals a genuine interest in hearing their thoughts, so that they do not view the
meeting as a cynical public relations ploy). Are your company's production processes
arousing the ire of local civic or environmental groups (and the growing interest of
local media)? Arranging a meeting in which they could register their concerns might
relieve the situation somewhat (again, provided that your company shows a genuine
interest in hearing them out and responding to legitimate concerns).

96

21.
CUSTOMER
RELATIONSHIP
MANAGEMENT

97

21. CUSTOMER RELATIONSHIP MANAGEMENT

Customer relationship management (CRM) creates a comprehensive picture of


customer needs, expectations and behaviors by analyzing information from every customer
transaction. CRM creates the customer intelligence necessary to develop customer
relationships.
Customer relationship management (CRM) consists of the processes a company uses to
track and organize its contacts with its current and prospective customers. CRM software is
used to support these processes; information about customers and customer interactions
can be entered, stored and accessed by employees in different company departments.
Typical CRM goals are to improve services provided to customers, and to use customer
contact information for targeted marketing.
While the term CRM generally refers to a software-based approach to handling
customer relationships, most CRM software vendors stress that a successful CRM effort
requires a holistic approach.[1] CRM initiatives often fail because implementation was limited
to software installation, without providing the context, support and understanding for
employees to learn, and take full advantage of the information systems.[2]
Overview :
From the outside, customers interacting with a company perceive the business as a
single entity, despite often interacting with a number of employees in different roles and
departments. CRM is a combination of policies, processes, and strategies implemented by
an organization to unify its customer interactions and provide a means to track customer
information. It involves the use of technology in attracting new and profitable customers,
while forming tighter bonds with existing ones.
CRM includes many aspects which relate directly to one another:

Front office operations Direct interaction with customers, e.g. face to face
meetings, phone calls, e-mail, online services etc.
Back office operations Operations that ultimately affect the activities of the front
office (e.g., billing, maintenance, planning, marketing, advertising, finance,
manufacturing, etc.)
Business relationships Interaction with other companies and partners, such as
suppliers/vendors and retail outlets/distributors, industry networks (lobbying groups,
trade associations). This external network supports front and back office activities.
Analysis Key CRM data can be analyzed in order to plan target-marketing
campaigns, conceive business strategies, and judge the success of CRM activities
(e.g., market share, number and types of customers, revenue, profitability).
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Types/Variations of CRM :
There are several different approaches to CRM, with different software packages
focusing on different aspects. In general, Customer Service, Campaign Management and
Sales Force Automation form the core of the system (with SFA being the most popular[citation
needed]).
Operational CRM :
Operational CRM provides support to "front office" business processes, e.g. to sales,
marketing and service staff. Interactions with customers are generally stored in customers'
contact histories, and staff can retrieve customer information as necessary.
The contact history provides staff members with immediate access to important
information on the customer (products owned, prior support calls etc.), eliminating the need
to individually obtain this information directly from the customer.
Operational CRM processes customer data for a variety of purposes:

Managing campaigns
Enterprise Marketing Automation
Sales Force Automation
Sales Management System

Sales Force Automation (SFA) :


Sales Force Automation automates sales force-related activities such as:

Activity Management: Scheduling sales calls or mailings


Tracking responses
Generating reports
Opportunity Management and Assessment
Account Management and Target Account Selling
Automate Sales Order Processing

99

Analytical CRM :
Analytical CRM analyzes customer data for a variety of purposes:

Designing and executing targeted marketing campaigns


Designing and executing campaigns, e.g. customer acquisition, cross-selling, upselling
Analysing customer behavior in order to make decisions relating to products and
services (e.g. pricing, product development)
Management information system (e.g. financial forecasting and customer profitability
analysis)

Analytical CRM generally makes heavy use of data mining.


Sales Intelligence CRM :
Sales Intelligence CRM is similar to Analytical CRM, but is intended as a more direct
sales tool. Features include alerts sent to sales staff regarding:

Cross-selling/Up-selling/Switch-selling opportunities
Customer drift
Sales performance
Customer trends
Customer margins
Customer aligment

Campaign Management :
Campaign management combines elements of Operational and Analytical CRM. Campaign
management functions include:

Target groups formed from the client base according to selected criteria
Sending campaign-related material (e.g. on special offers) to selected recipients
using various channels (e.g. e-mail, telephone, SMS, post)
Tracking, storing, and analyzing campaign statistics, including tracking responses
and analyzing trends

100

Collaborative CRM :
Collaborative CRM covers aspects of a company's dealings with customers that are
handled by various departments within a company, such as sales, technical support and
marketing. Staff members from different departments can share information collected when
interacting with customers. For example, feedback received by customer support agents
can provide other staff members with information on the services and features requested by
customers. Collaborative CRM's ultimate goal is to use information collected by all
departments to improve the quality of services provided by the company.[3]
Consumer Relationship CRM :
Consumer Relationship System (CRS) covers aspects of a company's dealing with
customers handled by the Consumer Affairs and Customer Relations contact centers within
a company.[1] Representatives handle in-bound contact from anonymous consumers and
customers. Early warnings can be issued regarding product issues (e.g. item recalls) and
current consumer sentiment can be tracked (voice of the customer).
Geographic CRM :
Geographic CRM (GCRM) combines geographic information system and traditional CRM.
Geographic data can be analyzed to provide a snapshot of potential customers in a region
or to plan routes for customer visits.
Strategy :
Several CRM software packages are available, and they vary in their approach to CRM. However,
as mentioned above, CRM is not just a technology but rather a comprehensive, customer-centric
approach to an organization's philosophy of dealing with its customers. This includes policies and
processes, front-of-house customer service, employee training, marketing, systems and
information management. Hence, it is important that any CRM implementation considerations
stretch beyond technology toward the broader organizational requirements.
The objectives of a CRM strategy must consider a companys specific situation and its customers'
needs and expectations. Information gained through CRM initiatives can support the development
of marketing strategy by developing the organization's knowledge in areas such as identifying
customer segments, improving customer retention, improving product offerings (by better
understanding customer needs), and by identifying the organization's most profitable customers.

101

CRM strategies can vary in size, complexity, and scope. Some companies consider a CRM
strategy only to focus on the management of a team of salespeople. However, other CRM
strategies can cover customer interaction across the entire organization. Many commercial
CRM software packages provide features that serve the sales, marketing, event
management, project management, and finance industries.
Implementation Issues :
Many CRM project "failures" are also related to data quality and availability. Data cleaning is
a major issue. If a company's CRM strategy is to track life-cycle revenues, costs, margins,
and interactions between individual customers, this must be reflected in all business
processes. Data must be extracted from multiple sources (e.g., departmental/divisional
databases such as sales, manufacturing, supply chain, logistics, finance, service etc.),
which requires an integrated, comprehensive system in place with well-defined structures
and high data quality. Data from other systems can be transferred to CRM systems using
appropriate interfaces.
Because of the company-wide size and scope of many CRM implementations, significant
pre-planning is essential for smooth roll-out. This pre-planning involves a technical
evaluation of the data available and the technology employed in existing systems. This
evaluation is critical to determine the level of effort needed to integrate this data.
Equally critical is the human aspect of the implementation. A successful implementation
requires an understanding of the expectations and needs of the stakeholders involved. An
executive sponsor should also be obtained to provide high-level management
representation of the CRM project.
An effective tool for identifying technical and human factors before beginning a CRM project
is a pre-implementation checklist.[5] A checklist can help ensure any potential problems are
identified early in the process.
Privacy and data security :
One of the primary functions of CRM software is to collect information about customers.
When gathering data as part of a CRM solution, a company must consider the desire for
customer privacy and data security, as well as the legislative and cultural norms. Some
customers prefer assurances that their data will not be shared with third parties without their
prior consent and that safeguards are in place to prevent illegal access by third parties.

102

22.
ENTERPRISE
GROWTH,
PRODUCT
DIVERSIFICATION
AND EXPANSION.

103

22.ENTERPRISE GROWTH PRODUCT DIVERSIFICATION EXPANSION


There are a number of ways of growing or expanding a business. Whatever choices
there may be, business owners who are in the hot seat to make a judgment, should
consider the best possible option that is in line with their main objectives.
This section aims to provide an initial understanding of some basic business growth
strategies and definitions. While the lists are by no means exhaustive, it is just to give you
an idea of some ways to expand or grow your business, amongst other options.
Some Possible Growth Strategies :
Ansoff's Growth Matrix (Product & Market Mix)
- Market Penetration, Market Development, Product Development & Diversification

Exporting
Franchising & Licensing
IPO
Merger & Acquisition
Venturing Overseas

Ansoff's Growth Matrix (Product & Market Mix) :


One of the common business strategy frameworks used in understanding growth strategies
is the Ansoff's Growth Matrix, developed by H. Igor Ansoff a strategic management guru.
The matrix serves as a basic handy tool to set a firm thinking about the direction it wants to
take in its search for growth.
As you can see in the diagram below, the two axes are marked by products and market
respectively. Should the firm be expanding to new markets or target the existing market with
new or existing products?

Market Penetration :
In this strategy, it would mean that the firm aims to sell more of its existing products in the
markets that they are already in. This would translate into allocating more resources and
efforts to build up sales and marketing activities to attain revenue growth. Indirectly, the firm
104

is also trying to increase its market share. Generally, this may seem less risky to a certain
extent because the firm is already dealing in the same markets and products, however there
may be limitations as to how much growth one can derive in this strategy.
Market Development :
For this strategy existing products/new markets, this happens when a firm decides to sell
its existing products into new geographical markets or new market segments (another
defined target market). For example, it could mean selling an existing computer model to a
new market overseas or alternatively, selling it to a new market segment (e.g. second-hand
market). The firm would also need to spend on sales and marketing to persuade consumers
in new markets to purchase the product / services.
Product Development :
This strategy on the other hand, necessitates developing new products to be sold in existing
markets. This can be seen as a quite common process because for a company to sustain its
presence and growth, it cannot rely on a single product range. For instance, in the retail
industry of product consumables like shampoo, cosmetics and even apparels, companies
are competitively refreshing their product lines to keep in touch with consumers as well as to
keep up with certain trends, market needs/tastes and etc. One would need some good
grasp of market knowledge and skills to come with new product introductions that suits
consumer's needs.
Diversification :
Often seen as a high risk strategy, diversification is where the firm sells entirely new
products to new customers in new markets. The reasons for such a business strategy could
be due to a rise in opportunity that the firm has identified, or feel the need to tap and rely on
new sources of growth and so on. While it is considered as a more risky approach that the
others, the firm must be able to carefully assess its abilities before plunging into a new area
that it may or not have competencies in.
There are two types of diversification: related and unrelated diversification.
Related diversification means that the firm remains in a particular industry, but diversify
into another type of product to be sold to new markets. For example, a chocolate
manufacturer diversifies into a bread/pastry manufacturing or a ladies fashion retailer
decides to go into retailing of children's apparel. This way, with some knowledge and skill in
a particular area (food or apparel), a firm is going into a new product line to serve new
markets.
Unrelated diversification refers to a situation where the firm completely ventures into a
new business area to serve new markets with its new product development. New capital
investments are also needed. In this scenario, it would mean that the firm is entering into an
industry that it has little experience with limited or no knowledge of the industry. For
example, is Virgin brand from the UK, in which the firm that deals with airlines (travel and
tourism) went into other diverse areas such as in media and telecommunications, shopping
and etc.
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Whichever growth options you decide, a few critical things to bear in mind would be the
suitability of your brand in other areas/sectors; time, human and labour resources as well as
market and consumer expectations. At the end of the day, the reward or benefit of
embarking into a particular strategy should outweigh its costs.
Franchising & Licensing :
Franchising and licensing are considered as viable business growth options. In both
situations, you build your business through intellectual property and sharing a proven way of
running a business effectively. In these circumstances, you must have a good
understanding of your rights as to whether you are a franchisor or franchisee, licensor or
licensee. The agreements must then of course be translated into a legal binding contract for
a
certain
period
of
time
for
selected
market(s).
You would also need to be able assess what makes a franchise or license sustainable or
marketable. The Franchising and Licensing Association (FLA) Singapore provides more
information
on
this.
Initial public offering (IPO) :
IPO refers to the company's first equity issue made available to the public to raise new
sources of funds to finance its next stage of growth. In other words, it is the first time a
company offers its shares to the public which was previously unlisted, at a particular price.
The reasons for an IPO are typically associated to a firm's decision to raise additional
capital. If the firm decides to put up a sale of its stock and sells part of their ownership to the
public, it then engages in an IPO. Before even making the step towards IPO, the firm must
go through a meticulous process of weighing its benefits and costs.
Merger & Acquisition:
Merger is a business term used to describe a tool implemented by corporations for
expansion purposes. Normally, a merger means the combination of two business firms that
results into one bigger entity. Acquisition or acquiring refers to the act of taking control over
another corporation. By taking control over a another business entity, one would hope to
gain access to certain key functions, skill or knowledge in a particular industry.
While the above are not meant to be an exhaustive list, there are various reasons for
taking on different options. In determining your growth path, it is very critical to have both
inward and outward looking approach. Identify key resources that you need within your firm
is one way and understand what is in for you should go with any strategy.

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23.
RISK TAKING
BEHAVIOUR

107

23.RISK TAKING BEHAVIOUR


Risk is an enforcing happening that affects an individual but he/she have no control
over it for e.g. Government comes up with a new law that affects your business and there is
nothing. That he/she can do to prevent the law from coming into force. However, he/she can
predict some of the risks and planned on how to handle whenever a risk becomes reality.
It is therefore essential that when an individual is running a business. He /she should
learn to identify possible risks & to manage them. There are 3 actions involved in Risk
Management they are as follows.
1.
Risk Prevention: Takes steps to see that threats do not take place.
If proper measures are taken to avoid damage it is called as Preventing Risk
or Risk Prevention. for e.g. an individual is working in a hotel it is necessary to
close the gas cylinder wolves properly before putting the matchsticks to avoid
fire breaking out in the work shed.
2.
Risk Mitigation: To take steps that if the threat does happen, the loss
Is minimized .The entrepreneur can take action to reduce the damage. If at all
there is any damage sometimes it is not possible to prevent the risk from
becoming a reality. However, he/ she can take measures to reduce the
damage cost. This is known as Mitigating Risk or Risk Mitigation.
3.
Transferring Risk: If the threat does materialize, the loss is borne by
someone else. An entrepreneur can transfer risk by taking insurance policies
by paying premium to the insurance company.
Before managing the risk it is must to learn to identify and access the risk. The
potential risk in each business will vary for each business and each business will have its
own specific set of risks.
Business enterprises and the businessmen are subject to several taxes. We shall, however,
focus on the three important tax measures that affect the business firms in the next 3
sections:
1. Sales Risk: Risk of sudden drop in sales. It is depended on fixed cost and
variable cost. The sales risk is sometimes due to fixed cost is so
high, the break even point is to close to sales. A slight drop in
sales drops below break even point. Hence, it is essential to
reduce breakeven point. This can be done by converting fixed
cost into variable cost therefore in the initial phases of business
fixed cost should not be high and take whatever possible on per
unit for e.g. Sales Commission. There should be a balance
between fixed and variable cost as well as appropriate costing
that balance between fixed and variable cost to mitigate sale risk.
Sale risk can be reduced by diversifying the product.

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2.

Cash Flow Risk: Cash flow risk is a risk when an entrepreneur


needs cash immediately. The unit may have made profit but may
not have access to money reality. The more working capital is the
more cash flow risk for e.g. a tuition teacher takes fees upfront
and a manufacturer of shirts will first have to buy cloth, make shirt
and then wait for a sell. A manufacturer cash flow risk is higher
than that of tuition teacher. The ways to take care of cash flow risk
are 1. Contingency Fund ( kept aside sudden require for e.g.
woman with gold ornaments.) 2. Overdraft Facilities.

3.

Production Risk: The risk of production shortages is called


production risk. The biggest production risk for units is lack of
electricity. To mitigate production loss due to electricity shortage,
one can invest in UPS or an Inverter. Sometime production risk is
due to sudden fault in a machinery and equipments. Hence, it is
necessary to buy equipments under Warranty or Annual
Maintenance Contract.
Technology Risk: The risk of technology making the computer
and other equipments absolute. Hence, it is essential to buy the
latest equipments though it may be a little costlier and price of the
products to recover that cost in maximum.
Social Risk: The risk that a business failure could lead to social
failure.
Policy Risk: The policy risk is a risk of sudden change in
Government laws and policies which can be mitigated by
networking and having information about Government functioning.
Other Risk: This risk includes fire, storm and earthquakes which
can be transferred by insurance.

4.

5.
6.
7.

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24.
SUSTAINABILITY
OF AN UNIT
PRECAUTIONS
NEEDED

110

24.SUSTAINABILITY OF AN UNIT; PRECAUTIONS NEEDED


It is observed that many units become sick within a short period of time after
establishment of the time. if problems are identified properly, its cause, symptoms
are also identified the preventive measures can be evaluated very easily. The
problems arise at four different stages.
1. At project formulation stage
2. At project implementation stage
3. At Operational Stage
4. environmental / external factors
Following are the details indicating the cause, symptoms and preventive
measures at 4 different stages.
1) At project formulation stage:
Cause
Symptoms
Preventive Measures

Sr.
No.
Wrong choice of - Insufficient /low Sales or
1
product

Profit
- More time consumed for
product development
- No sense of achievement
- Reluctance on the part of
financial agencies in
financing the venture.

- Proper market survey


- SWOT Analysis: assessing
ones own strengths &
weaknesses in relation to
the venture.
- studying profit/ growth
opportunities of the venture &
possible threats from the
environment for the same.
- consulting a Banker, financial
Institution, Consultancy
Organisation

Poor Assessment of - Manufacturing problems


Technology
- less output
- Rejections or non-approval
of product specification.
- problem in identifying
required machinery.
- confusion regarding
machinery specifications.

- experts advice
- comparing technology
- studying existing technology/
units.

Sub- optimal Plant - overtime &pressure of time


Capacity.
- output, but no profits.
- Frequent break down of
machinery due to
overloading.

-proper balancing of machinery.


- proper production planning
- capacity of Key equipment to be
decided, based on advantages of
scale

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Locational problems - Non-availability of


transportation
- Power problems
- Labour problems
- Non- availability of raw
materials or delays in
getting them.
- Reluctance on the part of
Municipal Corporation &
other Agencies in granting
necessary clearance.

- proper study of location


advantages / disadvantages
- planning in advance
- studying rules & regulations
of the authority competent to
issue clearance.

Poor
Market - No order or unexpected
Assessment
Orders
- Different specifications and
quality
- No repeated orders
- Unremunerative prices
offered by wholesalers
customers.
- Consequently low turnoverprofit ratio.

- Detailed market survey.


- Assessing demand and
supply.
- studying existing / potential
distribution channels.

Wrong
Fixed -Heavy burden of interest
Investments
- Poor utilization of
equipments(idle M/c)
- No one lends when needed
100% loan
- Book loss due to unduly
high depreciation.

- Large size for status


- Wrong estimates
- Rented premises
- Job work
-Avoiding over- invoicing or
adjustments in project.
- Exploring all sources of finance
in the beginning
- Reduction of project size (start
with low risk, smaller size
project)

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2. At Project implementation stage :


Cause
Symptoms

Sr.
No.
1
Delay
- No replies from suppliers or
1)
Machinery Bankers.
supply
-Time schedule as per
2) Loan Sanction project report
3) Formalities
- Upset
- Cost estimates proving
wrong .

Preventive Measures
-Strict time bound plan of
activities
- Check suppliers reputation
- Devote full attention on followup
-Submit a complete loan
application with all required
documents.
- Make check list of all formalities
to be completed & all
documents to be submitted.
-Study approach of financial
institution through informal
chats with officials or borrowers

Failure to bring - FI/Bankers press for margin


sufficient equity money.
- search and persuation
-Exhaustive own cash
resources on fixed
Investment
-Consequently, liquidity,
shortage at operational level
Failure
to - Over- run of project cost
estimate project - Cash crisis
needs
and
contingency
needs.

- Proper estimates and provision


-Realistic, not ambitious,
optimistic plans.
- Openness with the Bankers on
ones own resource constraints.

Improper
estimates

- Estimates based on supporting


documents.
- Allowance for all taxes,
Transportation and
contingencies.

cost - overrun of cost

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- proper estimates and provisions


for contingency
- Listing down all preimplementation activities
involving cash out- flow

3. At operational stage :
Sr.
Cause
No.
1
Financial

Wrong
Strategies

Symptoms
- Absence of records; cost
data
- Withdrawal for personal use
- Changes in priorities for
payments
- Liquidity problems
- Lack of working capital
funds
- No recovery or delayed
recovery
- Cash inflow not matching
sales level
-List all possible uses
- Long over dues and Bad
debts
- Low efforts of marketing
- No repeat orders
- Wrong choice of customers/
market segmentation

114

Preventive Measures
- Proper records, uptodate data
(hire an accountant )
- Preparing cash flow
statements
- Anticipating needs and making
advance applications for loans.
- Maintaining list of debtors agewise & continuous follow up
recovery.

- Applications of the product.


- List all possible users/ target
markets.
- Decide that target which you want
to attack.
- Dont aim only at most potential
market segment.
- Aim at that segment also whose
requirements you can fulfill.
- Study the Product attributes of
completing products and
accordingly incorporate one or
more Product attributes in your
product as unique selling
proposition.

4. Environmental / External Factors


Sr.
Cause
No.
1
Product
Obsolescence

Symptoms
- Change in technology,
consumption patterns or
consumers, preference
- Market saturation
- Reduction in the rate of
increase of turnover
- Loss of orders
- New entries in market
- New trade policy or product
development by
competitors

Preventive Measures
- Proper market survey
- SWOT Analysis: assessing

Unawareness
about
competitors

Critical Shortage
a) Power
b)Raw materials

- Idle capacity
- Frequent breakdown
- Piling up of orders and
delivery delays.

Changes
Government
Policies/
Regulations

- Price control changes


- Awareness through readings or
- Taxation implications
membership in Associations
-Non- availability of materials - Consulting experts and advisors
regularly.

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- Membership in industry
Association
- Reading industry journals
official publications.
-Get regular feedback from your
salesman/dealers.
- Choose a location where power
is regular and not through rural
feeders.
- Proper Inventory
-Having more than one Supplier
-Provide for captive generation
right at the stage of preparing
project report.

25.
VALUE ADDED
TAX

116

25.VALUE ADDED TAX


Business enterprises and the businessmen are subject to several taxes. We shall,
however, focus on the three important tax measures that affect the business firms in the
next 3 sections:
1) VAT
2) INCOME TAX
3) SALES TAX
Importance of Taxes in Public Administration
For running a good administration & for achieving the socialist aims and also to
function as a welfare state, various taxes are laid down by the various Governments.
The tax laws come into existence through a laid down procedure. Again Article 255
provides that Acts made by Parliament / Legislature shall not become invalid for want
of due previous sanction, if Governor / President for Acts of Legislature & President for
Acts of Parliament gives his/her consent.
Introduction to VAT Systems:
Taxation is one of the major sources of revenue to the Government; taxes are broadly
of two types
1) Direct Tax and 2) In direct Tax, Sales tax or VAT is a indirect tax the
burden of which indirectly passed on to the consumers or buyers, to avoid the
cascading effect of multiple taxes, the MVAT Act was introduced by the state of
Maharashtra with effect from 01.04.2005. This new legislation allows setoff or
refund of tax paid on corresponding purchase of goods except in case of certain
goods not eligible for setoff or eligible after reducing some portion of tax and
subject to conditions specified therein,
The primary objective of VAT must be to enhance competitiveness while
removing the cascading effect of taxes and levies. The VAT regime must be
simple, Transparent, consistent in structure, and approach. The retail chain
remained the vast area untapped for taxation and now it would be covered under
the new VAT System along with the manufacturer and the wholesaler bringing
about a sea change in States Revenues
VAT which has been adopted in many parts of the world, especially in developed
countries is a system which would encourage industrial development further and
would avoid the cascading effect that is tax on tax.
The VAT in brief is defined as:
VAT is a State level Sales tax and it is a tax on retail sales collected in stages.
It is a multi-point tax running through different stages of production and distribution.
Value addition however, in each stage is taxed only once.
Tax is to be finally born by final user of goods.
It is free of cascading effect of taxes due to system of credit mechanism.

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Allow credit / Refund of tax paid on purchases.


VAT provides for no tax Scenario on inputs.
Ensures neutral treatment of exports & imports.
Being a tax on consumption, the final burden of tax is fully born by domestic
consumer of goods.

VAT Example
Raw Material
Producer

Sales Price Rs. 100


VAT Rs. 10

Manufacturer

Sales Price Rs. 100 Total


Vat Rs. 15 VAT Cash
Payable 15-10+ Rs. 5

Whole Seller

Sales Price Rs. 180


Total VAT Rs. 18 VAT
Cash Payable Rs.
18- 15 + Rs. 3

Sales Price Rs. 200 Total


Retailer
Vat Rs.20 VAT Cash
Payable Rs.20-18 + Rs.2
The origin of VAT could be traced back to the year 1918 but France first introduced it
in 1954, VAT can be called as an important fiscal innovation in the field of taxation.
By and large the scheme of levy of tax on sale of goods is, value added tax. Every
sale of goods is taxable under the Act in other words:
1) when manufactured goods are first sold
2) Goods imported from out of India or out of Maharashtra are sold
Consumer

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3) Goods purchased from unregistered dealers (URD) or sold in the same form.
Registration under M. VAT ACT 2002 Registration U/S.16.
(U/R 8,9,10,11,12,13 &14)

A dealer liable to pay tax under this act should have registration i.e. TIN NO.
Dealer who has to get registration under MVAT in the following circumstances:
a) Voluntarily
b) On the basis of turnover of sales.
c) Change in the constitution
d) Transfer of Business by succession i.e. death.
Application for registration should be in Form No. 101. It should be complete in all
respect.
It should be properly filled and filled in Black ink.
A person or a dealer who is registered under this Act shall be liable to pay tax during
the period in which registration is effective even if it is found subsequently that no
registration was necessary in his case.
Cancellation of Registration :
1) Discontinuation of Business
2) Transfer of Business.
3) Turnover of the dealer u/s.3 has reduced or gone below the prescribed limit i.e. Rs.
5,00,000/- in the previous year.
In all these cases the dealer has to apply for cancellation of Registration granted
in Form No. 103. Important Fact in these cases is that it does not affect the Tax
Liability or penalty or interest up to the date of cancellation. The Assessment may
take place after cancellation.
In the following cases the dealer has to apply for amendment in the certificate of
Registration granted.
a) Change in the name of business.
b) Change in the address of Business in local area? W.e.f. 8.9.2006
c) Change in the partners i.e. introduction of new partner or partners or Retirement of
partner or partners.
d) Change in the trustees in the case of Trust.
e) Change in the Guardian of Ward.
f) Change in the karta of Hindu undivided Family.
g) Pvt. Ltd. Company is converted into Public Ltd. Co.
Time limit :
a) For Voluntary registration there is no time limit. When it is required the dealer can
apply.
b) In the case of turnover limit the dealer has to apply within 30 days of completion
of required turnover of sales i.e. 5,00,000/c) In other cases it is 60 days i.e. in succession

119

U/s. 17 of M.VAT Act fresh registration is prescribed under this section the
Commissioner may requires every dealer who holds a valid registration certificate
on a specified date notified by him in U/s. 18 of M. VAT Act & under rule 15 of
M.VAT Act the dealer should inform the department in:a) Change in the name of business, type of business, place of companies.
b) Discontinuation of Business.
c) Merger and demerger of Company, & amalgamation of Companies.
d) Likewise u/s.44 (4) change in the constitution of firm or HUF or transfer of
business.
In all these circumstances the dealer should inform the VAT Authority within 30 days.

Turnover limits:
U/s. 3 of M. VAT Act. The limits of turnover for registration and liability to pay tax.
Importer: Turnover of sales of Rs. 1,00,000/- and the value of Taxable goods sold or
purchased by him during the year is not less than 10,000/-.
Other dealer: Turnover of sales of Rs. 5,00,000/- and the value of Taxable goods sold or
purchased by him during the year is not less than 10,000/-.

120

26.
INCOME TAX

121

26.INCOME TAX
What is Income Tax
Income Tax is the tax levied on income as defined by Income Tax Act. It is an annual tax
collected by the Central Govt. for each financial year on the total income of the previous
year. The financial year of the Central Government is from 1st April to 31st March and,
therefore, the taxes have to be paid for each assessment year on the income of the
previous year relevant of it. The Income- Tax rates are decided by the Central Government
every year while presenting the budget. The important things that an entrepreneur has to
keep in mind regarding this are as under:
I. Accounting Year:
A businessman has a freedom to choose his accounting year. He can keep his accounting
year ending in any month of the calendar year or Vikram Samvat year, etc. it is his choice.
Once the choice is exercised, the change in the accounting year cannot be made without
the permission of Income- Tax Officer..
II. The businessman has to understand his legal and residential status. The status is very
important because the tax rates are different for different status. According to the legal
status, the following is the classification of the assesses.
1) Individual
2) Hindu Undivided Family
3) Company
4) Partnership Firm
5) Association of Persons.
According to the residential status, the categories are:
1) Resident (Resident and Ordinarily Resident)
2) Resident but not ordinary resident
3) Non- resident.
Since the rates of tax, exemptions, deductions vary with the legal status of the assesses,
the entrepreneur must understand the implications of his status.
III. Income- tax is levied on the income as determined and defined by the Income- Tax Act.
The government is giving various kinds of exemptions, deductions and incentives which
reduce tax burden. These deductions are related sometimes to the status of the tax- payer
(Individual, Company, Partnership), sometimes with the size of the industry (small scale),
nature of industry (Poultry farming) location of the industry (Backward District). For
example, all the interest paid by a company is deductible in deciding taxable income. In
case of partnership, interest and salary paid to the partner are not regarded as deductible
from the income. Since the exemptions keep on changing, the entrepreneur will be well
advised to consult of his tax expert, who could guide him in planning out his affairs in such
a manner that the tax liability is reduced to legally minimum possible.

IV. As far as the business income is concerned, the following are the general
permissible deductions.

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Computation of Business Income :


In order to determine the total income computation of income under each of the six
heads is the first step. Aggregation of income under different heads after adjusting for
losses and allowing deductions and tax reliefs results into total taxable income.
So far as computation of business income is concerned, the profits from the business
or profession must be first determined according to the generally accepted commercial
principles and adjustments should then be made to the same on the basis of the
provisions of law.
Deduction expressly allowed in computing business income :
i. Rent rates, taxes, repairs and insurance of buildings used for business purposes.
ii. Current repairs and insurance of machinery, plant and furniture used for business
purposes.
iii. Depreciation of buildings, machinery, plant and furniture owned by the assesses.
iv. Investment allowance in respect of plant and machinery
v. Expenditure on scientific research
vi. Expenditure on patent and copy rights
vii. Amortization of preliminary expenses
viii. Insurance premium against risk of damage or distraction of stocks
ix. Bonus and commission to employee
x. Interest on borrowed capital
xi. Contribution to provident fund
xii. Bad debts written off
xiii. Any other expenditure (not being capital or personal expenditure) which is incurred
wholly and exclusively for purposes of business or profession
Amounts expressly prohibited as deductions :
i. Any tax paid in proportion of profits e.g. income tax
ii. Wealth tax
iii. In case of firm, payment of interest, salary, bonus, commission or remuneration to
partners
iv. Expenditure in the nature of charity or donations
v. Capital expenditure
vi. Personal expenses
vii. Amount transferred to a Reserve Account
With a view to prevent avoidance of tax, certain restrictions / limits have been imposed
on the deductions of certain expenses.
i. Payments made to tax- payers relative or an associate concern will be
disallowed to the extent it is considered excessive or unreasonable.
ii. Payments in respect of any expenditure exceeding Rs. 2,500/- made in cash
not allowable (such payments in order to be allowable must be by cross order
cheque or draft)
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iii.(a) Payment of salary to an employee in excess of Rs. 7,500/- p.m. not


allowable.
(b) Payment of salary to ex-employee in excess of Rs. 90,000/- per year
not allowable.
(C) Payment in providing any perquisite to an employee in excess of 20%
of salary or Rs. 1000/- p.m. not allowable.
iv. Payment of fees to ex- employee in excess of Rs. 90,000/- not allowable.
v. More provision for payment of tax or duty under any law (such as excise,
custom duty or sales tax) or for contribution to any fund not allowable.(in order
to be allowable such payments must be actually paid during the year).
vi. Entertainment expenditure
vii. Expenditure on maintenance of guest house.
If the net result of computation under this head is a loss, the same is allowed to be
set-off against the income of any other head of income for the year. If it could not be so set
off fully, the balance loss can be carried forward to 8 subsequent years and set off against
the business income of those years.
Deductions :
Deductions are in the nature of relief or concession and given as an incentive to
savings and investment. Such deductions are allowed from Gross Total Income in order to
determine total taxable income.
Deductions are of two kinds:
(A) in respect of Payments
(B) in respect of income
Examples of deductions in respect of payments are:
a. Life Insurance Premiums, contribution to P.F. and investments in approved
securities.
b. Donations of Charitable institutions
c. Medical expenses of handicapped dependent
d. House rent paid
e. Donations for scientific research or rural development
Examples of deductions in respect of income:
a. Dividend and Bank Interest
b. Lottery winnings
c. Long- term capital gains in case of non-company assesses
d. 20% of the profits of new industries undertaking or hotel establishment
after 31.12.70 in backward area for 10 Asst. years.
e. 20% of the profits of new small scale industrial undertaking established
after 30.9.7. in certain rural areas for 10 assessment years.
f. 50% of profits on export turnover + 4 % of Net Foreign Exchange
Realisation.
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g. 25% of the profits relating to execution of foreign projects


h. 20% of the profits (25% in case of company) of new industrial
undertaking or a ship or a Hotel which starts functioning after 31.3.81
for 8 Assessment years.
i. Certain income of cooperative societies.
Tax Payers Obligations :
There are certain obligations cast on the assess under the tax laws. Failure on the part
of the assess exposes him to severe penalties and sometimes prosecution too.
Maintenance of Accounts Books :
a) Any person carrying on business must maintain Account Books- if his income
exceeds Rs. 25,000/- or turnover exceeds Rs. 2,50,000/- in any of the three
preceding previous years. In case of newly set up business the incometurnover is likely to exceed the said limits. The Account Books must be such
that it enables correct computation of income.
b) Also such books are to be retained for a certain number of years.
c) Any person engaged in any profession, (legal, medical, engineering or
accountancy etc.) must maintain books of accounts and documents as
prescribed by law, if his gross receipts exceed of Rs. 60,000/- in any of the
three preceding previous years.
Obtaining Permanent Account Number :
Any person whose income exceeds the maximum amount not chargeable to tax (Rs.
18,000/-)_ or whose business turnover exceeds
Rs. 50,000/- must apply in Form
No. 49A for allotment of P.A. number.
Filling Income Tax Returns :
All the person whose income exceeds the exemption limit must file their income
return in the prescribed applicable form in time which has been fixed as under:
i. Assesses having business income within 4 months from the end of the accounting
year or 30th June of the assessment year, whichever is later.
ii. In any other case the return should be filled on before 30th June.
Payment of Tax :
Taxes have to be paid within due dates.
The person deducting tax from payments described above should also file
appropriate returns with the income-tax department.
The taxpayer should comply with notices issued by the Income Tax Officer in the
course of assessment. The notice would call for production of account books, bank accounts
and other evidence to support the return filled. Notices calling for personal attendance should
be complied with and the tax paper is bound to make statements on oath and sign such
statements.
The taxpayer should intimate discontinuance of a business within 15 days of such
discontinuance to the Income Tax Officer.

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27.
SALES TAX

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27.SALES TAX
Sales Tax is a state levy made applicable whenever the goods are purchased from within
the state. When the goods are procured from outside the state Central Sales Tax (CST)is levied.
Since it is the duty of the seller to charge the sales tax and hand it over to the government, a
businessman has to acquaint himself with the broad outlines of the sales tax.

The basic scheme of sales tax is as under:


It is made obligatory for the firms having a turnover exceeding specified limits to get
the sales tax registration. It is optional for the firm to get the registration for the Central
Sales Tax (CST). Since the rates of CST are considerably lower than the rate of the State
Sales Tax, registration of CST would result into significant economic advantage.
Businessmen having registration are known as registered dealers (RD). The businesses
which are not registered dealers are known as unregistered dealers (URD). A
businessman has to get acquainted with the following facts:
1) Is he obliged to get the registration or not ?
2) Is his commodity / service subject to sales tax and if so, at what rate ? Different
commodities may be subject to different rates.
3) Under what conditions can he get the goods from outside the state against the
payment of the Central Sales Tax? In case of the outside purchases he will have to
submit a C Form to the supplier.
4) To whom can he sell outside the state on CST ? in this case he will be collecting the
C Form from the authorized dealer.
5) Is the tax rate on the commodity the same for the re-sale, lower or nil for the re-sale?
This question would arise when a person would be selling the commodity which he
has already purchased.
6) Finally, what are the incentives given by the government in respect of the sales tax to the
different kinds of the business.
Generally, the policy of first point/ first stage imposition of tax prevails in almost all the
states of our country. That is why the liability to pay tax starts from the very first transaction
of sale the entrepreneur should know the limit of total turnover and when the liability to pay
tax starts. He should also know the limit of taxable turnover limited and the limit of the
turnover fixed for importing or exporting the goods.
What procedure an entrepreneur may follow :
Now the question may arise that to know all these things what one should do ? for this, the
correct way is to contract the Legal Branch, Administrative Branch or the Public Relation Officer of
the Department concerned with Sales Tax. Some primary information is also being provided by
guidance bureau and single point assistance agencies or by Chamber of Commerce also. The
Industries Department also provides information regarding any incentives or benefit granted by the
taxation department.
We highlighted below some general procedure to be followed by any new businessman
irrespective of the state in which he is doing the business.

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1) Registration of the Business :


Here, registration means registration of business under the sales tax law. One
should first know under whose jurisdiction his business is situated. After confirming
this jurisdiction, he/ she should try to contract as a dealer. He should know what
types of prescribed forms are required to be filled in. other information required to be
furnished alongwith the registration form, such as, copies of the partnership deed,
proof of permanent place of business, registration under Shop Act or Rent Receipt or
Municipal Tax Bill may become helpful. Normally no fees are required to be paid.
The department will give registration number bearing Sales Tax Number. Registering
authority is Sales Tax Department in the State.
2) Filling of Return:
After having registered as a dealer, the second step is of maintenance of the books
of accounts and filling of periodical returns, Return is a statement of figures showing
all sales and purchases, with all claims such as tax free goods, goods sold against
certain forms required under Act and also showing taxable balance and the amount
of tax payable. The tax payable must be deposited in government, treasury (or
through authorized banks) in the prescribed form known as Challan Return and
Challan should be submitted tighter in a prescribed time.
3) Assessment of Returns :
Assessment (final amount to be paid and liability for the year)of the returns filled by
the dealer is an important procedure. The Sales Tax Department calls the assesses
to verify the returns filled by the dealer during the year. Generally the final
assessment takes place two to three years after the completion of accounting year.
During verification for assessment, the concerned department checks the
correctness of the claims and deductions shown by the dealer in his returns. The
assesses should be careful in claiming his deductions and claims. He should keep
himself ready with the books of accounts duly closed and adjusted with the forms like
C forms etc. he should also be ready to prove the claims for refund also.
He should keep himself aware of right of appeal. If he is aggrieved by any order
passed by the sales tax authority then he should prefer an appeal within a stipulated
time provided in the law.
4) Other formalities:
Certain miscellaneous procedures are also required to be observed properly . the
department should be informed by the dealer about any cheque in the name and style of
the business, change of constitution, change in accounting year etc. though these things
prima- facie do not seem to be of any importance, sometime these may create a major
problem. The dealer should also be careful in preparing the sales bill. Not just the amount
and date but also exact description of the goods he has sold, rate of tax legimately charged
must be mentioned. He is also required to show the name and address of the purchaser
and sometimes the sales tax registration number of the purchaser also

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Condition on which incentives are given ?


It will be perceived that a knowledge of these factors require a good acquaintance
with the existing tax laws and hence the entrepreneur will be well advised to consult a
practitioner in the field. The entrepreneur is under the following obligations:

1)

He has to register his business under the Sales Tax Law if his
business turnover crosses the limit prescribed. This registration is
granted by the Sales Tax Department of the state as per the
procedures decided by them.

2)

He is supposed to submit periodical returns to the Sales Tax Authorities


which will show all his sales, categorized according to the commodities
so that the exact tax could be decided. It will also show the categories of
sales like, within the state, outside the state, etc. keeping of the records
are very crucial for the Sales Tax Returns and hence these factors
should be kept in mind while the books are written. These returns are to
be submitted periodically. There are penalties provided for failures and
late fillings of the returns

There are other formalities, like information about the change in the
name and style of the business, change in the constitution of the
firm, change in the accounting year, etc. to be complied with. One
has also to be careful in preparing the format of the invoice which
will show the amount, date, sales tax registration number,
description of the goods sold, rate of tax charged, name and
address of the purchaser and sometimes the sales tax registration
number of the purchaser also.
Implications on Sale Price, Cost and Competencies :
It would be clear that no beginner can proceed further without giving proper importance to
sales taxation, because the goods manufactured by him perhaps may not attract Central
Excise but sales tax is always leviable which ultimately is going to raise his sale price. The
beginner should bear in mind that the price should not be higher as compared to his
competitors. Sometimes it may happen that only because of higher rate of tax, some raw
materials may prove to be costly to you as compared to the cost in the neighboring state .
So a new entrepreneur should bear in mind the following:
1) Know the exact rate of tax on raw materials and finished goods.
2) Benefit or incentives declared by the state.

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28.
MANAGEMENT
OF WORKING
CAPITAL

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28.MANAGEMENT OF WORKING CAPITAL


Efficient use of capital is the essence of Financial Management. Management of
capital has two aspects- management of capital employed in fixed assets and management
of Working Capital. The aim of the former is effective use of capital in the purchase of fixed
assets e.g. plant and machinery, land and building, etc. the purpose of working capital
management is to finance day today operations of the firm i.e. maintenance of all current
assets such as cash, bank balance, stock, debtors, advance to suppliers, etc. working
capital can be Gross Working Capital or Net Working Capital. While the Gross Working
Capital is the total of current assets, the Net Working Capital is the excess of current assets
over the current liabilities. Net Working Capital in other words is a part of Working Capital
which is financed by long term sources of funds and this determines the margin of safety for
meeting the current liabilities.
The management of Working Capital has its significance for the following reasons.
a) Cost of Working Capital is higher because of higher interest rate charged by the
bank on working capital loans than on term loans.
b) The fixed assets are purchased occasionally and the financial decisions are
called for only occasionally. But the management of current assets calls for
decision making on a continuing basis and often involves huge amount of
funds.
c) In an inflationary situation where prices of raw materials show a constantly
rising trend, unless working capital is managed efficiently, production can be
hampered for want of funds to purchase raw materials.
The aim of efficient working capital management is to see that the firm has sufficient
funds to meet its daily expenses on production, sales and other operations and at
the same time the firm does not block its capital in maintaining inventory in excess of
what is required, and that it is prompt in collecting its receivable. Blocking of excess
capital means higher expenses by way of payment of interest on capital and
therefore a decrease in the profitability. A firm therefore has to estimate its working
capital need accurately and provide for it from its own sources or by way of outside
borrowings.
Operating Cycle Concept
The basis for determining the working capital needs of a firm is the concept of
Operating Cycle. Operating Cycle is a circular flow in which cash is used to buy raw
materials. Raw materials are converted to stock in process and finished goods by
incurring the expenses for production. Finished goods are sold to the customers on
credit and cash is blocked in the form of receivables. On realization of the
receivables, the funds complete one cycle and become cash again to be used for
purchase of raw materials. This cycle continuously goes on and therefore at any one
point of time the working capital employed by a firm is the summation of the
following:
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a) Cash and Bank Balance


b) Value of Raw Material Stock
c) Value of Stock-in- process
d) Value of Finished Goods Stock
e) Value of Receivables
The entrepreneur or his financial manager should design and control the quantum of
above items scientifically.
Management of Cash
The size of cash balance that a firm should keep depends on the following factors:
a) Volume of Transactions:
On the level of sales realization and daily operational expenses. Some
balance is to be maintained between the inflow of cash from sales realization and
outflow of cash in daily operational expenses.
b) Contingency Needs:
Some amount of cash should be kept for contingencies e.g. a major customer
does not pay his bill, a sales delivery lot is rejected because of improper quality, a
supplier suddenly reduces the credit period, etc.
c) Opportunity Needs:
To make use of opportunities for financial gains e.g. a supplier offers a large
cash discount for purchase of materials, etc.
d) Availability of Short Term Credit:
If short term credit is easily available from bank or money market, less cash
balance can be kept and vice versa.
e) Variation in Cash Flow:
Keeping harmony with the monthly cash flow projection, different amount of
cash balance should be kept in different stages of a month, or if there is any
seasonality in the operations of the unit, it should be taken into account.
Management of Stock
Raw Material Inventory:
The volume of inventory will depend upon the following factors:
i) Lead time of purchase i.e. time lag between placing of order and actual
receipt of materials.
ii) Minimum order quantity- the minimum quantity a material is packed in or the
supplier executes an order.
iii) Rate of consumption of raw materials.
iv) Ordering cost- the cost of postage, stationery, telephone and of visit to the
supplier which have to be incurred for placing an order. Higher the ordering
cost, less will be the frequency of purchase and more will be the volume of
one purchase and hence the maximum raw material stock will be high.
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v) Inventory carrying cost: interest, rent of godown, cost of insurance, are


examples of inventory carrying costs. If this cost is high, efforts should be
made to reduce the volume of the stock.
Stock- in Process:
The volume of stock-in- process mainly depends upon the period of completion
of manufacturing process i.e. the investments in stock-in-process will be higher
where the manufacturing cycle time is long and vice versa. The stock-in-process is
also high when manufacturing process involves use of several machine and
capacities of those machine are not balanced.
Finished Goods:
The volume of finished goods inventory depends upon the following factors:
a) firms that produce in anticipation of sale will have to maintain higher stock of
finished goods than the firms who produce against specific orders.
b) Waiting time for inspection
c) Waiting time for Railway wagon/ Road Transport facilities.
d) If delivery in large batch sizes is wanted by the customer then higher stock
of finished goods have to be maintained.
e) If optimum batch size of production is large, then finished goods stock will
also be high.
Receivables :
The volume of receivables depends upon the payment terms of the customers
and their liquidity position. It also depends upon the credit policy of the selling firm.
For example, a firm selling in a sellers market will follow a stringent credit policy and a
firm in a competitive market may prefer a liberal credit policy. Many firm offer a cash
discount i.e. if goods are paid for in cash as soon as they are delivered, some
discount is allowed to the customer. In such cases it has to be seen that the discount
allowed (a loss) is less than the cost of interest on funds blocked in credit during the
collection period. Higher receivables means blockage of funds and involve the risk of
debts going bad. On the other hand, credit, sometimes, is used as an instrument for
promoting sales.

Resources Planning for Working Capital :


Small industries generally have a poor equity base and the amount of credit
they can manage from suppliers is also limited. In such cases, they have no
other way than to borrow from commercial banks. As the unit operates
profitably, more and more of surplus generated should be ploughed back to
working capital to reduce the dependence on bank borrowings and to finance
the additional working capital need for growth in the sales turnover.

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