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5 How to Establish A Business Enterprise

5.1 Introduction
In the previous lesson you have learnt that one can start a business of ones own. A person can choose any business as a career. A small business is a profitable economic activity which can become an avenue of employment. You may think that it is easy to start a business if you have necessary money required to establish a business. But actually it is not an easy task howsoever small the business may be. It requires so many decisions and steps to be taken at various stages. At first you have to prepare a plan. You have to take decisions about the nature of business location and sources of raising necessary capital. You have also to take a decision regarding physical and material resources. Though the procedure for setting up a business is not the same for all types of business, there are certain steps which you have to take to start any business. In this lesson you will learn how to establish a business and how to expand its activities whenever opportunity arises.

5.2 Objectives
After studying this lesson you will be able to :

appreciate the role of Small Industries Service Institutes in establishing a small business unit;

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prepare a plan for setting up a small business unit, identify various factors that affect the decision regarding location; identify the various sources of raising fixed capital and working capital; prepare a project for loan to be submitted to an agency which grants loans; describe the methods of obtaining regular and adequate supply of raw materials and man power; keep in view the legal and other formalities required to be complied with to establish a business unit; evaluate business performance within a short period after its commencement; identify the various measures of quality control; and decide the time and scope of expansion of business.

5.3 Role of SISIs (Small Industries Service Institutes) relating to establishing a small business unit
Dear learner, in case you decide to establish a business unit of your own and manage its affairs, you can take the help of any SISI. SISIs have been set up by the government in state capitals and other big cities all over the country. There are 28 SISIs and 30 branches set up in state capitals and other places SISIs render assistance in the following areas:

1.

Guidance in financial requirements:


An SISI may guide you in determining the capital requirements as well as selecting the sources of raising finance.

2.

Trade and market information:


SISIs conduct market surveys and give advice to entrepreneurs regarding market conditions and demand for products to be sold.

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3.

Project Reports:
SISIs help in preparing project reports which are to be submitted to licensing authorities or to banks and other financial institutions for loans and credit facilities.

4.

Training Programme:
SISIs organise training programmes regarding establishment of a business and running it. It also arranges training in various fields of manufacturing, such as electroplating and power coating, heat treatment, die and tool making, electronics, repair works, cane and bamboo works etc.

5.

Modernisation:
They also help existing units in the modernisation of manufacturing techniques by giving advice regarding its possibilities and the steps to be taken.

Thus, once you decide to start a business, you can go to SISI unit of your area. You can seek advice from the experts and select the type of business you can start. These institutes help in selecting the line of business, explain legal formalities to be complied with, prepare project reports and give such advice which may help one in establishing a business. If necessary you can get technical training also. Suppose you decide to establish a unit of Die and Tool making, you can attend the training programmes in which you can learn how to make dies and machine-tools. With that technical knowledge you can easily start a business.

Intext Questions 5.1


Fill in the blanks (i) (ii) (iii) SISI stands for __________________. _______________ SISIs have been set up in the country. SISIs give advice to entrepreneurs regarding market conditions as they conduct _______________ .

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(iv)

They organise _______________ programmes regarding establishment of a business and running it.

5.4 Preparing a plan of action


Once you decide to establish a business unit, you will have to prepare a plan of action. You will have to decide in advance each and every step you are going to take in that connection till it starts functioning which is helpful in avoiding delay at the initial stages of starting business. The following aspects of the action plan should be kept in view before deciding on the course of action.

1.

Selection of the line of business:


At first decision is to be taken about the line of business. The main considerations will be its profitability, risk involved and the amount of capital required. You may consider other business opportunities along with the market demand for the goods.

2.

Choice of form of organisation:


A small business may be organised as a sole proprietorship or a partnership firm. Advantages and disadvantages of both the forms will have to be considered and decision is to be taken. As a sole proprietor you will have the authority of managing the business and will be entitled to the entire profit generated, but then you will also have to bear the risk of loss involved. In partnership there will be others to share the risk and contribute capital and help in management. But then the profit earned will also be distributed among the partners. A company form of organisation may also be considered for the purpose.

3.

Financial Planning:
A business cannot be started and run without sufficient amount of capital. Capital is required to buy fixed assets like land, building, machines and equipment. Capital is also required to buy raw material and meet day to day expenses of the business like wages, electricity charges, carriage, etc. Decision has to be

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taken in advance regarding the amount of capital required for the various purposes and regarding the sources of raising it, what amount is to be contributed by the owners and the amount to be borrowed from financial institutions, banks, etc.

4.

Location of business:
Where to establish a business is also to be decided in advance. A business established at a particular location cannot be shifted to other location easily. Decision regarding location of the business unit consists of decision regarding the choice of locality and selection of site. The deciding factors are nearness to the source of supply of raw material, nearness to the market, availability of labour, transportation and banking facilities. Selection of the site depends on cost of land, development cost, etc.

5.

Physical facilities:
Decisions have to be taken regarding plant and machinery and equipments to be provided for the business, building and other physical facilities like water and power supply, transportation, etc. The factors that may affect the decisions in this regard are the size of business, techniques of production to be used, availability of funds, etc.

6.

Plant layout:
After selecting the machinery and equipments required, it is necessary to decide about their installation in a proper manner. This is called plant layout. A good layout makes the operations efficient and economical. It reduces the costs of material handling, storage of inventory, use of space, etc. It helps in optimum utilisation of all resources.

7.

Man Power and Raw Materials:


The number and type of employees to be enrolled have to be estimated and decided in advance. Decision is also to be taken regarding source of procurement, development and training of the employees.

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Raw material is also very important for producing goods. To maintain continuity of production, raw materials must be available in adequate quantity and at regular intervals . Quantity and quality of materials to purchased and sources of supply should be decided in advance.

8.

Production process and operations:


The whole production process is to be visualised and the various activities of the business operation are to be decided in advance. Action plan should be prepared with great care because it determines the course of action to be adopted.

Intext Question 5.2


Following are the aspects of business action plan and the areas they cover listed in columns A and B. Match them: A (a) Lay Out (i) B decision regarding the amount of capital and sources of raising it Decision regarding the place whether business is to be set up. Decision regarding plant and machinery, equipment, building etc. Type and nature of business

(b)

Line of business

(ii)

(c)

Financial planning

(iii)

(d)

Location of business

(iv)

(e)

Physical facilities

(v)

The manner in which machinery and equipments are to be installed.

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5.5 Deciding the nature of business and its location


Nature of business:
To decide about the nature of business the entrepreneur wants to launch, he has to consider the following factors : (i) Whether the business would be profitable, (ii) How much capital would be required, (iii) What would be the degree of risk, (iv) Whether there would be sufficient market demand for the goods, (v) Whether there would be opportunities to grow and expand. The above factors will help him to decide as to which line of business he can successfully pursue.

Location of business:
Once the nature of business has been decided upon the decision will have to be taken regarding the location of the place of business. Special care should be taken while making such selection because the place of business cannot be changed easily. In case of a manufacturing unit the factors that determine location are: (i) Nearness to the source of raw material particularly when the cost of transporting the raw material is high and these are bulky or heavy in relation to their value. Examples of such raw materials are timber, sugar cane, jute, iron ore, etc. Availability of rail or road transport facilities. This will make it convenient to bring raw materials to the factory and transporting finished goods to the market. Availability of banking facilities and postal and other communication facilities. Business cannot be run smoothly without communication with buyers and suppliers. Banks help in transmitting money which is necessary to receive payments and make payments Adequate supply of power and water is another requirement of a factory. Availability of power and water is also a deciding factor. Business unit should be located near the market, particularly when

(ii)

(iii)

(iv)

(v)

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the finished product is expensive to carry because of its bulk, weight and perishability. (vi) Availability of labour at low cost and at ease is also a factor to be kept in view while deciding the location.

In case of a trading business, the best location is the main market area of a commercial city or town. It should have its own godowns preferably near the railway station. There should be enough scope of selling the products.

Intext Questions 5.3


(A) Fill in the blanks (i) Considerations that will help in the selection of the line of business are: (a) (b) (ii) ____________________ ____________________

A small business may be organised as: (a) (b) ____________________ ____________________

(iii)

Capital is required to buy fixed assets like: (a) (b) ____________________ ____________________

(iv)

A good plant layout will make the operations: (a) (b) ____________________ ____________________

(B)

Write True and False against the following statement as the case may be : (i) Place of business is changed frequently

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(ii)

Availability of power and water is an important determinant of location of business Opportunities to grow and expand explain the nature of business A trading business can be established anywhere. While deciding about the location of your business you will care least for the cost of labour.

(iii)

(iv) (v)

5.6 Sources of raising finance


You are well aware that business cannot be run without capital. Adequate capital is required to establish a small business. The capital required for a business are of two types (a) Fixed capital, and (b) Working capital Fixed capital refers to funds necessary to acquire fixed assets like land, building , machinery and equipments. Such assets cannot be easily moved from the business site. They provide the base or foundation of the business.

Factors determining Fixed Capital:


As fixed capital is needed to meet the long term requirements of the business, it is necessary to estimate the amount with utmost care. Following are the factors that may be kept in view for estimating fixed capital requirements.

(a)

Nature of Business:
The business may be a manufacturing concern or a service undertaking or a trading concern. In a manufacturing firm larger amount of fixed capital is required for building, machine etc. which require more funds to be invested. In a trading concern fixed capital required is smaller as the fixed assets like furniture etc. do not involve large investment.

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(b)

Size of business:
The amount of fixed capital required depends upon the size of business i.e. larger the size greater will be the need for fixed capital.

(c)

Types of goods produced:


If a business manufactures consumer goods like soap, hair oil etc smaller amount of capital is required but if it manufactures industrial goods like machine tools and equipments, more fixed capital will be required.

(d)

Production Technology :
In a capital intensive production unit the amount of fixed capital required will be more while it will be less if labour intensive technology is used.

(e)

Method of acquisition of fixed assets:


Fixed assets may be purchased or may be acquired on lease or on hire purchase. If the fixed assets are purchased it will require more fixed capital initially than if the assets are procured on lease or hire purchase.

Sources of fixed capital


Following are the main sources of fixed capital:

1.

Ownership Capital:
The entrepreneur or partners may invest their own savings as capital. This amount of capital is not returnable. In case of a company, share holders contribute the capital as owners.

2.

Borrowed Capital:
Long term loans may be arranged from different sources, such as (i) Commercial banks, and (ii) financial institutions. Banks grant term loans for two to ten years as per the governments credit policy for small scale industries. The banks exntend credit to such industries as part of priority sector lending.

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Then there are allIndia and statelevel financial institutions. Besides there is the Small Industries Development Corporations and Small Industries Development Bank of India which extend long term loans on easy terms to small scale units.

Factors that determine working capital needs:


Working Capital is the capital required to meet day to day expenses like wages, rent, electricity and water charges, and to be invested in the current assets, such as stock of raw materials, semi finished goods, finished goods etc. Working capital is also called circulating capital. This is because investment in current assets are recovered and reinvested repeatedly in course of business operations. Going by the above meaning of working capital, its requirements may be met by short term funds. however, since the business is a continuing concern it must at all times have a certain amount of working capital which would be needed again and again. This may be regarded as the permanent part of working capital. Following are the various factors that need to be considered to estimate the amount of working capital needed.

1.

Proportion of cost of raw materials to total cost:


If the raw materials account for a major portion of the total cost of the finished product, more working capital is required.

2.

Cost of labour:
If labour intensive methods of production are used more working capital will be required.

3.

Length of operating cycle:


If more time is taken in the completion of the production process and the sale of the products, higher investment will be required in inventories and wage bills and hence more working capital will be needed.

4.

Terms of purchase and sale:


If raw materials and other services are available on credit and goods produced are sold for cash, less working capital investment

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will be involved. On the other hand, if raw material is to be purchased for cash and goods produced are sold on credit, larger working capital will be necessary.

5.

Current Assets turnover:


The current assets turnover is measured by the ratio of sales to current assets. In other words, more rapid is the use of raw materials in the production process and more rapid the sale of goods produced lesser will be the amount of working capital needed. For instance if sales over a year amount to Rs. 12 lac and the current assets on the average during the year has been worth Rs. 2 lac, the current assets turnover will be Rs. 12 lac/ Rs.2 lac=6 times. In other words the current assets are used and raised every 2 months during the year. A business having the use and reuse every two months will naturally require more working capital than the business where the use and reuse is every one month. More rapid the flow of working capital lesser is the need for working capital and vice versa.

6.

Cash requirements:
Needs for cash to meet the operating expenses like wages, rent, freight, taxes etc, also determine the amount of working capital.

7.

Seasonal operations:
Business units engaged in manufacturing seasonal goods are required to have a relatively larger amount of working capital. The recovery of working capital through sales of such products is limited to a particular period, and hence a large amount of working capital is required to meet offseason requirements.

Sources of short term finance/working capital


Following are the main sources of raising finance to meet working capital requirements:

1.

Trade credit:
It is the credit extended by sellers to the buyers. Raw material in case of manufacturing business and finished goods in case of trading business may be purchased on credit. The period of credit

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depends upon the prevailing custom and trade practices and terms of supply , but it generally ranges from 15 days to 3 months. No security is required for availing of trade credit.

2.

Bank credit:
Commercial banks are the most important sources of short term finance. The various types of short term credit facilities that banks provide are: (a) outright loans to be paid back in one single instalment, (b) Cash credit which is a facility of borrowing upto a certain limit, (c) Overdraft which is a facility given to firms having current accounts to overdraw, (d) Discounting of bills implying procurement of cash from a bank in exchange for credit instruments like bills of exchange, promissory notes hundis, etc.

3.

Advances from Customers:


Customers may pay in advance a part of the price of the goods ordered to be supplied later.

Intext Questions: 5.4


Following statements relate either to Fixed Capital or Working Capital. Classify them: 1. Capital required to buy fixed assets like machinery, building, etc. Manufacturing seasonal goods require more capital A higher ratio of the cost of raw material to the total cost is an important determinant. Bank credit is an important source of raising finance. A manufacturing concern requires more of this capital than a trading concern. Borrowing from financial institutions such as Small Industries Development Corporation and Small Industries Development is an important source of raising capital.

2. 3.

4. 5.

6.

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5.7 Project for Loan


Once the financial requirements, both long term and short term for fixed and working capital, are finalised and it is decided to raise capital by borrowing money from banks and other financial institutions, a project report will have to be prepared. A project report is a document which contains the estimated amount of fixed investments and working capital to produce or manufacture an estimated quantity of products. It also contains the methods and techniques of production to be used, estimated number of workers to be employed, and expected sales revenues during the next one or two years.

How to prepare a Projectreport?


A project report contains the estimates and course of action regarding the following for an estimated number of years, say five years:-

1.

Items to be manufactured and production capacity:


The item or items of goods to be manufactured are specifically mentioned. For example the items may be optical lenses and glasses which may be bifocal and unifocal. The number of working days in a year and per month and the working hours per day have to be shown in the report. This clause will also show the installed capacity in terms of quantity and the capacity utilisation of the plant yearwise for the years for which the report is prepared. In our example, the installed capacity may be 2,000 pairs of lenses per month or 24,000 pairs per annum. Estimated utilisation may be 7% , 80%, 90%, 100%, & 100% respectively during the next five years.

2.

Use of the products:


In this clause the various uses of the item or items of goods to be manufactured are mentioned. It also explains the marketing feasibilities, areas and channels of marketing, etc.

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3.

Manufacturing process:
This clause contains the basic raw material to be used and the whole process of converting it into finished product.

4.

Status of the project:


It explains the stage of completion of the project. For example, land has been acquired and construction work is complete, plant and machinery to be used and the sources from which these will be purchased are identified, provisional registration form SSI is obtained, provisional sales tax registration has been done, temporary power connection is there, etc. The date by which production is expected to start is also mentioned.

5.

Total cost of the project:


This clause contains details of the total estimated cost of the project clearly dividing it into fixed investment requirements and working capital requirements and showing the total capital requirements and the calculations in details. Mention is also to be made of the owners, proposed contribution and the funds to be raised through loans.

6.

Expected Sales Revenue:


Details will have to be given of the annual expected sales for the number of years for which the report is prepared and the revenues expected from sales.

7.

Projected profitability statement:


This clause shows the estimated profit expected to be earned during the project period.

The project report is an important document and should be prepared carefully. On the basis of this report banks and other financial institutions decide whether loan should be granted, and if granted, the amount that should be sanctioned.

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Intext Questions 5.5


Column A contains the name of the clause of a project and Column B explanation of the clauses. Match the two: A (a) (b) Status of the project Use of products (i) (ii) B Shows the estimated profits. Contains the process of converting raw materials into finished goods. Shows number of working days in a year and hours per day. Explains the stage of production capacity empletion of a project. Explains the marketing process feasibilities.

(c)

Project profitability

(iii)

(d)

Assumptions and

(iv)

(e)

Manufacturing

(v)

5.8 Supply of manpower and raw materials:


In case the business is not so small as to be run single handed, the owner will have to employ persons to help him. These workers can be unskilled, semiskilled and skilled. To run a business smoothly it has to be ensured that sufficient manpower is available at the right time and at competitive rate. The whole process which ensures a regular supply of required manpower of right type is called recruitment. The various sources of recruitment are: (1) (2) (3) Employment Exchange Technical institutions and institutes of education and training like ITIs, and Through news paper advertisement. These sources are useful for skilled workers. For unskilled labour, sources of recruitment are (i) those available at factory gate, (2) through contractors, (3) reference by the existing employees.

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The owner should find out the going rate of wages and decide about the wages, particularly of the skilled workers. It should be satisfactory, lest they leave the job as soon as they get a better paid job elsewhere. However some workers may also be employed on trial basis. If found suitable they may be made permanent later. As a regular and adequate supply of manpower is necessary, so is the regular supply of raw materials necessary. Depending on the nature of products, there may be need for different types of raw material. For example, furniture making requires timber, for making ready made garments cloth is required and so on. To maintain continuity of production, raw materials must be available in adequate quantity at regular intervals. Suppliers should be identified and enquiries made regarding price, cost of transport and terms of payment. Keeping in view the time taken by the suppliers to supply raw material, adequate stock has to be maintained. If there is apprehension of rise in price of raw materials, quantity of purchase can be increased. But some factors are to be kept in view while deciding on the quantity to be held in stock. These are (1) Storage cost, (2) working capital, (3) risk of loss or damage of materials held in stock, (4) insurance premium to be paid, (5) discount available if purchased in bulk and so on.

Intext Questions 5.6


Fill in the blanks with suitable words. 1. Man power consists of (a) ________ (b) ___________ and (c) _________ wokers. ITIs are sources of recruitment for _________ workers. Contractors are sources of recruitment of ____________ workers. Discount on bulk purchase will decide ___________ of purchase. The raw material required for furniture making is __________ .

2. 3.

4.

5.

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5.9 Legal Requirement


To establish a business unit many legal and other formalities are to be fulfilled which are as follows :

(A)

Form of organisation:
Sole Proprietorship There is no legal formality necessary to set up a sole proprietorship business. Partnership An agreement between the persons who want to form a partnership firm is necessary. As far as possible it should be in writing. A partnership firm should be registered with the Registrar of firms. Joint Hindu Family No legal formality is required. A Joint Hindu Family business is run as per Hindu Law. Joint Stock Company It must be registered under the Indian Companies Act. It may be a Private Limited Company or a Public Limited Company. Cooperative Society If the business is organised as a cooperative society, it is required to be registered with the Registrar of Cooperative Societies of the State in which societies registered office is to be situated.

B.

Other legal requirements and formalities which are applicable to all forms of organisations:
1. License is to be obtained from the Ministry of Industries if manufacturing activities are taken up. However industrial units employing less than 50 workers with power or less than 100 worker without power, have been given exemption.

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2.

Registration with the Registrar of Small Scale Industries of the state in which the unit is to be set up is compulsory. Registration with the Labour Commissioner of the state in which the unit is set up is also compulsory. This is necessary so that there is compliance of various labour laws and the Factories Act. Environmental clearance certificate has to be obtained from the state Pollution Control Board. However except for 17 categories of heavily polluting industries, such as fertilizer, sugar, chemicals, etc., sending an application is sufficient. The industrial unit has to get it registered with the excise department so that it can get concession under General Excise Duty exemption scheme. The firm has to be registered with Sales Tax Authorities and a Sales tax number is to be obtained. If it is a trading concern it is to be registered with the Shop and Establishment Authorities.

3.

4.

5.

6.

7.

Intext Question 5.7


Which the following statements are true and which are false ? 1. 2. 3. Partnership is formed by an agreement No legal formality is required to form a Joint Stock Company. License is to be obtained from the Ministry of Industries if more than 100 workers are employed without use of power. Registration with the Registrar of Small Scale Industries is compulsory. Environmental clearance certificate has to be obtained from the State Pollution Control Board.

4.

5.

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5.10 Evaluation of business Performance


Evaluation of business performance means reviewing the performance of business activities to ascertain how far the predetermined objectives of business have been achieved. It is a system of finding out the difference between the planned performance and the actual performance so that the reasons of the difference can be ascertained and corrective measures can be taken. Once all the formalities have been completed and business is started i.e., the business unit starts functioning, its evaluation becomes necessary. It may be done say after one or two months. The purpose of evaluation of business performance is to ascertain whether the performance of the business is as per plans or not. Evaluation is necessary to maintain the progress of business on the right lines. In the project report, a certain percentage of estimated capacity to be utilised in the very first year of business is shown. If the performance is not as indicated in the project report, the loan extending agencies may review their decision. Performance appraisal within a short period after commencement of business activities helps in evaluating the plans and making amendments whereever necessary. The owner may revise the targets or make amendments in the methods of production and marketing if the performance is not as per plans. If the management of operations has not been perfect that may also be improved upon. Performance evaluation is done in terms of : (a) Profitability: This is to ascertain how far the estimated profit expected to be earned during the given period has been earned. (b) Capacity utilisation: This is to ascertain whether the production is equal to the quantity planned or not. (c) Quality of product & service: This is another field of evaluation. Goods produced or services

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to be provided should be us per the standards laid down in the plan. (d) Volume of Sales : This is to determine whether sales in terms of quantity and revenue are as per estimates or not. (e) Expenses incurred : This is to find out whether expenses under various heads such as labour, raw material, etc. are as estimated or not.

Intext Question 5.8


Fill in the blanks with suitable words: (i) Evaluation of business means evaluating the _________ of business. The purpose of evaluation of business performance is to see whether the performance of business is as per ___________ or not. Performance evaluation in terms of _____________ means to ascertain how far the estimated profits have been earned. Goods produced should be as per the standards fixed is performance evaluation in terms of _________.

(ii)

(iii)

(iv)

5.11 Measures of Quality Control.


For success in business, customers confidence should be won by standard quality of products. In other words, products should not only be of good quality but the quality should also be maintained. Quality products find ready market and can fetch higher price. Therefore you will have to take a decision about setting a particular standard of quality and adopting measures for quality control. The term quality has got different meaning for different products. For example in case of medicines it is the genuineness. In case of household

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appliances it is the durability and safety, and in case of ready-made garments it is the design and the fastness of colours and so on. Basically, quality means conformity with standards set on the basis of customers requirements. It is not simply glitter or gloss or beauty. Quality control refers to the use of operational techniques and activities to maintain the standard quality of product or service that will satisfy the needs of users.

Aims and Objectives of Quality Control :


1. 2. 3. The first and foremost aim of quality control is that the goods are produced according to the quality decided upon. Quality control helps in increasing sales as it enhances the reputation of the product in the eyes of the consumers. It helps in bringing about uniformity in the ingredients and raw materials used in the of manufacturing process and thus helps in establishing a brand name. It enables a firm to compete with other firms because, given the same price, the consumers generally prefer qualitatively superior products. Quality control helps in reducing the cost of production by reducing the rejection rate. In some cases it is legally compulsory to maintain a particular standard of quality. The Bureau of Indian Standards (BIS) sets such quality standards. For example wearing helmet is compulsory for a scooterist in Delhi and the helmet should bear the ISI mark. Similarly for supplies to the government departments the goods should bear ISI mark.

4.

5. 6.

Measures of Quality Control :


Following are some of the measures of quality control : 1. 2. 3. Inspection Statistical quality control (SQC) Quality circles (QC)

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1.

Inspection : It is a simple and direct method in which each and every item produced is inspected as per the specifications laid down. Those found not in conformity with specifications are rejected. This may include inspection of raw materials or the goods in process of manufacturing.

2.

Statistical Quality Control : It is an application of the statistical methods in controlling, the quality of manufactured products. In this method, sampling and tests of significance are carried out. The characteristics of the product are noted and compared with the specifications. The variations are then shown in a chart. It is called a control chart. A tolerance limit is decided by the management in advance. Say it is 5%. If the variation is within this limit the entire lot is taken to be in conformity with the standard quality. If it exceeds the tolerance limit the whole lot is rejected.

3.

Quality Circles : This method originated in Japan and is widely used now. It is a method of involving workers in quality analysis and quality improvement. It is a voluntary group of workers who have a shared area of responsibility. They meet at short intervals to discuss, analyse and resolve the quality problems.

Intext Question 5.9


(A) Match the following : A (a) Quality (i) B method of involving workers in quality analysis and quality improvement application of statistical methods to control the quality of goods produced.

(b)

Inspection

(ii)

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(c)

Quality Circles

(iii)

conformity with standards or requirements. physical verification of products to ascertain whether the same are according to specifications or not.

(d)

Statistical Quality Control

(iv)

(B)

Fill in the blanks : (i) A ____________ chart contains the variation between the characteristics of a product and the specifications. In case of medicines quality means _____________ BIS stands for _____________ Quality Control helps in __________ which is necessary to build up a brand image for the product.

(ii) (iii) (iv)

5.12 Expansion of business


Once you have established yourself in the market, you are Free to sell your products as well as efficiently manage your organisation. Now you can think of increasing your sales and adding other items to the existing products. That means you can think of extending or broadening the operation or area of business. This is called expansion or growth of business: For example, if you are in the business of readymade garments of gents and ladies, you can now also manufacture childrens wear. You can start manufacturing jeans. You can decide to export your products. This is growth or expansion of your business.

Need of expansion :
1. It is a universal truth that survival depends upon growth. It is very difficult to keep your operations at a particular level because all the factors may not always be available in desired quantities for an ideal combination.

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2.

The volume may be increased so that the machinery, building and other resources can be utilised to the maximum extent. A true entrepreneur is never satisfied with what he has achieved. He sets new targets and accepts new challenges. So he either takes up intensive growth of business or extends his operations in other spheres. Expansion is also done to exploit new opportunities of business and to increase profits. Proper planning is required before taking the decision of expansion. Following points are to be considered to determine the scope of expansion: (i) Market Potential:

3.

4.

The scope to increase sales is found out through market research. To what extent sales can be increased either in the same market or in new markets can be estimated on the basis of potential demand. (ii) Scope of increase in production:

To increase production new machines must be installed, more workers will have to be employed more capital will be required both for fixed assets and for working capital. Generally the area of factory is limited and it limits the scope of expansion. (iii) Management capability: Management capability is another factor that is to be kept in mind. With the expansion of business, management problems increase. (iv) Favourable conditions:

Generally the boom period is the best period for expansion of business activities. Supply of labour, of raw material and of electricity should be adequate. Various state agencies also come forward with assistance for expansion programmes of the existing business units during periods of rising demand.

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Intext Questions 5.10


Fill in the blanks with suitable words: (i) Extending or broadening the operations or area of business is called ____________. Generally the ___________ period is the best period for expansion. Expansion is done to _______________opportunities. exploit the new

(ii)

(iii)

(iv)

Since the area of factory is generally___________, it limits the scope of expansion. It is an universal truth that survival depends upon _________.

(v)

5.13 What You Have Learnt


Small Industries Service Institutes help in establishing small businesses. They help in preparing project reports, arrange training and give trade and market information. To start with, a plan of action will have to be prepared. It consists of deciding about the line of business, the type of organisation, financial requirements, location of business, plant layout and estimates of raw material and manpower requirement. Profitability, capital requirements, scope of expansion and degree of risk involved will be other deciding factors of the nature of business. The factors that will determine the location of business are nearness to the source of raw materials and the market, availability of power, water, cheap labour, banking and transport facilities and the concessions to be given by the government. Two types of capital are required to run a business (a) Fixed Capital, and (b) Working Capital. Requirement of both will have to be estimated. Fixed capital will be provided by owners investment and by borrowing from banks and loans from SIDC and SIDB. Working capital can be raised

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through (i) trade credits, (ii) Bank Credit, (iii) discounting of bills, (iv) advances from customers. A Project report contains the estimates and course of action for some years regarding (a) items to be manufactured, assumptions and production capacity, (b) uses of products, (c) manufacturing process, (d) status of the project, (e) total cost of the product, (f) expected sales revenue and (g) projected profitability. Sufficient man power & raw material of the right quality is to be made available. The various sources of recruitment are employment exchange, technical institutes and advertisement for skilled workers and recruitment at factory gate, through contractors and reference of the exhisting employees for unskilled workers. Wages should be satisfactory. Adequate stock of raw material is to be maintained. More purchases can be made to bear the impact of expected rise in price of raw materials. Legal formalities may divided into two categories, viz., (A) As regard form of organisation (B) Those that apply to all organisations. No legal formalities are required for sole proprietorship and Joint Hindu Family business. As for as possible agreement for partnership should be in writing and is to be registered with Registrar of Partnership, where as joint stock company should be registered under Companies Act and a cooperative society under the Co-operative Societies Act. Other legal formalities which are required to be fulfilled for all forms of organisation are: (i) License from Ministry of Industries, (ii) Registration with the Registrar of Small Scale Industries, (iii) Registration with the Labour Commissioner, (iv) Environmental clearance from State Pollution Control Board, (v) Registration with excise department, sales tax department and income tax department, (vi) A trading concern is to be registered with Shop and Establishment Authorities. Evaluation of business is required to ascertain whether the performance of the business is as per plans or not. In case of deviations either targets are revised or methods of production and marketing are changed. Quality Control means use of operational techniques and activities to maintain the given quality of a product. It helps in (i) increasing sales, (ii) making the products competitive, (iii) reducing the cost of

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production. In case of certain products it is legally compulsory to maintain a particular standard. Methods of quality control are: (a) Inspection (b) Statistical quality control (c) Quality Circles. Extending or broadening the operation or area of business is called expansion. Expansion in necessary (i) for survival, (ii) to make full use of building, machinery etc., (iii) to be a true entrepreneur, (iv) to exploit new opportunities in business. Factors determining the scope of expansion are: (i) Potentiality of the market, (ii) scope of increase in production, (iii) limits to management capabilities, (iv) favourable conditions.

5.14 Terminal Exercise


1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. Explain the role of Small Industries Service Institute in establishing a business. Enumerate the various aspects of an action plan. Explain the factors that determine the location of a business. State the meaning of working capital. Enumerate the various sources of raising working capital. State the meaning of a project report. How is a project report prepared? List out the main sources of recruitment of skilled workers. List out the factors determining the quantity of stock of raw materials. Explain the various legal formalities to be complied with to run a small business. State the meaning of evaluation of business performance. What is meant by quality control? Explain its objectives. Explain the various methods of quality control. State the meaning of expansion of business. Explain the need for business expansion.

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5.15 Answers to Intext Questions


5.1 (i) Small Industries Service Institute (ii) 28 (iii) market surveys (iv) training 5.2 (a) & (v); (b) & (iv); (c) & (i); (d) & (ii); (e) & (iii) 5.3 A) (i) (ii) (iii) (iv) B) (i) (ii) (iii) (iv) (v) 5.4 (a) (b) (a) (b) (a) (b) (a) (b) False true true False False . Whether the business would be profitable How much capital would be required Sole proprietorship Partnership Land and Building Plant and Machinery Efficient Economical

Fixed Capital : 1, 5, 6 Working Capital : 2, 3, 4

5.5

(a) & (iv); (b) & (v); (c) & (i); (d) & (iii); (e) & (ii);

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5.6

(1) (2) (3) (4) (5)

unskilled, semiskilled & skilled skilled unskilled quantity Timber True False True True True performance plans profitability Quality of product and services. (a) & (iii); (b) & (iv); (c) & (i); (d) & (ii);

5.7

(1) (2) (3) (4) (5)

5.8

(i) (ii) (iii) (iv)

5.9

(A)

(B)

i) (ii) (iii) (iv)

Quality Control Genuineness Bureau of Indian Standards Standardisation

5.10 (i) (ii) (iii) (iv) (v)

expansion of business boom business limited growth.