UNIT V

SETTING UP A SMALL SCALE INDUSTRIES

Location of an Enterprise
• The location of the business can have a significant
effect on how it performs. Businesses will aim to
operate from locations that provide the
maximum competitive advantage. These
decisions need to be reviewed regularly.
• By selecting the best location, a business could
get more customers, improve its efficiency and
generate greater profits.
• For example, choosing an out-of-town shopping
park instead of a high street may allow a retail
business to have greater shop space, better
overheads and attract more customers because
parking is easier.
• Multinational businesses need to make many
decisions about the location of their operations.
At an international level, they might need to
choose which countries or territories to operate
within to maximise opportunities.
• Within each country, they would need to locate
the head office. At a more local level, they may
need to choose whether to locate within or
around major cities.
Location Feasibility
• Plant Location means selection of suitable site
or area for construction of factories.
Selection of site- Factors to be considered:
The following factors are to be considered for
selection of a site for the factory.
• Nearness to market
• Nearness to raw material
• Transport and Communication facilities
• Availability of Labour
• Availability of Power and Fuel
• Availalability of Water
• Climate and Atmospheric conditions
• Land
• Labour laws and Taxation
• Financial and other aids
• Social and Recreational facilities
STEPS FOR STARTING A SMALL INDUSTRY
• Start up process
• Project Identification
• Business Idea Generation Techniques
• Identification of Business opportunities
• Marketing Feasibility
• Financial and Economic feasibilities
• Technical, Legal, Management, Locational and other
feasibilities
• Project Appraisal
• Project Report
Start up process:
• Economic, political & legal environment
• Assistance offered
• Incentives
• Licensing & regulations
• Policies and Regulation of import, export, excise etc.
Project identification:
Identifying new opportunities
Inputs-raw material, men, machine, money
Outputs- goods, services, employment, revenue
Input constraints
• Lack of management strategies
• Shortage of inputs & patents skill and
experience.
External constraints:
• Government policies
BUSINESS IDEA GENERATION TECHNIQUE:
Business idea:
• A business idea is a business seed, which
expands and grows into a business tree.
• A business idea can emerge from technical
source,(within the company) or from the
market source(outside the company).
 Sources of
Business
Ideas

Technical Market
Sources Sources

Consumers,
Company,
Distributors,
Internal R&D
Suppliers
IDENTIFICATION OF BUSINESS OPPORTUNITIES
Business opportunity:
• An opportunity has the qualities of being
attractive, durable and timely and is anchored
in a product or service which creates or adds
value for its buyer or end user. Opportunities
are created or built, using ideas and
entrepreneurial creativity. They are
situational.
Various sources of business identification
opportunity:
There are three sources through which we can
identify a business opportunity. They are
through
• Systematic innovation as advocated by Peter
Drucker.
• Through Trade Fairs and Exhibitions.
• By using a tool known as ‘positioning’.
FEASIBILITY STUDIES:
• Feasibility of a business means viability of the
business. A feasibility study is the evaluation
of a business idea.
MARKETING FEASIBILITY
• Information is collected through primary and
or secondary sources of information for
determining market feasibility.
Importance of Marketing Feasibility.
• Marketing feasibility is extremely useful for
strategy formulation, if done in a systematic
and scientific manner.
• It is usually done in combination with the
Economic feasibility study.
FINANCIAL AND ECONOMIC FEASIBILITIES
• After Marketing feasibility, the economic and financial
feasibilities are ascertained. In this step, income and
expenses are estimated on the basis of cost and price.
• In financial feasibility the financial soundness of the
idea is tested. Finance is one of the most important
pre-requisites to establish an enterprise. Through a
diligent use of finance , an entrepreneur brings
together the labour, machine and raw material
together to produce the desired goods.
METHODS OF EVALUATION OF FINANCIAL FEASIBILITY
Cost of Production and Marketing
• The cost of production - both short term and long term
is estimated. This depends on the selection of the
technology and the size of the plant chosen in the
technical feasibility study.
• The determination of the size depends on demand and
the expected market share. The costs are estimated on
the overall and also on the per unit basis. The total
costs will be the initial project cost. The fixed and the
variable costs are estimated. The overhead costs, direct
cost and in direct costs are all added.
Break Even Analysis:
• Break even analysis helps to identify the
minimum volume required to ensure that there is
no loss. Break even point is the level or point of
operation where there is no profit and no loss.
The total costs are equal to total revenue
(TC=TR).
• It is absolutely essential that the entrepreneur
knows exactly the minimum number of units to
be sold or how much sales volume must be
achieved for a break.
• This analysis is the relationship of costs-
volume-profit. It is the fundamental estimate
which has to be forecast.
• Break even point =Total fixed cost/(selling
price-variable cost per unit)
TECHNICAL, LEGAL, MANAGERIAL AND
LOCATIONAL FEASIBILITIES:
Technical feasibility:
• Technical feasibility is also known as techno-
economic feasibility.
• in a Technical feasibility study, one can ascertain
whether a business idea is feasible, whether it
can be transformed into a product and also
whether a business opportunity really exists.
• The technical study evaluates the choice of
technology, production process, and allocation
of the business.
• Raw material analysis
• Make or buy decision
• Plant size and location
• Market oriented location
• Material oriented location
• Layout
• Cost-benefit analysis
LEGAL FEASIBILITY
• An Entrepreneur should be aware of the various laws which
are applicable to his business. Such laws vary from industry
to industry.
• If the product is chemical, then legal clearance from the
Pollution Control Board, environmental clearance under
Environment Protection Act, protection under the Patent
Right and Trademark Act, have to be obtained.
• Also procedure for disposal of waste material has to be
adhered to by the entrepreneur.
• For example. if the business is trading, an entrepreneur has
to follow the Shops and Establishment Act.
MANAGERIAL FEASIBILITY
Different forms of Organization
• Sole proprietorship
• Partnership
• Joint stock company
• Co-operative societies
Sole Proprietorship:
• According to wheeler sole proprietorship is owned and
controlled by a single individual. He receives all the profits
and bears all the risks in running his enterprise.
• About 87% of the enterprises in India are sole
proprietorship.
Partnership:
• According to section 4 of the Indian
Partnership Act, 1932, Partnership is the
relation between persons who have agreed to
share the profits of a business carried on by all
or any one of them acting for all.
• Persons who enter into such agreements are
known individually as partners and collectively
as firm.
Joint stock company
• The Indian Companies Act, 1956, defines a joint
stock company as a company limited by shares
having a permanent paid up or nominal share
capital of fixed amount divided into shares also of
fixed amount, held and transferable as stock and
formed on the principles having in its members
only the holders of those shares or stocks and no
other persons.
Co-operative Societies:
• The co-operative societies are based on the
philosophy of self help and mutual help. These
organizations aim at rendering services in place
of earning profits.
• Section 4 of the Indian Co-operative Societies Act,
1912, defines co-operative as a society which has
its objective as the promotion of economic
interests of its members in accordance with co-
operative principles.
LOCATION FEASIBILITY
• Plant Location means selection of suitable site
or area for construction of factories.
SELECTION OF SITE-FACTORS TO BE
CONSIDERED:
The following factors are to be considered for
selection of a site for the factory.
• Nearness to market
• Nearness to raw material
• Transport and Communication facilities
• Availability of Labour
• Availability of Power and Fuel
• Availalability of Water
• Climate and Atmospheric conditions
• Land
• Labour laws and Taxation
• Financial and other aids
• Social and Recreational facilities
 PROJECT APPRAISAL
• Assessing the viability or feasibility of a proposed project by
the lending institutions is called project appraisal.
• The feasibility is done by the entrepreneur or his
consultant, while project appraisal is done by the investors
and lending Institutions.
• The various profitability appraisal methods used for
evaluation are given below. They are
1.Pay back period
2.Return on investment
3.Discounted cash flow
4.Internal rate of return
5.Net present value
6.Profitability index
Payback period technique:
• It represents the number of years in which the
investment is expected to pay for itself.
Return on Investment:
• ROI is defined as the ratio of profit to initial
capital outlay.
PROJECT REPORT
Meaning of Project Report:
• It is a written document that (i)summarizes a
business opportunity. It explains why the
opportunity exists and why the management
team has selected the opportunity for execution.
And
(ii)Defines and articulates how the management
team expects to seize and execute the
opportunity identified.
Cover
• The cover page contains details such as the
name of the company, its address, its
telephone number, E-mail address, web site
address and date. It specifies to whom the
report is submitted and the purpose.
• For example, Report submitted to the State
Bank of India, Kilpauk Branch, for obtaining
Term loan etc.
Table of content:
• Executive summary
• The industry and the company, its products or
services.
• Market research and analysis
• The economics of business
• Marketing plan
• Design and development plans
• Manufacturing and operation plan
• Management team
• Overall schedule
• Critical risks, problems and assumptions
• Financial plan
• Proposed company offering
• Appendices.
SELECTION OF TYPES OF ORGANIZATION
Different forms of Organization
• Sole proprietorship
• Partnership
• Joint stock company
• Co-operative societies
Sole Proprietorship:
• According to wheeler sole proprietorship is owned and
controlled by a single individual. He receives all the profits
and bears all the risks in running his enterprise.
• About 87% of the enterprises in India are sole
proprietorship.
Partnership:
• According to section 4 of the Indian
Partnership Act, 1932, Partnership is the
relation between persons who have agreed to
share the profits of a business carried on by all
or any one of them acting for all.
• Persons who enter into such agreements are
known individually as partners and collectively
as firm.
Joint stock company
• The Indian Companies Act, 1956, defines a joint
stock company as a company limited by shares
having a permanent paid up or nominal share
capital of fixed amount divided into shares also of
fixed amount, held and transferable as stock and
formed on the principles having in its members
only the holders of those shares or stocks and no
other persons.
Co-operative Societies:
• The co-operative societies are based on the
philosophy of self help and mutual help. These
organizations aim at rendering services in place
of earning profits.
• Section 4 of the Indian Co-operative Societies Act,
1912, defines co-operative as a society which has
its objective as the promotion of economic
interests of its members in accordance with co-
operative principles.
INCENTIVES AND SUBSIDIES
• State incentives and subsidies for small scale
industries in Tamilnadu
(i)State capital investment subsidy:
• The Tamilnadu state Government gives incentives
for setting up units in backward areas. under this
scheme, 32 notified backward taluks not covered
by central investment subsidy scheme are eligible
for 15% of the fixed capital investment or Rs.15
lakhs, whichever is less. The scheme covers small,
medium and large scale units.
(ii) Supply of raw materials:
• SIDCO procures certain raw material like iron and
steel, caustic soda ash and supplies them to the
needy SSI units.
(iii) Interest free sales tax(IFST) act loan:
• All new small scale industries located beyond 15
kilometers of Chennai city and 8 Kilometers
around Coimbatore,Trichy and Salem are eligible
for this assistance. The maximum assistance
available is 20% of the fixed assets or Rs.20
lakhs,whichever is less.
(iv)Concessional Power Tariff:
• Any new industry set up anywhere is given a
concession in power tariff for the first five years and
further 15% for units in backward regions. 30% charges
of the actual energy in the first year,20% in second year
and 10% in third year are waived. An application for
availing this subsidy should be submitted to DIC.
(v)Seed capital for New Entrepreneur:
• If a new entrepreneur wishes to promote medium
scale project and does not have sufficient capital, IDBI
offers financial assistance in the form of seed capital.
(Vi)Exemption in power cut:
• Exemptions from power cuts for units coming up in
Tuticorin, Manamadurai in Pudukkottai,Cuddalore, and
Gummidipoondi are given.
(vii)Subsidy for Feasibility Report:
• Subsidy for feasibility report and studies done by
SIPCOT(State Industries Promotion Corporation of Tamil
Nadu.) on payment of 10% of the cost and Rs.5000 or 80%
whichever is less for ITCOT.
(ITCOT, a Technical Consultancy Organization (TCO) based at
Chennai, set up in 1979, was promoted by ICICI along with
other financial institutions such as IDBI and IFCI, various
commercial banks, and State development corporations.)
(viii) Special Concessions for SC/ST Entrepreneurs:
• 15% promoter’s contribution is sufficient.1.5% concession
on interest on term loans is also extended.
(ix) Subsidies in water Royalties:
• Subsidies in water royalties for new industries set up in the
backward areas. payment of Rs.300 per annum is enough
for drawing any quantity of water in the first 6 years.
(x)Exemption in Stamp Duty:
• Exemption in stamp duty for the plots acquired and
developed by SIPCOT in the growth centres located at
Hosur, Ranipet,Pudukkottai,Cuddalore,Gummidipoondi and
Manamadurai.
EXPLORING EXPORT POSSIBILITIES
• Small scale Industries produce wide range of
items, only a few items like sports goods,
ready-made garments, leather products,
processed foods, plastic goods, engineering
goods, electrical and electronic goods, basic
chemicals and pharmaceuticals play a
dominant role in exports.
Steps taken by Government to Boost Exports:
To encourage exports, the Government of India has
offered a number of incentives. The export-import
policy announced by the Government every year
specifies the details of export assistance and
incentives.
some of the important incentives are given below.
• Import Replenishment(REP) Licenses
• Import-Export Pass Book Scheme
• Duty Exemption Scheme
• 100% Export Oriented Units
• The profits earned on export earnings are deducted by
50% for calculation of tax. It can be availed of by an
individual or company.
• Exemption from sales tax, excise duty and import duty
for exports.
• Cash assistance is given to enable exporters to
compete in the international market.
• Under LERMS ( Liberalized Exchange Rate
Management System), the Government allows partial
convertibility of rupee for all the approved
transactions.
• EPCG(Export Promotion Capital Goods Scheme)
• This scheme permits the import of capital
goods at a concessional rate of customs duty,
subject to export obligation to be fulfilled over
a period of time.