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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I N D E X Sl no Name of the Topic Page no

1. COMMUNICATION & PRESENTATION 3-6

2. LEADERSHIP 8

3. ENTREPRENEURSHIP CHARMS AND CHALLENGES 10-12

4. QUALITY STANDARDS 14-18

5. MANPOWER MANAGEMENT 20-21

6. TIME MANAGEMENT 23-25

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

27-29

8. BUSINESS PLAN PREPARATION 31-34

9. DESIGN AND PACKING 36-39

10. COSTING, PRICING AND PROFIT MAKING 41-45

11. RAPPORT BUILDING AND UNFREEZING – MICROLAB 47-49

12. THEMATIC APPERCEPTION TEST (TAT ) 51-54

13. SCORING MANUAL FOR ACHIEVEMENT MOTIVATION

(TAT)

56-59

14. PURCHASING INVENTORY/MATERIAL MANAGEMENT 61-62

15. BREAK EVEN ANALYSIS 64-71

16. ESTABLISHMENT OF AN ENTERRISE : SYSTEMATIC APPROACH

73-76

17. LEGAL FORMALITIES FOR SETTING UP OF UNIT 78

18. MARKETING STRATEGY AND SALES TECHNIQUES 82-84

19. ACCOUNTS AND BOOK- KEEPING 86-90

20. CRISIS MANAGEMENT 92-96

21. CUSTOMER RELATIONSHIP MANAGEMENT 98-102

22. ENTERPRISE GROWTH PRODUCT DIVERSIFICATION EXPANSION

104-106

23. RISK TAKING BEHAVIOUR 108-109

24. SUSTAINABILITY OF AN UNIT; PRECAUTIONS NEEDED

111-115

25. VALUE ADDED TAX 117-120

26. INCOME TAX 122-125

27. SALES TAX 127-130

28. MANAGEMENT OF WORKING CAPITAL 131-133

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1. COMMUNICATION & PRESENTATION

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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. To convey ideas, opinions, views, news, data or information. 2. To facilitate the managerial decision-making and policy-making. 3. To elicit the co-operation in and out of the organization of all those concerned. 4. To secure co-ordination of different departments or sections within the organization. 5. To promote the managerial efficiency and productivity. 6. To achieve the organizational aims, goals and objectives. 7. To develop the morals and team-spirit among the staff/employees. 8. 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,

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

It is any peace of information relating to any fact, idea, opinion feeling, attitude or the course of action.

2. 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.

3. 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.

4. 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.

5. 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.

6. 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.

7. Acting / Implementing The receiver will act and implement the message in practice according to his understanding of the message.

8. 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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12 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.

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

b. 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.

c. 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.

d. 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. e. 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 –

f. Just words alone are not enough to convey a message. g. Words with gestures & expressions give more meaning to the message. h. Asking questions can help make understanding more effective. I Start multimedia and take them through screens 1-8. Explain where required.

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2.

LEADERSHIP

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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.

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3.

ENTREPRENEUSHIP CHARMS

AND CHALLENGES

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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 individual’s 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 one’s 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 one’s 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 one’s technical competence and experience. Entrepreneurship provides an excellent opportunity to realize both the goals – the individual status as well as an individual’s 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

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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.

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4.

QUALITY STANDARDS

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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 customer’s 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 don’t complain, they switch. And in most cases, they don’t 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’?

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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

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supporting systems. Thus all processes that affect a supplier’s 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 customer’s 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

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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.

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5.

Manpower Management

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5.Manpower Management You alone can’t 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

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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.

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6.

TIME MANAGEMENT

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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 individual’s 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.

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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 wasn’t 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. Don’t 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 don’t 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

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will be ready in just a few minutes instead of in hours. Less pressure and you will ensure you haven’t 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 ½ 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 person’s strengths are. Use your staff’s 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 hasn’t 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.

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7. CHARACTERISTIC

OF AN ENTREPRENEUR;

A MATTER OF ATTITUDE AND

SKILL

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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

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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

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

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8.

BUSINESS PLAN PREPARATION

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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 life’s 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.

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(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 company’s 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 ?

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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 one’s 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.

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• 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.

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9.

DESIGN AND

PACKING

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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 –

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� 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-à-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

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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?

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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.

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10.

COSTING, PRICING AND

PROFIT MAKING

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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.

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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 year’s accounts. For those of you who are yet to start the business

43

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

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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 under-quote 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,

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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.

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11.

RAPPORT BUILDING AND UNFREEZING –

MICROLAB

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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 participant’s 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 entrepreneur’s 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.

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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.)

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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 ?

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12.

THEMATIC APPERCEPTION

TEST (TAT )

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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)

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2. 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.

3. 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.

4. How can we tell whether one has the need for achievement in his thinking ? 5. 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.

6. The participants are given a set of sample stories and are asked to score for AI, UI, and TI. 7. 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.

8. 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.

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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.

Trainer’s Guide All the steps stated earlier are present in the following four major aspects

concerned in the exercise. � Excitement � Action � Experimentation and � Facilitation

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Activities performed under four different aspects 1 Excitement Presenting a challenge before the participation to be as imaginative as

possible and write interesting stories instead of merely describing the picture

2 Action Asking participants to write stories, making them serious in following instructions, and sticking to the time allotted to write the stories.

3 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.

4 Facilitation What did we do ? why did we do ? what do I, as an entrepreneur, find on introspection ? yes. I can, and will be an achievement oriented person.

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13. SCORING

MANUAL FOR ACHIEVEMENT MOTIVATION

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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.”

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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 sub-categories. 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, in-between 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.

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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 Act + or Act – + 1 or Act ? 3. Goal anticipation (a) Positive goal anticipation Ga + + 1 (b) Negative goal anticipation Ga -- + 1 4. Obstacle or blocks (a) Personal blocks Bp + 1 (b) Worldly blocks Bw + 1 5. Help H + 1 6. Feeling (a) Positive feeling Fe + + 1 (b) Negative feeling Fe -- + 1 7. Achievement theme Th + 1 _____________________________________________________________________ Stories with AI + 1 _____________________________________________________________________ Maximum obtainable score in one story will be + 11

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TAT SCORING FOR THE ACHIEVEMENT MOTIVE Story No.

AI UI N ACT+ ACT ACT --

GA +

GA --

Bp Bw H Fe +

Fe --

Th Total

N.B. AI - Achievement Imagery Bp - Personal Block UI - Unrelated Imagery Bw - Worldly Block N - Stated Need H - Help Act - Successful action Fe+ - Positive Feeling + towards goal Fe-- - Negative Feeling ACT - Unsuccessful Action Th - Achievement Thema Act ? - Doubtful Action towards the goal Ga+ - Positive goal anticipation GA -- - Negative anticipation

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14. PURCHASING INVENTORY /

MATERIAL MANAGEMENT

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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 don’t 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 supplier’s 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 don’t 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 supplier’s 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.

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In case your require more output, the existing equipment can always be operated on extra shift.

� In your sheer enthusiasm don’t 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.

Sr. No.

Description of item Rate per unit Quantity Total value (Rs.)

Same table can be used for machineries also

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15. BREAK EVEN

ANALYSIS

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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 ‘long-term 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:

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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.

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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.

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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 : P/V Ratio = Contribution/Sales = SR – VC/SR = 4000 – 2000 = ½ = 0.5 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

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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 Fixed Cost = Contribution Per unit Total Contribution = Rs. 3,07,000 Production = 1500 Kgs. 3,07,000 Contribution unit = 1500 = Rs. 204,67 (Approx.) 1,16,000 (FC) Break – Even Sales Volume = 204.67 = 566.76 Kgs.

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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.

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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.

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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.

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16. ESTABLISHMENT

OF AN ENTERPRISE: SYSTEMATIC

APPROACH

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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 DIC’s are good places to start with.

1. Procedures And Contact Points Procedural Requirement Concerned office or contact address Remarks

Constitution i). Proprietorship ii).Partnership iii)Company (Pvt. Ltd.)

Legal Advisor - Legal Advisor Registrar of firms - CA/Company Secretary - Registrar of firms

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

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

- District Industries Centre of Deptt. of Industries - Dist. Khadi & V.Industries D.I.C. or I.C. Office. Sales Tax Deptt. Legal Advisor DGTD Dept.of Excise or Customs Factory Inspector in the State or Legal Advisor Office of Shop & Establishment Local Authorities Legal Advisor or Trade Mark Registry.

Temporary Registration & Permanent Registration after establishment of the unit. Registration for subsidy for State level and central level both, whichever applicable. Registration for Sales Tax No. for interstate & state transaction. For units other than SSI. Registration for Excise for scheduled industries. For more than 9 workers, under Factory Act Registration. For non-manufacturing activities registration for Gumastas. For exclusive right over use of mark or design.

No Objection Certificate i). For location and construction ii). For water & Air pollution Control

Local authorities Municipal, Panchayat Collector etc. Ind. Dev. Corpn. Water & Air Pollution Control Board or Authorities

Unit located under jurisdiction of these authorities, needs No. objection Certificates for manufacturing. Clearance or no objection from these authorities, where ever required.

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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 c). For Specified Industries for regulation of raw material, price, distribution etc.

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

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 authorities Local self-Government agencies such as Panchayat, Nagar Palika, Municipal Corporation.

4 No Objection Certification from Health Department

District Health Officer

5 No Objection Certificate from Electricity Department

Electricity Department

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6 Loan Application form for Term Loan

State Finance Corporation/Nationalised Bank/National Small Industries Corporation

7 Subsidy Registration Form District Industries Centre 8 Application for Building Plan

and Estimates Approval of Architect/Contractor

9 Application for Bank Account/Hypothecation/Cash Credits/Working Capital Loan

Nationalised Banks

10 Application for Air & Water pollution No Objection Certificate

State Pollution Control, Authorities

11 Application for the approval of production programme for certain restricted items

District Industries Centre Central Ministry and SISI

12 Registration of Partnership deed

Registrar of firms

13 Application for Ancillary Units Parent Companies 14 Registration of firm Registrar of firms 15 Application for the Boilers and

Plant lay-out of the Unit Inspector of Factories

16 Application for the production of petroleum based products

Director of Industries Ministry of Petroleum’s

17 Application for Excise Registration Number

Excise Department

18 Application for Latex in rubber based products

Rubber Board

19 No Objection Certificate from Forest Department for wood based Products

State Conservator of Forests

20 Application for essential commodity items as raw-materials

District Collector/District Civil supply Department

21 Application for imported raw-materials

District Industries Centres/Export-Import Boards

22 Application for Import of M/cs. District Industries Centre/Export-Import Boards

23 Application for raw materials District Industries Centre/Export-Import Boards

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(B) DURING IMPLEMENTATION 24 Application for power

connection Local Electricity Department

25 Application for Water Local Authorities 26 Application for ‘C’ Form-Sales-

Tax Sales Tax Department

27 Application for State Sales Tax Registration

Sales Tax Department

28 Application for Central Sales Registration

Sales Tax Department

29 Application for Exemption from Sales-Tax

Sales Tax Department, District Industries Centres

30 Application for Exemption from Octroi Duty

Local Authorities, District Industries Centre

31 Application for storing raw-materials

Director for Explosive

(C) AT OPERATIONAL STATE 32 Application for permanent

Registration Number District Industries Centre / Directorate of Industries

33 Application for Subsidy Claim District Industries Centre 34 Application for Power Subsidy Local Self Government Agencies 35 Application for FPO Licence Food Preservation Ordinance,

Food Controller 36 Application for Registration in

case of more than 20 employees without power use more than 10 in power oriented units.

Labour Welfare Board/ Employment Exchange, Provident Fund

37 Application for product marketing to the Central Government Departments

Directorate of Industries or Director General of Supply.

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17. LEGAL

FORMALITIES FOR

SETTING UP OF UNIT

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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. No.

Applicable Acts Remarks

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, Employer’s 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.

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18.

MARKETING STRATEGY AND

SALES TECHNIQUES

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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.

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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.

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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. Salesmen’s 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 manufacturer’s 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

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� 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

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19.

ACCOUNTS

AND

BOOK- KEEPING

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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 specialist’s 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.

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� 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 owner’s 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. ‘Post-

dated ‘ 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

NOMINAL ACCOUNT

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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 RULE 1) Personal the receiver the giver 2)Real What comes in What goes out 3)Nominal Expenses or losses Incomes or gains

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20.

CRISIS

MANAGEMENT

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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 events—as well as numerous others—can 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 media—radio, newspaper, television—is 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 alike—Such 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."

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4. Arm yourself with the facts—Companies can hurt themselves terribly

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

5. Stay on message—Engaging 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).

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21.

CUSTOMER

RELATIONSHIP

MANAGEMENT

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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

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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, up-

selling • 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

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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 company’s 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.

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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.

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22. ENTERPRISE

GROWTH, PRODUCT

DIVERSIFICATION AND EXPANSION.

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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

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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

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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.

4. 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.

5. Social Risk: The risk that a business failure could lead to social failure.

6. 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.

7. Other Risk: This risk includes fire, storm and earthquakes which can be transferred by insurance.

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24.

SUSTAINABILITY OF AN UNIT

PRECAUTIONS NEEDED

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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: Sr. No.

Cause Symptoms Preventive Measures

1 Wrong choice of product

- Insufficient /low Sales or 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 one’s 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

2 Poor Assessment of Technology

- Manufacturing problems - 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.

3 Sub- optimal Plant Capacity.

- overtime &pressure of time - 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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4 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.

5 Poor Market Assessment

- No order or unexpected Orders - Different specifications and quality - No repeated orders - Unremunerative prices offered by wholesalers customers. - Consequently low turnover- profit ratio.

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

6 Wrong Fixed Investments

-Heavy burden of interest - 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 : Sr. No.

Cause Symptoms Preventive Measures

1 Delay 1) Machinery supply 2) Loan Sanction 3) Formalities

- No replies from suppliers or Bankers. -Time schedule as per project report - Upset - Cost estimates proving wrong .

-Strict time bound plan of activities - Check suppliers reputation - Devote full attention on follow- up -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

2 Failure to bring sufficient equity

- FI/Bankers press for margin money. - search and persuation -Exhaustive own cash resources on fixed Investment -Consequently, liquidity, shortage at operational level

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

3 Failure to estimate project needs and contingency needs.

- Over- run of project cost - Cash crisis

- proper estimates and provisions for contingency - Listing down all ‘pre- implementation activities’ involving cash out- flow

4 Improper cost estimates

- overrun of cost - Estimates based on supporting documents. - Allowance for all taxes, Transportation and contingencies.

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3. At operational stage :

Sr. No.

Cause Symptoms Preventive Measures

1 Financial - 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

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

2 Wrong Strategies

-List all possible uses - Long over dues and Bad – debts - Low efforts of marketing - No repeat orders - Wrong choice of customers/ market segmentation

- Applications of the product. - List all possible users/ target markets. - Decide that target which you want to attack. - Don’t 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”.

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4. Environmental / External Factors

Sr. No.

Cause Symptoms Preventive Measures

1 Product Obsolescence

- Change in technology, consumption patterns or consumers, preference - Market saturation - Reduction in the rate of increase of turnover

- Proper market survey - ‘SWOT’ Analysis: assessing

2 Unawareness about competitors

- Loss of orders - New entries in market - New trade policy or product development by competitors

- Membership in industry Association - Reading industry journals official publications. -Get regular feedback from your salesman/dealers.

3 Critical Shortage a) Power b)Raw materials

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

- 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.

4 Changes Government Policies/ Regulations

- Price control changes - Taxation implications -Non- availability of materials

- Awareness through readings or membership in Associations - Consulting experts and advisors regularly.

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25. VALUE ADDED

TAX

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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

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

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

Retailer Sales Price Rs. 200 Total Vat Rs.20 VAT Cash Payable Rs.20-18 + Rs.2

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

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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/-.

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26.

INCOME TAX

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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 relief’s 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 income- turnover 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.