entrepreneurship chp 1

8/2/2019 Entrepreneurship CHP 1

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Course Content :

(A) Entrepreneurial Perspective:

Concept of Entrepreneur, Entrepreneurship and Enterprise ;advantages Entrepreneur

1) Nature and Development of Entrepreneurship; Gender Issues inEntrepreneurship. -

2) The dynamic role o Small Business? Industry in EconomicDevelopment

3) Personality of an Entrepreneur! Entrepreneur

4) Innovation and Entrepreneurship


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ENTREPRENEURSHIP

A French word entrepreneur meaningbetween- taker or go-between.

Marco Polo who attempted to establish

trade routes to the far East. As a gobetween he would sign contracts with amoney person to sell his goods. As amerchant-adventurer he took the active

role in trading, bearing physical andemotional risk. While the capitalist was thepassive risk taker.


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Doing new things or doing things that arealready being done in a new way is

therefore a simple definition ofentrepreneurship.

Entrepreneurship can be described as acreative and innovative response to theenvironment. Such responses can takeplace in any field of social endeavour business agriculture, education, socialwork and the like.


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QUALITIES OF ENTERPRENEUR High level of motivation

Moderate risk taker

Self confident with positive self image

Excellent leadership qualities

Good business acumen Managerial competence.

Problem solving attitude

Flexibility and adaptability Realistic approach to planning

Independence of thought and action

Ability to perceive opportunities and threats


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QUALITIES OF ENTERPRENEUR

Entrepreneurs are quick to see possibilitiesfor achievements, unlike managers in largesedate organizations where they are

generally blinded by the in-grown culture. As we are aware that ideas for new

products and services often originate inunexpected places, entrepreneurs are the

first one to embark on these innovativeideas or opportunities.


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ENTREPRENEUR

Grabs such novel ideas, develops themand pursues their success doggedly withunflagging spirit thus these people are

entrepreneurs in true sense of the word. They are self starters and doers who

organize and build successful enterprises.

They are not opportunist because it is notonly selfish interest that drives him but healso meets the needs of the people.


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Global Views onEntrepreneurship Dr. Joseph A. Schumpeter well-known

expert on entrepreneurship,emphasizes-

Innovation as the key factor thatdistinguishes enterprises from otherform of endeavors.

No body is an entrepreneur all the time

one behaves as entrepreneur only whencarrying out innovative activities.


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Dr. Joseph A. Schumpeter well-known experton entrepreneurship, emphasizes.

Early English Entrepreneurs demonstratedthe key factor of enterprising person-theinnovative personality.

They were involved in developinginventions for commercial use and inapplying new scientific discoveries toproductive purposes.

They set a standard basic value forentrepreneurs who were to follow.


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Dr. David C McClelland-key researcherin the area of entrepreneurship-findings

Achievement motivation is one of the keyfactor contributing to success of anentrepreneur.

Prime psychological drives that motivatesan entrepreneur is high need forAchievement identified as N-Ach.

A drive towards accomplishing a goalembodying a reasonable challenge to theindividuals competence.


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Dr. David C McClelland-key researcher inthe area of entrepreneurship-findings

Desire for responsibility

prefer to use their own resources inthere own fashion in working towards the

goal. Would like to be accountablepersonally for the result.

Preference of moderate risk

Sets goals requiring high level of

performance, which demands exertion &are confident of meeting


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Dr. David C McClelland-key researcher in the

area of entrepreneurship-findings Perception of probability of success- Confidence in

their ability to succeed. Stimulation by feedback-Stimulated to higher level of

performance from feedback regarding their efforts asthe task progress

Energetic Activity -Exhibit high level of energy -active&mobile,engaged for long time in getting tasksdone in novel ways.

Future orientation-Plans and thinks ahead

Skill in organizing-both work and people for achievingthe goals. Attitude towards money-financial gains is secondary

in importance to achievement.


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Entrepreneur&

Interpreneur


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Entrepreneur/Interpreneur

An Entrepreneur operates in an openworld.

An Intrapreneur operates within anorganization fighting with bureaucratichurdles and inertia in the organization to

keep the Entrepreneurial spirit alive. He isan internal entrepreneur in anorganization.

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Intrepreneurship is the development, withina large corporation, of internal markets andrelatively small autonomous orsemiautonomous business units, producingproducts, services or technologies thatemploy the firms resources in a uniqueway.

Intrepreneurship gives the manager of acorporation the freedom to take initiativeand try new Ideas. It is entrepreneurshipwithin an existing business.

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Companies recognize that an individualcould make major contributions withoutbecoming a manager-by inventing or

making technical breakthroughs. Many innovative companies-IBM,

Tektronic, EM and Texas Instrumentcreated a second career path through

which inventor could win prestige andsalary increase without assumingManagerial roles.

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Intrepreneruship offered a third careerpath to bridge the gap between amanager and an inventor.

Like entrepreneurs they are notnecessarily in a new product or servicetheir contribution is in taking new ideas

and even working prototype and turningthem into profitable products andbusiness.

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When the ideas have become solid and functioningbusiness, intrapreneurs tend to grow bored, provenmanagers are need to take over to maintain anddevelop the business while they go back to buildnew ventures for others to manage.

Intrapreneurship is corporate entrepreneurshipwhereby an organization seeks to expand byexploring new opportunities through newcombinations of it existing resources. A tool for

stimulating and capitalizing on individuals whobelieve that something can be done differently andin a better way.

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Advantages of Intrapreneurship. Intrapreneurial ideas offer a way to build onto or

improve the corporate business. Capital for ideas is easy to come from internal

sources within a corporate identity. The established corporate image helps to boost

the chances of success of an intpreneurial idea. Corporates offer continuing access to the

organizational proprietary technology to staycompetitive.

Corporates offer economies of scale in marketingdistribution and services. Unique advantage of multidisciplinary team work. Interpreneur retains job security as well as enjoys

freedom of prosperity.

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Creating Intrapreneurial Environment

Research & Development-R&D efforts are keysources for successful new product ideas. It isan investment for sustainability & growth.

Funding-corporate venture funds.If a co caninvest in other companies, why cant theyinvest in ideas of their own employees.

Creating a climate-define what a

intrapreneurial culture means in different partsof their organization & appropriate for theirindustry.

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Creating Intrapreneurial Environment

Training-for employees at different levels on how tobehave in accordance with intrapreneurial valuesand motivational factors. Developing creativitythrough brain storming session and other means.

Most organization encourage idea that has astrategic fit with the company.

Reward System-well defined transparent rewardsystem. Stock Option appears to be the best and

most widely accepted approach. While rewardingsuccess, the failure should not be harshlypenalized.

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Creating Intrapreneurial Environment Multi-disciplinary Team: An Idea can be converted

into an enterprise only by critically viewing allaspects. Organizations have to allocate peoplefrom different function for an intrapreneurial projectand reabsorb them after the project.

Commitment-by top,upper & middle managementlevels for intrapreneurship in order to undergo thecultural climate change necessary forimplementation. A long term horizon should be set

to evaluate the success of the programme. HP, Dupont AT&T Xerox G.E, Ranbaxy Levers,

Telco, M&M, Godrej, Infosys, Satyam computersare companies were transformation is brought

about by intrapreneurship 22

E t i l/I t i l


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Entrepreneurial/Intrapreneurialcomparison

Parameter Intrapreneurial

Characteristics

Entrepreneurial

Characteristics

Primary

motives

Freedom and access

to corporate resource

Wants freedom, self

reliant &Self motivated

Timeorientation

5-10 years. Looks forincremental

achievement

5-10 years. Looks forincremental

achievement

Skill &

experience

Much like

entrepreneur,

Doesnt get

discouraged by

hierarchy

Knows business very

well & can put together

resources

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Environment Same as entrepreneurmust deal with

corporate environment

Macro-environ. &Micro environ.

relevance

Resources Derived primarily fromslack within the

organization

Assembled &acquired from the

factor markets

Failure &Mistakes

Sensitive to corporateattitudes. Attempt to

hide errors. Will learn

from mistakes

Own errors. Allerrors public &

visible.

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Entrepreneurial/Intrapreneurial


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Decisions Needs to get others to

share vision, willing toaccept compromise

Follows own vision, makes

own decision May notcompromise

Attitude to

bureaucracy

Dislike system but learned

to live and manipulate it

May have done well with

the system,grew impatient

& left to start own venture.

Risk

preference

Accepts moderate risk

Puts career & job on line

Accepts moderate risk. Has

money & reputation at

stake

Attitude to

status

Corporate symbols

demeaning & worthless

Willing to accept long

period of low status.

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ENTREPRENEUR/PROFESSIONAL

INNOVATOR RECOGNIZED BY

THE TRAITS

IN PURSUIT OF

NEW IDEAS &ENVIRONMENTS.

SEEKS ADVICE &SUPPORT

OWNSENTERPRISE

EXPERT

RECOGNIZED BYQUALIFICATIONAND EXPERIENCE

IN PURSUIT OFENHANCMENT OFEXPERTISE

PROVIDES ADVICE& SUPPORT

MAY OWN ORWORK FORORGANISATION


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Nature & Development ofEntrepreneurship Entrepreneurship collectively has the

power to change the destiny of family, city,state or country.

Punjab & Haryana has high economic

growth as compared to other states likeBihar,Orissa because of strongentrepreneurial base.

Individuals in economically backward

states search for jobs. South Indian states are catching up onentrepreneurial activity which can speed upeconomic growth in current decade.28


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Nature & Development ofEntrepreneurship

Earlier entrepreneur were Marwaris,Baniyas

SIDC & SISI has made some efforts to train

entrepreneur. Short term courses have been conducted by

them to develop capabilities in entrepreneurs.

There have shortcomings in these projects.


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Reasons for limited success in NurturingEntrepreneurship.

General Lack of Entrepreneurs in the country. Rural India people prefer jobs to self employment

Need for research and re-strategizing developmentalschemes.

Candidates selected for these courses are the oneswho have failed to get a job.

Qualified men seek government jobs Unemployed people lack experience and ability to

perceive the project and build the enterprise. They aremore likely to fail strengthening belief to take up jobs.


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Nature & Development ofEntrepreneurship Source for ample supply of entrepreneurs

could be management institutes. Business schools need to re-orient

management education in India.

Presently producing administrativemanagers whereas developing countrieslike ours need entrepreneurs.

Entrepreneurship should be made a

compulsory subject & cases on successfulentrepreneurs should be presented inthese courses.


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Project work on entrepreneurial venture should beintroduced-could be a feasibility report. In AIMs Manilastudents do not pass unless they submit a xerox copyof cheque issued by Bank approving the feasibilityreport prepared by him.

Talks by successful entrepreneurs should be organized Emerging entrepreneurs from sunrise industry should

be call for such talks. Encourage students to generate new ideas for

launching new ventures specially in new technologyareas. Talks by successful entrepreneur- alumni will be more

impactful in nurturing entrepreneurship.


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Nature & Development ofEntrepreneurship Institute should start Entrepreneurship

centres to do research on the subject andrecommend policy measures to strengthenentrepreneurship in management student.

IIT has established such a centre toconvert engineers into entrepreneurs. Entrepreneurs should preferably start with

trading/marketing/service providing, with

less capital need and less risk and avoidtemptation of building. Once he has thefeel of the market then he could backwardintegrate.


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BUSINESS

PLAN


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Business Plan

A Business plan provides all necessaryinformation about the unit to be set up. It isuseful for the entrepreneur and also forvarious development agencies who will help

the entrepreneur in setting up the unit. Wealth of information is available which will

help the entrepreneur to prepare the businessplan various branches of SISI (small

Industries service Institute, publishesguideline on industries which containstatistical information on a large no of items


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Business Plan

Present installed capacity

Production & capacity utilization

Government approach towards the item

The information helps to ease the task of the

entrepreneur. All he has to do now is. Decide on the production & Activity level

Match financial resources with amount required

Prepare the business plan.

The Technical Consultancy organization set up by

IDBI also helps the entrepreneur to prepare aBusiness plan.


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Business Plan

The size of the business plan depends on thefollowing.

The size of the unit to be set up

The nature of production and the product

The amount of financial assistance required


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Business Plan

Business Plan format typically consists ofseven selections.

General Information Project Description

Market Potential

Capital Cost and Sources of finances Assessment of Working capital requirement

Other financial aspects

Economic and social variables


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Preparing a Business Plan General Information-This section must contain the

following information: Name & Address of the entrepreneur.

Qualification, experience & capabilities

If there are any partners then the above details of the

partners must be included. Reference to the industry to which the product to be

manufactured must also be included. Trends in theindustry, Past production trends, future demands must

be presented. Organization structure and constitution of firm.


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Preparing a Business Plan

Information whether the firm is registered withDirector of Industries. The certificate no andother details pertaining to the registrationshould be mentioned.Though the registration

is not compulsory it helps In obtaining power connection from the SEBs

In getting raw material quotas when in shortsupply.

While dealing with other governmentagencies.


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Project Description

Mention of the site, indicate town andindustrial estate.

Whether the land is owned or leased.

In case the project is being set up in anapproved industrial area indicate whetherpermission has been taken. If the project isnot to be set up in approved industrial area,

then indicate whether a NOC has beenobtained from the local Municipal corporation.


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Project Description

Some suggestion on the choice of location-depending on the type of industry.

Demand based industry-the location must benear the market.

Resource based industry- must be closed to theresource (sugar industry)

Skill based industry- must be closed to the skillcenter (carpet weaving, diamond )


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Project Description

Physical infrastructure facilities available.

Raw material-whether imported or locally available,licensed or control.

The price, availability & method of procurement of

the Raw Material. Availability of skilled labor communication &

transport facilities, power & fuel.

Availability of water.

Method of waste disposal. How environmental hazards are handled-water & air

pollution.


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Project Description

Technology selected whether indigenous orimported. If imported, mention the name of theforeign collaborator and method of technologytransfer.

Details of the manufacturing process-draw theproduction flow chart. If the manufacturing processis known, then mention the following.

Machine required for each sub process.

Their specification ,cost and capacity Balancing equipment required and their cost.

Quality control method to obtain ISI orAgmark(food industry) certification.


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Market Potential This section must contain following information.

The total demand & supply position at present.

Future demand & supply position.

The demand supply gap. In case demand is greater

than supply mention how this will affect profitability. The expected price-with justification.

If price is more than the competitors-justify how the

high price has been arrived at and why the productwill sell at that price.This information may berequired by the banks- to know how the high pricecould be realized.

M k t P t ti l


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Market Potential

How the product is proposed to be sold? What is

the distribution network?Are there anyarrangements with the distributors or suppliers.

Will you be ancillary for another unit or will yourproduct be sold by a reputed marketing organization

under its own name. Proposed after-sales service? Particularly relevant

in the consumer durable industry.

In case of seasonal items, what would be done

during off-season? What will be the warehousingarrangement for such items during off-season.

Goods transportation details if the product is bulkyor requiring controlled temperature .


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Capital cost & Sources of Finance.

There are two types of Capital Costs.

One time cost ( Fixed cost) Land building-Plant & Machinery Installation cost-

furniture/fixtures,vehicles, tools, dies, jigs,etc.

Contingency cushion against price rise/ unforeseen

expenses Margin of working capital

Report should also include present& probablesources of finance. The sources of fund should

equal the cost of a project. The resources of funds would include the owners

fund together with loans and deposits raised as wellas the limits expected by the financial

institutions/banks.

C i l S f Fi


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Capital cost & Sources of Finance

Working capital costs. This includes cost incurred in

Raw Material, Work in Progress & Finished goodsinventory & accounts receivable.

Assessment of working Capital.

Planning working capital is crucial. Most units fall sickbecause of inadequate assessment of working capitalrequirements.

The Account receivable a component of working capital-average credit period need to be calculated on the basis of

industry average.

The entrepreneurs assess the working capital requirementsin their own way this has a problem as the banks have theirown assessment. Hence it is a good idea to calculate the

working capital requirements according to the bank formats.


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Other financial Aspects The other aspects to be included in the Business Plan.

Prepare the projected Balance Sheet. Prepare the projected Profit & Loss Account

Prepare the cash flow statement.

Calculate the Break Even point.

BE=FX100 F=Fixed cost,

(S-V) S= Sales at Full capacityV=Variable cost

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Other financial Aspects

Calculate & Indicate the following ratios in the plan.

1)Profitability ratio = Net Profits X 100

Sales

2)Return on Investment= Net profits X 100

Capital employed


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Other financial Aspects

Debt : Equity ratio = DebtEQUITY

Debt Service Coverage Ratio (DSCR)= Net Profit after tax+ Depreciation+Interest for one year

Installments + Interest (for one year)

The DSCR indicates to the banker or the financial institution

about the capacity of the unit to repay it loan installment andinterest. TSCR must work out to 2:1


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Economic and Social Variables

Here, the entrepreneur must perform a cost-benefit analysis with respect to its impact onthe economy and on the society.

The entrepreneur must include Abatementcosts or costs incurred to controlenvironmental damage.This the value ofadditional engineering & technology required

for effluents, reducing noise pollution etc.


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The following social & Economic benefitscould be mentioned.

Promoting employment:The number ofpersons the unit proposes to employ vis--vis

the current employment situation in the area Import substitution:How much foreign

exchange will be saved by the unit. What isthe proposed indigenisation programme?

Ancillary: If any work would be sub-contracted, what will be the level of ancillaryand additional employment thus generated


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It would be wise to include details of the plantlayout. Because ultimately, the business planmust serve as blueprint for the entrepreneurand a plant layout would be very useful to

him.

The plan implementation schedule must bementioned. For SSIs however it would suffice

to include a simple plan implementationschedule.


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Economic and Social Variables The various activities could include the following.

Acquiring Land Registration

Obtaining bank loans

Construction of building Ordering plant and machinery

Supply & installation of plant machinery

Recruitment of personnels

Training of personnels Trial Production

Commercial Production.

B i Fi i


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Business Financing

Financial Management is an integral part of business

administration and ranks equally in importance with

other key areas such as Production & Marketing.

Fundamental objective of any venture are

Survival,Growth & maximization of profits along withother social objective.

Financial management plays a major role in fulfilling

the above objectives & it includes function like

analyzing & forecasting financial needs, managingworking capital, planning the capital structure etc.


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Business Financing

Short term & Long term Finance.

Short term finance is used for short termrequirements & Long term finance is deployed to

meet both long term and short-term uses. Short term finance include

Sundry creditors

Bank borrowings for working capitalDeposits/borrowing from friends relatives & others

Advance received from customers

Credit available from suppliers.

Business Financing


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Long term Finance Include.

Equity/owners Capital & Deposits.

Term Loans from financial Institutions & Banks

Seed Capital, Margin Money & subsidy fromgovernment and financial Institution.

Besides the above external sources, there is an internalsource of funds through retention of Profits orconversion of assets into funds.

For sound financial health of any industry, it is essential

that short term finance be utilized for acquisition ofcurrent assets only which are converted into cash withinone year.Long term finance is utilized for acquiringfixed assets as also financing current assets, that is for

meeting margin on working capital

Business Financing


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Business Financing

The application for loan or say short-termfinance always needs the back-up of a

project Report, which is essential when thesmall-scale unit wants to apply for the loanfor monetary support.

Estimation of Fixed Assets

Land, Building, Plant & machinery-these are byand large, met out of market borrowing orterms loans from financial institution includingbanks

Fixed Assets


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Fixed Assets

A Land

Location, Area, Whether freehold or leaseholdPurchase price of land, if owned

Rent in case of Leased Land

Term of Lease

Ground rent Payable per Year

B Building

Location, Whether owned or leased

Purchase price of Building if ownedRent in case of leased/rented premises

Terms of lease

Fixed Asset- Building &


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ed sset u d g &

MachineryStructure Type of Structure Dimension Area

Sq. Mtrs

Actual

Cost/Rs

Date of

Erection

1

2

3

4

Workshop

Godown

Administrative

Other

Buildings

C Cost of

Machinery

E l ti f P ti


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Evaluation of Pre-operative expenseSr

NoPre-operative Expense Cost

alreadyIncurred

Proposed to

be Incurred

Total

A

B

C

D

E

Establishment

Rent, rates &

Taxes

Traveling Expense

Miscellaneous Exp.

Interest &commitment

charges on borrowings

E l ti f P ti


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Sr.

No

Pre-operative Expense Cost

alreadyIncurred

Proposed to

be Incurred

Total

F

G

H

Insurance during

construction including

erection insurance

Mortgage expenses

(Stamp duty,

registration charges &other loan expenses

Interest on deferred

payment if any

Evaluation of Pre-operative expense

Evaluation of Working Capital Requirement


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A. Current Assets

Sr.

No

Item 1st Year of

Operation

2nd Year

Operation

3rd Year

Operation

1

2

3

Raw Materials

-Imported (month

consumption)

-Indigenous(month

consumption)

Other consumablespares

Stock in process(Months cost of production)



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Sr.

No

Item 1st Year

Operation

2nd Year

Operation

3rd Year

Operation4

5

6

Finished Goods(months cost of sales)

Receivables other

than exports &deferred

receivables (includingbills purchased & discounted

by bankers) Months domesticsales excluding deferred

payment sales.

Export Receivables(including bills purchased by

bankers) Months export sales

A. Current Assets



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A. Current Assets

Sr.

No

Item 1st Year

Operation

2nd Year

Operation

3rd Year

Operation

7

8

Advance to

suppliers of raw

materials & stores/spares consumables

Other current assets

including cash &

bank balance &deferred receivable

due within one year

Total current Assets (A)



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Sr.

NoItem 1st Year

Operation

2nd Yr.

Operat.

3rd Year

Operat.

1

2

3

4

5

Other than bank

borrowing for Working

Capital.

Creditors for purchase of

raw material & Stores &

Consumables spares

(Months purchases)Advances from customers

Accrued expenses

Statutory Liabilities

Total Current Liabilities (B)

B. Current Liabilities



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OTHER ITEMS

Sr.

NoItem 1st Year

Operation

2nd Yr.

Operat.

3rd Year

Operat.C

D

E

Working capital gap

(A-B)

Margin on working

capital (25% of C/25%of

A)

Bank borrowing (C-D)

Management of Working Capital


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Working capital is that part of the capital which is

invested in the working or current assets like stock orraw material semi finished goods, Sundry debtors, billreceivable etc.

This capital is also known as circulating capital or

revolving capital. Working capital is used for financing current assets ie.

the day to day business needs.

Also used for purchasing raw materials.

A major portion of the capital lies in the business in theform of semi-finished, finished goods & cash.



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Management of Working Capital Working capital is also required for payment of wages &

salaries,overhead expenses like power, rent taxes repairing &

maintenances of machinery. The amount in respect of goods sold on credit (sundry Debtors)

represent a vital portion of working capital.

Classification of working capital.

Regular working capital-meeting continuous day-to-daybusiness needs of the firm, it is re-invested in business. It iscalled as fixed or regular working capital.

Variable working capital-not regular, not static but required

to meet periodic or seasonal rise in quantity of goodsproduced. This is called seasonal working capital.

Special working capital-need on special occasion vizincreasing price of raw materials, business recession, strike

or failure of machinery, fire etc.



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a ag g Cap a

Working Capital is classified as

Gross Working Capital: Total of all current Assets.

Net Working Capital:Difference between Total

Current Assets & Total Current Liabilities.

On going review of Gross Working capital isessential for efficient management of current

Assets.

Long-Term View we have to concentrate on networking capital.


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Net working capital of a healthy unit should be

positive.

Periodic study on changes in net working capital isnecessary.

Changes in net working capital can be measured in

terms of value as also in percentage by comparing

current assets, current liabilities & working capitalover a given period.This involves basic approach

to working capital analysis.

Deployment of Working Capital is called Operatingcycle


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cycle

Stage V

Sundry Debtors

Receivables

Stage I

Cash

Stage II

Raw Material

OPERATINGCYCLE

Stage IVFinished Goods

Stage IIIStock in process


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Operating cycle is also called the cash to cashcycle.

Working Capital is the total cash that is circulating

in this cycle.

It also becomes clear that working capital cash beturned over, or reused after completing the cycle.

Therefore Management of Working Capitalmeans, apart from finding out the source ofmeeting capital requirements, ways of reducingthe cycle time for optimum results.



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The following factors forms a force affecting the working

capital needs:Nature of business

Production policies

Manufacturing processGrowth & expansion of business

Business cycle fluctuations

Terms of Purchase and sales

Withdrawal by promoters etc.

For an industry there are likely to be periodic changes in

any or all of the above. Therefore management of working

capital becomes a dynamic activity.



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Working Capital requirements are met through

internal as well as external source.

Major external source is the Banking system.

Bank offers various types of credit facilities for

meeting the financial requirements like

Credit against inventory holdings.

Book debts & bills receivable.

export finance (Pre-shipment & Post-shipment

credits)Certain contingent facilities like issuing letter of

credit & guarantees are also offered by them.



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g g p

Working capital requirements above 10 Lakhs are

required to comply with norms laid by Tandoncommittee & chore committee which is accepted by

Reserve Bank of India.

Tandon committee : Important featuresClassification of Industry and fixation of

inventory/receivables norms

Application of Margin & eligibility of borrowing: In order to avoid double financing, the committee

recommended that only a part of the working capital

gap(current assets-current liabilities excluding bank

borrowings) could be financed by the banks



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Tandon committee suggested 3 methods for computing the

maximum permissible level of bank borrowings.Method 1. Bank would finance 75% of the WC gap the

remaining 25% to come from long term sources such asowned funds or term borrowing.

Method 2. Borrower should provide 25% of the gross currentassets through long term source & the rest to be provided bytrade credit, other current liabilities & the bank

Method 3.Similar to 2 further stipulates that the core currentassets should be taken out from the current assets separately

funded from long term sources.

Also recommended submission of periodic statementsregarding operation of the units for the purpose ofeffective monitoring & supervision by banks.



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g g p

Chore committee norms-important recommendations.

The borrower enjoying aggregate working capital limits ofRs. 50 lakhs and over require to conform to secondmethod of lending prescribed by Tandon committee whichwould give a minimum current ratio of 1.33.

Borrower would be required to submit to the bank

quarterly requirement of funds on the basis of his budget& provide periodical information of the actualperformance vis--vis the estimates.

Liberalized Norm: A new norm to compute Working capital

introduced in 1992 with ceiling enhanced from time to time.SSI units having aggregate WC requirement upto 1 Crore.The bank calculates the limit on the basis of simplecalculation of 20% of their annual turnover. This is for unitshaving turnover less the 5 crores per annum.

Financial Forecasting


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Financial Forecasting

A systematic projection of the expected actions of

the management in the form of financialstatements, budgets etc.

Process involves use of past records, funds flow

behavior, financial ratios and expected economicconditions in the industry as a whole as well as

the unit.

A working plan formulated for a specific periodby arranging future activities.

Advantages of financial forecasting


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Advantages of financial forecasting

Enables optimum utilization of funds

Helps in planning the units growth & in settingperformance goals.

Anticipate financial needs & reduce adhoc &

emergency decision.

Good basis not only for negotiating confidently with

banks/financial institution.

These projected statement provide and important

base for financial reasonable estimate of revenue,

costs, profits, taxes,other uses & sources of funds.

P j d P fi & L


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Projected Profit & Loss statement

Statement begins with the estimate of the

expected sales for the forecast period .

The purposes of this statement is to have a fair &

reasonable estimate of expected revenue, costs,

profits, taxes etc..


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Projected Balance Sheet

Forecast of expected funds flow of eachitem therein. Various items of assets &liabilities of the projects balance sheet areexplained below.

Assets:

Cash: There is an assumption for a minimum

level of cash or liquid funds desired at the endof the period of forecasting. It can also be abalancing of assets & liabilities


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Trade Debtors: Magnitude of debtors is closely

linked to sales.Based on past

trend/performance, expected credit policy & the

pattern of future clientele, a certain number of

days debtors or receivables is expected to be

outstanding. Thus to forecast debtors one has to

study historical data about the industry,marketconditions and nature of customers.


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Inventories:estimate of inventories is

prepared on the basis of past operating data

together with an examination of futurepolicies. It involves analysis of the additions

to opening stocks, purchases & productions

of goods during the period and reduction

therein through use & sale.


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Fixed Assets: Outlays for factory building,

plant & machinery are generally planned in

advance. Adjustments have to be made foradditions and sales of the old assets.

Adequate provision for depreciation should

be made year by year to generate funds for

replacement of the relative assets.


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Liabilities

Trade creditors-creditors can be estimated by

analyzing schedules of purchase paymentmaturing during the period or by calculating the

ratio of accounts payable to purchases.

Loans & advances-This is usually the balancing

figure to equalize assets and liabilities


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Accrued Liabilities- These are arrived at by

analyzing the pattern of wage payments, the tax

dues, interest obligation & repayment of loans.

Provision for taxes- will be found by starting with

the opening balance of the provision for taxes,

adding the new provision for taxes & deducting

the actual payment of taxes.


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Cash Management

Cash flow statements will forecast the probable

time of receiving cash from sales and estimate the

time after which the bills are paid.

Projected cash flow statement show all cash

receipts from every source as they are expected to

be received and of cash payments by the business

as there are to be made.

Cash Management


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Cash Management

Importance of cash flow Statement

Cash flow gives the following

A list of bills giving details on how much is due and

when it is due

A schedule of anticipated cash receipt.A schedule of priorities for the payment of accounts

Estimate of the amount of money needed to borrow in

order to finance day to day operations. This is perhapsthe most important aspect of a complete cash flow

projections


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Cash Management

Format for planning the most effective use of

your cash.

A measure of the effects of unexpected changes

in circumstance ie loss of many bids,

bankruptcy of general contractor or a developer

strikes, poor estimate etc.

An outline to show the financer the sufficientcash to make loan payments, if there any plans

to borrow money on a long term basis.

Cash ManagementP ti f C h Fl t t t i l i b i


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Preparation of Cash Flow statement involves six basicsteps.

Estimate cash receipts for the budget period.Estimate cash disbursement for the budget period.

Calculate the net cash inflow (or outflow)

Add in cash on hand at the beginning of the month

Compute cash balance (or shortages)Project amount of loans necessary.

A cash flow statement is normally prepared for twelvemonths.

It is computed on an on-going basis and is revised as thesituation changes. It assist in financial planning, inventorypurchases & formulating credit & collection policies. Itserves as an early indicator when expenses are getting out of

line.

Estimating your operating cash requirements


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g y p g q

Cash flow statements estimate the amount of money

required to be borrowed to finance the day to day operation.When the cash flow statement is ready we realize how muchoperating capital must be injected into business by doing thefollowing calculation.

Identify your initial bank loans balance or overdraft beforethe start of the year.

Proceeding month by month add the increase or deductdecrease in your operating bank loan to determine the

monthly operating loan balance. Identify the highest operating balance, this represent the

minimum operating loan or line of credit that should beobtained

Break-even AnalysisB k l i l ll d t l fit l i


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Break even analysis also called cost-volume profit analysishelps in finding out the relationship of cost & revenue to the

output. The analysis can be done only after calculating theBreak even Point BEP.

BEP is defined as that level of sales at which the total costequals total revenue ie the sales level at which there is no

profit or no loss. BEP is calculated using the following formula:

BEP= fixed expense/contribution per unit where thecontribution is sales minus variable cost per unit.This will

be in units. BEP=fixed expense* sales/Total contribution where

contribution is the total sales minus the total variableexpense.This will be in Rupees.


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Break-even Analysis

For calculating BEP, it is essential toclassify the expense into fixed expenses andvariable expenses. The break-even pointshows the level of sales at which there is noprofit or loss.This information is ofimmense use to the units because it gives

the minimum level at which the unit shouldoperate, at given cost and price to startgenerating profits.

Sales Revenue LineCost & Sales

R


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Break even

Point

Total cost Line

Fixed cost

Variable Cost Line

Volume of output in units

Revenue

Rs

Break-even Analysis

Break-even Analysis Break even analysis is useful in the following areas:


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Break even analysis is useful in the following areas:

Determining product mix. This is done by knowing the

contributions of different products and choosing theproducts in such a way the the total contribution ismaximized.

Make or buy decisions. If the variable cost is less than the

price that has to be paid to an outside supplier, it may bebetter to manufacture than buy.

Knowing profits at given sales volume and finding theeffects of changes in fixed and variable costs to profits.

In case of SSI units it is essential that the break-even pointis as low as possible. This can be ensured by minimizing thefixed expenses or increasing the contribution. However thecontribution is dependent on market condition, it is

necessary to keep the fixed expenses at the minimum level.

Venture Capital Financing


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Venture Capital Plays an important role in financing

small-scale enterprises, particularly Innovative oneswhere the growth prospects are high but the risk

factor is equally high.

Investment is needed at any stage of implementationof the project between start-up and commencement

of commercial production.

It is recognized as an industry by itself in the

developed countries in the early 1960 and is

established in India also now.

Venture Capital Financing


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Venture capital providers offer services like

Development of the business

Approval of project ideas

Financial assistance

Overall management expertise

The main features of venture capital financing can belisted as:

Long term source of investment. Usual period is 5 to 10years.

Venture capital firms in most situation insist on qualityparticipation through direct purchase of shares orconvertible securities.

Ensures continuous participation of venture capitalist inthe management of the entrepreneurs business.

Features of venture capital financingP id i f k i f h l


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Provides services of marketing management of technology

and developing appropriate organization structure.

Venture capitalist comes into the game when it is not easyto access funds from the conventional sources.

Business must have a high potential of growth. Venture

Capitalist is not averse to the risk. The flow of fund from the venture capitalist is in a phased

manner and can be in the form of debt also in the initial

stage.

Venture capitalist is not a permanent equity holder.

Ensure the exit route in the appropriate manner ensuring the

interest of the entrepreneur

Venture Capital -Process The Preliminary screening:


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y g

Begins with receipt of the Business Plan from theentrepreneur to the venture capital provider.

A good plan should have a clear-cut mission,

clearly stated objectives

in depth industry & market analysis

& key financial statements While evaluating the business the venture capitalist first

determines that the proposal fits in his long-term policy &short-term needs in developing a portfolio balance.

He investigates the economy of the industry & ensures thathe has appropriate knowledge & ability to invest in theproject.

Return on Investment is the key issue but the credentials &

capability of the entrepreneur is also an important factor.

Venture Capital -Process


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Due diligence:

This stage cover the agreement on principal termsbetween the entrepreneur & the venture capitalist before

making the major commitment of money, time & efforts

involved.

Detailed review of the companys history, the businessplan, the resumes of the promoters & their key managers,

financial background of the promoters and target market

are scrutinized.Risk Analysis of the business is jointly

undertaken.

Venture Capital -Process


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NEGOTIATIONS:

Once the viability of the project is clearly understood thenegotiation process starts.

This stage will cover the amount of investment to be

made by both promoters & venture capitalist, total funds

to be made available by the venture capitalist, debtcomponent & the interest rate for the loans, securities,

equity and other convertible securities, protective

clauses,right to control the management of the business,

buy-back arrangements and finally the exist routes.

Venture Capital -ProcessC M d f U d ki (MOU)


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Contract or Memorandum of Undertaking (MOU)

Taking into consideration the negotiations the final agreement

or MOU is signed between both the parties. This should takeinto consideration the regulatory laws as well.

Flow of funds

This now progress as per the terms of the agreement or MOU.

A change in the external environment does happen andflexibility is very much desired on the part of both the parties.Periodical reviews at each stage of project launch are done.

Exit

A venture capitalist is not a permanent associate. He likes toquit at the appropriate stage. Buy-Back of the equity, initialpublic offering, mergers & acquisition & smooth transitionare the components of the exit strategy.

A few Tips for the Entrepreneur


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Select the venture Capitalist carefully

Do not hesitate to get all the facts and the previousbackground of the venture capitalist.

It is better to have an intermediary, who is respected and hasa pre-existing relationship with the venture capitalist

Avoid lawyers, accountants or other advisors in the initialstages

Be very careful about what is projected or promised.

Disclose your strengths and weakness to build a good

relationships.

Be flexible & patient.

Always remember that it it the performance, which will buildthe trust.

Venture Capital Provider- Indian Scenario.

Th i l id i I di i h


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There are many venture capital provider in India in theform of individuals and firms. A large number of

entrepreneurs have set up their enterprises throughventure capital financing particularly in the field ofinformation technology.

Most banks & financial institutions have promoted

Venture funds. To name a few1) SIDBIS Venture capital fund.

2) Technology Development and Information Company ofIndia Limited (TDICI)

3) Risk Capital& Technology Finance Corporation Limited.(RCTC)

4) SBI Capital Venture fund.

5) Canbank Venture Capital Fund

Venture Capital Provider- Indian Scenario.


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6) 20

th

Century Venture Capital Fund7) Indus Venture Capital Fund

8) Andhra Pradesh Industrial Development

Corporation -Venture Capital Ltd.9) India Investment Fund

In order to promote this concept, tax concession are

being offer by the Government of India to VentureCapital providing firms. However the regulatory

mechanism also operates through SEBI


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PREREQUISITE FOR

ENTREPRENEURSHIP

Prerequisites for Entrepreneurship


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INDIVIDUAL ENVIRONMENT

SOCIO-CULTURAL FACTOR

NORMATIVE BEHAVIOUR RISK TAKING

INDEPENDENCE

WORK CULTURE SOCIALIZATION

SUPPORT SYSTEM



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INDIVIDUALThree Major AttributesENTREPRENEURIAL MOTIVATION

Achievement-Power-Extension Motivation

PERSONAL EFFICICACY

Project DevelopmentEnterprise Management

COPING CAPABILITY SustainGrowStrategies to meet competitive demand


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Environment

Knowledge of economic-political environment

Polices of Govt., Financial & Commercial Inst.Availability of raw material,infrastructure-

transportation, power& market in proposed location.

Agencies providing financial, material, consultancy.

Schemes from Industries, State Government,

Associations


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Environment

choice of enterprise will be more rewarding if one

has wide knowledge of alternative industries &bearing of them on the one chosen.

Manufacturing process-product & commercial

feasibility

Various technologies & their cost benefit.



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Socio-Cultural FactorsFamily background & immediate social circle

Values, attitudes & pressure of values inherited

Initiative, risk taking, self reliance, workingwith ones own hand for required tasks areresults of socialization process in family,school& society

Appreciation, encouragement & other external& internal devices get reinforced in developingrelated values & norms.



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Normative BehaviourFamily expectation & pressure to do independent

work and earn to maintain standard of living.

Familys role in small business-Philippines model

Husbandwife teams up as entrepreneurs.

Classmates plan enterprise during college days

Husband takes up job & supports family with income

Wife starts small stores & the income ploughed back to

expand business & later Husband quits job to take overthe expanded business.



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Risk-taking important for success.

-Takes moderate risk, does not gamble nor

opts to play safe

Independence.

self reliant, works out own plans, searches and exploresresources & uses experience & inner urge to make theenterprise a success.

Work

Willing to work with own handsindefinite work

schedule.

Socialization

Family & other social institution plays crucial role intraining an indiviual.



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q p p

Support System.

Several agencies & organization help to support anentrepreneur.

Corporation set up to develop small industries in aregion.

Financing institution including banks. Department of Industries, NGOs of small industries,

consultants & private agencies & educationalinstitutions like Institute of Technology, Institute ofManagement etc.

Development administration in the district.

Large industrial establishment interested in developingancillary industries provide guidance for growth.

R l i f


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Relation of

Environmental

Factors ToEntrepreneurship

Relation of Environmental


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Factors To Entrepreneurship Findings of a Research conducted at

Mumbai to isolate environmental factors

related to entrepreneurship in order to havea better understanding of the developmental

process of an entrepreneur.



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Factors To Entrepreneurship Entrepreneurial Behavior (EB) is a function ofindividuals personality characteristic and

environmental factors.

Represented as EB=f(P,E)

P=Personality characteristics

E=Environmental factors.

Environmental factors could be either nurturant orimpediments to entrepreneurial development



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Factors To Entrepreneurship

Greater Emphasis was laid on determining

environmental facts at micro level that correlated

with development and success.

The factor that were concentrated on.

Social/psychological factors including family, peer

group, formal and informal association, etc.

Financial Material availability

Technology availability/applicability.



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At the macro level, the study tried to establish the

relationship between the state of national economy

and the development of entrepreneur. The success

was measured based on.

Increase in profits

Increase in turnover

Increase in assets Extent of diversification.



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The sample was 51 respondents from the list of

700 members of Small Scale Industries

Federation.

Structured questionnaire with certain open ended

question were administered. 12 of the member

were also interviewed after three months, cases

were constructed based on these interviews . Conclusions where drawn to further revalidate

these finding of the study.

Relation of EnvironmentalFactors To Entrepreneurship


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Factors To Entrepreneurship For the purpose of study, entrepreneurs life was

divided into two stage, initiation and subsequentsuccess of an entrepreneur

Following were the variables studied and the findings.

Educational background: Against the earlier notionthat those lacking educational qualification went infor business 41.18 % had professional qualification27.45% were graduates and rest non-graduates or SSCand below.

No significant relationship could be establishedbetween the educational background andentrepreneurship of a person.



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e at o o v o e ta

Factors To Entrepreneurship Age: Mean age at which entrepreneurs started an

enterprise was found to be 24.6 yrs.

82.35% thought of starting business befor the age

of 30. Maximum concentration was determined between

the age of 25-30 years indicating that ideal time toimpart entrepreneurial training would be between

18 to 25 years.So after highlighting all thealternatives the entrepreneur is ready to start a newventure at the age of 30 yrs,



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Factors To Entrepreneurship From the sample studied not a single entrepreneur

started business between 40 to 50 years.

Indicating a tendency not to take risk at middle

age or postpone the idea of entrepreneurship tillretirement.

Comparing the average the entrepreneurs actuallystarted business at 28 and the average age at which

they thought of the starting business at 24.6 ittakes 3.5 years from conceiving the idea tocommencing the business.Therefore sowing theidea of entrepreneurship in the form of training

should be undertaken before the age of 25



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Also 37 of the 51 entrepreneurs started

business at 30 years

There were no fresh business venturesbetween 41 to 50 years.

Only 20 % of the entrepreneurs started their

business between the age of 31 and 40years.



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Factors To Entrepreneurship Friends: influence was found to play a significant

role to the extent of 29.4%.

While selecting a prospective entrepreneur for

intensive training it is advisable to gatherinformation of his friends.As an entrepreneurfriend is likely to induce people towardsentrepreneurship.

It is recommended to establish an EntrepreneurClub by agencies associated with development ofentrepreneurship for speedy development, vitalfor economic growth.



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Community: 13 of the 51 entrepreneurs

surveyed quoted this as a determining factor

as the community, family members andrelatives made significant contribution in

inculcating entrepreneurship.



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Prior Occupation status: As regards the status ofentrepreneurs before their entry into business 70.59percent were previously employed,21.57 percentstudying 7.84 percent unemployed.

Looking out for opportunities while studying andstarting a business immediately after completion ormany join family business gain some experience andstart their own venture

Being unemployed and taking to entrepreneurship as alast resort. Failure in the category will be the highest.Government programmes also concentrate on thiscategory.



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After serving for some years, accumulating some capital,leaving the jobs to take up entrepreneurial roles.

Of the 36 falling in this category, 13 worked for largecompanies, 11 in medium size and 11 in small

companies and 1 in state government. 17 of these peopleleft their job due to dissatisfaction.

It is possible to locate prospective entrepreneur amongstthose working in commercial undertaking who are either

dissatisfied or having high achievement motivation. Alsodue to attractive policies and money makingopportunities one would like to take up entrepreneurship



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Family size: Only 13.72% came from small familyhaving one or two children.23.53% came from families

having 5 children and as high as 54.9% came from

families having 5 or more children.

Financial difficulties spurring children to take upeconomic activities with higher determination /N.Ach

or the feeling of support from brothers & sisters in

times of need should explain this phenomenon.

Family size no way related to entrepreneurial success




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Except one respondent, all fathers of entrepreneurs hadcrossed the age of 40.

Possible that these parents gave mature advice becauseof their age and experience.

Parents education had no correlation to development ofentrepreneurship.

A large 58.2% of entrepreneurs came from familieswhere their parental profession had influence.However

there was no correlation with the later success. Alsothere was no correlation with the individualsentrepreneurship and his brothers profession



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Factors To Entrepreneurship Wife: Seeks support at the beginning of the

entrepreneurial venture & wife is in vantageposition to provide the emotional and financial

support. With exception of 6 (11.77%) cases of early

marriage rest had married at normal ages for urbanpopulation. There were 8 bachelors.

There was one solitary non matric wife rest werereasonably well educated which was in contrastwith respect to mothers of entrepreneurs.



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Factors To Entrepreneurship An educated wife is an asset to an entrepreneur as

she can assist or take up a job, should need arise.

Risk taking abilities of the entrepreneur was

reinforced in such above cases. (58.6%) of the wives were unemployed.

Though they were safety devices during leanperiods.

Education background of wives had no correlationwith the success of the entrepreneurs.



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Joint family: Often thought to be

impediment to nurturance of

entrepreneurship in Hindu families. Finding disprove this notion as 45.10%

were from joint families.

Though family status was not found to haveany bearing on the entrepreneurs success.



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Migration: Though no relationship could be

determined between these two factors in the

initiation stage it was found to correlatewith success of entrepreneurship.

Such movement serves to inculcate coping

capabilities which is desirable quality for

success.



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Factors To Entrepreneurship Peer Group: The finding of 56.8% having at least

one entrepreneur friend substantiated the initialnotion that peer group had significant effect on the

thinking and behavior of entrepreneurs. This finding could be used while selecting

prospective entrepreneurs developmentprogrammes or other support from governmental

agencies. No relationship was found between having an

entrepreneur friend and the later success.



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Factors To Entrepreneurship Association Membership: 7 member had

membership 44 replied in the affirmative.

Two members subsequently became members.

It is suggested that entrepreneur club be startedwith support from government or SIDC having amix of existing and would be entrepreneurs togenerate more prospective entrepreneurs.

This may be only for initiation of entrepreneur, nocorrelation has been found between this factor tothe success of an entrepreneur.



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Factors To Entrepreneurship Financial Status of family:

23.53% came from rich families the rest frommiddle and low income group.

32.59% concentration was from low income groupbelow Rs. 10000 per annum.

66% were from middle class.

Willingness to take risk is not very high in lowincome group but very high in middle incomegroup



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Factors To Entrepreneurship People coming from lower middle and lower income

group has relatively high risk in taking upentrepreneurship.

High income families with income over Rs. 1 Lakh weremostly engaged in business.

Indian tradition of taking up hereditary profession musthave contributed to children from such families to take

up entrepreneurship. More successful entrepreneur came from such business

environment with ability to take higher risks.



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Factors To Entrepreneurship This finding is somewhat contrary to socio-

economic objective of the government which feelconcerned about the rich getting richer and poor

getting poorer. 16.29% had married into rich families 79.07%

married into middle class and 4.65% into lowerincome groups.

Of the 51, 16 had received financial aid fromrelatives ranging Rs. 5000 to Rs. 50000. & 12 hadreceived aid from friends varying from Rs. 1000to Rs. 50000



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Most of the entrepreneurs had accumulated

capital before starting their venture 68.3%

had accumulated capital above Rs, 10000,

few depended on help from wife relatives or

friends. No relationship was established

between these aids and their success.



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Availability of Material

Only 7.84% claimed that availability of material in their

areas of stay was an aid to their becoming entrepreneurs.

Though easy availability of raw material is a good reason

for starting an industry it may be worthwhile to isolate

such materials and give support to certain selected

entrepreneurs to develop industries related to thesematerials



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Availability of Technology

Only 4 entrepreneurs stated this reason for

starting venture. Thus some members may become

entrepreneurs due to easy availability of

technology in nearby areas but it is not anecessary condition.

Nature & Development of


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Entrepreneurship Entrepreneurship collectively has the power to

change the destiny of family, city, state or country.

Punjab & Haryana has high economic growth as

compared to other states like Bihar,Orissa becauseof strong entrepreneurial base.

Individuals in economically backward statessearch for jobs.

South Indian states are catching up onentrepreneurial activity which can speed upeconomic growth in current decade.145



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Entrepreneurship

Earlier entrepreneur were Marwaris,Baniyas

SIDC & SISI has made some efforts to train

entrepreneur. Short term courses have been conducted by them

to develop capabilities in entrepreneurs.

There have shortcomings in these projects.


Entrepreneurship


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Entrepreneurship

Reasons for limited success in NurturingEntrepreneurship.

General Lack of Entrepreneurs in the country.

Rural India people prefer jobs to self employment

Need for research and re-strategizing developmentalschemes.

Candidates selected for these courses are the ones whohave failed to get a job.

Qualified men seek government jobs

Unemployed people lack experience and ability toperceive the project and build the enterprise. They are

more likely to fail strengthening belief to take up jobs



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Entrepreneurship Source for ample supply of entrepreneurs could be

management institutes.

Business schools need to re-orient management

education in India. Presently producing administrative managers

whereas developing countries like ours needentrepreneurs.

Entrepreneurship should be made a compulsorysubject & cases on successful entrepreneursshould be presented in these courses.


Entrepreneurship


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Entrepreneurship

Project work on entrepreneurial venture should beintroduced-could be a feasibility report. In AIMs Manilastudents do not pass unless they submit a xerox copy ofcheque issued by Bank approving the feasibility reportprepared by him.

Talks by successful entrepreneurs should be organized

Emerging entrepreneurs from sunrise industry should becall for such talks.

Encourage students to generate new ideas for launchingnew ventures specially in new technology areas.

Talks by successful entrepreneur- alumni will be moreimpactful in nurturing entrepreneurship.



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Entrepreneurship Institute should start Entrepreneurship centres to

do research on the subject and recommend policymeasures to strengthen entrepreneurship in

management student. IIT has established such a centre to convert

engineers into entrepreneurs.

Entrepreneurs should preferably start with

trading/marketing/service providing, with lesscapital need and less risk and avoid temptation of

entrepreneurship chp 1

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