A DISSERTATION

ON

FINANCIAL PLANNING FOR A SMALL SCALE UNIT

Submitted for partial fulfillment of award of Post Graduate Degree in Business

Administration

By

Amit Kumar Gautam

Under the guidance of

1
 ACKNOWLEDGEMENT

It has been a great learning experience on this dissertation report “Financial

Planning for A Small-Scale Industry”. I would like to thank my faculty mentor Dr.Nidhi
Srivastava for imparting knowledge and guidance to me in the field of Finance and
support through out my project completion. I would also like to thank I.T.S. for giving
me this opportunity to do this project.

AMIT KUMAR GAUTAM

MBA (FINANCE)
20010-11
SIKKIM MANIPAL UNIVERSITY

2
 CONTENTS

CHAPTERS TOPIC PAGES

ABSTRACT
OBJECTIVE
1 INTRODUCTION 6-29
i. Small-scale industry
ii. Objective
iii. Advantage
iv. Reforms
v. SSIs in India
vi. Challenges & Opportunities
2 LITERATURE REVIEW 30-53
Nayak Committee
Kapur Committee
3 FINANCIAL PLANNING 54-92
Process of financial planning
Stages of financial planning
Elements of financial planning
Financial strategy
How to develop financial function
4 Research Methodology 93
5 Conclusion 94
6 Limitations 95
7 Suggestion & Recommendation 96
8 Bibliography 98

3
 ABSTRACT

My project “FINANCIAL PLANNING FOR A SMALL SCALE INDUSTRY” deals

with the study of growth of Small scale industry and mainly how financial planning is
done in a Small scale industry.

The small-scale industries sector plays a vital role in the growth of the country. It
contributes almost 40% of the gross industrial value added in the Indian economy. It has
been estimated that a million Rs.10 of investment in fixed assets in the small scale sector
produces 4.62 million worth of goods or services with an approximate value addition of
ten percentage points

Financial planning is a part of a larger planning system in the firm. And this planning
process begins with a statement of the firm’s goal or mission, which is stated in
qualitative terms. Financial planning, involves analyzing the financial flows of a
company, forecasting the consequences of various investments, financing and dividend
decisions, and weighing the effects of various alternatives.

The project is intended to provide information regarding the financial planning procedure
followed by various SSIs so that it can be useful to all those who are willing to gain
knowledge about financial planning processes of a SSI. As the most valuable asset of
organizations, financial planning now-a-days play a very significant role in success of
every organization.

The comparative study conducted, can also be used by the companies to study their own
financial planning process as compare to the other companies. This project can also be
used to help employees of organization, customers, government bodies and can used by
those person who is doing research on this topic.

4
 OBJECTIVE

 To know the process of financial planning.

 To study the scope of Small scale industry.
 How financial planning is done in SSI
 What are the problems SSI faces while doing it.
 The tools for elimination of these problems.
 To make a comparative analysis of financial planning by the sample organization.

5
 CHAPTER- I

INTRODUCTION

The small scale sector has played a very important role in the socio-economic
development of the country during the past 50 years. It has significantly contributed to
the overall growth in terms of the Gross Domestic Product (GDP), employment
generation and exports. The performance of the small scale sector, therefore, has a direct
impact on the growth of the overall economy. The performance of the small scale sector
in terms of parameters like number of units.

During the one year period i.e., 2000-01over 1999-2000, the number of SSI units is
estimated to have increased by 1, 58,000, production at current prices by Rs. 72,609 crore
and at constant prices by Rs. 33,714 crore. Employment increased by 7,14,000persons,
while exports were higher by Rs.5,778crores.7.67According to projections made by the
Ministry of Small Scale Industries during2000-01, the SSI sector recorded growth in
production of 8.09 per cent over the previous year. The small scale industries sector has
recorded higher growth rate than the industrial sector as a whole (4.9 per cent
during2000-01). It contributed about 40 per cent towards the industrial production as a
whole and 35 per cent of direct exports from thecountry.7.68 The Government has been
taking various measures from time to time in order to enhance the productivity, efficiency
and competitiveness of the SSI sector.

As on March 31, 2001, there were2, 49,630 sick SSI units which had obtained loans from
banks. An amount of Rs. 4,506 crore of bank credit was blocked in these units. Of these
only 13,076 units were considered potentially viable by the banks with outstanding credit
of Rs. 399 crore. Further, banks had identifie2, 25,488 units with outstanding bank credit
amounting to Rs. 3,943 crore as unviable. Rehabilitation of sick units is a costly

6
proposition as it involves rescheduling of past over dues with concessions on interest
amount due, additional credit for modernisation and technology upgradation and
provision for fresh working capital. Presently, the State Level Inter- Institutional
Committee (SLIIC) of banks and financial institutions is the only forum looking into
rehabilitation of potentially viable sick SSI units. However, in the absence of statutory
backing, SLIICs has no power to enforce its decisions.7.70 To tackle the problem of
rehabilitation of potentially viable sick SSI units, the RBI constituted a working group on
November 25, 2000 under the chairmanship of Shri S.S. Kohli, the then chairman of
Indian Banks Association, to look into the issue. The Working Group Submitted its report
in May, 2001. All the major recommendations of the working group have been accepted
by the RBI, including a change in the definition of Sick SSI units, norms for deciding on
the viability of sick units, etc. The revised definition would enable banks to take action at
an early stage for revival of the units. Based on the accepted recommendations of the
Working Group, the RBI has drawn up the revised guidelines for Rehabilitation of Sick
SSI units, which have been circulated on January 16, 2002 to all the Banks for
implementation.

The small-scale industries sector plays a vital role in the growth of the country. It
contributes almost 40% of the gross industrial value added in the Indian economy. It has
been estimated that a million Rs.10 of investment in fixed assets in the small scale sector
produces 4.62 million worth of goods or services with an approximate value addition of
ten percentage points.

The small-scale sector has grown rapidly over the years. The growth rates during the
various plan periods have been very impressive. The number of small-scale units has
increased from an estimated 0.87 million units in the year 1980-81 to over 3million in the
year 2000, SSI sector has made significant contributions to employment generation and
also to rural industrialization. This sector is ideally suited to build on the strengths of our
traditional skills and knowledge, by infusion of technologies, capital and innovative
marketing practices. The promotional and protective policies of the Govt. have ensured
the presence of this sector in an astonishing range of products, particularly in consumer

7
goods. Small industry sector has performed exceedingly well and enabled our country to
achieve a wide measure of industrial growth and diversification

The Product Group Matrix

There are about twenty-one major industry groups in the small scale sector. These are
listed below:
 Food Products
 Chemical & Chemical Products
 Basic Metal Industries
 Metal Products
 Electrical Machinery & Parts
 Rubber & Plastic Products
 Machinery & Parts Except Electrical goods
 Hosiery & Garments - Wood Products
 Non-metallic Mineral Products
 Paper Products & Printing
 Transport Equipments & Parts
 Leather & Leather Products
 Miscellaneous Manufacturing Industries
 Other Services & Products
 Beverages, Tobacco & Tobacco Products
 Repair Services
 Cotton Textiles
 Wool, Silk, Synthetic Fiber Textiles
 Jute, Hemp and Mesta Textiles
 Other Services

8
OBJECTIVE OF SMALL SCALE INDUSTRY

 Elimination of economic backwardness of rural & underdeveloped regions in the

country.
 Attainment of self-reliance
 Reduction of regional imbalance
 Reduction of disparities in income, wealth and consumption
 Mobilization of resources of capital and skills and their optimum utilization
 Creation of greater employment opportunities and increased output, income and
standard of living.
 Meeting a substantial part of the economy’s requirements for consumer goods and
simple producer goods.
 Provide employment and a steady source of income to the low-income groups
living in rural and urban areas of country.
 Provide substitutes for various industrial products now being imported into the
country.
 Improve the quality of industrial products manufactured in the cottage industry
sector and to enhance both the production and exports.

9
IMPORTANCE OF SMALL SCALE INDUSTRY

 Small is beautiful : Man’s current pusuit of profit and progress, which

promotes giant organization and increased specialization has infact resulted in
gross inefficiency, environmental pollution and inhuman working conditions.
 INNOVATIVE & PRODUCTIVE : It is the small units which are highly
innovative though they do not maintain their own research and development
wings.
 Individual tastes, fashion & personalized services: Small firms are quick in
studying the changes in tastes and fashions of consumers and in adjusting the
production process and subsequent production accordingly.

 Symbols of national identity: Small enterprises are almost locally owned and
controlled and they can strengthen rather than destroy the extended family and
other social systems and cultural tradition that are perceived as valuable in
their own right as well as symbols of national identity.

 Happier in work: People who work in small enterprises are happier in their
work than those who work in large ones inspite of lower wages and
inadequate standards of safety, comfort and welfare facilities
 Always Winners of the Games: Small enterprises were at the forefront of
practically every business boom of the last decade whether it was computers,
consumer electronics, diamond exports or advertising. They frequently put the
established large industrial house in the shade with the quality of their
performance. Their ability to seize business opportunities and their aggressive
feeding of burgeoning markets.
 Dispersal Over Wide Areas: It is only Small scale units which have a
tendency to disperse over wide areas. According to the second All-India

10
 Census of Small-scale units, 62.19% of the units are located in backward
areas.

ADVANTAGE OF SMALL SCALE INDUSTRIES

 Small scale industries do not require a high level of technology

 They are generally labour-intensive and do not require a large amount of capital .
 Projects related to these industries can be undertaken in a short period and hence
can increase production both in the short and the long run.
 Most developing countries are rich in certain agricultural, forest and mineral
resources and small-scale enterprises can be based on the processing of locally-
produced raw-materials.
 It is possible both to save and to earn foreign exchange by producing and
exporting goods from local resources
 From Small-scale industrial enterprises, skills and knowledge can be transferred
to other enterprises and small enterprises may grow into medium-sized enterprise.
 By creating opportunities for the small business, small industrial enterprises can
bring about a more equitable distribution of income which is socially necessary
and desirable.
 Imperfect competition protects the small firms markets and enables them to exist
even where they are not efficient in terms of costs.

 There is an essential linkage between large-scale enterprises and small-scale

enterprises in the sense that the former create opportunities or facilities for the
growth of the latter.
 These enterprises in developing countries help to create economic stability in
society by diffusing prosperity and by checking the expansion of monopolies.
 Small scale enterprises will make possible a transfer of manufacturing activities
from the congested metropolitan to the non-metropolitan and rural areas.
 It creates immediate and permanent employment at a relatively small capital cost.

11
 It meets a substantial part of increased demand for consumer goods including
mass consumption goods.
 It facilitates mobilizations of resources of capital and skills which often would
remain inadequately utilized
 It offers equitable distribution of national income
 It involves a short gestation period
 It doesn’t require as heavy and costly infrastructure as large enterprises.
 It has a favorable capital output ratio
 The products of these enterprises earn a substantial exchange
 It assists in dispersal and avoids problems which unplanned urbanization tends to
create.

12
Structure of Small-Scale industry:-

Small-scale
sector

Cottage- Specialized Ancillary Modern

Tiny-sector
industries sector Units Small
Entreprises

Artisan Skilled

13
Role of Small-Scale industry in a Developing Economy:-

 In a developing economy it is the SSI that constitutes the backbone of its

economic structures.
 It creates vast employment opportunities for the people, effects decentralization of
industries by the creation of industrial estates and makes possible a redistribution
of economic power and income
 It also raises the standard of living of people.

Reforms in Small-Scale Industry:-

 Reforms have touched the SSIs, but marginally, in the form of a relaxation of
the investment limits of Rs.60 lakhs to Rs.3 crore for garment units exporting
over 50 percent of their output.
 Non-SSI units are allowed into the reserved for SSIs on a case by case basis,
provided they export over 75 percent of their production.
 For 177 items they do make SSIs get purchase and price preferences,
subsidized loans, and tax exemptions at state level.
 Many corporates continue to manufacture the same products- reservation only
prevents them from expanding their capacities- they also market these
products, outsourced from SSI units, under their own brand name, thus
moping up the margins.

14
FORM OF OWNERSHIP ORGANIZATION IN A SMALL-SCALE INDUSTRY:-

Small-Scale Industry

Public
Private (With state
participants)

Collective
Individual
Ownership

Sole Proprietorship Partnership Cooperative

Limited

Unlimited

Joint stock company

15
SSI IN INDIA

India is ranked among the ten most industrialized countries in the world. The country
derived its economic strength from the growth of small industries throughout its length
and breadth. The pivotal role the small industries play in the economy of India i.e. more
than 55% of total production in India today is from small scale sector.

SSI Sector in India creates largest employment opportunities for the Indian populace,
next only to Agriculture. It has been estimated that 100,000 rupees of investment in fixed
assets in the small-scale sector generates employment for four persons SSI Sector plays a
major role in India's present export performance. 45%-50% of the Indian Exports is
contributed by SSI Sector. Direct exports from the SSI Sector account for nearly 35% of
total exports. Besides direct exports, it is estimated that small-scale industrial units
contribute around 15% to exports indirectly. This takes place through merchant exporters,
trading houses and export houses. They may also be in the form of export orders from
large units or the production of parts and components for use for finished exportable
goods.

It would surprise many to know that non-traditional products account for more than 95%
of the SSI exports. The exports from SSI sector have been clocking excellent growth
rates in this decade. It has been mostly fuelled by the performance of garments, leather

16
and gems and jewellery units from this sector. The product groups where the SSI sector
dominates in exports are sports goods, readymade garments, woolen garments and
knitwear, plastic products, processed food and leather products. The SSI sector is
reorienting its export strategy towards the new trade regime being ushered in by the
WTO.

PERFORMANCE OF SMALL SCALE INDUSTRY

• Employment
• Production
• Exports
• Opportunities
• Economic Indicators

Employment Generation

SSI Sector in India creates largest employment opportunities for the Indian populace,
next only to Agriculture. It has been estimated that a lakh rupees of investment in fixed
assets in the small scale sector generates employment for four persons.

17
 200
180 167.2 171.58
160
146.56 152.61
160
139.38
140
120
values
100
80
60
40
20
0
2001-02 2002-03 2003-04 2004-05 2005-06 2006-07
years

According to the SSI Sector survey conducted by the Ministry and National
Informatics Centre with the base year of 1987-88, the following interesting
observations were made related to employment in the small scale sector.

Food products industry has ranked first in generating employment, providing

employment to 4.82 lakh persons (13.1%).The next two industry groups were Non-
metallic mineral products with employment of 4.46 lakh persons (12.2%) and Metal
products with 3.73 lakh persons (10.2%).

In Chemicals & chemical products, Machinery parts and except Electrical parts,
Wood products, Basic Metal Industries, Paper products & printing, Hosiery &
garments, Repair services and Rubber & plastic products, the contribution ranged
from 9% to 5%, the total contribution by these eight industry groups being 49%.

18
In all other industries the contribution was less than 5%.Per unit employment was the
highest (20) in units engaged in Beverages, tobacco & tobacco products mainly due to
the high employment potential of this industry particularly in Maharashtra, Andhra
Pradesh, Rajasthan, Assam and Tamil Nadu.

Next came Cotton textile products (17), Non-metallic mineral products (14.1), Basic
metal industries (13.6) and Electrical machinery and parts (11.2.) The lowest figure of
2.4 was in Repair services line.

Per unit employment was the highest (10) in metropolitan areas and lowest (5) in
rural areas.
However, in Chemicals & chemical products, Non-metallic mineral products and
Basic metal industries per unit employment was higher in rural areas as compared to
metropolitan areas/urban areas.
In urban areas highest employment per unit was in Beverages, tobacco products (31
persons) followed by Cotton textile products (18), Basic metal industries (13) and
Non-metallic mineral products (12).

Non-metallic products contributed 22.7% to employment generated in rural areas.

Food Products accounted for 21.1%, Wood Products and Chemicals and chemical
products shared between them 17.5%.

As for urban areas, Food Products and Metal Products almost equally shared 22.8%
of employment. Machinery and parts except electrical, Non-metallic mineral
products, and Chemicals & chemical products between them accounted for 26.2% of
employment. In metropolitan areas the leading industries were Metal products,
Machinery and parts except electrical and Paper products & printing (total share
being 33.6%).

19
Tamil Nadu (14.5%) made the maximum contribution to employment. This was
followed by Maharashtra (9.7%), Uttar Pradesh (9.5%) and West Bengal (8.5%) the
total share being 27.7%.Gujarat (7.6%), Andhra Pradesh (7.5%), Karnataka (6.7%),
and Punjab (5.6%) together accounted for another 27.4%. Per unit employment was
high - 17, 16 and 14 respectively - in Nagaland, Sikkim and Dadra & Nagar Haveli.
It was 12 in Maharashtra, Tripura and Delhi. Madhya Pradesh had the figure of 2. In
all other cases it was around the average of 6.

Production

The small scale industries sector plays a vital role for the growth of the country. It
contributes 40% of the gross manufacture to the Indian economy.

It has been estimated that a lakh rupees of investment in fixed assets in the small scale
sector produces 4.62 lakhs worth of goods or services with an approximate value
addition of ten percentage points.

The small scale sector has grown rapidly over the years. The growth rates during the
various plan periods have been very impressive.

20
 600 538
500 465
413
400 356
values

294
300 242
200

100

0
2001-02 2002-03 2003-04 2004-05 2005-06 2006-07
years

The number of small scale units has increased from an estimated 8.74 lakhs units in
the year 1980-81 to an estimated 31.21 lakhs in the year 1999.

From the year 1990-91 this sector has exhibited a comparatively lower growth trend
(though positive) which continued during the next two years. However, this has to be
viewed in the background of the general recession in the economy. The transition
period of the process of economic reforms was also affected for some period by
adverse factors such as foreign exchange constraints, credit squeeze, demand
recession, high interest rates, shortage of raw material etc.

When the performance of this sector is viewed against the growth in the
manufacturing and the industry sector as a whole, it instills confidence in the
resilience of the small scale sector.

The estimates of growth for the year 1995-96 have shown an upswing. The growth of
SSI sector has surpassed overall industrial growth from 1991 onwards. The positive
trend is likely to strengthen in the coming years. This trend augurs a bright future for
the small scale industry.

21
Export contribution

SSI Sector plays a major role in India's present export performance. 45%-50% of the
Indian Exports is being contributed by SSI Sector. Direct exports from the SSI Sector
account for nearly 35% of total exports. The number of small scale units that undertake
direct exports would be more than 5000.

Besides direct exports, it is estimated that small scale industrial units contribute around
15% to exports indirectly. This takes place through merchant exporters, trading houses
and export houses. They may also be in the form of export orders from large units or the
production of parts and components for use for finished exportable goods.

It would surprise many to know that non traditional products account for more than 95%
of the SSI exports. The exports from SSI sector have been clocking excellent growth
rates in this decade. It has been mostly fuelled by the performance of garment, leather
and gems and jewellery units from this sector.

60
49
50 44
39
40 36
values

29
30 25

20

10

0
2001-02 2002-03 2003-04 2004-05 2005-06 2006-07

years

The lucrative product groups where the SSI sector dominates in exports, are sports goods,
readymade garments, woolen garments and knitwear, plastic products, processed food

22
and leather products.

Opportunities

Small industry sector has performed exceedingly well and enabled our country to achieve
a wide measure of industrial growth and diversification.

23
 35
30.14
30 28.57
27.24
25.71
23.88
25

20

values
15

10

0
2002-03 2003-04 2004-05 2005-06 2006-07

years

By its less capital intensive and high labour absorption nature, SSI sector has made
significant contributions to employment generation and also to rural industrialization.
This sector is ideally suited to build on the strengths of our traditional skills and
knowledge, by infusion of technologies, capital and innovative marketing practices.

The opportunities in the small scale sector are enormous due to the following factors:

 Less Capital Intensive

 Extensive Promotion & Support by the Government
 Reservation for Exclusive Manufacture by small scale sector
 Project Profiles
 Funding
 Finance & Subsidies
 Machinery Procurement
 Raw Material Procurement
 Manpower Training.
 Technical & Managerial skills.
 Tools & Tools utilization support.

24
  Reservation for Exclusive Purchase by Government.
 Export Promotion.
 Growth in demand in the domestic market size due to overall economic
growth.
 Increasing Export Potential for Indian products.
 Growth in Requirements for ancillary units due to the increase in number
of Greenfield units coming up in the large scale sector.

So this is the opportune time to set up projects in the small scale sector. It may be said
that the outlook is positive, indeed promising, given some safeguards. This expectation is
based on an essential feature of the Indian industry and the demand structures. The
diversity in production systems and demand structures will ensure long term co-existence
of many layers of demand for consumer products / technologies / processes. There will be
flourishing and well grounded markets for the same product/process, differentiated by
quality, value added and sophistication. This characteristic of the Indian economy will
allow complementary existence for various diverse types of units.

The promotional and protective policies of the Govt. have ensured the presence of this
sector in an astonishing range of products, particularly in consumer goods. However, the
bug bear of the sector has been the inadequacies in capital, technology and marketing.
The process of liberalization will therefore, attract the infusion of just these things in the
sector.

Economic Indicators

The Small Scale Industry today constitutes a very important segment of the Indian

25
economy. The development of this sector came about primarily due to the vision of our
late Prime Minister Jawaharlal Nehru who sought to develop core industry and have a
supporting sector in the form of small scale enterprises.

 Small Scale Sector has emerged as a dynamic and vibrant sector of the
economy.
 Today, it accounts for nearly 35% of the gross value of output in the
manufacturing sector and over 40% of the total exports from the country.
 In terms of value added this sector accounts for about 40% of the value added
in the manufacturing sector.
 The sector's contribution to employment is next only to agriculture in India. It
is therefore an excellent sector of economy for investment.

By its less capital intensive and high labour absorption nature, SSI sector has made
significant contributions to employment generation and also to rural industrialization.
This sector is ideally suited to build on the strengths of our traditional skills and
knowledge, by infusion of technologies, capital and innovative marketing practices. So
this is the opportune time to set up projects in the small scale sector. It may be said that
the outlook is positive, indeed promising, given some safeguards.

This expectation is based on an essential feature of the Indian industry and the demand
structures. The diversity in production systems and demand structures will ensure long
term co-existence of many layers of demand for consumer products / technologies /
processes. There will be flourishing and well grounded markets for the same
product/process, differentiated by quality, value added and sophistication.

This characteristic of the Indian economy will allow complementary existence for various
diverse types of units. The promotional and protective policies of the Govt. have ensured
the presence of this sector in an astonishing range of products, particularly in consumer
goods. However, the bug bear of the sector has been the inadequacies in capital,

26
technology and marketing. The process of liberalization will therefore, attract the
infusion of just these things in the sector.

A survey of indices of industrial production (IIP) maintained for these major industry
groups reveals what the sunrise industries are and on what segments the sun has set. SSI
units produce an amazing variety and type of products. Over 7500 products are known to
be manufactured in this sector. Even in a particular product, there would exist a wide
range of qualities or specifications catering to different market segments, particularly in
consumer/household products. Small Scale sector has emerged as a major supplier of
mass consumption items like
 leather and leather goods
 plastic and rubber goods
 ready-made garments
 hosiery goods, sheet metal goods
 stationery items - soap and detergents
 domestic utensils
 toothpaste and toothpowder
 safety matches
 preserved foods and vegetables
 wooden and steel furniture
 paints and varnishes etc.,

Among the sophisticated items mention may also be made of

 Television sets

27
  calculators
 microwave components
 plastic film capacitors
 carbon film registers
 electrometrical equipments
 electronic teaching aids
 digital measuring equipments
 air-conditioning equipments
 optical lenses
 drugs and pharmaceuticals
 electric motors
 pesticide formulators
 photographic sensitized paper
 razor blades
 collapsible tubes,etc.

Entrepreneurs in small scale sector are normally not required to obtain a license either
from the Central Government or the State Government for setting up units in any part of
the country. Registration of a small scale unit is also not compulsory. But, its registration
with the State Directorate or Commissioner of Industries or DIC's makes the unit eligible
for availing different types of Government assistance like financial assistance from the

Department of Industries, medium and long term loans from State Financial Corporations
and other commercial banks, machinery on hire-purchase basis from the National Small
Industries Corporation, etc. Registration is also an essential requirement for getting
benefits of special schemes for promotion of SSI viz. Credit guarantee Scheme, Capital
subsidy, reduced custom duty on selected items, ISO-9000 Certification reimbursement
& several other benefits provided by the State Government.

CHALLENGES AND OPPORTUNITIES

28
  In the emerging scenario, characteristics of a liberalized regime, unrestricted
competition from multinational entering the consumer durables and non-durables
market segment with their internationally known brand names, technological
superiority and intensive marketing efforts would offer formidable challenge to
the small-scale sector’
 Large-scale exports of agricultural commodities in processed and semi-processed
form by large export houses and multinational leaving gaps in the supply of these
resources which have traditionally been the input for tiny industries.
 Liberalization in imports of capital goods and related components, it is feared,
would exert pressures on the existing markets of ancillaries and SSI vendors.
 FDI (Foreign Direct Investments) will have the spin-off effects of linkages with
small-scale units which can provide the supply base to large undertakings.
 Indian industry is at the crossroads where on the one hand it has to integrate itself
with the global markets, while on the other, it has to face competition in the
domestic market from international suppliers.
 On moving from a protected economy to a market-oriented economy, some
amount of transitional problems seem unavoidable, but given the intrinsic strength
of the sector and several support services available to it, the sector can look
forward to a level of sustained development in the coming years.

COMPETITIVE ADVANTAGES OF SMALL-SCALE UNITS

ADVANTAGES

 Ability to perceive opportunities

 Action orientation
 Ability to mobilize local resources
 Risk management
 Ability to utilize resources efficiently
 Increased resource specialization
 Better managerial control

29
  Ability to react to rapidly changing environment

OUTCOMES

 Innovation and technological development

 Development of venture capital funds
 Higher profitability
 Lower factor cost, particularly labour costs.
 Greater innovative capabilities
 Better equipped to compete in the growing service industry and in knowledge
intensive industries.

CHAPTER II

30
 LITERATURE REVIEW

Ministry of Small Scale Industries

The Ministry of Small Scale Industries acts as the nodal agency for growth and
development of SSIs in the country. The ministry formulates and implements policies and
programmes in order to promote small scale industries and enhance their
competitiveness. It is assisted by various public sector enterprises like:-

 Small Industry Development Organization (SIDO) is the apex body for

assisting the Government in formulating and overseeing the implementation
of its policies and programmes/projects/schemes.
 National Small Industries Corporation Ltd (NSIC) was established by the
Government with a view to promoting, aiding and fostering the growth of SSI
in the country, with focus on commercial aspects of their operation.
 The Ministry has established three National Entrepreneurship Development
Institutes which are engaged in development of training modules, undertaking
research and training and providing consultancy services for entrepreneurship
development in the SSI sector. These are:-

o National Institute of Small Industry Extension Training (NISIET) at

Hyderabad,
o National Institute of Entrepreneurship and Small Business Development
(NIESBUD) at NOIDA
o Indian Institute of Entrepreneurship (IIE) at Guwahati

 The National Commission for Enterprises in the Unorganized Sector (NCEUS)

has been constituted with the mandate to examine the problems of enterprises in
the unorganized sector and suggest measures to overcome them.

Small Industries Development Bank of India (SIDBI) acts as apex institution for
financing SSIs through various credit schemes.

31
INSTITUTION PRIME FUNCTION

 Small Scale Industries Board =Providing refinance facility

 SIDO= Provide working capital finance to SSIs
 NSIC= Render advise to government on various policies/programmes for SSIs
 SIDBI =Supply machines on hire-purchase basis and assist SSIs in procuring
government orders for supply of their product
 SFC’s Provide long term finance
 Commercial Banks= Assist government in formulating, coordinating,
implementing policies and programmes for the promotion of SSIs

Credit Flow

Credit is the prime input for sustained growth of small scale sector and its availability
continues to be a matter of concern. Credit provided for creation of fixed assets like land,
building, plant and machinery is called long term credit. Credit provided for running the
industry for its day to day requirement for purchasing raw material and other inputs like
electricity and water etc. and for payment of wages and salaries is called short term credit
or working capital.

Institutional Arrangement

Small Scale Industrial Sector is provided working capital by commercial banks and in
some cases by cooperative banks and regional rural banks. Term loans are provided by
State Financial Corporations (SFCs), Small Industries Development Corporations
(SIDCs), National Small Industries Corporation (NSIC) and National Bank for
Agriculture and Rural Development (NABARD). Financial assistance from NSIC and to
some extent from SIDCs is available in the form of supply of machinery on hire purchase
basis/deferred payment basis. Small sized SSI and tiny units also get some term loans
from commercial banks along with working capital in the form of composite loans.

32
Refinance to these institutions is provided by the Small Industries Development Bank of
India (SIDBI). Such refinance comprises assistance provided to State Financial
Corporation Bills, Finance Scheme, Special Capital/Seed Capital Scheme, new debt
instruments and to National Small Industries Corporation. Long term loan are provided to
the smalls scale industrial units by SFCs mainly through Single Window Scheme and
National Equity Fund as also direct assistance provided to State Financial Corporations in
the form of refinance. Some part of working capital for pre-operative expenses is also
provided by State Financial Corporations to Small Scale Industrial Units under the Single
Window Scheme.

Credit to SSI Sector from Public Sector Banks

The table below gives the positions with regard to flow of credit to SSI Sector:-

At the end At the end At the end At the end At the end
of March of March of March of March of March
1995 1996 1997 1998 1999
Net Bank Credit 1,69,038 1,84,381 1,89,684, 2,18,219 2,46,203
Credit to SSI 25,843 29,485 31,542 38,109 42,674
No. of SSI 32.25 33.77 N.A. 29.64 N.A.
Accounts (in
lakhs)
SSI Credit as 15.29 15.99 16.6 17.5 17.33
percentage of
Net Bank Credit

There is a marginal decline in share of credit to SSI sector as a percentage of net bank
credit.

Credit to Tiny Sector

33
The Table below gives the status of credit flow to tiny sector since 2004

At the end of At the end of At the end of At the end of

March 2004 March 2005 March 2006 March 2007
Net Credit to Tiny
7734 8183 9515 10273.13
Sector
Tiny credit as
percentage of net SSI 29.93 27.76 30.2 27.0
credit

The advances outstanding against Tiny sector increased from Rs.9515 crores at the end of
March, 1997 to Rs. 10273 crores at the end of March, 1998. The share of tiny sector in
the advances to SSI sector has, however, decreased from 30.2% at the end of March 1997
to 27.0% at the end of March, 1998. As per RBI guidelines, 40% priority sector lending
going to SSI has to go to tiny units with investment in plant and machinery below Rs. 5
lakhs and another 20% to tiny units with investment in plant and machinery between Rs.
5 lakhs and Rs. 25 lakhs. Thus, against the target of 60% of SSI credit for tiny units,
actual flow at 27% is very low.

Nayak Committee

Nayak Committee was set up by the Reserve Bank of India in December. Nayak
Committee, RBI issued a number of circulars advising the banks to grant working capital
to the extent of 20% of the projected annual turnover, timely disposal of loan applications
and setting up of specialized bank branches for SSI loaning in areas of higher SSI
concentration.

As a follow up of Nayak Committee recommendations, Finance Minister in the Budget

speech of 1995-96, announced a Seven Point Action Plan for improving the flow of credit

34
to small scale sector consisting of the following:

i) Time bound action for setting up specialized SSI branches in 85 identified districts; at
least 100 such dedicated branches to be opened before the need of 1995-96.

ii) Adequate delegation of powers at the branch and regional levels.

iii) Banks to conduct sample surveys of their performing SI accounts to find out whether
they are getting adequate credit.

iv) Steps to be taken to see as far as possible that composite loans (covering both term
loans and working capital) are sanctioned to SSI entrepreneurs.

v) Regular meetings by banks at zonal and regional levels with SSI entrepreneurs.

vi) Need to sensitize bank mangers and reorient them regarding working of the SSI
sector. vii) Simplification of procedural formalities by banks for SSI entrepreneurs.

Steps taken by Reserve Bank of India to improve credit flow to SSI sector

a) The Government had raised the investment limit for SSIs from Rs.60 lakhs to Rs.300
lakhs and for tiny units from Rs.5 lakhs to Rs.25 lakhs. In order to ensure that credit is
available to all segments of tiny sector. RBI has issued instructions that out of the funds
normally available to SSI sector, 40% be given to units with investment in plant and
machinery up to Rs. 5 lakhs; 20% for units with investment between Rs. 5 lakhs to Rs.25
lakhs and remaining 40% for other units.

b) Public sector banks have been advised to operationally more specialized SSI branches
at centers where there is a potential for financing many SSI borrowers. As on March
1998, 370 specialized SSI branches are working in the country.

35
c) To extend 'Single Window Scheme' of SIDBI to all districts to meet the financial
requirements (both term loan & working capital) of SSIs.

d) With a view to moderating the cost of credit to SSI units, banks are advised to accord
SSI units with a good track record the benefits of lower spread over the Prime Lending
Rate.

e) In order to take expeditious decision on credit proposals of SSI units, banks have been
advised to delegate enhanced powers to the branch managers of the specialized SSI
branch so that most of the credit proposals are decided at the branch level.

Monitoring

Credit to SSIs is monitored periodically by Reserve Bank of India, Department of SSI &
ARI, National Advisory Committee of SIDBI, State Level Bankers Committee and
District Level Coordination Committees of the Bank.

Fresh initiatives announced in the Budget of 2006-2007

In this budget speech the Finance Minister has announced the following measures for
improving credit supply to SSI sector

a) A new credit insurance scheme launched.

Inability to provide adequate security to banks and low recovery are often sighted as
major constraint in flow of investment credit of SSI units. The problem is more acute for

Export oriented and tiny sector enterprises. To alleviate this problem, the Finance
Minister announced that a new credit insurance scheme will be launched.

36
b) Composite Loan Scheme Limit Enhanced to Rs. 5 Lakh

The composite loan scheme of SIDBI and commercial banks is designed to case
operational difficulties of the small borrowers by presiding term loan and working capital
through a single window. The limit for composite loans currently at Rs. 2 lakhs has been
enhanced to Rs. 5 lakhs.

c) Working Capital Limit Enhanced to Rs. 5 Crores

For SSI units the working capital limit is determined by the banks on the basis of simple
calculation of 20% of their annual turnover. The turnover limit for this purpose has been
enhanced from Rs. 4 Crore to Rs. 5 Crore.

d) Credit Delivery to Tiny Sector

To increase the outreach of banks to the tiny sector, leading by banks to Non-Banking
Financial Companies (NBFCs) or other financial intermediaries for purposes of on-
lending to the tiny sector is being included within the definition of priority sector for
bank lending.

High level committee for credit (Kapur committee)

In December, 1997, Reserve Bank of India has appointed a One-Man Committee under
the Chairmanship of Shri S.L. Kapur, former Secretary (SSI), Government of India, to
suggest measures for improving the delivery system and simplification of procedures for
credit to small scale industrial sector. The Committee has submitted its report to RBI on

30th June, 1998. Some of the major recommendations of the Committee are:-

i) Special treatment to smaller among small industries;

37
ii) Enhancement in the quantum of composite loans;

iii) Removal of procedural difficulties in the path of SSI advances;

iv) Sorting out issues relating to mortgages of land including removal of stamp duty and
permitting equitable mortgages;

v) Allowing access to low-cost funds to Small Industries Development Bank of India

(SIDBI) for refinancing SSI loans

vi) Non-obtaining of collaterals for loans up to Rs.2 lakhs;

vii) Setting up of a collateral reserve fund to provide support to first party guarantees;

viii) Setting up of a Small Industries Infrastructure Development Fund for developing

industrial areas in/around metropolitan and urban areas;

ix) Change in the definition of sick SSI units;

x) Giving statutory powers to State Level Inter-Institutional (SLIIC);

xi) Setting up of a separate guarantee organization and opening of 1,000 additional

specialized branches; and

xii) Enhancement of SIDBI's role and status to match with that of National Bank for
Agriculture and Rural Development (NABARD).

Kapur Committee has made 126 recommendations out of which RBI has already
accepted 40 recommendations for implementation.

Amendment of interest on delayed payment act

38
To tackle the problem of settlement of dues of SSI units by large companies. Interest on
Delayed Payment Act has been amended. The following amendments have been made in
the Act.

a) The payment has to be made within 120 days to the SSI supplier from the date of
acceptance of the goods by the buyer.

b) Interest on delayed payment has been revised from 5% above the floor rate to one and
half time the prime lending rate charged by SBI.

c) Mechanism has been prescribed for settling disputes by Industry Facilitation Councils
to be set up by State Governments through notification.

Small Industries Development Bank of India (SIDBI)

SIDBI was set up by an Act of Parliament, as an apex institution for promotion, financing
and development of industries in small scale sector and for coordinating the functions of
other institutions engaged in similar activities. It commenced operations on April 2, 1990.
SIDBI extends direct/indirect financial assistance to SSIs, assisting the entire spectrum of
small and tiny sector industries on All India basis.

The range of assistance comprising financing, extension support and promotional, are
made available through appropriate schemes of direct and indirect assistance for the
following purposes:-

• Setting up of new projects

• Expansion, diversification, modernisation, technology upgradation, quality
improvement, rehabilitation of existing units
• Strengthening of marketing capabilities of SSI units.

39
 • Development of infrastructure for SSIs and
• Export promotion.

Direct Assistance Schemes

SIDBI directly assists SSIs under Project Finance Scheme, Equipment Finance Scheme,
Marketing Scheme, Vendor Development Scheme, Infrastructural Development Scheme,
ISO-9000, Technology Development & Modernisation Fund, Venture Capital Scheme,
assistance for leasing to NBFCs, SFCs, SIDCs and resource support to institutions
involved in the development and financing of small scale sector.

These Schemes are mainly targeted at addressing some of the major problems of SSIs in
areas such as high tech project, marketing, infrastructural development, delayed
realization of bills, obsolescence of technology, quality improvement, export financing
and venture capital assistance.

Indirect Assistance Schemes

Under its indirect schemes, SIDBI extends refinance of loans to small scale sector by
Primary Lending Institutions (PLIs) viz. SFCs, SIDCs and Banks. At present, such
refinance assistance is extended to 892 PLIs and these PLIs extend credit through a net
work of more than 65,000 branches all over the country. All the Schemes of SIDBI both
direct and indirect assistance are in operation in all the States of the country through 39
regional/branch offices of SIDBI.

Promotional and Development Activities

40
SIDBI is actively involved in promoting tiny and small scale industries by means of its
promotional and developmental activities through suitable professional agencies for
organizing Entrepreneurship Development Programmes, Technology Upgradation &
Modernisation Programmes, Micro Credit Schemes and assistance under Mahila Vikas
Nidhi to bring about economic empowerment of women specially the rural poor by
providing them avenues for training and employment opportunities.

A. Refinance against term loans in respect Interest on term loans Interest on

of projects/activities eligible for for fixed assets and Refinance (%
assistance under the Scheme working capital p.a.)
advances (excluding
interest tax) (% p.a.)
(i) Upto and inclusive of Rs. 25,000 12.0 9.0
(ii) Over Rs. 25,000 and upto Rs. 2 lakh Not exceeding 13.5 10.5
B. Refinance against term loans in respect Interest on term loans Interest on
of projects/activities eligible for (excluding interest tax) Refinance (%
assistance under TDMF and ISO 9000 (% p.a.) p.a.)
Schemes (Applicable to all eligible
institutions) (except RRBs)
(i) Upto and inclusive of Rs. 25,000 12.0 9.0
(ii) Over Rs. 25,000 and up to Rs. 2 lakh Not exceeding 13.5 10.5
(iii) Over Rs. 2 lakh Not exceeding 14.0* 12.0

Performance

SIDBI's efforts have resulted in increased flow of credit to SSI sector since inception as
indicated below:

Year Sanction Disbursement

1999-2000 2410 1839

41
2000-01 2847 2028
2001-02 2909 2146
2002-03 3357 2672
2003-04 4706 3390
2004-05 6066 4801
2005-06 6485 4585
2006-07 7484 5241

 SIDBI's assistance to:

(i) Tiny Units - about 89.2 per cent of the number of projects assisted under
Refinance Scheme during 1996-97 were tiny, receiving assistance upto Rs. 5 lakh
per project. The sanctions for such projects accounted for 39.6% of the total
amount of sanctions in 1996-97 as against 36.0% during the previous year.

(ii) Women entrepreneurs - under various schemes assistance amounting to Rs.

19.07 crores was given to 1067 women entrepreneurs during 1996-97.

(iii) Backward areas - during 1996-97, projects emanating from backward areas
received assistance to the tune of Rs. 775 crores of sanction which accounted for
37% of total assistance under Refinance Scheme of SIDBI.

Measures to simplify Rules/Regulations

 To fill the gaps in the existing structure of credit delivery mechanism to the small
scale sector, Small Industries Development Bank of India (SIDBI) keeps on
effecting simplification of procedures, liberalization of new schemes and
introduction of new schemes.
 Endeavour of SIDBI is to ensure that no worthwhile proposal is denied credit for
want of funds.

42
 Norms lay down by Reserve Bank of India and Government of India is followed
by SIDBI for granting assistance to SSI units.

Liberalization effected

(i) Enhancement in the ceiling on loan amount of the Composite Loan Scheme to
Rs. 2 lakh from the earlier ceiling of Rs. 50,000/- to ensure timely availability of
term loan and working capital to the small units. The scheme was also liberalized
to include units in all areas other than metropolitan areas.

(ii) Scope of Technology Development & Modernisation Fund Scheme and

Refinance Scheme for Technology Development & Modernization has been
expanded to cover non-exporting SSIs/ancillary units graduating out of SSI sector
for assistance under the scheme.

(iii) Scope of Single Window Scheme has been enlarged to cover modernisation,
technology upgradation in addition to new SSI units. Project outlay under the
scheme has been gradually raised from s. 30 lakhs to Rs. 100 lakhs.
Simultaneously, the sub-limits for working capital and term loan components has
been done away with.

 Main Schemes of SIDBI

 A brief summary of the Schemes available with SIDBI

 .More details are available under the Section Policies & Schemes.
 National Equity Fund Scheme which provides equity support to small
entrepreneurs setting up projects in Tiny Sector.

43
Technology Development & Modernisation Fund Scheme for providing finance to
existing SSI units for technology upgradation/modernisation.Single Window Scheme
to provide both term loan for fixed assets and loan for working capital through the
same agency. Composite Loan Scheme for equipment and/or working capital and also
for work sheds to artisans, village and cottage industries in Tiny Sector. Mahila
Udyam Nidhi (MUN) Scheme provides equity support to women entrepreneurs for
setting up projects in Tiny Sector.

Scheme for financing activities relating to marketing of SSI products which provides
assistance for undertaking various marketing related activities such as marketing
research, R&D, product up gradation, participation in trade fairs and exhibitions,
advertising branding, establishing distribution networks including show room, retail
outlet, wears-housing facility, etc. Equipment Finance Scheme for acquisition of
machinery/equipment including Diesel Generator Sets which are not related to any
specific project.

Venture Capital Scheme to encourage SSI ventures/sub- contracting units to acquire

capital equipment, as also requisite technology for building up of export
capabilities/import substitution including cost of total quality management and
acquisition of ISO-9000 certification and for expansion of capacity. ISO 9000
Scheme to meet the expenses on consultancy, documentation, audit, certification fee,
equipment and calibrating instruments required for obtaining ISO 9000 certification.

Micro Credit Scheme to meet the requirement of well managed Voluntary Agencies
that are in existence for at least 5 years; have a good track record and have established
network and experience in small savings-cum-credit programmes with Self Help
Groups (SHGs) individuals.

New Schemes

44
(i) To enhance the export capabilities of SSI units.

(ii) Scheme for Marketing Assistance.

(iii) Infrastructure Development Scheme.

(iv) Scheme for acquisition of ISO 9000 certification.

(v) Factoring Services and

(vi) Bills Re-discounting Scheme against inland supply bills of SSIs.

Major schemes

Technology Development & Modernisation Fund

SIDBI has set up Technology Development & Modernisation Fund (TDMF) scheme
for direct assistance of small sale industries to encourage existing industrial units in
the sector, to modernize their production facilities and adopt improved and updated
technology so as to strengthen their export capabilities.

Assistance under the scheme is available for meeting the expenditure on purchase of
capital equipment acquisition of technical know-how, up gradation of process
technology and products with thrust on quality improvement, improvement in
packaging and cost of TQM and acquisition of ISO-9000 series certification.

SIDBI in July 1996 had permitted SFCs and promotional banks to grant loans for
modernisation projects costing upto Rs. 50 lakhs. The Coverage of the TDMF scheme
has been enlarged w.e.f. 1.9.1997. Non-exporting units and units who are graduating
out of SSI sector are now eligible to avail assistance under this scheme.

45
 National Equity Fund

National Equity Fund (NEF) under Small Industries Development Bank of India
(SIDBI) provides equity type assistance to SSI units, tiny units at one per cent service
charges. The scope of this scheme was widened in 1995-96 to cover all areas
excepting Metropolitan areas, raising the limit of loan from Rs. 1.5 lakhs to Rs. 2.5
lakhs and covering both existing as well as new units:

(a) The following are eligible for assistance under the scheme:-

i. New projects in tiny and small scale sectors for manufacture preservation or
processing of goods irrespective of the location (except for the units in
Metropolitan areas).
ii. Existing tiny and small scale industrial units and service enterprises as mentioned
above (including those which have availed of NEF assistance earlier), undertaking
expansion, modernisation, technology up gradation and diversification
irrespective of location (except in Metropolitan areas).
iii. Sick units in the tiny and small scale sectors including service enterprises as
mentioned above, which are considered potentially viable, irrespective of the
location of the units (except for the units in Metropolitan areas).

iv. All industrial activities and service activities (except Road Transport Operators).

(b) Project cost (including margin money for working capital) should not exceed Rs. 10
lakhs in the case of new projects in the case of existing units and service enterprises, the
outlay on expansion/modernisation/technology upgradation or diversification or
rehabilitation should not exceed Rs. 10 lakh per project.

(c) There is no change in the existing level of promoters' contribution at 10% of the

46
project cost. However, the ceiling on soft loan assistance under the Scheme has been
enhanced from the present level of 15% lakh per project to 25% of the project cost
subject to a maximum of Rs. 2.5 lakh per project.

State Financial Corporations (SFCs)

In pursuance of the SFCs Act, 1951, SFCs were set up mainly to finance small and
medium scale units. Their area of operation is generally restricted to the concerned
States. SFCs also assist small scale units for their modernisation and technology up
gradation programmes by providing soft loans, restructuring the sick small scale units
through rehabilitation schemes and through equity type assistance under SIDBI's seed
capital scheme.

At present, there are 18 SFCs (including TIIC which was set up as a company) in
existence for more than 40 years and operate as Regional Development Banks. The SFCs
have played an important role in the evolution and growth of small and medium scale
industries in their respective states. They provide financial assistance to industrial units
by way of term loans, direct subscription to equity, guarantees, etc. Over the years SFCs
have expanded their activities and coverage of assistance.

One-Man Committee set up by RBI under the Chairmanship of former Secretary,

SSI&ARI, to look into various problems regarding credit flow to SSI sector and support
appropriate measures for their redressal has given the following recommendations in its
report submitted to RBI which are being processed by them:-

 Restructuring of weaker SFCs by the Government.

 Funds for lending under Single Window Scheme by SFCs should be
placed by SIDBI with the SFCs in adequate measures.
 Each SFC should get into an MOU with one or two Public Sector banks
and participate in joint lending in which both term loan and working

47
 capital is provided jointly. For example, 80 per cent of the term loan could
be given by SFC and 20 per cent by bank. In case of working capital
which may be sanctioned at the same time as term loan, the proportion
could be reversed, i.e., 80 per cent by bank and 20 per cent by SFC.
However, the working capital account be managed and supervised by the
bank through its specialized SSI branches.

 SIDBI should sign MOUs with the State Governments to provide some
assistance to SFC prior to the approval of assistance packages by the
Government of India/SIDBI.

 The staff of SFCs has to be adequately trained and SIDBI may be asked to
make arrangements for this purpose.

National Small Industries Corporation (NSIC)

Bill Financing

Bills drawn by small scale units for the supplies made to the reputed and well
established enterprises and duly accepted by them will be financed / discounted by
NSIC for a maximum period of 90 days.

Working Capital Finance

48
Finance for augmenting working capital of viable and well managed units, on selective
basis in case of emergent requirements, to enable them to payoff their purchases of
consumable stores and spares and production related overheads particularly electricity
bills, statutory dues, etc.

Export Development Finance

Finance for export development to export oriented units for meeting their emergent
requirements. Pre and post shipment finance shall also be provided to such units at usual
terms & conditions.

Equipment Leasing Scheme

The object of the Leasing Scheme is to assist SSI Units to procure industrial equipment
for modernisation, expansion and diversification of their industries.

BENEFITS

 100% financing at very liberal terms with easy repayment schedule.

 Simple formalities and speedy sanction.
 Single window system for imported equipment. The Corporation undertakes to
complete formalities like procuring import license, opening of Letter of Credit
etc.
 Tax rebate on full 5 year lease rental.

BASIC TERMS

49
 Lease period of 5 years extendable by another 3 years.
 Repayment as lease rental at the rate of Rs.24 per Rs.100 per month of the cost of
machine. There is no separate interest.
 Minimum assistance provided is Rs.100,000 and maximum subject to SSI ceiling
of Rs.6,000,000 or Rs.7,500,000 in case of an ancillary unit. The value of
installed machinery at original cost including value of the machine proposed to be
obtained under leasing should not exceed Rs.6,000,000 or Rs.7,500,000 in case of
an ancillary unit.
 The unit will have to pay the following before the order for equipment can be
placed on the supplier
 Amount equal to three months rental (six months rental for special equipment)
and
 Approximately 7% cost of the equipment (8% for Imported equipment) to cover
the insurance charges of the machinery for the period of lease i.e. 5 years and
administrative charges of the Corporation.
 The unit/party must carefully read the terms and conditions and also the list of the
documents to be furnished along with the application as printed on the application
form.
 The party will have to execute an Agreement Bond before delivery of machine.
 Payment of lease rental will start after three months of delivery of machine.

 The cost of the application form is Rs.25/-.

 The application can be submitted to NSIC Branch Office/Regional Office of the
area in which the unit is located.
SMALL SCALE INDUSTRIES

50
 NO OF UNITS INVESTMENT. EMPLOYMENT
(RS. IN LACS) (IN NO.)
TAXTILE 20 650.00 376
HANDLOOM 180 36.00 380
PHARMACEUTICALS 12 240.00 128
M. S. PIPES 6 1218.00 323
PVC PIPES 10 250.00 90
CEMENT 1 52.00 15
PAPER/PAPER PRODUCT 12 145.00 96
CERAMICS 04 162.00 107
CHEMICALS 26 26.20 104
FOOD 258 1580.00 774
COTTON GINNING & OIL 312 1896.00 3712
AGRI IMPLEMENTS 516 103.00 778
REPAIRING WORK SHOP
STEEL AND WOODEN 418 201.60 896
FURNITURE
PAINTS 6 36.00 36
UTENSILS 4 24.00 40
ROLLING MILLS 5 440.00 214
ENGGINEERING ITEMS 626 313.00 939
LATHER SHOES/JUTI ETC. 398 19.00 597
MISC & OTHERS 558 238.55 2408

SSI’s CONTRIBUTION
 The SSI sector makes a valuable contribution of about 40 per cent to our total
manufacturing sector production, 35 per cent to exports and employs over 160
lakh workers. Our commitment to the SSI sector is total. The commonest
complaint of SSI entrepreneurs and associations are the insufficiency of
timely credit and the harassment of the "Inspector Raj".
 On the credit problems of the SSI sector, I propose the following initiatives:
At present, for SSI units having aggregate working capital requirements up to

51
 Rs.2 crore, the working capital limit is determined by the banks on the basis of
a simple calculation of 20 per cent of their annual turnover. This facility is
being doubled to Rs.4 crore. This will ease the flow of bank credit to SSI.
 To moderate the cost of credit to SSI units, RBI will advise the banks to
accord SSI units with a good track record, the benefit of lower spreads over
the prime lending rate. Enhanced powers would be delegated to bank
managers of specialized SSI branches to ensure that most credit proposals are
decided at the branch level.
 At present, Small Industrial Development Bank of India (SIDBI) is a
subsidiary of IDBI and IDBI is the major shareholder in State Finance
Corporations (SFCs). To equip SIDBI to play its apex role in SSI credit
provision more effectively, SIDBI will be delinked from IDBI and IDBI
shareholding in SFCs will be transferred to SIDBI.
 SSI units are often handicapped by delays in the settlement of their dues from
larger companies. To tackle this problem, I am asking RBI to strengthen the
existing mechanisms available to SSI for discounting of bills. RBI will also
modify its guidelines to commercial banks on credit appraisal to give greater
weight to the amount of overdue outstanding that large units have in respect of
SSI supplier.
Small Scale and Ancillary Industry Undertaking Act,1993 to make the
existing legislation more effective.

 As for the pervasive problem of the "Inspector Raj", I shall be announcing far
reaching changes in the administration of Central Excise which should help
SSI units significantly. I urge all States to review their laws and regulations
and make necessary changes to lighten the burden of the inspector raj problem
of SSI units.
 I shall also be announcing some tax concessions to the SSI sector later in my
speech.

52
 TARGETS AND ACHIEVEMENTS

The small-scale sector has continued to play an important role in the Indian economy.
This sector helps generate cost effective employment and address the problem of poverty
through well dispersed economic growth.

According to estimates, based on the Third All-India Census of SSI with references year
of 2001-02, there are about 118.60 lakh small enterprises (2004-05) in the country
contributing more than 39 per cent of the total industrial production in the manufacturing
sector. It provides employment to about 282.91 lakh persons (2004-05), which is second
only to that in the agriculture sector.

The SSI sector has, over the years, generally recorded higher growth rate than the
industry sector as a whole. Indicative physical targets and achievements in respect of
production, employment and exports are given in the table below:

2004-05 2005-06 2007

Target Target Achievement Target Achievement Target

(Anticipated)
1.Prodution 429548 412450* 493405 493405 566404
(Rs.crore at current
prices)
2.Employment (lakh 275.73 282.91 284.53 284.53 293.33
persons)
3.Export (Rs. crore at 93653 NA 107701 NA 126107
current prices)

PLAN OUTLAY (LIKELY BUDGET ALLOCATION) FOR 2006-07

53
The Plan schemes of the Ministry provide support for the development and promotion of
small scale sector in the form of infrastructure development, technology up-gradation,
human resource development, enhanced credit availability, market development, etc. In
order to continue these activities, the Plan outlay allocated for 2006-07 is 469.93 crore, as
against Rs.412.26 crore in the BE, 2005-06. As in the previous years, a major portion of
the Plan outlay is for the Credit Guarantee Fund Scheme (Rs.118.10 crore), Credit Linked
Capital Subsidy Scheme (Rs.61.81 crore), and Scheme for Technology Up-gradation
(Rs.62.93 crore).
A promotional package for the small-scale sector is under preparation and is likely to be
announced shortly. The Plan outlay for 2006-07 would need to be augmented to
accommodate the requirement of funds for this purpose.
The National Manufacturing Competitiveness Council has recently approved a National
Manufacturing Competitiveness Programme, with focus on small and medium
enterprises. It is expected that the Plan outlay for 2006-07 would be able to accommodate
the funds needed for starting implementation of this programme during 2006-07.
The NCEUS has also initiated steps for formulating pilot project(s) of Growth Poles
(bases on PURA principles) for enterprises in the unorganised sector. Implementation of
this project is expected to be started in 2006-07, for which a token sum of Rs. 28 crore
has been included in the approved Plan outlay.

CHAPTER - III
FINANCIAL PLANNING

Financial planning is a part of a larger planning system in the firm. And this planning
process begins with a statement of the firm’s goal or mission, which is stated in
qualitative terms.

Financial planning involves analyzing the financial flows of a company, forecasting the
consequences of various investments, financing and dividend decisions, and weighing the
effects of various alternatives. The main idea is to determine where the firm has been,

54
 where it is now, and where it is going. The advantage of financial planning is that it
forces management to take account of possible deviations from the company’s
anticipated path.

In general usage, a financial plan can be a budget, a plan for spending and saving future
income. This plan allocates future income to various types of expenses, such as rent or
utilities, and also reserves some income for short-term and long-term savings. A financial
plan can also be an investment plan, which allocates savings to various assets or projects
expected to produce future income, such as a new business or product line, shares in an
existing business, or real estate
In business, a financial plan can refer to the three primary financial statements (balance
sheet, income statement, and cash flow statement) created within a business plan.

Financial forecast or financial plan can also refer to an annual projection of income and
expenses for a company, division or department. A financial plan can also be an
estimation of cash needs and a decision on how to raise the cash, such as through
borrowing or issuing additional shares in a company

While a financial plan refers to estimating future income, expenses and assets, a
financing plan or finance plan usually refers to the means by which cash will be acquired
to cover future expenses, for instance through earning, borrowing or using saved cash

Financial planning is the task of determining how a business will afford to achieve its
strategic goals and objectives. Usually, a company creates a Financial Plan immediately
after the vision and objectives have been set. The Financial Plan describes each of the
activities, resources, equipment and materials that are needed to achieve these objectives,
as well as the timeframes involved
The Financial Planning activity involves the following tasks
 Assess the business environment
 Confirm the business vision and objectives
 Identify the types of resources needed to achieve these objectives

55
 Quantify the amount of resources ( labour, equipment, materials )
 Calculate the total cost of each type of resource
 Summarize the costs to create a budget
 Identify any risks and issues with the budget set.

Performing Financial Planning is critical to the success of any organization. It provides

the Business Plan with rigor, by confirming that the objectives set are achievable from a
financial point of view. It also helps the CEO to set financial targets for the organization
reward staff for meeting objectives within the budget set

Financial planning is the process of establishing personal and financial goals and creating
a way to reach them.

The ongoing process involves taking stock of all your existing resources, developing a
plan to utilize them, and systematically implementing the plan in order to achieve your
short- and long-term goals.

The plan must be monitored and reviewed periodically so that adjustments can be made, if
necessary, to assure that it continues to move you toward your financial goals

Financial planning is the process of developing a personal roadmap for your financial
well being. The inputs to the financial planning process are:

a. your finances, i.e., your income, assets, and liabilities,

b. your goals, i.e., your current and future financial needs and
c. Your appetite for risk.

56
The output of the financial planning process is a personal financial plan that tells you how
to use your money to achieve your goals, keeping in mind inflation, real returns, and
taxes.

In short, financial planning is the process of systematically planning your finances

towards achieving your short-term and long-term life goals.

Financial planning System

57
 Goals

Strategy

Research
& Marketing Production Personal Financial
developme policy policy policy policy
nt policy

Capital
Research &
Marketing Production Personal Budget &
Developme
nt Budget Budget Budget Budget financing
Plan
FINANCIAL
PLAN
Profit & Loss
a/c
Balance Sheet
Cash Flow
Statement

A long term financial plan represents a blueprint of what a firm proposes to do in the
future. Typically it covers a period of three to ten years. Most financial plans have certain
common elements. These are:-

58
  Economic assumptions
 Sales forecast
 Pro forma statements
 Asset requirements
 Financing plan
 Cash budget.

These are discussed below in details.

1. Economic Assumption:-

The financial plan is based on certain economic

assumptions about the economic development. ( Interest rates, inflation rate,
growth rate, exchange rate, and so on )

2. Sales Forecast:-

The sales forecast is typically the starting point of the financial

planning exercise. Most financial variables are related to the sales figure.

It may be prepared for varying planning horizons to serves different

purposes. It may be for a period of 3-5 years or for even longer duration to aid
investment planning. A wide range of sales forecasting techniques are

 Qualitative technique = these techniques rely essentially on the judgment of

experts to translate qualitative information into quantitative technique.

 Time series projection method = These methods generate forecasts on the basis
of the past behavior of time series

59
  Casual models = this technique is based on cause-effect relationships expressed
in explicit, quantitative manner.

3. Pro forma Statements:-

The heart of financial plan is the pro Forma statements which

include:-

 Profit & loss account and

 Balance sheet.

Pro forma profit & loss account.

Two common method for preparing pro forma profit & loss account.

 Percent of Sales method = it assumes that future relationship between

various elements of costs to sales will be similar to their historical
relationship. While using this method a decision has to be taken about which
historical cost ratios to be used: should these ratios pertain to the previous
year or the average of two more previous years.
 Budgeted Expense Method = this method calls for estimating the value of
each item on the basis of expected developments in the future period for
which the pro forma profit and loss account is being prepared

Pro forma Balance sheet

 Employ the percent of sales method to project the items on the assets side, except
“investments” and “miscellaneous and losses”
 Estimate the expected values for “investments” and “miscellaneous expenditure
and losses” using specific information applicable to them.
 Use the percent of sales method to derive the projected values of current liabilities
and provisions.

60
  Obtain the projected value of reserves and surplus by adding the projected
retained earnings to the reserves and surplus figure of the previous period.
 Set the projected values for loan funds will be tentatively equal to their previous
values
 Assume that the projected values for loan funds will be tentatively equal to their
previous levels repayments or retirements as per terms and conditions applicable
to them.
 Compare total the assets side with that of the liabilities side and determine the
balancing item.

4. Asset Requirements:-

Firms need to invest in plant and equipment and working

capital. The financial plan spells out the projected capital investments and working
capital requirements overtime.

5. Financial Plan:-

Suitable sources of financing have to be thought of for

supporting the investment in capital expenditure and working capital.

6.Cash budget:-

It shows the cash inflows and outflows expected in the budget

period.

STAGES OF FINANCIAL PLANNING

61
There are three different phases of financial planning:

 The Accumulation phase

 The Distribution phase and
 The Preservation phase

In the accumulation stage is to hold the assets you are acquiring, and allow time to work
its magic. Set time-bound goals for how long you intend to accumulate your assets before
moving on to the next phase. Work diligently on your plan and keep your focus.

The distribution stage is the period when you get to enjoy the benefits of wealth, when
you get to draw down income from your assets

The last phase is the preservation stage. This is the period when you plan to preserve
and protect your accumulated wealth and prepare to safely transfer it to your rightful
heirs.

The process of financial planning includes

1. The link between objectives, goals and action plans

2. The complementary nature of organizational mission and finance
3. Applying strategic evaluation and its application
4. Planning within a quality framework

5. The link between objectives, goals and action plans

6. The complementary nature of organizational mission and finance

62
 7. Applying strategic evaluation and its application
8. Planning within a quality framework

Defining the Mission

Voluntary organizations should be clear as to why they exist and how they will fulfill
their mission. Meeting a financial goal is not the mission of a voluntary organization but
is essential if it is to fulfill its mission.

A voluntary organization mission and its financial goals are complementary to each
other, not in competition.

• Mission - strategic goals and operational objectives: an example mission

statement, and set of strategic goals and operational objectives

Planning

Planning can be defined as the establishment of objectives and the formulation,

evaluation and selection of the policies, strategies, tactics and action required to achieve
these objectives.

Planning comprises long-term and strategic planning, and short-term operations planning
(usually for the coming year). Finance Managers have a key role in planning and should
be integral to the planning process.

Voluntary organizations need to plan effectively but often do not because:

• In many voluntary organizations, the demands of the moment - fire fighting,

meeting income targets and controlling expenditure - leave little time for strategic
analysis.
• Too little is known about how complex external factors affect voluntary
organizations.

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Three stages of planning

Planning really happens in three stages:

Deciding general goals

1. Setting objectives
2. Creating action Plans

Understanding the Strategic Position :-

To answer the questions "what is, or will be our strategic position?" requires an
organization to understand the external environment in which it operates, as well as its
own internal structures. This has four aspects:

Environmental analysis (external appraisal)

This is the scanning of the organization environment for factors relevant to the
organization’s current and future activities. To assist this process NCVO has developed
the Third Sector Foresight project, which seeks to understand these external factors, and
how they impact on the sector.

Position audit

This examines the current state of an organization in respect of resources both financial
and organizational for example, the qualities of the management committee.

Organizational appraisal (or SWOT analysis)

This is a critical assessment of the strengths, weaknesses, opportunities and

threats to the organization.

Gap analysis

64
This arises from a projection of current activities into the future to identify if there is a
difference between the organization’s objectives and what will happen if the organization
just continues its current activities.

Undertaking these assessments helps to identify the strategic choices open to the
organization, for example:

 To grow or to stay the same size or even reduce in size

 Issues of current and future service provision, geography and policy

Evaluation

Once choices are identified they need to be evaluated, as it is unlikely that all options will
be feasible within available resources. Each option should be examined on its merits as to
whether it:

 Increase strengths?
 Strengthens existing weaknesses?
 Is suitable to the organization’s existing position?
 Is acceptable to stakeholders?

In addition in testing their feasibility the following questions should be asked:

 Is the leadership suitable?

 Is the culture capable?
 Is the organizational structure appropriate?
 Are the functional policies appropriate?
 Are the resources available?
 Is this strategy an improvement on not changing at all?
 Are there procedures for implementation and monitoring?

65
Each chosen strategy needs to satisfy all these points. If it fails on any, the organization
must assess whether remedial action is possible.

Preparing day-to-day plans

Once the strategic goals have been identified they must be translated into day-to-day
activities.

For example, a cancer charity aiming to reduce the incidence of smoking might set an
objective to reduce smoking in women attending antenatal clinics by 25% within the next
six months. To achieve this objective the following action plans have been formulated:

 A pamphlet explaining the dangers

 A counseling session
 A chance to attend an anti-smoking course

The action plan for producing the pamphlet may be further broken down into a number of
tasks as follows:

 Identify major issues, medical and otherwise, which expectant mothers should
be aware
 Identify main contributors to pamphlet
 Prepare draft, check accuracy of content and design
 Conduct a limited testing with readers' or users' panel
 Print
 Market and promote pack to expectant mothers attending the clinics.

The persons responsible for each of these tasks, and the time allocated, should be
identified, so as to provide a basis for performance appraisal. This information can then
be collated along with other action plans in order for the Finance Manager to have an
overall picture of the organization, are there any shortfalls, what are the fund-raising
targets, what costs need to be recovered and to prepare budgets for the coming year.

66
Financial managers first need to assess what information they have, particularly on costs
and income projections. These ties in with the issues of allocating core costs. Until they
know what the costs currently are, what they are projected to be and what the projected
income generating strategy is it is impossible to control or plan the future.

Financial Managers need to set clear goals for the organization; and project staff/
managers need to be sure of what their budgets are, understand their budgets and what
margin of error has been allowed (if any).

These budgets also need to be checked against actual on at least a quarterly basis,
preferably monthly and action to analyze any variances from budget should be
undertaken promptly throughout the year.

Financial Management

Good financial management is key to organisational sustainability. It will impact on

decision-making across the organisation and as such should be integrated into all aspects
of an organisation’s operations, from managing project budgets to gathering information
for strategic decision-making.

This resource has been created to help organisations move towards having an integrated,
strategic financial management function.

Financial Strategy

Voluntary and community organisations operate in a challenging and uncertain funding

environment. Many manage income received from a number of difference sources,
including donations, grants, contracts and income generated from trading.

This increased complexity means that it is essential that organisations successfully

manage their funding and financing sources to ensure the best and most efficient use of
their financial resources.

67
Whatever the size of the organisation, sound financial management is a prerequisite to
sustainability. Rather than being seen as a separate function (merely ‘doing the books’),
the finance function should be integrated within, and add value to, the overall planning
and management of an organisation.

The Financial Strategy section includes:

 How to develop your finance function =Overview of the changes occurring

in the finance function, and how Finance Managers and voluntary
organisations will have to change to respond to them
 Importance of financial planning =Why it's essential to do financial
planning before preparing a budget
 Financial planning =
Objectives, goals, action plans, mission, strategy, quality: what you need to
know
 Mission = strategic goals and operational objectives
An example mission statement, and set of strategic goals and operational
objectives
 Internal performance review = The internal review will identify weakness
as well as untapped strengths that should lead to more effective strategic
planning
 Financial management = The role of trustee boards .Details on: the financial
management functions of the board; who comprises the financial team; and
differences from the commercial sector
 Financial monitoring = Activities and motivations that typify financial
monitoring
 Financial benchmarking =A framework for financial performance
monitoring, including case studies
 Financial procedures = Procedures designed to ensure the propriety and
efficiency of the organisation's activities

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  Financial management procedures =Procedures that would help towards
creating and efficient and economical organisation
 Sample contents of financial procedures manual = The procedures manual
is useful for establishing controls as well as laying out trustees financial
responsibilities
 Financial governance framework checklist =12-point checklist for creating
a financial governance framework

How to develop the finance function

 Voluntary organizations sit in an increasingly complex web in which services

previously delivered by statutory services are now being delivered by voluntary
agencies. The drivers of this change are complicated: an ageing population, a
consumer society and a distrust of institutions. The UK has been moving away
from welfare to a market state in which civil society and the responsibility of the
individual have come to the fore.
 The profile of the voluntary sector over the last ten years has reflected these
changes. This is especially so in the shifting sources of income, with government
now funding a third of total expenditure both through grants and, increasingly,
service level contracts. With increased finance also comes responsibility and
accountability and voluntary organizations have to respond to these changes.

Historically many finance teams have focused 80% of their time on the processing and
only 20% focus on the strategic information requirement.

When thinking about finance, many people instinctively associate it with book-keeping
and tiresome bureaucratic procedural controls, and only peripherally with forward
planning, so the finance team can be seen as blockers rather than enablers for change and
development.

To ensure that the finance function - whether that is a team or an individual - can add
value to both planning and management it should see it as having the following key roles:

69
  Providers of information for decision-making
 Business managers

The finance function will be more useful to the organization if it:

 Understands the importance of communicating information

 Understands the cost profile/ strategic perspective of the organization

In essence there is the need to move away from bean counting - "I need to get the trial
balance finished before I can produce management accounts" which may involve a
cultural change too.

The finance function of the future will be moving to more of an organization service
focus. This means:

• Responding to challenges, not avoiding problems:

o Strategic understanding of organization
o In-depth knowledge of who its stakeholders are

• Answering Key Questions

o Regular checks that they are meeting their stakeholder needs
o Different ways of presenting information

• Critically review the experience and capability of the finance function

o The skills or can access the skills they need
o Up-to-date knowledge and are regularly updating this knowledge

• Having a range of skills and experiences

The skills range from both the technical to strategic and it is important that the
finance function has:
o Technical Skills

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 o Professional Knowledge
o Management experience
o Strategic thinking - this is perhaps the most important!

Initial questions

Questions to be considered

Where does our current finance function fit in the organization’s hierarchy?

What strategies could I and my team put in place so we are providers of information
for decision making and Business Managers?

Tools to help development

Staff induction - including job description design and recruitment of staff in the
finance team and being involved in the induction of new staff in the organization

Training - identifying what personal training and development needs you and your
team have. Courses, mentoring, receiving financial publications joining financial
management networks are just some of the options to consider

Talking to your stakeholders finding out what information they need and how they
would like this information presented

It is worth noting that changing the perception or the way in which your finance function
works and interacts within your organization probably won't occur overnight. However,
in times of external environmental uncertainty and change a finance function which is
integral to its management, planning and decision making will undoubtedly enable that
organization to mange this uncertainty and change more effectively.

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Importance of financial planning

All voluntary organizations must first define precisely why they exist and how they plan
to fulfill their mission. Only when this has been done can discussions on preparing a
budget begin.

A conflict often exists between those responsible for carrying out the charitable mission
and those responsible for ensuring the financial stability of the organization. It then
introduces techniques to improve strategic planning.

Voluntary organizations usually exist because they have a mission: to cure the sick, to
advance a profession, to discover new technologies, to educate the public. Meeting
financial goals is essential to fulfilling this mission, but is not the top priority. Managers
must ask a 'chicken and egg' question: Which comes first, the programmes to fulfill the
mission, or the income (earned and voluntary) to finance the programmes? It is important
to recognize that aspirations and financial resources are related, and that it is
management's task to co-ordinate the two.

Striking a balance

Vigorous demand for the services of an organization is an indication of success. But if

financial management is neglected, it will not be long before the whole organization
begins to run on a deficit budget. Once in this situation, the organization will find it hard
to secure extra funding. Similarly, the provision of services for which there is no need -
irrespective of the level of finance - will not enable the organization to accomplish its
mission - and can conversely, result in 'mission drift'.

Planning

Voluntary organizations need to plan effectively. For too many organizations, however,
this process merely consists of adding a percentage to last year's budgets - which can only
be valid in a world where nothing ever changes.

72
For most voluntary organizations, moreover, planning is usually short term, typically in
one to three year cycles, corresponding to funding. It also tends to happen in a vacuum,
cut off from what is happening in the outside world. The short-term nature of most
funding and the uncertainty caused by constant change are often given as reasons for not
planning. But they are very good reasons why voluntary organizations should plan, and in
a robust way at that

Mission - strategic goals and operational objectives

Mission statement

A mission statement is a brief declaration of an organization’s purpose and values - the

reason why it exists. The mission does not say much about what an organization will do,
or how or when it will do it. Rather, they are long-term statements of intent deriving from
the vision that originally inspired the organization.

Strategic goals

Strategic goals set out the direction of the organization; they are a statement of its
priorities in the medium to long term. Everything the organization does should be related
back to a strategic goal..

Vision

The vision is to reduce substantially the incidence and effect of toxoplasmosis (an
infection harmful to the unborn child) and ultimately to eradicate congenital
toxoplasmosis in the UK.

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Strategic goals

• To raise awareness of toxoplasmosis

• To support people affected by toxoplasmosis
• To campaign to raise the profile of toxoplasmosis amongst government, health
careers and the public
• To ensure better prevention and management of toxoplasmosis
• Have a presence in each major city in the UK
• Influence policy formulation by and within major organizations and institutions
affecting young people
• Network with other organizations providing high quality youth work
• Increase our annual membership numbers

Operational objectives

 Organize four pilot study days on toxoplasmosis for midwives around the
country
 Develop a midwives' education pack
 Send out a toxoplasmosis newsletter to local and hospital laboratories
 Develop a new fact sheet for parents of children with retinochoroiditis

Internal performance review

An internal review of organizational performance is part of the information-gathering

process feeding into strategic planning. The aim of the review is to identify weaknesses
that must be addressed and strengths that are not being exploited.

Areas to cover

• Leadership
o Trustee board characteristics and balance
o Trustee board focus: core activities and other decision-making systems
o Skills experience and balance

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 o Management training
• Culture
o Power groupings
o Power sources: authority, control over resources, ability
o Social norms
o Attitudes
• Structure
o Reporting lines
o Level of integration
o Resources balance
o Information systems
• Functional analysis
o Programmed services
o Community development
o Information, training and education
o Fundraising
o Finance and administration
• Control systems
o Planning systems
o Budget systems
o Performance appraisal
o Internal audit (where appropriate)

Tools to use for internal performance review

Management audit

This sets out to assess the effectiveness of the trustee board, management team and
organizational structure in achieving charitable objectives. It will therefore be looking at
leadership, culture and structure to identify existing and potential weaknesses and
recommend ways to rectify them.

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Ratio analysis

Key ratios - such as liquidity, fundraising performance, cost ratios and trading
profitability (for trading groups) - can, when analyzed over time and compared with those
of other voluntary organizations offering comparable services, provide a valuable
indication of trends and highlight key relationships.

Contribution analysis

This identifies the absolute or percentage amount that a particular programmed

contributes to the general overheads (after deducting direct programme costs from any
earned or unearned income for that programme). The aim is to ensure that each
programme makes a contribution to these overheads.

Main financial management roles

The three main financial management functions of the board are:

• Financial monitoring
• Financial procedures
• Financial management

The financial management team for a voluntary organization might comprise

• Honorary treasurer
• Chief finance officer
• Internal audit function (for the larger charity)
• External auditors/accountants
• Investment advisers and bankers.

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Each is a specialist function in its own right, and together they can do much to ensure that
the organization is managed efficiently and effectively. The treasurer's role can best be
understood by looking at a job description and person specification for a typical
treasurer's post.

Differences from commercial sector

The financial management role of a trustee board is quite unlike that of the board of a
commercial entity.

• Most voluntary organizations are financially accountable to a far greater number

of stakeholders, because they are funded by a combination of tax concessions and
money from the general public, local government and charitable trusts.
• The goal of maximizing shareholder value - which can be measured objectively -
is not relevant to voluntary organizations. Instead, the whole trustee board (not
just the treasurer) must demonstrate value for money and effectiveness, which by
their nature are more subjective criteria.

Financial monitoring

In practice, the financial monitoring carried out by boards may be typified by the
following activities and motivations:

• The comparing of budgets for income and expenditure with actual results
• The consideration of projected sources and level of income and expenditure
• The need to report to founders
• The lack of any value added, instead seen as a compliance function
• Information which is too detailed and conforming to accounting regulations
• Totally reactive responses conditioned by when information is presented

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Ideally, however, financial monitoring should be characterized by:

• The use of key financial ratio analysis (which can, for example, highlight
financial stability)
• The inclusion of financial performance information against predetermined
financial policies (for example, income reserves)
• A committee that is adequately empowered in its role by proper induction, an
understanding of cost structures and its relationship with management
• The provision of information that is understandable, timely and accurate

Financial procedures

These procedures are designed to ensure the propriety and efficiency of the
organization’s activities. They typically include policies for the proper accounting,
control and protection of the income, expenditure and assets of the organization.

By means of delegation the board must ensure that financial procedures appropriate to the
size and complexity of the organization exist. This could be achieved by compiling and
distributing a financial procedures manual, and/or by responding to reports on areas of
weakness by external auditors.

Financial management procedures

These procedures cover a wider area of decision-making than the purely financial ones:
they are the procedures that help management to decide overall strategy and make the
best use of resources.

Examples might include the decision to outsource an area of operations - catering or

payroll, perhaps. Too often, however, the board lacks the expertise to carry out these
procedures, or is reluctant to 'step on the chief executive's toes'.

78
As a result, financial management is often seen as a luxury, since the funding does not
allow for it; if done at all, it tends to be restricted to budget construction, with little or no
consideration of resource inputs, outputs and outcomes.

Financial Planning Process

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The Financial Planning Process consists of the following six steps:

1. Establishing and defining the client-planner relationship.

The financial planner should clearly explain or document the services to be provided to
you and define both his and your responsibilities. The planner should explain fully how
he will be paid and by whom. You and the planner should agree on how long the
professional relationship should last and on how decisions will be made.

2. Gathering client data, including goals.

The financial planner should ask for information about your financial situation. You and
the planner should mutually define your personal and financial goals, understand your
time frame for results and discuss, if relevant, how you feel about risk. The financial
planner should gather all the necessary documents before giving you the advice you need.

3. Analyzing and evaluating your financial status.

The financial planner should analyze your information to assess your current situation
and determine what you must do to meet your goals. Depending on what services you
have asked for, this could include analyzing your assets, liabilities and cash flow, current
insurance coverage, investments or tax strategies.

80
4. Developing and presenting financial planning recommendations and/or
alternatives.

The financial planner should offer financial planning recommendations that address your
goals, based on the information you provide. The planner should go over the
recommendations with you to help you understand them so that you can make informed
decisions. The planner should also listen to your concerns and revise the
recommendations as appropriate.

5. Implementing the financial planning recommendations.

You and the planner should agree on how the recommendations will be carried out. The
planner may carry out the recommendations or serve as your "coach," coordinating the
whole process with you and other professionals such as attorneys or stockbrokers.

6. Monitoring the financial planning recommendations.

You and the planner should agree on who will monitor your progress towards your goals.
If the planner is in charge of the process, she should report to you periodically to review
your situation and adjust the recommendations, if needed, as your life changes.

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No Elements of financial planning A B C Total This
in research
developing franchise system

1 Existing financial statements - � � 2 �

(statements from the established
business)

2 Identify SSI development costs � - � 2 �

3 SSI start-up cost for � � - 2 �

the entrepreneur to begin
the SSI

4 SSI fees (initial fee, continuing � � � 3 �

fee, and advertising levy)

5 Operating budget (monthly) - - � �

1
6 Capital budget (monthly) - � - 1 �

7 Cash flow budget (monthly � � � 3 �

basis) and
cash flow projections statement
(yearly
basis)

8 Pro-forma annual income � � � 3 �

statement

9 Pro-forma annual balance sheet � � � 3 �

10 Break-even analysis � - � 2 �

11 Financial ratio analysis � - � 2 �

12 Financing � � � 3 �

Total 9 8 10 - 12

Benefits of financial planning

Here’s a list of the benefits that a well chalked out financial plan can bring about:

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 • Helps monitor cash flows and reduces unnecessary expenditure.
• Enables maintenance of an optimum balance between income and expenses.
• Helps boost savings and create wealth.
• Helps reduce tax liability.
• Maximizes returns from investments
• Creates wealth and ensures better wealth management to achieve life goals.
• Financially secures retirement life.
• Reviews insurance needs and therefore also ensures that dependents are
financially secure in the unfortunate event of death or disability.
• Lastly, it also ensures that a will is made.

The 6-Step Approach to Financial Planning

1.Your Present Situation

The financial planner clarifies the client’s present situation by collecting and assessing all
relevant financial information, including:

Net worth and cash flow statements, insurance policies, tax returns, investment portfolios,
pension plans, employee benefit statements etc. The planner will itemize all basic family
information - name, age, marital status, employment history, details of the children’s birth
dates and other qualitative data.

Essentially this step summarizes where the client is today. An individual’s current
situation is a result of the cumulative effects of all of the financial decisions and
transactions that have occurred in the past up until the current time.

2. Identify Goals and Objectives

The financial planner helps identify both financial and personal goals and objectives as
well as clarify the client’s financial and personal values and attitudes. These may include

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providing for children’s education, supporting elderly parents or relieving immediate
financial pressures which would help maintain the client’s current lifestyle and provide
for retirement. These considerations are important in determining the best financial
planning strategy. Any goals established should be:

Specific. Otherwise they are not goals, they are merely dreams. “I require $500,000 by
my 65th birthday” is an example of a specific goal. “I want to be rich when I retire” is a
dream, not a goal.

Measurable. Financial goals are easily measurable since dollars and cents can be
counted.

Realistic and attainable. In order for a goal to be achieved, it must be within the realm of
reason. To accumulate $1 million by age 65, if one is currently age 64, and has no savings
may be attainable by winning a lottery however; this is unrealistic. Conversely, for a 25-
year-old to accumulate $1 million by age 65 through saving and investing is probably
both attainable and realistic.

Time bound. All goals should be time bound in order to track progress towards the goal’s
completion and to provide feedback. Corrections should be made in the action plan
therefore maximizing the probability of success.

3. Identify Problems
The financial planner identifies financial obstacles to achieving financial independence.
Problem areas can include too little or too much insurance coverage, or a high tax burden.
The client’s cash flow may be inadequate, or the current investments may not be winning
the battle with changing economic times. These possible problem areas must be identified
before solutions can be found.

4. Design The Plan

The financial planner provides written recommendations and alternative solutions. The
length of the recommendations will vary with the complexity of one’s individual situation,
but they should always be structured to meet the client’s needs without undue emphasis

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on purchasing certain investment products..

5. Implement The Plan

A financial plan is only helpful if the recommendations are put into action. Implementing
the right strategy will help to reach the desired goals and objectives. The financial planner
should assist in either actually executing the recommendations, or in coordinating their
execution with other knowledgeable professionals..

6. Periodic Review
The financial planner provides periodic review and revision of the plan to assure that the
goals are achieved. Your financial situation should be re-assessed at least once a year to
account for changes in life and current economic conditions..

Financial Planning provides complete top-down and bottom-up functionality to support

the financial planning process at any level. Built with unparalleled usability in mind, this
solution provides total flexibility to plan the way you want to, while delivering proven
scalability to manage large or complex plans.

Financial Planning provides a rich set of features that are both powerful and easy to use,
including:

• Multiple views of planning information within one solution

• Flexibility and scalability necessary to support a multi-channel organization and
planning process
• Ability to support multiple measures and versions with built-in intelligence,
enabling you to determine which measures are appropriate for specific areas of
the business
• A high-performance calculation engine that sums, spreads and locks dollars, units,
variances and percentages with built-in benchmarking to guarantee fast response
times
• Automated import and export of data
• Ability to group and reconcile plans without constraints
• Extremely flexible reporting capabilities

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Setting the financial goals
Key factors to consider when constructing your investment goals and objectives are:

• Time = (includes both investment and individual time horizon)

• Risk =(the uncertainty of loss or the possibility of a misfortune occurring)
• Return = (what do you want to receive from each investment - income or capital
appreciation or a little of both?)
• Inflation = (a dollar today is generally not worth a dollar tomorrow - your
returns are positive provided the net return from an investment is greater than the
prevailing inflation rate)
• Tax = what you earn and what you keep is important - the investment and
structures you may adopt must be tax efficient)

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Comprehensive Plan Contain?

Your financial plan document should contain not only the plan strategies but also all
pertinent data relating to the development of the plan.

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While order and style of presentation may vary, the plan document should include at least
the 13 essential elements described below. This does not necessarily mean your plan will
be lengthy, as each area should be addressed so that it suits your personal situation.

1. Personal data, including relevant personal and family data for those covered under the
plan.

2. Your goals and objectives, including their priority and desired time frame for
achievement, where applicable.

3. Identification of issues and problems, including education costs, taxes, major

illnesses and other factors that are or may develop into a problem. These areas may be
identified by you, your planner, or other advisors.

4. Assumptions used in plan preparation, such as inflation, investment growth,

mortality rates, and other material assumptions.

5. Balance sheet/net worth. An analysis that includes, but is not limited to, a schedule
listing assets and liabilities with a calculation of net worth and itemized schedules of
liabilities and assets to be included, as appropriate.

6. Cash flow management. Statements and analysis to include, but are not limited to, a
statement of your sources and uses of funds for all relevant years, indicating net cash
flow, as well as a separate income statement, where appropriate.

7. Income Tax Review. A statement and analysis to include, but are not limited to, the
income taxes for all relevant years covered in the plan. Projections should show the
nature of the income and deductions to permit calculation of your tax liability. The
analysis should identify the marginal tax rate for each year, and any special situations
such as alternative minimum tax, passive loss limitation, etc., that affect your tax liability.

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 8. Risk management. An analysis of your financial exposure relative to mortality,
morbidity, liability, and property, including your business if appropriate. This section
should list and analyze current policies and problems, including life, disability, medical,
property/casualty, liability, and business.

9. Investments. A listing of your current investment portfolio and an analysis or

discussion of its liquidity, diversification, and investment risk exposure. In addition, the
suitability of the investments in relationship to your goals should be addressed, including
risk tolerance, risk management of investments, suitability, liquidity, diversification and
personal management efforts.

10. Special needs such as retirement planning or education planning. An analysis of

the capital needed at some future time to provide for your specific needs. The analysis
should include a projection of resources expected to be available to meet these needs at
that time.

11. Estate planning to identify assets to be included in your estate, and an analysis of
the control, disposition and taxation of those assets.

12. Recommendations in writing to specifically address your goals and objectives, all
issues and problems identified in the plan, and actions necessary to compensate for any
shortfalls.

13. Implementation schedule to prioritize a list of actions required to implement the

recommendations, indicating responsible parties, action required, and timing.

If any area of the financial plan is not within the range of the financial planner's expertise, the
planner has the responsibility to coordinate with other professionals and document such
coordination in the financial plan report. Documentation of such areas can include the
professional's name and then the review will be completed.

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The analysis which is called for in all the elements of the plan should consist of a review of
pertinent facts, a consideration of the advantage(s) and/or disadvantage (s) of the current
situation and a determination of what, if any, further action is required. The plan should include a
summary statement providing the planner's comments on the analysis and recommendations,
where appropriate, for each element of the plan.

What is a Comprehensive Financial Review?

To complete a comprehensive review and revision of your financial plan, the planner will
review and analyze the data pertinent to your changing situation. The planner then will
review the strategies to accommodate your current goals and objectives. A written
document should be prepared for you which complies with the thirteen plan elements.
Those schedules which have not changed since the previous plan don't need to be
duplicated; a simple statement that there has been no change will suffice.

How to Select Your Financial Advisor

Once you've made the decision to seek the services of a financial advisor, you may have
many more questions: Which professional is right for me? How do I identify a competent
financial planner who can coordinate all aspects of my financial life?

Just as you select a doctor or attorney, you should base your decision on a number of
factors: education, qualifications, experience, and reputation. When selecting your
financial planner, choose one you can work with comfortably. You are paying this person
to help you shape your financial future. It is your responsibility and right to fully
investigate the practitioner's background, methods of practice, credentials, references and
other relevant information.

Call the practitioner and ask for a short meeting. Use this opportunity to get a sense of
compatibility and to discover exactly how the practitioner will work with you. Ask
questions about financial planning that will give you a basis for comparison with other

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practitioners you have contacted. In short, get the information you need to feel confident
that this person

Financial planning covers the various facets of individual's financial needs, which
include:

Accumulating capital — Cash flow planning and budgeting

Protection against risk — Insurance planning and risk management

Investment planning and advice

Estate planning:

Retirement planning

Tax planning

Success by design

1. A Disciplined Savings plan If you wanted to become financially independent, what

would you have to do? What are the important disciplines to help you get ahead
financially? There are lots of theories out there; some are wacky, wild and crazy. For me,
it’s more about common sense than anything else. For me, there are four key disciplines
to financial success

In order to get ahead, you must put money away for the future. It requires a certain level
of discipline to put away money on a regular basis. A forced saving plan is simply one
where you have money debited out of your bank account each and every month. David
Chilton popularized the phrase pay yourself first. The reality is it matters less what you
invest in and more that you maintain a discipline to put away something regularly. There
are two key points to remember: It’s never too late to start and the more you save the
more choices you have for the future.

2. A Disciplined Spending Plan

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Also in conjunction with a forced savings plan, you need to make sure that you are
spending less than you earn so you do not go into huge amounts of debt just to try to save
money. It all starts with that dreaded “b” word: Budgeting. Make sure you have a
disciplined spending plan and you have a realistic idea of what is important and what is
not. Make sure you can differentiate properly between your needs and your wants.

3. A Disciplined Investment Allocation Plan

In the real estate business, you’ve probably heard the old saying “location, location,
location.” When building an investment portfolio, the saying should say “diversification,
diversification, and diversification.”

The problem is diversification has been treated more like an art than a science. For most
people diversification is more about quantity rather than efficiency. In a recent study, the
average number of mutual funds held by Canadians is somewhere between 15 and 20. In
most cases, you can optimize a portfolio with 5 to 12 funds.

The key is to have a properly allocated investment plan and then having the discipline to
stick with that plan. The most successful money managers like Warren Buffet, Sir John
Templeton, and Peter Lynch are successful because of adherence to their discipline. And
yet they all have different disciplines.

4. A discipline to rebalance

In a previous article, I showed the financial merits of rebalancing. Little did I know that I
would include re-balancing as one of the key traits to financial success? Once you have
an investment plan, rebalancing helps you to make the best long-term

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 The Linkages of Financial Planning Process
of Small-scale industry

Identify Small-Scale
development cost

Small-scale industry start-

up cost

Small-Scale industry Fees

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 RESEARCH METHODOLOGY

a) Research problem :-

To study the financial planning process in the changing trends

of selected organization and their comparative analysis.

b) Area of study: - Area of study will be under the city Ghaziabad region

c) Method of collecting datas :-

Methodology followed for conducting this research is

descriptive as the method used for collecting data is secondary and is obtained
books, magazines, articles and internet.

d) Sampling procedure :- The researcher has used convenience sampling while

selecting five industries

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 CONCLUSION

There is little research about the process of financial planning for a new SSI.The practical
framework developed in this research, the elements of financial planning for a new SSI
have been identified based on the western and Malaysian literature; all the elements of
financial planning are considered for use in the financial planning for a SSI with two
additional elements. This paper not only contributes to the body of knowledge about the
effective framework of financial planning for both a new SSI and new venture business
but it also has implications for policy and practice

The guidelines could be used to build SSI guidelines in other developing

Countries. Business consultants in strengthening the process of developing the SSI could
also use the guidelines, and bankers could use this framework in updating the
Evaluation guidelines of financial planning characteristics for business financing.

The guidelines also provide a platform for comprehensive training, and show existing
SSIs how to improve their financial planning system. Moreover, the
Paper provides another example of the power of action research methodology.
Further research could consider how the findings could be used in other countries,
Cultures and regulatory contexts.

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 LIMITATIONS

1. Since data used in this research is secondary form, so chances of error might rise.

2. Difficulty is faced by researcher while collecting the information as topic is very

vague and need lots of searching.

3. Comparison of financial planning in organization is very difficult because one

process which is very beneficial to organization might not be equally good for others.

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SUGGESTION &RECOMMENDATION

Findings from this action research project extended the preliminary framework that
has been developed based on the literature, to provide two conclusions.

Firstly, the payback period analysis of the Small-Scale industry must be

included in the process of financial planning in developing a new Small-scale industry
because it is an element of financial planning that could be used to monitor the financial
plans of a Small-Scale unit and it helps a entrepreneur to forecast the duration of getting
the total investment of a Small-Scale unit.
Secondly, safety margin analysis must be included too because it is an
element of financial planning that could be used to monitor the financial plans of Small-
Scale unit and it can help the small-scale entrepreneur to indicate the level of the small-
scale operation to continue the business operation in the worst scenario. Using a payback
period and safety margin analysis for this purpose was discovered for the first time by
this research because of the processes of the action research project. These two
additional elements in financial planning in developing a small-scale industry had
not been considered for financial planning of a small-scale industry before and so
are contributions of this research.

The second conclusion, the ten linkages in the financial planning process of
developing a small-scale industry was not discussed in the literature. This
research had included the linkages in the conceptual framework. The findings of this
research also confirmed for the first time the use of all ten linkages in the financial
Planning process of developing a small-scale industry. This research discovered
Using the linkages because of the collaboration between the entrepreneur and the
members of workgroup in the action research project and the aim to produce a high

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Standard of financial planning. In summary, 14 elements of financial planning and 10
linkages within the elements of financial planning are to be used in the process of
developing a small-scale industry in India. No other research has examined the process of
financial planning in developing small-scale industry as precisely or as broadly as this
research, especially in India where only minimal literature exists.

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 BIBLIOGRAPHY

a. BOOKS
i. Financial management by P. Chandra.
ii. Financial management & policy by J.C.V.Horne
iii. Small-Scale Industries by Dr. Vasant Desai
iv. Banking Finance & Entrepreneurship by Vivek Deolankar.

b. Articles
i. Effects of formal strategic planning on financial performance in
small firms ( by R. Schwenk)
ii. Planning & financial performance of small firms. ( Jeffrey S.
Shrader)
iii. Small business financial management practices: a literature review. (
Richard G.P.McMahon)

c. Websites
i. exim.indiamart.com
ii. ask.com
iii. ssi.india.com
iv. ncvo-vol.org.uk

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