Unit - 3

SMALL BUSINESS MANAGEMENT Small Scale Industry
A small scale industry is an industrial

ENTREPRENEURSHIP AND

undertaking (SSI) in which the investments in
fixed assets in plant and machinery, whether
hold on ownership term or lease or hire
purchase does not exceed 1crore.
 Small scale industry are generally more labour

intensive.
© Dr.Ansuman Sahoo, dransumansahoo@gmail.com ,(M) -09861014414 1

Classification of SSIs
SMALL BUSINESS MANAGEMENT
Traditional SSIs
It includes khadi and handloom, village

industries and handicrafts and sericulture
etc.
Modern SSIs
Modern SSIs produce wide range of goods
from comparatively simple items etc.

Advantages of SSIs
1. Close Supervision
2. Economic Management
3. Personal attention to Customers
4. Personal attention to Employees
5. Greater Adaptability
6. Independence

Disadvantages of SSIs
1. Less Scope for Machinery

2. Less Scope for Division of Labour
3. Disadvantages in Purchase and Sales
4. No Research and Experimentation
5. High Overhead Cost
6. High cost of Credit

Sole Proprietorship
A business enterprise exclusively


owned, managed and controlled by a
single person with all authority,
responsibility and risk.
 Small grocery stores, STD booths
are mostly proprietorship businesses.
 A “Sole Proprietorship” business
means that there is only ONE owner.

Characteristics of a sole
proprietorship
Single Ownership

 No Separate Entity
 Capital
 Ownership
 Risk Bearing
 Unlimited Liability
 Management and Control
 Continuity
Advantage of a Sole Proprietorship
 Easy to form and wind up:

A sole proprietorship form of business is very easy to form. With a

very small amount of capital you can start the business.There is no
need for any legal formalities.
 Direct motivation:
The profits earned belong to the sole proprietor alone and he bears
the risk of losses as well.Thus, there is a direct link between the
effort and the reward.
 Better control:
In sole proprietorship business the proprietor has full control over
each and every activity of the business. Since the proprietor has all
authority with him, it is possible to exercise better control over
business.

 Maintenance of business secrets:
Business secrecy is an important factor for every business. It
refers to keeping the future plans, business strategies, etc., secret
from outsiders or competitors. In the case of sole proprietorship

business, the proprietor is in a very good position to keep his
plans to himself since management and control are in his hands.

 Encourages self-employment:
Sole proprietorship form of business organization leads to
creation of employment opportunities for people. Not only is the
owner self-employed, sometimes he also creates job
opportunities for others.Thus, it helps in reducing poverty and
unemployment in our country.

Disadvantage of a Sole Proprietorship
Limited capital:

In a sole proprietorship business, the owner arranges for the
required capital for the business. It is difficult for a single individual
to raise a huge amount of capital.The owner’s own funds as well as
borrowed funds sometimes become insufficient to meet the
requirement of the business’s growth and expansion.
 Unlimited liability:
In case the sole proprietor fails to pay the expenses arising out of
business activities, his personal properties may have to be used to
pay for those.This generally discourages the sole proprietor from
taking risks. He thinks cautiously while deciding to start or expand
the business activities.

 Lack of continuity:
The existence of a sole proprietorship business is dependent on
the life of the proprietor. Illness, death etc. of the owner brings an
end to the business.The continuity of business operation is
therefore uncertain.
Limited size:
There is a limit beyond which it becomes difficult for a sole

proprietor to expand the business activities. It is not possible for a
single person to supervise and manage the affairs of the business if
it grows beyond a certain limit.
Lack of managerial expertise:
A sole proprietor may not be an expert in every aspect of
management. He/she may be an expert in administration, planning,
etc., but may be weak in marketing. Again, because of limited
financial resources it is also not possible to employ a professional
manager.Thus, the business lacks benefits of professional
management.

JOINT STOCK COMPANY
 It is a voluntary association formed by

some persons for profits with a capital
divided into transferable shares, having a
corporate body and a common seal.

FEATURES OF JOINT STOCK
COMPANY
Separate legal entity


 Artificial Legal person
 Perpetual existence
 Limited liability
 Common seal
 Transferability of shares
 Separation of ownership and management
 Voluntary association

Advantages of Joint Stock
Company
Large financial resources


 Limited Liability
 Professional management
 Large-scale production
 Contribution to society
 Research and Development

Limitations of Joint Stock
Company
 Difficult to form
 Excessive government control

 Delay in policy decisions
 Concentration of economic power and wealth in
few hands

PARTNERSHIP
 According to Indian Partnership Act,
1932 section 4 Partnership is “the

relation between persons who have

agreed to share profits of a business
carried on by all or any of them acting
for all.”
 Persons who enter into partnership
are collectively known as ‘firm’ but
individually known as ‘partners’.

FEATURES
1. More Persons
There should be at least two persons subject to

a maximum of ten persons for banking

business and twenty for non-banking business
to form a partnership firm.
2. Profit and Loss Sharing:
There is an agreement among the partners to
share the profits earned and losses incurred in
partnership business.

3. Contractual relationship:
Persons competent to contract can be
partners.The contract may be either
written or oral form among the partners.

4. Existence of Lawful Business:

Partnership is formed to carry on some
lawful business and share its profits or
losses
5. Utmost good faith & honest:
They should present true accounts and
must disclose true information to one
another.

6. Restrictions on Transfer of Share:
No partner can transfer his share to any
outside person without seeking the consent of
all other partners.

7. Principal-agent relationship :
Every partner is an agent of the firm. He can
act on behalf of the firm. He is responsible for
his own acts and also for the acts done on
behalf of the other partners.
8. Unlimited liability:
If the property or the assets of the firm are
insufficient to meet the claims of the creditors,
the private property of the partners can be
attached to meet the claims of the creditors.
ADVANTAGE
1.Easy to form : A partnership firm can be
formed without any legal formalities and
expenses. Even if the firm is to be registered, the

expenses are not much than company form of

organization.
2.Access to more capital : A firm consists of
more than one person.Therefore it can secure
more capital from combined resources.
3.Combined Talent, Judgment and Skill:. Usually,
partners are pooled from different specialized
areas to complement each other.This gives the
firm an advantage of collective expertise for
taking better decisions.

4. Diffusion of Risk:
In case of partnership, the losses of the firm
are shared by all the partners as per their

agreed profit-sharing ratios.

5. Flexibility: Changes in the business can be
adopted easily. There are no legal
restrictions.
6. Borrowing capacity : The creditors will lend
Loans not only on the basis of the firm’s
assets but also based on the personal
properties of the partners. So the borrowing
capacity of a firm is more.

DISADVANTAGE
1.Unlimited liability : The creditors of a firm can
recover their loan amounts from the personal

properties of the partners when the firm’s sources

are not enough. Therefore the personal properties
of the partners are not safe.
2. Lack of continuity : A partnership gets dissolved
on the death, insolvency, insanity or retirement of
any partner. So, there is no guarantee for the
continuity of the firm.
3. Internal conflicts : Sometimes the partners may
not agree with one another. Differences in
interests lead to conflict among partners

4.Misuse of assets: The partners may use the
assets of the firm for their personal purposes.
5.Risk of Implied Authority: At times, an

incompetent partner may lend the firm into

difficulties by taking wrong decisions. Risk
involved in decisions taken by one partner is
to be borne by other partners also.

COOPERATIVE

 Section 4, of the Indian cooperatives

societies act, 1912 defines a
cooperatives “as a society which has its
objective of the promotion of
economic interest of its members in
accordance with cooperative principle.”

FEATURES
1.Voluntary Association: The membership of
co-operative organizations is open for all. At
any time a person can become the member

and can leave it by giving notice to the

society.
2.Democratic Management: The management
is based on democracy principles. This means
all members can participate in the
management activities and express their
views.
3.Service Motive:The main object of this
organization is to give services to the
members and not to earn profit.

4. Capital and Return Thereon: capital is entitled
to a limited return, known as ‘dividend’ in India. In
co-operative laws, a ceiling has been put to the
rate of dividend which could be declared out of

profit for the use of capital and it generally never

exceeds 10%.
5. Distribution of Surplus:
After giving dividends to the members, the
surplus of profits, if any, is distributed among the
members in the proportion of business they have
done with the cooperative society.
6. Government Control:
In India, the activities of cooperative societies are
regulated by the Co-operative Societies Act and
the State Cooperative Societies Acts

ADVANTAGE
1.Easy to form: Formation of a cooperative
society does not involve long and complicated
legal formalities.
2.Limited liability: The liabilities of the members

of the society is limited to the extent of capital
contributed by them.
3.Perpetual Existence: cooperative society has a
separate legal entity. Hence, the death, insolvency,
retirement, lunacy, etc., of the members do not
affect the perpetual existence of a cooperative
society.
4.Service motive: In Cooperative society
members are provided with better good and
services at reasonable prices.

5.Open Membership:The membership of
cooperative societies is open to all irrespective of
caste, color, creed and economic status.

6.State Assistance: Government offers a number

of grants, loans and financial assistance to the
cooperative societies to make their working more
effective.
7.Democratic management: The cooperative
society is managed by the elected members from
and among themselves. Every member has equal
rights through its single vote but can take active
part in' the formulation of the policies of the
society.

DISADVANTAGE
1.Lack of Secrecy: A cooperative society has to
submit its annual reports and accounts with the
Registrar of Cooperative Societies. Hence, it

becomes quite difficult for it to maintain secrecy

of its business affairs.
2.Lack of Interest: The paid office-bearers of
cooperative societies do not take interest in the
functioning of societies due to the absence of
profit motive.
3.Corruption: Lack of profit motive breeds fraud
and corruption in management. This is reflected in
misappropriations of funds by the officials for
their personal gains.


The typically hierarchical arrangement of

lines of authority , communications , rights

and duties of an organization is known as
organizational structure .
Organizational structure determines how
the roles , power and responsibilities are assigned
, controlled , and coordinated , and how
information flows between the different levels of
management .


SMALL BUSINESS MANAGEMENT ORGANIZATION
FORMAL INFORMAL
ORGANIZATION ORGANIZATION
Fully The decision
structured & making power is
the top layer distributed and
of the departments
management and divisions
has most of may have
the decision different degrees
making power of independence
A formal organization refers to the structure of
well defined jobs, each bearing a definite

measure of authority, responsibility and

accountability. Thus, a formal organization is
created through the co-ordination of efforts of
various individuals . Every member is
responsible for the performance of a specified
task assigned to him on the basis of authority
responsibility relationship in an organization.


Systematic Working
Achievement of Organisational
Objectives
No Overlapping of Work
Co-ordination
Creation of Chain of Command
More Emphasis on Work

Delay in Action
Ignores Social Needs of Employees
Emphasis on Work Only
Always follows rules and procedures

A informal organization refers to the relationship
between people in an organization based on

personal attitudes, emotion, prejudices, likes and

dislikes, etc. These relations are not developed
according to procedures and regulations laid
down in the formal organization.

Fast Communication
Fulfils Social Needs
Correct Feedback
Quick solve of problems

Spread Rumours
No Systematic Working
May Bring Negative Results
More Emphasis to Individual Interest

DIFFERENCE BETWEEN FORMAL &
INFORMAL ORGANIZATION
An organization in An organization
which the job of each formed within the
member is clearly formal
defined, whose organization as a
authority, network of
Meaning
responsibility and interpersonal
accountability are relationship, when
fixed is formal people interact
organization. with each other, is
known as informal
communication.
Deliberately by top Spontaneously
Creation management by members.
To fulfil, the ultimate To satisfy their social
Purpose objective of the and psychological

organization. needs.
Nature Stable, it continues Not stable

for a long time
Communication Official communication Grapevine
Control mechanism Rules & regulations Norms, values and

beliefs
Focus on Work performance Interpersonal

relationship
Members are bound All members are equal
Authority by hierarchical
structure.
Size Large Small

LINE Organisation structure
Line organisation is the simplest and the
oldest type of organisation.

 It is also known as scalar organisation or
military type of organisation.
 In the words of J.M. Lundy, “It is
characterized by direct lines of authority
flowing from the top to the bottom of the
organizational hierarchy and lines of
responsibility flowing in an opposite but
equally direct manner.”
 In this type of Organisation,Superior
delegates authority to another subordinate
and so on, forming a line from the very top

to the bottom of the organisation

structure.
 The line of authority so established is
referred as “line authority.” Under this type
of organisation authority flows downwards,
responsibility moves upwards in a straight
line. Scalar principle and unity of command
are strictly followed in line organisation.


Types of LINE Organisation
 Line organisation is of two types

(a) Simple or Pure Line Organisation

(b) Departmental Line Organisation
Simple or Pure line Organisation:-
In pure line organisation all the persons at a
given level perform same type of work. The
divisions are solely for the purpose of
control and direction.
Simple/Pure LINE Organisation
Departmental LINE Organisation
 In departmental line organisation, the

whole unit is divided into different

departments that are convenient for
control purposes.
 Each departmental worker is under the
control of the departmental manager who
is responsible to his superior over him.
 All departmental managers enjoy equal
status and work independently, again, even
within a department, there may be several
sub-departments.
Features of LINE Organisation
 The main features of line organisation are as
follows:
1) Orders and instructions flow from top to the bottom,

whereas requests and suggestions move from bottom to
top.
2) The principle of unity of command is the most salient
feature of this type of organisation. In simple words, the
orders are received by the subordinates from one boss.
3) The subordinates are accountable to their immediate
superior.
4) There are limited numbers of subordinates under one
superior.
5) This is simple to operate and control.
6) Co-ordination can be easily achieved.
ADVANTAGES
Simplicity: It is very simple to establish

and operate. It can be easily understood
by the employees.
 Fixed responsibility: Line organisation
helps in fixing authority and responsibility.
Hence nobody can avoid his responsibility.
 Unity of control: An employee receives
orders and instructions from only one
superior. It means a subordinate is
responsible to only one superior.
 Prompt decisions: Unification of
authority and responsibility facilitates quick
and prompt decision.
 Discipline: Single line authority and responsibility
ensures strong discipline in the organisation.
 Flexibility: The adjustments in the organisation can
be easily made to suit the changing conditions.

 Co-ordination: It helps to achieve effective co-

ordination. All the activities pertaining to single
department are controlled by one person.
 Economical: It is not complex and expensive. It is
simple and economical in operation. It does not need
any expert and specialised personnel.
 Direct communication: As there will be direct
communication between the superior and the
subordinates at different levels it would be helpful in
achieving promptness in performance.
DISADVANTAGES
 Excess work : In this type, an executive is
overloaded with work and hence he may not be

in a position to direct and control the efforts of

his subordinates properly.
 Lack of specialisation: As one person
looks after all the work relating to his
department, there is no scope for specialisation.
 Scope for favoritisms: There may be a
good deal of favouritism and nepotism under
this type of organization. As the concerned
officer will judge the performance of the
persons at work according to his own norms, it
is possible that efficient people may be left
behind and inefficient or may get higher and
better posts.
 Lack of communication from lower ranks:
Under line organisation suggestions move from down to
upwards the superiors usually do not pay attention to
suggestions sent by lower ranks. This leads to inadequacy of

communication from subordinates to superiors.
 Lack of initiative:
Under line organization, ultimate authority lies in the hands
of top management and departmental managers or heads
have little powers. This adversely affects their initiative and
enthusiasm to motivate the subordinates working under
them.
 Unity of administration:
All the decisions relating to a department are taken by only
one executive and hence, the successful functioning of that
department depends upon his abilities.
 Lack of co-operation : Unitary control may result in lack
of cooperation and team spirit.
STRUCTURE
ORGANISATION
LINE AND STAFF
 Line and staff organization is
an organization in which line managers

make decisions, and staff personnel provide

advice and support.
 Line and staff organization
structure refers to a pattern in
which staff specialists advice managers to
perform their duties.
Features/Characteristics
 There are two types of staff :

a) Staff Assistants- P.A. to Managing Director, Secretary

to Marketing Manager.
b) Staff Supervisor- Operation Control Manager,
Quality Controller, PRO
 Line and Staff Organization is a compromise of
line organization. It is more complex than line
concern.
 Division of work and specialization takes place in
line and staff organization.
 The whole organization is divided into different
functional areas to which staff specialists are
attached.
 Efficiency can be achieved through the
features of specialization.
 There are two lines of authority which

flow at one time in a concern :

a) Line Authority
b) Staff Authority
 Power of command remains with the line
executive and staff serves only as
counselors.
ADVANTAGES
 Specialisation: The staff officers
concentrate mainly on the planning function and

the line officers on the "doing" function. By this

method, specialisation is attained.
 Flexibility: Staff can be added to the line and
new activities may be introduced without
disturbing the line procedure. Hence, there is
greater flexibility in the organisation.
 Expert Advice: The staff officers provide
expert advice and guidance to line officers and
by this, the enterprise as a whole gets benefit.
 Sound Decisions: In this type, the decisions are
made by experts and hence, there is a possibility
of making sound managerial decisions

 Relief to Line Executives: The Staff officers

look after the detailed analysis of each
important managerial activity which is a big relief
to the line officers.
 Opportunities for Advancement: In this type,
a greater variety of responsible jobs are available
and this provides more opportunities for
advancement of capable workers
DISADVANTAGES
Conflict between line and staff authorities:
There may be chances of conflict between line and

staff authorities. Line Officers resent the activities of

staff members on the plea that they do not always
give correct advice. On other hand staff officials
complain that their advice is not properly carried out.
 Expensive: This type requires the appointment of a
large number of experts involving heavy expenditure.
Hence, it is quite expensive and small and medium-sized
concerns cannot afford it.
 Confusion:There may be confusion on the relationship
of line and staff authorities. Line Officers consider
themselves superior to Staff Officers. The Staff Officers
object to it.
 Delay in Decision making:
The process of decision making is delayed as

line executives have to consult with the staff

experts before finalising the decision. The decisions
of line managers are likely to be delayed due to this
lengthy procedure.
 Encourages Carelessness: As the staff

officer is not concerned with the execution of
the plan, he may not take proper precautions
and care before he advises the line officer. Thus,
this system may encourage carelessness on the
part of the staff officer.
Various Principles
designing a sound
organisation structure
 Principle of Organization Objective: It
should be same, consistent, defined and clear. It
should aim at achieving high production with
customer focus, growth and survival. At the core,
there should be unity of objective.

 Principle of Division of Work and

Specialization: Every unit or person of an
organization is assigned to a specific task and
accomplishment. For this, there is a need to focus on
specialization and assignment of specific work to
individual.
 Principle of Functional Definition: Each
employee must be assigned specific task, role,
relationship and job-related activities. What is
expected of him, must be defined in the organization.
 Principle of delegation: Authority needs to be
delegated in the organization. Delegation is for
empowering the subordinates to achieve results.
 Principle of Parity of Responsibility and
Authority: Responsibility is the obligation on the path of a
person towards the boss for completing the assigned task. It is
also called as accountability. A person at a higher position in
the organization exercises authority or power over his

subordinates for getting the task done. Authority is vested in
the superior of the organization so as to extract work from

subordinates. Therefore, authority is always associated with
responsibility to get things done. There should be a balance
between authority and responsibility.
 Principle of Scalar Chain: Scalar chain, chain of
command or line of authority, means that there should be a
continuous line of authority (or scalar chain) from top of the
organizational pyramid to the lower levels. The chain provides a
superior-subordinate relationship. Levels above in the chain are
superiors while lower levels in the scalar chain are
subordinates. Scalar chain is useful in the delegation of
authority down the chain. It is also useful in maintaining
effective communication between different layers of the
organization.
 Principle of Unity of Command: Unity of command means
that there should be only one source of authority for each
subordinate. This also means: one subordinate-one boss. The
principle of unit of command is important for maintaining
discipline and for fixing responsibility for the result.

 Principle of Balance: All the techniques and values of the

organizations must be effectively balanced. Many issues have
divergent focus in organization. These are: line vs. staff;
centralization vs. decentralization, unity of command vs.
specialization, vertical hierarchy vs. span of control, etc. Proper
balance between these issues must be maintained.
 Principle of Continuity: Continuity means survival and
existence despite turbulence in market forces. Therefore, the
organization must look at long-term goals rather than mere
profit-making and short-terms goals.
 Principle of Cooperation: Cooperation means
involvement as a team and solving the functional goal of the
organization as one unit. This can be achieved by evolving a
proper code of conduct, rule of business, conflict resolution
mechanism and cooperation.
 Principle of Flexibility: Flexibility means
adaptability to change. This is needed due to
uncertainty, scope for diversification and growth,
new opportunity, and competitive forces in the
environment. Organization-design should have

some in-built flexibility to withstand the

excessive control, complicated procedure, etc.
 Principle of Efficiency: Organization

structure should be useful in achieving the
optimum utilization of resources at least cost
and least effort. Considering system view of the
organization (which is input-processing-output
framework), the maximization of output and
minimization of inputs will improve the
efficiency.
 Principle of Coordination: There are many
functions, such as marketing, finance, HRD, etc., in an
organization. Different groups have different
priorities and local level objectives. Proper
coordination is needed to work in one direction and

for achieving the overall (global) corporate goals.

Proper communication, meetings, news-letters, etc.,
are helpful to achieve this.
 Principle of Span of Control: Any superior

can handle only limited numbers of subordinates.
Narrow span of control is useful for complex jobs
while wider span of control is useful for routine type
of jobs. By span of control, we mean how many
subordinates a manager (or, superior) can handle.
INDUSTRY
SMALL SCALE
STEPS IN STARTING A
INTRODUCTION
 The potential entrepreneur would become

an entrepreneur only when he owns an
enterprise. The business enterprise to be
set up can be a manufacturing venture, a
trading firm or a service establishment.
The manufacturing venture includes the
steps required for setting up a trading firm
or a service establishment also.
The steps in setting up a small unit are as
follows :
1. Decision to be Self-employed:
This is the most crucial decision a person has to take shunning wage
employment and opting for self-employment or entrepreneurship. He

should know the advantages and risks of entrepreneurship.
2. Analysing strengths, weaknesses:
The potential entrepreneur has to analyse his strength, weaknesses,
while deciding to go for entrepreneur career. This analysis enables him
to know what type and size of business would be the most suitable.
The strengths and weaknesses will vary from person to person.
3. Availability of own money:
No business can be created, with zero capital. The ‘Own Money’
concept means the funds available with an .entrepreneur from
his own so family or friends. The size of the unit depends on the
availability of ‘Own Money’ in short-term and long-term.
4. Scanning of business environment:
It is always essential on the part of an entrepreneur to study and understand
the prevailing business environment in which they operate particularly the
industrial policy, economic policy, licensing policy, legal environment,

technological environment and above all the markets. In order to ensure

success of his enterprise, the entrepreneur should scan the business
opportunities and threats in the environment. He should study the
administrative frame work, procedures, policies, rules and regulations and
other formalities implemented by the government.
5.Training:
The person should undergo training for developing skills for entrepreneurship
and developing technical, conceptual and managerial skills. Before going to start
the enterprise, the potential entrepreneur must assess his own deficiencies,
which he can compensate through training. He can attend the Entrepreneurial
Development Programmes and skill up gradation training programmes
conducted by institutes like SBI, MSME etc.
6. Product Selection:
The next step and the most important step is to decide what business
to venture into, the product or range of products that shall be selected

for manufacture and in what quantity. The level of activity will help in
determining the size of business and thus form of ownership. One

could generate as many project ideas as one can through environment
scanning and short list a few of them. Closely examine with the help of
opportunity analysis each one of them and zero in on to a the final
product or products.
7. Market Survey:
It is always convenient to manufacture an item but difficult to sell. So it
is prudent or rational on the part of the entrepreneur to survey the
market thoroughly before embarking upon production and ensure that
the product chosen is in sufficient demand and is preferably in the
growth phase of a product life cycle.
Market survey means systematic collection of data by the entrepreneur
about the product for manufacture, demand-supply lag, extent of

competition, frequency of demand, pattern and design of demand, its
potential share in the market, pricing, distribution policy etc. The

principle is to produce what actually people demand. The entrepreneur
can contact for this the concerned authorities.
8. Selection of form of
ownership/organisation:
A firm can be constituted as proprietorship, partnership, limited
company (public or private) or co-operative society. This will depend
upon the type, purpose and size of entrepreneur’s business. One may
also decide on the form of ownership, on the basis of resources in
hand or from the point of view of investment.
9. Location:
The next step will be to decide the location where the unit is to be
established. Will it be hired or owned? The size of plot, covered and
open area and the exact site will have to be decided.

Decision about the location of unit is very important. Location

determines the success or failure of the enterprise. Location is
selected after considering such factors such as nearness to market,
sources of material and labour, modern infrastructural facilities etc.
10.Technology:
To manufacture any item, technology is used. Information on all
available technologies should be collected by the entrepreneur and the
most suitable one should be identified. This will also be useful to
determine the type of machinery and equipment to be installed. Many
institutions of government ,research laboratories, R & D. divisions of
big industries and certain consultancy agencies provide the
manufacturing know-how.
11.Machinery and equipment:
Having chosen the technology, the machinery and equipment required

for manufacturing, the chosen products have to be decided, suppliers

have to be identified and their costs have to be estimated. One may
have to plan well in advance for machinery and equipment especially if
it has to be procured from outside the town, state or country.
12.Technical know-how:
In some cases, technical know-how may be arranged for setting up
enterprises. This can be arranged through TC0s, NSIC, SSIDC, DIC,
private consultants, SISI, ED-institutes, foreign collaborators, India
Investment Centre and Industry etc. Facilities are also available to SSI
for making variety of technical know-how arrangements including turn-
key jobs.
13.Preparation of Project Report (Business Plan):
After deciding the form of ownership, location, technology for

manufacturing, machinery and equipment, the entrepreneur should be

ready to prepare his project report or the feasibility study. The
economic viability and the technical feasibility of the product selected
have to be established through a project report. A project report that
may now be prepared will be helpful in formulating the production,
marketing, financial and management plans. It will also be useful in
obtaining finance, shed, power connection, water connection, raw
material quotas, etc. The entrepreneur has to consider the guidelines
given by the Planning Commission in preparing the project report. The
project report should indicate the vision of the promoter and short
term and long term aspects of the project implementation.
14.Project appraisal:
Project appraisal means the assessment of a project. It is a technique for
ex-ante analysis of a scheme or project while preparing to set up an
enterprise, the entrepreneur has to carefully appraise the project from the
stand point of economic, financial, technical, market, social and managerial
aspects to arrive at the most socially-feasible enterprise. To avail the

finance from the banks and financial institutions, a comprehensive appraisal
of projects carrying techno-economic feasibility aspects should be
undertaken by the entrepreneur.
Thus a project which is selected should be technically feasible and
economically viable and then only it will be bankable. For this the following
appraisals can be performed at the preliminary level
(a) Economic appraisal
(b) Financial appraisal
(c) Technical appraisal
(d) Management appraisal
(e) Organisational appraisal
(f) Operational appraisal
(g) Market appraisal
15.Finance:
Finance is the life-blood of the enterprise. Entrepreneur has to take certain
steps and follow specified norms of the financial institutions and banks to
obtain money or finance. A number of financial agencies provide capital
assistance and venture capital for starting an enterprise. There are some
agencies which provide financial assistance on concessional rates. Under PMRY
and REGP schemes, financial assistance and subsidies are being provided to the
persons who want to set up their own enterprise, which obviates the need for
margin money.
16.Provisional Registration:
It is always worthwhile to get the unit registered with the government. The
entrepreneur has to obtain the prescribed application form for provisional
registration from DIC or Directorate of Industries. After having duly filled in
the application form, he has to submit the application with all relevant
documents in the local DIC or Directorate of Industries. This will enable the
entrepreneur to avail various government facilities, assistance and incentives
schemes including financial assistance from NSIC, SFCs, KVIC.
17.Power and Water Connection:
The sites where the enterprise will be located, should either have
adequate power connections or this should be arranged. The entrepreneur

can calculate the total power requirement and determine the nearest pole
from which power will be given to the enterprise, as it can materially affect
the installation cost. There are two categories of power, namely, the Low
Tension (LT) and High Tension (HT). A consumer can avail LT only if the
connected load is 75 HP and below. If the connected load is between 75
HP and 130 HP, the consumer has the option to avail either LT supply or
HT supply. Most of the SSI units fall under the LT category.
HT power supply may mean additional investment in transformer and sub-
station. Most states, need a No Objection Certificate from the concerned
Pollution Control Authorities, before the power connection. Similarly, the
water connection will have to be obtained or provision should be made
for adequate water supply to the firm .
18.Installation of machinery:
Having completed the above formalities, the next step is to

procure machinery and begin its installation as per the plant
layout.
19.Insurance:
It is necessary to have adequate insurance for the fixed assets at
this stage and later on for the current assets as well.
20.Recruitment of manpower:
Once machines are installed, the need for manpower arises to
run them. So, the quantum and type of manpower (skilled, semi-
skilled, unskilled, administrative etc.) is to be decided. The
sources of getting desired labour are also important. This
follows the recruitment, training and placement.
21.Procurement of raw materials:
Raw materials are the important ingredients for running an enterprise.

The labour will require raw materials to work upon the installed
machinery. These materials may be procured indigenously or may have
to be imported by the entrepreneur. The entrepreneur has to identify
the cheap and assured sources of supply of raw materials for running
his own enterprise. Government agencies can assist in case the raw
materials are scarce or imported.
22.Production:
The unit established should have an organisational set-up. To operate

optimally, the organisation should employ its manpower, machinery and

methods effectively. There should not be any wastage of manpower,
machinery and materials. If items are exported, then the product and
its packaging must be attractive. Production of the proposed item
should be taken up in two stages : (i) Trial production (ii) Commercial
Production. Trial production will help tackling problems confronted in
production and test marketing of the product. This will reduce the
chances of losses in the eventuality of mistakes in project conception.
Commercial production should be commenced only after the
successfully launching the product at the test marketing stage.
23.Marketing:
Marketing is the most important activity as far as the
entrepreneurial development is concerned. Various aspects like

how to reach the customer, distribution channels, commission

structure, pricing, advertising, publicity etc. have to be decided by
the entrepreneur. Like production, marketing should also be
attempted cautiously, that is, in two stages namely: (i) Test stage
(ii) Commercial marketing stage.
Test marketing is necessary to save the enterprise from going
into disrepute in case the product launched is not well accepted
by the customers. It will also assist the entrepreneur in carrying
out modifications or additions in designs and features of the
product. Having successfully test marketed the product,
commercial marketing can be undertaken. The entrepreneur can
contact the Small Industries Marketing Corporation.
24.Quality Assurance:
Before marketing, the product quality certification
from BIS (Bureau of Indian Standard) / AGMARK /

HALLMARK etc. should be obtained depending

upon the product. If there is no quality standards
specified for the products, the entrepreneur
should evolve his own quality control parameters.
After all, quality ensures long-term success.
25.Permanent Registration:
After the small scale unit goes into production and
marketing, it becomes eligible to get permanent
registration based on its provisional registration
from DIC or Directorate of Industries.
26.Market Research:
Once the product or service is introduced in the market,
there is strong need for continuous market research to
assess needs and areas for modification, up gradation and

growth. Market becomes the waterloo for most SSI

entrepreneurs as they ignore this vital function. Initial
success should not lure the entrepreneur into a sense of
complacency.
27.Monitoring:
Periodical monitoring and evaluation not only of markets
but also production, quality and profitability helps in
knowing where the firm stands in comparison to
performance envisaged in the business plan. It also
identifies direction of future growth.
PROJECT FEASIBILITY
Study used to determine the viability of

the project.
 Is driven by research & analysis.

 Used to assess the strengths & weaknesses
of a proposed project.
 Present directions of activities which will
improve a project & achieve desired goals.
 Objective is to ensure a project is legally
technically feasible & economically
justifiable.
 Involves some form of consultation

with stakeholders, community,users etc.

 Focuses on analysing, clarifying, & resolving key
issues & areas of concern or uncertainty.
 Two criteria to judge feasibility are cost
required & value to be delivered.
 Very often involves basic modeling & testing of
alternative concepts & approaches.
TYPES OF FEASIBILITY
Technical Feasibility: Measures the availability of

technical resources.
Studies the availability of the technical manpower

for
the project.
 Economical Feasibility: Measures wheather
investments are available for the proposed
project.
Typically involves a cost/ benefit analysis of the
project.
 Legal Feasibility: Investigates if the proposed
system conflicts with legal requirements like data
protection acts or social media laws.
 Operational Feasibility: Analyse & determine
whether your bisiness needs can be fulfilled
by using the proposed solution.

Measure how people feel about the system.

 Schedule Feasibility: If a dead-line(time-
limit) is established , it is called schedule
feasibility.
The dead-line is studied under this.
Depends upon available manpower &
economical condition as well.
COMPONENTS OF
FEASIBILITY STUDY
1. The project scope: Clearly defines the business

problem/opportunity that has to be addressed.
Also ensure that you define the parts of the

business that would be affected either directly or
indirectly.
2. Current market Analysis: Critical as it examines
the business environment in which the new
product & service is to be placed.
From this analysis we can discover the strength
& weaknesses of the current approach.
3. The Requirements: Represents two groups
technical & organisational requirements.
If there is a potential market & demand for the
product & service then we need to identify the
technical & resouce requirements for the new
venture.
4. The Approach: Consider & choose the
recommended solution or course of action in
order to meet the requirements.

5. Evaluation: Examines the cost effectiveness

of the selected approach & the estimated total
cost of the project.
After that evaluation & cost summary will
be prepared to include a return on
investment,cost/ benefit analysis etc.
6. Review: Verify the accuracy of the feasibility
study & to make a project decision.
At this stage , we can approve , reject even
revise the study for making a decision.
SEVEN-PHASES OF PROJECT
MANAGEMENT
INITIATION PHASE
DEFINITION PHASE
FEASIBILITY PHASE
APPROVING & FINANCING PHASE
DETAILED DESIGN PHASE
PROJECT IMPLIMENTATION PHASE
EX- POST EVALUATION

IMPLIMENTATION OF
PROJECT FEASIBILITY STUDY
1. Concept or Identification:
Implimenting Agencies identifies projects to

impliment it from various sources.
2. Definition or preparation:
• Implimenting Agencies review existing agencies
procedures which can affect the project.
• Examine institutional & technical alternatives.
• Assess costs, time schedule & operational
requirements.
3. Feasibility Phase:
• Implimenting agencies prepare the various
modules of feasibility study
• Determine if project is worthwhile to
impliment.
4. Approving & Financing :
 Approving Body:
• Defines Policy parameter
• Checks accuracy of information on parameters

• Decides on the project.

 Implimenting Bodies:
• Present project for ‘yes’, ‘no’ decision.
• Arranges financing in case of ‘yes’ decision.
5. Detailed Design Phase:
• Implimenting agencies detail basic
programmes
• Allocates tasks
• Determine resources
• Complete blue prints & specification
6. Project Implimentations:
 Implimenting agencies impliment, operate &
evaluate process of the project.
 This phase is complete when all of the
requirements have been met & when the
result corresponds to the design.
 Conflict arises when external customer has

ordered the project result but it has not been

fulfilled.The customer may appeal to the
agreements that were made during the
definition phase.
7. Ex-post evaluation:
• Implimenting agencies reestimate project
outcomes based on actual performance.
• Identify critical variations from the plan
TAX BENEFITS,
INCENTIVES AND
CONCESSION TO
SMALL SCALE
INDUSTRIES
SMALL BUSINESS MANAGEMENT NEED FOR TAX BENEFITS
In the beginning the small industries have

to incur more expenses but the return is

either nil or nominal.
Therefore they need to be motivated,
provide support, assistance.
Hence the govt. has taken the initiatives
by providing various benefits to small
scale industries.
VARIOUS TAX BENEFITS TO
SMALL SCALE INDUSTRIES
TAX HOLIDAY
 According to the section 80J of the Income
Tax Act the small industries exempted from
the payment of income tax on their profits up
to 6% (7.5 % for companies) from the total
income of the units in the assessment year in
which the units began manufacture.
 This tax holiday is available up to 5 years from
the commencement of production.
 Condition :
a) the unit should not have been formed by
the splitting or reconstitution of an existing
product
b) the units should employ 10 or more

workers in a manufacturing process or
atleast 20 workers without power
DEPRECIATION
 Under Section 32 of the Income Tax Act. a
small scale industry is eligible to get a
deduction on depreciation account of plant
and machinery.
land and buildings, at the prescribed rates.
 In the case of small scale industries the
deduction from the actual cost of plant and
machinery is allowed up to Rs. 20 lakhs.
 The amount of depreciation is calculated

on the Diminishing Balance method.

 Eligibility criteria :
a) the asset must be owned by the
assesses
b) the assets must actually be used for the
purpose of business only
c) the deduction is allowed on the fixed
assets i.e. building, plant & machinery etc.
REHABILILITATION ALLOWANCES
 This is granted to small scale units, under
Section 33 B whose business has been

disturbed by:
(a) Riot or civil disturbance, floods, typhoons,
hurricanes, cyclones, earthquakes or other
natural disasters.
(b) Accidental fire or explosion.
(c) Action by an enemy.
 This allowances need to be used for only
business purposes within a period of 3 years
of units of re-establishment , reconstitution or
revival
 This allowances is allowed to the unit
equivalent of 60% of the amount

INVESTMENT ALLOWANCES
 Such allowances is allowed under section of
31A of Income Tax Act
 At the @ of 25% of the cost of acquisition of
new plant installed
 The industry can avail such benefit, provided
it has to put to machinery in use within a
year of
Installation or in the immediate following year,
failing which the benefit will be forfeited
EXPENDITURE ON SCIENTIFIC
RESEARCH
 Section 35 of Income Tax Act provides
deduction in respect of such expenditure
 Any expenses incurred in the research
related to the business of the assesse in the
previous year
 Any sum paid a research association or a
college , university or to a public company
which has its object of undertaking scientific
research
AMORTISATION OF CERTAIN
PRELIMINARY EXPENSES
 Section 35D of Income Tax Act is allowed to

write off the preliminary & development
expenses
 Small industries in connection with the
setting up of a new industrial unit
 The writing off the expenses is allowed
against subject to a maximum of 10 annual
instalments beginning with the previous
year in which the new unit commences.
The aggregate amount of expenditure allowed
to be deducted is 2.5% of the total cost of
the project.
EXPENDITURE ON
AQUISITION OF PATENTS &
RIGHTS
 Under section of 35A of Indian Tax Act any
expenditure of a capital nature incurred in
acquiring patent & copyright by a small
industry is deductible from its income.
 The expenditure can be deducted in 14
equal instalments
TAX CONCESSION TO
IN RURAL AREAS
The tax payers under the section 80HHA are

entitled to a deduction of 20% of the profits %
gains derived by running SSIs.
 The deduction is allowed for a period of 10
years from the year of commencement of
manufacturing activity after 30th September
1977.
 The criteria are as follows :
a)The small industry is not formed by
splitting
Or reconstitution of a business already in
existence.
b) It is not formed by transfer to a new

business of plant or machinery

previously used for any purpose.
c) The accounts of the unit are audited by a
CA.
d) It employs 10 or more workers in
manufacturing process with the aid of
power of power.
TAX CONCESSION TO
IN BACK
 The SSIs in these areas are entitled to a

deduction of 20% of their profits & gains
from the gross total incomes.
 This deduction is allowed for a period of 10
years.
 However if the SSIs has already been
established in a non-backward areas & later
it shifts to a backward area the unit will be
allowed the deduction on the profits earned
from the undertaking after shifting in the
backward area for a period of 10 years.
 CONDITIONS :
a) It is established on or after 31st
December, 1970.
b) It employs 20 or more workers in a
manufacturing process without the aid of
power or more workers in manufacturing
process with the aid of power.

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SMALL BUSINESS MANAGEMENT Small Scale Industry

A small scale industry is an industrial

 Small scale industry are generally more labour

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It includes khadi and handloom, village

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1. Less Scope for Machinery

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A business enterprise exclusively

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 Easy to form and wind up:

A sole proprietorship form of business is very easy to form. With a

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from outsiders or competitors. In the case of sole proprietorship

plans to himself since management and control are in his hands.

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There is a limit beyond which it becomes difficult for a sole

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 It is a voluntary association formed by

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Separate legal entity

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Large financial resources

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 Excessive government control

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1932 section 4 Partnership is “the

relation between persons who have

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There should be at least two persons subject to

a maximum of ten persons for banking

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written or oral form among the partners.

4. Existence of Lawful Business:

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all other partners.

expenses. Even if the firm is to be registered, the

expenses are not much than company form of

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are shared by all the partners as per their

agreed profit-sharing ratios.

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recover their loan amounts from the personal

properties of the partners when the firm’s sources

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5.Risk of Implied Authority: At times, an

incompetent partner may lend the firm into

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 Section 4, of the Indian cooperatives

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any time a person can become the member

and can leave it by giving notice to the

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rate of dividend which could be declared out of

profit for the use of capital and it generally never

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2.Limited liability: The liabilities of the members

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caste, color, creed and economic status.

6.State Assistance: Government offers a number