MEANING:

The word entrepreneur is derived from the French word ‘entreprendre’ which
means to ‘undertake’, i.e. the person who undertakes the risk of new enterprise.

DEFINITION:
According to Adam Smith an entrepreneur is a person who only provides capital
without taking active part in the in the leading role in enterprise.
 Understanding Entrepreneurship
Entrepreneurial development today has assumed special significance. The
objective of Industrial development, regional growth and employment generation
depends upon entrepreneurial development.

Entrepreneurs are the seeds of industrial development, the fruits of industrial

development are greater employment opportunities, increase in per capita
income, higher standard of living, revenue to the government in the form of
income-tax, sales tax, export duties, import duties and balanced regional
development.

Entrepreneurs have historically altered the direction of national economies,

industries and markets.

Entrepreneurs have invented new products and developed organizations and the
means of production to bring them to market.

Entrepreneurs have forced the reallocation of resources away from existing users
to new and more productive users. Many innovations have transferred the society
and altered our pattern of living and many services have been introduced to alter
or create new service industries.

Reasons for entrepreneurs need in India

i)To capitalize on new opportunities

ii)To create wealth and new jobs.

By 2015, 110 -130 million Indian citizens will be searching for jobs, including 80 –
100 million looking for the first jobs, that is seven times Australia’s population.

Since traditional large employers- including the Government and old economy
players may find it difficult to sustain this level of employment in the future. It is
entrepreneur who will create these new jobs & opportunities.

The success stories of businesses built on a great idea executed by a talented

team have great appeal in India, where access to capital is scarce and regulation
has often created barriers to success and young Indian have a dream to be the
next Sabeer Bhatia of India.

Why should you become an entrepreneur?

i) You will be your own boss & boss to other people & make decisions that are
crucial to the business success or failure.

ii) You will have the chance to put your ideas into practice.

iii) You will make money for yourself rather than for someone else.

iv) you may participate in every aspect of running a business & learn and gain
experience in a variety of discipline.

v) you will have a chance to work directly with your customers.

vi) you will have the personal satisfaction of creating and running a successful
business.

vii) you will be able to work in a field or area that you really enjoy.

vii) you will have the chance to built retirement value (by selling the business
when you retire).
 CONCEPT:
It is an elusive (difficult to describe) concept. It is defined differently by different
authors. While some call entrepreneurship as ‘risk bearing’, others view it
‘innovating’ and yet others consider it ‘thrill seeking’.

According to Schumpeter, “Entrepreneurship is the purposeful and systematic

innovation. It included not only the independent businessman but also directors
and managers who actually carry out innovative functions”.

In simple entrepreneurship refers to the functions performed by an entrepreneur

in establishing an enterprise. Just as management is regarded as what managers
do, entrepreneurship may be regarded as what entrepreneurs do.

Innovation and risk bearing are regarded as the two basic elements involved in
entrepreneurship. Let us understand what these two terms actually mean.

Innovation

Doing something new or something different is a necessary condition to be called

a person as an entrepreneur. The entrepreneurs are constantly on the look out to
do something different and unique to meet the changing requirements of the
customers. They may or may not be the inventors of new products or new
methods of production, but they possess the ability to foresee the possibility of
making use of the inventions for their enterprises.

EX: In order to satisfy the changing preference of customers, now-a-days fruit

juice is sold in small cartons (Mango Fruity) instead of bottles so that customers
can carry it and throw away the container after drinking the juice.

Similarly Lipton offers its tea in small packs known as ‘PUDIYAS’ to meet the
requirements of its rural customers.
 Risk-Bearing

Starting a new enterprise always involves risk and trying for doing something new
and different is also risky. The reason is not difficult to seek. The enterprise may
earn profits or incur losses because of various factors like increasing competition,
changes in customer preferences, and shortage of raw material and so on. An
entrepreneur, therefore, needs to be bold enough to assume the risk involved in
the enterprise. Hence, he needs to be a risk-taker, not risk avoider. His risk
bearing ability enables him if he fails in one time or one venture to persist (to try
to do) on and on which ultimately helps him succeed.
 Entrepreneurial Motivation

Meaning of Motivation
The term ‘motivation’ has been derived from the word ‘motive’. Motive may be
defined as an inner state of our mind that moves or activates and directs our
behavior towards our goals. Motives are expressions of a person’s goals or needs.
In simple terms, motives or needs are ways of behavior that gives direction to
human behavior to achieve goals or fulfill needs.

Definition
Motivation may be defined as the process that motivates a person into action and
induces him to continue the course of action for the achievement of goals.

Motivation Theories

1.Maslow’s Need Hierarchy Theory

2.McClelland’s Acquired Needs Theory

1.Maslow’s Need Hierarchy Theory: It is based on human needs. These

needs are classified into a sequential priority from the lower to the higher.
According to him, all human needs are classified into the five need clusters. The
five need clusters are discussed one by one.

(i) Physiological Needs: These are the basic needs of human being and include
food, cloth & shelter. They exert (to use something such as authority, power,
influence) tremendous influence on human behavior. Entrepreneur also being a
man needs to meet his physiological needs for survival. Hence, he/she is
motivated to work in the enterprise to have economic rewards to meet the basic
needs.

(ii) Safety and Security Needs: After satisfying the physiological needs, the next
needs felt are called safety and security needs. These are economic security and
protection from physical dangers. Meeting these needs, requires more money
and, hence, the entrepreneur is prompted to work more in his/her enterprise.
Like physiological needs, these become inactive once they are satisfied.

(iii) Social Needs: Man is a social animal. These needs, therefore, refer to
belongingness. All individuals want to be recognized and accepted by others.
Likewise, an entrepreneur is motivated to interact with fellow entrepreneurs,
his/her employees and others.

(iv)Esteem Needs: These needs refer to self-esteem(respect for) and self respect .
They include such needs which indicate self-confidence, achievement, knowledge
competence & independence. In case of entrepreneurs, the ownership and self-
control over enterprise satisfies their esteem needs by providing them status,
respect, reputation and independence.

(v)Self-Actualisation: The final step under the need hierarchy model is the need
for self-actualisation. This refers to self-fulfilment. The term Self-Actualisation
means to become actualized(realize) in what one is potentially good at. An
entrepreneur may achieve self-actualization is being a successful entrepreneur.

For entrepreneur it is mainly social, esteem and self-actualization needs which

motivate them to work more and more for satisfying them.

2.McClellands Acquired Needs Theory: According to McClelland, a person

acquires three types of needs as a result of one’s life experience. These needs are
as follows:

(i) Needs for Affiliation: These are the needs which refer to establish and
maintain friendly and warm relations with others.

(ii) Need for Power: These mean the one’s desire to dominate and influence
others by using physical objects and actions.

(iii) Need for Achievement: This refers to one’s desire to accomplish

something with own efforts. This implies one’s will to excel in his/her efforts.
But, in case of an entrepreneur, the high need for achievement is found
dominating one. In this view, the people with high need for achievement are
characterized by the following:

(i)They set moderate, realistic and attainable goals for them.

(ii)Prefer to situations in which they can find solutions for solving personal
responsibility.

(iii)They need concrete feedback on how well they are doing.

(iv)They have need for achievement for attaining personal accomplishment.

(v)They look for challenging tasks.

Motivating Factors
There are basically two factors that motivate entrepreneurs. They are as follows.

(i) Internal Factors

(ii)External Factors

(i)Internal Factors: These included the following factors.

(a) Desire to do something new.

(b) Educational Background.

(c) Occupational Background or Experience.

(ii) External Factors: These included the following factor.

(a) Government Assistance and Support.
(b) Availability of labor and Raw material
(c) Encouragement from big business houses.
(d) Promising demand for the product.
 Motivation For Economic Development
1. Entrepreneurship promotes capital formation by mobilizing the idle saving
of the public.
2. It provides immediate large scale employment, thus it helps to reduce the
employment problem in the country, the roots of all socioeconomic
problem.
3. It promotes balanced regional development.
4. It helps to reduce the concentration of economic power.
5. It stimulates the equitable redistribution of wealth, income and even
political power in the interest of the country.
6. It encourages effective resource mobilization of capital and skill which
might otherwise remain unutilized and idle.
7. It also induces backward and forward linkages which stimulates the process
of economic development in the country.
8. Last but no means the least, it also promotes country’s export trade, an
important ingredient to economic development.
 Entrepreneurial Achievement
The need for achievement plays an important role in making an entrepreneur as
successful. It is an inner spirit that activates an entrepreneur to strive(to make
something happen) for success. In simple terms need for achievement is the
desire to do well. The empirical evidences support the hypothesis that need for
achievement contributes to entrepreneurial success. Hence, there is the need for
developing achievement motivation for developing entrepreneurship in an
economy.

David C. McClelland, a well known behavioural scientist of USA holds the view
that achievement can be developed through training and experience. For this,
McClelland conducted his experiments with groups of businessmen in three
countries, i.e., Malawi, India and Equador. He carried out a separate full-fledged
training programme in India to instil(to put an idea or feeling) achievement
motivation in the minds of entrepreneurs. His successful experiment is popularly
known as ‘Kakinada Experiment’.

Kakinada Experiment
Kakinada is an industrial town in Andhra Pradesh. The experiment started in
January 1964. The main objective of the experiment was to break the barrier of
limited aspirations by including achievement motivation. A total of fifty two
persons were selected from business and industrial community of the town. They
were given an orientation programme at Small Industry Extension Training
Institute (SIET), Hyderabad. The participants were grouped into three batches.
They were put under training for 3 months. The training programme was
designed in such a way that it could help the trainees improve imagination and
enable them introspect(consideration of your own idea)their motivation.

The impact of the training programme on the participant’s behavior was observed
after a period of two years. The observations were encouraging. It was found that
those attended the programme performed better than those did not. The
participants need for achievement was assessed by using Thematic Appreciation
Test (TAT). In this TAT, ambition related pictures were displayed to the trainees
and then they were asked to interpret the picture and what is happening in the
picture. Thereafter, all the themes related to achievement were counted and,
thus, the final score represented one’s need for achievement. Hence, the
conclusion is that the training programme positively influenced the
entrepreneurial behavior of the participants.

The need for achievement motivation can be developed more especially in

younger minds. EX: A ‘Junior Achievement Programme’ is started in the United
States of Americawith a view to instil(to put an idea or feeling) achievement
motivation in the minds of younger generation. Similarly, in United Kingdom,
‘Young Enterprise’ programme has been started with the same objective of
inducing( cause to arise) achievement motivation in younger minds.

The above said experiments/programmes have made us to realize the

entrepreneurship is to be developed from a very young age. Accordingly, efforts
have been made to develop a school curriculum that would result in a high need
for achievement among the students.
 Enterprise And Society
Entrepreneurship is an important ingredient of a modern society. Existence of
enterprises is the symbol of a civilized and developed society. Development of a
society largely depends on the existence of good number of enterprises of various
types. Enterprises cater to the need of goods and services to the society.
Enterprises not only bring economic development but also bring social
educational and cultural development to a great extent. A society is dull if there is
no production of goods and services followed by their consumption. Here the
production of goods and services takes place in different enterprises. Enterprises
live in the society and a society is enriched by the existence of enterprises. There
is a good relation between the both. Enterprises are considered to be the pillars
of a modern society. Entrepreneurs are the precious assets of a family, locality,
state, country and society at large.

Some of the points as to how an Enterprise is linked to Society.

Benefits

1) Enterprises provide goods and services to the members of the society as

per their expectations and take care of their regular needs. They are
responsible for all the necessaries, comforts and luxuries of life.
2) Enterprises provide both direct and indirect employment opportunities to
the members of the society and through this social development take
place.
3) Products produced by many segments of the society like agriculture,
fisheries, horticulture, handloom etc are used by enterprises as raw-
material to produce many useful products for the society.
4) Enterprises brings of economic development which gives rise to
development in many areas like social, educational, cultural, agricultural
etc.
5) Establishment of an enterprises in a locality attracts many facilities and due
to this a remote are becomes a city.
6) Enterprises are responsible for the distribution of national wealth through
various activities among the people in the society.
7) Development of a society is linked to the development of entrepreneurs
and enterprises.
8) Enterprises creates entrepreneurs and further enterprises thus increase
entrepreneurial population in the society.
9) Scattered raw-materials in small quantities which were idle or misutilised
find effective utilization through enterprises making economic gain for the
people.

10) Existence of enterprises creates social revolution to generate income.

11) Growth of various types of enterprises at different places in the society

creates balanced economic growths of various regions.

12) There is the creation of entrepreneurial culture in the society due to the
presence of enterprises.
 Hazards
1) Enterprises are responsible for many types of environmental pollution (ex:
Air, water etc.) which makes life difficult and even shorter.
2) Many enterprises create a lot of noise and heat in the locality which cause
many health hazards for the living hazards for the living beings.
3) Due to the presence of enterprises , there is large scale inflow of people
into a locality and concentration of people in the locality shall cause
congestion.
4) Enterprises are responsible for many social problem poor and ordinary
people cannot bear the price rise of essential commodity.
5) Enterprises are mainly responsible for the economic imbalance in the
society.
6) Enterprises also create regional imbalance by developing few regions and
keeping other regions backward.
7) Enterprises attract people from various fields like agriculture, handicraft,
art etc to work as labourer, worker etc. As a result traditional professions
dies.
8) Wastes generated by the enterprises are usually not treated properly and is
left at the mercy of the nature and the sufferers are local inhabitants.
 WHY AND HOW TO START A BUSINESS
Following are the reasons why someone wants to start his own business.

i) Want to be your own.

ii) Demand is very high.
iii) For economic gains.
iv) Status in society.
v) Opportunity to serve society.
vi) Somebody else is doing it successfully.
vii) By thinking of doing something new or better
viii) Somebody has promised to help.
ix) Tired of job or service.

For setting up a business the following preliminary or introductory steps are

needed.

i) Selection of product
ii) Preparation of project report
iii) Acquiring land or plot
iv) Obtaining power and water connection
v) Registration of the unit
vi) Arranging finance
vii) Arranging machinery and equipment
viii) Arranging raw materials
ix) Recruitment of people
x) Planning
xi) Quality
xii) Marketing facilities
xiii) Export promotion opportunities

i)Selection of product: The first decision required to be taken before setting up a

business is the selection of an item for production. This decision is very important
and should be taken after taking into account your personal choice, financial
resources, managerial skills and technical ability. One must find out the market
potential of the item which is proposed to be manufactured.

ii) preparation of project report: Project report is a must before setting up a

business unit. In this report we have to give an idea about the cost to be incurred,
sale, profit and economic viability of the project.

iii) Acquiring land or plot: Next we need a place for setting up the business. We
can arrange land or plot according to the requirement. The land or plot acquired
should be in a place that which is nearer to market, supply of raw material,
transport facility, supply capital etc.

iv) Obtaining power and water connection: Both water and powers are very
essential for any business. We have to arrange these before setting up of the
business. These connections are available on priority-basis to the entrepreneurs.
One has to contact Electricity board for power and Municipal Corporation or local
bodies for water.

v) Registration: Registration for the business in some cases is compulsory while in

other cases optional and voluntary. But it is desirable to get the business
registered in order to avail facilities from the various Government agencies.

vi) Arranging Finance: Finance is the utmost importance for setting up a business
unit. It is mainly because of lack of financial resources that many people have to
give up their plans of starting business. It is therefore important to know that
there are several agencies which provide financial assistance to different business
units. There are commercial banks, regional rural banks, cooperative banks etc.

vii)Recruitment of people: Recruitment and training of skilled and unskilled staff

wherever necessary, should be made keeping in view the job requirements,
availability of workers and financial constraints.

viii) Quality: Quality control and testing of product is most important aspect of
business since success or failure of a product largely depends upon its quality.
ix) Marketing Facilities: The most essential step is marketing. It is the
entrepreneur who has to arrangements for marketing their products. And in this
regard they can take assistance of some external agencies also.

x) Export promotion opportunities: It is better to explore export promotion

opportunities for the products. A number of facilities are provided by the
government in the form of consultancy services, training in export marketing,
export information services etc.
 Entrepreneurial Traits and Skills
Entrepreneurial traits are indispensible(vital) functions of management. According
to a recent study, it was found out that possession of certain traits or
competencies result in superior performance. An entrepreneur may possess
certain traits or competencies and at the same time it is possible to develop these
through training , experience and guidance . Various traits required for superior
performance, they are as follows.

(i)Initiative: There is a popular saying ‘Well begun is half done’. It is entrepreneur

who initiates a business activity. Most of the innovators have got this urge(advise)
to do something different. Entrepreneur basically is an innovator who carries out
new combinations to initiate and accelerate(speed) the process of economic
development.

(ii)Looking For Opportunity: An entrepreneur is always on the look out or

searching for opportunity and is ready to exploit it in the best interests of the
organization.

(III)Persistence(continuity): An entrepreneur is never disheartened by failures. He

believe in the Japanese proverb ‘Fall seven times, stand up eight’. He follows Try-
Try again for overcoming the obstacles th at come in the way of achieving goal.

(iv)Information Seeker: A successful entrepreneur always keep his eyes and ear
open and is receptive(willing to receive favorably) to new ideas which can help
him in realizing his goals. He is ready to consult expert for getting their expert
advice.

(v)Quality Consciousness: Successful entrepreneur do not believe in moderate

and average performance. They set high quality standard for themselves and then
put in their best for achieving these standards. They believe in excellence, which
is reflected in everything they do.

(vi)Commitment to Work: successful entrepreneurs are prepared to make all

sacrifices for honoring the commitments they have made. Whatever they commit,
they take it as a moral binding irrespective of the costs involved.
(vii) Commitment to Efficiency: Top performers are always keen to device new
methods aimed at promoting efficiency. They are keen to evolve and try new
methods aimed at making working easier, simpler, better and economical.

(viii) Proper planning: Formulate realistic and proper plans and then execute
rigorously(strictly)to accomplish the task.

(ix) Problem Solver: Successful entrepreneur take problem as a challenge and put
in their best for finding out the most appropriate solution for the same. They will
first of all understand the problem and then evolve(work out) appropriate
strategy for overcoming the problem.

(x) Self Confidence: Top performers are not cowed down by difficulties as they
believe in their own abilities and strengths. They have full faith on their
knowledge, skill and competence and are not worried about future uncertainties.

(xi) Assertive: An assertive(aggressive ) person knows what to say, when to say,

how to say and whom to say. He believes in his abilities and ensures that others
fall in line with his thinking, aimed at promoting the interests of the organization.

(Xii) Persuasive: Able to successfully convince others to do what he actually wants

from them.

(xiii) Effective Monitoring: Top performers ensures that everything is carried out
in their organization as per their wishes. They ensure regular monitoring of the
working so that the goals of the organization are achieved in best possible
manner.

(xiv) Employee’s Welfare: Future of the organization depends on its employees. If

the employees are dedicated, the organization is bound to perform well. A
successful entrepreneur tries to promote organisation’s interests through
promotion of interests of the workers.

(xiv) Effective Strategist: A successful entrepreneur possesses the ability to

evolve(work out) relevant strategy, aimed at safeguarding or promoting
organisation’s interests. Strategy may be with respect to facing future
uncertainties or challenge s posed by competitors.
 Entrepreneurial skills
The skills which an entrepreneurs include are his ability to deal with situations,
organizations, and social and economic forces as they emerge(come out) from
time to time. The skill to deal with a situation suddenly emerging must be an
essential characteristic of an entrepreneur. The entrepreneur is rarely a master of
the management skill, and yet is usually directly responsible for all aspects of
business. Often he or she has to be the general manager, production manager,
purchasing manager, personnel manager, controller and research organizer for
the business. The entrepreneur therefore has to have an understanding of
marketing, quality control, finance, banking, commercial law, government
regulation and procedures, and human relation as each of them has a vital role on
the health of the enterprise.

Types of skills
Types of skill vary according to location, products, clientele, etc.. In rural areas, a
small enterprise making goods for local consumption based on local raw materials
would need relatively simpler skills. In urban areas, the product, processes,
packaging, advertising have to match with the growing sophistication of consumer
goods, preference of need etc.

Skills for new class of Entrepreneurs

Entrepreneurship till recently in most of the developing countries has been
confined to persons coming from the traditionally trade-oriented families. Now
there is emphasis on new classes of entrepreneurs. These would include women,
tribals and young men from non-traditional families. For women entrepreneurs,
special training facilities have to be provided relating to the special difficulties
faced by them as compared to men. For tribal entrepreneurs, care will have to be
taken that their basic culture, crafts and skills are not materially affected.
The various skill needed are as follows:

. Individual skills

. Functional skills specific to jobs

. Knowledge skills

. Analytical skills

. Problem solving skills

. Negotiation skills

. Out of the box thinking skills

. Business skills

. Management skills

. Behavioural skills

. Learning skills

. Interpersonal skills/ Communicational skills

. Planning and implementatation skills

. Risk management

Group skills

. Ability to work together

. Ability to learn together

. Ability to use task force/ project teams

. Ability to work in unstructured situation

. Ability to work with “tight” resource base

Technical Skills

. Writing

. Oral communication

.Technical business management

. Technology

. Interpersonal

. Listening

. Ability to organize

. Network building

. Management style

. Coaching

. Being a team player

Business Management skills

.Planning and goal setting

.Accounting

.Management

.Control

.Decision making

.Human relations

.Marketing

.Finance
Personal entrepreneurial skills

.Inner control/disciplined

.Risk taker

.Innovative

.Change oriented

.Persistent

.Ability to manage change

Behaviourial skill

.Motivation

.Judgement

.Initiative

.Team working

.Self management

.Trust yourself

.Initiative taking

Communication skills

.Be flexible

.Able to identify an opportunity to communicate

.Don’t blow your own trumpet

.Put your intelligence into words

.Emphasise on the issue

.Communicate well
Listening Skills

. Listen without the intervention of any thoughts

. Pay more attention to others

. Establish rapport

. Actively listen

Soft skill to broaden entrepreneurial capabilities and improve decision-making.

P → Problem solving (judgement, logic, conflict resolution)

E → Ethics (courtesy, honesty, professionalism)

O → Openmindedness (flexibility, open to new ideas, positive outlook)

P → Persuasiveness (intended) ( diplomacy, communication, listening skill)

L→ Leadership ( accountability, management and motivational skill)

E → Educational interests (continual thirst for knowledge and skill development)

 Mind vs Money
Starting an enterprise newly is not an easy task. It is full of challenges . However
for an existing entrepreneur, it is comparatively easy because of the experiences
earned over the years in launching and managing other enterprises. Experienced
entrepreneurs are more careful in making decisions as they shall be able to
foresee the future with more accuracy and ensure that there are no problems.
Existing entrepreneurs shall use mind more than money in launching enterprises
whereas a new entrepreneur shall take the help of money more than mind in
solving entrepreneurial problems.

Simply possessing ideas not create enterprise; it will require money to convert
ideas into activities. Similarly, simply having money shall not create enterprise; it
will require ideas to create enterprise. One has to require both ideas and money
in launching an enterprise. On the other hand, if one has ideas and the ideas are
not suitable, money can refine the ideas.

The most power thing in the earth today is idea. If one has ideas other resources
shall automatically come nearer without many efforts. But it may not be
otherwise, if one has money idea shall not come automatically and if comes it
may not be appropriate. Appropriate ideas are the most important asset which is
not found in every individual. It is the most important tool in the launching and
managing an enterprise.

It is desirable to collect ideas from various sources. The most difficult thing is that
ideas do not come at the time of need. Moreover the most important thing here
is to distinguish between good and bad ideas.

Requirement of fund is a must for any enterprise and for a new enterprise the
requirement is still more as there is no source of revenue. For a new enterprise,
fund may come from different sources, such as personal sources, loans and
advances from bank and financial institutions, etc. of course, availability of land,
building, plant and machinery etc. on credit for a longer period shall be
considered as a source of finance for the enterprise.
 In India, in the process of financial depending, commercial banks had to shoulder
special responsibilities for meeting the financial needs of diverse sectors of the
economy, at various stages of development.

Types of industrial finance

Depending upon the nature of activity, the entrepreneur requires three types of
finance. They are as follows:

➔ Short-Term Finance
➔ Medium-Term Finance
➔ Long-Term Finance

Short-Term Finance: Short-term finance usually refers to funds required for a

period of less than one year. These funds are usually required to meet variable,
seasonal or temporary working capital requirements.

Borrowing from banks is a very important source of short-term finance. Other

important sources of short term finance are trade credit (an arrangement to buy
goods or services on account, that is without making immediate cash payment),
installment credit and customer advances.

Medium-Term Finance: The period of one year to five years may be regarded as
medium- term. Medium-term finance is usually required for permanent working
capital, small expansion, replacements, modifications etc.

Medium-Term finance may be raised by i) issue of shares, debentures, borrowing

from banks and other financial institutions and ploughing back of profits.

Long-Term Finance: The period exceeding 5years is regarded as long-term. Long-

Term finance is required for procuring fixed assets, for the establishment of a new
business, for substantial (extraordinary)expansion existing business,
modernization etc.
Sources of finance

Broadly speaking the various sources from which an entrepreneur can raise funds
are as follows.

1) Internal

A. Paid-up Capital

i) Ordinary shares
ii) Preference shares
iii) Deferred shares
iv) Forfeited shares

B. Reserve surplus

i) Capital reserves
ii) Development rebate reserves
iii) Others

C. Provisions
i) Taxation
ii) Depreciations

2) External

D .Borrowings

i) From banks
ii) From term-lending institutions like IDBI, ICICI, IFCI etc.
iii) From government and semi-government agencies
iv) Others.
 D. Trade Dues and other Current Liabilities

i) Sundry creditors
ii) Others

E. Miscellaneous

All these sources of finance are not available to all the small units. The funds a
small-scale industry can raise depends upon the character of the company, its
productive activity and the substantial uses to which these funds are put –
irrespective of it being a private limited or a proprietary concern. Some of the
uses are:

i) Gross fixed assets: Land, building, plant & machinery- these are by and
large, met out of marketing borrowings or term loans from financial
institutions, including banks.

ii) Working capital: This includes inventories-raw materials, components,

finished goods, work in progress and operating expenses- wages,
salaries, lighting and other running expenses. All these expenses are met
out of commercial bank loans in the form of pledge loans.

iii) Funds are also required for

a) Making loans and advances in the course of day-to-day purchase and

sale operations.
b) Sundry debtors- that is for sale on credit basis.
c) Investments.
d) Building up other assets.
Incentives and subsidies
Entrepreneur in India are offered a number of incentives with their strategic
contributions to economic development. The term ‘incentive’ means encouraging
productivity. There is evidence that people respond significantly to incentives
even in situations where we do not usually imagine their behavior to be rational.

‘subsidy’ denotes a single lump-sum which is given by a government to an

entrepreneur to cover the cost.
 Entrepreneurial success
1. Look for opportunities to do something better than just about everyone else.

2.Accept risk as a necessary evil. It makes for much less competition.

3.Act responsibly to customers, employees and vendors.

4.Goals are not enough. You need a plan and execute the plan.

5.You need to fix the plan as you go. Learn from your mistakes. Most people
don’t.

6.Do not reinvent the wheel. Learn from others – join a business group.

7.Make sure the math works. Plenty of people work hard and follow their passion
but the math doesn’t work. If the math doesn’t work, neither does the business.

8.Make sure that every employee understands and works toward the mission.

9.There are going to difficult times and you need to be resilient; whining is a
waste of time.

10.There will be sacrifices. Work to find a balance so that you don’t become a
financially successful loser. It’s not about the income, it’s about the outcome.
 Entrepreneurial Failure
1.Choosing a business that isn’t profitable

2.Inadequate cash reserves

3.Lack of education in marketing

4.Poor Management.

5.Insufficient capital

6.Location

7.Lack of Planning

8.Lack of experience

9.Over expansion
 Environmental Dynamics and Change
A business is affected by various forces for its existence. It needs a good business
environment to live and grow. Health of a business is affected by a healthy
environment. But the forces or elements in the environment do not remain static.
They are changing in nature. These changes may affect a business in both positive
way and in negative way. Sometimes, a business may gain from such changes and
sometimes lose. An entrepreneur has to be aware of such changes and should be
able to forecast such changes so that the business can be in a position to adjust
itself to meet such changes in future.

Such changes are usually in the field of technology, taste and fashion of the
consumers, change in the level of competition, development of new and better
products, availability of new substitutes and alternative products, availability of
better look products, change of prices of ingredients, change of government
policies and plans, etc. There may be change in demand of a product due to
change in population, change in the composition of population, change in socio-
economic status, change in income, change in educational status, change in
culture, change in the standard of living, change in the lifestyle, change in climate
etc.

All of the above factors somehow affect the business activities of an enterprise.
Prosperity of a business may go down or go up depending on situations. So an
entrepreneur has to keep an eye over such forces to make adjustments in future
so as to keep the business interest of the enterprise high all the time. The
entrepreneur should be in a position to visualize such changes before others.

The world of business is all the times dynamic. A product or service does not
remain in the same position for a longer period. the entrepreneur has to bring
changes to the product or service at frequent intervals depending on the need
and all such changes must be aimed at the betterment of the enterprise.
Maintaining the quality intact, some fashionable changes may be desirable to
retain the customers attached with the product or service. The need, aspiration
and fashion of the people changes from time to time and hence the entrepreneur
has to understand that and act accordingly. If a business is not able to adjust itself
to the changes around it, there may be a negative growth which may lead to the
closure of an enterprise.
 Entrepreneurial Process
Entrepreneurial process is a leadership function which centres round the dynamic
of entrepreneurial growth and change. It is a process comprising several distinct
stages.

i) The first stage in the entrepreneurial process is some change in the

socio-economic environment leading to changes in the every aspect of
life in the country. The change creates needs for new goods and
services.
ii) The second stage is by starting a new venture.
iii) The third process is intrapreneurship. It is the process of extending the
enterprises by exploiting new opportunities through new combinations
of its available resources.
iv) The fourth process is to co-ordinate the various activities to achieve the
entrepreneurial goal.
 Step by step approach to entrepreneurial start up
Entrepreneurial process can be defined as a process of starting a new venture. It
involves all the functions, activities and action to start a small enterprise, which are
as follows:

A) Preliminary step

Under this, an entrepreneur has to develop entrepreneurial competencies. success

in entrepreneurship depends on this step. Majority of the work in entrepreneurship
shall be done in this step.Once the preliminaries are complete, all other activities
shall not be much difficult. This will enrich an entrepreneur to overcome all possible
hurdles in entrepreneurship. Under this step, there is the need of extensive travel,
meeting varieties of people, visiting various places and collecting lot of information
from various sources. This step is time consuming. Activities under step includes:

1. Taking decision to become an entrepreneur.

2. Developing entrepreneurial characteristic

3. Studying business environment.

4. Searching business opportunity.

5.Meeting people and collecting information.

B) Decision making step

Under this , an individual shall take various decisions relating to enterprise and
entrepreneurship. Taking decisions include analyzing information and data,
comparison of the information and making conclusion. Decision s shall be based on
the suitability of the alternatives to the occasion and situation. Instead of taking
the base decision, best suited decisions should be taken. Decisions should be taken
based on the reality and consultation with various experts. Decisions taken are not
usually reverted “hence decisions should be taken carefully. There may be some
provisions for making adjustment or alteration depending on situation in future.
Room for some sort of flexibility may be there to adjust the decision to future
conditions.

1. Selecting business opportunity.

2. Consulting various agencies connected to enterprise such as; DIG, MSME

development institute, banks, consultants, licensing authorities etc.

3. final selection of business opportunity .

4. deciding the size, type, technology, etc of the project.

5. decide the location and survey sites.

6. prepare the preliminary project report.

7. study the project from technical, managerial, financial, marketing and

operational point of view.

8. selection of exact site.

9. decide the product policy, marketing policies, pricing policies.

10. decide the sources of finance.

C) Planning step

After the decision making step there is the need of preparing plans to
implement the decision. Under this an entrepreneur has to carry some
preliminary activities which are essential for establishment of an enterprise.
Here there is need of filing different application with different authorities for
different activities. Some formalities are also required before filing different
applications. Some documents, enclosures etc have to be attached with
application basing on which application shall be considered by the appropriate
authorities, entrepreneurs have to attach copies of preliminary project report
along with application for getting clearances, permissions, license, no objection
etc.
 1. Apply for acquisition of land at the exact site.

2. Apply for provisional registration with the DIG.

3. Apply for no objection certificate and assurance from bankers.

4. Apply for licenses, permissions, and clearances to different authjorities.

5. Apply for loan and arrange capital.

6. Apply for energy connection.

7. Enquire the source of plant and machinery.

8. Prepare plans for the factory buildings.

9. Prepare plans for acquiring plant, machineries, tools, equipments, furnitures,

fixtures,etc.

10. Prepare the detail project report.

D. Implementation step

Here, plans are implemented and actual activities start. Activities shall be carried
on as per the plans prepared. by this time all the permissions, licenses, clearances,
no-objection certificates might be in the hand of an entrepreneur. Actual execution
of plans shall start here. Now the enterprise shall be given life by collecting different
resources and placing them at the appropriate places in the enterprise. This is the
tough task of an entrepreneur and at this stage maximum financial resource shall
be spent. This is supposed to be the foundation of an enterprise.

1. Acquire land.
2. Develop the site.
3. Construct buildings, develop roads and other infrastructure.
4. Place orders for plant and machineries, tools and equipments,
furnitures and fixtures.
5. Arrange electricity and water.
6. Install of plant and machineries and make trial running.
 7. Make recruitment selection, training and placement of manpower.
8. Procure raw materials and other materials.
9. Finalise the marketing channel, distribution policy and decide the
middlemen and their commission etc.
10. Carry on trial production and test marketing.

E. Managerial step

Managerial activities start at the starting of construction of enterprise. That is the

project management. After, the stage is over, the real production of goods and
services shall take place. Starting of commercial production, management of all the
activities shall be done here which includes different management. This will
include; human resource management, production management, financial
management, materials management, safety management, sales management,
marketing management etc. here the entire activities are aimed at the
achievement of goal.

1. Evaluate the field performance of the product and examine the

consumer response.
2. Appoint dealers, wholesalers, retailers, agents, arrange show rooms,
etc.
3. Carry on commercial production.
4. Carry on advertising and marketing activities.
5. Carry on distribution and selling.
6. Manage the enterprise.
7. Create external economies like canteen, hospitals, schools, clubs,
residential facilities etc.
8. Consolidate the marketing and selling network.
9. Ensure growth, cost effectiveness and generate profit.
10. Start repayment of loans and interest.

Decision for entrepreneurial start up

When a multifaceted (many-sided) environment confronts (oppose) the
unemployed persons, if they posses strong orientation towards entrepreneurship
and growth, the most important decision would be to start a business. Instead of
playing the subservient (subordinate) role of an employee/worker , he can enjoy
the sovereign (independent) status of being the owner controlling the affairs of his
enterprise. An entrepreneur possessing the keen aptitude (inherent ability) for
setting up a business unit should formulate a business plan and take a number of
steps to give shape to his business idea. He is to prepare project report and obtain
various approvals and sanctions.

Different types of entrepreneurs

The different types of entrepreneur are as follows.

1. Innovating Entrepreneurs: An innovating entrepreneur is one who introduces

new goods. Inaugurates new method of production, discovers new market,
and recognizes the enterprise. It is important to note that such entrepreneurs
can work only when a certain level of development is already achieved, and
people look forward to change and improvement.

2. Imitative Entrepreneurs: These are characterized by readiness to adopt

successful innovations inaugurated innovating entrepreneurs. Imitative
entrepreneurs don’t innovate the change themselves, they only imitate
techniques and technology innovated by others.

3. Fabian(cautious ) Entrepreneurs: Fabian Entrepreneurs are characterized by

very great caution and skepticism(disbelief, mental rejection ) in
experimenting any change in their enterprises. They imitate only when it
becomes perfectly clear .

4. Drone(a low continuous noise which doesn’t change it’s not, ex: bee )
Entrepreneur: These are characterized by a refusal to adopt opportunities to
make changes in production formulae even at the cost of severely reduced
returns relative to other like producers. Such entrepreneurs may even suffer
from losses but they are not ready to make changes in their existing
production methods.

Some other types of entrepreneurs are as follows.

1. Solo operators: These are the entrepreneurs who essentially work alone and,
if needed at all, employ a few employees. In the beginning, most of the
entrepreneurs start their enterprises like them.

2. Active partners: Active partners are those entrepreneurs who start/carry on

an enterprise as a joint venture. It is important that all of them actively
participate in the operations of the business. Entrepreneur who only
contribute funds to the enterprise but do not actively participate in business
activity are called simply ‘partners’.

3. Inventors: such entrepreneurs with their competence and inventiveness

invent new products. Their basic interest lies in research and innovative
activities.

4. Challengers: These are the entrepreneurs who plunge(to move or fall

suddenly) into industry because of the challenges it presents. When one
challenge seems to be met, they begin to look for new challenges.

5. Buyers: These are those entrepreneurs who do not like to bear much risk.
Hence, in order to reduce risk involved in setting up a new enterprise, they
like to buy the ongoing one.

6. Lifetimers: These entrepreneurs take business as an integral(necessary or

imp.) part of their life. Usually, the family enterprise and businesses which
mainly depend on exercise of personal skill fall in this type of entrepreneurs.

Functions of an Entrepreneur
An entrepreneur performs all the functions necessary right from the genesis of an
idea up to the establishment of an enterprise. These can be listed in the following
sequential manner:

→Idea generation and scanning of the best suitable idea.

→Determination of the business objectives.

→Product analysis and market research.

→Determination of form of ownership/organization.

→Completion of promotional formalities.

→Raising necessary funds.

→Procuring machine and material.

→Recruitment of men.

→Undertaking the business operation.

Broadly entrepreneurial functions are divided into three categories

(i) Risk Bearing ii) Innovation iii)Organisation

Distinction between an Entrepreneur and a Manager

1. Motive: The main motive of an entrepreneur is to start a venture by setting
up an enterprise. He understands the venture(risk) for his personal
gratification(to get what someone want immediately).But the main motive
of a manager is to render his services in enterprise already set up by
someone else.

2. Status: An entrepreneur is the owner of the enterprise.

A manager is the servant in the enterprise owned by the entrepreneur.

3. Risk-bearing: An entrepreneur being the owner of the enterprise assume all

risks and uncertainty involved in running the enterprise. A manager as a
servant does not bear any risk involved in the enterprise.

4. Rewards: The reward an entrepreneur gets for bearing risks involved in the
enterprise is profit which is highly uncertain. A manager gets salary as reward
for the services rendered by him in the enterprise. Salary of manager is
certain and fixed.

5. Innovation: Entrepreneur himself thinks over what and how to produce

goods to meet the changing demands of the customers. Hence, he acts as an
innovator also called a ‘change agent’. But, what a manager does is simply
to execute the plans prepared by the entrepreneur. Thus, a manager simply
translates the entrepreneur’s idea into practice.

6. Qualifications: An entrepreneur needs to possess qualities and qualifications

like high achievement motive, originality in thinking, foresight, risk bearing
ability and so on. On the contrary a manager needs to possess distinct
qualifications in terms of sound knowledge in management theory and
practice.

Identifying The Business Opportunity

After getting motivated to be self employed, an entrepreneur has to search
business opportunities. Business opportunity is an idea in the mind of an individual
based on some valuable thought. Such ideas doesn’t come automatically, one has
to search for it. There are a lot of business opportunities in the world of business
but not visible to everyone. They are visible to only those who possess a right vision
(ability or mental image) and thought different from others.

A person has to move from place to place, meet different persons like, producer,
customers, dealers, advertisers, transporter and various persons associated with
different types of businesses. Interaction with them shall provide a lot of
information particularly on matters relating to taste, fashion, likeness, dislikeness,
requirement, desire, needs, satisfaction, dissatisfaction, expectation, problems etc.
Sharing their experiences shall provide some valuable information. One has to
move around the market to interact with the various people and collect
information which can be used to create ideas on different business opportunity.
Apart from that one has to go through various magazines, journals and other
publications. Such searching activities shall enable an individual to germinate (start
growing) many new ideas which can be termed as business opportunities.

A prospective entrepreneur has to look at the resources available in the locality

like, natural resources, marine resources, agricultural resources, mineral resources,
etc. and think if they can be used to carry on some business activities. An
entrepreneur has to meet a variety of traders, producers, employees, competitors,
producers and dealers of various alternatives and substitute products to know
various things related to different business. Employees of various organizations can
provide valuable information and trade secrets on which various business
opportunities can be thought of.

One can study the government policies and plans on various products, industries,
services, imports and exports of different products and services. One can think of
some new products and services or improvement over some existing products and
services available. There is need of studying population, composition of population,
their socio economic status, standard of living, occupation, pattern of
consumption, educational status, cultural background, taste, fashion, custom,
readiness to accept changes, etc.

One can think of ideas on ancillary products. Import substitutes, export potential
etc. one has to very careful on the change in government policies and plans, change
in business environment, change in technology, foreign collaborations,
development of new substitutes, change in the economic conditions of the country,
etc. while searching a business opportunity.

Business Opportunities In Various Sectors

It has been discussed earlier, business opportunity is nothing but an attractive
project idea in the mind of an entrepreneur. The world is full of opportunities.
Business opportunities are time bound and an opportunity does not remain an
opportunity forever. It is just a scope for conducting business. It is all the time
desirable to forecast business opportunities rather than searching one. Sometimes
it may be desirable to create a business opportunity by own efforts rather than
searching one.

There are many business opportunities waiting to be tapped by potential as well as

existing entrepreneurs. The broad classification of such opportunities is as follows:

1) Resource based opportunities

➔ Industries based on mineral, agricultural, marine and forest resources
2) Linkage related opportunities
➔ Industries arising out of various types of linkages such as backward and
forward integration from existing lines of manufacture.
3) Export/import related opportunities
➔ Export oriented activity
➔ Import substitution
4) Market shift or growth related opportunities
➔ Consumer and industrial products that have growth potential as a result of
increased population or changes in composition of population, purchasing
power, changes in life styles, etc.

5) Special product opportunities

➔ Research and invention-based products.
➔ Skill/knowledge based products
➔ Products based on institutional, government purchases, hospital, schools.
Etc.
➔ Foreign collaboration

6) Service sector opportunities

➔ Household repair and maintenance
Specifically, the potential sectors for business opportunities are: green business,
biotechnology, event management, IT enable services, food processing mineral
water, courier services, insurance, Telecommunication, Travel and Tourism, plastic
etc. All these sectors provide opportunities for entrepreneurs.

Formalities for setting up small enterprises in manufacturing and

services
Selection of a business opportunity is influenced by the strength, weakness,
likeness, dislikeness, preference etc. of an entrepreneur. Searching a business
opportunity is an important task the entrepreneur has to do. Selection of a business
opportunity comes only when one has many opportunities in hand for comparison.
So, one has to collect a lot of information on various business opportunities and
compare them to find out the best among them. It is not important to select the
best opportunity but it is more important to select the best suited business
opportunity. For this, the information has to be analyzed minutely from different
angles.

While selecting a business opportunity, the negative things shall be visible first than
the positives and in some cases the positive things shall be visible first than the
negatives. This is because of our negative and positive thoughts and attitude. A
person has to ensure that the negative thoughts do not overpower the positive
thoughts and vice versa.

All the merits and demerits, opportunities and threats, negatives and positives
should be properly analyzed before taking a final decision.

An entrepreneur has to study the possibility of creation of new market, new

customers, new competitors, new substitutes, new alternatives etc. which are
likely to affect the prospect of the business opportunity selected. After that there
is the need of final selection of business opportunity which shall involve the
following:

1. Selection of industry.
2. Selection of product.
3. Selection of project.
4. Selection of technology.
5. Amount of investment.
6. Planning the implementation of the business opportunity.
7. Selection of location.

1.Selection of industry: There is all the time rise and fall in any business and no
industry is free from this element. If there is a rise, the fall may be just behind and
vice versa. sometimes the fall may be longer than the rise or the rise may be longer
than the fall. The success of an entrepreneur lies in making the rising period longer
and falling period shorter or converting the falling period into a rising period. This
depends on the ability of the entrepreneur. Choice of an industry by an
entrepreneur usually is influenced by the likeness, dislikeness, preferences,
competence, etc. of an entrepreneur. Keeping in mind the above, an entrepreneur
has to decide the industry on which to make a business. There may be various
choices for an entrepreneur, such as; consumer goods industry, producer goods
industry, intermediate goods industry, etc. More specifically, one may choose from
a host of industries like; iron & steel, leather, food processing, apparel, electronics,
hotels, entertainment, transport, automobile, warehousing, electrical,
pharmaceutical, cosmetic, health care, gems and jewelry, etc. Before selecting an
industry to enter into , one has to study the present position in the country as well
as in another countries and the expected future of the industry. Decision should be
made keeping in mind the amount of investment, rate of return on
investment,level of competition, scope of growth, etc.

2. Selection of product: After the selection of industry, the entrepreneur has to

decide the product to be produced or service to be rendered. Selection of the
product is the most crucial task for an entrepreneur. It will include study analysis
and comparison of information before taking a decision. Here, an entrepreneur has
to decide the exact product to be manufactured. Suppose one has decided to enter
into electrical industry the choice product may be very wide, such as; fan, iron, bulb,
cable, switches, tube lights, inverters, UPS, heaters, air coolers, electric cooker, etc.
Majority of the entrepreneurs select products they like or prefer. But, here there is
the need of scientific selection based on realistic information.

While taking a decision on the selection of a product, one has to analyze the govt.
policies, level of competition, possibility of new entrants, formalities for license and
permissions, etc. The product going to be selected should preferably be market-
friendly, consumer-friendly, trader friendly, society friendly, and environment
friendly. Market survey is a most before deciding a product. It is also essential to
study the number of alternatives and substitutes products available and their
present position in the market. The aim of product selection should be to achieve
easy marketability with a reasonable profit. Hence an easy entry into the market is
essential for a new entrant to consolidate the market position later. Many
entrepreneurs are influenced by the different concessions, subsidies, incentives,
preferences, etc. extended by government and decides products accordingly. Such
a force behind selection must be supported by independent positive ingredients,
so that, if such facilities are stopped or withdrawn, the enterprise should not suffer.

3.Selection of project: An entrepreneur has to decide the type and size of project
depending on the nature of product, type of product, size of product, volume of
production, availability of fund, availability of raw materials, availability of
technology, import of plant and machineries, govt. restrictions, license, permission,
etc. The project should not hamper the existence of other projects otherwise there
may be strong resistance from different sections. Selection of a project also
depends on the facilities required like land, water, rail, road, waste disposal,
affluent treatment, electricity, physical facilities etc. The extent of environment
pollution may be a matter of concern while deciding the project.

An entrepreneur may decide the ownership pattern of the project, such as, sole-
proprietorship, partnership, private limited company, etc. change in the
technology, change in the taste and fashion and risk involved in the project may
also be taken into account while deciding a project. It is desirable for an
entrepreneur to consult experts and make techno-economic feasibility study of the
project. For a new entrepreneur t is essential to visit some ongoing projects to gain
some practical knowledge for the implementation of the project.

4.Selection of technology: selection of a technology is a decision to be taken only

after the consultation with various experts. The question of selection of technology
arises when alternative technologies are available for an entrepreneur. The
entrepreneur may select the technology based on the availability, performance,
efficiency, cost effectiveness, amount of investments, savings, repair and
maintenance, availability of spare parts, trained manpower to run the technology,
profitability etc. Rate of change in technology, impact of new technology,
appropriateness of the technology to environment ay be studied properly.
The technology to be selected should be environment-friendly, consumers-
friendly, government-friendly, social-friendly, entrepreneur-friendly, market-
friendly, investment-friendly, product-friendly. However amounts of investment
plays an important role in the selection of technology.

5.Amount of investment: selection of a business opportunity largely depends on

the amount of finance available for the investment in the project. Here finance
means owners fund and borrowed funds from banks and financial institutions. The
determination of amount of investment depends on the type of industry, type of
product, type of technology, volume of production, size of the project etc. An
entrepreneur has to make an estimate for the amount of investment to be made
for the performance of each and every activity for the completion of the project
and running it successfully. There may be the provision for contingencies and
increase in the cost of inputs due to price rise, inflation and passage of tie. The
entire amount of estimate made by the entrepreneur may not be required at a time
while launching the project. The requirement may be spread over a long period of
time that is from the planning stage till the completion of the project where the
project shall be able to generate more fund than its day to day requirement. The
entrepreneur has to prepare a list of expenses, time of their requirement and the
sources of financing them so that fund doesn’t remain idle and fund is readily
available when the requirement comes.

6. planning the implementation of business opportunity: After the selection of a

final business opportunity the entrepreneur has to decide the plan for the
implementation of the business opportunity. The entrepreneur might have worked
on few business opportunity on which information have been collected and
possibility was being worked out. A comparative study of different business
opportunity will enable the entrepreneur to select the best suited business
opportunity on which the entrepreneur shall start working the plan. Here planning
is nothing but deciding in advance the activities to be performed in a systematic
manner to encase the business opportunity. This planning will enable the
entrepreneur to go into the deeper to see that the business opportunity selected
is alright in every respect. Here an entrepreneur ay take steps for the establishment
of an enterprise. After that the entrepreneur has to make a tecno-economic
feasibility study and market survey to prepare a preliminary project report which
has been discussed in details later on.

7. Selection of location: The first step in the implementation of business plan may
be the decision relating to the location of the project selected and decision relating
to its layout. An industry can be located anywhere but it is not likely have a full life
and may meet on timely death. An industry lives on the support of many facilities
and amenities which may not be available everywhere and making them available
shall be a costly affair for an entrepreneur. So an industry may be located at a place
where it is likely to derive maximum benefits and facilities. Industries may be
located at a place where the cost of production and distribution shall be
comparatively less and organization shall be able to cater the aximu number of
customers.

Environmental pollution and allied regulatory and non regulatory

clearances for a new venture promotion in SME sector
Environment pollution by industrial activities is a major concern for all the
government around the world. In developing and under developed countries,
environment pollution has become a threat for all. Almost all the countries are
strict on regulating industrial pollution to protect environment. Different types of
industries cause different types of environment pollution and accordingly, pollution
control measures have to be followed to suit the environment. The guidelines, rules
and regulations are prescribed by government and to enforce them Pollution
Control Broad has been created. They are located at all the important locations
throughout the country. Three acts have been passed with a set of rules and
regulations to be followed by all the industries. They are:

1) The Water (prevention and control pollution) Act, 1974,

2) The Air (prevention and control pollution Act, 1981, and
3) The Environment (protection) Act, 1986.

For the sake of environment pollution, industries are classified into three categories
depending on the products they manufacture; such as,

8. Red category (refers to the highly polluting industries)

9. Orange category (refers to medium level of polluting industries)
10. Green category (refers to non-polluting industries)

1. Red category: Pollution control board puts maximum restrictions on the red
categories of industries where they have to follow a number of restrictions and
adopt a large number of pollution control measures.

Ex: Iron and steel, power, aluminum, cement, cotton, textile, leather, paper,
fertilizer, chemical, etc.

2. Orange category: This category of industries causes medium level of pollution.

Hence are given less importance so far pollution control measures are concerned.
Ex: Bricks, food processing, hotels, pharmaceuticals, soap and detergent, hospitals
etc.

3.Green category: This category of industries is non- polluting or very little polluting
in nature. That is why they are normally not given much importance.

Ex: Floor mills, fabrication units, apparel manufacturing, cinema halls, software
industries, cosmetic, jewelry, printing press etc.

Pollution control board has classified industries into three categories such as: small
scale, medium scale and large scale industries depending on the amount of
investment in such industry. If the amount of investment is up to Rs.60 lakh, it is a
small scale industry. From Rs.60 lakh to 5 crore it is medium scale industry and
beyond rupees 5 crore investment, it is a large scale industry. Pollution control
measures differ depending on the class of industry.

Therefore, an entrepreneur is required to get the following clearances before the

proposal is presented for getting final registration:

1. A no objection certificate (NOC) should be obtained from the state pollution

control board before commencement of construction activity.
2. The industry that require water and would affect effluent (liquid waste)
disposal, a no objection certificate (NOC) should be obtained from the state
pollution control board before commencement of construction activity.
3. For units functioning outside the industrial area, permission has to be sought
from the Municipal Corporation or equivalent bodies.
4. In case of private agricultural land is purchased for the project, the land
would have to be rezoned as industrial zone. Permission to convert such
agricultural land to industrial area would have to be obtained from the local
office of the directorate of town and country planning before the actual start
of the construction.
 5. For registration and licensing of a boiler ( a device that heats water by
burning gas or oil) safety clearance of the chief electrical inspector and the
chief inspector of boilers are required before commencing operations with
electrical and boilers respectively.
6. For registration as a 100 percent export-oriented unit (EOU) which can enjoy
many additional concessions the clearance of the development
commissioner of the export processing zone (EPZ) I required.
7. In the enterprise wishes to offer equity shares to the public, the clearance of
the securities exchange board of India (SEBI) has to be taken.

All the above clearances must be submitted while applying for final registration of
the enterprise. Then the entrepreneur will have to take necessary steps to
physically implement the project.

What is Business Plan?

Business plan is the estimate of activities to be performed by an entrepreneur in
future for the purpose of establishment of an enterprise. They may include decision
made by entrepreneur relating to the following:

1. What to produce?
2. Where to produce?
3. How to produce?
4. How much to produce?
5. Where to market?
6. How to market?
7. How much money shall be invested?
8. How much profit shall be earned?
9. When to start the project?
10. When to start production?

When answers to the above questions are written down in paper, it becomes a
business plan. When this plan is written down in a systematic manner, it becomes
a project report. Such a business plan or project report has to be shown to various
individuals and authorities to get their opinion, permission, consent, clearance,
license etc.

Types Of Business Plan

The business plan or project report may be of two types. One is the brief plan and
the other is the detail plan. The brief plan is prepared first and is known as the
Preliminary Project Report (PPR). Copies of the PPR has to be submitted by an
entrepreneur to various individuals and organizations particularly govt.
organization to get; certificate of registration, license, permission, clearance, land,
electricity, water, raw materials, loans, etc. PPR is a brief report of an enterprise
and is the mirror of the project covering almost all aspect of an enterprise. One can
get a clear picture of the proposed project by going through the PPR. The detail
plan is known as DPR (Detail Project Report) which contain details of each and every
component like its specification, size, capacity, strength, power, function etc.

It is all the time desirable that the entrepreneur personally prepares the Business
Plan of the enterprise. Decision of the entrepreneur in almost all the components
is essential for better implementation of the enterprise.

Business plan
A business plan is a brief summary of a project describing the expected inputs and
outputs like finance, manpower, materials, machinery, technology, expenses,
production, profits, sales etc. of a project before the project is actually
implemented. A business plan is a rough estimate of the project as envisaged
(desirable possibility in the future) by the entrepreneur. It is a short description of
the project by the entrepreneur. Readymade project reports are also available in
the form of book which helps an entrepreneur to prepare business plan.

Business Plan Format

 1. Introduction
A. Information about the entrepreneur:
Name________________________ Date of Birth ___________________
Address______________________________ Age _____________
_______________________________ Sex______________

Telephone No.________________________ e-mail:___________________

Present monthly income: RS._________________________________

Educational Qualification:____________________________________

Work experience: ____________________________________________

Category: SC/ST/Ex-military/NRI/ physically handicapped/

General/: _________________

B. Information about the product/project:

Product:_____________________________________________________
Location of the project:_________________________________________
Type of organization:___________________________________________
Name of the firm:______________________________________________
General information about the product:
(under this section the entrepreneur has to write the details of the product;
like its uses, its quality, size, specification and other details including its
application, advantages over other similar products, etc.)

2. Market potential

Under this section the entrepreneur has to mention the area over which his
product may be sold. He has to mention the present demand of the product in the
area division-wise with quantity and value in a tabular manner. He has also to
mention the supply position in quantity and their sources of supply into the areas
with quantities in tabular form.)
 3. Basis of presumption

(Under this section, the entrepreneur has to mention the following details:

a) The average working hour per day, per month and per year have to be
mentioned.
b) When the plant will operate in its full capacity has to be mentioned.
c) What will be the pay back period of the term loan may be mentioned.
d) How much percentage of margin money shall be provided by the promoter
may be stated. Usually the entrepreneur invests 30% to 35% of the entire
fund from own pocket and the rest may be obtained on loans from banks
and the financial institutions.
e) The rate of interest for the long term loan as well as working capital loans
may be stated.
f) The cost of land and building has to be mentioned as per the prevailing rates.
The cost of land differs depending on the area but the cost of building is
usually fixed on the basis of square feet area. If the factory shall be placed in
a rented shed, it may also be mentioned here.)

4. Implementation schedule

Under this, the entrepreneur has to mention the time to be taken for the
completion of the project. The detailed calculation of time to be taken for each
activity may be mentioned.

For example

a. Preparation of project report,

Selection of site, registration ………………....................................... 2month

b. Sanction of loans ……………………………………………………………………… 3months

c. Construction of building,

Procurement of machinery,
 Equipments & installation ………………………………………………………… 9 months

d. Arrangement of utilities,

Like, electricity, water, etc. ………………………………………………………… 3 months

e. Procurement of raw materials,

Recruitment of labor and staff …………………………………………………1-1/2month

f. Commissioning of plant and

Trial production .........................………………………………………………….1/2 month

Total time required = 19 months

5. The entrepreneur has to mention the production programme of the unit

per annum.

Example

Items Total quantity Sales volume Capacity Utilization

Per year per year(Rs.)

A 85 tonne 49,00,000 100%

B 68 tonne 26,12,000 95%

C 10,000 units 35,00,000 100%

D 25,000 litres 62,00,000 100%

E 15,000 metres 73,50,000 100%

6. Technical Details
(The entrepreneurs has to mention all the technical details of the project including
the technical details of the project including the details of manufacturing process,
quality and standard, power requirement, extent of pollution of air, water, sound,
etc. pollution control measures, energy, conservation measures, affluent disposal,
etc).

7. Financial Details

(Under this, the entrepreneur has to mention the amount of investment needed
on various items to arrive at the total capital required for the project. The items to
be shown are given as under :)

Fixed Capital

A. Land and Building

Area Value

i) Land ….… …..…

ii) Building ……. ……..

(For building Rs.840 per square feet for ACC roof and Rs.900 per square feet for
RCC roof is the present standard of valuation.)

B. Machinery and Equipment

(Under this, the entrepreneur has to mention the name of the machineries and
equipments, their qualities, quantity, price, total value and the name and address
of the supplier,etc. )

Ex:
Sl. Description of No. Price Total Name and
no of mach. & equips. required rate value addresses of
. th e suppliers

1. ….. ….. … … …..

2. ….. ….. … … …..

3. ….. ….. … … …..

4. ….. ….. … … …..

5. ….. ….. … … …..

6. ….. ….. … … …..

Total value in Rs………………..

Add installation and electrification charges i.e. 10% of the value of plant &
machinery Rs..... = Rs…….

c. Miscellaneous Fixed Assets:

1. Tools and Tackles Rs………..

2. Furniture Rs………..

3. office equipments Rs………..

Total Rs……….

Total fixed assets = A+B+C

D..Preliminary & Preparative Expenses

(This includes the amount to be spent by the entrepreneur to get registration,

license, permission, security deposits, travelling and allied expenses etc. This also
includes the charges payable to consultants, architect, etc. The entrepreneur has
to mention the details of expenses on each item and arrive at the total figure.)
Working Capital:

(a) Raw Materials

(Under this different raw materials to be used for production per month may
be-mentioned with their respective values with their respective values )

Sl Items Total monthly Value in Sources

No. requirement Rs.

1. ….. ….. ……. …….

2. ….. ….. ……. …….

3. ….. ….. ……. …….

4. ….. ….. ……. …….

Total raw materials required per month Rs…………………………

(b) Salaries & wages of labor/staff per month:

(The entrepreneur has to mention the name of the posts, number of persons
needed and salary payable per month in the following manner)

Sl No. Name of the post No. of person Rate per month Total expenses

1 Manager 01 --- ---

2 Supervisor 02 --- ---

3 Skilled workers 18 --- ---

4 Unskilled workers 36 --- ---

5 Clerk/Accountant 04 --- ---

6 Sales Representatives 06 --- ---

7 Store-keeper 01 --- ---

8 Peons 02 --- ---

9 Watchman 03 --- ---

Total Rs. …………………………………………………...

(C) utilities: (per month)

Sl. No. Particulars Monthly Monthly

Requirement(QTY) Expenses

1. Electricity ……. …..

2. Water ……. …..

3. Coal ……. …..

4. Oil ……. …..

5. LPG ……. …..

The electricity charges are calculated as under;

Total horse power of machineries X .75 = KW per hour, per day = 8hours

Per month = 25days x 8hours = 200 hours.

Total electricity consumption = 200 x K/V of electricity per hour x rate per KW.

(D) Other Contingent Expenses:

1. Repair and maintenance @ 1% of the

cost of machineries and equipments Rs. …………………………………

2. Transportation expenses Rs. …………………………………

3. Consumable stores Rs. …………………………………

4. Telephone Rs. …………………………………

5. Postage & stationery Rs. …………………………………

6. Advertising & publicity Rs. …………………………………

7. Insurance charges Rs. …………………………………

8. Rent Rs. …………………………………

The total working capital per month shall be a+b+c+d.

If the time taken by the operating cycle to convert cash into cash once again in
three months, then, the enterprise needs working capital for three months. So
the total working capital per month shall be multiplied by three.

8. Total capital investment/cost of the project:

(a) Working capital p.m. x 3 = Rs……………………..
(b) Fixed capital = Rs……………………..
(c) Preliminary expenses = Rs……………………..

Total cost of the project = Rs…………..………..

9. Cost of production per annum:

 (a) Working capital p.m. x 12 = Rs…………………..
(b) Depreciation:
(i) Plant & Machinery@10% = Rs………………….
(ii) Building @ 5% = Rs…………………..
(iii) Miscellaneous fixed assets @ 20% = Rs…………………..
Total = Rs…………………..

(c) Interest per annum on the total

Investment, say @ 15% = Rs………….……
Total cost = Rs…………………

10. Turnover per annum

Sl. No. Item Quantity Value in rupees

1 A 1250 tonnes 57,80,000

2 B 6500 tonnes 3,09,00,000

3 C 3450 tonnes 8,95,00,000

4 D 4,56,000 units 5,65,00,000

5 E 2,50,000 litres 7,42,00,000

Total 25,68,80,000

11.Profit before tax:

Turnover per annum in rupees – Cost of production per annum

= profit before tax.

12. Breakeven point:

BEP = Total Fixed cost/ Total fixed cost + profit X 100

13. Profitability ratio:

Profitability = profit/Turnover X 100

14.Rate of return on investment:

R = profit / total investment x 100

15.(a) List of suppliers / sources of raw materials:

i. _______________________
ii. _______________________
iii. ______________________________

(b) List of suppliers of plant & machineries, tools & equipments:

i. _____________________________

ii _____________________________

iii _____________________________

16. Name of banks and branches having financial transactions:

i. _______________________________
 ii. _______________________________
iii. _______________________________

17.Names and addresses of the Referees:

i. _________________________
ii. _________________________
iii. _________________________

Place:_________________

Date:_________________ Signature of the entrepreneur.

Determining Bankability of the project

Project report or business plan prepared by an entrepreneur has to be submitted
to different agencies for different purposes like; granting of registration, issue of
license, getting clearance, getting no objection certificate, getting assurance for
finance etc. The project report should be able to answer all the questions the
evaluators want to know. The answers must satisfy the evaluators. The project
report is evaluated from technical, financial, managerial and marketing point of
view. The figures mentioned in the report should be realistic and should be based
on some logic which has to be mentioned in the project report in sort.

Different agencies shall evaluate the project report from their point of view and the
persons evaluating are likely to be experts in the matter. Licensing authorities shall
evaluate the project report from technical and social point of view, banks shall see
it from commercial and viability point of view, local authorities shall see it from
environment point of view, etc.

The major evaluator of the project report is the bank who evaluates the project
report from various angles for the safety of their investment. They analyse the
project from the financial viability point of view. Sometimes, banks take the opinion
of technical experts to confirm the technical viability of the project. They must be
assured that the project shall generate adequate revenue for the timely repayment
of loan and interest thereof. For the security of their investment they ensure some
collateral securities against the loan.

Evaluation of a project report is usually based on;

1. Technical appraisal
2. Financial appraisals
3. Marketing appraisal
4. Promoter appraisal
5. Social appraisal
6. Environment appraisal

Institutional Support For SME

 The importance of the small-scale sector, a strong institutional network has been
evolved for the promotion of small industries in the country. The institutional
network can broadly be classified as

i) Central level institutions/agencies

ii) State level institutions/agencies

Central level institutions/agencies

1. National Small Industries Corporation Limited (NSIC)

The national small industries corporation limited (NSIC), an enterprise under the
Union Ministry of Industries, was set up in 1955 to promote, aid and foster (take
care of) the growth small scale industries in the country. NSIC provides a wide range
of services, predominantly promotional in character to small scale industries. Its
main functions are:

➔ To provide machinery on hire-purchase scheme to small scale industries.

➔ To provide equipment leasing facility.
➔ To help in export marketing of the products of small scale industries.
➔ To participate in bulk purchase programme of the government.
➔ To develop prototype of machines and equipments to pass on to small scale
industries for commercial production.
➔ To distribute basic raw material among small scale industries through raw
material depot.
➔ To impart training in various industrial trades.
➔ To set up small scale industries in other developing countries.
➔ To undertake the construction of industrial estates.

2. Small-scale Industries Board (SSI Board)

The SSI board was constituted in 1954 to facilitate the coordination and inter-
institutional linkages for the SSI sector. The board is an apex advisory body
constituted to render advice to the govt. on all issues pertaining to the SSI sector.

The Board broadly operates in the following areas.

➔ Policies and programmes

➔ Development of industries in a specific region such as the North East
➔ Ancillary development, quality improvement and marketing assistance
➔ Credit facilities, taxation and modernization
➔ Industrial sickness.

3. Small Industries Development Organisation (SIDO)

SIDO is a subordinate office of the department of SSI and ARI. It is an apex body
and nodal agency for formulating, coordinating and monitoring the policies and
programmes for promotional and development of small-scale industries.
Development Commissioner is the head of the SIDO.

The main functions of SIDO are classified into (i) co-ordination, (ii) industrial
development, and (iii) extension.

Functions relating to co-ordination

➔ To evolve ( to develop gradually) a national policy for the development of

small scale industries.
➔ To co-ordinate the policies and programmes of various State Governments.
➔ To co-ordinate the programmes for the development of industrial estates.
Functions relating to industrial development

➔ To reserve items for production by small-scale industries.

➔ To render required support for the development of ancillary units.
➔ To collect data on consumer items imported and then, encourage the setting
of industrial units to produce these items by giving coordinated assistance.

Functions relating to extension

➔ To provide consultancy and training services to strengthen the competitive

ability of small-scale industries.
➔ To render marketing assistance to small-scale industries to effectively sell
their products.
➔ To provide assistance in economic investigation and information to small-
scale industries.

4. Khadi and Village Industries Commission (KVIC)

The KVIC is a statutory (decided or controlled by law) body created by an act of

parliament. It deals with planning, promotion, organization and implementation of
the programme for the development of khadi and other village industries in the
rural areas in coordination with other agencies engaged in rural development
wherever necessary. KVIC is entrusted (to give someone a duty) with the task of
providing financial assistance to institutions or persons engaged in the
development and operation of khadi and village industries and guide them through
supply of designs, prototypes ( the first example of something ex- machine or
industrial product), and other technical information.

5. Industrial Estates
Industrial estates is yet another institutional measure to promote industrialization
in the country. In India, industrial estate have been utilized as an effective tool for
the promotion and growth of small-scale industries. They have also been used as
an effective tool to decentralize industrial activities to rural and Back-ward areas.
Industrial states are also known by different names, e.g.,Industrial region, industrial
park, industrial area, industrial zone, etc.

Objectives of Industrial Estates

The main objectives of the establishment of industrial estates are:

(i) To provide infrastructure and accommodation facilities to the

entrepreneurs.
(ii) To encourage the development of small-scale industries in the country.
(iii) To decentralize industries to the rural and backward areas.
(iv) To encourage ancillarisation ( ) in surrounding major industrial units.
(v) To develop entrepreneurship by creating a congenial ( ) climate to
run the industries in these estates/areas/townships, etc.
6. Small Industries Service Institutes (SISIs)

The small industries service institutes are set up to provide consultancy and training
to small entrepreneurs. There are 28 SISIs and 30 branch SISIs set up in state capital
and other places all over the country.

The main functions of SISIs include:

➔ To serve as interface between Central and State Governments.

➔ To render technical support services.
➔ To conduct entrepreneurship development programmes.
➔ To initiate promotional programmes.

The SISIs also render assistance in the following areas:

➔ Economic Consultancy/Information/ EDP Consultancy

➔ Trade and market informations.
 ➔ State industrial potential survey.
➔ District industrial potential survey.
➔ Workshop facilities.
➔ Training in various trade / activities.
7. The National Science and Technology Entrepreneurship Development
Board (NSTEDB)

Established in 1982, by the Government of India under the Department of Science

and Technology. The major objectives of (NSTEDB) are as follows:-

➔ To promote and develop high-end entrepreneurship for S & T manpower as

well as self-employment by utilizing S & T.
➔ To facilitate and conduct various informational services relating to
promotion of entrepreneurship.
➔ To act as a policy advisory body with regard to entrepreneurship.
8. National Productivity Council (NPC)

NPC is an autonomous institution functioning under the overall supervision of the

Ministry of Industry, Government of India. The primary objective of NPC is to act as
a catalyst ( something that causes an important event to happen) in enhancing the
productivity of all sectors of the economy, including industry and agriculture. The
Director General of NPC is the Chief Executive Officer, dealing with the day-to-day
management of the council.

NPC is active in the field of consultancy and training and has a number of specialized
divisions to provide tailor-made solutions to agriculture and industry. These
divisions manned by trained consultants, deal with issues related to industrial
engineering, plant engineering, energy management, human resource
development, agriculture and so on. NPC also coordinates the Annual Productivity
Awards instituted by the Ministry of Industry and the Ministry of Agriculture for
various sub-sectors of the economy.

9. National Institute For Entrepreneurship and Small Business Development

(NIESBUD)
The NIESBUD was set up at okhla (near Delhi) by the government of India to serve
as the apex body for the development of small entrepreneurship in the country.

Activities

The various activities of institute include

i) Providing effective training strategies, methodology, manuals and tools

facilitating and supporting central/state government and other agencies
in executing programmes of entrepreneurship and small business
development.
ii) Maximizing benefit and accelerating ( ) the process of
entrepreneurship development.
iii) Conducting programmes for motivators, trainers and entrepreneurs
which are commonly not undertaken by other agencies.
iv) Organizing those who help in developing entrepreneurial culture in the
society.
10. Entrepreneurship Development Institute of India (EDII)

The EDII is an autonomous non-profit institution, set up in 1983, sponsored by

financial institutions, such as IDBI, IFCI, ICICI, SBI. THE Government of Gujarat has
also provided assistance for the setting up of EDII.

The objectives of the EDII are as follows.

i) Augment the supply of trained entrepreneurs through training.

ii) Improve managerial capabilities of small scale industries.
iii) Participate in institution building effort.
iv) Promote micro enterprise at the rural level.
v) Collaborate with similar organizations in India and other developing
countries to accomplish the above objectives.

State level institutions/agencies

1. Directorate of Industries (DIs)

All the state level, the Commissioner/Director of Industries implement policies for
the promotion and development of small-scale, cottage, medium and large-scale
industries. The central policies for the SSI sector serve as guidelines but each state
evolves ( ) its own policy.

2. District Industries Centres (DICs)

In order to extend promotion of small-scale and cottage industries beyond big cities
and State capitals to the district headquarters , the DIC programme was initiated in
May 1978.

DICs provide services of the following nature.

➔ Economic investigation of local resources.

➔ Supply of machinery and equipment.
➔ Provision of raw material.
➔ Arrangement for credit facilities.
➔ Marketing
➔ Quality inputs
➔ Consultancy and extension services.

3. State Financial Corporations (SFCs)

State Financial Corporations, established under the SFCs act, 1951. It plays an
important role in the development of small and medium enterprises. The main
objectives of SFCs are to finance and promote small and medium enterprises,
particularly when normal banking accommodation is not available. There are 18
SFCs functioning in different states of India. The area of operation s of an SFC is
normally confined to one state, but the activities of some of the SFCs cover the
neighboring states which do not have SFCs of their own. SFCs have also opened
a number of regional branch offices.

4. State Industrial Development/ Investment Corporation (SIDCs/SIICs)

SIDCs/SIICs, set up under the Companies Act, 1956, as wholly owned undertakings
of the State governments, act as catalysts ( ) for industrial development in their
respective states. SIDCs play an important role by developing land and providing
industrial infrastructural facilities in the form of readymade factory sheds or
developed plots together with facilities like road, power, water supply, etc etc. Set
up primarily for providing assistance to medium and large scale industries,
SIDCs/SIICs also extend assistance to the small sector by way of term ( ) loans and
promotional services. Presently, there are 28 SIDCs in the country, of which 11 also
function as SFCs.

5. State Small Industrial Development Corporations (SSIDCs)

SSIDCs, established under the companies act, 1956, as State government

undertaking, cater ( ) to the needs of the small, tiny and village industries in
their respective State/Union Territory . SSIDCs undertake a variety of activities
for the benefit of the SSI sector. Some of the important activities under taken
by SSIDCs include

➔ Procurement and distribution of scare raw material;

➔ Supply of machinery to SSI units on hire-purchase basis;
➔ Assistance for marketing of products;
➔ Construction of industrial estates;
➔ Extending seed capital assistance on behalf of State government;
➔ Providing management assistance to production units.

Financial Management In Small Business

What Is Financial Management

Financial management refers to the activities relating to the handling of all finance
function of an organization efficiently and effectively for smooth functioning and
overall growth of an organization. Financial management can be described as the
planning, procurement, utilization, and controlling the financial resources of an
organization to achieve the goal of an enterprise. Financial position does not
include only cash position but also include many items like: bank transaction, short
term investment, short term loans and advances, overdraft, bills receivable, bills
payable, sundry debtors, prepaid expenses, out standing expenses etc. So, financial
management is a very broad term which includes management of all items which
are nearer to cash. This means, items which will affect the financial position of an
organization.

Financial management includes taking the following few decisions:

1. Investment Decision: Here the entrepreneur has to decide as to whether fund

shall be invested in particular project or item.
2. Financing Decision: Here, the entrepreneur has to decide the sources of fund
and the cost of fund to finance the investment decision.
3. Dividend Decision: Her the entrepreneur has to determine as to whether the
proposed investment shall yield adequate rate of return on the investment.
4. Liquidity Decision: Here the entrepreneur has to decide the liquidity position
of the organization that is the proportion of assets to liability.
5. Proper use of surplus fund: whenever there is any surplus fund at the disposal
of the organization, it should not be allowed to remain idle and the
entrepreneur has to decide the fruitful use of the same even for a temporary
period.

Importance Of Financial Management

Finance is an absolute necessary. No business can remain away from finance.
Finance is supposed to be the life of a business. It is the most precious among all
the assets and has the power to be converted into any other assets. It is the
ultimate asset all other assets are procured with the help of this. Smooth
management of finance is highly essential for the success of any business. Values
of all the properties are expressed in financial term and it has the power to be
exchanged for any asset. No business can survive without finance. Success and
failure of a business largely depends on the financial strength of a business.

Finance is needed to turn ideas into projects and generate profit. It is required for
the purchase and creation of fixed assets like land, building, machineries, plants,
equipments and to develop other infrastructure. It is also needed for the purchase
of raw materials, payment of wages, salaries and meeting all day to day expenses
for the smooth running of an enterprise. Sufficient fund should be made available
to an enterprise on time to carry on all the business activities. Finance is required
not only to start a business but also run it successfully to ensure proper growth.

Management of finance is not a onetime affair, it is a continuous activity and there

is no end to it till the existence of the enterprise. Financial management is required
to bring perfection to the art of managing finance function of an organization. It is
essential to ensure financial discipline by effective utilization of all the financial
resources of an organization. Miss utilization, miss appropriation as well as idleness
of fund is harmful for any organization. Financial management is responsible for
increasing the financial strength of a business by maintaining a stable liquidity
position. Liquidity position here means the proportion of current assets to current
liabilities.

In a business there is always inflow and outflow of finance. Financial management

has to ensure a perfect balance between the both so that there is no shortage of
fund as well as idleness of fund. The importance of financial management does not
depend on the size of an organization. It is highly complicated task because it is
linked to all the activities of an organization. Hence, decision should not be taken
hastily (hurriedly). One is to see the financial implication of the decisions.

Objectives of Financial Management

The objective of financial management is to achieve the objective of the
organization. The objectives of the organization is profit maximization .The
objective of the financial management in any organization are as follows.

1) Ensure regular increase in the inflow of fund into the organization.

2) Regulate outgoing of fund from the organization.
3) Regulate the effective utilization of finance of the organization.
4) Coordinate with all other functions and department in increasing revenue
and reducing cost and expenses.
5) Participate in the decision making to make in time availability of fund for
different purposes.
6) Provide correct picture of the financial position of the organization to the
owners.

Functions of Financial Management

Financial management is a managerial activity concerning the finances of the firm.

It deals with planning, control and management of financial resources of the
enterprise. The functions of financial management are as follows:

1. Estimating financial requirement: Financial management provides the tools

and techniques of estimating the fixed capital and working capital
requirements of a small scale enterprise.
2. Identifying sources of finance: The entrepreneur should identify the sources
from which finance can be obtained. There are many sources open to a small
industrial unit such as personal funds, funds from friends, banks financial
institutions etc etc.
3. Raising of finance: Regarding this the entrepreneur should look into four
aspects, they are the right source of finance, time schedule, cost of capital
and adequacy. This helps in the smooth running of business.
4. Proper use of finance: Finance raised for the purpose of business activity
should be carefully used. Money should not be used for any purpose other
than purely business activity. Many units become sick because of lack of
proper use of finance.
 5. Control of finance: Control relates to establishing proper procedure and
systems to check the financial activity of the business enterprise. A business
should be carried out as planned in the project report. A review should be
made periodically to know whether the business is being carried out on
proper lines or not.
Important routine finance functions are as follows:

1) Supervision of cash receipts and payments.

2) Safeguarding cash balances.
3) Record keeping (Accounting)
4) Custody and safeguarding of securities, insurance policies, and other
important documents.
5) Regular return of borrowed funds.

“ Do not borrow funds which you cannot repay. That harms your reputation and
business.”

“Financial discipline is of utmost importance for business and industry.”

Financial Needs

There are two ways of classifying the financial needs of an enterprise:

 1. On the basis of extent of permanence (durability).
2. On the basis of period of use.

1. On the basis of extent of permanence:

i) Fixed capital
ii) Working capital
2. On the basis of period of use.
i) Long-term capital/Finance
ii) Short-term capital/Finance

Fixed capital: The money invested in some fixed assets or durable assets like land,
building, machinery, equipment, furniture etc., is known as fixed capital. These
assets are required for permanent use, that is, for a long period of time.

Working capital: The money invested in current assets like raw material, finished
goods, debtors, etc., is known as working capital. In other words, money required
for day-to-day operations of business is called “working capital”.

Calculation of working capital needed

Total cost/Manufacturing cycle

Assume that production is 1,00,000 unit per annum.

Total production cost Rs.90000 P.a.

One manufacturing cycle 120 days. (that is, three cycles a year)

Working capital needed is = Total cost/Manufacturing cycle

= Rs. 90,000/3 =Rs.30,000.

The minimum working capital requirement of the firm is Rs.30,000.

Long-term capital: This is such money whose repayment is arranged for more than
five years in future. The source of long-term finance could be owner’s equity, term-
loans from financial institutions, credit facilities from the commercial banks etc.
Short-term capital: The borrowed capital/money that is to be repaid within one
year. The source of short-term finance include bank borrowings for working capital,
borrowings from friends and relatives, etc.

Sources Of Finance

The various sources from which an enterprise can raise the required funds could
broadly be classified into two sources. They are as follows:

1. Internal sources
2. External sources

1. Internal sources:

Under this source, funds are raised from within the enterprise itself. The internal
sources of financing could be owner’s capital known as equity, deposits and loans
given by the owner, the partners, the directors etc to the enterprise. One source
for raising funds internally may be personal loans taken by the entrepreneurs on
his personal asset. However, the scope of raising funds from internal sources
particularly in the case of small-scale enterprise remains highly limited.

2. External sources:

In short, funds raised from other than internal sources are from external sources.
The external sources usually include the following:

1. Borrowings from relatives and friends and others.

2. Borrowings from the banks for working capital purposes.
3. Credit facilities from the commercial banks.
4. Loans from financial institutions.
5. subsidies from the government and the financial institutions.

Financial Planning

Financial Planning is the most important component in the financial management

of an enterprise. This will ensure timely availability of finance for different purposes
so that no activity is held up or delayed due to shortage of finance. As pointed out,
finance is needed all the time for the very beginning of the organization till its
existence. Hence there is the need of maintaining a regular inflow of fund and
regulate the outflow of fund for the success of a business.

The entire amount of fund needed for an enterprise is not needed at a time at the
time of launching an enterprise. It will be required in a phased manner at different
times in different amount till the completion of the project. The amount of fund
needed during the gestation (development) is more. It is the duty of the
entrepreneur to determine the amount of fund required, time of requirement,
purpose of requirement etc. so that funds can be arranged accordingly in advance.
This will reduce idleness of fund which is uneconomic for the organization. Fir this
the entrepreneur has to prepare an estimate of different amount of fund required
at different times for different purposes and decide the sources of financing them.

There is need of financial planning in an organization. Financial planning is

determining in advance the inflow and outflow of finance for the organization. This
will require preparation of financial budget. Preparation of financial budget
demands deep involvement of an individual and requires a lot of information from
various sources including the policies and plans of the organization. Budgets are
prepared keeping in mind the past experiences, the present position and the future
conditions. Preparation of budget also requires forecasting the future income and
expenditure, receipt and payment, investment plans, expansions, modernization,
diversification etc. Forecasting all such elements is not an easy task and one has to
be realistic. In an organization there may be different budgets like sales budget,
purchase budget, investment budget, cash budget, advertisement budget, salary
budget, production budget, marketing budget etc.

Types Of Budget

1. Operational Budget: This type of budget includes preparation of separate

budget for each and every function of an organization like;
a. purchase Budget: Individual associated with the purchase of different items
in the organization should prepare a purchase budget. Such a person usually
 knows different types of materials required, time of their requirement,
quantities of their requirement, sources of supply, expected prices, etc. while
preparing a purchase budget, one has to keep in mind the trade discount,
availability of storage space, cost of purchase, transportation cost,
availability of fund, availability of materials in future, the future price, the
future quality etc.
b. Sales Budget: The budget is prepared keeping in mind the demand and
supply position, level of competition market share of the business, etc. Here
the entrepreneur has to estimate the future sales volume of products and to
be more realistic there is the need of splitting the budget into territory wise,
region wise, areas wise, state wise, district wise, town or city wise etc. Such
a budget may also be split into half yearly, quarterly, monthly, fortnightly,
etc. sales budget is prepared linking it to the marketing and advertising
budget.
c. Production Budget: Production budget have to be prepared product wise
and this may be divided into department wise, shop wise, section wise, etc.
production budget is usually period wise i.e. yearly, half yearly, quarterly,
monthly, weekly etc. Production budget is prepared keeping in mind the
demand, production capacity, inventory policy, sales forecast etc. the main
aim of production budget is to keep product ready in front of the customers
when the demand takes place.
d. Financial Budget: Preparation of financial budget refers to the preparation
of projected final accounts which includes preparation of a projected profit
and loss a/c, preparation of a projected balance sheet for the next financial
year which is based on the previous year figure and changed business
situation.

e. Marketing Budget: Preparation of marketing budget includes anticipated

expenses to be made in the marketing of products. This contains deciding
the cost of advertising, deciding the media-mix, media for advertising,
amount to be spent on each of the medias, etc. marketing budget shall be
split into region wise, territory wise or state wise depending on the need. It
can also be product wise.
2. Expenses or Cost Budget: Preparation of this type of budget includes
forecasting the different item of expenses/cost. Preparation of this types of
budget includes forecasting the different item of expenses/cost. One has to
decide in advance as to how much should be spent on different items so that
cost or expenses can be regulated. Preparation of expenses budget includes
preparation of production cost budget, administrative cost budget, selling
and marketing cost budget, overhead cost budget, etc. In all these types of
budgets, different item of expenses are determined in advance based on a
sound line and efforts are made to meet the target fixed.

3. Cash Budget: This budget makes an estimate of incoming and outgoing of

cash in a business for a future period. Cash budget may be split into monthly,
quarterly, half yearly etc. Inflow of cash results due to sale of goods, bills
receivables, fresh loan or capital, sale of old assets, etc. Whereas outflow of
cash may be due to purchase of different items, payment of salary and
wages, payment of loans, payment of taxes, meeting day to day expenses,
etc.
4. Capital Expenditure Budget: There may be the requirement of purchasing
some capital assets like plant, machineries, tools, etc. for regular use or
replacement. There may be the requirement of such assets for expansion,
modernization, diversification, safety, increasing efficiency, increasing
quality, increasing productivity, etc. Hence there is the need of a separate
budget for financing of such activities known as capital expenditure budget.
The sources of financing such capital expenditure have to be determined in
advance.

5. Investment Budget: An organization may decide to make some short term

and long term investment for future need out of the surplus generated. So,
there is the need of an investment budget. This is because the surplus
generated should not be allowed to remain idle at any cost. Till the use of
such surplus, it may be invested in some profitable schemes or projects.
Under this, the amount to be invested the scheme of investment shall be
 determined in advance. These types of investments are done to meet
unforeseen activities and maintain a good liquidity position.

6. Manpower Budget: Manpower budget is prepared keeping in mind the

future manpower need of an organization. The requirement of manpower
depends on the budget estimates of various functional departments.
Estimate is made for the type of manpower, number of manpower, quality
of manpower, time of requirement, financial involvement, their
advertisement, recruitment, selection, training, etc. Even separate budget
may be prepared for each of the activities.

7. Master Budget: When all the functional and other budgets are compiled into
one budget, it is called the master budget. It covers all the activities and their
financial involvement of an organization. Master budget is usually prepared
keeping in mind all other budgets.

Financial Accounting

A business organization has to maintain accounts preferably under Double Entry

System of Book-Keeping. The accountant or the accounts manager has to know
procedure of maintaining accounts under double entry system.

Book Keeping
Art of recording business transactions in set of books is known as book keeping.
Book means records and keeping means maintaining. So, book keeping means
record maintaining or record keeping. In the present day, every business
organization has to maintain records of its financial activities in a systematic
manner which is known as book keeping.

A business usually maintains various accounts such as ; Salary A/c, Rent A/c, Cash
A/c, Bank A/c, Furniture A/c, Machinery A/c etc. All the relevant business
transactions are recorded in their respect A/c. For example salary paid shall be
recorded in the salary A/c so that at the end of the year one can easily know how
much transactions have been done in any account.

Double Entry Book Keeping

Almost all the business organizations maintain accounts under double entry system
of book-keeping. Under this system of book keeping, different types of accounts
are maintained and every account is divided into two sides. The left side is the debit
side and the right side is called the credit side.

As per the principle, all the accounts maintained are classified into three categories
such as; Real A/c, Personal A/c and Nominal A/c.

Real Account:

This includes all those accounts which are real things. That means they are visible
and tangible. One can transfer it possess it, sale it, etc.

Ex: Machineries a/c, furnitures a/c, cash a/c, materials a/c.

Personal Account:

This includes all those accounts of different individuals or persons or companies or

organizations

Ex: Mr.Ashok a/c, LIC a/c, Axis bank a/c. etc.

 with whom the business has business transaction particularly credit purchases and
credit sales, loans, advances. The names of those individuals must be recorded and
their accounts must be maintained to know the details receipt and [payment to
them.

Nominal Account:

This types of accounts includes all items of expenses, losses, incomes, gains etc.
such items are not visible.

Ex: Rent a/c, Salary a/c, Commission a/c, Advertisement a/c etc.

Rule of Debit and Credit

Real A/c

Debit what comes in.

Credit what goes it.

Personal A/c

Debit the receiver .

Credit the giver.

Nominal A/c

Debit all losses and expenses.

Credit all gains and incomes.

Journal

In a business, whenever a transaction takes place, first it is recorded in the journal

which is known as the book of prime entry. Hence, all the business transactions are
recorded in the book of journal. Entries are made in the journal for all the business
transactions are called journal entry. The rules of debit and credit are strictly
followed while making entry in the journal.

Some examples of journal entries are as follows:

1. Salary paid Rs.35,000.

Salary a/c Dr. Rs.35,000

To cash a/c Rs.35,000

2. Goods worth Rs.10,000 sold for cash to Mr.Akash.

Cash a/c Dr. Rs.10,000

To sales a/c Rs.10,000

3. Goods worth Rs.10,000 sold to Mr.Akash on credit.

Mr. Akash a/c Dr. Rs.10,000

To sales a/c Rs.10,000

Ledger

All the business transactions are recorded in the journal and at the end of the day
all the entries of the journal are transferred to their respect accounts. All such
accounts are accommodated in a big register called the ledger, where one page is
allocated to each and every account. All the debit entries in the journal are
transferred to the debit side of the respective accounts and the credit entries are
transferred to the credit side of the respective account. This transfer of entry
from journal to ledger is known as posting.

At the end of the financial year, all the accounts are closed. That means, the totals
of both the debit side and credit sides are found out. The difference between the
totals of both the sides is found out and is known as the closing balance of that
account. If the total of the debit side is more than the total of the credit side, the
difference is debit balance and is written on the credit side of the account and the
totals of both the sides are made equal. On the other hand, if the total of the
credit side of an account is more than the total of the debit side, the difference is
a credit balance and is written on the debit side of the account to make the totals
both the sides equal. The totals of the debit side and the total of credit side must
tally.

Cash Book

In a business, cash transactions are very frequent and take place unlimited
number of times. Hence, for the sake of convenience, a separate cash book is
maintained to record all cash transactions. It is just like the cash a/c. The cash
book is a register which contains two sides divided vertically from the middle of
the register. The left side is the debit side also called the receipt side and the right
side is the credit side called the payment side. All the cash receipts are recorded
on the debit side known as the receipt side of the cash book and all the payments
are recorded on the credit side also known as the payment side. The difference
between the totals of both the sides is the cash balance in hand. The total of the
debit side is always more than the total of the credit side resulting in excess of
receipts over the payment. This is the cash balance of the business. Hence, cash
book always shows a debit balance and never shows any credit balance. If the
total of the debit side I equal to the total of the credit side, it means there is no
cash balance in the business. Cash book can be of three types such as; cash book
with cash column, cash book with discount column, cash book with discount
column and bank column. They are known as single column cash book, double
column cash book, triple column cash book respectively.

Subsidiary Book

Apart from the cash book, a business firm may maintain many such books
separately for the sake of convenience. Accordingly, for all the credit sales a
separate book is prepared and that is known as sales book or sales day book or
sales journal. As the credit sale transactions are quite large in number and are
very frequent, it is recorded in this separate book. Sales day book records all the
credit sales of the goods in which the business is dealing. All the cash sales are
however recorded in the cash book. If the firm is selling any other unusual
commodity, it may be recorded in journal proper separately.

Similarly, a business makes a lot of credit purchases from different persons. The
number of such credit transactions are quite large and take place at frequent
intervals. So, all such credit purchases of the commodities required regularly are
recorded in a separate book for the sake of convenience. Such a book is known as
purchase day book. Whereas all the cash purchases are to be recorded in the cash
book.

Similarly lot of other books like purchase return books or return outward books,
sales return books or return inward book, bills receivable book, bills payable book
etc are maintained.

Preparation of Final Accounts

After a transaction is recorded in journal, it is transferred to the respective

ledgers and this process continues till the end of the financial year. At the end of
the financial year it is essential to close all the books of accounts to know the
profit or loss of the business for which final accounts have to be prepared. So,
preparation of final accounts is possible only when all the accounts are closed and
all the closing balances of different accounts are put together into one statement
called the Trial Balance. So, trial balance is the first step in the preparation of final
accounts.

Trial Balance

Trial Balance is a statement which contains the summary of all the accounts. All
the closing balances of different accounts are put together into this statement.
Trial balance is divided into two sides, the left side is the debit side and the right
side is the credit side. All the debit balances of different accounts are put on the
debit side of the trial balance and all the credit balance of different accounts are
put on the credit side of the trial balance. The total of both the sides of the trial
balance must be equal.

Trading A/c

Preparation of trading account is the first stage in the preparation of final

accounts. From the information provided by the Trial Balance, one can prepare
Trading, profit and loss a/c and the Balance Sheet. Trading, profit and loss a/c is
divided into two parts; the first part is known as Trading a/c and the second part
is known as profit and loss a/c. For a manufacturing concern, Trading a/c is known
as Manufacturing a/c.

Like any other account, Trading account has two sides, the left side is the debit
side and the right side is the credit side. On the debit side, all expenses relating to
trading are recorded and on the credit side all the incomes from sales are
recorded. If the total of the credit side is more than the totals of the debit side,
the difference is known as “Gross Profit” which is recorded on the debit side of
the Trading a/c. On the other hand, if the total of the debit side is more than the
total of the credit side, the difference is a “Gross Loss”, which is written on the
credit side of the Trading a/c. the gross profit or gross loss of the trading account
is transferred to the profit and loss a/c. Trading a/c is the first statement of the
final accounts.
 Profit and Loss A/c

Profit and loss a/c is prepared from the information provided by the Trial Balance.
It can be prepared only after the preparation of the Trading a/c. The gross profit
or the gross loss of the trading a/c is transferred to the profit and loss a/c. If there
is a gross profit, it is written in the credit side of the profit and loss a/c. On the
other hand, if there is a gross loss, it is written on the debit side, of the profit and
loss a/c.

The items written on the debit side debit side of the profit and loss a/c are; gross
loss. And the items written on the credit side are; gross profits.

If the total of the credit side is more than the total of the debit side, the
difference is a “Net profit” which is written on the debit side of the profit and loss
a/c. On the other hand, if the total of the debit side more than the total of the
credit side, the difference is a “Net Loss” which is written on the credit side of the
profit and loss a/c. The net profit is transferred to the Balance Sheet and added to
the capital or is shown separately on the liabilities side. The profit and loss a/c
reflects all the incomes and expenses that are revenue in nature. Capital
expenditures and capital incomes do not find place in the Profit and Loss a/c.

Balance Sheet

Balance sheet is prepared from the information provided by the Trial Balance and
the Profit and Loss A/c. Balance sheet is usually prepared at the end of the
financial year, only after the preparation of the Trading, Profit and Loss A/c.
Balance sheet reflects the exact financial position of a business on a particular
day. Balance Sheet is a statement and not an account. It is a statement of all the
assets and liabilities held by the business on that particular day on which the
Balance Sheet is prepared.

Balance Sheet has two sides, the left side is the liabilities side and the right side is
the asset side. The totals of both the sides of Balance Sheet must be equal. If the
totals of both the sides do not tally, the Balance Sheet is supposed to be wrong
and is not acceptable.

MARKETING
It can be broadly defined as the study of the performance of sales, distribution,
advertising & sales promotion, planning of product sales & conducting research for
demand.

In short, those functions in a business that directly involve contact with the
consumer & assessment of their needs are called marketing.

KOTLER → According to Kotler marketing is a social & managerial process by which

individuals & groups obtain what they need & want through creating, offering &
exchanging products of value with others.

OBJECTIVES OF MARKETING

* To satisfy the needs and wants of customers.

* To determine marketing-mix that aim to satisfy the needs of the customer.

* To generate and create goodwill for the enterprise.

* To raise the standard of living of the people.

* To establish the organization &the methods which will be required.

*Helping on self to decide whether his career shall be marketing.

FUNCTIONS OF MARKETING
 In most of the business enterprises, Marketing Department is

set up under the supervision of the Marketing Manager. The major purpose of

this Department is to generate revenue for the business by selling want

satisfying goods and services to the Customers. In order to achieve this

purpose, this Marketing Manager partners the following functions.

1. Marketing Research :

Marketing research is the systematic search and analysis of facts related to

marketing problem. It helps in analyzing the buyer’s habit, popularity of a

product, effectiveness of advertisements, etc. It provides upto-date

information in regular intervals of time regarding marketing and thus helps

in decision making.

2. Product Planning & Development :

It is always necessary to plan and develop products which meet the

specifications of the customers. Product planning and development involves

a number of decisions, viz, what to produce or buy ? How to have its

packing? How to fix its price and how to sell it? etc.

3. Buying & Assembling :

 Buying and Assembling are important functions of marketing. Buying is

different from assembling. Buying involves determination of requirements,

finding the sources of supply, placing the order and receiving the goods. But

assembling means collection of goods already purchased from different sources

at a common point. It is also used in another sense. Raw-materials are

purchased and assembled in order to produce goods and services as per the

need of customers.

4. Selling :

This is an important function of marketing under which ownership of goods

in transferred from the seller to the buyer. This is done at a price. There are

two different forms of selling, viz. negotiated selling and action selling.

5. Standardization, Grading & Branding :

Standardization means setting up of specifications of a product. Then gradation

is done on the basis of these specifications and standards. At last, a brand name

is given to a product for identification.

6. Packing :
A good package represents a combination of the designer’s creative skills and

the product as well as marketing and sales knowledge of the manufacturer’s

management team. Packaging has become one of the essential services of

modern marketing. Now, it is used by the manufacturer to establish his

branded product or distinct from those of rivals. Packaging also gives protection

to the product. Thus, packaging acts as a multi-purpose arrangement.

7. Storage :

Storage of goods in ware houses has become an indispensable services these

days. Goods are stored in ware houses to protect them from any kind of

damage till they are actually sold in the market.

8. Transportation :

It provides the physical means which facilitate the movement of persons, goods

and services from one place to another.

9. Salesmanship :
Salesmanship or personal selling is widely used in retail marketing. It involves

direct and personal contact of the seller or his representative with the

purchaser.

10. Advertising :

It helps to spread the message about the product and thus, promote its sale.

11. Price :

Determination of price is an important function of a Marketing Manager. Price

of a product is influenced by the cost of production, profit margin, price fixed

by the rival firms and Govt. policy.

12 .Financing :

Financing of customer purchasing has an integral part of modern marketing.

The provisional goods to the customers on credit basis is an important device

to increase the sales volume.

13. Insurance:

A large number of risks are involved in exchange of goods and services.

Insurance helps to covers these risks.

IMPORTANCE OF MARKETING
* Marketing is the heart of any business organization .Thus, it affects each person’s
life .

* Marketing aims at satisfying the needs of customers, accordingly it creates

utilities of time, place & possession.

* Marketing as a career provides an employment opportunity to various people.

* It helps in developing economic resources of any country.

* Marketing brings regional balances.

* Marketing determines the pattern of consumptions.

* Marketing aims to provide quality products & services , so as to satisfy the

customer and ultimately raise their standard of living.

* The Marketing Concept:

The concept emerged in the mid-1950s. Instead of “ make and sell ” philosophy,
business shifted to “ sense and respond ’’ philosophy. Therefore, now-a-days
marketing is “customer centered ’’ and not “product centered’’. Hence the job is
not to find the right customers for the products, but the right products for your
customers. The marketing concept emphasizes the determination of the
requirements of present and potential customers and supplying products to satisfy
their requirements.

MARKETING MANAGEMENT
Marketing management is the process of planning and executing the conception,
pricing, promotion and distribution of goods, services and ideas to create
exchanges with target groups that satisfy customer and organizational objectives.

OBJECTIVES

* To satisfy customer.

* To create good image of the organization.

* To increase the quality of life of the people.

* To increase profit for the growth of the business.

* To generate more and more customer base for the business.

* To determine the marketing-mix that will satisfy the needs of customer.

FUNCTIONS
* Determining Objectives → The goals like attaining a certain profit or sales target
etc. are clearly defined in the marketing management segment.

* Planning → After setting the goal the next step is to determine the manner in
which these goals are to be achieved.

* Organizing→ It is the process of arranging activities and people in such a way so

that maximum output with highest degree of efficiency can be achieved.

* Controlling → Here, the actual performance result, is compared with the

standards set if there is any deviation then proper measures should taken to avoid
such deviation.

* Staffing → This requires selection of human resources to accomplish the

objectives of marketing management. Staffing is the most important function of
marketing management as proper selection of personnel is the key to eliminate or
reduction in management problems.

* Operating → This function includes operating a sales force and directing an

advertising programme.

* Establishment Of Marketing Policies → It is very essential for guiding executives

in their decision making on marketing problems that frequently arise.

PROBLEMS OF MARKETING MANAGEMENT

The common marketing problems faced by small scale industries are as follows:

1. Lack of Brand Image: Consumers are often guided by brand image. Small
scale industries usually face the problems of image building with limited
propaganda and advertising. So it makes difficult for them to penetrate the
market.
2. Competition With Modern Sector: The market competition of the small
scale enterprises with the modern sector has aggravated (forced) due to
several factors over the years. There always exists an implicit assumption
that poor quality goods are produced in small scale units. Thus, SSIs needs to
cater to wide diversity and changing tastes and preferences of their
consumers which they do fail.
3. Product Quality: SSIs in the initial stages have a serious limitation of product
quality. It is costly and difficult for a small business unit to go through the
process of quality testing and evaluating equipment.
4. Price Competition: The stipulation (condition) of minimum wages, on the
one hand and low labor productivity, on the other, makes it difficult for small
units to compete with medium and large scale enterprises in terms of prices.
They may, therefore, be compelled to reduce the profit margin or use low-
priced inputs or zero wage family labor.
5. Lack of Sales Force: The small scale enterprises usually face the problems of
maintaining well motivated and trained sales force for the purpose of sales
of promotion.
6. Limited Scope for Sales Promotion: Small scale industries lack in the
required resources as well as knowledge to practice the methods of sales
promotion. Thus it is the persuasive (winning) capacity of the dealer that
plays an important role in influencing the sales of SSIs. In such a case dealers
demand higher rate of commission thereby leading to high unit cost. In this
way the small enterprises are unstirred.

7. Weak Bargaining Power: The bargaining strength of a small scale unit is

usually weak. This leads to low prices and lower profit margin.
8. Credit Sales: the small scale sector is invariably (always) called upon to sale
on credit. However when it comes to procure the inputs, they are derived
liberal credit facilities. This leads to excessive borrowings to meet the
working capital needs. So the effective interest cost increases and makes the
general cost of product and prices higher thereby making the small scale
enterprises non competitive.

9. Problems of Buyer’s Market: Incase of small enterprises, the prices are

bargained on one-to-one basis and brought down to the lowest level
possible. Thus, small scale enterprises face a buyer’s market while marketing
their products, and this problem aggravates when they face a seller’s market
while buying inputs.

10.Local and Limited Market: Small scale enterprise cater to the needs of local
and limited market due to small scale production, technological inefficiency,
low labor productivity, implicitly assumed low product quality, and due to
non affordable sales promotion schemes, transportation costs, etc.

MARKETING STRATEGIES
Marketing management decisions should never be taken only from the side of the
producer or organization. It should also take into account the other side i.e. the
customer side. So, the marketing management policies may also be decided
depending on the thought of the buyers. Marketing management also involves
the management of the customers and prospective customers. Factors usually
taken into account by the buyers before making a purchasing decision may be the
guide for the decision makers in marketing management so that decisions are
made in that line. The decision-makers must understand the factors responsible
for attracting the buyers to the product.

Marketing management requires a strong force of marketing people. So

appropriate recruitment of appropriate sales force is very much important in
marketing management. Experienced and capable sales force is an added
advantage which may be procured from other competitors so that they not only
bring talent to the organization but also bring a market share with them. If the
marketing activities are strong, it will increase the strength of the organization.
However a weak marketing network will make the survival of the organization
difficult. Hence, the marketing team may all the time be kept up-to-date with new
talent and innovative ideas.

Marketing management all the time requires new thoughts, new ideas, new
creations etc. The business which is capable of innovating new ideas of marketing
stay ahead and the imitators always lag behind. Hence, it is essential for a
producer to know his products, customers and prospective customers and try to
adopt marketing activities perfectly matching to the situations. One has to
develop new ideas best suited to the products, customers and market to survive
and stay ahead in the market. A seller has to keep a constant eye on the
movement of marketing to design and develop activities to take advantage of the
situations. Hence, marketing management may be the manipulating of the market
and market conditions to ensure success.

Marketing as a ‘Process’
The process of marketing involves an exchange transaction between the buyer in the
seller. In this exchange transaction the development of a long term relationship
between buyers and sellers occurs if the buyer’s gain in the satisfaction on the
purchase and subsequent consumption of the product whereas the seller’s gain in the
profit that he/she makes on such a transaction. If the buyer is not satisfied, then the
transaction has been at best, a selling transaction. And if the seller does not make a
profit, then it has been a dumping transaction. To be termed as a marketing
transaction the exchange must result in mutual satisfaction to both the buyer and the
seller. The essence of this is :

(a) Marketing is an exchange process – both buyer and seller must have
something to give to each other.
(b) Both the buyer and Seller must gain.
(c) It should result in a long term satisfying relationship between both
relationship month is crucial to successful business.

Therefore, it can be concluded that marketing as a process involves –

(a) Understanding the customers interests.

(b) Serving them in such a way that it helps the selling organization to fulfill
its objective – profit maximization.
The marketing process is influenced by a No. of factors such as :

(i) Competition
(ii) Govt. rules & policies
(iii) The marketing Environment.
(iv) The social, political, economic & technological forces.
(v) Mass media of communication
(vi) Consumer Advocates
MARKET SEGMENTATION
 It is the process of dividing a heterogeneous market into
homogeneous sub-units.

Objectives of Market Segmentation :

• To identify potential customers and additional benefits desired by the

consumers.
• To know the willingness of consumers to pay for the additional
benefits.
• To know the preference of place of purchase (shop) by consumers.
• To pay proper attention to particular areas.
• To plan all marketing activities around the consumers.
• To understand competition and formulate marketing programmes.
• To design marketing mix and promotion mix.
• To help and make the marketing efforts more efficient and more
economical.
• To increase productivity and adds to consumer value.
Importance of Market Segmentation :

In reality market demand is heterogeneous and not homogeneous. When

differences in customer needs are analysed, the analysis may reveal that certain
customers needs are not being met and the marketer can exploit such a marketing
opportunity and till these needs. This can yield profits and prospects for growth.
Segmentation ensures higher customer satisfaction. Importance of market
segmentation can be understood from the following points.

(i) Facilitates proper choice of target market : Segmentation helps the

marketer to distinguish one customer group from another within a given
market and thereby enables him to decide which segment should form
his target market.
(ii) It plan all marketing activities around the customers.
(iii) Facilitates tapping of the market : Segmentation also enables the
marketer to fulfill the needs of the target buyer. It also helps him to
generate an accurate prediction of the likely responses from each
segment of the target buyers.
(iv) Making the Marketing effort more efficient and economic: Segmentation
ensures that the marketing effort is concentrated on well defined and
carefully chosen segments. It would benefit the firm if the efforts were
concentrated on segments that are the most productive and profitable
ones.
(v) Effective utilization of Marketing resources : Segmentation leads to more
effective utilization of marketing resources, because customer is the
focus of marketing effort and only target markets are served. Marketing
programme is tailored exactly in accordance with the needs of specific
market segment and produce, price and promotion can have best
coordination.
(vi) Helps to assess competitive strengths and weaknesses. Competitive
strengths and weakness can be assessed effectively and marketers can
avoid competition and use resources more profitably by catering
customer demand which is not being met by rivals.
(vii) Creates good Coordination among customers : Segmentation brings
benefits not only to the marketer, but to the customer as well. When
segmentation attains higher level of sophistication and perfection,
customers and companies can conveniently settled down with each
other.
 1. (a) The concept of marketing mix involves a deliberate & careful choice of
Organization ,
Product, Price, Promotion & Place, Strategies & Policies.

4 P’s Of Marketing Mix

Marketing

Mix Places

• Channel
• Coverage
• Locations
Product • Inventory
• Transport
• Product Variety
• Quality
Promotion
• Design
• Features Price
• Sales promotion
• Brand Name
• Advertising
• Packaging • List Price
• Sales force
• Sizes • Discounts
• Direct Marketing
• Services • Allowance
• Personal Selling
• Warranties • Payment Period
• Return • Credit Term
 BRANDING STRATEGY

A brand is defined by the American marketing Association as “a name, term, sign,

symbol or design, or a combination of them which is intended to identify the goods or
services of one seller or group of sellers and to differentiate them from those of
competitions”.

Once a brand is used, it becomes an integral part of the product. From the view point
of the manufacturer, middle man, or retailer, who is considering employing a brand, a
brand can be defined as a device designed to assist in the processes of creating,
stimulating, strengthening or maintaining demand for his products.

A) Producer’s Strategies

Producer’s must decide whether to brand their products and whether

to sell any or all of their output under middlemen’s brands. Thus, three cases
arise which are as follows :

Case-I – (Marketing entire output under producer’s own Brands)

The large, well financed and well managed companies like IBM, etc.
market their entire output under their own brands. But it is particularly difficult
for a new firm to produce only for its own brands.

Case-II – (Branding of Fabricating Materials and parts)

Some producers use a strategy of branding manufactured goods that

become part of another product following subsequent manufacturing. This
strategy is used in marketing many automotive parts such as spark plugs,
batteries, and oil filters. With this strategy, strategy, the seller seeks to develop
a market preference for its branded parts or materials. This strategy is most
likely to be effective when the particular type of fabricating parts or materials
has two characteristics :

(a) The product is also a consumer good that is bought for replacement
purposes. For example, EXIDE batteries.

(b) The item is a key part of the finished product. For instance, an integral
part of an automobile.

Case-III – (Marketing under Middlemen’s brands)

A strategy among manufacturers is to sell part or all of their output to

middlemen for branding by these customers. This strategy helps a manufacturer
fully utilize its plant capacity. Also this strategy helps the manufacturer to
achieve additional sales.

B) Middlemen’s Strategies

An alternative to manufacturer’s own brand policy is the middlemen’s

or distributor’s brand policy. This is useful when the firm does not have strength
in marketing, adequate financial resources to build a brand and the competition
in the industry is high. Several small producers market their products under well-
known brand names like Bajaj, Voltas, and so forth. In fact, it is not uncommon
to see ready-made garments and other accessories being marketed under the
store name or stores created brand name. If customers prefer a given retailer’s
brand sometimes called a store brand they can get it only from that retailer.

Middlemen may find it advantageous to market their own brands, in

place of or in addition to producer’s brands, because it increases their control
over their target markets.

Middlemen may find it advantageous to market their own brands, in

place of or in addition to producer’s brands, because it increases their control
over their target markets.

The risks in this strategy are :

i) Loss of control over the product’s marketing.

ii) If the product succeeds, premium may go to the middlemen (distributor)
but not to the producer.
iii) Distributor may not extend the desired marketing support to the brand.

C) Strategies Common to Producers and Middlemen

Producers and middlemen (distributors) alike must choose strategies

with respect to branding their product mixes branding for market saturation, and
joint branding activity with another company.

Case-I – (Branding within a Product-Mid)

Three possible strategies are used by firms that sell more than one
product.
 (a) A separate name for each product.
(b) The company name combined with a product name.
(c) The company name alone.
Case-II – (Branding for Market Saturation)

With increasing frequency, firms are employing a multiple-brand to

increase their total sales in a market. They have more than one brand of
essentially the same product, aimed either at the same target market or at
distinct target markets. Suppose, for example, that a company has built one
type of sales appeal around a given brand. To reach other segments of the
market, the company may use other appeals with other brands. Two &G
detergents, Tide and Dreft, illustrate this point. Some people feel that if Tide is
strong enough o clean soiled work clothes, it should not be used on fine
clothings. For these people P&G has Drefts, a detergent promoted as being
gentler than Tide.

Case-III – (Co Branding)

Sometimes two separate firms or two segments within the same

firm/company agree to place both of their respective brands on a particular
product or enterprise. This arrangement is called co-branding, or dual branding.

POSITIONING A BRAND
 The concept of positioning wall first advocated by AI Ries and Jack Trout.
Positioning is the act of communicating company’s offer so that it occupies a distinct and
valued place in the mind of customers. There are different ways of positioning the brand.
These are as follows :

1. Use Situations : The marketer can identify use situations for his brand or product and
analyze customer perception of existing competitor brands in different use situations.
Based on this analysis the firm can position its brand.
2. Emphasizing Tangible Benefits : The ;positioning of brand may be done on the basis of
tangible benefits that the company offers to customers. These are in the form of
specific features and sometimes through its price and distribution. For example -
Colgate offers benefits of preventing cavity and fresh breath. Nirma offers the benefit
of low price.
3. Linking to Uses :- In this case, positioning of a brand is done by identifying the possible
uses which the firm’s brand can be put to.
4. Head-on Competitive Positioning : This is the strategy of placing a firm’s brand next to
the leader in the market and trying to uproot it on a specific tangible variable. ONIDA
colour TV was launched and positioned against the giants in the CTV industry with the
message that all others were clones and only ONIDA was the leader.
5. Life Style Positioning :- A brand may be positioned as a life style component. Many of
today’s new kitchen appliances like the microwave oven, etc. are positioned
accordingly.
6. Benefits offered :- In this way of positioning the brand, the benefits that customers get
in using the product are highlighted.

Packaging strategies :
 Packaging, thus, consists of all the activities of designing and producing the
container or wrapper for a product.

Importance of Packaging :

Packaging a product is very important for the following purposes :

i) It protects the product on its way to the consumer.

ii) It protects the product after it is purchased.
iii) It helps to meet the needs of wholesaling and retailing middlemen. For
example, a package’s size and shape must be suitable for displaying ad
stacking the product is the store.
iv) It can assist in getting a product noticed by consumers.
v) It makes the product distinct from that of the competitors.
Functions of a Package :

The following are some of the functions, a good package is expected to

perform :

i) A package protects a product during transportation, inventory processing,

shelf-life and in the customer’s home.
ii) Packaging serves a convenience function in that it provides both the
middlemen and the customer’s greater economy and convenience in the
handling, opening and storage of the products.
iii) Packaging can be used to achieve common identification of the various
products in a company’s line of products.
iv) Packaging helps to achieve a greater degree of product differentiation.
 v) Packaging helps the selling function particularly in the shops and in
advertising i.e., packages can be designed to educate the customers and
distribution channels on the benefits of the product.
Objectives of Packing :

The following five basic objectives are generally highlighted.

i) To supply a consumer need.

ii) To increase total consumer demand.
iii) To redistribute existing consumer demand more in favour of the concerned
firm.
iv) To reduce costs through efficient handling methods, better and less
expensive materials, greater reduction of waste and lower distribution
costs

LABELLING

Labeling means putting identification marks on the package. A label is the

part of a product that carries information about the product and the seller.

There are three primary kinds of labels : brand label, descriptive label and
grate label. A brand label is simply the brand alone applied to the product or
package. A descriptive label gives objective information about the product’s use,
construction, care, performance, and/or, other pertinent features.

A grade label identifies the product’s judged quality with a letter, number
or word. Example : ‘A’ grade product.
 PRICING DECISION

Pricing is the matter of vital importance to the seller as well as to the

buyer in the market place. Price refers to the exchange value of goods and
services expressed in terms of money.

OBJECTIVES OF PRICING

Price is very significant in our economy, in the consumers mind, and in

an individual firm. Thus, it is important to have a look on pricing objectives.
Pricing objectives are overall goals that describe the role of price in an
organization’s long-range plans. Pricing objectives aid planners in formulating
price policies planning pricing strategies and setting actual prices. Thus, all
pricing objectives emanate form the corporate and marketing objectives of the
firm.

The various objectives sought to be realized through pricing are listed

below :

1. Profit – Maximization in the short-run.

2. Profit-optimization in the long-run.
3. A minimum return (or target return) on investment.
4. A minimum return on sales turnover.
5. Target sales volume.
6. Target market share.
7. Deeper penetration of the market.
8. Entering new markets.
9. Target profit on the entire product line irrespective of profit level in
individual products.
10. Keeping competition out, or keeping it under check.
11. Keeping parity with compensation.
12. Fast turn around and early cash recovery.
13. Stabilising prices and margins in the market.
14. Providing commodities at prices affordable by weaker sections.
15. Providing commodities/services at prices that will stimulate economic
development.

FACTORS INFLUENCING PRICING

Two categories of factors – internal factors and external factors –

influence the pricing decisions of any enterprise. In each categories some may
be economic factors and some psychological factors; again, some factors may be
quantitative and yet other qualitative. A fairly exhaustive list of internal and
external factors which exercise an influence on pricing is given below :

(A) Internal Factors :

1. Corporate and marketing objectives of the firm.

2. The image sought by the firm through pricing.
3. The characteristics of the product.
4. The stage of the product on the product life cycle.
5. Use pattern and turn around rate of the product.
6. Costs of manufacturing and marketing.
7. Extent of distinctiveness of the product and extent of product
differentiation practiced by the firm.
8. Other elements of the marketing mix of the firm and their interaction with
pricing.
9. Composition of the product line of the firm.
10. Price elasticity of demand of the product.
(B) External Factors

1. Market characteristics- open or closed market; national or overseas

market; perfect competition, or monopoly, or monopolistic or oligopolistic
market.
2. Buyer behaviour in respect of the given product.
3. Bargaining power of major customers.
4. Bargaining power of major suppliers.
5. Competitor’s pricing policy.
6. Government controls/regulations on pricing, and other relevant legal
aspects.
7. Societal (or social) considerations.
8. Understanding, if any, reached with price cartels.

PRICING STRATEGIES

After deciding on pricing goals and setting the base price, marketers must
establish pricing strategies that are compatible with the rest of the marketing
mix. There are a number of pricing strategies available to a marketer. The choice
of a pricing strategy is dependent on corporate goals and objective, customer
characteristic intensity of inter-firm rivalry and phase of the product life cycle.
When a firm is launching a new product, it must choose a market-skimming or a
market penetration pricing strategy. Similarly, strategies must be devised for
discounts and allowances. In this section a thorough discussion will be made
regarding pricing strategies.

Market Entry Strategies :

(A) Skimming Pricing :

In skimming pricing, the new product is priced high and the cream of
the market is skimmed by concentrating on those segments of the market that
are not price sensitive. In other words, skimming pricing aims at high price and
high profits in the early stage of marketing the product. As the word skimming
indicates, this strategy literally skims the market in the first instance through
high price and subsequently settles down for a lower price. Ordinarily, the price
is set at the highest possible level that the most interested consumers will pay
for the new product.

The skimming pricing strategy can prove ideal for really new and distinctive
products on account of the following factors.

1) The quantity of the product that can be sold is less affected by pricing in
the early stages especially when the product has novelty.

2) Through skimming, the product is tapping profitably those segments of the

market which do not bother much about price. Such tapping will not be
possible at a later stage in the life cycle.
3) By skimming the ream of the market through a high price the product is
fetching big funds which could be used for market development in the
initial stage.

4) The Skimming pricing can be a way to feel and figure out the demand for
the product. And by strategy at a higher price it is always possible to come
down on price, when the situation warrants.

There are certain objectives of this skimming pricing strategy.

1) Since it is expected to provide healthy profit margins, this strategy

intended primarily to recover and R&D costs as quickly as possible.

2) When the product has distinctive features strongly desired by consumers.

3) When demand for the new product is fairly inelastic.

4) When the new product is protected from competition through one or more
entry barriers such as a patient.

(B) Penetration Pricing

In this pricing strategy, a relatively low initial price is established for a

new product. The price is low in relation to the target market’s range of
expected prices. The intention of this pricing strategy is to penetrate a brand
market through low prices. The income is generated by large sales spread over
large markets. The large volume of sales facilitates substantial economics in unit
cost of production and marketing and the cycle can continue in establishing the
product in the market, through the low price strategy. This strategy advocates
for starting with a low price as it is intended to discourage other firms from
introducing competing products.

The penetration pricing is most suitable under the following conditions

:

1) When a large market exists for the product.

2) When demand is highly elastic.
3) When it is possible to achieve economics of scale (substantial reductions in
unit costs) through large-scale operations.

4) When a fierce competition already exists in the market for this product or
is expected soon after the product is launched.

The penetration pricing becomes the choice for the new product,
when the product market characteristics are as follows :

1) The quantity of product that can be sold is highly price sensitive, even in
the early stages of introduction.

2) There is no elite market for the product.

3) The product is likely to encounter heavy competition.

4) Large volume of sales is required to ensure economy in production and
distribution.

Discounts and Allowances :

It is necessary that the strategies must be devised for discounts and

allowances which are very common in business dealings. Discounts and
allowances are deductions from the base price or list price. Management has
the option of offering quantity discounts, trade discounts cash discounts, and/or
other types of deductions.

(A) Quantity Discounts

These are deductions from a seller’s list price intended to encourage

customers to buy in larger amounts or to buy most of what they need from the
seller, offering the deduction. There are two types of quantity discounts, viz,
cumulative discount and non-cumulative discount.

1. A cumulative discount is based on the total volume purchased over a

specified period. This type of discount is advantageous to a seller because
it ties customers closely to that firm.

2. A non-cumulative discount is based on the size of an individual order of

one or more products. This type of discount is intended to encourage
large orders.

Quantity discounts are given in terms of rupees or in physical units.

 Quantity discounts can help a producer achieve true economies in
production as well as in selling. In this regard two points are noteworthy.

1) Large orders, motivated by a non-cumulative discount can result in lower

production and transportation costs.

2) Frequent orders, from a single customer, motivated by a non-cumulative

discount, can enable the producer to make efficient and effective use of
production capacity.

(B) Trade Discounts

These discounts are also called functional discounts. These are reductions
from the list price offered to buyers in payment for marketing functions the
buyers will perform. The marketing functions are storing, promoting and selling
the product. For example, a manufacturer may quote a retail price of Rs.10,000
with trade discounts of 30% & 10%. It means the retailer pays the wholesaler
Rs.7,000 (Rs.10,000 – 30% of Rs.10,000) and the wholesaler pays the
manufacturer Rs.6,300 (Rs.7,000 – 10% of Rs.7,000).

(C) Cash Discounts

A cash discount is a deduction granted to buyers for paying their bills within
a specified time. The discount is computed on the net amount due after first
deducting trade and quantity discounts from the base price.

(D) Other Discounts & Allowances :

1. Rebate : Some sellers offer rebates to prospective customers so as to
stimulate sales. A rebate is a discount on a product that a customer obtains by
submitting a form or certificate provided by the seller. There are three types of
rebates.

(a) Coupon : A coupon is a small printed certificate that the buyer presents
when purchasing the product in order to obtain a discount equal to the value
shown on the certificate.

(b) Mail-in Rebate : A mail-in rebate, in which the buyer fill out a short
form, encloses proof of the purchases, and sends the paper work to specified
address. If all goes well, a rebate cheque arrives in the mail a short while later.

(c) e-coupon : A company places an e-coupon on its website or sends a

coupon to a customer via e-mail. A seller can redeem this kind of coupon in
cyber space and/or at a physical store that sells the firm’s products depending
on the conditions attached to the offer.

2. Seasonal Discount : The manufacturers of seasonal goods like air

conditioners, greetings cards, etc. consider granting a seasonal discount on
purchases made in a season.

3. Promotional Allowance : It is a price reduction granted by a seller as payment

for promotional services performed by buyers.

Geographic Pricing Strategies :

 Geographical pricing involves the company in deciding how to rice its
products to different customers in different locations and countries. For
example, should the company charge higher prices to distant customers to cover
the higher shipping costs or a lower price to win additional business? It may
happen that in geographic pricing strategy, a firm may charge a premium in one
market, penetration price in another market, and a discounted price in the third.
The most important requirement of this strategy is that the markets should be
separated by transportation costs. Besides there are certain conditions on which
this strategy is based :

i) A firm should not discriminate between competing buyers in the same

region.
ii) A firm’s strategy should not kill other firms operating in a market.
iii) A firm should not attempt to fix prices among competitors for basing point
or zone pricing.

iv) The elasticity of demand for the product should differ with respect to
markets or localities or regions or countries.

There are different pricing strategies coming under geographic pricing.

These are :

1) Uniform Delivered Pricing Strategy : In this pricing the seller quotes the
selling price at the point of production and the buyer selects the mode of
transportation and pays all freight costs.
2) Uniform Delivered Pricing Strategy : In this pricing, the same delivered price
is quoted to all buyers regardless of their locations. This pricing strategy
is used where freight costs are a small part of the seller’s total costs.
3) Zone-Delivered Pricing Strategy : This pricing strategy divides a seller’s
market into a limited number of broad geographic zones and then sets a
uniform delivered price for each zone. The freight cost built into the
delivered price is an average of the charges to all points within a zone.
4) Freight-Absorption pricing strategy : Under this strategy a manufacturer
quotes to the customer a delivered price equal to its factory price plus the
shipping costs that would be charged by a competitive seller located near
that customer. This pricing strategy is due to the seller’s willingness to pay
a part of the freight cost so s to penetrate distant markets. This strategy is
especially useful to a firm that has :
i) Excess capacity, ii) high fixed costs, & iii) Low variable costs per
unit of product

Special Pricing Strategies :

1) One Price Strategy : Under this pricing strategy, a seller charges the same
price to all similar customers who buy identical quantities of a product.
2) Flexible-price Strategy : This is also called variable price strategy. Under
this pricing strategy, similar customers are charged different prices when
buying identified quantities of a product.
For example :- Airways use this flexible-price strategy when charging lower-
price tickets requiring advance purchase, to passengers who would not fly
at higher prices.

3) Flat-Rate Pricing Strategy : It is a variation of the one price strategy, under

which a buyer pays a stipulated single price and then can consume as little
or as much of the product as desired.
4) Single-price Strategy : It is an extreme variation of the one-price strategy,
under which not only all customers are charged the same price, but all
items sold by the seller carry a single price.
5) Price Lining : It is a strategy which involves selecting a limited number of
prices at which a business will sell related products. The Athletic store, for
example, sells several styles of shoes at Rs.1999 a pair, another group at
Rs.1499, and a thing group at Rs.1999.
6) Odd Pricing : Odd pricing sets prices at uneven (or odd) amounts such as
Rs.99.95, rather than at even amounts. Bata, for instance, sets prices for
shoes in this manner. The rational for odd pricing is that it suggests lower
prices and as a result, yield greater sales than even pricing.
7) Leader Pricing : Many firms, primarily retailers, temporarily cut prices on
a few items to attract customers. This strategy is called leader pricing. The
items, on which prices are cut, are termed leaders.
8) High-low pricing : This strategy entails alternating between regular (high)
and ‘sale’ (low) prices on the most visible products offered by a retail firm.
Many retailers, especially super-markets and department stores, that want
to engage in price competition rely on high-low pricing.
9) Every low Pricing : It involves consistently low prices and few if any
temporary price reductions. This strategy is featured by some large
discounters.
10) Resale Price maintenance : Some manufacturers want to control the prices
at which distributors and retailers resell their products; this is termed as
resale price maintenance. Manufacturers seek to do this to protect the
brand’s image. Thus, resale price maintenance means controlling the prices
at which middlemen resell products.
 Pricing Methods

1. Full Cost or Mark up pricing:

In this method, the marketer estimates the total cost of producing or
manufacturing a product and then adds a mark up or the margin that the
firm wants. This is indeed the most elementary pricing method and many
 services and products are priced accordingly. To arrive at the mark up
price, one can use the following formula

Mark up price = alpha/(1-r)

Where alpha = Unit Cost (Fixed cost +Variable cost)

r = Expected return on sales expressed as a percent

For Example, if the fixed cost for 10,000 shirts is Rs.1,50,000 and the variable
cost per shirt is Rs.30. then cost per shirt is Rs.45. now the firm expects 30
percent return on sales. Keeping this figure in mind, the mark up price will be

Mark up price = 45/(1-0.3)

=45/0.7

=Rs.64.28.

This, approach, ensures that all costs are recovered and the firm makes a profit.
Indeed it satisfies the finance oriented executives, but this method ignores the
fact that it is not necessary that the firm is able to sell its entire merchandise at
this price. Some firms use this as a launch strategy ,but this could prove fatal if
competition already exists within the industry. It may be a useful method, if
everyone in the industry adopts it.

2. Customer oriented or perceived value pricing:

An increasing number of companies base their price on the customer’s
perceived value. Here positioning strategy is important. This method helps
the firm in reducing the threat of price wars. It can help the firm in reducing
the threat of price wars. But the key to this method is to correctly
understand customer’s perception of product value and not to overestimate
the firm’s product value.

3. Going Rate or ‘ Follow the crowd’: This is a method which is competition

oriented. In this method, the firm prices its products at the same level as
that of
Their major competitor. This methods assume that there will be no price
war within the industry. This is a method commonly used in an
oligopolistic market that sell a commodity such as steel, paper or
fertilizer, firms normally charges the same price. The small firm “follows
the leader,” changing their prices when the market leader’s prices change
rather than when their own demand or costs change is the key limitation.

Going-rate price is is quite popular . where costs are difficult to measure

and competitive response is uncertain.

4. Auction-Type pricing :Auction type pricing is growing more popular,

especially with the growth of the internet. One major use of auctions is to
dispose of excess inventories or used goods. Companies needs to aware
of the three major types of auctions and their separate pricing procedure.
i)English auctions (ascending bids): one seller and many buyers. The
seller puts up an item and bidders raise the offer price until the top price
 is reached.english auctions are being used today for selling antiques, real
estateand used equipment and vehicles.

ii)Dutch auctions(descending bids):one seller and many buyers, or one

buyer and many seller. In the first kind, an auctioneer announces a high
price for a product and then slowly decreases the price until a bidder
accepts the price. In the other, the buyer announces something that he
wants to buy and the potential sellers compete to get the sale by offering
the lowest price. Each seller sees what the last bid is and decide whether
to go lower.

Ex: General Electric uses this method when it wants to buy some of its
product.

iii)Sealed bid auction: The U.S. government often uses this method to
procure supplies. Here would-be suppliers can submit only one bid and
cannot know the other bids. Here a supplier will not bid below its cost but
can’t bid too high for fear of losing the order.

5. Target return pricing: In target return pricing, the firm determines the
price that would yield its target rate of return on investment (ROI). Target
pricing is used by General Motors, which prices its automobiles to achieve
a 15 to 20 percent ROI. This method is used when a firm wants to make a
fair return on their investment.
The Target- return price can be calculated by using the following formula

Target-return price = unit cost + desired return * invested capital / unit

sales.
 6 .Psychological pricing: Many consumers use price as an indicator of
quality. Image pricing is especially effective with ego-sensitive products
such as expensive watches, cars etc. etc.. Higher –priced cars are
perceived to possess high quality. Higher quality cars are likewise
perceived to be higher priced than they actually are. When alternative
information about true quality is available, price becomes a less
significant indicator of quality as a signal of quality.. When this
information is not available, price acts as a signal of quality.

Many sellers believe that prices should end in an odd number. Many
customer see a shoe priced at Rs.999 instead of Rs.1000 as a price in the
Rs.900 range rather than Rs.1000 range. Another explanation is that odd
endings convey the notion of a discount or bargain, but if a company
wants a high price image instead of a low price image, it should avoid the
odd ending tactic.

SERVICE MARKETING

Service Marketing is the marketing of any activity or benefit that is essentially intangible
and does not lead to the ownership of anything.
Characteristics of Services

1. Service as a performance :- The products are produced, but the services are performed.
2. Intangible :- The services can’t be seen, touched or smelt. Also the consumer can’t sample the
services in advance. Accordingly, it is difficult for the consumer to judge the service before the
purchasing. That’s why it creates the feeling of uncertainty about the outcome of a service.
The process of a company making a service tangible should include location and physical
setting. The location at which the service outlets are established should be accessible to the
target consumers.
3. Inseparability :- Services can’t be separated from its provider. In fact, the production, delivery
and consumption of a service takes place simultaneously in the buyer – seller interactions. This
characteristic of a service creates a problem to the marketer, particularly in the case of market
expansion. Whenever the service provider intends to offer services, he should have a service
production unit that offers the same service quality standards. However, some organizations
can introduce new technologies to decrease the direct interactions.
4. Variability / Heterogeneity :- Services are highly variable. It is always not possible to have the
same service from the same seller for the second time. Again no two customers can have
exactly similar service even though they experience it simultaneously. The services are always
variable, because :
(a) The inseparability of the service from the provider.
(b) The services are highly people intensive.
(c) The effect varies depends on when and where the service is provided.
5. Perishability :- Services can’t be stored for a longer time. It is perishable as well. As it is
produced and consumed simultaneously. When the demand is stable, perishability can’t be a
problem to the service organization. But service organizations face many problems when
demand fluctuates.

6. No ownership :- Since the services are perishable and intangible, there is

no question of ownership. Service consumers only have experiences not
the ownerships.
 7. Customer Participations :- The production quality of the service greatly
depends upon the ability and performance of the customers. As the role
of the customers can’t be overemphasized.

Factors Distinguishing Services from Products :

1. Services are intangible but products are tangible.

2. Services are perishable, but products are not so perishable like services.
3. Precise standardization of services is often not possible.
4. Production and consumption of services are often inseparable.
5. There is no ownership transfer of services.
6. There are no inventories of the services.
7. The quality of services is highly variable.
8. Middlemen role are different.
9. Customer is often involved in the distribution system of services.
10. Services are inseparable from the provider of services.
11. Services are little bit difficult to be patented.
12. Services are highly people intensive.

Sickness in Small Enterprises

 Industrial sickness refers to a situation where the revenues of a firm are insufficient
to meet the costs and the rate of return on investment is less than firm’s cost of capital.
SYMPTOMS OF SICKNESS
There are various symptoms of sickness. These symptoms may be found at various
stages of a project implementation.
(i) When the management appears to deny institutional discipline by non-compliance
with certain vital conditions.
(ii) Lack of commitment on the management’s part for supervision on implementation
of the Project.
(iii) Undue delay in project implementation.
Second, when the project has started operations, the following symptoms are observed;
(i) Increase in receivables and payables.
(ii) increase I the rejection rate of the finished product.
(iii) Increase in the level of inventories
(iv) Lack of understanding between promoters
(v) Irregularity in the payment of institutional loans
(vi) Industrial relation problems
Third, certain symptoms are also observed in the position of cash credit account such as:
(i) Cash credit or overdraft account has been overdrawn or frequently drawn
(ii) Cheques drawn on such account have been returned unpaid
(iii) Bills drawn by the company remain unpaid for long periods
(iv) pledged stocks are overvalued to get additional funds from the government
(v) Stocks are uninsured.

Therefore, persisting shortage of cash, deteriorating financial ratios, widespread use of

creative accounting, continuous tumple in the prices of the shares, frequent request of
banks and financial institutions for loans, delay and default in the payment of statutory
dues, delay in the audit of annual accounts and morale degradation of employees and
desperation among the top and middle management level are the important symptoms
of industrial sickness.
CAUSES OF SICKNESS
 So far as the cause of industrial sickness are concerned, it cannot be attributed to
a single factor alone. In view of the origin of the causes of Industrial sickness, these are
broadly classified into two categories:
A. External or Exogenous Causes
B. Internal or Entogenous Causes

External causes
The external or exogenous causes are beyond the control of the industry and
usually affect the industry-group as a whole. The important external factors causing
industrial sickness include the following:
1. Changes in the Industrial Policies of the government from time to time.
2. Inadequate and untimely availability of necessary inputs like raw-materials, power
and shrinkage of demand for the product.
3. Lack and shrinkage of demand for the product.
4. Recessionary trends hovering in the economy.
5. Frequent industrial strikes and labour unrest.
6. Shortage of financial resources especially working capital.
7. Natural calamities like drought, floods, etc.
8. Change in preference of consumers
9. Cheaper variety of products available in the market.
10. Rise in the cost of raw-materials.
11. Foreign exchanges fluctuations leading to adverse effect on the price of machinery
and raw materials, which are imported.
12. Ignorance on the part of the entrepreneur and complicated procedures, adamant
attitude of the financial institutions cost the small unit heavily.

Internal Endogenous Causes

 Internal causes are those which are the within the control of the unit. These causes
arise due to some internal deficiencies in various functional areas like finance, production,
marketing and personal. Internal causes can be categorized into two :
1. Anatomical Causes :
(i) Underestimation of the project cost.
(ii) The existing manufacturing process has become out-dated or absolete.
(iii) Selection of wrong project site, resulting in increased transportation cost
(iv) Undue investment in fixed assets
(v) Defective working of plat and machinery affecting quality of production
2. Operational Causes
(i) Defective financial planning and financial management
(ii) No research and development planning
(iii) Low productivity
(iv) Incapable and incompetent management
(v) Improper manpower planning
(vi) Difference among promoters and interference in the functioning of the company.
(vii) Management that is inclined to making personal gains at the cost of the company.
(viii) Poor marketing efforts
(ix) faulty capital structure
(x) unplanned capital expenditure
(xi) Excessive growth of inventories
(xii) Under-utilisation of capacity.

CONSEQUENCES OF SICKNESS
 The consequences of industrial sickness is widespread. But the main consequences
include locking up the economy’s financial resources, wastages of scare capital assets,
loss of production and increase in unemployment. These are discussed below.
1. Financial Losses :
The banks and financial Institutions provide substantial funds to start an industry.
Thus, industrial sickness leads to huge locking up of financial resources. Such locking up
of resources impinges on the future lending capacity of the banks and the financial
institutions. Furtherance, the recovery of overdue also posses some problems.
2. Impact on Employment Opportunities
One of the serious consequences of industrial sickness is loss of employment
opportunities and thereby aggravating the most dangerous socio-0economic problem of
unemployment in a labour surplus economy like India.
3. Industrial Unrest:
Industrial sickness often leads to retrenchment of workers. So the trade unions
oppose it and resort to industrial strikes. This results in set back to industrial production
and growth.
4. Wastage of Scare Resources :
In a developing economy like India, the resources are already scarce. If these scarce
resources are locked up in sick industries, it becomes the wastage of scare resources
which otherwise invested would have yielded substantial returns to the economy.
5. Loss of Govt. Revenue :
The Govt. raise a substantial portion of its revenue from industrial units by way of
various taxes and duties levied on them. But, when a large number of industrial units
becomes sick, the possibilities for raising substantial revenue from the sick units by way
of various levies are greatly reduced.
6. Effect on Prospective Entrepreneurs
Due to industrial sickness, the share price of the unit tumbles down which, in turn,
adversely affects the stock market of the country. The creates a psychology of despair for
investments amongst the prospective investors. Added to this, the failure and closure of
a unit acts as an unhappy example of disincentive to the prospective entrepreneurs who
are planning to plunge into the same lines of production. On the whole, the industrial
climate becomes non-conducive for the industrial development of the economy.

REMEDIAL MEASURES
In an emerging market economy like India, small scale industries are considered
the backbone for achieving sustained economy growth. Thus, timely action needs to be
taken to protect these industries in the larger interest of the economy.
The following remedial measures can be taken to improve the efficiency of small
scale units and to prevent sickness in SSIs.
1. The identification and detection of sickness at the incipient stage is the first and
foremost measure to detect and reduce industrial sickness.
2. In view of limited resources at the disposal, a large number of sick units may have
to be permitted to close / liquidate, a fewer number of sick units may be picked up
for revival / rehabilitation and a larger number of weak units may be combined
together to prevent sickness.
3. In a market oriented economy, SSIs must put greater emphasis a pragmatic
planning of their functions and discover new markets with innovative product or
services.
4. Emphasis should be given to research and development for product innovation,
quality improvement, cost reduction and so on.
5. The infrastructure facility should be improved by the state to enable a smooth
functioning of the SSi activities.
6. The SSIs must give attention to adequate marketing arrangements with the
prospective layer to get regular orders and also undertake continuous market
research.
7. The product of SSIs should be widely advertised in the media for adequate publicity
and for the better research.
8. It is imperative that SSIs familiarize themselves with inventory control techniques
to reduce the cost of working capital.
9. In order to arrest sickness, at the incipient stage, banks and financial institutions
should periodically review the accounts of small scale industries borrowers to
identify units which are becoming sick or are prone to sickness.
 10. Last but not the least, it is required to import necessary knowledge to the
entrepreneurs in various functional areas through Entrepreneurship Development
Programme (EDP).

GOVERNMENT POLICY ON INDUSTRIAL SICKNESS

Government of India has taken various measures from time to time to detect
sickness at the incipient stage and rehabilitation of sick units in the small-scale sector.
1. Instructions of Commercial Bank : For tackling the problems of Industrial sickness
in the SSI sector and rehabilitation of sick, units, the Reserve Bank of India issued
guidelines to commercial Banks in Feb 1987 (modified in June 1989 and April 1993)
containing, inter-alia, definition of sick SSI units, viability norms, incipient sickness,
as also relief / concessions from Banks/financial institutions for implementation of
packages I the case of potentially viable sick SSI units.
2. Nayak Committee : The Nayak Committee set-up by the Reserve Bank of India in
1991 to deal with aspects of adequacy and timeliness of credit to SSIs, went into
the issue of sickness in detail. The RBI took action on its recommendations which
related to a modified definition of sick SSI units, reduced rate of interest for
rehabilitation, prompt viability studies/ nursing programmes of identified sick
units, head office to deal with sick industrial units and provision of expert staff,
including technical personnel to look into technical aspects.

3. Kapur Committee : The RBI set up a one-man committee under the Chairmanship
of Mr.S.L.Kapur, former secretary, to look into various problems germane to credit
flow to the SSI sector and suggest appropriate measures for their redressal. The
committee in its report submitted to the RBI, inter-alia, recommended the
following so that sick SSIs are rehabilitated quickly – If any one of the borrowal
accounts of the unit remains sub-standard for sick months, that is., principal or
interest in respect of any of its borrowal accounts has remained overdue for a
period exceeding one.

4. Kohli Committee : As per the recommendation of the Group of Ministers, RBI had
set up a working Group under the chairmanship of Mr.S.S.Kohli to review the
existing guidelines in regard to rehabilitation of sick SSI units and to recommended
revision of guidelines, making them transparent and non-discretionary for the
rehabilitation of currently sick and potentially viable SSI sick units.
The working Group submitted its report in May 2001. Based o the accepted
recommendations of the working Group, the RBI drew up the revised guidelines
for rehabilitation of sick units, which were circulated on January 16 2002, to all
schedule commercial Banks for implementation.
i) If penal rates of interest or damages have been charged, such charges
should be waived from the accounting year of the unit in which it started
incurring cash losses continuously.

ii) The rate of interest on term loans may be reduced below the document rate
where necessary, by not more than 3% in the case of tiny/decentralized
sector units and by not more than 2% for other SSI units.

iii) Cash losses are likely to be incurred in the initial stages of the rehabilitation
programme till the unit reaches the break-even level. The bank or the
financial institution during the nursing programme may also finance such
cash losses excluding interest, if only one of them is the financier.

iv) Interest on working capital may be charged at 1.5% below the prevailing
fixed or minimum lending rate charged by the Bank wherever applicable.
Additional working capital limits may be extended at a rate not exceeding
the minimum lending rate chargeable by the Bank.

v) For meeting escalations in capital expenditure to be incurred under the

rehabilitation programme, banks, financial institutions may provide,
wherever necessary, appropriate additional financial assistance upto 15%
of the estimated cost of rehabilitation by way of contingency loan
assistance. Interest on this contingency assistance may be charged at the
concessional rate allowed for working capital assistance.

vi) There will be need to provide the unit under rehabilitation with funds for
start-up expenses or margin money for working capital in the form of long-
term loans. Where a financial institution is not involved banks may provide
the loan for start up expenses, while margin money assurance may either
come from SIDBI under its refinance schemes for rehabilitation or should be
provided by the State Govt. where it is operating margin money scheme.
 Interest on fresh rehabilitation term loan may be charged at a rate 1.5%
below the prevailing fixed / minimum lending rate chargeable by the Bank.

vii) The promoters contribution towards the rehabilitation package is fixed at a

minimum of 10% of the additional long-term requirements under the
rehabilitation package in the case of tiny sector units and at 20% of such
requirements for other units.

5. Assistance by SFCs: State Finance Corporations have run a scheme for

rehabilitation of sick units. Under this scheme, reliefs and concessions like funding
of overdue interest, waiver of penal interest, re-scheduling of loans, and margin
money for additional term loans are provided.

6. Technical Consultancy Organisations (TCOs) : TCOs provide the following services

to sick units : diagnostic studies to asses the working of existing units and
diagnosing the reasons for sickness, rehabilitation plans for reviving sic units,
providing technical, managerial and commercial counseling.

7. Industrial Reconstruction Bank of India: The Bank was to act as the principal credit
and reconstruction agency for reconstruction and rehabilitation of sick units
through assistance for their moderanisation, diversification, expansion for
rationalization and for co-ordinating similar work of the other institutions
employed therein.

8. Sick Industrial Companies Act : Those industrial units whose net worth has
considerably eroded are refused any assistance by the financial institution are
assisted under this Act. The act also provides for the sett6ing up of a board of
experts for industrial and financial reconstruction of the sick unit.