THE FINANCIAL PLAN

17. ~E AN lN G OF FIN AN CIA

L AN AL YS IS

Financial analysis was always an imp •

ortant ~business activity for any
business new or old. In the recent years
it has gained increased importance in
e\'aluation of ongoing organisational activit
ies and new projects. Analysis helps
to understand the exa ct position or
worth of a project from the financial poi
of Yie\\' and enables to manoeuvre the nt
strategy.
·'Financial Analysis is defined as the pr·
occss of discovering economic
facts about an entcrpcise or..projec t on.J hc
bas is of an interpretation off in~ al
data'~.l t focuses on all aspects like €apital
costs, operation costs·and op_eratiJ1g
~even~~l t establishes relations with var
ious factors of the project and helps
in decision making at different stages
of project activities. Two important
factors to be,c>l>served in analysis arc -
1~etUI]) on investment and financial
soundness offli e comp_a ni ~-
The routine internal accounting provides
information which is required
for control and ma km g accoui1ting and
financial statements. A financial /
analysis brings out where the company
stands with respect to profitability,
liquidity, leverage and an effective use
of its assets. It is the process of
detem1ininoe, the si onificant- finanG-i.a.1 cha
e, racteristics of a firm both external
and internal. Th_e external analys_is_is car '
ried out by creditors, stock holders
and investment ana lys ts. Th e iotcrnal
analysis is performed by various
departments of a firm.
~p or tan ce of Financial Analysis
r- --------1---+
► Evaluates Project
,_ _ _,.... Displays Soundness of projec
Financial t/enterprise
Analysis ,_ _ _,..; Indicator of performance

~- -- -- -_ _. .J1 - - - • ; Indicator of shortcomings

FIG . 17.1 : FIN ANC IAL ANA LYS
IS
300 • Entrepreneu rship
.. . be obse rv ant and keen to
• Various stakeholders of the enterpri se wi11 .· _ ; proj ec t
·~ d d ·lopmcnt of cntcrpr rsc : .
know th e progress an eve · rnraisa l o l va ri ous
• Informat10n co ll cctc·d wt·111, cIP fo r co mparat1vcaP-.r
.
. fi ·. I allocations
_,,,,.. . t . l .· ·· ti cs lor inanc1a .
;" proiect activities and l ec tl c pt 1011 . /I ·tuat 1·on
J . 1·1 I rofit OSSS I ·
• Anal ysis will give an idea abo ut I <e y 1? . . d b k . f' .
...,,-- . . ,- ·a l in st1tut1 ons an an s o1
_, Will be helpful in cxp la111111g to manc i ·
loans. . · ns financial hea lth ,
, • Top management can quickly draw c~c_u~sio · 011
profitability and efficiency of the enterprise .
An entrepreneur should be able to rea d an d un d et•stand various
. financial
.
. . ffi · I
statements. This will enable him to dea 1e ect1ve Y WI ·th outside. .
sources
.
like
. h fi
banks and the in-company executives. 1n s ort mancia · I analysis indicates
. . the
direction in which an enterprise is progressing and also gives warnmg signal s.

Ratio Analysis

Financial analysis by relative figures or ratios gives more me~ni_ngful

picture of financial performance of an organisation. "Ratio anal~s1s 1s the
establishment of a reasoned relationship". The ratio has to be with factors
having some kind of linkage.
If we say sale as on today is Rs. 1,000, it does not give adequate
information. Instead if we say today's gross input to_sale ratio is 1:4 or 25°/o
profit in sale of Rs. 1,000 it carries more meaning. Similarly con1pany A
makes_Rs. 5,000 profit and company B makes Rs. 7,500 profits per day is not
correct comparison. It is possible that A has made profit in Rs. 50,000
investment (10%) and B has made profit in Rs. 1,00,000 investment (7 .5%).
Though in figures B's profits are more, based on return on investment the
profits of A are more. By ratio analysi~ A proved a wiser entrepreneur.
In brief we can say that ratios should be made with directly related figures.
The figures should be related and influencing each other. An entrepreneur
should use ratios for improvement in his own firm. The ratios enable to
det~rmine and ~o~~~re efficiency of_ investment of capit~l by comparing
capital, assets, habil1t1es and sales of different companies in similar industry.
Such ratio comparisons of industry are done by trade magazines and consultants
to know the trends.

Advantages of Ratio Analysis

• Ratio analysis involves a study of total fi,1 .1 · I ·

. , , ncia picture. I-I ence tl1e
analysis can_recommend sugoestions fioi· c _. • . h . er·
.
required.
0
01iect1vcact1onsw e,ev
 ht I, n, rAI n • l I

1_ : C " r I TA t { o s 1 Es 1 1 ~1 A T 1 , 0 , 11 H p • 0 J, ( 1
Pr c • JU I I ~
lhr m r~ I of a11 1he c , ()("ml , urc
C"\I a
I the dal e ' c~-: c Th m, C71£ t c,lSt. '-l\SI of lnnd
p!am and
nnsc-c laneou
OC'

oa (~.a,1h1l ah ~.Aud, . , u r, c ) lot

(' 1,,pr:nt,;n .
ri1a mztr.n ali ~~h n C"nc c-h:u , a ,n ~dd111o n en !'I r.-nucc•
o!fll('JC e.nd , ctnck cndp!M ! kl:.,. 21 mn c,f,ai~ ::..1c :alw, "" ohod 111 , cpt I
C.116 u1trn:, o I.he p: !OC"I O ~ 1J . noo lht pu: ptfi c!C• C'.9..ptflt. C~
• 111 be
ll1 I M o 'l tU R.t-: fl Cllf)a\~ !l In , f (;'\) of tho m !)IJflU'IC: !, ,t C
t !1fld r•u u :t pre ,n, Gtn,cn :

I I
•
net <"uucnt ,n;tt • e::t pn~ • and o -'
,.,....._,.,,..., I c~fKO r ,1 ~nd fra h-u
) })hie !'U 'IA d i 1B' ' 1.1 lv.c ft l

I) IDX!•
I« llit
II «f
SW c: l
("· - JU
304 • Entrepreneurship

Every expenditure until project comp leti on ha s to be capita li sed since

incoi11~ has not sta rted to make in co me ex penditure statement s. Wherever
expe nses category is not mac.l e, mi sce llan eous hea din g is to be used. A
specimen cost estimat e is shown in Table 17.2.

'/able 17 . 2
CAPITAL CosT EsT IMAT ES OF A PROJECT

Cost o( Suh lte1JJ

/te111 Particulars Costs
Items

·1. Advance expenditure

(a) Preparation of prospect sheet
(b) Survey of raw materials
(c) Techno-economics survey
(d) Project formulation costs

I I. Cost of land
(a) Cost of land
(b) Cost of site development
(c) Total cost of land

III. Cost of buildings and civil works

(a) Cost project premises
(b) Cost of administrative buildings
(c) Cost of ancillary buildings (godowns)
(d) Cost of residential buildings and
civic amenities
(e) Cost of services and other civil works

IV. Plant and machinery costs

(a) Cost of imported P and M
(b) Cost of spares
(c) Freight and insurance charges
(d) Duties and taxes
(e) Cost of indigenous P and M
(t) Cost of spares
(g) Freight and insurance charges
(h) Local taxes and duties
(i) Installation costs
(j) Erection charges
(k) Overhead expenses
Total plant and machinery costs
 __. .,.-- ---- :--- ---~ Fhr Fi" an cirtl J>/rm • 3o 5
V. Cost of a nci Ila rv.r ...111- - ~~~
d -miscc lh;;;;:. :~- :-- r-- --- --- -
(a) Cos t of an cill ·1r I , ncous ~ssc ts
. ~ Y P ant
(b) ln stall. atr on and costs. . o l. ·111 1.11
(c) Erection charg , . ,. .
. cs , 0 1 ancil~I·c ary planl
(d) Costs of ancil la r . .
Y cqu ,1)11v·ary
11t p lant
( wo r k·s· I1?P, rire fighting) "
(c) Costs ot mi .scc ll ancou · , s assets.
Tota
·
l cos ts of anciIla1·y . d
d ll
m1 sccllaneo us asset.

VI. I nvisiblc expenses

(a) Costs of patents, licenses
copyright s, technical kno~-how
trade mark s , etc '
(b) Cons ultan ts'
. fe es fior eng11
. ·1eering services
Total invisible expenses.
VII. Special items not listed above
(a) Registration fees
(b) Pre-o perat ion interest changes
Total special items costs.
VIII. Provision for escalation
(a) Escalation a/c. of land costs
(b) Escalation a/c. of building costs
(c) Escalation a/c. of plant machinery
(~) Escalation aic. of ancillary assets
(e) Escalation a/c. of other items
Total provision for escalation .

IX. Provision for contingencies and unforeseen

Item s@-% of items I-IX
X.
.___ Total capital cost estimates for the
______________
proje_
_-:--_ ct _..L-_ _ _ __j__ __J

I7.3. PROJ ECT OPER ATIO NAL CosT EsTIM ATES

b . Once the proje ct stage of the work is completed and produ

ction function
eg,ns expe nses have to be incur red for day to day requireme
nts. Estimates
of these expe nses cons titute the opera ting costs estimation
of the project.
E "nated cash value of the outpu t generated constitute the operating
st revenue
 306 • Entr ep reneursh1jJ

va ry based on qua ntum

estim ates. The proj ec t ope rat ing costs and reve nu es
e cost input and reve nu e
of output. Hence it is adv isa bl e to wor k out bo th th
vo lum es. The estim ated
output estimat es for diffe rent leve ls of prod ucti on
entrepre neur to deve lop a
fi gure s of operatin g costs and reve nu es enabl e th e
sheet and pro-forma cash
pro- fo m1a profi t/loss state ment. pro-fonm.1 ba lance
evaluation of operational
fl ow statem ents. The state ments in turn enabl e th e
strat egy of the proj ect.
stra tegy. th e fin ancial stra tegy and the inves tment
are:
The main co mpon ents of opera ting costs of a proj ect
I. Raw materials costs,
2. The ener gy costs,
3. The oper atin g labour costs,
4. The plan t maintenance costs.
5. Sup ervi sing costs.
6. Adm inis trati ve and management costs,
7. Interest and borrowing costs,
8. Dep reci atio n cost s.
as poss ible so that
Ope ratin g cost s shou ld be estimated as accurately
s an idea how to pres ent
the prof it / loss estim ate is realistic. Table 17.3 give
idea of estim atio n of cost
oper atin g cost s estim ates and Table 17.4 gives an
of prod ucti on and wor king results.

Table I7.3
ES
PRO JEC T OPE RAT ING Cos T EST IMAT
I rd
/ten 1
1
Particulars /'' yea,· 2"'1 year 3 year 4'" yea r

I. Raw materials costs

2. Operating labour costs
3. Supervision costs
4. Energy costs
5. Maintenance costs
6. Sales and advertising costs
7. Administrative and management
costs
8. Royalty and know how costs
9. Insurance costs
I 0. Depreciation costs
11. lnterest charges
12. lncidental expenses
Total operating costs
 IIIU\., 11111' -ll'-'.., ....,,..., • .
.,I Lill., 11.,l.jU lll.,U
)Dl[" i:i~llU l.,lUlU l IU.vll U.lv.: >. lVIUl l.,UVl
to be prio r to
from anyw here in the wor ld in much shor ter time than it used
liberalisation.

17~ K EVE N ANALYSIS

whe n he is
The basi c purp ose of BEA is to mak e an entr epre neur kno w
e and prof it is a
likely to start gen erat ing prof its. This helps to set an obje ctiv
motivating and esse ntia l fact or for any entr epre neur. Brake even
is the volu me
a loss. The
of sales at whi ch the busi ness wiJI neit her make a profit nor incu r
9-::. calculation of such sale s volu me (quan tity) is as follo\vs:
Let TC = Total
Cos t,
= TFC (Total Fixe d Costs) + TVC (Total Variable Cos ts)
TVC = Vari able Cos t/Un it (VC /Uni t) x Q
TR = Tota l Rev enue
= Sale s Price (SP) x Quantity (Q)
For no loss - no prof it situa tion SP x Q = TFC + TVC
= TFC + VC/ Unit x Q

TFC = (SP x Q) - (VC /Uni t x Q)

OR
= Q (SP - VC/ Unit )
OR
TFC
Q= SP- VC / Unit
 1

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J
 INS~rrrL JT'l()N J\ L FINANCE

1').l. ·ru n Nt~li l) ANO IM1~0 Rl'r\N CE FOR INSTI r t1 TIONA L FINA ~ C ES

1:111:\lh.'l' is ('Ill' l,r lhl' tlh.lSl t'SSt'nli~I inputs t~, r !l ll ryr t·~ t){ ~u ~1ne~s
Pl).!lllll S:lti,,n s irrt·spl·,:ti, c l,t' "h1..·thcr runn in!! l't1,!:l ni ~n t iL, n l)f t1..' r,e st~rtt:-.J
1\l·,, . Tlw t:t\ )Wth. lk'\'..rll,pnw111 .rnd di, t't~iti'-·!1t i,)11 :h:t i, itics 3b0 ft"\lU l rt'
f111!1th.·i:d nssist :1nl:l', l l'hy '-' l'tnpnnil'S "kpt'th.i nn , nrk•us tin.uK i:11 insutu k·~
nnd pt 1,·:1t~ fitunh:i~ rs t°'-,r th1.· ir t't'qu irt'llh.'nts l'f funJsl fh t· n·r~ 1: n1cnc p~·n "-, j
l,l'll'!lll :ind intcrt·$t ,·nrit·s th,m l ,·1..'!lr tl, 1l) : t·~11~ d~p"·nJ1ng up~,n th~ ~lllh."'un t
:rnd llw tt "\~t\ 't'ttw11ts 1n:1dt· .
Fi1mm:inl tll!lllU ~l'nh~nl is, 1.·ry "'rth.·1:, I .rnd dc.Yh.k s tht' ur'~ ~uh.id '""'" ll$ "-"' t'
, " ,sntit,
:u1, ''''-'nn ' - n- "'\ l k·nt·r the ti1w1h· in l ft.int·r i,.Jn 1.' t 1n,1n.1~t·111 ..·nt "-·.in l'""· ...._~n t' r:
...._

lll ht ll' f :1~ ll ndt·r:

{:,) Sdt·,· t i,ro"iurt and ~l'n i'-'l' ,h.·t i, it tt·~ ,, hi'-· h f '' t ' t:1ir r rHtnl ~ "... ..,
1n, t·~t1nc11t.
lb) l1t'1w r.,tc and build up pt\)r1t~ h,r t'\.' in, \.·~ tnw1H in l'\. [, Hl~h ' n Jn. .~
dl'\ l'll'ptn rnt ~ •l'ti, 1t i~~ -
ll') l \'-'-'1\ tin:1h.·, :1n1.'\I~ 1.i i, •~'"'ll~ ,md ~ f:U h.' h ·'"·c,, til l'~ t~,r ~h.''-"-"tt nt'.l~: h t:
~•nd d i~,·1pl11H.' Ht ti n:uh.· i:ll trnn ~.h-tl l'H~.
ld) r""''\' h.,~ tl' t,t· t1 11.uh:u 1 pLu11un~ .H ".'"''1'\) Clt\..· It'\ "-1 ,~,:- r •\."i'-'r
d1t\.'\.'t i1.'tl. \.'1.)ll ( t\ )I, ~H ldlt ll l f . ~1.' :1~ h' Ill..\~~- IH~\ \. l llHHH ,Hh.t ~~tl& \.' l -.':H
l'pl·nu i1.,n:-- l,r th1..· '"':0-1.'\l'"'-·\.·~.
(t') Kr\'P ~~'1.'d rt·l :1t11..,n~ with t'\k-rn ~I ;t~ ..·th ' i1...·-!- h~l' , ('fkll.)~ . ,' ht'n~
nth.i tim11h' h.'t~ :llld ,nfu~t.' "'"'nf,d"·n'-''-. 1n tlwn, .,~,uc \ "'Ur ~~•~it: "~'
~h:ti, itit·~ h ' lll!\k.c th~·tn inh' t'\'!-{\.'\i in tht' ..k .du\~~-

nw ti n:Hh·t :tl 1\ "-l ll l1'.' llh.'ll(~ 1.'f \ ~H h.' H ~ Hh l U~! n ~-~ \ :o-lH:l t:. " l ,\.\1.P t' -~·- ..r
t,1~) :11\· t)t\'\hll ~ \·,H t' ~'-' t i~t'\.1 ~\~ t ;,) ~h1.' l-t-t\·n n f1:u n-.'\.' ,u t..i \ ~ \ 1'_,,,:>!..·n -- t~•1-.r •..~... .
 • cn tref>re nru rsh ip
3)"' 2 , I ll l:t ll<' l'>, :I I L' lill•ll ll ;il h .1111, 1(I,
,:, r . Sh ort - ILi Ill
t m fin an ce. or two . Tli c~L · · lll l ' n11111 il y ll <Jt111v d lo, Ill1·
( a) Short - er . ar
. d fo r . .. ,so
about J ye,tio n pla n, sc, · n:il cl crn:111d :rnd co n, l't pi l' 111
req uir e
10 th e produc . c ,m: nl .s. .Nrn 111:1•11 ) thr.· s. , c,p111c, 11 l'll I
l rcq u,r
change s . ., , ita
r1 r. ll ing wo rking ca1 crcia I '-[Ji•ll 1 ", ·~ . 1,r,v ;1k
1111,1 1H ll t :-.. .111 d Ir.rd l,
sho ia r,- dc nk rs .:111 d n1 stP n1 l·r ~·
ken car e fro m com m ncc s
. 0 111 .
,s ta nd ad v::i , <ld nr 2
dit from ven do rs a . . fin •incc can be l nr. .:1 .pn . . . . :111
e: Lo ng-tc, mt bas .
' , . . h /o ,111 s ,lit rcq ur rcd /
ere
(b) Long-term financ on ,ns . talmcn is. Su c . 01
bl Ic.\
IO years repaya e ~ cri. cs. (j,xc d
:,ss t: ls. t; \p : 111 s 10 11 :l l' II\ II
·1·1 1·1llt- ..
f ac hrn . t of· ,; w h 11 s 111L· ss . l e< 1 rll1
P urc has e o. m d cs tabl .
. 1 s 1,m en 111
. 111 , cq u, n·11w11 h :11~·
modern1 sat ,on an for· ' both ~ 110 1.1 ,•1nd Iu ng ~t c,
sources of finance
indicated in Tabl e 19. 1

Table 19.1
# v rEs or FrN AN C ~ AN D Souu c ,,s

l.o ng -tcr111 11 eccl,

Sho rt-t erm nee ds
L'"
--
( i) By is\ ll ~ of' !-- '1 :11 c~. dchr 11lt11
(i) Commercial bc1nks
(ii ) C'o lk ct 111 g p11l>li c ck p1>';1h
(ii) Tracie credit from ve nd ors
(i ii ) lJ ti lisati on of"proli1 ~11rplu ,
(iii) Advances from cus tomers
:1nd dealer s
(iv) Privat~ financier s ( iv) Loa n~ from h:111k s :111 d
f j 11 ~111 L j ;Ji i 11 ~ I i ILI t j O 11 S

CE
19. 1. SO UR CE S OF FI~ AN

c,, c ,11 i:11 rh :rt 1/1c " " 11 c1. r:111 "'"'.
;
For startin g o f any new , c111 urc it i, ~1ppl y lur 111 'i tI 111111 111 "
or pro moter:-. have to co nt rihutc the ir fund \ ;111d 1hc 11
e ha nk s :ind ins titu t ion \ rro , 1dc fund\ P 11h t!l til e c ,1 c 111 n l 7'i",, 11 1
loans. Th 1· I1L't 11 " Ir,
c lo he p, m ,dcd-1)\ til t· L'll lI L·p I
80°10 \\ hic li mc :111s thL bala nce li;n
ind u ~t11 e , 110 1111~ lh· \~o r k ' " . ., ,,;,l
L'd t , , ,11 1 tile pc,; ,, t1n:il
ca se of tin ) and ~nl JII I hL·H :l 111 l'
..,
and la ter on loan :irr li c J 11o rh :11 L· madt.: f(l lin; 111 u,t l 111 11 11111011
fun ds
tlin \i. 11 he : ,' l I L.
l cl 1l11
11 rt " '' I ,- 1;tl r ,~, :trid hl'n u.:
s111:1 . u.s tn c-.. stJ
111< j • . 1 111, 1nL 1
(rl '
., Ill\ :.111 d -, nr.ill ,11d t1,
if they -., tan u 111 ihl' ll1J l~L l U>1 l1pl '( , , Ill
well on ly c I, 111 k, :1 •1: 1
~a II! app roJ , I, c11 11111 1c, u ,t 1,. 111 I.,. , ; , , ,per .II"
cntrqi rc~1cu r, ge,
l:tr,:c ll td '"' ,c tpp ,n:i ch , :rt
'"", 1i11,111< '",
pm ate l rnJnc, ers . fhc m c~ ~-• •n<l
ht1\ Cand ton1ml'11111· L). ,t
f I IJ'II( ti ,n ~
•n <,l ttul c , for car 1 1a1p urc , r ,11, ,.,\ <11 \ \ (Jl t\J llf L , •
,, l·qt tl'
,
1 k,u l'J {'J rli• f
n 11 o nJli<..11 H,n ofcommcrc1:-i lh,1 11 1
4

t' l,1 111' ~ d ft' L llll' >ll 1L 111 11fP ,11 ~·1'
1 . 1
J
t II
m .
1
11 t\ JW" of md u-. tric " ,md h~ \c c, en 01 1 . l ! ,p1. ' ., • 111' ,
1
fro t n,· l , , ,11 IL It'"' l 1.
I 1
,nd u\tr 1JI u1"-l11mn, 1n 1ndu, 1r:;.t
• 1 1,,v, n, incl , 1.
1
IL '> f , I I l f 111, 1111 I, I t I II
' ( I'
l'' '1
 !w titllt iunrtl Fiwmce • J53

also play a mujor rok in i1u.J11 s1rial fin.1n c in g. Th e.: vari o us fin anc ia l in stitut es
uriliscd for fi x ed capital and workin g capilal_t! rc.: show n in Fi g ure 19 . 1.
~
- ( <ll 111 11 CIl 1, il
ICI C I l~:11 1ks
sn · ( '<H ! JH: I ; 11 I \ C
NSIC i:i xcd Wf), ki11 ~ ll:in ks
H11 s in css ,
SSIC S - Pri vJ l c Fin:..r 11c c
( 'apital ( )rg~,11 i sat i <111 ( ·:,pil ,1'
SIDC:S St all: I 11dus1ric..1 I
Commercial and I n v c stmc nt
13:.111 ks ( ·orpora ti o n

Fie 19.1 SouRc Es 011 f1NANCE

The establ ishmcnt and growth of Inc..lustrics as well as economic growth

of the area is largely dependent on the financial in stitutions and their acti ve
supportive role. The success lies in havin g lesser paper work and fast di sposal
of loan application s. The fund requirements for business activiti<.:s are a<.;
follows:
vf?('Fixed Assets: Funds arc required for land, building, plant and
machinery and these arc normally arranged based on long-term loan s
from financial in stitution s.
\.ft Wo~·~i~,g Capital: \Vorkin~ capital i~ '.cquired for ra:v-materi al s,
facil1t1es, wages and salaries, l:lcctnc1ty, rent and m1 sccllaneou s
expenses. The biggest blockage of working capital in the inventories
consisting of raw-materia ls, work in progress and finished goods.
Higher the inventory level more will be the interest burden for the
organisatio n. One of the methods to get working capital from the
banks is to hypothccatc the goods.
For getting loans from bank s and financial institutions the credit
wonhincs~ of the industry and owners is very important. Some of the fact s
and sy mptoms of the credit worthines s arc product , sa les invoice s a nd
purchase hills. repeat orders from cli ent s. reputati o n o fthL: indu stry in ma rk et
circles and t:mrloycc morale. A success ful project tric e; to plou g h back th e
profit surplu s for expan sion :rnd moderni sati on acti viti es . Thi s kind o f intern a l
rc:-:ource generation i.;; , cry hea lth y sign for natural grow th o f an indu stry.
In the las t 1O _\·ears hundreds o f new entrepren eurs ha ve co lle cted mo ney
by w::iy o f publi c is~11 c ll f" sh:: i rc...; . Unfortunat e ly th e irl\'c:sto rs hav e h<.:c n chea ted
~y at lc-~1st 50% o r t hL·sc new entrepreneu rs. Th e re Iaxed ru Je s fo r pu b Ii c
is-; uL·s w ere meant 10 he lp th e ex i stin g t1nd ne\v en tre p re neu r s to take care of
th fin ,rn c i;il req uirement s. I lowever m~111 y cnt n: prcnc urs have mi su-, cd t h r\
t ir
0
Pno rtun,t y ;111d th e ir "li:-irc , :ire no t c\L'n bc in µ ~u o tcd .
 SUPPORT FUN.CTIONS TO SMALL
ENTREP.RENEU RS

20.1. NEED AND IMPORTANCE OF SUPPORT FUNCTIONS

Many entrepreneurs and especially those in sn1all-scale sectors have

technology related knowledge to take care of production and quality aspects.
They require lot of guidance and support in the beginning stage and production
stage of the industry in various project and business related activities. The
important areas they need guidance are project report preparation, location
and layout of plant, selection of n1en and n1achinery, competition level, various
marketing aspects, various types of finance faci lities and Government
assistance and subsidies. The suppo11 functions will extend necessary guidance
and provide inputs and help industries in n1oulding during initial stages of an
ente1vrise. Any industry will have teething problcn1s and uncertain situations
in the initial phases of the onJ.'.lnisation. With the backing of the support function
organisation can decide to get over difficult situations. The n1ost important
aspects for a new businessn1an are finance and n1arketing related subjects.
An entrepreneur should be able to consider the advantages of various
Government subsidies and assistance given for backward areas and the dis-
advantages of marketing activities and transport cost and proble1ns of raw-
materials and other facilities availability. Many industries started in backward
areas are suffering for various reasons and therefore it is esse~tial to give a
serious thinking about location of an industry. It is always advisable to start
an industry in a location where adequate infrastructure facilities, avµilability
of raw-material, market and skilled labour are available. In such semi-developed
or developed industrial areas other supports of banks and civic amenities will
be available. In this chapter various organisations which are started specifically
to play a supportive role to ~mal I industries are covered in brief.
An elaborate frame work exists in India to provide necessary assistance
to SSI units. Figure 20.1 below gives details of institution fran1e work fi.)r
 .370 • t ntrepre11eu rs111p
Srn te Le, ·el fns:::. . : rJ -
SSI units on All lndia basis by Cen tral Sector and

Inst illltions
to ass ist SSI
,_ -----. -i--------
------~- --------.-- I
-... -.---..i .-.....
State Le, el
: Centr:ll GoYernment : I nstirut ions
Institutions .- - - - - . - - - - - - - .. ,. - ..
• Stat~ Directorate of l ndu.s:...:~
• D~partment of Small Scale Industries
• State Sma ll Sca le lr.du 5:ri0
(Ministry of Industry)
~ 11~• Small Scale Industries Board • Indu stria l £scares
n
s '-::>c . Small lndustries Oe\·elopment Organis atio • Distri c Ind ustries Ceni.n.--s
t• ~i c. • National Small Industrie
s Corporation • Technical Consuh.anc~
• Specialised Institutions

SSI
FIG . 20.I : INST ITU TIO N TO ASS IST

s is in fin anc e ar~

The support function required for small industrie
financial assi stan ce to SSI iS
For this SIDBI which was startetl mainl y for
B. SISI and SSIDC im·ol\c
very important. Other organisations like SIDO. SSI
for SSI units. The re arc
them selv es in othe r types of assistance required
g Centers. Entrepreneursh ip
specialised institutions like Tool Room Trainin
y Organisations which help
Development Centers and Technical Consultanc
t.
SSI in various activities related to their developmen

UST RIE S COR POR ATI ON LTD . )

20. 2. NS IC (NA TIO NAL SMA LL IND

1955 with the objet'liH:'

ti~IC was started by the Central Govemm~nt in
o_ut the co_un!f)'. It sra ned
of promoting and developing SSJ units throug_h
with multiple obk ctiv es of helping SSI units for:
(ll'f pro\·iding machine[) on
, (c) enlisting SSI units for
hire purchase, (e) assisting, marketing and exports
tender participation in Government purchases, (
d1 organising supply of rJ \\ ·
ce in modernisation ofche
mat eria ls." " training of personnel and (t) assistan
units.
as und er:
The important functions of NSIC can be summed
scheme for purr hnse
• Financial assistance by way of hire purchase
of local and imported machiAery.
s.
• Provision of various equipments on lease basi
country and also tr
• Assistance for marketing the produce in the
help in exporting the products of SSI units.
 GOVERNMENT INCENTIVES, SUBSIDIES
AND POLICIES

21.1. INTR ODU CTIO N

th e
Industries occupy an important place in Indian economy. All over
up the
world the contribution of small-scale indu stri es is sizable and make
tries
overwhelming majority of all business enterprises. In developing coun
ibution
SSI unit play special role of creating large employment, equitable distr
and
of wealth, balan ced grow th of indu stri es . use of natur al resou rces
development of traditional art and craft.
The small-scale industries have grown in the country over last four
a hand-
decades. Government of India and all State Governments are giving
This
holding to develop SSI Sector and help indu striali sation of the country.
ase per
also helps making goods available at fair or competitive prices, incre
Policy
capita income and give overall benefit to the common man. Industrial
aims at
of Government of India of 23 July 1980 and recently in July 1991
rd

units in
helping SSI units in the country. The table below gives growth of SSI
India .

Table 21.1

SMAL L-SC ALE INDU STRI ES

Fi11a11 cial 200 1- 2000- 1999 - 1995-

Year > 02 OJ 00 9()

No. of unit s ('OOOs) 3.442 3.3 12 3.212 2,658

Employment ( l\1n ) I 9_2 18.6 17.9 15.3
Grnss ou tput * ( Rs. crs. ) 690J l6 639.024 572,887 362,656
E'-ports ( Rs. c-rs .) 71 .244 69.797 54.200 36,470
Sh:irc in Total Exports (%) 34 34 34 34
Bank credit to SSI sector (Rs. crs. ) 62.917 60.3 19 45,788 19,485
SSI credit as % of net
bank credit (%) 12.6 14.0 17.0 16.0
• At curre nt price s
P3g~ No 61)
Yii 11 cc Sta t1 , tica l Out line of Indi a : 00J-04 o f TATA Sc f\·ic.-c" LIJ ..
 1
to 90 ° 0 for dilfcrcnr reg ions is pro
v ided tor bo t11 111c o11 111 1g
~ub~id) l )r 50 \,

d out go i ng fin ish ed pro du cts . Th e Air ser vic es for the se
1.1 \\ -11111tcri: tls :111
v~ ry cco110 111i cal so that 111o vcn1cnl o f 111e n an d n1aterials
, t':1:--n11s is ,ilso rna dc
i~ ~lllt )rt b b le.

! l. ~- ~li\X CO NC ES S IO NS

rie s cor ni ng 11 in ba ck \va rd and hill region s the, Go vt. eit he r

Fnr ind ust 1)

\·ar i o us t.1x cs (ex c ise du ty. sa les tax an d oc troi) for a

t' \ c111pts tht.· rn fro rn
th crn co nc ess ion al rat es. Th is is spe cia lly ve ry he lpful
1:crt:1in per iod or e:i \ 'CS

~' Hld
~ snr nl l ind u str ies as the y can no t afford thi s pro ced ure an d the co st
!l) tin

utp ut \\ ill inc rea se anu 1na kc th cn1 difficult to con1pele in the rnarket.
l,f rhc iro
bJ c~ ,,·a rd reg i on s tax ho lid ay is de cla red for 5 ye ars for both
For so111c
ta\ . Th is ho lid ay is ap p li ca ble to all units wh ere mo re
~.lies Ll \ and incL,n1c
rlu n IO \\ ork cr: - arc c111 plo yc d .
 reneurship
384 • Entrep · S AND Suas101ES ~
JNCEN'fJYE
. AoVAN'fAGES Of . . tors a nd cncou rage both Pot
21 •4. , 1110 t1Vd . . cn 1·
enti ve acts dS . tin g' indu stn al1 sts. 'al
• Inc . . dal socx ts ~ c . .
. dustriatists an , tory iactors ,or various d1 sadva
in . 1 as co111pcn 5 <-1 c ntagc,
Incenttves he p . . backward areas. s
• . du stnes in
. 111 ..
for starting t ,d employ1nent opportunities impro
. t d velopmen at d . vc.
• Reg1ona e d rni zation and upgra at1on of techn 1
·stance for 1110 e o og11i
The asst .1.
• . etitive abi ity. .
1111proves co 01_Pd t .· es and developn1ent of national economy 11 ,.

(onofmUSll' . . vv! J
1

• Promo 1 ··zing and investing on the 1ncent1ves.

enhance by popu 1at 1

WBACKS OF INCENTIVES AND SUBSIDIES

21.5. DRA
• Past records and studies have proved that about 25% of the industriei
in backward areas were started n1ainly to exploit subsidies ana
financial institutions.
• The benefit disbursements have been n1ade 1nainly on consideratiom
of favouritism and gains to officials.
• In the paper work the prices of capital investtnents have beenjackea
up to increase the subsidy by dishonest applicants and officials.
• The schemes and incentives and subsidies have been treated ai
opportunities for unethical practice by Govt. officials.
1

• The purpose for which the scheme is started is not well taken care
due to (a) delays in disbursen1ents and (b) unethical practices in
Govt. offices. ·

21.6. INCENTIVES AND F

ACILITIES TO EXPORTERS ~
. In. order to improve the e . st rteO
vanous institutions and ct· xpo, t prospects the Government has a J
h . 6o Ies fi d.1ft~ 31.n1eu
t~ elp m financial mat • or erent type of assistance. They are .
s1mplifi d , ' ena1s, tax rebat , , . .. . ouonl•
e procedures and d es, sales exh1b1t1ons and pr 0111 .. ,0
more to sm aJI• scale and n ct·uty drawb·ac k s etc. Such assistance 1s. requ11t 1·
0
k nowledge d ,e 1um seal · d . rrns •
can af:c d an resources to tak e 111 ustnes who are lacking tn te triei
1or to t k e care 0 ft] 1 · dus •
. 111
Gov . a e care of the · . . e exports. Only few big al
e1nmentsubs·ct· mte1nat1on
1 ies. The orga· ·
1 b . . . tance
explained a usmess without the assis •. 8ri
6e1ow· n1sat1on s w~ tc-1 -- • ·11eS
assist in export actiVI
 Government In centives, Subsidies and Policies • 385

21.7. EOU AND EPZ

(1) EOU (Expo rt Orient ed Units)

The compa nies which ex port th e ir entire produ ction of good s can be
set up under EOU Schem e. Such units arc provid ed separa te space in the
industrial area called EPZ (Expor t Process ing Zo nes). This area is separa tely
fenced since the tariffs are differe nt compa red to other industr ies. Such EPZ
are created in Chenn ai, Mumb ai , Cochin , Noida and Vi sakhap atnam . Th ese
are nearer the Seapor t or Airpor t to enable easy shipme nt of goods to other
countri es.

(2) Facilit ies for the EPZ

• Ready made plots and buildin gs are provid ed in the EPZ area.
• No licens ing is requir ed for import of machi neries , spares ,
consum ables and raw-m aterial s for the units under EPZ area.
• The units are exemp ted from Excise Duty for all the goods
manuf acture d in EPZ.
• Foreig n investm ent is approv ed up to I 00%.
• Incom e Tax is exemp ted for a period of 5 years.
• Allow ance will be given for sale of up to 25%> produc tion in the
domes tic market to take of ups and downs of interna tional market .
• Off loadin g part of the worklo ad can be done with sub-co ntracto rs.
• Worki ng capital will be provid ed at conces sional interes t rates.
• The supplie s made to the produc tion units in EPZ area are treat~d
as deeme d export s.
• Comm unicat ion faciliti es and raw-m aterial s would be provid ed to
EPZ on priorit y basis.
• The contain ers are usually approv ed and sealed in the EPZ area and
will not be checke d again in the same country .
• Neces sary admin istrativ e suppor t, contai ner facility , Custom s
clearan ce and securit y are provid ed in the EPZ area itself.

21.8. VARIO US TAX CONC ESSIO NS

• Duty drawb ack: The facility is availab le for the produc ts export ed
from India for the follow ing:
(i) Excise duty paid for variou s inputs in the manuf acturin g and
(ii) Duties paid for import of raw-m aterial s and compo nents.
This proced ure was_ follow ed as per the provisi ons prevai ling
386 • Entrepreneurship

before liberal isation and wa s he lpful to expo rters. J\ l't cr

liberalisation howeve r the import duti es have bee n dr;is ti call y
reduced and waved on many raw-ma terials. Al so th e M ODV;\'j'
scheme on excise is any how help fu l to both sa le on do mesti c
market as well as ex ports. Hence th e dut y drawbac k is 11 0 1 as
big a help as it used to be be fore liberali sation.
• Advan ce license : Schem e was helpful to ge t duty exempti on for
raw-materi als intended for production for ex ports. Sud1 adva ncl:
licenses were issued to exporters on th e condition th at import should
be made only for production of exportabl e goods. Th ose wh o npl
for this method cannot apply for duty drawback method ex plained
above.
The companies which were doing high volume electronic goods were
taking advantage of this advance license method as _they used to buy a raw-
materials from the co1laborators. The brand name and Documentation was
helpful to show the records of imports against exports. After liberalisation
this procedure also is not as helpful as it was before liberalisation. The reason
being there is drastic waver and reduction of import duties on various materials.
• RBI permits the exporters to maintain foreign currency accounts ~

with Nationalised Banks for easy operations. This facility is provided

to those companies who do exports of more than Rs. 4.00 crores
per year. They have to follow a procedure of routing the export
documents through the same bank where foreign currency faci Iity
is provided.

21.9. RE'HAB ILITAT ION ALLOW ANCE

For SSI units rehabi litation allowa nces is provid ed in case of

discontinuation of business for following reasons:
(i) Due to floods, typhoon, cyclone. ea11hquake and other natural causes.
(ii) Due to civil disturbances like riots and violence.
(iii) Fire hazard, explosion and accidents.
(iv) Damage due to wars.
The amount spent is not considered for Income Tax under the Income
Tax Act, 1961.
 Co/J('l'lJ}ll f' IJI ln a11 t i/Jf'S, ,r. ,·uusirlirs rtncf /Jolicies • 387

21. 1 0 . MODVAT

Mod ified Valu e Added Tax sys tem was int rodu ced in 1990 to avo id
mult i-po int tax in g in c:1sc of Exc ise Duty. It was obse rved th at a co mponent
phases excise duty more than once. f-o r exa mpl e - a stee l raw- materi al buye r
pays exc ise dut y v,d1ilc buyin g steel from th e stee l produ ce rs. J\ small indu stry
ma kes a co mponent out of it and se ll s it to big industri es wh ere aga in exc ise
du ty is charged on raw-materi al and labour. Th e co mponent is asse mbl ed and
bi g industri es se ll s it to its customers wifh ex ci se duty on total mac hine. Thi s
mea nt th e ra w-materi al undergoes excise duty tax ation 3 times. Such many
exampl es ca n be gi ve n where a materi al undergoes multi-point ta xin g.
In order to avoid the multi-tax the Government introduced MODVAT
wherein after first stage tax will be made only for the value additions. This
avoids reputation of taxes. In order to operate this system the compani es
have to maintain registers to show the excise duty paid on the inputs so that
they can claim that much deduction of excise duty while charging the excise
duty for final product. This means in the subsequent operations the duty was
charged only for operations or labour work done by them and not for the
material and work done earlier. This has very much helped all the industrial
sectors and especially to the SSI units. The only problem is the registers and
paper work has to be written neatly and correctly for accuracies and making
it available for cross checks.

Expenses on Scientific Research

Income Tax deduction is allowed in respect of expenditure on scientific

research as fol lows:
(i) For expenditure incurred on scientific research related to the business
activity.
(ii) Amount paid to research association, institution or company under
taking the scientific research work.
(iii) Capital expenditure mad e for scientific research related to th e
business.

21.II. MARKETING ASSISTANCE

For helping marketing of Indian products abroad the Government has

created a Marketing Development Fund (MDF) to provide grants. Various
export promotion schemes are taken care to boost the exports. Some of the
schemes for which up to 60% of funding is made by MDF are as follows:
388 • Entreprenn1r hrp
1

1, un C\- to under the ex port potential .

( a) ;\ ~c, 1stanccfor mar~ct ', - a~
domc~t, c market · · b
. . f ari ou., trade cxh1b1tton " a roa d .
( b) I·or part1 c1pa11on o \ . d d.
h O\\ room~. ~c 0 ·1cc centre <; an ,~play~ ,n ,t
(c) for ~ctllng up o " f lit
rlomcsti c and ex port market. .
c R&D "ork and consultancy service s.
(d) A <:>s 1stancc ,or
(C)
For startin g rnarkcung offices abroad .

2 1.r 2 . R.Aw-MATER IALS

The organizati ons expo rting their goods are given pri orit_y _in allonini
ra\\ -materia ls Jike stee l an d al Joys, copped and alloys, al u~m 1um alloys,
t:lcctronic co mponents and the mater ials "v hich are to be 1mpo~ed. Th~
engineering export promoti on council even rc imbu r~es the cost difference
hctwcen loca l and ove rsea~ market fo r the ra w-materials.

21.1 3. OTHER CO N CESSIONS

(a)Exem ption of Sales Tax and Income Tax.

(b) Tra inin g o f employees in India and ab road.
(c ) Concess ion in the interest bu rden for finance from EXI M Bank.
(d) ()uick processing of import Iiccnsing and co nsideration of licensing
fo r item~ in ncgati ve Iist. ·
(c) Pro vision of foreign exc han ge fo r business visits. exhibitions and
trad e fair participati ons.
In addition to th e Central Government the State Governments also
providc inccntivc~ and ~ubs1dies fo r export oriented units. These are aimed to
hel p <;ma ll indu stri es and rural industries which lag behind in exports. However.
it may be mentioned here that onl y subsidi es and concessions are not adequate
to h(,o~t expo rts. The important requirement is the quality end consistencies
of qua Iity as per the ~pcc ifi cati ons of the importers. Even in our traditional
(;X port~ of c1gro based products th ere are various incidents of quality failures
und in consistencies. J fen ce quality and price are more helpful in competition
to grah ,,rdc rs and to increase exports. The Gove rnment subsidies and
conccs<.; ion s arc therefore mean ingfu I on Iy to th ose who are qua! ity conscious
ancJ competiti ve in th e globa l market.

/14. GOVERNM ENT POLI CJES

'I he Cc.: ntral Government has been ann ouncing IPR (Industrial roJicY
I<c "ioluti ons) from 1'J4H onward <; giving pri orities and guid elines for various