Entrepreneurship

Entrepreneurship Semester
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UNIT I: CONCEPTS OF ENTREPRENEURSHIP
1. Who is an entrepreneur? What are the various categories of entrepreneur?

Mr. Chatterjee was a student of an undergraduate course in Calcutta University. While studying,
he observed that the people in Kolkata were so busy that they did not have time to clean their houses.
He borrowed Rs. 3,000 and bought a vacuum cleaner and started cleaning houses on Saturdays, Sundays
and other holidays on payment basis. Within a year, the demand for his service increased and he
expanded his business by engaging more people in his work. Today, Mr. Chatterjee is considered as
one of the leading businessmen of Kolkata. Apparently, Mr. Chatterjee has been able to visualise a
business opportunity, decided to take the risk, arrange the resources and successfully organised them
in his venture. So, he can be termed as an Entrepreneur and his efforts as Entrepreneurship.
To be specific, entrepreneur is a person who tries to do something new, visualises a business
opportunity, organises the necessary resources for setting up the business and bears the risk involved.
Thus, an entrepreneur may be termed as an innovator, an organiser and a risk bearer. As an innovator,
the entrepreneur introduces new products in the market; finds out new markets for existing products;
introduces new production technology; launches new marketing strategy and so on. He bears the risk
and uncertainties associated with the business activities. He organises all the factors of production like
land, labour and capital and sets up the business to take advantage of the opportunity. Thus, an
entrepreneur refers to a person who visualises a business opportunity, takes steps to promote a new
enterprise, assembles resources in the form of men, materials and money to make the business venture
successful and bears the risk and uncertainties involved.
Entrepreneur Entrepreneurship Enterprise
Person Process of Action Object

Evolution of the Concept of Entrepreneurship
The word ‘entrepreneur’ is derived from a French word ‘enterprendre’ which means ‘to
undertake.’ In early 16th century, the Frenchmen who led military expeditions were referred to as
‘entrepreneurs.’ Around 17th century, this term was used for architect and contractors for public works.
Later it was applied to the function of engaging labour and buying materials and selling the resultant
products at contracted prices. In fact, it was in 18th century that the term ‘entrepreneur’ was applied
initially to business by the French economist, Richard Cantillon, who designated him as a dealer who
purchases the means of production for combining them into marketable products. Another Frenchman,
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J. B. Say, expanded Richard Cantillion’s idea and conceptualised entrepreneur as an organiser of a

business firm.
In case of a developing economy like India, it refers to one who starts a new business, undertakes
risk, bears the uncertainties and performs the managerial functions of decision making and
coordination. In many countries, the entrepreneur is associated with a person who starts his own new
and small business.
Famous Entrepreneurs in India
Successful Entrepreneurs before Liberalization: Tata, Birla, Modi, Dalmia, Kirloskar and others who
started their enterprises in a small way and made a good fortune.
Post Liberalization: the latest generation of entrepreneurs such as Ambani, Ruia, Azim Premji, Murthy,
Siva Nadar etc. Scanning their personal characteristics show certain prominent traits:
✓ Willingness to work hard and to persevere even if the business is in the verge of failure.
✓ Having a strong desire to achieve high goals in business.
✓ Undying optimism for a future and not disturbed by others and follow their own route.
✓ Independent and not guided by the current problems besieging them.
✓ Good foresight to visualize the likely changes in the business and taking timely actions accordingly.
✓ Ability to bring together all the resources required for starting the enterprise.
✓ Initiating research and innovative activities to cater to changing needs of customers.
CATEGORIES/CLASSIFICATION OF ENTREPRENEURS
I. According to the Type of Business
Entrepreneurs are found in various types of business coronations of varying size. We may broadly
classify them as follows:
Business Entrepreneur:
Business entrepreneurs are individuals who conceive an idea for a new product or service and-then
creates a business to materialize their idea into reality. They tap both production and marketing’
resources in their search to develop a new business opportunity. They may set up a .big establishment
or a small business unit. They are called small business entrepreneurs when found in small business
units such as printing press, textile processing house, advertising agency; readymade garments, or
confectionery. In a majority of cases, entrepreneurs are found in small trading and manufacturing
business and entrepreneurship flourishes when the size of the business is small.
Trading Entrepreneur:
Trading entrepreneur is one who undertakes trading activities and is not concerned with the
manufacturing work. He identifies potential markets, stimulates demand for his product line and creates
a desire and interest among buyers to go in for his product. He is engaged in both domestic and overseas
trade. Britain, due to geographical limitations, has developed trade through trading entrepreneurs. These
entrepreneurs demonstrate their ability in pushing many ideas ahead to promote their business.
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Industrial Entrepreneur:
Industrial entrepreneur is essentially a manufacturer, who identifies the potential needs of
customers and tailors a product or service to meet the marketing needs. He is a product-oriented man
who starts in an industrial unit because of the possibility of making some new product. The entrepreneur
has the ability to convert economic resources and technology into a considerably profitable venture. He
is found in industrial units as the electronic industry, textile units, machine tools or videocassette tape
factory and the like.
Corporate Entrepreneur:
Corporate entrepreneur is a person .who demonstrates his innovative skill in organizing and
managing corporate undertaking. A corporate undertaking is a form of business’ organization, which
is registered under some statute or Act, which gives it a separate legal entity. A trust registered under
the Trust Act, or companies registered under the Companies Act are example of corporate undertakings.
A corporate entrepreneur is thus an individual who plans, develops and manages a corporate body.
Agricultural Entrepreneur:
Agricultural entrepreneurs are those entrepreneurs who undertake agricultural activities as raising
and marketing of crops, fertilisers and other inputs of agriculture. They are motivated to raise
agriculture through mechanization, irrigation and application of technologies for dry land agriculture
products. They cover a broad spectrum of the agricultural sector and include its allied occupations.
II. According to the Technology use
The application of new technology in various succors of the national economy is essential for the
future growth of business. We may broadly classify these. entrepreneurs on the basis of the use of
technology as follows:
Technical Entrepreneur:
A technical entrepreneur is essentially compared to a “craftsman.” He develops improved quality
of goods because of his craftsmanship. He concentrates more on production than marketing. On not
much sales generation by and does not do various sales promotional techniques. He demonstrates his
innovative capabilities in matter of production of goods and rendering of services. The greatest strength,
which the technical entrepreneur has, is his skill in production techniques.
Non-technical Entrepreneur:
Non-technical entrepreneurs are those who are not concerned with the technical aspects of the
product in which they deal. They are concerned only with developing alternative marketing and
distribution strategies to promote their business.
Professional Entrepreneur:
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Professional entrepreneur is a person who is interested in establishing a business, but does not have
interest in managing or operating it once it is established. A professional entrepreneur sells out the
running business and starts another venture with the sales proceeds. Such an entrepreneur is dynamic
and he conceives new ideas to develop alternative projects.
III. According to the Entrepreneur and Motivation
Motivation is the force that influences the efforts of the entrepreneur to achieve his objectives. An
entrepreneur is motivated to achieve or prove his excellence in job performance. He is also motivated
to influence others by demonstrating his business acumen.
Pure Entrepreneur
A pure entrepreneur is an individual who is motivated by psychological and economic rewards. He
undertakes an entrepreneurial activity for his personal satisfaction in work, ego or status.
Induced Entrepreneur
Induced entrepreneur is one who is induced to take up an entrepreneurial task due to the policy
measures of the government that provides assistance, Incentives, concessions and necessary overhead,
facilities to start a venture. Most of the induced entrepreneurs enter business due to financial, technical
and several other facilities provided to them by the state agencies to promote entrepreneurship. A person
with a sound project is provided package assistance to his project. Today, import restriction and
allocation to production quotas to mall units have induced many people to start a small-scale industry.
Motivated Entrepreneur
New entrepreneurs are motivated by the desire for self-fulfillment. They come into being because
of the possibility of making and marketing some new product for the use of consumers. If the product
is developed to a saleable stage, the entrepreneur is further motivated by reward in terms of profit.
Spontaneous Entrepreneur
These entrepreneurs start their business their by Entrepreneur. They are persons with initiative,
boldness and confidence in their_- ability, which activate, them, underage entrepreneurial activity. Such
entrepreneurs have a strong conviction and confidence in their inborn ability.
IV. According to the Growth and Entrepreneurs
The development of a new venture has a greater chance of success. The entrepreneurs a new and
open field of business. The customer’s approval to the new product gives them psychological
satisfaction and enormous profit. The industrial units are identified as units of high growth, medium
growth and low growth industries and as such we have “Growth Entrepreneur” and “Super-Growth
Entrepreneur.”
Growth Entrepreneur:
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Growth entrepreneurs are those who necessarily take up a high growth industry, which has
substantial growth prospects.
Super-Growth Entrepreneur:
Super-growth entrepreneurs are those who have shown enormous growth of performance in their
venture. The growth performance is identified by the liquidity of funds, profitability and gearing.
V. According to the Entrepreneur and Stages of Development
Entrepreneurs may also be classified as the first generation entrepreneur, modern entrepreneur and
classical entrepreneur depending upon the stage of development.
They are explained below:
First-Generation Entrepreneur:
A first-generation entrepreneur is one who starts an. industrial unit by innovative skill. He is
essentially an innovator, combining different technologies to produce a marketable product or service.
Modern Entrepreneur:
A modern entrepreneur is one who undertakes those ventures, which go well along with the
changing demand in the market. They undertake those ventures, which suit the current marketing needs.
Classical Entrepreneur:
A classical entrepreneur is one who is concerned with the customers and marketing needs through
the development of a self-supporting venture. He is a stereotype entrepreneur whose aim is to maximise
his economic returns at a level consistent with the survival of the firm with or without an element of
growth.
VI. Others
Innovating entrepreneurship is characterized by aggressive assemblage in information and analysis
of results, deriving from a novel combination of factors. Men / women in this group are generally
aggressive in experimentation who exhibit cleverness in putting attractive possibilities into practice.
One need not invent but convert even old established products or services by changing their utility,
their value, and their economic characteristics into something new, attractive and utilitarian. Therein
lies the key to their phenomenal success. Such an entrepreneur is one who sees the opportunity for
introducing a new technique of production process or a new commodity or a new market or a new
service or even the reorganization of an existing enterprise.
2. What do you mean by entrepreneurship? What are the factors that affect entrepreneurship
development?
The term ‘entrepreneurship’ refers to the functions performed by an entrepreneur. It is the process
involving various actions to be undertaken by the entrepreneur in establishing a new enterprise. In fact,
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what an entrepreneur does is regarded as entrepreneurship. Thus, entrepreneurship can be viewed as a

function of:
(i) identifying and using the opportunities exist in the market;
(ii) converting the ideas into action;
(iii) undertaking promotional activities to launch an enterprise;
(iv) striving for excellence in his/her field of work;
(v) bearing the risk and uncertainties involved, and
(vi) harmonising.
Entrepreneurships can be described as a creative and innovative response to the environment and
the process of giving birth to a new enterprise. Such response can take place in any field of social
endeavour, business, agriculture, education, social work etc.
“Entrepreneurship is the attempt to create value through recognition of business opportunity, the
management of risk taking, and through the communicative and management skills to mobilize
human, financial, and material resources necessary to bring a project to fruition.”
Entrepreneur vs. Entrepreneurship

The term entrepreneur is often used interchangeably with “entrepreneurship.” But conceptually,
they are different yet they are just like the two sides of a coin. Entrepreneur and entrepreneurship are
co-related. The relationship between entrepreneur and entrepreneurship is given in the table:
Entrepreneur Entrepreneurship
Refers to a person Refers to a Process / Activity / Action
Leader Leadership
Planner Planning
Programmer Action
Motivator Motivation
Risk-taker Risk-taking
Creator Creativity
Visionary Vision
Innovator Innovation
Technologist Technology
Initiator Initiative
Organizer Organization
Decision-maker Decision Making
Administrator Administration
Adopter Adopting
Delegator Delegating
Ethical Ethics
Goal Setter Goal Setting
Imagination Imagining
Skilled Skills
Transformer Transformation
Wealth Creator Wealth Creation
Economic Developer Economic Development
Promoter Promotion
Factors Affecting Entrepreneurial Development

The emergence and development of entrepreneurship is not a spontaneous one, but a dependent
phenomenon of economic, social, political, and psychological factors. These factors act as supporting
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conditions to entrepreneurship development. These conditions may have both positive and negative
influences on the emergence of entrepreneurship. Positive influences constitute facilitative and
conducive conditions for the emergence of entrepreneurship, whereas negative influences create
inhibiting milieu (environment, setting, background) to the emergence of entrepreneurship.
The various factors that affect entrepreneurial growth and development can be classified under two
broad categories, viz., economic factors and non-economic (social) factors1.
1. Economic Factors: Economic environment plays an important role in entrepreneurial
development. Modern enterprises are believed to be social and economic institutions. Therefore,
their development is influenced by various social and economic factors. These factors include
economic system, industrial policies, licensing, foreign exchange policy, banking policy,
technological development, etc. An enterprise has to grow and develop within the framework of
these environmental factors2. These are:
a) Economic Systems:
b) Industrial Policy:
c) Industrial Licensing Policy:
d) Economic and Business Policies:
e) Foreign Investment:
f) Banking Policies:
g) Five-Year Plans:
h) Other Contributions:
2. Non-Economic Factors/Social Environmental Factors:
a) Social Changes:
b) Social Consciousness:
c) Cultural Environment:
d) Ecological Balance:
e) Caste and Community:
f) Family Background:
g) Educational Background:
h) Occupational Background:
i) Technological Development and Innovations:
1
Dr. S.S. Khanka, Entrepreneurial Development (New Delhi: S. Chand, 2009), 164.
2
Rajiv Bansal’s, Entrepreneurship (Agra: SBPD, 2017), 9.
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j) Migratory Character:
3. Explain the importance of entrepreneurship development and the role of an entrepreneur.

Importance of Entrepreneurship Development
It has been said that entrepreneurship is essential for economic development. In capitalistic
economies, the entrepreneurs played an important role in their development. In socialist economies, the
state played the role of the entrepreneur. But in a developing country like India which followed the path
of mixed economy, both the government and the private entrepreneurs played an equally important
role. Of course, there has been a significant increase in entrepreneurship in India in the post
liberalisation period. People have now begun to realise the crucial role the entrepreneurs have to play
for achieving the goal of economic development. They are regarded as the prime movers of innovations
and act as key figures in economic development of a country. Thus, entrepreneurship:
(a) helps the formation of capital by bringing together the savings and investments of people;
(b) provides large-scale employment opportunities and increases the purchasing power of the people;
(c) promotes balanced regional development in the country;
(d) helps in reducing concentration of economic power (power to own the factor of production in a few
hands).
Role of Entrepreneurs
Entrepreneurs play a significant role in economic development of a country. He promotes the
prosperity of a nation by his innovation and dynamic leadership Skills. He creates wealth, opens up
employment opportunities and fosters the other segments. According to Harbison, entrepreneurs are
prime movers of innovation, growth and as such, entrepreneurship is a dynamic force. The role and
significance of an entrepreneur are explained below:
1. Bringing Economic Growth and Prosperity: Entrepreneur bring economic growth and prosperity
in the country through generation of employment opportunities, capital and wealth creation,
increasing per capita income and GDP, improvement in quality of life by raising the standard of
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living, growth of infrastructural facilities, forward and backward linkages in society, development
of backward regions, economic independence. George gilder observes, “The ‘heroic creativity of
entrepreneur came to seem essential to our economic well-being in a global economy.” Baumback
and Mancuso write, “In underdeveloped nations, entrepreneurs often hold the key to economic
growth for a whole society. So entrepreneur is not a dirty word or a fast buck opportunist, but,
rather the backbone of the capitalist system.”
2. Brining Social Stability and Balanced Regional Development: Entrepreneurs play a crucial and
unique role in bringing about social stability and balanced regional development through absorption
of workforce in industries, removal of poverty, improving health and education facilities, creating
fair competition, equitable distribution of income, creation of social infrastructures, empowering
women and weaker sections of the society and supply of qualitative goods and services.
Although entrepreneurs are criticized as self interested exploiters, Adam Smith, while
recognizing that they do some good for society, partly reflected this view when he wrote in The
Wealth of Nations: “In spite of their natural selfishness and rapacity, though they mean only their
convenience, though the sole end which they propose from the labours of all the thousands they
employ be the gratification of their own vain and insatiable desires they are led by a hidden hand,
and without intending it, without knowing it, advance the interest of society.”
3. Innovator in Economic Growth: by bringing new ideas, combinations, products techniques,
organizations, new markets, making full use of technical knowledge, balanced growth, systematic
innovation, technological advancement, implementation of mechanical skills, an entrepreneur play
very crucial role in encouraging entrepreneurship and economic development. Peter Drucker
writes, “Just as management has become the specific organ of all contemporary institutions and the
integrating organ of our society of organizations, so innovation and entrepreneurship have to
become an integral life-sustaining activity in our organizations, our economy, and our society.” He
further says that the emergence of a truly entrepreneurial economy is the most significant and
hopeful event that have occurred in recent economic and social history.
4. Creation of Employment Opportunities: Entrepreneurs play a significant role in generation of
employment opportunities by establishing new units in manufacturing, trading and service sectors,
laying emphasis on small scale industries, utilizing the surplus labour force in varied industrial
and/or service activities, upholding self-employment as a core objective. Entrepreneur integrates
resources and technologies into profitable business ventures and creates job opportunities.
5. Increase Productivity with Modern Production System: Play an important role in raising
productivity. John Keudrick writes, “Higher productivity is chiefly a matter of improving
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production techniques, and this task is the entrepreneurial function par excellence.” Two keys to
higher productivity are research and development and investment in new plant and machinery. But
there is a close link between R & D and investment programmes, with a higher entrepreneurial
input into both.” George Gilder in The Spirit of Enterprise said that: “Entrepreneurs are innovators
who evoke demand.’ They are makers of markets, creators of capital, and developers of opportunity
and producers of new technology. They seek the unique product, the marketing breakthrough, the
startling new, feature or the novel design. They change technical frontiers and reshape public
desires. They create wealth and employment. They take exception to the received view that
companies should be market led. They lead the market.”
6. Export Promotion and Import Substitution: Liberalization, privatization and globalization
[LPG] has opened the arena of export promotion and import substitution to entrepreneurs by
establishing industries producing import substitution goods, establish new industries, especially for
export, products, exploration of new global markets, earning foreign exchange reserves, utilizing
the available productive resources, achieving self-reliance in production of as many goods as
possible, entrepreneur, are playing a pivot role in export promotion and import substitution.
7. Entrepreneur Plays a Role of Catalytic Agent: As Joseph Schumpeter says, entrepreneur’s task
is “creative destruction.” He destroys to create new things. He changes and transmutes values. He
searches change and responds to it. He is a change creator. Ralph Harwitz writes in his book
Realities of Profitability’, “The entrepreneur makes a happening, wants piece of action, is the
growth man. Without him there is no happening, no action, and no growth.”
8. Augmenting and Meeting Local Demands: Entrepreneurs also play a significant role in
augmenting local demands and meeting them satisfactorily. Towards this entrepreneurs focus their
attention to manufacture service through indigenous technology, skill, resources and experiences.
9. Reinventing Entrepreneurial Venture: An entrepreneur work to reinvent his entrepreneurial
venture. He knows that change and innovation is good for his organization. Paul Wilken observes,
“Entrepreneurship is a discontinuous phenomenon, appearing to initiate changes in the production
process and then disappearing until it reappears to initiate another change.” Zoltan Acs writes,
“Entrepreneurs stir up the waters of competition in the market place. They are ‘agents of change in
a market economy.”
4. Write short notes on:

a. Intrapreneur: The term ‘intrapreneur’ emerged in during the seventies. Several senior executives
of big corporations left their jobs to start their own small businesses because the top bosses in these
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corporations were not receptive to innovative ideas. These executives-turned-entrepreneurs

achieved phenomenal success in their new ventures, posing a threat to the corporations they had
left. These types of entrepreneurs came to be known as ‘intrapreneurs.’ This kind of brain drain
phenomena is not limited to the US, but has spread all over the world. Companies, as a result, have
started devising ways and means to stop this outflow of talent, experience and innovation.
The notion of intrapreneurship requires that managers inside the company should be
encouraged to be entrepreneurs within the firm rather than go outside. For an entrepreneur to
survive in an organization he/she needs to be sponsored and given adequate freedom to implement
his ideas. Otherwise, the entrepreneurial spark will die. The entrepreneur who starts his own
business generally does so because he aspires to run his own show and does not like taking orders
from others.
What is needed in large bureaucratic companies is a strong and healthy risk-taking culture,
where risk-taking managers are assured security and rewards. An entrepreneurial culture requires
a constant generation of ideas. It needs managers who listen and respond to new ideas and are
willing to risk their future, a system that rewards managers who may fail but who have generated
and experimented with ideas.
Definition
Intrapreneuring means the entrepreneurial activities that acquire organizational sanctions and
commitments of resources for the sole objective of innovative results. Intrapreneuring aims at
boosting the entrepreneurial spirit within the limits of organization, thus creating an environment
to develop.
In-tra-pre-neur a person within a large corporation who takes direct responsibility for turning
an idea into a profitable finished product through assertive risk-taking and innovation.
“Intrapreneurship is Entrepreneurship practiced by people within established organizations.”
Intrapreneurship revolves around the restructuring and reemergence of the firm’s capacity to
develop innovative skills and new ideas. Intrapreneurship is not just limited to the germination of
new ideas, but includes even the implementation of those ideas.
Characteristics of Intrapreneurs
Following are the characteristics of intrapreneurs:
1. Intrapreneurs bridge the gap between inventors and managers. They take new ideas and turn
them into profitable realities.
2. They have a vision and the courage to realize it.
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3. They can imagine what business prospects will follow from the way customers respond to their
innovations.
4. They have the ability to plan necessary steps for actualization of the idea.
5. They have high need for achievement and they take moderate calculated risks.
6. They are dedicated to their work that they shut out other concerns, including their family life.
b. Technopreneur: Technopreneurship is a simple entrepreneurship in a technology intensive
context. It is a process of merging technology prowess (expertise) and entrepreneurial talent and
skills.
Technopreneur is one of the major extensions of entrepreneurship. He is an entrepreneur with
a different set of tools and greater potential for success. [He is a developer first]. He is a new age
entrepreneur who makes use of technology to come out with something new to make some
innovation. Once the person succeeds in it, he/she exploits his/her achievement in the market to
make money. A technopreneur operates business differently from any other businessman. The
business of a technopreneur has high growth potential and high leverage of knowledge and
intellectucal property. For e.g. Sachin Bansal & Binny Bansal (Flipkart), Vijay Shekhar Sharma
(Paytm), Kunal Behl & Rohit Bansal (Snapdeal), Bhavish Aggarwal (Ola Cabs), etc.
[Technopreneur is a person who destroys the existing economic order by introducing new products
and services, by creating new forms of organisations and by exploiting new raw materials. It is
someone who perceives an opportunity and creates and organisation to pursue it. A person who
undertakes risks that has the chance of profit. Technopreneurs distinguish themselves through their
ability to accumulate and manage knowledge, as well as their ability to mobilize resources to
achieve a specified business or social goal].
c. Cultural Entrepreneur: Cultural entrepreneurs are cultural change agents and resourceful
visionaries who organize cultural, financial, social and human capital to generate revenue from a
cultural activity. Such people drive global change, create economic value and promote cultural
preservation and innovation. They enrich their communities and the work. They generate self-
determination and self-reliance. [The term cultural entrepreneurship applies to the creation of any
product or service that primarily targets our tastes, and that is an expression of our tastes., whether
it’s our taste in fashion, movies, music, stories, games, cuisine, or opinions. A newspaper is part of
media; but I’d say a magazine like People or Vanity Fair would be part of the Cultural industry].
d. Social Entrepreneur: Social entrepreneur is one who recognizes the part of society which is stuck
and provides new ways to get it unstuck. Be it dedicated efforts for child upliftment, fighting for
the conservation of Assam’s rainforests, working for the betterment of the blind or initiatives to
empower women, the entrepreneur’s passion is very strong. Freedom, wealth, exposure, social
mobility and greater individual confidence are driving this huge wave of social innovation and
entrepreneurship. After all are tired with the Inefficiency of governments and the indifference of
corporate, and want to make a change and this is the case everywhere.
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UNIT II: ENTREPRENEURSHIP AND MICRO, SMALL AND MEDIUM ENTERPRISES
5. What is a Small Scale Industry? Discuss the advantages and limitations of small scale industry.
`The small scale industrial sector comprising micro and small enterprises (previously known as tiny
and small industrial sector) has been recognized as an engine of growth all over the world. This sector
is characterized by low investment requirement, operational flexibility, location wise mobility, and
import substitutions. They have been the prime mover of industrial development in many developed
economies.
The small scale industrial units are the roots and fruits of economic activities. They provide way of
life to more number of people. With less amount of capital investment, this sector contributes more
towards GDP, provides more employment opportunities, offers unique product and service offerings,
and serves customers with personal attention. Though the large and medium types of industries make
the infrastructure and skeleton of an economy, the blood, flesh and skin of a flourishing economy is
made up of small scale industrial units.
Small Scale Industries (SSI) in India

Small scale industries have made considerable contribution to the socioeconomic development of
almost all the countries including India. In our country, the increasing pressure of population and
unemployment has made this contribution even more significant. In India, ever since the days of
Mahatma Gandhi, the small scale industry movement has been largely regarded as a vehicle for
uplifting the weaker sections of the population whether it is handloom weavers, handicraft workers,
rural women spinning at home, the rural artisans or the urban craftsmen-all of them look to specific
support in being able to compete with the modern industrial sector. The small scale industry is
phenomenal in our country that it has started thinking global in the wake of liberalization in the nineties.
The SSI sector as an important segment of Indian economy, accounts for 95 per cent of the
industrial units; 40 per cent of output in the manufacturing sector; employment to over 17 million
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persons; 35 per cent of total exports.1 The SSI sector has been receiving due attention and importance
from the policy makers owing to its special characteristics, namely, low level of investment required,
high potential for creating employment opportunities, least location constraints, thereby contributing to
a balanced regional development and a high utilization of local resources. This sector covers a wide
spectrum of industries categorized under small, tiny and cottage segments. The sector has also
maintained its pace of growth over the years, and has contributed significantly in supporting the overall
economic development of the country.
Definition of Small Scale Industry
Defining small-scale industry is a difficult task because the definition of small-scale industry varies
from country to country and from one time to another in the same country depending upon the pattern
and stage of development, government policy and administrative set up of the particular country.
Every country has set its own parameters in defining small-scale sector. Generally, smallscale
sector is defined in terms of investment ceilings on the original value of the installed plant and
machinery. But in the earlier times, the definition was based on employment. In the Indian context, the
parameters are as follows.
The Fiscal Commission, Government of India, New Delhi, 1950, for the first time defined a small-
scale industry as, one which is operated mainly with hired labour usually 10 to 50 hands. Fixed capital
investment in a unit has also been adopted as the other criteria to make a distinction between small-
scale and large-scale industries. This limit is being continuously raised upwards by the government.
The Small Scale Industries Board in 1955 defined, "Small-scale industry as a unit employing less than
50 employees if using power and less than 100 employees if not using power and with a capital asset
not exceeding Rs. 5 lakhs."
The initial capital investment of Rs. 5 lakhs has been changed to Rs. 10 lakhs for small industries
and Rs. 15 lakhs for ancillaries in 1975. Again this fixed capital investment limit was raised to Rs. 15
lakhs for small units and Rs. 20 lakhs for ancillary units in 1980. The Government of India in 1985, has
further increased the investment limit to Rs. 35 lakhs for small-scale units and Rs.45 lakhs for ancillary
units.
Again the New Industrial Policy in 1991, raised the investment ceilings in plant and machinery to
Rs. 60 lakhs for small-scale units and Rs. 75 lakhs for ancillary units. An ancillary unit is one which is
engaged or proposed to be engaged in the manufacture of production of parts, components, sub-
assemblies, tooling or intermediaries or rendering services and the undertaking supplies or renders or
proposes to supply or render not less than 50% of its production or services, as the case may be, to one
or more other industrial undertakings and whose investment in fixed assets in plant and machinery
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whether held on ownership terms or lease or on hire-purchase does not exceed Rs. 75 lakhs. For small-
scale industries, the Planning Commission of India uses terms 'village and small-scale industries.’
These include modern smallscale industry and the traditional cottage and household industry.
Revision in the Definition Small Scale Industry in India

In India, the term “small-scale industry” evokes different meanings for different agencies for a long
time. The Planning Commission of the Government of India views the entire village and small
industries (VSI) sector as SSI sector.
The National Sample Survey Organization under the Central Statistical Organization (CSO)
Government of India defines the entire industrial sector in terms of organized and unorganized
segments and also in terms of industrial enterprises run by the households and nonhouseholds. The
Central Excise Department, on the other hand, distinguishes SSI on the basis of the annual turnover of
the respective unit. However, with a view to determining the types of industrial units requiring special
support, a more clear cut definition was felt necessary. Accordingly, from the industrial policy
perspective the size of gross investments in plant and machinery, land and buildings as well as the
strength of the work-force in the respective units were the criteria to demarcate a unit as SSI. These
rules have undergone periodical changes overthe years. Shift from work-force criterion to investment
criterion was made in the later period. Further, a new concept of ancillary and tiny units was introduced
with a view to bringing more units under SSI concept. The SSI has been currently defined in terms of
investment ceilings on the original value of installed plant and machinery. This classification on the
basis of investment in plant and machinery also covers residual units not included under the assistance
programme of any of the Statutory Boards. In 1998, the Government of India fixed the ceiling as Rs.
one crore in plant and machinery for small-scale industries and ancillary industries. The ceiling was
Rs.25 lakhs in plant and machinery for tiny industry.
With a view to building a sound industrial base and a strong village and small industrial sector, the first
step taken by the Government in the post-independence era was the announcement of the Industrial
Policy of 1948. It spelt out the framework of the basic and strategic industries to be established by the
states.
The enactment of the Constitution which guarantees fundamental rights for the citizens of India,
the launching of the First Five Year Plan, and the adoption of socialistic pattern of society by the
Parliament paved the way for the Industrial Policy Resolution, 1956. It recognized the role of SSI sector
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in providing employment opportunities, mobilizing local skills and capital resources and in the process,
integrating with large-scale industrial sector. The global economy witnessed several structural changes
in the 1990s. Markets have become more open and competitive, economies have become more
independent and developments in the sphere of international trade and finance have altered the pace
and pattern of international flow of commodities and investment.
Current Definition of Micro and Small Enterprises

Now in India, the small enterprises in the manufacturing sector are defined in terms of investment
in plant and machinery (excluding land and buildings), and further classified into micro, small and
medium enterprises.
In accordance with the provisions of Micro, Small & Medium Enterprises Development (MSMED)
Act, 2006, the Micro, Small and Medium Enterprises (MSME) are classified into two groups:
(a) Manufacturing Enterprises
(b) Service Enterprises
The limit for investment in plant and machinery / equipment for manufacturing service enterprises,
as notified, vide S.O. 1642(E) dtd.29-09-2006 is as under:
Micro Enterprise:
A micro-enterprise is one where the investment in plant and machinery (the original cost excluding
land, building and items specified by the Ministry of MSME in its notification No.S.O.1722 (E) dated
october 5, 2006) does not exceed Rs.25 lakh.
Small Enterprise:
A small enterprise is one where the investment in plant and machinery (see above) is more than Rs.25
lakh but does not exceed Rs.5 crore.
Medium Enterprise:
A medium enterprise is one when the investment in plant and machinery (see above) is more than
Rs.5 crore but does not exceed Rs.10 crore.
The definition of MSMEs in the service sector is:

Micro-enterprise: investment in equipment does not exceed Rs.10 lakh.
Small enterprise: investment in equipment is more than Rs.10 lakh but does not exceed Rs.2 crore
Medium enterprise: investment in equipment is more than Rs.2 crore but does not exceed Rs.5 crore.
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(a) Manufacturing Enterprises: The enterprises engaged in the manufacture or production of goods
pertaining to any industry specified in the first schedule to the Industries Development and Regulation
Act, 1951) or employing plant and machinery in the process of value addition to the final product having
a distinct name or character or use. The manufacturing enterprises are defined in terms of investment
in plant & machinery.
(b) Service Enterprises: The enterprises engaged in providing or rendering of services and are defined
in terms of investment in equipment.
Manufacturing Sector
Enterprises Investment in plant & machinery
Micro Enterprises Does not exceed twenty five lakh rupees
Small Enterprises More than twenty five lakh rupees but does not exceed
five crore rupees
Medium Enterprises More than five crore rupees but does not exceed ten crore
rupees
Service Sector
Enterprises Investment in equipments
Micro Enterprises Does not exceed ten lakh rupees:
Small Enterprises More than ten lakh rupees but does not exceed two crore
rupees
Medium Enterprises More than two crore rupees but does not exceed five crore
rupees
Source: Ministry of Micro, Small and Medium Enterprises, Government of India, New Delhi.
The last revision was with the enactment of the MSME Act, 2006 and the definition is a part of the
Act. The Act defined the MSME sectors overwriting the earlier concept of small-scale industries of
India.
The current classification marks enterprises in manufacturing sector with an investment in plant
and machinery of up to Rs 25 lakh as micro, up to Rs 5 crore as small and up to Rs 10 crore as medium
enterprises. Similarly, the limits for enterprises providing services are set at Rs 10 lakh, Rs 2 crore and
Rs 5 crore for micro, small and medium enterprises, respectively.
Advantages of SSI (in India) / Relevance to Indian Economy
At the dawn of independence, India was beset with an appalling state of the economy, poor
infrastructure, lack of funds, scarcity of food and social tensions arising out of the division of the
country into India and Pakistan. The first government under the leadership of Pundit Jawaharlal Nehru
inherited the Philosophy of Mahatma Gandhi and was for fostering cottage industries and the use of
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traditional skills as a means of attaining a self – reliant rural structure. Village and cottage industries
have remained close to the hearts of our policy makers since then.
The philosophy of economic development in the post independence era provided a key thrust to
large-scale public enterprises. While the Second Five Year Plan based on the Mahalanobis model set
out to build an efficient infrastructure to meet the emerging needs of industry and consumers, small
industries were accorded an important place in the framework of Indian economic planning. Village
and Cottage industries has remained the darling of politicians and bureaucrats alike for a variety of
social economic, ideological and political reasons. 12
The Small Scale Sector has been assigned pride of place in the country’s industrial development
programme due to the following reasons:
1. A given amount of capital invested in a small-scale unit provides more employment than the same
amount in a large undertaking. This is very important, particularly in a country like India where there
is surplus work force.
2. Small-scale industries provide employment without adversely affecting the prime occupation,
namely agriculture. The illiterate masses can undertake work during the off-season in these industries.
3. India is short in two important factors of production, namely
i. Capital
ii. Technical and managerial skill. Small-scale industrial economies contribute to capital formation
and act as a nursery to raise managerial skill.
4. Small-scale industries mobilize untapped resources of capital and rural skill that may otherwise
remain unutilized in this vast country. Large-scale industries as they cluster around cities cannot attract
these resources.
5. Unlike large-scale industries, small-scale industries need relatively shorter gestation periods.
6. Small-scale industries are less dependent on imported machinery and raw materials.
7. Small-scale industries help dispersal of economic power and thus ensure balanced economic growth
in the country.
8. Small-scale industries help to meet a substantial part of increased demand for consumer goods and
simple producer goods.
9. The creation of a network of small-scale units opens up more sources of supply and demand
opportunities for large-scale industries and imparts strength and viability to the industrial sector.
10. Small-scale industries also can develop handicrafts and promote aesthetic values.
For the above reasons, the small-scale sector and its development in a developing country like India
is essential.
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Limitations of SSI
Certain problems of small-scale industries arise out of difficulties, which are inherent in such units.
Some of the major handicaps are briefly given in Table below:
Various Reasons for Sickness/Incipient Sickness

Reason for sickness/ incipient sickness Proportion of sick/ incipient sick units *
Total SSI Regd. SSI Unregd. SSI

Sector Sector Sector
Lack of demand 66 % 58 % 69 %
Shortage of working 46 % 57 % 43 %
Non-availability of raw 12 % 12 % 12 %
Power shortage 13 % 17 % 12 %
Labour problems 05 % 06 % 04 %
Marketing problems 36 % 37 % 36 %
Equipment problems 11 % 09 % 12 %
Management problems 04 % 0 5% 03 %
Source: Ministry of Small Scale Industries Annual Report 2004 – 2005 Chapter – IV Page No 48
Raw Material: This difficulty is experienced in a very pronounced form. The small-scale industries
find themselves at a loose end in competition with large-scale industries and resources. The latter mop
up all the raw material they can lay their hands on, and leave little for the small-scale industries. Of all
the present difficulties, the non-availability of raw material at competitive prices appears to be the
greatest. Financial weakness stands in the way of securing raw materials in bulk in a competitive
market. “The entrepreneur does not get enough of what he wants, and what he gets is of poor quality
and has to be bought at higher prices.”
Production: Small-scale units suffer from inadequate workspace, power, lighting and ventilation,
absence of sanitary and safety measures etc. These shortcomings navel tended to endanger the health
of workers and have adversely has affected the rate of production. Many units are following primitive
methods of production. Either the entrepreneurs dislike adoption of modern techniques or it is not
feasible. Units are suffering from shortage of finance required for modernizing equipment and
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expanding business. Wage rates and service conditions of small industries are not attractive to skilled
labour.
Marketing: Lack of standardization, absence of trade names, absence of proper costing procedure, lack
of contact with wider markets and absence of knowledge of techniques of marketing are also main
constraints in the small-scale industrial units. Often small entrepreneurs are dependent on
intermediaries who have a monopoly over the markets. They do not have the resources to advertise and
their direct contacts with the customers are limited.
Management: Small-scale industries in our country suffer from lack of entrepreneurial ability and
initiative. The inefficiency in management comes first among the managerial problems. The poor
training imbibed by the owner-manager leads the concern to the brink of ruin. As the capital invested
is very low, there is no scope for specialization in any discipline. Hereditary entrepreneurship, often
lacking proper planning, forecasting, and involving family feuds, brings down the efficiency of the
management.
Financial: Shortage of finance affects the viability of small units severely. Every kind of problem
whether of raw material, power, transport or marketing faced by an entrepreneur, in its ultimate
analysis, turns out to be a problem of finance. The small industry is elbowed out by the large and
medium scale industries in the procurement of bank finance and institutional credit. Commercial banks
suspect the stability of small industries and are not interested in lending the small amounts these
industries require.
This problem of finance is vitally related to the problems of production, technical and managerial
competence and marketing. Non-availability of timely finance has been the root cause of the above
problems.
Sickness: A serious problem, which hampers the small-scale sector, has been sickness. Many small
units have fallen sick due to one problem or the other. Research has shown that sickness is broadly
caused by two sets of factors-internal and external. From among the various internal and external causes
of sickness. The important once are bad management, lack of accounting and management information
systems, high rate of capital gearing, failure of the management to respond adequately to the changing,
economic, social, political and technological environment, delays and cost escalation, inadequacy of
finance, shortage of raw materials, outdated plant and machinery, low labour productivity, labour
unrest, inflation and demand recession etc.
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6. What do you mean by family business? What are the advantages of family business?
The family business is the most frequently encountered ownership business model in the world and
their impact on the global economy is considered significant. It is estimated that the total economic
impact of family businesses to global GDP is over 70%. Family businesses are recognized as one of
the engines of the post-industrial growth process since they are given credit for developing across
generations' entrepreneurial talent, a sense of loyalty to business success, long-term strategic
commitment, and corporate independence. This transformation can be achieved if the micro, small and
medium scale enterprises (family owned businesses included) are encouraged to grow through the
provision of finance and human capital. The key result of this study shows that Family firms are an
integral part of Indian economy and have contributed significantly to GDP of the country which sustains
economic growth.
Introduction
Family business is defined as a business in which two or more members of a family are involved
and the majority of ownership and control lies within the family. Family business is one of the oldest
forms of business organization.
Family business are within the category of micro, small and medium enterprises (MSMEs) globally
whether in USA, South America, Europe, Asia and Africa. However, some family businesses are large
multinational corporations that operate in many countries such as Ford Motors and McDonalds which
originates from USA.
According to the Institute of Family Business, in 2011, there were just under 3 million family
businesses operating in the UK, representing 66% of the private sector total. In terms of distribution by
size 75% (2.2 million) of these firms were micro businesses with no employees, with a further 639,000
(or 22%) family businesses employing between one and nine employees. Using the British SME size
definitions of small, medium and large, family businesses made up the balance of the sector with 3.1%,
0.5% and 0.3% respectively.
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In India, Confederation of Indian Industry (CII) in 2011 reports that the gross output of these family
run businesses accounts for 90% of India’s industrial output, 79% of organised private sector
employment, and 27% of overall employment superseded only by the government and public sector
undertakings, companies in which the government own the majority of share. Various terms like
‘family-owned,’ ‘family controlled,’ ‘family managed,’ ‘business houses,’ and ‘industrial houses’ are
used torefer to family business.
Family ownership is often associated with a double role for the family as that of owners and
managers of the firm. In economic terms, families make firm-specific investments in human capital,
which makes them reluctant to give up control. This, and the fact that typically a higher share of owner’s
wealth is invested in the firm, creates a long-term commitment to the survival of the company and
results in family firms being more risk-averse than other firms. Hence, their behaviour may be affected
by a high sensitivity to uncertainty and by a risk attitude which induces them to avoid decisions
affecting the firm’s survival or the stability of control.
Definition
1. Barry, “Ownership control b the members of a single family.”
2. Rosenblatt, de Mik, Anderson and Johnson, “Majority ownership by a single family and direct
involvement by at least two members in its operation.”
Example: Some of the largest family business firms worldwide are:
- Wal-Mart (USA): Revenues $245 billion, Sam Walton Family
- Samsung Group (South Korea): Revenues $98.7 billion, Lee Family
- Flat Group (Italy): Revenues $54.7 billion, Agnell Family
- McCain Foods (Canada): Revenues $3.5 billion, McCain Family
- Tata Group (India): Revenues $7.9 billion, Tata Family
- Others (India): Bajaj, Birlas, Bangurs, Khaitans, Goenkas, etc., started in Kolkata and developed
the city as a centre for commerce.
Advantages of Family Business
“When it works right, nothing succeeds like a family firm. The roots run deep, embedded in family
values. The flash of the fast buck is replaced with long-term plans. Tradition counts (Facts and Figures:
Family Business in the US, Family Business Magazine).” A family business provides a range of
advantages which other enterprises (non-famiiy businesses) do not. These include but not confined to
the following only:
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1. Common Values: Entrepreneur and his/her family are likely to share the same ethos and beliefs
on how things should be done. This will give entrepreneur and extra sense of purpose and pride
and a competitive edge for his/her business.
2. Strong Commitment: Building a lasting family enterprise means entrepreneur is more likely to
put in the extra hours and effort needed to make the business a success. At the same time, his/her
family is more likely to understand that he/she needs to take a more flexible approach to his/her
working hours.
3. Loyalty: Strong personal bonds, called loyalty, means entrepreneur and family are likely to stick
together in hard times and show the determination needed for business success. Loyalty leads to
commitment which gets translated into hard work and perseverance which are the prerequisites of
success in any endeavour including business.
4. Stability: Purpose provides stamina and stability in efforts. Knowing one is building for future
generations encourages and strengthens his/her efforts in terms of long-term thinking and tenacious
efforts needed for growth and success of his/her business. Yes, at times it can also produce counter-
productive effects in terms of entrepreneur’s inability to respond to requirement.
5. Decreased Costs: Unlike non-family business, members of family business may be more willing
to make financial sacrifices for the sake of the business. For example, accepting lower pay than
they would get elsewhere to help the business in the long term, or deferring wages during a cash
flow crisis. The family can also hold down the costs of governance, in terms of special accounting
systems, security systems, policy manuals, legal documents and other mechanisms to reduce theft
and monitor employees’ work habits. This is possible because employees and managers of business
are well related and have trust and confidence on each other.
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7. What are the conflicts in family business and how can these conflicts be resolved?
Introduction
Conflict is a fact of family business life. According to the Family Firm Institute, 20% of family
businesses report weekly conflict, another 20% report monthly conflict, and 42% report conflict three
to four times per year. You can draw your own conclusions about the 18% who report no conflict at
all! According to Zimmerer and Scarborough, only 30% of businesses survive till second generation,
10% of businesses survive till third generation.
It’s worth noting that not all disagreements rise to the level of conflict. Disagreement is a difference
of facts, perceptions, beliefs, or expectations. Conflict is a higher level of disagreement; it is the belief
of two or more people that their positions are mutually exclusive.
When two or more individuals must act upon or implement their needs, values, or interests, and
they perceive others are blocking or opposing them, conflict arises. In life, and especially in families
and businesses where values and interests are deeply held and tied to future happiness, conflict is
inevitable and sometimes can even be positive.
Rather than mask or deny inevitable conflict, conflict resolution brings difference to the surface
and creates a comfortable, safe space and set of skills to successfully move forward while enhancing
the relationships involved.
Reasons for Family Business Conflict
i) Challenges of Interrelationships: One of the peculiarities of family business is that the boundaries
between work and family are quite intermingled, complex and also multifaceted. Such an inter-
related context at times creates three overlapping perspectives that influence the actions and
decisions of family business owners. These are: (i) The family wants to take care of family
members. (ii) The concern for ownership by doing what is in the best interest of the family business.
(iii) The concern for management by doing what is the best interests of other organizational
employees, i.e. non-family employees.
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ii) Challenges of Management Succession: Management succession has been found the second
major challenge facing the family businesses everywhere in the world, including India. Research
studies on family business have reported that, on average, only 30 per cent of family businesses
survive to the second generation, and only 10 per cent make it to the third generation. This is
because many entrepreneurs dream of passing on the family business to their children or kins and
kiths. But, the human traits such as lack of interest or competence or jealousy usually get into
business with their evil effects on business. The consequence is the failure of business.
iii) Sibling Rivalry: One of the challenges family businesses face is sibling rivalry. The main reason
for this is the share in the family business cake the members get. This happens particularly when
business starts flourishing and expanding over the period. The sibling rivalry ultimately culminates
to split in the family business. The main reason for this rivalry is that siblings’ anxiety to prove
their mantle better than the others. Rivalry with each other often amounts to pull each other down
at the cost of the organizational resources. The rivalry further gets fuelled and even complicated
when some members of the family in one way or other favour one of the siblings. This further leads
to the complication as one of them feels of unjust and undue favouritism. If rivalry is not resolved
well in time, it may lead to split in the family business and, thus, may damage the age-old family
business. Ramachandran (2009) has rightly said that family businesses are found to split up like
amoeba as they grow, and very few of them survive beyond three generations. Examples: rivalry
between Ambani brothers.
Resolving Family Business Conflicts
Conflict is a daily reality for everyone. Some conflicts are relatively minor and easy to handle.
However, others of greater magnitude require a strategy for successful resolution or else they will create
constant tension and lasting enmity in the family or business. Knowing how to manage and resolve
these conflicts is important for the overall success of the family business.
Conflict is not necessarily bad. Properly managed, moderate doses of conflict can be beneficial.
Conflict is the root of change and allows people to learn and grow. It stimulates curiosity and
imagination, and relieves monotony and boredom. After conflict, closer unity may be established.
However, conflict can be harmful to the family and business, and divert time, energy, and money
away from family and business goals. Prolonged conflict can be injurious to your physical and mental
health.
The family may need assistance in resolving conflict. There are six steps or techniques for
managing a family business dispute. These are:
i) Initiate dialogue: Call the family together and establish the fact that you (mediator) will be open,
honest and attentive to everyone’s needs in what is likely to be a sensitive situation. Discuss only
present problems and discuss them one at a time. Remember, everyone has a right to talk. It is
important to understand every person’s position.
ii) Involve all parties: Next, involve all parties in the communication process. Involvement begins by
asking questions and encouraging others to answer. Listen as people respond to your questions.
iii) Assimilate Information: The third phase is to assimilate all this information. Everyone must
consider all of the facts and feelings. Clarify every position expressed and its cause.
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iv) Reinforce agreements: The next step is to reinforce agreements. Reinforcing agreements is a
powerful psychological tool. This process builds trust and understanding and makes negotiation
easier. Always reinforce agreements before you negotiate disagreements.
v) Negotiate disagreements: This begins by reviewing and ranking the disagreements. When issues
are ranked, seek adjustments from each adversary, with the most insignificant or easies problem
first. Remind them that you cannot negotiate disagreements until the facts and feelings are
understood by everyone.
vi) Solidify agreements: The last step is to solidify agreements and confirm solutions to the problem.
Begin by reviewing the changes agreed to, and ask if compromises are still acceptable. Review
proposed actions carefully. Commitment to the adjustment can be confined through formal or
informal contracts, a checklist, a handshake, or even a hug.
UNIT III: ENTREPRENEURSHIP STIMULANTS
8. What do you mean by financing for an enterprise? In this context explain the various type of
capital requirements and sources of capital for an enterprise.
Introduction
Production is the outcome of five factors of production viz., land, labour, capital, entrepreneurship
and organistaion. These factors are mutually dependent on each other. Finance is the life-blood for a
business enterprise.
Meaning and Need for Financial Planning
Finance is one of the most important prerequisites to start an enterprise. In fact, it is the availability
of finance that facilitates and entrepreneur to bring together land, labour, machinery and raw material
together to combine them to produce goods. The significance of finance in production is elucidated like
a lubricant to the process of production. The trite phrase “whoever has the gold makes the rule” also
underlines the significance of finance for small enterprises, in particular, and industry, in general.
Financing an enterprise whether large or small is a critical element for success of business. Many
enterprises, though potentially successful, fail because they are under-capitalised. Therefore, what
follows is that every enterprise should clearly chalk-out its future financial requirements in its very
beginning itself.
The decisions taken by the entrepreneur well in advance regarding the future financial aspects of
his/her enterprise is called ‘financial planning.’ In other words, financial planning deals with futurity
of present decision in terms of financial aspects of an enterprise. In short, financial planning is a
financial forecast made for the enterprise in the beginning itself.
In a financial plan/financial forecast, the entrepreneur should clearly answer the following three
questions:
i) How much money is needed?
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ii) Where will money come from?

iii) When does the money need to be available?
Institutional Finance to Entrepreneurs
In order to meet the financial requirements of small scale entrepreneurs, the Government of India
and the State Governments have set up a number of financial institutions. The financial assistance
provided exclusively to small scale industry by various institutions are described as below:
a) State Financial Corporations (SFC): State Financial Corporations have been set up in different
states under SFCs passed by the Parliament on September 28, 1951. The first SFC was set up in
Punjab in 1953. There are about 18 SFCs in the country.
b) Tamil Nadu Industrial Investment Corporation (TIIC): The Tamil Nadu Industrial Corporation
Ltd. was established in 1949 under the Companies Act and functions as a full-fledged SFC. It
provides financial assistance to tiny, small and medium scale industrial units for acquisition of fixed
assets. The financial assistance is given to set up new industries and also for expansion,
diversification, modernization and for purchase of generators.
The Corporation provides term loan upto Rs. 800 lakh to private and public limited companies
and co-operative societies, and upto Rs. 120 lakh to proprietary or partnership concerns.
Some Schemes of Financial Assistance
▪ General Scheme: The scheme is intended to provide financial assistance for new projects or to
expand the existing project. The assistance is also available for expansion, modernization and
diversification of existing units. The loan is given for purchase of land, construction of building
and purchase of machinery/equipment. The present rate of interest is 15% p.a. for a term loan upto
Rs. 25 lakhs and 15.25% for loans above Rs. 25 lakhs. The term loan shall be repayable not
exceeding 7 years including an initial moratorium (halt, pause, cessation, etc.) of not more than 2
years.
▪ Soft Loan Scheme/Seed Capital Loan: It is meant for qualified/experienced entrepreneurs who
are unable to bring in stipulated promoter’s contribution. The quantum of soft loan is the gap
between promoter’s contribution stipulated and the actual contribution that can be brought in by
promoter. The assistance will be a maximum 20% of project cost subject to the maximum of Rs. 4
lakh per project.
The soft loan is repayable along with the term loan repayment. Normally the repayment shall
not exceed 5 years including the initial moratorium period. A nominal rate of interest of 1% per
annum is payable. In case, the financial position and the profitability of the unit improves, a higher
rate but not exceeding the normal rate of interest on term loan will be applied.
▪ Single Window Scheme: Single Window Scheme is a composite loan for fixed capital and working
capital. The projects not exceeding a total cost of Rs. 200 lakh are eligible for assistance under this
scheme, the repayment of working capital is fixed at 5 years and term loans 5 to 7 years. The
repayment holiday is one year for working capital component and 6 months to 2 years for term
loan. The rate of interest for working capital and term loan depends on the SIDBI refinance rate
prevailing at the time of sanctioning of the loan.
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▪ Mahila Udayama Nidhi Scheme: This scheme is introduced for providing equity type assistance
to women entrepreneurs for setting up/expanding industrial projects with project cost upto Rs. 10
lakh. The promoter’s contribution is 10% of the project cost. Soft loan to the extent of 25% of the
project cost subject to a maximum of Rs. 2.5 lakh is given under the scheme. The soft loan and the
term loan are repayable over a period not exceeding 9 years including an initial moratorium of not
more than two years.
c) Small Industries Development Bank of India (SIDBI): SIDBI was set up under the Small
Industries Development Bank of India Act, 1989 as a wholly-owned subsidiary of the IDBI. The
Bank commenced its operations from April 2, 1990, by taking over the outstanding portfolio and
activities of IDBI pertaining to its small scale sector.
d) Commercial Banks: In the last few decades, commercial banks have evolved a number schemes
tailored to the specific needs of small scale industry. The salient features of the schemes are:
Liberalised Scheme, Entrepreneur Scheme, Equity Fund Scheme etc.
Classification of the Financial Needs
There are two ways of classifying the financial needs of an enterprise:
I. On the basis of extent of performance
a) 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, i.e., for a long period of time.
b) Working Capital: The money invested in current assets like raw materials, finished goods,
debtors, etc., is known as working capital. In other words, money required for day-to-day
operations of business/enterprise is called ‘working capital.’
II. On the basis of period of use
a) Long-term Capital: This is such money whose repayment is arranged for more than 5 years
in future. The sources of long-term finance could be owner’s equity, term-loans from financial
institutions, credit facilities from the commercial banks, hire-purchase facilities from specific
organisations, etc.
b) Short-term Capital: This is a borrowed capital/money that is to be repaid within one year.
The source of short-term finance include bank borrowings for working capital, deposits or
borrowings from friends and relatives, etc.
From the point of view of financial health of an enterprise, short-term finance/funds should be
utilized for acquiring current assets. Current assets, for example, include the items like raw material,
finished goods, semi-finished goods, debtors, etc. Basically, these are the items which keep changing
their shape. They can normally be converted into cash within a period of one year. On the other hand,
long-term finance should be used for acquiring assets which are of long nature. These are commonly
termed as ‘fixed assets.’ The examples of fixed assets could be land and building, plant and machinery,
furniture, etc.
Sources of Capital
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The various sources from which an enterprise can raise the required funds could broadly be classified
into two sources:
i) 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, as the case may be, in the enterprise. One source for raising funds
internally may be personal loans taken by the entrepreneur on his/her personal assets like Provident
Fund, Life Insurance Policy, buildings, investments, etc. In additions to these, in case of a running
enterprise, funds could also be raised through the retention of profits of conversion of some assets
into funds. The cardinal principal of financial management also suggests that an entrepreneur should
religiously plough back a good portion of his/her profits into the enterprise itself. However, the
scope for raising funds from internal sources particularly in the case of small-scale enterprises
remains highly limited.
ii) External Sources: In short, funds raised from other than internal sources are from external sources.
The external sources usually include the following:
1. Deposits or borrowings from relatives and friends and others.
2. Borrowings from the banks for working capital purposes.
3. Credit facilities from the commercial banks.
4. Term-loans from financial institutions.
5. Hire-purchase or leasing facility from the National Small Industries Corporation (NSIC) and
State Small Industries Corporations (SSICs).
6. Seed/Margin money, subsidies from the Government and the financial institutions. If we now
lump both the sources together, these can broadly be classified as follows:
▪ Personal funds or Equity Capital
▪ Loans from relatives and friends
▪ Mortgage Loans
▪ Term-loans
▪ Subsidies.
9. Explain the importance of providing marketing assistance to micro and small enterprises.
Introduction
Micro and small enterprises do not possess resources required for taking care of various marketing
aspects [i.e. to conduct surveys, create a brand image, establish marketing channels]. As a result, they
are not in a position to compete with large and well-established business houses and have to face unfair
competition. For example, a small detergent manufacturer cannot compete with Hindustan Lever
(Unilever) or Tatas for a market share due to his inability to conduct surveys, create brand image,
establish marketing channels, etc. Therefore, he has to remain content with whatever market is left over
after the major share is covered by big companies. The Government of India has banned the large
sectors from producing certain items but such preventive measures have not solved the basic problem
of making available quality goods at a reasonable price to the consumer, the ultimate aim of all
manufacturing activities.
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The consumer’s interest must be safeguarded. As a buyer, he would like to get quality goods at
reasonable price without bothering to know whether the goods are produced by a small entrepreneur or
a big industrial house.
Marketing Assistance3
Marketing is a major problem for small scale units. Given a good and assured market, the small
scale units can run profitable. Therefore, the Government of India and the state governments have laid
much emphasis on the marketing of products manufacturing in the small sector.
1) Government Stores Purchase Programme: The government is the single largest buyer of variety
of goods. With a view to increasing the share of products from small scale sector, the Government
Stores Programme was launched in 1955-56. Under this programme, the Director General of
Supplies and Disposal arranges the purchase and sale of stores required by the Government of India
and State Governments, public sector organisations and semi government bodies.
2) Sub-Contracting Exchange: The Small Industries Development Organisation (SIDO) has
established 16 sub-contracting exchanges in all major states of the country. The exchanges invited
small scale units to register their spare capacity with them and approach large scale units for seeking
orders for the registered units. Thus, the exchanges provide linkage between small and large scale
units and help to market the products of small scale units.
3) Trade Centres: The Government of India has set up Trade Centres to cater to the marketing needs
of small scale units. The trade centres collect and disseminate information relating to all types of
small scale industries in the region, giving full details of products, capacities and prices.
They provide a focal point for buyers and sellers of products. The setting up of trade centres in
different parts of the country has considerably filled up the information and communication gap
between small manufacturers, consumers and buyers.
4) Internal Marketing: National Small Industries Corporation (NSIC) has undertaken the marketing
of certain products such as tapioca starch, hand-made paper and hosiery items. A consortium of
hosiery manufacturers is organized for the sale of ISI marked hosiery products.
5) Exhibitions and Seminars: The Small Industries Development Organisation (SIDO), besides
encouraging entrepreneurs to participate in the Stores Purchase Programme, organizes seminars,
exhibitions and training programmes in marketing and publishing of information booklets etc.
NSIC has established Marketing Development Centre known as ‘NSIC Shoppe’ in principle towns
all over the country as part of its internal marketing programme to provide exposure to products of
SSI units. It also provides permanent showroom facilities for display of product of SSI. The centres
are intended to market on all India basis as well as export a wide range of products.
6) Tender Marketing: Under Tender Marketing, NSIC participates in bulk tender enquiries of
Central and Stage Government and public sector organisations. For this purpose, the corporation
identifies large number of items to participate in the tenders. On receipt of orders, the corporation
3
E. Gordon and K. Natarajan, Entrepreneurship Development (Mumbai: Himalaya Publishing House, 2009), 223-
25.
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forms out these to the units on whose behalf it has quoted and gets the items made under its own
supervision and supplies them to the buyers ensuring timely delivery of quality goods. To get
benefit under this programme, industrialists should register their units with the Directorate of
Industries/DIC. This programme ensures fair margin to SSIs.
7) Integrated Marketing Support: NSIC has been operating all Integrated Marketing support in
which bills relating to supplies made by SSI are eligible for discount by NSIC upto a certain limit.
This scheme has been introduced with a view to mitigate the problem of delayed payment by buyer
against the supplies made by SSI.
In addition to all these, the Government of India provides export assistance in the forms of a
number of incentives, such as liberalized credit, cash incentive, Export insurance, tax concessions,
participation in international exhibitions, training programme of packaging for exports.
Importance of Marketing Assistance to MSMEs

1) To enhance marketing capabilities and competitiveness of MSMEs
2) To showcase the competencies of MSMEs
3) To update MSMEs about the prevalent market scenario and its impact on their activities
4) To facilitate the consortia of MSMEs for marketing their products and services
5) To provide platform for interaction with larger institutional buyers
6) To propagate various programmes of the Government
7) To enrich the marketing skill of micro, small and medium enterprises
10. Explain the role of self-help groups in development of women entrepreneurship.
Introduction
Women owned businesses are highly increasing in the economies of almost all countries. The
hidden entrepreneurial potentials of women have gradually been changing with the growing sensitivity
to the role & economic status in the society. Skill, Knowledge & adaptability in business are the main
reason for women to take up entrepreneurship. They span generations and are there in every field, From
Tractors to television, from biscuits to banking, from HR to hospitals.
About SHGs
Many of the leading commercial banks in India have taken a noble mission to reach those families
who were hitherto having no access to the credit by any formal financial institution and therefore, were
depending on informal sources & moneylenders. Banks has successfully initiated various measures to
widen its SHG network like: Sensitization of Staff, Special Training Program in SHGs, Close liaison
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with NGOs, SHG Cells, RUDSET etc., and a silent Economic Revolution has taken place slowly but
steadily with the formation of SHGs.
One major group that is going to benefit from Micro Finance is women. Women make up nearly
half of the rural poor & they lack the required financial resources to either sustain themselves & their
families or start a small enterprise. They form 80% of the clientele to Micro Finances. Credit obtained
by them from these institutions have helped them improve their lives to large extent since they spend
the money earned from their economic activities on their family to feed them & educate them.
Delivery Vehicles of Micro Finance

Non Governmental Organizations
Commercial Banks
Micro Finance Institutions
Challenges facing Micro Finance

Many challenges faced by Micro Finance Institutions are multi layered & many challenges are local
origin. In spite of their local origin, they have a significant impact on the functioning of the Micro
Finance service providers in the rural areas. Some of the major challenges are:
*Sustainability of the institution
*Recovery mechanism of loans
*Out reach of these institutions
*Performance assessment of these institutions
*Long-term socio-political impact of Micro Finance activities
*Service delivery approaches
Incept of Micro Finance Idea-The Micro Finance industry has its origin in 1970s to provide financial
services, mainly loans, & non-financial business advisory services to the poor. The first of its kind was
Grameen bank project of Bangladesh initiated by Professor Muhammed Yunus in 1976.
A New Business Model

In 1990s a new strategy for third world development arose which is referred to as Micro
Entrepreneurship, Micro Enterprise or Micro Finance. This movement has emerged from the grassroots,
from so called Informal economy. Social Scientists have conceptually divided a society’s economic
activities into the formal sector, such as factory or Office work, or the informal sector-survival on the
street as the vendor or provider of services.
Role of Micro Finance in Rural Women’s Economic Empowerment

The women from the rural region generally work for long hours to feed their families. Large
numbers of women earn their livelihood in the informal sector. In the absence of formal employment,
they created their own opportunities by becoming self-employed in the informal sector. Collateral
requirements, banking formalities, high transaction cost of micro credit & cumber some procedures
have resulted in restricting access to financial services especially for women.
1. Women Empowerment
The Micro Finance helped women by providing independent sources of income outside the home
which reduces the dependency on the husband’s income, by increasing the assertiveness of women &
providing independent source of income with exposure to new sets of ideas, values & social support.
2. Institutional Objectives for reaching out to Women Clients
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*To address the struggles of poor women’s against caste, class, & gender oppression in workplace &
community
*To achieve empowerment of women, which brings in social & economic change in the family society
*To advance & promote the direct participation of economically active women in viable business, to
improve their economic & social status by providing sustainable financial & non-financial services
* To provide equal opportunity to women entrepreneurs to sustain & develop their economic activity
by having access to collateral free funds
*To increase access to financial services for micro & small business, particularly those owned &
operated by women .
3. Outreach
Today there is scarcely a village in Karnataka where a SHG has not been facilitated. The state
government is now the single largest SHG promoting institution. It is important also to note that even
in the many government programmes that are not primarily SHG-oriented, SHGs are still included and
budgeted for, mainly to engage and empower the poor and introduce a measure of equity, have remained
‘poor-neutral.’
Self Help Group (Stree Shakthi & Swashakthi Groups)

An SHG is a small (12-20) group of poor people who voluntarily come together to address their
poverty and other social issues. The core activity is mobilization of small savings from group members
and group lending from accumulated savings as well as bank loans. It is for this reason that SHGs are
also known as micro finance or microcredit institutions. Poor people who are viewed as security risks
by the formal banking system are, thus, enabled to access small loans for both income generation and
consumption purposes. The SHG also offers its members a much-needed space for dealing with
economic, social and family problems in a group environment. This process, can contribute
considerably to the ‘empowerment’ of SHG members though the actual effects of such empowerment
may often be transitory or insubstantial if the programme design fails to support empowerment
enhancing in a concrete manner.
There are around 2,05,485 self-help groups (SHGs) in Karnataka under various departmental
Programmes, the majority of which are WSHGs or women’s self-help groups, a strategy which has
emerged world wide as the single most significant economic development programme for women.
Functions of Typical SHGs

Create a common fund by the members through their regular savings.
Flexible working system and pool the resources in a democratic way.
Periodic meeting. The decision making through group meeting.
The loan amount is small and reasonable. So that easy to repay in time.
The rate of interest is affordable, varying from group to group and loan to loan.
Role of SHGs for the Development of Women Entrepreneurs

1. Membership & Members
Women without discrimination of caste, creed/religion can become members of the group. Once
there is consensus built among the members, immediately they will name the group with acceptance by
all the members. Usually membership size is around 15-16 & a maximum of 20 people can form a
group. Two members are selected as the representatives who takes care of accounting & documentation.
2. Savings and Credit
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Cultivating the habit of regular savings and the ability to access them when required through credit
not only reduces significantly the vulnerability of the livelihood base of the poor and their dependence,
it also enhances human development. It enables them to borrow for urgent needs instead of going to
moneylender. To avoid these things, members save from her pocket and weekly once group meets and
pools equal savings from all the members. On that day or the next day one of the members should go
and credit the pooled amount in the group’s account in the Bank. It is on rotation basis that all the
members need to go & address the bank work .Member that is taking care of the bank work is paid
transportation expenses from the group fund.
3. Loans to members
Savings made by members are pooled and loaned to one another. SHG members determine the
terms and conditions (these differ from SHG to SHG). Loans are provided for all purposes without
making the traditional distinction between ‘consumption’ and ‘income generation.’ The SHG model
provides its members with the space and flexibility to make decisions that are appropriate to each
situation. Only private moneylenders lend for such a variety of purposes with minimum fuss and paper
work; all financial institutions and government schemes lend only for ‘productive’ purposes. But it is
the ‘life events’ and emergencies that drive the poor to debt traps. It leads also to the diversion of loans
taken from formal organizations/government into consumption loans, which they are unable to repay.
The percentage of interest levied on the loan is 2% across all the groups under the study.
Positive Features of the SHG - Bank Linkage Programme

The financial inclusion attained through SHGs is sustainable and scalable on account of its various
positive features. The programme confronts many challenges and for further scaling up, these
challenges need to be addressed.
Financial Inclusion of Poor Women

The notable thing is that more than 85% of the members of SHGs are poor and asset less. The SHG
movement has been instrumental in mainstreaming women by-passed by the banking system.
Loan Repayments
One of the distinctive features of the SHG - Bank Linkage Programme has been very high on-time
recovery. As on June 2010 the on-time recovery under SHG - Bank Linkage Programme was 84%.
Challenges
Group Loans to SHGs and SHG Loans to Members
The average loan provided to new SHGs was Rs 25, 000. On an average, per member loans work
out to less than Rs. 1600. Many believe that such loan amounts are grossly inadequate for pursuing any
meaningful livelihood activity. Per capita loans in mature SHGs are increasing very gradually. It has
also to be kept in view that members take very short term loans of 3 to 6 months on many occasions
and there can be more than one cycle of borrowing/ repayment in one year.
Cost Recovery and Sustainability

It is important for banks to carefully work out their actual costs for SHG lending. While the SHG
portfolio is often only a small part of the total bank lending, and since the portfolio quality is good, it
may be possible to reduce interest rates while ensuring recovery of costs. In the initial phase of the SHG
movement, the groups were formed by NGOs and hence start-up costs were low for banks. However,
over the years, banks have also evolved as SHPIs. In the process, the start-up costs of group formation,
etc. have evolved on the banks, impacting their pricing policies. It is an accepted fact that banks will
base their lending
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From Microcredit to Microenterprise – Challenges
Economic benefits
Often, a micro finance scheme is judged purely in terms of mobilization of savings, lending and
repayment. The larger issue of reducing women’s economic exploitation by either the market or her
family is not factored when preparing report cards even while organizers loudly proclaim the scheme
is emancipating. Emancipation, however, does not just happen as a by-product of micro finance. The
objectives of the study were to assess the growing role of and the impact of the SHGs formed with
reference to Stree Shakti and Swashakti in empowering Women.
The functioning of SHGs as micro-credit institutions

Their effectiveness in reducing poverty
Their effectiveness as gender empowerment catalysts
Their role in effecting changes, if any, in women’s status in the family and the community
Their effectiveness as agents of socioeconomic change
The adequacy of inputs provided to SHGs by government.
Sustainability is the key to the success factor of any financial institution. The same holds good for
Micro Finance institution that are providing financial services in rural areas. In spite of the hoopla
surrounding the micro finance loans & their success, one glaring aspect that has not been addressed
properly is the recovery mechanism of the loans that are provided to the micro entrepreneurs. Although
some Micro Finances have 99% collection rates, many have been languishing with mountains of bad
debts & very high default rates. Most importantly there is no provision among these institutions to
guard themselves against bad debts .So there is a requirement on part of these institutions to have proper
risk management framework to guard themselves against any potential loss of capital in the form of
bad debts. Outreach of these institutions is another problem area for Micro Finance. In spite of their
reach there has been a debate whether majority of the poor are having access to the credit flow. Of late
there has been criticism of these institutions that they have not reached the real poor and they have been
serving rural communities that are not so poor and their reach is not broad enough to serve the needy.
Major Findings about Features of the Groups
*Members reflects a diverse membership covering different social & economic categories, including
poor
*It seems more significant that for women been an SHG member
*At group level, SHG is not homogenous by wealth
*SHG leaders are of all castes, reflects caste composition of their group
*Replacement of group members are usually the relatives or family members of the existing member
*Many members left the group when they feel that they can’t pay the savings because of economic &
family problems
Micro Entrepreneurship
Some of the major ventures undertaken by the members of SHGs are
*Seasonal Business (leasing mango groves, keeping stalls in villages fares/festivals)
*Incense Sticks (Agarbatti)
*Areca paper plates/bowls
*Hotel
*Broom sticks
*Medicine agriculture ( Growing Marigold & Gherkin)
*To eatable business (pickle, papad, snacks and the like)
*Cattle Grazing
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*Bangle Stores/
*financing
11. What are the role and functions of business incubators?

Introduction
Incubate: to hatch egg
Incubator: an instrument for hatching egg/artificial condition for hatching eggs.
Business incubator is a facility established to nurture young (start-up) firms during their early
months or years. It usually provides affordable space, share offices and services, hand-on management
training, marketing support and, often, access to some form of financing.
Business incubators are organisations geared toward speeding up the growth and success of startup
and early stage companies. They are often a good path to capital from angel investors, state
governments, economic-development coalitions and other investors.
Incubators vary in their strategies. Some are located in an actual physical space meant to foster
networking among entrepreneurs and their coaches. Others operate on a virtual basis. Incubators
sometimes call themselves accelerators instead, often when they’re geared toward jumpstarting
businesses that are more developed. Many have potential capital to invest, or links to potential funding
sources. There’s access to services such as accountants and lawyers—not to mention invaluable
coaching and networking connections through the staff and other entrepreneurs at the incubator.
Business incubation programmes are often sponsored by private companies or municipal entities
and public institutions, such as colleges and universities. Their goal is to help create and grow young
businesses by providing them with necessary support and financial and technical services.
Incubators provide numerous benefits to owners of startup businesses. Their office and
manufacturing space is offered to below-market rates, and their staff supplies advice and much-needed
expertise in developing business and marketing plans as well as helping to fund fledgling businesses.
Companies typically spend an average of two years in a business incubator, during which time they
often share telephone, secretarial office, and production equipment expenses with other startup
companies, in an effort to reduce everyone’s overhead and operational costs.
If an incubation programme seems interesting to you, be prepared to submit a fleshed-out business
plan. The plan will be reviewed by a screening committee to determine whether or not you meet the
criteria for admission. Incubators carefully screen potential businesses because their space, equipment,
and finances are limited, and they want to be sure they’re choosing to nurture businesses with the best
possible chance for success.
Business incubators support the development of start-ups by providing them with advisory and
administrative support services. According to the National Business Incubation Association, an
incubator’s primary objective is to produce successful and financially viable firms that can survive on
their own. Early incubators focused on technology companies or on a combination of industrial and
service companies, but newer incubators work with companies from diverse industries.
Definition
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An organisation designed to accelerate the growth and success of entrepreneurial companies

through an array of business support resources and services that could include physical space, capital,
coaching, common services and networking connections.
Importance of Business Incubators

a) Finance: Incubators help start-ups save on operating costs. The companies that are part of an
incubator can share the same facilities and share on overhead expenses, such as utilities, office
equipment rentals, and receptionist services. Start-ups can also take advantage of lower lease rates
if the incubator is located in low-rent industrial parks. Incubators may also help start-ups with their
financing needs by referring them to angel investors and venture capitalists, and helping them with
presentations. Start-ups may have better luck securing financing if they have the stamp of approval
of incubator programmes.
b) Management: In addition to financial help, start-ups also need guidance on how to compete
successfully with established industry players. Incubators can tap into their networks of
experienced entrepreneurs and retired executives, who can provide management guidance and
operational assistance. For example, a biotechnology start-up would benefit from the counsel of
retired pharmaceutical executives who have first-hand experience of the drug development and
clinical approval process. Similarly, a restaurant entrepreneur could learn about the difficulties of
overseas expansion from retired hospitality-industry executives. Start-ups usually benefit from
having respected individuals on their boards of directors and scientific advisory panels, because
these individuals bring invaluable connections and experience to the table.
c) Synergy: [the extra power, energy, success, etc., that is achieved by two or more people or
companies working together, instead of their own] The close working relationships between an
incubator’s start-ups create synergies. Even after the start-ups leave an incubator, the connections
and networks established through these relationships can endure for a long time. Start-up
entrepreneurs can provide encouragement to one another, and employees may share ideas on new
approaches to old problems. Start-ups may plan joint marketing campaigns and cooperate on
product development initiatives. These synergies do not necessarily exist among start-ups funded
by venture capitalists, because the companies that receive the funds do not necessarily know one
another and they may be located in different geographical locations.
d) Economy: By helping new businesses prosper, incubators assist in creating long-lasting jobs for
their host communities. In a March 2003 Association for Small Business and Entrepreneurship
conference paper hosted by the University of Central Arkansas Small Business Advancement
National Centre, Northwestern Oklahoma State University professor Patti L. Wilber and her
colleague cited research to write that start-ups in incubation programmes have greater viability and
show superior financial performance over the long term. They create long-lasting jobs for new
graduates, experienced mid-career personnel, and veteran executives. This benefits communities
and drives economic growth.
[FAQ]
Q.01 What support is provided by the Ministry for setting up Business Incubators?
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Ans. The Ministry implements the Support for Entrepreneurial and Managerial Development of
SME’s Through Incubators.” The main purpose of the scheme is to nurture innovative business
ideas (new/indigenous technology, processes, products, procedures, etc), which could be
commercialized in a year. Under the Scheme, financial assistance between 75% to 85% of the
project cost upto maximum of Rs. 8 lakh per idea/unit, provided to Business Incubators (BIs). The
BIs are also eligible to avail Rs. 3.78 lakh for infrastructure and training expenses for incubating
10 ideas. Any individual or Micro and Small Industries (MSEs) that has innovative business idea
at near commercialization stage can approach the Business Incubators approved under the scheme.
Under the scheme, various institutions like Engineering Colleges, Management Institutions,
Research labs, etc. that have in-house incubation facilities and faculty for providing handholding
support to new idea/entrepreneur can apply in the prescribed application form. For further details
please visit www.dcmsme.gov.in.
Q.02 Which are the Implementing Agencies under this scheme?

Ans. The incubational support will be provided by Host Institutions, like:
(i) Indian Institutes of Technology (IITs)
(ii) National Institutes of Technology ( NITs)
(iii) Engineering Colleges
(iv) Technology Development Centres, Tool Rooms, etc
(v) Other recognised R&D&/or Technical Institutes/Centres, Development Institutes of
DIP&P in the field of Paper, Rubber, Machine Tools, etc.
The geographical areas, the disciplines and the infrastructure-providers listed above will be
reviewed midway during the implementation, for any corrective action needed to make the scheme
more effective with better outcome.
Q.03 What is Business Incubator?

Ans. Business Incubator is a unit which will be given assistance for developing and doing research
or study on any innovative idea that they want to develop as a business. For further details please
refer the scheme document.
Q.04 What is the assistance provided per Business Incubator?

Ans. The assistance provided per incubatee/idea can be any amount between Rs. 4 Lakhs to Rs. 8
lakhs depending upon the requirement.
Q.05 Is there any limitation on number of incubators to be given financial assistance?

Ans. Yes. Under this scheme, 100 “Business Incubators” (BIs) are to be set up under
Technology (Host) Institutions [@ say 25 per financial year] and each BI is expected to help the
incubation of about 10 new ideas or units.
Q.06 What is the mode of applying for assistance under this scheme?
Ans. The application can be sent to MSME or any of the implementing agencies listed in the scheme
document.
12. Write short notes on:

a. Angel Investors
An angel (also known as business angel, informal investor, angel funder, private investor or seed
investor) investor is an affluent individual who provides capital in small start-ups (usually in exchange
for convertible debt or ownership equity) or entrepreneurs. Often, angel investors are among an
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entrepreneur’s family and friends. The capital angel investors provide may be one-time investment to
help the business propel or an ongoing injection of money to support and carry the company through
its difficult early stages.
Origin of Angel Investors: The concept of ‘angel investor’ comes from the Broadway theatre
(New York, 1681) when wealthy individuals extended money to help theatrical productions. The term
‘angel investor’ was first used by William Wetzel of the University of New Hampshire (the USA).
Who can be an angel investor: In order to be an angel investor, one needs to be approved by
Securities Exchange Commission. A person willing to be an angel investor requires a minimum net
worth of $ 1 million dollar and annual income of $ 2,00,000. Angel investors are typically diverse group
of individuals who gained their wealth through a variety of sources. However, the majority are usually
entrepreneurs themselves, or are executives who retired early from previous ventures that developed
into successful empires.
Though angel investors usually represent individuals, the entity that actually provides the fund may
be a limited liability company, a business, a trust or an investment fund. Angel investors, who seed
start-ups that fail during the early stages, lose their investment completely. The effective internal rate
of return for a successful portfolio for angel investors ranges from 20 to 30%
b. Venture Capital
Venture capital is money for new, young, and/or small businesses that typically have little or no
access to capital markets.
OR ----
[Venture capital is financing that investors provide to startup companies and small businesses that
are believed to have long-term growth potential. For startups without access to capital markets, venture
capital is an essential source of money. Risk is typically high for investors, but the downside for the
startup is that these venture capitalists usually get a say in company decisions.]
Venture capital generally comes from well-off investors, investment banks and any other financial
institutions that pool similar partnerships or investments. For small businesses, or for up-and-coming
businesses in emerging industries, venture capital is generally provided by high net worth individuals
(HNWIs) – also known as ‘angel investors’ – and venture capital firms. The National Venture Capital
Association (NVCA) is an organization composed of hundreds of venture capital firms that offer
funding to innovative and entrepreneurial ventures. Venture capital does not always take a monetary
form; it can be provided in the form of technical or managerial expertise.
One of the most common and controversial characteristics of venture capital funding is that venture
capital firms usually take active management roles and board seats in the companies they invest in.
This often means that entrepreneurs give some control over their businesses to venture capital firms,
who usually own a portion of the company (in some cases, controlling interest). However, venture
capital firms can also provide crucial managerial and technical expertise, particularly in areas where
the entrepreneur is less confident.
Definition:
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a) Startup or growth equity capital or loan capital provided by private investors (the venture
capitalists) or specialized financial institutions (development finance houses or venture capital
firms). Also called risk capital.
b) Venture capital is a type of funding for a new or growing business. It usually comes from venture
capital firms that specialize in building high risk financial portfolios. With venture capital, the
venture capital firm gives funding to the startup company in exchange for equity in the startup. This
is most commonly found in high growth technology industries like biotech and software.
c) A person who deals in venture capital is a venture capitalist, and usually works for a venture capital
firm.
d) The firm typically has one or more investment portfolios that are owned by a limited partnership.
The venture capitalist is often a general partner in the portfolio, and individual investors or other
institutions (particularly university endowments and pension funds) are limited partners in the
limited partnership.
How it works: There are three general types of venture capital: Seed capital, for ideas that have
not yet come to market; early-stage capital, for companies in their first and second stages or existence;
and expansion-stage financing, for companies that need to grow beyond a certain point to become
truly successful. Venture capital can also help a company merge with or acquire other companies.
The managers of many venture capital funds receive an annual management fee (usually 2% of the
invested capital) and a portion of the fund’s net profit (typically 20%). These fees compensate the
managers for their expertise and the respo0nsibility to help their investments become successful.
The Venture Capital Process: The first step for any business looking for venture capital is to
submit a business plan, either to a venture capital firm, or to an angel investor. If interested in the
proposal, the firm or the investor must then perform due diligence, which includes a thorough
investigation of the business model, products, management and operating history, among other things.
Once due diligence has been completed, the firm or the investor will pledge an investment in exchange
for equity in the company. The firm or investor then takes an active role in the funded company.
Because capital is typically provided in rounds, the firm or investor actively ensures the venture is
meeting certain milestone before receiving another round of capital. The investor then exits the
company.
Since venture capital is full or risk. Venture capital firms anticipate this by diversifying their
investment and hoping that their successful investments more than compensate for their losses.
Nonetheless, venture capitalists must be willing to take significant long-term risks for what can be high
returns.
Venture Capital vs Angel Investor

a) Timing: Venture capital is not used for extremely early funding. Instead, these rounds are often
called “Series AA,” or “Pre-A” rounds, and include funding from friends and family, angel
investors, and seed stage financing syndicates and firms. Venture capital firms usually get involved
at the Series A round an after. Although both VC and Angel investing are high risk investments,
angel investing usually happens in the earliest stages of a startup when the risk is ultra high.
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b) Funding Amount: Venture investing usually starts with companies that are slightly more mature,
with higher valuation, and higher funding amounts. Angel investing typically ranges from a couple
thousand USD through to one million USD, while venture capital is usually millions, tens of
millions, or even hundreds of millions of dollars.
c. Private Equity Fund
Private equity is capital that is not noted on a public exchange. Private equity is composed of
funds and investors that directly invest in private companies, or that engage in buyouts of public
companies, resulting in the delisting of public equity. Institutional and retail investors provide the
capital for private equity, and the capital can be utilized to fund new technology, make acquisitions,
expand working capital, and to blister and solidify a balance sheet.
Private equity funds are set up as a limited partnership by a private equity firm. The firm then
reaches out to large investors like university endowments, union pension plans, charities, insurance
companies, and extremely wealthy individuals to raise capital. Once invested, the limited partners’
capital is locked up for a predetermined number of years before the fund is liquidated and the
principle (and hopefully profits) are returned to shareholders.
The investors are limited partners in the newly established fund. The private equity firm
managing the fund is the general partner enabled to make all investment decisions after raising
capital.
Private equity fund refers to a general partnership formed by PE firms, which are utilized to
invest in private companies. The private equity fund may have general investment criteria (meaning
it invests in different industries) or have specific industry criteria. However, private equity funds
have an investment philosophy that it sticks to throughout its term, which tends to be anywhere
between 10 to 13 years. After this time period elapses, the private equity fund is closed by having
al funds distributed back to the limited partners.
Private equity funds may invest directly in equity securities of the target investment, in the
form of mezzanine debt, or in both equity and debt. In general terms, private equity funds often
focus on one of the following investment philosophies”
i) Venture capital – used to finance early stage companies that do not have access to financial
markets or conventional financing.
ii) Growth capital – used to fund the expansion of an established private company that is ‘asset
light,’ and therefore may not be able to use its own assets to secure traditional financing for
such growth.
iii) Leveraged or management buyouts – used in combination with additional leverage placed on
a company to allow the existing management to take control of the target. The company’s cash
flow has to be sufficient to cover the carrying costs of the additional debt.
iv) Distressed or turnaround situation – used when companies are unable to service their existing
debt, and the fund’s equity is used to recapitalize the balance sheet along with management
conducting a turnaround strategy.
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UNIT IV: BUSINESS IDEAS AND BUSINESS PLAN

13. What are the various sources of business ideas and what are the methods of generating business
ideas?
Introduction4
The promotion of a new enterprise, in fact, is similar to the birth of a child with one difference, that
is the gestation period for a business unit varies according to the nature of work undertaken by it. The
entrepreneur is both the mother and midwife in this operation and as such he has to bear the birth bangs
and the initial botheration of bringing up the infant.
Business Idea
The first and foremost step in starting a business is to find out a suitable business idea and give a
practical shape to the idea. The entrepreneur should be convinced that the idea is in fact a sound one
and likely to give reasonable return on his investment. The search for an appropriate business idea is a
complicated exercise because the entrepreneur comes across innumerable business opportunities. To
choose a business idea, skill, foresight and ingenuity are required on the part of the entrepreneur. He
should keep in view his competencies, capabilities and resources while identifying the business idea.
Sources of Business Idea
An entrepreneur can identify a project idea himself out of his experience in his previous trade, job
or profession. The project idea can also be identified with the help of friends or relatives of the
entrepreneurs who are engaged in the same trade or industry or business.
Besides, there are numerous sources from which an entrepreneur can get business idea.
4
E. Gordon and K. Natarajan, Entrepreneurship Development (Mumbai: Himalaya Publishing House, 2009), 89-91.
.
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1) Observation: Human mind has infinite capacity to observe and deduct. Observation is one of the
most important sources of project idea. The observant mind continuously comes across situations
which can be utilized to develop investment opportunities. For instance, the non availability of a
particular article may lead to development of an industrial unit.
2) Market Characteristics: The demand and supply conditions of various products will give an idea
about the unfulfilled demand for certain products. For example, people especially youngsters prefer
fast food or ready to eat food. The demand for fast food is expected to increase manifold in coming
years. Indian companies and business organisations spend crores of rupees on giving gift to their
employees, shareholders and business associates on many occasions. As per rough estimates,
corporate in India spend Rs. 1,000 crore every year on corporate gifting and the culture is on the
rise. So also, the demand for greeting card is expected to rise in future.
3) Conversion of Waste into Wealth: A study of the end products and by-products can throw light on
new project ideas. For example, rice bran which was considered as waste and sold at minimum
price is used to produce rice bran oil. Such business ideas help improving the wealth of the society.
4) Adoption of Technology: Commercial exploitation of indigenous or imported technologies is
another source of business idea. In this era of severe competition, the entrepreneur has to be on the
lookout for high technology oriented product/process. The new product/process developed by
national level research institutions like NRDC, CT-TRI, CIECRI etc. provide good business ideas.
The entrepreneur can go for commercial exploitation of these product process which have been
proved successful at the laboratory level.
5) Socio-economic Changes: The change in the socio-economic status of people provide scope for
business opportunities. By careful observation, a business idea can be identified easily. For
example, there is a preference of people towards foreign brand shirts, beauty parlours, cellphones,
etc.
6) Trade Fairs: Industrial and Trade Fairs are organized by central and state Governments and also
by Trade Associations at the state, national and international levels. A dynamic entrepreneur can
get lot of business ideas visiting these fairs.
7) Trade and Professional Journals: Trade and professional magazines provide a very fertile source
of project idea. The statistics of information given in these magazines and reports and records of
professional bodies often reveal business opportunities. Bulletins of Research Institutes are also a
source of information for new project ideas. These bulletins generally give the broad outlines of
the new processes or products developed by the institutes.
8) Publications of Government Departments: The Techno-economic survey, conducted by the SIDO,
SISI and SIDCO also provide the project idea.
Screening of Ideas5
5
N K Jain and R L Varshney, Entrepreneurship Development – An Indian Perspective (Noida: Mayoor Paperbacks,
1993), 129-30.
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Various ideas listed by an entrepreneur should be screened for final selection. Screening may be
done on the following grounds:
1) Compatibility with the interest and technical knowledge of the promoter: According to Murphy, a
real opportunity has three characteristics: (i) it fits the personality of the entrepreneur, it squares
with his abilities, training and proficiency, (ii) it is accessible to him, and (iii) it offers him the
prospects of rapid growth and high return on invested capital.
2) Consistency with Government policies/priorities: An opportunity should be in agreement with the
laid down policies and priorities of the State/Central Governments.
3) Availability of Inputs: (a) Are the capital requirements within manageable limits? (b) Can the
required technical knowledge be obtained early? (c) Are the raw materials required available
domestically at reasonable cost? Can inputs be made easily? (d) What is the situation of labour
supply?
4) Market Adequacy (Present and Potential): For this, following factors are to be examined: (a) Total
present domestic market, (b) The existing competitors and their market shares, (c) Availability of
export market, (d) Quality-price profile of the product vis-à-vis competitive products, (e) Sales and
distribution system, (f) Projected increase in consumption, (g) Barriers to entry of new units, (h)
Economic, social and demographic trends favourable to increased consumption.
Fortunately in India, barring recessionary conditions, the demand for most of the products has
been growing and from the point of view of entrepreneurs the Indian Economy is not a share-shift
economy like western developed countries.
5) Cost Reasonableness: In this respect, following points may have to be surveyed: (a) Cost of
material inputs, (b) Labour costs, (c) Factory overheads, (d) General administration expenses, (e)
Selling and distribution expenses, (f) Service costs, (g) Economies of scale.
6) Risk level within acceptable limits (with reference to each individual particular case of an
entrepreneur): The assessment of risk is a difficult task because of: (a) Vulnerability and business
cycles, (b) Technological changes, (c) Competition from substitutes, (d) Competition for inputs,
and (e) Government controls on production, distribution and price which are likely to change with
a change in government.
14. What is a project? Explain its classification and approaches.
Introduction
The project is an important groundwork of an enterprise and is also very crucial to the entrepreneur.
The entrepreneur cannot succeed in his venture without a project. By and large, project denotes
programme of action. There are agricultural projects with sub-projects relating to land development,
irrigation, fertiliser, seed etc. There are also research projects and so on. The dictionary meaning of
project is speculative imagination, a scheme of something to be done, a proposal for an undertaking
etc. In other words, innovation and vision form and integral aspect of project programme.
Project is defined as a time-tested, goal-directed, major undertaking, requiring the commitment of
varied skills and resources. A project is also described as a combination of human and non-human
resources pulled together in a temporary organization to achieve a specified purpose. A project has a
single objective and when this objective is reached, the project is completed. Therefore, a project has a
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finite and well-defined life-span. Further, management must have a clear idea as to what these
objectives are so that there can be no doubt as to when the project is completed. The terms programme
and project appear to be similar but there is a difference. A programme is usually larger in scope, is
activity-oriented and not necessarily time-bound. For example, health programme, educational
programme, agricultural or industrial development programme. A programme may consist of a number
of projects, such as, industrial development programme consists of one or more fertilizer project, power
project etc. the scope of project is narrower. For example, a project is for setting up a plant and when
the plant becomes operational, the project is treated to be completed.
Definition
According to Gordon, “Project is defined as the whole complex of activities involved in using
resources to gain benefits.”
According to Little and Mirless, “Project is defined as scheme or a part of schemes for investing
resources which can be reasonably analysed and evaluated as an independent unit.”
Features
1. Project has a mission or set of objectives.
2. Project is one single entity.
3. Project calls for team-work.
4. Project has a life cycle.
5. Project is always unique – no two projects are similar.
6. Project is always customer specific.
7. Project is a complex set of things.
8. Project is exposed to risk and uncertainty.
9. Project has to terminate at some time or the other.
10. Project has a learning component.
11. Project process is flexible.
12. Project is interrelated.
Project Approach
1. Sub-Sector or Product Approach
The effort is restricted to a sub-sector of production or one product which covers a broad
geographical area. For example, such approaches are found in projects involving tea, coffee etc.
2. Functional Approach
The effort here is restricted to certain development functions – marketing research or agricultural
extension projects. The emphasis is on the services and not on the output or a specific product.
3. Regional Approach
The effort is limited to a geographically bounded area, within which the tasks are usually broadly
conceived. E.g. IRDS.
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Project Classification
1. Quantifiable and Non-Quantifiable
Quantifiable projects are those in which quantitative assessment of benefits can be made. Non-
quantifiable projects are those where such an assessment is not possible. Projects concerned with
industrial development, power generation, mineral development fall in the first category and projects
involving health, education and defense fall in the second category.
2. Sectoral Projects
The project under this classification falls into any one of the following sectors:
a) Agriculture and allied sector
b) Irrigation and power sector
c) Industry and mining sector
d) Transport and communication sector
e) Social service sector
f) Miscellaneous
3. Techno Economic Project
There are 3 main groups:
a) Factor intensity-oriented classification
On the basis of this classification, projects may be classified as capital intensive projects or labour
intensive depending upon whether large scale investment in plant and machinery or human
resources is involved.
b) Causation-oriented Classification
Here, projects are classified as demand based or raw materials based projects – depending on the
non-availability of certain goods or services and consequent demand for such goods or services
or the availability of certain raw materials, skills or other inputs as the dominant reason for
starting the project.
c) Magnitude-oriented classification
In this size of investment forms the basis of classification. Projects may be classified as large
scale, medium scale or small scale projects depending upon the total project investment.
4. Financial Institutions
All India and state financial institutions classify the projects according to their age and experience
and the purpose for which the projects are being taken up. They are as follows:
a) New projects
b) Expansion projects
c) Modernization projects
d) Diversification projects
5. Services projects
The services-oriented projects are classified as:
a) Welfare projects
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b) Research and development projects

c) Educational projects
15. What are the different considerations while designing a project?

A project comprises a series of activities for achieving predetermined objective or a set of
objectives. Keeping this in mind, the objectives/s of the project should be defined as precisely as
possible the objectives may be social, economic or a combination of both and they can be defined under
the following categories:
i) General objectives,
ii) Operational objectives
A general objective merely states in broad terms the achievements expected whereas an operational
objective specifically mentions results expected from the implementation of the project or scheme. The
definition of objective in clear terms helps in qualifying physical, financial, human and other resources
requirements.
Following this, the next strategy is the location and size of the project. The location of the project
is influenced by the availability or existence of various resources and the infrastructural facilities.
Examination of availability of these resources/facilities at one or more sites should lead to a decision
on the selection of the location of the project and thus facilitate exploitation of the available
resources/facilities to the advantage of the investor or the community at large or both.
Consideration for designing a project

1. Feasibility Analysis
This is the very first step in project designing. At this stage, the project idea is examined from the
point of view of whether to go in for a detailed investment proposal or not. As project idea is
examined in the context of internal and external constraints three alternatives could be considered.
First, the project idea seems to be feasible; second, the project idea is not a feasible one and third,
unable to arrive at a conclusion for want of adequate data. If it is feasible, we proceed to the second
step, if not feasible, we abandon the idea and if sufficient data are not available, we make more
efforts to collect the required data and design development.
2. Techno-Economic Analysis
In this step, estimation of project demand potential and choice of optimal technology is made. As
the project may produce goods or services, it is imperative to know the market for such goods or
services produced. Market analysis is also in-built in this step. The choice of technology itself will
be based on the demand potential and aid in project design. Techno-economic analysis gives the
project a unique individuality and sets the stage for detailed design development.
3. Project Design and Network Analysis
This important step defines individual activities which constitute the project and their inter-
relationship with each other. The sequence of events of the project is presented. A detailed work
plan of the project is prepared with time allocation for each activity and presented in a network
drawing. Project design is the heart of the project entity. This paves the way for detailed
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identification and qualification of the project inputs, an essential step in the development of the
financial and cost-benefit profile of the project.
4. Input Analysis
The step assesses the input requirements during the construction of the project and also during the
operation of the project. In the earlier step, a project was divided into several activities. Now it is
better to see to the inputs required for each activity and sum it up to get at the total input
requirements on qualitative and quantitative terms. Inputs include materials, human resources.
Input analysis also considers the recurring as well as non-recurring resource requirements of the
project and evaluate the feasibility of the project from the point of view of the availability of these
resources. This will aid in assessing the project cost itself which in turn is necessary for financial
analysis or cost-benefit analysis.
5. Financial Analysis
This stage mainly involves estimating the project costs, estimating its operating costs and fund
requirements. Financial analysis also helps in comparing various project proposals on a common
scale, thereby aiding the decision-maker. Some of the analytical tools used in financial analysis are
discounted cash flow, cost-volume—profit relationship and ratio analysis. It is very essential to
take caution in preparing financial estimates. The objective of this strategy caution is to develop
the project taking into consideration resources and also to identify these characteristics. Investment
decisions whether made for the provision of goods or services involve commitment of resources in
future. Since investment proposition has a very long time horizon, it is absolutely necessary to
exercise due care and foresight in developing project financial forecasts.
6. Cost-Benefit Analysis
The overall worth of a project is the main consideration here. While financial analysis will go to
justify a project from the profitability point of view, cost-benefit analysis will consider the project
from the national viability point of view. Here again, the project design forms the basis of
evaluation. When we talk of cost-benefit analysis, we not only take into account the apparent direct
costs and direct benefits of the project but also the costs which all entities connected with the project
have to bear and the benefits which will be enjoyed by all such entities. This strategy is now taken
to be the internationally recognized system of project formulation.
7. Pre-investment Analysis
The project proposal gets a formal and final shape at this stage. All the results obtained in the above
steps are consolidated and various conclusions arrived at to present a clear picture. At this stage,
the project is presented in such a way that the project-sponsoring body, the project-implementing
body and the external consulting agencies are able to decide whether to accept the proposal or not.
The sum total of the pre-investment appraisal is to present the project idea in a form in which the
project-sponsoring body, the project-implementing body can take an investment decision regarding
the project.
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16. What is a project report? What are the various aspects of project report?
Introduction
Soon after the identification of a project and its implementation, the project report is formulated
after examining various relevant aspects. Usually, the entrepreneur gets a project report prepared before
a project or investment is undertaken. That project report prepared before a project of investment is
undertaken. That project report assesses the demand of the proposed product to be produced, works out
the costs of investment as well as operational costs and thus estimates the expected profitability of the
proposed investment. It is on this basis that not only the entrepreneur takes his decision on whether to
proceed on the proposed project, but also financial backers, banks and state departments involved in
the project base their decisions on the ways and the extent to which the help should be provided. If the
entrepreneur has to go to the money market to raise some risk capital for his venture, the project report
may serve as his main instrument in convincing the investors about the profitability of his venture.
In fact, the state financing and nationalized banks in India over the years have been insisting on
first getting such a project report from the entrepreneur before taking any action on his application for
financial and other support. This strategy has been in operation for several decades. However, the
number of the closing down of comparatively new businesses, and the emergence of large number of
‘sick’ mills give a cause of concern about the strategies adopted at the time of project appraisal. These
issues not only adversely affect the involved entrepreneurs, but also the financing institutions. Thus it
is not only a serious setback to the budding entrepreneurs of a newly developing country; it wastes the
scarce investable funds of the nation, and as the banks have to break-even, this situation hikes up the
real interest rate in the economy, making development costly.
A Project Report
A project report incorporating relevant data in respect of a project serves as a guide to management
and records merits and demerits in allocating resources to production of specific goods or services. A
project report is prepared for analyzing the extent of opportunities in the contemplated project.
A project report is prepared by an expert after detailed study and analysis of the various aspects of
a project. It gives a complete analysis of the inputs and outputs of the project. It enables the entrepreneur
to understand, at the initial stage, whether the project is sound on technical, commercial, financial and
economic parameters.
Parties Interested in Project Report
Financial institutions and commercial bankers are the interested parties in the project report which
is prepared for direct submission to financial corporations, banks for getting loans. It does not contribute
substantially to future operations.
The entrepreneur gets the report prepared by a consultant. As such, these parties providing term
loans go for the report because it spells out how production should be organized to yield maximum
results.
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Aspects of Project Report

Project report includes information on the following aspects:
1. Economic Aspects: The project report should be able to present economic justification for
investment. It should present analysis of the market for the product to be manufactured. Market
analysis basically pertains to the following issues: (a) How big is the present market? (b) How
much is it likely to grow? (c) How much of the future market the proposed project can capture after
allowing a margin for future entrants? It provides an analysis of the economics of production.
2. Technical Aspects: The appropriate report should give details about the technology needed,
equipment and machinery required and the sources of availability.
3. Financial Aspects: The report should indicate the total investment required including sources of
finance and the entrepreneur’s contribution. It should present a comparison of cost of capital with
the return on capital.
4. Production Aspects: It should contain a description of the product selected for manufacture and the
reasons for such selection. The report should also bring out the fact whether the product is export
worthy. It should also give details of the design of the product.
5. Managerial Aspects: The report should contain qualifications and experience of the persons to be
on the management of the job. If the entrepreneur will look after management, the report must
emphasise as to how he is qualified to manage the venture.
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17. Write short notes on;

a. Technical Feasibility
Technical feasibility simply refers to the adequacy of the proposed plant and equipment to produce
the product as per the required norms. This aspect requires a careful examination and a thorough
assessment of the various inputs of the project like land, machineries, trained labour, transportation,
fuel, power etc. It also requires the analysis of the know-how necessary to run the project and whether
the entrepreneur possesses that knowledge or whether he is going to produce from outside.
Sometimes, a project may require collaboration. In such a case, the terms and conditions of the
collaboration should be examined. In the case of foreign technical collaboration, the legal provisions
prevailing in the country in relation therein should also be analysed.
On the whole, technical analysis deals with the following aspects:
▪ Availability of land and site
▪ Location of the project
▪ Size and adequacy of the plant and factory layout
▪ Availability of inputs like water, power, transport, communication facilities, etc.
▪ Types of technology to be adopted
▪ Suitability of the technology
▪ Availability of servicing facilities like machine shops, repair shops etc.
▪ Availability of skilled labour and raw material.
The lending institutions may employ a technical consultant to study the projects on their technical
aspects.
b. Financial Feasibility
Finance is the most important prerequisite to establish an enterprise. Hence, the appraisal of the
financial viability of the project assumes much importance in a project appraisal. This requires the
scrutiny of the following:
i) Cost of the project and means of financing: Assessment of the financial requirements both for
fixed and working capital should be carefully made. In fact, the financial plan for meeting the
cost of the project depends upon the accurate estimates of the various costs. The cost of the project
normally includes the following items:
✓ Cost of land and site development
✓ Cost of building, plant and machinery (including spare parts, erection charges, etc.)
✓ Technical know-how fees including consulting and engineering fees
✓ Preliminary and pre-operative expenses
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✓ Interest during construction

✓ Provision for contingencies
✓ Margin money for working capital
✓ Other fixed assets.
The tendency to under-estimate the cost of production should be avoided. Having estimated the
cost of the project, the sources of finance should be identified. The usual sources of finance are:
✓ Owned funds
✓ Share capital
✓ Issue of debentures
✓ Reserves and surplus and retained earnings
✓ Term loans and long-term borrowings
✓ Deferred payment guarantees
✓ Public deposits
ii) Cash flow estimates: A cash flow estimate is nothing but a projection of the future sources of
cash and their application. Cash flow estimates are necessary to ascertain as to when the project
will need money for different purposes and from different sources. Moreover, this statement helps
to fix the repayment schedule on the basis of cash accruals shown in the statement.
In cash flow statement, profit is the most important source of inflow and this profit actually
depends upon the management policies. For instance, a change in the method of valuation of
stock would affect the profit correspondingly.
iii) Projected balance sheets: The projected balance sheet will reflect the financial position of the
concern in the future years during the entire period of the term loan. One can find out the effect
of the plan of operations on the assets, liabilities and capital of the business unit.
The lending institution should pay a special attention to the following:
✓ The procedure adopted for the valuation of assets
✓ The depreciation policy adopted
✓ The impact of term loan on the assets and liabilities
After sanctioning the term loan, the lending bank has to make a post-sanction inspection to
ensure:
✓ Whether the loan has been actually utilized for the purpose for which it was borrowed?
✓ Whether the terms and conditions of the loan have been complied with?
✓ Whether the value of the security is adequate?
✓ Whether there is any default in repayment?
c. Market Analysis
The success of any enterprise depends upon its ability to market its products/services, therefore
lending institution should first of all pay meticularous attention to this aspect. The survival of any
business depends upon its earning capacity which in turn depends on the volume of sales. Again,
marketing is the only activity which brings revenue while all other activities involve expenditures.
Hence, a detailed market analysis should be undertaken estimating the supply and demand for the
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product. In fact, the potential of the market constitutes the determinants of probable rewards for an
entrepreneur.
UNIT V: MOBILIZING RESOURCES FOR START-UPS
18. Explain the concept of Start-up. State some of the basic problems that start-ups are faced with.
A startup is a young company that is just beginning to develop. Startups are usually small and
initially financed and operated by a handful of founders or one individual. These companies offer a
product or service that is not currently being offered elsewhere in the market, or that the founders
believe is being offered in an inferior manner.
A startup company (startup or start-up) is an entrepreneurial venture which is typically a newly
emerged, fast-growing business that aims to meet a marketplace need by developing a viable business
model around an innovative product, service, process or a platform.
A startup company is a newly formed business with particular momentum behind it based on
perceived demand for its product or service. The intention of a startup is to grow rapidly as a result of
offering something that addresses a particular market gap. Examples of Startups: HappiestMinds
(happiestminds.com) provides IT Services, GlamIndia
(glammedia.com) Media, Kronos (kronos.in) Software Product, Livestream Technologies
(new.livestream.com) provides Media Software-Product Development, etc.
There are no fixed parameters on what type of company can be considered a startup, but the term
most frequently applies to high-tech companies creating products that leverage technology to offer
something new or to perform an existing task in a novel way.
Funding
The genesis for startups is often the founder's concept for a product; some originate once the
founder has hit the subsequent step, at the proof of concept stage.
The startup's founder often leads the development of the product and serves as the organization's
business leader. He or she often focuses on scaling the company ahead of making a profit. Facebook
did not make a profit until 2009, five years after Mark Zuckerberg founded the company while he was
a student at Harvard University.
As a result, the value assigned to a startup does not necessarily correspond with the actual revenue
it generates during those early years. Instead, company leaders and investors might consider the
company's potential value based on the profits it's projected to generate. Startups that have a value of
$1 billion or more are called unicorns.
Organizational structure
The term startup rose in popularity during the 1990s, as the number of technology and internet-
related companies rapidly increased. Excitement over their potential led to the dot-com bubble, with
investors that were eager to capitalize on the growing popularity of the internet overvaluing startups.
This was the dot-com boom.
When too many of these companies failed because they lacked solid business fundamentals,
including viable products, it left investors unable to recoup their investments -- a comedown that's
sometimes called the dot-com bust.
Unique characteristics
Not all new companies are considered startups. Companies that have limited growth potential in
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terms of their customer base, revenue and product aren't seen as startups. For instance, a new restaurant,
dry cleaner or professional services firm aren't likely to be called startups.
Although there's no single standard for what defines a startup company, the business community
recognizes there is a special class of young companies and a particular work culture that exists within
startups.
Perceptions of startups
Startups are often heralded for their potential to disrupt industries and introduce new processes and
products to the market, as well as for their innovative spirit. They can have an almost mythical hold on
the American imagination, as they embody the notion that anyone can start with an idea, work hard and
become rich, while shaking up the status quo.
Basic Problems of Startups/Startup Business Problems
Startup business problems are common when starting a business. Every new business will face
some type of problem as it opens. Creating a business plan will help relieve some startup business
problems before opening a business by helping to identify and budget the costs involved in solving
these issues. Some common startup business problems most business face include environmental
issues, labor, financing, business zoning, licensing and permits.
i) Environmental: Environmental issues, such as global warming, increasing energy costs and
environmental regulations, are a challenging problem for any businesses trying to make a profit.
According to the National Federation of Independent Business’s consumption poll, small
companies spend their primary energy costs on operating vehicles, heating, cooling and for
operating equipment. Business can control energy costs using energy saving devices.
Unfortunately, many new businesses face budgetary constraints and financing the conversion of
building and the purchasing of energy efficient equipment is difficult. Counties requiring an
environmental impact studies and/or permits for startup businesses located in certain areas such as
near wetlands are a trend happening across the U.S. Many states and local governments require
environmental permits such as the Clean Air Permit that are required for sources of air pollution
and Resource Conservation and Recovery Act Permit that ensure the safe treatment, storage and
disposal of hazardous waste for some businesses.
ii) Labor: Startup business problems concerning the regulatory laws for employees can result in
compliance fines. Employees are costly and some states require payroll taxes to be paid quarterly
no matter how profitable the business. Startups must report new hires to the state and budget
payroll, administrative expenses and payroll taxes into their startup costs to avoid startup business
problems. All states require businesses with employees to pay withholding, unemployment taxes,
Social Security and follow federal employment regulations, such as the Occupational Safety and
Health Act and the Fair Labor Standards Act.
iii) Funding: The financial crisis starting in 2007 has created a tightening of all credit markets
including business. Startup businesses face credit problems as lender closely examine both personal
and business finances prior to approving loans. Startup business owners must provide a financially
sound business plan and have a clean credit history prior to applying for business loans. Lenders
will look at the owner’s debt to credit ratio, credit score and past credit history before a loan
approval. According to the U.S. Small Business Administration, business owners without sufficient
assets, business plan and poor credit can expect a turn down of their loan application. To avoid
startup business problems when getting financing make sure to review the financial background of
all business partners.
iv) Zoning: Startup businesses face problems when selecting location without considering the type of
business they will operate. Business owners must check federal and local zoning ordinances prior
to selecting any business location. For example in Chicago, Illinois, businesses that sell liquor are
restricted from the city’s dry precincts and must obtain voter approval from residents with 250 feet
of their establishment prior to receiving a city liquor license. The federal Endangered Species Act
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prohibits business activities that threaten and endanger species. Certain businesses, such as
manufacturers, must obtain a permit from the U.S. Fish and Wildlife Service or the National
Oceanic and Atmospheric Administration National Marine Fisheries Service. Other zoning laws
pertain to wetlands while all state, counties and cities have zoning ordinances limiting the use of
certain areas or buildings.
v) Licensing and Permits: All states require some type of business registration for tax purposes. To
avoid startup business problems check with federal, state, and local government agencies to
determine licensing requirements. Certain types of professions and businesses require special
licensing. Bar owners, day care owners and others may face criminal background checks prior to
being granted a business license. State licenses for business services, such as building contractors,
cosmetologists, physicians and real estate agents, are needed to operate these businesses.
Businesses selling certain products also require special licensing. For example, all states require
licenses to sell liquor or firearms. Business startups can contact their state's business assistance
agency for help to comply with permit and licensing requirements. Startups will need to include
licensing and fee costs in their business plan.
19. What are key business resources? What happens when these are not met properly?
Introduction
Starting a new business venture is a complex process that needs momentous resources, not only
financial but also non-financial such as manpower, skills, know-how, intellectual property rights
(IPRs), suppliers, customers etc. These resources are required to make a business model work. Every
business model needs these resources, and it is only through the exploitation of these resources a
business can generate business value and revenue. However, the intensity of importance of these
resources varies from business to business. For example, a microchip manufacture needs more capital
intensive production facilities, whereas a microchip designer depends on more human capital. Business
resources can usefully be grouped under four categories:
i) Financial Resources: Before starting a new business venture, an entrepreneur needs to secure
sufficient financial resources in order to be able to operate efficiently and sufficiently well to
promote business success. Financial resources are also required for start-up requirements and
operating expenses until the business starts generating profits. It is said that “without adequate
finance, no business can survive”. An audit of financial resources would include assessment of the
following factors:
» Cost of project
» Working capital requirements
» Break even analysis
» Projected income and balance sheets
» Cost of capital
» Availability of financial resources
» Modes of financing
» How quickly money is needed
» The amount of risk involved in the reason for cash
» The length of time of the requirement of finance
ii) Manpower resources: Personnel are essential resources for carrying out any productive operation.
Without personnel/employees (human) no activity in the organisation can be done. Most
importantly, without human efforts, no organisation can achieve its objectives. Therefore, it is vital
for every entrepreneur not only to recruit people, but also to train them and develop them. A solid
assessment of manpower resources should include the following factors:
» Need of manpower
» Skills required
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» Need of training
» Employee benefits
» Performance and incentives
» Legal compliance
» Future demand
iii) Knowledge resources: 21st century is the century of knowledge. Therefore, knowledge is also
considered as strategic resource in modern organisations. It is not only a source of competitive
advantage but also act as an enables in process of change. Studies revealed that organisations that
effectively manage their knowledge are more innovative and perform better. Assessment process
of knowledge resources should consider following aspects:
» Need of knowledge
» Need of know-how
» Need to technology
» Modus operandi to retrieve knowledge
» Mechanism to store knowledge
» Methods of knowledge share
» Techniques of generating business value from knowledge
» Technology management
» Cost of technology
» In-house R&D
» Licensing, patenting and franchising
» Management of IPRs
iv) Physical Resources: Whether it is a small home business or a multinational retail store with
multiple locations, every business must have the appropriate and adequate physical resources.
Acquisition of physical resources can be one of the costliest aspects of starting a business venture.
Therefore, it is essential for entrepreneur to realistically assess the need of these resources. Land,
plant, machinery etc. are the examples of physical resources.
The following points should be considered in physical resources planning:
» Current need of resources
» Future need of resources
» Availability of funds
» Cost of acquisition
» Methods of Acquisitions
» Option of financing
» Site master plan
No business can survive and grow without these resources. Therefore, mobilisation of these
resources is critical aspect of start-up enterprises. Resources mobilisation refers to all activities and
process of securing or procuring the required resources (new or additional), through different means
to attain organisational objectives. It also deals with better use of existing resources. These
resources should be acquired at the right time, right prices and should be of right type. Resources
mobilisation process is generally referred to as “New Business Development”.
Broadly, resource mobilisation process involves three important activities:
1. Identification of resources in time
2. Procurement of resources
3. Utilisation of resources
20. Why do businesses need funds? Discuss the sources from which a new business venture can raise
capital.
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Business is an economic activity directed towards producing, acquiring wealth through buying and
selling of goods. It is a very wide term. Finance is the life blood of the business. Funds are required to
commence and carry on business. All business activities such as planning, organizing, managing,
controlling, purchasing, selling, directing, marketing, etc cannot take place without finance. Thus, we
can say requirements of funds by business to carry out its various activities is called business finance.
When an entrepreneur takes a decision to start business the need of fund arises in order to meet the
expenses of establishment of business, finance is required for purchasing fixed and current assets, for
day-to-day operations, purchase of raw material, to pay salaries, etc. Smooth functioning, expansion
and growth of business is possible when it has sufficient funds.
Putting all your eggs in one basket is never a good business strategy. This is especially true when
it comes to financing your new business. Not only will diversifying your sources of financing allow
your start-up to better weather potential downturns, but it will also improve your chances of getting the
appropriate financing to meet your specific needs.
Keep in mind that bankers don't see themselves as your sole source of funds. And showing that
you've sought or used various financing alternatives demonstrates to lenders that you're a proactive
entrepreneur.
Whether you opt for a bank loan, an angel investor, a government grant or a business incubator,
each of these sources of financing has specific advantages and disadvantages as well as criteria they
will use to evaluate your business.
Here's an overview of seven typical sources of financing for start-ups:
i) Personal investment: When starting a business, your first investor should be yourself—either with
your own cash or with collateral on your assets. This proves to investors and bankers that you have
a long-term commitment to your project and that you are ready to take risks.
ii) Love money: This is money loaned by a spouse, parents, family or friends. Investors and bankers
considers this as "patient capital", which is money that will be repaid later as your business profits
increase.
When borrowing love money, you should be aware that:
• Family and friends rarely have much capital
• They may want to have equity in your business
• A business relationship with family or friends should never be taken lightly
iii) Venture capital: The first thing to keep in mind is that venture capital is not necessarily for all
entrepreneurs. Right from the start, you should be aware that venture capitalists are looking for
technology-driven businesses and companies with high-growth potential in sectors such as
information technology, communications and biotechnology.
Venture capitalists take an equity position in the company to help it carry out a promising but higher
risk project. This involves giving up some ownership or equity in your business to an external party.
Venture capitalists also expect a healthy return on their investment, often generated when the
business starts selling shares to the public. Be sure to look for investors who bring relevant
experience and knowledge to your business.
BDC has a venture capital team that supports leading-edge companies strategically positioned
in a promising market. Like most other venture capital companies, it gets involved in start-ups with
high-growth potential, preferring to focus on major interventions when a company needs a large
amount of financing to get established in its market.
iv) Angels: Angels are generally wealthy individuals or retired company executives who invest
directly in small firms owned by others. They are often leaders in their own field who not only
contribute their experience and network of contacts but also their technical and/or management
knowledge. Angels tend to finance the early stages of the business with investments in the order of
$25,000 to $100,000. Institutional venture capitalists prefer larger investments, in the order of
$1,000,000.
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In exchange for risking their money, they reserve the right to supervise the company's
management practices. In concrete terms, this often involves a seat on the board of directors and
an assurance of transparency.
Angels tend to keep a low profile. To meet them, you have to contact specialized associations
or search websites on angels. The National Angel Capital Organization (NACO) is an umbrella
organization that helps build capacity for Canadian angel investors. You can check out their
member’s directory for ideas about who to contact in your region.
v) Business incubators: Business incubators (or "accelerators") generally focus on the high-tech
sector by providing support for new businesses in various stages of development. However, there
are also local economic development incubators, which are focused on areas such as job creation,
revitalization and hosting and sharing services.
Commonly, incubators will invite future businesses and other fledgling companies to share
their premises, as well as their administrative, logistical and technical resources. For example, an
incubator might share the use of its laboratories so that a new business can develop and test its
products more cheaply before beginning production.
Generally, the incubation phase can last up to two years. Once the product is ready, the business
usually leaves the incubator's premises to enter its industrial production phase and is on its own.
Businesses that receive this kind of support often operate within state-of-the-art sectors such as
biotechnology, information technology, multimedia, or industrial technology.
MaRS – an innovation hub in Toronto – has a selective list of business incubators in Canada,
plus links to other resources on its website.
vi) Government grants and subsidies: Government agencies provide financing such as grants and
subsidies that may be available to your business. The Canada Business Network website provides
a comprehensive listing of various government programs at the federal and provincial level.
Criteria
Getting grants can be tough. There may be strong competition and the criteria for awards are often
stringent. Generally, most grants require you to match the funds you are being given and this
amount varies greatly, depending on the granter. For example, a research grant may require you to
find only 40% of the total cost.
Generally, you will need to provide:
• A detailed project description
• An explanation of the benefits of your project
• A detailed work plan with full costs
• Details of relevant experience and background on key managers
• Completed application forms when appropriate
Most reviewers will assess your proposal based on the following criteria:
• Significance
• Approach
• Innovation
• Assessment of expertise
• Need for the grant
Some of the problem areas where candidates fail to get grants include:
• The research/work is not relevant
• Ineligible geographic location
• Applicants fail to communicate the relevance of their ideas
• The proposal does not provide a strong rationale
• The research plan is unfocused
• There is an unrealistic amount of work
• Funds are not matched
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vii) Bank loans: Bank loans are the most commonly used source of funding for small and medium-
sized businesses. Consider the fact that all banks offer different advantages, whether it's
personalized service or customized repayment. It's a good idea to shop around and find the bank
that meets your specific needs.
In general, you should know bankers are looking for companies with a sound track record and
that have excellent credit. A good idea is not enough; it has to be backed up with a solid business
plan. Start-up loans will also typically require a personal guarantee from the entrepreneurs.
BDC offers start-up financing to entrepreneurs in the start-up phase or first 12 months of sales.
You may also be able to postpone the principal payments for up to 12 months.
21. What are preliminary contracts with vendors and bankers? Why are they necessary?
Promotion
- It is the first stage in the incorporation of a company
- Means conceiving (planning) an idea of business, organisation of funds, property, management –
profit
- Prof. E.S. Mead: “Promotion includes four elements—discovery, investigation, assembling and
financing.”6
- C.W. Gerstenberg: “Promotion may be defined as the discovery of business opportunities and
the subsequent organisation of funds, property and managerial ability into a business concern for
the purpose of making profits there from.”7
- Dr. H.E. Hogland: “Promotion is the process of creating a specific business enterprise. The
aggregate of activities contributed by all of those who participate in the building of business
constitutes promotion.”8
- The one who is involved in this task is called a PROMOTER

Promoter
- The promoter is a person who does the necessary preliminary work incidental [ secondary,
supplementary] to the formation of a company.
- Chronologically, the first persons who control a company’s affairs are its promoters.
- It is they who conceive the idea of forming a company with reference to a given object and then
to set it going and it is they who take the necessary steps to incorporate it].
Meaning of Preliminary Contract

The sale of a residential immovable to a physical person who buys it to live in it, irrespective of
whether it is already built or to be built by a builder or developer, must necessarily (it is required by
Law) be preceded by a preliminary contract.
6
Saha and Singh, 58.
7
Ibid, 58.
8
Ibid, 58.
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Preliminary contract is the first step in the purchase of a new property. It is a critical legal document
similar to the promise of purchase which precedes the purchase of a property from a previous owner,
but it possesses particular characteristics and specifications that it is essential to know before
embarking on the adventure of buying a new house. This contract binds the promisor-buyer and the
vendor. By signing it, the promisor-buyer commits to buying the property designated by the
preliminary contract and to pay the agreed upon price.
Preliminary contract formalizes the promise to sell and purchase the immovable by the parties in a
transaction. By signing it, the vendor and the purchaser are legally committed. Therefore, one must
purchase a house/apartment for the agreed price. And except for exceptions in Law or in the contract,
it is difficult if not impossible to walk away from the preliminary contract without financial and legal
consequences.
Contents of Preliminary Contract
The following are contained in the preliminary contract:
✓ The name and address of the promisor-buyer and the vendor
✓ The address and lot number of the property, the dimensions of the building and those of the lot
✓ The date the property is to be delivered by the vendor
✓ The detailed sale price including method of payment
✓ The intend or not to obtain hypothecary load to finance the purchase, along with the particulars of
such financing
✓ Description of work to be completed by the vendor
✓ The obligations of both the promisor-buyer and the vendor
✓ The deadline to finalize the contract
✓ The signatures of both parties.
Pre-incorporation Contract and Provisional Contract
Pre-incorporation Contract (Preliminary Contract):
- Preliminary contracts are contracts entered into by the promoters on behalf of the company, before
its incorporation, with third parties
- Promoters enter into contracts to acquire some rights/property for the company before its
incorporation
Legal position of such contract
- Such contract is not legally binding upon the company, because before its incorporation, a company
is a non-entity. Even after it comes into existence, pre-incorporation contracts are not legally
binding
- Promoters are personally liable for such contracts, unless there is a new contract after its
incorporation made stating to include the old ones
The Specific Relief Act [Sec. 19(e)]
If a contract is made for the purpose of the company and such contract is warranted by the terms of
contract, the company accepts the contract after its incorporation and communicates such acceptance
to other party to the contract.
Provisional Contract:
- Contract made by the company after getting the Certificate of Incorporation but before getting the
Certificate of Commencement of Business
- It is not legally binding on the company until the company obtained the Certificate of
Commencement of Business
- Companies (Amendment) Act, 2015 has removed this requirement by removing Section 11
Need for Preliminary Contract

- It formalizes the contract between the promisor-buyer and the vendor
- If preliminary contract is not there, a person will be entitled to annul (call off, withdraw, terminate,
rescind, invalidate, etc.) the sale
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- For purchase of property

- For securing the services of managers and other experts
22. What is contract management?

Introduction
This guide is intended to cover all those activities associated with contract management from the
establishment of the business case and the confirmation of need, through contract administration and
relationship management to the review of contract performance. The activities themselves are divided
into two distinct but interdependent phases, upstream and downstream of the award of the contract.
The guide is generic in that its principles are intended to be applicable to all contracts from a simple
order, through framework contracts to complex construction or service contracts, and it should be seen
as equally applicable to contracts in the private as well as the public sector.
Definition
Contract management is the process of managing contracts from vendors, partners, customers, or
employees. It supports the entire customer lifecycle which covers any process that contributes, creates
or utilizes contract data. The personnel involved in contract administration are required to negotiate,
support and manage effective contracts are often expensive to train and retain. Contract management
includes negotiating the terms and conditions in contracts and ensuring compliance with the terms and
conditions, as well as documenting and agreeing on any changes or amendments that may arise during
its implementation or execution. Contract management can be an asset, or a liability, depending on
how digital and integrated a process is.
The business world is changing. New ways of driving revenue are forcing companies to re-imagine
the way they manage the customer lifecycle—making contract management more important than ever
before.
For many companies, “contract management” means “stuffing executed contracts into the
overflowing filing cabinet, never to be referenced again.” On the other side of the spectrum, when
contract management is handled correctly, contract management includes self-service portals, Legal
pre-approved templates, Legal playbooks, and electronic signature (e-signature). In this world, Legal
resources are free to manage by exception, and can focus attention on the critical, or non-standard,
contracts that typically introduce risk into the organisation. Before diving in, be sure to download a
complementary copy of the Ultimate Guide to Contract Management for a detailed look at how Contract
Management is important to any business.
Objectives of Contract Management
Contract management is necessary to ensure that:
the objectives of the contract are delivered
the goods/works/services provided comply fully with the requirements laid down in the contract
specification and the terms and conditions of the contract
the roles and responsibilities of those involved in the process are clearly defined and understood
best value for money is achieved including any equality and sustainable development requirements
included in the specification or conditions of the contract
all anticipated benefits are fully realised
accountability and effective control of budgets
evidence of regular contract monitoring and audit trail of issues raised and resolved is provided
continuous improvement realisation in terms of quality, cost, sustainability and service is brought
about.
Elements of a Business Contract
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A business contract is a legal agreement between two parties, and may be used in situations where
services are rendered for a fee or specific duties are required to be performed. To be legally valid, a
contract must contain several key elements.
i) Parties: The parties of a contact are simply the entities involved in the agreement. These can be
the name of a person or a separate business entity. For example, if you are a freelance photographer
and you are hired as an independent contactor, the parties to the agreement are you (or your business
name if you use one) and the name of the entity that is hiring your services.
ii) Consideration: The consideration in a contract spells out what each party stands to gain from the
business arrangement. Continuity with the freelance photographer example, the consideration
received by the hiring entity is the finished photographs, and the photographer’s consideration is
the payment received for providing the service. It could also indicate what expenses may be paid
by the hiring entity, such as the cost of the photographer’s travel to the site of the shoot.
iii) Terms and conditions: The terms and conditions of a business contract specify the rights and
obligations of each party. These can vary widely depending on the nature of the business agreement.
Common examples can include the amount of payment, when payment is due, the specific nature
of the work involved and how long the agreement will remain in effect. Terms can also include
possible remedies if one party is found to be in breach of the contract.
iv) Competent parties: A contract may be deemed invalid if it can be shown that one of the parties
was mentally incompetent at the time of entering into the agreement. A contract may also be voided
if one party was under the influence of drugs or alcohol and the other party was aware of the first
party’s condition.
v) Legal purpose: A business contract must be for a legal purpose to be considered valid. If, for
example, one party knowingly contracted to deliver stolen merchandise for a second party, the
second party would have no legal recourse if the first party failed to deliver the goods to their
intended destination.
Importance of contract management
The business environment is full of agreements between businesses and individuals. While oral
agreements can be used, most businesses use formal written contracts when engaging in operations.
Written contracts provide individuals and businesses with a legal document stating the expectations of
both parties and how negative situations will be resolved. Contracts also are legally enforceable in a
court of law. Contracts often represent a tool that the companies use to safeguard their resources. It is
worthwhile noting that contract management is successful if:
✓ the arrangements for service delivery continue to be satisfactory to both parties, and the expected
business benefits and value for money are being realised
✓ the expected business benefits and value for money are being achieved
✓ the supplier is co-operative and responsive
✓ the organisation understands its obligations under the contract
✓ there are no disputes
✓ there are no surprises
✓ a professional and objective debate over changes and issues arising can be had
✓ efficiencies are being realised.
The importance of contract management can be summarized as follows:
Facts: Business contracts typically include a negotiation process in which various terms to which each
party must abide are stipulated. The negotiation process may take days, weeks or months, depending
on the contract and the contractual responsibility of each party. Contracts also can include a process for
making changes or addendums to the agreement. Businesses frequently use contracts to ensure that a
certain level of service is maintained or that competing companies do not have access to specific
economic resources.
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Fix Resource Costs: A common use of business contracts is the creation of an agreement or company
that agrees to sell economic resources to another at a fixed cost. These contacts ensure manufacturing
or production businesses can obtain economic resources at a specific price for a defined time period.
Businesses also use these contracts to hedge against the potential cost increase of economic resources.
Fixed cost contracts may backfire on companies of a decrease in economic resources occurs in the
future.
Limit Obligations: Service contracts outline the specific duties a company will perform in a contractual
agreement. These contracts typically are used when companies contract with other business to perform
services such as maintenance, technical support or call-centre operations. Service contracts usually
include information relating to prices for each service and the frequency at which the company will
perform the services. Businesses use these contracts to ensure that they do not complete work without
being compensated.
Non-Compete Agreements: Businesses often use contracts to enforce non-compete agreements. Non-
compete agreements prohibit individuals or other businesses from offering goods or services in the
economic marketplace. These contracts create strategic relationships between two companies and allow
them to provide unique goods and services to consumers. Companies also can use non-compete
agreements to limit the type of services offered by former employees who have specific knowledge
about the company’s specialized business services.
Expert Insight: Legal advice should be sought before entering into any binding contract. Small
businesses may be susceptible to larger businesses taking advantage of the entrepreneur’s willingness
to complete business functions. Contracts often include difficult legal terms that many business owners
fail to understand. Attorneys can provide clear information on the benefits of business contracts and
whether small businesses should agree to specific contractual terms.
63

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Entrepreneurship Semester

UNIT I: CONCEPTS OF ENTREPRENEURSHIP

1. Who is an entrepreneur? What are the various categories of entrepreneur?

Entrepreneur Entrepreneurship Enterprise

Person Process of Action Object

J. B. Say, expanded Richard Cantillion’s idea and conceptualised entrepreneur as an organiser of a

what an entrepreneur does is regarded as entrepreneurship. Thus, entrepreneurship can be viewed as a

Entrepreneur vs. Entrepreneurship

Factors Affecting Entrepreneurial Development

3. Explain the importance of entrepreneurship development and the role of an entrepreneur.

4. Write short notes on:

corporations were not receptive to innovative ideas. These executives-turned-entrepreneurs

UNIT II: ENTREPRENEURSHIP AND MICRO, SMALL AND MEDIUM ENTERPRISES

Small Scale Industries (SSI) in India

Revision in the Definition Small Scale Industry in India

Current Definition of Micro and Small Enterprises

The definition of MSMEs in the service sector is:

Various Reasons for Sickness/Incipient Sickness

Total SSI Regd. SSI Unregd. SSI

UNIT III: ENTREPRENEURSHIP STIMULANTS

ii) Where will money come from?

Importance of Marketing Assistance to MSMEs

10. Explain the role of self-help groups in development of women entrepreneurship.

Delivery Vehicles of Micro Finance

Challenges facing Micro Finance

A New Business Model

Role of Micro Finance in Rural Women’s Economic Empowerment

2. Institutional Objectives for reaching out to Women Clients

Self Help Group (Stree Shakthi & Swashakthi Groups)

Functions of Typical SHGs

Role of SHGs for the Development of Women Entrepreneurs

Positive Features of the SHG - Bank Linkage Programme

Financial Inclusion of Poor Women

Cost Recovery and Sustainability

From Microcredit to Microenterprise – Challenges

The functioning of SHGs as micro-credit institutions

11. What are the role and functions of business incubators?

An organisation designed to accelerate the growth and success of entrepreneurial companies

Importance of Business Incubators

Q.02 Which are the Implementing Agencies under this scheme?

Q.03 What is Business Incubator?

Q.04 What is the assistance provided per Business Incubator?

Q.05 Is there any limitation on number of incubators to be given financial assistance?

12. Write short notes on:

Venture Capital vs Angel Investor

UNIT IV: BUSINESS IDEAS AND BUSINESS PLAN

b) Research and development projects

15. What are the different considerations while designing a project?

Consideration for designing a project

Aspects of Project Report

17. Write short notes on;

✓ Interest during construction

UNIT V: MOBILIZING RESOURCES FOR START-UPS

- The one who is involved in this task is called a PROMOTER

Meaning of Preliminary Contract

Need for Preliminary Contract

- For purchase of property

22. What is contract management?

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