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EDP2
EDP2
EDP2
entrepreneur is supposed to be an opportunity seeker. Their first task is to identify and select an attractive opportunity. Good market scope An attractive return on investment
Technical/production
and
Identification
of a suitable project is a very crucial decision, as the ultimate success of the venture greatly depends upon the selection of the right type of product.
identifying a suitable project one should make a proper SWOT analysis of ones own strengths and weaknesses in respect of the sources that one has at hand.
While
Opportunities
Gujarat
Entrepreneurs Opportunities
follow the herd mentality. for SSI and medium and large
scale projects
Workable
definition of good business opportunity is that It is an end result that the entrepreneur definitely wants and that is also attainable by the entrepreneurial team.
are useless unless used.
Ideas An
entrepreneur is driven by opportunity, which is found in the needs of customers and a favorable situation, competitive advantage and timing.
Family Background Previous experience Special interests Skills Managerial Technical Personal traits Training exposure ENTREPRENEUR
Industry line Size Technology Activity Original structure Form of org. ENTERPRISE Location Product type & range
ENVIRONMENT
1. Environment
o
3. Resources
Industries based on minerals, agricultural, marine, and other natural resources. 4.
Linkages
Backward and forward integration
5.
6.
7.
8. Special products
Research and Invention based products
skills/knowledge based products foreign collaboration
9.
Consumers
Existing
Focus
group of individuals providing information in a structured format Brainstorming Problem inventory analysis Evolution of ideas
Idea germination Incubation Illumination Verification Unexpected success & unexpected failure
Incongruity Process
need Industry and market structure Demography Changes in perception New knowledge
Return on investment
Finance
Market
Government policy
Tourism and Hospitality Auto Ancillaries Two Wheelers Garments Software Light and Medium Engineering Industry Trading/Supplies Education and Training Poultry Food Processing Fruit and Vegetable Processing Manufacture of Business Attires Corporate Gifting Herbal Medicines and Skincare Products Mineral Water Paints, Enamels and Varnishes Organic Farming
Music
and Entertainment Writing Instruments Plastics Toys Floriculture Health-care Sector Biotechnology Information Technology (IT) Enabled Services Education Portals Organized Retailing Processing, Refrigeration and Transportation of Food, Vegetables and Fruits Courier Services
Plant
Size
layout
Plant
Efficient
and economic material handling Optimum use of available floor space Quick disposal of work and minimum waste of time in production Efficient production control Higher employee safety and amenities Smooth flow of factory operations, minimum bottlenecks Quality improvement and cost reduction Adequate storage and packing facilities Built-in provision for future expansion
Better
Available space is utilized properly The accident rate is lower There is saving in power load Production control is easily facilitated
Process
Product
People
, resource and customers Cost considerations raw materials transportation of raw materials availability of workforce with required skills ecological requirement public utilities (power, sewage, etc) transportation of finished goods scope for expansion Competitors
Standards
business plan is a written summary of what you hope to accomplish by being in business and how you intend to organize your resources to meet your goals.
experts say it is the road map for operating any business and measuring progress along the way. say it is the blueprint for building a business on solid grounds.
Some
Others
Business idea
Business objectives
Business strategies
An
ideal business plan should answer the following questions. 1. What business am I in? 2. What do I sell? 3. Where is my market? 4. Who will buy my product? 5. Who is my competitor? 6. What is my promotion strategy? 7. How much money is needed to operate my firm? 8. How will I get the work done? 9. What management controls are needed? 10. How can they carried out?
Where will the business be twelve months from now? Where will it be two years from now? When should I revise my plan? Where can I go for help?
It
serves as a tool for internal use to track the progress of the firm helps in seeking capital for external use
It
Helps
in reducing an emotional bias Provides SWOT analysis Test ones commitment Enables one to justify his/her plans and ideas Tests the ideas on paper Helps one to develop a consistent strategy Helps in convincing others about the idea
well researched and designed business plan include details of all the elements necessary to get it going. For larger ventures, plans are often written separately with specific purposes. All business plans must take into consideration, the various govt. policy requirements varying from municipal by-laws for zoning to methods of soliciting finance. As every business proposal must assume the worst case scenarios at the planning stage itself and work out strategies to keep the business on track.
The
35 elements of a business plan can be studied as follows. 1. Summary 2. Introduction to the business plan Phase I Data collection and analysis 3. General description of the industry 4. Description of the firm 5. Description of products and services 6. Market area, size and characteristics 7. Customers 8. competition
Phase II Strategy formulation 9. Overall marketing strategy 10. Location 11. Advertising and promotion 12. Pricing 13. Method of selling and distribution 14. Servicing, warranties, and packaging 15. Sales and credit terms 16. Other marketing strategy elements 17. Description of premises and facilities 18. Production methods and equipment 19. Materials and sources of supply 20. Key personnel
Compensation and ownership 22. Staffing plan 23. Supporting professional services 24. Management assistance and staff training 25. Long-range plans 26. Critical risk and assumptions Phase III Forecasting results 27. Estimated market share 28. Sales forecast 29. Determining cash requirement 30. Pro-forma profit and loss statement
21.
pro-forma cash flow statement Pro-forma balance sheet Break-even analysis Explanation of projections Ratio analysis
1.
2. 3. 4.
Preliminary
Consumables/
Working
capital calculation Total cost of the project Financing of the project Profitability calculation
Supplementary
details do u own house/ property etc. own insurance policy any interest in other firms do u belong to S.C./S.T./O.B.C. present monthly income
Feasibility
report is a document with respect to any investment proposal based on certain information and factual data for the purpose of appraising the project.
study enables an entrepreneur to know the inputs required and if rightly prepared, confirms that he is proceeding in the right direction.
Feasibility
Project 1. 2. 3. 4. 5. 6.
feasibility analysis Technical feasibility Commercial and economic feasibility Financial feasibility Managerial feasibility Market analysis Social profitability analysis
Main areas studied under technical feasibility are: basic availability of land , raw materials , Fuel, Power , Water , Skilled and unskilled labor Appropriateness of plant , Machinery , Techniques of production
SPECIFIC REQUIREMENT Soft water , high tension power , technology adapted is capable of producing the intended good & services which can satisfy the customer.
Success
of the project is based on the sound marketing conditions. Assess the scope for successful marketing of goods and services. Existing demand & supply position in the market The prospective market for the product The nature of competition Whether project will be able to break even within 2-3 years matching with realistic cost estimates.
It
examines the reliability of the cost estimates. Adequacy of provision made with regard to the fixed and working capital. Dependability made about the sources of finance. Evaluates whether project will give sufficient profitability and repayment capacity. BEP Tax element in price Cash flow and fund flow statement
Brief
description of the market. Analysis of past and present demand Analysis of past and present supply with source.
Government
evaluation in terms of
With
reference to a new entrepreneur this may be most difficult because it is difficult to evaluate the potential managerial capability or competence. Once a unit is established, the entrepreneur has to become its manager. Based on entrepreneurial vision Past records resourcefulness
Appraisal
is performed by a financial institution or lending bank prior to the sanction of term loan / working capital assistance to the project promoter.
Technical aspect of project appraisal Marketing aspect of project appraisal Financial aspect of project appraisal
Technological
considered
Plant and machinery selected Technology proposed to be used Raw material sources Availability and arrangement of supply Manpower availability Promoters competence
Examination
market. Competitive envt., share of competitors, what market share the promoter hopes. Distribution channels. Analyze if the promoter propose to create new market, entrench himself deeper in existing markets or wider use of the product.
Cost
Internal
constraints
Internal constraints is more with the entrepreneur or with his system of functioning.
External
constraints
beyond the control of the entrepreneur and more so in the general environment in which the enterprise exists.
One
of the most difficult problems in the new venture creation process is obtaining financing. Debt or equity financing
Debt financing is financing method involving an interest bearing instrument, unusually a loan, the payment of which is only indirectly related to the sales and profits of the venture.
Internal
sources
Profits Personal saving or family & friends Sale of assets Reduction in working capital Reducing stocks Extended payment terms Account receivables Retained earnings Depreciation fund Trade credit
External
sources
Ordinary shares Preference shares Debenture Commercial banks Other loans Overdraft facilities Leasing and hire purchase Lines of credit from creditors Government loan / grant programs Venture capital Mortgages Factoring services
Long
term sources
Shares Venture capital Government grant Bank loans Mortgages Owners capital Retained profit Selling assets
Short
term sources
Personal
Account receivable loans(factoring) up to 80% Inventory loans up to 50% Equipment loans(leasing) 50 to 80% and 3-10 years Real estate loans(mortgage) up to 75%
Cash
flow financing
Installment loans 30-40 days seasonal needs Straight commercial loans 30-90 days Long term loans up to 10 years Character loans
Bank
lending decisions
Role
of SBA (Small Business Administration) in small business financing Research and development limited partnerships
Contract, sponsoring company , limited partners Eg. Syntex corporation raises $23.5 million to develop five medical diagnostic products.
Government
grants
Federal agencies participating in small business innovation research program (SBIR) 1. Department of defense (DOD) 2. National aeronautics and space administration (NASA) 3. Department of energy (DOE) 4. Health and human services (HHS) 5. National science foundation (NSF)
6.
7.
8. 9. 10.
11.
U.S. department of agriculture (USDA) Department of transportation (DOT) Nuclear regulatory commission (NRC) Environmental protection agency (EPA) Department of education (DOED) Department of commerce (DOC)
Phase I up to $ 100000 for 6 months Phase II up to $ 750000 for 24 months Phase III funds from the private sector or regular govt. procurement contracts are needed to commercialize the developed technologies
Another
grant program available to the entrepreneur is the small business technology transfer (STTR)
Private
placement
A formalized method for obtaining funds from private investors. Private offering is faster and less costly when a limited number of sophisticated investors are involved who have the necessary business acumen and ability to absorb risk.
Bootstrap
financing
Bootstrap financing involves using any possible method for conserving cash. Eg. Take advantage of supplier discount, bulk packing instead of individual items, advertising with channel member so that cost is shared.
Most misunderstood type of risk capital market. Consists of virtually invisible group of wealthy investors, often called business angels. Typically investing anywhere from $10000 to $ 500000. One article determined that the angel money available for investment each year was about $ 20 billion. There are about 250000 angel investors who invest an amount of $10 billion to $ 20 billion annually in about 30000 firms.
Well educated, with many having graduate degree Will finance firms anywhere, particularly in the united states Most firms financed within one days travel Majority expect to play an active role in ventures financed Many belong to angel clubs
Investment record
Range of investment $ 10000 to $ 500000 Average investment is $ 50000 One to two deals each year
Venture
preference
Most financing in stat-ups or ventures less then 5 years old Most interest in financing
Manufacturing industrial/commercial products Manufacturing consumer products Energy/natural resources Services software
Reasons
Risk/return ratio not adequate Inadequate management team Not interested in proposed business area Unable to agree on price Principals not sufficiently committed Unfamiliar with area of business
The
investment are in early stage deals as well as second and third stage deals In fact venture capital can best be characterized as a long term investment discipline, usually occurring over a fiver year period. In each investment venture capitalist takes an equity participation through stock, warrant and convertible securities and has an active involvement.
Before
world war II, venture investment activity was a monopoly led by wealthy individuals, investment banking syndicates and few family org. First step took place in 1946 with the formation of American Research & Development Corporation (ARD) in Boston. The next major development is Small Business Investment Company Act in 1958. The 1960 saw a significant expansion of SBICs with 585 SBIC approval and more than $205 million private capital.
During
the late 1960s, small private venture capital firms emerged. These were usually formed as limited partnerships with the venture capital company acting as the general partner that received a mgt fee and a % of profit earned on a deal. Eg. Insurance co., endowment funds, bank trust departments, pension funds & wealthy individuals and families. In response to the need for economic development, a forth type of venture capital firm has emerged in the form of the state sponsored venture capital fund.
These
state sponsored funds have a variety of formats. While the size and investment focus and industry orientation vary from state to state. Besides the four types there is now emerging university sponsored venture capital funds. These funds, usually managed as separate entities invest in the technology of the particular university Eg. School such as stanford, columbial, western reserve university etc
Private venture capital firms (general partners and limited partners) Small business investment company (SBIC) Types of venture capital firms Industry sponsored Banks and other financial institutions Non financial co. State government sponsored
University sponsored
1.
1. 2.
Preliminary screening
Begins with receipt of business plan VC first determine if the deal or similar deals have been seen previously Determines proposal fits his or her long term policy and short term needs. Determine whether the business can reasonably deliver the ROI required.
3.
4.
2.
1.
3.
1. 2. 3.
Due diligence
This is the longest stage General evaluation time is from 1-3 months Detailed review of companys history, business plan the resumes of the individuals their financial history and target market customers.
4.
1. 2. 3.
Final approval
A comprehensive internal investment memorandum is prepared. VC findings and details of invt terms and conditions. Both the entrepreneur and VC will sign to finalize the deal.
Factors in valuation 1. Nature and history of the business 2. Examination of the financial data of the venture compared with that of other co. in the industry 3. The book value (net value) of the stock of the company and the overall financial condition of the business. 4. Previous years earnings are generally not simply averaged but weighted with the most recent earnings receiving the highest weighting. Income by product line should be analyzed to judge future profitability and value.
5.
6. 7. 8.
Dividend paying capacity of the venture. An assessment of goodwill and other intangibles of the venture. Assessing any previous sale of stock Market price of the stocks of companies engaged in the same or similar lines of business.
Liquidity
ratios
Current ratio
This ratio is commonly used to measure the short term solvency of the venture or its ability to meet its short term debts A ratio 2:1 is generally considered favorable, entrepreneur should also compare this ratio with any industry standards.
Quick
ratio
current assets inventory current liabilities
This is a more rigorous test of the short term liquidity of the venture Usually 1:1 ratio would be considered favorable in most industries.
Activity
Account receivable Average daily sales This ratio indicates the average number of days it takes to converts accounts receivable into cash.
Inventory
turnover
Cost of Goods Sold inventory
This ratio measures the efficiency of the venture in managing and selling its inventory. A high turnover is a favorable sign indicating that the venture is able to sell its inventory quickly.
Leverage
Total liabilities total assets This ratio helps to assess the firms ability to meet all its obligations (short term & long term)
Debt
to equity
Total liabilities Stock holders equity
This ratio assesses the firms capital structure It provides a measure of risk to creditors by considering the funds invested by creditors (debt) and investors (equity).
Profitability
net profit net sales This ratio represent the ventures ability to translate sales into profits
Return
on Investment
net profit total assets
The
ROI measures the ability of the venture to manage its total investment in assets.