Module III: Institutional Support for SME. 1. Central / State level Institution promoting SME. 2.

Financial Management in small business. 3. Marketing Management, problems & strategies 4. Problems of HRM Relevant Labour laws. Sickness in Small Enterprises. 5. Causes and symptoms of sickness 6. cures of sickness. 7. Govt. policies on revival of sickness and remedial measures

Financial management in small scale enterprises.. As we know that production is the outcome of all 4 factors of productions. They are land labour capital and entrepreneur. These factors are mutually dependent on each other. The availability of all 4 factors in proportion are necessary to produce the desired level of output. But without finance these 4 factors cannot combined together to produce desired level of production. The decisions taken by the entrepreneur well in advance regarding the future financial aspects of his/her enterprise is known as financial planning. In a financial plan the entrepreneur should clearly answer the following 3 questions 1) How much money is needed? 2) Where will money come from/ 3) When does the money need to be available? What is financial management? Financial management refers to the activities relating to the handling of all finance function of an organisation efficiently and effectively for smooth functioning and overall growth of an organisation Financial management includes taking of few decisions Investment decision,Financing decision,Dividend decision,Liquidity decision Objectives of financial management Sources of finance

1) Internal source 2) External source Internal sources- funds are raised from within the enterprise itself,. The internal sources of financing could be the owners capital known as equity, deposits and loans given by the owner, the partners, the directors to the enterprise. 2) External sources- funds from other than the internal source are from external source Deposits or borrowings from relatives and friends and others Borrowings from the banks for working capital purposes Credit facilities from commercial banks Term loans from financial institutions etc

Term loans- loans taken for a definite period of time are called term loans. Based on the period laons are broadly classified into two types Short- term loans- Short term loans: Short term loans are designed for shorter repaying duration and therefore are not bound by long term obligation. Short term loans are obtained for a smaller amount as you need to repay it quickly and may be provided for any purpose including educational expenses, home improvements, auto repairs, clearing smaller debts etc. Advantages of short term loans: Short term loans do not usually require collateral Short term loans are made available in several days or even hours Short term loans require little paperwork Short term loans provide you with money when you feel a sudden unexpected need With short term loans you do not burden yourself with long term obligations Disadvantages of short term loans: Short term loans are usually more expensive. As short term loans are not secured by collateral the lender raises interest rates to cover the risk they bear with your short term loan. The lender of short term loans is likely to investigate the credit history of the borrower and it will be offered only when it is found satisfactory. Short term loans are obtained for a smaller amount. Long term loans- Loans are considered as long term loans if they are for more than three years by the definition of most financial institutions. However, most long term loans are for more than ten years, and, in fact, can be as long as twenty years. A long term loan will generally be put up against collateral or security. Whether it is property, equipment, or some other asset, there usually has to be something securing a long term loan. The rate of interest

for short term loans is never fixed arbitrarily. The magnitude of the loan amount, length of the payment period, records of the regular source of income of the person taking loan and his collateral status are seriously counted prior to fix the rate of interest. Advantages of long term loans: Long-term loans are usually available are cheaper rates. As long term loans are secured by collateral the lender charges lower interest rates. Long term loam allows one to borrow large amount. Disadvantages of long term loans: Long term loans are subject to interest rate fluctuations. The total interest paid is substantially higher in case of long term loans Financial needs Based on permanence Fixed capital the money invested in some fixed assets or durable assets like land building machinery equipment furniture etc Working capital- the money invested in current assets like raw material, finished goods, debtors etc is known as working capital. In other words money required for day to day operations of business/enterprise is called working capital Based on period of use Accounting process 1. Recording of transactions 2. Classifying transactions 3. Summerising transactions 4. Analysisng and interpreting results there of Journal Journal is the book of original entry. All day to day transactions are recorded first in it in chronological order with the help of vouchers like cash memos, cash receipts, cash invoices etc.It is otherwise known as day book. The process of writing business transactions in journal is known as journalising. Format of journal Date particulars L.F Dr.amont Rs Cr. amount Rs

What is an account? In simple words an account is a summerised record of all trasactions realting to a particular person,thing,an item or an income or expense.An account resembles in the shape of T. Proforma of account Name of the account Dr. Cr.

Classification or types of accounts Personal account-accounting relating to persons and organisations representing to persons are called personal account.eg, chinmoys accou,SBI account,Hari accountetc Real account-accounts which are related to properties assets,physical possession can be treated as real accounts.eg cash account,furniture account,building account. Nominal account-accounts realting to expenses,losses,incomes,gains, profits are called nominal account, eg,wages account,salaries account,commission received account,interest account. Rules of debit and credit Accounts Personal Real Nominal Debit The receiver What comes in Expenses and losses Credit The giver What goes out Incomes and gains

Legder Ledger is a summarised and classified form, a complete record of all transactions. Since it contains complete information about various transactions it is called principal book. Specimen of Ledger Dr. Date particulars LF Amount Cr. date particulars LF Amount

Trial Balance Sum total of debit balance should match with sum total of credit balance. Final accounts It is primarily prepared for ascertaining the operational result and the financial position of the business of the business. These are prepared with the help of trial balance. The final accounts consist of the following 2 account. 1. Trading and PL account 2. Balance sheet Trading and profit loss account-the p/l account ios [prepared for ascertaining whether the business earned profit or incurred loss during the particular period of time called accounting period.All nominal accounts are entered in p/l accounts as per the rules followed by golden rules of accounting. As per the rule of nominal account all expenses and losses are shown on the dedit side of the p/l account,and all incomes sand losses are shown in the credit side of accounts.Then the total of debit and credit side are compared to ascertaining profit or loss of the business during accounting period.If the total credit side exceeds the total debit side,the excess will be profit earned during the period.on the contrary if the total debit side exceeds total credit side excess will be loss incurred during the period.The net result is transferred to balance sheet which is known as positional statement. Format of trading and p/l account Trading and p/l account For the period ended 31st jan 2012 Dr Cr particulars To purchases To direct wages To carriages To gross profitc/d Amount(Rs) Particulars By sales amount(Rs)

To interest paid To insurance To salary To rent To postages, stamps

By gross profit b/d By interest received

To net profit

Balance sheet Balance sheet shows a clear picture of what the business owns and what it owes to other or say, how much assets and liabilities it has. The account shows a debit balance represent assets and the accounts shows a credit balance represent liabilities. Total of the asset should coincide with total of the liability side of the balance sheet.

Format of balance sheet Balance sheet as on 31st dec 2012 liabilities Capital Add net profit 20000 2200 21700 10000 amount assets Cash in hand Cash at bank Furniture Debtors 19,700 5000 5000 2000

Less drawings -500 Creditors

31700

31700

Sickness Meaning of industrial sickness Sickness is easy to understand but difficult to define According to Reserve bank of india.An industrial unit is regarded as sick if it has incurred cash loss for one year and in the judgement of the bank it is likely to continue to incur cash loss in the two following years and it has imbalance in its financial structure such as current ratio of less than 1:1 and worsening debt-equity ratio i.e the ratio to total outside liabilities to the net worth and when the cumulative losses exceed capital and reserve.

Thus the emphasis in the RBIs definition of sickness is on profitability, liquidity and solvency of enterprise. The sick industrial companies act, 1985 defines a sick industry as an industrial company (being a company registered for less than 7 years), which at the end of any financial year accumulated losses equal to or exceeding its entire net worth and has suffered from losses equal to or exceeding its entire net worth and has also suffered from cash losses in such financial year immediately preceding such financial year. Incipient sickness While the concept of incipient sickness exists, the same has not been defined for MSMEs so far and needs to be defined. An enterprise may be treated to have reached the stage of incipient sickness/potential sickness, if any of the following events are triggered There is delay in commencement of commercial production by more six months for reasons the control of the promoters and entailing cost overrun. The company incurs losses for two years or cash loss for one year, beyond the accepted timeframe on account of charge in economic and fiscal policies affecting the working of MSEs or otherwise. The capacity utilisation is less than 50% of the projected level in terms of quantity or the sales are less than 50% of the projected level in terms of value during a year.

There are three key industrial economic sectors The primary sector, largely raw material extraction industries such as mining and farming The secondary sector involving refining, construction and manufacturing The tertiary which deals with services (such as law and medicine) and distribution of manufactured goods.

Symptoms of sickness 1. Increase in inventories 2. Increase in quantities of slow or non moving items in the total inventories, 3. Low capacity utilisation 4. Poor industrial relation 5. Frequent industrial relation 6. Higher rejection of completed goods 7. Default or delay in payment of taxes, excise duty, provident fund contribution, ESI contribution. 8. Failure to make timely payment of electricity bills, telephone bills, etc. 9. Delay in making payment to creditors. 10. Inability to pay timely instalment of loans and its interest. 11. Increase in interest burden 12. increased litigation with the customers. 13. Higher rate of labour turnover 14. Increase in non-productive expenses etc. 15. Decrease in the market price of the equity share and debentures 16. Poor maintenance of plants and machineries 17. Frequent application/request to banks for additional credit 18. Renewal of loans and advances

19. Increase in push sales 20. Decrease in consumer 21. Low asset turnover ratio and profitability ratios. 22. Constant decrease in profitability. 23. High competition

Reasons for sickness Internal reasons External reasons Internal reasons Obsolete technology Non flexibility Poor Financial management D) Poor industrial relation Inefficient management Inefficient sales and marketing activities Higher cost h)Wrong selection and placement of workers i)Unwanted expansion, modernisation and diversification j) problem of marketing of goods. External reasons The external factors which are beyond the control of a small scale industry usually affect the industry group as a whole. In fact there may be several external factors causing a unit sick and which vary from time to time and from industry to industry and even from one point of time to another for the same industry. 1)due to infrastructure Location Power Water Post office Bank Communication facilities Transportation 2) Financial problems Capital Working capital Long-term funds Recovery Rate of interest 3) Marketing problems 4) Taxation 5) Raw materials 6) Industrial and financial regulations 7) Inspection problems

8) Technological problems 9) EXIM policy of Govt. 10) Globalisation.

CAUSES OF INDUSTRIAL SICKNESS managerial capacity-the most important cause for the ailment of an industrial undertaking in the small scale sector is attributed to lack of managerial competence or capacity .About 75%of SSI units are proprietorship units. The corporate units are family concerns registered as pvt ltd companies having two or three family members or close relatives or friends without an organised structure which are unable to attract high quality professionals and suffer from more number of employees turnover. Working capital- most of SSIs purely depends on the need based financial assistance in time. The proprietary concerns are unable to get the need based financial assistance from the banks and financial institutions most of the time .the balance sheet didnt show the encouraging trend to able to qualify to the required norms of banks and financial institutions. Hence they suffer from lack of financial support from the banks. Cash management- cash is an important asset for the operation of the business, cash is the basic input, that keeps business run, any mis management of cash leads to bankruptcy. Good book keeping and frequent checks on cash transactions will provide greater scope and also provide suitable remedy to take appropriate remedial action. Marketing of the product-most of the industrial units failed to address the problem of marketing of their products. Once the product is produced it should reach the market and to the end users without any hindrance. Technical knowledge-frequent changes in the technology affect the smooth functioning of the unit. Outdated technology will cost more to produce the goods when compared with the latest technology. hence, technical know-how will improve the production substantially. Tax policy of the government- frequent changes in the policy of the government and also the tax structure, leads to sickness where the promoter is required to show his income. Hence suitable policy of the govt will bring down the sickness of the industry. Consequences of industrial sickness Substantial investment in sick units causes a great national loss in the form of wastage of scarce resources and decline in production. Industrial sickness causes a great loss to entrepreneur and investors. Due to this value of investors. Due to this value of investors will decline. Due to industrial unrest, industrial units often delay the pay to their staff. As a result strikes, lock-outs and other forms of the industrial unrest occur.

Closure of sick and no- viable industrial units causes widespread unemployment in the country. Loss of job causes tension and other social unrest. In an under-developed economy like ours, the resources are already scarce. If these scarce resources are locked up in sick units, it becomes the wastage of scarce resources which otherwise invested would have yielded substantial return to the economy. The govt. raises a substantial portion of its revenue from industrial units by way of various taxes and duties levied on them. But when a large number of industrial units become sick, the possibilities for raising substantial revenue from the sick units by way of various levies are greatly reduced. Thus industrial sickness results in loss of revenue to the government. Huge financial losses to the banks and the financial institutions or they provide substantial funds to start an industry. The locking up of substantial funds in the sick industrial units impinges on the future lending capacity of the banks and the financial institution.

Preventive measure of sickness The following preventive measures can be taken by the entrepreneur. Identification and detection of sickness at the incipient stage which is the first and foremost preventive measure to detect and reduce or avoid industrial sickness. Identification of sickness needs appropriate yardsticks, so appropriate yard sticks should be developed. To avoid social disorder solve labour problems merger of large no of sick units will be a welcome proposition. Proper steps should be taken to rehabilitate weak units to strengthen viability. Rehabilitation of sick units are provided only in the form of funding but other problems like marketing etc should be given equal weight age. Remedial measures of sickness The rehabilitation of sick industries- the sick industrial companies special provisions act 1985 address itself to the rehabilitation of sick units which are engaged in all types of industrial activity except ship building.

Refinancing schemes under rehabilitation-the industrial development bank of India evolved a new scheme of RSR (rehabilitation scheme of refinance).under this scheme in which industrial undertaking financed by the financial institution facing any financial constraints and encountering any problem financial institutions provide additional fund to recover from the problem faced by the unit .extension of repayment period is also offered to those eligible units. Rescheduling/rephasement loans/advance-the financial institutions and banks are evolved a regular procedure of rephasing of loans of advances by taking into account the problem faced by the industrial unit. The re schedulement /rephasement will be in accordance with the time

limit and the extension of time should not be more than 15 to 20 years. The eligible units will have to qualify the basic criteria that the sickness should not be due to mismanagement.

Debt reconstruction schemeThe scheme evolved to encourage the ssi uits facing with huge losses. The capital loss should be more than 50% of the initial capital and the unit should have suffered loss for more than 50% cash loss to become eligible to qualify for the availment of DRS scheme. Seed margin money schemeIn order to assist the sick industrial units the central govt has evolved a margin money for the revival of viable sick unit to supplement the various efforts of the state govt.the RBI, commercial banks and financial institution offer seed margin money at 10%of the project with the reduced rate of interest to overcome only financial setbacks. Bridge loan schemeAny units facing with shortage of working capital and facing certain problems in mobilising funds due to non realisation of bills in time. That industrial unit eligible for investment subsidy from the govt can approach banks and financial institution to avail bridge loan against to subsided component eligible from respective state. Negotiated settlement schemeThe banks and financial institutions are allowing the debt ridden account o get closed in the books of account by providing easy and honourable exit policy. In which to chronic accounts banks and financial institutions sacrifice a portion of principal or interest or both depending upon cases. Negotiated settlement policy which allows the bankers /financial to put on end to the default accounts.