Unit No.

Understanding Ownership Structure: Definition of

3
small scale, medium scale and large scale enterprises, role
of small enterprises in economic development, policies
governing SMEs, Steps in setting up a small unit, Sources
of finance for SME’s,
Setting up of a small Business Enterprise-; Rationale
for Small & medium enterprise; Objective; Scope; Role of
SME in Economic Development of India, Identifying
business opportunity in various sectors, SME Registration;
NOC from Pollution Board; machinery and equipment
selection; project report preparation; project planning and
scheduling using networking techniques of PERT / CPM;
Methods of Project Appraisal.
 SSI’
s
• Stands for Small Scale Industries
• MSME in Indian Context
• Governed by MSME Act, 2006
 Small Scale
Industries
• A SSI is an industrial undertaking in which the investment in
fixed assets in plant and machinery, whether held on
ownership term or on lease or hire purchase, does not exceed
Rs.1 Crore.
• This investment limit is varied by the government from time to
time.
• Entrepreneurs in small scale sector are normally not required
to obtain a licence either from the Central Government or
the State Government for setting up units in any part of
the country. Registration of a small scale unit is also not
compulsory.
• The ministry of micro, small and medium enterprises acts as
the nodal agency for growth and development of SSIs in the
country. (http://msme.gov.in/Web/Portal/New-Default.aspx)
• Objective: To promote SSIs and enhance their competitiveness
Various public sector enterprises assist it.
• Small Industry Development Organization. (SIDO)
- It is the apex body for assisting the government in formulating
and overseeing the implementation of its policies and
programmes/projects/schemes.

• National Small Industries Corporation Ltd. (NSIC):

• It was established by the government with a view to
promoting, aiding and fostering the growth of SSI in the
country, with focus on commercial aspects of their operations
 Importance of SMEs

• Small and Medium Enterprises (SMEs) are vital for

development of a country
– Helps reshaping the productive sectors
– Generates employment
– Creating an environment for entrepreneurship
– Promotes innovation

• Globally, SMEs contribute over 90% of Business Enterprises

and 50-60% of Total Employment.
(UNIDO Report 2009-10)
 Importance of
SMEs

• In Europe, Japan and the USA, 99% of the enterprises

belong to the small business segment

• Employment generated through Small businesses is more

than 50% in the EU and approximately 40% in the USA

(World Retail Banking Report 2010)

 Facts About
MSME
• This sector contributes 8% of India’s GDP.
• It contributes 45% of manufactured
output and 40% of its exports.
• It provide employment to about 60
million people through 26 million
enterprises.
• The Small Scale Industry Sector holds the Key to
Economic Prosperity of the Indian Economy,
Characterized by abundant Labor Supply,
Unemployment & Under Employment , Scarcity of
Finance, Growing Modern Large Industries providing
scope for development of Ancillary Industries & so
• on.
The Small Scale Industry has grown phenomenally
during the last Six Decades & has acquired a very
prominent place in the Socio – Economic Development
in the Country. 9
Classification
 Definitions After 2nd Oct. 2006

Investment Ceiling for Plant, Machinery or Equipments

Classification Manufacturing Service Enterprises

Enterprises

Micr Up to Rs. 2.5 Up to Rs. 1

o million million

Smal Between 2.5 to 50 Rs. 1 to 20

l million million

Mediu Rs. 50 million to Rs. Rs. 20 to 50

m 100 million million
Features of
SSI
 Characteristics of
Small Enterprises :
• A Small Enterprise is generally a “One Man Show”.
• Owner himself / herself is also a Manager of the
Enterprise. Thus, a Small Enterprise is managed in a
personalized manner.
• A Small Enterprise has lesser Gestation Period
compared to a Large Enterprise.
• Small Enterprises generally carryout their operations so
as to cater to the Local & Regional Markets.
13
 Characteristics of
Small Enterprises :
• Small Enterprises use indigenous resources & therefore can be
located anywhere subject to the availability of these resources like
Raw Materials, Labor, Transport Facilities etc.
• They are fairly Labor Intensive with comparatively smaller Capital
Investment than the Larger Units.
• Using Local Resources, Small Units are decentralized & dispersed
to Rural Areas & Smaller Towns
• Small Enterprises are more susceptible & highly reactive &
receptive to Socio – Economic conditions compared to larger
enterprises
14
 Advantages of
Small
Enterprises :
 They are the Back Bone of the Industrial
Activity in the Country & are playing a very
important role in improving the Socio –
Economic Conditions of the people. Advantages
of these Enterprises are as follows :
1) They create greater Employment
Opportunities thro Labor Intensive processes &
thereby help in tackling the Unemployment
Problem.
15
 2)They have Low Gestation Period & thereby Expensive
Financial Resources are not idled unproductively for long
periods.
3) They can be set up easily in Rural & Backward Areas.
4) They need Small / Local / Regional Market.
5) They encourage growth of Local Entrepreneurship.
6) They create Decentralized pattern of Ownership.
7) They foster Diversification of Economic Activities.

16
 8)They Innovate & Introduce New Products
particularly to cater to Local Needs.
9)They influence & improve Standard of Living of
Local People.
10)They provide equitable dispersal of enterprises
throughout Rural & Backward Areas.
11)They earn Vital Foreign Exchange for the Country
through their Exports of Goods / Services.
12)They Increase Revenue to Central & State Govts by
way of Taxes Paid by them.

17
Role of Small enterprises in
Indian economy
Problems of
SSI
Setting up an
SSI
Stages for setting up
SSI
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 Project Identification

• Project identification is the first phase of a project cycle.

It is a recurrent process for documenting, ranking and
approving candidate projects.
 Project Formulation

• It refers to step by step investigation of resources

and development of project idea.
• To derive maximum benefits from minimum expenditure
in shortest possible time
Elements of Project
Formulation
Selection of Ownership
Location of
plant
Factors affecting
layout
 Project Report :

For any New Project or Enterprise to be set up, Proper Planning is

necessary.

A detailed Project Report provides such a plan for the Project.

The Report is useful to the Entrepreneur for Planning &
Implementing the Project. This is essential for Obtaining
Finance & other clearances for the Project.

In fact, the Project Report gives a detailed insight of the

Techno
– Economic Viability of the Project.
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 Format of a Project
Report:
• 1. Cover Sheet
• 2. TABLE OF CONTENTS
• 3. EXECUTIVE SUMMARY
• 4. THE BUSINESS
• 5. Funding Requirement
• 6. The Product or Services
 Format of a Project
Report:
• 7. The Plan
a. Marketing Plan
b. Operational Plan
c. Organization Plan
d. Financial Plan
• 8. Critical Risks
• 9. Exit Strategy
• 10. Appendix
 EXECUTIVE SUMMARY

• The first impression about the business personal

 THE BUSINESS

• Details about the business concept

• Objective of the business

• A brief history about the past performance of the

company

• Form of ownership
 Legal Forms of Business
Three basic legal forms of business:

• Proprietorship - Single owner, unlimited liability, controls all decisions,

and receives all profits.

• Partnership - Two or more individuals having unlimited liability who

have pooled resources to own a business.

• Corporation - Most common form of corporation; regulated by statute;

treated as a separate legal entity for liability and tax purposes.
 Funding Requirement

• Investors & financial institutions

• A careful, well- planned funding requirement

should be documented.

• It is also necessary to project how these

requirements would be fulfilled.
 The Product/ Services

• Key features of product & the product range

 The Plan- Marketing
Plan
• Marketing Mix strategies are to be drawn based on the market
research

• Taste, needs, habit of the customer – Marketing Segmentation and

Targeting

• Marketing mix strategies

• Budget
 Operational Plan

• Plant location & plant

layout.

• Budget
 Organization Plan

• Responsibilities & duties amongst people in the

organization
• Information about board of directors
• Manpower plan
• Details about the laws that would be governed in
managing the employees of the organization
• Budget
 Financial
Plan
• Two to five years for an existing company
• 1.Projected sales
• 2.Projected income & expenditure
statement.
• 3.Projected breakeven point
• 4.Projected profit & loss statement
• 5.Projected balance sheet
• 6.Projected cash flows.
• 7.Projected fund flows.
• 8.Projected ratios
 Critical
Risks
• The investors are interested in knowing the tentative risks

• Purpose- To evaluate the viability of the project & to

measure the risks involved in the business

• It give confidence to the investors as they can calculate the

risks involved
 Exit
Strategy
• How the organization would be dissolved,
what would be the share of each
stakeholder in case of winding up of
the organization.
 Appendix
• The curriculum vitae of the owners, ownership agreement

• Certificate from pollution board

• Memorandum of understanding, article of association

• All the supporting agreements/documents that can help in marketing the

project viability at large.
 Essentials for Project Report

• 1. The project report should be sequentially arranged.

• 2. The project report should be covering all the details about the
proposed project.
• 3. The project report should not be very lengthy a subjective.
• 4. The project report should justify the financial needs and
financial projection.
• 5. The project report should also justify market prospects and
demands.
• 6. The project report should be attractive to the financial
and investors.
agencies 47
Registration of
SSI
 Introductio
n
• SSI units(i.e. undertaking with investment in plant and
machinery of less than Rs. 10 lakh) should seek
registration with the Director of Industries of the
concerned State Government.

• States generally adopt the uniform registration procedures

Objectives of
Registration
Benefits of
registration
 Features of the
scheme
• DIC is the primary registering centre
• Registration is voluntary.
• Two types of registration
• Provisional registration certificate valid for 5 years
• After commencement of production, a permanent
registration certificate is given.
Provisional Registration Certificate
(PRC)
 Permanent Registration Certificate

• Income-Tax and Sales Tax exemption

• Incentives and concessions in power tariff.
• Price and purchase preference for goods produced.
• Availability of raw material
• Permanent registration of tiny units should be
renewed after 5 years.
 Procedure for registration
• A unit can apply for PRC for any item that does not require
industrial license and items not listed in Schedule-I or Schedule-
II.(
http://laghu-udyog.gov.in/publications/reserveditems/reservite
ms.html
)
• Units employing less than 50/100 workers with/without power
can register even for items included in Schedule-II.
• PRC is valid for five years
• Atcommencement of production, it has to apply
for permanent
registration(
http://dcmsme.gov.in/howtosetup/grgxx01x.htm)
 The following form basis of
evaluation
• The unit has obtained all necessary clearances whether
statutory or administrative. e.g. drug license under drug
control order, NOC from Pollution Control Board, if
required etc.
• Unit does not violate any locational restrictions in force,
at the time of evaluation.
• Value of plant and machinery is within prescribed limits.
• Unit is not owned, controlled or subsidiary of any other
industrial undertaking as per notification.
 Government Policy towards SSI

Small Scale Enterprises have been given an important

place in the frame work of Indian Planning for
both ideological & Economic Reasons.
Development of Small Scale Enterprises have been
taken up with various important objectives to be
realized.

57
 Objectives

• The of Immediate Employment

generation
Opportunities with relatively Low Investment.
• The promotion of more equitable distribution of
National Income.
• Effective mobilization of untapped Capital & Human
Skills.
• Dispersal of Manufacturing activities all over the
Country, leading to growth of Villages , Small Towns &
economically Backward Regions.
Therefore, the Govt of India as well as various State Govts in
the Country have started various programs & evolved policies
for the Development of Micro & Small Enterprises in the
Country.

Various measures taken by the Central & State Govts for the
development of Micro & Small Enterprises have included Product
Reservations, subsidies on fixed capital investment, Sales Tax &
Income Tax Concessions, Preferential allocation of credit &
interest subsidy, extension of business & Govt purchases,
Marketing Assistance including Export Promotion by institutions
such as National Small Industries Corporation, Small Industries
Development Organization & several other agencies.
59
 For the purpose of administration of India’s Micro &
Small Enterprises have been divided into Seven Groups
as under into Traditional Sector & Modern Sector.
Traditional Sector :
1) Handicrafts.
2) Handlooms.
3) Khadi, Village & Cottage Industries.
4) Coir.
5) Sericulture.
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 Modern Sector :
6) Power Looms.
7) Residual Micro & Small Enterprises.

61
Governmental Support to Small
Scale Enterprises :

 Immediately after independence, Govt of India

initiated various steps for promotion & development of
Small Scale & Cottage Industries. Govt of India has
attached great importance to the development of Small
Enterprises Sector in all the Five Year Plans since the
beginning in 1951.

62
 Impact of Liberalization,
Privatization & Globalization of
Small Enterprises :
The process of Liberalization & Economic Reforms , since 1991,
have thrown up new challenges to the small enterprises sector ,
simultaneously creating tremendous opportunities for the growth of
this sector.

In this changed scenario, building Competitive Strengths, introducing

Technology Up gradation & Quality Improvement are important
issues which need to be addressed in order to build the capacity to
withstand emerging pressures & ensure sustained growth. Also
small enterprises sector needs to reposition itself if it has to meet
the growing demands for ancillary items , subcontracting etc
from other Medium & Large Enterprises , requiring higher
standards of Quality, Economies of Scale & strict delivery
schedules.
63
 Salient features of the price
policy
1.Increasing in the investment limit in plant and machinery of tiny
enterprises from Rs. 2 Lakhs to Rs. 5 Lakhs, irrespective of the
location of the enterprise.
2.Inclusion of industry related service and business enterprises,
irrespective of their location as small-scale industries.
3. To introduce a limited partnership act. This would limit the
financial liability of the new enterprises to the capital invested.
4.Introduction of a scheme of integrated infrastructural
development for small-scale industries.
5. Introduction of factoring services to help solve the
problems
of delayed payments of small-scale sector.
6. Market promotion of small-scale industries products through co-operative/public sector
institutions, other specialized professional/marketing agencies and the consortium approach.
7. To set up a Technology Development Cell in the small industries development organization.
8. To accord priority to small and tiny sector in the allocation of indigenous raw materials.
9. Setting up of an Export Development Center in the small industries development
organization.
10.To widen the scope of the National Equity Fund (NEF) to enlarge the single window scheme
and also to associate commercial banks with provision of composite loans.
The new policy was founded on a proper understanding of the fundamental problems of the small-
scale sector and the measures proposed by it have integrated the various handicaps that face this
sector.
Tax Benefits: Boon for the Growth of
SSIs
• Need for Tax benefits

• Tax Holidays (Section 80J of income tax act,1961):- Small-scale

industries, are exempted from the payment of income-tax of
their profits subject to a maximum of 6% per annum of their
capital employed. This exemption in tax is allowed for the period
of five years from the commencement of production.
• Conditions:- (i) The unit should not have been formed by the
splitting or reconstitution of an existing unit.
• (ii) The unit should employ ten or more workers in a
manufacturing process with power, or at least twenty
workers without power.
• Depreciation (Section 32 of the income tax act,
1961):- Small-scale industry is entitled to a
deduction on depreciation on block of
assets at the prescribed rate
• In the case of the small-scale industry, deduction
from the actual cost of plant and machinery
is allowed subject to a maximum ofrupees 20
Lakhs 67
• Rehabilitation Allowance (33-B income tax act,
1961):-

• (i) Flood, Cyclone, earthquake or other natural upheavals.

• (ii) Riot or civil disturbance Accident fire or explosion
• (iii) Action by an enemy or action taken in combating an
enemy.
• The rehabilitation allowance should be used for the business purposes
within
three years of the unit's re-establishment reconstruction of revival.
•
The rehabilitation allowance is allowed to the unit equivalent of 60% of the
amount of the deduction allowable to the unit.
• Investment Allowance (31-A income tax act, 1961):- The
investment allowance under the section 31A of the
Income-tax Act, 1961, is allowed at the rate of 25% of
the cost of acquisition of new plant or machinery
installed
• A small-scale industry can avail of investment allowance
provided it has put to use machinery or plant either in
the year of installation or in the immediate following
year, falling which the benefit will be forfeited.
• Expenditure on Scientific Research (35 income tax act, 1961):- The
following deductions in respect of expenditure on scientific research
are allowed
• (i) Any revenue expenditure incurred on scientific research
related to the business of the assessee in the previous year.
• (ii) Any sum that it pays to a scientific research association or a
university, college, institutions or to a public company which has
as its object, the undertaking of scientific research.
• (iii) Any capital expenditure incurred on scientific research
related to the business of the assessee subject to the provision of
section 35(2) of the Income Tax Act, 1961.
 Greater Attention on TQM in
Small Enterprise:-
TQM can help strengthening of small enterprises in the following manner:
•(i By increasing efficiency in
)
•(ii) processes.
By providing more time for innovation and
creativity.
•(iii) Boosting the morale of employees
•(iv) Improving the quality of products and services
•(v) Enhancing customer satisfaction
•(vi) Snatching higher market share
•(vii) Generating higher productivity
•(viii) Achieving higher profits, etc.
 SME
Financing
• Sources of Fund: Internal and External Sources

72
 Interna
l
• Retained Profits
• Controlling Working Capital
• Sale of Assets
• Owner Personal Saving
• Reducing Stocks

73
 External

• Short Term: Less than 1 Years

• Medium term: 1-5 Years

• Long Term: 5 years +

74
 Short Term

• Indigenous/Commercial bankers
• Installment Credits
• Advances
• Accrued Expense and Deferred Incomes
• Account Payable
• Trade Credit
• Bill Discounting
75

• Factoring
 Medium Term

• Special Financial Institutions

• Commercial Banks
• Public deposits
• Investment Companies
• Hire Purchase
• Lease Financing
• Loans from Government 76
 Long Term

• Equity Shares
• Preference Shares
• Debenture
• Retained Earning
• Venture Capital
• Commercial banks
• Institutional Financing
77