food processing industry

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The Food Processing Sector in India An Overview INTRODUCTION T he food processing sector is critical to India’s development, for it estab- lishes a vital linkage and synergy between the two pillars of the econ- omy—Industry and Agriculture. India is the world’s second largest producer of food and holds the potential to acquire the numero uno status with sus- tained efforts. The enormous growth potential of this sector can be understood from the fact that food production in the country is expected to double in the next 10 years, while the consumption of value-added food products will also correspondingly grow. The growth of this industry will bring immense bene- fits to the economy, raising agricultural yields, enhancing productivity, creat- ing employment and raising life-standards of a large number of people across the country, especially those in rural areas. The liberalisation of the Indian economy and world trade and rising con- sumer prosperity has thrown up new opportunities for diversification in the food-processing sector and opened new vistas for growth. A recent study has revealed that there is tremendous potential in India to build a profitable business in the sector. This industry ranks fifth in the country and employs 16 lakh workers, comprising 19% of the country’s industrial labour force. It accounts for 14% of the total industry output with 5.5% of the GDP. Its turnover is estimated at Rs.1,44,000 crore, of which Rs.1,11,200 crore is in the unorganised sector. The industry has started producing many new items like ready-to-eat food, beverages, processed and frozen fruit and vegetable products, marine and meat products, IQF products, etc. The Indian consumer is being fast introduced to newer high quality food products made by using the latest state-of-the-art technology, that is also giving the industry a com- petitive edge. 1 CHAPTER chp-1.qxd 10/18/05 9:03 AM Page 1

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Page 1: Food Processing Industry

The Food Processing Sector in IndiaAn Overview

INTRODUCTION

The food processing sector is critical to India’s development, for it estab-lishes a vital linkage and synergy between the two pillars of the econ-

omy—Industry and Agriculture. India is the world’s second largest producerof food and holds the potential to acquire the numero uno status with sus-tained efforts. The enormous growth potential of this sector can be understoodfrom the fact that food production in the country is expected to double in thenext 10 years, while the consumption of value-added food products will alsocorrespondingly grow. The growth of this industry will bring immense bene-fits to the economy, raising agricultural yields, enhancing productivity, creat-ing employment and raising life-standards of a large number of people acrossthe country, especially those in rural areas.

The liberalisation of the Indian economy and world trade and rising con-sumer prosperity has thrown up new opportunities for diversification in thefood-processing sector and opened new vistas for growth. A recent study hasrevealed that there is tremendous potential in India to build a profitablebusiness in the sector. This industry ranks fifth in the country and employs16 lakh workers, comprising 19% of the country’s industrial labour force. Itaccounts for 14% of the total industry output with 5.5% of the GDP. Itsturnover is estimated at Rs.1,44,000 crore, of which Rs.1,11,200 crore is inthe unorganised sector. The industry has started producing many new itemslike ready-to-eat food, beverages, processed and frozen fruit and vegetableproducts, marine and meat products, IQF products, etc. The Indian consumeris being fast introduced to newer high quality food products made by usingthe latest state-of-the-art technology, that is also giving the industry a com-petitive edge.

1CHAPTER

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BROAD CATEGORISATION OF FOOD PROCESSINGENTERPRISES AND THEIR PRESENT STATUS

(i) Fruits and VegetablesHorticultural crops in India are currently grown on 12 million hectares repre-senting 7% of the country’s total cropped area. Annual horticultural productionis estimated at 100 million metric tonnes, which is over 18% of India’s grossagricultural output. India is the third largest producer of fruits after Brazil andthe United States, while its vegetable production is exceeded only by China.

Mango, Banana, Citrus fruits, Guava and Apple account for 75–80% of fruitproduction, which was around 37 million metric tonnes in 1997–1998.Vegetable production was 65 m tonnes in the same period. India’s share ofworld trade in this sector is still around one per cent.

In 1997–1998, processed fruits and vegetables exported, valued Rs.5,240 mil-lion. India’s major exports are fruit pulp, pickles, chutneys, canned fruitsand vegetables, concentrated pulps and juices, dehydrated vegetables andfrozen fruits and vegetables. This sector has attracted a total investment ofRs.75,000 million in the last six years i.e. since the initiation of the liberali-sation process, including a rise in Foreign Investment from Rs.46.9 million toabout Rs.102 million between 1993 and 1998.

Chapter One2

Sr. No.

1. Rank of Industry 5th

2. Employment in lakhs 16

3. % of total Industrial Labour 19Force

4. Total Industry Output in 14percentage

5. Output as % of GDP 5.5

6. Estimated Turnover 1,44,000(rupess in crores)

7. Unorganised Sector 1,11,200(rupees in crores)

Table 1.1 Status of Food Processing Industry in India

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The following statistics presents the growth in the number of fruit and veg-etable processing units, their production and installed capacity.

Table 1.2 Fruit and Vegetable Processing Units

Out of the 5198 F&VP enterprises in 1999, 2002 (38%) were home-scale(household) units, 1083 (21%) cottage, 834 (16%) small-scale, 598 (12%)large-scale and the remaining 681 (13%) were only relabellers.

The growth trend from 1994 to 1997 remained upward, being 21.8% in thefirst year, 25.2% in the second and 11.76% in the third. During 1997–1998,this sector showed a negative trend of 4.2% over the preceding year and1998–1999 registered a positive growth of 3.3%. Though the detailed reasonfor this trend could be ascertained by ground-level research, the factor respon-sible for negative growth in 1997–1998 was excise duty of 8% on processed(Fruit and Vegetables) F&V products, as against no duty in the precedingyears.

The Food Processing Sector in India: An Overview 3

F&VP Units 4270 4368 4674 4932 5112 5198

Installed Capacity(lakh tonnes) 12.60 14.02 17.50 19.10 20.40 21.00

Production 5.59 6.79 8.50 9.50 9.10 9.40(in million metric tonnes)

Year 1994 1995 1996 1997 1998 1999

Home Scale

38%

Relabellers

13%Large Scale

12%

Small Scale

16%

Cottage

21% Home Scale

Relabellers :

Large Scale :

Small Scale :

Cottage :

: 2002 Units

681 Units

598 Units

834 Units

1083 Units

Total : 5198 Units

Distribution of Fruit and Vegetable Processing Enterprises by Scale of Industry

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(ii) Meat and PoultryMeat Processing: India has the world’s largest livestock population, account-ing for 50% of buffaloes and 1/6th of the goat population. Such a large popu-lation represents a challenge to retain existing productivity traits by applica-tion of modern science and technology. Rigorous efforts are being made toimprove the condition of livestock by providing basic infrastructure and lat-est technology.

FAO has estimated the existing production of meat and poultry products at4.42 million tonnes. Only 11% of the buffalo population, 6% of cattle, 33% ofsheep and 38% of the goat population is culled for meat.

At present, only a small percentage of the meat produced is converted intovalue added products and most meat is purchased by consumers in thefresh/frozen form for conversion into products at home, restaurants, etc.Maximum conversion takes place in pork products.

With growing urbanisation and increasing quality consciousness, the marketfor scientifically produced meat products is expected to grow rapidly.Demand is growing for ready-to-eat and semi-processed meat productsbecause of changing life styles and increase in exports to neighbouringcountries, especially the Middle East. India exports meat products worthRs.8,000 million mainly to countries in the Middle East and South EastAsia.

Meat processing is the new thrust sector for Indian industry with manyprocessing centres being set up with advanced technology. Animals render

Chapter One4

Buffalo

11%

Cattle

6%

Sheep

33%

Goat

38%

Others

12% Buffalo

Cattle

Sheep

Goat

Others

Source: Composition of Estimated Meat Production

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extremely useful service in out-transport system and agriculture. Indianeeds technical cooperation to build up organised facilities for rearing meatproducing animals, proper storage and refrigerated transport system. Thissector has attracted an investment of Rs.9000 million, including foreigninvestment of Rs.5000 million, in the last six years since the initiation ofthe liberalisation process.

Poultry India ranks fifth in the world in egg production with a yield of1.61 million tonnes a year. Yet the per capita availability is low. Now, withchanging food habits and increasing availability of eggs, the demand isincreasing and growing at 10% a year.

Egg production has grown during the last 30 years at an annual average of16%, while that of broilers, by 27%. During this period, Indian poultry indus-try made spectacular progress transforming itself from backyard farming to adynamic and sophisticated agri-based industry.

The increasing awareness about balanced nutrition has effected changesin eating habits with vegetarians accepting eggs as part of their diet.Simultaneously, purchasing power has increased and more money is allo-cated for food. Despite this, the egg industry experiences periodic slumps.There are five modern integrated poultry processing plants in the country,besides a good number of not-very-modern small plants. These plants producedressed frozen chicken and cut parts. While poultry industry is graduallytaking shape, poultry dressing and processing is still in its infancy in thecountry.

There are about 15 pure-line and grandparent franchise projects in India.There are 115 layer and 280 broiler hatcheries both in the private and publicsector, producing 1.3 million layer parents and 2.6 million broiler parents,which, in turn, supply about 95 million hybrid layer and 275 million broiler,day-old chicks. Please refer to Table 1.3. In India, five egg powder plants havealso been set up to produce whole egg, yolk and albumen powders. Demandfor egg powder is increasing every year. Each project will process a millioneggs daily. Only one egg powder plant has been in operation in Mumbai sincethe 1970’s. Other such plants will help boost egg production.

The Food Processing Sector in India: An Overview 5

1. Layer 115 1.3 952. Broiler 280 2.6 275

Table 1.3 Status of Pureline & Grandparent Franchise Projectsin India

Sr. No. Hatcheries No. of Parents (in Supply (inHatcheries Million) Million)

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(iii) Milk and Milk ProductsIndia has the largest livestock population with milch cows and buffaloes beingits main constituent. India is the world’s largest milk producer (72 milliontonnes annually) and the dairy industry has been recognised the world over asits most successful development programme.

Going by FAO estimates, while world milk production fell by 2% in the lastthree years, the Indian production galloped by 4%. While consumption of liq-uid milk accounts for 46% of the total production, the rest is converted intomilk products. Of this, the share of the organised sector is less than 10%. Theproducts manufactured by the organised sector are ghee, butter, cheese, icecreams, milk powders, malted milk food, condensed milk, infant foods, etc.The products also include casein, lactose and dairy whiteners.

The value of Indian dairy produce is expected to rise from Rs.2,88,000 mil-lion in 1999 to Rs.10,00,000 million by 2005.(Please see the chart below). Inthe last six years, investment in this sector has been to the tune of Rs.16,000million with foreign investment of Rs.3,600 million.

(iv) Consumer ProductsThis comprises product groups like confectionery, chocolates, cocoa products,soya-based products, ready-to-eat foods, mineral water, high protein foods

Chapter One6

1200000

1000000

800000

600000

400000

200000

288000

1000000

1999 2005 (est.)

Year

Rs

. M

illi

on

s

Value of Dairy Products

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etc. This sector has attracted a whopping investment of Rs. 1,28,000 million,including foreign investment of Rs.50,000 million, since liberalisation.

Soft drinks enjoy the biggest share in this. The Indian soft drinks’ market isworth Rs.22,000 million a year. Statistically, this implies three bottles perIndian. Cola, orange and lemon are some of the accepted tastes in India. It isestimated that 65% prefer non-carbonated drinks. Lemon drinks continue tobe very popular in the country.

India produces a large range of cocoa and non-cocoa based confectioneryitems, besides other cocoa-based products. The production of confectioneries,except chocolates, is reserved for the small-scale sector. However, there areseveral large companies with an established market presence and brands incocoa and non-cocoa confectionery markets.

Confectionery output grew at a compound rate of 6 to 7% in recent years.Chocolate production is growing at the rate of 10 to 15% a year.

Among the ready-to-eat products, the installed capacity in the organised sec-tor is 33,400 tonnes for manufacture of pasta products like noodles, macaroni,vermicelli, etc. Besides, there are 10 units with an annual capacity of 9,340tonnes for corn flakes, oat flakes and pearl barley.

(v) Alcoholic BeveragesLiquor made in India is categorised as beer, country liquor and Indian MadeForeign Liquor (IMFL). Country liquor is made from a variety of raw mate-rials and has different names in different parts of the country.

IMFL production comprises wine, vodka, whisky, gin, rum, brandy, etc.Pre-mixed drinks like gin and lime, rum and cola are being introduced in Indianow. Draught beer is another recent introduction and has done well whereintroduced. Canned beer is also a recent introduction.

There are 36 breweries with a licensed capacity of 160 million litres perannum. Current production is over 300 million litres. In all, Rs. 11,000 millionincluding Rs. 7,000 million of foreign investment, has been made in this sec-tor in the last six years.

The Indian beer market, currently at Rs.7,000 million a year, has been grow-ing by 15% and now all world famous brands of liquor are available in India.The country has 212 distilleries with a yearly installed capacity of 1,933 mil-lion litres. However, there are only 24 units producing IMFL and 31 makingcountry liquor. Alcohol produced by the rest is either sold as industrial alcohol

The Food Processing Sector in India: An Overview 7

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or in bulk as potable alcohol to other distilleries for bottling or for making bot-tled alcohol (estimated 927.82 million litres).

Raw material like Molasses, barley, maize, potatoes, grapes, yeast and hopsfor beer and alcoholic products’ industry are abundantly available in India.

(vi) Fisheries and Sea FoodIndia boasts of the seventh largest marine landing base in the world with anextensive 7,500 km coastline and an Exclusive Economic Zone (EEZ) of2 million sq km, largely untapped, and a 29,000 km stretch of rivers andcanals, 145 million hectares of reservoirs and 0.75 million hectares of tanksand ponds. Though India’s fish potential from the EEZ has been estimated at3.9 million tonnes, the harvest is only of 2.87 million tonnes. This can beincreased to 3.37 million tonnes by intense tapping in offshore and deep-seagrounds using modern technology. There is also a good scope to improve fishharvest from inland waters which, at present is 2.7 million tonnes. Besides,the fish potential in aquaculture and shrimp farming has also largely remaineduntapped.

Though, traditionally, only local fishermen have tapped the vast marine andinland water resources to meet domestic demand, the organised corporate sec-tor has become involved in preservation and export of coastal fish since thelast decade.

Marine fish found in India include prawns, shrimps, tuna, cuttlefish, squids,octopus, red snappers, ribbon fish, mackerel, lobsters, cat fish and countlessother varieties.

Domestic per capita consumption of fish is only 5 kg per annum against theworld average of 12 kg. India’s per capita consumption is much lower than theAsian maritime countries (e.g. Japan–86 kg). India’s 60% fish production isfrom marine sources. However, coastal fishing i.e. from the continental shelfconstitutes the bulk of the marine catch. It is estimated that only 10% of themarine catch is accounted by deep-sea resources. Processing of produce intocanned and frozen form is done almost exclusively for the export market.Totally, there are 258 freezing units with a capacity of 2,170 tonnes, 23 canningunits of 84.5 tonnes capacity, 131 ice-making units of 1820 tonnes, 24 fishmeal units with a capacity of 419 tonnes and 297 cold storage units with acapacity of 2,03,448 tonnes.

This sector has attracted domestic and foreign investment to the tune ofRs.30,000 million in the last six years, of which the foreign component isaround Rs.7,000 million.

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Please see Table 1.4 which compares the investment pattern in differentsectors.

(vii) Grain ProcessingThe country’s current foodgrain production (including rice, jowar, bajra, maize,ragi, wheat, barley, gram and pulses) has been put at 225 million tonnes a year.Food processing industries play a crucial role in reducing post-harvest losses.Since most operations of this industry are rural based, it has the potential to gen-erate high employment at low investment. Promotion of food processing alsohelps in energy conservation by reducing energy wastages in home cooking.

Grain processing, with a share of 40%, is the biggest component of the foodsector. Its basic feature is pre-dominance of the primary processing sector,sharing 96% of the total value, with the secondary and tertiary sectors addingabout 4%. This area needs to be viewed as a high growth potential area.

Indian Basmati rice commands a premium in the international market.The export of Basmati and non-Basmati rice has been steadily increasing.From Rs.3538.3 million in 1988–1989, the exports increased to Rs.62,000million in 1998–1999. The country has a total paddy milling capacity of186 million tonnes, of which 85 m tonnes is of traditional mills and 101 ofmodern mills.

(viii) PlantationTea, coffee, cashew, cocoa, etc. are the country’s major plantation crops, whichare grown in different parts for they require specific agro-climatic conditions.

India’s principal plantation crops account for around 5 to 6% of the country’saggregate export earnings. Production and domestic consumption of majorplantation crops have increased considerably during the last three decades.

The Food Processing Sector in India: An Overview 9

1. Milk & Milk Products 16,000 3,600

2. Consumer Products 1,28,000 50,000

3. Alcoholic Beverages 11,000 7,000

4. Fisheries/Sea Food 30,000 7,000

Table 1.4 Investment Pattern in Different Sectors

Sr, No. Sector Total Foreign Investment Investment(in Million) (in Million)

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India continues to be the world’s largest producer, consumer and exporter ofblack tea. Cashew is also an important crop and earns foreign exchange worthRs.16,000 million. India is the world’s leading producer and exporter ofcashew kernels (75,000 tonnes annually) and shares 31% of the world’s pro-duction of raw cashew and nearly 48% of the world’s cashew kernel export.

Coffee is the oldest plantation crop of India.

POLICY INITIATIVES THUS FAR

The food processing sector has been identified as a thrust area for develop-ment. This industry has been included in the priority lending sector. Most foodprocessing enterprises have been exempted from industrial licensing underthe Industries (Development and Regulation) Act, 1951, with the exception ofbeer and alcoholic drinks and items reserved for Small Scale Sector. For for-eign investment, automatic approval is given even to 100% equity for major-ity of the processed foods. Since economic liberalisation in 1991, 5875Industrial Entrepreneur Memoranda (IEMs), involving an investment ofRs.53,736 crore and envisaging employment for 10.23 lakh persons, werefiled between July 1991 and December 1999. Of these, 673 IEMs with invest-ment of Rs.7,517 crore and jobs for 0.87 lakh persons have been imple-mented. Moreover, 1,120 approvals for investment of Rs.19,100 crore andemployment of 2.75 lakh have been given. From these, 248 proposals withinvestment of Rs.4,225 crore and 0.95 lakh jobs have been implemented.

The kind of units, which have come up, include:

Fruit and Vegetable – Beverages, Juices, Concentrates, Pulps, Slices, Frozen& Dehydrated products, Wine, Potato wafers/chips etc.

Fisheries – Frozen and canned products mainly in fresh form

Meat and Poultry – Frozen and packed mainly in fresh form, egg powder(only a couple of units)

Milk and Dairy –Whole milk powder, Skimmed milk powder, Condensedmilk, Ice cream, Butter and Ghee

Grain and Cereals – Flour, Bakeries, Biscuits, Starch, Glucose, Cornflakes,Malted foods, Vermicelli, Pasta foods, Beer and Malt extracts, Grain-basedAlcohol

Consumer Industry – Chocolates, Confectionary, Soft/Aerated Beverages/Drinks

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The policy initiatives of the government also include automatic approvalsfor Foreign Technology Agreements, sale of 50% in domestic tariff area ofagro-based 100% EOUs, zero duty EPCG scheme extended to FoodProcessing sector with a reduced threshold limit of Rs.1 crore in the EximPolicy, declaration of the industry for priority lending by banks, the Planschemes envisaging grant of loans at a very low rate of 4% and grant-in-aidto select cooperatives and NGOs, assistance for upgrading standards to inter-national level and assistance for R&D activities.

CHALLENGES, CONSTRAINTS AND CONCERNS

Despite policy initiatives, growth potential and significant achievements,there are several disturbing trends as delineated here:

In India, the value addition to food fortification is only 7% com-pared to as much as 23% in China, 45% in Phillipines and 188%in the UK. Further, there are few large or medium sized compa-nies in the organised sector against many small ones. Thesmall-scale and unorganised sectors account for 75% of the total indus-try.

Despite its importance to India’s well-being, the food industry has inthe past been neglected. Food is usually the first industry to developand has importance in most economies. In India, it is still relativelysmall and not regarded attractive.

External liberalisation opens up new export avenues and seeks to inte-grate the economy with the global market. But it also poses threatsof stiffer competition under a new world trade order with WTOagreements relaxing quantitative restrictions and non-tariff/sanitarybarriers on importing countries. This exposes the Indian farmer toworld market forces. Strategies to convert the potential disadvantage,on account of the new import regime, into advantage are needed.The inherent strength of high raw material production and largedomestic market base has to be buttressed and energised by evolv-ing the right international-level infrastructure and growing suitable rawmaterial. This, coupled with operating processing units at optimumcapacity levels as per economies of scale, would enableachieving a competitive edge over imported products. Thefood sector will be confronted by challenges of trade relatedIntellectual Property Rights, comprising patent laws, copyrights, tradelinks, etc.

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Advances in bio-technology have enabled production of GeneticallyModified (GM) foods. These have already appeared in some countries.GM foods need be critically examined on their good and adverseimpacts on human health.

India is the second largest producer of food in the world but itsshare in world’s exports is very low despite its inherent strength in tea,spices and rice. The share of agricultural exports in the country’s totalexport basket has been fluctuating, from 27% in 1985–1986 to 16% in1994–1995 and to 20% in 1996–1997. In 1996–1997, India exportedRs.24,618 crore worth of agro products. During 1997–1998, marineproducts, rice, coffee, oil and spices were major export items. Theshare of horticulture crops, plantation crops, meat and meat prepara-tions and sugar in the country’s agri exports is much less than itscompetitive potential.

Taxes on processed food in India are among the highest in theworld. No other country imposes excise duty on processed food. No country distinguishes between branded and unbranded food sectorsfor taxation. There is excise duty of 16% in the form of CENVATlevied on food products and then there is sales tax, octroi, mandisamiti, entry tax and customs duty on material, levied by theCentral/State/Local bodies. The net effect ranges from 21% to 30% onvarious food items. India is the only country to have levied excise dutyon machinery and equipment for processed foods. Indian consumersare very price-sensitive and cost reductions are imperative to raisedemand and consumption of food products. Since the net effect of var-ious taxes falls directly on the price, the off-take of processed fooditems remains low. Consider the Food and Vegetable sector, whereagainst the installed capacity of 21 lakh tonnes (of the units registeredunder FPO), present production is only 9.4 lakh tonnes or about 45%.Assuming a value of Rs.10 per kg, the receipts on account of 16%CENVAT would be around Rs.150 crore in the first year,and looking at past experience of negative growth, the receipts willreduce by 5 to 10% in every succeeding year. Reduction of excise dutyby say 5% might result in less receipts in the first year but would morethan make up in the subsequent years i.e. at 100% capacity utilisation,the first year receipt would be Rs.100 crore, but with annual growthrate of 25%, the receipts would Rs.125 crore in the second year, Rs.156crore in third and after five years, it would crossRs.200 crore at the present price index. Moreover, the NationalSavings because of reduction in wastage would run into thousands ofcrores (the present level because of 30% wastage in Fruit andVegetable Sector alone results in an estimated wastage of Rs.25,000 toRs.30,000 crore).

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India is viewed as an unpredictable and unreliable source of food andagro products despite its world class production measures for ensuringsupply to the international markets and increased production and qual-ity of food products specific to exports.

Food processing enterprises in organised and unorganised sectorsare in private hands. Though there has been certain growth in thefood industry because of domestic demand, the demand itselfremained low due to policies pursued earlier. Majority of the foodunits are in primary processing and since production base ofsecondary and tertiary processed foods is low, there is lower valueaddition.

Commercial R&D activities in the food industry have remained con-fined to only a few areas. R&D activities have scarcely emerged fromthe laboratory to be extensively adopted on the field.

Indian brands have yet to acquire an image in the international marketsbecause of poor global marketing. Poor awareness of most of Indianagri produce, seed constraints and India’s image and identity of a lowquality, unreachable producer of food items ensure that Indian fooditems are not the most preferred ones.

Financial institutions do not have the capacity to appraise hi-techexport-oriented projects. There are no suitable insurance schemesfor such projects, most of which deal in export of perishables. Infinancing projects like high density farming, greenhouse floriculture,controlled environment livestock farming, bio-technology, tissueculture, embryo transfer technology, bio-pesticides and bio-fertil-izer, etc., the banks face considerable risk like credit risks. Withnew technology, the risk perception is higher than the existing one.Since it has not been tested in actual situations, the chances offailure of new technology are higher. For risk of rejection byconsumer or by sovereign intervention foreign exchange risks,ECGC cover is available only in cases of insolvency/default ofimporters.

Branded food items attract higher sales tax and excise duty as againstthe unbranded ones. It is reasonable to expect that any meaningfulinvestment in this sector will necessitate branding of products. It isnoteworthy that no country treats branded food differently for levyingduties. The exemption to unbranded and unorganised sector fromexcise and sales tax leads to low quality consciousness among manu-facturers and consumers.

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There is a growing disparity between the actual and potential results inthe food industry, exposing the gulf between research and extensionagencies.

There have been instances of ban imposed by the European Union onall seafood exports originating from India. This was after detection ofsalmonella in some EU-bound consignments and of V Cholera in con-signments to Denmark. These consignments mostly had fish, prawnsand frozen squids.

The sector is capital starved. Investments in infrastructure and researchhave been far from adequate.

The sector has been characterised by poor marketing, transport andcommunication infrastructure. The market density of fruits andvegetables is low and facilities for storage and cold chains in thehinterlands are woefully inadequate. Erratic and inadequate power sup-ply, lack of roads, education and health facilities and no or low ruralindustrialisation accentuate the problems. There is lack of integrationof local markets with national and global ones to support faster andmore diversified growth. Lack of maintenance of infrastructurebecause of limited and declining public resources and the absence ofcommunity involvement in the protection of community assets andpoor cargo facilities at airports and ports are other bottlenecks.Infrastructure for extension of food technology is hampered.Moreover, there is lack of organised marketing system in meat andpoultry products. The system is obsolete, with primitive methods ofsale of live birds or unhygienic slaughtered birds. A similar poorsystem exists in towns and small cities in the case of pork and porkproducts.

Cooperatives and other semi-government organisations are weak andpeople’s participation, either through Panchayat Raj institutions,NGOs, farmer organisations or industries’ associations in food sectorremains extremely inadequate.

Multiple and complicated tax regimes have rendered the food industryuncompetitive. Regulations on the entry operations of private sector intrade, post-harvest facilities and food processing have restricted privatesector investment in the agricultural sector. Then, the current land ten-ancy regulations have frozen the land-lease market and discouragedtenant farmers and share-croppers from investing in the land they till.With the signing of the GATT and the coming up of World TradeOrganisation, this sector is facing internal and external pressures stem-ming from policies of economic liberalisation.

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NEED FOR A COMPREHENSIVE PAN-INDIANINITIATIVE

The present scenario has resulted from the lack of cohesive and integratedplanning of the industry, keeping in mind specific needs of various regions,their produce and special industries, which could be energised to work at opti-mum capacity. The policy initiatives thus far have gone by the assumptionthat this industry has high risk and low return and that seasonalities of pro-duce dictates the levels of capacity utilisation; that any multi-line projects willbecome unviable, for there is paucity of marketing outlets and lack of otherinfrastructural facilities. These problems cannot be viewed in isolation norcan they be tackled by a single department/ministry. It is important to adopt aholistic approach in formulating any viable policy for this nascent sector. Theplanning should be bottom up and not top down, for in India, the initiative hasto come from the rural sector constituting 70% of the population. This iswhere tapping of Panchayat Raj institutions and networking of cottage, smalland medium industries can viably provide the primary and secondary pro-cessing for take-off by large-scale industries. What is envisaged is an inte-grated model wherein cottage, small and medium enterprises act as input fac-tors for further development of products by larger enterprises, by creating pri-mary/secondary processing facility centres within a radius of 15 to 25 kmfrom the farm. These centres will provide appropriate packing techniques forfarmers. Other facilities that could be envisaged at these centres includetreatment, washing, sorting and grading, packaging and cold storage.Adequate system will be evolved to transport these processed products for useby larger industries as well as for sale in wholesale markets. This process willensure backward and forward links between farmers, markets (domestic andinternational) and larger industries.

This way, each unit would be viable and independent and at the same time,be linked with higher players in the market. The sectoral deficiencies andadvantages in each spatial segment will be attended to since investment willnot be higher. Thus, imbalances, which were a built-in variable, could eitherbe corrected or converted into an advantageous variable. This is possible onlyif all Panchayat institutions in the country are networked with leading marketoutlets, including the top players in the industry. Such a synergy cannotevolve in a short time unless the government initiates many Centrally-spon-sored direct assistance to Panchayat institutions, including allocations forinfrastructure like roads and transport. This way, the WTO restriction on sub-sidies could be overcome and within a couple of years the entire gamut offunctioning of these industries could be re-oriented. This will also wean awaythe thinking process of planners to view the food processing industry only asa means to reduce wastages. In fact, this Pan-Indian Model will ensure a pro-active industry-oriented approach enabling the industry’s growth in a modern,

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scientific and planned manner. This will increase productivity at minimumcosts improving the product’s competitiveness in any economy. On a largerscale, this will make the economy vibrant and prevent unnecessary migrationof population and unplanned urbanisation.

STRATEGIES AND INITIATIVES PROPOSED IN THENEW POLICY

There are various strategies and initiatives proposed in the new policy.

These are discussed below:

Creating an Enabling Environmenta. The Central and State Governments will work closely and evolve joint

efforts to provide an enabling environment to entrepreneurs to set up foodprocessing enterprises.

b. Fiscal initiatives/interventions like rationalisation of tax structure on freshfood as also processed foods and machinery are a must. This is necessary toprovide processed food at reasonable prices as well as to stimulate domes-tic demand. The aims of the National Policy on food enterprises are soughtto be achieved by adopting initiatives and practices congenial to industrialdevelopment in the processed food sector. A concentrated promotion cam-paign is vital to create market for processed foods. Multinational companiescan take care of their products for they have large funds for promotionalcampaigns. The Department will continue to provide financial assistance toindustry associations, NGOs/Cooperatives, private sector units, state gov-ernment organisation for market promotion and brand formation.

c. Going by projections of the Working Group on Food Processing Industriesfor the 9th Plan, investment requirement of Rs.24,315 crore from the pri-vate sector, Rs.2,275 crore from the Central Government, Rs.1,660 crorefrom the State Government, totalling upto Rs.28,250 crore, have beenidentified for the entire food processing sector in a five-year plan period.

d. Efforts will be made to expand the availability of raw material and improvetheir quality for agro-based processing activities round the year by increas-ing production, improving productivity and yield.

e. The information/database for the industry will be strengthened to ensuregreater reliability and thus help in planning and policy making. This is

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proposed to be achieved through studies and surveys in various states. Theinformation will be vital for the industry to plan investments in appropri-ate sector matching availability of resources and market conditions.

Intensive and Extensive Awarenessa. Extensive training will be provided to farmers and cooperatives in post-

harvest management of agro-produce to encourage creating pre-processingfacilities near farms. Facilities may include provision for washing, fumi-gation, packaging, etc. Efforts will be made to encourage the setting up ofagro-processing facilities as close to the area of production as possible toavoid wastages in transporting raw materials to far away places and toensure increased value addition, specially for horticultural produce.

b. Efforts will be made to improve general awareness about the advantages ofconsuming processed foods to stimulate domestic demand. Unfoundedapprehensions about consuming processed food will also be removed.

Infrastructural Developmenta. Establishment of cold chain and provision of low cost pre-cooling facili-

ties for farmers, entrepreneurs, traders and consumers would be encour-aged and they will be trained to bring about attitude changes. Efforts willbe made to disseminate market intelligence to enable farmers to fetchhigher value for their produce.

b. Efforts will be made to motivate farmers/industries to use insulated/refrig-erated vehicles for transporting raw materials from the place of produc-tion/harvest to the point of consumption, to avoid wastage and qualitydeterioration.

c. Establishment of cold storages and cold chain facilities would be encour-aged.

d. The interactive mesh between technology, economy, environment andsociety will be promoted for quicker development of agro-processingindustries and to build up a substantial base for production of value-addedproducts for domestic and export market with special emphasis on foodsafety and quality, taking into account all aspects of Total QualityManagement (TQM) and Hazard Analysis and Critical Control Points(HACCP) to achieve international standards. Sustained R&D activitieswill be encouraged through recognised institutions having expertise inrespective fields.

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e. Application of bio-technology, remote sensing technology, pre and postharvest technologies, energy saving and environmental protection tech-nologies through National Research System or any other mode will beencouraged.

Backward Linkage—Raw Material Supplya. The concept of backward linkage between farmers and industry would be pro-

moted to encourage and enable farmers to grow products of appropriate qual-ity. This will help the poorest of the poor farmers as well as marginal andmedium farmers fetch appropriate and remunerative return for their produce.The scheme for providing assistance under the 9th Plan is already in opera-tion and will be strengthened further to cover majority of farmers/producers.It would be ideal to dovetail this scheme with similar schemes offered by localbodies like Panchayats to provide the required fillip to this significant pro-gramme in the best interests of farmers and processors.

b. The existing institutions like local bodies, cooperatives and self-help groups,which have been in operation for over four decades in different contexts,would be utilised to strengthen the backward linkage. This way the skill andexpertise acquired by these institutions would be constructively used, whilethis mechanism would help quickly create the bridge of trust between farm-ers and processors. This would ensure smooth supply of raw material to theprocessors and help the farmers (poor, marginal and big) in getting remu-nerative prices for their products. Thus, a complete network of farmers andprocessors will be created cutting across their status.

Forward Linkage—Marketinga. There is an urgent need to develop forward linkages for fresh and

processed food. Presently, there are a large number of intermediaries oper-ating between the farmers/processors and the consumers, resulting in highcost to the latter and low return to the former. The efforts to cut intermedi-aries would be made in such a way that the special skill and expertiserequired to operate the intermediate links in the system like transportationand market distribution are not jeopardized. To achieve this, attempts willbe made to provide appropriate tax incentives and holidays for setting upfood processing industries, taking care of expenses on market promotionand ancillary activities.

b. The North Eastern Region, the Hilly States (J&K, HP and Western UP),the Islands (A&N, Lakshadweep) and the Integrated Tribal Development

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Projects (ITDP) areas in the country need to be given special considera-tion. Fiscal incentives like excise duty/sales tax concessions and tax holi-days should be given not only to the units being established here, but alsoto those set up outside but processing the produce from these areas. This isbecause the high cost involved in transporting raw material and packagingmaterial makes the product expensive, and thus uncompetitive, in the mar-kets outside. Providing fiscal incentives to units located outside but oper-ating as a part of the primary processing unit in one of these areas wouldfacilitate cutting down the double transportation cost and help the productsfrom these areas become marketable at competitive rates. The consumerwould also have the advantage of buying quality products from these areasat affordable prices.

c. Special attention is to be laid towards setting up regulated markets with theprimary objective to improve market efficiency and achieve equitable dis-tribution of benefits between producers, traders and consumers. This willbe possible by evolving strategies to strengthen regulated market yieldsand equipping them with grading, cleaning and packaging facilities, alongwith market information systems.

d. Efforts are to be made to develop packaging technologies for individualproducts to increase their shelf life and improve consumer acceptance,both in the domestic and international markets.

e. Efforts are to be made to harmonise food laws to encourage production ofhigh quality products with minimum intervention from regulatory authori-ties. The complexity of multiple administering authorities for foodprocessing enterprises is also required to be simplified by developing anintegrated and unified system.

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The Impact of Policy on Enterprises

FRUIT AND VEGETABLE PROCESSING SECTOR:AN ELABORATE PROFILE IN TERMS OF GENERICAND INTERNAIONAL MARKETING

Although India is the largest producer of fruit and vegetables, their process-ing has largely remained in primary forms like pickling, sun drying and/or

making preserves. Commercial processing is rather poor. Indians largely preferfresh fruit and vegetables over processed foods because of economic reasonsand food habits. High packaging costs make them expensive. Therefore, theMinistry has offered specific support for the marketing and generic promotionof processed food. Since India has varied agro-climatic conditions, some prod-ucts are available throughout the year. Fruits and vegetables like banana arenon-seasonal, while apples, oranges, potatoes, etc. are put in the cold storagesand made available in the off-season as well. Fruits like guavas and orangeshave two seasons and so are available fresh almost half the year.

Units registered under the Fruit Products Order, 1955, are distributed acrossthe country and most are in cottage and small-scale sector. Liberalisation of thecountry’s economic policies has attracted a few modern processing plants to pro-duce mango pulp and tomato paste in aseptic packing and freeze drying of fruitand vegetables including mushroom. Joint ventures with USA, UK, Netherlands,Switzerland and Germany are on, focussing on technology transfer, financial andmarketing tie-ups. Such projects focus on production of canned mushrooms,banana and mango puree, fruit concentrates, dehydration of vegetables andfrozen fruits/vegetables. The policy has been supporting such options.

Items already being produced in the country include, pulps, particularly oftomatoes and mangoes, ready-to-serve juices, canned fruits, jam, squashes etc,while carbonated fruit drinks, dehydrated and freeze-dried fruits, fruit juice con-centrate are poised to pick up. There is varied potential for the demand ofprocessed food. The markets for mango pulp are Saudi Arabia, Kuwait, UAE,Netherlands and Hong Kong, while pickles and chutneys go to the USA, UKand Germany, besides Saudi Arabia and UAE. Products like tomato paste, jams,jellies and juices are exported to the USA, Russia, UK, UAE and Netherlands.

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The Ministry of Commerce and the Ministry of Food Processing Industrieshave been giving specific support to international marketing initiatives.

Policy to bridge the gap between resourcebase and value additionIndia is among the world’s major producers of food products. It ranks first inthe production of cereals, livestock population and milk; is the second largestfruit and vegetable producer; and among the top five producers of rice, wheat,groundnut, tea, coffee, tobacco, spices, sugar and oilseeds. And yet, India’sshare in international food trade is less than two per cent. Value addition tofood by processing is poor.

This has encouraged a policy thrust on the sector and enlarged the FoodProcessing Industry Ministry’s scope to promote it. It includes developingfruit/vegetable processing, food grain milling, dairy products and processingof poultry, eggs and meat products and fish, including canning and freezing.This is in addition to developing enterprises in bread, oilseeds, breakfastfood, biscuits, confectionary, non-alcoholic beer and aerated drinks.

While the Ministry supports investment in R&D and product development,the Agricultural and Processed Food Products Export Development Authority(APEDA) offers subsidy to upgrade laboratory facilities. The DevelopmentCommissioner of Small Scale Industries (DCSSI) offers subsidy for imple-mentation of ISO systems in business. The production quality as alsohygienic and sanitary improvement in manufacture are accorded priority.

Simultaneously, the production base is being enlarged by modern methodsof cultivation to improve yield and productivity. A cold chain is also beingdeveloped to reduce post-harvest losses and maintain freshness. With newhybrid varieties being added, the production season is getting extended.Thrust is being given to enhance productivity with better raw material.

Since liberalisation, several policy measures have come for regulation andcontrol, fiscal changes, export and import, taxation, exchange and interestrate control, export promotion and several incentives to high priority indus-try, including food processing.

Deregulation and DecontrolThe policy initiatives include an important incentive that industrial license isnot required for most food processing enterprises, except for products like

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beer, potable alcohol and wines, cane sugar, hydrogenated animal fat and oils,etc, and some items reserved for exclusive manufacture in the SSI sector, likepickles, chutneys, bread, confectionary, mustard, sesame and groundnut oil,ground and processed spices, other than spice oil and oleoresin, sweetenedcashew nut products and tapioca flour. Price controls have been removed.Automatic investment approval up to a certain percentage of foreign equity orcent per cent NRI equity is allowed for most of the sector, except in the caseof malted food, alcoholic beverages, etc. Use of foreign brand names is freelypermitted. Most items can be freely imported and exported. Capital goodsmay also be freely imported, including second-hand ones. These initiativesare likely to encourage entrepreneurship in the field.

Fiscal Incentives with AdditionalEncouragement for ExportUnder this, excise and import duty rates have been reduced. Many processedfood items are exempted from excise duty. There are limited-period tax incen-tives for new manufacturing units, except for beer, wine, aerated water usingflavouring concentrates, confectionery, chocolate, etc. A high capital investmentsubsidy is available for new processing units. Food processing is one of the thrustareas identified for exports. Free Trade Zones (FTZs) and Export PromotionZones (EPZs) have been set up with necessary infrastructure. Capital goods,including spares, can be imported at concessional customs duty, subject to exportobligations under the Export Promotion Capital Goods (EPCG). Export-linkedduty-free imports are also allowed. Enterprises in EPZs and FTZs may retain apercentage of foreign exchange receipts in foreign currency accounts and a per-centage of output is saleable domestically. Profit from export sales are, however,being progressively brought under the corporate tax bracket. Effective capitalstructuring of projects has therefore become more critical.

The WTO Agreement and the SectorTrade liberalisation under the World Trade Organisation (WTO) is expectedto improve scope for exports for the Indian food processing industry, whilesmoothening import barriers on inputs and making enterprises cost competi-tive. Enterprises will, however, need to improve safety and quality standardsto reap the benefits of the new world order and avoid being penalised for non-tariff barriers. They will have to progressively follow a food quality manage-ment system called Hazard Analysis and Critical Control Points (HACCP).Many developed countries have already made this mandatory. The seafoodprocessing enterprises have already faced the brunt of related bans fromimporting countries asking them to implement the costly requirements. Be it

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with regard to the aflatoxin content in groundnut, lead in milk or sulphur insugar, it is safer to meet the more stringent international norms. Quality, safetyand health are the buzzwords for the food enterprise of tomorrow.

IMPACT OF POLICY IN TERMS OF INTEREST RATESAND INCOME TAX ON THE STRUCTURING OF APROJECT

Policy incentives in terms of investment subsidies and duty relief have an obvi-ous impact on project viability. Policy-related variables, such as interest rates onterm loans and the working capital, also affect project viability. Similarly dovariables, such as income tax on profit or net earnings of an enterprise. Thesevariables have serious implications on the structuring of a project in terms ofdebt or loan and equity (promoters’ contribution or investment) in either ‘fixedassets’ such as equipment, land, and buildings or with regard to ‘current assets’or working capital (or money required for operating a business). The latter mayimply cash, stock and receivables for credit sale. The structuring of a businessin terms of capital basically involves decisions on the debt and equity mix.Policy variables also have implications on the structuring of costs.

Implication of policy variables on thestructure of capital of an enterpriseConsider a mixed fruit jam project ‘Manjunath Enterprises’ that is to be sanc-tioned in Mysore, Karnataka. The enterprise requires an investment (projectcost) of Rs.50 lakh. The project expects to earn a Return On Investment (ROI)of about 24 per cent every year. The enterprise plans to manufacture juice con-centrates and jams. The interest rate on loan (debt) is about 15 per cent. If theproject were structured in terms of wholly equity investment by the promoter,it would yield a much lower return on equity. For illustration, assume the taxon earnings is 50 per cent. An ROI of 24 per cent implies a net profit of Rs.6lakh after tax. In the case of an alternative option assume that half the invest-ment is financed by equity and one half (Rs.25 lakh) by debt. In this case itwill be observed that net profit after payment of interest on loan and tax willbe Rs.4,12,500. By investing an equity of Rs.50 lakh on this project, the netprofit works out to Rs.6 lakh and alternatively, investing equity of only Rs.25lakh net profit works out to Rs.4.125 lakh. In terms of return on moneyinvested by the entrepreneur, return on the second case is about33 per cent higher! This benefit is due to the tax shield on interest paid ondebt. Therefore, the structure of investment is dependent on tax rates. If they

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are low or negligible or not `declared’, it does not make a difference if thebusiness is financed by high debt or high equity. Similarly, the structuring ofa project should be based on interest rates on debt. If interest rates are higherthan the ROI, going in for debt will kill an enterprise, as repayment will notbe possible. It is, therefore, necessary to understand past trends and make ajudgement on future trends on these two parameters before taking a decisionon the structuring of a business in terms of capital.

In fact, there is yet another critical impact on debt-equity mix on a business.Consider Tables 2.1 and 2.2 below. The Tables consider profit after taxes fora given increase in the ROI in two circumstances. A project that entails aninvestment of Rs.50 lakh is considered. Table 2.1 considers an option of 25per cent equity in capital structure while Table 2.2 considers 100 per centequity investment. The Tables indicate the impact of the structure of capitalof the enterprise on Profit before Tax (PBT) and Profit after Tax (PAT).

Table 2.1 Capital Structure of Manjunath Enterprises:(75% debt, 25% equity)

The Impact of Policy on Enterprises 25

Interest 3 3

PBT 1 3

Taxes 0.5 1.5

PAT 0.5 1.5

ROI 8% (Rs.4 lakhs) 12% (Rs.6 lakhs)(Rs.in lakhs)

PDBIT 4 6

Interest - -

PBT 4 6

Taxes 2 3

PAT 2 3

ROI 8% 12%

(Rs.in lakhs)

Table 2.2 Structure of Capital of Manjunath Enterprises:(100% equity)

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The tables above illustrate a similar benefit with regard to the rate ofincrease in profit with similar increase in return on investment. The ROIincreases by 50 per cent in both cases but profit after taxes increases by thesame amount in a self-financed project (Table 2.2) but by 200 per cent ifhighly debt financed (Table 2.1). Therefore the rate of increase in profit ismuch higher for a unit increase in the ROI, if the project is highly debtfinanced.

Implication of policy variables on structur-ing project costs Compare the proposed cost structure of Arundhati Enterprises in Ahmedabadwith another proposed enterprise ABC Food Products. The latter plans tofocus on largely outsourced ‘manufacture’ of pickles, while ArundhatiEnterprises plans on largely in-house processing of pickles. In the case ofArundhati Enterprises fixed costs are higher while in the case of ABC FoodProducts, variable costs are higher. The fixed cost in operation includescosts such as rent that do not vary with output, while variable costs such asraw-material purchase costs do. As the table below indicates, ArundhatiEnterprises could make more profit than the outsourcing ‘packager’ (ABCEnterprises). This indicates that scale economies operate on the manu-facturing front. Nevertheless, in the case of Arundhati Enterprises, the extent

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Production (Jars) 80,000 80,000

Selling price (per jar) Rs.40 Rs.40

Variable price (per jar) Rs.30 Rs.10

Contribution (per jar) Rs.10 Rs.30

Sales revenue (Total) Rs.32,00,000 Rs.32,00,000

Variable cost (Total) Rs.24,00,000 Rs.8,00,000

Contribution (Total) Rs.8,00,000 Rs.24,00,000

Fixed cost (Total) Rs.1,60,000 Rs.10,00,000

Profit (Total) Rs.6,40,000 Rs.14,00,000

ABC Enterprises Arundhati Enterprises

Table 2.3 Cost Structure of Enterprises

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of fall in profits with fall in sales or sales margins is likely to be higher. Theinterest cost on term loan is a fixed cost, while the interest cost on the work-ing capital is a variable cost. Arundhati Enterprises is likely to operate with asubstantial term loan while ABC enterprises is likely to be operating morewith mere working capital. It may be estimated that a 20 per cent fall in saleswill lead to about 25 per cent fall in profit in the case of ABC Enterprises.There is a much greater fall (about 34 per cent) in the case of ArundhatiEnterprises. The reverse operates in the case of an increase in sales.Therefore, studying potential for interest rate change on the working capitaland term loans and market demand which in turn may be affected bypolicy variables such as customs duties on finished products (market protec-tion) remains critical either in terms of reducing business risk or enhancingprofitability.

Therefore, particularly for those who declare profit ‘realistically’ such asexporters, interest rates and income tax rates critically determine the extent ofdebt finance to be sought for a project. This benefit occurs due to the taxshield on interest on loan or debt finance. Similarly the trend falls in interestrates as indicated by fall in the Prime Lending Rate (PLR) of lending institu-tions as also increased implementation of income tax rules may encouragegoing in for debt finance.

The cost structure in a business, which in effect helps decide on the ‘size’ ofan enterprise in terms of fixed investment, is affected by interest rates and cus-toms duties, among other variables. Further, customs duties on inputs used byfood processing manufacturers, for instance, may initially help on deciding onthe structuring of a project. For instance, customs duties on oranges as rawmaterial may be rather stagnant at 35 per cent, while customs duties onsquashes as finished product may be progressively reducing at a higher rate.In this case, the manufacture of a standard product (with little scope for dif-ferentiation) like a ‘squash’ may warrant export orientation as to import inputssans duty (as per the export-import policy) and remain competitive.

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THE IMPORTANCE OF POLICY:THE CASES OF PURSHOTTAM ENTERPRISES ANDMAHILA UDHYAM SANSTHA

The case of Purshottam Enterprises in Patna exemplifies the importance ofsourcing and production management, including purchase decisions andchannel motivation, to serve as critical success determinants of projects in thesector. Purshottam Enterprises was launched in 1985. It initially started off asa flourmill, which set up a retail outlet. The enterprise has graduated from aturnover of about Rs.40 lakh to about Rs.3 crore. The enterprise, whichstarted off as a tiny unit, has now become a flourishing small-scale enterprise.This has happened without its availing support in the form of any incentiveor schemes. In fact, the promoter has been ‘blissfully’ ignorant of suchschemes. Investment in equipment over the years has been done by the pro-moter out of the surplus generated by the business. Further, the enterprise usesformal finance of only about Rs.10 lakh in the form of a cash credit facilityfrom a bank. It uses about Rs.60 lakh of own funds as the working capital.

The enterprise is involved in the manufacture of spices, viz. chilly powderand various types of spices. The enterprise operates through 183 distribu-tors. Raw material is sourced from various parts of India directly viz. chill-ies from Andhra Pradesh, for instance. The working capital is largelylocked up in credit sales. About 25 per cent of output is sold on cash basisand 75 per cent on credit sales of 2 months. A cash discount of 3 per centis offered for cash purchase. The enterprise has not availed itself of any billsdiscounting facility from agencies such as the National Small IndustriesCorporation (NSIC) or commercial banks. As a matter of fact, blocking onown funds on equipment and fixed assets and on the working capital hasaffected potential growth prospects of the enterprise. Policy and supportsystem incentives have not been effectively availed of. There is a virtualdearth of information on support schemes. Policy and support seems tohave hardly played any role in the current success of this enterprise. Theenterprise proposes to attempt at exporting its spices-based ‘masalas’ to tar-get NRIs viz. ethnic Biharis in particular. However, information on theMarket Development Assistance Schemes of the Ministry of Commerce orthe Development Commissioner–Small Scale Industry (DCSSI) is notknown. The enterprise would like to go in for ISO implementation but isignorant of sources such as the Indian Statistical Institute and the SmallIndustries Service Institute. The enterprise, therefore, plans its growth as ithad operated since inception—absolutely ‘self-driven’ and not policy orsupport driven. Though, a costly proposition, the case of Purshottam

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Enterprises highlights that effective management of a business is the key toperformance. Policy support may be required to augment and not substitutethis requirement.

Handholding needs to be coupled with business acumen and drive: Policyand support alone will hardly suffice.

Consider the enterprises established by the support system in the1990s. These include enterprises established by the Khadi andVillage Industry Board in different states. The cottage industries’department in Tamil Nadu had established a self-help group of 200women under the leadership of Neelavalli who acts as the Presidentof ‘Mahila Udhyam Sanstha’. The enterprise had secured about Rs.1lakh for equipment with a significant amount of subsidy and reapsinterest subsidy as to secure C.C. facility at the rate of only about 9per cent. Support agencies such as the State Export PromotionCorporation have helped them ‘indirectly’ export their ‘papads’ toEurope. Support in the form of entrepreneurship and managementskill development training has been received and financial support interms of soft loans and marketing support offered. But since thebeginning the enterprise’s turnover has remained stagnant. Despitesupport right from the conception stage, the enterprise has hardlyeven taken off despite a decade of operation.

Policy with Regard to Sales Tax andCustoms Duties

A ‘masala’ manufacturer in Guwahati makes chilli powder and sellsit in an average lot size of 1 kg. He gives his distributor a marginof 15 per cent and his retailer a margin of 30 per cent on the MRP.He also offers various schemes for retailers such as a one kg pack forevery 10 kg of material paid for. He essentially uses retailer or chan-nel motivation at the point of sale as a tool to push his products.Bigger ‘masala’ manufacturers and suppliers are believed to offer amargin of only 7 per cent to distributors and 5 per cent to retailers.The net margin on chillies is believed to be about 10 per cent. Hisown costing of the product is as follows: for one kg. of chilli—rawmaterial cost works out to Rs.4, labour about Rs.1.5, packagingabout Rs.2.5, marketing (advertising/hoardings) Rs.3 and transport(raw material and finished products) Rs.2. The product is offered todistributors at Rs.19, viz. he believes he makes a net profit of aboutRs.6. He does not consider interest or opportunity on own cost ofcapital under which circumstance margins may vary. Large Indian

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business houses are believed to enjoy economy of scale advantages(in terms of lower per unit cost) of even 15-20 per cent on variousproducts. It is their marketing expenses in terms of TV commercials,etc., that are believed to be high. It is believed that larger enterprisesfocus on a ‘consumer-pull’ strategy, while smaller enterprises layemphasis on a ‘customer-push’ strategy. The latter seems to workbetter! It is believed that ‘masalas’ and chilli powders, for instance,have to be blended to suit the palate of different communities inIndia. Hence, large enterprises do not manufacture many ‘masala’varieties; cottage and small units do well. It is, therefore, efficientmarketing that serves as a critical success determinant.

Yashwant Bakery in Patna has a turnover of Rs.1.25 crore. Theequipment utilised include semi-automatic mixers. The promoterhad taken an NSIC loan of Rs.25 lakh. Equipment was sourcedfrom an Indian agent of the machinery manufacturer. The enter-prise’s main competitor is a medium-sized manufacturer. The com-petitor, who has a turnover of over Rs.10 crore and a market shareof about 50 per cent in the region, uses fully automatic equipment.Yashwant Bakery seems to have not realised the value of using thepush strategy to enhance market reach. Perhaps, this is why bothenterprises, which started at about the same time with similarinvestment, have different performances. For instance, in the 400gm. ‘sandwich bread’ that he manufactures, the retailer is offered amargin of Rs.2 and distributor a margin of 80 paise. He sells atRs.7.20 to distributors. He makes a net margin of about 8 per centon sale price. Price has been about the same for over a 3 yearperiod. Unlike his competitor, he gives exclusive agency or distrib-utorships and low ‘customer’ or middleman margins.

The larger enterprise, which has the bulk of the market share inthe region, offers 50 per cent higher margins to dealers (whole-salers) and retailers. No wonder Yashwant Bakery has a 5 per centmarket share of Patna city, while his competitor is believed to havean over 50 per cent market share. What is also obvious is that mar-ket growth in the case of chilli powder and bread, for instance, ismore likely to be merely related to population growth. Setting upnew projects in such relatively saturated markets could only affectthe performance of existing enterprises, while affecting the sustain-ability of new enterprises. Existing enterprises in the sector would,in fact, have to look for options such as technology upgradation tofurther reduce costs and enhance performance. Further, with regardto new projects, a focus on value added and newer products such asbread with soya etc. would benefit. New value added products may

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be considered by new projects and technology upgradationoptions may be pursued by existing enterprises as to reduce costsand increase margins in new markets. Technology upgradation maybe in terms of incorporating high-speed mixers and kneadingmachinery.

Policy is often skewed towards protecting raw materialproviders. For example, in 400 gms. of sandwich bread offered atRs.7.20, raw material cost (maida, wheat flour, yeast) is about 65per cent, labour 10 per cent, electricity 5 per cent and chemicals andsalt and oil about 12 per cent. Raw material costs in India areskewed towards the higher side in the international perspective dueto lower productivity in agriculture. With regard to surviving evenin the context of high domestic raw material costs, enterprises maydo well if they focus on ethnic and traditional products. South EastAsian competitors cannot afford to focus on ‘masala’ powders tar-geted at the region specific taste and preference segments! Sicknessin the industry is believed to be largely due to problems in creditrealisation and inefficient speculation in raw material prices, bothof which affect performance. Efficient management is the key.

A ‘masala’ powder and confectionery manufacturer in Chennai hasthe ‘Agmark’ label and is also involved in intra-state trade. Hebelieves that while bread has no sales tax, items like masala and cakesand pastries have tax fixed at 2 per cent on ‘Masalas’ and 12 per centon cakes and pastries. Supplying beyond a state could imply paymentof local sales tax in a state plus octroi at the rate of, say, 2 per cent forentry into different regions as also sales tax in the target state. Thiseffectively keeps away efficient competition from other states, a sortof tariff barrier to protect local manufacturers in a state. Further, foodinspectors in other states are believed to be a source of ‘harassment’in terms of pulling up intra-state suppliers under the Weights andMeasures Act, ingredient content and mix, labelling norms, etc.While the various acts are necessary, filing cases in local courts byauthorities proves to be expensive for entrepreneurs. This entrepre-neur in Chennai has been going to court in Andhra Pradesh for thelast 25 years to resolve a relevant dispute. A promoter needs to under-stand such aspects before planning and implementing a business.

The margins secured by entrepreneurs in some sectors arebelieved to be phenomenal. In the manufacture of confectioneryproducts such as ‘pedas’, for instance, for the manufacturing enter-prises in Pune, which are integrated into own retail outlets, returnson cost of production are expected to be 200 per cent. Cottage and

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smaller enterprises do well if they operate in fragmented markets.Markets may be fragmented either due to the perishable nature ofthe product with low shelf life such as bread or due to regionalvariations in preferred taste or choice. Pickles and certain spices areall examples. Further, in some products such as ‘rotis’, which areconvenience products that are tending towards becoming necessi-ties, pricing has to be low. MNCs are not likely to enter into suchproducts, as it is difficult to charge premium prices for their brandimage. Hence, small enterprises have their own opportunities in thesector, while larger enterprises have theirs.

Regional characteristics of demand are also critical. In cities likeMumbai and Pune, the fast pace of life and palate of local con-sumers have encouraged a wide range of processed enterprises to beestablished. In a city like Ahmedabad, however, convenience foodshave not made as much an entry. Hence, such aspects also play acritical role in determining the success of a project. An example ofregional variation is that of chilli preferred in Gujarat which is lesspungent than in other states. Consumers stress more on colour, i.e.in terms of ‘dark red’. Bigger enterprises may find it difficult toenter into such fragmented markets by reaping scale economies inmanufacturing or purchase as their production run may not be opti-mised, particularly if such fragmented markets are relatively smallas also price conscious. Exchange rates are critical policy relatedfactors for price competitiveness. ‘Basmati’ rice from Pakistan hasan advantage over that from India, currently, given their lowerrupee–dollar rates.

Chapter Two32

The cases of different enterprises presented in this section indicate the impor-tance of management along with the need for incorporating possible policytrends such as regulatory norms, sales tax, customs duties, etc., while plan-ning a project and implementing it.

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Who is an Entrepreneur?

Without entrepreneurship and growing number of entrepreneurs, an econ-omy is certain to become sluggish in growth. Entrepreneurial

dynamism forms the cornerstone of a progressive society as it is a purposefulactivity that attempts to create value through recognition of business opportu-nity, management of risk appropriate to opportunity and through communica-tive and management skills to mobilise human, financial and materialresources necessary to bring a project to fruition.

This gives a definite upsurge to the economic growth of a nation. Economicgrowth is an upward change whereby the per capita income increases over along period of time. If economic growth is the effect, entrepreneur is thecause. Entrepreneurs are the ones who explore opportunities, scan the envi-ronment, mobilize resources, convert ideas into viable business propositionand provide new products and services to the society by bringing together andcombining various factors of production. An entrepreneurial individual has adistinct concept, vision and a dream, which he/she is able to convert into prod-ucts. Such individuals are driven by task, challenge and opportunity with veryhigh achievement orientation.

If you wish to start and succeed in your enterprise, you need to play differentroles at different stages. Some essential qualities of entrepreneurs are:

1. A strong desire to win. (NEED FOR ACHIEVEMENT)

Most people dream of success, but seldom do anything to imple-ment it. In contrast, entrepreneurs have a strong desire to continu-ously hit new goals and do not rest till they win.

2. An approach of never-say-die. (PERSEVERANCE)

Once committed to a goal and a course of action, entrepreneursnever retract. Difficulties do not deter them and they work hard tillthe entire project is successfully accomplished.

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3. Entrepreneurs prefer a middle-of-the-road strategy while handlingtricky situations. (MODERATE RISK BEARING)

They don’t take high risks; they are not gamblers. They prefer amoderate risk to a wild gamble, high enough to be exciting and con-taining a reasonable winning chance.

4. Alert to opportunities and seizing them to their advantage. (ABIL-ITY TO FIND AND EXPLORE OPPORTUNITY)

Entrepreneurs are innovative and can convert crises into opportuni-ties. But they are realistic enough to ensure that the opportunity suit-ably dovetails into realising their goals.

5. They have a dispassionate approach to problems. (ANALYTICALABILITY)

Entrepreneurs will not let personal likes or dislikes come in theway of their taking a business decision. They seek out experts forassistance rather than friends and relatives. Their decisions areobjective and not emotional or impulsive.

6. It is important for them to know how they are faring when theywork on their goals. (USING FEEDBACK)

Entrepreneurs take immediate feedback on performance and preferprompt and accurate data, irrespective of whether these arefavourable or not. Unfavourable news spurs them into makingamends to attain their goals.

7. Entrepreneurs do not get deterred by unfamiliar situations. (FACINGUNCERTAINTY)

Achievement-driven people are optimistic even in unfamiliarsituations. Even if they find the odds daunting, they see no reasonwhy they can’t succeed with their treasure of abilities. They marchundeterred, making the best of fine opportunities that come theirway, even without guidelines. They quickly come to grips with thenew environment and present a picture of boldness and prudence.They apply their special insight and skill to quickly understand theenvironment and adapt to it.

8. They dislike working for others. (INDEPENDENCE)

Entrepreneurs do not like to work for others and therefore start offon their own. They wish to be their own masters and be responsiblefor their own decisions.

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9. They are flexible. (FLEXIBILITY)

Successful entrepreneurs have an open mind and do not hesitate tochange their decisions.

10. Entrepreneurs think ahead of others and plan for the future.(PLANNING)

Most successful people set goals for themselves and plan to realisethem in a time frame.

11. Entrepreneurs can deal with people at all levels. (INTERPER-SONAL SKILLS)

An entrepreneur comes across all kinds of people. He has to makethem work for him and with him to help realise his objectives. Helikes working with people and has skills to deal with them.

12. They can influence others. (MOTIVATION)

Successful entrepreneurs can influence others and motivate them tothink and act in their way.

13. They can work for long hours and simultaneously tackle differentproblems. (WITHSTANDING STRESS)

As a key figure in his enterprise, the entrepreneur has to cope withseveral situations simultaneously and take the right decisions, evenif it involves physical and emotional stress. This is only possible ifone has the capacity to work long hours and still keep cool.

14. They know themselves. (POSITIVE SELF-CONCEPT)

An achiever channelises his fantasies into worthwhile, achievablegoals and sets standards for excellence. He can do this for he knowshis strengths and weaknesses, and so adopts a positive approach. Heis seldom negative.

15. Entrepreneurs think ahead. (ORIENTATION FOR FUTURE)

They have the ability to look into the future. They won’t allow thepast to bother them and think only of the present and the future.“Bygones are bygones, what of now?” This is their usual response.

An individual may not have all these qualities, but most will havemany. The first step for a person aspiring to become an entrepreneuris to make an inventory of his traits. This self-awareness and analy-sis will help him define his strengths and overcome weaknesses.

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Soft Skills for Entrepreneurs

COMMUNICATION SKILLS

Communication is the process of exchanging ideas, facts or opinions bytwo or more persons. For communicating, we use different modes, like

oral, written or non-verbal. The process is explained by using this diagram:

Major vehicles for communication:

Speech – Face to face (oral)

Writing Formal – long (reports, documents, etc)

Non-verbal – Facial expression, body language

In life, we use several methods to communicate effectively (i.e. gestures/watch for response/ words/ pictures). Successful communication depends oncorrect receipt of the message and receiving is an active element.Communication vehicles will be effective only if both parties are involved inthe process. Good communicators listen and observe. They are alert receiversof response signals while they are also communicating. This helps them tailortheir communication style to make it easier for the receiver to absorb or acceptthe message.

Who?

Communicator

Say what?

Message

Throughwhich

channel?

Medium

To whom?

Receiver

Impact

Effect

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There are certain rules for communication:

i. Fitness of purpose:

Will it achieve the objective?

What, why, when, where, how?

Select the most effective way to achieve the objective.

ii. Quality of the message:

Always maintain clarity, accuracy and simplicity.

Don’t leave the important part of the message merely implied.

We all transmit personal, non-verbal signals continuously, mostly reflectingour attitudes and responses to communication systems. By observing andresponding to signals appropriately, we can build on the positives and weedout the negatives. To some extent, most people respond to non-verbal com-munication, but often only to the obvious, well-known signals. The tablebelow gives examples of such signals and their implications:

Source: Adapted from Communication Skills, 1996 by Carter Wendy

Chapter Four38

1 Leaning Concentration Important meeting Make points clearlyForward Increased

emphasis Negotiation State your own case

2 Leaning Taking time to After a proposi- Allow silenceBack think tion/explanation thought

Inviting Towards end of Wait for others toexpansion meeting speak first

Looking forconclusion

3 Clasping both Extreme con- Non-threatening Maintain openness hands behind fidence situations of situatiuonneck Relaxation In charge of Be positive about

situations your own case

4 Straight gaze Failing Disputed occasions Ask for reactions/No head attention feelingsmovement Dislike what is Unwelcome Ask for suggestions

communicated instructionsLack of co-operation

5 Narrowing Disapproval Expects to Allows expression eyes Disbelief challenge of opinion

Dislike Patience may be Shows that you short acknowledge

differenceGive your reasons

Sr. No. Behaviour Reason Circumstances Responses

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CREATIVITY AND PROBLEM SOLVINGAn entrepreneur has to be creative. He has to arouse and enhance creativityand experience competition not only with others but also the standards ofexcellence set for himself. Certain pre-conceived ideas create barriers in thegrowth of creative thinking. The barriers are:

1. Self-imposed

2. Restricted mindset

3. Nature of compliance

4. Backtracking to obvious challenge

5. Jumping to conclusion

6. Fear of being ridiculed

It calls for a positive attitude, an open mind, insight and right perception toremove these barriers and arouse and enhance creativity. Everyone facesproblems of different nature and magnitude. Sometimes in daily life, weencounter problems so often that we don’t even notice them and this isbecause of our monotonous experience in dealing with them and hence thespontaneous reactions result in solutions. But we do get stuck when facedwith unusual and difficult problems, as our routine reactions fail to producesolutions. In such cases, different approaches and ways have to be tried out.

Similarly, as an entrepreneur you may face several problems while managingyour small-scale enterprise. If you develop an appropriate system, approachand methodology to solve problems, it will prepare you to manage youraffairs and problems smoothly and without tension.

There are several qualitative and quantitative approaches evolved in manage-ment science to help solve problems. The right strategy would be to under-stand your own environment, resources, capacities, limitations, strengths andweaknesses in order to design the right approach. This approach will helpyou, initially, in working on problems and, later, in formulating your ownstrategy to solve them. These steps help you have a problem-solving attitudeand mechanism:

Create a desire to solve problems

Recognise the problem

Formulate the possible causes

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Specify the problem

Test each cause

Explain each cause with minimum assumptions

Verify your explanation and determine the cause

Establish objectives about the resources to be produced and resourcesused

Classify objectives into ‘MUST’, ‘DESIRABLE’ and ‘CAN BEIGNORED’ categories

Generate alternative solutions

Choose one solution

Compare each solution in terms of positive and adverse consequences

Make a decision to implement

Internalise the process

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Planning a Small-Scale Unit:Whom to Approach for What

The speed with which you implement your project is critical during thesedays of competition. If you have planned in advance and evaluated

resources required, your project will be implemented in the shortest possibletime. The first step to initiate planning is to identify a suitable project.

PROJECT IDENTIFICATION

There are no set rules to identify a suitable project, though this is one decisionon which the success of your entire venture hinges. So, don’t take hasty deci-sions. Most prospective entrepreneurs tend to display the herd tendency andgo for a project, which people have already ventured into. This is not a healthyattitude as success of one in a particular field does not guarantee success ofthe other. While identifying a suitable project, you should make a SWOTanalysis of your own strengths and weaknesses. There are more details in aseparate chapter.

The next step, after you have selected your project, is to collect all infor-mation about it. The most important information is about the potential marketof the items you selected. There are several ways for this. You may go for abasic desk survey, a snap survey or a detailed market survey. A separate chap-ter provides guidelines to assess the market potential.

PROJECT REPORT: A FORECAST PLAN

Now, you will need to prepare a feasibility report about your project. A feasi-bility report will broadly contain:

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REQUIREMENTS TO START A BUSINESS

Selection of Location: A Vital DecisionThis is extremely important. Usually, small-scale entrepreneurs are found tohave a predetermined location. The location should be decided according tothe proximity to sources of raw materials, consumption centers, availabilityof infrastructure, necessary skills in surrounding areas and availability ofincentives. Sometimes the requirements conflict with one another and a par-ticular location may not match all. Such situations want you to balance outthe requirements, while also ensuring that they do not affect the viability ofthe project. Experience shows most entrepreneurs attaching more impor-tance to available financial incentives and ignoring other important aspectsguiding the selection of the location. Such misplaced emphasis may runthe project into unviability in the long run. Your decision on the location,

Chapter Five42

a. Background of the entrepreneur and constitution of the business

b. Market potential and marketing strategy

c. Selection of location

d. Requirements of land and building

e. Manufacturing process

f. Requirements of plant and machinery

g. Requirement of utilities

h. Requirement of raw material

i. Estimated cost of the project

j. Proposed means of finance

k. Cost of production and profitability

l. Break-even point

m. Cash flow statement

n. Internal rate of return

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therefore, should not just be based on incentives, but more on availability ofinfrastructure and skills.

Land and Building: Make Correct AssessmentBefore assessing land requirements, you must draw up a plant layout based onthe type of facilities proposed to be installed. Normally, the land should notexceed five to six times the built-up area; but it all finally depends upon theproject. Land in excess of the requirement will block up funds, which couldotherwise be utilised for productive purposes. The land should be free fromany encumbrances and should be non-agricultural.

Select the Right Manufacturing ProcessSuitable manufacturing processes have to be identified for production. Someproducts may need a particular process depending upon raw material avail-ability, the prices and the quality requirement of the end product. A detailedflow chart may also be drawn with all operating parameters.

Government Formalities and ProceduresThe process of planning also includes planning for execution of various gov-ernment formalities. Though the government in the post-liberalisation eraintends to reduce permissions/clearances to free the industry from bureau-cratic controls, you need to clear specific formalities to avail certain benefits.The following formalities need to be considered for small-scale units:

i) SSI Registration: Required for the Records Though SSI registration is not mandatory according to recent changes in therules, it is advisable that you register your small-scale unit with the DistrictIndustries Centre (DIC) of the district where your project will be located. Thegovernment requires this registration to plan for future needs of the industryand it is in your interest to register your unit.

ii) Acquisition of Infrastructure FacilitiesIf you plan to locate your project in an industrial estate promoted by a gov-ernment agency, you may apply for a built-up shed or a plot of land. You canstart your activities once the shed/plot is offered. If you have been allotted a

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plot, you can start construction after your building plans are approved. Ineither case, you have to apply for power connection to the State ElectricityBoard and for water to the authorities concerned.

iii) Pollution Control Clearance: Obtain NOC orConsent

You should also apply for obtaining an NOC from the State Pollution ControlBoard (PCB). If your unit is likely to be a pollution hazard or may dischargeeffluents, the PCB first issues an NOC with certain conditions to install facil-ities to check air or water pollution to specific levels. After you have installedthe necessary facilities and they are satisfied, the PCB gives its consent tostart operations.

iv) Constitution of the BusinessYou should decide on the organisational form of your business, viz. if it shouldbe a proprietorship, partnership or a private limited company, according to thesize of its operations and the degree of risk involved. In proprietorship, thegains and losses of the business rest with the proprietor, while in partnership,all the partners share the gains and the losses except the minor partners, whoare exempt from bearing the losses. In a private limited company, the memberstake the gain or losses as per their holding in the company, for it is consideredto be a separate legal entity. Once the business constitution is decided, you mayundertake necessary formalities for registering the firm accordingly.

v) Arrangement of Finance for Fixed Assets andCurrent Assets

After taking these clearances, you may apply for a term loan either to a state-level financial institution or a commercial bank, with a techno-economic fea-sibility report, including market survey, and all documentary evidence justify-ing your claim for the project being feasible. Once the loan is sanctioned, youmay have to execute necessary legal documents mortgaging your assets. Thedisbursement of the term loan usually starts after you have fulfilled all the con-ditions and also after 50 per cent of your own capital is raised and invested inthe project. The institutions generally disburse 75 per cent of the loan sanc-tioned on a matching basis. Thereafter, you should raise and invest the rest ofyour contribution to stake your claim for disbursal of the balance term loan.Simultaneously, you can also negotiate with your bankers to sanction theworking capital requirements. The bankers would, however, consider the working

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capital loan only after the term loan is sanctioned. If you propose to locate yourproject in developing areas eligible for state incentives, you will need to applyfor registration and sanction with the state authority to avail the incentives. Onlyafter you get the sanctions can you start implementing your project.

vi) Government Formalities Need to be Viewedin Proper Perspective

Experience shows that many people do not give adequate weightage to com-plying with various government formalities. Utmost care should be taken inthis connection during the planning stage itself, as in the case of ignorance theproject implementation gets delayed and incurs cost overruns, and sometimesderails the entire project.

You must also be aware of the sequence of steps to be followed while plan-ning a small-scale unit. There are no rigid rules, but experience reveals thatnothing important will be missed if you follow the sequence. Some activitiescan be handled simultaneously. The sequence may vary according to theneeds and size of your project. You may decide basing on ground realities.The steps above will help you develop an insight into project planning. Fine-tuning project implementation activities at the planning stage will help youcoordinate resources appropriately in keeping with the project needs andavoid slippage in implementation and cost overruns.

Whom to Approach for What?

New entrepreneurs must know where to go for a particular piece of informa-tion as this knowledge will help them avoid a lot of running around. For this,they must know clearly what they are looking for.

Some may be completely ignorant, a few may know about marketing orproduction or finance, etc. The completely ignorant will require initial deskwork and discussions with knowledgeable persons like the EDP trainer, exten-sion officers, businessmen, small-scale industrialists, etc. This will help youaccelerate the process of enterprise establishment.

Those with some knowledge will require specific information. It will beuseful for them to list the various things to be completed to set up their enter-prise. This desk work will give them a clear idea about the assistance theyneed to fulfill their activities.

Various development agencies assist entrepreneurs:

a. Some agencies provide only general information and you yourselfhave to collect specific information.

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b. Some provide technical/marketing expertise in specialised areas.

c. Some provide guidance in technical and financial matters, besidestaking up turnkey responsibility (implementation assistance).

But government formalities will have to be completed by the entrepre-neurs themselves. They can contact the concerned departments/offices forinformation.

You should only retain the relevant information/data while collecting infor-mation. You must keep important information at a proper place to find themwhen needed. The compilation and segregation of information will need tablework and it should be compared with the checklist prepared earlier to ensureall data has been collected before actual commencement of work.

Expert guidance will help in decision-making process. It will be useful toacquire first-hand information from institutions to get a clear picture of theentire exercise.

A table below shows various sources of information for a new entrepreneur.They need not contact all agencies except the relevant ones. However, theymust contact at least the following agencies to have knowledge about small-scale industries and the procedures:

Chapter Five46

District Industries Centre

Directorate/Commissioner of Industries Office

State Financial Corporation

Technical Consultancy Organisation and

Agencies Conducting Entrepreneurship Development Programmes

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Whom to contact and for what information

DIC = District Industries CentreSISI = Small Industries Service InstituteTCOs = Technical Consultancy OrganisationsSFCs = State Financial CorporationsNSIC = National Small Industries CorporationDFRI = Defence Food Research LaboratoryED Inst. = Entrepreneurship Development OrganisationsCFTRI = Central Food Technology Research InstituteIDCs = Infrastructure Development CorporationsLA = Local Authorities like Municipalities

EPC (APEDA, MPEDA) = Export Promotion Council (Agriculture andProcessed Food Export Development Authority, Marine ProductsExport Development Authority)

Planning a Small-scale Unit: Whom to Approach for What 47

1 For Selection SISI, DIC, TCOs, SFCsof a Project

2 Registration DIC

3 Finance Banks, SFCs, NSIC

4 Technical DIC, TCOs, CFTRI, Guidance SISI, NSIC, DFRI

5 Training ED Inst., SISI, TCOs, DICs, CFTRI, NGOs

6 Infrastructure DIC, IDCs, LA

7 Raw Materials DIC

8 Plant & Machinery DIC, NSIC, SISI

9 Marketing DIC, TCOs, EPC Information (APEDA, MPEDA)

Sr. No. Area of Assistance Sources

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Business Opportunity Identification

Agood business opportunity is that which is a techno-economically andcommercially viable and feasible and environmentally sustainable

proposition. Every entrepreneur needs to identify a sound opportunity. Toidentify an opportunity, one needs to:

The opportunities in the food-processing sector may be classified on the basisof the following parameters:

i. Collect basic information on local resource base, e.g. agriculture,forest and mines

ii. Collect information on Opportunity Identification (OI) exercisedone earlier (if any), by DIC, banks, other financial institutions, etc.

iii. Discuss the potential business opportunities with existing entre-preneurs

iv. Discuss with octroi and sales tax officials about the inflow ofgoods

v. Collect information on new major investment going to materialisein the area

vi. Collect negative list of banned items for financing

vii. List out poor performing industries

viii. Collect information on skill base—especially on handicrafts, etc.

ix. Collect information on availability of infrastructure like power,water and transport, etc.

1. Natural Resource-Based Opportunities: such as the ones basedon cereals, cash crops, fruits and vegetables, agro-wastes, animals,marine-based, processing of food products like cereals and pulses,

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Following the above method, will offer a large number of business opportu-nities. However, please remember, these opportunities are location and timespecific. An opportunity today may not remain an opportunity tomorrow. Oran opportunity in a forest area may not hold good in the deserts of Rajasthan,as the resource base will change. Moreover, one would also need to assess theviability and feasibility of the opportunities before pronouncing them as busi-ness opportunities.

An opportunity may be absolutely viable but may not be feasible if it ismismatched. For example, although setting up a large flourmill may be a per-fectly viable proposition, it may not be feasible to set up one in Sunderbansfor an illiterate rural or tribal man. Therefore, one needs to consider the fol-lowing facts before deciding upon an opportunity:

Chapter Six50

fruit preservation, pickles, honey, etc.

2. Local Industry Based: those dealing in supply of intermediary rawmaterial, ancillarisation, job-work, recycling of industrial wastes,by-products, etc.

3. Local Demand Based: which may include products like bread, bis-cuits, flour, spices, etc.

4. Export Based: any local product, which is being exported; orresources available locally to manufacture the items, which havegood export potential

One’s Education

Experience

Economic Background

Investment Capacity

Family Background

Managerial Capabilities

Market Competition with other Producers/Size of Market

Location of the Unit

Availability of Technology and Process Know-how

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After ascertaining these factors, a SWOT analysis of the entrepreneur vis-à-vis the identified opportunity should be conducted. If both match, one canproceed for a preliminary feasibility study through market survey. It is advis-able to zero in two to three opportunities to finalise one.

A set of introspective questions while deciding upon an opportunity:

Business Opportunity Identification 51

Availability of Raw Material

Availability of Skilled Workforce

Availability of Required Infrastructure

Project Cost

Export Potential

Life-cycle of the Product and Future Growth of the Product

Shelf-life of the Product (highly perishable like milk or long-termlike capital goods or consumer durables, etc,)

Profitability of the Product

Degree of Risk

Gestation Period

Government Policy

How comfortable are you with the technology? Will you be able tohandle it?

What is the situation of competition? How will you withstand thecompetition?

Will you be able to muster enough resources (especially finance)?Will you be able to manage investment from your own resources?If not, how do you plan to get funds?

How critical is the government support for your product?

Is raw material easily available? If not, how will you manage regu-lar supply of raw material?

Will you get adequate skilled manpower? If not, how will youmanage?

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Market Survey Tools, Preparation ofSchedule and Techniques of Data

Collection

Market survey is a valuable tool to help minimise risks and increase theprobability of success. However, that doesn’t mean it is a sure-shot way

to eliminate risk and guarantee complete success. You should undertake mar-ket assessment with a survey before you finalise marketing plans for yourproduct or service. This chapter aims to explain what a market survey is andhow to conduct it.

Markets are changing rapidly, becoming complex and competitive. It is dif-ficult to keep pace with the rapidly changing demand and supply patterns asan entrepreneur is unable to respond quickly to a new environment. He needsbetter market understanding and a market survey puts him in contact with themarket. A systematic use of this tool can reduce risks in decision-making.

WHAT IS A MARKET SURVEY?A market survey is an objective and systematic collection, recording, analysisand interpretation of data about existing or potential markets for aproduct/service. This definition will be better understood by looking at theobjectives of a market survey. During a market survey, one needs to focus on:

Size of the market and the anticipated market share in terms of vol-ume and value

Pattern of demand—seasonal or fluctuating in time (in a month,day, etc)

Market structure

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Buying habits and motives of buyers

Unique selling proposition of certain products/services

Past and present trends affecting the selected product or similarproduct

PRIMARY AND SECONDARY SOURCES OFINFORMATION

Conducting a market survey does not always mean contacting people directly.There may be information in the form of reports, published material ordocuments of trade/industry associations. Data may be collected from twosources:

Primary data sources: Information coming straight from those in thespecified market, e.g. in the toy market, information obtained from toymanufacturers and traders.

Secondary data sources: Data existing in reports or in a publishedform and may not have been collected for specific purpose. Suchinformation can also be had from census office, banks, traders andmanufacturers’ association or published anywhere.

Chapter Seven54

PROCESS OF CONDUCTING A MARKET SURVEY

A systematic 5-point process is involved in a market survey:

1. Defining objectives and specific information needed:

Identifying source to obtain information

Assessing time and cost for the study

Working methodology and action plan

2. Selecting a sample size by determining whom to contact and when

3. Preparing questionnaires for the survey

4. Collecting data and analysing it

5. Preparing a report, based on analysed data

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SCHEDULE FOR MARKET SURVEY

A market survey is not restricted to collecting information on the market for aproduct, but also about marketing infrastructure and existing market conditions.

Designing a market survey schedule could fetch a lot of data. Questionsmay be designed on these areas:

Existence of competitors, their products and marketing strategies

Information on all consumer groups

Information on competing products/ similar products

Attitude of existing/potential consumers, including buying prefer-ences, behaviour etc.

MARKET RESEARCH: 10 TIPS TO BE MOREEFFECTIVE

1. Clearly identify the issue/problem that needs to be investigated. Seeif any published/secondary sources of information are available forthis problem.

Market Survey Tools, Preparation of Schedule and Technique of Data Collection 55

DON'TS OF CONDUCTING A MARKET SURVEY

Do not be prejudiced. As an entrepreneur, you must be open-mindedand confident.

Do not be impatient or argumentative. Your objective is to get infor-mation.

Do not reveal privileged information to others, for you may lose thetrust of your sources.

Avoid taking notes while discussing. Make notes immediately afteran interview. People are not comfortable if one writes while talking.

Don’t interview without preparation and sequencing of questions.Ensure that the interviewee has time for you.

Don’t approach competitors as “likely competitors” but meet them as“potential clients” to get best results.

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2. Based on existing information, check if the problem can be definedor narrowed down. Further, with this as your basis, write down“terms of reference” for any subsequent study.

3. Try to look at the problems from different angles:

your own point of view as producer or seller

customers/consumers’ viewpoint as buyer and end users of prod-ucts/services

competitors’ viewpoint for they may have addressed similar prob-lems

4. Try to remain objective throughout the market research process andcheck impulses/gut feeling from totally influencing the research.

5. Prepare schedule in as simple and clear a form as possible.

6. Maintain a tight control on the subject. If other subjects surface dur-ing the research, give them the attention they deserve.

7. Complete the research promptly and maintain confidentiality lest thecompetitors hear of it and forge ahead in the market.

8. Be prepared to take necessary action, which the research identifies.

9. Use the research immediately for the good of the enterprise.

10. Review all market research exercise and processes—the lessonslearnt and areas to improve next time.

MODEL QUESTIONNAIRE FOR MARKET SURVEY

For Market PotentialCollect data about sources of market information like consumers, suppliersand manufacturers.

Chapter Seven56

A. Consumers

What is their annual consumption and requirement?

What is their present source of supply?

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What is the customer’s brand loyalty and preferences about price,quality, payment terms, etc?

Are they satisfied with the present product and supply?

What is their purchasing criteria and purchasing power?

What is the consumption pattern? (basis to calculate their require-ments)

What could be the future consumption pattern, in quantity and qual-ity due to technological changes, etc?

What is the size of the average order, specifications and time and fre-quency of their placement?

Will any government institutions/departments or any company/indus-try buy the products? Is it possible to establish linkages with them, andhow?

What is the life of your potential buyer?

Their age group, sex?

What geographical area they live in? Urban, village and which part ofthe country?

B. Suppliers (Traders)

Who are the principal traders in the item, their range of products andbusiness terms/commissions, etc?

What are the possibility to trade with them and on what businessterms?

What is the normal stock level maintained and problems in stocking?

What are future predictions on business conditions?

C. Manufacturers and Competitors

What are their products range, installed capacity, selling price?

What are their normal business terms about payment, price, etc?

What are their salient features, like technical skill, finance, otherresources, etc.?

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What are their strengths and weaknesses? (Try to do their SWOTanalysis)

Where do they get information regarding market and consumer pro-files from?

For Information on Raw Materials

Who are the major manufacturers/suppliers?

What is the time required to get raw material after order placement?Supply terms (tax structure, price, packing, payment, etc)? Cost oftransportation?

What is the standard or minimum order quantity?

Is raw material freely available or is there a quota system?

Will any decision/policy affect its availability or price?

For Information on Machinery and Equipment

Who are the manufacturers/suppliers?

What capacity, specifications and brands are available in market?

What is the price of the machine? (Consider all costs—taxes, trans-port, accessories, etc.)

Which electrical equipments, like motors, starters, switches, areneeded?

What performance guarantees/warranties are given? Is the sup-plier/manufacturer reputed and reliable?

What is the normal repair/maintenance cost per year?

What spare parts would be frequently required?

What quality and maximum output (production) a machine can give?

Does the supplier train you/staff to acquire skills to operate machinery?

Chapter Seven58

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A K G FOOD PRODUCTS168 B B Chatterjee RoadKOLKATA – 700 042Pr: Food Processing Equipments

A M B AGROTECHAshvini LayoutNr. Sahakar NagarAKOLA – 444 004Pr: Mini Dal Mill

A V ENGINEERING WORKS12-A, Adj.Hira AutomobileFactory AreaPATIALA – 147 001Pr: Automatic Biscuit making plant

ADVANCE EQUIPMENT CO.Navjivan SocietyBuilding No.3/2/7Bombay CentralMUMBAI - 400 008Pr: Bakery Equipments, Meat/Fish,Poultry Processing/Packaging plant

AERO THERM SYSTEMSPVT.LTD.Plot No.1517, Phase – IIIGIDC (Vatva)AHMEDABAD – 380 445Pr: Hot Water Generators,Steam Boilers, Fluid Bed Dryers,Tray Dryers

AGARAM INDUSTRIES126, Nelson RoadAminjikaraiCHENNAI – 600 029Pr: Milk Analytical Instruments,Pasta Making Machines, FoodAnalytical Instruments

AGRITECH INDIA FOODS8, Manilaxmi Apts.Daxini Society – ManinagarAHMEDABAD – 380 008Pr: Processed Food Machinery,Beverage Processing Machinery

AGRO THERMODYNE CO.8/4, Shamanna LayoutB/h. Mangaram FactoryGorugunte PalyaBANGALORE – 560 002Pr: Bakery/Biscuit makingEquipments

BAHUBALI ENGINEERING5, Parekh Nagar, S.V. RoadKandivali (W)MUMBAI – 400 067Pr: S S Food Processing Equipments

BAJAJ MECHANICALSC-582, New Friends ColonyNEW DELHI – 110 065Pr: Food Processing Equipments

Suggested Sources of Technology and Listof Machinery Manufacturers and

Suppliers

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BAKER ENTERPRISES23, Bhera EnclaveNr. Peera GarhiNEW DELHI – 110 087Pr: Bakery Machines, Machines forBuns, Hotdogs, Cookies, Rusk &Cakes

BANSAL FLOUR MILLENGINEERS4/5-B, Asaf Ali Road – Gr. FloorNEW DELHI – 110 002Pr:Grading/Sizing/CleaningMachinery, Spices CleaningMachines

CENTRAL ENGINEERINGWORKS380, Patel RoadwaysCOIMBATORE – 641 009Pr: Commercial Kitchen Grinders

CHALLENGER PRODUCTS12, Devaki Niketan396,402 Kitchen Garden LaneB/h. Lohar ChawlMUMBAI – 400 002Pr: Pizza Ovens, SandwichGrillers, Idli Steamers

CHEMICAL CONSTRUCTIONCO. PVT.LTD. Br: 956/57 T.H.RoadCHENNAI – 600 019Pr: Poultry Feed Plant, CoconutProcessings,Oil Refinining Plant, SolventExtraction Plant, Vanaspati Plant,Veg. Oil Refining Plant

CONGAS FOOD SERVICESEQUIPMENTS (PVT.) LTD.4, Krishanapur Road, Dum DumKOLKATA – 700 028

Pr: Bakery Equipments,Commercial Kitchen EquipmentsRefrigeration Equipments

DAIRY DEN LTD.A-29, GIDC Electronic EstateSector – 25GANDHINAGAR – 382 044Pr: Soft Ice-cream Machines,Juice Dispensing Machines,Fast Food Vans

DANDEKAR BROTHERSFactory Area, Shivajinagar (N)Sangli – 416 416MAHARASHTRAPr: Knit Grinding Machines,Groundnut Decorators, GrindingMills, Chaffcutters, SugarcaneCrushers

DELHI INDUSTRIES4, Paharganj LaneNEW DELHI – 110 055Pr: Fruit & Vegetable Processing,Canning/Bottling Equipments andMachinery

DELTA CORPORATION201, Wadala Udyog BhavanNaigaum Cross RoadWadala – MUMBAI 400 031Pr: Internal Gear S.S. Pumps forFood Processing

EASTEND ENGINEERING CO.173/1, Gopal Lal Thakur RoadKOLKATA – 700 035Pr: Fruits & Vegetables ProcessingMachinery & Equipments

ELMEC INDIAP B No.7624,

Chapter Seven60

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No.37/38, Goodshet RoadBANGALORE – 560 053Pr: Packaging Machines, HeatSealing Shrink Packaging, SealMachines, Bottling Machines,Bag Closures

EMERGE SYSTEMS &SERVICES PVT.LTD.A-2/4, Arjun TowersSatellite RoadAHMEDABAD – 380 015Pr:Waste Food Disposers

EMERSION ENGG.ENTERPRISESNr. Gate StationSURENDRANAGAR – 363 001Pr: Cookers, Vacuum Batch,Packaging Machinery, Break/Biscuits Machinery,Cutting & Wrapping Machines,Bubble Gum

ESS EMM CORPORATION205-H, Vivekanand RoadRamnagarCOIMBATORE – 641 009Pr: Baking Equipments, Ovens,Deep Fat Fryers, Bread Slicers,

Meat Mixers, Juicers, CoffeeGrinders, Vegetable Cutters,Cutter/Mixers, Veg. ProcessingMachines

EUROTECH FOOD &PACKAGING MACHINESK-17, Ghirongi, Malanpur Ind. AreaDist. Bhind, GWALIOR, M.P.Pr: Nut Roasting Plant, Form-Fill-Seal Packaging Machines, NamkeenFrying Plant

FLORA ENGINEERING CO.A-4, Laghu Udyog KendraI.B. Patel, Goregaon (E)MUMBAI – 400 063Pr: Industrial Ovens (forDehydrating Roasting,Drying of Food Products)

FOOD TECH ENGINEERS31/A, Ghanshyam Ind. EstateVeera Desai Rd., Andheri (W)MUMBAI – 400 058Pr: Machinery for Fish/Meat, Veg.Fruits, Frozen, Pulps, Juices

FOODMAC ENGINEERS(PVT.) LTD.Bassi RoadSirhind 140 406 PUNJABPr: Automatic Machinery forBiscuits Cookie/Crackers CreamSandwiching

FORAM FOODS PVT.LTD. 397, Swami Vivekanand RoadVile Parle (W)MUMBAI – 400 056Pr: Lug Cap Sealing Machines,RTE Snack Food Plant,Pickle/Jam making plant,Packaging Machines

GADEKAR & ASSOCIATESPVT.LTD.304, Sector 21AFARIDABAD – 121 001Pr: URSCHEL Food Cuttingmachinery, Snack Food Fryers

GAYATRI FABRICATIONWORKSTarun Plastic Ind. EstateGali No.10, Mogra Road,

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Andheri (E)MUMBAI – 400 069Pr: Kitchen Equipments – PizzaOvens, Potato Peelers, BulkCookers, Deep Fat Fryers,Griddle Plates

GENERAL MECHANICALINDUSTRIESNational Tankiwala Ind. EstateSteelmade CompoundMarol Maroshi road Andheri (E)MUMBAI – 400 059Pr: Confectionery Equipments

GOLDEN ENGINEERINGINDUSTRIESA-87, Naraina Ind. AreaPhase – INEW DELHI – 110 028Pr: Sealing & Cutting machinery,Pouch/Bag Making Machinery,Veg. Oil Refining Plant

H P INDUSTRIES2, Hoaquim Cottage, Vazir GlassWorks Rd.J B Nagar, Opp. Tata Infotech Ltd.Andheri (E) MUMBAI – 400 059Pr: Conveyors, AutomaticPickle/Chutney/ Jam Filling &Capping Machines

HARI OM INDUSTRIESDhebar Road (South)Atika Ind. AreaStr.No.3, Nr. Jaydev FoundryRAJKOT – 360 002Pr: Potato Cutting Machines, DryFruit Cutting Machines, BananaWafer Machines, Other FoodProcessing Machines

HEATRAN SERVICES180-A/131, NSP Complex(Opp Royal Agencies) Dr. Nanjappa Road COIMBATORE – 641 108Pr: Pizza Ovens, Bread BakingOvens, Heaters for Steam Boilers

INDIAN DAIRY EQUIPMENTSCO.364, Azad MarketDELHI – 110 006Pr: Milk Testing equipments,Cream Separators

INDO STAINLESS FABTECHPVT.LTD.439, Sidco Ind. EstateAmbatur CHENNAI – 600 098Pr: Milk Coolers,Milk Chillers, Cooling Tanks,Milking Machines

INDUSES FOOD PRODUCTS &EQUIPMENTS LTD. 238/B, Acharya J.C. Bose RoadKOLKATTA – 700 020Pr: Paddy Processing, Parboiling,Drying equipments

INDUSTRIAL AIDERSBD-135/1, Tagore GardensNEW DELHI – 110 027Pr: Dairy/Food ChemicalEquipments

INTERNATIONAL FOODMACHINERYA-13, Kailash ColonyNEW DELHI – 110 048 Pr: Blanches, Groundnut, HammerMill Dehydration Machinery forOnion & Garlic

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J K ENGINEERING WORKSBus Stand RoadRAJPURA – PUNJABPr: Bread/Biscuits MachineryBakery machinery

JWALA ENGINEERINGCOMPANY12, Survey Industrial EstateSonawala Cross Road No.1Goregaon (E)MUMBAI – 400 063Pr: Fruit & Vegetable Processing& Packing Machinery such asFruit & Vegetable Preparatory,Fruit Juice ConcentrationEquipments, Mushroom Processing& Canning line, Peas Preparatory

& processing line Potato ChipsLine, Pulp Concentration Plant

K.S. ENGINEERING WORKSFactory Area, Nr. Ranjit Press Patiala – 147 001 PUNJABPr: Biscuit Plant, Papad Plant &Bread Plant

KAG FABRICARES PVT. LTD.A-26N, Gali No.4Anand Parbat Ind. AreaNEW DELHI – 110 005Pr: Bread/Bakery Plant

LARSEN & TOUBRO LIMITEDPlot No.101, GIDCRanoli DIST. BARODA Pr: Food Processing Machinery

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Production Programme, PlantCapacity, Manpower Requirements

and Layout

PRODUCTION PROGRAMME

Production programme of a food processing unit is based on several param-eters—local conditions, market access and technology. Your programme

should be justified in relation to:

Market requirement and marketing strategy, e.g. fruits/vegetables areperishable.

Input requirements and supply schedule—seasonal nature.

Technology and economy of scale—low BE, cottage, small and medi-um scale in food processing.

Minimum economic size and equipment constraints.

Resource and input constraints.

Performance of staff/labour.

PLANT CAPACITY

Consider these to determine the plant capacity:

Project cost corresponding to various sizes and whether one has finan-cial resources to meet the cost and whether one is prepared to run a riskcommensurate with the project cost

CHAPTER 8

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Minimum economically viable size of plant

Popular plant size of existing small-scale enterprises making similarproducts

Comparative capital cost of major plant sizes, within the maximum ofthe project cost one has estimated, offered by machinery producersand their operating income/expenditure implications. A comparison ofnet financial impact of individual plant sizes.

Market size and growth prospects (biscuit market in India is growingrapidly and a well-organised promoter may find himself unable tomeet the demand, if he chooses too small a market size)

SSI in India gets benefit in excise duty and interest rate concessions.But there is a legal ceiling on the investments in plant and machineryto avail these concessions. No wonder, most plants are priced justaround that ceiling. You may choose a size matching the ceiling, forexceeding it will deprive you of excise/interest benefits.

The cost of expanding the plant capacity vis-à-vis setting up alarger plant must be considered for it might be cheaper to establisha larger plant of 5 MT per day than to expand capacity from 2 MT to5 MT.

MANPOWER REQUIREMENT

You will need manpower for:

Production (Workers)

Supervision (Technicians)

Administration, sales, miscellaneous work (Staff)

In a small unit, it is possible that the entrepreneur handles administration, salesand technical supervision, and thus have limited manpower needs. It is, how-ever, important to analyse workload and arrive at a gross manpower need.

Manpower requirements will be decided by manufacturing operations,material handling and packing jobs. It is useful to classify your manpower-need in three categories—skilled, semi-skilled and unskilled. The wage ratefor each category varies. Special attention should be paid for hiring andretaining skilled workers.

Chapter Eight66

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Look at the availability of skills at the selected location and plan for theirrecruitment. It may be, for instance, difficult for a biscuit manufacturing unit inHimachal Pradesh being established at Parwanoo to source biscuit machineoperators locally. They may have to be brought from Delhi/Chandigarh. It is dif-ficult to find skilled people in industrially backward areas and may have to bescouted for in nearby towns. Arrangements will have to be made for technicaland other staff also. Such employees expect better living conditions or compen-sation and won’t move in otherwise.

SELECTION OF LOCATION

Ideally one may want to locate the project in one’s home town or native place,but there may be a problem of high land price if that place is a large city. Usually,the government offers investment subsidy and tax concessions to enterprises inspecified areas. One must be aware of various physical and commercial facili-ties to run an enterprise. The hometown or native place may not be an idealchoice. Various parameters need to be considered while deciding a location.

One will then have to select a site—a specific piece of land in a given townwhere the enterprise will be located. Sometimes, one may also have to dropa location for want of a good site.

How should one go about location/site selection? We recommend a two-stage procedure. Practically, only a few locations will merit consideration. Inthe first stage, identify two-three such locations. Identify one or two sites ateach location. In the second stage, examine each location/site according to asix-dimension selection checklist:

The findings of each parameter will help decide a location.

Production Programme, Plant Capacity, Manpower Requirements and Layout 67

Basic consideration (development status of the town and its locationvis-à-vis enterprise needs)

Status of physical infrastructure (power, water, etc.)

Status of commercial infrastructure (telecom, banking, etc.)

Status of social infrastructure (housing, health, etc.)

Financial incentive position (investment subsidy, tax concessions etc.)

Site-specific considerations (land price, contours, etc.)

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Sources of Information on LocationHow do we get answers to the checklist? We try to tap the right sources ofinformation:

It is important to visit the location, armed with the checklist and to put downanswers to each point. One may also get water and soil tests done. One mustreview the data objectively and then decide.

PLANT LAYOUT PLAN

One needs to develop a factory layout plan to decide on location of each facilitylike raw material, storage, individual machines, packaging, finished goods stor-age and quality control unit and work out the space for each. The distancebetween one facility and another or one machine and another should meet tech-nical requirements. Usually, the flows of production process and space require-ments for material handling and manpower determine the layout. It calls for con-siderable technical knowledge. Without the layout plan, it is not possible todecide the gross built-up area of the enterprise. For a food processing industry,statutory requirements like FPO and by-laws of the local authority issuing foodproduction license have to be fulfilled in the layout plan. Where HACCP or GMPis required, additional care must be taken as per the rules and regulations.

Chapter Eight68

Industrial Estate Officials

Local Authorities

Revenue Department

State Electricity Board

Public Works Department

Office-bearers of Local Industry Associations

Local knowledgeable Persons/Businessmen

Banks/State Financial Corporations

District Industries Centre

Landowners, Residents of Nearby Villages/Towns, Local OpinionLeaders, etc.

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Production Programme, Plant Capacity, Manpower Requirements and Layout 69

Following is a model layout plan for a jelly and jam manufacturing unit:

A Preliminary Layout Plan

BOILER ROOM QC LAB OFFICE

PACKING

JUICE EVAPORATION &JAMS/JELLY MAKING

FRUIT JUICEEXTRACTION

12 MT

RAW MATERIAL& OTHER STORE

20 MT

2 1

(Note: Layout is not to scale)

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Business Plan Format for Tiny andSmall Enterprises

Abusiness plan helps the entrepreneur set out objectives, targets andbenchmarks. It is also a prerequisite to get credit from lending agencies

like banks and State Financial Corporations, etc. It is a blueprint or a road mapfor your business.

The purpose of a business plan is:

to arrange thoughts logically

to highlight resource needs and their sources

to raise funds from a bank or other source

to demonstrate viability of the business proposition and potential torepay credit

to stimulate reality and anticipate pitfalls before they occur

The business plan must answer these questions:

What do you intend to do/how do you intend to do it/when do youintend to do it?

How much do you wish to borrow?

When will you repay it?

Will you be able to pay the interest?

Can your business survive a setback in its plans?

What is the security available for lending?

CHAPTER 9

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How many jobs will be created?

Is the business proposal commercially viable?

Will the business be profitable?

Can the business cope with inflation?

The business plan must include the following in sequential order:

Summary of the Project/ Project at a Glance

(The purpose of the business plan, location, resource needs, volumeof business, brief note on market, customers, promoters and financialhighlights)

General Information

(About the business and promoter’s qualification, training and rele-vant experience)

Details of the Proposed Project

(Requirement of fixed and working capital, project cost and meansof finance)

Market Potential

(A note on marketing strategy, potential customers, competition,market size and future prospects)

Manufacturing Process

(Step-by-step description of the manufacturing process, plant capac-ity, expansion plans and quality control procedures, etc.)

Production Programme/Sales Revenue

(Plant capacity, capacity utilisation, quantity produced/sold and salerealisation)

Cost of Manufacturing

(Cost of raw material, utilities, manpower, repairs and maintenance,selling and distribution expenses, administrative overheads, intereston loans availed, depreciation and any other expenses)

Profitability Projects

(Sales, cost of manufacturing, tax liabilities, repayments, retainedprofit/loss)

Chapter Nine72

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The Financials of a ProjectReport

A SCAN OF FACTORS PRIOR TO PREPARATIONOF A PLAN

Before preparing a business plan, one must analyse various factorsand related actors. This manual stresses this aspect repeatedly. This chap-

ter analyses factors existing in a district, including other enterprises, particu-larly relating to institution-information-enterprise gaps and problems. Thefindings about raw material stocking and market issues are to be incorporatedin the financials of a business plan in the context of dehydrated vegetableunit and a grain processing enterprise. Consider Patna district in Bihar, wherethe crops grown are vegetables, grains and grams. A study of enterprises inthe region shows that the food processing sector is less developed than theagricultural sector. There are several rice and flourmills. The agriculturalresources are vital raw material for such enterprises. Milling activitiesinclude paddy milling. The by-products are rice, bran and husk. Severaldal mills are also there. Their main activity is green and bengal grammilling.

The State Government encourages self-help groups to set up small foodprocessing units making pickles, spice powder, papads etc. and these enter-prises and others dominate the local market. Institutions/associations at locallevel include industry associations, District Rural Development Agency(DRDA) and financial institutions. According to Government of India’s cap-ital investment criteria, units with investment up to Rs.1 crore in plant andmachinery are small-scale units. Tiny units have investment below Rs.25lakh, while cottage or household enterprises are those operating largely out ofhouseholds.

CHAPTER 10

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Lacunae in Information and Support SystemLinkagesThe main activity of the units here is processing of jams, pickles, papads,spices and rice and dal milling. Within similar product mix, medium andsmaller units cater to the brand and quality conscious affluent sections.Packaging quality is better and prices are higher. In the lower end, tiny andcottage units vie with each other for their market share through lower price andmargins. Their market comprises low income group consumers, who buy non-branded and low priced products. Units without their own marketing outletsundertake distribution through local outlets. The State Government is encour-aging Self Help Groups (SHGs) to sell their products through exhibitions.Most products have simple packing material with the manufacturer’s name onthe pack. ‘Unorganised’ enterprises are hardly aware of food related norms.

Rice and dal mills procure raw material through commission agents. Ricemillers used to sell rice to the Food Corporation of India (FCI) and in the openmarket through commission agents. In the processing sector, rice millers faceproblems like high percentage of brokens and need upgraded technology. Themilling and polishing of paddy require electricity. Consumption of electricityis high in this case. The reason is use of rewound and higher HP motors.

Most milling units face problems with institutional finance. Local suppli-ers largely meet the machine and equipment needs of the units. Also, the mainweakness of enterprises here is the lack of testing facilities and access toinformation on advanced technology, quality and food-related norms. FewSSI units are aware of the Mysore-based CFTRI, which has excellent infra-structure to provide consultancy on technology, equipment design etc. Yet,options like value-added products or reducing ‘brokens’ by involving agen-cies like CFTRI are unexplored. There is a dearth of information on packag-ing to improve shelf life with the support of agencies like DRDA, while thelatter has backed such initiatives in other regions.

Can Policy Incentives Substitute for suchGaps?The Bihar Government offers several special fiscal concessions like sales taxrelief/exemption on purchase of raw material/exemption in excise duty. Fiscalincentives include investment subsidy upto 25 % of fixed investment, subsidybetween 20% and 25% on cost of installing captive power generators, subsidyon cost of preparing feasibility/project reports, subsidy on technical know-how, etc. The Bihar State Industrial Development Corporation offers equityparticipation in ventures.

Chapter Ten74

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The State Government’s five-year policy, effective from 1.1.90, had, in factdecided to continue capital investment subsidy to all new units set up in alldistricts at a rate of 15% of the equity (maximum Rs.1.5 million). This facil-ity is also available for expansion programmes of existing units, provided thecapacity is raised by atleast 50% of the installed capacity. Additional 5%(limited to Rs.5 lakh) capital investment subsidy is given to units located innotified growth centers, units promoted by NRIs and cent percent export–ori-ented units. Additional 10% subsidy (maximum Rs.1 million) is for invest-ment on energy saving schemes based on energy audit reports or otherwise forsmall and medium units. Subsidy on power, water and such utilities is alsoavailable.

However, although incentives are important, there are other aspects alsowhich are crucial. Be it Bihar or Assam, other critical parameters like rawmaterial availability and their prices/quality/domestic market potential/labouravailability need to be considered before structuring the project costs, meansof finance and working capital requirements. On this basis, financial state-ments may be developed with profitability analysis. Such structuring is pre-sented in the form of a pulse processing enterprise in Patna in sub-section 5of this chapter. First, two cases of grain processing units are given here to helpunderstand how not to structure your project costs/means of finance.

INTERNAL FACTORS KILL AN ENTERPRISE:SINHA RICE MILLS, PATNA, BIHAR

Depressed Project Cost and WorkingCapital Finance and hence Means ofFinance: The CulpritThe enterprise was doomed since inception due to underfinance. It faced aproblem in the first two years because of poor monsoon with the failure ofpaddy crop. The paddy prices in other regions were high, while payments weregetting delayed. This resulted in a cash crunch. Then, the bank discontinued its

The Financials of a Project Report 75

Established in 1997 near Patna, the mill was engaged in dehuskingpaddy and rice shelling with an installed capacity of 2,400 MTpaddy per annum. The target market was Patna city. A term loanwas provided by the SFC and working capital by a commercialbank. But by 2001, the unit became unviable.

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cash credit. Written assurances by the promoter to liquidate overdrawal of CClimit in monthly instalments and application for relief were not entertained. Thebankers later froze the account and the unit was tied for working capital. As acumulative effect of delayed payments and high input costs, the unit worked ata very low capacity and incurred huge losses. With no institutional support forworking capital, poor capacity utilisation contributed to the tragedy.

The enterprise closed for three months. But later, bumper harvests of paddymade purchase easier and cheaper. The promoter borrowed money fromfriends in the form of unsecured loans and re-started operations. The mainproblems were the failure of paddy crop for two years and subsequentincrease in input costs. The problem seems external and not internal. In fact,even during a ‘good’ year input prices fluctuate up to 200 per cent dependingon the ‘season’ or ‘non-season’ timing of purchase. In his project report, thepromoter simply took the average of purchase price trends of previous years.Had he taken the weighted average purchase price of the months when a pricelevel prevails, he would have projected a purchase price and working capitaldouble than what he had asked. It was his fault that he did not project hisworking capital needs and margin higher. Besides, he had also misjudged theimportance of a credit strategy to push sales. In other grain milling enterprisesin the region, 70% sales were on two-month credit. His was only 50%, but hehad not even considered credit sale necessary while projecting working capi-tal nor had included the relevant margin in his report submitted to and sanc-tioned by the term lender and banker.

Infuse Funds as Working Capital andFocus on the Procurement front to ReviveManufacturing facilities of the enterprise were good, while the main raw mate-rial, paddy, was available locally. But, resources and equipment do not make anenterprise. He would need, in future, to reinvest all surplus earnings in businessas working capital to enable him to procure and stock raw material when pricesare low and use it over a period of time. Sustainable management is all abouttaking timely decisions and procuring adequate raw material inputs.

At 60% capacity utilisation, sales of basmati, husk, rice barn etc. and paddymilling could have touched Rs.150 lakh. At this level of operation, the enter-prise could earn Rs.20 lakh profit by incurring Rs.130 lakh expenditure.These expenses also cover the liabilities on term loan and working capital. Intwo years, it could have earned Return on Investment (RoI) of 29%.

For a few months, the enterprise could mobilise funds from friends and rel-atives and regularise repayment of dues of term loan and working capital.

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Over two years, the surpluses generated could replace such support. Theirregularity in existing term loan and interest since its disbursement could becorrected during this period. With additional doses of working capital, the unitcould have become viable. Offering cash discount for cash purchase and iden-tifying alternative sources of procurement to avoid adverse input problems inthe region are other options the enterprise could have pursued for revival.

INGTY DAL MILLS, ASSAM: EXTERNAL FACTORSLIKE BAD DEBTS COULD ALSO AFFECTPERFORMANCE

An Analysis of the Enterprise’sPerformance: Indicators of UnsustainabilityThe financial statements of the enterprise for the last two-three years showedthat in 2001–2002 and 2002–2003 it made ‘cash’ losses. An analysis of the struc-tural strength and liquidity viz. ability to meet short-term liabilities, profitabilityand performance of the enterprise is revealing. (Annexure II to this chapter elab-orates on definitions of various management and accounting terms and ratios).

Structural strength: The unit had promoter’s fund of Rs.10 lakh in 2001–2002.However, the accumulated losses by 2002–2003 were Rs.6.62 lakh. Total out-side liabilities had been rising because of non-payment of interest liabilities.

Liquidity: The current ratio viz. current assets over current liabilities was 0.76in 2001–2002 and it declined to 0.52 in 2002–2003, showing that current

The Financials of a Project Report 77

Ingty Dal Mills, a sole proprietory firm, was promoted by Ingty tomanufacture dal, besan and flour with an installed capacity of 12MT/day for dal, 4 MT for besan and 8 MT for flour. This capacityis based on 300 working days in one shift of 8 hours. TheDepartment of Industries and Commerce (DIC) granted permis-sion to the unit to grind wheat in 1997. There are other Roller flourmills in the district for wheat milling. All are operational. This isthe only unit engaged in processing of grams and other gram prod-ucts i.e. dal and besan. The enterprise had potential for the localmarket and was doing well till 2000 and could repay interest andprincipal obligations to institutions in time. Later, payments wereblocked owing to recessionary conditions and the enterprise had tobe closed down due to non-recovery of receivables.

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assets were insufficient to meet current liabilities. Current assets largelyincluded stock and debtors while current liabilities were creditors. Though thepromoters infused Rs.8 lakh into the business in the last three years, the lia-bilities of creditors remained high.

Turnover: Stock of finished goods and receivables for credit sales were highin 2001–2002 and 2002–2003.

Profitability: Since the unit was near Guwahati and the local market had goodpotential, the unit did well initially and the dues were regularly paid upto 2000.Performance deteriorated rapidly due to repayment problems from two majortraders (debtors). A revival plan could have been evolved based on analysis ofpast performance and future projections on various parameters. Evolving cost ofproject and means of finance for revival was possible in the past when financialinstitutions were not finicky about reducing their Non-Performing Asset (NPA)portfolio. Today, most institutions prefer one-time settlement of dues. The onlyoption for evolving, implementing and managing a sustainable project is to struc-ture the cost of project and means of finance by properly estimating the cost ofraw material procurement, working capital etc, as well as income, and decidingon the optimal means of finance through a capital structure analysis.

FINANCIAL VIABILITY OF PREPARATION ANDANALYSIS

The analysis of financial feasibility of a project or business plan helps studya project’s potential from financial angle. It also helps understand invest-ment requirements and its sources. Some major components of financialviability are:

Cost of establishing a project

Means of finance or sources contributing to project cost

Capacity utilisation and income and expenditure estimates on anannual basis

Profitability projections on an annual basis

Income, expenditure and profit projections are made till the period of repaymentto financial institutions. An eight-year period could be ideal. Projections may bemade in such a manner that capacity utilisation improves over the years.Parameters such as, selling price and cost of raw material may be changed everyyear. It is obviously difficult to project the direction or extent of such change. It

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is normally assumed that increase in costs over time will be matched withincrease in selling price. And so, they can be assumed constant over the years.

The following sub-sections introduce major components of financial viabilitypreparations and assessment.

Project CostProject cost comprises investment for establishing an enterprise. The signifi-cant elements of project cost are land and site development, building, machin-ery, other fixed assets, technical know-how expenses, preliminary and pre-operative expenses, including interest during construction period, workingcapital margin and contingency costs.

Certain administrative and financial expenses are incurred before produc-tion starts. These are Preliminary and Pre-operative (P&P) expenses. Theyinclude rent, interest during construction, Pollution Board licence, collateralrelated expenses like stamp duty, trial production expenses, deposits for utili-ties and processing fees of financial institutions.

Contingency is a provision made for escalation of cost of equipment, forinstance, in the lag between plan preparation and project implementation.

Comparative quotations from several suppliers may be invited to convincelending institutions about cost of plant and machinery. Institutions, sometimes,specify ‘acceptable’ suppliers. For valuation of land and building, lender offersloan against the ‘book price’ as per documents and not ‘market price.’ A pro-moter should know these aspects and work closely with lending institutions.

The Financials of a Project Report 79

These are the key components of project cost:

1. LAND AND SITE DEVELOPMENT: Cost of land, legal charges,levelling and developing charges, fencing etc.

2. CIVIL WORKS: Factory building, office, warehouse, drainagefacilities, etc.

3. PLANT AND MACHINERY: Price of machinery/equipment andexcise duty, sales tax, freight, octroi and installation costs.

4. OTHER FIXED ASSETS: Furniture, office equipment like faxmachines, vehicles, laboratory and pollution control equipment,diesel generating sets, etc.

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Means of FinanceThe common means of finance are term loan, subsidy or equity. State finan-cial or industrial development corporation and even commercial banks offerterm loan against project cost. Repayment terms vary with institutions andwith schemes. The MoFPI offers subsidy on a proportion of the cost of fixedassets. Equity capital is promoters’ contribution or monetary contribution byothers in terms of deposits and unsecured loans. The minimum amount of pro-moter contribution, irrespective of such private participation, could be speci-fied at a minimum 17.5 per cent of project costs by lending institutions.

Working Capital, Relevant Margin and itsAssessmentFunds required to operate an enterprise is Working Capital. A certain minimumamount of working capital is permanently invested in business. The entrepre-neur will have to contribute this fund initially. Working capital margin, whichis included in the project cost, is estimated on the basis of the year when theenterprise breaks even. The estimation of this margin depends on projectionsof working capital needs:

Chapter Ten80

Projecting output over different years of operation.

Projecting raw material input needed and unit price of each inputrequired to produce output and the amount of material an enterprisemust carry, given first year production targets. For the latter, the‘lead’ time between order placement and receipt should be consid-ered. Enterprises in the food processing sector need to carry high rawmaterial inventory, given the seasonality of production. Price ofinputs vary drastically and enterprises need to stock up to reap advan-tage of favourable prices. The value of raw material, to be stocked,should be ascertained, as also that of other consumables and packingmaterial to be stocked up.

Projecting value of goods under production. This will depend on thelength of the manufacturing cycle. For such valuation, direct costs ofraw material, wages and utilities should be considered. You may ignoredepreciation, administrative and marketing expenses.

Projecting the level of stock of finished goods. An enterprise produc-ing in anticipation of demand, as do most processing enterprises, maycarry substantial stock of processed/semi-processed finished goods.The quantity of such stock should be valued at cost, viz. direct andindirect, sans depreciation.

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The Financials of a Project Report 81

Projecting total sales on credit in terms of duration or amount of out-standing receivables. Only production cost of sales is considered.

Projecting the monthly wages and salary expenses, power/fuel, otherutility related costs, administrative expenses, selling, repair/mainte-nance expenses.

The sum total of the value of investment forecasted for each of thecomponents of raw materials as indicated in the second bullet pointfor one operating cycle, should be considered while projecting therequirement.

Working Capital Requirement for Priya Foods, Chennai

1. Even at 30% utilisation of its capacity, the enterprise should be gen-erating profits. As per product-mix annual capacity amounts to745.4 tonnes.

2. Annual raw material stock in the first year of carrots, onion, potato,garlic and ginger amounts to 223.6 tonnes. Raw material stockingperiod is projected at two months. This is valued at Rs.5.41 lakh(viz. Rs.32.43 lakh divided by 12 months and the resultant estimatemultiplied by 2).

3. Value of Consumables and / Packing Material Stock in terms of onemonth stocking period:

Consumables: Rs.5,000

Packing material: Rs.19,000

4. Value of Stock of Goods in Process in the first year

a) Manufacturing cycle = 1 day

b) Quantity of goods in = 0.745 tonnes process in the first year

c) Price of Goods in Process = Rs.17000 per tonne

d) Working capital on account of Goods in Process equals approxi-mately Rs.13,000

5. Value of stock of Finished Goods in the first year:

a) Carrying of Finished Goods = 1/2 month

b) Price of Finished Goods = Rs.26000/-

c) Quantity of Finished Goods to be carried = 9.32 tonnes

d) Price of Finished Goods = Rs.24,000 per tonne

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A financial institution may refuse working capital support for expenses eitheron wages/salary or administrative expenses. Such policy may change withtime. Around 60–70% support for most working capital components may besecured. Anticipated institutional support and working capital margin forPriya Foods is presented in the following table:

Chapter Ten82

e) Working capital on account of finished = Rs.2.24 lakhGoods

6. No Working Capital is required on account of credit sale as allsales are assumed to be on cash basis.

7. Wages and Salary for one month (first year) = Rs.70,000/-

8. Fuel, light, power, utilities for one month = Rs.1,00,000/- (first year)

9. Administrative and selling expenses and = Rs.32000/- repairs and maintenance for one month(first year)

10. Working Capital requirement (total 4 to 9) = Rs.10.04 lakh/-

1. Raw Material 60 5.41 50% 2.71 2.70

2. Consumables 30 0.05 30% 0.03 0.02

3. Packing Material 30 0.19 30% 0.13 0.06

4. Stock of Goods inProcess @ Rs.17,000per tonne 1 0.13 30% 0.09 0.04

5. Stock of FinishedGoods @ Rs.24,000per tonne 15 2.24 30% 1.57 0.67

6. Wages & Salary 30 0.70 100% - 0.70

7. Utilities 30 1.00 100% - 1.00

8. Production andAdministrativeExpenses 30 0.25 100% - 0.25

9. Repairs andMaintenance - 0.07 100% - 0.07

Total 10.04 4.53 5.51

Table 10.1 Working Capital Contributors for Priya Foods, Chennai –Approximate Estimates (rounded off).

Sr. No. Component No. of days Amount Margin Bank Loan Margin(Rs. in lakhs in first year)

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Support for Working Capital and Term LoansTo sanction a term loan, a term lender may ask the promoter to submit a sanc-tion letter of a bank approving, in principle, a working capital facility for aproject. The project appraisal pursued by a term lender is considered prior tosuch ‘in-principle’ sanction. A bank may still disagree on projections oncapacity utilisation or profitability, and hence on support. Many enterprisesare still-born despite receiving working capital support as they receive andaccept less than requirements. SFCs and institutions like NSIC and manybanks offer both term and working capital loans. They offer composite loans.

An enterprise may also secure deposits or private loans at a certain interestbut a lending institution invariably insists that such private loans remain unse-cured in terms of assets of the project as they will be mortgaged to the lend-ing institution.

Agencies like NSIC also support hire purchase financing of machinery.Special assistance is also available under several schemes for women entre-preneurs. Agencies offering venture finance for risky projects with new tech-nology also exist. For instance, there is the Technology Development andInformation Company of India (TDICI), an ICICI-sponsored company inBangalore. They remain partners in profits and losses. Conventional financialnorms are not followed under this financing pattern.

Extent of Loan or Debt Financing: Normsand its Sanction and DisbursementThe extent of term loan that can qualify depends on norms of Debt-EquityRatio, minimum Promoter Contribution, policy of lending institutions aboutmargin against specific components of project costs and the fixed asset cov-erage security margin for the lender.

A 2:1 Debt-Equity Ratio may be acceptable to a lender. The term lender has apolicy on contribution pegged between 15% to 22.5%. Component-wise normpolicy about margin against project cost may vary over time between institu-tions. Land, building, machinery, equipment and other assets may be mortgagedwith the term lender as security. Lenders accept no security for working capitalmargin or preliminary/pre-operative expenses. The promoter may have to con-tribute as these assets cannot be disposed off to recover dues. The term loan ispegged at 30–40% less than the value of fixed and saleable assets. While alender may offer extra loan against a cost overrun, assuming project viability isnot affected, it is not responsible for delay in receipt of subsidy.

The Financials of a Project Report 83

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A loan application of a lender will include standard questions about thecomponents of a project report. There could be questions about promoter-pro-file and experience, financial strength, personal assets/liabilities. Homeworkon the project should be thorough. Also, the loan is disbursed in stages. It isnecessary to study disbursement procedures and fund-position of the lender.The term lender may need collateral security besides the mortgage of assetsand may include personal residence or other personal assets. SIDBI supportsterm loans without collateral in certain schemes.

Financial Viability of Priya Foods, ChennaiThe project cost as well as means of finance for the company is given below:

Table 10.2 Project Cost—Priya Foods, Chennai

Means of Finance—Priya Foods, Chennai

Chapter Ten84

1. Land (6000 sq. m. @ 3.00Rs.50 per sq. m)

2 Site Development 0.12

3. Civil Works 20.20

4. Plant and Machinery 72.51

5. Other Fixed Assets 2.80

6. Preliminary and 5.40Pre-operative Expenses

7. Working Capital Margin 5.50

8. Contingency and Escalation @ 9.6810% of (1) to (5)

Total 119.21

Particulars Cost(Rs. in lakh)

Promoter’s Equity 26.82

Term Loan 62.39

Investment Subsidy 30.00

Total 119.21

Sources of Finance Amount (Rs. in lakh)

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The structuring of a project’s finances should consider the cost of capital. Thecost of capital is the minimum return expected by its suppliers. The expectedreturn depends on the degree of risk assumed by the investor. The cost of capitalfrom different sources varies depending on risk level. In the case of a promoter’sown investment, cost of capital is the opportunity cost or the rate of return fore-gone on an alternative project/ investment option of similar business risk.

Capacity Utilisation and Income EstimateThe table 10.3 below shows capacity and product-mix for Priya Foods, Chennai.

Table 10.3 Capacity, Product-mix and Income at Full Capacity:Priya Foods, Chennai

The installed capacity based on product mix is 745.4 tonnes/year. High capac-ity utilisation cannot be achieved in the first year. Market constraints andteething technical problems always exist. Table 10.4 shows year-wise capac-ity utilisation and income estimates of Priya Foods.

Table 10.4 Projected Production and Income—Priya Foods, Chennai

The Financials of a Project Report 85

Onions 360.00 35000 126.00

Garlic 228.60 30000 68.58

Potatoes 92.30 32000 29.54

Peas 20.00 75000 15.00

Carrots 17.00 90000 15.30

Lady’s fingers 15.00 80000 12.00

Ginger 12.50 100000 12.50

745.40 278.92

Vegetable Output Price Amount (tonnes) (Rs./tonne) (Rs. in lakh)

Installed capacity 745.4 745.4 745.4 745.4 745.4 745.4 745.4 745.4

Capacity utilisation 30% 40% 50% 60% 60% 60% 60% 60%

Production (tonnes) 223.6 298.16 373.7 447.24 447.24 447.24 447.24 447.24

Income 83.68 111.57 139.46 167.35 167.35 167.35 167.35 167.35

Year 1 2 3 4 5 6 7 8

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Sale prices may be fixed at the rate the competitors’ charge. Production esti-mates and sale price are considered to project income. After this, expendituresare projected. Expenditures and their basis are:

Raw material: Proportional to production quantity.

Consumables and packing materials: Depend on production quantitybut not proportionately.

Power, fuel and utilities: Depend on production quantity but not pro-portionately.

Wages and salary: Partially related to production quantity.

Repairs and maintenance: Expenses on plant, building and other assetsincrease over time.

Rent, taxes and insurance: These are fixed expenses.

Administrative expenses: Fixed.

Selling expenses: Include fixed expenses as advertising and salesmen’ssalary as well as variable expenses like commission to dealers.

Interest on term loan: Outstanding loan due.

Loan repayment plan is fixed by the term-lending agency and interest onworking capital fixed by working capital provider. Interest rates depend onworking capital requirement, which in turn depends on sale/production quan-tity and working capital margin.

There are cash and non-cash expenses. Cash expenses have to be projectedannually for raw material, packing, utilities, wages/salary, repairs/mainte-nance, administrative and selling expenses, interest on loan, rent, etc. Incomeminus such cash expenses is cash profit. To account profit, both cash and non-cash expenses are deducted from income. Non-cash expenses include depre-ciation, amortisation of P&P expenses and write-off of technical know-howexpenditure. Value of fixed assets like building, machinery and office equip-ment depreciates every year. Depreciation in ‘accounting’ measures suchreduction in the asset value. It also helps build a cash reserve for replacementof the existing asset later. Land’s value does not depreciate and no deprecia-tion is provided for it. Amortisation or gradual write-off of intangible assetsare stipulated in income tax rules, viz. how and by how much every year. Onemay write off P&P and technical know-how expenditures in 10 and 6 yearsrespectively. Contingency/escalation expenditures may be added to estimateasset cost and depreciation is provided on the resultant amount.

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Depreciation can be provided by two methods, straight line (SL) and writ-ten down value (WDV). Depreciation rates are stipulated by law and varyaccording to asset and industry. The WDV method enables making substan-tial provisions in the initial years, thereby increasing expenditure and reduc-ing accounting profit, and hence, income tax. The SL method may be used toprepare a projected profit statement, while the WDV may be used to estimateincome-tax obligations.

Income Tax ProjectionsThe tax burden can be estimated as follows:

The WDV depreciation amount is subtracted from profit before tax. Apercentage of preliminary and know-how related expenditure may bededucted every year as per norms to correspondingly reduce taxableprofit before tax. It is also possible to carry forward losses. Lossesincurred in a particular year may be offset against profit in the follow-ing years.

Tax incentives offered for enterprises in a region or sub-sector shouldbe incorporated and subtracted.

Tax calculation depends on tax rate, which depends on assessee status andlegal form of an enterprise’s constitution. It may be a soleproprietary, a Hindu Undivided Family (HUF), a private or public limitedcompany or a cooperative society. Tax rates vary accordingly. Tax isdeducted from profit before tax (PBT) to arrive at profit after tax (PAT).

Financial Viability and Cash Flow of anEnterpriseViability from the lender’s point of view is the ability to repay the term loan.A financial ratio measures the enterprise’s capacity to meet term loan andinterest. Related obligation is the Debt Service Coverage Ratio (DSCR). ADSCR of 1 implies that the enterprise will earn cash to exactly meet all termloan and interest obligations. DSCR of about 2 is considered adequate. Thehigher the DSCR, the better the project.

There are various ratios like income-capital ratio, PBT to turnover ratio andReturn on Investment (RoI) ratio, which reflect profitability:

A turnover capital ratio shows annual income as against project cost.A small enterprise may earn only low levels of profit or even incur losswith slightest of adversity.

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PBT to turnover ratio indicates profitability of enterprise operations. A0.08 ratio implies that even a small adverse movement in selling pricemay result in a loss.

Interest on term loan added back to PBT is the RoI. Return divided byinvestment gives RoI. RoI may be estimated every year.

The projects and estimates over above sub-section 4.1 to 4.8 are the basis toestimate cash flow. Table10.5 presents the cash flow of Priya Foods. As thereis no cash deficit, there will be no need to generate it to fill it.

Table 10.5 Priya Foods, Chennai—Cash flow

Risk and Sensitivity Analysis of anEnterpriseThis analysis is the means to study business risk. Each level has a break-evenpoint. The higher the break-even in terms of capacity utilisation, the greaterthe degree of risk. Break-even for Priya Foods is about 27.7%.

Chapter Ten88

Inflow

Equity 26.83 - - - - - - - -

Subsidy 30.00 - - - - - - - -

Term loan 62.39 - - - - - - - -

Bank loan - 4.50 1.50 1.50 1.50 - - - -

Profit - 1.17 15.64 32.44 47.87 48.32 48.77 49.22 48.67before tax

Depreciation - 9.96 9.96 9.96 9.96 9.96 9.96 9.96 9.96

Total inflow 119.22 15.63 27.10 43.90 59.33 58.28 58.73 59.18 58.63

Outflow

Capital 113.71 - - - - - - - -expenditure

Working capital - 10.00 13.33 16.67 20.00 - - - -

Term loan - - 12.39 10.00 10.00 10.00 10.00 10.00 10.00repayment

Tax - 0.07 0.90 1.87 2.75 2.78 2.80 2.83 2.80

Dividend - - 4.02 5.36 5.36 5.36 5.36 5.36 5.36

Total outflow 113.71 10.07 30.64 33.90 38.11 18.14 18.16 18.19 8.16

Net inflow 5.51 5.56 (3.54) 10.00 21.22 40.14 40.57 40.99 -

Year 0 1 2 3 4 5 6 7 8

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At break-even level of capacity utilisation, surplus or contribution or incomeminus total variable expenses equals to total fixed costs. The break-evenanalysis thus implies risk analysis indicating the extent of possibility to reduceexpenses. Limited ability to do so implies a high break-even and risk level.Through sensitivity analysis, it is possible to study the impact of changes inthe assumptions on enterprise performance and viability. The impact ofadverse changes in a few variables may be studied. The risk is low if viabil-ity sustains despite significant changes in variables. In contrast, if a negligi-ble fall in selling price reduces DSCR to an unacceptable level, it means aheavy risk. A sensitivity analysis for Priya Foods is presented below. Table10.6 considers a 10% possible fall in capacity utilisation.

Table 10.6 Sensitivity Analysis:(Priya Foods, Chennai)

A sensitivity analysis helps isolate variables critically determining the extentof profits.

The Financials of a Project Report 89

1. Drop in Profit Before Tax Rs.95.36 lakh

2. Drop in Profit After Tax Rs.89–99 lakh

3. Profit After Tax over 8 years Rs.185.42 lakh

4. Return on Investment (after tax) 24.66%

10 per cent fall in capacity utilisation throughout projected period

20 per cent rise in raw material cost throughout the projected period1. Drop in Profit Before Tax Rs.90.80 lakh

2. Drop in Profit After Tax Rs.85.58 lakh

3. Profit After Tax over 8 years Rs.188.72 lakh

4. Return on Investment (after tax) 25%

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Financial Viability: A Summary Installed capacity is 745.4 tonnes/year (based on product-mix). Financial via-bility of Priya Foods is given below:

The following sub-section elaborates the financial scheme of a project report.

A CASE ON DEVELOPING THE FINANCIAL SCHEMEOF A PROJECT REPORT OR BUSINESS PLAN

An entrepreneur plans to establish a minipulse processing unit. Advanced‘Durham’ quality pulse is to be processed. The enterprise, to be established inan industrial estate in Guwahati, is to have an installed capacity of 24,000kgper annum working in double shifts (16 hours) for 310 days a year. It is tooperate at 60% of installed capacity in the first year, 70% the second year and80% in future years. The project expense of land cost, site development and

Chapter Ten90

Project cost 119.21

Means of finance

Promoter’s equity 26.82

Term-loan 62.39

Investment subsidy 30.00

Capacity utilisation

1st year 30%

2nd year 40%

3rd year 50%

4th year onwards 60%

Average turnover (Rs.) 145.18

Debt service coverage ratio 3.21

Turnover capital ratio 1.22

Profit before tax to turnover ratio 0.257

Cash balance at the end of 8 years (Rs.) 168.60

Break-even point 27.76%

Particulars Amount (Rs. in lakh)

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fencing is Rs.17,000. One thousand and fifty kg of whole pulse yields 1,000kg of processed dal. The price of whole-pulse is Rs.62 a kg. It is consideredsufficient to carry raw material and finished goods stock for 30 days. The pro-duction cycle time is two days.

The cost of constructing buildings, including warehouse, office and factoryis Rs.2 lakh, while that of stores, consumables and packing is estimated atRs.2 per kg of output. The stocking period of these items is believed to be thesame as that of raw material. The cost of machinery and equipment is Rs.4.6lakh and includes excise duty. Besides, sales tax and freight, insurance andoctroi are estimated at 5%, each, of post-excise duty of machinery.

Machinery and equipment related installation expenses are aroundRs.30,000. The average finished goods inventory is estimated at one monthand 50 per cent of total sale is expected to be on credit basis, while balancewill be cash sales. The credit sale will carry credit at an average of 30 days.Rs.4,000 is required as expense on office furniture, while other such miscel-laneous assets are likely to cost Rs.6,000 more.

A provision of 10% each, against possible price escalation/contingencies infixed/miscellaneous assets can be made.

The term lender is expected to offer loan up to 75% of project cost. The StateBank of India, the potential working capital provider, gives assistanceup to 75% for goods in process and finished goods. The bank supports upto 70% for raw material, stores, packing material and 60% of value ofsundry debtors or accounts receivables. The rate of interest on workingcapital is 17%.

Salary and wages are estimated at Rs.7,000 a month, while administrativeexpenses at Rs.3,000. The power consumption will be 15 units a day. The sub-sidised power tariff is Rs 3 per unit. The selling commission to be paid isRs.2.50 per kg of output. Repairs and maintenance are likely to touchRs.30,000 per annum for the first year and rise by Rs.2,000 thereafter.Construction period of factory is 6 months from sanction of term loan. Termloan interest is 12%. First registration and other preliminary expenses are putat Rs.4,000. Rs.1,000 will be needed in trial production.

The selling price of dal is Rs.110 a kg. The income tax rates for taxableprofit is in the range of Rs.0.75 to Rs.1.0 lakh, Rs.1.00 to Rs.1.25 lakh,Rs.1.25 lakh to Rs.1.75 lakh is 10%, 13% and 15% respectively.

To estimate the financial viability of the project, various statements areneeded: project cost, working capital, means of finance, capacity utilisationand income projections, expenditure projections, profit and tax projections,

The Financials of a Project Report 91

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debt service coverage, profitability indicators, cash flow projections andbreak-even levels.

The sub-sections below present relevant statements. The values have beenrounded off for easy comprehension.

Project Cost

Table 10.7 Project Cost Estimates (Approximate Estimates)

Chapter Ten92

(Rs. in '000)

(I) Land and Fencing 17

(II) Building 200

(III) Machinery and Equipment (M & E)

* Price inclusive of duty 460

* Sales-tax @5% 23

* Freight, Insurance, Octroi @ 5% 23

* M & E installation related expenditure 30

536

Miscellaneous

(IV) Assets (total) 10

(V) Escalation & Contingencies 76(10 percent of above total)

(VI) Preliminary & Pre-operative Expenses 5

* Firm-registration and—trial-production

* Interest during project implementation period 18(construction and installation of machinery)

(VII) Working Capital Margin 91

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Table 10.8 and Table 10.9 below indicate calculations of two components:interest during implementation and working capital margin. Their values areincorporated in Table 10.7.

Table 10.8 Interest During Period of Implementation

The Financials of a Project Report 93

(I) Land and Site Development 17,000

Building 2,00,000

Plant & Machinery 5,36,000

Miscellaneous Assets 10,000

Preliminary and pre-operative expenses 5,000(Excluding interest during construction)

Escalation and Contingency 76,000

Total of (1) above 8,44,000

(II) Term loan @ 70% of (I) (Rounded off) 5,91,000

(III) Implementation Period 6 months from sanctionof term loan

(IV) Average period for which interest during construction period on term loan should be computed is 3 months. Interest during construction period is (approximately) 18,000

Item Particulars CostNo. Rs.

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Table 10.9 Working Capital—Estimation

Chapter Ten94

i Capacity utilisation and output: 60%, or 14,400 kgs. per annum.

ii Annual raw material requirement: 15,120 kgs @ Rs.62 per kg.

iii Desirable raw material carrying level: one month(15,120 ÷ 12 viz. 1260 kgs.)

iv Value of raw material which will be kept in stock(1260 kgs. × Rs.62 viz. Rs.78,120)

v Annual value of stores, consumables, packing-material(Rs.2 × 14,400 kgs) is Rs.28,800. Desirable carrying level:one month value of stores, consumables and packing material(Rs.28,800 ÷ 12) as stock equal Rs 2,400

* Goods in Process:

a) Manufacturing Cycle: 2 days

b) Quantity under manufacturing cycle

c) Direct cost of 14,400 kgs. of output

Raw Material (15120 × 62) 9,37,440

Stores, Consumables, Packing (14400 × 2) 28,800

Wages (Rs.7000 per month × 12) 84,000

Power (15 units per day × 300 days × Rs.3.00 per Unit) 13,500

10,63,740

d) Direct cost of one kg. of output: Rs. 73.87

e) Direct cost of goods in process (96 Kgs.): Rs. 7,092

* Finished goods:

i) Desirable carrying level: One month (1200 kgs)

ii) Direct cost of 1200 kgs. of output (1200 kgs. × Rs. 73.87):Rs. 89,000 (approximately)

iii) Other Indirect Cost (one month) Administration: Rs. 3,000

14400 × 2

300= 96 kgs

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The Financials of a Project Report 95

Selling Expenses: Rs. 6,000

Interest on Term Loan (Adhoc) Rs. 6,000

Interest on Working Capital Loan (Adhoc) Rs. 3,000

Rs. 18,000

iv) Total (direct + indirect) cost of 1200 kgs of outputexcluding depreciation Rs. 1,07,000

* Account Receivables:

i) Cost of a month's sale Rs. 1,07,000

ii) The cost of credit sales (50 per cent) Rs. 54,000

* Wages and Salary (one month) Rs. 7,000

* Electricity (one month approximated) Rs. 1,000

* Administrative, Selling Expenses, Repairs Rs. 9,000and Maintenance

Gross Working Capital Requirement (approximately)

Component Rs.

Raw Materials 78,000

Store, Consumables & Packing Materials 2,000

Goods in Process 7,000

Finished Goods 1,07,000

Account Receivables 54,000

Wages and Salary 7,000

Electricity 1,000

Administrative and Selling Expenses,

Repairs and maintenance 9,000

Total 2,65,000

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The working capital requirement and margin that may have to be contributedby promoters is in Table 10.10 below:

Table 10.10 Working Capital—Contributors

(Amount in Rs.)

The project cost is summarised in the following Table 10.11:

Table 10.11 Project Cost

Chapter Ten96

1 Raw material 1260 kgs 78000 70% 54600 23400 (@ Rs. 62 per Kg.)

2 Store, Consumables — 2000 70% 1400 600and PackingMaterials

3 Goods in Process 2 days 7000 75% 5250 1750

4 Finished Goods 1200 107000 75% 80250 26750

5 Account 600 kgs 54000 60% 32400 21600Receivables

6 Other Expenses (Wages 1 month 17000 None None 170007000, Power 1000,Admn. 3000, Selling3000, Repair & Maintenance 3000)

Approximate Total 265000 174000 91000

Sr. Requirement Quantity Total Norm for Amount of Promoter'sNo. Bank Bank Contribution

Assistance Assistance (Margin)

Building 200

Machinery and Equipment 536

Miscellaneous Assets 10

P & P Expenses 23

Escalation & Contingency 76

Working Capital Margin 91

Total 953

Land and Fencing 17(Rs. in ’000)

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Means of Finance

Capacity Utilisation and Income EstimateA capacity utilisation and income estimate statement is in Table 10.12 below:

Table 10.12 Capacity Utilisation and Income Estimate

Installed capacity is 24000 kgs / year. Capacity utilisation and output esti-mates in this circumstance are:

Selling Price: Rs.110 per kg.

Income Estimates given selling price of Rs.110 per kg. is

Expenditure EstimatesThe expenses, raw materials, power, fuel and utilities, stores, consumables andpacking material are considered proportional to production levels. Theexpenses also include salary and wages. The term lender offers a moratoriumperiod of 2 years when interest payments alone have to be made.

The estimates the promoter needs to incorporate in the case of depreciation isgiven below. It is necessary to consult an updated tax manual to incorporateprevailing rates.

The Financials of a Project Report 97

Year 1 2 3 4 5 6 7 8

I Capacity 60% 70% 80% 80% 80% 80% 80% 80%Utilisation

II Output 14400 16800 19200 19200 19200 19200 19200 19200

I Year 1 2 3 4 5 6 7 8

II Income 1584 1848 2112 2112 2112 2112 2112 2112

Financial institutions expect promoters to contribute a minimum of 17.5%of total project cost, irrespective of extent of subsidy. Subsidy, therefore,reduces equity required to such extent and balance goes to reduce debt. Forthe purpose of illustration, subsidy is not considered. Hence, at 3:1 debt-equity ratio, the term loan is about Rs.7.15 lakh while equity contributionis Rs.2.38 lakh.

(Rs in ‘000)

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Table 10.13 Depreciation Rate (Indicative)

Table 10.14 below, proportionately allocates about Rs.76,000 of contingencyand escalation @ about 10% to various assets.

Table 10.14 Allocation of Contingency And Escalation To VariousDepreciable Assets

1 Buildings 10% 2.3%

2. Machinery and 33.33% 8.33%Equipment

3 Miscellaneous Assets 10% 2.3%

Assets WDV Rate Sl. Rate

Building 200 20 220

Machinery and 536 54 590Equipment

Miscellaneous Assets 10 1 11

Item Value Allocation Value of assets fordepreciationpurposes

(Rs. in ‘000)

Chapter Ten98

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Calculation of Depreciation [WDV]

The income and the expenditure statements help get a statement of profitbefore tax. To compute tax obligations, depreciation levels also need to beestimated. Depreciation rules may change with time. Section 32 of theIncome Tax Act lays down income tax rates. Under the SL method, depreci-ation rate is applied to the asset’s annual acquisition value every year. UnderWDV, it is computed on the written down value or an asset’s balance value.Further, 8.33% SL method rate and 33.33% WDV rate is almost the same, asboth reduce the asset value to almost nil in 12 years.

While preparing income, expenditure and profit statement, the SL methodis used. Under this, the annual depreciation value remains constant andhence it is possible to judge the impact of annual improvement in capac-ity utilisation on profit. To compute taxable profit, it is necessary to use WDV.

The Financials of a Project Report 99

Building 220 10.00% Dp. Val 220 198 178 160 144 130 117 105

Depn 22 20 18 16 14 13 14 11

W.D.V. 198 178 160 144 130 117 105 95

Machinery 550 33.33% Dp. Val 550 367 245 163 109 73 49 38

Depn 183 122 82 54 36 24 16 11

W.D.V. 367 245 163 109 73 49 38 22

Equipment 40 100.00% Dp. Val 39.6 - - - - - -

Depn 39.6 - - - - - -

W.D.V. 0 - - - - - -

Miscellane- 11 10.00% Dp. Val 11 10 9 8 7 6 5 4

ous Assets Depn 1 1 1 1 1 1 1 0

W.D.V. 10 9 8 7 6 5 4 3

Item Value Rate Year wise Depreciation[%]

1 2 3 4 5 6 7 8

(Rs. in ‘000)

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Profit is income less direct and indirect expenses during production.Depreciation is an amortised expense and written off. Other expenses have alsoto be deducted to assess profit before tax. Fixed assets entail depreciation. P&Pexpense requires amortisation. This is for preliminary and not pre-operativeexpenses like on establishment and interest during construction, which can beadded to fixed asset value and then depreciation computed. For business planpurposes, P&P expenses may be amortised or deducted from profit in 10 equalannual instalments as amortisable. All preliminary and prospective expenses,including interest during construction, are amortised at 10% p.a. in this project.

The term loan repayment is made over the year. Repayment is not made inthe beginning of the year. Therefore, half repayment amount is deducted fromthe outstanding term loan at the beginning of the year and the interest is com-puted on the balance amount.

Table 10.15 The Solution Interest Burden And Loan Repayment

Term Loan : 715Working Capital loan (First Year) : 174

I. Interest on Term Loan

II. Interest on Working Capital Loan

III. Total Interest (Term-Loan and Working Capital)

Chapter Ten100

Outstanding 715 715 650 520 390 260 130 Nil Term Loan

Term Loan - 65 130 130 130 130 130 NilRepayment During the Year

Interest @ 86 82 70 55 39 23 8 Nil12% p.a.

Year 1 2 3 4 5 6 7 8

Working 174 203 232 232 232 232 232 232 Capital Loan

Interest 30 35 39 39 39 39 39 39@ 17%p.a.

Year 1 2 3 4 5 6 7 8

Total Interest 116 117 109 94 78 62 47 39Payment

Year 1 2 3 4 5 6 7 8

(Rs. in ‘000)

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The Financials of a Project Report 101

Table 10.16 Expenditure Statement: The Solution

Tax Computation for the ProjectTax computation for the project is shown in the following table:

Table 10.17 Tax Computation (Illustrative)

Raw Material 987.4 1093.7 1249.9 1249.9 1249.9 1249.9 1249.9 1249.9

Stores, Consumables & 28.8 33.6 38.4 38.4 38.4 38.4 38.4 38.4Packing Materials

Power 162 189 216 216 216 216 216 216

Wages and Salaries 84 96 108 116 124 132 140 146

Repairs and 30 32 34 36 38 40 42 44Maintenance

Rent, Taxes & 12 13 14 15 16 17 18 19Insurance

Dt. Admn. Expenses 24 26 28 30 32 34 36 38

Selling Exp. 36 42 48 48 48 48 48 48

Interest on Term Loan 86 82 70 55 39 23 0 0

Interest on Working 30 35 39 39 39 39 39 39Capital

Depreciation 92 52 52 52 52 52 52 52

P&P Amortisation 2 2 2 2 2 2 2 2

Total (approximate) 1524 1696 1899 1897 1894 1891 1889 1894

YEAR/ Year Year Year Year Year Year Year YearEXPENDITURE 1 2 3 4 5 6 7 8

Profit before tax 60 152 213 215 218 221 223 218

Excess of WDV over SL (154) (91) (49) (19) - (14) (23) (30)

Depreciation carry (94) (94) (33) - - - - -forward loan

80 HHA Deduction - - (26) (39) (44) (47) (49) (50)

80 I Deduction - - (21) (31) (35) (38) (39) (40)

Taxable Profit (94) (33) (84) (126) (139) (150) (158) (158)

Tax - - (8) (19) (23) (23) (25) (25)

Profit After Tax 60 152 205 196 197 198 198 193

YEAR 1 2 3 4 5 6 7 8

(Rs. in ‘000)

(Rs. in ‘000)

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Table 10.18 The Solution: Profit Statement

Debt Service Coverage RatioThe single most important parameter is an enterprise’s ability to repay term-loan in terms of principal and interest. A financial ratio, which measuresenterprise capacity to meet term-loan-cum-interest and other long-term com-mitments/obligations, is called Debt Service Coverage Ratio (DSCR). Theterm lender prefers a project in which even if there is some slide back in pro-jected performance, it will generate enough cash surplus to meet the dues. ADSCR of 1.7 may be considered as minimum.

Table 10.19 The Solution: Debt Service Coverage Ratio

Chapter Ten102

i. Cash Accrual 154 206 259 250 251 252 252 247 1624

ii. Interest on Term- 86 82 70 55 39 23 8 - 363loan (pre-tax)

iii. Term-loan – 65 130 130 130 130 130 – 715Repayment (post tax)

iv Debt-service 2.79 1.96 1.60 1.66 1.72 1.80 1.88 1.83Coverage Ratio -(i+ii/ii+iii)

v Average Ratio Need be Estimated

YEAR 1 2 3 4 5 6 7 8 Total

(Rs. in lakh)

Income 1584 1848 2112 2112 2112 2112 2112 2112 16104

Expenditure 1524 1696 1899 1897 1894 1891 1889 1894 ---

Profit before Tax 60 152 213 215 218 221 223 218 1520

Tax - - (8) (19) (23) (23) (25) (25) ---

Profit after Tax 60 152 205 196 197 198 198 193 ---

Non-cash 94 54 54 54 54 54 54 54 ---Expenditure(Depreciation and P&P Amortization)

Cash Profit 154 206 259 250 251 252 252 247 ---

YEAR 1 2 3 4 5 6 7 8 Total

(Rs. in ‘000)

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Loan Repayment is Post-Tax, but interest is tax deductable. Hence allinflows/outflows be shown uniformly on pre-tax or post-tax basis.

Profitability Indicators

Table 10.20 Profitability Ratios For The Project

Cash Flow StatementCash Flow Projection for the Project is presented in the next table. There is acash surplus every year. And, the enterprise will have a cash balance ofRs.12,58,800 at the end of seven years upon meeting loan-repayment andinterest liability.

The Financials of a Project Report 103

Turnover 1.66 1.94 2.22 2.22 2.22 2.22 2.22 2.22 2.11Capital Ratio

Profit Before 0.44 0.08 0.19 0.10 0.19 0.19 0.19 0.10 0.09Tax to Turnover

YEAR 1 2 3 4 5 6 7 8 Total

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Risk or Break-even AnalysisThe projected cash-flow statement and break-even analysis for the project ispresented below.

Table 10.21 Projected Cash Flow Statement

Chapter Ten104

CASH INFLOW

Prom. Cap. 238 - - - - - - - - 238

Term Loan 715 - - - - - - - - 715

Working Cap. - 174

Prof. B.T. - 60 152 213 215 218 221 223 218 -

Depreciation - 92 52 52 52 52 52 52 52 -

P&P Amortn. - 2 2 2 2 2 2 2 2 -

Other - - - - - - - - - -

Total 953 328 206 267 269 272 275 277 272

CASH OUTFLOW

Increase in Working Cap. - 265 - - - - - - - -

Cap. Exp. 862 - - - - - - - - -

Tax - - - 8 19 21 23 25 25 -

Repmt. of TL - - 65 130 130 130 130 130 130 -

Dividends

Total 862 0 65 138 149 151 153 155 25 -

Surplus/Deficit 91 63 141 129 120 121 122 122 247 -

Cum. Surplus 91 154 249 424 544 665 787 909 1156 -

Details Constn. 1 2 3 4 5 6 7 8 9

(Rs. in ‘000)

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Table 10.22 The Break-even Analysis

The Financials of a Project Report 105

I. Variable Cost per Unit (kg) of Output (Rs.)

Raw Material Consumption 65.10

Stores, Consumables and Packing Materials 2

Power 11.25

Wages and Salary (50% of total annual bill) 2.92

Selling Expense 2.50

Interest on Working Capital 2.08

Total 85.85

II. Fixed Cost (Rs.)

Wages and Salary (50% of total annual bill) 42,000

Repairs and Maintenance 30,000

Rent, Taxes and Insurance 12,000

Other Administrative Expenses 24,000

Interest on Term Loan 86,000

Depreciation 92,000

P&P Amortisation 2,000

Total 2,88,000

III. Selling Price per Unit (kg) of Output Rs. 110

IV. Contribution per Unit (kg) of Output Rs. 24.15

(Selling price less variable cost)

V. Break-even Point (Unit of Output)

Fixed Cost (Rs.) 2,88,000

Contribution per Unit of Output (Rs.) 24.15

(or)11590 Units (kg)

VI. Break-even Point (Capacity) 11,590 kgs. (48.3%)

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Chapter Ten106

Table 10.23 The Sensitivity Analysis

The financial viabilities of the project therefore indicate that the projectis viable. However, a five per cent drop in selling price rendered the projectunviable.

Possibility No.1: Drop of 5% in selling price with costs remainingunchanged

(i) Income under basic plan (8 years) 16104

(ii) Revised income estimate (8 years) 15299

(iii) Revised profit before tax 715

(iv) Revised tax burden (ad hoc) 45

(v) Revised profit after tax 670

(vi) Revised cash profit 1142

(vii) Revised debt service coverage ratio (same loan 1.4repayment schedule)

1142 + 363 1505=

715 + 363 1078

Possibility No. 2: Capacity-utilisation levelling off at 70%

(i) Income under basic plan (8 years) 16104

(ii) Revised income estimate (8 years) 14520

(iii) Revised expenditure estimate (8 years) 13454

(iv) Revised profit before tax 1066

(v) Tax burden 70

(vi) Revised profit after tax 996

(vii) Revised profit after tax 1468

(viii) Revised debt service coverage ratio 1.7

1462 + 363 1825=

715 + 363 1078

(Rs. in ‘000)

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Table 10.24 Financial Viability of Project

BUSINESS PLAN FORMAT FOR TINY AND COTTAGE UNITS

1.0 General

The Financials of a Project Report 107

i. Installed capacity 24000 kgs of yarn per year

ii. Project cost Rs. 9,53,000

iii. Means of Finance

Term Loan Rs. 7,15,000

Promoters Capital Rs. 2,38,000

iv. Capacity Utilisation

First Year 60%

Second year 70%

Third year and thereafter 80%

v. Average Annual Turnover Rs. 20,13,000

vi. Debt Service Coverage Ratio 1.82

vii. Turnover Capital Ratio 2.11

viii. Profit before Tax to Turnover Ratio 0.09

ix. Cash Balance at the end of 8 years Rs. 12,58,000

x. Break-even Point 48.3% of Installed Capacity

xi. Sensitivity Analysis Findings

(a) 5% drop in selling price DSCR of 1.4 project unviable

(b) Capacity utilisation levelling off at 70% DSCR of 1.7 project viable.

Name of the Firm:Project: Location: Type of the Organisation: Proprietary/PartnershipAddress: Name of the Chief Promoter (s): Birth Date:

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1.1 Educational Qualifications

1.2 Special Training

1.3 Work Experience (Past and Present)

1.4 i. Promoter's Annual Income: Rs.______________(Last year)

ii. Assets owned by the promoter(s):

Movable Rs.-----------

Immovable Rs.-----------

2.0 Details of the Proposed Project: Manufacturing

2.1 Land and Building

Chapter Ten108

SSC Degree/ Institute Major Year ofor Below Diploma Subject Passing

Training in Institute Duration Achievement/Remark

Organisation Position Nature of Work Duration

1. Land2. Building

Total

Sr. No. Particulars Area Required Total Value Remarks

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2.2 Machinery/Equipments

2.3 Misc. Fixed Assets

2.4 Preliminary and Pre-Operative Expenses

2.5 The Working Capital

The Financials of a Project Report 109

Total

Sr. No. Description Nos. Required Rate (Rs.) Total Value(Rs.)

Total

Sr. No. Particulars Nos. Required Rate (Rs.) Total Value(Rs.)

1. Interest during Implementation

2. Establishment Expenses

3. Start-up Expenses

4. Misc. Expenses

Total

Sr. No. Particulars Amount (Rs.) Remarks

1. Raw-material Stock

2. Semi-finished Goods Stock

3. Finished Goods Stock

4. Sales on Credit

5. Production Expenses

Total

Sr. No. Item Duration Total Value (Rs.)

Year-I Year-II Year-III

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Chapter Ten110

2.6 Total Cost of the Project

2.7 Means of Finance

3.0 Market Potential

3.1 Present demand and supply of the product

3.2 Competition

3.3 Target clients/selected market area

3.4 Marketing strategy (USP)

4.0 Manufacturing Process

a) Technical know-how availability

b) Step-by-step description of the manufacturing process (R.M-F.G)

c) Attach process flow chart (if required)

5.0 Production Programme

i) No. of working days per annum -

ii) No. of working shifts (8hrs) per day -

1. Fixed Capital(Total of item nos. 2.1,2.2,2.3)

2. Working Capital (Total of item no. 2.5)

3. Preliminary & Pre-operative Expenses (Total of item no. 2.4)

Total

Sr. No. Particulars Total Value (Rs.)

1. Own Investment

2. Term Loan

3. Working Capital Loan

4. Any Other Source

Total

Sr. No. Particulars Amount (Rs.) Remarks

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iii) Installed capacity (annual) -

iv) Utilised capacity (%): -

Year - I -

Year - II -

Year - III -

5.1 Sales Revenue

5.2 Raw Material (Annual Requirement)

5.3 Utilities

The Financials of a Project Report 111

Sr. No. Items Quantity Produced Per Year Capacity Utilisation (%)

Year Items Quantity Sold Rate Per Sales RealisationPer Year Unit (Rs.) (Rs.)

Total

Sr. No. Items Quantity Rate (Rs.) Total Value (Rs.)

Total

1. Power/Electricity

2. Water

3. Coal/Oil/Steam

4. Any Other Item

Total

Sr. No. Particulars Annual Expenditure (in Rs.) Remarks

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5.4 Man Power (Salary/Wages)

5.5 Repairs and Maintenance

5.6 Selling and Distribution Expenses

5.7 Administrative Expenses

Chapter Ten112

1. Skilled

2. Semi-skilled

3. Unskilled

4. Office Staff

5. Any Other

Total

Sr. No. Particulars No. Wages/Salary Annualper Month (Rs.) Expenses (Rs.)

Sr. No. Particulars Amount (Rs.)

Total

1. Publicity Expenses

2. Travelling

3. Freight

4. Commision

5. Misc.

Total

Sr. No. Particulars Amount (Rs.) Remarks

1. Stationery & Printing

2. Post/Telephone/Telegrams

3. Entertainment Expenses

4. Misc.

Total

Sr. No. Particulars Amount (Rs.) Remarks

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The Financials of a Project Report 113

5.8 Interest

5.9 Depreciation

6.0 Profitability Projections

Debt Service Coverage Ratio*

Break-even Level of Activity*

Return on Investment*

Larger projects require projected financial statements like projectedProfit and Loss Accounts and Balance Sheets.*

* These concepts are covered in the next Chapter.

Year Outstanding Loan Interest Instalment BalanceAmount (Rs.) (Rs.) (Rs.) (Rs.)

Sr. No. Type of Asset Cost of Asset Expected Life Depreciation

A. Sales RealisationB. Cost of Production

i) Raw Materialsii) Utilitiesiii) Salary/Wagesiv) Repairs & Maintenancev) Selling & Distribution

Expensesvi) Administrative Expensesvii) Interestviii) Rentix) Misc. Expenses

Total

C. Less: DepreciationD. Gross Profit/Loss (A–B)E. Income-tax F. Net Profit/LossG. RepaymentH. Retained Surplus

Sr. No. Particulars Amount (Rs.)Year-I Year-II Year-III Year-IV Year-V

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Assessing Financial Viability of theProject

Certain tools help us assess the financial viability of any project whereinvestment is contemplated. We will discuss some tools in brief.

Tools that determine the adequacy of the surplus:

RETURN ON INVESTMENT (ROI)

What is Return?As we know, a project collects funds from two sources for long-term invest-ment. The amount collected is used to create assets and operation, whichgenerates surplus for the enterprise. Surplus is required to be distributed tothe contributors of the funds. Interest is the compensation given to contri-butors of borrowed capital, and net profit and depreciation are given tocontributors of own capital. Why should one add depreciation here? Thoughdepreciation reduces profit, it is a non-cash provision made to recover theoriginal investment. Thus, the cash profit of the enterprise is increased tothe extent of depreciation.

The total surplus generated by the project over its entire life has to be averagedto find out yearly return. This yearly return, when calculated on the total invest-ment needed for the project, tells us about the Return on Investment. Simplyspeaking, this ratio tells us the surplus-generating capacity of the investment.

One must know how much RoI a viable project must generate. This is animportant question that needs to be answered to know the financial viability.The simple rule to assess the viability is that the RoI must be greater than thecost of investment.

CHAPTER 11

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First look at the investment cost. Investment comprises two major compo-nents:

i. Borrowed Capital (Normally taken as loans from banks and financialinstitutions)

ii. Own Capital (Normally contributed by entrepreneurs)

It is simple to calculate the cost of borrowed capital. Any borrower isrequired to commit the fixed service charge, i.e. interest at the time of sanc-tioning loan. Thus, the interest becomes the cost of borrowed capital. Interestis tax-allowed expense and, therefore, its effective weight is reduced by theactual rate of tax paid by the borrower. The entrepreneurs may have morethan one investment alternative and under such conditions, the opportunitycost becomes the cost of entrepreneur’s capital.

Acceptance Rule For the investment to be financially viable, the RoI should be greater than thecost of investment.

DEBT SERVICE COVERAGE RATIO (DSCR)Running an enterprise with financial support from banks/financial institu-tions, requires their loans to be repaid with interest. Therefore, an entrepre-neur must generate surplus, adequate to meet repayment obligations. TheDSCR is a tool used to determine this. Its formula is:

Acceptance RuleA project is considered financially viable if the cumulative DSCR duringrepayment period is at least 2:1

BREAK-EVEN POINT (BEP)This is another important tool. The break-even point is the level of activitywhere the total contribution is equal to the total fixed cost. Contribution is theexcess of sales over variable cost, i.e.;

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Net profit + Interest (on long term loans) + DepreciationInterest (on long term loans) + Principal Loan

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Contribution is a type of surplus that the business generates after paying fullythe variable cost from the sales revenue.

The break-even point is the point of activity where all costs (variable as wellas fixed) are recovered from the sales values. The business, therefore, doesnot make profit or loss. For any activity below break-even, the business willincur loss, while it makes profit when activity is above it. So, when the busi-ness fully pays for the total fixed cost from contribution, the unit can be saidto have achieved the BEP. When contribution fully pays for fixed cost, thebusiness is said to have achieved break-even. Several formulae have beenevolved to calculate break-even:

Acceptance RuleThe BEP indicates the risk involved in a project. Normally, enterprisesachieving break-even sales level at a higher capacity utilisation, are consid-ered to be more risky, while those achieving it at a lower level of capacity util-isation are safer. The thumb rule is lowering the break-even betters the propo-sition.

DEBT-EQUITY RATIO

This ratio indicates the extent to which the promoter’s funds are leveraged toprocure loans. The formula of DER is:

Assessing Financial Viability of the Project 117

Contribution = Sales – Variable Cost

1. Total Fixed Cost(In quantum of activity) Contribution per unit of activity

2. Total Fixed Cost (In sales value) Contribution per unit of activity

Total long-term debtTotal promoter’s funds (includes subsidy)

×× Selling Price per unit

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A higher debt equity ratio indicates more risk due to a higher fixed cost ofinterest. The BEP of such enterprises will go up.

Acceptance RuleIt would be desirable to maintain the DER at a judicious level, say, varyingbetween 2:1 and 3:1 for small and micro enterprises.

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Bookkeeping and Accounting andFinancial Statements

Any business activity, be it manufacturing, servicing or trading, involvesmonetary transactions. At the end, if the total money received is more

than the total money spent, the business is said to have generated a ‘surplus’or `profit'. If it is otherwise, the business is said have been in ‘deficit' or`loss'. Every business intends to generate a surplus or profit. Therefore, thepromoter(s) is/are always interested in knowing the outcome of the economicactivity.

Several transactions take place in the course of business. To remember allof them is almost impossible. A business therefore, needs to record all suchtransactions to find out the outcome of the business activity. A methodical andsystematic science has been developed which helps the promoter record alleconomic transactions properly and know the outcome of the business deal-ings. This science is called "Financial Accounting."

Accounting is a name given to the system which measures, records, analy-ses and reports the effect of business transactions and events taking placein a business enterprise. Since such reporting is in financial units, thesystem is also known as financial accounting. It has been defined as theart and science of recording business transactions in a methodical mannerso as to show (a) the true state of affairs of a business at a particular time,and (b) the surplus or deficiency, which has accrued during a specifiedperiod.

Thus Financial Accounting involves (a) data recording and (b) datapresenting technique used for recording various transactions. This iscalled ‘Bookkeeping’. The data recorded is summarised and systemati-cally arranged and presented to various users in the form of FinancialStatements.

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WHAT IS BOOKKEEPING?‘Bookkeeping’ is one of the functions of financial accounting. Bookkeepingentails maintaining proper records and books for recording complete detailsof transactions made during the course of business. Business transactions canbe classified into several major activities/groups e.g. sales, purchases, assets,etc. Separate books for recording transactions pertaining to these activitiesare maintained, registering in them the details of respective transaction. Thisexercise is called Bookkeeping.

Why are Books of Accounts Maintained? It is extremely important to have the latest information about what is hap-pening in business. This helps in taking appropriate and timely action. A doc-tor needs details about the physiological conditions of a patient to diagnosethe illness, its causes and its remedies. Just like that the owner of the business,creditor, or banker needs to know about the latest financial health of the busi-ness for taking suitable decisions about the future course of action.Bookkeeping helps in maintaining and providing the latest financial positionof the business and, therefore, assumes great significance. It is advisable tomaintain books of accounts for the following reasons as well:

They provide up-to-date information about the business.

They reflect the outcome of transactions made during the period underreview.

They give information about the state of affairs of the business atregular intervals.

They help governments and other authorities to decide about theincidence of various taxes.

They help analyse the performance of the business.

They help compare the performance of several business firms.

The accounting information of business is required not only by the owner ofthe business but by various other parties too. They are the government, sup-pliers, creditors, bankers, investors, shareholders, auditors, etc. They dependon the information prepared by financial accounting for taking various deci-sions pertaining to their activities. This emphasises the need for writingbooks of accounts in a systematic and methodical way. Though, as an ownerof the business one has the prime responsibility to write and maintain the

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books of accounts, one is not free to write the accounts, the way one likes. Theyhave to be written as per the norms and principles of techniques and systems ofaccounting used the world over. There are a few accounting techniques avail-able for writing accounts but the Double Entry Bookkeeping System has uni-versal acceptability and credibility. It is the modern and scientific accountingsystem designed to reflect the true and fair position of the business.

DOUBLE ENTRY BOOKKEEPING

The concept of the Double Entry Bookkeeping System is based on the princi-ple that every economic transaction has two effects, which are exactly oppo-site to each other. Any transaction can have only two effects: ‘debit’ and`credit', and they are always equal. As a result, at the end of the accountingperiod, the accounts should ‘tally’, meaning thereby that both ‘total debits’and ‘total credits’ should tally with each other. Double entry bookkeeping isdesigned in such a way that, while entering the credit entry of a particulartransaction, the details of the corresponding debit entry is also given.

Writing Accounts Under Double EntryBookkeeping

TransactionsIn business, the promoter does several transactions. The effect of these trans-actions on the business is recorded in the books of accounts. Only those trans-actions, which result in exchange of money or exchange of goods or services,whose value can be measured in monetary terms, need accounting treatment.Transactions may be of the following nature:

Bookkeeping and Accounting and Financial Statements 121

a. Exchange of goods against cash/credit

b. Exchange of services against cash/credit

c. Exchange of assets against cash/credit

d. Payment of cash to creditors

e. Receipt of cash from debtors

f. Exchange of goods against assets

g. Exchange of goods against services

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Thus several types of transactions take place in business and they form the start-ing point of accounting. There are two types of transactions: (i) Cash transactionsand (ii) Credit transactions. Cash transaction results in exchange of cash, whilecredit transaction results in an obligation to pay / receive cash in the future.

AccountsTransactions involve ‘accounts’. Each transaction has to be done through an‘account’. There are total three types of accounts:

i. Personal Account or Individual account: This group of accountsincludes all accounts of individuals and organisations like a firm, acorporate entity, a society, etc.

ii. Assets Account: This group of accounts covers all types of assets.Assets mean all those investments made in tangible or intangibleform of assets, which have utility value or use value. Moreover,these assets can also be disinvested and converted into cash.

iii. Income-Expenditure Account: This group of accounts encompassesall accounts, which represent revenue income and revenue expendi-ture of the business.

Rules of Debit and CreditIn the Double Entry Book-Keeping System, each transaction has two effects.One is called ‘Debit’ and the other is called ‘Credit’. Thus each transactionhas minimum one debit effect and minimum one corresponding credit effect.There are prescribed rules for debiting and crediting various accounts, whichare classified under three major groups as mentioned above. These rules formthe basis of accounting under Double Entry Bookkeeping System. Belowgiven are these rules:

(i) Rule for ‘Personal Accounts’: "Debit the Receiver and Credit the Giver".

Explanation: Any person involved in a transaction can either be a receiver ofcash, asset or services, or be a giver of cash, asset or services, without anyimmediate consideration. The account of the person who receives is debited,while the account of the person who gives is credited.

(ii) Rule for ‘Assets Accounts’: "Debit what comes in and Credit what goes out."

Explanation: In business, goods and assets come and go. Whenever assets orgoods come in the business its respective account is debited, while in the case

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of assets or goods going out of the business as a result of a transaction, itsrespective account is credited.

(iii) Rule for ‘Income-Expenditure Accounts’: "Debit Expenses and Lossesand Credit Incomes and Gains"

Explanation: This group of accounts covers all revenue income and expendi-ture accounts. All those revenue incomes that are generated during the courseof the business are credited in their respective accounts and all such revenueexpenditures incurred during the course of the business are debited in theirrespective accounts.

Steps for Identifying Debit or Credit Effect

i. Decide whether the transaction needs accounting treatment.

ii. Determine which are the two accounts involved in the transaction.

iii. Apply the rules of debit and credit for the identified accounts as pertheir classification.

iv. It should be seen that there couldn’t be both ‘credits’ and both ‘deb-its’ in a single transaction. Every transaction must have a debit and acorresponding credit.

The Journal EntryA journal entry is the first noting in the books of accounts whereby debit andcredit effects of each transaction on accounts are identified and noted alongwith proper description. Journal entries help in preparing several books ofaccounts. A suggestive format for maintaining a journal and writing journalentries is shown below:

Explanation:

i. Date: The journal entries must be written date-wise in a chronologi-cal sequence. It is ideal to make entries of the transactions daily. Theyear, month and date of the transaction for which journal entry ismade should be mentioned in the ‘Date’ column.

Bookkeeping and Accounting and Financial Statements 123

Date Particulars Ledger Debit CreditFolio No. (Amount) (Amount)

Journal entries in the book of M/s. .................

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ii. Particulars: In this column, for each transaction, the account tobe debited and the account to be credited is mentioned. The account,which is to be debited, is written first followed by the account tobe credited. A word ‘To’ precedes the name of account, which iscredited.

E.g. “Bank Account debited to Sales Account”

Subsequent to debiting and crediting the appropriate accounts, a brief narra-tion of the transaction, if possible, in one line only is written in the‘Particulars’ column.

iii. Ledger Folio No.: In the third column the folio number of therespective accounts in the ledger is mentioned. This helps trace theposting of each transaction and verify it.

iv. Debit and Credit: In this column the amount by which the respec-tive account is debited and credited is mentioned. At the end of everypage the total of debits and credits is made and is carried forward tothe next page.

LedgerA ledger is a book, which contains details of all accounts in which transac-tions are made. It contains a condensed and classified record of all businesstransactions transferred from the journal or subsidiary books. Ledger is theprincipal book under the double entry bookkeeping system. It contains up-to-date information about all accounts, e.g. if an owner wants to know how muchhe/she owes to Mr. X, he/she can learn this from Mr. X’s account maintainedin the Ledger. If such accounts were not maintained in the ledger, the ownerwould be required to go through each transaction involving Mr. X to find outthe payment liability. This exercise is time-consuming and inconvenient. Forbusinesses with a sizeable number of transactions, it is impossible to scan theprimary books or journal every time to know the exact position of anyaccount. It is, therefore, very important to maintain a ledger.

A suggestive format for maintaining an ‘account’ in the ledger is givenbelow:

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Date Particulars Folio Amount Date Particulars Folio AmountNo. No.

Debit Side Account (Name of the Account) Credit Side

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Explanation:

It may be noticed from the format that a ledger account has two sides: debitside (left-hand side) and credit side (right-hand side). Each side is furtherdivided into four sections, viz. ‘Date’, ‘Particulars’, ‘Journal Folio Number’and‘Amount’.

i. Date: In this column, the date of a transaction as entered in the jour-nal book from where the entry is brought to the ledger account, ismentioned.

ii. Particulars: In this column the name of the account in which thecorresponding credit or debit (under the double entry principle) isfound, is mentioned.

iii. Journal Folio Number: In this column the page number of the jour-nal book or subsidiary book from where the transaction is brought tothe account is mentioned.

iv. Amount: In this column the amount, with which the account is deb-ited or credited, is mentioned.

TransactionsTransactions are entered, as and when they occur in the journal book or sub-sidiary books. From there necessary records are created in the ledger. Theprocess of transferring entries from the journal or subsidiary books to theappropriate accounts in the ledger is called ‘posting’. If an account is debitedwith an amount as entered in the debit column of the journal book, the sameis posted to the debit side of the account in the ledger. Similarly, if an accountis credited in the journal book, it is posted to the credit side of the account.While posting entries, care should be taken to see that the name of the accountin which the entry is posted is not mentioned in the column of particulars.Instead the name of the other account, which is affected under the same trans-action, should be mentioned. While posting, each entry to the debit side of anaccount should begin with the word ‘To’ (in the ‘Particulars’ column) andeach entry to the credit side should begin with the word ‘By’.

Balancing the AccountNormally as it happens, the total of all postings to the debit side and the creditside of the account is not equal. The amount by which the total of any side(debit or credit) is greater than the total of the other side is called the ‘balance’

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of the account. If the total of debit side is greater, then the balance iscalled ‘debit balance’ and if it is vice versa, it is called ‘credit balance.’ Forexample:

i. Following accounts always have debit balances:

a. Cash Account/Bank Account

b. Asset’s Account

c. Debtor’s Account

d. Stocks Account

e. Revenue Expenses Account

f. Losses Account

g. Investment Account

ii. Following accounts always have credit balances:

a. Creditor’s Account

b. Revenue Income's Account

c. Gain’s or Profit's Account

d. Bank Loan Account

e. Interest Received

As seen earlier, the journal book is the first book required to be kept inthe business where all transactions are recorded. It is the book of originalentry. Likewise, the ledger is the most important basic book, which recordsall accounts. So long as the transactions in the business are limited andsimple, it is possible to enter all transactions first in the journal book andthen in respective accounts in the ledger. But with the size of a businessand the number of transactions increasing, it becomes difficult to maintain ajournal book for all the transactions and post them in the ledger. Under suchcircumstances, it becomes necessary to divide the journal books and theledger into some separate subsidiary books, each of which is reserved forrecording one particular class of transactions, e.g. purchase book, sales book,cash book, etc.

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BOOKS NEEDED TO BE MAINTAINED FOR A SIMPLEACCOUNTING SYSTEM

For a small industrial enterprise, the usage of the simple financial accountingsystem is recommended. Such businesses must maintain a set of books as sug-gested below. By doing so, the businesses can get a correct and fair picture ofthe activities speedily.

a. Journal: All transactions (except those which are to be recorded in sub-sidiary books) are properly recorded here.

b. Subsidiary books (for journal)

i. Purchase book: In the purchase book, all transactions pertaining topurchases, be it on credit or by cash, are recorded. Transactions of pur-chase returned are also recorded here separately.

ii. Sales book: In the sales book, all transactions pertaining to credit orcash sales are recorded. Transactions of sales returned are alsorecorded separately.

iii. Ledger: All accounts involved in the transactions recorded in the jour-nal or its subsidiary books are maintained here, and necessary postingis made.

iv. Cash book: The cashbook is a subsidiary book of the ledger where theaccount of `cash' is maintained. Transactions involving ‘petty cash’ arealso posted here separately.

v. Bank book: The bankbook is a subsidiary book of the ledger where theaccount of `bank' is maintained.

vi. Stock register: This is a register where the movement of stock ismaintained.

The formats for the journal book and the ledger accounts were discussed ear-lier. The formats of subsidiary books like purchase book, sales book, cash-book, bankbook and stock register are given here along with a brief explana-tion for its usage.

Format of a Purchase Book

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Total

Date Party's Bill Ledger Item Quantity Rate Amount TermsName No. Folio Name

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Explanation:

i. Date: The date on which the purchase was made is mentioned here.

ii. Particulars: The name of supplier of the materials and necessarydetails of the invoice are mentioned here.

iii. Bill No.: The number of the bill of the supplier is mentioned here.

iv. Ledger Folio: The folio number of the ledger, on which either thesupplier's account (if credit purchase) or cash account (if cash pur-chase) is credited, is mentioned here.

v. Amount: The net amount of purchase made is mentioned here.

vi. Terms: The terms of purchase, as on cash terms or credit terms, etc.,are mentioned here.

Format of a Sales Book

Explanation:

i. Date: Date on which the sales transaction took place is mentioned here.

ii. Particulars: The name of the purchaser of the goods and necessarydetails of the transaction are mentioned here.

iii. Bill No.: The number of the bill given to the buyer is mentioned here.

iv. Ledger folio: The folio number of the ledger on which either thebuyer account (if credit sales) or cash account (if cash sales) is deb-ited is mentioned here.

v. Amount: The amount of sales done through this transaction is men-tioned here.

vi. Terms: The terms of sales transactions like, ‘cash or credit’ is men-tioned here.

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Total

Date Party's Bill Ledger Item Quantity Rate Amount TermsName No. Folio Name

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Format of a Cash Book

Explanation:

The ‘Cash Book’ is nothing but a cash account. Like other asset accounts, thisaccount is also required to be mentioned in the ledger. However, because ofthe multiplicity of cash transactions and for convenience, cash account is notmaintained in the general ledger but maintained as a separate account andnamed as cash book. All the rules of maintaining accounts in ledger apply tothis account also.

Format of a Bank Book

Explanation:

Like cash book, bank book is nothing but the bank account required to bemaintained in the ledger. Since the transactions involving bank are increas-ing, it is convenient and proper to keep a separate bank account where alltransactions involving the bank are posted. This account, therefore, is sepa-rately maintained and named bank book. All rules of making posting in otherledger accounts are applicable to this account as well.

Bookkeeping and Accounting and Financial Statements 129

Date Particulars Journal Amount Date Particulars Journal AmountFolio Folio

ClosingBalance

Total Total

Debit side(Receipts) Credit side (Payments)

Date Particulars Journal Amount Date Particulars Journal AmountFolio Folio

ClosingBalance

Total Total

Debit side(Receipts) Credit side (withdrawals)

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Format of a Stock Register

Explanation:

The stock register is very similar to the stock account. It tells us about theactual closing stock available with the business to help the owner physicallyverify and place further orders.

i. Date: The date of transactions resulting in movement of stock is puthere.

ii. Particulars: The details of transactions due to which the stockchanges, are narrated here.

iii. Sales Book/Purchase Book Folio number: The page number of thesales book or purchase book where the particular transaction result-ing in addition or deduction of stock is put here.

iv. Addition: Purchase resulting in addition of stock. The quantity ofstock purchased along with its value is put here.

v. Deduction: Sales result into deduction of stock. The quality ofstocks sold along with its value is put here.

vi. The Closing Balance: The amount that accrues, as a result of addi-tion or deduction is calculated and put here.

vii. Itemwise separate page is to be kept in Stock Register.

FINANCIAL STATEMENTS

The main objective of bookkeeping is to record all transactions according tothe accepted accounting principles and practices. But only proper recordingof transaction is not adequate. Unless the various accounts recorded are prop-erly classified for summary, it becomes difficult to visualise the total pictureof the business. It is, therefore, very essential to summarise all those account-ing details recorded by maintaining various books and to present them in anacceptable form. Financial statements are such forms in which all accounting

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Date Particulars S.B./ P.B. Receipts Issues BalanceFolio No.

Quantity Value Quantity Value Quantity Value

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details are presented for the use of various users like owners, bankers, credi-tors, tax authorities, government, suppliers, etc. With the support of thefinancial statements, one can understand the financial position of the businessmeaningfully.

Various Financial StatementsNormally at the end of the financial period for which the accounts are writ-

ten, the ledger accounts are closed and balances are drawn for preparing finalaccounts. The statements known as final accounts are:

i. Trial Balance

ii. Profit and Loss Account

iii. Balance Sheet

(i) Trial Balance

The first step in preparing final accounts is to prepare a trial balance. The mainobjective of the trial balance is to determine the arithmetical accuracy of theentries made in the ledger. The fundamental principle of Double-EntryBookkeeping is that every transaction has two equal and opposite effects. Itmeans, every debit has a corresponding credit and vice-versa. Hence the totalof all those accounts having a ‘debit balance’ and the total of all those accounts,which have a ‘credit balance’ at the end of the accounting period, should tally.They should be equal; otherwise the accounts would be inaccurate.

While preparing the trial balance, the accounts, which have debit balances,are placed in the debit column, while the accounts, which have credit bal-ances, are placed in the credit column. In every trial balance, the total of thedebit column must tally with the total of the credit column, unless some mis-takes in posting, casting or compilation have been committed. The agreementof the totals of debit and credit columns of the trial balance ensures only arith-metical accuracy of the accounting, but it is not a conclusive evidence of theaccounting accuracy as there are some mistakes which a trial balance cannotdetect. A suggestive format of trial balance is given below:

Format of a Trial Balance

Trial Balance of M/s. ------------ for the year -----------

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Total

Ledger Folio Name of Account Debit closing Credit balance closing balance

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Explanation:

i. Ledger Folio: In this column the folio number (page number) of theledger or its subsidiary books where a particular account is maintained, iswritten. This helps in crosschecking the accuracy of accounts.

ii. Name of Account: In this column, the name of the account whose closingbalance is being brought to the trial balance is written.

iii. Debit/Credit closing balance: In these columns, the amount of debit andcredit closing balances of individual account is mentioned.It may be noted that a single account at a time cannot have both debitand credit balances. If an account has a debit closing balance the amountof that balance is mentioned in the debit column of the trial balanceagainst the name of the respective account. Similarly, if an account hasa credit closing balance, it is mentioned in the credit column of the trialbalance.

iv. Total: When the closing balances of all accounts from the ledger and itssubsidiary books are brought to the trial balance one by one, the totals ofaccount in the debit column and the credit column are made and tallied.One should remember that:

If the totals of debit and credit columns of the trial balance do not agree, itmeans there is some mistake in preparing the accounting books. The mis-take/s, traced and rectified would tally the trial balance. However, there are afew mistakes, which cannot be detected by trial balance, such as:

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a. Closing balances of all ‘Assets Accounts’, ‘Revenue ExpensesAccounts’ and ‘Losses Accounts’ are always debit balances.

b. Closing balances of all ‘Revenue Income Accounts’ and ‘GainAccounts’ are always credit balances.

c. Accounts of individuals to whom the business owes money alwayshave credit balances and accounts of individuals who owe money tothe business always have debit balances.

d. ‘Loan (Taken) Accounts’ always have credit balances.

e. ‘Cash Account’ always has debit balance.

i. Errors of Principle

ii. Errors of Omission

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After the trial balance is tallied, necessary adjustment entries need to be madefor closing stocks, outstanding expenses, transfer provisions, etc.

(ii) Profit and Loss Account

The preparation of a trial balance is a step towards preparing the remainingtwo more important financial statements correctly viz. profit and loss accountand balance sheet. However, its use remains to a great extent limited to detect-ing arithmetical accuracy. From the financial accounting system, the userwould like to know about the profitability of the business operations for aspecified period and the position of the business at the end of the period. Astatement that reveals the profitability of the business operations for theaccounting period is called ‘Profit And Loss Account' (P & L A/c.).

Contents of P & L A/c.

From all the balances mentioned in the trial balance, the accounts that are forrevenue expenditures, revenue type of losses, revenue income and revenuetype of gains, are taken to P&L A/c. By doing so, it becomes possible to learnwhether the business at the end of the accounting period has generated a sur-plus or deficit. All accounts of revenue income and gains are brought to thecredit side, whereas all accounts of revenue expenditure and losses arebrought on the debit side of the P&L A/c. If the total income is more than thetotal expenditure, the business is said to have generated surplus or profit. Butif the total expenditure exceeds the total income during the accounting period,the business is supposed to have made losses. If the P & L A/c. has a creditbalance, it signifies net profit and on the other hand, if the P&L A/c. has adebit balance, it denotes net loss of the business during the accounting period.A suggestive format of the profit and loss account is given below:

Format of Profit and Loss Account

Profit and Loss A/c. of M/s.-------------------------;

For the period -------------------------

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Net Profit Net Loss(Balance Figure) (Balance Figure)

Total: Total:

Particulars Amount Particulars AmountDebit side Credit Side

iii. Errors of Commission

iv. Compensating Errors

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Explanation:

i. Particulars: In this column, on the debit side, names of the followingaccounts are mentioned individually:

a. All accounts of revenue expenditure

b. All accounts of revenue losses

Names of the following accounts are mentioned on the credit side:

a. Sales account

b. Closing stock account (if it is adjustment entry)

c. Accounts having credit effect of adjustment entries

ii. Amount: The respective amount of debit and credit balances of theaccounts, which are brought to the P&L account, is mentioned in thesecolumns on debit and credit side against the names of their respectiveaccount head.

One should also keep in mind the following:

i. The P & L account contains all “Income and Expenditure Accounts”.Not a single account from either individual, ‘Personal Accounts orAsset Accounts’ can be brought to the P & L account. All accounts of‘Income and Expenditure Accounts’ get closed when they are broughtto P & L account while the balance of ‘Personal/Individual Accounts’and ‘Asset Accounts’ get carried forward to the subsequent year. Allincome generated and expenditure incurred during the whole period ismentioned in the P & L account.

ii. Subsequent to bringing all balances of the accounts to concerneddebit and credit sides, the total of their balances is made. If the totalof credit side is more than the total of debit side then the business issaid to have made net profit. The amount by which the total of thecredit side exceeds the total of the debit side of the P&L account iscalled the ‘Net Profit’ generated during the accounting period.Similarly, the amount by which the total of the debit side exceeds thetotal of the credit side of the P & L account is called ‘Net Loss’ gen-erated by the business during the year. Thus both figures of net profitand net loss are balancing figures. Adding them up with the total ofthe debit or credit side as the case may be would make the totals ofboth the sides tally. This is a situation where total income is equal tototal expenses.

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Thus, if

i. Total of credit side > Total of debit side = Profitof P&L A/c. of P&L A/c.

ii. Total of credit side < Total of debit side = Lossof P&L A/c. of P&L A/c.

iii. Total of credit side = Total of debit side = No profit/no lossof P&L A/c. of P&L A/c.

Net profit or net loss is the result of business operations during the account-ing period. They are transferred to the balance sheet where the capital accountrepresenting the financial involvement of the promoter is increased ordecreased appropriately by the figures of net profit or net loss.

iii. Balance Sheet

A balance sheet is a statement prepared for measuring the true financial posi-tion of a business at a certain point of time (normally the last day of theaccounting period). It is essential to prepare the balance sheet (i) to ascertainthe results of business operations during the accounting period; and, (ii) toknow the financial position of the business at a particular point of time. Theprofit and loss account serves the former objective while the balance sheetserves the latter.

As seen earlier, all the accounts pertaining to the group of ‘Income andExpenditure Accounts’ are taken to the profit and loss account. The accountspertaining to the remaining groups, viz. “Personal or Individual Accounts”and “Assets Accounts” are brought to the balance sheet. The accounts broughtto the balance sheet are not closed. Their closing balances at the time of thebalance sheet are carried forward to the subsequent accounting period. Theyare shown on the balance sheet only to apprise the users about the position ofthe accounts at that particular time. The balance sheet should be prepared in aprescribed format so that its understanding becomes easy. Given below is aprescribed format of the Balance Sheet.

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Balance Sheet – Format

Balance Sheet of M/s. ----------------------- as on ------------

Explanation:

It has been explained above that the balance sheet reveals the true andfair position of a business at a particular point of time. Thus, the balancesheet gives the details of what the business owns and what the businessowes. Whatever the business owns is termed as ‘Assets’ and whatever thebusiness owes is termed as ‘Liabilities’. All liabilities are mentioned onthe left-hand side of the balance sheet, while assets are shown on the right-hand side.

Assets

Assets are classified under the following broad heads:

i. Fixed Assets: Fixed assets are of permanent nature and the underlyingmotive of the business is to utilise them for value addition. The total valueof fixed assets at the close of the accounting period is shown on the bal-ance sheet.

ii. Current Assets: Current assets, unlike fixed assets, do not permanentlymaintain the same form. In whichever form they may be, they are likely tobe converted in the form of ‘Cash’ or ‘Bank Balance’ in the near future.

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Capital Fixed assetsReserves & Surplus InvestmentsSecured Loans Loans and Advances(Received) (Given)Unsecured Loans & Current AssestsDeposits(Received) (i) Stocks ------Current Liabilities (ii) Debtors ------Provisions (iii) Cash ------Profit Accumulated (iv) Bank ------

Balance ------

Accumulated Losses

Total Total

Liabilities Amount Assets Amount

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Normally, the following accounts are termed as ‘Current Assets’:

a. Stocks: Closing stock of raw material, work in process and finishedgoods.

b. Debtors: Individuals from whom money is to be received (as a result of business transactions) are termed as ‘Debtors’ or ‘Accounts Receivables’ and are also current assets.

c. Cash Balance & Bank Balance: Cash lying with the business, andbalance in the bank account of the business are current assets.

iii. Investments: At times, the business invests in some other businesses orcompanies. The value of these investments is an ‘Asset’ for the business.

iv. Loans & Advances (given): At times, the business gives loans oradvances to third parties. The value of such loans or advances is an‘Asset’. These are not similar to debtors (current assets) where the indi-vidual becomes liable to pay to the business due to his buying the productof the business on credit terms.

v. Fictitious Assets: Fictitious assets are not real and tangible assets but aredebit balances of accounts like P&L A/c., Accumulated Losses A/c.,Expenses Not Written Off A/c., etc.

Liabilities

On the liabilities side, all ‘Personal’ and ‘Individual’ accounts to whom thebusiness owes are mentioned. Liabilities can be classified in the followingbroad groups:

i. Capital: Money invested by the promoter is a liability. Businessowes that much to the owner.

ii. Reserves and Surplus: Accumulated profit, which is not withdrawnand is a part of profit, which is reserved for some specific purposes,also belongs to the promoter(s). Business owes that much to theowner. They are, therefore, liabilities.

iii. Secured Loans (received): Amount of loans taken by the businessis a liability for the business. These loans are secured against someassets, which are offered to the institutions/person who have givenloans, as security or collateral.

iv. Unsecured Loans and Deposits (received): Like secured loans,these loans are also liabilities for the business. However, these loansare not secured.

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v. Current Liabilities: They are short-term funds taken for financingcurrent assets. Normally, they are credits offered by suppliers of rawmaterials and the working capital loans given by banks.

vi. Provisions: They are liabilities in which case payment provision hasbeen made by the business from the profits, e.g. provision for taxliability.

The total of the ‘Liabilities’ side and the ‘Assets’ side of the balance sheetmust tally. If they don’t, there are some mistakes in preparing the finalaccounts, which should be detected and rectified.

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Costing and Pricing of Products

Arealistic and comprehensive knowledge on costing and pricing isrequired to build the financial management capabilities of entrepreneurs.

This will help in running the enterprise successfully and enable one to givedue importance to costing and pricing.

Costing can be defined as the process of determining how much it costs toproduce and sell a product or service. Costing is very important as the cost ofa product can decide its profit or loss. There are two costs involved in deter-mining the cost of a product / service, i.e. direct cost and indirect cost.

Direct Cost: The cost of those items that become part of the end-product areknown as direct costs such as; raw material, labour, packing material, etc.

Indirect Cost: All expenses incurred in running a business and that whichcannot be directly identified with the end product are indirect costs.

The following exercise could be used as an illustration for a better under-standing of the concept:

Costing Exercise

Mr. Ramesh is processing mangoes for a pickles manufacturer, who subcon-tracts the work, when he has orders for processing less than 5000 Kgs ofmangoes. The pickles manufacturer provides raw mangoes, but all otherinputs and expenses are the responsibility of Mr. Ramesh.

To process 200 Kgs of mangoes, he needs spices and oil costing Rs.400/- andfuel costing Rs.100/-. In addition, he pays Rs.2000/- to workers who workfor eight hours, processing 2000 Kgs of mangoes.

Calculate the price that he must quote per Kg of processing, to the picklemanufacturer if he decides to earn a minimum of Rs.20 per Kg for himself.

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The correct solution is:

Cost of processing 200 Kgs of Mangoes Rs.

i) Spices and Oil 400.00

ii) Fuel 100.00

iii) Labour 200.00

700.00

He wants to earn Rs.20/- per Kg. Hence for 200 Kgs targeted earning isRs.4000/- (i.e. 200 × 20). Therefore, he must quote Rs.700.00 + Rs.4000= Rs.4700/- for 200 Kgs i.e. Rs.23.50/- per Kg.

Please note that more the price the higher the profitability. But then properpricing should be done so that the product finds a place in the market. Costreduction is the other way to earn more profit. For pricing a product/ service,an entrepreneur could exercise the following options:

A desired margin may be added to the total cost to obtain theprice.

All possible efforts are made to make the price competitive and keepit less than the existing brands.

In this option the price is kept exorbitantly high. This happens in amonopoly market.

PRICING AND COSTING: MARGINAL COST BASEDPRICING AND CONTRIBUTION ANALYSIS

As an illustration of select costing and pricing tools, consider the case of asmall enterprise—Fardeen Products, making and selling sheekh-kebabs inplastic packs and casseroles to institutions and directly to consumers. Thebreak-even level of the activity can be estimated from the data in tablebelow. The performance of the enterprise has remained stagnant in the lastfour years.

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Indicative break-even level of activity of Fardeen Products, Ahmedabad

Selling price (SP) of the product on a per kilogramme basis is about Rs. 120.The enterprise manufactured about 15,000 kg. of the product in a year on fullcapacity basis. It had sales of about Rs. 22 lakh a year.

Beyond break-even, viz. production of about 11,280 kg, it is on the basis ofmarginal costs that pricing may be made, as all fixed costs are covered atbreak-even level. Similarly, the ideal product mix of an enterprise may beidentified by means of a contribution analysis as illustrated in the examplebelow. Avidhoot enterprises has 6 product lines. The enterprise makes stuffedparatha, macaroni and pasta items and sells them to institutional customersviz. to private offices, foreign banks etc. in Ahmedabad, Gujarat. The tablebelow provides line wise data on variable costs, selling price and output ofthe enterprise for the year 2001–2002.

Costing and Pricing of Products 141

1 Raw Material 10,00,000.00 -

2 Electricity 64,000.00 3,000.00

3 Labour 4,80,000.00 -

4 Interest - 1,80,000.00

5 Other Expenses 10,000.00 1,000.00

6 Depreciation - 1,000.00

Total 15,54,000.00 1,85,000.00

Sr. No. Particulars Variable Cost Fixed Cost

Break-even point (BEP)

Total Fixed Cost (Rs. 1.85 lakh) × 100=75.20% of capacity=

Revenue (Rs. 18 lakh)—Total Variable Cost (Rs. 15.54 lakhs)

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Avidhoot Enterprises—Current Product-mix & Variable Cost (VC)Statement of the Enterprise

The enterprise has a fixed cost of Rs.6.10 lakh per annum. Hence, profits hadbeen Rs.2 lakh in the year 2001–2002. Upon study of the performance of theenterprise and customer and consumer demand pattern in the last 4 years, itwas observed that there are certain market constraints. About 1,00,000 nos. ofStuffed Parathas (Vegetarian and Non-Vegetarian, each), about 25,000 nos. ofMacaroni (Vegetarian and Non-Vegetarian, each) and about 50,000 nos. ofPasta (Vegetarian and Non-Vegetarian, each) is the maximum demand forrespective product lines a year. Further, a minimum demand or order size of5000 plates or numbers of each product line prevailed. The enterprise has thecapacity to make and sell maximum 1,45,000 plastic packs and casseroles ofall products in total.

Wide variations in demand prevailed in different years. Nevertheless, theenterprise has to make and offer all the six product lines as to remain a ‘one-stop’ shop of its clients.

How could the enterprise resolve its problem of stagnant sales perform-ance?

If the enterprise is to optimise its product mix (and profits) it should ide-ally sell about 1,00,000 plates of Stuffed Parathas (Non-Veg.), 30,000plates of Pasta and 5,000 plates of other products. That is, products withmaximum contribution need be sold. The table below presents the revisedproduct mix.

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1 Stuffed Paratha 30000 45.00 50.00 13.50 15.00(Veg)

2 Stuffed Paratha 40000 52.00 60.00 20.80 24.00(Non-Veg.)

3 Macaroni (Veg.) 10000 17.00 20.00 1.70 2.00

4 Macaroni 7000 20.00 25.00 1.40 1.75(Non-Veg.)

5 Pasta (Veg.) 20000 16.00 20.00 3.20 4.00

6 Pasta (Non-Veg.) 25000 17.20 25.00 4.30 6.25

Total 132000 44.90 53.00

Sr. Product - mix Qty. Sold VC/Unit SP/Unit Total VC Total SalesNo. (nos.) (in Rs.) (in Rs.) (Rs. lakh) (Rs. lakh)

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Avidhoot Enterprises—Ideal Potential Product-mix of the Enterprise(in Rs.)

If the enterprise can restructure its product mix, it can increase its profit toRs.4.95 lakh per year—more than double. However, an ideal selling incentivein terms of credit and discount strategy may have to be evolved as to encour-age sales of product with higher contribution and in turn encouraging suchshift in the product mix. A similar analysis of the market mix with regard tomarketing channels and customer or consumer segments or groups need bemade and ideal strategies to encourage sales through such channels or cus-tomer or consumer segments that yield high contribution may be evolved. Forinstance, direct sale to consumers may yield higher contribution to a small‘Curry base and Instant Noodles’ manufacturer. In which case, a strategy ofemploying salespersons to directly market products to consumers with appro-priate selling incentives to both the sales persons and consumers may be anideal sales strategy than adopting the conventional dealer-retailer channel.

The cases on product mix, pricing, contribution analysis presented in thischapter indicates scope for sales promotion incentives and pricing of productsas also on product positioning, packaging and real differentiation. The learn-ing from these cases may be incorporated to enhance rigour in terms of mar-ket-mix and market-plan as a part of an efficient preparation of a business orproject plan.

Costing and Pricing of Products 143

1 Stuffed Paratha 50 45 5.00 5000 25,000 2,25,000 2,50,000(Veg.)

2 Stuffed Paratha 60 52 8.00 1,00,000 8,00,000 52,00,000 60,00,000(Non-Veg.)

3 Macaroni (Veg.) 20 17 3.00 5,000 15,000 85,000 1,00,000

4 Macaroni 25 20 5.00 5,000 25,000 1,00,000 1,25,000(Non-Veg.)

5 Pasta (Veg.) 20 16 4.00 5,000 20,000 80,000 1,00,000

6 Pasta (Non-Veg.) 25 17.20 7.80 25,000 1,95,000 4,30,000 6,25,000

1,45,000 10,80,000 61,20,000 72,25,000

Sr. Product-mix SP/ VC/ C/ Qty. Contribution VC SPNo. Unit Unit Unit

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Working Capital Management

In the chapters on ‘Planning an SSI Unit’ and ‘ Business Plan’, a discussionwas made on the fixed capital and the working capital. Every business

needs investment to procure fixed assets, which remain in use for a longerperiod. Money invested in these assets is called ‘Long term Funds’ or ‘FixedCapital’. Business also needs funds for short-term purposes to finance currentoperations. Investment in short term assets like cash, inventories, debtors etc.,is called ‘Short-term Funds’ or ‘Working Capital’. The ‘Working Capital’ canbe categorised, as funds needed for carrying out day-to-day operations of thebusiness smoothly. The management of the working capital is equally impor-tant as the management of long-term financial investment.

Every running business needs working capital. Even a business which isfully equipped with all types of fixed assets required is bound to collapsewithout (i) adequate supply of raw materials for processing; (ii) cash to payfor wages, power and other costs; (iii) creating a stock of finished goods tofeed the market demand regularly; and, (iv) the ability to grant credit to itscustomers. All these require working capital. Working capital is thus like thelifeblood of a business. The business will not be able to carry on day-to-dayactivities without the availability of adequate working capital. The diagramshown on the next page clarifies it:

Working capital cycle involves conversions and rotation of various con-stituents/components of the working capital. Initially ‘cash’ is converted intoraw materials.

Subsequently, with the usage of fixed assets resulting in value additions, theraw materials get converted into work in process and then into finished goods.When sold on credit, the finished goods assume the form of debtors who givethe business cash on due date. Thus ‘cash’ assumes its original form again atthe end of one such working capital cycle but in the course it passes throughvarious other forms of current assets too. This is how various components ofcurrent assets keep on changing their forms due to value addition. As a result,

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they rotate and business operations continue. Thus, the working capital cycleinvolves rotation of various constituents of the working capital.

While managing the working capital, two characteristics of current assetsshould be kept in mind viz. (i) short life span, and (ii) swift transformationinto other form of current asset. Each constituent of current asset has com-paratively very short life span. Investment remains in a particular form of cur-rent asset for a short period. The life span of current assets depends upon thetime required in the activities of procurement; production, sales and collec-tion and degree of synchronisation among them. A very short life span of cur-rent assets results into swift transformation into other form of current assetsfor a running business. These characteristics have certain implications:

i. Decision regarding management of the working capital has to betaken frequently and on a repeat basis.

ii. The various components of the working capital are closely relatedand mismanagement of any one component adversely affects theother components too.

iii. The difference between the present value and the book value ofprofit is not significant.

The working capital has the following components, which are in severalforms of current assets:

Stock of Cash

Stock of Raw Material

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Debtors

Cash Creditors

Finished Goods

Working Expenses

Raw Material

Work in Process

AdditionValue

AdditionValue

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Stock of Finished Goods

Value of Debtors

Miscellaneous current assets like short term investment loans &advances

The working capital needs of a business are influenced by numerous factors.The important ones are discussed in brief as given below:

i. Nature of Enterprise

The nature and the working capital requirements of an enterprise are interlinked.While a manufacturing industry has a long cycle of operation of the workingcapital, the same would be short in an enterprise involved in providing services.The amount required also varies as per the nature; an enterprise involved in pro-duction would require more working capital than a service sector enterprise.

ii. Manufacturing/Production Policy

Each enterprise in the manufacturing sector has its own production policy,some follow the policy of uniform production even if the demand varies fromtime to time, and others may follow the principle of 'demand-based produc-tion' in which production is based on the demand during that particular phaseof time. Accordingly, the working capital requirements vary for both of them.

iii. Operations

The requirement of working capital fluctuates for seasonal business. The work-ing capital needs of such businesses may increase considerably during the busyseason and decrease during the slack season. Ice creams and cold drinks havea great demand during summers, while in winters the sales are negligible.

iv. Market Condition

If there is high competition in the chosen product category, then one shallneed to offer sops like credit, immediate delivery of goods etc. for which theworking capital requirement will be high. Otherwise, if there is no competi-tion or less competition in the market then the working capital requirementswill be low.

v. Availability of Raw Material

If raw material is readily available then one need not maintain a large stock ofthe same, thereby reducing the working capital investment in raw materialstock. On the other hand, if raw material is not readily available then a large

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inventory/stock needs to be maintained, thereby calling for substantialinvestment in the same.

vi. Growth and Expansion

Growth and expansion in the volume of business results in enhancement ofthe working capital requirement. As business grows and expands, it needs alarger amount of working capital. Normally, the need for increased workingcapital funds precedes growth in business activities.

vii. Price Level Changes

Generally, rising price level requires a higher investment in the working cap-ital. With increasing prices, the same level of current assets needs enhancedinvestment.

viii. Manufacturing Cycle

The manufacturing cycle starts with the purchase of raw material and is com-pleted with the production of finished goods. If the manufacturing cycleinvolves a longer period, the need for working capital would be more.

At times, business needs to estimate the requirement of working capital inadvance for proper control and management. The factors discussed aboveinfluence the quantum of working capital in the business. The assessment ofworking capital requirement is made keeping these factors in view. Each con-stituent of working capital retains its form for a certain period and that hold-ing period is determined by the factors discussed above. So for correct assess-ment of the working capital requirement, the duration at various stages of theworking capital cycle is estimated. Thereafter, proper value is assigned to therespective current assets, depending on its level of completion. The basis forassigning value to each component is given below:

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Component of Working Capital Basis of Valuation

i. Stock of raw material Purchase cost of raw materials

ii. Stock of work in process At cost or market value, whichever is lower

iii. Stock of finished goods Cost of production

iv. Debtors Cost of sales or sales value

v. Cash Working expenses

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Each constituent of the working capital is valued on the basis of valuationenumerated above for the holding period estimated. The total of all such val-uation becomes the total estimated working capital requirement.

The assessment of the working capital should be accurate even in the caseof small and micro enterprises where business operation is not very large. Weknow that working capital has a very close relationship with day-to-day oper-ations of a business. Negligence in proper assessment of the working capital,therefore, can affect the day-to-day operations severely. It may lead to cashcrisis and ultimately to liquidation. An inaccurate assessment of the workingcapital may cause either under-assessment or over-assessment of the workingcapital and both of them are dangerous.

CONSEQUENCES OF UNDER ASSESSMENT OFWORKING CAPITAL

Growth may be stunted. It may become difficult for the enterpriseto undertake profitable projects due to non-availability of working cap-ital.

Implementation of operating plans may become difficult and conse-quently the profit goals may not be achieved.

Cash crisis may emerge due to paucity of working funds.

Optimum capacity utilisation of fixed assets may not be achieved dueto non-availability of the working capital.

The business may fail to honour its commitment in time, therebyadversely affecting its credibility. This situation may lead to businessclosure.

The business may be compelled to buy raw materials on credit and sellfinished goods on cash. In the process it may end up with increasingcost of purchases and reducing selling prices by offering discounts.Both these situations would affect profitability adversely.

Non-availability of stocks due to non-availability of funds may resultin production stoppage.

While underassessment of working capital has disastrous implica-tions on business, overassessment of working capital also has its owndangers.

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CONSEQUENCES OF OVER ASSESSMENT OFWORKING CAPITAL

Excess of working capital may result in unnecessary accumulation ofinventories.

It may lead to offer too liberal credit terms to buyers and very poorrecovery system and cash management.

It may make management complacent leading to its inefficiency.

Over-investment in working capital makes capital less productive andmay reduce return on investment.

Working capital is very essential for success of a business and, therefore,needs efficient management and control. Each of the components of the work-ing capital needs proper management to optimise profit.

Inventory ManagementInventory includes all types of stocks. For effective working capital manage-ment, inventory needs to be managed effectively. The level of inventory shouldbe such that the total cost of ordering and holding inventory is the least.Simultaneously, stock out costs should also be minimised. Business, therefore,should fix the minimum safety stock level, re-order level and ordering quantityso that the inventory cost is reduced and its management becomes efficient.

Receivables’ Management Given a choice, every business would prefer selling its produce on cash basis.However, due to factors like trade policies, prevailing marketing conditions,etc., businesses are compelled to sell their goods on credit. In certain circum-stances, a business may deliberately extend credit as a strategy of increasingsales. Extending credit means creating a current asset in the form of ‘Debtors’or ‘Accounts Receivable’. Investment in this type of current assets needsproper and effective management as it gives rise to costs such as:

i. Cost of carrying receivable (payment of interest etc.)

ii. Cost of bad debt losses

Thus the objective of any management policy pertaining to accounts receiv-ables would be to ensure that the benefits arising due to the receivables are

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more than the cost incurred for receivables and the gap between benefit andcost increases resulting in increased profits. An effective control of receiv-ables helps a great deal in properly managing it. Each business should, there-fore, try to find out average credit extended to its client using the below givenformula:

Each business should project expected sales and expected investment inreceivables based on various factors, which influence the working capitalrequirement. From this it would be possible to find out the average credit daysusing the above given formula. A business should continuously try to moni-tor the credit days and see that the average credit offered to clients is notcrossing the budgeted period. Otherwise, the requirement of investment in theworking capital would increase and, as a result, activities may get squeezed.This may lead to cash crisis.

Cash Management Cash is the most liquid current asset. It is of vital importance to the daily oper-ations of business. While the proportion of assets held in the form of cash isvery small, its efficient management is crucial to the solvency of the business.Therefore, planning cash and controlling its use are very important tasks.Cash budgeting is a useful device for this purpose.

Cash BudgetCash budget basically incorporates estimates of future inflows and out-flows of cash over a projected short period of time which may usually be ayear, a half or a quarter year. Effective cash management is facilitated ifthe cash budget is further broken down into month, week or even on dailybasis.

There are two components of cash budget (i) cash inflows and (ii) cash out-flows. The main sources for these flows are given hereunder:

Cash Inflows (a) Cash sales

(b) Cash received from debtors

(c) Cash received from loans, deposits, etc.

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Average credit Total amount of receivables=

Extended (in days) Average credit sales per day

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(d) Cash receipt of other revenue income

(e) Cash received from sale of investments or assets.

Cash Outflows (a) Cash purchases

(b) Cash payment to creditors

(c) Cash payment for other revenue expenditure

(d) Cash payment for assets creation

(e) Cash payment for withdrawals, taxes

(f) Repayment of loans, etc.

A suggestive format for ‘Cash Budget’ is given below:

Cash Budget of M/s…

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Estimated cash inflows-----------------------

I. Total cash inflows

Estimated cash outflows

------------

-----------

II. Total cash outflows

III. Opening cash balance

IV. Add/Deduct surplus/Deficitduring the month (I–II)

V. Closing cash balance (III–IV)

VI. Minimum level of cashbalance

VII. Estimated excesses or shortfall ofcash (V–VI)

Particulars Months

January February March

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Financing Working CapitalNow let us understand the means to finance the working capital. Working cap-ital or current assets are those assets, which unlike fixed assets change theirforms rapidly. Due to this nature, they need to be financed through short-termfunds. Short-term funds are also called current liabilities. The following arethe major sources of raising short-term funds:

i. Supplier’s CreditAt times, business gets raw material on credit from the suppliers. The cost ofraw material is paid after some time, i.e. upon completion of the credit period.Thus, without having an outflow of cash the business is in a position to useraw material and continue the activities. The credit given by the suppliers ofraw materials is for a short period and is considered current liabilities. Thesefunds should be used for creating current assets like stock of raw material,work in process, finished goods, etc.

ii. Bank Loan for Working Capital This is a major source for raising short-term funds. Banks extend loans tobusinesses to help them create necessary current assets so as to achieve therequired business level. The loans are available for creating the following cur-rent assets:

Stock of Raw Materials

Stock of Work in Process

Stock of Finished Goods

Debtors

Banks give short-term loans against these assets, keeping some security mar-gin. The advances given by banks against current assets are short-term innature and banks have the right to ask for immediate repayment if they con-sider doing so. Thus bank loans for creation of current assets are also currentliabilities.

iii. Promoter’s FundIt is advisable to finance a portion of current assets from the promoter’s funds.They are long-term funds and, therefore do not require immediate repayment.These funds increase the liquidity of the business.

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Marketing Management

Aproduction process acquires meaning only if it produces products whichemerge out of anonymity and find a place in the market. Many small

entrepreneurs produce quality products, but are unable to sell it due to poorunderstanding of the markets and marketing management. Most think market-ing and selling to be the same and hence, face serious consequences. The facthowever, remains that this is one of the most critical areas that entrepreneursmust master. You must develop the capability to understand your market anddevice your marketing strategies accordingly. You should be able to assess whowill buy your product and why; and also your competitors and their strategies.

THE CONCEPT OF MARKETING

Most people think that marketing is all about selling and buying of goods andservices in exchange for money. This is a very narrow view. There are threemajor facets of marketing. First is the production-driven approach wherestress is laid on selling whatever is produced. This works during scarcity ofgoods. And the producer’s key function here is to sell goods available ataffordable prices. Most small and micro enterprises follow this approach. Thesecond is the sale-driven approach that revolves around personal selling andadvertising to convince customers to buy your product. This approach isadopted when there is an abundance of supply in the market. The last is theconsumer-driven approach, which focus on promoting sale by meeting thecustomers’ expectations in terms of quality, looks, aesthetics, prices and after-sales-service. The earlier two approaches where goods are tailor-made areproducer-oriented and may not work satisfactorily as they require a properunderstanding of the consumer behaviour, preferences, tastes and needsbefore undertaking production.

The third being consumer-driven, lasts. This is why sales becomes a smallpart of an entire system called marketing that addresses planning, pricing,

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promotion and distribution of goods and services to satisfy customer needs.Therefore, you must understand that marketing is not just selling, but muchmore, and includes:

i. Market Assessment

ii. Market Segmentation

iii. Market Targeting

iv. Developing Market Mix

Market AssessmentFirst, there is a need to know the demand for the proposed product and thisrequires market assessment. With this, one would know the volume thatmight be bought by a defined customer-base in a defined geographical areaand time-frame, under a defined marketing programme. The market demandcan be estimated by multiplying the number of buyers by the average quan-tity bought at a given price. Though this may be difficult for small entrepre-neurs to find out, they can still do a quick survey (discussed in Chapter 7) ifthe market is generally local or regional.

Market SegmentationThis helps in indentifying buyers. It is a process that identifies differences inbasic characteristics of different customer groups, and thus helps craft aneffective marketing strategy. Segmentation can be by assorting consumerslike rural & urban, young-old, married-unmarried, educated-uneducated,rich-poor, etc. and analysing their needs and demand pattern.

Market TargetingHaving done the market segmentation, one should decide the target group. Itis normally not possible to meet the expectations of all the customer groupsin the market. Therefore, there is a need to zero in on a specific segment. Onewill commit a blunder if one thinks one can meet the expectation of all thesegments. The risk of a major failure prevails if one tries to cater to all thesegments and, therefore, one should specialize to succeed. The promotionalstrategies, infrastructure and manpower resources will greatly vary with thetargets. Having decided the target, strategies for successful marketing can bedevised.

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Marketing MixMarketing mix is the tool by which one could strategically position oneself inthe market. The positioning will depend on how different will one’s productbe than others in terms of attractiveness for a particular customer group. Itcould include features of the product, performance quality, durability, relia-bility, style, design, repairability, etc. These factors are popularly known as 4‘Ps’ of marketing:

i. Product (or service) – its quality, presentation, packaging, varieties,design, colours, styles, contents.

ii. Place – where it is bought, physical and social barriers, home deliv-ery, distribution channels, transport, ambience, sanitation, decora-tion.

iii. Promotion – advertising, tele–marketing, personal and promotionalselling, exhibitions, mailing.

iv. Price – the amount, prices vs. status, quality, discounts, credit terms.

There are more Ps now: People (understanding customers), Packaging (betterproduct look), Partnership (strategic marketing alliances), Positioning (geo-graphical, such as Punjabi or South Indian Food).

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Product Place

Better Performance Longer Opening HoursImproved Quality Better FurnishingBigger Quantities Better DecorationBetter Finish Different LocationAttractive Packaging Home DeliveryBetter Labels Telephone FacilityAttractive Colours Better SanitationAttractive ContoursMind-captivating Brand

Promotion Price

Proper Advertising Competitive PricingSignboards Higher PricingCompetitions Lower PricingDifferent Names Longer CreditOther Publicity Special OffersPromotional Selling Quantity Discounts

Cash Discounts

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The famous saying, “Leaders don’t do different things, they do things dif-ferently”, finds an apt place here. Being able to supply quality goods at com-petitive prices to the customers’ satisfaction does not take one any further. Tobe a market leader, one needs to market the product and create its brand loy-alty, by also taking care of distribution logistics. Most entrepreneurs neglectthis. Another crucial factor is to be able to make the business communicate forwhat it stands, which is done by effective promotional strategies.

PROMOTIONAL STRATEGY

Use of Electronic Media and ITA proper promotional strategy is needed to create a brand image of the productand this will need an effective fusion of print and electronic media. Everyday,we see brand ambassadors like Sachin Tendulkar endorsing Pepsi and AamirKhan advocating Coke. This creates an image in the minds of the customers.The promotional strategy should suit the market. While it may be expensive toget celebrity endorsement, there are local channels to one can make use of radioand the internet, besides TV, newspapers or magazines. The best decision willbe to hire a professional advertisement agency, howsoever small, for promotion.

Then, there is always the word of mouth that invisibly promotes the productby the sheer strength of its quality and other features, which people will talkabout and thus market. This is especially true in the food business.

Collective Marketing ApproachAll these steps are good for existing or small-scale entrepreneurs but may notalways apply to a large segment of micro enterprises who might find it diffi-cult due to paucity of financial as well as human resources. Micro enterprisesshould evolve innovative collective strategies to reap mutual benefits.

SEVEN TIPS FOR SUCCESSFUL MARKETING

a) Know Your Consumers/CustomersThere are two types of clients:

i. BUYERS/CUSTOMERS who buy goods from you to sell to others.The customers may not be the direct users of one’s products.Normally, wholesalers buy in bulk and sell to retailers, who sell to

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individual consumers or exporters, who in turn sell goods abroad tochain stores and retailers.

ii. Users who directly consume the products, who are CONSUMERS.

b) Satisfy Your Customers/ConsumersThey may be satisfied:

i. When they are happy with the features and quality of the product.

ii. When the price of your product is reasonable (reasonable meanswithin the budget).

iii. When one delivers on time and maintains agreed terms.

iv. When extra efforts are put in to make them happy; like by workingovernight to deliver on time.

c) Attract More CustomersMarketing must ensure that consumers repeatedly buy one’s products and alsospeak well about it to others. One should always remember the four Ps dis-cussed earlier:

i. Product

Consumers want the product to satisfy their needs and they may wantit to last long.

The product should be worth the money spent by buyers on it.

The product should meet the best standards of quality and aesthetics.

ii. Price

Prices should be affordable and there are ways to make them acceptable also.Match your competitors’ prices. One could use the formula (price – cost =profit) when (i) one is relatively new to the business (ii) the competition isstrong and (iii) when consumers are used to prevailing prices.

Look at the costs

The price could be set by adding a reasonable profit to the cost and this canbe used during (i) low competition and (ii) when the product is new.

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Make the price attractive

Prices may be made attractive in other regions than one’s own by differentways. Attractive prices can, for instance, be like Rs.49.95 for Rs.50.00.

iii. Promotion

A satisfied client is one’s best promoter not only in terms of repeat orders butalso for references.

Some ways to promote one’s product: Discount and credit offers can be pub-licised by placards placed in retail outlets or by distributing pamphlets toexisting and potential clients.

Discount and credit offers: Give limited-period discounts or credits to regularand new clients as also bulk buyers. This will attract potential customers andstrengthen the existing ones. Offer high discount on high-margin products asthis is likely to encourage sale and manufacture of such products withoutaffecting profits. Also, distribute pamphlets among exporters/wholesalers, ifnecessary.

Promotional items: Paperweights, calendars etc. with one’s brand name canbe good advertisements.

iv. Place

Determine where to sell the product and where should the client to find it.

d) Network and Reach-out to NewConsumers

This helps in expanding one’s customer base.

There are several ways by which one can network and reach new customersand expand one’s market base:

i. Personal visits to potential clients

ii. Participation in trade fairs where potential is found

iii. Product catalogues and web pages which could be forwarded to dis-tant customers

iv. Promotion methods like selling incentives to increase sales

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Rather than waiting for customers to come, the entrepreneur should look forthem. While i, iii and iv are means to network with new consumers, it helpsone network with both new and existing customers.

Participating in trade exhibits in different regions

i. Prepare for an exhibition:

Inquire about trade exhibitions from government offices and non-gov-ernment organisations that organise such fairs.

Participate in fairs after considering its location, the fees and productsfeatured.

Print business cards, product catalogue and price lists.

Prepare samples for display.

Keep a logbook to record visitors’ contact details.

ii. During the trade exhibit:

Approach visitors and talk informally about the products.

Encourage them to analyse the product.

Exchange business cards.

Request them to fill the logbook.

e) Give Selling IncentivesMarketing starts even before business identification and often involves allmanagement areas, while selling is about increasing sale. Selling incentivesare various:

Reduced price or discount

Multiple products for the price of one

Fixed-time discount coupons for repeat purchase

Better credit terms

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A processor may adopt any of these incentives. The following is a case studyof a price discount incentive option:

Arun Processors is a tiny unit and sells Rs.5 lakh worth pickles a year. Theyoffer 30-day credit to customers. They got an extra order of Rs.2 lakh this year.But the trader backed out after the products were made. Arun Processors,therefore, evolved a new incentive plan to dispose off the additional produc-tion, under which they offered a three per cent discount in case payment wasmade in cash 15 days after delivery and 90–day credit otherwise.

Let us do a cost analysis of this strategy. Assume 50% sale is executedby discount option and 50% by 90-day credit scheme. If the production costof increased sales is 70%, the actual cost of locked up funds in the creditsale would be three per cent a month. This is the rate he has to pay for creditpurchase.

Existing promotional and credit terms: 30 daysProposed promotional terms: 3/15 (or) 90 days

(Amount in Rs.)

Current Sales 5,00,000Likely Increase in Sales 2,00,000 (1)

Likely total sales 7,00,000

Cost of discount 3,000(Rs.1,00,000 of sales @ 3%)Cost of credit sale for 3 months 9,000(Rs.1,00,000 @ 36% per year)

Total cost 12,000 (2)

Increase in cost of production 1,40,000 (3)(70% of Rs.2,00,000)Profit in production (1) - (3) 60,000Cost of proposed promotional terms (2) 12,000

Net profit 48,000 (4)

Therefore the increase in profit is Rs.48,000/-. The proposed promotionalstratagem could benefit the enterprise.

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f) Know Your CompetitorsIt is very important in business to know one’s competitors and their strate-gies to remain competitive and there is a simple framework to understandthem:

The competitor as a food processor

What is his experience in the business?

What are his resources: (i) size of operation, (ii) technology,(iii) financial resources and (iv) market credibility.

The competitor’s clients

Does he have many clients?

Who are they?

Are his clients happy?

Can he retain customers?

The competitor’s product

Is his product better?

How is his product different?

The Competitor’s price

Is his price cheaper? Why?

The competitor’s promotional strategies

Does he provide better credit/discounts?

The competitor’s place

Does he directly deal with consumers?

Does he have agents/distributors?

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g) Developing a SustainableMarketing Advantage:

A business that does not develop any or all of the three advantages below issure to lose out to competition:

A sustainable cost advantage: This will help an enterprise offer lower prices.Cost savings can also help in offering better credits.

A differentiation advantage: This offers buyers better value than that of thecompetitors, as the product is different by its features and services as well asby brand image.

A niche market: Here consumers are delivered specially customised productsin small volumes.

FINALLY, REMEMBER THE CARDINAL PRINCIPLESTO SUCCEED IN THE MARKET:

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The customer is the most important person.

Put yourself in customers' shoes.

Good marketers sell products that never return but customers do.

Successful marketing is about building and sustaining human relation-ships.

Be flexible so as to encourage people to do business with you.

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Applied Management in Business:Learning from Existing Businesses

ANMOL FOOD PRODUCTS: STRUCTURING APROJECT EFFICIENTLY WITH THRUST ON THEMARKET PLAN

The enterprise, registered as a private limited company, has been involvedin marketing processed food products. It now proposes to manufacture

sauces, jams and other products. The unit is registered with the Ministry ofFood Processing Industries. The key promoters include a cost accountant anda scientist who have earlier worked with CFTRI, Mysore. The cost account-ant worked for a multinational and also has substantial experience in market-ing confectionery in Karnataka. He also has experience in catering andhas supplied packed meals to hospitals and banks in Mysore city. His enter-prise had then undertaken contracts to run canteens in various large facto-ries in Mysore. The experience of the promoters both in the catering fieldand in marketing products in the sector helped them evolve their projectwell.

Several products are proposed to be manufactured by this enterprise.These include sauces, squashes, jams, ‘masala’ paste, ready-to-eat productsand pickles. Sauces for example, include tomato sauce, chilly sauce and soyasauce. Jams include strawberry and pineapple jam. Ready-to-eat productscomprise tamarind rice mix, tomato rice mix and sambhar. Pickles includemango, mixed vegetable, lemon, garlic and green chilly. Products are offeredin various packing sizes to meet purchase preferences of different cus-tomers and consumers. Squashes include mango, orange, grape, pineappleand strawberry, and ‘masala’ powders largely include ‘garam masala’powder.

CHAPTER 16

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Reducing production risk in terms of rawmaterial price fluctuationThe main ingredients for sauces are tomato, green chilly and soya, which areto be procured in season, processed and retained, in preserved form likepuree. Inputs/ingredients are to be procured fresh and the food stuff preparedand then processed under high temperature and pressure in retorts underwater for 20 minutes to sometimes several hours, depending on the propertiesof the products. With regard to pickles, for instance, main fruits, vegetablesand ‘masala’ ingredients are to be procured in season. They are to be thenconverted into intermediaries like paste. The ‘masala’ ingredients are to bethoroughly cleaned and procured for preservation. When production of vari-ous pickles is planned the fruit/vegetable and ‘masala’ ingredients isprocessed into final products. So also with regard to ‘masala’ powders, rawmaterials and ingredients are procured during season, thoroughly cleaned andpreserved, depending on product formulation. Different ingredients aredrawn and processed either separately or together to obtain the final product.The enterprise proposes to effectively reduce the risk in terms of high rawmaterial price fluctuations and develop scope to secure high margins duringoff season in different products.

The machinery to be used mainly are fruit mills, boiler, steam vessels, pul-verizers, ovens, blenders, filling machine, etc. Past experience of the promot-ers helped in evolving a market plan for the enterprise. The product and mar-ket mix of the project is planned in relative detail.

Market Plan of Anmol Enterprises: Productand Market MixThe enterprise has segmented its market and planned a product mix to targeteach segment. The table 16.1 below indicatively presents the relevant plan interms of the number of customers the enterprise plans to target.

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Table 16.1 Proposed Product-Cum-Market Mix of Anmol Enterprises:Select Products

Specific marketing strategies have been planned to target each customer seg-ment in the proposed marketing mix.

Retail customer: The enterprise proposes to market its own brand in this seg-ment. The enterprise plans to appoint distributors who may, in turn, supply toretailers on a weekly basis. The promoters realised that in some productsbranding is hardly critical. Jams are yet “generic” and consumers do not dis-play strong brand pull. This product would provide volumes of business andfacilitate penetration among distributors and retailers as it has sales potentialeven at tiny retail outlets.

The enterprise plans to simultaneously sell its products through variouscategories of outlets in Tamil Nadu. Table 16.2 elaborates on points of saleand region-wise numbers.

Applied Management in Business: Learning from Existing Businesses 167

Jams 255 145 15

Tomato Ketchup 30 110 -

Tomato Sauce 12 90 6

Chilly Sauce 21 71 18

Soya Sauce 20 50 18

Ready-to-Eat - 105 -Products

Pickles 110 85 -

Squashes 65 66 -

Syrups 47 78 4

Ready-to-Serve 51 72 -Beverages

Masala Powders 102 95 -

Market mix Retail Retail Institutional(as a percentage Customers Customers Customersof sales) -Rural (33%) -Urban (31%) (36%)

Product-Mix

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Table 16.2 Point of Sale—Region-wise Numbers

A Consumer Pull-Seeking StrategyThe enterprise plans to initially place products in retail outlets and also cre-ate brand awareness at outlets. For the first two years, market support for pro-viding visual displays at points of sale for brand promotion is believed impor-tant. For this, points of sale (POS) material are to be provided. The enterpriseplans to lease shop shelf space and display boards to build brand awareness.The enterprise also plans to display its products at prominent trade fairs inIndia. Only in the third year, when sufficient profits have been generated andreserves built, does the enterprise plan to invest in media advertising anddecrease focus on certain other areas. Table 16.3 below presents relevant andproposed selling expenses of Anmol Enterprises. Such expenses are not to beincurred uniformally in all outlets but selectively.

Table 16.3 Planned Selling Expenses on Point of Sale ofAnmol Enterprises

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A Supermarkets 9 2 5 16

B Departmental Stores 25 2 11 38

C Provision Stores 55 11 45 111

D Petty Shops 202 43 83 328

Region Chennai Salem Coimbatore Total

Outlet Category

1 2 3 4 5

1. Glow Sign Board 6 1.5 1.5 1 1 12. Market Support

— for Supermarkets 2.25 1 1.25 - -— for Dept. stores 4 2 2 - -— for Provision stores 6 2 4 - - -

3. POS Materials 12.5 2 1.5 3 3 34. Trade Fairs 7.5 1.5 1.5 3 2.25 2.255. Advertising through 18 - - 6 6 6

print and electronic media

Sr. Selling Expense Amount Year (Rs. in lakh)No. (Rs. in lakh)

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Institutional CustomersThe enterprise proposes to enter into an agreement with specialised chainstores in the region such as ‘Nilgiris’ and ‘Foodworld’ for sale of jams andother products in their brand name. The enterprise also plans to supply saucesto a re-labeller to market products in their brand name effectively, catering toa large number of buyers—hotels and restaurants. The selling expense indi-cated in the Table 16.3 excludes customer discount and margins that are con-sidered separately in their market plan. The expenses and the plan proposedin this sub-section are to encourage consumer pull for their products.

More Realistic Sales (Price) and Input Estimates

Product-wise sales have been estimated by the promoters multiplying the pro-jected output by the selling price as indicated in table 16.4 below.

Table 16.4 Estimated Average Selling Price and Projected SalesRealisation of Product-mix

The enterprise has estimated the selling price of products on the basis of theweighted average selling price over one year of other similar processors in theregion. The raw material purchase price has also been similarly estimated.The prices have been weighted with the number of months the rate prevailson an annual basis. The estimates are hence more realistic.

Applied Management in Business: Learning from Existing Businesses 169

Tomato Ketchup and 36.85 13.34 14.01 15.34 16.68 16.68Tomato Sauce

Chilly/Soya Sauce 38.00 22.20 23.21 25.25 27.75 27.75

Jams 60.50 23 24.15 26.45 28.75 28.75

Tomato Puree 53.70 2.10 2.21 2.42 2.63 2.63

Garlic Paste/Ginger Paste 38.00 1.98 2.08 2.28 2.48 2.48

Ready-to-Eat products 75.00 21 22.05 24.15 26.25 26.25

Pickles 38.50 3.60 3.78 4.14 4.50 4.50

Squashes/Crush 64.00 5.81 6.10 6.68 7.26 7.26

Synthetic Jellies 60.00 3.64 3.82 4.42 4.55 4.55

'Masala' Powders 118.50 14.20 14.91 16.33 17.75 17.75

Products WeightedAverage Sales Realisation (Rs. in lakhs)Selling Price (Rs. per proposed standard unit)

Year 1 Year 2 Year 3 Year 4 Year 5

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The enterprise has also been conservative in projecting sales in terms ofcapacity utilisation. This is another factor that a lender scrutinises. As theenterprise appears to achieve sufficient Debt Service Coverage Ratio (DSCR)as indicated in table 16.5 below even at a low capacity utilisation, the projectrisk is believed to be low.

Table 16.5 Capacity Utilisation as per Projected Profitability Statement ofAnmol Enterprises

Based on the expenses projected in the profitability statement, the break-evenpoint of the enterprise is estimated. The enterprise is expected to operate onbreak-even levels from the first year itself despite its conservative projections.Given the specific analysis and projections made above, under normal cir-cumstances, there is hardly any reason why a lender will not support the proj-ect or question its viability. DSCR is also high in this case. Table 16.6 belowhighlights the point.

Table 16.6 Debt Service Coverage Ratio of Anmol Enterprises

An entrepreneur needs to accord adequate consideration to the market plan.The case in this sub-section highlighted efficient procurement and productionmanagement and indicated only some critical aspects that need be given con-sideration when preparing a plan. The product and market mix analysis andconservativeness are fundamental issues. The product market plan is the basisfor financial plan of an enterprise.

ANALYSIS AND MANAGEMENT OF RISK IN ANENTERPRISE: PARAG BISCUITS, AHMEDABAD

There are other critical decisions to be made in a project. These are particu-larly on the cost and financial structure of an enterprise. Decisions need to bemade on the risk and profitability orientation of a project. Consider an adverseenvironment with falling demand and increased competition. An analysis of

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Capacity utilisation 40% 45% 55% 75% 75%Year Year 1 Year 2 Year 3 Year 4 Year 5

DSCR 5.22 4.61 4.68 5.34 5.84Year 1 Year 2 Year 3 Year 4 Year 5

(Rs. in Lakh)

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the cost structure of Parag Biscuits reveals a thrust on fixed costs. This impliesan aggressive or relatively risky cost structure as the environment is adversefor this enterprise in terms of falling sales and margins in the past two years.

A break-even analysis highlights the level of sales at which the profitbefore tax (PBT) is zero. The following information is available on the enter-prise. The data presented in Table 16.7 below is for 2001–2002.

Table 16.7 Expenses-Revenues-Profit for Parag Biscuits,Ahmedabad (2001–2002)

Break-even sales may be estimated by using the formula: Fixed costs oversales realisation minus Variable cost. Break-even sale is at about 50 per centof current sales.

Risk Analysis of the EnterpriseRisk is estimated in terms of possible variability in profit. The variability in prof-its arises primarily because of variability in sales (volumes or margins or both).The impact on the PBT of Parag Biscuits if sales drop from its current level indi-cates a fall greater than the fall in sales. This is the Degree of Total Leverage(DTL) and measures the risk arising out of the sensitivity of profits to sales.

The risk includes: (i) the Degree of Operating leverage (DOL) arising fromthe structure of operating costs (variable costs that vary with output and fixedcosts that do not) of the enterprise, (ii) the Degree of Financial Leverage(DFL) arising from the financial structure of the enterprise. This refers to debtas against the equity structure in the capital of an enterprise.

Applied Management in Business: Learning from Existing Businesses 171

Sales 25,00,000

(Less) Variable Costs 21,25,000 (70,000)(Interest on WC)

Contribution 3,75,000

(Less) Fixed Costs 1,85,000

Profit before tax (PBT) 1,90,000

Expenses-Revenues-Profit Amount (in Rs.)

Contribution 3,75,000DTL = = = 1.97

PBT 1,90,000

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The Degree of Operating Leverage (DOL) measures the percentage changein PBT for a percentage change in sales: An enterprise that has higher levelsof fixed costs in operation will have a higher DOL.

The Degree of Financial Leverage (DFL) on the other hand measures thepercentage change in PBT for a per cent change in PBIT. An enterprise that hastaken more of institutional finance vis-à-vis own equity will have a high DFL.

The Degree of Total Leverage (DTL) is the product of the DOL and theDFL: Fixed costs in operations cause a 1 per cent change in sales to lead to amore than 1 per cent change in the PBIT. Similarly, 1 per cent change in thePBIT causes profits to change by greater than 1 per cent. Fixed costs leveragethe impact of changes in sales on profits. A high DTL is fine if sales havescope to increase and market growth is high in an industry. If not, it could beharmful to the enterprise as the fall in the PBT will be 1.97 per cent (DTL) forevery 1 per cent fall in sales. Structuring an enterprise’s finance and cost isthus important to increase its returns or reduce its risk.

The lessons for an entrepreneur do exist in the food-processing sector interms of exploring, outsourcing options of some activities as to reduce inter-est burden on fixed investment, which is a fixed cost, for example. Further,depending on the risk-return trade-off and potential of an enterprise, greaterdebt financing may be availed of and/or variable costs may be selectively con-verted into fixed costs as a part of the revised project report.

SYSTEMS IN BUSINESS

Management information and control systems (MICS) are important areas inenterprise management. As an illustration, consider the following case of anenterprise—Narsi’s Vegetable Processors engaged in the manufacture ofmango pickles in Hyderabad, Andhra Pradesh. The enterprise buys mangoesfrom wholesalers and undertakes processing and marketing. The enterprisemarkets its products in Hyderabad. Purchasing and stocking decisions are

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Contribution 3,75,000DOL = = = 1.44

PBIT 2,60,000

PBIT 2,60,000DFL = = = 1.36

PBT 1,90,000

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most critical in this sub-sector as the availability of products is seasonal andthe contribution of raw material cost to the total annual cost of production ofsuch an enterprise is high. Purchase on the basis of economic order quantityis critical in such business to optimise the cost and the benefit by virtue ofinventory management.

Economic Order Quantity (EOQ) in PurchaseManagement information and control systems for larger enterprises mayinclude utilisation of production and scrap reports on a daily basis, batch con-sumption reports, material utilisation report and production report on amonthly basis and, a purchase and stores ledger. Nevertheless, most critically,the EOQ at the enterprise level has to be estimated for enterprises that aretiny and small to facilitate purchase and stocking decisions. For instance,Narsi’s Vegetable Processors in Hyderabad requires raw material of 90,000 kgof mangoes a year. The enterprise works at an average for 300 days a year.The cost of processing an order is Rs.30 and the carrying cost per kg. ofmango is Rs.2 for one year. Lead-time for receipt of inputs upon order is fivedays and the enterprise may keep a reserve stock of 4 days’ usage. The eco-nomic order quantity and the re-order point may be estimated incorporatingthe formula:

The EOQ works out to 5196 kg. The re-order point may be estimated asfollows:

Re-order point = Safety stock × Usage rate + Lead time ×Usage rate

= 4 (300) + 5 (300) = 2,700 kg

Obviously, the variations in sale price over different months need be givendue consideration and then the EOQ decided upon. (The participants may beasked to work out EOQ of purchase of a hypothetical enterprise and discusstheir estimations).

Applied Management in Business: Learning from Existing Businesses 173

EOQ = 2AO/C, where A is the annual requirement of input, O is theordering cost (communication, transport, etc.) andC is the carrying cost (storage etc.)

Daily usage 90,000300

300 kg= =

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Maintaining Information on the CostStructure of a BusinessThe table below presents the cost structure and activity levels of a food pro-cessing (jam making) enterprise for 2001–2002. Maintaining information inthis format will facilitate decision making in an enterprise.

Cost Structure and Activity of an Enterprise for 2001–2002

Assume that the enterprise now receives an offer from an exporter on certainspecific terms. The exporter offers to buy products from this enterprise at aprice 20 per cent more than his current sale price. The exporter, however,guarantees offtake of only 80 per cent of his current sale. He also insists thatthe manufacturer offers his product to no one else directly. Certain otherexpenses are likely to rise. The Table below summarizes the offer.

Would the enterprise’s profits increase or decrease, if it accepts the offer?The cost structure and the activity of the enterprise, it accepts the offer, ispresented in the table below.

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Sales (10,000 jars @Rs.75 each) 7,50,000

Variable cost (10,000 jars @Rs.65 each) 6,50,000

Contribution 1,00,000

Fixed cost 30,000

Profit 70,000

1. Offer of increase in prices = 20% 2. Reduction in sales = 20% (As the exporter would like the enterprise to manufacture

for him alone)

3. Variable expenses increase = 20% 4. Fixed cost increase = 10% (in(in terms of better quality raw terms of additional expense onrelated cost) upgrading equipment)

Price Rs.90 per jar Total variable cost Rs.7,80,000

Variable cost Rs.78 per jar Fixed cost Rs.33,000

Production 10,000 jars Total sales Rs.9,00,000

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Therefore, profit equals Rs.87,000. Profit, therefore, increases if theenterprise accepts this offer. The decision to accept the offer may be madequickly and approximately, if an enterprise maintains ready data on its coststructure.

As a second illustration, consider the concept of a simple systems tool pre-sented below. Systems for cash management are important. If a business runsout of cash it may not be able to pay dues on time or take advantage of oppor-tunities because of lack of funds to finance them. A portion of profit shouldbe saved and ploughed back to business as retained earnings. Continuousinformal borrowings will put pressures on an entrepreneur to pay high inter-est and could affect credibility. All cash receipts and expenses should be reg-ularly recorded. A simple but extremely utilitarian tool appropriate for busi-ness decision-making is a cash-cum-cost sheet. A cash-cum-cost sheet allowskeeping records of cash and cost. But, more importantly, it helps decision-making on purchase and sales (discount v/s credit) and on structuring of coststo take advantage of leveraging effects of fixed costs on profits, or alterna-tively, reduce business risk.

A Cash-cum-Cost Sheet for EfficientDecision MakingThere are many reasons why an enterprise may run out of cash. Sales may bepoor or perhaps containing credit, besides the burden of paying the raw mate-rial supplier for credit purchase. Cash goes out even before it comes in.Working capital is used on personal expenses or directed to the purchase ofequipment. Short-term funds are diverted to long-term investment.

A cash-cum-cost sheet is a tool that allows to forecast how much cash isearned and how much is spent on every operating cycle. It also showsthe structure of costs. When cash is short at the end of one operating cycle,one can take remedial measures and purchase on credit and sell on cash,perhaps by offering discounts over the next operating cycle. One can alsostrive to convert fixed cost into variable cost when one is confident ofsales or margins for the next operating cycle or next few cycles. Even ele-ments of cost such as raw material purchase, which is invariably a variablecost, may be converted to a fixed cost temporarily or for longer periodsby means of post-dated cheque payments (with bank guarantee) or higherinventory stockpiling.

One can make entries in a cash-cum-cost sheet for the period of one oper-ating cycle as to plan on purchase and sales decisions as well as on prof-itability orientation on the next.

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An Illustration on Maintaining a Cash-cum-Cost SheetCash transactions may be recorded on the left page. Cash received, cash dis-bursed, investments, revenues and costs may be recorded on the right page.Incomes are cash received and costs are cash disbursed.

As an illustration, consider a ‘papad’ and ‘masala-making’ enterprise. Theenterprise had about Rs.5,00,000 as cash balance as on February 1, 2001 andused it to buy materials worth Rs.80,000 on February 10, 2001. On February13, the enterprise again bought raw material for Rs.50,000 and paid rentalcharges totalling Rs.80,000. On February 25, there was sale of products to anexporter for Rs.2,00,000. On February 27, the enterprise sold more productsto another trader for Rs.8,20,000. On February 28, the enterprise bought rawmaterial for Rs.7,00,000. These transactions are recorded in the followingcash-cum-cost sheet.

LEFT PAGE (CASH SHEET)

RIGHT PAGE (COST SHEET)

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2/1 5,00,000

2/10 Bought raw material Rajan Traders - 80,000 4,20,000

2/13 Bought raw material Mahesh Traders - 50,000 3,70,000

Paid rent (annual lease) - - 80,000 2,90,000Arrangement paid every6 months

2/25 Sales Alap Holds 2,00,000 - 4,90,000

2/27 Sales Mukesh Enterprise 8,20,000 - 13,10,000

2/28 Paid wages (piece-rate) Employees - 7,00,000 6,10,000

Total 10,02,000 9,10,000 -

Date Explanation To/From Cash Cash CashReceived Disbursed Balance

5,00,000 - - -- - 80,000 -- - 50,000 -- - 80,000- 2,00,000 - -- 8,20,000 - -- - 7,00,000 -- - - 80,000

5,00,000 10,02,000 8,30,000 -

Start-Up/Investment Income Variable Cost Fixed Cost

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In the cash-cum-cost sheet above, all expenses are recorded as variable orfixed costs simultaneously. As indicated earlier, such system tool facilitatesdecision-making on the purchase, sale and ‘outsourcing’ or profitability front.For instance, measures to consider when cash balance is inadequate given theworking capital requirement for the following operating cycle, include offer-ing shorter periods for credit sales and a discount for cash sales and suppliersrequested for credit. Further, if not very confident of demand in the next cycle,one may also reduce business risk by reducing the fixed cost, perhaps by dis-continuing the annual lease arrangement and utilising the idle capacity ofother enterprises on a monthly basis or by employing labour on contract thansalary basis and by reducing the stocking of raw material and inputs.Alternatively, one may enhance the potential for increasing returns or marginsby converting piece rate to salaried labour if the cash balance is relativelyhigher and market demand exists. Costs may hence be reduced and marginsincreased. That is by converting variable costs into fixed costs. Almost allvariable costs may be converted into fixed costs and vice versa. Such simplesystems in business could help make or break an enterprise.

These decisions also affect working capital requirements for the next oper-ating cycle. Working capital management involves estimating quantities ofraw material or components, stock-in-progress, finished goods stock and billsreceivable to be carried at any time so that uninterrupted production andinflow of cash are maintained. Working capital investment has a cost in termsof interest on funds invested, if they are borrowed, or if it is equity financed,there is a loss of return that could have been earned if invested alternatively.Those dealing with exporters and working on orders may require workingcapital only for raw material and stock in process as finished goods may bedispatched immediately upon production. The fortunate ones may also havetheir payments received immediately. The cycle beginning with the holding ofraw material or components and ending with the ‘carry’ of finished goods isknown as production cycle. The cycle which extends beyond the stage of ‘fin-ished goods carry’ up to ‘carry of receivables’ due from customers is calledan ‘operating cycle’.

A business has two kinds of assets: fixed assets such as machinery, land,building and operating assets, which are enclosed by one operating cycle.Operating assets are called gross working capital. Current liabilities such asthe amount due for purchase of raw material, components and stores, viz. billspayable and credit received for other services, payment to electricity and tele-phone departments or money from an ‘informal’ money lender, all constitutea source of working capital. The net working capital is thus the differencebetween these and the gross working capital.

The cash credit facility is normally given by financial institutions to a busi-ness in the form of a running current account. Funds may be drawn from time

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to time for only working capital requirements. This account is subject to‘drawing power’. The drawing power is the limit to which one can draw fundsout of this account. The drawing power is determined on the basis of marketvalue of stocks (raw materials, stock in process and finished goods) and bookdebts at a given point of time less the amount of margin contribution by theborrower (say, 20%) that is predetermined. The banker may require weekly,monthly or fortnightly certified statements of stock holdings and book debtsoutstanding. The bank may also insist on paying the supplier of raw materialdirectly from out of the cash credit facility. A financial institution may alsorequire certain documents that must be executed before provision of loan.Securities may include primary security and secondary or collateral security.Primary security includes tangible assets such as stock and book debts in thecase of a cash credit facility and equipment or particular asset that is financedfor a long-term use. Collateral security may include tangible assets such asproperty or intangibles such as guarantees from borrower or persons who arethird parties.

Advantage of Cash Purchase of Raw MaterialsConsider Parag Patel’s enterprise. He manufactures pickles at home. Rawmaterial fruits and vegetables are available on credit. For every Rs.100 of rawmaterial purchased, Rs.2, that is 2% is the interest for credit offered. An enter-prise that buys about Rs.1 lakh worth of raw material every month and paysRs.2,000 as interest may save this and increase their net earnings. The cost ofproduction approximately accounts for about 20 per cent of raw materialcosts. Assume current earnings to be Rs.6,000 a month or about 5 per cent ofthe cost of production. If Rs.2,000 can be saved every month, it increasesearnings for an enterprise by 33 per cent.

DAS AGENCY PVT. LTD.: A CASE ON MANAGERIALDEFICIENCIES CONTRIBUTING TO POORPERFORMANCE

Das Agency Pvt. Ltd. markets a wide range of processed foods. Das hadlaunched his business in 1998. The enterprise market viz. distributes productsof other brands as also ‘outsources’ processing and sells products in its ownbrand. The enterprise operated from a rented warehouse-cum-office head-quartered near Chennai. Das Agency Pvt. Ltd. is involved in procurement andsale of various products, including squash, jams and jellies and curried veg-etables. The products were sold through one small leased outlet in Chennai. Itwas also sold through other retailers and directly to household consumers who

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normally gave specific orders. Table 16.8 below presents the approximatedmarket mix of the enterprise.

Table 16.8 Market mix of Das Agencies Pvt. Ltd. (2002–2003)

Majority of sale was through own retail outlets. Retail prices in India were thesame in all retail outlets. Profit margins were, therefore, lower on indirectretail sale. Sale was also through indirect exports, traders for domestic mar-kets and direct sale to consumers. As the table above indicates, there werevarying degrees of profitability in sales through different market channels ormarket-mix. About 50 per cent of sales were credit sales regardless of thechannel. The enterprise used the services of CFTRI for developing newprocesses and new blends and mixes. A retired professional from the CFTRIwas appointed as a consultant on monthly retainership for this purpose.Activities of the enterprise largely included procurement, packaging and sale.

All products were outsourced. Developing new blends, particularly of thesquash and ‘masala’ products, was an area of expertise of Das. He had devel-oped over 16 blends and mixes of squash and ‘masalas’. Each blend was tosuit the taste of different ethnic communities based in Chennai. Das Agencieshad a number of suppliers and manufacturers to outsource production, butwere lucky to have vendors who retained quality.

While the business has been earning profits, it has been lower thanexpected. Performance has fallen compared to turnover growth. Stocksseemed to be mismanaged as the bank overdraft often crossed limits—partic-ularly during peak demand. The turnover growth of the company seemed to

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Sales (Rs.) 26,00,000 14,72,000 3,76,000 3,60,000 1,44,000 49,52,000

Gross contribution 10,72,000 3,96,000 1,08,000 1,40,000 17,16,000(sales minus costof production, inc-luding finishing &packaging charges)

Direct expenditure 4,24,000 1,60,000 48,000 36,000 20,000 6,88,000

Contribution (Net) 6,48,000 2,36,000 60,000 1,04,000 20,000 10,28,000

Indirect expenditure 4,52,000 2,16,000 64,000 60,000 24,000 8,56,000

Net profit before 1,96,000 20,000 4,000 44,000 44,000 1,72,000tax &interest

Own Other Export Direct Traders TotalRetail Retail (Indirect) Consumers- (Domestic (100%)Outlet Outlets Households sale)

(CustomizedOrders)

(Amount in Rs.)

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be putting stress on availing own financial resources. Das was confident of theability of his enterprise to improve performance despite intense and increas-ing competition. Das wondered on options, whether to:

1. Change the structure of capital of the enterprise to enhance profit andprofitability?

2. Backward integrate into food processing than continue with mere pack-aging and marketing of processed food?

3. Change his pricing strategies in different marketing channels?

4. Improve management in his enterprise in terms of production, financeand marketing as, though his turnover has been increasing, his profitshave not, proportionately?

The financial performance of the enterprise in the last two years are sum-marised in the tables below.

Table 16.9 DAS AGENCIES PVT. LIMITEDProfit and loss account for year ending 31st March 2002 and

31st March 2003

(Estimates rounded off to the nearest ‘000)

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Sales 49,51,358 31,48,252

Cost of Goods Sold (32,34,808) (20,81,684)

Profit (Gross) 17,16,580 10,66,588

Distribution Cost (3,32,180) (2,27,296)

Administration Costs (about 70% are fixed costs) (12,13,724) (6,89,936)

Operating Profit 1,70,676 1,49,356

Interest Receivable - 1356

Interest Payable (46,172) (10,980)

PBT 1,24,504 1,39,732

Tax on Profit Earned 37,068 39,756

PAT 87,436 99,976

Retained Profit (in the beginning of the year) 1,15,976 16,000

Capitalisation Issue (1,00,000) -

Retained Profit (at the end of year) 1,03,412 1,15,976

2002–2003 2001–2002Rs. Rs.

(Amount in Rs.)

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Table 16.10 DAS AGENCIES PVT. LIMITEDBalance Sheet as on 31st March 2002 and 2003

(Estimates rounded off to the nearest ‘000)

The sub-section below presents an indicative analysis of performance andfuture potential of the enterprise.

A Performance and Potential Analysis ofDas Agencies Pvt. Ltd.The enterprise has seen steady growth in sales since its inception. The pro-moter Das is technically well trained, having graduated from CFTRI, and veryrightly utilises the ‘retailer-push’ factor in promoting and selling his products,but lacks in management skills in other areas. Decisions are taken on thumb-rule basis. Growth in sales and increase in activity has not been well managed.This has somewhat affected performance. The performance potential of theenterprise has not been adequately exploited.

A diagnosis of the enterprise may help the present performance as shownin the statement below. The estimates are approximated, as the objective is toonly pursue an indicative analysis. Sales have increased in the two periodsviz. 2002–2003 over 2001–2002.

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1. Fixed Assets 2,00,932 1,83,272

2. a. Stock (Current Assets) 5,20,496 5,97,668

b. Accounts receivables (Current Asset) 4,32,132 3,06,256

c. Cash (Current Asset) 1952 1512

Total Current Asset 9,54,580 9,05,438

3. Creditors (Current Liabilities) 9,04,484 9,31,376

4. Net Current Assets (50,096) (25,940)

5. Creditors Falling due beyond one accounting year (7532) -

6. Provisions (36,080) (37,352)

7. Net Assets 2,07,416 1,19,980

8. Share Capital (Fixed liability) 1,04,004 4,004

9. Profit and Loss account 1,03,412 1,15,976

10. Capital Employed (Total in business) 2,07,416 1,19,980

Sr. No. 2002–2003 2001–2002Rs. Rs.

(Amount in Rs.)

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The Financial FrontThe net contribution to sales has been about the same over 2001–2002 and2002–2003. The overheads have increased as a percentage of turnovers in2002–2003. Operating profits have fallen in terms of sales over the two peri-ods. The expenditure on interest has also increased. Earnings after interest asa percentage of sales have gone down.

Financial Leverage: The unit did not take ideal advantage of financialleverage, as initial bank borrowings seem low. Savings on the incometax front could have been more. The enterprise has increased leveragesince but not to the extent desired.

Return on Capital Employed: Return on capital employed has fallenover 2001–2002 to 2002–2003.

Current Ratio: The current ratio of the enterprise has always been rel-atively poor. The enterprise seems to have invested short-termfunds for long-term purposes. Considering the current ratio, the enter-prise seemed to have invested more than ideal levels of own funds infixed assets. A term loan could have helped maintain better liquiditylevels.

Cash Flows and Problems: Cash balance has fallen considerably. Thenet ‘contribution’ as a percentage of sales is almost the same in bothyears.

The Marketing FrontGrowth Rate: The turnover of the enterprise has seen good growthover the years. Turnover has increased considerably between2001–2002 and 2002–2003. Net profits are however, a small percent-age of sales. This is a poor margin on sales performance. They mayreflect a poor market or product mix with a tendency towards worsen-ing circumstances.

Debtor Turnover: Sale through own retail outlets has been on cashbasis while remaining sales are on credit basis. The Debtor Turn-over Ratio (viz. Credit sales to Debtors) is about the same,indicating poor focus upon market mix or discount vs. creditmodes.

Margins in terms of operating profits and profit before tax (PBT) tosales have dropped although sales has increased. This has occurred in

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spite of increase in sales as overheads (administrative expenses) haveincreased more than proportionately. Earnings after interest have fallenin terms of percentage of sales as interest expenses have increased sev-eral folds.

Sales Mix: The sales mix in terms of product or market mix does notseem decided, considering the contribution per rupee of sales buton thumb-rule basis. The scope for efficient pricing and discountstratagem on the basis of contribution analysis seems to have beenignored. This could have reduced debtor realisation time and enhancedperformance, including sales. Economies of scale do not seem effec-tively reaped in marketing. As sales have increased, ideally, overheadsto sales ratio should have reduced. Rather, it has increased. This indi-cates the need for revamping product or market mix and evolving anideal promotional stratagem perhaps in terms of credit and discount.

The Production Front

Rise in Variable Costs: The enterprise is largely outsourcing entire‘production’. However, it has invested in equipment for packaging andlabelling.

Inventory Turnover: There may be mismanagement in terms of stock-ing raw material and finished goods inventory. Thus, inventoryturnover ratios (ITOR) have fallen between the two years. This maylead to increased working capital requirements and a cash crisis.Analysis of stock turnover at the market and product mix level seemignored.

Creditors: The level of non-bank creditors seems to be high. Interestcost has increased several folds as compared to 2001–2002. The use ofnon-bank creditors could imply higher interest charges over the years.This may have also affected performance, viz. margins.

Systems for planning seem to be on thumb rule basis. In essence, to enhanceperformance and sustainability, the enterprise could go in for higher levels ofinstitutional debt finance, may consider integrating backwards into process-ing, as also develop the marketing front in terms of offering ‘credit and dis-counts’ in channels of products, where contribution is the highest to ensurethat turnover increase will be matched with profit increase even while bene-fiting from a higher operating and financial leverage and hence profitability.In fact, these are aspects that need to have been considered earlier even dur-ing conception and implementation of the project.

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NETWORKING OPTIONS TO BE CLUBBED WITHMANAGEMENT EFFICIENCY

In fact, management efficiency at the enterprise level needs to be clubbed withefficient networking. There are many regions with established food-process-ing enterprises but with a weak technical knowledge base, weak informationchannels and limited facilities for testing and research. Legal and qualityissues may be unknown. Legal compliance, support in HACCP certificationand need for establishing food-testing laboratories are critical. An informationportal www.foodindia.org with information on international product standardshas been developed by the ‘Mahratta Chamber’ (MCCIA) in Pune, forinstance. But, few are aware of the facility. Information gaps need to bereduced by networking with different support institutions.

The food processing enterprises at Pune produce products such as jelly,squash, pickle, dehydrated ready food mixes, bakery products, milk productssuch as sweets, ice creams, confectionery items, ground cereal flours, papad,processed spices, etc. A consultant was called (FICCI, Quality Forum, NewDelhi) to introduce HACCP. A food-testing laboratory was established notonly to carry out testing facilities but also to carry out research and providetraining facilities to firms. The laboratory was established to work on theareas of product testing, (quality control & quality assurance), product devel-opment and training in an integrated manner. The Food Research andAnalysis Centre (FRAC), New Delhi, signed an MOU with MCCIA to pursueinitiatives.

FRAC helped the Pune laboratory in the selection of right machinery, staffand in training. In essence, SIDBI and the Ministry of Food ProcessingIndustries provided financial support. MCCIA provided finance and manage-ment. The FRAC provided finance and management and the CFTRI providedtraining. Such interventions for the benefit of enterprises in a region may becatalysed only if enterprises work together to ensure the same.

An information centre was developed for farmers, which strengthenedbackward linkage of processed food units. Potential entrepreneurs in otherregions should learn of such options to enhance performance.

Grameen Information Centre (GIC)In the food-processing region of Pune, IT is used to develop linkages betweenfood-processing units and agriculture producers around the city. The GIC is aconcept developed to provide information to facilitate better linkages.Information is provided on technology, prices, demand and supply situation in

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the international scenario, rules and regulations for exports, import duties,standards and specifications. A pilot GIC was established near Pune. Variousactivities of the GIC include ‘Rice Programmes’ to encourage better seeds andhybrid varieties; ‘Organisation Farming Programmes’ for the development ofniche products; dissemination of information on Government sponsoredschemes, new technologies in agriculture, post-harvest techniques, weatherforecasting and guidance on crop protection.

Development of Raw Material PurchaseConsortia or ‘Raw Material Banks’Input supplies to individual enterprises may be bought in volumes meritingdiscounts. Purchase consortia lend strength to small enterprises vis-à-vis sup-plies. It is necessary to secure information about raw material and inputsources and quantity discount-related options. Agencies such as the NSICmay be approached for establishment of such raw material banks. Forinstance, in Ahmedabad for certain vegetables Rs.5 crore is believed to be theoptimal size of purchase (on a quarterly basis). Networking with other enter-prises to purchase together may help even smaller individual enterprises ben-efit sustainably in terms of cost reduction.

The ‘sub-optimal’ raw material purchase price of various inputs (as it is),often on a credit purchase basis and in an uneconomic quantity, affects thecost structure of many smaller enterprises in different sub-sectors. The cost ofuneconomic purchase as also credit purchase need be avoided. The return oninvestment (pre-tax) to such common ventures (pre-tax) equals over 50 percent. Even if partly (debt for working capital) bank-financed, the ROE islikely to be very high, depending on the extent of rotation and amount andcost of working capital secured.

Development of Common Facility Centresand Exploring Common Financing OptionsCommon Facility Centres (CFCs) have the objective of providing necessaryservices to smaller enterprises. Shared facilities may be in terms of researchand development and product testing and standardisation. The PeenyaIndustries Association in Bangalore has, for example, established a permanentexhibition-cum-display centre for members’ products. Such centres may besupported by various ministries such as the Ministry of SSI and ARI, DC(SSI), etc. Common Facility Centres help smaller enterprises utilise expensivefacilities which they as individual enterprises cannot afford to develop and

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use. Common Financing options can be explored as it benefits tiny and smallenterprises that do not have access to institutional working capital due totheir inability to produce necessary documents on collateral. Mutual CreditGuarantee Fund Scheme (MCGFS) implemented by SIDBI is one suchoption.

The options of networking are several. Entrepreneurs in the sector mayexplore networking options among themselves as also establish a good net-working with support institutions to sustain performance.

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Legal Requirements

All industrial activities are governed by certain legal provisions that comein force from time to time. A few of them are given here with brief expla-

nation for your understanding. These could be divided into ‘general’ and‘Food Processing Industry specific’.

GENERAL LEGALITIES

Factories Act, 1948This is applicable to enterprises where the number of employees is:

Ten or more and where power is used; or

Twenty or more and power is not used.

The enterprises covered under the Act are required to keep certain records:

Muster Roll

Workers Register

Overtime Register

Advance Register

Register for Fine

Register for Deductions

Register of Wages

Register of Accidents and Dangerous Occurrences

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Bond Inspection Book

Register of Cleaning and White Washing

Record of Examination of Parts of Machinery

There is another Act known as Shops & Establishment Act which is applica-ble to shops and business undertakings employing 5 or more persons.

Employees Provident Fund &Miscellaneous Provisions Act, 1952The Act applies to every factory or establishment employing 20 or moreemployees. It, however, exempts a factory or establishment for an initial periodof 3 years from commencement of business if the number of employees is morethan 50 and for an initial period of 5 years if the number of employees is lessthan 50. The minimum contribution payable by the employer is 12% of the basicsalary contribution and Dearness Allowance. The employee also makes anequal contribution. The Act, however, does not specify a maximum contribution.

Employees’ State Insurance ActIt provides benefits to employees in case of sickness, maternity and employmentinjury and for certain other matters in relation thereto. The Act also provides forpayment of contributions by employers and employees at the rates specified inthe First Schedule of the Act. The existing rates of employee’s contribution varyaccording to wages and the employer’s contribution is exactly double the emp-loyee’s contribution. It shall apply to factories employing 20 or more people.

Payment of Wages Act, 1936 This Act is applicable to factories and establishments, which come under TheFactories Act. The act is restricted in its application to the class of workerswhose wages range upto Rs.1,600/- per month.

Minimum Wages Act, 1948The employer has to pay minimum wages to employees in certain scheduledindustries. At present the minimum wages act is applicable in 44 scheduledindustries.

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The Indian Partnership Act, 1932The Indian Partnership Act, which was amended in 1932, provides for rulesrelating to foundation of legal partnership. It states the rights and duties of thepartners amongst themselves and outside and lays down rules regarding thedissolution of partnership.

Central Excise (CE)The Central Government is empowered to levy excise on all articles manu-factured in India except alcohol, alcoholic preparations and narcotics. Theliability to duty starts the moment a new commodity is manufactured. Thereare, however, certain exemptions granted to SSI units. However, there is noCE on fruit and vegetable products.

Sales TaxSales tax is tax levied by state and centre. Tax charged by state is called LSTor Local Sales Tax and tax charged by Centre is known as CST or CentralSales Tax. The latter is charged when goods move out of a state.

The Income Tax Act, 1911The Act governs the levy of income tax in India. It defines various terms andexpressions and states the liability of a person to pay income tax. The ratesand pattern of taxation, however, are changed from time to time.

Pollution Control ActThe State Air and Water Pollution Control Board is the body responsible forimplementing this Act. The act is applicable to all kinds of industry.

SPECIFIC LEGALITIES: (FOOD PROCESSING)In addition to the general legal requirements, there are a few legal require-ments that are specific to Food Processing Industries. A food processingenterprise has to comply with several compulsory legal requirements.Implementation of these norms with regard to Small and Medium Enterprises

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is relatively stringent while cottage and household level units sometimes tendto compromise on such stipulations. These laws include:

a. Prevention of Food Adulteration Act (1954): which is the basic statuteto protect consumers against supply of adulterated food. The CentralCommittee for Food Standards ‘under the Directorate General &Health Services Ministry of Health and Family Welfare has specifiedthe standards.

b. Milk and Milk Products Order (MMPO): regulates milk and milkproducts production in the country. The order requires no permissionfor units handling less than 10,000 litres of liquid milk per day or milksolids upto 500 tpa.

c. Fruit Products Order (1955): regulates manufacture and distribution ofall fruit and vegetable products, sweetened aerated waters, vinegar andsynthetic syrups. The license is issued by Regional Director of MoFPIlocated at Mumbai, Delhi, Kolkatta, Chennai and Guwahati based onthe satisfaction of the concerned officer with regard to quality of pro-duction, sanitation and hygiene, machinery and equipment and workarea standards.

d. Standard of Weights and Measures (Packaged Commodities) Rules,1977: lay down certain obligations for all commodities in packedform with respect to their quality declaration. The Directorate ofWeights and Measures under the Ministry of Food and Civil Suppliesoperates these rules.

e. Export (Quality Control and Inspection) Act, 1963: is operated by theExport Inspection Council and under this act many exportable com-modities have been notified for compulsory pre-shipment inspectionunless specifically requested by the importer not to do so.

f. Voluntary Standards: are regulated by organisations involved withvoluntary standardisation and certificates systems concerning qualityparameters in food. They are the Bureau of Indian Standards (BIS)and Directorate of Marketing and Inspection (DMI). The food pro-cessing industries sector as a whole involves other legislations.

g. Oils, Deoiled Meal and Edible Flour Control Order 1967 andVegetables Products Control Order, 1976: control the production anddistribution of solvent extracted oils, deoiled meals, edible oil seedflours and hydrogenated vegetable oils (vanaspati).

h. Meat Food Products Control Order, 1973: regulates manufacture,quality, and sale of all meat products and is operated by theDirectorate of Marketing and Inspection.

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Support Institutions for Promotionof Food Processing Sector

THE BASIC SUPPORT INSTITUTIONAL FRAMEWORK

While information on various sources of information is presented in thischapter, potential entrepreneurs need not contact all agencies but only

the relevant ones, depending on their information needs and support.Important agencies for information on procedures and formalities include theDistrict Industries Centres (DICs), Directorate/Commissioner of Industries,State Financial Corporations (SFCs), Technical Consultancy Organisations(TCOs), and agencies conducting Entrepreneurship DevelopmentProgrammes such as State level and National level EntrepreneurshipDevelopment Institutions and Non-Government Organisations (NGOs).

Ministry of Food Processing Industries:The Key PlayerThe Ministry of Food Processing Industries, is the key central agency of theGovernment responsible for developing a strong and vibrant food processingsector with a view to creating increased job opportunities in the rural areas,enabling the farmers to reap benefit of modern technology, creating surplusfor exports and stimulating demand for processed food. The sub-sectors underthe purview of the Ministry are Fruits and vegetable processing; Food grainmilling; Dairy products; Processing of poultry and eggs, Meat and meat prod-ucts; Fish processing; Bread, oilseeds, meals (edible); Breakfast foods;Biscuits; Confectionery (including cocoa processing and chocolate); Maltextract; Protein isolate; High protein food; Weaning food and extrude otherready to eat food products; Beer, including non-alcoholic beer; Alcoholicdrinks from non-molasses base; Aerated waters/soft drinks and other

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processed foods; Specialised packaging for food processing industries). Italso provides technical assistance and advice to food processing industry.Information on schemes of the ministry is available on the websitewww.mofpi.nic.in.

OTHER SUPPORT INSTITUTIONS AND THEIR ROLES

Central Food Technological Research Institute – CFTRI (www.cftri.com):The institute provides technologies for food processing enterprises.

National Small Industries Corporation Ltd – NSIC (www.nsicindia.com):The Corporation provides integrated technology, marketing and financialsupport to small scale sector.

Small Industries Development Organisation – SIDO (www.laghu-udyog.com): The office of the Development Commissioner (Small Scale Industries)also known as Small Industries Development Organisation (SIDO) functionsas the Nodal Development Agency for small industries.

Export Credit Guarantee Corporation of India Limited – ECGC (www.ecgcindia.com): ECGC covers the risk of exporting on credit. Being essen-tially an export promotion organisation, it functions under the administrativecontrol of the Ministry of Commerce, Government of India. It provides arange of credit risk insurance covers to exporters against loss in export ofgoods and services. ECGC also provides information on credit-worthiness/credit ratings of overseas buyers and various countries.

Credit status information agencies abroad Dun & Bradstreet – (www.dnb.co.in): It is one of the world’s leading sourcesof business information, enabling business-to-business commerce for past 160years. D&B has the largest company database available, with information onmore than 66 million companies worldwide, for credit, marketing and purchas-ing decisions. Businesses also use D&B's information and technology to authen-ticate and verify potential trading partners online, increasing their trust and con-fidence in e-commerce transactions.

Small Industries Development Bank of India – SIDBI (www.sidbi.com):The Small Industries Development Bank of India Act, 1989 envisagedSIDBI to be “the principal financial institution for the promotion”, financingand development of industry in the small-scale sector and to co-ordinatethe functions of the institutions engaged in the promotion and financing or

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developing industry in the small scale sector and for matters connected there-with or incidental thereto.

India Trade Promotion Organisation – ITPO (www.indiatradepromotion.org): This is the nodal agency of the Government of India for promoting thecountry's external trade. ITPO, during its existence of nearly three decades, inthe form of Trade Fair Authority of India and Trade Development Authority,has played a proactive role in catalysing trade, investment and technologytransfer processes. Its promotional tools include organising fairs and exhibi-tions in India and abroad, Buyer-Seller Meets, Contact PromotionProgrammes, Product Promotion Programmes, Promotion through OverseasDepartment Stores, Market Surveys and Information Dissemination.

Federation of Indian Export Organisations – FIEO (www.fieo.com): FIEOprovides the content, direction and thrust to India’s expanding internationaltrade. It expresses all the dynamism and resurgence that are the hallmark ofIndia’s open, liberal and progressively market-friendly economic and traderegime, representing the Indian export promotion effort in its entirety.

Export-Import Bank of India – EXIM Bank (www.eximbankindia.com):EXIM Bank, set up in 1982 for the purpose of financing, facilitating, and pro-moting foreign trade of India, is the principal financial institution in the coun-try for co-ordinating working of institutions engaged in financing exports andimports.

Websites on the services provided by some other support institutions, web-sites related to food processing sub-sectors (Annexure I) and country-wiseprofile in terms of export/import of processed food is given in Annexure II.A list of important trade fairs is provided in Annexure III. The addresses ofstate level nodal agencies of the Ministry of Food Processing is given asAnnexure IV.

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Important Websites Related to Other SupportOrganisations, Food Processing Sub-Sectorsand Addresses of Import Promotion Agencies

1. Useful Web Sites on Important Support Organisations: Sources oftechnology and marketing assistance

Coffee Board (http://indiacoffee.org)

Spices Board of India (http://www.indianspices.com)

Tea Board (http://tea.nic.in)

Office of the Controller General of Patents, Design and Trade(http://patentoffice.nic.in)

Directorate General of Foreign Trade (http://dgft.delhi.nic.in)

Indian Institute of Packaging (www.iip-in.com)

APEDA - Agricultural and Processed Products Export DevelopmentAuthority (http://www.apeda.com)

MPEDA - Marine Products Export Development Authority(http://www.mpeda.com)

DGFT - Director General Foreign Trade & Regional Licensing Authorities(www.commin.nic.in)

Central Institute for Research on Goats (http://cirg.up.nic.in)

Central Institute of Agriculture Engineering (www.ciae.nic.in)

Central Institute of Brackishwater Aquaculture (http://www.nic.in/ciba)

ANNEXURE I

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Central Institute of Fisheries Education (www.icar.org.in/cife/index.htm)

Central Marine Fisheries Research Institute (www.cmfri.com)

Central Plantation Crops Research Institute (www.cpcri.nic.in)

Directorate of Wheat Research (www.icar.org.in/dwr/dwrmain.htm)

Indian Agriculture Research Institute (www.iaripusa.org)

Indian Institute of Horticulture Research (www.kar.nic.in/iihr)

Indian Institute of Pulses Research (www.icar.org.in/iipr.htm)

Indian Institute of Soil Science (www.iiss.nic.in)

Indian Institute of Vegetable Research (www.icar.org.in/Directorate1.htm)

National Bureau of Animal Genetic Resources(www.icar.org.in/nbagr/nbagr.html)

National Bureau of Plant Genetic Resources (http://nbpgr.delhi.nic.in)

National Dairy Research Institute (http://ndri.nic.in)

National Research Centre for Cashew (http://kar.nic.in/cashew)

National Research Centre for Mushroom (http://www.nrcmushroom.com)

National Institute of Agriculture Extension Management(www.manage.gov.in)

Agmark (http://agmarknet.nic.in)

National Horticulture Board (www.hortibizindia.org)

Central Institute of Fisheries Nautical and Engineering Training(http://cifnet.nic.in)

Educational Institutes / Financial Institutions / Embassies / Universities(www.goidirectory.nic.in)

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2. Useful Websites on Food Processing Sub-Sectors

Vegetable Oils

http://www.oilseed.org/

Topics: Information dissemination, associations, information resources, news,fats and oils, processing, storage marketing, imports, exports, transport.

http://www.oelmuehlen.de/

Topics: Fats and oils, statistical tables, genetically engineered foods, associ-ation, news, FAQ’s, publications.

http://www.corn.org/

Topics: Associations, information resources, statistics, conferences, employ-ment, publications, education, cereals, processing, starch, fats and oils, leg-islation and regulations, news company information

http://www.geocities.com/CapeCanaveral/Lab/1669/Index.html

Topics: Associations, fats and oils, food science, food technology

http://www.nopa.org/

Topics: Associations, publications, statistics, conferences, foods, soybeans,company information, exports

http://www.canolainfo.org/scdc/

Topics: Information resources, health, diet, recipes, processing, education,food service, nutrition, fats and oils

http://fruitsandnuts.ucdavis.edu/

Topics: Information resources, fruits and vegetables, processing, marketing,nutrition, agriculture

http://www.eridania-beghin-say.com/html/gb/home.htm

Topics: Company information, Sugar, starch, fats and oils, marketing, pro-cessing, animal nutrition, herbs and spices, ingredients

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http://www.oilworld.de/

Topics: Fats and oils, economics, markets, publication, financial information

http://www.agriline.it/oil/oil_ita/default.htm

Topics: Fats and oils, company information, consumer information, data-bases, publishers

Vitamins

http://www.bookman.com.au/vitamins/

Topics: Publishers, information resources, electronic zines, publications, vita-mins, minerals, nutrition, health

http://www.vitalstoffe.de/inhalt.html

Topics: Consumer information, minerals, vitamins, fruits and vegetables,human nutrition, cooking, mailing lists

http://ivacg.ilsi.org/

Topics: Information dissemination, information resources, publications, vitamins

http://www.vita-web.com/

Topics: Education, vitamins, health, nutrition

http://verlag.hanshuber.com/Zeitschriften/IJVNR/index.html

Topics: Publishers, publication, vitamins, nutrition

http://www.orst.edu/dept/lpi/

Topics: education, institutes, information resources, vitamins, allergies andintolerance, nutrition, health

http://www.nalusda.gov/fnic/etext/fnic.html

Topics: Information resources, directories, umbrella sites, food science, foodcomposition, diet, health, nutrition, illness, databases, electronic journals,electronic zines, electronic newspapers, legislation and regulations, educa-tion, vitamins, minerals

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http://www.realtime.net/anr/

Topics: Vitamins, minerals dietary supplements, nutrition, diet, health

http://www.medicineonline.de/

Topics: Consumer information, human nutrition, diet, foods, food composi-tion, vitamins, health, illness

http://www.cognis-us.com/cognis/verisonline/default.asp

Topics: Publishers, information resources, publication, nutrition, health, vita-mins, news

http://www.mc.vanderbilt.edu/biolib/hc/nutrition.html

Topics: Libraries, publications, nutrition, diet, health, vitamins

http://www.nutritionquest.com/

Topics: Nutrition, health, diet, vitamins, minerals, fats and oils, fruits andvegetables, consumer information, publications, consumer surveys

www.roche-vitamins.com/home.html

Topics: Product news, history, business, research and development, market-ing, product information, nutrition, careers

www.cybervitamins.com

Topics: Fats, nutrition

Health Foods

http://landwirtschaft.freepage.de/h.bollow/

Topics: Consumer information, education, health foods, food composition,vitamins, nutritional values, nutrition, processing, drying, minerals

http://www.phytonutrition.org/

Topics: Consumer information, dietary guidelines, dietary supplements, edu-cation, food composition, foods, health, nutrition, health, foods

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http://www.diasan.co.jp/cha2e.htm

Topics: Beverages, health, illness, functional foods

http://www.sana.it/

Topics: Consumer information, marketing, trade, food technology, process-ing, environment and ecology, health, health foods

http://www.earthfoods.co.uk

Topics: Health foods, genetically engineered foods, food safety, cereal prod-ucts, beverages, fats and oils, sugars

http://www.naturkost.de/

Topics: Consumer information, news, publications, courses, foods, healthfoods, vegetarian foods, diet, recipes, health, environment and ecology

http://foodsci.rutgers.edu/nci/index.htm

Topics: Education, institutes, functional foods, quality assurance

http://www.functionalfoods.nu/

Topics: Education, courses, databases, functional foods, dietary supplements,patents, publications, nutrition, health, legislation and regulations

http://www.aaccnet.org/FuncFood/top.htm

Topics: Associations, news, publications, functional foods, dietary supple-ments, health, nutrition

http://www.ag.uiuc.edu/ffh/

Topics: Novel foods, functional foods, health, food science, news, publica-tions, consumer information

http://www.science.ulst.ac.uk/niche/

Topics: Diet, health, novel foods, functional foods, legislation and regula-tions, food safety, marketing, consumer response, nutrition, sensory analysis,processing, courses

http://www.chfa.cu/

Topics: Associations, health foods, publications, legislation and regulations,discussion groups

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Herbs and Spices

http://www.astaspice.org/

http://www.herbs.org/

http://www.kusumspices.org/

http://www.schamel.de/

http://www.fks.com/

http://www.ahpa.org

http://www.todaymarket.com

Flavours

http://www.mccormick.com/index.cfm

http://www.naffs.org/

http://www.duckworth.co.uk/

http://www.glutamate.org/

http://www.calchauvet.com/index.php

http://www.melchersflavours.com/

http://www.leffingwell.com/

Sugar and Sweeteners

http://www.aspartame-info.com/

http://www.sugaralliance.org/

http://www.saccharin.org/

http://www.daniscosugar.com/

http://www.sucrose.com/sit/

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http://www.sweeteners.org/

http://www.sugarweb.co.uk/

http://www.sugaronline.com

General

http://mofpi.nic.in/venturesetup/

Topics: Website of Ministry of Food Processing, Government of India, containspolicy, procedure, incentives, guidelines, supporting institutions’ details etc.

http://www.indiatradepromotion.org/

Topics: Information on major trade shows

http://www.tradeportalindia.com/

Topics: ITPO’s Business Information Centre (Bic) one stop point for variedtrade information & services such as market intelligence, global importersdirectory, trade opportunities, trade statistics and trends, tariff & taxes, tradefairs details, etc.

http://www.aaharaindia.com/

Topics: India’s biggest international food show, trade fairs and seminarorganised in association with Ministry of Food Processing Industries,Government of India.

http://www.soyatech.com

Topics: News regarding soya technology and products all over the world

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1 0201 MEAT OF BOVINE ANIMALS MALAYSIA, EGYPT, UASEFRESH OR CHILLED ANGOLA, OMAN

2 0202 MEAT OF BOVINE ANIMALS MALAYSIA, PHILIPPINES, SINGAPORE, NETHERLANDSFROZEN EGYPT, UAE, JORDAN

3 0203 MEAT OF SWINE, FRESH, SAUDI ARAB, SPAIN, YEMEN SINGAPORE, NETHERLANDSCHILLED OR FROZEN CONGO, GEORGIA ITALY, GERMAN F.REP, FRANCE

4 0204 MEAT OR SHEEP OR GOATS UAE, OMAN, QATAR, SRILANKA NETHERLANDS, SINGAPORE,FRESH, CHILLED OR FROZEN JORDAN UAE, NEWZEALAND, AUSTRALIA

5 0206 EDIBILE OFFAL OF BOVINE VIETNAM, CHINA, HONGKONG GERMAN F.REP, NEW ZEALANDANIMALS, SHEEP, GOAT, ETC UAE, CANADA DENMARK, SINGAPORE

6 0302 FISH FRESH OR CHILLED BANGLADESH, SINGAPORE, BANGLADESH, NETHERLANDS,MALAYSIA, CHINESE TAIPEI, SINGAPORE, AUSTRALIA, UAECHINA PRP.

7 0303 FISH FROZEN CHINA, UAE, JAPAN, USA MAYANMAR, SINGAPORE,NETHERLANDS, UAE, UK

8 0304 FISH FILLETS AND OTHER JAPAN, SPAIN, CHINESE TAIPEI OMAN, UAE, PORTUGALFISH MEAT LITHUANIA, CHINA NETHERLANDS, THAILAND

9 0305 FISH DRIED, SALRED OR IN SRI LANKA, HONGKONG, JAPAN BANGLADESH, OMAN, JAPAN,BRINE CHINA, BANGLADESH MALAYSIA, PORTUGAL

10 0306 CRUSTACEANS FRESH, JAPAN, USA, NETHERLANDS USA, SOMALIA, MALAYSIACHILLED FROZEN CHINA, AUSTRALIA MYANMAR, PAKISTAN

11 0307 MOLUSCS FRESH, CHILLED SPAIN, USA, ITALY, CHINA, OMAN, UAE, YEMEN-REP,FROZEN JAPAN HONGKONG, SOMALIA

12 0401 MILK & CREAM NOT FRANCE NETHERLANDSCONCENTRATED

13 0402 MILK & CREAM BANGLADESH, UAE, EGYPT DENMARK, USA, GERMAN F.REP,CONCENTRATED OMAN, MALAGASY RP. UAE, NETHERLANDS

14 0403 BUTTER MILK, CURDLED MILK ZAMIBIA, THAILAND, UAE, THAILAND, NETHERLANDS& CREAM, YOGURT, KEPHIER GERMAN F.REP. SAUDI ARAB FRANCE, MALAYSIA, UAE

15 0404 WHEY PROUDCTS CHINA, JAPAN, KOREA REP. FRANCE, NETHERLANDS, CHINA F.USA, NEPAL REP, AUSTRALIA

16 0405 BUTTER AND OTHER FATS UAE, KUWAIT, GERMAN F.REP NEW ZELALAND, FRANCE,USA, NEPAL AUSTRALIA, UK, DENMARK

17 0406 CHEESE AND CURD JAPAN, USA, NEPAL, UAE AUSTRALIA, NEPAL, DENMARKMOROCCO NETHERLANDS, NEW ZEALAND

18 0409 NATURAL HONEY GERMAN F.REP, MOROCCO, NEPAL, AUSTRALIA, NEPAL, USA, UK NEWZEALAND

UAE, KYRGHYZSTAN

19 0701 POTATOES, FRESH OR NEPAL, UAE, SRI LANKA BANGLADESH, NEPALCHILLED MALAYSIA, BANGLADESH

20 0703 ONIONS, SHALLOTS, GARLIC, MALAYSIA, BANGLADESH CHINA PRP, MALAYSIA, MYANMARLEEKS & OTHER ALLIACEOUS UAE, SRI LANKA, SINGAPORE HONG KONG, CHINESE TAIPEIVEGETABLES FRESH ORCHILLED

21 0710 VEGETABLES COOKED OR UAE, SAUDI ARAB, MALDIVES GERMAN F-REP, NETHERLANDSNOT BY STEAMING/ BOILING NEW ZEALAND, THAILAND,IN WATER SINGAPORE

22 0711 VEGETABLES PROVISIONALLY USA, BELGIUM, FRANCE NETHERLANDS, SPAIN,PRESERVED NETHERLANDS THAILAND, AUSTRALIA, JAPAN

ANNEXURE II

Sr. Hs Code Item Top 5 Countries of Export Top 5 Countries of ImportNo.

Export/Import of Processed Food: Country-Wise Profile

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23 0712 DRIED VEGETABLES, WHOLE USA, GERMAN FRP, MALAYSIA, CHINA PRP, GERMANCUT, SLICED, BROKEN OR NETHERLANDS, SWITZERLAND F. REP, PADISTAN, USA,IN POWDER CANADA AFGHANISTAN

24 0713 DRIED LEGUMINOUS BANGLADESH, SRI LANKA MYANMAR, IRAN, CANADAVEGETABLES SHELLED USA, UAE, UK AUSTRALIA, FRANCE

25 0801 COCONUTS, BRAZIL NUTS & USA, NETHERLANDS, UK, IVORY COAST, GUINEA BISU,CASHEW BUTS, FRESH OR JAPAN, UAE BENIN, TANZANIA-REP, INDONE-

SIADRIED WHETHER OR NOTSHELLED OR PEELED

26 0802 OTHER NUTS FRESH OR SPAIN, EGYPT, GERMAN F.REP USA, IRAN, AFGHANISTAN,DRIED W/N SHELLED OR UK, GREECE INDONESIA, MYANMARPEELED

27 0803 BANANAS INCLUDING PLAIN- UAE, SAUDI ARAB, OMANTAINS FRESH OR DRIED QATAR, BAHARIN

28 0805 CITRUS FRUIT FRESH OR BANGLADESH, UAE, OMAN AUSTRALIA, USA, SINGAPOREDRIED SAUDI ARAB, USA THAILAND, NETHERLANDS

29 0806 GRAPES FRESH OR DRIED UK, UAE, NETHERLANDS, OMAN AFGHANISTAN, PAKISTAN, IRANSAUDI ARAB AUSTRALIA, CHINA PRP, INONESIA

30 0807 MELONS (INCLUDING WATER UAE, SAUDI ARAB, BAHARIN AFGHANISTAN, TURKMENISTANMELONS) & PAPAWS KUWAIT, QATER THAILAND, PAKISTAN, AUSTRALIA(PAPAYAS) FRESH

31 0808 APPLES, PEARS & BANGLADESH, KUWAIT, SAUDI USA, AUSTRALIA, CHINA PRP,QUINCES, FRESH ARAB, MALAYSIA, SRI LANKA NEW ZEALAND, S. AFRICA

32 0809 APRICOTS, CHERRIES PACHES ITALY, YEMEN REP, USA, PAKISTAN, USA, TURKEY, IRAN(INCL. NECTARIANS), PLUMS EGYPT, UAE AUSTRALIA'& SOLES FRESH

33 0810 OTHER FRUITS, FRESH BANGLADESH, SAUDI ARAB, PAKISTAN, ITALY, AFGHANISTANUAE, OMAN NEW ZEALAND, INDONESIA

34 1805 COCOA POWDER, NOT UK, MAURITIUS, USA, CHINA INDONESIA, MALAYSIA, SPAINCONTANING SUGAR SINGAPORE, MALI

35 1806 CHOCOLATE & OTHER FOOD NEPAL, BANGLADESH, SINGAPORE, MALASIYA, USAPREPARATIONS CONTAINING NIGERIA, SRILANKA, NIGER NETHERLANDS, UAECOCOA

36 2006 VEGETABLES, FRUITS, NUTS JAPAN, UAE, SAUDI ARAB UAE, NETHERLANDS,FRUIT PEEL & OTHER PARTS GERMAN F.REP, OMAN THAILAND SINGAPOREOF PLANTS

37 2007 JAMS, FRUIT JELLIES, NETHERLANDS, USA, UAE MALAYSIA, THAILAND, OMENMARMALADES, FRUIT/ NUT NETHERLANDS ANTIL, SAUDI INDONESIA, GERMAN F.REPPUREE & FRUIT/NUT PASTES ARAB

38 2009 FRUIT JUCIES (INCL. GRAPE NETHERLANDS, USA, CANADA NEPAL, SINGAPORE,MUST)/VEGETABLE JUICES SAUDI ARAB, NETHERLANDS NETHERLANDS, DENMARK,

ANTIL SLOVENIA39 2102 YEASTS (ACTIVE/INACTIVE) NEPAL, RUSSIA, BANGLADESH BRAZIL, FRANCE, SWITZERLAND

SRI LANKA, MYANMAR VIETNAM, USA

40 2103 SAUCES & PREPARATIONS USA, UK, CANADA, SINGAPORE USA, CHINA REP, SINGAPORETHEREOF UAE ITALY, THAILAND

41 2104 SOUPS & BROTHS & THAILAND, ITALY, USA, UK, USA, SWITZERLAND, MALAYSIAPREPARATIONS THEREOF SINGAPORE INDONESIA, UK

42 2105 ICE CREAM & OTHER EDIBLE NEPAL, BANGLADESH, NEW ZELALAND, BELGIUM, USAICE MARTINIQUE, NIGERIA, OMAN UK, AUSTRALIA

THAILAND

43 2203 BEER MADE FROM MALT NEPAL, BHUTAN, USA, UAE NEPAL, SINGAPORE, NETHER-SINGAPORE LANDS, DENMARK, SLOVENIA

44 2204 WINE OF FRESH GRAPES GERMAN F.REP, SINGAPORE FRANCE, UK, NETHERLANDSINCLUDING FORTIFIED WINES SPAIN, FRANCE, ITALY GERMAN F.REP, CHINA PRP,

AUSTRALIA

45 2209 VIEGAR & SUBSTITUTES FOR BELGIUM, FRANCE, BELGIUM, FRANCE, USA,VINEGAR OBTAINED FROM NETHERLANDS, USA, OMAN GERMAN F.REP, CHINA PRPACETIC ACID

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Important Trade Fairs, Exhibitions andConferences in Food Processing

January

13–15: World Food Technology Summit

26–29: International Sweets and Biscuits Fair

February

1–4: International Food Tec, Hyderabad

13–15: BIOFACH

27–Mar2: Genetically Modified Foods – Prospects, Challenges and Safety

March

4–5: Cheese as an Ingredient

5–7: Food Ingredients Asia – China Exhibition

9–13: Ahara

23–26: IFE, International Food Exhibition

30–Apr 1: International Conference on Food Hydrocolloids

April

8–11: ANUGA Food Tec

9–11: New Functional Ingredients and Foods

14–17: Interfood / Interfood Tech / Pack and Ingredients

May

20–22: FiCEE, Food Ingredients Eastern and Central Europe

ANNEXURE III

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June

4–5: High Potency Sweeteners – All You Need to Know

July

12–16: IFT Food Expo

September

16–17: Practical Guide to Using Gelling and Thickening Agents

23–25: Fi Asia Food and Beverages, Germany

October

7–9: Health Ingredients (Hi) Japan

9–11: Health Ingredients Japan

11–15: ANUGA World Food Market

15–16: Emulsions and Emulsifiers: Essential Guide to Stable Products

17: Food Additives – Ingredients for Success?

18–21: Genetic Engineering and the Intrinsic Value and Integrity ofAnimals and Plants

20–24: SIAL

27–29: CPhl Worldwide Exhibition and Conference and ICSE InternationalContract Services Expo

29: A Boost for Bone Health

November

18–20: Food Ingredients Europe and Conference

18–20: Food Safety and Hygiene Arena

P.S. Usually the aforestated events are organised in the months and aroundthe dates mentioned. However it is advisable to check with the Ministry ofFood Processing, Govt. of India, New Delhi.

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1. Andaman & Nicobar Islands Director, Agriculture, Port Blair 03192-33257

2. Andhra Pradesh Secretary, Agriculture & Cooperation 0842-231798Department Secretariat Building Hyderabad - 500 022

3. Arunachal Pradesh Chief Secretary Government of 03781-22595Arunachal Pradesh Itnagar

4. Assam Secretary Department of 0361-561307Industries Government of Assam Guwahati Fax-561176

5. Bihar Industrial Development 0612-221462Commissioner, Department of Industries Government of Bihar Vikas Bhawan Patna-800 001 Fax-224992

6. Chandigarh Director of Industries & Tourism 0172-707343Chandigarh Administration Chandigarh

7. Dadra & Nagar Haveli Director 02638-42367District Industries CentreDadra & Nagar HaveliCollectorate Silvasa-396 210

8. Daman & Diu Deputy Director of Agriculture 02638-54875Secretariat Moti Daman -396 220

9. Delhi Commissioner (Industries)C/O Commissioner of Industries, Delhi Administration Kashmiri Gate, Delhi 011-2968144

10. Goa Development Commissioner 0832-223196Government of Goa Panaji

11. Gujarat Managing Director 02712-25841Gujarat Agro IndustriesCorporation Ltd. Khet Udyog Bhavan, Opp. Old High Court, Navrangpura, Ahmedabad.

12. Haryana Managing Director 0172-707343Haryana Agro IndustriesCorporation Chandigarh

13. Himachal Pradesh Director of Industries 0177-213414Government of Himachal Pradesh Shimla

ANNEXURE IV

List of Nodal Officers of State/U.T. GovernmentsFor Food Processing Industries

Sr. No. State / U. T. Nodal Agency Tel. No.

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14. Jammu & Kashmir Jammu & Kashmir State 0194-30036Industrial Development Corporation Government of J&K Darbu House, Ram Bagh Srinagar

15 Karnataka Technical Consultancy Service 080-2266134Organisation of Karnataka (TECSOK) Directorate of Industries & Commerce, Rashtrothana Parishat Bhawan, Nrupathunga Road, Bangalore-560 002

16. KeralaSecretary Department of Agriculture 0471-325992Government of KeralaTrivandrum-695 001 Fax-333160

17. Lakshadweep Managing Director 0484-361630Lakshadweep DevelopmentCorporation, 40.5598II Floor, Near Padma JunctionM.G. Road, ErnakulamCochin-682 035 Fax-373635

18. Madya Pradesh Managing Director 0755-551807Madhya Pradesh State AgroIndustries Development Corporation'Panchanan' 3rd Floor Malviya Nagar,Bhopal Fax-557305

19. Maharashtra Managing Director 022-4305122Maharashtra Agro Industries Development Corporation Ltd Rajan House, Prabha Devi, Mumbai. Fax-4308618

20. Manipur Director of Industries 0385-310220Industries Department Secretariat Government of Manipur Imphal Fax-310550

21 Meghalaya Managing Director 0364-224965Meghalaya Indl. Dev. Corp.Kismat, Upland Road, Shillong Fax-224763

22. Mizoram Managing Director 0389-323680Mizoram Food & AlliedIndustries Corporation Ltd.(MIFCO), Aizwal Fax-323680

23. Nagaland Secretary 0370-22919Department of IndustriesGovernment of NagalandKohima 22534

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24. Orissa Managing Director 0674-420526Agricultural Promotion & Investment Corporation of Orissa Ltd., 326, Brahmunda, Bhubaneshwar Fax-420506

25. Punjab Managing Director, 0172-651386Punjab Agro Industries Corpn. 2-A Sector-28A, Madhya Marg Chandigarh-160 002 651576

26. Pondicherry Director of Industries, 0413-34145Industries Department Thattachavady Pondicherry-605 009 35512

27. Rajasthan Director of Industries, 0141-380727Department of IndustriesGovernment of RajasthanJaipur Fax-380796

28. Sikkim Director of Industries 03592-22853Department of IndustriesGovernment of Sikkim Gangtok-737 101

29. Tamil Nadu Managing Director 044-2341664Tamil Nadu Agro Industries Corporation Ltd.Agro House, Industrial EstateGuindy, Chennai-600 032 Fax-2342375

30. Tripura Director 0381-223826Industries & Commerce DteAgartala, Tripura Fax-224432

31. Uttar Pradesh Secretary 0522-280277Horticulture & Food Processing Government of Uttar Pradesh Lucknow Fax-280382

32. West Bengal Secretary 033-3374244Department of Food Processing Industries Government of West Bengal Mayukh Bhawan, Bindannagar, Calcutta-700 091 Fax-3372922

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References and SuggestedReadings

1. AIFPA, (1996), All India Food Preservers Association, InvestmentOpportunities in India for Food Processing Industries—New Delhi.

2. AIFPA, (1996), All India Food Preservers Association, Legal Provisionsrelating to Labelling of Fruits and Vegetable Packages (as amended up to31-3-1996)—New Delhi.

3. AIFPA, (1996), All India Food Preservers Association, The FruitProducts Order 1955 (as amended up to 31-3-1996)—New Delhi.

4. AIFPA, (1996), All India Food Preservers Association, The Prevention ofFood Adulteration Act, 1954 (37 of 1954) and PFA Rules, 1955 (asamended up to 31-3-1996) 4th ed.—New Delhi.

5. Allied, (2001), A Practical Guide for Implementation of Integrated ISO-9001, HACCP System for Food Processing Industry—New Delhi.

6. Chandra, Prasanna, (2001), Financial Management: Theory and Practice,New Delhi.

7. Chandra, Prasanna, (1995), Projects: Planning, Analysis, Selection,Implementation and Review, Tata McGraw Hill Publishing CompanyLimited, New Delhi.

8. Checker, Satish, (2001), Food Quality and Safety: An Overall View,Beverage & Food World.

9. Food Processing Industry Offering Scope for New Investment, (1998),Industrial Researcher.

10. GITCO, (1998), 25 Prospective Food Processing Projects Vol.1—Ahmedabad.

11. GITCO, (1998), Gujarat Industrial and Technical ConsultancyOrganization Limited, 24 Prospective Food Processing Projects—Ahmedabad.

12. Government of India, (1993), Ministry of Food Processing in Industry,Food Processing Industries in India: Investment Opportunities—NewDelhi.

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13. Gulati, M. (1997), Restructuring and Modernization of Small andMedium (SME) Clusters in India, Small and Medium Enterprises,UNIDO, Vienna.

14. International Law Book Company, (1998), Prevention of FoodAdulteration Act, 1954 with Prevention of Food Adulteration Rules, 1955and Commodity Index with Short Notes.—Delhi.

15. ITCOT, Opportunities in Food Processing Industry—Madras.

16. Kanji, Gopal, K. and Asher, Mike, (1996), 100 Methods for Total QualityManagement, Response Books, New Delhi.

17. Kotler, Philip, Leong Siew Meng, Ang, Swee Hoon and Tan, Chin Tiong,(1996), Marketing Management: An Asian Perspective.

18. Padmanand, V and Jain, P. C., (2000), Doing Business in India: Street-smart Entrepreneurs in an Imperfect Marketplace, Sage Publications, India.

19. Pandey, I.M. and Bhat, Ramesh, (1991), Cases in Financial Management,New Delhi.

20. Pareekh, Udai and Rao, T.V., Developing Motivation ThroughExperiencing, New Delhi, Oxford & IBH Publishing Co., 1982.

21. Parthasarthy, Ashok, (1998), Food Processing Industry—Futuristic View,SEDME.

22. Parthasarthy, Ashok, (1998), Food Processing Industry, SEDME.

23. Patel, J.B. and Allampally, D. G. (1991), A Manual on How to Prepare aProject Report, EDII, Ahmedabad.

24. Patel, V.G., Entrepreneurship Development Programme in India and ItsRelevance to Developing Countries, Ahmedabad, EntrepreneurshipDevelopment Institute of India, 1987.

25. Patel, V.G., Innovations in Banking: The Gujarat Experiments, Bombay, Industrial Development Bank of India, Oct. 1981, pp.2–10.

26. Porter, M.E., (1990), The Competitive Advantage of Nations, Free Press,New York.

27. Porter, Michael E., (1980), Competitive Strategy, New York, The FreePress.

References and Suggested Readings212

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28. Raghuramaiah, B, (2002), Indian Food Regulations in the GlobalContext, Beverage & Food World.

29. Ramaswamy, V.S. and Namakumari, S., (1999), Marketing Management:Planning, Implementation and Control, New Delhi.

30. SBP, (2001), SBP Consultants and Engineers Private Limited Food andBiotechnology for Corporates—New Delhi.

31. SBP, (2001), SBP Consultants and Engineers Private Limited Handbookof Food and Agrobased Industries with High Tech Projects—New Delhi.

32. Shah, Narendra, (1998), Opportunities and Challenges in Agro-basedIndustries: Food Processing, Journal of Rural Development.

33. SIDBI, (1994), Profiles on Food Processing and Agro-based Industries—Lucknow.

34. Sivasankar, B, (2002), Food Processing and Preservation—New Delhi:PHI.

35. Sohrab, (2002), Adoption of ISO 140001—A New Imperative for FoodIndustry: A Practical Implementation Case Study, Beverage & FoodWorld.

36. The Amalgamated Press, (2001), Processed Foods and BeveragesDirectory 2001–2003—4th ed.—Mumbai.

37. Vyas, Jaynarayan and Shah, Girish, (1998), Saket Food ProcessingHandbook—Ahmedabad: Saket Projects Limited.

38. World Importers Directory, (1997), Process Food, Food Products,Vegetables—New Delhi: Centre of Publication.

References and Suggested Readings 213

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