th

e “Rog, al cunctional Areas of Management

UNtry> a alia ol
a?
W116) unit=n elle
| 1 ras
es,
fais Chapter 7
Sings
§
the ky .
acon, Functional Areas of Management
lance |
4 production Management — Factors influencing Choice of Technology — Material

Management — Purchasing: Need and Importance, inventory Control: Need and

Importance — Marketing Management: Factors Affecting Choice of Channels,
problems faced by SSI units and Remedies to Overcome the Problems —
Financial Management: Fixed and Working capital — Factors Considered,
Sources and Management of Fixed and Working Capital — Problems faced by SSI
units - Manpower Requirements-- Unskilled, Semi-skilled, Skilled, Contract and
Casual Workers — Sources of Recruitment in SSI Units, Problems faced (Labour
Turnover, Labour Absenteeism, Labour Shortage, Maintenance of Workers) -

Questions for Self-Practice.

PRODUCTION MANAGEMENT: (April 17)

MEANING:
Production is the creation of goods and services and

production management refers to the appreciation of

management. Principles to the production function are a factory.
in other words, production management is the application of
planning, organizing, directing and controlling the production

function.
Production management deals with decision making relating

to production process.
DEFINITION:
(1) According to E. L. Brech, “Production Management is the

process of effective planning and regulating the operation of that

section of an enterprise which is responsible for the actual

transformation of materials into finished products.”

(2) According to E. S. Buffa, “Production Management deals with
decision-making related to production processes so that the

U<]
Me |

Fe
|
170 oe Vipul's” mee: en iy sp)
a : cording to specificat; t
apr og goods a the sched pi ied rt the mista i
cost. 5: bor
Eduction of useful and quality goods at low or reasonah}, ae
production cost. “A ih
(2) Provides regular and continuous supply of goods ang 0B
services to consumers. nat
(3) Reduces cost of production. c
(4) Provides support to other functional areas. fo
(5) Creates utility and improves standard of living of the people.
FUNCTIONS: y)
(1) Design and development of production process. qu
(2) Location layout and provision of essential facilities. de
(3) Production planning and control. :
(4) Cost control and quality control.
(5) Expansion and diversification of production activities. it
F

(6) Coordination with other department.

(7) Reporting to top management.

PROBLEMS OF PRODUCTION MANAGEMENT:

(1) Selection of promising products in the product line of the

company.
Product improvement, modification and introduction of new

products as per the consumer needs.

(3) Problems relating to quality improvement and cost control.

(4) Problems relating to introduction of new products.

(5) Problems developed due to industrial recession.

DEVELOP APPROPRIATE TECHNOLOGY:

ie underdeveloped countries face a number of problems

ia e both serious and complex. The problem of
une P yment is one of them which demands early and effective

n. Blind invitation and wholesale adoption of the

(2)
functional Areas of Management

tablished technology form the ; eT .

<neravate the problem of unemployment “4 countries may

The ma te economics are capital-short and

abour affluent, whe the industrialists countries are enormously

Small scale industries is a Partial remedy for the mounting

roblem of unemployment.

Perhaps a new type of technology would have to be developed

which will take the cognizance of millions of idle hands and at the
same time, will facilitate production of goods of comparable
quality at a reasonable cost. Such a technology should be
developed through the small industry. However, the development
of such a technology which can be tumed as “Appropriate
Technology” is not entirely in the hands of small-scale industry.

It is the scientific capability and innovative talent that could

really provide a solution.

FACTORS INFLUENCING CHOICE OF TECHNOLOGY:

(April 16)

(1) The scale and scope of operations: As stated earlier, the size

or the scale of operations is the key factor influencing the

decision on the type of systems required.

The financial resources available to the organization: Many

(2)
a times, the financial resources available to the firm for
investment in technology are a crucial differentiating factor.
In India investment in technology varies significantly with
the size of operations and the estimated payback period.

(3) The nature of the business: The industry that the SSI

operates in is an important factor affecting the requirement

and the use of technology. For example, a retailer who is a
part of the fashion industry, needs to track consumer

demands and changes in buying patterns at a much faster

pace than a retailer operating in the consumer durables

_—_
pi )s

| g 1M ntrepreneurship Develo
[ rer vipul's™ € -

tn

industry. While both ion indust

detaie ave significantly higher in the fashion : eRe, z
a4) Human Resources available Sere to onies z
i technology solutions. aNd
eearalecitie of a aaiiess that the SSI operates in ang at
the comp ‘ f technology that will suit busines, i

me time, the type ° se

— ot only need to implement the system, but also to trai, |
eople within the organization on its use and applications ; s
Bor this reason that Information Technology is many a time a

termed as the backbone of business. ;

(5) Unique needs of technology: Ihe spread of the Internet has E
) opened up a number of opportunities for using fy 7

need technology, the change, in |

innovatively to extend the reach of the business. While the (ee!

Internet was expected to revolutionize the business and ta,, x
it into the virtual world, it has been found to be appropriate |

only for some categories of goods.

a MATERIAL MANAGEMENT: (April 17)|

Under uegrater Material Management concept Material, a

manager have learnt that a_majority of materials need: of thei, |

. * . oe 4

organization over a period of one year or so can be forecast inf

advance and that too with acceptable accuracy. 4

Materials planning, materials budgeting and material contro] q

have taken. prominent roles in the integrated material}
management. Planning for material requirement and working out 7
realistic material budget serve as an effective control device.

In materials planning the material requirement of the , |

Production unit are estimated with accuracy and suitable |

arrangements are made for providing the same. This avoids |

bottlenecks in the production schedules,

Materia! plannin g is one important area of production planning

forecasting, routing |

and control. which deals with estima ting

cheduli hi g l i
scheduling, dispatching and Progressing of productive activity. |
PPE Stine niga
(April 17)

PURCHASING: _
s of Man
han, ; eynctional Area anagement

Is en ’ '

yt extemal agencies. Purchasing is an operatio arket

-buitg exploration to eS 800ds and services of desired quality,
nq , quantity. allow price and at the desired time. Supper who can
Cc €

S 3 ‘de standard items at the iti :

in provide: —— competitive pri selected.
t bust purchas a a Enterprise has now becorte a specialised
S experie non
So to te ee ity to a speciale se by giving the purchase
ica Specialist, the firm can obtain greater

| ton, ; mies in purchasing. Mo —

ny S| onom : _loreover purchasing involves more
Ya tin, than 50% of capital expenditure budgeted by the firm.

term, Definitions

th, (1) In the wor ds of Alford and Beatty, “Purchasing is the procuring

of mater ials, supplies, machines, tools and services required for

and th, equipment, maintenance, and operation of a manufacturing plant”.

la, () According to Walters, purchasing function means “the

Proprig, procurement by purchase of the proper materials, machinery,

equipment and supplies for stores used in the manufacture of a

Pril 1) product adopted to marketing in the proper quality and quantity at

Mate. the proper time and at the lowest price, consistent with quality
Aeria, desired.’

‘OF the, (3) According to Westing, Fine and Zenz “Purchasing is a

managerial activity that goes beyond the simple act of buying. It

Tecast j,

includes research and development for the proper selection of

! contr materials and sources, follow-up to ensure timely delivery;
ae inspection to ensure both quantity and quality; to control traffic,
king oy receiving, _Storekeeping and accounting operations related to
. purchases.
= The modern thinking is that Purchasing is a strategic
of th managerial function and any negligence will ultimately result
Suitabl into decrease in profits.

avout Importance of Purchasing:

(1) Purchasing function provides materials to the factory without
lannin; which wheels of machines cannot move.
oun (2) A one percent saving in materials cost is equivalent to a 10
jad percent increase in turnover. Efficrent-buying~ean—achieve
pei 1 this.
(3) Purchasing manager is the custodian of his firm's is purse as
he spends more than 50 per cent of his company’s earnings

on purchases.

emer
1 sort
a

174 lg
Ls) VY Vipul's'™ Entrepreneurship Developme,
t

\ (4) Increasin re

4
4

Proportion of one’s requirements are now bough,

instead of being made as was the practice in the earlier day.

Buying, therefore, assumes significance.

(5) Purchasing can contribute to_import substitution and say,

foreigr piLexchange. —_, "=
y execution of Ndustria)

ee, =

(6) Purchasing is the main factor in timely

—_—_—_————_— _ ee. ~.

projects.
Wee
AVG

’ ranisations that exist now

ment organise lat ex a h

(7) Materials manage

evolved Gul ap purchasing departments.

Objectives of Put asing:

(1) To pay reasonably low prices for the best values obtainable
negotiating and executing all company commitments.

(2) To keep inventories as low as is consistent with maintaining

production.
To develop satisfactory sources of supply and maintain B0od
relations with them.

To secure good vendor performance

deliveries and acceptable quality.

To locate new materials or products as required.

r with adequate controls

(3)
(4) including Prompt

(5)
(6) To develop good procedures, togethe
and purchasing policy.

(7) To implement such

analysis, and make-or-

(8) To secure high calibre personnel and

his maximum ability.

(9) To maintain as economical a department a

commensurate with good performance.

(10) To keep top management informed of material development

which could affect company profit or performance.

(11) To achieve a high degree of co-operation and co-ordination

with other departments in the organization,

INVENTORY CONTROL: (April 17)

Inventory control is the process whereby the investments in

materials and parts carried jn Stock is regulated within the pre-

Programmes as value analysis, cost

buy to reduce cost of purchases,
allow each to develop to

S is possible,
al Areas of Management

re noy, St pynction
rmined limits set in accordan
ay, ‘ -ched by the managem
Ys astablishe 7 gsement.
need/Objectives of Inventory Control:
Say, w protection of stores.

ce with the inventory policy

‘nimising loss,
ae = US ty: (2) Minimusing, .
— 3) Correct valuation.

St Row hay ) Proper use of funds. i

~ (5) Balancing for results. PsA unt

S be: (6) Ensures continuity of support. / 3 5 ae |

ante ‘ainabl, (7) Focus in inventory. ( >| (G bs vi) |

: g) Correct valuation. \ aS -. Bile. }

maintaining Importance of Inventory Control: ‘y : : ~ ~ —— i,
intain . (1) Optimum inventory size. : s

sa (2) Right amount of budget.

MS promp (3) Improved service to customers,

(4) No blocking of capital.

(5) Tackles contingencies.

1t€ Controls (6) Fluctuation in demand.

(7) Reduces Pilferage of materials.

lysis, cost (8) Periodic Assessment.

‘i MARKETING MANAGEMENT: (April 17)

levelop to ;
Marketing occupies an important place in management of

. small-scale industries. Traditionally, marketing was considered as

possible, 4 producer oriented market.

| Marketing of products manufactured under small-scale sector

elopment | is one of the major problems of small entrepreneurs. A small

entrepreneur is unable to spend huge sums of money on research

dination | nd development, publicity and sales promotion measures. He is

; also ignorant of the various markets he intends to cater. The lack

47) | popular brand name and standardisation of products are two

prt | vockin in thei d

g stones in their way. Markets for the product

nents “| manufacture under the small-scale sector or for that matter in any
Vipul’s' Entrepreneurship Developmen,

busi
USINess can be created through research People
enterprise IS, however, the most important activity of an
any edger involves production. Without good marketing
ica ah nt :
elephant. y brilliant product can become another white

FUNCTIONS OF MARKETING:

(1) Marketing research: It is a systemic process of finding out the

information relating to other problems of marketing. Through
marketing research we can come to know the likes, dislikes,

taste preferences and buying habits of the consumer.

(2) Selling: There can be no marketing without selling the goods

produced. Goods are sold to the consumers through direc

channel or through indirect channel.

(3) Buying and Assembling: The manufacturer buys raw

material and other requirements necessary for the smooth

flow of production. At time the marketer assemble the goods

produced by the producer for the purpose of selling in the

market.

(4) Transporting: It means moving of goods from one place to

another, various modes of transports are used such as road,
rails, air, water etc. depending upon the nature of the product
and the requirement of the sellers and buyers.

(5) Standardization: It is mental process of giving certain good

norms or standards to the products. It helps in sorting out the
goods.

(6) Grading: It is physical activity by which the goods are

classified into different classes or grades as per the fixed
standards or norms.

(7) Branding: It refers to giving a name or mark or symbols to

the products. The purpose of branding is to give a separate
identity to the products.

(8) Storing and Warehousing: Storing of goods at different

places is a good example of warehousing. It is an important
marketing function. Storage of goods fills the time gap and
creates time utility.
Place ty
iS TOad,
Product

N good
out the

ids are
2 fixed

bols to
»parale

fferent
vortant
Ip and

Yr

tional Areas of Management Lv ay

“s : In orde i
o Era skein, soe ome | out various marketing activities
euch as ‘ » Fescarch, transporting w i
is . an ; + Warehousing ete.
there IS need for funds. These funds can be i eae as
“ 7 Le 7 ~ bs " ‘ .
advances from customers, credit from suppliers and
“ Le * L
obtained from creditors and suppliers.

full

can be

0 advertising ae Publicity: It can play a great role in selling

the goods ANG BErvices: Advertising creates brand awareness
and helps to develop brand image and brand loyalty. .

pricing: It is the exchange value at which the seller is willing

to sell and the buyer is willing to buy. While fixing the a
number of factors such as cost, demand, competition, product
and customers are to be considered.

(11)

(12) Salesmanship: Salesmanship for personal selling are

‘mportant functions of marketing. It involves persuading
people to buy the goods and services of the sellers through
sales force. y ;

f ; f }

CHANNELS OF DISTRIBUTION: / [apt te

f
Important factors affecting the choice of channels of
distribution by the manufacturer are:

(A) Considerations Related to Product:

When a manufacturer selects some channel of distribution
he/she should take care of such factors which are related to the

quality and nature of the product. They are as follows:

(1) Unit Value of the Product: When the product is very costly it
is best to use small distribution channel. For example,

Industrial Machinery or Gold Ornaments are very costly

roducts that are why for their distribution small distribution

P
channel is used. On the other hand, for less costly products
long distribution channel is used.

(2) Standardised or Customised Product: Standardised products

are those for which are pre-determined and there has no
scope for alteration. For example: utensils of MILTON. To sell

this long distribution channel is used. On the other hand,

customised products are those which are made according to
the discretion of the consumer and also there is a scope for
alteration, for example; furniture. For such products face-to-

Fi
wart .

el oe et
178 YY av Vipul’s™ Entrepreneurship Developmen,

face interaction between the manufacturer and the cons

is essential. So for these Direct Sales is a good option.

(3) Perishability: A manufacturer should choose gin Stn,

middlemen as channel of distribution for —— an iter Ms
product which is of highly perishable na ee mm the
contrary, a long distribution channel can be Cted fo,

durable goods. oni

(4) Technical Nature: If a product is of a technica nature, then ’

is better to supply it directly to the oan = is Will he|

the user to know the necessary technicalities of the product,

(B) Considerations Related to Market:

(1) Number of Buyers: If the number of buyer is large then it jg

i i the distributj
ake the services of middlemen for an
iran the distribution should be done

of the goods. On the contrary,

by the manufacturer directly if the number of buyers is less,
be of two types: General Buyers

2) Types of Buyers: Buyers can

Oma : e more buyers of the produc

and Industrial Buyers. If th

then there can be more

belong to general category

middlemen. But in case of industrial buyers there can be less

middlemen.
Buying Habits: A manufacturer should take the services of

middlemen if his financial position does not permit him to

sell goods on credit to those consumers who are in the habit
of purchasing goods on credit.

Buying Quantity: It is useful for the manufacturer to rely on

the services of middlemen if the goods are bought in smaller
quantity.

(5) Size of Market: If the market area of the product is scattered

fairly, then the producer must take the help of middlemen.

(C) Considerations Related to Manufacturer/Company:

(1) Goodwill: Manufacturer’s goodwill also affects the selection

of channel of distribution. A manufacturer enjoying good
reputation need not depend on the middlemen as he can

open his own branches easily.

(2) Desire to control the channel of Distribution: A _
manufacturer's ambition to control the channel of

(3)

(4).
y gynctional

Yr

Areas of Management

$s . to the custo

are resorting to company owned ealall count the point of sale

: nancial Strength: one

Fina gth: A company which has a strong financial

hase can evolve its own channels. ©

financially weak companies would have the other hand,
e

middlemen.
(D) Considerations Related to Government:

(3)

to depend upon

Considerations related to th
selection of channel of diatsibattin. Far cone ; alse! ntéet the
holder can sell medicines in the market acetic, " Ging a license
government. In this situation, the Sdnulaetaene SE. law of the
should take care that the distribution of his product medicines
only through such middlemen who have the alevant ion pune

(E) Others:
(1) Cost: A manufacturer should select such a ch
distribution which is less costly and also useful ie

angles.
(2) Availability: Sometimes some other channel of distributi
can be selected if the desired one is not available. istribution

(3) Possibilities of Sales: Such a channel which has ibili

of large sale should be given weightage. a possibility

MARKETING RELATED PROBLEMS OF SSI: (April 16)

The tools and techniques of marketing helps in widening and

diversifying the market by creating awareness, providing
information, generating conviction and impelling to action.

All types of business enterprises face marketing problems, but

these problems are more severe in case of small scale units |
because of lack of knowledge, adequate funds and lack of
experience. Some of the marketing problems commonly faced by
the small scale entrepreneurs in India are:
or: Because of scarcity of

usually use inferior

e not standardized. —

(1) Competition from large scale sect

resources, small entrepreneurs
technology. As a result their products ar
180

(2)

(3)

(4)

(5)

(6)

Other Problems:

(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)

"a" a Vipul's™ Entrepreneurship Developmen, |

The obsolete technology used by them gets translated inj,

inferior quality of products.

Lack of marketing knowledge: Most of the small scale
entrepreneurs are not highly educated or professionally

ualified to have knowledge of marketing concept anq

q expertise further inhibits the,

strategy. Their lack of

indemtanding of the prevailing trends in the market.

Lack of sales promotion: Small units lack the resources and
knowledge for effective sales promotion. Large scale units
mostly have well-known branded names. They also have
huge amount of resources to spend on advertisement and
other sales promotion tools. Small scale units, on the other
hand, have to pay a heavy commission to dealers for their
selling efforts, which reduce profits margins.

Weak bargaining power: At the time of purchase of inputs,

large scale entrepreneurs manage to get huge discounts and |
credit. Such facilities are not available to small units.
Product quality: It is costly and difficult for a small unit to.
have quality testing and evaluating equipment.

Credit sales: The small scale enterprise is invariably called

upon to sell on credit. However, when it comes to purchasing
inputs, they are denied liberal credit facilities. As a result,
they have to borrow excessive working capital than actually
needed. This increases the general cost of production and

prices, making it non-competitive.

Lack of brand name.
Standardization and quality improvement.

Raw material.
Research and marketing investigation.

Identification of proper market and consumers.

Introduction of goods in foreign market.
Defective pricing policy.

Poor sales relationship.

Lack of marketing techniques.

4) Areas of Management

punto”

Mo fF gn PoO® &
", pooking large orders at fixed price,

iles realisation,

§ )

nak i weak market organisation.

« hy (I ae

they | rm tack of research. ae

ay yeASURES TO REDUCE THE PROBLEMS,

i | a) cooperative Buying: Bulk purchase is th

ay rices- Group buying CaN secure more f = ay cine

me srices because it enables small units paint terms and

the competition. | Small retailers may for meet chain store

hei Association in order to conduct joint omitinn co-operative

scale and reap the benefits of bulk riivehiikes “Thi t arger

ases, tend is

noticeable in the grocery trade.

Uts :
dern business principles:
ip) Modern Du Ples: Small retailers may unde
modernisation of the business practices and sai
secure maximum economy and efficiency in the trade =

lo .
ic) Cash and carry warehousing: Some wholesalers sell at lower
prices and offer free delivery services. Small retaile
e fore buy at so } ee
therefo y mewhat lower price,

H id) Wholesaler’s specialised services: small shopkeepers can

\ take full advantage of the specialised services of the
dh wholesalers.

() Market information: Market information is available with

MSME Development Institutes (MSMEDIs) and DIC's of
respective states/areas. Market Survey reports on various -

items and Industrial potential surveys of particular areas

provide the information about the market potential of items.

Industry and Trade associations, specialized institutions

like PPDC can also provide such information. Market
| potential can be ascertained by conducting preliminary study
by prospective entrepreneur to get an insight of the product/

services to be setup. An entrepreneur can estimate local

demand, demand within the state or country, export market
and future prospects of product(s)/service(s). Visit to
wholesale and retail markets, bulk consumers etc. provides

accurate information on market potential.

182
YY iV Vipul’s™ Entrepreneurship Developmen,

(f) Marketing Support Programme: NSIC, has been acting a, ‘4

acilitator to promote SSIs, to bear the onslaughts of such Ps
Open economy. NSIC has, over a period, devised a number ¢;
innovative programmes for the support of SSIs in the field
marketing, both in and outside the country.
In the post-independence period, Government and j,,
agencies, have been the largest buyers of various types

products and services and NSIC has been trying to act as ,

MEs closer to various Governmenta|

nodal agency to bring 5 )

purchasing agencies, with the intention of creating
agencies about SMEs, and their

confidence in the purchasing =,

capabilities to supply goods and services of requisite quality

economic prices and adherence to agreed delivery schedules,

(g) Tender Marketing: Participation by NSIC in bulk

local/global tender on behalf of Small Scale Industries /

Enterprises
It is aimed at assisting SSIs with the ability to manufacture

quality products but which lack brand equity and credibility

or have limited financial capabilities.

Small Scale Industries/Enterprises should be registered

with Directorate of Industries/ District Industries Centre to |

gain eligibility.

Integrated Marketing Support: NSIC has been operating an

Integrated Marketing Support Programme in which bills
pertaining to supplies made by small scale units to eligible |
purchasers are discounted by NSIC upto a certain specified
limit.

The scheme has been introduced with a view to mitigate

the problem of delayed payment by buyers against supplies
made by small scale units.
(i) Government Stores Purchase Programme: This Programme

was initiated in 1955-56 with a view to assist the small scale

industries in obtaining a fair share of the total purchases

made by the Government and its departments including the
public sector undertakings and State Governments. The main _
objective of this programme is that SSI units will in the.

(h)
as of Management

My neo _ iented

acess be oriented to prody

‘ Pandards laid down by the b ;
io jaRrKET DEVELOPMENT ASSIS

gM ste scheme offers funding for:

| articipation by manufacturin
tk 2 international Trade Fairs / “ke and Micro Enterprises
‘ stall. ons under MSME India

cific market st

lta tor spe ; Studies by Ing nae

hy export Promotion Councils / Federation. ny ci nage
Cir Organisation ian Export

ly, ) Initiating / contesting 7

8. associations and cases by MSME

AN India) by Small &

te Micro units for the first three years for bar code

Y! gpjective:

(i) To encourage Small & Micro exporters in their efforts at

tapping and developing overseas markets,

(ji) To increase Participation of representatives of small/ micro

manufacturing enterprises under MSME India stall at
International Trade Fairs/ Exhibitions.

(i) To enhance export from the small/ micro manufacturing

enterprises
| (iv) To popularise the adoption of Bar Coding on a large scale.

SPECIALIZED AGENCIES PROVIDING MARKETING

ASSISTANCE:

There are Governmental and non-governmental specialised

agencies which provide marketing assistance. NSIC & KVIC are
| the devoted govt. agencies for providing marketing assistance to

MSME units.

(1) State Small Industries Corporation: They secure orders from

| the State Government and other Semi-Government

organization for the supply of stores.

N
5
1
|
184

(3)

(4)

(5)

th Entrepreneurship Developrne,,,

YY iY Vipul's

ation: Besides promotiy,, FF

NSIC directly market ri ,
SSI produce in the domestic and o g market. NSIC aj),
manages a single point registration scheme for manufacturer,
for Govt. purchase. Units registere under this scheme get th,
benefits of free tender documents and exemption fror,
earnest money deposit and performance guarantee. 7
NSIC help the micro, small and medium enterprises for 4 ?

exhibiting products in the domestic and internation,

om the Director General «

exhibition.
Further, they secure contracts fr 8

Supplies and Disposals, Railways, and Defence for supply of 4

behalf of small-scale units. tt

manufactured goods on
]I Industries Service Institutes:
bution and surveys for the benefit o,

of SSI products thr

Sma
(a) They conduct distri
small industrialists.
(b) They enlist the units for participation under Centr, §%
Government Stores purchase program. iz
(c) They issue competency certificates to the units receiving F
Government orders. of
(d) They maintain close liaison with specialized agencies like
Export Promotion Councils to have up-to- date .
They supply information about the products having bs

export markets.
They disseminate information about the items having :

(e)

(f)
export markets.

They render technical counselling.

Chief Controller of Imports and Exports: They help Smal
unit for participation under export aid to small industry
scheme of the State Trading Corporation of India.

Directorate of Export Promotion:

(a) They issue license for export of products to foreign

countries.
(b) They collect and supply information on foreign markets.

(c) They carry out market studies for ) articular products.

(g)

{
oy sional Areas of Management
fur

5 be,
®, caPITAL REQUIREMENT:

total capital require

, apstied into four broad categoria OF & Business “unit can <

Vy ) Bomntion# Capital: It is needed to promote new business.

promotional capital is required for roject planni

feasibility studies, Preparation of Mémotandien a ete .

of Associahon, Prospectus and also for ein “s

promotional expenses. pe

», @ Long Term Capital (Fixed Capital): Fixed capital is required

in the initial period for purchasing fixed assets such as lant

| and machinery, land, factory building, furniture, etc. Lon
iy term capital remains in the business as long as the business i
oing on. It is usually collected through the issue of equity
ik and preference shares, debentures and loans from term
lending institutions.

n (3) Short Term Capital (Working Capital): Working capital is

necessary to meet the current needs of business. It is used for
the purchase of current assets, raw material, spare parts,
payment of wages etc. It is required only for a short period as
it is recovered from the price charged to customers. Working
capital is normally collected through bank loans, public

deposits and advances from customers.

(i) Development Capital: Development capital is required for
expansion, diversification and modernisation of business
activities. It is normally used for purchasing new machinery,
replacement of old assets, construction of new factory

building, manufacturing of new product etc. It can be

collected by issue of new shares, ploughing back of profits
and long term loans from financial institutions like IDBI,

ICICI, SHCOM, MSFC etc.

186 '
a" LY i Vipul's™ Entrepreneurship Developme,

CAPITAL STRUCTURE:

% According to Gestenberg, “Capital structure of a company re Crs

9 fhe make-up of its capitalization. It refers to the composition of thy
firm's preference and long term debts. It shows the ratio between ow), ,
finds and borrowed funds.”
FACTORS GOVERNING CAPITAL STRUCTURE:
(1) Trading on Equity: Trading on equity means taking th, —
q

advantage of other securities in giving a fair return on equity,

Generally public utility establishment with a stable earnings

go for this policy.

(2) Cost of financing: The cost of getting the capital raised alg,
influences the capital structure. Capital has to be arranged a

the lowest cost.

(3) Retention of control: Different types of securities are issued
to meet specific objectives. Preference shareholders and

debenture holders do not have voting rights. Only equity

shareholders have voting rights. The management has to give |
a thought before issuing security with a view to keep its hold.
(4) Elasticity of structure: The capital structure should be
flexible enough so that changing needs of the organisation

can be fulfilled.
(5) Legal Restriction: Companies have to work within the
framework of various restrictions which directly influence the

capita] structure. The Banking Companies Act does not allow

banks to issue various types of securities except equity shares,

CAPITALISATION:
It is the sum total of the share capital, debentures, long-term

debts and retained profits. In the words .of Lillion Doris,

“Capitalisation means the total accounting value of the capital stock,

surplus and long term loans of a corporation.”

So capitalisation refers to:

(a) The value of different types of shares.

(b) The value of debentures and bonds which are yet not

redeemed.
by” eunctional Areas of Management
Hs

. SY i
to () The value of a

‘
k ‘ distribution. ~ ti \ \ nd *urPluses not meant for
; D CAPITAL; \438 = oS

fakin Ss ~

Neg Fixed capital is that a - SY _ a)

“amy, purchase fixed assets like land, b Sapital which ;
® The capital invested in Fj,

seg ml Definitions:

"ange (1) According to B.O, w

i long ruit assets, The aniount of fixed i

Te ig. with the amount of the fix Y fi capital neede , vari

heeler, “p;

y eg . defined to include Igy

S to gh
Sho, Features of Fixed Capital:
bulg : (1) Needed for meetin

d, building, machinery and othe

lanent existence.”

ed § long-term needs: Fixed ca

Visag. permutting the long-term needs of bidtness aur pn
° normally used for Purchasing fixed assets and alse for
in meeting promotional expenses,
Icex (2) Needed at the beginning: Fixeg Capital is needed at the time
‘: of company promotion in Order to make Promotional!
he expenses and also for the Purchase of fixed assets like land
RR and building plant and machinery, furniture and fixture and
so on. It is also required for the xpansion and diversification
rv of business activities.

‘x (3) Withdrawal not possible: Fixed ca

| for the business carried on by
capital is of permanent nature a

(4) Collected from various sourc

through different sources viz

so on.

Pital cannot be withdrawn

the company. Naturally fixed
nd has low liquidity.

es: Fixed capital is collected

., issuing shares, debentures and
(5) Requirement is variable: Fixed capital is required by all
business enterprises. However, the amount is not uniform for
all enterprises as it depends on various factors such as nature
of the business, size of the enterprise and so on. The amount

ee
188

(6)

(7)

(8)

Factors Dete

number of factors such as:

(1) Nature of the business activi

(2)

(3)

(4)

YY Vipul’s™ entrepreneurship Developme,,

of fixed capital required is much mo
working capital requirement.
Needs long-term planning: F
planning. Many units face exce
or the unit may fall sick due tot
fixed capital.

Appreciation and depreciation: The value of some fixed

assets like land and building, plant and machinery mg
increase in due course of time. As 4 result, there will be 4]

e company. In addition

precision of fixed capital of the ¢o

deposition is the amount of fixed capital which reduces the

value of the assets.

ce of strengt

re as compared to thy

d capital needs long-term,

hortage of fixed capitay
ive management of

ixe
55 OF S$
he ineffect

h: Fixed capital provides streng

1 and stability of manufacturing company. |
tribution for earning profits. It is rightly
f a business enterprise.

Acts as a sour
for the surviva
makes positive con
treated as the backbone O
rmining Fixed Capital Require
of fixed capital requirement is determined by

ment:

The amount

ty: The nature of the busines

activity determines the amount of fixed capital. Transpo

undertaking and public utilities need large amount of fixe
capital for purchasing fixed assets. On the other han
commercial enterprise need limited amount of fixed capital g
fixed assets required are limited.
Size of the business unit: The size of the business unit

determines the amount of fixed capital. Large si

organisation require more capital as compared to small si
organisation
Government Subsidy: Government may supply land at
concessional rate or may supply machinery on instalme
basis or offer term loans on easy terms. In such cases F
amount of fixed capital required may be comparatively le
as certain fixed assets will be available at a lower price. “a

Type of product manufactured: If a company

manufacturing sophisticated equipment or machinery sucht
Mined |.

he bus:
» Trang
Nt of &
other
1d capit:

SS unl:
Large °
» smal:

> Jand!
inst”
h cae
ative"
rice:
mp"

ae Gh

gunctional Areas of Management

Computers, Planes etc. will require more fixed capital as

compared to those companies whose products are like
stationery products, plastic items etc.

(3) Method of acquiring fixed assets: The assets can be

urchased outright or on instalment basis or on rental basis.

The fixed capita] requirement will be more if land, machinery

etc. are purchased on outright basis. On the other hand fixed

capital requirements will be less if the fixed assets are

purchased on instalment basis.

(6) Technology used: Those firms which use sophisticated

technology to produce goods, require huge investment in
fixed asset like plant and machinery. However, those
companies which are more labour intensive or which do not
make use of latest technology may require less investment in
plant and machinery.

(7) Scope of the activity undertaken: Organizations who

manufacture entire range of their production require huge
investment in fixed assets. There are organisations which
partly manufacture their components and parts may require
less investment in fixed capital.

Importance of Adequate Fixed Capital:

Every business unit needs sufficient fixed capital as it provides

strength and stability to a business enterprise. The advantage of
having adequate fixed capital is that it acts as the cornerstone of
the capital structure of a business enterprise. The smooth
functioning, expansion and diversification of business are not
possible without the support of fixed capital and this suggest its
importance and significance.

The modernization of the manufacturing processes and the

replacement of obsolete assets need additional fixed capital.
Introduction of automation and modernization and use of modern
computer-based technology needs the support of adequate fixed
capital. Expansion of business activities is possible through the

support of adequate fixed capital.

Such expansion includes expansion of product line,

undertaking distribution or service activities or manufacturing
components in place of purchasing from outside sources. This
490 VV Vipul's'™ Entrepreneurship Develop, 3! are
ty i
Suggests the importance of fixed capital throughout the life ,, a onen
Manufacturing company. 5 om akin’ /
The future stability, growth and prosperity of a business a Ee wet reser
linked with the support of adequate fixed capital. All this SUBR Est - eal
the significance of fixed capital. eo cute os
Sources of Fixed Capital: (Apri! 17) 3? pn
Important sources of fixed capital are: i je i
NE nts +
(1) Public issue of shares. 4c? t jiabil
(2) Right issue of shares. cult joans
(3) Issue of debentures. ai worki
(4) Issue of preference shares. Go oa val
(5) Ploughing back of profits. [t owned \
(6) Bank loans. por gtative
(7) Lease Financing. el ae
(8) Loans from specialised financial institutions. . acePt im
Ww ING CAPITAL: aactO® *
; QuIRE
eaning: Re }
; : . : , . . e wor
Working capital is also called as Circulating Capital. It is tha Th ‘
part of capital which is required for meeting the day-to-day J 0 ine :
expenses of a business unit. It is required for purchase of raw fF wpe Th
material and stores, payment of wages and other regular expenses capital are
like electricity, water charges, taxes etc. It is recurring in nature. i) Nature
Adequate working capital ensures smooth and orderly expens
functioning of a business unit. capital
Definition of Working Capital: “a :
ee ; et uw
In the word of Shubin, “Working capital is the amount of funds ‘ik R
necessary to cover the cost of operating the enterprise. Working capital :
in a going concern is a revolving fund, it consist of cash receipts from § () The S
sales witch are used to cover the cost of current operations.” produ
According to Field Backer Malott, “Working capital means a sun work
of current assets only. 3) The 1
take t
of w
opera
_ ae

ctional Areas of Management Ka" ta" ka

iow
COMPONENTS OF WORKING CAPITAL: \/
It represents the excess of total current assets over the total

current liabilities and it is measured by current ratio. Unit which

has a current ratio 2:1, indicate greater solvency while a very low

ratio indicates insolvency.

Networking capital = Current assets (Cash + marketable assets

, accounts + bills receivable + inventories + securities) minus (-)
current liabilities (Trade dues + sundry creditors + provision +

taxes + loans + Bills payable.)

Gross Working Capital:

It is equal to the total sum of current assets and may represent

both owned capital and loan capital. The gross concept gives only

uantitative information about the company’s finance minus (-)

total circulating assets. The concept of gross capital is financial

concept while that of net capital is an accounting concept.
FACTORS DETERMINING WORKING CAPITAL
REQUIREMENT:

The working capital requirement of small-scale industry varies

from one unit to another and from one type of unit to another
type. The important factors determining the amount of working

capital are

(1) Nature of t
expensive raw material require huge amount o

capital. Some firms require more working capital because

they depend on imported raw material. Public utilities
conduct their business on cash basis and hence they require

limited amount of working capital.

(2) The State of Technology: Each industry and the type of

production tend to have its own typical proportion on

working capital for given volume of output or distributions.

(3) The length of manufacturing cycle: The longer the goods

take to go through the factory, the greater will be the amount
of working capital needed. A service firm has a short
operating cycle and which deals on cash basis requires lesser
working capital. On the other hand, a manufacturing concern

a |

he business: The business firms which use

f working
i. 192

# = YY Vipul'’s™ Entrepreneurship Developrn reg

which has a long operating cycle and which sells largely € m,

credit needs a substantial amount of working, capital.

(4) Terms of Purchase and sale: A business unit: makin ,
purchase of raw materials on credit basis and =e On Cashy
basis will require lesser amount of working capital and vicg
versa. ; 4

i i f la
vary according to the importance Of 18"
the, producbort- If the firm is labour intensive then morg

working capital will be required. |

(6) Production Policy: Working capital needs a ai oops upon

the production policy of a firm. Ifa firm is dea mee eensoni
items like such as school-bags, raincoats, umbre — et
Umbrella may pursue a policy of steady production
ther than intensify the production

throughout the year fa icti

: k — This will reduce the sharp variation

during the pea

/ in working capital needs.
(7) inventories are large and
le industry will need a bigger
inventories are small and
ill require small amount o

Turnover of inventories: If
turnover is slow, a small-sca
amount of working capital. If the
their turnover is quick, the unit w
working capital.
(8) Banking Facilities: If a small-scale unit has good banking
connection it may have a minimum margin of regula

working capital over current liabilities.

(9) Growth and Expansion: Those firms which are growing and
expanding at rapid pace need more working capital ag
compared to those firms which are more or less stable in thei

growth.
IMPORTANCE OF WORKING CAPITAL:

A business requires adequate working capital to meet it

various short term needs. Adequate working capital mean

neither shortage of capital nor excess of capital.

The importance of working capital is explained below:
(1) Continuity in business operation: Continuity in busines
activities is possible only when there is continuous flow
!

cl

yorkings capital. This Makes jf :

yperation moving. POSSible |
*.

crease Creditworthinegs:
(2) jonour its COomMilMents dog
market oe enables the rAheteed

er cred erms and ; a :

lon » banks 7 Obtain | Material on

from the 3 ave Oans and advances

3) Goodwill: en ig Which me
without much c ifficulty brings a good apital needs
jhe labour and capital market, hame to itself and in
repayment of Long term loans: Workin

y term ,
ere ae ital ae and debentures Without suffici
al i a su
working, Cap IL would be 'MPossible to repay d b icient
jong term loans and other liabilities pay debentures,

pu"

-
eV

0 keer .
keep the business

busj i

USiness firm Which is

7 * 800d name in
to Obtain r

able to

8 Capital is used to

5) Regular Dividend payment: Regular p

possible when adequate working capit

company. This creates confidence

shareholders.

) Easy availability of bank loans: Adequate working capital

raises the credit standing of a company. Banks are willing to
offer loans to such companies.

ayment of dividend is
al is available with the
in minds of the
(7) Increase efficiency and productivity: Those companies
which do not face working capital problems do provide good
working conditions and welfare facilities to the staff and
workers. The company can also maintain machines in good
condition. It can spend on training and development of

personnel.

(8) Enable to face competition: Working capital enables the firm

to meet the challenges of the competitors. Adequate amount
can be used to advertise and to undertake sales promotion

strategies.

| SOURCES OF WORKING CAPITAL: (Oct. 15)

() Trade Credit: This is the most important source of working

onvenient source of finance. Trade credit

¢ i cll. is € ery ¢
pilaf Gia VERY d of 30 days, 60 days, 90 days

is generally granted for a perio

eV ay Vipul'’s™ Entrepreneurship Developmen;

sing —
and 120 days after purchase. The extent of credit is subjective!
"1 + * . * a
and depends upon the individual circumstance

k Overdra 1 Y I ‘ I I 5s sist of an a ia i
i I S Hf business entrepreneur Can

srcial banks gener

draw current account cheques. Commercial P fora ale:
provide overdraft facilities to small enterprises veal dtran of
6 to 12 months. The period of overdraft is aa a Y arranged
ae * ine oy ae lirm.
in conjunction with a cash requirement of tl

Cash Credit: This represents the ough Fee Ng

‘ i i d book debts. Periodic
hypothecation of inventories an 3
ht nares and debtors statement have to be submitted to the
bank.
(4) Bill Discounting: The bills receivable from the debtors are
discounted with the banks. This facility helps in realising
funds fast without waiting for the maturity period to get

(3)

over.
Self-Financing: Self-finance is one of the important method

of meeting fixed capital requirement. It is an internal soureg

of financing as accumulated savings are used for meeting the
current needs of the business. Self-financing is economical ag
the liability of interest payment is absent.
Packing credit facility for Exporters: The commercial ba
in India offer packing credit or Pre-Shipment finance to thé
exporter on the basis of confirmed export order and/or lettey
of credit issued by the importer’s bank.
(7) Dealers Advance: Dealer or customer advances enables t e
firm to meet its working capital needs. Normally,
company may have to pay interest on such deposits which ig
reasonably low. Again, there are no complicated formalitie

in obtaining such advances.

(8) Commercial Paper: Commercial Paper represents short-terg

unsecured promissory notes issued by firm which enjoy j
fairly good credit rating. Generally, well establishet
companies with sound financial background are able to iss 1
commercial paper. The maturity period normally range
between 90 to 180 days. Commercial Paper is sold at
discount from its face value and redeemed at its face value.

(5)

(6)
Lal
anal Areas of Managemen =
punetion seas oe

<5 FUNDING:

order to provide financial assistance to entrepre

vernment — = up a number of special Gidget!) atic: the
es commercial banks, they can be slaSsiCied inka. ber
ies: (U) National Level Financial Institutions (2) St ° en
| Institutions. tate Level

pest
calegor
pinancla
e state-level financial institutions. are further divided int
categories i.e. State Financial Corporations |SFCs] oe Beate
industrial and Investment Corporations. Besides the two mal
-qstitutions, In some States there are State Industrial Co aoe
which are engaged in the development of the aus ae
and providing financial assistance like equity support. _

_ANPOWER REQUIREMENT: “[, pe Me.

(1) Skilled Employees: Skilled employee is one who is capable

of working independently and efficiently and turning out

accurate working. He must be capable of reading and

working on simple drawing circuits and process, if necessary.

Example: Electrician, mechanic, tailors, cooks comes in skilled

category.

Semi-skilled employees: Semi-skilled employee is one who

has sufficient knowledge of the particular trade or above to
do respective work and simple job with the help of simple
tools and machines. Example:-gatekeeper(cinema),asst.
operator, asst electrician, bookbinder, waiter or bearer, mali
with technical experience

3) Un-skilled employees: Un-skilled employee is one who

possesses no special training and whose work involves the
performance of the simple duties which require the exercise
of little or no independent judgement or previous experience
although a familiarity with the occupational environment is
necessary. Example: Peon, chowkidar, watchman, cleaner,
sweeper, loader, helper, mali comes in unskilled category.

(2)

(4) Contract employee: A contract employee is hired for a

specific rate of pay. He works under contract

r. A contract employee does not become a

considered a
specific job at a
for an employe
regular addition to the staff and is not

permanent employee.
| die 18) © Pave,
f Tow

if

Vipul's™ Entrepreneurship Developme, |

(5) ¢
as
one Workers: Casual employment can be defined as
bh re an employee is employed when and if needed, ang
Where there is no particular expectation of continuing

employment.

Casual employees are generally hired for a specific perigg |

of employment to do work of a temporary nature. fo, |
example, casuals work on special projects or act as emergency |

teplacements for employees on leave.

SOURCES OF RECRUITMENT:
Available sources of recruitment can be conveniently divide
into two broad categories. These are: (1) Internal sources and (2)

External sources.

(1) Internal Sources of Recruitment: These include:

(a) Promotions
(b) Transfers
(c) Internal Notification

(d) Retirements
(e) Recalls and Former employees.

(a) Promotions: Promotion means an improvement in pay, status

and responsibilities of an employee within the organisation,
The management follows the policy of internal promotion in |

order to motivate the existing employees.

(b) Transfers: Whenever a new vacancy is created within the

organization, management may fill the vacancy through the
transfer of existing manager rather than employing a new
hand.

(c) Internal Notification (advertisement): Sometimes,

management issues an internal notification for the benefit of |
the existing employees. Suitable persons are appointed at the

vacant posts.

(d) Retirement: At times, management may not find suitable

candidates in place of the one who had retired. Here the!

management may decide to call retired managers with new

extension.
ing | _io™

Peg emp! ; ick

ne ‘his facilitates quick and correct Sele
“Op i

. dividiuat.
t = * uals
ting |) ee jor some other jobs, might be wil)

i
Lareas of Management
1

hp Cher wages and incentives. ha

nigh

re t
oyees is already known, he pe

Ction of the candi

ruitment;
ees,

dates.

stages of Interna] Sources Of Rec

y oo sick recruitment of fresh employ

t romotion of sincere

* Tegular, and h
Viq @ sponsible position, wales employees to

®) fy Recommendation useful.

i ceparate training is not required.

(iv) — ntrol possible as employees are known.
7 No separate expenses on advertisement.
| weaerna Sources of Recruitment: These
wr Campus recruitment,
ib) Press advertisement.

include:

(d) Deputation of personnel or trans

fer from one enterprise to

another.

(e) Management having schemes,

() Walk-in interviews.

) Campus recruitment: In camp

recruit the final year stude
Placement services are now pr

us recruitment, companies
nts of the degree courses.
ovided by all the engineering
colleges and ploy technique. It is an economical source of
recruitment.

b) Press advertisement: Press advertisement is very widely

used for recruitment of all the categories of personnel
Particularly for the appointment of middle level manager.

Selection of most suitable candidates is possible by this

method.
ing | _io™

Peg emp! ; ick

ne ‘his facilitates quick and correct Sele
“Op i

. dividiuat.
t = * uals
ting |) ee jor some other jobs, might be wil)

i
Lareas of Management
1

hp Cher wages and incentives. ha

nigh

re t
oyees is already known, he pe

Ction of the candi

ruitment;
ees,

dates.

stages of Interna] Sources Of Rec

y oo sick recruitment of fresh employ

t romotion of sincere

* Tegular, and h
Viq @ sponsible position, wales employees to

®) fy Recommendation useful.

i ceparate training is not required.

(iv) — ntrol possible as employees are known.
7 No separate expenses on advertisement.
| weaerna Sources of Recruitment: These
wr Campus recruitment,
ib) Press advertisement.

include:

(d) Deputation of personnel or trans

fer from one enterprise to

another.

(e) Management having schemes,

() Walk-in interviews.

) Campus recruitment: In camp

recruit the final year stude
Placement services are now pr

us recruitment, companies
nts of the degree courses.
ovided by all the engineering
colleges and ploy technique. It is an economical source of
recruitment.

b) Press advertisement: Press advertisement is very widely

used for recruitment of all the categories of personnel
Particularly for the appointment of middle level manager.

Selection of most suitable candidates is possible by this

method.
198 Ly YY Vipul's'” Entrepreneurship Developmery

consultants and private

consultants and

(c) Recruitment through management

employment exchanges: Managemen

private employment exchanges ma ke necessary arrangemen a
and select suitable staff required by ® busine “ae ioe thie.
they give advertisement, conduct tests and also arrangg!

interviews. 7
For executive position for shor

i f personnel: *

eriod, the services of an excct apem

i be used on loan basis. This method is useful only for

temporary period. oe |
(e) Management Training Schemes: Some TE TT eae
management training schemes for the recruitment of

executives. Here the group talented candidates are selected ag

trainee executives in different areas such as accounts;
technical and commercial. After selection, the candidates are
sent to their management training institutes for extensive
training. Here the candidates develop loyalty for the job and
the organization in which they work.

() Walk-in interviews: The most economical approach for

recruitment of candidates in direct applications. Those

interested in the job submit their resumes directly to the
employer. The advertisement mentions the day, date and
timing during which the applicant can ‘Walk-in’ for an
interview.

Advantages of External Sources of Recruitment:

(i) Wider scope for selection of candidates.

(ii) The selection of fresh employees becomes more scientific.

(iii) Fresh recruits follow the rules and regulations and obey the
orders honestly hence handling these employees becom

more easier.
Limitations of External Sources of Recruitment:

(i) It is expensive and time consuming.

(ii) Beneficial to large organisations only.

(iii) Use of training becomes necessary.