Small Scale Enterprise –

Getting Organised
UNIT 8 PREPARATION OF THE BUSINESS
PLAN
Objectives

After going through this unit you should be able to

• discuss the importance of a business plan in the small enterprise
• explain the steps involved in preparation of a business plan
• describe the criteria to be considered while presenting a project report for
purposes of industrial finances
• estimate the various projections that need to be made for your enterprise
planning.
Structure
8.1 Introduction
8.2 Project Report-L.-Significance and Scope
8.3 Executive Summary of the Business Plan
8.4 Product Description
8.5 Location Criteria arid Checklist
8.6 Plant and Machinery-Space Consideration
&7 Technical Feasibility and Know-how
8.8 Raw Materials
8.9 Working Capital Computation-A Checklist
8.10 Project Cost Components
8.11 Cost of Production and Profitability Projection
8.12 Cash Flow Statement
8.13 Break-even Analysis
8.14 Drawing up an Implementation Schedule
8.15 Common Errors in Business Plan Formulations
8.16 Summary
8.17 Self-assessment Questions
8.18 Further Readings

8.1 INTRODUCTION
A business plan is a written statement of what you hope to achieve in your business
and how are you, going to achieve it. It is a course of action that you chart for
yourself in order to reach the destinations determined by you.
One of the important reasons for preparing a business plan is the realisation it brings
to you about the amount of financing that you will need and the times at which you
will need it. Whenever you go to a financial institutions or a tender to borrow money,
they would certainly want to see how investment worthy you are, by taking a look at
your business plan or the project report as it is sometimes called.
Having a plan also enables you to look ahead and prepare for future developments. In
accordance with these planned developments than, you would need to start activating
the enterprise in the direction that would lead you to realise those future plan. This
unit gives .a detailed account of how to prepare a business plan for your enterprise
and the pitfalls to avoid while preparing the project report.

8.2 PROJECT REPORT-SIGNIFICANCE AND SCOPE

A project report also referred to as pre-investment feasibility study or a Business Plan
is .a detailed description of what business you want to be in. How the business will
achieve the stated goals and when would that happen. It is an operating document.
22 The description of a project indicating what products are to be manufactured or what -
vices are to be offered (in case of a Service Venture) and to whom, constitute answers tc
what business? While such an operational description is relatively easy to formulate, Preparation of the Business Plan
it is essential that the promoter of a business venture has 'conceptual *clarity' on what
business he or she is in. For example a manufacturer of 'drill bits' may think that the
customer needs a drill bit but what the customer really wants is a 'hole'. As Phillip
Kotler puts it 'there are no products, there are only services performed by products.' If
the manufacturer understands that the need of the customer for a drill bit is a hole, it
is most likely that the manufacturer Would keep pace with the technology
advancement and may advocate, at an appropriate stage, use of laser technology for
drilling. Such conceptualisation equips an entrepreneur, with the vision necessary to
understand the needs of the 'client system'.
Details regarding infrastructural facilities required for the business, manpower,
material and - financial resources needed to reach the envisaged activity level, how
such resources would be mobilised and managed and with what financial
implications constitute the answers to the question, 'How the business will achieve
the stated goals'?
'The time frame with in which a project is implemented when it will produce the
envisaged output, when the business would reach optimal activity level generating
financial surplus constitute the answer to when of a business plan.
One major issue that needs to be addressed while preparing and presenting a business
plan is 'why is the business, who needs the envisaged output of the business (in other
words, who are the clients/customers) and why would they buy the same, need to be
established as a part of the marketing component of a business business plan.
Essentially a business plan must establish what competitive edge it has to enter,
survive, sustain and grow in the market.
Activity I
Assume you are entrepreneur planning to start any of the following businesses
(a) A Curio shop
(b) A family enterprise supplying lunch packs to office complexes. What details
would you require to define 'what, how and when and why' of the above
businesses.
.........................................................................................................................................
.........................................................................................................................................
.........................................................................................................................................
.........................................................................................................................................
.........................................................................................................................................
.......................................................................................................................................
What follows is a presentation of a detailed 'outline of a business plan with notes'
appended to elaborate, wherever necessary, the given component.
8.3 EXCLUSIVE SUMMARY OF THE BUSINESS PLAN
1. Summary
− What is being proposed
• Product/Service
• Location
• Ownership
• Project cost
• What is wanted
• Funding pattern including term loan and working capital loan
requirement
• Assistance regarding technical collaboration
2. Introduction
− Current industrial status in the country
− Current status of the industry in the international scene (if the proposed project is to 23
Small Scale Enterprise – operate at international level in terms of marketing)
Getting Organised − Rationale for project selection
3. About the Promoter
− Educational background, work experience, project related experience..
− Similar information for any other key persons associated in promoting the project.
− If the State is one of the promoters, and if the project has international
ramification with respect to marketing, technology, etc, the information
regarding similar projects promoted by the State is to be provided.
4. About the Project
− Description of product and its use
− Installed capacity
− Operating capacity
(for details see 8.4)
− A write up on what will distinguish the proposed project from others
already operating in the market place.
− Any legal requirements/stipulations regarding the product at
national/international level? Describe.
− Clearances from government and other regulatory agencies for setting
up of the project-what are they and what is the status with regard to
obtaining such clearances.
5 About the Location
− Exact location of the project
− Various alternatives available which have been examined
− Criteria for selecting the location
− Locational advantages including infrastructural facilities available at the
location (for details refer to 8.5)
6. Land and Building
− Area of land
− Constructed Area
− Type of Construction - Cost
(Refer Note 4 hereafter)
7. Plant and Machinery
− Capacity
− Equipment balancing
− Suppliers
− Cost
− Various alternatives available
− Criteria for choosing the proposed equipments amongst several
alternatives (Refer to 8.6)
8. Miscellaneous Assets
− Nature of miscellaneous assets that form a part of the project. For
example air-conditioning systems, office automation equipments, etc.
− Itemised description of such assets alongwith cost and source of procuring.
9. Production Process*
− Description of the production process
− Process flowchart
− Details of technology
o Has the technology been developed indigenously or would the
technology be bought out from certain sources within or outside the
country?
o What are the arrangements for technical know-how?
o What are the technology alternatives available?
o How these alternatives have been evaluated)
o What are the possibilities of change in the technology in the course
of time and how the project proposes to adopt such changes.
o Various process parameters.
o (Refer to 8.7)
24 * While the description in this write-up indicate a bias towards manufacturing ventures, the basic format
of the business plan along with explanatory notes hold good, by the large, for 'service ventures' too.
10. Production Programme Preparation of the Business Plan
− Time required to make one unit of the product.
− How much/how many in one week, one month, first year, 2nd year and
so on upto 10 years.
− Input-output ratio.
− Any national or international standards set for product quality? If so
how they are to be maintained with respect to production programme
and production process.
11. Raw Material
− List of raw materials needed.
− Quantity required for one unit of output.
− Quantity needed in the first year, second year and so on upto 10 years.
− Quality specifications for the raw materials.
− Sources of procurement; If the raw materials are to be procured from the
international market, are there any restrictions on supply.
− Cost of raw materials for the first year,. 2nd year and so on upto 10
years. Supply position, i.e. position regarding availability of the raw
materials. Any tie-up arrangement for procurement of raw materials.
− Are there alternate raw materials other than what is proposed to be
used? Have such alternatives been examined? Provide details.
(Refer to 8.8 for details)
12. Utilities
− Requirements of power, water, steam, compressed air and other consumables:
Quantity and value for the first year, 2nd year and so on upto 10 years.
− Source of said materials.
− Position regarding availability of said materials.
− Any specific arrangements for electric power.
13. Manpower
− Requirement of skilled, semi-skilled personnel for production operations for
the first year, second year and so on for upto first 10 years of project life.
− Requirement of administrative/managerial staff and marketing personnel.
− Cost of manpower during first year, second year and so on for 10 years.
− Position regarding availability of skilled manpower.
− Any scheme for training skilled manpower in case they are not readily
available: Describe.
14. Market"
A) Current market status
− What are the major end uses of the product?
− Are there any substitute products available in the market?
− Is the proposed product a substitute for on already existing product in the martket?
− Who are the major buyers?
− Who influences purchase decision?
− What are the major criteria that a buyer looks for while purchasing the product?
− Are there similar products available in the market? If so, what are the
major attributes of such products?
− Status regarding competitors at the regional/national level and at the
international level if the project is expected to market the products in the
international scene.
− What are the major strengths and weaknesses of the competitors? ,
− How the product proposed to be manufactured would differ from the
products already available in the market? '
− On what strengths does the project propose to make an entry into the
market and capture a reasonable market share?
− What are the trade practices being adopted by the competitors or those
producing the product currently in the market place?
− What are the trade channels normally adopted by the competitors?
** Note: The points mentioned under the title `Marketing' as indicated above are not
exhaustive. Pl. refers to unit 6 and unit 13 of this course. 25
Small Scale Enterprise – B) Proposed approach towards marketing
Getting Organised
− The geographical area that would constitute the limit for marketing the
product-regional, national, international (name/s)
− Distribution channel you wish to adopt.
− Trade practice
− The strategy that you have in mind for entering the market and
promoting sales.
15. Working Capital Requirements
− What would be the stock levels of raw material, work-in-progress and
finished goods? Why such stock levels have to be maintained? What is
the amount involved in the stock of raw materials, work-in-progress and
finished goods?
− What would be the extent of credit facilities to be offered to the buyers?
It has to be reflected in terms of the cost of that quantum of goods
against which payment would be outstanding at any given point of time
considering the length of credit facility offered.
− Based on the above the total working capital requirement is to be
calculated and the source to meet the same has to be indicated.
− If foreign currency loan is being sought for import of raw materials on a
regular basis from outside the country details of the requirements have
to be provided.
− What is the nature and extent of credit facilities available from the
suppliers of raw materials? The same have to be accounted for while
arriving at the working capital requirement.
− The arrangements for financing working capital are to be indicated.
(Please refer to 8.9 hereafter)
16. Requirement of Funds
− Cost of the project giving a break-up of the cost of land, building,
machineries, miscellaneous assets, technical know-how fees if any,
preliminary/pre-operative expenses, contingencies and margin money
for working capital.
(Refer Note 8 hereafter)
− The proposed funding pattern to meet the cost of setting up the project-
requirements of funds from national/international financial institutions
towards capital expenditure and contribution from the promoters of the
projects. Also include any other sources of funds, including subsidies
available from the State.
17. Cost of Production and Profitability Projections for Ten Years.
(Refer to 8.11 for details)
18. Cash Flow Statements
(Refer to 8.12)
19. Break-even Analyses
(Refer to 8.13 for details)
20. Implementation Schedule
(Refer to 8.14)
Activity 2
Talk to some successful entrepreneurs about their project planning activities. What
was the sequence of information search and pattern of organisation of this
information as a project report?
…………………………………………………………………………………………
…………………………………………………………………………………………
…………………………………………………………………………………………
…………………………………………………………………………………………
…………………………………………………………………………………………
26 …………………………………………………………………………………………
 Preparation of the Business Plan
8.4 PRODUCT DESCRIPTION
You must, in the first place, understand, in sufficient detail what you propose to
make. It is not enough to state that you want to make aluminium collapsible tubes.
The tubes have specifications.-The tubes come in a range of sizes. The technical-
cum-size specifications have a direct connotation in terms of use of the tube-whether
it will be utilized by toothpaste producer or medicinal ointment producer. There often
exist, recommendatory or statutory standards which a product should fulfil (In, India,
Indian Standards Institute lays down such standards: These are popularly known as
ISI Standards. These are available, product-wise, at a nominal price).
Capacity: A Key Parameter: It is useful to state, right in the beginning, the production
capacity which you propose to instal. A back-of-the-mind awareness of such
proposed capacity will tell you how in-depth a market study you need. For assessing
plant and machinery and other physical facilities and later for financial viability
calculations, installed capacity is the most important parameter.
Oh the question of capacity, remember the following :
• You must specify the number of days your factory will work in a year. It is
customary to presume 300 working days. However, if it is a seasonal enterprise,
because of being dependent or agricultural output (open pan sugar made from
sugarcane) or part-of-the-year demand (firecrackers in India), it may work for
less than 300 days. Enterprises located' in areas where life gets paralysed for few
months in a year on account of inclement weather may work for less than 300
days in a year.
• You must specify the number of shifts, on average, your enterprise will work
everyday. One shift consists of 8 hours. One shift working is the most popular
pattern among small enterprises. Three-shift working is rare, being limited
largely to continuous process enterprises where production cannot be interupted
for technical reasons.
Activity 3
What are the parameters in terms of product description that would consider while
developing a project report for
(a) publishing business-
(b) an industrial lubricant
.........................................................................................................................................
.........................................................................................................................................
.........................................................................................................................................
.........................................................................................................................................
.........................................................................................................................................
.........................................................................................................................................

8.5 LOCATION CRITERIA AND CHECKLIST

Given a choice, you may like to establish your project in your present address town
or your "home town". There is however the problem of stiff land-price, if your
present address or home-town is a large city. Besides, you are aware that the
government offers investment-subsidy and tax-concession to entrepreneurs setting up
enterprises in specified areas. You ' are also aware that you need various physical and
commercial facilities to run an enterprise. Present-address town or home-town, thus,
is no longer an automatic location-choice. You have to consider a gamut of points
while deciding upon a location. There is, in addition, the task of choosing a site-the
specific piece of land, in a given town, where the enterprise will be located.
Sometimes, the location-selection and site-selection are intertwined in so far as you
may drop a location for want of a good site.
How will you go about location/site selection? We recommend a two-stage procedure. For 27
Small Scale Enterprise – practical reasons, just a few locations are likely to merit consideration. Under the first
Getting Organised stage, identify two or three such locations. Also identify one or two sites at each
location. Under the second stage, examine each location/site in terms of a six-
dimension location/site selection checklist given below.
Even if you have just one location/site in view, it is useful to evaluate it in terms of
the checklist to make sure that you are not making a major error. The six dimensions
of the checklist are:
1. Basic Considerations (Development status of the town and its location with
reference to enterprise needs)
2. Physical Infrastructure Position (Power, Water, etc.)
3. Commercial Infrastructure Position (Telecommunication, banking etc.)
4. Social Infrastructure Position (Housing, Health etc.) .
5. Financial Incentives Position (Investment Subsidy, Income-tax concession etc.)
6. Site-specific considerations (Land Price, Contours etc.)
So, put down your finding against each point in the checklist before you pass the
final comment on any location.
The checklist is enclosed.
Checklist for Location and Site Selection
Basic Considerations: Dimension I-
1. Location (City/Town/Village)
2. Population
3. Nearest large city (Name and Distance)
4. Connections to major cities (Rail, Road, Air-distance, Connection, Frequency)
5. Climate (Minimum/maximum temperature, humidity, minimum/maximum
rainfall)
6. Distance from important geographical markets
7. Distance from major raw material sources and significance (or lack of it) of
enterprise proximity to such sources
8. Distance and connection to relevant ports (in case of export/import oriented
enterprises)
9. Manpower : availability, of required skills and prevailing wage rates
10. Overall industrial relations (strike/lockout/dispute in the area)
11. Law and order position in the area
12. Level of industrial development in the area and anticipated tempo.
13. Composition of industrial development in terms of types. of industry and
size/health of existing enterprises.'
14. Proposed enterprise and govt. preference for type of industries at proposed
location.2
15. Whether ready built-up factory shed is available at the location and whether its
size conforms to your need.
Activity 4
With reference to the entrepreneurs you contacted for Activity 2 evaluate the location
decision on the checklist provided above.
………………………………………………………………………………………….
1. An eletronic enterprise may suffer from an environmental hazard if industries in the area
are predominantly chemical. A strong presence of large industries may ensure quick
development of facilities but push up housing cost and wage-levels. Wide-spread
industrial sickness in an area may dilute governmental interest in area development
programmes.
2. The Government may wish concentrated growth of a particular industry-electronics or
ceramic or any other-at a given location. The facilities meant specifically for such
industry will develop quickly there. Likewise, the government may wish to keep certain
28 industries-water intensive or noise-intensive-away from certain locations.
......................................................................................................................................... Preparation of the Business Plan
.........................................................................................................................................
.........................................................................................................................................
.........................................................................................................................................
Physical Infrastructure Position Dimension II
1. Land : Availability and Price
2. Whether there exists an organized industrial estate.
3. Water-supply : Source (river, canal, tubewell), distance, quality (pH, Hardness),
rate, common storage facility, operating authority (Public Works Department,
industrial estate authorities corporation, municipality).
4. Power Supply : Nearest substation, feeder type (industrial/rural).
5. Effluent-Treatment and Disposal (if relevant): Disposal point (land, sea, river),
arrangement for treatment (individual, common), drainage arrangement for
conveying the effluent (open, underground), treatment and conveyance charge.
6. Approach road/internal roads
7. Street lighting
8. Responsibility for maintaining roads, drainage and street lighting (a single or
multiple agencies).
9. Annual maintenance charges.
Commercial Infrastructure Position : Dimension III
1. Telecommunication (availability of new telephone connections, manual or
automatic exchange, STD facility, Telex facility, etc.)
2. Postal and telegram facility
3. Banking facility
4. Transport-operator facility
5. Weighbridge
6. Typing/photocopying
7. Courier
8. Warehousing
9. Nearest offices of law-enforcing agencies (excise, sales tax, labour Iaws, factory
inspection, pollution control etc.).
10. Nearest Offices of Industry-assisting agencies (State Finance Corporation,
Industrial 'Estate Corporation, Raw material/Marketing Corporation, District
Industry Centre which sanctions and disburses financial incentives).
11. Building/Electrical/Fabrication contractor facility.
12. Building material, spares parts and such other shops.
13. Motor-rewinding, painting, gas-supply and such other industrial services.
14. Technical educational facility (e.g. Industrial Training Institute, Polytechnic).
15. Professional resources position (management/industrial consultants,
financial/legal advisers, management/productivity associations).
Social Infrastructure Position: Dimension IV
1. Housing: Availability, Quality, Price (ownership and rent), Public Housing
(Actual and Planned housing by State Housing Board, Infrastructure
Corporation or such other agencies).
2. Education: Primary, secondary and university education facility (quality,
number of seats, ease of admission, medium of instruction). 29
Small Scale Enterprise – 3: Health: Dispensary, hospitals, specialities.
Getting Organised
4. Recreational Facility: Cinema,restaurant, library, parks etc.
5. Hotel Accommodation
6 Service Organisations : Rotary, Lion etc.
Financial Incentive Position : Dimension V
1. Investment subsidy (from the Govt.)
2. Income-tax concession.
3. Sales tax exemption/interest-free sales-tat loan.
4. Promoter contribution (margin) and interest-rate policy followed by Finance
institutions.
5. Electricity-duty exemption, local-tax exemption and such other incentives.
Site-specific Consideration : Dimension VI
1. Whether the proposed site is a part of an organised industrial estate.
2. Direction of town-growth with reference to the site.
3. Non-agricultural status of the site. .
4. Site-contours (levelled, hilly, pits, ravines, brick-kilns).
5. Site-shape (regular/irregular)
6. Immediate proximity of railway line, national highway, state highway.'
7. Overhead telephones or powerlines or underground water/drainage/gas line
passing through the site. .
8. Access to national/state highway or other roads provided by the site.
9. Wind direction in relation to the site.
10. Soil-type.

8.6 PLANT AND MACHINERY-SPACE CONSIDERATIONS

It is necessary to identify the complete range of machines and equipments required to
carry out manufacturing/auxiliary operations and to specify the capacity and
technical features of individual machines.
So far as capacity is concerned, the emphasis should be on balancing. A polyurethane
foam project involves machines for foam-making and then for cutting slabs into
required sizes. The foam-making is very rapid while cuttiaig is slow. In most cases,
cutting machines ' capacity is so low that production remains at 10% of foaming
machine capacity level. So, cutting machine consitutes a bottleneck to achiev Ong
desired overall plant-capacity: Such bottlenecks must be avoided. Likewise,
excessive investment in the capacity of a single equipment is undesirable.
While firming up a plant and machinery list, it is essential to arrive at `make or buy'
decisions. The producer of a collapsible tube may decide to make slugs on his own or
to procure these ready from the market. In the former case, he needs a power press. In
the latter case, he does not need it. So, decide what you are to make and what you are
to buy before ' you draw up a list of machinery.
The suppliers sometimes exaggerate the capacity of a machine. The claimed capacity
(quantity. of output per 8. hours) is often with reference to ideal operating conditions
which do not exist. The actual capacity, therefore, turns out to be lower than claimed.
So take
1. This may imply leaving out some portions of a plot for building purpose.
30
supplier-claims with a pinch of salt, make enquiries with entrepreneurs who are Preparation of the Business Plan
operating the machine and utilize, if necessary, a suitably downward revised capacity
estimate for working out enterprise performance projection.
Machinery List : An Illustration
Please look at an illustrative list of machinery below. This is for aluminium
collapsible tube enterprise envisaged to have a capacity to produce 75 lakhs tubes per
year on a single-shift, 300-day working basis.
While all machines, in this case, will be utilized well, the power press and to some
extent offset printing machine will be utilized for fewer hours-say 4 or 5 hours per
shift of 8 hours. There is no practical alternative to this. It may be observed that there
are two components of machinery-extrusion and other machines to make tubes and
machines to maintain and make dies and accessories. We have called tube-making
machines the main plant. The dies are required for each tube-size and they wear out.
Lathe and other equipments-what we have called tool room equipment-are required
to make and maintain dies.

31
Small Scale Enterprise – These are major considerations. Some term lending organisations maintain a list of
Getting Organised approved suppliers. In this case, ascertain whether the selected supplier is on such an
approved list. In any case, make sure that he is not black-listed by the term lending
agency.
We have discussed the question of computing the cost of plant and machinery under
the subject of project cost. For the time being, it is pertinent to point out that it is
customary to get offers or quotations from the suppliers and to carry out a
comparison of these in order to convince the term loan organisation that you have
made the most judicious supplier selection.
Old Machinery: Need for Caution
If you are buying old machinery you must satisfy yourself regarding the present
conditions of such machinery and its value and residual life. The term loan
organisations, but for imported machinery, may not lend any money at all against old
machinery. It is advisable to check the policy of term-loan organisation before
deciding to acquire second-hand machinery.
Identification of Sources of Machinery.
You may ask-How does one identify sources of plant and machinery? The person
responsible for providing technical know-how is normally in a position to pinpoint
such sources. However, there are directories of machinery manufacturers brought out
by term-loan organisations; industry associations and research organisations which
you can profitably utilize. Owners of similar existing enterprises can shed
considerable light on sources of machinery.
Activity 5
Choose a sample of ten entrepreneurs who are in manufacturing business. Find out
from them
(a) How did they identify sources of machinery?
(b) What were the considerations in machinery supplier selection?
.........................................................................................................................................
.........................................................................................................................................
.........................................................................................................................................
.........................................................................................................................................
.........................................................................................................................................
Dies, Spares and Extras
Your job extends beyond identification of equipments and laying down capacity and
specifications of such equipments. There are dies and spares to be bought alongwith
machinery. It is important to appreciate the significance of these `extra' or `optional'
items. The dies often hold the key to determination of your product-range and
production capability. The absence of critical spares can cause lengthy production
shut-downs. So, consult your technical associate, interview machinery suppliers,
discuss the experience with present users of equipment and work out a statement of
dies and spares which you must buy initially.
Machinery Supplier Selection
Next, there is the question of machinery supplier-selection. It is not necessary-on
most occasions, not possible-that all machinery comes from a single supplier. The
supplier-to supplier comparison normally rests on the following considerations :
• technical features of equipment offered by individual suppliers
• reliability of equipment offered by individual suppliers
• price of equipment offered by individual suppliers
• delivery period stipulated by individual suppliers and their respective reputation
in terms of delivery schedule fulfilment
• nature of warranties or performance guarantees offered by individual suppliers
• scope of after sale service, terms and conditions of such service and reliability of
32 such service offered by individual suppliers.
Space Consideration Preparation of the Business Plan
We have already discussed the issues of location/site selection. As a general policy, it
is wise for a small-scale entrepreneur to locate the enterprise in an organised
industrial estate so that he does not have to deal with such problems as land
development (filling or levelling), provision of utilities, encroachment and security.
There is, however, the question of amount of land an entrepreneur should acquire. In
this behalf, the following considerations are relevant
• Compute the built-up area requirement and ascertain the building regulations.
• Your enterprise may grow and you may wish to raise installed productive
capacity. It is prudent to keep a provision for expansion of built-up area in the
future. A popular practice is to provide this-@ 100% of built-up area proposed
for construction in the initial years.
• You must consider the open storage area which you will need, if such storage is
to occupy a large amount of open space. A mini paper enterprise devotes a good
deal of open space to storage of rice straw.
• Do not forget to take into account -the laws. These laws may pertain to
construction restriction.
Given .built-up area need, it is not difficult to arrive at the land requirement. The
question, however, is-how does one fix the built-up area requirement?
In the first instance, it is essential to visualise the built up area separately for the
following purposes:
• Production (Factory)
• Auxillary Services (e.g. laboratory, workshop, steam supply)
• Administration (Office)
• Godown
• Miscellaneous non-factory purposes (security-cum-time cabin, excise cabin etc.)
• Silos, tanks, wells, cisterns etc.
A small enterprise may not require space for some-of the above cited purposes. It is,
however, useful to assess the requirement purpose wise and it is essential to work out
the layout plan accordingly. Based on the layout plan, you can compute the gross
amount of required built-up area.
It is not sufficient to determine the built-up area requirement. The building
specifications-length, width, .height, type of construction-must be worked out. The
specifications will flow from the technical considerations. In texfurising industry,
double toryed structures are common since machinery is light while in most
industries, single-storey. is the norm. Most factory building have asbestos roofing
while in pharmaceutical reinforcement cement concrete roofing is customary.
Once the built-up area, size and specifications are settled, it is useful to consult a civil
engineer or a contractor. You will get a cost estimate. I
If your project is large or involves complicated building design, it may be desirable to
seek the services of an architect.
Activity 6
Assume that you are establishing a factory to manufacture polypropylene sheets. Talk
to a manufacture in the small sector of this product and assess the space required for
a small scale organisation.
…………………………………………………………………………………………
…………………………………………………………………………………………
…………………………………………………………………………………………
…………………………………………………………………………………………
…………………………………………………………………………………………
…………………………………………………………………………………………
It is useful to bear in mind the general cost of one square metre of factory building prevalent
in the area. This will give you a quick, preliminary estimate of factory-building cost. 33
Small Scale Enterprise –
Getting Organised
8.7 TECHNICAL FEASIBILITY AND KNOW-HOW
Technical Feasibility
You will often come across a reference to technical feasibility of an enterprise. In
simple words, the concept of technical feasibility denotes adequacy of the proposed
manufacturing process and plant and machinery to produce a given product largely
within the framework of predetermined quality-specifications, raw-material and
utility-consumption levels and output quantity per 8 hour norms, without long or
expensive break-down problems. We are devoting this part to a discussion of
technical feasibility. However, we shall touch upon, in the course of this discussion,
on some commercial points intertwined with technical feasibility.
Scope of Technical Arrangements
In order to-accomplish technical feasibility, you must make sound technical
arrangements. For a small enterprise, the technical arrangements normally over the
following:
• laying down the manufacturing process.
• working out the specifications of plant and machinery, identifying possible
sources of supply, evaluating offers from various suppliers and formulating a
machinery procurement-cum-erection plan.
• preparing a factory layout plan and assessing built-up area requirement.
• selecting a location/site.
• estimating raw material and utility (power, water, fuel) consumption norms,
selecting equipment-systems required to ensure a satisfactory supply of utilities
and assessing capital expenditure required to install such equipment/Systems.
• coping with anti-pollution law.
Before we discuss these components of technical arrangements, let us highlight the
question of technical know-how.
Provision of Technical Know-how
You need a fund of knowledge to carry out the above-cited and related technical
tasks. In other words, you need technical know-how..
If you are a technocrat possessing experience in the business-line you want to set up,
you' already have such know-how. If it is a low-technology project say making
wirenails-you may be able to acquire a quick technical appreciation through exposure
to existing enterprises, interaction with plant suppliers and may be in a position to
undertake the technical tasks, through a combination of quick appreciation and hiring
of an experienced technician.
Depending on technology-content of your enterprise, you may contemplate seeking
assistance from. a specialised technical consultant. While seeking such assistance, satisfy
yourself that the consultant is knowledgeable and dependable. If his knowledge is poor,
you will end up with wrong machinery and defective process and not be able to produce
the desired product at a reasonable cost. Check the track-record of the consultant and
watch for yourself work he may have done earlier. Pay attention to drafting your
commercial contract with the technical consultant to make sure that he does not leave you
halfway or does not do a shoddy job.
Whether you are dealing with a technical consultant or a research organisation, bear
the following in mind.
What works at the laboratory scale sometimes does not work at the commercial scale.'
One is forced to make modifications in the design of equipment, raw material
composition or construction of equipment-material in the process of scaling up. The final
outcome, in view of this, becomes somewhat uncertain. A manufacturer of magnesium
oxychloride tiles could not manufacture it because the process borrowed; from-a-national
research organisation was meant for laboratory and not for continuous fair-scale
production. A producer of furfural was forced to drop the initially chosen raw material,
viz., corn-cob because the yield was lower than original projection. Many chemical plants
switchover from mildsteel to stainless steel equipment, thanks to corrosion problem:
Thus, utmost circumspection is called for in case of technology-oriented small projects. It
will be prudent to ask another technocrat to look at the technology in respect of such
34 projects. Besides, a financial provision for further technology-related work to ensure
technical feasibility must be built into the project cost.
There are instances, rather rare, of a small enterprise having to borrow technical Preparation of the Business Plan
know-how from abroad. This is called foreign technical collaboration. There are legal
provisions in force from time to time which specify products for which such
collaboration will be allowed and-the permissible terms and conditions for it. If you
contemplate such collaboration, you must check the policy/legal provisions. So far as
foreign collaborator is concerned, assess the capability. It is worthwhile to secure
offers from a few prospective collaborators and get the best deal. The provision of
technical know-how in case of foreign collaboration normally encompasses supply of
equipment, drawings, erection-support, training of Indian manpower by the
collaborator. It is important to ensure that all mutual obligations are spelt out
comprehensively and carefully in the collaboration agreement.
There exist voluntary/public organisations which can provide help to a small
enterprise in locating foreign suppliers of technology and sometimes in bringing
about a tie-up.
8.8 RAW MATERIALS
You will have to do a fair amount of techno-commercial work on the subject of raw
materials. The work must cover following points:
1. Identify all raw materials required for producing the proposed product.
2. State clearly the specifications of all such raw materials.'
3. Analyse raw material loss at each stage of production process.
4. Identify all chemicals, stores, consumables and packing material required for
producing the proposed product.
5. Workout the consumption norms in respect of raw material, chemicals, stores,
consumables and packing material per unit of output.
6. Identify bought-outs required, the rate at which they are required per unit of
finished output, the price of brought-outs and the names of prospective
suppliers.
7. State whether (which) raw materials are available indigenously or imported.
8. In case of imported raw materials, describe the clearances/ licences required and
thus give an idea regarding ease of import.
9. State names and addresses of major suppliers of raw materials.
10. .Ascertain the (prevailing) price of various raw materials, chemicals, stores,
consumables and packing materials. Comment on the volatility or otherwise of
price.
11. Add taxes, freight, duties, excise octroi and such other charges to the price.
12. Ascertain the credit-period which suppliers normally grant to the buyers.
13. Comment on availability of major raw materials-whether these materials are
easily available or are occasionally or continuously in short supply.
14. Whether there is a price control on raw materials. If so, the details of such
control.
15. Whether there is a distribution control in respect of raw materials. If so, give
details pertaining to registration status, quota allotment expected and so on.
16. Incidence of loss of material in transit or storage, if such incidence is significant.
Activity 7
In consultation with the respondents you chose for Activity 6, try to find out the raw
material cost for your products. How much bank financing can you expect for this
estimate of raw material?
.........................................................................................................................................
.........................................................................................................................................
.........................................................................................................................................
.........................................................................................................................................
......................................................................................................................................... 35
.........................................................................................................................................
Small Scale Enterprise – .........................................................................................................................................
Getting Organised .........................................................................................................................................
.........................................................................................................................................

8.9 WORKING CAPITAL COMPUTATION - A

CHECKLIST
(1) What is the expected capacity utilisation or output (in physical terms) during the
first year of operation?
(2) In order to produce output, as envisaged under No. 1, the quantity of raw
material required and the unit price of each raw material. If there are multiple
raw materials, state the requirement/unit price separately.
(3) Determine the quantity of raw material which your enterprise, given first
production target, must carry. This may be equivalent to 15 days or one month
or two months or any other period's requirement. While determining carrying-
level, it is useful to keep the following in mind.
• If it is an imported raw material, an enterprise generally likes to carry a
relatively large-a few months-requirement since the time lag between order
placement and procurement is considerable.
• An enterprise carries a heavy inventory of a raw material which is
frequently in short supply or which takes long to arrive after order-
placement.
• If the raw material price is volatile, an enterprise tends to stockpile it to
take advantage of a favourable price.
• If the raw material is available on a seasonal basis, an enterprise is forced to
carry a large volume, e.g. agricultural raw materials.
• There may be in operation in a law which limits raw-material levels e.g.
edible oils.
(4) Ascertain the value of raw material which the enterprise will keep in stock. This is a
product of quantity of raw material fixed under 3 and the unit price of raw material.
(5) Carry out the exercise identical to what you did for raw material in case of
stores, spares, consumables, packing material and arrive at the value of these
which the enterprise will keep in stock.
(6) Estimate the value of goods in process which the enterprise will carry at any point
of time. This will depend on the length of manufacturing cycle. Suppose, there is a
Ghamela (a pan-like article used for material handling in civil construction and
farming work) enterprise which is expected to produce 1,50,000 Ghamelas by
working 300 days (single-shift) during the first year. It needs two days to complete
raw material to finish product process. This means the length of manufacturing
cycle is two days. In other words, 1000 Ghamelas will remain under process at any
point of time. No. of Annual output units x Length of Manufacturing Cycle in
Days. No of Working Days in a Year. How does one.put value on such goods under
process? Take all direct cost-raw material, wages and utilities. Ignore depreciation,
administrative and selling cost.
(7) Estimate the level of stock of finished goods which the enterprise will generally
carry. This may depend on whether it produces against orders or in anticipation
of demand. An enterprise producing against firm orders carries no or little stock
(limited to time taken to get transport or to cover cancellation of firm orders) of
finished goods. In contrast, an enterprise selling in anticipation of orders always
carried some stock of finished goods. If the demand is seasonal, e.g. firecracker,
the enterprise may have to carry a large volume of finished goods. The quantity
of finished goods stock should be valued at cost-direct as well as indirect
(exclude only depreciation).
(8) Segregate your total sales in cash sales and credit sales. Assess the credit time
limit which you will have to grant. This will furnish to you the amount of
outstanding book debts. While putting value on sales, exclude your own profit.
In other words, consider production cost of sales,
(9) The amount required to meet one month's wages and salary bill.
36
(10) Cost of fuel, light, power and other utilities for a month.
(11) Administrative and selling expenses and repairs and maintenance for a month. Preparation of the Business Plan
(12) Total-up 4, 5, 6, 7, 8, 9, 10 and U. You will arrive at the gross working capital
requirement.
(13) The bank extends credit against the following components :
• Raw Materials
• Goods in Process
• Stores, Spares, Consumables, Packing Materials
• Finished Goods Stock
• Book debts
The bank does not give credit against wage and salary utilities (No. 10) and
administrative/ selling/repair expenses (No. 11). Against permissible components,
credit is generally granted @ 70% of total requirement. This may, however, differ
from component to component, project to project or time to time.
A. bank may grant credit @ 75% of requirement in case of raw materials, stores/
consumables, 50% of requirement against goods in process, 60% of requirement
against finished goods and 70% of requirement against book debts. It is useful to
check the component-wise margin policy with a bank before you finalise bank
assistance estimate. 70% against all components and no assistance against expenses
(wage, salary, power, fuel, administration, sale) is a generalised thumb rule.

8.10 PROJECT COST COMPONENTS

I. Land and Site Development
− Cost of land
− Land-related legal charges
− Levelling and filling charge
− Approach/Internal Road Charges
− Fencing/Compound Wall charge
− Cost of Gates
II. Building and Civil Works
− Factory Building
− Office, Godown and such other structures at project site
− Well, Tank, Silos, Garage at project site
− Sewer, Drainage
− Architect Fee
III. Plant and Machinery
− Price of Machinery
− Excise-taxes, freight, packing, transit insurance and octroi in respect of
machinery
− Stores/spares bought alongwith machinery
− Foundation and installation cost
IV. Other Fixed Assets
− Furniture
− Office equipments
− Miscellaneous tools and equipments
− Vehicles
− Equipment,. Cabling for distribution of power
− Equipment and piping for water supply
− Laboratory equipment Workshop equipments Fire fighting equipments
− Effluent collection,. treatment and disposal arrangement
− Boiler
− Diesel Generating set
− Other Assets
V. Technical Know-how Fees (Training Cost Included)
VI. Preliminary and Pre-operative Expenses 37
Small Scale Enterprise – − Firm-floatation Feasibility Report Capital Raising
Getting Organised
− Salary and Administrative cost during implementation period
− Rent, Rates, Taxes during implementation period
− Travel Cost during implementation period
− Interest during implementation period
− Insurance during implementation period
− Mortgage expenses in respect of loan
− Trial Product Cost
VII. Working Capital Margin
VIII. Contingency and Escalation (generally @ 10% of Ito IV)
Cost of production and profitability projections
While estimating cost of production and profitability, asumptions are to be 'explicitly
stated. For example one may like to work out the projections on an annual basis over
a period of time at `constant cost' constant selling prices. To illustrate, an
entrepreneur planning to manufacture injection moulded plastic goods may project
cost of production over a period of five years considering the cost of raw materials to
be the same year of year. Another approach is based on historical data. Other factors
ore may consider higher cost levels over a period of time and corresponding (if not
proportionate) increase in selling prices. Further, one may take into account the cost
of raw materials at a particular level different from the prevailing market rate based
on certain long-term tie-up arrangement envisaged as a part of the project. Such
assumptions are to be explicitly stated.
By the time one reaches the stage of estimating cost of production and profitability, it
is obvious that all cost elements would have been individually and descriptively
worked out and depicted in a separate statements. Thus, the exercise of preparing cost
of production and profitability statements amounts to compilation of the data already
gathered or processed and presenting the same in a particular format. Enclosed
herewith is a format indicating various elements that go into cost of production and
profitability statement. Given the basic structure of the format, modifications need to
be done to suit the nature of the business. Thus, the enclosed format is suggestive.
Estimate of Cost of Production & Profitability
(Rs. in lakhs)
Operating year I II III IV V VI VII VIII
Capacity of the plant
Production in unit
Capacity utilisation
A. Material Costs
a Raw material
b Components
c Consumables
d Packing
Total material cost
B. Utilities
a Power
b Water
c Fuel
l
Total utilities cost
C. Labour and Plant
Overheads
a Direct wages
b Factory
supervision
c Bonus,
38 provident
Total labour cost
Annexure-(Cont.) Preparation of the Business Plan

39
Small Scale Enterprise – Activity 8
Getting Organised
Using the proforma given for estimate of cost of product and Profitability, develop an
estimate for any Product or service of your choice.

.........................................................................................................................................
.........................................................................................................................................
.........................................................................................................................................
.........................................................................................................................................
.........................................................................................................................................
.........................................................................................................................................

Cash Flow Statement

This is a critical `Statement' in any business plan document. While most

entrepreneurs, at least of while crystallising a business idea and preparing a business
plan are more concerned with `profit figures' it is essential to focus attention on cash
inflow and cash outflow.

Cash inflow indicates how much money is coming into business from where and
when. Cash outflow indicates how much money is going out of business, to where
arid when. Enclosed herewith is a format for preparation of cash flow statement.

40
Break-Even Analysis (BEA) Preparation of the Business Plan
As a part of the business plan, the activity level of a business-in-other words,
quantum of production of goods or services as the case may be-is projected over a
period of time, i.e. 5 to 10 years or even more depending on the nature of the
business. However, when the business plan is implemented, there are several factors
that came into play towards realisations of the targeted activity level. Unforeseen
shortages .of raw materials, disruption in power supply, inability to penetrate the
market etc., may curtail targeted activity level. What would be the financial
implications of such even finalities?
To what extent a business can afford to curtail its activity level due to a variety of
compulsions and yet manage to meet-all its liabilities. These questions need to be
answered right at the stage of preparing a business plan so that the entrepreneur as
also financial institutions intending-to fund the business are in a position to assess,
though partially, risks involved: The said questions could be answered through break-
even analysis-an analysis of the relationships amongst costs, production level and
profit. What follows is an outline of the concepts of BEA and the mechanics involved
in calculation of Break-even point.
Break-Even Analysis
In order to carry out profit-oriented activity, may be production of goes through
setting up of a factory or provision of services by setting up an automobile workshop
or hotel/repairs shop, certain costs are involved. Various items of costs may be the
raw material cost, salaries/wages, interest charges and the money you have borrowed
for setting up the unit etc. All these items of cost put together form the total cost.
The cost components can be divided into two major types viz. (i) Fixed Cost and (ii)
Variable Cost.
Fixed Cost
Fixed cost is that cost which does not vary or change with other factors in the
production level. In other words, there are certain items of cost such as, interest on
`long-term loan', rent on factory shed or office if they are rented, depreciation on
machinery and building if they are owned, etc. which are to be incurred whether the
factory or service centre is working at full capacity or not. For example, if an
entrepreneur has borrowed Rs. 1 lac from a bank or State Finance Corporation for
buying machinery for his factory to produce 100 Tons of a product per year (product
A) and the interest rate on the loan is 12.5%, he will have to pay Rs. 12,500 as
interest per year irrespective of the fact that the production is 10 Tons or 15 Tons or
absolutely nothing. Let us go through another illustration. A factory building is
rented and the rent per month is Rs. 1,000. The production on monthly basis is 500
units in January, 800 in February and 600 in March. Now, the question is what is the
fixed cost for the factory as such for the months of January, February and March?
Likewise, what is the fixed cost per unit of the output in these months?
The fixed cost for the factory unit as such, assuming that there are no other costs,
would be Rs. 1000 per month for each of these 3 months. The fixed cost per unit of
the output can be obtained by dividing fixed cost for, a month by the number of units
produced/to be produced for that month as noted below:
Month Fixed Cost/No. of Fixed Cost
Units per
January 1000/500 Rs. 2.00
February 1000/800 Rs. 1.25
March 1000/600 Rs. 1.66
Another interesting point one could note from the above example is that though the total
fixed cost for the factory as such remains constant (i.e. Rs. 1000 per month), there is an
increase in fixed cost per unit of the output when the production decreases and likewise,
there is a decrease in the fixed cost per unit when the production increases.
Variable Costs
Variable cost is variable with the level of production i.e. variable cost is directly related
to the quantity of output. For example, if Rs. 100 worth of raw-materials are needed to
produce 1 ton of Product A, the variable cost can be calculated as below (Assuming
that there are no other variable costs):. 41
Small Scale Enterprise – Raw-material cost per ton of output
Getting Organised i.e. variable cost per kg. = Rs. 100
Month Output Variable
January 500 kgs. Rs.
February 800 kgs. Rs.
March 600 Kgs. Rs.
As could be seen from the above illustration, that the total variable cost for the
venture as such increases/decreases alongwith the increase/decrease of production
level. But the variable cost remains constant for each unit of the output.
In short, any item of cost which does not change with the level of production is `fixed
cost' and that item of cost which changes with the level of production is `variable cost'.
Fixed cost is fixed for the venture as such. But fixed cost per unit of the output varies
with change in production level/activity level. Total variable cost for the venture as such
is variable as per the production level. But variable cost per unit of output remains
constant. (Here we are not going into the intricacies of economies scale.)
When we make an attempt to classify various items of cost into fixed and variable
cost we may come across certain items of costs such as, wages which remain fixed
till a particular level of production is reached but vary whenever that level is crossed.
In other words, there are certain items of cost which can be termed as `semi variable'.
But for the operational convenience, it is sufficient if one could classify the cost
components into fixed and variable without going into further analysis.
Having understood the level of Fixed Cost and Variable Cost, let us now see how
best we can understand the concept of Break-Even Point.
Calculating Break-Even Point
Whenever an entrepreneur estimates profit for his venture at the time of preparing the
project report or making projections for the coming year (when the unit is already in
operation), normal approach is to deduct total Cost from Total Sales Revenue to
arrive at Gross Profit.
Suppose, he goes a step further and calculates profit at two stages by splitting the
Total Cost into Fixed Cost and Variable Cost for the project, the analysis will throw
some light. It is known that Variable Cost per unit of the output remains the same.
Hence, given the same selling price, the difference between Variable Cost per unit
and selling price per unit which we call `Contribution' also remains the same. Thus,
as sales go up, the Contribution (difference between Sales Revenue per unit and
Variable cost per unit x No. of units), also goes up. Given the fact that the Fixed Cost
for the project remains the same, the venture has to at least earn enough money to
meet the Fixed Cost. In other words, if loss is not to be incurred the venture must sell
enough number of units of the output so that the contribution is equal to the Fixed
Cost. The profit would be to the extent of the Contribution which is in excess of
Fixed Cost.
Such a 2-stage analysis to identify the production level at which the venture makes
neither profit nor loss is called Break-Even Analysis. The said production level is
called Break-Even Point.
We can now put it mathematically as below:
i) Total Cost at `X' Production Level = Variable Cost for `X' No. of Units (VC) +
Fixed Costa
ii) Contribution (CN) = Sales Revenue (SR) - Variable Cost (VC)
iii) Profit (P) at `X' level of production = (Sales Revenue for `X' No. of Units) -
Total Cost. i.e. SR-(VC+FC) Or SR-VC-FC i.e. Profit = Contribution (SR - VC)
Fixed Cost (FC)
To clarify the concept, let us now look at the illustration mentioned below. The'
calculations are done at 3 different production levels to illustrate the relation between
42 the level of 40 production and profit.
 Preparation of the Business Plan

This surplus i.e. `Contribution' is not profit as we have to meet Fixed Cost also.
Considering the Fixed Cost for the Project is Rs. 90,000 then at 10,000 units
production level, the company is incurring a net loss of Rs. 30,000 (Rs. 60,000 - Rs.
90,000); at 15,000 units production level, there is no profit or loss (Rs. 90,000 - Rs.
90,000) and at 20,000 units production level, a net profit of Rs. 30;000 (Rs. 1,20,000
- Rs. 90,000) is made.
Thus, Profit = Contribution (CN) - Fixed Cost (FC). At 15,000 units production level,
the company is just breaking even and so, it is called Break-Even Point (BEP) of
production. At this level, the Contribution = Fixed Cost, i.e. CN = FC.
BEP can be expressed either in terms of production level that would take the venture
'No Profit - No Loss Level' or in terms of sales revenue.
i) Capacity Utilisation Indicator
Usually, Break-Even Point is expressed in terms of capacity utilisation. In other
words, suppose the venture can produce a maximum of 1.00 tons of Product A per
year which we can call the installed capacity, at what percentage of installed capacity
the venture must operate to reach the Break-Even level of production? This could be
found out using the below noted formula:

ii) Sales Revenue Indicator

Break-Even Point in terms of Sales Revenue could be calculated using just two
figures viz., Fixed Cost and `Profit Volume Ratio'.
One of the important ratios to watch in business, especially in Break-Even Analysis
is P/V Ratio. It expresses the relation between `Contribution' (Sales Revenue -
Variable Cost) and Sales. In other words, it tells us that after meeting Variable Cost,
what percentage of sales revenue is available to you to meet fixed cost and then, the
extent of surplus generation.

Suppose, the Sales Revenue per year is Rs. 4,000 and the varibale cost is Rs. 2,000
then the P/V Ratio is calculated as under

In other words half of the Sales Revenue is available to meet fixed cost.
Having understood the concept of P/V Ratio, we can now see how to calculate Break-
Even Revenue using the below noted formula:

43
Small Scale Enterprise – Illustration
Getting Organised
With the help of illustration, let us now find out how these formulas can be applied.
Let us take the example of a unit manufacturing a chemical product. The below noted
illustration gives details of all costs so that we can practice identifying fixed cost as
well as variable cost. Before one goes through this illustration, one has to make sure
that one has understood the terminology and concepts discussed so far.

44
 Preparation of the Business Plan

From the data in the said illustration, we have to do the Break-Even Analysis. The
first step for doing so is to segregate the cost components into Fixed and Variable
Costs. One could notice that there are certain items like maintenance cost; cost of
spares and stores; administrative expenses etc. that are neither Fixed nor Variable i.e.
they can be classified as Semi-variable cost.
Right now, we will not go into such intricate analysis. In case we have to identify
Semi-Variable Cost properly and accurately, we have to examine the given cost item
and if it is found that it is semi-variable in nature, split the cost items into various
sub-components and find out which one is Fixed and which one is Variable. What we
will now do for the sake of simplicity in calculation is to divide the cost components
into just two parts viz., Fixed and Variable Cost. If it is found that a particular item
cannot be so classified and falls under the category of semi-variable cost, we may
take 50% of that item in Fixed Cost and rest in Variable Cost. Such an approach
would not mislead us since those components of the cost that contribute most to the
total cost (in this illustration about 50% of the total cost is that of raw material)
would be appropriately classified as FC or VC. However, in practice, it is advisable
to categorise the cost properly and in case of semi-variable cost take that component
which is fixed, under the title `Fixed Cost'. The items of cost as they appear in the
said illustration can be categorised as follows:
Item Variable Cost Fixed Cost
1. Raw material Rs. 8,46,000
2. Power Rs. 7,500
3. Fuel Rs. 25,000
4. Wages Rs. 62,000
5. Stores & Spares Rs. 6,000
6. Maintenance Rs. 3,000 Rs. 3,000
7. Insurance* Rs. 5,000
8. Miscellaneous* Rs. 2,500 Rs. 2,500
9. Administrative Expenses* Rs. 4,000 Rs. 4,000
10. Selling Expenses Rs. 65,000
11. Interest on term loan Rs. 19,600
12. Interest on Working Capitals Rs. 9,000
13. Depreciation on Bldg. Rs. 20,000
& Machinery
Total Rs. 9,68,000 Rs. 1,16,100
It could be noticed that 3 items of cost `star marked' are, semi-variables and for
simplicity in .calculation 50% of the amount has been taken as Fixed Cost and the
rest as Variable Cost. For example, in this case, wages are taken as Fixed Cost
because the job calls for skill and .skilled labour cannot be thrown out just because
the production goes down from 1500 kgs. to 1200 kgs. or so per year: So, the
categorisation indicated above cannot and should not be considered as universally
applicable.
As could be seen from the above statement total Fixed Cost of Rs. 1,16,000 (approx.)
and Variable Cost is Rs. 9,68,000. As' a check, when we add both the figures, the
sum total must be equal to the total cost as it appears in Serial No. III above. Now,
with the following data, let us do the necessary BEP calculations using the
methodology described above.

45
Small Scale Enterprise –
Getting Organised

Thus, when the Sales Revenue reaches the level of Rs. 4,83,300 then the venture
.neither make profit nor loss. This calculation can be checked for its accuracy like the
one we did to calculate the Break-even production level. However, if one has
understood the concepts of Break-even Point and P/V Ratio discussed so far, one
should be in a position tc check the calculation oneself.

While if is not necessary to present the details of the calculation of BEP, as a part of
the business plan document, it A necessary to provide details breakup of fixed costs
and variable costs and indicate BEP in terms of capacity utilisation as also sales
revenue level.

Activity 9

How would you use break-even analysis to judge the profitability of the following ventures
(a) retail trade in stationary
(b) establishment offering photocopying and fax services
46 .................................................................................................................................
.................................................................................................................................
 ................................................................................................................................. Preparation of the Business Plan
.................................................................................................................................
.................................................................................................................................
8.14 IMPLEMENTATION SCHEDULE
It is essential to draw an implementation Schedule or a time-table for your enterprise.
The task of preparing such a schedule forces you
• to enumerate the various steps which you will have to take prior to
commencement of commercial production.
• to appreciate the inter-dependence among these steps and hence the chain-effect
of delay in carrying out one step on overall implementation schedule.
• to work out a calendar for bringing in your own funds for implementation.
Implementation schedule is an aid to ensure timely implementation of your plan.
Timely implementation is important because if there is a delay, it causes, among
other things, a project cost overrun. A project meant to be implemented in 12 months
at a cost of Rs. 15 lacs may entail an expenditure of Rs. 20 Lacs, if there is a delay in
implementation and this may jeopardise the financial viability of the project itself.
Hence, the need to draw up a schedule and more importantly, to adhere to it.
You will recall that project cost computation includes interest during construction
periou. The amount of such interest depends on your schedule for drawal of term-
loan funds which in turn is tied up with your implementation progress. Thus,
implementation schedule is required to arrive at an estimate of interest during
construction period.
Major Considerations For Formulating Implementation Schedule
While working out implementation schedule, bear in mind the following:
• You will like to carry out tasks involving capital expenditure only after the term-
loan is sanctioned.
• Some tasks are sequential. For example, machinery can be installed only after it
is received. Some tasks are not sequential and can be carried out simultaneously
e.g. electrification of factory building and recruitment of manpower.
• Remember, implementation progress is not entirely in your hands. An unhelpful
official can hold up your term-loan sanction. A transport strike may delay
delivery of machinery by a few weeks. A state financial institution may claim
that a loan is sanctioned in 12 months, but enquiries with loanee8 may reveal
that in most cases, it takes 3 months. It this is so, provide for 3 months. It is,
thus, important to work out a realistic' schedule and to build a sufficient margin
of safety.
Implementation Schedule: An Illustration

Let us look at a typical, simple implementation' schedule for a small project.

(Statement is given below.)

This is a simplified overall schedule. It is possible to break this up into scores of

specific tasks. An interested entrepreneur can use Project Evaluation and Review
Technique (PERT)/ Critical Path Method (CPM) to gain better insights into all
implementation-related operations and to ensure a closer monitoring. of
implementation progress.

Implementation Schedule: An Illustration

47
Small Scale Enterprise –
Getting Organised

8.15 COMMON ERRORS IN BUSINESS (PLAN

FORMULATION
We have covered the ways in which you should go about working on various facets
of a business plan. If you work accordingly, you are likely to avoid major errors.
However, there are some errors which are so widely noticed that we, though it
amounts to repetition, have chosen to highlight here:
Capacity-Utilization Estimates: Gross Unrealism
Over-optimistic and simplistic assumption with reference to utilization of installed
capacity is a pervasive feature of business plans. There are so many entrepreneurs
who presume 80% capacity-utilization in the first year, 90% in the second year and
100% in the third year. The assumption is made in complete disregard of exising
enterprise-performance, market conditions, competition-level and ,possible technical
snags. The business plan, in such a case, is reduced to financial jugglery. It is exciting
to make such an assumption and derive satisfaction from financial-performance
projection. But then, the projection is based on a completely false premises. Avoid
this temptation.
Capacity Computation: A Miscalculation
The computation of installed capacity is a technical task not always performed
competently. There are several finer points-die-changing time, down time, periodic
shut-down, capacity of other equipments-which tend to lower the overall installed
capacity. An exaggerated statement of overall capacity on account of entrepreneur
being unaware of such finer points is rather commonplace. So, pay attention to
capacity-calculation.
Market Study: A Neglected Task
Market study continues to be a grey area. It is relatively easy to work out technical
arrangement and to-make financial-performance projection. You are, in these cases,
dealing with specific or quantiable variables. Market study, in contrast, entails a less
structured probe and contending with less definite variables. So, there are
entrepreneurs who pass by this component of business plan completely. They cite
demographic (population, income, etc.) statistics, present sketchy and inaccurate
information on demand-supply position, produce stray opinions and conclude that
market is just there waiting to be tapped. This is an attitudinal block. Make sure you
do not develop such a block.
Machinery Selection: Serious Errors
This is a subject on which faulty decisions, are common. There are machinery-
suppliers who may never have made a certain kind of machinery, may not have
ability to do so and yet undertake to supply such machinery. The results are
sometimes disastrous. There are plastic extruders which can scarcely extrude. These
are being sold and bought by entrepreneurs. A small entrepreneur does not have the
resources to replace or rectify the machinery. So, take care that you choose sound
machines.
Technology-Oriented Products: A Shaky Arrangement
There are products which call for sophisticated technology or are not amenable to
being produced in the small-scale sector. The entrepreneur is swayed by reported
profit margins. He relies on a technician who may have worked in comparable
48 enterprise but does not have the capability, to line-up complete technology.
Alternatively, it is not possible to setup
enterprise within stipulated financial resources. In other words, the technical feasibility is not Preparation of the Business Plan
there. The enterprise is fore-doomed to failure.
Project-Pruning and Resource-straining: Safe Limits. Exceeded
You have a certain amount of money to invest. You are not in a position to exceed a pre-
determined financial limit. This is understandable. However, there is an entrepreneurial
tendency to accommodate enterprise-parameters within such limit, even if it is not
possible to do so. Thus, an entrepreneur may cut down built-up area or exclude some
machinery to keep the project cost down-within his own financial limit. He may make
most favourable assumption on means of finance (75% of project cost to come as tent-
loan) while some amount of economy or optimism may be in order, this is sometimes
carried out to such .extreme lengths as to render the enterprise-proposal technically
unviable (because important facilities are missing) or unrealistic (in terms of proposed
financial resource plan). It is better not to pursue such an enterprise-idea. So, do not
distort technical viability or pin your hope on the best deal from financial institutions to
fit the proposal within resources at your disposal.
Project Cost: An Underestimate
The promoters of very small enterprises do not consider P & P expenses and working
capital margin. They, consequently, underestimate the project cost and own resource
requirement (margin). The others tend to play down magnitude of working capital
margin. This is because if the working capital margin is large, financial institution
will expect the entrepreneur to raise his own contribution to project cost. Thus
working capital underestimates an error you must guard against.
Location Selection: Some Temptations
There are two major errors which an entrepreneur makes in respect of location-
selection. First, he is so completely swayed by the offer of financial incentives
(subsidy, income-tax concession) that he does not look into other criteria for location-
selection. This sometimes becomes the sole and overriding concern. He may thus
choose a location which from the standpoint of market-proximity, raw material
'availability, manpower position and operating cost-structure, is eminently suitable.
Then, there are instances of an entrepreneur choosing a location merely because it is
his hometown or he owns ancestral land-though it is not an appropriate Iocation. Do
not fall prey to these temptations: If you are selecting a location, take a
comprehensive view.
Selling Price: Unfounded Optimism
A new enterprise, despite offering comparable quality; may not be able to realise the selling
price which established enterprises do. The fact is overlooked. Worse still, entrepreneurs
assume a higher than prevailing price because they believe the quality of their product will
be superior. An unrealistic selling price estimate is an error. It is comforting to assume such
a price since it will make the enterprise look very profitable. The comfort may be
shortlived. So follow a conservative path while estimating selling price.
Cashflow in Initial Years: Poor Detail
The cashflow during implementation period and initial years is not charted out in
sufficient detail. You will be able to do this only, if you ascertain the disbursement
modalities of financial institutions completely and work out a thorough cash-plan
with built-in contingencies. They may expect you to spend from your own resources
in the first place. It may make direct payment to machinery supplier and reduce your
flexibility. There are machinery suppliers and others who may expect advance
payments from you. If you have not envisaged such payments under your cashplan,
your implementation will grind to a halt.
Activity 10
From the sample you talked to for Activity 5 collect information on their experiences
about the probable errors that can be made in developing the project plan.
…………………………………………………………………………………………
…………………………………………………………………………………………
…………………………………………………………………………………………
………………………………………………………………………………………… 49
Small Scale Enterprise – …………………………………………………………………………………………
Getting Organised …………………………………………………………………………………………
…………………………………………………………………………………………

8.16 SUMMARY
The business plan is a blue-print of activities that an organisation proposes to engage
in. Besides being a guidefrost for activities it is an essential exercise required for the
purposes of developing cost and profit estimates, resource planning and feasibility
testing. The project report is one of the important documents needed for the purposes
of obtaining external financing from commercial banks and other financial
insitutions.

This unit provides an overview of the information needed and the sequence of
activities needed to be carried out in order to prepare project report. Common errors
in project planning are also discussed.

8.17 SELF-ASSESSMENT QUESTIONS

1. What is the need and significance of the preparation of a project report for a
small scale entrepreneur? Discuss with the help of examples.
2. Give an overview of the project preparation process.
3. What are the important infrastructure consideration that you should keep in
mind before deciding upon the site of your plant?
4. How would you plan for the technology input needed in your small enterprise?
5. What are the, main project cost components for which of these courses would a
commercial bank offer financial assistance?
6. Explain the utility of break-even analysis for judging the profitability of small
enterprises, with the help of an example.
7. Describe the common errors in project report formulation.

8.18 FURTHER READINGS

Richand M. Hodgills, "Effective Small Business Management, Academic Press
Incorporated, Harcout, Brace Jovanovich.

50