Food Processing Industry

chp-1.qxd

10/18/05

9:03 AM

Page 1

1

CHAPTER

The Food Processing Sector in India An Overview

INTRODUCTION

T

he food processing sector is critical to India’s development, for it establishes a vital linkage and synergy between the two pillars of the economy—Industry and Agriculture. India is the world’s second largest producer of food and holds the potential to acquire the numero uno status with sustained efforts. The enormous growth potential of this sector can be understood from the fact that food production in the country is expected to double in the next 10 years, while the consumption of value-added food products will also correspondingly grow. The growth of this industry will bring immense benefits to the economy, raising agricultural yields, enhancing productivity, creating employment and raising life-standards of a large number of people across the country, especially those in rural areas. The liberalisation of the Indian economy and world trade and rising consumer prosperity has thrown up new opportunities for diversification in the food-processing sector and opened new vistas for growth. A recent study has revealed that there is tremendous potential in India to build a profitable business in the sector. This industry ranks fifth in the country and employs 16 lakh workers, comprising 19% of the country’s industrial labour force. It accounts for 14% of the total industry output with 5.5% of the GDP. Its turnover is estimated at Rs.1,44,000 crore, of which Rs.1,11,200 crore is in the unorganised sector. The industry has started producing many new items like ready-to-eat food, beverages, processed and frozen fruit and vegetable products, marine and meat products, IQF products, etc. The Indian consumer is being fast introduced to newer high quality food products made by using the latest state-of-the-art technology, that is also giving the industry a competitive edge.

chp-1.qxd

10/18/05

9:03 AM

Page 2

Table 1.1 Status of Food Processing Industry in India Sr. No. 1.

Rank of Industry

5th

2.

Employment in lakhs

16

3.

% of total Industrial Labour Force

19

4.

Total Industry Output in percentage

14

5.

Output as % of GDP

5.5

6.

Estimated Turnover (rupess in crores)

1,44,000

7.

Unorganised Sector (rupees in crores)

1,11,200

BROAD CATEGORISATION OF FOOD PROCESSING ENTERPRISES AND THEIR PRESENT STATUS (i) Fruits and Vegetables Horticultural crops in India are currently grown on 12 million hectares representing 7% of the country’s total cropped area. Annual horticultural production is estimated at 100 million metric tonnes, which is over 18% of India’s gross agricultural output. India is the third largest producer of fruits after Brazil and the United States, while its vegetable production is exceeded only by China. Mango, Banana, Citrus fruits, Guava and Apple account for 75–80% of fruit production, which was around 37 million metric tonnes in 1997–1998. Vegetable production was 65 m tonnes in the same period. India’s share of world trade in this sector is still around one per cent. In 1997–1998, processed fruits and vegetables exported, valued Rs.5,240 million. India’s major exports are fruit pulp, pickles, chutneys, canned fruits and vegetables, concentrated pulps and juices, dehydrated vegetables and frozen fruits and vegetables. This sector has attracted a total investment of Rs.75,000 million in the last six years i.e. since the initiation of the liberalisation process, including a rise in Foreign Investment from Rs.46.9 million to about Rs.102 million between 1993 and 1998. 2

Chapter One

chp-1.qxd

10/18/05

9:03 AM

Page 3

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

Table 1.2 Fruit and Vegetable Processing Units Year

1994

F&VP Units

1995

1996

1997

4270

4368

4674

4932

12.60

14.02

17.50

19.10

Production 5.59 (in million metric tonnes)

6.79

8.50

9.50

Installed Capacity (lakh tonnes)

1998

1999

5112

5198

20.40 21.00 9.10

9.40

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

Distribution of Fruit and Vegetable Processing Enterprises by Scale of Industry

Cottage 21%

Home Scale 38%

Small Scale 16% Large Scale 12%

Relabellers 13%

Home Scale

: 2002 Units

Relabellers :

681 Units

Large Scale :

598 Units

Small Scale :

834 Units

Cottage

:

1083 Units

Total

:

5198 Units

The growth trend from 1994 to 1997 remained upward, being 21.8% in the first year, 25.2% in the second and 11.76% in the third. During 1997–1998, this sector showed a negative trend of 4.2% over the preceding year and 1998–1999 registered a positive growth of 3.3%. Though the detailed reason for this trend could be ascertained by ground-level research, the factor responsible for negative growth in 1997–1998 was excise duty of 8% on processed (Fruit and Vegetables) F&V products, as against no duty in the preceding years. The Food Processing Sector in India: An Overview

3

chp-1.qxd

10/18/05

9:03 AM

Page 4

(ii) Meat and Poultry Meat Processing: India has the world’s largest livestock population, accounting for 50% of buffaloes and 1/6th of the goat population. Such a large population represents a challenge to retain existing productivity traits by application of modern science and technology. Rigorous efforts are being made to improve the condition of livestock by providing basic infrastructure and latest technology. FAO has estimated the existing production of meat and poultry products at 4.42 million tonnes. Only 11% of the buffalo population, 6% of cattle, 33% of sheep and 38% of the goat population is culled for meat. Source: Composition of Estimated Meat Production

Others 12%

Buffalo 11% Cattle 6%

Buffalo Cattle Sheep

Goat 38%

Sheep 33%

Goat Others

At present, only a small percentage of the meat produced is converted into value added products and most meat is purchased by consumers in the fresh/frozen form for conversion into products at home, restaurants, etc. Maximum conversion takes place in pork products. With growing urbanisation and increasing quality consciousness, the market for scientifically produced meat products is expected to grow rapidly. Demand is growing for ready-to-eat and semi-processed meat products because of changing life styles and increase in exports to neighbouring countries, especially the Middle East. India exports meat products worth Rs.8,000 million mainly to countries in the Middle East and South East Asia. Meat processing is the new thrust sector for Indian industry with many processing centres being set up with advanced technology. Animals render 4

Chapter One

chp-1.qxd

10/18/05

9:03 AM

Page 5

extremely useful service in out-transport system and agriculture. India needs technical cooperation to build up organised facilities for rearing meat producing animals, proper storage and refrigerated transport system. This sector has attracted an investment of Rs.9000 million, including foreign investment of Rs.5000 million, in the last six years since the initiation of the liberalisation process. Poultry India ranks fifth in the world in egg production with a yield of 1.61 million tonnes a year. Yet the per capita availability is low. Now, with changing food habits and increasing availability of eggs, the demand is increasing and growing at 10% a year. Egg production has grown during the last 30 years at an annual average of 16%, while that of broilers, by 27%. During this period, Indian poultry industry made spectacular progress transforming itself from backyard farming to a dynamic and sophisticated agri-based industry. The increasing awareness about balanced nutrition has effected changes in eating habits with vegetarians accepting eggs as part of their diet. Simultaneously, purchasing power has increased and more money is allocated for food. Despite this, the egg industry experiences periodic slumps. There are five modern integrated poultry processing plants in the country, besides a good number of not-very-modern small plants. These plants produce dressed frozen chicken and cut parts. While poultry industry is gradually taking shape, poultry dressing and processing is still in its infancy in the country. There are about 15 pure-line and grandparent franchise projects in India. There are 115 layer and 280 broiler hatcheries both in the private and public sector, producing 1.3 million layer parents and 2.6 million broiler parents, which, in turn, supply about 95 million hybrid layer and 275 million broiler, day-old chicks. Please refer to Table 1.3. In India, five egg powder plants have also been set up to produce whole egg, yolk and albumen powders. Demand for egg powder is increasing every year. Each project will process a million eggs daily. Only one egg powder plant has been in operation in Mumbai since the 1970’s. Other such plants will help boost egg production. Table 1.3 Status of Pureline & Grandparent Franchise Projects in India Sr. No. Hatcheries 1. 2.

Layer Broiler

No. of Hatcheries 115 280

Parents (in Million) 1.3 2.6

The Food Processing Sector in India: An Overview

Supply (in Million) 95 275

5

10/18/05

9:03 AM

Page 6

(iii) Milk and Milk Products India has the largest livestock population with milch cows and buffaloes being its main constituent. India is the world’s largest milk producer (72 million tonnes annually) and the dairy industry has been recognised the world over as its most successful development programme. Going by FAO estimates, while world milk production fell by 2% in the last three years, the Indian production galloped by 4%. While consumption of liquid milk accounts for 46% of the total production, the rest is converted into milk products. Of this, the share of the organised sector is less than 10%. The products manufactured by the organised sector are ghee, butter, cheese, ice creams, milk powders, malted milk food, condensed milk, infant foods, etc. The products also include casein, lactose and dairy whiteners. The value of Indian dairy produce is expected to rise from Rs.2,88,000 million in 1999 to Rs.10,00,000 million by 2005.(Please see the chart below). In the last six years, investment in this sector has been to the tune of Rs.16,000 million with foreign investment of Rs.3,600 million. Value of Dairy Products 1200000 1000000

1000000

Rs. Millions

chp-1.qxd

800000 600000 400000 288000 200000

1999

2005 (est.)

Year

(iv) Consumer Products This comprises product groups like confectionery, chocolates, cocoa products, soya-based products, ready-to-eat foods, mineral water, high protein foods 6

Chapter One

chp-1.qxd

10/18/05

9:03 AM

Page 7

etc. This sector has attracted a whopping investment of Rs. 1,28,000 million, including foreign investment of Rs.50,000 million, since liberalisation. Soft drinks enjoy the biggest share in this. The Indian soft drinks’ market is worth Rs.22,000 million a year. Statistically, this implies three bottles per Indian. Cola, orange and lemon are some of the accepted tastes in India. It is estimated that 65% prefer non-carbonated drinks. Lemon drinks continue to be very popular in the country. India produces a large range of cocoa and non-cocoa based confectionery items, besides other cocoa-based products. The production of confectioneries, except chocolates, is reserved for the small-scale sector. However, there are several large companies with an established market presence and brands in cocoa and non-cocoa confectionery markets. Confectionery output grew at a compound rate of 6 to 7% in recent years. Chocolate production is growing at the rate of 10 to 15% a year. Among the ready-to-eat products, the installed capacity in the organised sector is 33,400 tonnes for manufacture of pasta products like noodles, macaroni, vermicelli, etc. Besides, there are 10 units with an annual capacity of 9,340 tonnes for corn flakes, oat flakes and pearl barley.

(v) Alcoholic Beverages Liquor made in India is categorised as beer, country liquor and Indian Made Foreign Liquor (IMFL). Country liquor is made from a variety of raw materials and has different names in different parts of the country. IMFL production comprises wine, vodka, whisky, gin, rum, brandy, etc. Pre-mixed drinks like gin and lime, rum and cola are being introduced in India now. Draught beer is another recent introduction and has done well where introduced. Canned beer is also a recent introduction. There are 36 breweries with a licensed capacity of 160 million litres per annum. Current production is over 300 million litres. In all, Rs. 11,000 million including Rs. 7,000 million of foreign investment, has been made in this sector in the last six years. The Indian beer market, currently at Rs.7,000 million a year, has been growing by 15% and now all world famous brands of liquor are available in India. The country has 212 distilleries with a yearly installed capacity of 1,933 million litres. However, there are only 24 units producing IMFL and 31 making country liquor. Alcohol produced by the rest is either sold as industrial alcohol The Food Processing Sector in India: An Overview

7

chp-1.qxd

10/18/05

9:03 AM

Page 8

or in bulk as potable alcohol to other distilleries for bottling or for making bottled alcohol (estimated 927.82 million litres). Raw material like Molasses, barley, maize, potatoes, grapes, yeast and hops for beer and alcoholic products’ industry are abundantly available in India.

(vi) Fisheries and Sea Food India boasts of the seventh largest marine landing base in the world with an extensive 7,500 km coastline and an Exclusive Economic Zone (EEZ) of 2 million sq km, largely untapped, and a 29,000 km stretch of rivers and canals, 145 million hectares of reservoirs and 0.75 million hectares of tanks and ponds. Though India’s fish potential from the EEZ has been estimated at 3.9 million tonnes, the harvest is only of 2.87 million tonnes. This can be increased to 3.37 million tonnes by intense tapping in offshore and deep-sea grounds using modern technology. There is also a good scope to improve fish harvest from inland waters which, at present is 2.7 million tonnes. Besides, the fish potential in aquaculture and shrimp farming has also largely remained untapped. Though, traditionally, only local fishermen have tapped the vast marine and inland water resources to meet domestic demand, the organised corporate sector has become involved in preservation and export of coastal fish since the last decade. Marine fish found in India include prawns, shrimps, tuna, cuttlefish, squids, octopus, red snappers, ribbon fish, mackerel, lobsters, cat fish and countless other varieties. Domestic per capita consumption of fish is only 5 kg per annum against the world average of 12 kg. India’s per capita consumption is much lower than the Asian maritime countries (e.g. Japan–86 kg). India’s 60% fish production is from marine sources. However, coastal fishing i.e. from the continental shelf constitutes the bulk of the marine catch. It is estimated that only 10% of the marine catch is accounted by deep-sea resources. Processing of produce into canned and frozen form is done almost exclusively for the export market. Totally, there are 258 freezing units with a capacity of 2,170 tonnes, 23 canning units of 84.5 tonnes capacity, 131 ice-making units of 1820 tonnes, 24 fish meal units with a capacity of 419 tonnes and 297 cold storage units with a capacity of 2,03,448 tonnes. This sector has attracted domestic and foreign investment to the tune of Rs.30,000 million in the last six years, of which the foreign component is around Rs.7,000 million. 8

Chapter One

chp-1.qxd

10/18/05

9:03 AM

Page 9

Please see Table 1.4 which compares the investment pattern in different sectors. Table 1.4 Investment Pattern in Different Sectors Sr, No.

Sector

1.

Milk & Milk Products

2.

Consumer Products

3. 4.

Total Investment (in Million)

Foreign Investment (in Million)

16,000

3,600

1,28,000

50,000

Alcoholic Beverages

11,000

7,000

Fisheries/Sea Food

30,000

7,000

(vii) Grain Processing The country’s current foodgrain production (including rice, jowar, bajra, maize, ragi, wheat, barley, gram and pulses) has been put at 225 million tonnes a year. Food processing industries play a crucial role in reducing post-harvest losses. Since most operations of this industry are rural based, it has the potential to generate high employment at low investment. Promotion of food processing also helps in energy conservation by reducing energy wastages in home cooking. Grain processing, with a share of 40%, is the biggest component of the food sector. Its basic feature is pre-dominance of the primary processing sector, sharing 96% of the total value, with the secondary and tertiary sectors adding about 4%. This area needs to be viewed as a high growth potential area. Indian Basmati rice commands a premium in the international market. The export of Basmati and non-Basmati rice has been steadily increasing. From Rs.3538.3 million in 1988–1989, the exports increased to Rs.62,000 million in 1998–1999. The country has a total paddy milling capacity of 186 million tonnes, of which 85 m tonnes is of traditional mills and 101 of modern mills.

(viii) Plantation Tea, coffee, cashew, cocoa, etc. are the country’s major plantation crops, which are grown in different parts for they require specific agro-climatic conditions. India’s principal plantation crops account for around 5 to 6% of the country’s aggregate export earnings. Production and domestic consumption of major plantation crops have increased considerably during the last three decades. The Food Processing Sector in India: An Overview

9

chp-1.qxd

10/18/05

9:03 AM

Page 10

India continues to be the world’s largest producer, consumer and exporter of black tea. Cashew is also an important crop and earns foreign exchange worth Rs.16,000 million. India is the world’s leading producer and exporter of cashew kernels (75,000 tonnes annually) and shares 31% of the world’s production of raw cashew and nearly 48% of the world’s cashew kernel export. Coffee is the oldest plantation crop of India.

POLICY INITIATIVES

THUS

FAR

The food processing sector has been identified as a thrust area for development. This industry has been included in the priority lending sector. Most food processing enterprises have been exempted from industrial licensing under the Industries (Development and Regulation) Act, 1951, with the exception of beer and alcoholic drinks and items reserved for Small Scale Sector. For foreign investment, automatic approval is given even to 100% equity for majority of the processed foods. Since economic liberalisation in 1991, 5875 Industrial Entrepreneur Memoranda (IEMs), involving an investment of Rs.53,736 crore and envisaging employment for 10.23 lakh persons, were filed between July 1991 and December 1999. Of these, 673 IEMs with investment of Rs.7,517 crore and jobs for 0.87 lakh persons have been implemented. Moreover, 1,120 approvals for investment of Rs.19,100 crore and employment of 2.75 lakh have been given. From these, 248 proposals with investment of Rs.4,225 crore and 0.95 lakh jobs have been implemented. The kind of units, which have come up, include: Fruit and Vegetable – Beverages, Juices, Concentrates, Pulps, Slices, Frozen & Dehydrated products, Wine, Potato wafers/chips etc. Fisheries – Frozen and canned products mainly in fresh form Meat and Poultry – Frozen and packed mainly in fresh form, egg powder (only a couple of units) Milk and Dairy –Whole milk powder, Skimmed milk powder, Condensed milk, Ice cream, Butter and Ghee Grain and Cereals – Flour, Bakeries, Biscuits, Starch, Glucose, Cornflakes, Malted foods, Vermicelli, Pasta foods, Beer and Malt extracts, Grain-based Alcohol Consumer Industry – Chocolates, Confectionary, Soft/Aerated Beverages/ Drinks 10

Chapter One

chp-1.qxd

10/18/05

9:03 AM

Page 11

The policy initiatives of the government also include automatic approvals for Foreign Technology Agreements, sale of 50% in domestic tariff area of agro-based 100% EOUs, zero duty EPCG scheme extended to Food Processing sector with a reduced threshold limit of Rs.1 crore in the Exim Policy, declaration of the industry for priority lending by banks, the Plan schemes envisaging grant of loans at a very low rate of 4% and grant-in-aid to select cooperatives and NGOs, assistance for upgrading standards to international level and assistance for R&D activities.

CHALLENGES, CONSTRAINTS

AND

CONCERNS

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

z

z

In India, the value addition to food fortification is only 7% compared to as much as 23% in China, 45% in Phillipines and 188% in the UK. Further, there are few large or medium sized companies in the organised sector against many small ones. The small-scale and unorganised sectors account for 75% of the total industry. Despite its importance to India’s well-being, the food industry has in the past been neglected. Food is usually the first industry to develop and has importance in most economies. In India, it is still relatively small and not regarded attractive. External liberalisation opens up new export avenues and seeks to integrate the economy with the global market. But it also poses threats of stiffer competition under a new world trade order with WTO agreements relaxing quantitative restrictions and non-tariff/sanitary barriers on importing countries. This exposes the Indian farmer to world market forces. Strategies to convert the potential disadvantage, on account of the new import regime, into advantage are needed. The inherent strength of high raw material production and large domestic market base has to be buttressed and energised by evolving the right international-level infrastructure and growing suitable raw material. This, coupled with operating processing units at optimum capacity levels as per economies of scale, would enable achieving a competitive edge over imported products. The food sector will be confronted by challenges of trade related Intellectual Property Rights, comprising patent laws, copyrights, trade links, etc. The Food Processing Sector in India: An Overview

11

chp-1.qxd

10/18/05

9:03 AM

z

z

z

12

Page 12

Advances in bio-technology have enabled production of Genetically Modified (GM) foods. These have already appeared in some countries. GM foods need be critically examined on their good and adverse impacts on human health. India is the second largest producer of food in the world but its share in world’s exports is very low despite its inherent strength in tea, spices and rice. The share of agricultural exports in the country’s total export basket has been fluctuating, from 27% in 1985–1986 to 16% in 1994–1995 and to 20% in 1996–1997. In 1996–1997, India exported Rs.24,618 crore worth of agro products. During 1997–1998, marine products, rice, coffee, oil and spices were major export items. The share of horticulture crops, plantation crops, meat and meat preparations and sugar in the country’s agri exports is much less than its competitive potential. Taxes on processed food in India are among the highest in the world. No other country imposes excise duty on processed food. No country distinguishes between branded and unbranded food sectors for taxation. There is excise duty of 16% in the form of CENVAT levied on food products and then there is sales tax, octroi, mandi samiti, entry tax and customs duty on material, levied by the Central/State/Local bodies. The net effect ranges from 21% to 30% on various food items. India is the only country to have levied excise duty on machinery and equipment for processed foods. Indian consumers are very price-sensitive and cost reductions are imperative to raise demand and consumption of food products. Since the net effect of various taxes falls directly on the price, the off-take of processed food items remains low. Consider the Food and Vegetable sector, where against the installed capacity of 21 lakh tonnes (of the units registered under FPO), present production is only 9.4 lakh tonnes or about 45%. Assuming a value of Rs.10 per kg, the receipts on account of 16% CENVAT would be around Rs.150 crore in the first year, and looking at past experience of negative growth, the receipts will reduce by 5 to 10% in every succeeding year. Reduction of excise duty by say 5% might result in less receipts in the first year but would more than make up in the subsequent years i.e. at 100% capacity utilisation, the first year receipt would be Rs.100 crore, but with annual growth rate of 25%, the receipts would Rs.125 crore in the second year, Rs.156 crore in third and after five years, it would cross Rs.200 crore at the present price index. Moreover, the National Savings because of reduction in wastage would run into thousands of crores (the present level because of 30% wastage in Fruit and Vegetable Sector alone results in an estimated wastage of Rs.25,000 to Rs.30,000 crore). Chapter One

chp-1.qxd

10/18/05

9:03 AM

z

z

z

z

z

z

Page 13

India is viewed as an unpredictable and unreliable source of food and agro products despite its world class production measures for ensuring supply to the international markets and increased production and quality of food products specific to exports. Food processing enterprises in organised and unorganised sectors are in private hands. Though there has been certain growth in the food industry because of domestic demand, the demand itself remained low due to policies pursued earlier. Majority of the food units are in primary processing and since production base of secondary and tertiary processed foods is low, there is lower value addition. Commercial R&D activities in the food industry have remained confined to only a few areas. R&D activities have scarcely emerged from the laboratory to be extensively adopted on the field. Indian brands have yet to acquire an image in the international markets because of poor global marketing. Poor awareness of most of Indian agri produce, seed constraints and India’s image and identity of a low quality, unreachable producer of food items ensure that Indian food items are not the most preferred ones. Financial institutions do not have the capacity to appraise hi-tech export-oriented projects. There are no suitable insurance schemes for such projects, most of which deal in export of perishables. In financing projects like high density farming, greenhouse floriculture, controlled environment livestock farming, bio-technology, tissue culture, embryo transfer technology, bio-pesticides and bio-fertilizer, etc., the banks face considerable risk like credit risks. With new technology, the risk perception is higher than the existing one. Since it has not been tested in actual situations, the chances of failure of new technology are higher. For risk of rejection by consumer or by sovereign intervention foreign exchange risks, ECGC cover is available only in cases of insolvency/default of importers. Branded food items attract higher sales tax and excise duty as against the unbranded ones. It is reasonable to expect that any meaningful investment in this sector will necessitate branding of products. It is noteworthy that no country treats branded food differently for levying duties. The exemption to unbranded and unorganised sector from excise and sales tax leads to low quality consciousness among manufacturers and consumers. The Food Processing Sector in India: An Overview

13

chp-1.qxd

10/18/05

9:03 AM

z

z

z

z

z

z

14

Page 14

There is a growing disparity between the actual and potential results in the food industry, exposing the gulf between research and extension agencies. There have been instances of ban imposed by the European Union on all seafood exports originating from India. This was after detection of salmonella in some EU-bound consignments and of V Cholera in consignments to Denmark. These consignments mostly had fish, prawns and frozen squids. The sector is capital starved. Investments in infrastructure and research have been far from adequate. The sector has been characterised by poor marketing, transport and communication infrastructure. The market density of fruits and vegetables is low and facilities for storage and cold chains in the hinterlands are woefully inadequate. Erratic and inadequate power supply, lack of roads, education and health facilities and no or low rural industrialisation accentuate the problems. There is lack of integration of local markets with national and global ones to support faster and more diversified growth. Lack of maintenance of infrastructure because of limited and declining public resources and the absence of community involvement in the protection of community assets and poor cargo facilities at airports and ports are other bottlenecks. Infrastructure for extension of food technology is hampered. Moreover, there is lack of organised marketing system in meat and poultry products. The system is obsolete, with primitive methods of sale of live birds or unhygienic slaughtered birds. A similar poor system exists in towns and small cities in the case of pork and pork products. Cooperatives and other semi-government organisations are weak and people’s participation, either through Panchayat Raj institutions, NGOs, farmer organisations or industries’ associations in food sector remains extremely inadequate. Multiple and complicated tax regimes have rendered the food industry uncompetitive. Regulations on the entry operations of private sector in trade, post-harvest facilities and food processing have restricted private sector investment in the agricultural sector. Then, the current land tenancy regulations have frozen the land-lease market and discouraged tenant farmers and share-croppers from investing in the land they till. With the signing of the GATT and the coming up of World Trade Organisation, this sector is facing internal and external pressures stemming from policies of economic liberalisation. Chapter One

chp-1.qxd

10/18/05

9:03 AM

Page 15

NEED FOR INITIATIVE

A

COMPREHENSIVE PAN-INDIAN

The present scenario has resulted from the lack of cohesive and integrated planning of the industry, keeping in mind specific needs of various regions, their produce and special industries, which could be energised to work at optimum capacity. The policy initiatives thus far have gone by the assumption that this industry has high risk and low return and that seasonalities of produce dictates the levels of capacity utilisation; that any multi-line projects will become unviable, for there is paucity of marketing outlets and lack of other infrastructural facilities. These problems cannot be viewed in isolation nor can they be tackled by a single department/ministry. It is important to adopt a holistic approach in formulating any viable policy for this nascent sector. The planning should be bottom up and not top down, for in India, the initiative has to come from the rural sector constituting 70% of the population. This is where tapping of Panchayat Raj institutions and networking of cottage, small and medium industries can viably provide the primary and secondary processing for take-off by large-scale industries. What is envisaged is an integrated model wherein cottage, small and medium enterprises act as input factors for further development of products by larger enterprises, by creating primary/secondary processing facility centres within a radius of 15 to 25 km from the farm. These centres will provide appropriate packing techniques for farmers. Other facilities that could be envisaged at these centres include treatment, washing, sorting and grading, packaging and cold storage. Adequate system will be evolved to transport these processed products for use by larger industries as well as for sale in wholesale markets. This process will ensure backward and forward links between farmers, markets (domestic and international) and larger industries. This way, each unit would be viable and independent and at the same time, be linked with higher players in the market. The sectoral deficiencies and advantages in each spatial segment will be attended to since investment will not be higher. Thus, imbalances, which were a built-in variable, could either be corrected or converted into an advantageous variable. This is possible only if all Panchayat institutions in the country are networked with leading market outlets, including the top players in the industry. Such a synergy cannot evolve in a short time unless the government initiates many Centrally-sponsored direct assistance to Panchayat institutions, including allocations for infrastructure like roads and transport. This way, the WTO restriction on subsidies could be overcome and within a couple of years the entire gamut of functioning of these industries could be re-oriented. This will also wean away the thinking process of planners to view the food processing industry only as a means to reduce wastages. In fact, this Pan-Indian Model will ensure a proactive industry-oriented approach enabling the industry’s growth in a modern, The Food Processing Sector in India: An Overview

15

chp-1.qxd

10/18/05

9:03 AM

Page 16

scientific and planned manner. This will increase productivity at minimum costs improving the product’s competitiveness in any economy. On a larger scale, this will make the economy vibrant and prevent unnecessary migration of population and unplanned urbanisation.

STRATEGIES AND INITIATIVES PROPOSED NEW POLICY

IN THE

There are various strategies and initiatives proposed in the new policy. These are discussed below:

Creating an Enabling Environment a. The Central and State Governments will work closely and evolve joint efforts to provide an enabling environment to entrepreneurs to set up food processing enterprises. b. Fiscal initiatives/interventions like rationalisation of tax structure on fresh food as also processed foods and machinery are a must. This is necessary to provide processed food at reasonable prices as well as to stimulate domestic demand. The aims of the National Policy on food enterprises are sought to be achieved by adopting initiatives and practices congenial to industrial development in the processed food sector. A concentrated promotion campaign is vital to create market for processed foods. Multinational companies can take care of their products for they have large funds for promotional campaigns. The Department will continue to provide financial assistance to industry associations, NGOs/Cooperatives, private sector units, state government organisation for market promotion and brand formation. c. Going by projections of the Working Group on Food Processing Industries for the 9th Plan, investment requirement of Rs.24,315 crore from the private sector, Rs.2,275 crore from the Central Government, Rs.1,660 crore from the State Government, totalling upto Rs.28,250 crore, have been identified for the entire food processing sector in a five-year plan period. d. Efforts will be made to expand the availability of raw material and improve their quality for agro-based processing activities round the year by increasing production, improving productivity and yield. e. The information/database for the industry will be strengthened to ensure greater reliability and thus help in planning and policy making. This is 16

Chapter One

chp-1.qxd

10/18/05

9:03 AM

Page 17

proposed to be achieved through studies and surveys in various states. The information will be vital for the industry to plan investments in appropriate sector matching availability of resources and market conditions.

Intensive and Extensive Awareness a. Extensive training will be provided to farmers and cooperatives in postharvest management of agro-produce to encourage creating pre-processing facilities near farms. Facilities may include provision for washing, fumigation, packaging, etc. Efforts will be made to encourage the setting up of agro-processing facilities as close to the area of production as possible to avoid wastages in transporting raw materials to far away places and to ensure increased value addition, specially for horticultural produce. b. Efforts will be made to improve general awareness about the advantages of consuming processed foods to stimulate domestic demand. Unfounded apprehensions about consuming processed food will also be removed.

Infrastructural Development a. Establishment of cold chain and provision of low cost pre-cooling facilities for farmers, entrepreneurs, traders and consumers would be encouraged and they will be trained to bring about attitude changes. Efforts will be made to disseminate market intelligence to enable farmers to fetch higher value for their produce. b. Efforts will be made to motivate farmers/industries to use insulated/refrigerated vehicles for transporting raw materials from the place of production/harvest to the point of consumption, to avoid wastage and quality deterioration. c. Establishment of cold storages and cold chain facilities would be encouraged. d. The interactive mesh between technology, economy, environment and society will be promoted for quicker development of agro-processing industries and to build up a substantial base for production of value-added products for domestic and export market with special emphasis on food safety and quality, taking into account all aspects of Total Quality Management (TQM) and Hazard Analysis and Critical Control Points (HACCP) to achieve international standards. Sustained R&D activities will be encouraged through recognised institutions having expertise in respective fields. The Food Processing Sector in India: An Overview

17

chp-1.qxd

10/18/05

9:03 AM

Page 18

e. Application of bio-technology, remote sensing technology, pre and post harvest technologies, energy saving and environmental protection technologies through National Research System or any other mode will be encouraged.

Backward Linkage—Raw Material Supply a. The concept of backward linkage between farmers and industry would be promoted to encourage and enable farmers to grow products of appropriate quality. This will help the poorest of the poor farmers as well as marginal and medium farmers fetch appropriate and remunerative return for their produce. The scheme for providing assistance under the 9th Plan is already in operation and will be strengthened further to cover majority of farmers/producers. It would be ideal to dovetail this scheme with similar schemes offered by local bodies like Panchayats to provide the required fillip to this significant programme in the best interests of farmers and processors. b. The existing institutions like local bodies, cooperatives and self-help groups, which have been in operation for over four decades in different contexts, would be utilised to strengthen the backward linkage. This way the skill and expertise acquired by these institutions would be constructively used, while this mechanism would help quickly create the bridge of trust between farmers and processors. This would ensure smooth supply of raw material to the processors and help the farmers (poor, marginal and big) in getting remunerative prices for their products. Thus, a complete network of farmers and processors will be created cutting across their status.

Forward Linkage—Marketing a. There is an urgent need to develop forward linkages for fresh and processed food. Presently, there are a large number of intermediaries operating between the farmers/processors and the consumers, resulting in high cost to the latter and low return to the former. The efforts to cut intermediaries would be made in such a way that the special skill and expertise required to operate the intermediate links in the system like transportation and market distribution are not jeopardized. To achieve this, attempts will be made to provide appropriate tax incentives and holidays for setting up food processing industries, taking care of expenses on market promotion and ancillary activities. b. The North Eastern Region, the Hilly States (J&K, HP and Western UP), the Islands (A&N, Lakshadweep) and the Integrated Tribal Development 18

Chapter One

chp-1.qxd

10/18/05

9:03 AM

Page 19

Projects (ITDP) areas in the country need to be given special consideration. Fiscal incentives like excise duty/sales tax concessions and tax holidays should be given not only to the units being established here, but also to those set up outside but processing the produce from these areas. This is because the high cost involved in transporting raw material and packaging material makes the product expensive, and thus uncompetitive, in the markets outside. Providing fiscal incentives to units located outside but operating as a part of the primary processing unit in one of these areas would facilitate cutting down the double transportation cost and help the products from these areas become marketable at competitive rates. The consumer would also have the advantage of buying quality products from these areas at affordable prices. c. Special attention is to be laid towards setting up regulated markets with the primary objective to improve market efficiency and achieve equitable distribution of benefits between producers, traders and consumers. This will be possible by evolving strategies to strengthen regulated market yields and equipping them with grading, cleaning and packaging facilities, along with market information systems. d. Efforts are to be made to develop packaging technologies for individual products to increase their shelf life and improve consumer acceptance, both in the domestic and international markets. e. Efforts are to be made to harmonise food laws to encourage production of high quality products with minimum intervention from regulatory authorities. The complexity of multiple administering authorities for food processing enterprises is also required to be simplified by developing an integrated and unified system.

The Food Processing Sector in India: An Overview

19

chp-2.qxd

10/18/05

9:02 AM

Page 21

CHAPTER

2

The Impact of Policy on Enterprises FRUIT AND VEGETABLE PROCESSING SECTOR: AN ELABORATE PROFILE IN TERMS OF GENERIC AND INTERNAIONAL MARKETING

A

lthough India is the largest producer of fruit and vegetables, their processing has largely remained in primary forms like pickling, sun drying and/or making preserves. Commercial processing is rather poor. Indians largely prefer fresh fruit and vegetables over processed foods because of economic reasons and food habits. High packaging costs make them expensive. Therefore, the Ministry has offered specific support for the marketing and generic promotion of processed food. Since India has varied agro-climatic conditions, some products are available throughout the year. Fruits and vegetables like banana are non-seasonal, while apples, oranges, potatoes, etc. are put in the cold storages and made available in the off-season as well. Fruits like guavas and oranges have two seasons and so are available fresh almost half the year. Units registered under the Fruit Products Order, 1955, are distributed across the country and most are in cottage and small-scale sector. Liberalisation of the country’s economic policies has attracted a few modern processing plants to produce mango pulp and tomato paste in aseptic packing and freeze drying of fruit and vegetables including mushroom. Joint ventures with USA, UK, Netherlands, Switzerland and Germany are on, focussing on technology transfer, financial and marketing tie-ups. Such projects focus on production of canned mushrooms, banana and mango puree, fruit concentrates, dehydration of vegetables and frozen fruits/vegetables. The policy has been supporting such options. Items already being produced in the country include, pulps, particularly of tomatoes and mangoes, ready-to-serve juices, canned fruits, jam, squashes etc, while carbonated fruit drinks, dehydrated and freeze-dried fruits, fruit juice concentrate are poised to pick up. There is varied potential for the demand of processed food. The markets for mango pulp are Saudi Arabia, Kuwait, UAE, Netherlands and Hong Kong, while pickles and chutneys go to the USA, UK and Germany, besides Saudi Arabia and UAE. Products like tomato paste, jams, jellies and juices are exported to the USA, Russia, UK, UAE and Netherlands.

chp-2.qxd

10/18/05

9:02 AM

Page 22

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

Policy to bridge the gap between resource base and value addition India is among the world’s major producers of food products. It ranks first in the production of cereals, livestock population and milk; is the second largest fruit and vegetable producer; and among the top five producers of rice, wheat, groundnut, tea, coffee, tobacco, spices, sugar and oilseeds. And yet, India’s share in international food trade is less than two per cent. Value addition to food by processing is poor. This has encouraged a policy thrust on the sector and enlarged the Food Processing Industry Ministry’s scope to promote it. It includes developing fruit/vegetable processing, food grain milling, dairy products and processing of poultry, eggs and meat products and fish, including canning and freezing. This is in addition to developing enterprises in bread, oilseeds, breakfast food, biscuits, confectionary, non-alcoholic beer and aerated drinks. While the Ministry supports investment in R&D and product development, the Agricultural and Processed Food Products Export Development Authority (APEDA) offers subsidy to upgrade laboratory facilities. The Development Commissioner of Small Scale Industries (DCSSI) offers subsidy for implementation of ISO systems in business. The production quality as also hygienic and sanitary improvement in manufacture are accorded priority. Simultaneously, the production base is being enlarged by modern methods of cultivation to improve yield and productivity. A cold chain is also being developed to reduce post-harvest losses and maintain freshness. With new hybrid varieties being added, the production season is getting extended. Thrust is being given to enhance productivity with better raw material. Since liberalisation, several policy measures have come for regulation and control, fiscal changes, export and import, taxation, exchange and interest rate control, export promotion and several incentives to high priority industry, including food processing.

Deregulation and Decontrol The policy initiatives include an important incentive that industrial license is not required for most food processing enterprises, except for products like 22

Chapter Two

chp-2.qxd

10/18/05

9:02 AM

Page 23

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

Fiscal Incentives with Additional Encouragement for Export Under this, excise and import duty rates have been reduced. Many processed food items are exempted from excise duty. There are limited-period tax incentives for new manufacturing units, except for beer, wine, aerated water using flavouring concentrates, confectionery, chocolate, etc. A high capital investment subsidy is available for new processing units. Food processing is one of the thrust areas identified for exports. Free Trade Zones (FTZs) and Export Promotion Zones (EPZs) have been set up with necessary infrastructure. Capital goods, including spares, can be imported at concessional customs duty, subject to export obligations under the Export Promotion Capital Goods (EPCG). Export-linked duty-free imports are also allowed. Enterprises in EPZs and FTZs may retain a percentage of foreign exchange receipts in foreign currency accounts and a percentage of output is saleable domestically. Profit from export sales are, however, being progressively brought under the corporate tax bracket. Effective capital structuring of projects has therefore become more critical.

The WTO Agreement and the Sector Trade liberalisation under the World Trade Organisation (WTO) is expected to improve scope for exports for the Indian food processing industry, while smoothening import barriers on inputs and making enterprises cost competitive. Enterprises will, however, need to improve safety and quality standards to reap the benefits of the new world order and avoid being penalised for nontariff barriers. They will have to progressively follow a food quality management system called Hazard Analysis and Critical Control Points (HACCP). Many developed countries have already made this mandatory. The seafood processing enterprises have already faced the brunt of related bans from importing countries asking them to implement the costly requirements. Be it The Impact of Policy on Enterprises

23

chp-2.qxd

10/18/05

9:02 AM

Page 24

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

IMPACT OF POLICY IN TERMS OF INTEREST RATES AND INCOME TAX ON THE STRUCTURING OF A PROJECT Policy incentives in terms of investment subsidies and duty relief have an obvious impact on project viability. Policy-related variables, such as interest rates on term loans and the working capital, also affect project viability. Similarly do variables, such as income tax on profit or net earnings of an enterprise. These variables have serious implications on the structuring of a project in terms of debt or loan and equity (promoters’ contribution or investment) in either ‘fixed assets’ such as equipment, land, and buildings or with regard to ‘current assets’ or working capital (or money required for operating a business). The latter may imply cash, stock and receivables for credit sale. The structuring of a business in terms of capital basically involves decisions on the debt and equity mix. Policy variables also have implications on the structuring of costs.

Implication of policy variables on the structure of capital of an enterprise Consider a mixed fruit jam project ‘Manjunath Enterprises’ that is to be sanctioned in Mysore, Karnataka. The enterprise requires an investment (project cost) of Rs.50 lakh. The project expects to earn a Return On Investment (ROI) of about 24 per cent every year. The enterprise plans to manufacture juice concentrates and jams. The interest rate on loan (debt) is about 15 per cent. If the project were structured in terms of wholly equity investment by the promoter, it would yield a much lower return on equity. For illustration, assume the tax on earnings is 50 per cent. An ROI of 24 per cent implies a net profit of Rs.6 lakh after tax. In the case of an alternative option assume that half the investment is financed by equity and one half (Rs.25 lakh) by debt. In this case it will be observed that net profit after payment of interest on loan and tax will be Rs.4,12,500. By investing an equity of Rs.50 lakh on this project, the net profit works out to Rs.6 lakh and alternatively, investing equity of only Rs.25 lakh net profit works out to Rs.4.125 lakh. In terms of return on money invested by the entrepreneur, return on the second case is about 33 per cent higher! This benefit is due to the tax shield on interest paid on debt. Therefore, the structure of investment is dependent on tax rates. If they 24

Chapter Two

chp-2.qxd

10/18/05

9:02 AM

Page 25

are low or negligible or not `declared’, it does not make a difference if the business is financed by high debt or high equity. Similarly, the structuring of a project should be based on interest rates on debt. If interest rates are higher than the ROI, going in for debt will kill an enterprise, as repayment will not be possible. It is, therefore, necessary to understand past trends and make a judgement on future trends on these two parameters before taking a decision on the structuring of a business in terms of capital. In fact, there is yet another critical impact on debt-equity mix on a business. Consider Tables 2.1 and 2.2 below. The Tables consider profit after taxes for a given increase in the ROI in two circumstances. A project that entails an investment of Rs.50 lakh is considered. Table 2.1 considers an option of 25 per cent equity in capital structure while Table 2.2 considers 100 per cent equity investment. The Tables indicate the impact of the structure of capital of the enterprise on Profit before Tax (PBT) and Profit after Tax (PAT).

ROI

Table 2.1 Capital Structure of Manjunath Enterprises: (75% debt, 25% equity) (Rs.in lakhs) 8% (Rs.4 lakhs) 12% (Rs.6 lakhs)

Interest

3

3

PBT

1

3

Taxes

0.5

1.5

PAT

0.5

1.5

Table 2.2 Structure of Capital of Manjunath Enterprises: (100% equity) (Rs.in lakhs) ROI

8%

PDBIT

4

6

Interest

-

-

PBT

4

6

Taxes

2

3

PAT

2

3

The Impact of Policy on Enterprises

12%

25

chp-2.qxd

10/18/05

9:02 AM

Page 26

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

Implication of policy variables on structuring project costs Compare the proposed cost structure of Arundhati Enterprises in Ahmedabad with another proposed enterprise ABC Food Products. The latter plans to focus on largely outsourced ‘manufacture’ of pickles, while Arundhati Enterprises plans on largely in-house processing of pickles. In the case of Arundhati Enterprises fixed costs are higher while in the case of ABC Food Products, variable costs are higher. The fixed cost in operation includes costs such as rent that do not vary with output, while variable costs such as raw-material purchase costs do. As the table below indicates, Arundhati Enterprises could make more profit than the outsourcing ‘packager’ (ABC Enterprises). This indicates that scale economies operate on the manufacturing front. Nevertheless, in the case of Arundhati Enterprises, the extent Table 2.3 Cost Structure of Enterprises

Production (Jars)

ABC Enterprises 80,000

Arundhati Enterprises 80,000

Selling price (per jar)

Rs.40

Rs.40

Variable price (per jar)

Rs.30

Rs.10

Contribution (per jar)

Rs.10

Rs.30

Sales revenue (Total)

Rs.32,00,000

Rs.32,00,000

Variable cost (Total)

Rs.24,00,000

Rs.8,00,000

Contribution (Total)

Rs.8,00,000

Rs.24,00,000

Fixed cost (Total)

Rs.1,60,000

Rs.10,00,000

Profit (Total)

Rs.6,40,000

Rs.14,00,000

26

Chapter Two

chp-2.qxd

10/18/05

9:02 AM

Page 27

of fall in profits with fall in sales or sales margins is likely to be higher. The interest cost on term loan is a fixed cost, while the interest cost on the working capital is a variable cost. Arundhati Enterprises is likely to operate with a substantial term loan while ABC enterprises is likely to be operating more with mere working capital. It may be estimated that a 20 per cent fall in sales will lead to about 25 per cent fall in profit in the case of ABC Enterprises. There is a much greater fall (about 34 per cent) in the case of Arundhati Enterprises. The reverse operates in the case of an increase in sales. Therefore, studying potential for interest rate change on the working capital and term loans and market demand which in turn may be affected by policy variables such as customs duties on finished products (market protection) remains critical either in terms of reducing business risk or enhancing profitability. Therefore, particularly for those who declare profit ‘realistically’ such as exporters, interest rates and income tax rates critically determine the extent of debt finance to be sought for a project. This benefit occurs due to the tax shield on interest on loan or debt finance. Similarly the trend falls in interest rates as indicated by fall in the Prime Lending Rate (PLR) of lending institutions as also increased implementation of income tax rules may encourage going in for debt finance. The cost structure in a business, which in effect helps decide on the ‘size’ of an enterprise in terms of fixed investment, is affected by interest rates and customs duties, among other variables. Further, customs duties on inputs used by food processing manufacturers, for instance, may initially help on deciding on the structuring of a project. For instance, customs duties on oranges as raw material may be rather stagnant at 35 per cent, while customs duties on squashes as finished product may be progressively reducing at a higher rate. In this case, the manufacture of a standard product (with little scope for differentiation) like a ‘squash’ may warrant export orientation as to import inputs sans duty (as per the export-import policy) and remain competitive.

The Impact of Policy on Enterprises

27

chp-2.qxd

10/18/05

9:02 AM

Page 28

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

AND

The case of Purshottam Enterprises in Patna exemplifies the importance of sourcing and production management, including purchase decisions and channel motivation, to serve as critical success determinants of projects in the sector. Purshottam Enterprises was launched in 1985. It initially started off as a flourmill, which set up a retail outlet. The enterprise has graduated from a turnover of about Rs.40 lakh to about Rs.3 crore. The enterprise, which started off as a tiny unit, has now become a flourishing small-scale enterprise. This has happened without its availing support in the form of any incentive or schemes. In fact, the promoter has been ‘blissfully’ ignorant of such schemes. Investment in equipment over the years has been done by the promoter out of the surplus generated by the business. Further, the enterprise uses formal finance of only about Rs.10 lakh in the form of a cash credit facility from a bank. It uses about Rs.60 lakh of own funds as the working capital. The enterprise is involved in the manufacture of spices, viz. chilly powder and various types of spices. The enterprise operates through 183 distributors. Raw material is sourced from various parts of India directly viz. chillies from Andhra Pradesh, for instance. The working capital is largely locked up in credit sales. About 25 per cent of output is sold on cash basis and 75 per cent on credit sales of 2 months. A cash discount of 3 per cent is offered for cash purchase. The enterprise has not availed itself of any bills discounting facility from agencies such as the National Small Industries Corporation (NSIC) or commercial banks. As a matter of fact, blocking on own funds on equipment and fixed assets and on the working capital has affected potential growth prospects of the enterprise. Policy and support system incentives have not been effectively availed of. There is a virtual dearth of information on support schemes. Policy and support seems to have hardly played any role in the current success of this enterprise. The enterprise proposes to attempt at exporting its spices-based ‘masalas’ to target NRIs viz. ethnic Biharis in particular. However, information on the Market Development Assistance Schemes of the Ministry of Commerce or the Development Commissioner–Small Scale Industry (DCSSI) is not known. The enterprise would like to go in for ISO implementation but is ignorant of sources such as the Indian Statistical Institute and the Small Industries Service Institute. The enterprise, therefore, plans its growth as it had operated since inception—absolutely ‘self-driven’ and not policy or support driven. Though, a costly proposition, the case of Purshottam 28

Chapter Two

chp-2.qxd

10/18/05

9:02 AM

Page 29

Enterprises highlights that effective management of a business is the key to performance. Policy support may be required to augment and not substitute this requirement. Handholding needs to be coupled with business acumen and drive: Policy and support alone will hardly suffice. Consider the enterprises established by the support system in the 1990s. These include enterprises established by the Khadi and Village Industry Board in different states. The cottage industries’ department in Tamil Nadu had established a self-help group of 200 women under the leadership of Neelavalli who acts as the President of ‘Mahila Udhyam Sanstha’. The enterprise had secured about Rs.1 lakh for equipment with a significant amount of subsidy and reaps interest subsidy as to secure C.C. facility at the rate of only about 9 per cent. Support agencies such as the State Export Promotion Corporation have helped them ‘indirectly’ export their ‘papads’ to Europe. Support in the form of entrepreneurship and management skill development training has been received and financial support in terms of soft loans and marketing support offered. But since the beginning the enterprise’s turnover has remained stagnant. Despite support right from the conception stage, the enterprise has hardly even taken off despite a decade of operation.

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

The Impact of Policy on Enterprises

29

chp-2.qxd

10/18/05

9:02 AM

Page 30

business houses are believed to enjoy economy of scale advantages (in terms of lower per unit cost) of even 15-20 per cent on various products. It is their marketing expenses in terms of TV commercials, etc., that are believed to be high. It is believed that larger enterprises focus on a ‘consumer-pull’ strategy, while smaller enterprises lay emphasis on a ‘customer-push’ strategy. The latter seems to work better! It is believed that ‘masalas’ and chilli powders, for instance, have to be blended to suit the palate of different communities in India. Hence, large enterprises do not manufacture many ‘masala’ varieties; cottage and small units do well. It is, therefore, efficient marketing that serves as a critical success determinant. Yashwant Bakery in Patna has a turnover of Rs.1.25 crore. The equipment utilised include semi-automatic mixers. The promoter had taken an NSIC loan of Rs.25 lakh. Equipment was sourced from an Indian agent of the machinery manufacturer. The enterprise’s main competitor is a medium-sized manufacturer. The competitor, who has a turnover of over Rs.10 crore and a market share of about 50 per cent in the region, uses fully automatic equipment. Yashwant Bakery seems to have not realised the value of using the push strategy to enhance market reach. Perhaps, this is why both enterprises, which started at about the same time with similar investment, have different performances. For instance, in the 400 gm. ‘sandwich bread’ that he manufactures, the retailer is offered a margin of Rs.2 and distributor a margin of 80 paise. He sells at Rs.7.20 to distributors. He makes a net margin of about 8 per cent on sale price. Price has been about the same for over a 3 year period. Unlike his competitor, he gives exclusive agency or distributorships and low ‘customer’ or middleman margins. The larger enterprise, which has the bulk of the market share in the region, offers 50 per cent higher margins to dealers (wholesalers) and retailers. No wonder Yashwant Bakery has a 5 per cent market share of Patna city, while his competitor is believed to have an over 50 per cent market share. What is also obvious is that market growth in the case of chilli powder and bread, for instance, is more likely to be merely related to population growth. Setting up new projects in such relatively saturated markets could only affect the performance of existing enterprises, while affecting the sustainability of new enterprises. Existing enterprises in the sector would, in fact, have to look for options such as technology upgradation to further reduce costs and enhance performance. Further, with regard to new projects, a focus on value added and newer products such as bread with soya etc. would benefit. New value added products may

30

Chapter Two

chp-2.qxd

10/18/05

9:02 AM

Page 31

be considered by new projects and technology upgradation options may be pursued by existing enterprises as to reduce costs and increase margins in new markets. Technology upgradation may be in terms of incorporating high-speed mixers and kneading machinery. Policy is often skewed towards protecting raw material providers. For example, in 400 gms. of sandwich bread offered at Rs.7.20, raw material cost (maida, wheat flour, yeast) is about 65 per cent, labour 10 per cent, electricity 5 per cent and chemicals and salt and oil about 12 per cent. Raw material costs in India are skewed towards the higher side in the international perspective due to lower productivity in agriculture. With regard to surviving even in the context of high domestic raw material costs, enterprises may do well if they focus on ethnic and traditional products. South East Asian competitors cannot afford to focus on ‘masala’ powders targeted at the region specific taste and preference segments! Sickness in the industry is believed to be largely due to problems in credit realisation and inefficient speculation in raw material prices, both of which affect performance. Efficient management is the key. A ‘masala’ powder and confectionery manufacturer in Chennai has the ‘Agmark’ label and is also involved in intra-state trade. He believes that while bread has no sales tax, items like masala and cakes and pastries have tax fixed at 2 per cent on ‘Masalas’ and 12 per cent on cakes and pastries. Supplying beyond a state could imply payment of local sales tax in a state plus octroi at the rate of, say, 2 per cent for entry into different regions as also sales tax in the target state. This effectively keeps away efficient competition from other states, a sort of tariff barrier to protect local manufacturers in a state. Further, food inspectors in other states are believed to be a source of ‘harassment’ in terms of pulling up intra-state suppliers under the Weights and Measures Act, ingredient content and mix, labelling norms, etc. While the various acts are necessary, filing cases in local courts by authorities proves to be expensive for entrepreneurs. This entrepreneur in Chennai has been going to court in Andhra Pradesh for the last 25 years to resolve a relevant dispute. A promoter needs to understand such aspects before planning and implementing a business. The margins secured by entrepreneurs in some sectors are believed to be phenomenal. In the manufacture of confectionery products such as ‘pedas’, for instance, for the manufacturing enterprises in Pune, which are integrated into own retail outlets, returns on cost of production are expected to be 200 per cent. Cottage and

The Impact of Policy on Enterprises

31

chp-2.qxd

10/18/05

9:02 AM

Page 32

smaller enterprises do well if they operate in fragmented markets. Markets may be fragmented either due to the perishable nature of the product with low shelf life such as bread or due to regional variations in preferred taste or choice. Pickles and certain spices are all examples. Further, in some products such as ‘rotis’, which are convenience products that are tending towards becoming necessities, pricing has to be low. MNCs are not likely to enter into such products, as it is difficult to charge premium prices for their brand image. Hence, small enterprises have their own opportunities in the sector, while larger enterprises have theirs. Regional characteristics of demand are also critical. In cities like Mumbai and Pune, the fast pace of life and palate of local consumers have encouraged a wide range of processed enterprises to be established. In a city like Ahmedabad, however, convenience foods have not made as much an entry. Hence, such aspects also play a critical role in determining the success of a project. An example of regional variation is that of chilli preferred in Gujarat which is less pungent than in other states. Consumers stress more on colour, i.e. in terms of ‘dark red’. Bigger enterprises may find it difficult to enter into such fragmented markets by reaping scale economies in manufacturing or purchase as their production run may not be optimised, particularly if such fragmented markets are relatively small as also price conscious. Exchange rates are critical policy related factors for price competitiveness. ‘Basmati’ rice from Pakistan has an advantage over that from India, currently, given their lower rupee–dollar rates. The cases of different enterprises presented in this section indicate the importance of management along with the need for incorporating possible policy trends such as regulatory norms, sales tax, customs duties, etc., while planning a project and implementing it.

32

Chapter Two

chp-3.qxd

10/18/05

9:04 AM

Page 33

3

CHAPTER

Who is an Entrepreneur?

W

ithout entrepreneurship and growing number of entrepreneurs, an economy is certain to become sluggish in growth. Entrepreneurial dynamism forms the cornerstone of a progressive society as it is a purposeful activity that attempts to create value through recognition of business opportunity, management of risk appropriate to opportunity and through communicative and management skills to mobilise human, financial and material resources necessary to bring a project to fruition. This gives a definite upsurge to the economic growth of a nation. Economic growth is an upward change whereby the per capita income increases over a long period of time. If economic growth is the effect, entrepreneur is the cause. Entrepreneurs are the ones who explore opportunities, scan the environment, mobilize resources, convert ideas into viable business proposition and provide new products and services to the society by bringing together and combining various factors of production. An entrepreneurial individual has a distinct concept, vision and a dream, which he/she is able to convert into products. Such individuals are driven by task, challenge and opportunity with very high achievement orientation. If you wish to start and succeed in your enterprise, you need to play different roles at different stages. Some essential qualities of entrepreneurs are: 1. A strong desire to win. (NEED FOR ACHIEVEMENT) Most people dream of success, but seldom do anything to implement it. In contrast, entrepreneurs have a strong desire to continuously hit new goals and do not rest till they win. 2. An approach of never-say-die. (PERSEVERANCE) Once committed to a goal and a course of action, entrepreneurs never retract. Difficulties do not deter them and they work hard till the entire project is successfully accomplished.

chp-3.qxd

10/18/05

9:04 AM

Page 34

3. Entrepreneurs prefer a middle-of-the-road strategy while handling tricky situations. (MODERATE RISK BEARING) They don’t take high risks; they are not gamblers. They prefer a moderate risk to a wild gamble, high enough to be exciting and containing a reasonable winning chance. 4. Alert to opportunities and seizing them to their advantage. (ABILITY TO FIND AND EXPLORE OPPORTUNITY) Entrepreneurs are innovative and can convert crises into opportunities. But they are realistic enough to ensure that the opportunity suitably dovetails into realising their goals. 5. They have a dispassionate approach to problems. (ANALYTICAL ABILITY) Entrepreneurs will not let personal likes or dislikes come in the way of their taking a business decision. They seek out experts for assistance rather than friends and relatives. Their decisions are objective and not emotional or impulsive. 6. It is important for them to know how they are faring when they work on their goals. (USING FEEDBACK) Entrepreneurs take immediate feedback on performance and prefer prompt and accurate data, irrespective of whether these are favourable or not. Unfavourable news spurs them into making amends to attain their goals. 7. Entrepreneurs do not get deterred by unfamiliar situations. (FACING UNCERTAINTY) Achievement-driven people are optimistic even in unfamiliar situations. Even if they find the odds daunting, they see no reason why they can’t succeed with their treasure of abilities. They march undeterred, making the best of fine opportunities that come their way, even without guidelines. They quickly come to grips with the new environment and present a picture of boldness and prudence. They apply their special insight and skill to quickly understand the environment and adapt to it. 8. They dislike working for others. (INDEPENDENCE) Entrepreneurs do not like to work for others and therefore start off on their own. They wish to be their own masters and be responsible for their own decisions. 34

Chapter Three

chp-3.qxd

10/18/05

9:04 AM

Page 35

9. They are flexible. (FLEXIBILITY) Successful entrepreneurs have an open mind and do not hesitate to change their decisions. 10. Entrepreneurs think ahead of others and plan for the future. (PLANNING) Most successful people set goals for themselves and plan to realise them in a time frame. 11. Entrepreneurs can deal with people at all levels. (INTERPERSONAL SKILLS) An entrepreneur comes across all kinds of people. He has to make them work for him and with him to help realise his objectives. He likes working with people and has skills to deal with them. 12. They can influence others. (MOTIVATION) Successful entrepreneurs can influence others and motivate them to think and act in their way. 13. They can work for long hours and simultaneously tackle different problems. (WITHSTANDING STRESS) As a key figure in his enterprise, the entrepreneur has to cope with several situations simultaneously and take the right decisions, even if it involves physical and emotional stress. This is only possible if one has the capacity to work long hours and still keep cool. 14. They know themselves. (POSITIVE SELF-CONCEPT) An achiever channelises his fantasies into worthwhile, achievable goals and sets standards for excellence. He can do this for he knows his strengths and weaknesses, and so adopts a positive approach. He is seldom negative. 15. Entrepreneurs think ahead. (ORIENTATION FOR FUTURE) They have the ability to look into the future. They won’t allow the past to bother them and think only of the present and the future. “Bygones are bygones, what of now?” This is their usual response. An individual may not have all these qualities, but most will have many. The first step for a person aspiring to become an entrepreneur is to make an inventory of his traits. This self-awareness and analysis will help him define his strengths and overcome weaknesses. Who is an Entreprenuer?

35

chp-4.qxd

10/18/05

9:05 AM

Page 37

4

CHAPTER

Soft Skills for Entrepreneurs

COMMUNICATION SKILLS

C

ommunication is the process of exchanging ideas, facts or opinions by two or more persons. For communicating, we use different modes, like oral, written or non-verbal. The process is explained by using this diagram: Who?

Communicator

Say what? Message

Through which channel?

To whom?

Impact

Medium

Receiver

Effect

Major vehicles for communication: Speech – Face to face (oral) Writing Formal – long (reports, documents, etc) Non-verbal – Facial expression, body language In life, we use several methods to communicate effectively (i.e. gestures/ watch for response/ words/ pictures). Successful communication depends on correct receipt of the message and receiving is an active element. Communication vehicles will be effective only if both parties are involved in the process. Good communicators listen and observe. They are alert receivers of response signals while they are also communicating. This helps them tailor their communication style to make it easier for the receiver to absorb or accept the message.

chp-4.qxd

10/18/05

9:05 AM

Page 38

There are certain rules for communication: i. Fitness of purpose: z

Will it achieve the objective?

z

What, why, when, where, how?

z

Select the most effective way to achieve the objective.

ii. Quality of the message: z

Always maintain clarity, accuracy and simplicity.

z

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

We all transmit personal, non-verbal signals continuously, mostly reflecting our attitudes and responses to communication systems. By observing and responding to signals appropriately, we can build on the positives and weed out the negatives. To some extent, most people respond to non-verbal communication, but often only to the obvious, well-known signals. The table below gives examples of such signals and their implications: Sr. No. Behaviour 1

Leaning Forward

Reason z z

Circumstances

Concentration Increased emphasis

z z

Important meeting Negotiation

Responses z

Make points clearly

z

State your own case

2

Leaning Back

z

Taking time to think z Inviting expansion z Looking for conclusion

z

After a proposition/explanation z Towards end of meeting

z

3

Clasping both hands behind neck

z

Extreme confidence z Relaxation

z

Non-threatening situations z In charge of situations

z

4

Straight gaze No head movement

z

5

Narrowing eyes

z z z

Failing z Disputed occasions attention z Dislike what is z Unwelcome communicated instructions z Lack of cooperation Disapproval Disbelief Dislike

Expects to challenge z Patience may be short z

Source: Adapted from Communication Skills, 1996 by Carter Wendy

38

Chapter Four

Allow silence thought z Wait for others to speak first

Maintain openness of situatiuon z Be positive about your own case Ask for reactions/ feelings z Ask for suggestions z

Allows expression of opinion z Shows that you acknowledge difference z Give your reasons z

chp-4.qxd

10/18/05

9:05 AM

Page 39

CREATIVITY

AND

PROBLEM SOLVING

An entrepreneur has to be creative. He has to arouse and enhance creativity and experience competition not only with others but also the standards of excellence set for himself. Certain pre-conceived ideas create barriers in the growth of creative thinking. The barriers are: 1. Self-imposed 2. Restricted mindset 3. Nature of compliance 4. Backtracking to obvious challenge 5. Jumping to conclusion 6. Fear of being ridiculed It calls for a positive attitude, an open mind, insight and right perception to remove these barriers and arouse and enhance creativity. Everyone faces problems of different nature and magnitude. Sometimes in daily life, we encounter problems so often that we don’t even notice them and this is because of our monotonous experience in dealing with them and hence the spontaneous reactions result in solutions. But we do get stuck when faced with unusual and difficult problems, as our routine reactions fail to produce solutions. In such cases, different approaches and ways have to be tried out. Similarly, as an entrepreneur you may face several problems while managing your small-scale enterprise. If you develop an appropriate system, approach and methodology to solve problems, it will prepare you to manage your affairs and problems smoothly and without tension. There are several qualitative and quantitative approaches evolved in management science to help solve problems. The right strategy would be to understand your own environment, resources, capacities, limitations, strengths and weaknesses in order to design the right approach. This approach will help you, initially, in working on problems and, later, in formulating your own strategy to solve them. These steps help you have a problem-solving attitude and mechanism: z

Create a desire to solve problems

z

Recognise the problem

z

Formulate the possible causes Soft Skills for Entrepreneurs

39

chp-4.qxd

10/18/05

9:05 AM

z

Specify the problem

z

Test each cause

z

Explain each cause with minimum assumptions

z

Verify your explanation and determine the cause

z

z

40

Page 40

Establish objectives about the resources to be produced and resources used Classify objectives into ‘MUST’, ‘DESIRABLE’ and ‘CAN BE IGNORED’ categories

z

Generate alternative solutions

z

Choose one solution

z

Compare each solution in terms of positive and adverse consequences

z

Make a decision to implement

z

Internalise the process

Chapter Four

chp-5.qxd

10/18/05

9:06 AM

Page 41

CHAPTER

5

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

T

he speed with which you implement your project is critical during these days of competition. If you have planned in advance and evaluated resources required, your project will be implemented in the shortest possible time. The first step to initiate planning is to identify a suitable project.

PROJECT IDENTIFICATION There are no set rules to identify a suitable project, though this is one decision on which the success of your entire venture hinges. So, don’t take hasty decisions. Most prospective entrepreneurs tend to display the herd tendency and go for a project, which people have already ventured into. This is not a healthy attitude as success of one in a particular field does not guarantee success of the other. While identifying a suitable project, you should make a SWOT analysis of your own strengths and weaknesses. There are more details in a separate chapter. The next step, after you have selected your project, is to collect all information about it. The most important information is about the potential market of the items you selected. There are several ways for this. You may go for a basic desk survey, a snap survey or a detailed market survey. A separate chapter provides guidelines to assess the market potential.

PROJECT REPORT: A FORECAST PLAN Now, you will need to prepare a feasibility report about your project. A feasibility report will broadly contain:

chp-5.qxd

10/18/05

9:06 AM

Page 42

a. Background of the entrepreneur and constitution of the business b. Market potential and marketing strategy c. Selection of location d. Requirements of land and building e. Manufacturing process f. Requirements of plant and machinery g. Requirement of utilities h. Requirement of raw material i. Estimated cost of the project j. Proposed means of finance k. Cost of production and profitability l. Break-even point m. Cash flow statement n. Internal rate of return

REQUIREMENTS

TO

START

A

BUSINESS

Selection of Location: A Vital Decision This is extremely important. Usually, small-scale entrepreneurs are found to have a predetermined location. The location should be decided according to the proximity to sources of raw materials, consumption centers, availability of infrastructure, necessary skills in surrounding areas and availability of incentives. Sometimes the requirements conflict with one another and a particular location may not match all. Such situations want you to balance out the requirements, while also ensuring that they do not affect the viability of the project. Experience shows most entrepreneurs attaching more importance to available financial incentives and ignoring other important aspects guiding the selection of the location. Such misplaced emphasis may run the project into unviability in the long run. Your decision on the location, 42

Chapter Five

chp-5.qxd

10/18/05

9:06 AM

Page 43

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

Land and Building: Make Correct Assessment Before assessing land requirements, you must draw up a plant layout based on the type of facilities proposed to be installed. Normally, the land should not exceed five to six times the built-up area; but it all finally depends upon the project. Land in excess of the requirement will block up funds, which could otherwise be utilised for productive purposes. The land should be free from any encumbrances and should be non-agricultural.

Select the Right Manufacturing Process Suitable manufacturing processes have to be identified for production. Some products may need a particular process depending upon raw material availability, the prices and the quality requirement of the end product. A detailed flow chart may also be drawn with all operating parameters.

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

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

ii) Acquisition of Infrastructure Facilities If you plan to locate your project in an industrial estate promoted by a government agency, you may apply for a built-up shed or a plot of land. You can start your activities once the shed/plot is offered. If you have been allotted a Planning a Small-scale Unit: Whom to Approach for What

43

chp-5.qxd

10/18/05

9:06 AM

Page 44

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

iii) Pollution Control Clearance: Obtain NOC or Consent You should also apply for obtaining an NOC from the State Pollution Control Board (PCB). If your unit is likely to be a pollution hazard or may discharge effluents, the PCB first issues an NOC with certain conditions to install facilities to check air or water pollution to specific levels. After you have installed the necessary facilities and they are satisfied, the PCB gives its consent to start operations.

iv) Constitution of the Business You should decide on the organisational form of your business, viz. if it should be a proprietorship, partnership or a private limited company, according to the size of its operations and the degree of risk involved. In proprietorship, the gains and losses of the business rest with the proprietor, while in partnership, all the partners share the gains and the losses except the minor partners, who are exempt from bearing the losses. In a private limited company, the members take the gain or losses as per their holding in the company, for it is considered to be a separate legal entity. Once the business constitution is decided, you may undertake necessary formalities for registering the firm accordingly.

v) Arrangement of Finance for Fixed Assets and Current Assets After taking these clearances, you may apply for a term loan either to a statelevel financial institution or a commercial bank, with a techno-economic feasibility report, including market survey, and all documentary evidence justifying your claim for the project being feasible. Once the loan is sanctioned, you may have to execute necessary legal documents mortgaging your assets. The disbursement of the term loan usually starts after you have fulfilled all the conditions and also after 50 per cent of your own capital is raised and invested in the project. The institutions generally disburse 75 per cent of the loan sanctioned on a matching basis. Thereafter, you should raise and invest the rest of your contribution to stake your claim for disbursal of the balance term loan. Simultaneously, you can also negotiate with your bankers to sanction the working capital requirements. The bankers would, however, consider the working 44

Chapter Five

chp-5.qxd

10/18/05

9:06 AM

Page 45

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

vi) Government Formalities Need to be Viewed in Proper Perspective Experience shows that many people do not give adequate weightage to complying with various government formalities. Utmost care should be taken in this connection during the planning stage itself, as in the case of ignorance the project implementation gets delayed and incurs cost overruns, and sometimes derails the entire project. You must also be aware of the sequence of steps to be followed while planning a small-scale unit. There are no rigid rules, but experience reveals that nothing important will be missed if you follow the sequence. Some activities can be handled simultaneously. The sequence may vary according to the needs and size of your project. You may decide basing on ground realities. The steps above will help you develop an insight into project planning. Finetuning project implementation activities at the planning stage will help you coordinate resources appropriately in keeping with the project needs and avoid slippage in implementation and cost overruns. Whom to Approach for What? New entrepreneurs must know where to go for a particular piece of information as this knowledge will help them avoid a lot of running around. For this, they must know clearly what they are looking for. Some may be completely ignorant, a few may know about marketing or production or finance, etc. The completely ignorant will require initial desk work and discussions with knowledgeable persons like the EDP trainer, extension officers, businessmen, small-scale industrialists, etc. This will help you accelerate the process of enterprise establishment. Those with some knowledge will require specific information. It will be useful for them to list the various things to be completed to set up their enterprise. This desk work will give them a clear idea about the assistance they need to fulfill their activities. Various development agencies assist entrepreneurs: a. Some agencies provide only general information and you yourself have to collect specific information. Planning a Small-scale Unit: Whom to Approach for What

45

chp-5.qxd

10/18/05

9:06 AM

Page 46

b. Some provide technical/marketing expertise in specialised areas. c. Some provide guidance in technical and financial matters, besides taking up turnkey responsibility (implementation assistance). But government formalities will have to be completed by the entrepreneurs themselves. They can contact the concerned departments/offices for information. You should only retain the relevant information/data while collecting information. You must keep important information at a proper place to find them when needed. The compilation and segregation of information will need table work and it should be compared with the checklist prepared earlier to ensure all data has been collected before actual commencement of work. Expert guidance will help in decision-making process. It will be useful to acquire first-hand information from institutions to get a clear picture of the entire exercise. A table below shows various sources of information for a new entrepreneur. They need not contact all agencies except the relevant ones. However, they must contact at least the following agencies to have knowledge about smallscale industries and the procedures:

46

z

District Industries Centre

z

Directorate/Commissioner of Industries Office

z

State Financial Corporation

z

Technical Consultancy Organisation and

z

Agencies Conducting Entrepreneurship Development Programmes

Chapter Five

chp-5.qxd

10/18/05

9:06 AM

Page 47

Whom to contact and for what information Sr. No. 1

Area of Assistance For Selection of a Project

Sources SISI, DIC, TCOs, SFCs

2

Registration

DIC

3

Finance

Banks, SFCs, NSIC

4

Technical Guidance

DIC, TCOs, CFTRI, SISI, NSIC, DFRI

5

Training

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

6

Infrastructure

DIC, IDCs, LA

7

Raw Materials

DIC

8

Plant & Machinery

DIC, NSIC, SISI

9

Marketing Information

DIC, TCOs, EPC (APEDA, MPEDA)

DIC = District Industries Centre SISI = Small Industries Service Institute TCOs = Technical Consultancy Organisations SFCs = State Financial Corporations NSIC = National Small Industries Corporation DFRI = Defence Food Research Laboratory ED Inst. = Entrepreneurship Development Organisations CFTRI = Central Food Technology Research Institute IDCs = Infrastructure Development Corporations LA = Local Authorities like Municipalities EPC (APEDA, MPEDA) = Export Promotion Council (Agriculture and Processed Food Export Development Authority, Marine Products Export Development Authority)

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

47

chp-6.qxd

10/18/05

9:20 AM

Page 49

CHAPTER

6

Business Opportunity Identification

A

good business opportunity is that which is a techno-economically and commercially viable and feasible and environmentally sustainable proposition. Every entrepreneur needs to identify a sound opportunity. To identify an opportunity, one needs to: i. Collect basic information on local resource base, e.g. agriculture, forest and mines ii. Collect information on Opportunity Identification (OI) exercise done earlier (if any), by DIC, banks, other financial institutions, etc. iii. Discuss the potential business opportunities with existing entrepreneurs iv. Discuss with octroi and sales tax officials about the inflow of goods v. Collect information on new major investment going to materialise in the area vi. Collect negative list of banned items for financing vii. List out poor performing industries viii. Collect information on skill base—especially on handicrafts, etc. ix. Collect information on availability of infrastructure like power, water and transport, etc. The opportunities in the food-processing sector may be classified on the basis of the following parameters: 1. Natural Resource-Based Opportunities: such as the ones based on cereals, cash crops, fruits and vegetables, agro-wastes, animals, marine-based, processing of food products like cereals and pulses,

chp-6.qxd

10/18/05

9:20 AM

Page 50

fruit preservation, pickles, honey, etc. 2. Local Industry Based: those dealing in supply of intermediary raw material, ancillarisation, job-work, recycling of industrial wastes, by-products, etc. 3. Local Demand Based: which may include products like bread, biscuits, flour, spices, etc. 4. Export Based: any local product, which is being exported; or resources available locally to manufacture the items, which have good export potential

Following the above method, will offer a large number of business opportunities. However, please remember, these opportunities are location and time specific. An opportunity today may not remain an opportunity tomorrow. Or an opportunity in a forest area may not hold good in the deserts of Rajasthan, as the resource base will change. Moreover, one would also need to assess the viability and feasibility of the opportunities before pronouncing them as business opportunities. An opportunity may be absolutely viable but may not be feasible if it is mismatched. For example, although setting up a large flourmill may be a perfectly viable proposition, it may not be feasible to set up one in Sunderbans for an illiterate rural or tribal man. Therefore, one needs to consider the following facts before deciding upon an opportunity:  One’s Education  Experience  Economic Background  Investment Capacity  Family Background  Managerial Capabilities  Market Competition with other Producers/Size of Market  Location of the Unit  Availability of Technology and Process Know-how

50

Chapter Six

chp-6.qxd

10/18/05

9:20 AM

Page 51

 Availability of Raw Material  Availability of Skilled Workforce  Availability of Required Infrastructure  Project Cost  Export Potential  Life-cycle of the Product and Future Growth of the Product  Shelf-life of the Product (highly perishable like milk or long-term like capital goods or consumer durables, etc,)  Profitability of the Product  Degree of Risk  Gestation Period  Government Policy After ascertaining these factors, a SWOT analysis of the entrepreneur vis-àvis the identified opportunity should be conducted. If both match, one can proceed for a preliminary feasibility study through market survey. It is advisable to zero in two to three opportunities to finalise one. A set of introspective questions while deciding upon an opportunity:  How comfortable are you with the technology? Will you be able to handle it?  What is the situation of competition? How will you withstand the competition?  Will you be able to muster enough resources (especially finance)? Will you be able to manage investment from your own resources? If not, how do you plan to get funds?  How critical is the government support for your product?  Is raw material easily available? If not, how will you manage regular supply of raw material?  Will you get adequate skilled manpower? If not, how will you manage?

Business Opportunity Identification

51

chp-7.qxd

10/18/05

9:23 AM

Page 53

7

CHAPTER

Market Survey Tools, Preparation of Schedule and Techniques of Data Collection

M

arket survey is a valuable tool to help minimise risks and increase the probability of success. However, that doesn’t mean it is a sure-shot way to eliminate risk and guarantee complete success. You should undertake market assessment with a survey before you finalise marketing plans for your product or service. This chapter aims to explain what a market survey is and how to conduct it. Markets are changing rapidly, becoming complex and competitive. It is difficult to keep pace with the rapidly changing demand and supply patterns as an entrepreneur is unable to respond quickly to a new environment. He needs better market understanding and a market survey puts him in contact with the market. A systematic use of this tool can reduce risks in decision-making.

WHAT

IS A

MARKET SURVEY?

A market survey is an objective and systematic collection, recording, analysis and interpretation of data about existing or potential markets for a product/service. This definition will be better understood by looking at the objectives of a market survey. During a market survey, one needs to focus on: z

z

z

Size of the market and the anticipated market share in terms of volume and value Pattern of demand—seasonal or fluctuating in time (in a month, day, etc) Market structure

chp-7.qxd

10/18/05

9:23 AM

Page 54

z

Buying habits and motives of buyers

z

Unique selling proposition of certain products/services

z

Past and present trends affecting the selected product or similar product

PROCESS

OF

CONDUCTING

A

MARKET SURVEY

A systematic 5-point process is involved in a market survey: 1. Defining objectives and specific information needed: z

Identifying source to obtain information

z

Assessing time and cost for the study

z

Working methodology and action plan

2. Selecting a sample size by determining whom to contact and when 3. Preparing questionnaires for the survey 4. Collecting data and analysing it 5. Preparing a report, based on analysed data

PRIMARY AND SECONDARY SOURCES INFORMATION

OF

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

z

54

Primary data sources: Information coming straight from those in the specified market, e.g. in the toy market, information obtained from toy manufacturers and traders. Secondary data sources: Data existing in reports or in a published form and may not have been collected for specific purpose. Such information can also be had from census office, banks, traders and manufacturers’ association or published anywhere. Chapter Seven

chp-7.qxd

10/18/05

9:23 AM

Page 55

SCHEDULE

FOR

MARKET SURVEY

A market survey is not restricted to collecting information on the market for a product, but also about marketing infrastructure and existing market conditions. Designing a market survey schedule could fetch a lot of data. Questions may be designed on these areas: z

Existence of competitors, their products and marketing strategies

z

Information on all consumer groups

z

Information on competing products/ similar products Attitude of existing/potential consumers, including buying preferences, behaviour etc.

z

DON'TS z

z

z

z

z

z

OF

CONDUCTING

A

MARKET SURVEY

Do not be prejudiced. As an entrepreneur, you must be open-minded and confident. Do not be impatient or argumentative. Your objective is to get information. Do not reveal privileged information to others, for you may lose the trust of your sources. Avoid taking notes while discussing. Make notes immediately after an interview. People are not comfortable if one writes while talking. Don’t interview without preparation and sequencing of questions. Ensure that the interviewee has time for you. Don’t approach competitors as “likely competitors” but meet them as “potential clients” to get best results.

MARKET RESEARCH: 10 TIPS EFFECTIVE

TO BE

MORE

1. Clearly identify the issue/problem that needs to be investigated. See if any published/secondary sources of information are available for this problem. Market Survey Tools, Preparation of Schedule and Technique of Data Collection

55

chp-7.qxd

10/18/05

9:23 AM

Page 56

2. Based on existing information, check if the problem can be defined or narrowed down. Further, with this as your basis, write down “terms of reference” for any subsequent study. 3. Try to look at the problems from different angles: z z

z

your own point of view as producer or seller customers/consumers’ viewpoint as buyer and end users of products/services competitors’ viewpoint for they may have addressed similar problems

4. Try to remain objective throughout the market research process and check impulses/gut feeling from totally influencing the research. 5. Prepare schedule in as simple and clear a form as possible. 6. Maintain a tight control on the subject. If other subjects surface during the research, give them the attention they deserve. 7. Complete the research promptly and maintain confidentiality lest the competitors hear of it and forge ahead in the market. 8. Be prepared to take necessary action, which the research identifies. 9. Use the research immediately for the good of the enterprise. 10. Review all market research exercise and processes—the lessons learnt and areas to improve next time.

MODEL QUESTIONNAIRE

FOR

MARKET SURVEY

For Market Potential Collect data about sources of market information like consumers, suppliers and manufacturers. A. Consumers

56

z

What is their annual consumption and requirement?

z

What is their present source of supply?

Chapter Seven

chp-7.qxd

10/18/05

9:23 AM

z

Page 57

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

z

Are they satisfied with the present product and supply?

z

What is their purchasing criteria and purchasing power?

z

z

z

z

What is the consumption pattern? (basis to calculate their requirements) What could be the future consumption pattern, in quantity and quality due to technological changes, etc? What is the size of the average order, specifications and time and frequency of their placement? Will any government institutions/departments or any company/industry buy the products? Is it possible to establish linkages with them, and how?

z

What is the life of your potential buyer?

z

Their age group, sex?

z

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

B. Suppliers (Traders) z

z

Who are the principal traders in the item, their range of products and business terms/commissions, etc? What are the possibility to trade with them and on what business terms?

z

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

z

What are future predictions on business conditions?

C. Manufacturers and Competitors z

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

z

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

z

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

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

57

chp-7.qxd

10/18/05

9:23 AM

z

z

Page 58

What are their strengths and weaknesses? (Try to do their SWOT analysis) Where do they get information regarding market and consumer profiles from?

For Information on Raw Materials z z

Who are the major manufacturers/suppliers? What is the time required to get raw material after order placement? Supply terms (tax structure, price, packing, payment, etc)? Cost of transportation?

z

What is the standard or minimum order quantity?

z

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

z

Will any decision/policy affect its availability or price?

For Information on Machinery and Equipment z

Who are the manufacturers/suppliers?

z

What capacity, specifications and brands are available in market?

z

z

z

58

What is the price of the machine? (Consider all costs—taxes, transport, accessories, etc.) Which electrical equipments, like motors, starters, switches, are needed? What performance guarantees/warranties are given? Is the supplier/manufacturer reputed and reliable?

z

What is the normal repair/maintenance cost per year?

z

What spare parts would be frequently required?

z

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

z

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

Chapter Seven

chp-7.qxd

10/18/05

9:23 AM

Page 59

Suggested Sources of Technology and List of Machinery Manufacturers and Suppliers A K G FOOD PRODUCTS 168 B B Chatterjee Road KOLKATA – 700 042 Pr: Food Processing Equipments A M B AGROTECH Ashvini Layout Nr. Sahakar Nagar AKOLA – 444 004 Pr: Mini Dal Mill A V ENGINEERING WORKS 12-A, Adj.Hira Automobile Factory Area PATIALA – 147 001 Pr: Automatic Biscuit making plant ADVANCE EQUIPMENT CO. Navjivan Society Building No.3/2/7 Bombay Central MUMBAI - 400 008 Pr: Bakery Equipments, Meat/Fish, Poultry Processing/Packaging plant AERO THERM SYSTEMS PVT.LTD. Plot No.1517, Phase – III GIDC (Vatva) AHMEDABAD – 380 445 Pr: Hot Water Generators, Steam Boilers, Fluid Bed Dryers, Tray Dryers

AGARAM INDUSTRIES 126, Nelson Road Aminjikarai CHENNAI – 600 029 Pr: Milk Analytical Instruments, Pasta Making Machines, Food Analytical Instruments AGRITECH INDIA FOODS 8, Manilaxmi Apts. Daxini Society – Maninagar AHMEDABAD – 380 008 Pr: Processed Food Machinery, Beverage Processing Machinery AGRO THERMODYNE CO. 8/4, Shamanna Layout B/h. Mangaram Factory Gorugunte Palya BANGALORE – 560 002 Pr: Bakery/Biscuit making Equipments BAHUBALI ENGINEERING 5, Parekh Nagar, S.V. Road Kandivali (W) MUMBAI – 400 067 Pr: S S Food Processing Equipments BAJAJ MECHANICALS C-582, New Friends Colony NEW DELHI – 110 065 Pr: Food Processing Equipments

chp-7.qxd

10/18/05

9:23 AM

Page 60

BAKER ENTERPRISES 23, Bhera Enclave Nr. Peera Garhi NEW DELHI – 110 087 Pr: Bakery Machines, Machines for Buns, Hotdogs, Cookies, Rusk & Cakes BANSAL FLOUR MILL ENGINEERS 4/5-B, Asaf Ali Road – Gr. Floor NEW DELHI – 110 002 Pr:Grading/Sizing/Cleaning Machinery, Spices Cleaning Machines CENTRAL ENGINEERING WORKS 380, Patel Roadways COIMBATORE – 641 009 Pr: Commercial Kitchen Grinders

DAIRY DEN LTD. A-29, GIDC Electronic Estate Sector – 25 GANDHINAGAR – 382 044 Pr: Soft Ice-cream Machines, Juice Dispensing Machines, Fast Food Vans DANDEKAR BROTHERS Factory Area, Shivajinagar (N) Sangli – 416 416 MAHARASHTRA Pr: Knit Grinding Machines, Groundnut Decorators, Grinding Mills, Chaffcutters, Sugarcane Crushers DELHI INDUSTRIES 4, Paharganj Lane NEW DELHI – 110 055 Pr: Fruit & Vegetable Processing, Canning/Bottling Equipments and Machinery

CHALLENGER PRODUCTS 12, Devaki Niketan 396,402 Kitchen Garden Lane B/h. Lohar Chawl MUMBAI – 400 002 Pr: Pizza Ovens, Sandwich Grillers, Idli Steamers CHEMICAL CONSTRUCTION CO. PVT.LTD. Br: 956/57 T.H.Road CHENNAI – 600 019 Pr: Poultry Feed Plant, Coconut Processings, Oil Refinining Plant, Solvent Extraction Plant, Vanaspati Plant, Veg. Oil Refining Plant CONGAS FOOD SERVICES EQUIPMENTS (PVT.) LTD. 4, Krishanapur Road, Dum Dum KOLKATA – 700 028 60

Pr: Bakery Equipments, Commercial Kitchen Equipments Refrigeration Equipments

DELTA CORPORATION 201, Wadala Udyog Bhavan Naigaum Cross Road Wadala – MUMBAI 400 031 Pr: Internal Gear S.S. Pumps for Food Processing EASTEND ENGINEERING CO. 173/1, Gopal Lal Thakur Road KOLKATA – 700 035 Pr: Fruits & Vegetables Processing Machinery & Equipments ELMEC INDIA P B No.7624,

Chapter Seven

chp-7.qxd

10/18/05

9:23 AM

Page 61

No.37/38, Goodshet Road BANGALORE – 560 053 Pr: Packaging Machines, Heat Sealing Shrink Packaging, Seal Machines, Bottling Machines, Bag Closures EMERGE SYSTEMS & SERVICES PVT.LTD. A-2/4, Arjun Towers Satellite Road AHMEDABAD – 380 015 Pr:Waste Food Disposers

FLORA ENGINEERING CO. A-4, Laghu Udyog Kendra I.B. Patel, Goregaon (E) MUMBAI – 400 063 Pr: Industrial Ovens (for Dehydrating Roasting, Drying of Food Products) FOOD TECH ENGINEERS 31/A, Ghanshyam Ind. Estate Veera Desai Rd., Andheri (W) MUMBAI – 400 058 Pr: Machinery for Fish/Meat, Veg. Fruits, Frozen, Pulps, Juices

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

FOODMAC ENGINEERS (PVT.) LTD. Bassi Road Sirhind 140 406 PUNJAB Pr: Automatic Machinery for Biscuits Cookie/Crackers Cream Sandwiching

ESS EMM CORPORATION 205-H, Vivekanand Road Ramnagar COIMBATORE – 641 009 Pr: Baking Equipments, Ovens, Deep Fat Fryers, Bread Slicers,

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

Meat Mixers, Juicers, Coffee Grinders, Vegetable Cutters, Cutter/Mixers, Veg. Processing Machines EUROTECH FOOD & PACKAGING MACHINES K-17, Ghirongi, Malanpur Ind. Area Dist. Bhind, GWALIOR, M.P. Pr: Nut Roasting Plant, Form-FillSeal Packaging Machines, Namkeen Frying Plant

GADEKAR & ASSOCIATES PVT.LTD. 304, Sector 21A FARIDABAD – 121 001 Pr: URSCHEL Food Cutting machinery, Snack Food Fryers GAYATRI FABRICATION WORKS Tarun Plastic Ind. Estate Gali No.10, Mogra Road,

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

61

chp-7.qxd

10/18/05

9:23 AM

Page 62

Andheri (E) MUMBAI – 400 069 Pr: Kitchen Equipments – Pizza Ovens, Potato Peelers, Bulk Cookers, Deep Fat Fryers, Griddle Plates

HEATRAN SERVICES 180-A/131, NSP Complex (Opp Royal Agencies) Dr. Nanjappa Road COIMBATORE – 641 108 Pr: Pizza Ovens, Bread Baking Ovens, Heaters for Steam Boilers

GENERAL MECHANICAL INDUSTRIES National Tankiwala Ind. Estate Steelmade Compound Marol Maroshi road Andheri (E) MUMBAI – 400 059 Pr: Confectionery Equipments

INDIAN DAIRY EQUIPMENTS CO. 364, Azad Market DELHI – 110 006 Pr: Milk Testing equipments, Cream Separators

GOLDEN ENGINEERING INDUSTRIES A-87, Naraina Ind. Area Phase – I NEW DELHI – 110 028 Pr: Sealing & Cutting machinery, Pouch/Bag Making Machinery, Veg. Oil Refining Plant H P INDUSTRIES 2, Hoaquim Cottage, Vazir Glass Works Rd. J B Nagar, Opp. Tata Infotech Ltd. Andheri (E) MUMBAI – 400 059 Pr: Conveyors, Automatic Pickle/Chutney/ Jam Filling & Capping Machines HARI OM INDUSTRIES Dhebar Road (South) Atika Ind. Area Str.No.3, Nr. Jaydev Foundry RAJKOT – 360 002 Pr: Potato Cutting Machines, Dry Fruit Cutting Machines, Banana Wafer Machines, Other Food Processing Machines 62

INDO STAINLESS FABTECH PVT.LTD. 439, Sidco Ind. Estate Ambatur CHENNAI – 600 098 Pr: Milk Coolers, Milk Chillers, Cooling Tanks, Milking Machines INDUSES FOOD PRODUCTS & EQUIPMENTS LTD. 238/B, Acharya J.C. Bose Road KOLKATTA – 700 020 Pr: Paddy Processing, Parboiling, Drying equipments INDUSTRIAL AIDERS BD-135/1, Tagore Gardens NEW DELHI – 110 027 Pr: Dairy/Food Chemical Equipments INTERNATIONAL FOOD MACHINERY A-13, Kailash Colony NEW DELHI – 110 048 Pr: Blanches, Groundnut, Hammer Mill Dehydration Machinery for Onion & Garlic

Chapter Seven

chp-7.qxd

10/18/05

9:23 AM

Page 63

J K ENGINEERING WORKS Bus Stand Road RAJPURA – PUNJAB Pr: Bread/Biscuits Machinery Bakery machinery JWALA ENGINEERING COMPANY 12, Survey Industrial Estate Sonawala Cross Road No.1 Goregaon (E) MUMBAI – 400 063 Pr: Fruit & Vegetable Processing & Packing Machinery such as Fruit & Vegetable Preparatory, Fruit Juice Concentration Equipments, Mushroom Processing & Canning line, Peas Preparatory

& processing line Potato Chips Line, Pulp Concentration Plant K.S. ENGINEERING WORKS Factory Area, Nr. Ranjit Press Patiala – 147 001 PUNJAB Pr: Biscuit Plant, Papad Plant & Bread Plant KAG FABRICARES PVT. LTD. A-26N, Gali No.4 Anand Parbat Ind. Area NEW DELHI – 110 005 Pr: Bread/Bakery Plant LARSEN & TOUBRO LIMITED Plot No.101, GIDC Ranoli DIST. BARODA Pr: Food Processing Machinery

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

63

chp-8.qxd

10/18/05

9:24 AM

Page 65

CHAPTER

8

Production Programme, Plant Capacity, Manpower Requirements and Layout PRODUCTION PROGRAMME

P

roduction programme of a food processing unit is based on several parameters—local conditions, market access and technology. Your programme should be justified in relation to: z

z z

Market requirement and marketing strategy, e.g. fruits/vegetables are perishable. Input requirements and supply schedule—seasonal nature. Technology and economy of scale—low BE, cottage, small and medium scale in food processing.

z

Minimum economic size and equipment constraints.

z

Resource and input constraints.

z

Performance of staff/labour.

PLANT CAPACITY Consider these to determine the plant capacity: z

Project cost corresponding to various sizes and whether one has financial resources to meet the cost and whether one is prepared to run a risk commensurate with the project cost

chp-8.qxd

10/18/05

9:24 AM

z z

z

z

z

z

Page 66

Minimum economically viable size of plant Popular plant size of existing small-scale enterprises making similar products Comparative capital cost of major plant sizes, within the maximum of the project cost one has estimated, offered by machinery producers and their operating income/expenditure implications. A comparison of net financial impact of individual plant sizes. Market size and growth prospects (biscuit market in India is growing rapidly and a well-organised promoter may find himself unable to meet the demand, if he chooses too small a market size) SSI in India gets benefit in excise duty and interest rate concessions. But there is a legal ceiling on the investments in plant and machinery to avail these concessions. No wonder, most plants are priced just around that ceiling. You may choose a size matching the ceiling, for exceeding it will deprive you of excise/interest benefits. The cost of expanding the plant capacity vis-à-vis setting up a larger plant must be considered for it might be cheaper to establish a larger plant of 5 MT per day than to expand capacity from 2 MT to 5 MT.

MANPOWER REQUIREMENT You will need manpower for: z

Production (Workers)

z

Supervision (Technicians)

z

Administration, sales, miscellaneous work (Staff)

In a small unit, it is possible that the entrepreneur handles administration, sales and technical supervision, and thus have limited manpower needs. It is, however, important to analyse workload and arrive at a gross manpower need. Manpower requirements will be decided by manufacturing operations, material handling and packing jobs. It is useful to classify your manpowerneed in three categories—skilled, semi-skilled and unskilled. The wage rate for each category varies. Special attention should be paid for hiring and retaining skilled workers. 66

Chapter Eight

chp-8.qxd

10/18/05

9:24 AM

Page 67

Look at the availability of skills at the selected location and plan for their recruitment. It may be, for instance, difficult for a biscuit manufacturing unit in Himachal Pradesh being established at Parwanoo to source biscuit machine operators locally. They may have to be brought from Delhi/Chandigarh. It is difficult to find skilled people in industrially backward areas and may have to be scouted for in nearby towns. Arrangements will have to be made for technical and other staff also. Such employees expect better living conditions or compensation and won’t move in otherwise.

SELECTION

OF

LOCATION

Ideally one may want to locate the project in one’s home town or native place, but there may be a problem of high land price if that place is a large city. Usually, the government offers investment subsidy and tax concessions to enterprises in specified areas. One must be aware of various physical and commercial facilities to run an enterprise. The hometown or native place may not be an ideal choice. Various parameters need to be considered while deciding a location. One will then have to select a site—a specific piece of land in a given town where the enterprise will be located. Sometimes, one may also have to drop a location for want of a good site. How should one go about location/site selection? We recommend a twostage procedure. Practically, only a few locations will merit consideration. In the first stage, identify two-three such locations. Identify one or two sites at each location. In the second stage, examine each location/site according to a six-dimension selection checklist:

z

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

z

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

z

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

z

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

z

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

z

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

The findings of each parameter will help decide a location. Production Programme, Plant Capacity, Manpower Requirements and Layout

67

chp-8.qxd

10/18/05

9:24 AM

Page 68

Sources of Information on Location How do we get answers to the checklist? We try to tap the right sources of information: z

Industrial Estate Officials

z

Local Authorities

z

Revenue Department

z

State Electricity Board

z

Public Works Department

z

Office-bearers of Local Industry Associations

z

Local knowledgeable Persons/Businessmen

z

Banks/State Financial Corporations

z

District Industries Centre

z

Landowners, Residents of Nearby Villages/Towns, Local Opinion Leaders, etc.

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

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

68

Chapter Eight

chp-8.qxd

10/18/05

9:24 AM

Page 69

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

A Preliminary Layout Plan 20 MT BOILER ROOM

QC LAB

OFFICE

RAW MATERIAL 12 & OTHER STORE MT

2 FRUIT JUICE EXTRACTION

PACKING

1 JUICE EVAPORATION & JAMS/JELLY MAKING

(Note: Layout is not to scale)

Production Programme, Plant Capacity, Manpower Requirements and Layout

69

chp-9.qxd

10/18/05

9:26 AM

Page 71

CHAPTER

9

Business Plan Format for Tiny and Small Enterprises

A

business plan helps the entrepreneur set out objectives, targets and benchmarks. It is also a prerequisite to get credit from lending agencies like banks and State Financial Corporations, etc. It is a blueprint or a road map for your business. The purpose of a business plan is: z

to arrange thoughts logically

z

to highlight resource needs and their sources

z

to raise funds from a bank or other source

z

z

to demonstrate viability of the business proposition and potential to repay credit to stimulate reality and anticipate pitfalls before they occur

The business plan must answer these questions: z

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

z

How much do you wish to borrow?

z

When will you repay it?

z

Will you be able to pay the interest?

z

Can your business survive a setback in its plans?

z

What is the security available for lending?

chp-9.qxd

10/18/05

9:26 AM

Page 72

z

How many jobs will be created?

z

Is the business proposal commercially viable?

z

Will the business be profitable?

z

Can the business cope with inflation?

The business plan must include the following in sequential order: z

Summary of the Project/ Project at a Glance (The purpose of the business plan, location, resource needs, volume of business, brief note on market, customers, promoters and financial highlights)

z

General Information (About the business and promoter’s qualification, training and relevant experience)

z

Details of the Proposed Project (Requirement of fixed and working capital, project cost and means of finance)

z

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

z

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

z

Production Programme/Sales Revenue (Plant capacity, capacity utilisation, quantity produced/sold and sale realisation)

z

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

z

Profitability Projects (Sales, cost of manufacturing, tax liabilities, repayments, retained profit/loss)

72

Chapter Nine

chp-10.qxd

10/18/05

9:31 AM

Page 73

10

CHAPTER

The Financials of a Project Report

A SCAN OF FACTORS PRIOR OF A PLAN

TO

PREPARATION

B

efore preparing a business plan, one must analyse various factors and related actors. This manual stresses this aspect repeatedly. This chapter analyses factors existing in a district, including other enterprises, particularly relating to institution-information-enterprise gaps and problems. The findings about raw material stocking and market issues are to be incorporated in the financials of a business plan in the context of dehydrated vegetable unit and a grain processing enterprise. Consider Patna district in Bihar, where the crops grown are vegetables, grains and grams. A study of enterprises in the region shows that the food processing sector is less developed than the agricultural sector. There are several rice and flourmills. The agricultural resources are vital raw material for such enterprises. Milling activities include paddy milling. The by-products are rice, bran and husk. Several dal mills are also there. Their main activity is green and bengal gram milling. The State Government encourages self-help groups to set up small food processing units making pickles, spice powder, papads etc. and these enterprises and others dominate the local market. Institutions/associations at local level include industry associations, District Rural Development Agency (DRDA) and financial institutions. According to Government of India’s capital investment criteria, units with investment up to Rs.1 crore in plant and machinery are small-scale units. Tiny units have investment below Rs.25 lakh, while cottage or household enterprises are those operating largely out of households.

chp-10.qxd

10/18/05

9:31 AM

Page 74

Lacunae in Information and Support System Linkages The main activity of the units here is processing of jams, pickles, papads, spices and rice and dal milling. Within similar product mix, medium and smaller units cater to the brand and quality conscious affluent sections. Packaging quality is better and prices are higher. In the lower end, tiny and cottage units vie with each other for their market share through lower price and margins. Their market comprises low income group consumers, who buy nonbranded and low priced products. Units without their own marketing outlets undertake distribution through local outlets. The State Government is encouraging Self Help Groups (SHGs) to sell their products through exhibitions. Most products have simple packing material with the manufacturer’s name on the pack. ‘Unorganised’ enterprises are hardly aware of food related norms. Rice and dal mills procure raw material through commission agents. Rice millers used to sell rice to the Food Corporation of India (FCI) and in the open market through commission agents. In the processing sector, rice millers face problems like high percentage of brokens and need upgraded technology. The milling and polishing of paddy require electricity. Consumption of electricity is high in this case. The reason is use of rewound and higher HP motors. Most milling units face problems with institutional finance. Local suppliers largely meet the machine and equipment needs of the units. Also, the main weakness of enterprises here is the lack of testing facilities and access to information on advanced technology, quality and food-related norms. Few SSI units are aware of the Mysore-based CFTRI, which has excellent infrastructure to provide consultancy on technology, equipment design etc. Yet, options like value-added products or reducing ‘brokens’ by involving agencies like CFTRI are unexplored. There is a dearth of information on packaging to improve shelf life with the support of agencies like DRDA, while the latter has backed such initiatives in other regions.

Can Policy Incentives Substitute for such Gaps? The Bihar Government offers several special fiscal concessions like sales tax relief/exemption on purchase of raw material/exemption in excise duty. Fiscal incentives include investment subsidy upto 25 % of fixed investment, subsidy between 20% and 25% on cost of installing captive power generators, subsidy on cost of preparing feasibility/project reports, subsidy on technical knowhow, etc. The Bihar State Industrial Development Corporation offers equity participation in ventures. 74

Chapter Ten

chp-10.qxd

10/18/05

9:31 AM

Page 75

The State Government’s five-year policy, effective from 1.1.90, had, in fact decided to continue capital investment subsidy to all new units set up in all districts at a rate of 15% of the equity (maximum Rs.1.5 million). This facility is also available for expansion programmes of existing units, provided the capacity is raised by atleast 50% of the installed capacity. Additional 5% (limited to Rs.5 lakh) capital investment subsidy is given to units located in notified growth centers, units promoted by NRIs and cent percent export–oriented units. Additional 10% subsidy (maximum Rs.1 million) is for investment on energy saving schemes based on energy audit reports or otherwise for small and medium units. Subsidy on power, water and such utilities is also available. However, although incentives are important, there are other aspects also which are crucial. Be it Bihar or Assam, other critical parameters like raw material availability and their prices/quality/domestic market potential/labour availability need to be considered before structuring the project costs, means of finance and working capital requirements. On this basis, financial statements may be developed with profitability analysis. Such structuring is presented in the form of a pulse processing enterprise in Patna in sub-section 5 of this chapter. First, two cases of grain processing units are given here to help understand how not to structure your project costs/means of finance.

INTERNAL FACTORS KILL AN ENTERPRISE: SINHA RICE MILLS, PATNA, BIHAR Established in 1997 near Patna, the mill was engaged in dehusking paddy and rice shelling with an installed capacity of 2,400 MT paddy per annum. The target market was Patna city. A term loan was provided by the SFC and working capital by a commercial bank. But by 2001, the unit became unviable.

Depressed Project Cost and Working Capital Finance and hence Means of Finance: The Culprit The enterprise was doomed since inception due to underfinance. It faced a problem in the first two years because of poor monsoon with the failure of paddy crop. The paddy prices in other regions were high, while payments were getting delayed. This resulted in a cash crunch. Then, the bank discontinued its The Financials of a Project Report

75

chp-10.qxd

10/18/05

9:31 AM

Page 76

cash credit. Written assurances by the promoter to liquidate overdrawal of CC limit in monthly instalments and application for relief were not entertained. The bankers later froze the account and the unit was tied for working capital. As a cumulative effect of delayed payments and high input costs, the unit worked at a very low capacity and incurred huge losses. With no institutional support for working capital, poor capacity utilisation contributed to the tragedy. The enterprise closed for three months. But later, bumper harvests of paddy made purchase easier and cheaper. The promoter borrowed money from friends in the form of unsecured loans and re-started operations. The main problems were the failure of paddy crop for two years and subsequent increase in input costs. The problem seems external and not internal. In fact, even during a ‘good’ year input prices fluctuate up to 200 per cent depending on the ‘season’ or ‘non-season’ timing of purchase. In his project report, the promoter simply took the average of purchase price trends of previous years. Had he taken the weighted average purchase price of the months when a price level prevails, he would have projected a purchase price and working capital double than what he had asked. It was his fault that he did not project his working capital needs and margin higher. Besides, he had also misjudged the importance of a credit strategy to push sales. In other grain milling enterprises in the region, 70% sales were on two-month credit. His was only 50%, but he had not even considered credit sale necessary while projecting working capital nor had included the relevant margin in his report submitted to and sanctioned by the term lender and banker.

Infuse Funds as Working Capital and Focus on the Procurement front to Revive Manufacturing facilities of the enterprise were good, while the main raw material, paddy, was available locally. But, resources and equipment do not make an enterprise. He would need, in future, to reinvest all surplus earnings in business as working capital to enable him to procure and stock raw material when prices are low and use it over a period of time. Sustainable management is all about taking timely decisions and procuring adequate raw material inputs. At 60% capacity utilisation, sales of basmati, husk, rice barn etc. and paddy milling could have touched Rs.150 lakh. At this level of operation, the enterprise could earn Rs.20 lakh profit by incurring Rs.130 lakh expenditure. These expenses also cover the liabilities on term loan and working capital. In two years, it could have earned Return on Investment (RoI) of 29%. For a few months, the enterprise could mobilise funds from friends and relatives and regularise repayment of dues of term loan and working capital. 76

Chapter Ten

chp-10.qxd

10/18/05

9:31 AM

Page 77

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

INGTY DAL MILLS, ASSAM: EXTERNAL FACTORS LIKE BAD DEBTS COULD ALSO AFFECT PERFORMANCE Ingty Dal Mills, a sole proprietory firm, was promoted by Ingty to manufacture dal, besan and flour with an installed capacity of 12 MT/day for dal, 4 MT for besan and 8 MT for flour. This capacity is based on 300 working days in one shift of 8 hours. The Department of Industries and Commerce (DIC) granted permission to the unit to grind wheat in 1997. There are other Roller flour mills in the district for wheat milling. All are operational. This is the only unit engaged in processing of grams and other gram products i.e. dal and besan. The enterprise had potential for the local market and was doing well till 2000 and could repay interest and principal obligations to institutions in time. Later, payments were blocked owing to recessionary conditions and the enterprise had to be closed down due to non-recovery of receivables.

An Analysis of the Enterprise’s Performance: Indicators of Unsustainability The financial statements of the enterprise for the last two-three years showed that in 2001–2002 and 2002–2003 it made ‘cash’ losses. An analysis of the structural strength and liquidity viz. ability to meet short-term liabilities, profitability and performance of the enterprise is revealing. (Annexure II to this chapter elaborates on definitions of various management and accounting terms and ratios). Structural strength: The unit had promoter’s fund of Rs.10 lakh in 2001–2002. However, the accumulated losses by 2002–2003 were Rs.6.62 lakh. Total outside liabilities had been rising because of non-payment of interest liabilities. Liquidity: The current ratio viz. current assets over current liabilities was 0.76 in 2001–2002 and it declined to 0.52 in 2002–2003, showing that current The Financials of a Project Report

77

chp-10.qxd

10/18/05

9:31 AM

Page 78

assets were insufficient to meet current liabilities. Current assets largely included stock and debtors while current liabilities were creditors. Though the promoters infused Rs.8 lakh into the business in the last three years, the liabilities of creditors remained high. Turnover: Stock of finished goods and receivables for credit sales were high in 2001–2002 and 2002–2003. Profitability: Since the unit was near Guwahati and the local market had good potential, the unit did well initially and the dues were regularly paid upto 2000. Performance deteriorated rapidly due to repayment problems from two major traders (debtors). A revival plan could have been evolved based on analysis of past performance and future projections on various parameters. Evolving cost of project and means of finance for revival was possible in the past when financial institutions were not finicky about reducing their Non-Performing Asset (NPA) portfolio. Today, most institutions prefer one-time settlement of dues. The only option for evolving, implementing and managing a sustainable project is to structure the cost of project and means of finance by properly estimating the cost of raw material procurement, working capital etc, as well as income, and deciding on the optimal means of finance through a capital structure analysis.

FINANCIAL VIABILITY ANALYSIS

OF

PREPARATION

AND

The analysis of financial feasibility of a project or business plan helps study a project’s potential from financial angle. It also helps understand investment requirements and its sources. Some major components of financial viability are: z

Cost of establishing a project

z

Means of finance or sources contributing to project cost

z

z

Capacity utilisation and income and expenditure estimates on an annual basis Profitability projections on an annual basis

Income, expenditure and profit projections are made till the period of repayment to financial institutions. An eight-year period could be ideal. Projections may be made in such a manner that capacity utilisation improves over the years. Parameters such as, selling price and cost of raw material may be changed every year. It is obviously difficult to project the direction or extent of such change. It 78

Chapter Ten

chp-10.qxd

10/18/05

9:31 AM

Page 79

is normally assumed that increase in costs over time will be matched with increase in selling price. And so, they can be assumed constant over the years. The following sub-sections introduce major components of financial viability preparations and assessment.

Project Cost Project cost comprises investment for establishing an enterprise. The significant elements of project cost are land and site development, building, machinery, other fixed assets, technical know-how expenses, preliminary and preoperative expenses, including interest during construction period, working capital margin and contingency costs. Certain administrative and financial expenses are incurred before production starts. These are Preliminary and Pre-operative (P&P) expenses. They include rent, interest during construction, Pollution Board licence, collateral related expenses like stamp duty, trial production expenses, deposits for utilities and processing fees of financial institutions. Contingency is a provision made for escalation of cost of equipment, for instance, in the lag between plan preparation and project implementation. These are the key components of project cost: 1. LAND AND SITE DEVELOPMENT: Cost of land, legal charges, levelling and developing charges, fencing etc. 2. CIVIL WORKS: Factory building, office, warehouse, drainage facilities, etc. 3. PLANT AND MACHINERY: Price of machinery/equipment and excise duty, sales tax, freight, octroi and installation costs. 4. OTHER FIXED ASSETS: Furniture, office equipment like fax machines, vehicles, laboratory and pollution control equipment, diesel generating sets, etc.

Comparative quotations from several suppliers may be invited to convince lending institutions about cost of plant and machinery. Institutions, sometimes, specify ‘acceptable’ suppliers. For valuation of land and building, lender offers loan against the ‘book price’ as per documents and not ‘market price.’ A promoter should know these aspects and work closely with lending institutions. The Financials of a Project Report

79

chp-10.qxd

10/18/05

9:31 AM

Page 80

Means of Finance The common means of finance are term loan, subsidy or equity. State financial or industrial development corporation and even commercial banks offer term loan against project cost. Repayment terms vary with institutions and with schemes. The MoFPI offers subsidy on a proportion of the cost of fixed assets. Equity capital is promoters’ contribution or monetary contribution by others in terms of deposits and unsecured loans. The minimum amount of promoter contribution, irrespective of such private participation, could be specified at a minimum 17.5 per cent of project costs by lending institutions.

Working Capital, Relevant Margin and its Assessment Funds required to operate an enterprise is Working Capital. A certain minimum amount of working capital is permanently invested in business. The entrepreneur will have to contribute this fund initially. Working capital margin, which is included in the project cost, is estimated on the basis of the year when the enterprise breaks even. The estimation of this margin depends on projections of working capital needs: z z

z

z

80

Projecting output over different years of operation. Projecting raw material input needed and unit price of each input required to produce output and the amount of material an enterprise must carry, given first year production targets. For the latter, the ‘lead’ time between order placement and receipt should be considered. Enterprises in the food processing sector need to carry high raw material inventory, given the seasonality of production. Price of inputs vary drastically and enterprises need to stock up to reap advantage of favourable prices. The value of raw material, to be stocked, should be ascertained, as also that of other consumables and packing material to be stocked up. Projecting value of goods under production. This will depend on the length of the manufacturing cycle. For such valuation, direct costs of raw material, wages and utilities should be considered. You may ignore depreciation, administrative and marketing expenses. Projecting the level of stock of finished goods. An enterprise producing in anticipation of demand, as do most processing enterprises, may carry substantial stock of processed/semi-processed finished goods. The quantity of such stock should be valued at cost, viz. direct and indirect, sans depreciation.

Chapter Ten

chp-10.qxd

10/18/05

9:31 AM

z

z

z

Page 81

Projecting total sales on credit in terms of duration or amount of outstanding receivables. Only production cost of sales is considered. Projecting the monthly wages and salary expenses, power/fuel, other utility related costs, administrative expenses, selling, repair/maintenance expenses. The sum total of the value of investment forecasted for each of the components of raw materials as indicated in the second bullet point for one operating cycle, should be considered while projecting the requirement.

Working Capital Requirement for Priya Foods, Chennai 1. Even at 30% utilisation of its capacity, the enterprise should be generating profits. As per product-mix annual capacity amounts to 745.4 tonnes. 2. Annual raw material stock in the first year of carrots, onion, potato, garlic and ginger amounts to 223.6 tonnes. Raw material stocking period is projected at two months. This is valued at Rs.5.41 lakh (viz. Rs.32.43 lakh divided by 12 months and the resultant estimate multiplied by 2). 3. Value of Consumables and / Packing Material Stock in terms of one month stocking period: Consumables:

Rs.5,000

Packing material: Rs.19,000 4. Value of Stock of Goods in Process in the first year a) Manufacturing cycle

= 1 day

b) Quantity of goods in process in the first year c) Price of Goods in Process

= 0.745 tonnes = Rs.17000 per tonne

d) Working capital on account of Goods in Process equals approximately Rs.13,000 5. Value of stock of Finished Goods in the first year: a) Carrying of Finished Goods

= 1/2 month

b) Price of Finished Goods

= Rs.26000/-

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

= Rs.24,000 per tonne

The Financials of a Project Report

81

chp-10.qxd

10/18/05

9:31 AM

Page 82

e) Working capital on account of finished Goods

= Rs.2.24 lakh

6. No Working Capital is required on account of credit sale as all sales are assumed to be on cash basis. 7. Wages and Salary for one month (first year)

= Rs.70,000/-

8. Fuel, light, power, utilities for one month (first year)

= Rs.1,00,000/-

9. Administrative and selling expenses and repairs and maintenance for one month (first year)

= Rs.32000/-

10. Working Capital requirement (total 4 to 9)

= Rs.10.04 lakh/-

A financial institution may refuse working capital support for expenses either on wages/salary or administrative expenses. Such policy may change with time. Around 60–70% support for most working capital components may be secured. Anticipated institutional support and working capital margin for Priya Foods is presented in the following table: Table 10.1 Working Capital Contributors for Priya Foods, Chennai – Approximate Estimates (rounded off). (Rs. in lakhs in first year) Sr. No. Component

No. of days

Amount

1.

Raw Material

60

5.41

50%

2.71

2.70

2.

Consumables

30

0.05

30%

0.03

0.02

3.

Packing Material

30

0.19

30%

0.13

0.06

4.

Stock of Goods in Process @ Rs.17,000 per tonne

1

0.13

30%

0.09

0.04

Stock of Finished Goods @ Rs.24,000 per tonne

15

2.24

30%

1.57

0.67

6.

Wages & Salary

30

0.70

100%

-

0.70

7.

Utilities

30

1.00

100%

-

1.00

8.

Production and Administrative Expenses

30

0.25

100%

-

0.25

Repairs and Maintenance

-

0.07

100%

-

0.07

4.53

5.51

5.

9.

Total

82

10.04

Chapter Ten

Margin

Bank Loan Margin

chp-10.qxd

10/18/05

9:31 AM

Page 83

Support for Working Capital and Term Loans To sanction a term loan, a term lender may ask the promoter to submit a sanction letter of a bank approving, in principle, a working capital facility for a project. The project appraisal pursued by a term lender is considered prior to such ‘in-principle’ sanction. A bank may still disagree on projections on capacity utilisation or profitability, and hence on support. Many enterprises are still-born despite receiving working capital support as they receive and accept less than requirements. SFCs and institutions like NSIC and many banks offer both term and working capital loans. They offer composite loans. An enterprise may also secure deposits or private loans at a certain interest but a lending institution invariably insists that such private loans remain unsecured in terms of assets of the project as they will be mortgaged to the lending institution. Agencies like NSIC also support hire purchase financing of machinery. Special assistance is also available under several schemes for women entrepreneurs. Agencies offering venture finance for risky projects with new technology also exist. For instance, there is the Technology Development and Information Company of India (TDICI), an ICICI-sponsored company in Bangalore. They remain partners in profits and losses. Conventional financial norms are not followed under this financing pattern.

Extent of Loan or Debt Financing: Norms and its Sanction and Disbursement The extent of term loan that can qualify depends on norms of Debt-Equity Ratio, minimum Promoter Contribution, policy of lending institutions about margin against specific components of project costs and the fixed asset coverage security margin for the lender. A 2:1 Debt-Equity Ratio may be acceptable to a lender. The term lender has a policy on contribution pegged between 15% to 22.5%. Component-wise norm policy about margin against project cost may vary over time between institutions. Land, building, machinery, equipment and other assets may be mortgaged with the term lender as security. Lenders accept no security for working capital margin or preliminary/pre-operative expenses. The promoter may have to contribute as these assets cannot be disposed off to recover dues. The term loan is pegged at 30–40% less than the value of fixed and saleable assets. While a lender may offer extra loan against a cost overrun, assuming project viability is not affected, it is not responsible for delay in receipt of subsidy. The Financials of a Project Report

83

chp-10.qxd

10/18/05

9:31 AM

Page 84

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

Financial Viability of Priya Foods, Chennai The project cost as well as means of finance for the company is given below: Table 10.2 Project Cost—Priya Foods, Chennai Particulars 1. Land (6000 sq. m. @ Rs.50 per sq. m)

Cost(Rs. in lakh) 3.00

2 Site Development

0.12

3. Civil Works

20.20

4. Plant and Machinery

72.51

5. Other Fixed Assets

2.80

6. Preliminary and Pre-operative Expenses

5.40

7. Working Capital Margin

5.50

8. Contingency and Escalation @ 10% of (1) to (5)

9.68

Total

119.21

Means of Finance—Priya Foods, Chennai Sources of Finance Promoter’s Equity

Amount (Rs. in lakh) 26.82

Term Loan

62.39

Investment Subsidy

30.00

Total

84

119.21

Chapter Ten

chp-10.qxd

10/18/05

9:31 AM

Page 85

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

Capacity Utilisation and Income Estimate The table 10.3 below shows capacity and product-mix for Priya Foods, Chennai. Table 10.3 Capacity, Product-mix and Income at Full Capacity: Priya Foods, Chennai Vegetable

Output (tonnes)

Price (Rs./tonne)

Amount (Rs. in lakh)

Onions

360.00

35000

126.00

Garlic

228.60

30000

68.58

Potatoes

92.30

32000

29.54

Peas

20.00

75000

15.00

Carrots

17.00

90000

15.30

Lady’s fingers

15.00

80000

12.00

Ginger

12.50

100000

12.50

745.40

278.92

The installed capacity based on product mix is 745.4 tonnes/year. High capacity utilisation cannot be achieved in the first year. Market constraints and teething technical problems always exist. Table 10.4 shows year-wise capacity utilisation and income estimates of Priya Foods. Table 10.4 Projected Production and Income—Priya Foods, Chennai Year

1

2

3

4

5

6

7

8

Installed capacity

745.4

745.4

745.4

745.4

745.4

745.4

745.4

745.4

Capacity utilisation

30%

40%

50%

60%

60%

60%

60%

60%

Production (tonnes)

223.6

298.16

373.7

447.24

447.24

447.24

447.24

447.24

Income

83.68

111.57

139.46

167.35

167.35

167.35

167.35

167.35

The Financials of a Project Report

85

chp-10.qxd

10/18/05

9:31 AM

Page 86

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

z

z z

Raw material: Proportional to production quantity. Consumables and packing materials: Depend on production quantity but not proportionately. Power, fuel and utilities: Depend on production quantity but not proportionately. Wages and salary: Partially related to production quantity. Repairs and maintenance: Expenses on plant, building and other assets increase over time.

z

Rent, taxes and insurance: These are fixed expenses.

z

Administrative expenses: Fixed.

z

z

Selling expenses: Include fixed expenses as advertising and salesmen’s salary as well as variable expenses like commission to dealers. Interest on term loan: Outstanding loan due.

Loan repayment plan is fixed by the term-lending agency and interest on working capital fixed by working capital provider. Interest rates depend on working capital requirement, which in turn depends on sale/production quantity and working capital margin. There are cash and non-cash expenses. Cash expenses have to be projected annually for raw material, packing, utilities, wages/salary, repairs/maintenance, administrative and selling expenses, interest on loan, rent, etc. Income minus such cash expenses is cash profit. To account profit, both cash and noncash expenses are deducted from income. Non-cash expenses include depreciation, amortisation of P&P expenses and write-off of technical know-how expenditure. Value of fixed assets like building, machinery and office equipment depreciates every year. Depreciation in ‘accounting’ measures such reduction in the asset value. It also helps build a cash reserve for replacement of the existing asset later. Land’s value does not depreciate and no depreciation is provided for it. Amortisation or gradual write-off of intangible assets are stipulated in income tax rules, viz. how and by how much every year. One may write off P&P and technical know-how expenditures in 10 and 6 years respectively. Contingency/escalation expenditures may be added to estimate asset cost and depreciation is provided on the resultant amount. 86

Chapter Ten

chp-10.qxd

10/18/05

9:31 AM

Page 87

Depreciation can be provided by two methods, straight line (SL) and written down value (WDV). Depreciation rates are stipulated by law and vary according to asset and industry. The WDV method enables making substantial provisions in the initial years, thereby increasing expenditure and reducing accounting profit, and hence, income tax. The SL method may be used to prepare a projected profit statement, while the WDV may be used to estimate income-tax obligations.

Income Tax Projections The tax burden can be estimated as follows: z

z

z

The WDV depreciation amount is subtracted from profit before tax. A percentage of preliminary and know-how related expenditure may be deducted every year as per norms to correspondingly reduce taxable profit before tax. It is also possible to carry forward losses. Losses incurred in a particular year may be offset against profit in the following years. Tax incentives offered for enterprises in a region or sub-sector should be incorporated and subtracted. Tax calculation depends on tax rate, which depends on assessee status and legal form of an enterprise’s constitution. It may be a sole proprietary, a Hindu Undivided Family (HUF), a private or public limited company or a cooperative society. Tax rates vary accordingly. Tax is deducted from profit before tax (PBT) to arrive at profit after tax (PAT).

Financial Viability and Cash Flow of an Enterprise Viability from the lender’s point of view is the ability to repay the term loan. A financial ratio measures the enterprise’s capacity to meet term loan and interest. Related obligation is the Debt Service Coverage Ratio (DSCR). A DSCR of 1 implies that the enterprise will earn cash to exactly meet all term loan and interest obligations. DSCR of about 2 is considered adequate. The higher the DSCR, the better the project. There are various ratios like income-capital ratio, PBT to turnover ratio and Return on Investment (RoI) ratio, which reflect profitability: z

A turnover capital ratio shows annual income as against project cost. A small enterprise may earn only low levels of profit or even incur loss with slightest of adversity. The Financials of a Project Report

87

chp-10.qxd

10/18/05

9:31 AM

z

z

Page 88

PBT to turnover ratio indicates profitability of enterprise operations. A 0.08 ratio implies that even a small adverse movement in selling price may result in a loss. Interest on term loan added back to PBT is the RoI. Return divided by investment gives RoI. RoI may be estimated every year.

The projects and estimates over above sub-section 4.1 to 4.8 are the basis to estimate cash flow. Table10.5 presents the cash flow of Priya Foods. As there is no cash deficit, there will be no need to generate it to fill it. Table 10.5 Priya Foods, Chennai—Cash flow Year

0

1

2

3

4

5

6

7

8

Inflow Equity

26.83

-

-

-

-

-

-

-

-

Subsidy

30.00

-

-

-

-

-

-

-

-

Term loan

62.39

-

-

-

-

-

-

-

-

Bank loan

-

4.50

1.50

1.50

1.50

-

-

-

-

Profit before tax

-

1.17

15.64

32.44

47.87

48.32

48.77

Depreciation

-

9.96

9.96

9.96

9.96

9.96

9.96

Total inflow

119.22

15.63

27.10

43.90

59.33

58.28

58.73

-

-

-

-

-

-

-

-

49.22 48.67 9.96

9.96

59.18 58.63

Outflow Capital expenditure

113.71

-

Working capital

-

10.00

13.33

16.67

20.00

-

-

Term loan repayment

-

-

12.39

10.00

10.00

10.00

10.00

Tax

-

0.07

0.90

1.87

2.75

2.78

2.80

Dividend

-

-

4.02

5.36

5.36

5.36

Total outflow Net inflow

-

10.00 10.00 2.83

2.80

5.36

5.36

5.36

113.71

10.07

30.64

33.90

38.11

18.14

18.16

18.19

8.16

5.51

5.56

(3.54)

10.00

21.22

40.14

40.57

40.99

-

Risk and Sensitivity Analysis of an Enterprise This analysis is the means to study business risk. Each level has a break-even point. The higher the break-even in terms of capacity utilisation, the greater the degree of risk. Break-even for Priya Foods is about 27.7%. 88

Chapter Ten

chp-10.qxd

10/18/05

9:31 AM

Page 89

At break-even level of capacity utilisation, surplus or contribution or income minus total variable expenses equals to total fixed costs. The break-even analysis thus implies risk analysis indicating the extent of possibility to reduce expenses. Limited ability to do so implies a high break-even and risk level. Through sensitivity analysis, it is possible to study the impact of changes in the assumptions on enterprise performance and viability. The impact of adverse changes in a few variables may be studied. The risk is low if viability sustains despite significant changes in variables. In contrast, if a negligible fall in selling price reduces DSCR to an unacceptable level, it means a heavy risk. A sensitivity analysis for Priya Foods is presented below. Table 10.6 considers a 10% possible fall in capacity utilisation. Table 10.6 Sensitivity Analysis: (Priya Foods, Chennai) 10 per cent fall in capacity utilisation throughout projected period 1. Drop in Profit Before Tax Rs.95.36 lakh 2. Drop in Profit After Tax 3. Profit After Tax over 8 years

Rs.89–99 lakh Rs.185.42 lakh

4. Return on Investment (after tax) 24.66% 20 per cent rise in raw material cost throughout the projected period 1. Drop in Profit Before Tax Rs.90.80 lakh 2. Drop in Profit After Tax 3. Profit After Tax over 8 years 4. Return on Investment (after tax)

Rs.85.58 lakh Rs.188.72 lakh 25%

A sensitivity analysis helps isolate variables critically determining the extent of profits.

The Financials of a Project Report

89

chp-10.qxd

10/18/05

9:31 AM

Page 90

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

Amount (Rs. in lakh) 119.21

Means of finance Promoter’s equity

26.82

Term-loan

62.39

Investment subsidy

30.00

Capacity utilisation 1st year

30%

2nd year

40%

3rd year

50%

4th year onwards

60%

Average turnover (Rs.)

145.18

Debt service coverage ratio

3.21

Turnover capital ratio

1.22

Profit before tax to turnover ratio Cash balance at the end of 8 years (Rs.) Break-even point

0.257 168.60 27.76%

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

A CASE ON DEVELOPING THE FINANCIAL SCHEME OF A PROJECT REPORT OR BUSINESS PLAN An entrepreneur plans to establish a minipulse processing unit. Advanced ‘Durham’ quality pulse is to be processed. The enterprise, to be established in an industrial estate in Guwahati, is to have an installed capacity of 24,000kg per annum working in double shifts (16 hours) for 310 days a year. It is to operate at 60% of installed capacity in the first year, 70% the second year and 80% in future years. The project expense of land cost, site development and 90

Chapter Ten

chp-10.qxd

10/18/05

9:31 AM

Page 91

fencing is Rs.17,000. One thousand and fifty kg of whole pulse yields 1,000 kg of processed dal. The price of whole-pulse is Rs.62 a kg. It is considered sufficient to carry raw material and finished goods stock for 30 days. The production cycle time is two days. The cost of constructing buildings, including warehouse, office and factory is Rs.2 lakh, while that of stores, consumables and packing is estimated at Rs.2 per kg of output. The stocking period of these items is believed to be the same as that of raw material. The cost of machinery and equipment is Rs.4.6 lakh and includes excise duty. Besides, sales tax and freight, insurance and octroi are estimated at 5%, each, of post-excise duty of machinery. Machinery and equipment related installation expenses are around Rs.30,000. The average finished goods inventory is estimated at one month and 50 per cent of total sale is expected to be on credit basis, while balance will be cash sales. The credit sale will carry credit at an average of 30 days. Rs.4,000 is required as expense on office furniture, while other such miscellaneous assets are likely to cost Rs.6,000 more. A provision of 10% each, against possible price escalation/contingencies in fixed/miscellaneous assets can be made. The term lender is expected to offer loan up to 75% of project cost. The State Bank of India, the potential working capital provider, gives assistance up to 75% for goods in process and finished goods. The bank supports up to 70% for raw material, stores, packing material and 60% of value of sundry debtors or accounts receivables. The rate of interest on working capital is 17%. Salary and wages are estimated at Rs.7,000 a month, while administrative expenses at Rs.3,000. The power consumption will be 15 units a day. The subsidised power tariff is Rs 3 per unit. The selling commission to be paid is Rs.2.50 per kg of output. Repairs and maintenance are likely to touch Rs.30,000 per annum for the first year and rise by Rs.2,000 thereafter. Construction period of factory is 6 months from sanction of term loan. Term loan interest is 12%. First registration and other preliminary expenses are put at Rs.4,000. Rs.1,000 will be needed in trial production. The selling price of dal is Rs.110 a kg. The income tax rates for taxable profit is in the range of Rs.0.75 to Rs.1.0 lakh, Rs.1.00 to Rs.1.25 lakh, Rs.1.25 lakh to Rs.1.75 lakh is 10%, 13% and 15% respectively. To estimate the financial viability of the project, various statements are needed: project cost, working capital, means of finance, capacity utilisation and income projections, expenditure projections, profit and tax projections, The Financials of a Project Report

91

chp-10.qxd

10/18/05

9:31 AM

Page 92

debt service coverage, profitability indicators, cash flow projections and break-even levels. The sub-sections below present relevant statements. The values have been rounded off for easy comprehension.

Project Cost Table 10.7 Project Cost Estimates (Approximate Estimates) (Rs. in '000) (I)

Land and Fencing

17

(II) Building

200

(III) Machinery and Equipment (M & E) * Price inclusive of duty

460

* Sales-tax @5%

23

* Freight, Insurance, Octroi @ 5%

23

* M & E installation related expenditure

30 536

Miscellaneous (IV) Assets (total)

10

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

76

(VI)

5

Preliminary & Pre-operative Expenses * Firm-registration and—trial-production * Interest during project implementation period (construction and installation of machinery)

(VII) Working Capital Margin

92

18 91

Chapter Ten

chp-10.qxd

10/18/05

9:31 AM

Page 93

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

Table 10.8 Interest During Period of Implementation Item Particulars No.

Cost Rs.

(I) Land and Site Development

17,000

Building

2,00,000

Plant & Machinery

5,36,000

Miscellaneous Assets

10,000

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

5,000

Escalation and Contingency

76,000

Total of (1) above

8,44,000

(II) Term loan @ 70% of (I) (Rounded off) (III) Implementation Period

5,91,000 6 months from sanction of term loan

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

The Financials of a Project Report

18,000

93

chp-10.qxd

10/18/05

9:31 AM

Page 94

Table 10.9 Working Capital—Estimation i

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

ii

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

iii

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

iv

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

v

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

*

Goods in Process:

a)

Manufacturing Cycle: 2 days

b)

Quantity under manufacturing cycle 14400 × 2 300

c)

= 96 kgs

Direct cost of 14,400 kgs. of output

Raw Material (15120 × 62)

9,37,440

Stores, Consumables, Packing (14400 × 2)

28,800

Wages (Rs.7000 per month × 12)

84,000

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

13,500 10,63,740

d)

Direct cost of one kg. of output:

Rs. 73.87

e)

Direct cost of goods in process (96 Kgs.):

Rs. 7,092

*

Finished goods: i)

Desirable carrying level: One month (1200 kgs)

ii)

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

iii)

Other Indirect Cost (one month) Administration:

94

Chapter Ten

Rs. 3,000

chp-10.qxd

10/18/05

9:31 AM

Page 95

Selling Expenses:

Rs. 6,000

Interest on Term Loan (Adhoc)

Rs. 6,000

Interest on Working Capital Loan (Adhoc)

Rs. 3,000 Rs. 18,000

iv)

*

Total (direct + indirect) cost of 1200 kgs of output excluding depreciation

Rs. 1,07,000

Account Receivables: i)

Cost of a month's sale

Rs. 1,07,000

ii)

The cost of credit sales (50 per cent)

Rs.

54,000

*

Wages and Salary (one month)

Rs.

7,000

*

Electricity (one month approximated)

Rs.

1,000

Rs.

9,000

*

Administrative, Selling Expenses, Repairs and Maintenance

Gross Working Capital Requirement (approximately) Component

Rs.

Raw Materials

78,000

Store, Consumables & Packing Materials

2,000

Goods in Process

7,000

Finished Goods

1,07,000

Account Receivables

54,000

Wages and Salary

7,000

Electricity

1,000

Administrative and Selling Expenses, Repairs and maintenance Total

The Financials of a Project Report

9,000 2,65,000

95

chp-10.qxd

10/18/05

9:31 AM

Page 96

The working capital requirement and margin that may have to be contributed by promoters is in Table 10.10 below: Table 10.10 Working Capital—Contributors (Amount in Rs.) Sr. No.

Requirement

Quantity

1

Raw material (@ Rs. 62 per Kg.)

1260 kgs

78000

70%

54600

23400

2

Store, Consumables and Packing Materials

—

2000

70%

1400

600

3

Goods in Process

2 days

7000

75%

5250

1750

4

Finished Goods

1200

107000

75%

80250

26750

5

Account Receivables

600 kgs

54000

60%

32400

21600

6

Other Expenses (Wages 7000, Power 1000, Admn. 3000, Selling 3000, Repair & Maintenance 3000)

1 month

17000

None

None

17000

174000

91000

Approximate Total

Total

Norm for Amount of Promoter's Bank Bank Contribution Assistance Assistance (Margin)

265000

The project cost is summarised in the following Table 10.11: Table 10.11 Project Cost (Rs. in ’000)

Land and Fencing Building

17 200

Machinery and Equipment

536

Miscellaneous Assets

10

P & P Expenses

23

Escalation & Contingency

76

Working Capital Margin

91

Total

96

953

Chapter Ten

chp-10.qxd

10/18/05

9:31 AM

Page 97

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

Capacity Utilisation and Income Estimate A capacity utilisation and income estimate statement is in Table 10.12 below: Table 10.12 Capacity Utilisation and Income Estimate Installed capacity is 24000 kgs / year. Capacity utilisation and output estimates in this circumstance are: Year

1

2

3

4

5

6

7

8

I

Capacity Utilisation

60%

70%

80%

80%

80%

80%

80%

80%

II

Output

14400

16800

19200

19200

19200

19200

19200

19200

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

(Rs in ‘000)

I

Year

1

2

3

4

5

6

7

8

II

Income

1584

1848

2112

2112

2112

2112

2112

2112

Expenditure Estimates The expenses, raw materials, power, fuel and utilities, stores, consumables and packing material are considered proportional to production levels. The expenses also include salary and wages. The term lender offers a moratorium period of 2 years when interest payments alone have to be made. The estimates the promoter needs to incorporate in the case of depreciation is given below. It is necessary to consult an updated tax manual to incorporate prevailing rates. The Financials of a Project Report

97

chp-10.qxd

10/18/05

9:31 AM

Page 98

Table 10.13 Depreciation Rate (Indicative) Assets Buildings

1

WDV Rate 10%

Sl. Rate 2.3%

2.

Machinery and Equipment

33.33%

8.33%

3

Miscellaneous Assets

10%

2.3%

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

Table 10.14 Allocation of Contingency And Escalation To Various Depreciable Assets (Rs. in ‘000)

Item

Value

Allocation

Building

200

20

Machinery and Equipment

536

54

590

10

1

11

Miscellaneous Assets

98

Chapter Ten

Value of assets for depreciation purposes 220

chp-10.qxd

10/18/05

9:31 AM

Page 99

Calculation of Depreciation [WDV] (Rs. in ‘000) Item

Value

Rate [%]

Year wise Depreciation

1 Building

Machinery

Equipment

Miscellaneous Assets

220

550

40

11

10.00%

33.33%

100.00%

10.00%

2

3

4

5

6

7

8

Dp. Val 220

198

178

160

144

130

117

105

Depn

22

20

18

16

14

13

14

11

W.D.V.

198

178

160

144

130

117

105

95

Dp. Val 550

367

245

163

109

73

49

38

Depn

183

122

82

54

36

24

16

11

W.D.V.

367

245

163

109

73

49

38

22

Dp. Val 39.6

-

-

-

-

-

-

Depn

39.6

-

-

-

-

-

-

W.D.V.

0

-

-

-

-

-

-

Dp. Val 11

10

9

8

7

6

5

4

Depn

1

1

1

1

1

1

1

0

W.D.V.

10

9

8

7

6

5

4

3

The income and the expenditure statements help get a statement of profit before tax. To compute tax obligations, depreciation levels also need to be estimated. Depreciation rules may change with time. Section 32 of the Income Tax Act lays down income tax rates. Under the SL method, depreciation rate is applied to the asset’s annual acquisition value every year. Under WDV, it is computed on the written down value or an asset’s balance value. Further, 8.33% SL method rate and 33.33% WDV rate is almost the same, as both reduce the asset value to almost nil in 12 years. While preparing income, expenditure and profit statement, the SL method is used. Under this, the annual depreciation value remains constant and hence it is possible to judge the impact of annual improvement in capacity utilisation on profit. To compute taxable profit, it is necessary to use WDV. The Financials of a Project Report

99

chp-10.qxd

10/18/05

9:31 AM

Page 100

Profit is income less direct and indirect expenses during production. Depreciation is an amortised expense and written off. Other expenses have also to be deducted to assess profit before tax. Fixed assets entail depreciation. P&P expense requires amortisation. This is for preliminary and not pre-operative expenses like on establishment and interest during construction, which can be added to fixed asset value and then depreciation computed. For business plan purposes, P&P expenses may be amortised or deducted from profit in 10 equal annual instalments as amortisable. All preliminary and prospective expenses, including interest during construction, are amortised at 10% p.a. in this project. The term loan repayment is made over the year. Repayment is not made in the beginning of the year. Therefore, half repayment amount is deducted from the outstanding term loan at the beginning of the year and the interest is computed on the balance amount. Table 10.15 The Solution Interest Burden And Loan Repayment Term Loan Working Capital loan (First Year)

: :

715 174

I. Interest on Term Loan

(Rs. in ‘000)

Year

1

2

3

4

5

6

7

8

Outstanding Term Loan

715

715

650

520

390

260

130

Nil

Term Loan Repayment During the Year

-

65

130

130

130

130

130

Nil

Interest @ 12% p.a.

86

82

70

55

39

23

8

Nil

II. Interest on Working Capital Loan Year

1

2

3

4

5

6

7

8

Working Capital Loan

174

203

232

232

232

232

232

232

30

35

39

39

39

39

39

39

Interest @ 17%p.a.

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

1

2

3

4

5

6

7

8

Total Interest Payment

116

117

109

94

78

62

47

39

100

Chapter Ten

chp-10.qxd

10/18/05

9:31 AM

Page 101

Table 10.16 Expenditure Statement: The Solution (Rs. in ‘000) YEAR/ EXPENDITURE

Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

Year 7

Year 8

Raw Material

987.4

1093.7

1249.9

1249.9

1249.9

1249.9

1249.9 1249.9

Stores, Consumables & 28.8 Packing Materials

33.6

38.4

38.4

38.4

38.4

38.4

38.4

Power

162

189

216

216

216

216

216

216

Wages and Salaries

84

96

108

116

124

132

140

146

Repairs and Maintenance

30

32

34

36

38

40

42

44

Rent, Taxes & Insurance

12

13

14

15

16

17

18

19

Dt. Admn. Expenses

24

26

28

30

32

34

36

38

Selling Exp.

36

42

48

48

48

48

48

48

Interest on Term Loan

86

82

70

55

39

23

0

0

Interest on Working Capital

30

35

39

39

39

39

39

39

Depreciation

92

52

52

52

52

52

52

52

P&P Amortisation

2

2

2

2

2

2

2

2

Total (approximate)

1524

1696

1899

1897

1894

1891

1889

1894

Tax Computation for the Project Tax computation for the project is shown in the following table: Table 10.17 Tax Computation (Illustrative) (Rs. in ‘000) YEAR

1

2

3

4

5

6

7

8

Profit before tax

60

152

213

215

218

221

223

218

Excess of WDV over SL

(154)

(91)

(49)

(19)

-

(14)

(23)

(30)

Depreciation carry forward loan

(94)

(94)

(33)

-

-

-

-

-

80 HHA Deduction

-

-

(26)

(39)

(44)

(47)

(49)

(50)

80 I Deduction

-

-

(21)

(31)

(35)

(38)

(39)

(40)

Taxable Profit

(94)

(33)

(84)

(126)

(139)

(150)

(158)

Tax

-

-

(8)

(19)

(23)

(23)

(25)

(25)

Profit After Tax

60

152

205

196

197

198

198

193

The Financials of a Project Report

(158)

101

chp-10.qxd

10/18/05

9:31 AM

Page 102

Table 10.18 The Solution: Profit Statement (Rs. in ‘000) YEAR

1

2

3

4

5

6

7

Income

1584

Expenditure

1848

2112

2112

2112

2112

2112

2112

1524

1696

1899

1897

1894

1891

1889

1894

---

Profit before Tax

60

152

213

215

218

221

223

218

1520

Tax

-

-

(8)

(19)

(23)

(23)

(25)

(25)

---

Profit after Tax

60

152

205

196

197

198

198

193

---

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

54

54

54

54

54

54

54

Cash Profit

206

259

250

251

252

252

247

154

8

Total 16104

--

---

Debt Service Coverage Ratio The single most important parameter is an enterprise’s ability to repay termloan in terms of principal and interest. A financial ratio, which measures enterprise capacity to meet term-loan-cum-interest and other long-term commitments/obligations, is called Debt Service Coverage Ratio (DSCR). The term lender prefers a project in which even if there is some slide back in projected performance, it will generate enough cash surplus to meet the dues. A DSCR of 1.7 may be considered as minimum. Table 10.19 The Solution: Debt Service Coverage Ratio (Rs. in lakh) YEAR i. Cash Accrual

1

2

3

4

5

6

7

8

Total

154

206

259

250

251

252

252

247

1624

86

82

70

55

39

23

8

-

363

–

715

ii. Interest on Termloan (pre-tax) iii. Term-loan Repayment (post tax)

–

65

130

130

130

130

130

iv Debt-service Coverage Ratio (i+ii/ii+iii)

2.79

1.96

1.60 1.66

1.72

1.80

1.88 1.83 -

v Average Ratio Need be Estimated

102

Chapter Ten

chp-10.qxd

10/18/05

9:31 AM

Page 103

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

Profitability Indicators Table 10.20 Profitability Ratios For The Project

YEAR

2

3

4

5

6

7

8

Total

1.66

1.94

2.22

2.22

2.22

2.22

2.22

2.22

2.11

Profit Before 0.44 Tax to Turnover

0.08

0.19

0.10

0.19

0.19

0.19

0.10

0.09

Turnover Capital Ratio

1

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

The Financials of a Project Report

103

chp-10.qxd

10/18/05

9:31 AM

Page 104

Risk or Break-even Analysis The projected cash-flow statement and break-even analysis for the project is presented below. Table 10.21 Projected Cash Flow Statement (Rs. in ‘000) Details

Constn.

1

2

3

4

5

6

7

8 9

CASH INFLOW Prom. Cap.

238

-

-

-

-

-

-

-

-

238

Term Loan

715

-

-

-

-

-

-

-

-

715

Working Cap.

-

174

Prof. B.T.

-

60

152

213

215

218

221

223

218 -

Depreciation

-

92

52

52

52

52

52

52

52 -

P&P Amortn.

-

2

2

2

2

2

2

2

2

-

Other

-

-

-

-

-

-

-

-

-

-

953

328

206

267

269

272

275

277

-

265

-

-

-

-

-

-

-

-

862

-

-

-

-

-

-

-

-

-

Tax

-

-

-

8

19

21

23

25

25

-

Repmt. of TL

-

-

65

130

130

130

130

130

130 -

Total

272

CASH OUTFLOW Increase in Working Cap. Cap. Exp.

Dividends Total

862

0

65

138

149

151

153

155

25 -

Surplus/Deficit

91

63

141

129

120

121

122

122

247 -

Cum. Surplus

91

154

249

424

544

665

787

909

104

Chapter Ten

1156

-

chp-10.qxd

10/18/05

9:31 AM

Page 105

Table 10.22 The Break-even Analysis I.

Variable Cost per Unit (kg) of Output

(Rs.)

Raw Material Consumption

65.10

Stores, Consumables and Packing Materials Power

11.25

Wages and Salary (50% of total annual bill)

2.92

Selling Expense

2.50

Interest on Working Capital

2.08

Total II.

2

Fixed Cost

85.85 (Rs.)

Wages and Salary (50% of total annual bill)

42,000

Repairs and Maintenance

30,000

Rent, Taxes and Insurance

12,000

Other Administrative Expenses

24,000

Interest on Term Loan

86,000

Depreciation

92,000

P&P Amortisation

2,000

Total

2,88,000

III.

Selling Price per Unit (kg) of Output

Rs. 110

IV.

Contribution per Unit (kg) of Output

Rs. 24.15

(Selling price less variable cost) V.

Break-even Point (Unit of Output) Fixed Cost (Rs.) Contribution per Unit of Output

2,88,000 (Rs.) 24.15 (or)11590 Units (kg)

VI.

Break-even Point (Capacity)

The Financials of a Project Report

11,590 kgs. (48.3%)

105

chp-10.qxd

10/18/05

9:31 AM

Page 106

Table 10.23 The Sensitivity Analysis (Rs. in ‘000)

Possibility No.1: Drop of 5% in selling price with costs remaining unchanged (i) Income under basic plan (8 years)

16104

(ii) Revised income estimate (8 years)

15299

(iii) Revised profit before tax

715

(iv) Revised tax burden (ad hoc)

45

(v) Revised profit after tax

670

(vi) Revised cash profit

1142

(vii) Revised debt service coverage ratio (same loan repayment schedule) 1142 + 363

1.4

1505 =

715 + 363

1078

Possibility No. 2: Capacity-utilisation levelling off at 70% (i) Income under basic plan (8 years)

16104

(ii) Revised income estimate (8 years)

14520

(iii) Revised expenditure estimate (8 years)

13454

(iv) Revised profit before tax

1066

(v) Tax burden

70

(vi) Revised profit after tax

996

(vii) Revised profit after tax

1468

(viii) Revised debt service coverage ratio 1462 + 363

1.7

1825 =

715 + 363

1078

The financial viabilities of the project therefore indicate that the project is viable. However, a five per cent drop in selling price rendered the project unviable. 106

Chapter Ten

chp-10.qxd

10/18/05

9:31 AM

Page 107

Table 10.24 Financial Viability of Project i.

Installed capacity

ii.

Project cost

iii.

Means of Finance

iv.

24000 kgs of yarn per year Rs. 9,53,000

Term Loan

Rs. 7,15,000

Promoters Capital

Rs. 2,38,000

Capacity Utilisation First Year

60%

Second year

70%

Third year and thereafter

80%

v.

Average Annual Turnover

Rs. 20,13,000

vi.

Debt Service Coverage Ratio

1.82

vii.

Turnover Capital Ratio

2.11

viii. Profit before Tax to Turnover Ratio ix.

Cash Balance at the end of 8 years

x.

Break-even Point

xi.

0.09 Rs. 12,58,000 48.3% of Installed Capacity

Sensitivity Analysis Findings (a) 5% drop in selling price

DSCR of 1.4 project unviable

(b) Capacity utilisation levelling off at 70%

DSCR of 1.7 project viable.

BUSINESS PLAN FORMAT FOR TINY AND COTTAGE UNITS 1.0 General Name of the Firm: Project: Location: Type of the Organisation: Proprietary/Partnership Address: Name of the Chief Promoter (s): Birth Date:

The Financials of a Project Report

107

chp-10.qxd

10/18/05

9:31 AM

Page 108

1.1 Educational Qualifications SSC or Below

Degree/ Diploma

Institute

Major Subject

Year of Passing

1.2 Special Training Training in

Institute

Duration

Achievement/Remark

1.3 Work Experience (Past and Present) Organisation

1.4

Position

Nature of Work

Duration

i. Promoter's Annual Income: Rs.______________(Last year) ii. Assets owned by the promoter(s): Movable

Rs.-----------

Immovable

Rs.-----------

2.0 Details of the Proposed Project: Manufacturing 2.1 Land and Building Sr. No.

Particulars

1. 2.

Land Building

Area Required

Total Value

Total

108

Chapter Ten

Remarks

chp-10.qxd

10/18/05

9:31 AM

Page 109

2.2 Machinery/Equipments Sr. No.

Description

Nos. Required

Rate (Rs.)

Total Value (Rs.)

Total 2.3 Misc. Fixed Assets Sr. No.

Particulars

Nos. Required

Rate (Rs.)

Total Value (Rs.)

Total 2.4 Preliminary and Pre-Operative Expenses Sr. No. Particulars

Amount (Rs.) Remarks

1.

Interest during Implementation

2.

Establishment Expenses

3.

Start-up Expenses

4.

Misc. Expenses Total

2.5 The Working Capital Sr. No. Item

Duration

Total Value (Rs.) Year-I

1.

Raw-material Stock

2.

Semi-finished Goods Stock

3.

Finished Goods Stock

4.

Sales on Credit

5.

Production Expenses

Year-II

Year-III

Total

The Financials of a Project Report

109

chp-10.qxd

10/18/05

9:31 AM

Page 110

2.6 Total Cost of the Project Sr. No. Particulars

Total Value (Rs.)

1.

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

2.

Working Capital (Total of item no. 2.5)

3.

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

2.7 Means of Finance Sr. No. Particulars 1. Own Investment

Amount (Rs.)

2.

Term Loan

3.

Working Capital Loan

4.

Any Other Source

Remarks

Total

3.0 Market Potential 3.1 Present demand and supply of the product 3.2 Competition 3.3 Target clients/selected market area 3.4 Marketing strategy (USP) 4.0 Manufacturing Process a) Technical know-how availability b) Step-by-step description of the manufacturing process (R.M-F.G) c) Attach process flow chart (if required) 5.0 Production Programme

110

i) No. of working days per annum

-

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

-

Chapter Ten

chp-10.qxd

10/18/05

9:31 AM

Page 111

iii) Installed capacity (annual)

-

iv) Utilised capacity (%):

-

Year - I

-

Year - II

-

Year - III

-

Sr. No. Items

Quantity Produced Per Year Capacity Utilisation (%)

5.1 Sales Revenue Year

Items

Quantity Sold Per Year

Rate Per Unit (Rs.)

Sales Realisation (Rs.)

Total 5.2 Raw Material (Annual Requirement) Sr. No. Items

Quantity

Rate (Rs.)

Total Value (Rs.)

Total 5.3 Utilities Sr. No. Particulars 1. Power/Electricity 2.

Water

3.

Coal/Oil/Steam

4.

Any Other Item

Annual Expenditure (in Rs.)

Remarks

Total

The Financials of a Project Report

111

chp-10.qxd

10/18/05

9:31 AM

Page 112

5.4 Man Power (Salary/Wages) Sr. No. Particulars 1.

Skilled

2.

Semi-skilled

3.

Unskilled

4.

Office Staff

5.

Any Other

No.

Wages/Salary per Month (Rs.)

Annual Expenses (Rs.)

Total 5.5 Repairs and Maintenance Sr. No.

Particulars

Amount (Rs.) Total

5.6 Selling and Distribution Expenses Sr. No. Particulars

Amount (Rs.)

1.

Publicity Expenses

2.

Travelling

3.

Freight

4.

Commision

5.

Misc.

Remarks

Total 5.7 Administrative Expenses Sr. No. Particulars

Amount (Rs.)

1.

Stationery & Printing

2.

Post/Telephone/Telegrams

3.

Entertainment Expenses

4.

Misc. Total

112

Chapter Ten

Remarks

chp-10.qxd

10/18/05

9:31 AM

Page 113

5.8 Interest Year Outstanding Loan Amount (Rs.)

Interest (Rs.)

Instalment (Rs.)

Balance (Rs.)

5.9 Depreciation Sr. No. Type of Asset

Cost of Asset

Expected Life Depreciation

6.0 Profitability Projections Sr. No.

Particulars

Amount (Rs.) Year-I

A. B. i) ii) iii) iv) v) vi) vii) viii) ix)

Year-II Year-III Year-IV Year-V

Sales Realisation Cost of Production Raw Materials Utilities Salary/Wages Repairs & Maintenance Selling & Distribution Expenses Administrative Expenses Interest Rent Misc. Expenses Total

C. D. E. F. G. H.

Less: Depreciation Gross Profit/Loss (A–B) Income-tax Net Profit/Loss Repayment Retained Surplus

Debt Service Coverage Ratio* Break-even Level of Activity* Return on Investment* Larger projects require projected financial statements like projected Profit and Loss Accounts and Balance Sheets.* * These concepts are covered in the next Chapter.

The Financials of a Project Report

113

chp-11.qxd

10/18/05

12:36 PM

Page 115

11

CHAPTER

Assessing Financial Viability of the Project

C

ertain tools help us assess the financial viability of any project where investment is contemplated. We will discuss some tools in brief.

Tools that determine the adequacy of the surplus:

RETURN

ON INVESTMENT

(ROI)

What is Return? As we know, a project collects funds from two sources for long-term investment. The amount collected is used to create assets and operation, which generates surplus for the enterprise. Surplus is required to be distributed to the contributors of the funds. Interest is the compensation given to contributors of borrowed capital, and net profit and depreciation are given to contributors of own capital. Why should one add depreciation here? Though depreciation reduces profit, it is a non-cash provision made to recover the original investment. Thus, the cash profit of the enterprise is increased to the extent of depreciation. The total surplus generated by the project over its entire life has to be averaged to find out yearly return. This yearly return, when calculated on the total investment needed for the project, tells us about the Return on Investment. Simply speaking, this ratio tells us the surplus-generating capacity of the investment. One must know how much RoI a viable project must generate. This is an important question that needs to be answered to know the financial viability. The simple rule to assess the viability is that the RoI must be greater than the cost of investment.

chp-11.qxd

10/18/05

12:36 PM

Page 116

First look at the investment cost. Investment comprises two major components: i. Borrowed Capital (Normally taken as loans from banks and financial institutions) ii. Own Capital (Normally contributed by entrepreneurs) It is simple to calculate the cost of borrowed capital. Any borrower is required to commit the fixed service charge, i.e. interest at the time of sanctioning loan. Thus, the interest becomes the cost of borrowed capital. Interest is tax-allowed expense and, therefore, its effective weight is reduced by the actual rate of tax paid by the borrower. The entrepreneurs may have more than one investment alternative and under such conditions, the opportunity cost becomes the cost of entrepreneur’s capital.

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

DEBT SERVICE COVERAGE RATIO (DSCR) Running an enterprise with financial support from banks/financial institutions, requires their loans to be repaid with interest. Therefore, an entrepreneur must generate surplus, adequate to meet repayment obligations. The DSCR is a tool used to determine this. Its formula is: Net profit + Interest (on long term loans) + Depreciation Interest (on long term loans) + Principal Loan

Acceptance Rule A project is considered financially viable if the cumulative DSCR during repayment period is at least 2:1

BREAK-EVEN POINT (BEP) This is another important tool. The break-even point is the level of activity where the total contribution is equal to the total fixed cost. Contribution is the excess of sales over variable cost, i.e.; 116

Chapter Eleven

chp-11.qxd

10/18/05

12:36 PM

Page 117

Contribution = Sales – Variable Cost Contribution is a type of surplus that the business generates after paying fully the variable cost from the sales revenue. The break-even point is the point of activity where all costs (variable as well as fixed) are recovered from the sales values. The business, therefore, does not make profit or loss. For any activity below break-even, the business will incur loss, while it makes profit when activity is above it. So, when the business fully pays for the total fixed cost from contribution, the unit can be said to have achieved the BEP. When contribution fully pays for fixed cost, the business is said to have achieved break-even. Several formulae have been evolved to calculate break-even: 1.

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

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

Acceptance Rule The BEP indicates the risk involved in a project. Normally, enterprises achieving break-even sales level at a higher capacity utilisation, are considered to be more risky, while those achieving it at a lower level of capacity utilisation are safer. The thumb rule is lowering the break-even betters the proposition.

DEBT-EQUITY RATIO This ratio indicates the extent to which the promoter’s funds are leveraged to procure loans. The formula of DER is:

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

Assessing Financial Viability of the Project

117

chp-11.qxd

10/18/05

12:36 PM

Page 118

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

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

118

Chapter Eleven

chp-12.qxd

10/18/05

12:45 PM

Page 119

CHAPTER

12

Bookkeeping and Accounting and Financial Statements

A

ny business activity, be it manufacturing, servicing or trading, involves monetary transactions. At the end, if the total money received is more than the total money spent, the business is said to have generated a ‘surplus’ or `profit'. If it is otherwise, the business is said have been in ‘deficit' or `loss'. Every business intends to generate a surplus or profit. Therefore, the promoter(s) is/are always interested in knowing the outcome of the economic activity. Several transactions take place in the course of business. To remember all of them is almost impossible. A business therefore, needs to record all such transactions to find out the outcome of the business activity. A methodical and systematic science has been developed which helps the promoter record all economic transactions properly and know the outcome of the business dealings. This science is called "Financial Accounting." Accounting is a name given to the system which measures, records, analyses and reports the effect of business transactions and events taking place in a business enterprise. Since such reporting is in financial units, the system is also known as financial accounting. It has been defined as the art and science of recording business transactions in a methodical manner so as to show (a) the true state of affairs of a business at a particular time, and (b) the surplus or deficiency, which has accrued during a specified period. Thus Financial Accounting involves (a) data recording and (b) data presenting technique used for recording various transactions. This is called ‘Bookkeeping’. The data recorded is summarised and systematically arranged and presented to various users in the form of Financial Statements.

chp-12.qxd

10/18/05

12:45 PM

Page 120

WHAT

IS

BOOKKEEPING?

‘Bookkeeping’ is one of the functions of financial accounting. Bookkeeping entails maintaining proper records and books for recording complete details of transactions made during the course of business. Business transactions can be classified into several major activities/groups e.g. sales, purchases, assets, etc. Separate books for recording transactions pertaining to these activities are maintained, registering in them the details of respective transaction. This exercise is called Bookkeeping.

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

z

z

They provide up-to-date information about the business. They reflect the outcome of transactions made during the period under review. They give information about the state of affairs of the business at regular intervals. They help governments and other authorities to decide about the incidence of various taxes.

z

They help analyse the performance of the business.

z

They help compare the performance of several business firms.

The accounting information of business is required not only by the owner of the business but by various other parties too. They are the government, suppliers, creditors, bankers, investors, shareholders, auditors, etc. They depend on the information prepared by financial accounting for taking various decisions pertaining to their activities. This emphasises the need for writing books of accounts in a systematic and methodical way. Though, as an owner of the business one has the prime responsibility to write and maintain the 120

Chapter Twelve

chp-12.qxd

10/18/05

12:45 PM

Page 121

books of accounts, one is not free to write the accounts, the way one likes. They have to be written as per the norms and principles of techniques and systems of accounting used the world over. There are a few accounting techniques available for writing accounts but the Double Entry Bookkeeping System has universal acceptability and credibility. It is the modern and scientific accounting system designed to reflect the true and fair position of the business.

DOUBLE ENTRY BOOKKEEPING The concept of the Double Entry Bookkeeping System is based on the principle that every economic transaction has two effects, which are exactly opposite to each other. Any transaction can have only two effects: ‘debit’ and `credit', and they are always equal. As a result, at the end of the accounting period, the accounts should ‘tally’, meaning thereby that both ‘total debits’ and ‘total credits’ should tally with each other. Double entry bookkeeping is designed in such a way that, while entering the credit entry of a particular transaction, the details of the corresponding debit entry is also given.

Writing Accounts Under Double Entry Bookkeeping Transactions In business, the promoter does several transactions. The effect of these transactions on the business is recorded in the books of accounts. Only those transactions, which result in exchange of money or exchange of goods or services, whose value can be measured in monetary terms, need accounting treatment. Transactions may be of the following nature: a. Exchange of goods against cash/credit b. Exchange of services against cash/credit c. Exchange of assets against cash/credit d. Payment of cash to creditors e. Receipt of cash from debtors f. Exchange of goods against assets g. Exchange of goods against services

Bookkeeping and Accounting and Financial Statements

121

chp-12.qxd

10/18/05

12:45 PM

Page 122

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

Accounts Transactions involve ‘accounts’. Each transaction has to be done through an ‘account’. There are total three types of accounts: i. Personal Account or Individual account: This group of accounts includes all accounts of individuals and organisations like a firm, a corporate entity, a society, etc. ii. Assets Account: This group of accounts covers all types of assets. Assets mean all those investments made in tangible or intangible form of assets, which have utility value or use value. Moreover, these assets can also be disinvested and converted into cash. iii. Income-Expenditure Account: This group of accounts encompasses all accounts, which represent revenue income and revenue expenditure of the business.

Rules of Debit and Credit In the Double Entry Book-Keeping System, each transaction has two effects. One is called ‘Debit’ and the other is called ‘Credit’. Thus each transaction has minimum one debit effect and minimum one corresponding credit effect. There are prescribed rules for debiting and crediting various accounts, which are classified under three major groups as mentioned above. These rules form the basis of accounting under Double Entry Bookkeeping System. Below given are these rules: (i) Rule for ‘Personal Accounts’: "Debit the Receiver and Credit the Giver". Explanation: Any person involved in a transaction can either be a receiver of cash, asset or services, or be a giver of cash, asset or services, without any immediate consideration. The account of the person who receives is debited, while the account of the person who gives is credited. (ii) Rule for ‘Assets Accounts’: "Debit what comes in and Credit what goes out." Explanation: In business, goods and assets come and go. Whenever assets or goods come in the business its respective account is debited, while in the case 122

Chapter Twelve

chp-12.qxd

10/18/05

12:45 PM

Page 123

of assets or goods going out of the business as a result of a transaction, its respective account is credited. (iii) Rule for ‘Income-Expenditure Accounts’: "Debit Expenses and Losses and Credit Incomes and Gains" Explanation: This group of accounts covers all revenue income and expenditure accounts. All those revenue incomes that are generated during the course of the business are credited in their respective accounts and all such revenue expenditures incurred during the course of the business are debited in their respective accounts. Steps for Identifying Debit or Credit Effect i. Decide whether the transaction needs accounting treatment. ii. Determine which are the two accounts involved in the transaction. iii. Apply the rules of debit and credit for the identified accounts as per their classification. iv. It should be seen that there couldn’t be both ‘credits’ and both ‘debits’ in a single transaction. Every transaction must have a debit and a corresponding credit.

The Journal Entry A journal entry is the first noting in the books of accounts whereby debit and credit effects of each transaction on accounts are identified and noted along with proper description. Journal entries help in preparing several books of accounts. A suggestive format for maintaining a journal and writing journal entries is shown below: Journal entries in the book of M/s. ................. Particulars Ledger Debit Credit Folio No. (Amount) (Amount)

Date

Explanation: i. Date: The journal entries must be written date-wise in a chronological sequence. It is ideal to make entries of the transactions daily. The year, month and date of the transaction for which journal entry is made should be mentioned in the ‘Date’ column. Bookkeeping and Accounting and Financial Statements

123

chp-12.qxd

10/18/05

12:45 PM

Page 124

ii. Particulars: In this column, for each transaction, the account to be debited and the account to be credited is mentioned. The account, which is to be debited, is written first followed by the account to be credited. A word ‘To’ precedes the name of account, which is credited. E.g. “Bank Account debited to Sales Account” Subsequent to debiting and crediting the appropriate accounts, a brief narration of the transaction, if possible, in one line only is written in the ‘Particulars’ column. iii. Ledger Folio No.: In the third column the folio number of the respective accounts in the ledger is mentioned. This helps trace the posting of each transaction and verify it. iv. Debit and Credit: In this column the amount by which the respective account is debited and credited is mentioned. At the end of every page the total of debits and credits is made and is carried forward to the next page.

Ledger A ledger is a book, which contains details of all accounts in which transactions are made. It contains a condensed and classified record of all business transactions transferred from the journal or subsidiary books. Ledger is the principal book under the double entry bookkeeping system. It contains up-todate information about all accounts, e.g. if an owner wants to know how much he/she owes to Mr. X, he/she can learn this from Mr. X’s account maintained in the Ledger. If such accounts were not maintained in the ledger, the owner would be required to go through each transaction involving Mr. X to find out the payment liability. This exercise is time-consuming and inconvenient. For businesses with a sizeable number of transactions, it is impossible to scan the primary books or journal every time to know the exact position of any account. It is, therefore, very important to maintain a ledger. A suggestive format for maintaining an ‘account’ in the ledger is given below: Debit Side Date

124

Account (Name of the Account)

Particulars

Folio No.

Amount Date

Particulars

Chapter Twelve

Credit Side Folio No.

Amount

chp-12.qxd

10/18/05

12:45 PM

Page 125

Explanation: It may be noticed from the format that a ledger account has two sides: debit side (left-hand side) and credit side (right-hand side). Each side is further divided into four sections, viz. ‘Date’, ‘Particulars’, ‘Journal Folio Number’and ‘Amount’. i. Date: In this column, the date of a transaction as entered in the journal book from where the entry is brought to the ledger account, is mentioned. ii. Particulars: In this column the name of the account in which the corresponding credit or debit (under the double entry principle) is found, is mentioned. iii. Journal Folio Number: In this column the page number of the journal book or subsidiary book from where the transaction is brought to the account is mentioned. iv. Amount: In this column the amount, with which the account is debited or credited, is mentioned.

Transactions Transactions are entered, as and when they occur in the journal book or subsidiary books. From there necessary records are created in the ledger. The process of transferring entries from the journal or subsidiary books to the appropriate accounts in the ledger is called ‘posting’. If an account is debited with an amount as entered in the debit column of the journal book, the same is posted to the debit side of the account in the ledger. Similarly, if an account is credited in the journal book, it is posted to the credit side of the account. While posting entries, care should be taken to see that the name of the account in which the entry is posted is not mentioned in the column of particulars. Instead the name of the other account, which is affected under the same transaction, should be mentioned. While posting, each entry to the debit side of an account should begin with the word ‘To’ (in the ‘Particulars’ column) and each entry to the credit side should begin with the word ‘By’.

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

125

chp-12.qxd

10/18/05

12:45 PM

Page 126

of the account. If the total of debit side is greater, then the balance is called ‘debit balance’ and if it is vice versa, it is called ‘credit balance.’ For example: i. Following accounts always have debit balances: a. Cash Account/Bank Account b. Asset’s Account c. Debtor’s Account d. Stocks Account e. Revenue Expenses Account f. Losses Account g. Investment Account ii. Following accounts always have credit balances: a. Creditor’s Account b. Revenue Income's Account c. Gain’s or Profit's Account d. Bank Loan Account e. Interest Received As seen earlier, the journal book is the first book required to be kept in the business where all transactions are recorded. It is the book of original entry. Likewise, the ledger is the most important basic book, which records all accounts. So long as the transactions in the business are limited and simple, it is possible to enter all transactions first in the journal book and then in respective accounts in the ledger. But with the size of a business and the number of transactions increasing, it becomes difficult to maintain a journal book for all the transactions and post them in the ledger. Under such circumstances, it becomes necessary to divide the journal books and the ledger into some separate subsidiary books, each of which is reserved for recording one particular class of transactions, e.g. purchase book, sales book, cash book, etc. 126

Chapter Twelve

chp-12.qxd

10/18/05

12:45 PM

Page 127

BOOKS NEEDED TO BE ACCOUNTING SYSTEM

MAINTAINED FOR A

SIMPLE

For a small industrial enterprise, the usage of the simple financial accounting system is recommended. Such businesses must maintain a set of books as suggested below. By doing so, the businesses can get a correct and fair picture of the activities speedily. a. Journal: All transactions (except those which are to be recorded in subsidiary books) are properly recorded here. b. Subsidiary books (for journal) i. Purchase book: In the purchase book, all transactions pertaining to purchases, be it on credit or by cash, are recorded. Transactions of purchase returned are also recorded here separately. ii. Sales book: In the sales book, all transactions pertaining to credit or cash sales are recorded. Transactions of sales returned are also recorded separately. iii. Ledger: All accounts involved in the transactions recorded in the journal or its subsidiary books are maintained here, and necessary posting is made. iv. Cash book: The cashbook is a subsidiary book of the ledger where the account of `cash' is maintained. Transactions involving ‘petty cash’ are also posted here separately. v. Bank book: The bankbook is a subsidiary book of the ledger where the account of `bank' is maintained. vi. Stock register: This is a register where the movement of stock is maintained. The formats for the journal book and the ledger accounts were discussed earlier. The formats of subsidiary books like purchase book, sales book, cashbook, bankbook and stock register are given here along with a brief explanation for its usage. Format of a Purchase Book Date

Party's Name

Bill No.

Ledger Item Folio Name

Quantity

Rate

Amount

Terms

Total

Bookkeeping and Accounting and Financial Statements

127

chp-12.qxd

10/18/05

12:45 PM

Page 128

Explanation: i. Date: The date on which the purchase was made is mentioned here. ii. Particulars: The name of supplier of the materials and necessary details of the invoice are mentioned here. iii. Bill No.: The number of the bill of the supplier is mentioned here. iv. Ledger Folio: The folio number of the ledger, on which either the supplier's account (if credit purchase) or cash account (if cash purchase) is credited, is mentioned here. v. Amount: The net amount of purchase made is mentioned here. vi. Terms: The terms of purchase, as on cash terms or credit terms, etc., are mentioned here. Format of a Sales Book Date

Party's Name

Bill No.

Ledger Item Folio Name

Quantity

Rate

Amount

Terms

Total

Explanation: i. Date: Date on which the sales transaction took place is mentioned here. ii. Particulars: The name of the purchaser of the goods and necessary details of the transaction are mentioned here. iii. Bill No.: The number of the bill given to the buyer is mentioned here. iv. Ledger folio: The folio number of the ledger on which either the buyer account (if credit sales) or cash account (if cash sales) is debited is mentioned here. v. Amount: The amount of sales done through this transaction is mentioned here. vi. Terms: The terms of sales transactions like, ‘cash or credit’ is mentioned here. 128

Chapter Twelve

chp-12.qxd

10/18/05

12:45 PM

Page 129

Format of a Cash Book Debit side(Receipts) Date

Particulars

Credit side (Payments)

Journal Folio

Amount

Date

Particulars

Journal Folio

Amount

Closing Balance Total

Total

Explanation: The ‘Cash Book’ is nothing but a cash account. Like other asset accounts, this account is also required to be mentioned in the ledger. However, because of the multiplicity of cash transactions and for convenience, cash account is not maintained in the general ledger but maintained as a separate account and named as cash book. All the rules of maintaining accounts in ledger apply to this account also. Format of a Bank Book Debit side(Receipts) Date

Particulars

Journal Folio

Credit side (withdrawals) Amount

Date

Particulars

Journal Folio

Amount

Closing Balance Total

Total

Explanation: Like cash book, bank book is nothing but the bank account required to be maintained in the ledger. Since the transactions involving bank are increasing, it is convenient and proper to keep a separate bank account where all transactions involving the bank are posted. This account, therefore, is separately maintained and named bank book. All rules of making posting in other ledger accounts are applicable to this account as well. Bookkeeping and Accounting and Financial Statements

129

chp-12.qxd

10/18/05

12:45 PM

Page 130

Format of a Stock Register Date

Particulars

S.B./ P.B. Folio No.

Receipts

Issues

Balance

Quantity Value Quantity Value Quantity Value

Explanation: The stock register is very similar to the stock account. It tells us about the actual closing stock available with the business to help the owner physically verify and place further orders. i. Date: The date of transactions resulting in movement of stock is put here. ii. Particulars: The details of transactions due to which the stock changes, are narrated here. iii. Sales Book/Purchase Book Folio number: The page number of the sales book or purchase book where the particular transaction resulting in addition or deduction of stock is put here. iv. Addition: Purchase resulting in addition of stock. The quantity of stock purchased along with its value is put here. v. Deduction: Sales result into deduction of stock. The quality of stocks sold along with its value is put here. vi. The Closing Balance: The amount that accrues, as a result of addition or deduction is calculated and put here. vii. Itemwise separate page is to be kept in Stock Register.

FINANCIAL STATEMENTS The main objective of bookkeeping is to record all transactions according to the accepted accounting principles and practices. But only proper recording of transaction is not adequate. Unless the various accounts recorded are properly classified for summary, it becomes difficult to visualise the total picture of the business. It is, therefore, very essential to summarise all those accounting details recorded by maintaining various books and to present them in an acceptable form. Financial statements are such forms in which all accounting 130

Chapter Twelve

chp-12.qxd

10/18/05

12:45 PM

Page 131

details are presented for the use of various users like owners, bankers, creditors, tax authorities, government, suppliers, etc. With the support of the financial statements, one can understand the financial position of the business meaningfully.

Various Financial Statements Normally at the end of the financial period for which the accounts are written, the ledger accounts are closed and balances are drawn for preparing final accounts. The statements known as final accounts are: i. Trial Balance ii. Profit and Loss Account iii. Balance Sheet (i) Trial Balance The first step in preparing final accounts is to prepare a trial balance. The main objective of the trial balance is to determine the arithmetical accuracy of the entries made in the ledger. The fundamental principle of Double-Entry Bookkeeping is that every transaction has two equal and opposite effects. It means, every debit has a corresponding credit and vice-versa. Hence the total of all those accounts having a ‘debit balance’ and the total of all those accounts, which have a ‘credit balance’ at the end of the accounting period, should tally. They should be equal; otherwise the accounts would be inaccurate. While preparing the trial balance, the accounts, which have debit balances, are placed in the debit column, while the accounts, which have credit balances, are placed in the credit column. In every trial balance, the total of the debit column must tally with the total of the credit column, unless some mistakes in posting, casting or compilation have been committed. The agreement of the totals of debit and credit columns of the trial balance ensures only arithmetical accuracy of the accounting, but it is not a conclusive evidence of the accounting accuracy as there are some mistakes which a trial balance cannot detect. A suggestive format of trial balance is given below: Format of a Trial Balance Trial Balance of M/s. ------------ for the year ----------Ledger Folio

Name of Account

Debit closing Credit balance closing balance

Total

Bookkeeping and Accounting and Financial Statements

131

chp-12.qxd

10/18/05

12:45 PM

Page 132

Explanation: i. Ledger Folio: In this column the folio number (page number) of the ledger or its subsidiary books where a particular account is maintained, is written. This helps in crosschecking the accuracy of accounts. ii. Name of Account: In this column, the name of the account whose closing balance is being brought to the trial balance is written. iii. Debit/Credit closing balance: In these columns, the amount of debit and credit closing balances of individual account is mentioned. It may be noted that a single account at a time cannot have both debit and credit balances. If an account has a debit closing balance the amount of that balance is mentioned in the debit column of the trial balance against the name of the respective account. Similarly, if an account has a credit closing balance, it is mentioned in the credit column of the trial balance. iv. Total: When the closing balances of all accounts from the ledger and its subsidiary books are brought to the trial balance one by one, the totals of account in the debit column and the credit column are made and tallied. One should remember that: a. Closing balances of all ‘Assets Accounts’, ‘Revenue Expenses Accounts’ and ‘Losses Accounts’ are always debit balances. b. Closing balances of all ‘Revenue Income Accounts’ and ‘Gain Accounts’ are always credit balances. c. Accounts of individuals to whom the business owes money always have credit balances and accounts of individuals who owe money to the business always have debit balances. d. ‘Loan (Taken) Accounts’ always have credit balances. e. ‘Cash Account’ always has debit balance. If the totals of debit and credit columns of the trial balance do not agree, it means there is some mistake in preparing the accounting books. The mistake/s, traced and rectified would tally the trial balance. However, there are a few mistakes, which cannot be detected by trial balance, such as: i. Errors of Principle ii. Errors of Omission

132

Chapter Twelve

chp-12.qxd

10/18/05

12:45 PM

Page 133

iii. Errors of Commission iv. Compensating Errors After the trial balance is tallied, necessary adjustment entries need to be made for closing stocks, outstanding expenses, transfer provisions, etc. (ii) Profit and Loss Account The preparation of a trial balance is a step towards preparing the remaining two more important financial statements correctly viz. profit and loss account and balance sheet. However, its use remains to a great extent limited to detecting arithmetical accuracy. From the financial accounting system, the user would like to know about the profitability of the business operations for a specified period and the position of the business at the end of the period. A statement that reveals the profitability of the business operations for the accounting period is called ‘Profit And Loss Account' (P & L A/c.). Contents of P & L A/c. From all the balances mentioned in the trial balance, the accounts that are for revenue expenditures, revenue type of losses, revenue income and revenue type of gains, are taken to P&L A/c. By doing so, it becomes possible to learn whether the business at the end of the accounting period has generated a surplus or deficit. All accounts of revenue income and gains are brought to the credit side, whereas all accounts of revenue expenditure and losses are brought on the debit side of the P&L A/c. If the total income is more than the total expenditure, the business is said to have generated surplus or profit. But if the total expenditure exceeds the total income during the accounting period, the business is supposed to have made losses. If the P & L A/c. has a credit balance, it signifies net profit and on the other hand, if the P&L A/c. has a debit balance, it denotes net loss of the business during the accounting period. A suggestive format of the profit and loss account is given below: Format of Profit and Loss Account Profit and Loss A/c. of M/s.-------------------------; For the period ------------------------Debit side Particulars Net Profit (Balance Figure) Total:

Amount

Credit Side Amount

Particulars Net Loss (Balance Figure) Total:

Bookkeeping and Accounting and Financial Statements

133

chp-12.qxd

10/18/05

12:45 PM

Page 134

Explanation: i. Particulars: In this column, on the debit side, names of the following accounts are mentioned individually: a. All accounts of revenue expenditure b. All accounts of revenue losses Names of the following accounts are mentioned on the credit side: a. Sales account b. Closing stock account (if it is adjustment entry) c. Accounts having credit effect of adjustment entries ii. Amount: The respective amount of debit and credit balances of the accounts, which are brought to the P&L account, is mentioned in these columns on debit and credit side against the names of their respective account head. One should also keep in mind the following: i. The P & L account contains all “Income and Expenditure Accounts”. Not a single account from either individual, ‘Personal Accounts or Asset Accounts’ can be brought to the P & L account. All accounts of ‘Income and Expenditure Accounts’ get closed when they are brought to P & L account while the balance of ‘Personal/Individual Accounts’ and ‘Asset Accounts’ get carried forward to the subsequent year. All income generated and expenditure incurred during the whole period is mentioned in the P & L account. ii. Subsequent to bringing all balances of the accounts to concerned debit and credit sides, the total of their balances is made. If the total of credit side is more than the total of debit side then the business is said to have made net profit. The amount by which the total of the credit side exceeds the total of the debit side of the P&L account is called the ‘Net Profit’ generated during the accounting period. Similarly, the amount by which the total of the debit side exceeds the total of the credit side of the P & L account is called ‘Net Loss’ generated by the business during the year. Thus both figures of net profit and net loss are balancing figures. Adding them up with the total of the debit or credit side as the case may be would make the totals of both the sides tally. This is a situation where total income is equal to total expenses. 134

Chapter Twelve

chp-12.qxd

10/18/05

12:45 PM

Page 135

Thus, if i. Total of credit side > Total of debit side of P&L A/c. of P&L A/c.

= Profit

ii. Total of credit side < Total of debit side of P&L A/c. of P&L A/c.

= Loss

iii. Total of credit side = Total of debit side of P&L A/c. of P&L A/c.

= No profit/no loss

Net profit or net loss is the result of business operations during the accounting period. They are transferred to the balance sheet where the capital account representing the financial involvement of the promoter is increased or decreased appropriately by the figures of net profit or net loss. iii. Balance Sheet A balance sheet is a statement prepared for measuring the true financial position of a business at a certain point of time (normally the last day of the accounting period). It is essential to prepare the balance sheet (i) to ascertain the results of business operations during the accounting period; and, (ii) to know the financial position of the business at a particular point of time. The profit and loss account serves the former objective while the balance sheet serves the latter. As seen earlier, all the accounts pertaining to the group of ‘Income and Expenditure Accounts’ are taken to the profit and loss account. The accounts pertaining to the remaining groups, viz. “Personal or Individual Accounts” and “Assets Accounts” are brought to the balance sheet. The accounts brought to the balance sheet are not closed. Their closing balances at the time of the balance sheet are carried forward to the subsequent accounting period. They are shown on the balance sheet only to apprise the users about the position of the accounts at that particular time. The balance sheet should be prepared in a prescribed format so that its understanding becomes easy. Given below is a prescribed format of the Balance Sheet.

Bookkeeping and Accounting and Financial Statements

135

chp-12.qxd

10/18/05

12:45 PM

Page 136

Balance Sheet – Format Balance Sheet of M/s. ----------------------- as on -----------Liabilities Capital Reserves & Surplus Secured Loans (Received) Unsecured Loans & Deposits (Received) Current Liabilities Provisions Profit Accumulated

Amount

Assets

Amount

Fixed assets Investments Loans and Advances (Given) Current Assests (i) Stocks -----(ii) Debtors -----(iii) Cash -----(iv) Bank -----Balance -----Accumulated Losses

Total

Total

Explanation: It has been explained above that the balance sheet reveals the true and fair position of a business at a particular point of time. Thus, the balance sheet gives the details of what the business owns and what the business owes. Whatever the business owns is termed as ‘Assets’ and whatever the business owes is termed as ‘Liabilities’. All liabilities are mentioned on the left-hand side of the balance sheet, while assets are shown on the righthand side. Assets Assets are classified under the following broad heads: i. Fixed Assets: Fixed assets are of permanent nature and the underlying motive of the business is to utilise them for value addition. The total value of fixed assets at the close of the accounting period is shown on the balance sheet. ii. Current Assets: Current assets, unlike fixed assets, do not permanently maintain the same form. In whichever form they may be, they are likely to be converted in the form of ‘Cash’ or ‘Bank Balance’ in the near future. 136

Chapter Twelve

chp-12.qxd

10/18/05

12:45 PM

Page 137

Normally, the following accounts are termed as ‘Current Assets’: a. Stocks: Closing stock of raw material, work in process and finished goods. b. Debtors: Individuals from whom money is to be received (as a result of business transactions) are termed as ‘Debtors’ or ‘Accounts Recei vables’ and are also current assets. c. Cash Balance & Bank Balance: Cash lying with the business, and balance in the bank account of the business are current assets. iii. Investments: At times, the business invests in some other businesses or companies. The value of these investments is an ‘Asset’ for the business. iv. Loans & Advances (given): At times, the business gives loans or advances to third parties. The value of such loans or advances is an ‘Asset’. These are not similar to debtors (current assets) where the individual becomes liable to pay to the business due to his buying the product of the business on credit terms. v. Fictitious Assets: Fictitious assets are not real and tangible assets but are debit balances of accounts like P&L A/c., Accumulated Losses A/c., Expenses Not Written Off A/c., etc. Liabilities On the liabilities side, all ‘Personal’ and ‘Individual’ accounts to whom the business owes are mentioned. Liabilities can be classified in the following broad groups: i. Capital: Money invested by the promoter is a liability. Business owes that much to the owner. ii. Reserves and Surplus: Accumulated profit, which is not withdrawn and is a part of profit, which is reserved for some specific purposes, also belongs to the promoter(s). Business owes that much to the owner. They are, therefore, liabilities. iii. Secured Loans (received): Amount of loans taken by the business is a liability for the business. These loans are secured against some assets, which are offered to the institutions/person who have given loans, as security or collateral. iv. Unsecured Loans and Deposits (received): Like secured loans, these loans are also liabilities for the business. However, these loans are not secured. Bookkeeping and Accounting and Financial Statements

137

chp-12.qxd

10/18/05

12:46 PM

Page 138

v. Current Liabilities: They are short-term funds taken for financing current assets. Normally, they are credits offered by suppliers of raw materials and the working capital loans given by banks. vi. Provisions: They are liabilities in which case payment provision has been made by the business from the profits, e.g. provision for tax liability. The total of the ‘Liabilities’ side and the ‘Assets’ side of the balance sheet must tally. If they don’t, there are some mistakes in preparing the final accounts, which should be detected and rectified.

138

Chapter Twelve

chp-13.qxd

10/18/05

12:47 PM

Page 139

CHAPTER

13

Costing and Pricing of Products

A

realistic and comprehensive knowledge on costing and pricing is required to build the financial management capabilities of entrepreneurs. This will help in running the enterprise successfully and enable one to give due importance to costing and pricing. Costing can be defined as the process of determining how much it costs to produce and sell a product or service. Costing is very important as the cost of a product can decide its profit or loss. There are two costs involved in determining the cost of a product / service, i.e. direct cost and indirect cost. Direct Cost: The cost of those items that become part of the end-product are known as direct costs such as; raw material, labour, packing material, etc. Indirect Cost: All expenses incurred in running a business and that which cannot be directly identified with the end product are indirect costs. The following exercise could be used as an illustration for a better understanding of the concept: Costing Exercise Mr. Ramesh is processing mangoes for a pickles manufacturer, who subcontracts the work, when he has orders for processing less than 5000 Kgs of mangoes. The pickles manufacturer provides raw mangoes, but all other inputs and expenses are the responsibility of Mr. Ramesh. To process 200 Kgs of mangoes, he needs spices and oil costing Rs.400/- and fuel costing Rs.100/-. In addition, he pays Rs.2000/- to workers who work for eight hours, processing 2000 Kgs of mangoes. Calculate the price that he must quote per Kg of processing, to the pickle manufacturer if he decides to earn a minimum of Rs.20 per Kg for himself.

chp-13.qxd

10/18/05

12:47 PM

Page 140

The correct solution is: Cost of processing 200 Kgs of Mangoes

Rs.

i) Spices and Oil

400.00

ii) Fuel

100.00

iii) Labour

200.00 700.00

He wants to earn Rs.20/- per Kg. Hence for 200 Kgs targeted earning is Rs.4000/- (i.e. 200 × 20). Therefore, he must quote Rs.700.00 + Rs.4000 = Rs.4700/- for 200 Kgs i.e. Rs.23.50/- per Kg. Please note that more the price the higher the profitability. But then proper pricing should be done so that the product finds a place in the market. Cost reduction is the other way to earn more profit. For pricing a product/ service, an entrepreneur could exercise the following options:  A desired margin may be added to the total cost to obtain the price.  All possible efforts are made to make the price competitive and keep it less than the existing brands.  In this option the price is kept exorbitantly high. This happens in a monopoly market.

PRICING PRICING

AND AND

COSTING: MARGINAL COST BASED CONTRIBUTION ANALYSIS

As an illustration of select costing and pricing tools, consider the case of a small enterprise—Fardeen Products, making and selling sheekh-kebabs in plastic packs and casseroles to institutions and directly to consumers. The break-even level of the activity can be estimated from the data in table below. The performance of the enterprise has remained stagnant in the last four years.

140

Chapter Thirteen

chp-13.qxd

10/18/05

12:47 PM

Page 141

Indicative break-even level of activity of Fardeen Products, Ahmedabad Sr. No.

Particulars

Variable Cost

1

Raw Material

10,00,000.00

2

Electricity

3

Labour

4,80,000.00

4

Interest

-

5

Other Expenses

6

Depreciation

64,000.00

Total

10,000.00 15,54,000.00

Fixed Cost 3,000.00 1,80,000.00 1,000.00 1,000.00 1,85,000.00

Selling price (SP) of the product on a per kilogramme basis is about Rs. 120. The enterprise manufactured about 15,000 kg. of the product in a year on full capacity basis. It had sales of about Rs. 22 lakh a year.

Break-even point (BEP) =

Total Fixed Cost (Rs. 1.85 lakh) × 100=75.20% of capacity Revenue (Rs. 18 lakh)—Total Variable Cost (Rs. 15.54 lakhs)

Beyond break-even, viz. production of about 11,280 kg, it is on the basis of marginal costs that pricing may be made, as all fixed costs are covered at break-even level. Similarly, the ideal product mix of an enterprise may be identified by means of a contribution analysis as illustrated in the example below. Avidhoot enterprises has 6 product lines. The enterprise makes stuffed paratha, macaroni and pasta items and sells them to institutional customers viz. to private offices, foreign banks etc. in Ahmedabad, Gujarat. The table below provides line wise data on variable costs, selling price and output of the enterprise for the year 2001–2002.

Costing and Pricing of Products

141

chp-13.qxd

10/18/05

12:47 PM

Page 142

Avidhoot Enterprises—Current Product-mix & Variable Cost (VC) Statement of the Enterprise

Sr. Product - mix No.

Qty. Sold (nos.)

VC/Unit (in Rs.)

SP/Unit (in Rs.)

Total VC (Rs. lakh)

Total Sales (Rs. lakh)

1

Stuffed Paratha (Veg)

30000

45.00

50.00

13.50

15.00

2

Stuffed Paratha (Non-Veg.)

40000

52.00

60.00

20.80

24.00

3

Macaroni (Veg.)

10000

17.00

20.00

1.70

2.00

4

Macaroni (Non-Veg.)

7000

20.00

25.00

1.40

1.75

5

Pasta (Veg.)

20000

16.00

20.00

3.20

4.00

6

Pasta (Non-Veg.)

25000

17.20

25.00

4.30

6.25

Total

132000

44.90

53.00

The enterprise has a fixed cost of Rs.6.10 lakh per annum. Hence, profits had been Rs.2 lakh in the year 2001–2002. Upon study of the performance of the enterprise and customer and consumer demand pattern in the last 4 years, it was observed that there are certain market constraints. About 1,00,000 nos. of Stuffed Parathas (Vegetarian and Non-Vegetarian, each), about 25,000 nos. of Macaroni (Vegetarian and Non-Vegetarian, each) and about 50,000 nos. of Pasta (Vegetarian and Non-Vegetarian, each) is the maximum demand for respective product lines a year. Further, a minimum demand or order size of 5000 plates or numbers of each product line prevailed. The enterprise has the capacity to make and sell maximum 1,45,000 plastic packs and casseroles of all products in total. Wide variations in demand prevailed in different years. Nevertheless, the enterprise has to make and offer all the six product lines as to remain a ‘onestop’ shop of its clients. How could the enterprise resolve its problem of stagnant sales performance? If the enterprise is to optimise its product mix (and profits) it should ideally sell about 1,00,000 plates of Stuffed Parathas (Non-Veg.), 30,000 plates of Pasta and 5,000 plates of other products. That is, products with maximum contribution need be sold. The table below presents the revised product mix. 142

Chapter Thirteen

chp-13.qxd

10/18/05

12:47 PM

Page 143

Avidhoot Enterprises—Ideal Potential Product-mix of the Enterprise (in Rs.) Sr. Product-mix No.

SP/ VC/ Unit Unit

C/ Unit

Qty.

Contribution

VC 2,25,000

SP

1 Stuffed Paratha (Veg.)

50

45

5.00

5000

25,000

2,50,000

2 Stuffed Paratha (Non-Veg.)

60

52

8.00

1,00,000

8,00,000

52,00,000

60,00,000

3 Macaroni (Veg.)

20

17

3.00

5,000

15,000

85,000

1,00,000

4 Macaroni (Non-Veg.)

25

20

5.00

5,000

25,000

1,00,000

1,25,000

5 Pasta (Veg.)

20

16

4.00

5,000

20,000

80,000

1,00,000

6 Pasta (Non-Veg.)

25

17.20

7.80

25,000

1,95,000

4,30,000

6,25,000

1,45,000

10,80,000

61,20,000

72,25,000

If the enterprise can restructure its product mix, it can increase its profit to Rs.4.95 lakh per year—more than double. However, an ideal selling incentive in terms of credit and discount strategy may have to be evolved as to encourage sales of product with higher contribution and in turn encouraging such shift in the product mix. A similar analysis of the market mix with regard to marketing channels and customer or consumer segments or groups need be made and ideal strategies to encourage sales through such channels or customer or consumer segments that yield high contribution may be evolved. For instance, direct sale to consumers may yield higher contribution to a small ‘Curry base and Instant Noodles’ manufacturer. In which case, a strategy of employing salespersons to directly market products to consumers with appropriate selling incentives to both the sales persons and consumers may be an ideal sales strategy than adopting the conventional dealer-retailer channel. The cases on product mix, pricing, contribution analysis presented in this chapter indicates scope for sales promotion incentives and pricing of products as also on product positioning, packaging and real differentiation. The learning from these cases may be incorporated to enhance rigour in terms of market-mix and market-plan as a part of an efficient preparation of a business or project plan.

Costing and Pricing of Products

143

chp-14.qxd

10/18/05

12:48 PM

Page 145

CHAPTER

14

Working Capital Management

I

n the chapters on ‘Planning an SSI Unit’ and ‘ Business Plan’, a discussion was made on the fixed capital and the working capital. Every business needs investment to procure fixed assets, which remain in use for a longer period. Money invested in these assets is called ‘Long term Funds’ or ‘Fixed Capital’. Business also needs funds for short-term purposes to finance current operations. Investment in short term assets like cash, inventories, debtors etc., is called ‘Short-term Funds’ or ‘Working Capital’. The ‘Working Capital’ can be categorised, as funds needed for carrying out day-to-day operations of the business smoothly. The management of the working capital is equally important as the management of long-term financial investment. Every running business needs working capital. Even a business which is fully equipped with all types of fixed assets required is bound to collapse without (i) adequate supply of raw materials for processing; (ii) cash to pay for wages, power and other costs; (iii) creating a stock of finished goods to feed the market demand regularly; and, (iv) the ability to grant credit to its customers. All these require working capital. Working capital is thus like the lifeblood of a business. The business will not be able to carry on day-to-day activities without the availability of adequate working capital. The diagram shown on the next page clarifies it: Working capital cycle involves conversions and rotation of various constituents/components of the working capital. Initially ‘cash’ is converted into raw materials. Subsequently, with the usage of fixed assets resulting in value additions, the raw materials get converted into work in process and then into finished goods. When sold on credit, the finished goods assume the form of debtors who give the business cash on due date. Thus ‘cash’ assumes its original form again at the end of one such working capital cycle but in the course it passes through various other forms of current assets too. This is how various components of current assets keep on changing their forms due to value addition. As a result,

chp-14.qxd

10/18/05

12:48 PM

Page 146

Cash

Debtors Value Addition

Creditors

Raw Material

Working Expenses

Finished Goods

Value Addition

Work in Process

they rotate and business operations continue. Thus, the working capital cycle involves rotation of various constituents of the working capital. While managing the working capital, two characteristics of current assets should be kept in mind viz. (i) short life span, and (ii) swift transformation into other form of current asset. Each constituent of current asset has comparatively very short life span. Investment remains in a particular form of current asset for a short period. The life span of current assets depends upon the time required in the activities of procurement; production, sales and collection and degree of synchronisation among them. A very short life span of current assets results into swift transformation into other form of current assets for a running business. These characteristics have certain implications: i. Decision regarding management of the working capital has to be taken frequently and on a repeat basis. ii. The various components of the working capital are closely related and mismanagement of any one component adversely affects the other components too. iii. The difference between the present value and the book value of profit is not significant. The working capital has the following components, which are in several forms of current assets:  Stock of Cash  Stock of Raw Material 146

Chapter Fourteen

chp-14.qxd

10/18/05

12:48 PM

Page 147

 Stock of Finished Goods  Value of Debtors  Miscellaneous current assets like short term investment loans & advances The working capital needs of a business are influenced by numerous factors. The important ones are discussed in brief as given below: i. Nature of Enterprise The nature and the working capital requirements of an enterprise are interlinked. While a manufacturing industry has a long cycle of operation of the working capital, the same would be short in an enterprise involved in providing services. The amount required also varies as per the nature; an enterprise involved in production would require more working capital than a service sector enterprise. ii. Manufacturing/Production Policy Each enterprise in the manufacturing sector has its own production policy, some follow the policy of uniform production even if the demand varies from time to time, and others may follow the principle of 'demand-based production' in which production is based on the demand during that particular phase of time. Accordingly, the working capital requirements vary for both of them. iii. Operations The requirement of working capital fluctuates for seasonal business. The working capital needs of such businesses may increase considerably during the busy season and decrease during the slack season. Ice creams and cold drinks have a great demand during summers, while in winters the sales are negligible. iv. Market Condition If there is high competition in the chosen product category, then one shall need to offer sops like credit, immediate delivery of goods etc. for which the working capital requirement will be high. Otherwise, if there is no competition or less competition in the market then the working capital requirements will be low. v. Availability of Raw Material If raw material is readily available then one need not maintain a large stock of the same, thereby reducing the working capital investment in raw material stock. On the other hand, if raw material is not readily available then a large Working Capital Management

147

chp-14.qxd

10/18/05

12:48 PM

Page 148

inventory/stock needs to be maintained, thereby calling for substantial investment in the same. vi. Growth and Expansion Growth and expansion in the volume of business results in enhancement of the working capital requirement. As business grows and expands, it needs a larger amount of working capital. Normally, the need for increased working capital funds precedes growth in business activities. vii. Price Level Changes Generally, rising price level requires a higher investment in the working capital. With increasing prices, the same level of current assets needs enhanced investment. viii. Manufacturing Cycle The manufacturing cycle starts with the purchase of raw material and is completed with the production of finished goods. If the manufacturing cycle involves a longer period, the need for working capital would be more. At times, business needs to estimate the requirement of working capital in advance for proper control and management. The factors discussed above influence the quantum of working capital in the business. The assessment of working capital requirement is made keeping these factors in view. Each constituent of working capital retains its form for a certain period and that holding period is determined by the factors discussed above. So for correct assessment of the working capital requirement, the duration at various stages of the working capital cycle is estimated. Thereafter, proper value is assigned to the respective current assets, depending on its level of completion. The basis for assigning value to each component is given below: Component of Working Capital

Basis of Valuation

i.

Stock of raw material

Purchase cost of raw materials

ii.

Stock of work in process

At cost or market value, whichever is lower

iii.

Stock of finished goods

Cost of production

iv.

Debtors

Cost of sales or sales value

v.

Cash

Working expenses

148

Chapter Fourteen

chp-14.qxd

10/18/05

12:48 PM

Page 149

Each constituent of the working capital is valued on the basis of valuation enumerated above for the holding period estimated. The total of all such valuation becomes the total estimated working capital requirement. The assessment of the working capital should be accurate even in the case of small and micro enterprises where business operation is not very large. We know that working capital has a very close relationship with day-to-day operations of a business. Negligence in proper assessment of the working capital, therefore, can affect the day-to-day operations severely. It may lead to cash crisis and ultimately to liquidation. An inaccurate assessment of the working capital may cause either under-assessment or over-assessment of the working capital and both of them are dangerous.

CONSEQUENCES

OF UNDER ASSESSMENT OF WORKING CAPITAL z

z

z z

z

z

z

z

Growth may be stunted. It may become difficult for the enterprise to undertake profitable projects due to non-availability of working capital. Implementation of operating plans may become difficult and consequently the profit goals may not be achieved. Cash crisis may emerge due to paucity of working funds. Optimum capacity utilisation of fixed assets may not be achieved due to non-availability of the working capital. The business may fail to honour its commitment in time, thereby adversely affecting its credibility. This situation may lead to business closure. The business may be compelled to buy raw materials on credit and sell finished goods on cash. In the process it may end up with increasing cost of purchases and reducing selling prices by offering discounts. Both these situations would affect profitability adversely. Non-availability of stocks due to non-availability of funds may result in production stoppage. While underassessment of working capital has disastrous implications on business, overassessment of working capital also has its own dangers. Working Capital Management

149

chp-14.qxd

10/18/05

12:48 PM

Page 150

CONSEQUENCES

OF OVER ASSESSMENT OF WORKING CAPITAL z

z

z z

Excess of working capital may result in unnecessary accumulation of inventories. It may lead to offer too liberal credit terms to buyers and very poor recovery system and cash management. It may make management complacent leading to its inefficiency. Over-investment in working capital makes capital less productive and may reduce return on investment.

Working capital is very essential for success of a business and, therefore, needs efficient management and control. Each of the components of the working capital needs proper management to optimise profit.

Inventory Management Inventory includes all types of stocks. For effective working capital management, inventory needs to be managed effectively. The level of inventory should be such that the total cost of ordering and holding inventory is the least. Simultaneously, stock out costs should also be minimised. Business, therefore, should fix the minimum safety stock level, re-order level and ordering quantity so that the inventory cost is reduced and its management becomes efficient.

Receivables’ Management Given a choice, every business would prefer selling its produce on cash basis. However, due to factors like trade policies, prevailing marketing conditions, etc., businesses are compelled to sell their goods on credit. In certain circumstances, a business may deliberately extend credit as a strategy of increasing sales. Extending credit means creating a current asset in the form of ‘Debtors’ or ‘Accounts Receivable’. Investment in this type of current assets needs proper and effective management as it gives rise to costs such as: i. Cost of carrying receivable (payment of interest etc.) ii. Cost of bad debt losses Thus the objective of any management policy pertaining to accounts receivables would be to ensure that the benefits arising due to the receivables are 150

Chapter Fourteen

chp-14.qxd

10/18/05

12:48 PM

Page 151

more than the cost incurred for receivables and the gap between benefit and cost increases resulting in increased profits. An effective control of receivables helps a great deal in properly managing it. Each business should, therefore, try to find out average credit extended to its client using the below given formula: Average credit

Total amount of receivables =

Extended (in days)

Average credit sales per day

Each business should project expected sales and expected investment in receivables based on various factors, which influence the working capital requirement. From this it would be possible to find out the average credit days using the above given formula. A business should continuously try to monitor the credit days and see that the average credit offered to clients is not crossing the budgeted period. Otherwise, the requirement of investment in the working capital would increase and, as a result, activities may get squeezed. This may lead to cash crisis.

Cash Management Cash is the most liquid current asset. It is of vital importance to the daily operations of business. While the proportion of assets held in the form of cash is very small, its efficient management is crucial to the solvency of the business. Therefore, planning cash and controlling its use are very important tasks. Cash budgeting is a useful device for this purpose.

Cash Budget Cash budget basically incorporates estimates of future inflows and outflows of cash over a projected short period of time which may usually be a year, a half or a quarter year. Effective cash management is facilitated if the cash budget is further broken down into month, week or even on daily basis. There are two components of cash budget (i) cash inflows and (ii) cash outflows. The main sources for these flows are given hereunder: Cash Inflows

(a) Cash sales (b) Cash received from debtors (c) Cash received from loans, deposits, etc. Working Capital Management

151

chp-14.qxd

10/18/05

12:48 PM

Page 152

(d) Cash receipt of other revenue income (e) Cash received from sale of investments or assets. Cash Outflows

(a) Cash purchases (b) Cash payment to creditors (c) Cash payment for other revenue expenditure (d) Cash payment for assets creation (e) Cash payment for withdrawals, taxes (f) Repayment of loans, etc.

A suggestive format for ‘Cash Budget’ is given below: Cash Budget of M/s… Particulars

Months January February

Estimated cash inflows ---------------------I. Total cash inflows Estimated cash outflows ---------------------II. Total cash outflows III. Opening cash balance IV. Add/Deduct surplus/Deficit during the month (I–II) V. Closing cash balance (III–IV) VI. Minimum level of cash balance VII. Estimated excesses or shortfall of cash (V–VI)

152

Chapter Fourteen

March

chp-14.qxd

10/18/05

12:48 PM

Page 153

Financing Working Capital Now let us understand the means to finance the working capital. Working capital or current assets are those assets, which unlike fixed assets change their forms rapidly. Due to this nature, they need to be financed through short-term funds. Short-term funds are also called current liabilities. The following are the major sources of raising short-term funds:

i. Supplier’s Credit At times, business gets raw material on credit from the suppliers. The cost of raw material is paid after some time, i.e. upon completion of the credit period. Thus, without having an outflow of cash the business is in a position to use raw material and continue the activities. The credit given by the suppliers of raw materials is for a short period and is considered current liabilities. These funds should be used for creating current assets like stock of raw material, work in process, finished goods, etc.

ii. Bank Loan for Working Capital This is a major source for raising short-term funds. Banks extend loans to businesses to help them create necessary current assets so as to achieve the required business level. The loans are available for creating the following current assets: z

Stock of Raw Materials

z

Stock of Work in Process

z

Stock of Finished Goods

z

Debtors

Banks give short-term loans against these assets, keeping some security margin. The advances given by banks against current assets are short-term in nature and banks have the right to ask for immediate repayment if they consider doing so. Thus bank loans for creation of current assets are also current liabilities.

iii. Promoter’s Fund It is advisable to finance a portion of current assets from the promoter’s funds. They are long-term funds and, therefore do not require immediate repayment. These funds increase the liquidity of the business.

Working Capital Management

153

chp-15.qxd

10/18/05

12:49 PM

Page 155

15

CHAPTER

Marketing Management

A

production process acquires meaning only if it produces products which emerge out of anonymity and find a place in the market. Many small entrepreneurs produce quality products, but are unable to sell it due to poor understanding of the markets and marketing management. Most think marketing and selling to be the same and hence, face serious consequences. The fact however, remains that this is one of the most critical areas that entrepreneurs must master. You must develop the capability to understand your market and device your marketing strategies accordingly. You should be able to assess who will buy your product and why; and also your competitors and their strategies.

THE CONCEPT

OF

MARKETING

Most people think that marketing is all about selling and buying of goods and services in exchange for money. This is a very narrow view. There are three major facets of marketing. First is the production-driven approach where stress is laid on selling whatever is produced. This works during scarcity of goods. And the producer’s key function here is to sell goods available at affordable prices. Most small and micro enterprises follow this approach. The second is the sale-driven approach that revolves around personal selling and advertising to convince customers to buy your product. This approach is adopted when there is an abundance of supply in the market. The last is the consumer-driven approach, which focus on promoting sale by meeting the customers’ expectations in terms of quality, looks, aesthetics, prices and aftersales-service. The earlier two approaches where goods are tailor-made are producer-oriented and may not work satisfactorily as they require a proper understanding of the consumer behaviour, preferences, tastes and needs before undertaking production. The third being consumer-driven, lasts. This is why sales becomes a small part of an entire system called marketing that addresses planning, pricing,

chp-15.qxd

10/18/05

12:49 PM

Page 156

promotion and distribution of goods and services to satisfy customer needs. Therefore, you must understand that marketing is not just selling, but much more, and includes: i. Market Assessment ii. Market Segmentation iii. Market Targeting iv. Developing Market Mix

Market Assessment First, there is a need to know the demand for the proposed product and this requires market assessment. With this, one would know the volume that might be bought by a defined customer-base in a defined geographical area and time-frame, under a defined marketing programme. The market demand can be estimated by multiplying the number of buyers by the average quantity bought at a given price. Though this may be difficult for small entrepreneurs to find out, they can still do a quick survey (discussed in Chapter 7) if the market is generally local or regional.

Market Segmentation This helps in indentifying buyers. It is a process that identifies differences in basic characteristics of different customer groups, and thus helps craft an effective marketing strategy. Segmentation can be by assorting consumers like rural & urban, young-old, married-unmarried, educated-uneducated, rich-poor, etc. and analysing their needs and demand pattern.

Market Targeting Having done the market segmentation, one should decide the target group. It is normally not possible to meet the expectations of all the customer groups in the market. Therefore, there is a need to zero in on a specific segment. One will commit a blunder if one thinks one can meet the expectation of all the segments. The risk of a major failure prevails if one tries to cater to all the segments and, therefore, one should specialize to succeed. The promotional strategies, infrastructure and manpower resources will greatly vary with the targets. Having decided the target, strategies for successful marketing can be devised. 156

Chapter Fifteen

chp-15.qxd

10/18/05

12:49 PM

Page 157

Marketing Mix Marketing mix is the tool by which one could strategically position oneself in the market. The positioning will depend on how different will one’s product be than others in terms of attractiveness for a particular customer group. It could include features of the product, performance quality, durability, reliability, style, design, repairability, etc. These factors are popularly known as 4 ‘Ps’ of marketing: i. Product (or service) – its quality, presentation, packaging, varieties, design, colours, styles, contents. ii. Place – where it is bought, physical and social barriers, home delivery, distribution channels, transport, ambience, sanitation, decoration. iii. Promotion – advertising, tele–marketing, personal and promotional selling, exhibitions, mailing. iv. Price – the amount, prices vs. status, quality, discounts, credit terms. There are more Ps now: People (understanding customers), Packaging (better product look), Partnership (strategic marketing alliances), Positioning (geographical, such as Punjabi or South Indian Food). Product

Place

Better Performance Improved Quality Bigger Quantities Better Finish Attractive Packaging Better Labels Attractive Colours Attractive Contours Mind-captivating Brand

Longer Opening Hours Better Furnishing Better Decoration Different Location Home Delivery Telephone Facility Better Sanitation

Promotion Proper Advertising Signboards Competitions Different Names Other Publicity Promotional Selling

Price Competitive Pricing Higher Pricing Lower Pricing Longer Credit Special Offers Quantity Discounts Cash Discounts

Marketing Management

157

chp-15.qxd

10/18/05

12:49 PM

Page 158

The famous saying, “Leaders don’t do different things, they do things differently”, finds an apt place here. Being able to supply quality goods at competitive prices to the customers’ satisfaction does not take one any further. To be a market leader, one needs to market the product and create its brand loyalty, by also taking care of distribution logistics. Most entrepreneurs neglect this. Another crucial factor is to be able to make the business communicate for what it stands, which is done by effective promotional strategies.

PROMOTIONAL STRATEGY Use of Electronic Media and IT A proper promotional strategy is needed to create a brand image of the product and this will need an effective fusion of print and electronic media. Everyday, we see brand ambassadors like Sachin Tendulkar endorsing Pepsi and Aamir Khan advocating Coke. This creates an image in the minds of the customers. The promotional strategy should suit the market. While it may be expensive to get celebrity endorsement, there are local channels to one can make use of radio and the internet, besides TV, newspapers or magazines. The best decision will be to hire a professional advertisement agency, howsoever small, for promotion. Then, there is always the word of mouth that invisibly promotes the product by the sheer strength of its quality and other features, which people will talk about and thus market. This is especially true in the food business.

Collective Marketing Approach All these steps are good for existing or small-scale entrepreneurs but may not always apply to a large segment of micro enterprises who might find it difficult due to paucity of financial as well as human resources. Micro enterprises should evolve innovative collective strategies to reap mutual benefits.

SEVEN TIPS

FOR

SUCCESSFUL MARKETING

a) Know Your Consumers/Customers There are two types of clients: i. BUYERS/CUSTOMERS who buy goods from you to sell to others. The customers may not be the direct users of one’s products. Normally, wholesalers buy in bulk and sell to retailers, who sell to 158

Chapter Fifteen

chp-15.qxd

10/18/05

12:49 PM

Page 159

individual consumers or exporters, who in turn sell goods abroad to chain stores and retailers. ii. Users who directly consume the products, who are CONSUMERS.

b) Satisfy Your Customers/Consumers They may be satisfied: i. When they are happy with the features and quality of the product. ii. When the price of your product is reasonable (reasonable means within the budget). iii. When one delivers on time and maintains agreed terms. iv. When extra efforts are put in to make them happy; like by working overnight to deliver on time.

c) Attract More Customers Marketing must ensure that consumers repeatedly buy one’s products and also speak well about it to others. One should always remember the four Ps discussed earlier: i. Product z

Consumers want the product to satisfy their needs and they may want it to last long.

z

The product should be worth the money spent by buyers on it.

z

The product should meet the best standards of quality and aesthetics.

ii. Price Prices should be affordable and there are ways to make them acceptable also. Match your competitors’ prices. One could use the formula (price – cost = profit) when (i) one is relatively new to the business (ii) the competition is strong and (iii) when consumers are used to prevailing prices.

Look at the costs The price could be set by adding a reasonable profit to the cost and this can be used during (i) low competition and (ii) when the product is new. Marketing Management

159

chp-15.qxd

10/18/05

12:49 PM

Page 160

Make the price attractive Prices may be made attractive in other regions than one’s own by different ways. Attractive prices can, for instance, be like Rs.49.95 for Rs.50.00. iii. Promotion A satisfied client is one’s best promoter not only in terms of repeat orders but also for references. Some ways to promote one’s product: Discount and credit offers can be publicised by placards placed in retail outlets or by distributing pamphlets to existing and potential clients. Discount and credit offers: Give limited-period discounts or credits to regular and new clients as also bulk buyers. This will attract potential customers and strengthen the existing ones. Offer high discount on high-margin products as this is likely to encourage sale and manufacture of such products without affecting profits. Also, distribute pamphlets among exporters/wholesalers, if necessary. Promotional items: Paperweights, calendars etc. with one’s brand name can be good advertisements. iv. Place Determine where to sell the product and where should the client to find it.

d) Network and Reach-out to New Consumers This helps in expanding one’s customer base. There are several ways by which one can network and reach new customers and expand one’s market base: i. Personal visits to potential clients ii. Participation in trade fairs where potential is found iii. Product catalogues and web pages which could be forwarded to distant customers iv. Promotion methods like selling incentives to increase sales 160

Chapter Fifteen

chp-15.qxd

10/18/05

12:49 PM

Page 161

Rather than waiting for customers to come, the entrepreneur should look for them. While i, iii and iv are means to network with new consumers, it helps one network with both new and existing customers.

Participating in trade exhibits in different regions i. Prepare for an exhibition: z

z

Inquire about trade exhibitions from government offices and non-government organisations that organise such fairs. Participate in fairs after considering its location, the fees and products featured.

z

Print business cards, product catalogue and price lists.

z

Prepare samples for display.

z

Keep a logbook to record visitors’ contact details.

ii. During the trade exhibit: z

Approach visitors and talk informally about the products.

z

Encourage them to analyse the product.

z

Exchange business cards.

z

Request them to fill the logbook.

e) Give Selling Incentives Marketing starts even before business identification and often involves all management areas, while selling is about increasing sale. Selling incentives are various: z

Reduced price or discount

z

Multiple products for the price of one

z

Fixed-time discount coupons for repeat purchase

z

Better credit terms Marketing Management

161

chp-15.qxd

10/18/05

12:49 PM

Page 162

A processor may adopt any of these incentives. The following is a case study of a price discount incentive option: Arun Processors is a tiny unit and sells Rs.5 lakh worth pickles a year. They offer 30-day credit to customers. They got an extra order of Rs.2 lakh this year. But the trader backed out after the products were made. Arun Processors, therefore, evolved a new incentive plan to dispose off the additional production, under which they offered a three per cent discount in case payment was made in cash 15 days after delivery and 90–day credit otherwise. Let us do a cost analysis of this strategy. Assume 50% sale is executed by discount option and 50% by 90-day credit scheme. If the production cost of increased sales is 70%, the actual cost of locked up funds in the credit sale would be three per cent a month. This is the rate he has to pay for credit purchase. Existing promotional and credit terms: Proposed promotional terms:

30 days 3/15 (or) 90 days (Amount in Rs.)

Current Sales Likely Increase in Sales

5,00,000 2,00,000

Likely total sales

7,00,000

(1)

Cost of discount (Rs.1,00,000 of sales @ 3%) Cost of credit sale for 3 months (Rs.1,00,000 @ 36% per year)

3,000

Total cost

12,000

(2)

1,40,000

(3)

Increase in cost of production (70% of Rs.2,00,000) Profit in production (1) - (3) Cost of proposed promotional terms (2) Net profit

9,000

60,000 12,000 48,000

(4)

Therefore the increase in profit is Rs.48,000/-. The proposed promotional stratagem could benefit the enterprise.

162

Chapter Fifteen

chp-15.qxd

10/18/05

12:49 PM

Page 163

f) Know Your Competitors It is very important in business to know one’s competitors and their strategies to remain competitive and there is a simple framework to understand them: The competitor as a food processor z z

What is his experience in the business? What are his resources: (i) size of operation, (ii) technology, (iii) financial resources and (iv) market credibility.

The competitor’s clients z

Does he have many clients?

z

Who are they?

z

Are his clients happy?

z

Can he retain customers?

The competitor’s product z

Is his product better?

z

How is his product different?

The Competitor’s price z

Is his price cheaper? Why?

The competitor’s promotional strategies z

Does he provide better credit/discounts?

The competitor’s place z

Does he directly deal with consumers?

z

Does he have agents/distributors? Marketing Management

163

chp-15.qxd

10/18/05

12:49 PM

Page 164

g) Developing a Sustainable Marketing Advantage: A business that does not develop any or all of the three advantages below is sure to lose out to competition: A sustainable cost advantage: This will help an enterprise offer lower prices. Cost savings can also help in offering better credits. A differentiation advantage: This offers buyers better value than that of the competitors, as the product is different by its features and services as well as by brand image. A niche market: Here consumers are delivered specially customised products in small volumes.

FINALLY, REMEMBER THE CARDINAL PRINCIPLES TO SUCCEED IN THE MARKET: z

The customer is the most important person.

z

Put yourself in customers' shoes.

z

Good marketers sell products that never return but customers do.

z

z

164

Successful marketing is about building and sustaining human relationships. Be flexible so as to encourage people to do business with you.

Chapter Fifteen

chp-16.qxd

10/18/05

12:51 PM

Page 165

CHAPTER

16

Applied Management in Business: Learning from Existing Businesses

ANMOL FOOD PRODUCTS: STRUCTURING A PROJECT EFFICIENTLY WITH THRUST ON THE MARKET PLAN

T

he enterprise, registered as a private limited company, has been involved in marketing processed food products. It now proposes to manufacture sauces, jams and other products. The unit is registered with the Ministry of Food Processing Industries. The key promoters include a cost accountant and a scientist who have earlier worked with CFTRI, Mysore. The cost accountant worked for a multinational and also has substantial experience in marketing confectionery in Karnataka. He also has experience in catering and has supplied packed meals to hospitals and banks in Mysore city. His enterprise had then undertaken contracts to run canteens in various large factories in Mysore. The experience of the promoters both in the catering field and in marketing products in the sector helped them evolve their project well. Several products are proposed to be manufactured by this enterprise. These include sauces, squashes, jams, ‘masala’ paste, ready-to-eat products and pickles. Sauces for example, include tomato sauce, chilly sauce and soya sauce. Jams include strawberry and pineapple jam. Ready-to-eat products comprise tamarind rice mix, tomato rice mix and sambhar. Pickles include mango, mixed vegetable, lemon, garlic and green chilly. Products are offered in various packing sizes to meet purchase preferences of different customers and consumers. Squashes include mango, orange, grape, pineapple and strawberry, and ‘masala’ powders largely include ‘garam masala’ powder.

chp-16.qxd

10/18/05

12:51 PM

Page 166

Reducing production risk in terms of raw material price fluctuation The main ingredients for sauces are tomato, green chilly and soya, which are to be procured in season, processed and retained, in preserved form like puree. Inputs/ingredients are to be procured fresh and the food stuff prepared and then processed under high temperature and pressure in retorts under water for 20 minutes to sometimes several hours, depending on the properties of the products. With regard to pickles, for instance, main fruits, vegetables and ‘masala’ ingredients are to be procured in season. They are to be then converted into intermediaries like paste. The ‘masala’ ingredients are to be thoroughly cleaned and procured for preservation. When production of various pickles is planned the fruit/vegetable and ‘masala’ ingredients is processed into final products. So also with regard to ‘masala’ powders, raw materials and ingredients are procured during season, thoroughly cleaned and preserved, depending on product formulation. Different ingredients are drawn and processed either separately or together to obtain the final product. The enterprise proposes to effectively reduce the risk in terms of high raw material price fluctuations and develop scope to secure high margins during off season in different products. The machinery to be used mainly are fruit mills, boiler, steam vessels, pulverizers, ovens, blenders, filling machine, etc. Past experience of the promoters helped in evolving a market plan for the enterprise. The product and market mix of the project is planned in relative detail.

Market Plan of Anmol Enterprises: Product and Market Mix The enterprise has segmented its market and planned a product mix to target each segment. The table 16.1 below indicatively presents the relevant plan in terms of the number of customers the enterprise plans to target.

166

Chapter Sixteen

chp-16.qxd

10/18/05

12:51 PM

Page 167

Table 16.1 Proposed Product-Cum-Market Mix of Anmol Enterprises: Select Products

Market mix (as a percentage of sales)

Retail Customers -Rural (33%)

Retail Customers -Urban (31%)

Institutional Customers (36%)

Product-Mix Jams

255

145

15

Tomato Ketchup

30

110

-

Tomato Sauce

12

90

6

Chilly Sauce

21

71

18

Soya Sauce

20

50

18

Ready-to-Eat Products

-

105

-

110

85

-

Squashes

65

66

-

Syrups

47

78

4

Ready-to-Serve Beverages

51

72

-

102

95

-

Pickles

Masala Powders

Specific marketing strategies have been planned to target each customer segment in the proposed marketing mix. Retail customer: The enterprise proposes to market its own brand in this segment. The enterprise plans to appoint distributors who may, in turn, supply to retailers on a weekly basis. The promoters realised that in some products branding is hardly critical. Jams are yet “generic” and consumers do not display strong brand pull. This product would provide volumes of business and facilitate penetration among distributors and retailers as it has sales potential even at tiny retail outlets. The enterprise plans to simultaneously sell its products through various categories of outlets in Tamil Nadu. Table 16.2 elaborates on points of sale and region-wise numbers.

Applied Management in Business: Learning from Existing Businesses

167

chp-16.qxd

10/18/05

12:51 PM

Page 168

Table 16.2 Point of Sale—Region-wise Numbers Region

Chennai

Outlet Category A Supermarkets

Salem

Coimbatore

Total

9

2

5

16

B Departmental Stores

25

2

11

38

C Provision Stores

55

11

45

111

202

43

83

328

D Petty Shops

A Consumer Pull-Seeking Strategy The enterprise plans to initially place products in retail outlets and also create brand awareness at outlets. For the first two years, market support for providing visual displays at points of sale for brand promotion is believed important. For this, points of sale (POS) material are to be provided. The enterprise plans to lease shop shelf space and display boards to build brand awareness. The enterprise also plans to display its products at prominent trade fairs in India. Only in the third year, when sufficient profits have been generated and reserves built, does the enterprise plan to invest in media advertising and decrease focus on certain other areas. Table 16.3 below presents relevant and proposed selling expenses of Anmol Enterprises. Such expenses are not to be incurred uniformally in all outlets but selectively. Table 16.3 Planned Selling Expenses on Point of Sale of Anmol Enterprises Sr. Selling Expense No. 1. 2.

3. 4. 5.

168

Glow Sign Board Market Support — for Supermarkets — for Dept. stores — for Provision stores POS Materials Trade Fairs Advertising through print and electronic media

Amount (Rs. in lakh)

Year (Rs. in lakh) 1

2

3

4

5

6

1.5

1.5

1

1

1

2.25 4 6 12.5 7.5 18

1 2 2 2 1.5 -

1.25 2 4 1.5 1.5 -

3 3 6

3 2.25 6

3 2.25 6

Chapter Sixteen

chp-16.qxd

10/18/05

12:51 PM

Page 169

Institutional Customers The enterprise proposes to enter into an agreement with specialised chain stores in the region such as ‘Nilgiris’ and ‘Foodworld’ for sale of jams and other products in their brand name. The enterprise also plans to supply sauces to a re-labeller to market products in their brand name effectively, catering to a large number of buyers—hotels and restaurants. The selling expense indicated in the Table 16.3 excludes customer discount and margins that are considered separately in their market plan. The expenses and the plan proposed in this sub-section are to encourage consumer pull for their products. More Realistic Sales (Price) and Input Estimates Product-wise sales have been estimated by the promoters multiplying the projected output by the selling price as indicated in table 16.4 below. Table 16.4 Estimated Average Selling Price and Projected Sales Realisation of Product-mix Products

WeightedAverage Selling Price (Rs. per proposed standard unit)

Sales Realisation (Rs. in lakhs)

Year 1

Year 2 Year 3 Year 4 Year 5

Tomato Ketchup and Tomato Sauce

36.85

13.34

14.01

15.34

16.68

16.68

Chilly/Soya Sauce

38.00

22.20

23.21

25.25

27.75

27.75

Jams

60.50

23

24.15

26.45

28.75

28.75

Tomato Puree

53.70

2.10

2.21

2.42

2.63

2.63

Garlic Paste/Ginger Paste

38.00

1.98

2.08

2.28

2.48

2.48

Ready-to-Eat products

75.00

21

22.05

24.15

26.25

26.25

Pickles

38.50

3.60

3.78

4.14

4.50

4.50

Squashes/Crush

64.00

5.81

6.10

6.68

7.26

7.26

Synthetic Jellies

60.00

3.64

3.82

4.42

4.55

4.55

'Masala' Powders

118.50

14.20

14.91

16.33

17.75

17.75

The enterprise has estimated the selling price of products on the basis of the weighted average selling price over one year of other similar processors in the region. The raw material purchase price has also been similarly estimated. The prices have been weighted with the number of months the rate prevails on an annual basis. The estimates are hence more realistic. Applied Management in Business: Learning from Existing Businesses

169

chp-16.qxd

10/18/05

12:51 PM

Page 170

The enterprise has also been conservative in projecting sales in terms of capacity utilisation. This is another factor that a lender scrutinises. As the enterprise appears to achieve sufficient Debt Service Coverage Ratio (DSCR) as indicated in table 16.5 below even at a low capacity utilisation, the project risk is believed to be low. Table 16.5 Capacity Utilisation as per Projected Profitability Statement of Anmol Enterprises Year Capacity utilisation

Year 1

Year 2

Year 3

40%

45%

55%

Year 4

Year 5

75%

75%

Based on the expenses projected in the profitability statement, the break-even point of the enterprise is estimated. The enterprise is expected to operate on break-even levels from the first year itself despite its conservative projections. Given the specific analysis and projections made above, under normal circumstances, there is hardly any reason why a lender will not support the project or question its viability. DSCR is also high in this case. Table 16.6 below highlights the point. Table 16.6 Debt Service Coverage Ratio of Anmol Enterprises (Rs. in Lakh)

DSCR

Year 1

Year 2

Year 3

5.22

4.61

4.68

Year 4

Year 5

5.34

5.84

An entrepreneur needs to accord adequate consideration to the market plan. The case in this sub-section highlighted efficient procurement and production management and indicated only some critical aspects that need be given consideration when preparing a plan. The product and market mix analysis and conservativeness are fundamental issues. The product market plan is the basis for financial plan of an enterprise.

ANALYSIS AND MANAGEMENT OF RISK IN AN ENTERPRISE: PARAG BISCUITS, AHMEDABAD There are other critical decisions to be made in a project. These are particularly on the cost and financial structure of an enterprise. Decisions need to be made on the risk and profitability orientation of a project. Consider an adverse environment with falling demand and increased competition. An analysis of 170

Chapter Sixteen

chp-16.qxd

10/18/05

12:51 PM

Page 171

the cost structure of Parag Biscuits reveals a thrust on fixed costs. This implies an aggressive or relatively risky cost structure as the environment is adverse for this enterprise in terms of falling sales and margins in the past two years. A break-even analysis highlights the level of sales at which the profit before tax (PBT) is zero. The following information is available on the enterprise. The data presented in Table 16.7 below is for 2001–2002. Table 16.7 Expenses-Revenues-Profit for Parag Biscuits, Ahmedabad (2001–2002) Expenses-Revenues-Profit

Amount (in Rs.)

Sales

25,00,000

(Less) Variable Costs (Interest on WC)

21,25,000 (70,000)

Contribution

3,75,000

(Less) Fixed Costs

1,85,000

Profit before tax (PBT)

1,90,000

Break-even sales may be estimated by using the formula: Fixed costs over sales realisation minus Variable cost. Break-even sale is at about 50 per cent of current sales.

Risk Analysis of the Enterprise Risk is estimated in terms of possible variability in profit. The variability in profits arises primarily because of variability in sales (volumes or margins or both). The impact on the PBT of Parag Biscuits if sales drop from its current level indicates a fall greater than the fall in sales. This is the Degree of Total Leverage (DTL) and measures the risk arising out of the sensitivity of profits to sales. Contribution DTL

=

3,75,000 =

PBT

=

1.97

1,90,000

The risk includes: (i) the Degree of Operating leverage (DOL) arising from the structure of operating costs (variable costs that vary with output and fixed costs that do not) of the enterprise, (ii) the Degree of Financial Leverage (DFL) arising from the financial structure of the enterprise. This refers to debt as against the equity structure in the capital of an enterprise. Applied Management in Business: Learning from Existing Businesses

171

chp-16.qxd

10/18/05

12:51 PM

Page 172

The Degree of Operating Leverage (DOL) measures the percentage change in PBT for a percentage change in sales: An enterprise that has higher levels of fixed costs in operation will have a higher DOL. Contribution DOL

3,75,000

=

= PBIT

=

1.44

2,60,000

The Degree of Financial Leverage (DFL) on the other hand measures the percentage change in PBT for a per cent change in PBIT. An enterprise that has taken more of institutional finance vis-à-vis own equity will have a high DFL. PBIT DFL

2,60,000

=

= PBT

=

1.36

1,90,000

The Degree of Total Leverage (DTL) is the product of the DOL and the DFL: Fixed costs in operations cause a 1 per cent change in sales to lead to a more than 1 per cent change in the PBIT. Similarly, 1 per cent change in the PBIT causes profits to change by greater than 1 per cent. Fixed costs leverage the impact of changes in sales on profits. A high DTL is fine if sales have scope to increase and market growth is high in an industry. If not, it could be harmful to the enterprise as the fall in the PBT will be 1.97 per cent (DTL) for every 1 per cent fall in sales. Structuring an enterprise’s finance and cost is thus important to increase its returns or reduce its risk. The lessons for an entrepreneur do exist in the food-processing sector in terms of exploring, outsourcing options of some activities as to reduce interest burden on fixed investment, which is a fixed cost, for example. Further, depending on the risk-return trade-off and potential of an enterprise, greater debt financing may be availed of and/or variable costs may be selectively converted into fixed costs as a part of the revised project report.

SYSTEMS

IN

BUSINESS

Management information and control systems (MICS) are important areas in enterprise management. As an illustration, consider the following case of an enterprise—Narsi’s Vegetable Processors engaged in the manufacture of mango pickles in Hyderabad, Andhra Pradesh. The enterprise buys mangoes from wholesalers and undertakes processing and marketing. The enterprise markets its products in Hyderabad. Purchasing and stocking decisions are 172

Chapter Sixteen

chp-16.qxd

10/18/05

12:51 PM

Page 173

most critical in this sub-sector as the availability of products is seasonal and the contribution of raw material cost to the total annual cost of production of such an enterprise is high. Purchase on the basis of economic order quantity is critical in such business to optimise the cost and the benefit by virtue of inventory management.

Economic Order Quantity (EOQ) in Purchase Management information and control systems for larger enterprises may include utilisation of production and scrap reports on a daily basis, batch consumption reports, material utilisation report and production report on a monthly basis and, a purchase and stores ledger. Nevertheless, most critically, the EOQ at the enterprise level has to be estimated for enterprises that are tiny and small to facilitate purchase and stocking decisions. For instance, Narsi’s Vegetable Processors in Hyderabad requires raw material of 90,000 kg of mangoes a year. The enterprise works at an average for 300 days a year. The cost of processing an order is Rs.30 and the carrying cost per kg. of mango is Rs.2 for one year. Lead-time for receipt of inputs upon order is five days and the enterprise may keep a reserve stock of 4 days’ usage. The economic order quantity and the re-order point may be estimated incorporating the formula:

EOQ = 2AO/C, where A is the annual requirement of input, O is the ordering cost (communication, transport, etc.) and C is the carrying cost (storage etc.)

The EOQ works out to 5196 kg. The re-order point may be estimated as follows: 90,000 300

300 kg

Daily usage

=

Re-order point

=

Safety stock × Usage rate + Lead time × Usage rate

=

4 (300) + 5 (300)

=

= 2,700 kg

Obviously, the variations in sale price over different months need be given due consideration and then the EOQ decided upon. (The participants may be asked to work out EOQ of purchase of a hypothetical enterprise and discuss their estimations). Applied Management in Business: Learning from Existing Businesses

173

chp-16.qxd

10/18/05

12:51 PM

Page 174

Maintaining Information on the Cost Structure of a Business The table below presents the cost structure and activity levels of a food processing (jam making) enterprise for 2001–2002. Maintaining information in this format will facilitate decision making in an enterprise. Cost Structure and Activity of an Enterprise for 2001–2002 Sales (10,000 jars @Rs.75 each)

7,50,000

Variable cost (10,000 jars @Rs.65 each)

6,50,000

Contribution

1,00,000

Fixed cost

30,000

Profit

70,000

Assume that the enterprise now receives an offer from an exporter on certain specific terms. The exporter offers to buy products from this enterprise at a price 20 per cent more than his current sale price. The exporter, however, guarantees offtake of only 80 per cent of his current sale. He also insists that the manufacturer offers his product to no one else directly. Certain other expenses are likely to rise. The Table below summarizes the offer. 1. Offer of increase in prices = 20%

2. Reduction in sales = 20% (As the exporter would like the enterprise to manufacture for him alone)

3. Variable expenses increase = 20% (in terms of better quality raw related cost)

4. Fixed cost increase = 10% (in terms of additional expense on upgrading equipment)

Would the enterprise’s profits increase or decrease, if it accepts the offer? The cost structure and the activity of the enterprise, it accepts the offer, is presented in the table below. Production

10,000 jars

Total sales

Rs.9,00,000

Price

Rs.90 per jar

Total variable cost

Rs.7,80,000

Variable cost

Rs.78 per jar

Fixed cost

174

Chapter Sixteen

Rs.33,000

chp-16.qxd

10/18/05

12:51 PM

Page 175

Therefore, profit equals Rs.87,000. Profit, therefore, increases if the enterprise accepts this offer. The decision to accept the offer may be made quickly and approximately, if an enterprise maintains ready data on its cost structure. As a second illustration, consider the concept of a simple systems tool presented below. Systems for cash management are important. If a business runs out of cash it may not be able to pay dues on time or take advantage of opportunities because of lack of funds to finance them. A portion of profit should be saved and ploughed back to business as retained earnings. Continuous informal borrowings will put pressures on an entrepreneur to pay high interest and could affect credibility. All cash receipts and expenses should be regularly recorded. A simple but extremely utilitarian tool appropriate for business decision-making is a cash-cum-cost sheet. A cash-cum-cost sheet allows keeping records of cash and cost. But, more importantly, it helps decisionmaking on purchase and sales (discount v/s credit) and on structuring of costs to take advantage of leveraging effects of fixed costs on profits, or alternatively, reduce business risk.

A Cash-cum-Cost Sheet for Efficient Decision Making There are many reasons why an enterprise may run out of cash. Sales may be poor or perhaps containing credit, besides the burden of paying the raw material supplier for credit purchase. Cash goes out even before it comes in. Working capital is used on personal expenses or directed to the purchase of equipment. Short-term funds are diverted to long-term investment. A cash-cum-cost sheet is a tool that allows to forecast how much cash is earned and how much is spent on every operating cycle. It also shows the structure of costs. When cash is short at the end of one operating cycle, one can take remedial measures and purchase on credit and sell on cash, perhaps by offering discounts over the next operating cycle. One can also strive to convert fixed cost into variable cost when one is confident of sales or margins for the next operating cycle or next few cycles. Even elements of cost such as raw material purchase, which is invariably a variable cost, may be converted to a fixed cost temporarily or for longer periods by means of post-dated cheque payments (with bank guarantee) or higher inventory stockpiling. One can make entries in a cash-cum-cost sheet for the period of one operating cycle as to plan on purchase and sales decisions as well as on profitability orientation on the next. Applied Management in Business: Learning from Existing Businesses

175

chp-16.qxd

10/18/05

12:51 PM

Page 176

An Illustration on Maintaining a Cash-cumCost Sheet Cash transactions may be recorded on the left page. Cash received, cash disbursed, investments, revenues and costs may be recorded on the right page. Incomes are cash received and costs are cash disbursed. As an illustration, consider a ‘papad’ and ‘masala-making’ enterprise. The enterprise had about Rs.5,00,000 as cash balance as on February 1, 2001 and used it to buy materials worth Rs.80,000 on February 10, 2001. On February 13, the enterprise again bought raw material for Rs.50,000 and paid rental charges totalling Rs.80,000. On February 25, there was sale of products to an exporter for Rs.2,00,000. On February 27, the enterprise sold more products to another trader for Rs.8,20,000. On February 28, the enterprise bought raw material for Rs.7,00,000. These transactions are recorded in the following cash-cum-cost sheet. LEFT PAGE (CASH SHEET) Date

Explanation

To/From

Cash Received

Cash Disbursed

Cash Balance 5,00,000

2/1 2/10

Bought raw material

Rajan Traders

-

80,000

4,20,000

2/13

Bought raw material

Mahesh Traders

-

50,000

3,70,000

-

80,000

2,90,000

Paid rent (annual lease) Arrangement paid every 6 months

-

2/25

Sales

Alap Holds

2,00,000

-

4,90,000

2/27

Sales

Mukesh Enterprise

8,20,000

-

13,10,000

2/28

Paid wages (piece-rate)

Employees

Total

-

7,00,000

6,10,000

10,02,000

9,10,000

-

RIGHT PAGE (COST SHEET) Start-Up/Investment 5,00,000 5,00,000

176

Income 2,00,000 8,20,000 10,02,000

Variable Cost 80,000 50,000 7,00,000 8,30,000

Chapter Sixteen

Fixed Cost 80,000 80,000 -

chp-16.qxd

10/18/05

12:51 PM

Page 177

In the cash-cum-cost sheet above, all expenses are recorded as variable or fixed costs simultaneously. As indicated earlier, such system tool facilitates decision-making on the purchase, sale and ‘outsourcing’ or profitability front. For instance, measures to consider when cash balance is inadequate given the working capital requirement for the following operating cycle, include offering shorter periods for credit sales and a discount for cash sales and suppliers requested for credit. Further, if not very confident of demand in the next cycle, one may also reduce business risk by reducing the fixed cost, perhaps by discontinuing the annual lease arrangement and utilising the idle capacity of other enterprises on a monthly basis or by employing labour on contract than salary basis and by reducing the stocking of raw material and inputs. Alternatively, one may enhance the potential for increasing returns or margins by converting piece rate to salaried labour if the cash balance is relatively higher and market demand exists. Costs may hence be reduced and margins increased. That is by converting variable costs into fixed costs. Almost all variable costs may be converted into fixed costs and vice versa. Such simple systems in business could help make or break an enterprise. These decisions also affect working capital requirements for the next operating cycle. Working capital management involves estimating quantities of raw material or components, stock-in-progress, finished goods stock and bills receivable to be carried at any time so that uninterrupted production and inflow of cash are maintained. Working capital investment has a cost in terms of interest on funds invested, if they are borrowed, or if it is equity financed, there is a loss of return that could have been earned if invested alternatively. Those dealing with exporters and working on orders may require working capital only for raw material and stock in process as finished goods may be dispatched immediately upon production. The fortunate ones may also have their payments received immediately. The cycle beginning with the holding of raw material or components and ending with the ‘carry’ of finished goods is known as production cycle. The cycle which extends beyond the stage of ‘finished goods carry’ up to ‘carry of receivables’ due from customers is called an ‘operating cycle’. A business has two kinds of assets: fixed assets such as machinery, land, building and operating assets, which are enclosed by one operating cycle. Operating assets are called gross working capital. Current liabilities such as the amount due for purchase of raw material, components and stores, viz. bills payable and credit received for other services, payment to electricity and telephone departments or money from an ‘informal’ money lender, all constitute a source of working capital. The net working capital is thus the difference between these and the gross working capital. The cash credit facility is normally given by financial institutions to a business in the form of a running current account. Funds may be drawn from time Applied Management in Business: Learning from Existing Businesses

177

chp-16.qxd

10/18/05

12:51 PM

Page 178

to time for only working capital requirements. This account is subject to ‘drawing power’. The drawing power is the limit to which one can draw funds out of this account. The drawing power is determined on the basis of market value of stocks (raw materials, stock in process and finished goods) and book debts at a given point of time less the amount of margin contribution by the borrower (say, 20%) that is predetermined. The banker may require weekly, monthly or fortnightly certified statements of stock holdings and book debts outstanding. The bank may also insist on paying the supplier of raw material directly from out of the cash credit facility. A financial institution may also require certain documents that must be executed before provision of loan. Securities may include primary security and secondary or collateral security. Primary security includes tangible assets such as stock and book debts in the case of a cash credit facility and equipment or particular asset that is financed for a long-term use. Collateral security may include tangible assets such as property or intangibles such as guarantees from borrower or persons who are third parties.

Advantage of Cash Purchase of Raw Materials Consider Parag Patel’s enterprise. He manufactures pickles at home. Raw material fruits and vegetables are available on credit. For every Rs.100 of raw material purchased, Rs.2, that is 2% is the interest for credit offered. An enterprise that buys about Rs.1 lakh worth of raw material every month and pays Rs.2,000 as interest may save this and increase their net earnings. The cost of production approximately accounts for about 20 per cent of raw material costs. Assume current earnings to be Rs.6,000 a month or about 5 per cent of the cost of production. If Rs.2,000 can be saved every month, it increases earnings for an enterprise by 33 per cent.

DAS AGENCY PVT. LTD.: A CASE ON MANAGERIAL DEFICIENCIES CONTRIBUTING TO POOR PERFORMANCE Das Agency Pvt. Ltd. markets a wide range of processed foods. Das had launched his business in 1998. The enterprise market viz. distributes products of other brands as also ‘outsources’ processing and sells products in its own brand. The enterprise operated from a rented warehouse-cum-office headquartered near Chennai. Das Agency Pvt. Ltd. is involved in procurement and sale of various products, including squash, jams and jellies and curried vegetables. The products were sold through one small leased outlet in Chennai. It was also sold through other retailers and directly to household consumers who 178

Chapter Sixteen

chp-16.qxd

10/18/05

12:51 PM

Page 179

normally gave specific orders. Table 16.8 below presents the approximated market mix of the enterprise. Table 16.8 Market mix of Das Agencies Pvt. Ltd. (2002–2003) (Amount in Rs.) Own Retail Outlet

Other Retail Outlets

Sales (Rs.)

26,00,000

14,72,000

3,76,000

Direct ConsumersHouseholds (Customized Orders) 3,60,000

Gross contribution (sales minus cost of production, including finishing & packaging charges)

10,72,000

3,96,000

1,08,000

1,40,000

Direct expenditure

4,24,000

1,60,000

48,000

36,000

20,000

6,88,000

Contribution (Net)

6,48,000

2,36,000

60,000

1,04,000

20,000

10,28,000

Indirect expenditure 4,52,000

2,16,000

64,000

60,000

24,000

8,56,000

20,000

4,000

44,000

44,000

1,72,000

Net profit before tax &interest

1,96,000

Export (Indirect)

Traders (Domestic sale)

Total (100%)

1,44,000

49,52,000 17,16,000

Majority of sale was through own retail outlets. Retail prices in India were the same in all retail outlets. Profit margins were, therefore, lower on indirect retail sale. Sale was also through indirect exports, traders for domestic markets and direct sale to consumers. As the table above indicates, there were varying degrees of profitability in sales through different market channels or market-mix. About 50 per cent of sales were credit sales regardless of the channel. The enterprise used the services of CFTRI for developing new processes and new blends and mixes. A retired professional from the CFTRI was appointed as a consultant on monthly retainership for this purpose. Activities of the enterprise largely included procurement, packaging and sale. All products were outsourced. Developing new blends, particularly of the squash and ‘masala’ products, was an area of expertise of Das. He had developed over 16 blends and mixes of squash and ‘masalas’. Each blend was to suit the taste of different ethnic communities based in Chennai. Das Agencies had a number of suppliers and manufacturers to outsource production, but were lucky to have vendors who retained quality. While the business has been earning profits, it has been lower than expected. Performance has fallen compared to turnover growth. Stocks seemed to be mismanaged as the bank overdraft often crossed limits—particularly during peak demand. The turnover growth of the company seemed to Applied Management in Business: Learning from Existing Businesses

179

chp-16.qxd

10/18/05

12:51 PM

Page 180

be putting stress on availing own financial resources. Das was confident of the ability of his enterprise to improve performance despite intense and increasing competition. Das wondered on options, whether to: 1. Change the structure of capital of the enterprise to enhance profit and profitability? 2. Backward integrate into food processing than continue with mere packaging and marketing of processed food? 3. Change his pricing strategies in different marketing channels? 4. Improve management in his enterprise in terms of production, finance and marketing as, though his turnover has been increasing, his profits have not, proportionately? The financial performance of the enterprise in the last two years are summarised in the tables below. Table 16.9 DAS AGENCIES PVT. LIMITED Profit and loss account for year ending 31st March 2002 and 31st March 2003 (Estimates rounded off to the nearest ‘000) (Amount in Rs.) 2002–2003 Rs.

2001–2002 Rs.

Sales

49,51,358

31,48,252

Cost of Goods Sold

(32,34,808)

Profit (Gross)

17,16,580

10,66,588

Distribution Cost

(3,32,180)

(2,27,296)

Administration Costs (about 70% are fixed costs)

(12,13,724)

(6,89,936)

Operating Profit

1,70,676

Interest Receivable

-

Interest Payable

(46,172)

(10,980)

PBT

1,24,504

1,39,732

Tax on Profit Earned

37,068

39,756

PAT

87,436

99,976

Retained Profit (in the beginning of the year)

1,15,976

16,000

Capitalisation Issue

(1,00,000)

Retained Profit (at the end of year)

1,03,412

180

Chapter Sixteen

(20,81,684)

1,49,356 1356

1,15,976

chp-16.qxd

10/18/05

12:51 PM

Page 181

Table 16.10 DAS AGENCIES PVT. LIMITED Balance Sheet as on 31st March 2002 and 2003 (Estimates rounded off to the nearest ‘000) (Amount in Rs.) Sr. No.

2002–2003

2001–2002

Rs.

Rs.

1.

Fixed Assets

2,00,932

1,83,272

2. a.

Stock (Current Assets)

5,20,496

5,97,668

b.

Accounts receivables (Current Asset)

4,32,132

3,06,256

c.

Cash (Current Asset)

1952

1512

Total Current Asset

9,54,580

9,05,438

3.

Creditors (Current Liabilities)

9,04,484

9,31,376

4.

Net Current Assets

(50,096)

(25,940)

5.

Creditors Falling due beyond one accounting year

6.

Provisions

(36,080)

(37,352)

7.

Net Assets

2,07,416

1,19,980

8.

Share Capital (Fixed liability)

1,04,004

4,004

9.

Profit and Loss account

1,03,412

1,15,976

10.

Capital Employed (Total in business)

2,07,416

1,19,980

(7532)

-

The sub-section below presents an indicative analysis of performance and future potential of the enterprise.

A Performance and Potential Analysis of Das Agencies Pvt. Ltd. The enterprise has seen steady growth in sales since its inception. The promoter Das is technically well trained, having graduated from CFTRI, and very rightly utilises the ‘retailer-push’ factor in promoting and selling his products, but lacks in management skills in other areas. Decisions are taken on thumbrule basis. Growth in sales and increase in activity has not been well managed. This has somewhat affected performance. The performance potential of the enterprise has not been adequately exploited. A diagnosis of the enterprise may help the present performance as shown in the statement below. The estimates are approximated, as the objective is to only pursue an indicative analysis. Sales have increased in the two periods viz. 2002–2003 over 2001–2002. Applied Management in Business: Learning from Existing Businesses

181

chp-16.qxd

10/18/05

12:51 PM

Page 182

The Financial Front The net contribution to sales has been about the same over 2001–2002 and 2002–2003. The overheads have increased as a percentage of turnovers in 2002–2003. Operating profits have fallen in terms of sales over the two periods. The expenditure on interest has also increased. Earnings after interest as a percentage of sales have gone down. z

z

z

z

Financial Leverage: The unit did not take ideal advantage of financial leverage, as initial bank borrowings seem low. Savings on the income tax front could have been more. The enterprise has increased leverage since but not to the extent desired. Return on Capital Employed: Return on capital employed has fallen over 2001–2002 to 2002–2003. Current Ratio: The current ratio of the enterprise has always been relatively poor. The enterprise seems to have invested short-term funds for long-term purposes. Considering the current ratio, the enterprise seemed to have invested more than ideal levels of own funds in fixed assets. A term loan could have helped maintain better liquidity levels. Cash Flows and Problems: Cash balance has fallen considerably. The net ‘contribution’ as a percentage of sales is almost the same in both years.

The Marketing Front z

z

z

182

Growth Rate: The turnover of the enterprise has seen good growth over the years. Turnover has increased considerably between 2001–2002 and 2002–2003. Net profits are however, a small percentage of sales. This is a poor margin on sales performance. They may reflect a poor market or product mix with a tendency towards worsening circumstances. Debtor Turnover: Sale through own retail outlets has been on cash basis while remaining sales are on credit basis. The Debtor Turnover Ratio (viz. Credit sales to Debtors) is about the same, indicating poor focus upon market mix or discount vs. credit modes. Margins in terms of operating profits and profit before tax (PBT) to sales have dropped although sales has increased. This has occurred in Chapter Sixteen

chp-16.qxd

10/18/05

12:51 PM

Page 183

spite of increase in sales as overheads (administrative expenses) have increased more than proportionately. Earnings after interest have fallen in terms of percentage of sales as interest expenses have increased several folds. z

Sales Mix: The sales mix in terms of product or market mix does not seem decided, considering the contribution per rupee of sales but on thumb-rule basis. The scope for efficient pricing and discount stratagem on the basis of contribution analysis seems to have been ignored. This could have reduced debtor realisation time and enhanced performance, including sales. Economies of scale do not seem effectively reaped in marketing. As sales have increased, ideally, overheads to sales ratio should have reduced. Rather, it has increased. This indicates the need for revamping product or market mix and evolving an ideal promotional stratagem perhaps in terms of credit and discount.

The Production Front z

z

z

Rise in Variable Costs: The enterprise is largely outsourcing entire ‘production’. However, it has invested in equipment for packaging and labelling. Inventory Turnover: There may be mismanagement in terms of stocking raw material and finished goods inventory. Thus, inventory turnover ratios (ITOR) have fallen between the two years. This may lead to increased working capital requirements and a cash crisis. Analysis of stock turnover at the market and product mix level seem ignored. Creditors: The level of non-bank creditors seems to be high. Interest cost has increased several folds as compared to 2001–2002. The use of non-bank creditors could imply higher interest charges over the years. This may have also affected performance, viz. margins.

Systems for planning seem to be on thumb rule basis. In essence, to enhance performance and sustainability, the enterprise could go in for higher levels of institutional debt finance, may consider integrating backwards into processing, as also develop the marketing front in terms of offering ‘credit and discounts’ in channels of products, where contribution is the highest to ensure that turnover increase will be matched with profit increase even while benefiting from a higher operating and financial leverage and hence profitability. In fact, these are aspects that need to have been considered earlier even during conception and implementation of the project.

Applied Management in Business: Learning from Existing Businesses

183

chp-16.qxd

10/18/05

12:51 PM

Page 184

NETWORKING OPTIONS TO MANAGEMENT EFFICIENCY

BE

CLUBBED

WITH

In fact, management efficiency at the enterprise level needs to be clubbed with efficient networking. There are many regions with established food-processing enterprises but with a weak technical knowledge base, weak information channels and limited facilities for testing and research. Legal and quality issues may be unknown. Legal compliance, support in HACCP certification and need for establishing food-testing laboratories are critical. An information portal www.foodindia.org with information on international product standards has been developed by the ‘Mahratta Chamber’ (MCCIA) in Pune, for instance. But, few are aware of the facility. Information gaps need to be reduced by networking with different support institutions. The food processing enterprises at Pune produce products such as jelly, squash, pickle, dehydrated ready food mixes, bakery products, milk products such as sweets, ice creams, confectionery items, ground cereal flours, papad, processed spices, etc. A consultant was called (FICCI, Quality Forum, New Delhi) to introduce HACCP. A food-testing laboratory was established not only to carry out testing facilities but also to carry out research and provide training facilities to firms. The laboratory was established to work on the areas of product testing, (quality control & quality assurance), product development and training in an integrated manner. The Food Research and Analysis Centre (FRAC), New Delhi, signed an MOU with MCCIA to pursue initiatives. FRAC helped the Pune laboratory in the selection of right machinery, staff and in training. In essence, SIDBI and the Ministry of Food Processing Industries provided financial support. MCCIA provided finance and management. The FRAC provided finance and management and the CFTRI provided training. Such interventions for the benefit of enterprises in a region may be catalysed only if enterprises work together to ensure the same. An information centre was developed for farmers, which strengthened backward linkage of processed food units. Potential entrepreneurs in other regions should learn of such options to enhance performance.

Grameen Information Centre (GIC) In the food-processing region of Pune, IT is used to develop linkages between food-processing units and agriculture producers around the city. The GIC is a concept developed to provide information to facilitate better linkages. Information is provided on technology, prices, demand and supply situation in 184

Chapter Sixteen

chp-16.qxd

10/18/05

12:51 PM

Page 185

the international scenario, rules and regulations for exports, import duties, standards and specifications. A pilot GIC was established near Pune. Various activities of the GIC include ‘Rice Programmes’ to encourage better seeds and hybrid varieties; ‘Organisation Farming Programmes’ for the development of niche products; dissemination of information on Government sponsored schemes, new technologies in agriculture, post-harvest techniques, weather forecasting and guidance on crop protection.

Development of Raw Material Purchase Consortia or ‘Raw Material Banks’ Input supplies to individual enterprises may be bought in volumes meriting discounts. Purchase consortia lend strength to small enterprises vis-à-vis supplies. It is necessary to secure information about raw material and input sources and quantity discount-related options. Agencies such as the NSIC may be approached for establishment of such raw material banks. For instance, in Ahmedabad for certain vegetables Rs.5 crore is believed to be the optimal size of purchase (on a quarterly basis). Networking with other enterprises to purchase together may help even smaller individual enterprises benefit sustainably in terms of cost reduction. The ‘sub-optimal’ raw material purchase price of various inputs (as it is), often on a credit purchase basis and in an uneconomic quantity, affects the cost structure of many smaller enterprises in different sub-sectors. The cost of uneconomic purchase as also credit purchase need be avoided. The return on investment (pre-tax) to such common ventures (pre-tax) equals over 50 per cent. Even if partly (debt for working capital) bank-financed, the ROE is likely to be very high, depending on the extent of rotation and amount and cost of working capital secured.

Development of Common Facility Centres and Exploring Common Financing Options Common Facility Centres (CFCs) have the objective of providing necessary services to smaller enterprises. Shared facilities may be in terms of research and development and product testing and standardisation. The Peenya Industries Association in Bangalore has, for example, established a permanent exhibition-cum-display centre for members’ products. Such centres may be supported by various ministries such as the Ministry of SSI and ARI, DC (SSI), etc. Common Facility Centres help smaller enterprises utilise expensive facilities which they as individual enterprises cannot afford to develop and Applied Management in Business: Learning from Existing Businesses

185

chp-16.qxd

10/18/05

12:51 PM

Page 186

use. Common Financing options can be explored as it benefits tiny and small enterprises that do not have access to institutional working capital due to their inability to produce necessary documents on collateral. Mutual Credit Guarantee Fund Scheme (MCGFS) implemented by SIDBI is one such option. The options of networking are several. Entrepreneurs in the sector may explore networking options among themselves as also establish a good networking with support institutions to sustain performance.

186

Chapter Sixteen

chp-17.qxd

10/18/05

12:53 PM

Page 187

17

CHAPTER

Legal Requirements

A

ll industrial activities are governed by certain legal provisions that come in force from time to time. A few of them are given here with brief explanation for your understanding. These could be divided into ‘general’ and ‘Food Processing Industry specific’.

GENERAL LEGALITIES Factories Act, 1948 This is applicable to enterprises where the number of employees is: z

Ten or more and where power is used; or

z

Twenty or more and power is not used.

The enterprises covered under the Act are required to keep certain records: z

Muster Roll

z

Workers Register

z

Overtime Register

z

Advance Register

z

Register for Fine

z

Register for Deductions

z

Register of Wages

z

Register of Accidents and Dangerous Occurrences

chp-17.qxd

10/18/05

12:53 PM

Page 188

z

Bond Inspection Book

z

Register of Cleaning and White Washing

z

Record of Examination of Parts of Machinery

There is another Act known as Shops & Establishment Act which is applicable to shops and business undertakings employing 5 or more persons.

Employees Provident Fund & Miscellaneous Provisions Act, 1952 The Act applies to every factory or establishment employing 20 or more employees. It, however, exempts a factory or establishment for an initial period of 3 years from commencement of business if the number of employees is more than 50 and for an initial period of 5 years if the number of employees is less than 50. The minimum contribution payable by the employer is 12% of the basic salary contribution and Dearness Allowance. The employee also makes an equal contribution. The Act, however, does not specify a maximum contribution.

Employees’ State Insurance Act It provides benefits to employees in case of sickness, maternity and employment injury and for certain other matters in relation thereto. The Act also provides for payment of contributions by employers and employees at the rates specified in the First Schedule of the Act. The existing rates of employee’s contribution vary according to wages and the employer’s contribution is exactly double the employee’s contribution. It shall apply to factories employing 20 or more people.

Payment of Wages Act, 1936 This Act is applicable to factories and establishments, which come under The Factories Act. The act is restricted in its application to the class of workers whose wages range upto Rs.1,600/- per month.

Minimum Wages Act, 1948 The employer has to pay minimum wages to employees in certain scheduled industries. At present the minimum wages act is applicable in 44 scheduled industries. 188

Chapter Seventeen

chp-17.qxd

10/18/05

12:53 PM

Page 189

The Indian Partnership Act, 1932 The Indian Partnership Act, which was amended in 1932, provides for rules relating to foundation of legal partnership. It states the rights and duties of the partners amongst themselves and outside and lays down rules regarding the dissolution of partnership.

Central Excise (CE) The Central Government is empowered to levy excise on all articles manufactured in India except alcohol, alcoholic preparations and narcotics. The liability to duty starts the moment a new commodity is manufactured. There are, however, certain exemptions granted to SSI units. However, there is no CE on fruit and vegetable products.

Sales Tax Sales tax is tax levied by state and centre. Tax charged by state is called LST or Local Sales Tax and tax charged by Centre is known as CST or Central Sales Tax. The latter is charged when goods move out of a state.

The Income Tax Act, 1911 The Act governs the levy of income tax in India. It defines various terms and expressions and states the liability of a person to pay income tax. The rates and pattern of taxation, however, are changed from time to time.

Pollution Control Act The State Air and Water Pollution Control Board is the body responsible for implementing this Act. The act is applicable to all kinds of industry.

SPECIFIC LEGALITIES: (FOOD PROCESSING) In addition to the general legal requirements, there are a few legal requirements that are specific to Food Processing Industries. A food processing enterprise has to comply with several compulsory legal requirements. Implementation of these norms with regard to Small and Medium Enterprises Legal Requirements

189

chp-17.qxd

10/18/05

12:53 PM

Page 190

is relatively stringent while cottage and household level units sometimes tend to compromise on such stipulations. These laws include: a. Prevention of Food Adulteration Act (1954): which is the basic statute to protect consumers against supply of adulterated food. The Central Committee for Food Standards ‘under the Directorate General & Health Services Ministry of Health and Family Welfare has specified the standards. b. Milk and Milk Products Order (MMPO): regulates milk and milk products production in the country. The order requires no permission for units handling less than 10,000 litres of liquid milk per day or milk solids upto 500 tpa. c. Fruit Products Order (1955): regulates manufacture and distribution of all fruit and vegetable products, sweetened aerated waters, vinegar and synthetic syrups. The license is issued by Regional Director of MoFPI located at Mumbai, Delhi, Kolkatta, Chennai and Guwahati based on the satisfaction of the concerned officer with regard to quality of production, sanitation and hygiene, machinery and equipment and work area standards. d. Standard of Weights and Measures (Packaged Commodities) Rules, 1977: lay down certain obligations for all commodities in packed form with respect to their quality declaration. The Directorate of Weights and Measures under the Ministry of Food and Civil Supplies operates these rules. e. Export (Quality Control and Inspection) Act, 1963: is operated by the Export Inspection Council and under this act many exportable commodities have been notified for compulsory pre-shipment inspection unless specifically requested by the importer not to do so. f. Voluntary Standards: are regulated by organisations involved with voluntary standardisation and certificates systems concerning quality parameters in food. They are the Bureau of Indian Standards (BIS) and Directorate of Marketing and Inspection (DMI). The food processing industries sector as a whole involves other legislations. g. Oils, Deoiled Meal and Edible Flour Control Order 1967 and Vegetables Products Control Order, 1976: control the production and distribution of solvent extracted oils, deoiled meals, edible oil seed flours and hydrogenated vegetable oils (vanaspati). h. Meat Food Products Control Order, 1973: regulates manufacture, quality, and sale of all meat products and is operated by the Directorate of Marketing and Inspection. 190

Chapter Seventeen

chp-18.qxd

10/18/05

12:54 PM

Page 191

CHAPTER

18

Support Institutions for Promotion of Food Processing Sector THE BASIC SUPPORT INSTITUTIONAL FRAMEWORK

W

hile information on various sources of information is presented in this chapter, potential entrepreneurs need not contact all agencies but only the relevant ones, depending on their information needs and support. Important agencies for information on procedures and formalities include the District Industries Centres (DICs), Directorate/Commissioner of Industries, State Financial Corporations (SFCs), Technical Consultancy Organisations (TCOs), and agencies conducting Entrepreneurship Development Programmes such as State level and National level Entrepreneurship Development Institutions and Non-Government Organisations (NGOs).

Ministry of Food Processing Industries: The Key Player The Ministry of Food Processing Industries, is the key central agency of the Government responsible for developing a strong and vibrant food processing sector with a view to creating increased job opportunities in the rural areas, enabling the farmers to reap benefit of modern technology, creating surplus for exports and stimulating demand for processed food. The sub-sectors under the purview of the Ministry are Fruits and vegetable processing; Food grain milling; Dairy products; Processing of poultry and eggs, Meat and meat products; Fish processing; Bread, oilseeds, meals (edible); Breakfast foods; Biscuits; Confectionery (including cocoa processing and chocolate); Malt extract; Protein isolate; High protein food; Weaning food and extrude other ready to eat food products; Beer, including non-alcoholic beer; Alcoholic drinks from non-molasses base; Aerated waters/soft drinks and other

chp-18.qxd

10/18/05

12:54 PM

Page 192

processed foods; Specialised packaging for food processing industries). It also provides technical assistance and advice to food processing industry. Information on schemes of the ministry is available on the website www.mofpi.nic.in.

OTHER SUPPORT INSTITUTIONS

AND THEIR

ROLES

Central Food Technological Research Institute – CFTRI (www.cftri.com): The institute provides technologies for food processing enterprises. National Small Industries Corporation Ltd – NSIC (www.nsicindia.com): The Corporation provides integrated technology, marketing and financial support to small scale sector. Small Industries Development Organisation – SIDO (www.laghu-udyog. com): The office of the Development Commissioner (Small Scale Industries) also known as Small Industries Development Organisation (SIDO) functions as the Nodal Development Agency for small industries. Export Credit Guarantee Corporation of India Limited – ECGC (www. ecgcindia.com): ECGC covers the risk of exporting on credit. Being essentially an export promotion organisation, it functions under the administrative control of the Ministry of Commerce, Government of India. It provides a range of credit risk insurance covers to exporters against loss in export of goods and services. ECGC also provides information on creditworthiness/credit ratings of overseas buyers and various countries.

Credit status information agencies abroad Dun & Bradstreet – (www.dnb.co.in): It is one of the world’s leading sources of business information, enabling business-to-business commerce for past 160 years. D&B has the largest company database available, with information on more than 66 million companies worldwide, for credit, marketing and purchasing decisions. Businesses also use D&B's information and technology to authenticate and verify potential trading partners online, increasing their trust and confidence in e-commerce transactions. Small Industries Development Bank of India – SIDBI (www.sidbi.com): The Small Industries Development Bank of India Act, 1989 envisaged SIDBI to be “the principal financial institution for the promotion”, financing and development of industry in the small-scale sector and to co-ordinate the functions of the institutions engaged in the promotion and financing or 192

Chapter Eighteen

chp-18.qxd

10/18/05

12:54 PM

Page 193

developing industry in the small scale sector and for matters connected therewith or incidental thereto. India Trade Promotion Organisation – ITPO (www.indiatradepromotion. org): This is the nodal agency of the Government of India for promoting the country's external trade. ITPO, during its existence of nearly three decades, in the form of Trade Fair Authority of India and Trade Development Authority, has played a proactive role in catalysing trade, investment and technology transfer processes. Its promotional tools include organising fairs and exhibitions in India and abroad, Buyer-Seller Meets, Contact Promotion Programmes, Product Promotion Programmes, Promotion through Overseas Department Stores, Market Surveys and Information Dissemination. Federation of Indian Export Organisations – FIEO (www.fieo.com): FIEO provides the content, direction and thrust to India’s expanding international trade. It expresses all the dynamism and resurgence that are the hallmark of India’s open, liberal and progressively market-friendly economic and trade regime, representing the Indian export promotion effort in its entirety. Export-Import Bank of India – EXIM Bank (www.eximbankindia.com): EXIM Bank, set up in 1982 for the purpose of financing, facilitating, and promoting foreign trade of India, is the principal financial institution in the country for co-ordinating working of institutions engaged in financing exports and imports. Websites on the services provided by some other support institutions, websites related to food processing sub-sectors (Annexure I) and country-wise profile in terms of export/import of processed food is given in Annexure II. A list of important trade fairs is provided in Annexure III. The addresses of state level nodal agencies of the Ministry of Food Processing is given as Annexure IV.

Support Institutions for Promotion of Food Processing Sector

193

Annex-1.qxd

10/18/05

12:56 PM

Page 195

ANNEXURE I

Important Websites Related to Other Support Organisations, Food Processing Sub-Sectors and Addresses of Import Promotion Agencies 1. Useful Web Sites on Important Support Organisations: Sources of technology and marketing assistance Coffee Board (http://indiacoffee.org) Spices Board of India (http://www.indianspices.com) Tea Board (http://tea.nic.in) Office of the Controller General of Patents, Design and Trade (http://patentoffice.nic.in) Directorate General of Foreign Trade (http://dgft.delhi.nic.in) Indian Institute of Packaging (www.iip-in.com) APEDA - Agricultural and Processed Products Export Development Authority (http://www.apeda.com) MPEDA - Marine Products Export Development Authority (http://www.mpeda.com) DGFT - Director General Foreign Trade & Regional Licensing Authorities (www.commin.nic.in) Central Institute for Research on Goats (http://cirg.up.nic.in) Central Institute of Agriculture Engineering (www.ciae.nic.in) Central Institute of Brackishwater Aquaculture (http://www.nic.in/ciba)

Annex-1.qxd

10/18/05

12:56 PM

Page 196

Central Institute of Fisheries Education (www.icar.org.in/cife/index.htm) Central Marine Fisheries Research Institute (www.cmfri.com) Central Plantation Crops Research Institute (www.cpcri.nic.in) Directorate of Wheat Research (www.icar.org.in/dwr/dwrmain.htm) Indian Agriculture Research Institute (www.iaripusa.org) Indian Institute of Horticulture Research (www.kar.nic.in/iihr) Indian Institute of Pulses Research (www.icar.org.in/iipr.htm) Indian Institute of Soil Science (www.iiss.nic.in) Indian Institute of Vegetable Research (www.icar.org.in/Directorate1.htm) National Bureau of Animal Genetic Resources (www.icar.org.in/nbagr/nbagr.html) National Bureau of Plant Genetic Resources (http://nbpgr.delhi.nic.in) National Dairy Research Institute (http://ndri.nic.in) National Research Centre for Cashew (http://kar.nic.in/cashew) National Research Centre for Mushroom (http://www.nrcmushroom.com) National Institute of Agriculture Extension Management (www.manage.gov.in) Agmark (http://agmarknet.nic.in) National Horticulture Board (www.hortibizindia.org) Central Institute of Fisheries Nautical and Engineering Training (http://cifnet.nic.in) Educational Institutes / Financial Institutions / Embassies / Universities (www.goidirectory.nic.in)

196

Annexure I

Annex-1.qxd

10/18/05

12:56 PM

Page 197

2. Useful Websites on Food Processing Sub-Sectors

Vegetable Oils http://www.oilseed.org/ Topics: Information dissemination, associations, information resources, news, fats and oils, processing, storage marketing, imports, exports, transport. http://www.oelmuehlen.de/ Topics: Fats and oils, statistical tables, genetically engineered foods, association, news, FAQ’s, publications. http://www.corn.org/ Topics: Associations, information resources, statistics, conferences, employment, publications, education, cereals, processing, starch, fats and oils, legislation and regulations, news company information http://www.geocities.com/CapeCanaveral/Lab/1669/Index.html Topics: Associations, fats and oils, food science, food technology http://www.nopa.org/ Topics: Associations, publications, statistics, conferences, foods, soybeans, company information, exports http://www.canolainfo.org/scdc/ Topics: Information resources, health, diet, recipes, processing, education, food service, nutrition, fats and oils http://fruitsandnuts.ucdavis.edu/ Topics: Information resources, fruits and vegetables, processing, marketing, nutrition, agriculture http://www.eridania-beghin-say.com/html/gb/home.htm Topics: Company information, Sugar, starch, fats and oils, marketing, processing, animal nutrition, herbs and spices, ingredients Annexure I

197

Annex-1.qxd

10/18/05

12:56 PM

Page 198

http://www.oilworld.de/ Topics: Fats and oils, economics, markets, publication, financial information http://www.agriline.it/oil/oil_ita/default.htm Topics: Fats and oils, company information, consumer information, databases, publishers

Vitamins http://www.bookman.com.au/vitamins/ Topics: Publishers, information resources, electronic zines, publications, vitamins, minerals, nutrition, health http://www.vitalstoffe.de/inhalt.html Topics: Consumer information, minerals, vitamins, fruits and vegetables, human nutrition, cooking, mailing lists http://ivacg.ilsi.org/ Topics: Information dissemination, information resources, publications, vitamins http://www.vita-web.com/ Topics: Education, vitamins, health, nutrition http://verlag.hanshuber.com/Zeitschriften/IJVNR/index.html Topics: Publishers, publication, vitamins, nutrition http://www.orst.edu/dept/lpi/ Topics: education, institutes, information resources, vitamins, allergies and intolerance, nutrition, health http://www.nalusda.gov/fnic/etext/fnic.html Topics: Information resources, directories, umbrella sites, food science, food composition, diet, health, nutrition, illness, databases, electronic journals, electronic zines, electronic newspapers, legislation and regulations, education, vitamins, minerals

198

Annexure I

Annex-1.qxd

10/18/05

12:56 PM

Page 199

http://www.realtime.net/anr/ Topics: Vitamins, minerals dietary supplements, nutrition, diet, health http://www.medicineonline.de/ Topics: Consumer information, human nutrition, diet, foods, food composition, vitamins, health, illness http://www.cognis-us.com/cognis/verisonline/default.asp Topics: Publishers, information resources, publication, nutrition, health, vitamins, news http://www.mc.vanderbilt.edu/biolib/hc/nutrition.html Topics: Libraries, publications, nutrition, diet, health, vitamins http://www.nutritionquest.com/ Topics: Nutrition, health, diet, vitamins, minerals, fats and oils, fruits and vegetables, consumer information, publications, consumer surveys www.roche-vitamins.com/home.html Topics: Product news, history, business, research and development, marketing, product information, nutrition, careers www.cybervitamins.com Topics: Fats, nutrition

Health Foods http://landwirtschaft.freepage.de/h.bollow/ Topics: Consumer information, education, health foods, food composition, vitamins, nutritional values, nutrition, processing, drying, minerals http://www.phytonutrition.org/ Topics: Consumer information, dietary guidelines, dietary supplements, education, food composition, foods, health, nutrition, health, foods Annexure I

199

Annex-1.qxd

10/18/05

12:56 PM

Page 200

http://www.diasan.co.jp/cha2e.htm Topics: Beverages, health, illness, functional foods http://www.sana.it/ Topics: Consumer information, marketing, trade, food technology, processing, environment and ecology, health, health foods http://www.earthfoods.co.uk Topics: Health foods, genetically engineered foods, food safety, cereal products, beverages, fats and oils, sugars http://www.naturkost.de/ Topics: Consumer information, news, publications, courses, foods, health foods, vegetarian foods, diet, recipes, health, environment and ecology http://foodsci.rutgers.edu/nci/index.htm Topics: Education, institutes, functional foods, quality assurance http://www.functionalfoods.nu/ Topics: Education, courses, databases, functional foods, dietary supplements, patents, publications, nutrition, health, legislation and regulations http://www.aaccnet.org/FuncFood/top.htm Topics: Associations, news, publications, functional foods, dietary supplements, health, nutrition http://www.ag.uiuc.edu/ffh/ Topics: Novel foods, functional foods, health, food science, news, publications, consumer information http://www.science.ulst.ac.uk/niche/ Topics: Diet, health, novel foods, functional foods, legislation and regulations, food safety, marketing, consumer response, nutrition, sensory analysis, processing, courses http://www.chfa.cu/ Topics: Associations, health foods, publications, legislation and regulations, discussion groups

200

Annexure I

Annex-1.qxd

10/18/05

12:56 PM

Page 201

Herbs and Spices http://www.astaspice.org/ http://www.herbs.org/ http://www.kusumspices.org/ http://www.schamel.de/ http://www.fks.com/ http://www.ahpa.org http://www.todaymarket.com

Flavours http://www.mccormick.com/index.cfm http://www.naffs.org/ http://www.duckworth.co.uk/ http://www.glutamate.org/ http://www.calchauvet.com/index.php http://www.melchersflavours.com/ http://www.leffingwell.com/

Sugar and Sweeteners http://www.aspartame-info.com/ http://www.sugaralliance.org/ http://www.saccharin.org/ http://www.daniscosugar.com/ http://www.sucrose.com/sit/

Annexure I

201

Annex-1.qxd

10/18/05

12:56 PM

Page 202

http://www.sweeteners.org/ http://www.sugarweb.co.uk/ http://www.sugaronline.com

General http://mofpi.nic.in/venturesetup/ Topics: Website of Ministry of Food Processing, Government of India, contains policy, procedure, incentives, guidelines, supporting institutions’ details etc. http://www.indiatradepromotion.org/ Topics: Information on major trade shows http://www.tradeportalindia.com/ Topics: ITPO’s Business Information Centre (Bic) one stop point for varied trade information & services such as market intelligence, global importers directory, trade opportunities, trade statistics and trends, tariff & taxes, trade fairs details, etc. http://www.aaharaindia.com/ Topics: India’s biggest international food show, trade fairs and seminar organised in association with Ministry of Food Processing Industries, Government of India. http://www.soyatech.com Topics: News regarding soya technology and products all over the world

202

Annexure I

Annex-2.qxd

10/18/05

12:58 PM

Page 203

ANNEXURE II Export/Import of Processed Food: Country-Wise Profile Sr. No.

Hs Code

Item

Top 5 Countries of Export

Top 5 Countries of Import

1

0201

MEAT OF BOVINE ANIMALS FRESH OR CHILLED

MALAYSIA, EGYPT, UASE ANGOLA, OMAN

2

0202

MEAT OF BOVINE ANIMALS FROZEN

MALAYSIA, PHILIPPINES, EGYPT, UAE, JORDAN

SINGAPORE, NETHERLANDS

3

0203

MEAT OF SWINE, FRESH, CHILLED OR FROZEN

SAUDI ARAB, SPAIN, YEMEN CONGO, GEORGIA

SINGAPORE, NETHERLANDS ITALY, GERMAN F.REP, FRANCE

4

0204

MEAT OR SHEEP OR GOATS FRESH, CHILLED OR FROZEN

UAE, OMAN, QATAR, SRILANKA JORDAN

NETHERLANDS, SINGAPORE, UAE, NEWZEALAND, AUSTRALIA

5

0206

EDIBILE OFFAL OF BOVINE ANIMALS, SHEEP, GOAT, ETC

VIETNAM, CHINA, HONGKONG UAE, CANADA

GERMAN F.REP, NEW ZEALAND DENMARK, SINGAPORE

6

0302

FISH FRESH OR CHILLED

BANGLADESH, SINGAPORE, MALAYSIA, CHINESE TAIPEI, CHINA PRP.

BANGLADESH, NETHERLANDS, SINGAPORE, AUSTRALIA, UAE

7

0303

FISH FROZEN

CHINA, UAE, JAPAN, USA

MAYANMAR, SINGAPORE, NETHERLANDS, UAE, UK

8

0304

FISH FILLETS AND OTHER FISH MEAT

JAPAN, SPAIN, CHINESE TAIPEI LITHUANIA, CHINA

OMAN, UAE, PORTUGAL NETHERLANDS, THAILAND

9

0305

FISH DRIED, SALRED OR IN BRINE

SRI LANKA, HONGKONG, JAPAN CHINA, BANGLADESH

BANGLADESH, OMAN, JAPAN, MALAYSIA, PORTUGAL

10

0306

CRUSTACEANS FRESH, CHILLED FROZEN

JAPAN, USA, NETHERLANDS CHINA, AUSTRALIA

USA, SOMALIA, MALAYSIA MYANMAR, PAKISTAN

11

0307

MOLUSCS FRESH, CHILLED FROZEN

SPAIN, USA, ITALY, CHINA, JAPAN

OMAN, UAE, YEMEN-REP, HONGKONG, SOMALIA

12

0401

MILK & CREAM NOT CONCENTRATED

FRANCE

NETHERLANDS

13

0402

MILK & CREAM CONCENTRATED

BANGLADESH, UAE, EGYPT OMAN, MALAGASY RP.

DENMARK, USA, GERMAN F.REP, UAE, NETHERLANDS

14

0403

BUTTER MILK, CURDLED MILK & CREAM, YOGURT, KEPHIER

ZAMIBIA, THAILAND, UAE, GERMAN F.REP. SAUDI ARAB

THAILAND, NETHERLANDS FRANCE, MALAYSIA, UAE

15

0404

WHEY PROUDCTS

CHINA, JAPAN, KOREA REP. USA, NEPAL

FRANCE, NETHERLANDS, CHINA F. REP, AUSTRALIA

16

0405

BUTTER AND OTHER FATS

UAE, KUWAIT, GERMAN F.REP USA, NEPAL

NEW ZELALAND, FRANCE, AUSTRALIA, UK, DENMARK

17

0406

CHEESE AND CURD

JAPAN, USA, NEPAL, UAE MOROCCO

AUSTRALIA, NEPAL, DENMARK NETHERLANDS, NEW ZEALAND

18

0409

NATURAL HONEY

GERMAN F.REP, MOROCCO, NEPAL, USA, UK

NEPAL, AUSTRALIA, NEWZEALAND UAE, KYRGHYZSTAN

19

0701

POTATOES, FRESH OR CHILLED

NEPAL, UAE, SRI LANKA MALAYSIA, BANGLADESH

BANGLADESH, NEPAL

20

0703

ONIONS, SHALLOTS, GARLIC, LEEKS & OTHER ALLIACEOUS VEGETABLES FRESH OR CHILLED

MALAYSIA, BANGLADESH UAE, SRI LANKA, SINGAPORE

CHINA PRP, MALAYSIA, MYANMAR HONG KONG, CHINESE TAIPEI

21

0710

VEGETABLES COOKED OR NOT BY STEAMING/ BOILING IN WATER

UAE, SAUDI ARAB, MALDIVES

GERMAN F-REP, NETHERLANDS NEW ZEALAND, THAILAND, SINGAPORE

22

0711

VEGETABLES PROVISIONALLY PRESERVED

USA, BELGIUM, FRANCE NETHERLANDS

NETHERLANDS, SPAIN, THAILAND, AUSTRALIA, JAPAN

Annex-2.qxd

10/18/05

12:58 PM

23

0712

24

0713

25

0801

Page 204

DRIED VEGETABLES, WHOLE CUT, SLICED, BROKEN OR IN POWDER DRIED LEGUMINOUS VEGETABLES SHELLED

USA, GERMAN FRP, NETHERLANDS, SWITZERLAND CANADA BANGLADESH, SRI LANKA USA, UAE, UK

MALAYSIA, CHINA PRP, GERMAN F. REP, PADISTAN, USA, AFGHANISTAN MYANMAR, IRAN, CANADA AUSTRALIA, FRANCE

COCONUTS, BRAZIL NUTS & CASHEW BUTS, FRESH OR

USA, NETHERLANDS, UK, JAPAN, UAE

IVORY COAST, GUINEA BISU, BENIN, TANZANIA-REP, INDONE-

USA, IRAN, AFGHANISTAN, INDONESIA, MYANMAR

SIA DRIED WHETHER OR NOT SHELLED OR PEELED 26

0802

OTHER NUTS FRESH OR DRIED W/N SHELLED OR PEELED

SPAIN, EGYPT, GERMAN F.REP UK, GREECE

27

0803

BANANAS INCLUDING PLAINTAINS FRESH OR DRIED

UAE, SAUDI ARAB, OMAN QATAR, BAHARIN

28

0805

CITRUS FRUIT FRESH OR DRIED

BANGLADESH, UAE, OMAN SAUDI ARAB, USA

AUSTRALIA, USA, SINGAPORE THAILAND, NETHERLANDS

29

0806

GRAPES FRESH OR DRIED

UK, UAE, NETHERLANDS, OMAN SAUDI ARAB

AFGHANISTAN, PAKISTAN, IRAN AUSTRALIA, CHINA PRP, INONESIA

30

0807

MELONS (INCLUDING WATER MELONS) & PAPAWS (PAPAYAS) FRESH

UAE, SAUDI ARAB, BAHARIN KUWAIT, QATER

AFGHANISTAN, TURKMENISTAN THAILAND, PAKISTAN, AUSTRALIA

31

0808

APPLES, PEARS & QUINCES, FRESH

BANGLADESH, KUWAIT, SAUDI ARAB, MALAYSIA, SRI LANKA

USA, AUSTRALIA, CHINA PRP, NEW ZEALAND, S. AFRICA

32

0809

ITALY, YEMEN REP, USA, EGYPT, UAE

PAKISTAN, USA, TURKEY, IRAN AUSTRALIA'

33

0810

APRICOTS, CHERRIES PACHES (INCL. NECTARIANS), PLUMS & SOLES FRESH OTHER FRUITS, FRESH

34

1805

COCOA POWDER, NOT CONTANING SUGAR

BANGLADESH, SAUDI ARAB, UAE, OMAN UK, MAURITIUS, USA, CHINA

PAKISTAN, ITALY, AFGHANISTAN NEW ZEALAND, INDONESIA INDONESIA, MALAYSIA, SPAIN SINGAPORE, MALI

35

1806

CHOCOLATE & OTHER FOOD PREPARATIONS CONTAINING COCOA

NEPAL, BANGLADESH, NIGERIA, SRILANKA, NIGER

SINGAPORE, MALASIYA, USA NETHERLANDS, UAE

36

2006

VEGETABLES, FRUITS, NUTS FRUIT PEEL & OTHER PARTS OF PLANTS

JAPAN, UAE, SAUDI ARAB GERMAN F.REP, OMAN

UAE, NETHERLANDS, THAILAND SINGAPORE

37

2007

JAMS, FRUIT JELLIES, MARMALADES, FRUIT/ NUT PUREE & FRUIT/NUT PASTES

NETHERLANDS, USA, UAE NETHERLANDS ANTIL, SAUDI ARAB

MALAYSIA, THAILAND, OMEN INDONESIA, GERMAN F.REP

38

2009

FRUIT JUCIES (INCL. GRAPE MUST)/VEGETABLE JUICES

39

2102

YEASTS (ACTIVE/INACTIVE)

NETHERLANDS, USA, CANADA SAUDI ARAB, NETHERLANDS ANTIL NEPAL, RUSSIA, BANGLADESH SRI LANKA, MYANMAR

NEPAL, SINGAPORE, NETHERLANDS, DENMARK, SLOVENIA BRAZIL, FRANCE, SWITZERLAND VIETNAM, USA

40

2103

SAUCES & PREPARATIONS THEREOF

USA, UK, CANADA, SINGAPORE UAE

USA, CHINA REP, SINGAPORE ITALY, THAILAND

41

2104

SOUPS & BROTHS & PREPARATIONS THEREOF

THAILAND, ITALY, USA, UK, SINGAPORE

USA, SWITZERLAND, MALAYSIA INDONESIA, UK

42

2105

ICE CREAM & OTHER EDIBLE ICE

NEPAL, BANGLADESH, MARTINIQUE, NIGERIA, OMAN THAILAND

NEW ZELALAND, BELGIUM, USA UK, AUSTRALIA

43

2203

BEER MADE FROM MALT

NEPAL, BHUTAN, USA, UAE SINGAPORE

NEPAL, SINGAPORE, NETHERLANDS, DENMARK, SLOVENIA

44

2204

WINE OF FRESH GRAPES INCLUDING FORTIFIED WINES

GERMAN F.REP, SINGAPORE SPAIN, FRANCE, ITALY

FRANCE, UK, NETHERLANDS GERMAN F.REP, CHINA PRP, AUSTRALIA

45

2209

VIEGAR & SUBSTITUTES FOR VINEGAR OBTAINED FROM ACETIC ACID

BELGIUM, FRANCE, NETHERLANDS, USA, OMAN

BELGIUM, FRANCE, USA, GERMAN F.REP, CHINA PRP

204

Annexure II

Annex-3.qxd

10/18/05

12:59 PM

Page 205

ANNEXURE III

Important Trade Fairs, Exhibitions and Conferences in Food Processing January 13–15: World Food Technology Summit 26–29: International Sweets and Biscuits Fair February 1–4: International Food Tec, Hyderabad 13–15: BIOFACH 27–Mar2: Genetically Modified Foods – Prospects, Challenges and Safety March 4–5: Cheese as an Ingredient 5–7: Food Ingredients Asia – China Exhibition 9–13: Ahara 23–26: IFE, International Food Exhibition 30–Apr 1: International Conference on Food Hydrocolloids April 8–11: ANUGA Food Tec 9–11: New Functional Ingredients and Foods 14–17: Interfood / Interfood Tech / Pack and Ingredients May 20–22: FiCEE, Food Ingredients Eastern and Central Europe

Annex-3.qxd

10/18/05

12:59 PM

Page 206

June 4–5: High Potency Sweeteners – All You Need to Know July 12–16: IFT Food Expo September 16–17: Practical Guide to Using Gelling and Thickening Agents 23–25: Fi Asia Food and Beverages, Germany October 7–9: Health Ingredients (Hi) Japan 9–11: Health Ingredients Japan 11–15: ANUGA World Food Market 15–16: Emulsions and Emulsifiers: Essential Guide to Stable Products 17: Food Additives – Ingredients for Success? 18–21: Genetic Engineering and the Intrinsic Value and Integrity of Animals and Plants 20–24: SIAL 27–29: CPhl Worldwide Exhibition and Conference and ICSE International Contract Services Expo 29: A Boost for Bone Health November 18–20: Food Ingredients Europe and Conference 18–20: Food Safety and Hygiene Arena P.S. Usually the aforestated events are organised in the months and around the dates mentioned. However it is advisable to check with the Ministry of Food Processing, Govt. of India, New Delhi.

206

Annexure III

Annex-4.qxd

10/18/05

1:00 PM

Page 207

ANNEXURE IV List of Nodal Officers of State/U.T. Governments For Food Processing Industries Sr. No.

State / U. T.

Nodal Agency

Tel. No.

1.

Andaman & Nicobar Islands

Director, Agriculture, Port Blair

03192-33257

2.

Andhra Pradesh

Secretary, Agriculture & Cooperation Department Secretariat Building Hyderabad - 500 022

0842-231798

3.

Arunachal Pradesh

Chief Secretary Government of Arunachal Pradesh Itnagar

03781-22595

4.

Assam

Secretary Department of Industries Government of Assam Guwahati

0361-561307

5.

Bihar

Industrial Development Commissioner, Department of Industries Government of Bihar Vikas Bhawan Patna-800 001

Fax-561176 0612-221462

Fax-224992

6.

Chandigarh

Director of Industries & Tourism Chandigarh Administration Chandigarh

0172-707343

7.

Dadra & Nagar Haveli

Director District Industries Centre Dadra & Nagar Haveli Collectorate Silvasa-396 210

02638-42367

8.

Daman & Diu

02638-54875

9.

Delhi

Deputy Director of Agriculture Secretariat Moti Daman -396 220 Commissioner (Industries) C/O Commissioner of Industries, Delhi Administration Kashmiri Gate, Delhi

011-2968144

10.

Goa

Development Commissioner Government of Goa Panaji

0832-223196

11.

Gujarat

Managing Director Gujarat Agro Industries Corporation Ltd. Khet Udyog Bhavan, Opp. Old High Court, Navrangpura, Ahmedabad.

02712-25841

12.

Haryana

Managing Director Haryana Agro Industries Corporation Chandigarh

0172-707343

13.

Himachal Pradesh

Director of Industries Government of Himachal Pradesh Shimla

0177-213414

Annex-4.qxd

10/18/05

1:00 PM

Page 208

14.

Jammu & Kashmir

Jammu & Kashmir State Industrial Development Corporation Government of J&K Darbu House, Ram Bagh Srinagar

0194-30036

15

Karnataka

Technical Consultancy Service Organisation of Karnataka (TECSOK) Directorate of Industries & Commerce, Rashtrothana Parishat Bhawan, Nrupathunga Road, Bangalore-560 002

080-2266134

16.

KeralaSecretary

Department of Agriculture Government of Kerala Trivandrum-695 001

0471-325992

Managing Director Lakshadweep Development Corporation, 40.5598 II Floor, Near Padma Junction M.G. Road, Ernakulam Cochin-682 035

0484-361630

17.

18.

19.

20.

21

22.

23.

208

Lakshadweep

Madya Pradesh

Maharashtra

Manipur

Meghalaya

Mizoram

Nagaland

Managing Director Madhya Pradesh State Agro Industries Development Corporation 'Panchanan' 3rd Floor Malviya Nagar, Bhopal Managing Director Maharashtra Agro Industries Development Corporation Ltd Rajan House, Prabha Devi, Mumbai.

Fax-333160

Fax-373635 0755-551807

Fax-557305 022-4305122

Fax-4308618

Director of Industries Industries Department Secretariat Government of Manipur Imphal

0385-310220

Managing Director Meghalaya Indl. Dev. Corp. Kismat, Upland Road, Shillong

0364-224965

Managing Director Mizoram Food & Allied Industries Corporation Ltd. (MIFCO), Aizwal Secretary Department of Industries Government of Nagaland Kohima

Annexure IV

Fax-310550

Fax-224763 0389-323680

Fax-323680 0370-22919

22534

Annex-4.qxd

10/18/05

1:00 PM

24.

25.

26.

27.

Page 209

Orissa

Punjab

Pondicherry

Rajasthan

Managing Director Agricultural Promotion & Investment Corporation of Orissa Ltd., 326, Brahmunda, Bhubaneshwar Managing Director, Punjab Agro Industries Corpn. 2-A Sector-28A, Madhya Marg Chandigarh-160 002 Director of Industries, Industries Department Thattachavady Pondicherry-605 009 Director of Industries, Department of Industries Government of Rajasthan Jaipur

0674-420526

Fax-420506 0172-651386

651576 0413-34145 35512 0141-380727

Fax-380796

28.

Sikkim

Director of Industries Department of Industries Government of Sikkim Gangtok-737 101

03592-22853

29.

Tamil Nadu

Managing Director Tamil Nadu Agro Industries Corporation Ltd. Agro House, Industrial Estate Guindy, Chennai-600 032

044-2341664

30.

31.

32.

Tripura

Uttar Pradesh

West Bengal

Fax-2342375

Director Industries & Commerce Dte Agartala, Tripura

0381-223826

Secretary Horticulture & Food Processing Government of Uttar Pradesh Lucknow

0522-280277

Secretary Department of Food Processing Industries Government of West Bengal Mayukh Bhawan, Bindannagar, Calcutta-700 091

Annexure IV

Fax-224432

Fax-280382 033-3374244

Fax-3372922

209

Refe.qxd

10/18/05

1:01 PM

Page 211

References and Suggested Readings 1. AIFPA, (1996), All India Food Preservers Association, Investment Opportunities in India for Food Processing Industries—New Delhi. 2. AIFPA, (1996), All India Food Preservers Association, Legal Provisions relating to Labelling of Fruits and Vegetable Packages (as amended up to 31-3-1996)—New Delhi. 3. AIFPA, (1996), All India Food Preservers Association, The Fruit Products Order 1955 (as amended up to 31-3-1996)—New Delhi. 4. AIFPA, (1996), All India Food Preservers Association, The Prevention of Food Adulteration Act, 1954 (37 of 1954) and PFA Rules, 1955 (as amended up to 31-3-1996) 4th ed.—New Delhi. 5. Allied, (2001), A Practical Guide for Implementation of Integrated ISO9001, HACCP System for Food Processing Industry—New Delhi. 6. Chandra, Prasanna, (2001), Financial Management: Theory and Practice, New Delhi. 7. Chandra, Prasanna, (1995), Projects: Planning, Analysis, Selection, Implementation and Review, Tata McGraw Hill Publishing Company Limited, New Delhi. 8. Checker, Satish, (2001), Food Quality and Safety: An Overall View, Beverage & Food World. 9. Food Processing Industry Offering Scope for New Investment, (1998), Industrial Researcher. 10. GITCO, (1998), 25 Prospective Food Processing Projects Vol.1— Ahmedabad. 11. GITCO, (1998), Gujarat Industrial and Technical Consultancy Organization Limited, 24 Prospective Food Processing Projects— Ahmedabad. 12. Government of India, (1993), Ministry of Food Processing in Industry, Food Processing Industries in India: Investment Opportunities—New Delhi.

Refe.qxd

10/18/05

1:01 PM

Page 212

13. Gulati, M. (1997), Restructuring and Modernization of Small and Medium (SME) Clusters in India, Small and Medium Enterprises, UNIDO, Vienna. 14. International Law Book Company, (1998), Prevention of Food Adulteration Act, 1954 with Prevention of Food Adulteration Rules, 1955 and Commodity Index with Short Notes.—Delhi. 15. ITCOT, Opportunities in Food Processing Industry—Madras. 16. Kanji, Gopal, K. and Asher, Mike, (1996), 100 Methods for Total Quality Management, Response Books, New Delhi. 17. Kotler, Philip, Leong Siew Meng, Ang, Swee Hoon and Tan, Chin Tiong, (1996), Marketing Management: An Asian Perspective. 18. Padmanand, V and Jain, P. C., (2000), Doing Business in India: Streetsmart Entrepreneurs in an Imperfect Marketplace, Sage Publications, India. 19. Pandey, I.M. and Bhat, Ramesh, (1991), Cases in Financial Management, New Delhi. 20. Pareekh, Udai and Rao, T.V., Developing Motivation Through Experiencing, New Delhi, Oxford & IBH Publishing Co., 1982. 21. Parthasarthy, Ashok, (1998), Food Processing Industry—Futuristic View, SEDME. 22. Parthasarthy, Ashok, (1998), Food Processing Industry, SEDME. 23. Patel, J.B. and Allampally, D. G. (1991), A Manual on How to Prepare a Project Report, EDII, Ahmedabad. 24. Patel, V.G., Entrepreneurship Development Programme in India and Its Relevance to Developing Countries, Ahmedabad, Entrepreneurship Development Institute of India, 1987. 25. Patel, V.G., Innovations in Banking: The Gujarat Experiments, Bombay, Industrial Development Bank of India, Oct. 1981, pp.2–10. 26. Porter, M.E., (1990), The Competitive Advantage of Nations, Free Press, New York. 27. Porter, Michael E., (1980), Competitive Strategy, New York, The Free Press.

212

References and Suggested Readings

Refe.qxd

10/18/05

1:01 PM

Page 213

28. Raghuramaiah, B, (2002), Indian Food Regulations in the Global Context, Beverage & Food World. 29. Ramaswamy, V.S. and Namakumari, S., (1999), Marketing Management: Planning, Implementation and Control, New Delhi. 30. SBP, (2001), SBP Consultants and Engineers Private Limited Food and Biotechnology for Corporates—New Delhi. 31. SBP, (2001), SBP Consultants and Engineers Private Limited Handbook of Food and Agrobased Industries with High Tech Projects—New Delhi. 32. Shah, Narendra, (1998), Opportunities and Challenges in Agro-based Industries: Food Processing, Journal of Rural Development. 33. SIDBI, (1994), Profiles on Food Processing and Agro-based Industries— Lucknow. 34. Sivasankar, B, (2002), Food Processing and Preservation—New Delhi: PHI. 35. Sohrab, (2002), Adoption of ISO 140001—A New Imperative for Food Industry: A Practical Implementation Case Study, Beverage & Food World. 36. The Amalgamated Press, (2001), Processed Foods and Beverages Directory 2001–2003—4th ed.—Mumbai. 37. Vyas, Jaynarayan and Shah, Girish, (1998), Saket Food Processing Handbook—Ahmedabad: Saket Projects Limited. 38. World Importers Directory, (1997), Process Food, Food Products, Vegetables—New Delhi: Centre of Publication.

References and Suggested Readings

213