LESSON 12 BASIC SKILLS FOR RUNNING A BUSINESS STRUCTURE 12.0
OBJECTIVES
12.1
INTRODUCTION
12.2
ENTREPRENEURSHIP 12.2.1 12.2.2 12.2.3 12.2.4
W HO IS AN ENTREPRENEUR? ARE YOU READY? IS ENTREPRENEURSHIP FOR YOU? IS KNOWLEDGE SUFFICIENT? W HAT IS A SKILL?
12.3
BASIC SKILLS REQUIRED FOR RUNNING A BUSINESS
12.4
SETTING UP A SMALL SCALE UNIT 12.4.1 12.4.2
12.5
ELEMENTARY COSTING 12.5.1 12.5.2 12.5.3
12.6
W HAT IS A SMALL SCALE UNIT? STEPS TO SET UP A SMALL SCALE UNIT
CALCULATION OF UNIT COST GENERAL FEATURES OF COSTING ELEMENTS OF PRODUCTION COST
ASSIGNMENTS 12.6.1 12.6.2
CLASS ASSIGNMENTS HOME ASSIGNMENTS
12.7
SUMMING UP
12.8
POSSIBLE ANSWERS TO SELF-CHECK QUESTIONS
12.9
TERMINAL QUESTIONS
12.10
REFERENCES AND SUGGESTED FURTHER READING
12.11
GLOSSARY
12.12
ABBREVIATIONS USED 1
12. BASIC SKILLS FOR RUNNING A BUSINESS In the previous two lessons we had learnt how to draft a good Business Plan and what factors should be kept in mind while raising finances. The next step in this sequence will be to learn how to actually set up and manage a small scale unit. This aspect will be covered in the present lesson. The lesson also includes a small section on elementary costing which allows an estimate of unit cost.
12.0 Objectives After studying this lesson, you will: •
Acquire an understanding of what constitutes an Entrepreneur and what are the basic skills required for running a Business.
•
Understand the various steps involved in setting up of a Small Scale Unit.
12.1 Introduction Setting up your own Business can indeed be an exciting challenge. One will not hesitate to say that a certain amount of risk is invariably involved when embarking on any such venture. A wise person is one who prepares himself/herself well for this challenge. In this lesson we will first understand who an entrepreneur is. We will then learn about the basic skills required for running a business. Finally, we will look at the steps involved in setting up a small Scale Unit.
12.2 Entrepreneurship 12.2.1 Who is an Entrepreneur? The commonest definition of an Entrepreneur could be a person who organizes, manages and takes risk of running a business or an enterprise.’ Entrepreneurs can be of different types and may prefer to go it alone or share the risks in groups with others. 12.2.2 Are you ready? Is Entrepreneurship for you? In a small enterprise, it is the promoter of the project, i.e. the entrepreneur who does most of the functions of planning, implementation and management. In order to plan a project flawlessly, an entrepreneur needs to possess certain 2
knowledge, attitudes, skills and appropriate personality profile. Start by evaluating your competencies as an entrepreneur. 12.2.3 Is Knowledge sufficient? Knowledge is acquired by reading, listening, visuals, etc. Knowledge is necessary for performing a task but not sufficient. Besides knowledge, an entrepreneur should have skills to translate the knowledge into actions. 12.2.4 What is a skill? Skill is the ability to demonstrate a system and sequence of behaviour that are functionally related to attaining a performance goal. Skill can be acquired only through practice.
12.3 Basic Skills Required for Running a Business Now let us take a look at the various skills, which an entrepreneur should possess for running a business. •
Communication skills - As a principal entrepreneur, there's no doubt about it: You need communication skills from day one. You will need good communication skills to deal with --your team, employees, vendors, customers and investors.
•
Computer skills - Computers play an important role in day-to-day life of an entrepreneur. Every entrepreneur should have basic skills of - working in Windows environment, browsing on the net, sending and receiving emails, etc.
•
Time Management - It will be entirely up to you to develop projects, organize your time, and follow through on details. You simply have to know how to manage time and prioritize your tasks.
•
Money Management - Knowing where, when and how to obtain finance is of limited value if you have little idea how to use it effectively. In short, there should be sufficient cash at the right time.
•
Decision Making - Small business owners are required to make decisions constantly - often quickly, independently, and under pressure.
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Self-check Questions 1.
Enumerate some of the important basic skills required for running a business. a)
b)
c)
d)
e)
12.4 Setting up a Small Scale Unit After a brief introduction on entrepreneurship and looking at the basic skills required for running a business, now let us take a look at the steps involved in setting up a Small Scale Unit. 12.4.1 What is a ‘Small Scale unit’? In Indian context, an industrial undertaking in which the investment in plant and machinery does not exceed Rs. 10 million is a Small Scale Industrial (SSI) Unit. 12.4.2 Steps to set up a Small Scale Unit The various steps involved in setting up a Small Scale Unit are listed below: •
Project Selection
•
Technology and Machinery
•
Preparation of Project Report (Covered in lesson 10)
•
Arranging Finance (Covered in lesson 11)
•
Unit Development
•
Getting 3M’s Right (Men, Machinery & Materials)
•
SSI Registration (If required)
•
Approvals
•
Clearances
Now let us gain an understanding of each of the above-mentioned steps. •
Project Selection
Project Selection begins with an idea. The overriding reason for anyone to think of establishing a SSI unit can be summarized in one word – opportunity opportunity to provide a product or service, which can generate sufficient surplus. This is all the more true if one is a believer in the maxim, "Small is Beautiful". However, ideas need to be filtered through a multi-layer sieve and this leads to a number of questions that must be answered and the various checks 4
and balances that need to be addressed. Some of the more important ones are listed below: o o o o o o o o o o
Does the idea fire up your motivation? Is it a viable business proposition in your area? Does it match the needs of your clientele? Check it out with basic market research Test it out at market place Consult with the experts Look out for competition in the field Is it a sunrise industry? Your business opportunity Project conceptualization
Once the ideas are screened and a viable business opportunity emerges, the project has to be conceptualized in all its dimensions. The 4Ps of Project Conception are: o Product (Shape, Size and Nature) o Process (Technology to produce the product) o Place (Location of Plant) o Partner (Technological or Financial collaborator) In the project conceptualization stage, while making a product choice, the following factors need to be considered: o Product Line - Depth, Width o Packaging o Branding Some other factors that one should consider while finalizing the product choice are: o Ease of availability of raw-material o Process Technology o Accessibility to the market o Incentive and support from Government Market information is also important for product selection. Once the product is finalized, choices of process technology emerge. •
Technology and Machinery
Choices of process technology emerge once the product is finalized. Indigenously developed process know-how has essential benefits such as 5
appropriateness and relative inexpensiveness. While checking out on a process technology, the following things need to be considered with utmost care: o Whether process requires very high level of skilled workers or complex machines? o Whether process requires large quantities of water and/or power? o Whether any process or product patent needs to be honoured while utilizing the selected process technology o Any special pollution or environmental regulations o Finally, the appropriateness to the Indian environment and conditions. One of the major deficiencies in the small industry scenario is the prevalence of outdated production and management methods hindering the efficient operation of small-scale units. It is observed that the most important reason for the reluctance of the small industrialists to install modern machinery and equipment is the lack of investible funds. The National Small Industries Corporation (NSIC) provides financial, technical and marketing support to SSIs. Now the Place and Right Partner have to be selected and Project Report has to be prepared. Preparation of Project Report has been discussed in detail in Lesson 10. •
Arranging Finance
The next step is negotiating and arranging for finance. This aspect has been discussed in detail in Lesson 11. •
Unit Development
After deciding the issues of product and process, the next important question is where to set the unit up? For many small units, home is perhaps the best starting point provided the building laws permit this. Setting up an establishment is much more than putting a signboard up and waiting for customers to walk in. It requires negotiating a favourable plot or shed purchase, organizing for proper construction of building, design of interiors and finding good deals for equipment and machinery. Once an industrial plot for the unit is secured, then the next job is that of finding a suitable architect. Design of factory building has to be according to the type of industry and should have an appropriate plant layout. An architect's estimate of building construction is essential for loan applications. Further, architect's certificate for money spent on building is needed for disbursement of loan. Among the utilities of prime importance are power and water. In many cases getting power connection causes delay in setting up of plant. Therefore, it is imperative to commence work on these aspects with diligent follow up. Power connections are generally of either LT (Low Tension) or HT (High-tension) type. If connected load is upto 75 HP, LT connection is provided. For connected loads of 130 HP or higher only HT connection is provided. A formal application needs to 6
be made in a specified form to the state electricity board, after which the load is sanctioned. In areas of power shortage, it is advisable to augment the power supply with a captive generating set. Water connection is also obtained likewise by applying in advance in formal forms. The water supply can be augmented by installation of tube well.
•
Getting 3M's Right The 3M’s are men, machinery and materials. These are briefly described
below: Men: Projections for manpower and staffing are made in the project report. However, it is necessary to time the induction of manpower in a planned manner. The required manpower must be available before the installation of the machinery. Machinery: Choosing and ordering of right machinery is also of paramount importance. An extensive techno-economic survey of machinery and equipment available must be carried out. The entrepreneur must also consult experts, dealers / suppliers as well as users, prior to making a selection of equipment and machinery. The advice of DIC, SISI and NSIC can also be sought. Materials: Materials procurement and planning are critical to success, of a startup with a unit. Inventory management can lead to manageable cash flow situations; otherwise, if too much is ordered too soon considerable amount of working capital gets locked up. On the other hand, non-availability may result in production hold-ups, and idle machine and manpower. •
SSI Registration
Small Scale and ancillary units (i.e. undertakings with investment in plant and machinery of less than Rs. 10 million) can seek registration with the Director of Industries of the concerned State Government. The registration scheme has no statutory basis. Units would normally be registered to avail some benefits, incentives or support given either by the Central or State Govt. •
Approvals
Every unit has to comply with various regulations in force. These include regulatory, taxation, environmental and certain product specific clearances. If a small-scale unit employs less than 50 workers with power or less than 100 workers without power, then it does not require any license from the Govt. of India.
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•
Clearances
An entrepreneur has to obtain several clearances or permissions depending upon the nature of his unit and products manufactured. Regulatory or Taxation Clearances: These include registration under Sales Tax, Excise, payment of Income Tax, power connection, Chief Inspector of Factories, etc. Environment & Pollution Related Clearances: The method of granting consent under water and air pollution to units has been simplified. Except for 17 critically polluting sectors including “Dye and Dye intermediates, in all other cases units will merely have to file an application and obtain an acknowledgement which will serve the purpose of consent.
Self-check Questions 2. State whether the following statement is true or false: i) In the Indian context, an industrial undertaking in which the investment in plant and machinery does not exceed Rs. 10 million is a Small Scale Industrial (SSI) Unit. True / False 2. Enumerate the 4 P’s of Project conception. a)
b)
c)
d)
12.5 Elementary Costing 12.5.1 Introduction When doing any work commercially we have to fix the price of the product or service in such a manner that a reasonable profit is available for covering business risk. The profit would also strengthen the business in future. Therefore the sale price of each item should be higher than the unit cost (including the manufacturing and the selling and distribution expenses that may be incurred). To assess the unit cost incurred over a period of time for doing a certain job, elementary costing technique may be followed for a process such as dyeing and block printing. 12.5.2 Calculation of unit cost Where there is a continuous flow of identical products, i.e. where it is not possible to distinguish one unit from another, a simplified system of taking the average cost over a period may be used e.g., a week or a month. Suppose 5000 handkerchiefs are dyed yellow and block printed in February, for which costs incurred are as follows: 8
Direct materials consumed
= Rs. 5,000
Direct labour costs
= Rs. 2,000
Production overhead incurred
= Rs. 500
The cost per unit is determined by dividing the total cost by the total number of units produced i.e. Rs. 7,500/5,000= Rs. 1.50 per unit
This may be shown in a cost statement as indicated below:
Royal Block Printers, February 2007 , Production 5000 units Prime Cost *
Rs Direct materials consumed = 5,000 Direct Labour = 2,000 7,000
Production overhead 25% of direct labour cost Production cost Hence, Production cost per unit = Rs.
500 7,500 7,500 5,000
= Rs1.50 per unit
(*Thus from the above it will be seen that prime cost is the direct cost of material and labour used). Production cost of Rs.1.50 per unit will relate to each of the 5,000 handkerchiefs produced in February, regardless of the fact that on one day the units produced cost Rs.1.45 each, and on another Rs.1.55. The important fact is that Rs.1.50 per unit is the average cost for the period. 12.5.2 General Features of process costing The factory is divided into departments or processes, which are each doing a particular job, e.g. dyeing, or block printing etc. usually, the materials are issued to the first process and the ‘finished goods’ of the first process become the ‘raw material’ of the next one, and so on, until the final product is completed.
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12.5.3 Elements of production cost The elements of production cost are explained below: •
Materials: Usually the materials are issued to the first process, as explained above, and are passed onward to the next department as the processing is done. Few cases may arise, however, where extra or new materials are added in the ‘next’ process, and then more material added in the further ‘next’ process; this may continue till completion.
•
Labour: Time spent on production by the people involved in the production process is considered. Where employees are engaged full time on a particular process, their full time is taken for purpose of costing, but where they are engaged in more than one process, their time is analyzed and appropriate cost is apportioned process-wise, as accurately as possible.
•
Direct Expenses: Each item of expenditure that can be directly attributed to a process is taken, e.g. design cost incurred for being used for preparing the blocks for block-printing on handkerchiefs.
•
Production Overhead: The entire overhead cost (which is other than the Prime cost) needs to be carefully analyzed and attributed to the various processes to which it relates.
Activity Please collect the various elements of cost incurred for any job that you have been associated with, such as printing of cloth, towels, bed sheets etc. If the exact costs are not available, then nearest estimates may be taken for calculation of the unit cost. Prepare your cost statement. On the basis of your cost calculation, (i.e. from your cost statement) suggest what should be the Selling Price for that item. Compare your suggested price with the price at which a comparable item is available in the market. Obtain two or three quotations from the market. Prepare and fill in the sale prices of comparable items in the following chart:Item Description Handkerchiefs Size (14"X14") 2 colour block printed
Suggested price per unit i.e.
Quotation no. 1
Quotation no. 2
Quotation no. 3
Rs.2.00
Rs.
Rs.
Rs.
Try to explain price differences of the above quotations from your own suggested Sale Price, in terms of the various elements of cost, or of quality or profit margin, as indicated below:a)
Materials 10
b)
Labour
c)
Direct Expenses
d)
Production Overhead
e)
Profit margin
f)
Quality Differences
12.6 Assignments 12.5.1 Class assignments i) You are a small entrepreneur planning to set up a printing unit. Assume that the starting point is your home. Enumerate the various steps which you will take to set up the printing unit. 12.5.2 Home assignments i) Collect information from the internet about the various benefits and incentives offered by the Government to Small Scale Units. (Hint: Try browsing http://www.laghu-udyog.com/)
12.7 Summing Up In this lesson, you were introduced to the definition of an entrepreneur and told about the skills required to run a business. Further you were introduced to the definition of Small Scale Unit and the steps involved in setting up such a unit. The following were the main points covered in Lesson 12: •
An entrepreneur is a person who organizes, manages and takes risk of running a business or an enterprise.
•
Besides knowledge, an entrepreneur should have skills to translate the knowledge into actions.
•
The basic skills required for running a business are – communication, computers, time and money management, decision-making, etc.
•
The various steps required to set up a Small Scale Unit are - Project Selection, Technology and Machinery, Preparation of Project Report, Arranging Finance, Unit Development, Getting 3M’s Right, SSI Registration, Approvals and Clearances.
•
Basics of elementary costing.
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12.8 Possible Answers to Self-check Questions 1. Some of the important skills required for running a business are: a) Communication skills b) computer skills c) Time Management skills d) Money Management skills and e) Decision Making skills 2. State whether the following statement is true or false: i) In the Indian context, an industrial undertaking in which the investment in plant and machinery does not exceed Rs. 10 million is a Small Scale Industrial (SSI) Unit. True 3. Enumerate the 4 P’s of Project conception: a) Product
b) Process
c) Place
d) Partner
12.9 Terminal Questions 1. What are the various skills required for running a business? 2. What is the reason for the reluctance of the small industrialists to install modern machinery and equipment?
12.10 References and Suggested Further Reading 1.
Dollinger, M.J. 2006. Entrepreneurship: Strategies and resources. Pearson Education Ltd., New Delhi.
2.
Patel, B.M. Project Management: Strategic financial planning, evaluation and control. 2000. Vikas Publishing House Pvt. Ltd., New Delhi.
12.11 Glossary 1.
Entrepreneur
A person who undertakes a commercial venture
2.
Embarking
Engaging in an activity
3.
Vendor
The seller in a sale, One who sells
4.
Investor
One who places money to secure profit
5.
Browse
Read or survey in a disconnected way
6.
Viable
Feasible, Practicable 12
7.
Collaborator
Working jointly
8.
Disbursement
Pay money
9.
Augment
Increase, make or become greater
12.12 Abbreviations Used 1.
SSI
Small Scale Industry
2.
NSIC
National Small Industries Corporation
3.
LT
Low tension
4.
HT
High tension
5.
HP
Horse Power
6.
DIC
District Industries Centre
7.
SISI
Small Industries Service Institute
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