Small Business

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Small Scale Industry

SSI - Introduction
 Small scale industries (SSI) play a key role in the industrialization of any developing countries like India.  It is a vital component in Indian Economy.  The Govt of India has recognized the importance of small-scale industry for achieving socio-economic objectives – generating employment, removal of regional disparities and economic backwardness of rural areas.  The small-scale sector has contributed about 55% of the total industrial production and account for about 40% of export from the country.  The employment provided by this sector is 175 lakh people in 31.75 lakh units.

SSI - Introduction
 The sector has developed from the production of simple consumer goods to manufacture of sophisticated and electronic components, medical equipments, TV sets and others.  Over 7,500 products are manufactured by the small scale industry.  Small-scale industries basically make use of local raw-materials, local skills, local finance and generally local markets.  The small scale industries consists of – small scale industrial undertaking, ancillary industrial undertaking, export-oriented units, tiny units, women entrepreneur enterprise.

Small Scale Industry

Modern Small Scale Industry

Cottage Industry

Village Industry

Ancillary Industry

Classification of SSI

Traditional Industries

Modern Industries

Khadi and Village Industry Small scale industrial undertaking Hand loom Export oriented units Handicrafts Ancillary Industrial units
Coir Sericulture Tiny Industrial units Small business enterprises

Classification of SSI
  1. Small Scale Industrial Undertaking An industrial undertaking in which the investment in plant and machinery does not exceed Rs. 10 million. 2. Ancillary Industrial Undertaking An industrial undertaking which is engaged in the manufacture of parts, components, sub-assemblies, tooling or intermediaries. It must supply not less than 50% of its production or services. The investment in plant and machinery does not exceed Rs. 10 million. 3. Tiny Units A unit where investment in plant and machinery does not exceed Rs. 25 lakh, irrespective of the location of the unit.


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Classification of SSI
 4. Women Entrepreneur Enterprise An SSI unit/industry related service or business enterprise, managed by one or more women entrepreneurs in proprietary concerns – share capital of not less than 51% as partners of private limited company. 5. Modern Small Scale Industries These are small firms using modern techniques to produce a wide range of products. They make use of sophisticated machinery and equipment and are mostly located in large towns. They use hired labour and raw materials supplied by large scale enterprises.

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Classification of SSI
Traditional Small Scale Industries • These include village industries, khadi and handloom, handicrafts, coir etc. • These are highly labour intensive and provide only subsidiary or part-time employment to agricultural laborers and artisans. • These units are located mostly in rural and semi-urban areas. Cottage Industries • These industries which provide part time or whole time work in rural and semi-urban areas. • They are generally associated with agriculture. Agro-based Industries • These industries are engaged in the processing of agricultural produce and provide inputs to agriculturalists. • Large scale agro based industries are set-up in cities whereas small scale agro-based industries are located in rural areas.

Popular Areas of Small Business Enterprise



• •


• •



Services Retailing Construction Financial Insurance Wholesaling Transportation Manufacturing

Manufacturing 5% Finance & Insurance Other 10% 1.7% Wholesale 8%

Construction 10% Transportation 5%

Retailing 22.7%

Services 37.6%

Overall Performance of SSI in India
Number of Units (in lakhs)
Year 1994-95 1995-96 1996-97 1997-98 1998-99 1999-2000 2000-01 2001-02 2002-03 Registered 11.61 11.57 11.99 12.04 12.00 12.32 13.10 13.75 14.68 Unregistered 6.27 67.99 71.27 74.12 77.67 84.83 88.00 91.46 95.42 Total 79.60 82.84 86.21 89.71 93.36 97.15 101.10 105.21 110.10

Production in Crores
122.210 148.290 168.413 189.178 212.901 234.255 161.289 282.270 311.993

Employment in Lakhs
191.40 197.93 205.86 213.16 220.50 229.10 239.09 249.09 261.38

Exports (Rs. Crores)
29.068 36.470 39.248 44.442 48.979 54.200 69.797 71.244 86.013

2003-04
2004-05 2005-06 2006-07 2007-08

15.54
16.57 18.70 20.32 21.46

98.41
102.02 104.70 108.12 110.10

113.95
118.59 123.46 128.44 133.68

364.547
429.796 497.886 585.112 695.126

271.42
282.57 299.35 312.52 322.28

97.644
1,24.417 1,50.242 1,77,600 1,96.750

100

120

19

20

40

60

80

0
-9 5 -9 6 -9 7 -9 8 -9 9 00

94 95 96 97 98

19 19 19 19 19 99 -2 0 00 -0 1 -0 2 -0 3 -0 4 -0 5 20 20 20 05 06 07 -0 6 -0 7 -0 8 01 02 03 04 20 20 20 20 20

Registered Unregistered

Performance of SSI in India

Overall Performance of SSI in India
1200 1000 800 600 400 200 0 1994- 1995- 1996- 1997- 1998- 1999- 2000- 2001- 2002- 2003- 2004- 2005- 2006- 200795 96 97 98 99 2000 01 02 03 04 05 06 07 08

Definition contd.
• Micro Enterprise: Investment in plant &machinery 25 lacs manufacturing & up to Rs 10 lacs in equipment in service sector • S.S.I-Investment in P&M does not exceed Rs500lacs in P&M and Rs10 to 200 lacs in equipment in service sector • Medium Enterprise: Above 500 lacs and up to Rs1000lacs in P&M in manufacturing and Above rs 200 lacs up to Rs500 lacs in P&M

Definition contd.
• Equipment in service sector ancillary units-proposes to supply 50% of its production or services • Tiny units-Investment in p & m does not exceed Rs. 25 lacs • Village & cottage industry.-population not exceeding 50000.

Definition contd.
• Women enterprises--SSI related service where share of the women as partner shareholders, directors not less than 51%. • Export oriented units--exports at least 30% of its production. • SSSBE--An industry related Service Business Enterprises with investment in fixed assets up to 5 lacs except land & bldg.

Details of Ceiling limit of investment in SSIs over the time period

SL No.
1. 2. 3. 4.

Year

Ceiling limit for SSIs

1950 Capital assets up to Rs. 5 lakhs 1958 Capital investment up to Rs. 5 lakhs 1960 Gross value of fixed assets up to Rs. 50 lakhs 1966 Value of plant and machinery up to Rs. 7.5 lakhs

5.
6. 7. 8. 9. 10.

1975 Plant and machinery Rs. 10 lakhs
1980 Plant and machinery up to Rs. 20 lakhs 1985 Plant and machinery up to Rs. 35 lakhs 1991 Plant and machinery up to Rs. 60 lakhs 1997 The investment limit was raised to Rs. 3 crores 2000 The investment limit was reduced to 1 Crore

11.

2007 Limit is 1 crore only

Objectives of Small scale industries
1. To generate immediate and large scale employment opportunities with relatively low investment. 2. To eradicate unemployment problem from the country. 3. To encourage dispersal of industries to all over country covering small towns, villages and economically lagging regions. 4. To bring backward areas too, in the main stream of national development. 5. Promote balanced regional development in the whole country. 6. To ensure more equitable distribution of national income. 7. To encourage effective mobilization of country’s untapped resources. 8. To improve the standard of living of people in the country.

Characteristics of Small scale industries
1. A small unit is generally a one-man show – even if SSI is run on partnership or company. 2. The scope of operation of SSI is generally localized, catering to the local and regional demands. 3. SSI requires relatively less amount of capital and therefore SSI can be developed even in capital-scale economies – labour intensive technology. 4. SSI generates more employment per unit of capital invested. 5. SSI has short gestation period 6. SSI relies less on infrastructure and hence can be located even in under developed regions. 7. SSI growth promotes distribution of economic powers.

Scope of Small scale industry  The scope for small scale industries is quite vast, covering a wide range of activities requiring less sophisticated technology.  Some of the important activities that SSI’s are normally involved in are –
1. Manufacturing activities 3. Public utilities 2. Construction activities 4. Repairing activities

5. Financial activities
7. Wholesale business 9. Communication etc

6. Retailing activities
8. Transport activities

Scope of Small scale industry
 In India, the small scale sector is protected by the Govt, by way of reservation.  Govt has made a list of 114 items which are reserved for exclusive production in small sector.  No large scale industry may produce any of these items reserved in favour of SSI’s.  The main objective of this reservation policy is to insulate the small sector from unequal competition with the large industrial establishments.  Although this policy has some negative effects, by and large it has helped SSI.  Some of the items in the reserved list of 114 as it stands today are -

1. Leather products 2. Rubber products 3. Natural essential oils 4. Boat making

12. Cotton hosiery 13. Scientific instruments 14. Auto ancillary 15. Electrical goods

5. Tricycles and perambulators 6. Stationery item
7. Sports goods 8. Ceramics 9. Electro plating 10. Food processing

16. Printing presses
17. Wooden furniture 18. Foundries 19. Flour mills 20. Ice creams 21. Pickles and Chutneys

11. Lock making

22. Khadi products

Small Business: A New Perspective
• The dominant theme of big business and large organizations is profitability through cost cutting and increasing efficiency. • For firms to be competitive, they have had to:

– Lay off employees at all levels. – Factories have been closed or relocated.
• Cost cutting has permeated the economy, and have begun to reassess their thinking about small business. • With the progression to a more diverse economy, assumptions about small business have changed. • For the beginner or those in mid-career, starting a small business is increasingly viewed as a viable option.

The Importance of - and Trends in Small Business

• Small business is the chief job generator in the United States • The trends seen in the small business growth
– In the slow economy of the 1990s, the small business sector hired almost 9 out of 10 workers – From 1980 through 1986, 31.8 million jobs were created by start-ups – From 1986–1988, small business contributed over 45% of the 6.17 million new jobs – In 1998, 99% of an estimated 24.8 million tax returns were filed by small business firms

The Importance of and Trends in Small Business (contd.)

• Between 1990 and 1995, small business (firms with fewer than 500 employees) created “three-fourths of net new jobs.” • U.S. Office of Advocacy projected that from 1992 to 2005, about 68 percent of future employment growth likely will come from small firms.

Success or Failure
• Starting and/or operating a small business includes the possibility of success as well as the risk of failure. • An entrepreneur must take into account factors that influence the success or failure of the venture.

• There appears to be a direct link between start-up dynamics and the size of the enterprise.
• The odds of survival and future expansion of a new firm can be related directly to the number of employees that the firm needs and can afford to hire.

Competitive Advantages of a Small Business

• Can maintain a closer relationship with its customers, employees, and its suppliers • Has a smaller base, and hence can provide more individual attention to its customers • Because of lower overhead, smaller firms can perform more efficiently. • Small firms have greater flexibility because their size lets them adopt new processes, services, materials, and products.

Competitive Advantages of a Small Business (contd.)

• Small companies encourage competition in design and efficiency and help prevent larger firms from forming monopolies. • The owner of a small business retains an element of control and autonomy that is dispersed in a larger company. • Small businesses tend to produce well-rounded people because they provide a greater variety of learning experiences and more potential for diversified interaction.

Competitive Advantages of a Small Business (contd.)

• The opportunities for freedom in decision making and the variety of activities leads to more creative and aggressive leadership. • Small businesses tend to attract good management personnel and so reduce the overall chance of failure.
– Management people are attracted to smaller firms because: • Advancement within smaller firms can be accelerated. • Personnel tend to have greater responsibilities and duties. • Work experience tends to be more diversified.

Disadvantages of a Small Business
• Some disadvantages of small business:
– – – – – – The inability to hire qualified employees Lack of funds for expansion Tax burdens Limited or nonexistent credit with suppliers High costs for advertising Coping with competition

• Many of these disadvantages can be linked directly to improper planning and misuse of funds • Success or failure revolves around
– Inadequate managerial ability – Inadequate financing – Poor competitive position

Reasons a Business Might Fail
• Problems exist because managers cannot specialize in any one area but rather must function with broad-based knowledge. • Expert knowledge in specific functional areas does not guarantee management ability. • Management skill is often gained separately from functional knowledge. • The best salesperson may have little interest or ability in managing an organization that requires knowledge in all aspects of the business operation.

Reasons a Business Might Fail
• A small business owner is expected to efficiently manage every aspect of the business, such as:
– The initial strategy – How the business is going to operate internally and externally

• A business plan can provide assistance in resolving questions, such as:
– Determining how much space is needed for operations – How much space to leave for future expansion for diversification into other lines or fields

• The business plan is a written description of the firm, its objectives, and the steps necessary to achieve them.

Reasons a Business Might Fail • A small business owner is expected to also contend with employee issues, such as
– – – – – The number needed initially Task specialization Compensation Scheduling Amount and extent of delegation of responsibility

• As the owner, one must act as a financial advisor for the business and be able to interact well with employees, customers, and suppliers.

Reasons a Business Might Fail

• Possess strong management and organizational skills, which are required for the daily operation • In addition to knowing the business thoroughly, one must keep abreast of important aspects, such as:
– – – – Competition Cyclical trends of the industry Technical advances The operational environment for related industries

• Be aware of the external environment and the forces that impact upon his or her operations.

Reasons a Business Might Fail

• Good overall planning looks at several factors, such as site analysis, good merchandising policies, thorough record keeping and expense analysis, and the determination of break-even point.
– Site planning
• An important reason for business failure is poor location.

– Marketing
• Price, place, product, promotion

– Record keeping
• Maintaining detailed information about purchases, sales, orders, expenses, and cash balances from a double-entry bookkeeping system

Reasons a Business Might Fail
• Improper financing: Common causes of financial business failure can be grouped into several categories:
– – – – – – – – – Poor sales High operating costs Poor credit and collection policies Too many fixed assets and wrong inventory Inflation Taxes Competition Government regulations Interest rates

Reasons a Business Might Fail

• Poor management is the main reason businesses fail, according to Dun & Bradstreet.
– Incompetence – Lack of experience and knowledge – Requirement of additional funds to finance operation and growth

Reasons a Business Might Fail (contd.)
Percentage of business failures

Requirements for Success
• A great deal depends on the owner’s own personality. • Successful managers tend to exhibit desirable characteristics

– – – – – – – – – – – –

Energy Initiative Organization Appearance Technical competence Administrative ability Good Judgment Restraint and patience Ability to communicate well Leadership qualities Pre-ownership experience Good managerial ability

Advantages of Small scale industry

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

Employment Generation Use of Local Raw-materials Balanced Regional Development Decentralisation of Industries Mobilisation of capital Developing Entrepreneurship Equitable Distribution of Wealth Efficient use of productive factors Promotion of Exports








1. Employment generation The small-scale industries are labour intensive and they can provide more employment per unit of capital. The employment generating capacity of small scale sectors is eight times that of large scale sector. In cottage and household industries, with given investment, employment possibilities would be ten or fifteen times greater in comparison with corresponding factory industries. In an economy, characterized by abundant labour supply and scarce capital, the small-scale industry assume special significance.

2. Mobilisation of Local Resources  Small scale industries help to mobilise and utilize local population, local natural resources local raw-materials, local market, local laborers etc. which might otherwise remain idle and unutilized.  They help to perfect and promote traditional family skills and handicrafts.  These industries facilitate the growth of local entrepreneurs and self-employed professionals in small towns and villages.

3. Export Promotion  Small scale industries help in reducing pressure on the country’s balance of payments in two ways.  First, they do not require imports of sophisticated machinery or raw-materials. They are now producing electro-medical equipment, drugs etc which were being imported earlier.  Secondly, small scale industries earn valuable foreign exchange through exports.  There has been a substantial increase in exports from the small scale sector.  Small scale sector contributes about 35% of India’s total exports and 90% of non traditional exports.

4. Consumer surplus  Small scale industries now produce a wide range of mass consumption items.  Over 5,000 products are being manufactured in the small scale sector.  By providing goods of daily use on a large scale small scale industries serve as an anti-inflationary force.  About one half of the output of manufacturing sector in India comes from small scale and village industries.

5. Feeder to Large Scale Industries  Small scale industries play a complementary role to large scale sector.  They provide parts, components, accessories to large scale industries. They serve as ancillaries to large units.  Social Advantage  Small scale sector contributes towards the development of a socialistic pattern of society by reducing concentration of income and wealth.  They provide an honorable and independent living to people with limited resources.  They facilitate wider participation of public in the process of development and thereby serve the cause of democracy and selfgovernance.







6. Development of Entrepreneurship Small scale units have helped to develop a class of entrepreneurs. These units facilitate self-employment and spirit of selfreliance in the society. The development of small scale industries contributes to increase in per capita income or economic development in various ways. It generates immediate employment opportunities with relatively low capital investment, makes effective utilization of untapped local resources, facilitates development of backward areas and weaker sections of society.




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7. Decentralisation of Industries The concentration of industries in urban areas encourages migration of people from rural areas to urban areas encourages migration of people from rural areas to urban centers in large numbers. This creates a number of problems such as pollution, slums and shortage of civic facilities. The dispersal of small industries in different areas reduce the intensity of the problem. Further, decentralization helps to tap the local resources such as raw materials idle savings, local talents.

8. Balanced Regional Development  Large industries are mostly concentrated in big cities and metropolitan cities.  The small towns and rural areas are deprived of the benefit of industrialisation.  In order to benefit the country as a whole, the industries should be dispersed in all regions.  It is possible to start small-scale industries in almost all areas such as villages, hill areas and even remote corner of the country.  Thus small-scale industries are helpful in achieving wider dispersal of industries and thereby ensure balanced regional development.

Disadvantages of small scale industries 1. Problem of Raw-materials 2. Problem of Finance 3. Problem of Marketing 4. Problem of under utilisation of capacity 5. Outdated technology 6. Poor project planning 7. Inadequate Infrastructure 8. Regulations 9. Competition 10. Sickness

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1. Problem of Raw-materials The availability of raw material is a great problem for small-scale units. These units use either local raw materials, or imported raw materials. The problem of raw material has assumed the shape of – an absolute scarcity a poor quality of raw material and a high cost. Earlier, the majority of small scale units mostly produced items dependent on local raw materials. The shortage of right type of raw materials at standard price affects the capacity utilisation and production programme.

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2. Problem of Finance Inadequate finance is the major problem for small scale units. Since most of the SSI units are either proprietary concerns or partnership firms their internal resources are small. The credit provided by the various institutional agencies such as banks, SFCs and SIDBI are inadequate to meet the requirements of small units. The initial investment of small units comes from relatives, friends, non-banking and non-governments sectors..The institutional agencies are still reluctant to advance money to small industries as they are unable to offer security or guarantee required by them. The shortage of funds makes it difficult to install modern machinery and maintain well organised and fully equipped factories.

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3. Problem of Marketing One of the main problems faced by small scale units is in the field of marketing.. The small units have to face competitions from other small units and large scale industries. The small units do not possess their own marketing organization. They do not have the resources and expertise to market their products effectively. Therefore, the small industries suffer from a comparative disadvantage vis-a-vis large scale units. Further, their products are often not standardized and of variable quality. These small units often do not possess any marketing network – they often to sell at local area at lower prices.

4. Problem of Underutilisation of Capacity  The small industries have an inherent problem of underutilization of capacity due to two reasons 1. Frequent power cut 2. Inability to go for alternatives like generators and installation of thermal units.

 There are studies that clearly bring out the gross underutilization of installed capacities in small scale industries.  On an average 40% to 50% of the capacity is not utilized in small units.

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5. Outdated Technology Most of the small scale units use only obsolete and outdated technology and old machineries and equipment. Adoption of latest technology alone can ensure good quality and higher productivity. Due to limited capital, the small industries find difficult to modernize their plant and machinery. As a result, the cost of production tend to be higher and quality of products lower as compared to the products of large industries. The small industries are financially weak to undertake research and development activities.

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6. Problem of Recovery One of the basic problems of small-scale industry is recoveries from sales. The buyers do not pay their dues in time, most of the Principals do not pay the ancillaries for six months or even longer after purchase of goods. The financial assistance obtained from a bank is taken advantage of by the customers of small scale units. 7. Poor Project Planning In the absence of education and experience, small scale businessmen often depend upon consultants. They do not fully understand project details. Due to poor planning of projects, cost and time overruns arise.


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8. Problem of Recovery One of the basic problems of small-scale industry is recoveries from sales. The buyers do not pay their dues in time, most of the principals do not pay the ancillaries for six months or even longer after purchase of goods. The financial assistance obtained from a bank is taken advantage of by the customers of small-scale units. 9. Inadequate Infrastructure Insufficient quality and quantity of transportation, communications and other basic services particularly in backward areas is another problem. Infrastructural gap results in underutilization of capacity and wastages. For example – instability of voltage, unscheduled power cuts and long delays in getting power connections are common. Poor communication and transportation, low quality of civic services etc.

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10. Regulations Small scale units face endless hassles from government agencies. As many as 30-4- inspectors from various departments visit them. Small entrepreneurs face cumbersome procedures. 11. Competition Small units face severe competition from large firms, MNCs and cheap imports from china and Korea. 12. Sickness There is widespread sickness in small scale sector. More than 10% of the small scale units are sick due to one reason or the other.

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