Unit 4
Sources of business ideas and tests of feasibility
Business plan/project proposal is a roadmap that gives a direction to promoters of business venture towards the achievement of their goal. Some of the significance of writing business plan/ project proposal are-
a) Helps to take critical decision
A well prepared business plan helps to take important decisions regarding requirement of fund, human resources and other raw materials and its sources of procurement and productive application.
b) It iron out kinks
The writing of business plan helps to conduct market research, prepare feasibility report of the project in advance.
c) It helps to avoid big mistake
A well prepared business plan helps to avoid big mistakes like mismanagement of funds, misutilisation of resources etc. that may affect organisational health.
d) It proves the viability of the business
The critical component of market research helps to get deep insight about the market situation, position of competitors and feasibility of the project in the market.
e) It set better objectives and benchmarks
The writing of business plan helps to set short term and long term goals of the organisation and to prepare plans and set the benchmark of work and product quality/service to be provided in the market.
f) It communicate objectives and bench mark
The designing of business plan in advance helps to communicate about the predetermined objective and bench mark to the other team members and employees of the organisation. It helps them to clear about their task and responsibility.
g) It secures financing
If the business venture approaches banks, NBFCs, private equity funds etc. for loan than there is need for business plan. After verifying the business plan, the lender determines the viability of the project and accordingly they decide whether to grant loan or not.
h) It reduces risk
The pre-determined business plan reduces the risk of loss and failure to a great extent by determining in advance the plans and objectives, short term and long term goals, benchmark for work etc.
Contents of business plan/ project proposal
1) Title page
The title page of the project proposal consist of legal information of the business, its name and address, contact number, name and address of promoters etc.
2) Executive summary
It is the summarised project proposal which highlights the important aspects of the whole project proposal in short and crisped form
3) Industry overview
This topic of the proposal provides details about the industry and provides information about nature and purpose of industry, major competitors, industry trends and estimated revenues etc.
4) Market analysis
The market analysis of the project proposal gives a deep insight about the market feasibility about the market, competitors’ share in the market, trends in the market etc.
5) Sales and marketing plan
It consists of sales and marketing strategies to be adopted by the promoters to sell their products/service in the market. It highlights pricing strategy, sales strategy, and promotional strategy of the business venture.
6) Management plan
It highlights the planning for managerial structure, appointment of human resources, financial management etc.
7) Operating plan
It provides details about the proposed operating structure of the organisation like office space, operating cost, machinery, labour, supplies and inventory.
8) Financial plan
It provides details about the estimated financial requirement, sources and employment of fund, projected financial statement etc.
9) Appendices
It consist of some additional information apart from the above mentioned information like details history of promoters, market research report etc.
Key takeaways-
1) Business plan/project proposal is a roadmap that gives a direction to promoters of business venture towards the achievement of their goal.
2) The contents of business proposal are title, summary, industrial overview, market analysis, sales and marketing plan, management plan, operating plan and financial plan.
The manager of the organisation has to take strategic decisions about designing business processes, location, layout, operation, planning and control. Such decisions are discussed below-
The business process is designed depending upon its product/service. The process may be
a) Project process: It is used when the product is unique and typically produces at one time.
b) Job-shop process: it is used when processing requirements are intermittent and different for each product.
c) Batch process: It is used when a moderate variety of products with moderate volume in groups and batches.
d) Repetitive: It is used when a high volume standardised product need to be produced.
2. Designing of location:
Decision regarding location of enterprise is crucial to attract more customers. Location of the venture should at a place where the customers can easily access for it. The factors that influence location of the enterprise are-
a) Proximity to customers, suppliers and skilled labour.
b) Environmental laws
c) Financial incentives offered by state or local development authorities.
d) Quality of life consideration
e) Potential for future expansion.
3. Designing of layout:
A layout describes the physical arrangement of work and storage areas, departments, or equipment within the plant, office, warehouse etc. the layouts may of following types-
a) Process layouts/functional layouts: It is used when a firm produces low volumes of products using job-shop or batch production process.
b) Product layouts/straight line layout: It is suitable for repetitive and continuous flow process used to produce a highly standardised product with high and constant demand.
c) Fixed position layouts: in this design, the resources like workers, materials, machines and tools needed to produce the product are brought to the producers location.
d) Hybrid layout: It is the combination of process, product and fixed position layout.
4. Designing of operation:
It is an important strategic function of manager that adds value to the customers and allows businesses to successfully produce goods and deliver services. It makes decision about
a) Inventory decisions
b) Capacity decisions
c) Quality decisions
d) Scheduling decisions
e) Process decisions
f) Technology decisions
g) Location decisions
5. Planning and control:
Planning is deciding in advance what to do? How to do? And who will do? Thus it helps to predetermine the goals and objectives of the organisation, derivative plans and rules and regulations of the organisation. It decides the standard of work and provides a benchmark for control process. The control function is performed by manager if there is any difference between the actual activity performed and pre decided benchmark of work.
Key takeaways
1) Designing business processes, location, layout, operation, planning & control are strategic decisions taken by management regarding the business venture.
A Project Report is a document which provides details on the overall picture of the proposed business. The project report gives an account of the project proposal to ascertain the prospects of the proposed plan/activity. A project report consist of following information-
A project report must provide information about the details of the industry to which the project belongs to. It must give information about the past experience, present status, problems and future prospects of the industry. It must give information about the product to be manufactured and the reasons for selecting the product if the proposed business is a manufacturing unit. It must spell out the demand for the product in the local, national and the global market.
2. Organisation summary:
The project report should indicate the organization structure and pattern proposed for the unit. It must state whether the ownership is based on sole proprietorship, partnership or joint stock company. It must provide information about the bio data of the promoters including financial soundness. The name, address, age qualification and experience of the proprietors or promoters of the proposed business must be stated in the project report.
3. Project Description:
A brief description of the project must be stated and must give details about the following:
1) Location of the site,
2) Raw material requirements,
3) Target of production,
4) Area required for the work shed,
5) Power requirements,
6) Fuel requirements,
7) Water requirements,
8) Employment requirements of skilled and unskilled labour,
9) Technology selected for the project,
10) Production process,
11) Projected production volumes, unit prices,
4. Marketing Plan:
The project report must clearly state the total expected demand for the product. It must state the price at which the product can be sold in the market. It must also mention the strategies to be employed to capture the market. If any, after sale service is provided that must also be stated in the project. It must describe the mode of distribution of the product from the production unit to the market. Project report must state the following:
a) Type of customers,
b) Target markets,
c) Nature of market,
d) Market segmentation,
e) Future prospects of the market,
f) Sales objectives,
g) Marketing Cost of the project,
h) Market share of proposed venture,
5. Capital Structure and operating cost:
The project report must describe the total capital requirements of the project. It must state the sources of finance, it must also indicate the extent of owner’s funds and borrowed funds. Working capital requirements must be stated and the source of supply should also be indicated in the project. Estimate of total project cost, must be broken down into land, construction of buildings and civil works, plant and machinery, miscellaneous fixed assets etc.
6. Management Plan:
The project report should state the following.
a) Business experience of the promoters of the business,
b) Details about the management team,
c) Duties and responsibilities of team members,
d) Current personnel needs of the organization,
e) Methods of managing the business,
f) Plans for hiring and training personnel,
7. Financial Aspects:
In order to judge the profitability of the business a projected profit and loss account and balance sheet must be presented in the project report. It must show the estimated sales revenue, cost of production, gross profit and net profit likely to be earned by the proposed unit. In addition to the above, a projected balance sheet, cash flow statement and funds flow statement must be prepared every year and at least for a period of 3 to 5 years. The income statement and cash flow projections should include a three-year summary, detail by month for the first year, and detail by quarter for the second and third years. Break-even point and rate of return on investment must be stated in the project report.
8. Technical Aspects:
Project report provides information about the technology and technical aspects of a project. It covers information on Technology selected for the project, Production process, capacity of machinery, pollution control plants etc.
Key takeaways-
1) A Project Report is a document which provides details on the overall picture of the proposed business. The project report gives an account of the project proposal to ascertain the prospects of the proposed plan/activity.
Project submission/ presentation
A project is submitted or presented for appraisal by financial institutions/ NBFCs to grant loans and advances. The criteria for project submission/presentation are-
Appraisal of the project by external agencies, such as financial/non-financial institutions
Project appraisal is the structured process of assessing the viability of the project or proposal. The different types of appraisal required for project are discussed below-
It determines whether the technical parameters are soundly conceived, realistic and technically feasible. Technical feasibility analysis is the systematic gathering and analysis of the data pertaining to the technical inputs required and formation of conclusion there from. The elements considered for technical appraisal includes-
-Physical scale
- Technology used & Type of equipment & Suitability conditions
- How realistic is the implementation schedule
- Labour intensive method or others
- Cost estimates of Engineering Data
- Escalations are taken care of or not
- Procurement arrangement
- Cost of operation & Maintenance
- Necessary raw material & Inputs
- Potential impact of project on human & physical Environment
2. Financial Appraisal:
To determine whether the financial costs and returns are properly estimated and whether the project is financially viable. Following minimum details are determined in the financial appraisal;
- Total Cost
- O & M Expenditure
- Opportunity costs
- Other costs
- Returns on Investment over project life
- NPV
- CBR
- IRR
3. Institutional Appraisal:
To determine whether the implementing agencies as identified in the report are capable for effective implementation, monitoring, and evaluation of the scheme. The elements that considers for institutional appraisal are-
- Whether the entity is properly organised do the job
- Strength to use capability and take initiatives to reach the objectives
- Openness to new ideas and willingness to adopt long term approach to extend over several projects.
4. Commercial Appraisal:
The appraisal involves the assessment of the current demand/market scenario, which enables the project to get adequate demand. Estimation, distribution and advertisement scenario also to be here considered into.
5. Environmental Appraisal:
To see any detrimental environmental impacts and how to minimise the impacts. Environmental appraisal concerns with the impact of environment on the project. The factors include the water, air, land, sound, geographical location etc.
6. Economic Appraisal:
How far the project contributes to the development of the sector, industrial development, social development, maximizing the growth of employment, etc. are kept in view while evaluating the economic feasibility of the project.
7. Legal Appraisal:
To determine whether the project satisfies the legal issues related to land acquisition, title deed, environmental clearance etc.
Key takeaways-
1) A project is submitted or presented for appraisal by financial institutions/ NBFCs to grant loans and advances.
2) Project appraisal is the structured process of assessing the viability of the project or proposal.
References:
1.Enterpreneurial Development by S.S. Khanka
2.Entrepreneurship Development and Small Business Enterprises by M. Charantimath
