Small Business Management

A1] a) Features of small scale industries:

           

“Small-scale industry is beautiful” because of its important following characteristics:

·         A small-scale unit is generally a one-man show. Even the small units, which are run by a partnership firm or company, the activities, are mainly carried out by one of the partners or directors. In practice, the other is simple as sleeping partners or directors who mainly assist in providing funds.

·         In case of small-scale industries, the owner himself/herself is a manager also. Thus, these units are managed in a personalized fashion. The owner has first hard knowledge of what is actually going on in the business. He takes effective participation in all matters of business decision making.

·         Compared to large units, a small-scale industrial unit has a lesser gestation period, i.e. the period after which the return on investment starts.

·         The scope of operation of small industrial undertaking is generally localized catering to the local and regional demands.

·         Small units use indigenous resources and, therefore, can be located anywhere subject to the availability of these resources like raw materials, labour etc.

·         Small industries are fairly labour intensive with comparatively smaller capital investment than the larger units. According to P.C. Mahalanobis, small-scale units require very little capital. About six or seven hundred rupees small-scale would get an artisan family started. With any given investment, employment possibilities would be ten or fifteen or even twenty times greater in comparison with corresponding factory system.

·         Using local resources, small units are decentralized and dispersed to rural areas. Thus, the development of small-scale industries in rural areas promotes more balanced regional development, on the one hand, and prevents the influx of job seekers from rural areas to cities and urbanizing centers, on the other.

·         Compared to larger units, small-scale units are more change susceptible and highly reactive to socio-economic conditions. They are more flexible to adapt changes like introduction of new products, new method of production, mew materials, new markets, new forms of organization etc.

Relationship between small and large units:

Going through the distinct characteristics of small scale industries, one should not assume that the both small and large are antithetic to each other. In other words, the both cannot sustain in an economy. It is, in fact, true the other way round, and to a great extent, one is often ancillary or complimentary to the other.

The relationship between the small and the large industrial units can be seen in various respects. Yet, the following are the important ones:

·         Competitive: Small-scale industry cannot compete with large industry in certain circumstances and in selected products. Examples of such industries are bricks and tiles, fresh baked goods and perishable edibles, preserved fruits, goods requiring small engineering skills, items demanding craftsmanship and artistry.

·         Supplementary: Small industries can fill in the gaps between the large scale production and standard outputs caused by large-scale units. This is due to this supplementary role of small units.

·         Complementary: Apart from supplementary relationship, small industry has been a complementary to its large counterparts. In the real world, many small units produce intermediate products to large units. Such subcontracting relationship between the small and large was particularly marked in the economic history of today’s industrially developed Japan. As industrialization proceeds, small firms seem naturally to shift from activities that compete with large firms to complementary ones.

·         Initiative: Attracted by the high profits of large units, small units can also take initiative to produce the particular product. If succeeds, the small unit grows too large over a period of time. Staley quotes such initiation that many of the automobile factories started this way in the United States of America. In our country too, the electronic industry looks like following to this initiative pattern of development.

·         Servicing: Small industries do also install servicing and repairing shops for the products of large units. In the case of India, such small servicing units can be seen proliferating in respect to large industries like refrigerators, radio and television sets, watches and clocks, cycles and motor vehicles.

b)  Meaning of Joint stock Company:

A company is an artificial person being created by the law that has an existence separate and apart from its owners. In other words a company is an artificial person created by law, with a distinctive name, a common seal and perpetual succession of members. It can sue and can be sued in its own name. Let us consider a few more definitions of company.

The Indian Companies Act, 1956 defines a joint stock company as a company limited by shares having a permanent paid up or nominal share capital of fixed amount divided into shares also of fixed amount, held and transferable as stock and formed on the principles of having in its members only the holders of those shares or stocks and no other persons.

One most widely quoted definition of a company (called corporation in USA) is given by Chief Justice Marshal in these words: “A corporation is an artificial being invisible, intangible and existing only in contemplation of law. Being the mere creature of law, it possesses only those properties which the charter of its creation confers upon it, either expressly or an incidental to its very existence”.

Lord Justice Lindley has defined a company as “an association of many persons, who contribute money or money’s worth to a common stock and employ it for a common purpose. The common stock so contributed is denoted in money and is the capital of the company. The people who contribute to it or to whom it belongs are members the proportion of capital to which each member is entitled is his share”.

Main Features:

Based on the above definition, given below are the main features of company form of ownership:

                    i.)      Artificial Legal Person: A company is an artificial person created by law. Though it has no body, no conscience, still it exists as a person. Like a person, it can enter into contracts in its own name and likewise may sue and be sued by its own name.

                  ii.)      Separate Legal Entity: A company has a distinct entity separate from its members or shareholders. Therefore, a shareholder of the company can enter into contract with the company. He/she can sue the company and be sued by the company.

                iii.)      Common Seal: Being an artificial person, company cannot sign the documents. Hence, it uses a common seal on which its name is engraved. Putting the common seal on the papers relating to company’s transactions makes them binding on the company.

                iv.)      Perpetual Existence: Unlike partnership, the existence of a company is not affected by death, lunacy, insolvency or retirement of its members or directors. This is because the company enjoys a separate legal existence from that of its members. It is said, “Members may come, members may go but the company goes forever”. It is created by law and is dissolved by law itself.

                  v.)      Limited Liability: The liability of the members of a company is normally limited to the amount of shares held or guarantee given by them.

                vi.)      Transferability of Shares: The members of a public limited company can sell his shares to others without the consent of other shareholders. He has to follow the procedure laid down in the Companies Act for transferring his shares. However, there are restrictions for transferring shares to others in case of a private limited company.

              vii.)      Separation of Ownership from Management: The shareholders, i.e. owner being scattered all over country give right to the directors to manage the affairs of the company. The directors are the representatives of the shareholders. Thus, ownership is separated from management.

            viii.)      Number of Members: In case of a public limited company, the minimum number is seven and there is no maximum limit. But, for a private limited company, the minimum of members is two and the maximum is fifty.

 A2] a) Sources of funds to finance a small scale sector:

            Required funds could be classified into two sources. These are Internal Sources and External Sources.

Ø  Internal Sources:

Under this source, funds are raised from within the enterprise itself. The internal sources of financing could be owner’s capital known as equity, deposits and loans given by the owner , the partners, the directors, as the case may be, to the enterprise. One source for raising funds internally may be personal loans taken by the entrepreneurs on his/her personal assets like Provident Fund, Life Insurance Policy, buildings, investments, etc. In addition to these, in case of a running enterprise, funds could also be raised through the retention of profits or conversion of some assets into funds. The principle of financial management also suggests that an entrepreneur should religiously plough back a good portion of his/her profits into the enterprise itself. However, the scope for raising funds from internal sources particularly in the case of small-scale enterprises remains limited.

Ø  External Sources:

The funds raised from other than internal sources are from external sources. The external sources usually include the following:

1.      Deposits or borrowings from relatives and friends and others.

2.      Borrowings from the banks for working capital purposes.

3.      Credit facilities from the commercial banks.

4.      Term-loans from financial institutions.

5.      Hire-purchase or leasing facility from the National Small Industries Corporation (NISC) and State Small Industries Corporations (SSIC).

6.      Seed/Margin money, subsidies from the government and the financial institutions.

If we now lump both the sources together, these can be broadly be classified into:

1. Personal funds or Equity Capital.
2. Loans from relatives and friends.
3. Mortgage Loans.
4. Term-Loans.
5. Subsidiaries.

b) The Industrial Disputes Act, 1947:

The main object of this Act is to make provision for the investigation and settlement of industrial disputes.

The Act seeks:

                    i.)      To provide a suitable machinery for the just, equitable and peaceful settlement of industrial disputes.

                  ii.)      To promote measures for securing and preserving amity and good relations between employers and employees.

                iii.)      To prevent illegal strikes and lockouts.

                iv.)      To provide relief to workers against layoffs, retrenchment, wrongful dismissal and victimization.

                  v.)      To promote collective bargaining.

                vi.)      To improve the condition of workers.

1.      Authorities: The Act provides for the setting up of the following for effective investigation and settlement of industrial disputes:

a.       Works committees

b.      Conciliation officers

c.       Boards of conciliation

d.      Courts of inquiry

e.       Labour courts

f.       Industrial Tribunals

g.      National Tribunal

Arbitration, conciliation and adjudication machinery is provided for settlement and prevention of industrial disputes. The Act makes it obligatory for an employer to setup a ‘Grievance Settlement Authority’ in an industrial establishment in which fifty or more workers have been employed in the preceding twelve months. This shall have the responsibility to settle industrial disputes concerning an individual worker.

2.      Obligation of Employer: Under the Act, an employer is required

1. To constitute works committees and provide all facilities for their proper working.
2. To implement all agreements, settlements and awards, and produce all documents and render other assistance for conciliation and adjudication of disputes.
3. To deist from declaring any illegal lockout.
4. Not to layoff or retrench workmen or close undertakings without prior permission of the Government.
5. To pay compensation for layoff and retrenchment and closure and to re-employ retrenched workmen.
6. To avoid any change in service and employment conditions without notice.
7. To report to the Government or its specified authority any strike or any notice of strike/lockout received/given within five days of receiving/giving the notice.
8. To maintain status quo tendency of disputes in conciliation and arbitration, and avoid taking disciplinary action against the workmen connected with disputes and ‘protected workmen’ as required under the Act; and
9. To avoid unfair labour practices.

A3] Basic Start up Problems in Small Scale Enterprise:

The main problems involved in the establishment of a small scale enterprise are given below:

1. Selection of the Industry: Once a person has decided to start his own business, the major problem is to select the line of business. This problem can be solved by analyzing the person’s aptitudes, propensity to take risk, organizational ability, skills and experience, family background, financial position, Government policy and incentives, infrastructure facilities, advice of consultants, etc

2. Product Selection: Another start up problem is the choice of the particular product to be manufactured. This can be decided through a comparative analysis of a few product items with special reference to :

·         Size and structure of the market

·         Future demand pattern

·         Competitive position

·         Life cycle of the product

·         Availability of raw materials

·         Technical aspects of production

·         Availability of required labour

·         Government policy and controls.

3. Choice of Factory Site: The next main problem is to find out a suitable location for the factory. It is essential for every entrepreneur to choose a suitable location for his venture. An entrepreneur should take into consideration several factors while deciding the location. Some of these factors are given below:

·         Nearness to the source of raw materials

·         Nearness to the market

·         Availability of land at cheap rates

·         Availability of skilled labour

·         Cost of labour (Prevailing wage rates) in the area

·         Availability of transport and communication facilities

·         Availability of power, water, waste disposal and other essential services

·         Incentives and concessions available in different states

·         General business climate in the region

·         Climate and environmental factors

·         Availability of factories sheds in industrial estates.

4. Form of Organisation: The proprietor has to select an appropriate form of business organisation for his unit.

5. Problem of Construction: Construction of factory building involves several problems e.g.,
• Acquisition of land in the chosen locality
• Architectural design of the building
• Appointment of engineers and contractors
• Civil work like obtaining power and water connection
• Supervision of construction work
• Acquisition and installation of machinery and equipment

6. Supply of Raw Materials: Appropriate suppliers of raw materials have to be selected. Agreements need to be made with the concerned suppliers.

7. Financing the Unit: The funds required for both fixed capital and working capital have to be estimated. Appropriate sources of required funds have to be decided. Arrangements are then made to collect the necessary finance.

8. Recruitment and Training of Staffs: Staffing of the new unit is another major problem. First of all, the quantity and quality of staff required are judged. Then people with required skills are selected. Necessary training arrangements are made for preparing the selected people to handle their jobs efficiently.

9. Trail Run: Production is then started on an experimental basis. The difficulties and constraints experienced during the trial run are tackled before starting commercial production.

10. Marketing: Through necessary prospecting, markets for the product are decided. Test marketing is done to judge the acceptability of the product. The experience gained through test marketing is used to make necessary improvement in the product. After that the product is launched in the market.

11. Control: Great care and efforts are required to successfully overcome the problems and risks during the gestation period. Effective control over expenses, time and costs overruns, sales pattern, etc. are necessary to ensure that the unit survives the initial expenses and losses. Once the unit starts generating profits the startup problems are by and large over.

Since, Vinaya Dasgupta has planed to manufacture and design fabrics as per the customer demands. And has identified a suitable location, has studied the market and also applied for a short-term loan. She should also consider the form of organisation, problem during construction, supply of raw materials, recruitment and training of staff, trail run and control of profits to avoid start up problems.