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APPRAISAL OF MANAGEMENT ASPECTS1 IN PROJECT FINANCING (1) Introduction: Small and Medium Scale Enterprises (SMEs)

constitute a major part of the profitable lending business of banks. The future growth of banks also rests on SMEs as some of them grow over the years and become very large customers. From a national point of view SMEs play/do have a significant role. For example they can create jobs with very small investments compared to large projects2. In the evaluation of SMEs the assessment of aspects of management is often a difficult one. This note attempts at giving you some practical insights as to how a appraisal officer could go about doing his best. Remember appraisal of SMEs involves only two things. That is appraisal 3 of (a) the entrepreneur (b) the project. However good the project may be it will be a flop if the man behind whose involvement reflects in the management of it is not suitable. So you could understand how important the appraisal of management aspects is. (2) A Practical Definition: The objective of Appraisal of Management

Aspects (AMA) can briefly and narrowly be defined as finding out whether the borrower or his proposed arrangements is likely to steer the enterprise successfully as planned and achieve the levels of profitability/cash generation to ensure repayment of the loans obtained in full and on time. So when management aspects are evaluated your focus must be on the borrowers overall arrangements for management (by himself or along with others recruited) are realistic and adequate, if not adequate why it is so and to ascertain if possible as to what could be done to improve. This assessment would help identifying the additional conditions that may have to be imposed to secure the loans to be granted etc. (3) What is successful management? Broadly speaking successful

management is Effective and Integrated Management of relationships both external and internal to the enterprise. Ex: External Relationships:
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Put together by MR W R Johnson Peiris. This note is heavily drawn from various published documents There are number other factors making SMEs nationally important. They are not discussed here. The appraisal is used interchangeably with evaluate and evaluation

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Customers (buyers) and Co-operating Industries viz; suppliers, transport services, bankers, government regulatory agencies, worker representatives, local communities. Internal Relationships: Production, provision of auxiliary functions, managing operations. Effective Integration would involve getting all acts together in a balanced, timely and effective manner a never ending process of adjustment. No readymade list of duties can be there. Each enterprise has both common and specifics characteristics. The mix that would finally emerge on the fusion of external and internal relationships will determine whether the SME would be a success or a failure.

(4)

Some General Characteristics of SMEs:

To quote from Prof.

Allan Gibb, Durham University Business School: small business is a way of life those who come to it perhaps have no other way of living, they may have burnt their boats; It is about personal risk; It means managing interdependencies; Know-who & know-how most important; Small business means standing alone; It means the buck really stops with him; It means learning by doing. SMEs is also described as a tripod or a threelegged stool: product or service know-how; marketing and sales ability; finance and accounting skills. Out of the three legs there is usually one very strong leg, the product or service knowledge that the entrepreneurs bring to their business. Sometimes they also have marketing and sales ability and expertise to take their products or services to the market place and obtain orders. Rarely or less do SME entrepreneurs have the finance and accounting skills that are needed to make a success. (5) How should one go about in the evaluation?

(a)

Your Role and the Tools of Evaluation: Obviously you have the very application/proposal form submitted by the customer, or a project report. Unfortunately the information provided in these documents is very scanty, vague and lacks credibility. It may just say managed by the promoter. Therefore your creativity and research ability would be very important. Your judgment would be all the more important. Because what you think and say whether it Page 2 of 8

is right or wrong is going to determine in all most all probability whether the application will be entertained or not. So you yourself should know about what management is. You must start reading on management. To learn how (i) (ii) (iii) (iv) (v) Organizations designed and structured. Technology & production matters be effectively planned and executed Selling, marketing & debt collection be organized. Complexities in People management handled The commitment of an entrepreneur plays critical role in the success of a project Knowing is one thing, you got to judiciously use your knowledge to appraisal. Very often you have to do some research on your own. Learn from your own colleagues, seniors and from your existing clients re the management related problems. Why some projects have gone bad and why some have emerged very successful. What traits those entrepreneurs have? Their behavior? The way they relate to other people? Spending habits etc. (b) Identification of management success factors (MSFs) of a project is the most important exercise. It can arise from any project related functional areas viz market, technology and or man management. What is meant here as MSFs those tasks that would be really necessary to attend to with greater care and attention to ensure the success of a SME. It does not mean other factors are not important but only means that MSFs are more critical. For instance a person says to you he wants to start a project for manufacturing of plastic ware. A project of this nature would require management of the use of some not so ordinary technology. The entrepreneur has to either himself be competent in it or be able to hire skilled persons on continuing basis. (c) Does your SME entrepreneur have these traits? How do you rate him?

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Goal-Setter: Most successful people continually set goals. Many started at an early age; for example, they may have set a goal to excel in certain sport, or in a specific subject in school. If they wanted to buy something, and knew that their parents couldn't afford it, or wouldn't spend the money, they earned the money themselves. They may have run away from home, worked as a cook or dishwasher at times, mowed lawns for neighbors, or delivered newspapers. And then achieved their goals. Check whether your prospective customer exhibit such traits. (i) Does he know his Strengths and Weaknesses: Another

trait of successful SME entrepreneurs is they know their strengths and weaknesses? Rather than letting his or hers ego get in the way, he admits when he needs to learn new skills or take other steps to improve themselves or their business. This is especially crucial in light of rapid changes in technology. (ii) Maximizing Opportunities: Successful SMEs entrepreneurs

are always looking for opportunities. Whether they are already in business or just getting started, they have an attitude that expects opportunities, and they invest the time necessary to find the opportunities that will work for them. Even those already running a successful business remain open to new possibilities. When someone approaches inquire how he got the idea. Why he wants to do it. But take note that Taking advantage of opportunities does not mean acting impulsively. He should be a person who asks himself the questions such as: Is this really as good as it sounds? Is this something one really wants to be doing? Do I have the required skills, or can I develop them? 4) Will this help me to reach the financial goals I have set for myself? 4) What impact will this have on my family? (iii) Does he know his Business/Know his competition: He everything he can about his competition, and

must know his business inside out to succeed?. That includes learning understanding how his own business would measure up against competitors. It also includes knowing exactly where his business stands in the context of the financial goals he has established. Page 4 of 8

(iv)

Effectively Manage Budgets and Finances: Successful

people know how to effectively manage budgets and finances. They know how much they have borrowed, the interest rates they are paying, and anything else that can affect their business. They always save for a rainy day. Understanding the principle that they must spend money to make money, they postpone personal expenditures such as a new house, car or vacation, until they can afford it. (v) Never Settle for Second Best: Another trait of good SME

entrepreneurs is they never settle for second best. Striving for excellence, they set standards for themselves as well as their products and services. If they work with an outside company and that company sends them a sub-standard product, they return it. They look for the best products and workmanship in the price category they have established. If they realize they haven't done a good job or haven't done it right, they will do it again or take other actions to ensure the customer is satisfied. For this reason, their customers remain loyal. Remember, repeat business is one of the keys to long-term success. If you don't make a good impression the first time, you are not likely to get a second chance. (vi) Enjoy your Business: The successful SME entrepreneur has

fun in their occupation. While they might not enjoy every aspect of their business, overall they enjoy their work. One reason for that enjoyment is the sense of satisfaction in knowing that the business is theirs, and that they are building for the future. (vii) Good Mane Managers: Good entrepreneurs are good man

managers. This perhaps is one of the very important traits. If a person can relate properly, motivate and lead his team well the success is definite. This needs a lot of patience, insightfulness, ability to be empathetic. (viii) Ability to delegate with control: Some people cant get

work done. They themselves want to everything by themselves. Have no confidence in others. Do not allow others to gain

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confidence. Worse still destroys others confidence. The successful entrepreneur is one who could delegate but maintain control. (ix) Hard Work: Successful SME owners willingly work long

hours because they know it is necessary to move the business forward. This is especially true in the first few years after launching a new business. An owner wears many hats: selling, book-keeping, handling customers, setting up appointments, meeting deadlines, and so forth. (x) Get Help When Necessary: Another trait of top business

people is they know when to get help. Realizing they are not experts in everything, they will contact other professionals when warranted. They also realize when the times comes that they can longer do it all, and they delegate responsibility to an outside source, independent contractor, or hire an employee. (d) Formal Training & Experience of SME Entrepreneur: Some jobs require technical expertise which may be possible only through years of training for example civil engineering and or accounting. Some may not. But if a project is highly technology based then the promoter must have well planned arrangements to get trained and experienced personnel. If an entrepreneur claims to have undergone training and or have enough experience, just dont look at the certificate and stop with that. Find out exactly what he has been trained in and what his experience has been. He can well be under a mistaken belief when claiming he has adequate training and experience. There may be lots of limitations. This is not to reject the application. But to enable you to assess what is lacking and to enlighten him as well as to what may be lacking. The training and experience of personnel to be recruited should also be similarly examined. Take also note whatever the training a person may have had and experience gained may not relate to the project proposed directly or at all. The project proposed may be a totally new one. So assess to what extent the past experience and training may help in the new enterprise. So ascertain tactfully in the case of a formal training: Who conducted it? How reputed were trainers? Duration of Page 6 of 8

it? What was the exact nature of training? Factory based? Field based? How has he been evaluated? Assess his/employees familiarity levels with the technology that is to be used and other aspects. In the case of claims of experience inquire; how long he has been in various positions? Any personal achievements? How he has been promoted in an organization is a good indicator. (e) Gather Opinion of others: Valuable information can be gathered about a person from his past work places, his colleagues, supervisors and subordinates. Across section of such views would reveal to you certain aspects of management ability that you cannot get easily from other sources. (6) (a) Shedding biases: Age and Success: The percentage of high success has shown to be maximum at the age group level of (40-50) years and lowest at below thirty years. (b) Education and Success: Professional and technical education are key indicators for entrepreneurial success. They provide the base for development of entrepreneurship. The professional and technical education helps the entrepreneurs in identifying right kind of business, market and technology. It also helps in taking product decisions related to costs, raw material procurement and selection of appropriate technology and manpower. A common presumption in this proposition is a strong and positive association between education and success level. It is observed that success is evenly spread over different types of education with the exception of technical education where the level of success is more skewed towards higher side. (c) Family background: From various qualitative analyses it has been observed that many of the successful entrepreneurs have inherited their business skills from family and learning by working in others enterprises. So college and university education does not play a very significant role in delivering successful entrepreneurial quality. Indication is that educational qualification and success level are Page 7 of 8

independent and there is no significant level of association between them. So the level of education does not determine the level of success of the unit. (d) Parental Occupation and Success level: The entrepreneurs originate from diverse family background. Their parental occupation varies from salaried class to trading, business, farming, service and manufacturing categories. industry including cottage and artisan based in industries. Highly successful entrepreneurs are found in all four Yet entrepreneurs with parental occupation manufacturing are found to be in high success level group, which is highest among all categories, followed by trading. It can be observed that entrepreneurs with a parental background in manufacturing and trading are relatively more successful in comparison to services & farming backgrounds. The experience of parents in business in the form of production and sales knowledge must have passed on to the next generation in business which is not possible in the case of first generation entrepreneurs coming from farming or service class. Thus, observed association between parental occupation and success level is not found to be statistically significant. (e) Previous Occupational Background and Success Level: From the qualitative data it is found that previous occupational the background plays a significant role in the business success. The previous occupational background greatly influences entrepreneurial venture by which the entrepreneur is able to bring all his knowledge and experience in to the new business.

(7) Finally it is your Assessment: You may run all over. Get all information you could get. Yet you will not have 100 % information or even 50% information you would like to have. You have to make an assessment yourself on the basis of available information.

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