How to Establish A Business Enterprise 5.

1 Introduction A small business is a profitable economic activity which can become an avenue of employment. You may think that it is easy to start a business if you have necessary money required to establish a business. But actually it is not an easy task howsoever small the business may be. It requires so many decisions and steps to be taken at various stages. At first you have to prepare a plan. You have to take decisions about the nature of business location and sources of raising necessary capital. You have also to take a decision regarding physical and material resources. Though the procedure for setting up a business is not the same for all types of business, there are certain steps which you have to take to start any business. In this lesson you will learn how to establish a business and how to expand its activities whenever opportunity arises. 5.4 Preparing a plan of action Once you decide to establish a business unit, you will have to prepare a plan of action. You will have to decide in advance each and every step you are going to take in that connection till it starts functioning which is helpful in avoiding delay at the initial stages of starting business. The following aspects of the action plan should be kept in view before deciding on the course of action. 1. Selection of the line of business: At first decision is to be taken about the line of business. The main considerations will be its profitability, risk involved and

the amount of capital required. You may consider other business opportunities along with the market demand for the goods. 2. Choice of form of organisation: A small business may be organised as a sole proprietorship or a partnership firm. Advantages and disadvantages of both the forms will have to be considered and decision is to be taken. As a sole proprietor you will have the authority of managing the business and will be entitled to the entire profit generated, but then you will also have to bear the risk of loss involved. In partnership there will be others to share the risk and contribute capital and help in management. But then the profit earned will also be distributed among the partners. A company form of organisation may also be considered for the purpose. 3. Financial Planning: A business cannot be started and run without sufficient amount of capital. Capital is required to buy fixed assets like land, building, machines and equipment. Capital is also required to buy raw material and meet day to day expenses of the business like wages, electricity charges, carriage, etc. Decision has to beSelf Employment in Business :: 103 taken in advance regarding the amount of capital required for the various purposes and regarding the sources of raising it, what

amount is to be contributed by the owners and the amount to be borrowed from financial institutions, banks, etc. 4 . Location of business: Where to establish a business is also to be decided in advance. A business established at a particular location cannot be shifted to other location easily. Decision regarding location of the business unit consists of decision regarding the choice of locality and selection of site. The deciding factors are nearness to the source of supply of raw material, nearness to the market, availability of labour, transportation and banking facilities. Selection of the site depends on cost of land, development cost, etc. 5. Physical facilities: Decisions have to be taken regarding plant and machinery and equipments to be provided for the business, building and other physical facilities like water and power supply, transportation, etc. The factors that may affect the decisions in this regard are the size of business, techniques of production to be used, availability of funds, etc. 6. Plant layout: After selecting the machinery and equipments required, it is necessary to decide about their installation in a proper manner.

This is called plant layout. A good layout makes the operations efficient and economical. It reduces the costs of material handling, storage of inventory, use of space, etc. It helps in optimum utilisation of all resources. 7. Man Power and Raw Materials: The number and type of employees to be enrolled have to be estimated and decided in advance. Decision is also to be taken regarding source of procurement, development and training of the employees.104 :: Commerce (Business Studies) Raw material is also very important for producing goods. To maintain continuity of production, raw materials must be available in adequate quantity and at regular intervals . Quantity and quality of materials to purchased and sources of supply should be decided in advance. 8. Production process and operations: The whole production process is to be visualised and the various activities of the business operation are to be decided in advance. Action plan should be prepared with great care because it determines the course of action to be adopted.

5.5 Deciding the nature of business and its location Nature of business:

To decide about the nature of business the entrepreneur wants to launch, he has to consider the following factors : (i) Whether the business would be profitable, (ii) How much capital would be required, (iii) What would be the degree of risk, (iv) Whether there would be sufficient market demand for the goods, (v) Whether there would be opportunities to grow and expand. The above factors will help him to decide as to which line of business he can successfully pursue. Location of business: Once the nature of business has been decided upon the decision will have to be taken regarding the location of the place of business. Special care should be taken while making such selection because the place of business cannot be changed easily. . 5.6 Sources of raising finance You are well aware that business cannot be run without capital. Adequate capital is required to establish a small business. The capital required for a business are of two types (a) Fixed capital, and (b) Working capital Fixed capital refers to funds necessary to acquire fixed assets like land, building , machinery and equipments. Such assets cannot be easily moved from the business site. They provide the base or foundation of the

business. 5.7 Project for Loan Once the financial requirements, both long term and short term for fixed and working capital, are finalised and it is decided to raise capital by borrowing money from banks and other financial institutions, a project report will have to be prepared. A project report is a document which contains the estimated amount of fixed investments and working capital to produce or manufacture an estimated quantity of products. It also contains the methods and techniques of production to be used, estimated number of workers to be employed, and expected sales revenues during the next one or two years. 5.8 Supply of manpower and raw materials: In case the business is not so small as to be run single handed, the owner will have to employ persons to help him. These workers can be unskilled, semiskilled and skilled. To run a business smoothly it has to be ensured that sufficient manpower is available at the right time and at competitive rate. The whole process which ensures a regular supply of required manpower of right type is called recruitment. 5.9 Legal Requirement To establish a business unit many legal and other formalities are to be fulfilled which are as follows : (A) Form of organisation:

Sole Proprietorship There is no legal formality necessary to set up a sole proprietorship business. Partnership An a g r e eme n t b e twe e n t h e p e r s o n s wh o wa n t t o f o rm a partnership firm is necessary. As far as possible it should be in writing. A partnership firm should be registered with the Registrar of firms. Joint Hindu Family No legal formality is required. A Joint Hindu Family business is run as per Hindu Law. Joint Stock Company It must be registered under the Indian Companies Act. It may be a Private Limited Company or a Public Limited Company. Cooperative Society If the business is organised as a cooperative society, it is required to be registered with the Registrar of Cooperative Societies of the State in which societies registered office is to be situated. B. Other l egal requirements and formalities which are applicable to all forms of organisations: 1. License is to be obtained from the Ministry of Industries if manufacturing activities are taken up. However industrial

units employing less than 50 workers with power or less t h a n 1 0 0 w o r k e r w i t h o u t p o w e r, h a v e b e e n g i v e n exemption.Self Employment in Business :: 117 2. Registration with the Registrar of Small Scale Industries of the state in which the unit is to be set up is compulsory. 3. Registration with the Labour Commissioner of the state in which the unit is set up is also compulsory. This is necessary so that there is compliance of various labour laws and the Factories Act. 4. Environmental clearance certificate has to be obtained from the state Pollution Control Board. However except for 17 categories of heavily polluting industries, such as fertilizer, sugar, chemicals, etc., sending an application is sufficient. 5. The industrial unit has to get it registered with the excise department so that it can get concession under General Excise Duty exemption scheme. 6. The firm has to be registered with Sales Tax Authorities and a Sales tax number is to be obtained. 7. If it is a trading concern it is to be registered with the Shop and Establishment Authorities. 5.10 Evaluation of business Performance Evaluation of business performance means reviewing the performance

of business activities to ascertain how far the predetermined objectives of business have been achieved. It is a system of finding out the difference between the planned performance and the actual performance so that the reasons of the difference can be ascertained and corrective measures can be taken. Once all the formalities have been completed and business is started i . e . , the bus ine s s uni t s t a r t s func t ioning, i t s eva lua t ion be come s necessary. It may be done say after one or two months. The purpose of evaluation of business performance is to ascertain whether the performance of the business is as per plans or not. Evaluation is necessary to maintain the progress of business on the right lines. In the project report, a certain percentage of estimated capacity to be utilised in the very first year of business is shown. If the performance is not as indicated in the project report, the loan extending agencies may review their decision. Performance appraisal within a short period after commencement of business activities helps in evaluating the plans and making amendments whereever necessary. The owner may revise the targets or make amendments in the methods of production and marketing if the performance is not as per plans. If the management of operations has not been perfect that may also be improved upon.