Small Business Management (SBMT) Solved Question Papers
2016 (May)
COMMERCE (General)
Course: 604 (Small Business Management)
Time: 3 hours
The figures in the margin indicate full marks for the questions
(New Course)
Full Marks: 80
Pass Marks: 24
1. (a) Write True or False: 1x4=4
1) Small enterprises are privately owned and operated small business. True
2) The full form of SISIs is small Industries Service Institutes. True
3) Small-scale enterprises are managed by the Central Government. False
4) Working capital means the current asset. False, Net current assets i.e., CA – CL
(b) Fill up the blanks with appropriate words: 1x4=4
1) Small-scale industries are suited for creation of ____ (employment/career)
2) Purchasing branded products give ____ satisfaction to the buyers. (physical/psychological).
3) Labour-intensive industrial unit require ____ working capital. (less/more)
4) Life of a product is ____ by product modification. (increased/decreased).
2. Write short notes on (any four):
a) Internal problems of small enterprise: Small scale industries are at a distinct disadvantage as compared to large scale industries. The scale of operations, availability of finance, ability to use modern technology, procurement of raw materials are some of these areas. This gives rise to several problems. Most of these problems can be attributed to the small size of their business, which prevents them from taking advantages, which accrue to large business organisations. However, the problems faced are not similar to all the categories of small businesses. For instance, in the case of small ancillary units, the major problems include delayed payments, uncertainty of getting orders from the parent units and frequent changes in production processes. The problems of traditional small scale units include remote location with less developed infrastructural facilities, lack of managerial talent, poor quality, traditional technology and inadequate availability of finance. The problems of exporting small scale units include lack of adequate data on foreign markets, lack of market intelligence, exchange rate fluctuations, quality standards, and pre-shipment finance. In general the small businesses are faced with the following problems:
(i) Finance: One of the severe problems faced by SSIs is that of non availability of adequate finance to carry out its operations. Generally a small business begins with a small capital base. Many of the units in the small sector lack the credit worthiness required to raise as capital from the capital markets. As a result, they heavily depend on local financial resources and are frequently the victims of exploitation by the money lenders. These units frequently suffer from lack of adequate working capital, either due to delayed payment of dues to them or locking up of their capital in unsold stocks. Banks also do not lend money without adequate collateral security or guarantees and margin money, which many of them are not in a position to provide.
(ii) Managerial skills: Small business is generally promoted and operated by a single person, who may not possess all the managerial skills required to run the business. Many of the small business entrepreneurs possess sound technical knowledge but are less successful in marketing the output. Moreover, they may not find enough time to take care of all functional activities. At the same time they are not in a position to afford professional managers.
(iii) Labour: Small business firms cannot afford to pay higher salaries to the employees, which affects employee willingness to work hard and produce more. Thus, productivity per employee is relatively low and employee turn over is generally high. Because of lower remuneration offered, attracting talented people is a major problem in small business organisations. Unskilled workers join for low remuneration but training them is a time consuming process. Also, unlike large organisations, division of labour cannot be practised, which results in lack of specialisation and concentration.
b) Nature of financial requirement for small enterprise: Finance is the lifeblood of small business concern, because it is interlinked with all activities performed by the small business concern. In a human body, if blood circulation is not proper, body function will stop. Similarly, if the finance not being properly arranged, the small business system will stop. Arrangement of the required finance to each department of small business concern is highly a complex one and it needs careful decision. Quantum of finance may be depending upon the nature and situation of the small business concern. But, the requirement of the finance may be broadly classified into two parts:
Long-term Financial Requirements or Fixed Capital Requirement: Financial requirement of the small business differs from firm to firm and the nature of the requirements on the basis of terms or period of financial requirement, it may be long term and short-term financial requirements. Long-term financial requirement means the finance needed to acquire land and building for small business concern, purchase of plant and machinery and other fixed expenditure. Long term financial requirement is also called as fixed capital requirements. Fixed capital is the capital, which is used to purchase the fixed assets of the firms such as land and building, furniture and fittings, plant and machinery, etc. Hence, it is also called a capital expenditure.
Short-term Financial Requirements or Working Capital Requirement: Apart from the capital expenditure of the firms, the firms should need certain expenditure like procurement of raw materials, payment of wages, day-to-day expenditures, etc. This kind of expenditure is to meet with the help of short-term financial requirements which will meet the operational expenditure of the firms. Short-term financial requirements are popularly known as working capital.
c) Packaging: In this age of competition, good and appropriate packaging occupies much significance. The policies pertaining to the packaging are a part of the product planning and product development program.
Some of the main definitions of 'packaging' are being given hereunder:
In the opinion of Prof. Rustom S. Davar, Packaging is that art and/or science which is related to the development and use of materials, methods and equipment, for the packing of the goods in some containers, so that the product, while passing through various stages of distribution, could remain fully safe.
William Stanton has opined that the meaning of packaging is the total group of activities under the product planning which are related to the chalking out of a design of the outer cover of a product and the concerned production.
Functions of Packaging
1. Product Identification: Packaging help in identification of the product.
2. Product Protection: The main function of the packing is to provide protection to the product from dirt, insect and breakage.
3. Convenience: It provides convenience in carriage, stocking and in consuming.
4. Product Promotion: Packaging simplifies the work of sales promotion.
d) Market assessment: Market Assessment is the evolution of market for a product or service including the analysis of the market trends, assessing the competitions and conducting market studies. It is a type of market research which is conducted before investing a great amount of time and money into a business. It is also a way to determine a clear understanding of the market environment in which the firm hopes to operate.
Market Assessment covers a scan of the competitive landscape, the value chain and the structure of the industry, the trends of a particular sector or sub-sector, the size of the addressable market and the underlying behaviours and needs of potential or existing customers.
Uses of Market Assessment
There are many uses for which market assessments are made. However, the primary reasons for undertaking such research are as follows:
1. To determine if a market or the product is worth the time and effort to pursue. The assessment can provide insights that may change the entrepreneur’s business direction and product plan perhaps abandoning either together.
2. To help in collecting information that will be used for business planning and in the preparation of materials for presentation to potential inventors.
3. To support management’s decision making as to whether to invest money for market expansion or additional product development.
e) Capacity utilization:
f) Concept of working capital: The capital required for a small business is of two types. These are fixed capital and working capital. Fixed capital is required for the purchase of fixed assets like building, land, machinery, furniture etc. Fixed capital is invested for long period, therefore it is known as long-term capital. Similarly, the capital, which is needed for investing in current assets, is called working capital. The capital which is needed for the regular operation of small business is called working capital. Working capital is also called circulating capital or revolving capital or short-term capital.
In the words of John. J Harpton “Working capital may be defined as all the shot term assets used in daily operation”.
According to “Hoagland”, “Working Capital is descriptive of that capital which is not fixed. But, the more common use of Working Capital is to consider it as the difference between the book value of the current assets and the current liabilities.
From the above definitions, Working Capital means the excess of Current Assets over Current Liabilities. Working Capital is the amount of net Current Assets. It is the investments made by a small business organisation in short term Current Assets like Cash, Debtors, Bills receivable etc.
Concepts of Working Capital
There are two concepts of working capital:
a) Gross working capital
b) Net working capital
Gross working capital refers to investment in all current assets -raw materials, work-in-progress, finished goods, book debts, bank balance and cash balance. The gross concept of working capital is significant in the context of measuring working capital needed, measuring the size of the small business, continued and smooth flow of operations of the small business and the like.
Net working capital refers to the excess of current assets over current liabilities. That is, value of current assets minus value of current liabilities (current liabilities include trade creditors, bills payable, outstanding expenses such as wages, salaries, dividend payable and tax payable, bank overdraft, etc.) The net concept of working capital is significant in the context of financing of working capital, the short term liquidity aspects of the small business, and the like.
3. (a) Discuss the features of the Micro, Small and Medium Enterprise Act, 2006. 11
Salient features of Micro, Small and Medium Enterprises Development Act, 2006 are as follows
By enacting the Micro, Small and Medium Enterprises Development Act, 2006, the Government has recently fulfilled one of the needs felt and articulated by this segment for long. This Act seeks to facilitate promotion and development and enhancing competitiveness of these enterprises. It provides the first-ever legal framework for recognition of the concept of “enterprise” (comprising both manufacturing and services) and integrating the three tiers of these enterprises, namely, micro, small and medium. Apart from clearer and more progressive classification of each category of enterprises, particularly the small, the Act provides for a statutory consultative mechanism at the national level with wide representation of all sections of stakeholders, particularly the three classes of enterprises.
1. Section 7 of Act provides for the following classification in respect of industries engaged in production or manufacture of goods or rendering service enterprises:
Class | Manufacturing Enterprises – Investment in Plant & Machinery | Services Enterprises – Investment in Equipment |
Micro | Less than Rs. 25 lacs | Less than Rs. 10 lacs |
Small | Greater than Rs. 25 lacs but up to Rs. 5 Cr. | Greater than Rs. 10 lacs but upto Rs. 2 Cr |
Medium | Greater than Rs. 5 Cr. but up to 10 Cr. | Greater than Rs. 2 Cr. but upto Rs. 5 Cr. |
2. Filing of Memoranda by MSMEs: Process of two-stage registration of Micro and Small Enterprises dispensed with and replaced by filing of memoranda. 1. Filing of Memorandum optional for all Micro and Small Enterprises. 2. Filing of Memorandum optional for Service Sector Medium Enterprises. 3. Filing of memorandum mandatory for Manufacturing Sector Medium Enterprises.
3. Constitution of National Board: National Board for Micro, Small and Medium Enterprises (MSME) to be headed by the Central Minister in-charge of MSMEs and consisting of 46 members from among MPs and Representatives of Central Ministries, State Governments, UT Administration, RBI, SIDBI, NABARD, Associations of MSMEs including women etc.
Functions of the National Board: Examine the factors affecting the promotion and development of MSMEs and review the policies and programmes of the Central Government in this regard.
4. Advisory Committee Headed by Central Government Secretary I/c of MSMEs and including not more than five officers of the Central Government and not more than three representatives of State Governments; and One representative each of the Associations of micro, small and medium enterprises.
5. Functions of the Advisory Committee
a) To examine the matters referred to it by the National Board;
b) To advise Central Government on matters relating to classification of MSMEs, programmes, guidelines or instructions for the promotion and development and enhancing the competitiveness of MSMEs.
c) To advise State Governments on matters specified in the rules related to repeal of, “The Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act, 1993, including anything done or any action taken under the Act so repealed.
6. Promotional and Enabling Provisions Central Government to notify programmes, guidelines or instructions for facilitating the promotion and development and enhancing the competitiveness of MSMEs. Central Government to administer the Fund or Funds for purpose mentioned in Section 9 and coordinate and ensure timely utilization and release of sums with such criteria, as may be prescribed.
7. Credit: The policies and practices in respect of credit to the MSMEs shall be progressive and such as may be specified in the guidelines or instructions issued by the Reserve Bank of India, with the aims of:
a) Ensuring smooth credit flow to the MSMEs,
b) Minimizing sickness among them, and
c) Ensuring enhancement of their competitiveness
8. Procurement Policies: Central Government or a State Government to notify preference policies in respect of procurement of goods and services produced and provided by MSEs, by its Ministries, departments or its aided institutions and public sector enterprises.
9. Provisions to Check Delayed Payments:
a) Provisions related to delayed payments to micro and small enterprises (MSEs) strengthened.
b) Period of payment of MSEs by the buyers reduced to forty-five days.
c) Rate of interest on outstanding amount increased to three times the prevailing bank rate or Reserve Bank of India compounded on monthly basis.
d) Constitution of MSE Facilitation Council(s) mandatory for State Government.
e) Declaration of payment outstanding to MSE supplier mandatory for buyers in their annual statement of accounts.
f) Interest (paid or payable to supplier) disallowed for deduction for income tax purposes.
g) No appeal against order of Facilitation Council to be entertained by any Court without deposit of 75% of the decreed amount payable by buyer.
h) Appellate Court may order payment of a part of the deposit to the supplier MSE
10. Facilitating Closure of Business: Central Government may (within one year of the commencement of the Act) notify a scheme for facilitating closure of business by a micro, small or medium enterprise. The objectives of the rehabilitation policy are to give guidelines in the following areas:
a) Identifying the sickness at an early stage.
b) Initiating remedial measures promptly with a pro active approach
c) Formulation and implementation of rehabilitation package for potentially viable sick MSME units
Or
(b) Explain the role of small enterprises in the development of a nation. 11
Ans: Role of Small Business in India
Small Scale Industries in India enjoy a distinct position in view of their contribution to the socio-economic development of the country. The following points highlight their contribution.
(i) Small industries in India account for 95 per cent of the industrial units in the country. They contribute almost 40 per cent of the gross industrial value added and 45 per cent of the total exports (direct and indirect exports) from India.
(ii) Small industries are the second largest employers of human resources, after agriculture. They generate more number of employment opportunities per unit of capital invested compared to large industries. They are, therefore, considered to be more labour intensive and less capital intensive. This is a boon for a labour surplus country like India.
(iii) Small industries in our country supply an enormous variety of products which include mass consumption goods, readymade garments, hosiery goods, stationery items, soaps and detergents, domestic utensils, leather, plastic and rubber goods, processed foods and vegetables, wood and steel furniture, paints, varnishes, safety matches, etc. Among the sophisticated items manufactured are electric and electronic goods like televisions, calculators, electro-medical equipment, electronic teaching aids like overhead projectors, air conditioning equipment, drugs and pharmaceuticals, agricultural tools and equipment and several other engineering products. A special mention should be made of handlooms, handicrafts and other products from traditional village industries in view of their export value.
(iv) The contribution of small industries to the balanced regional development of our country is noteworthy. Small industries which produce simple products using simple technologies and depend on locally available resources both material and labour can be set up anywhere in the country. Since they can be widely spread without any locational constraints, the benefits of industrialisation can be reaped by every region. They, thus, contribute significantly to the balanced development of the country.
(v) Small industries provide ample opportunity for entrepreneurship. The latent skills and talents of people can be channelled into business ideas which can be converted into reality with little capital investment and almost nil formalities to start a small business.
(vi) Small industries also enjoy the advantage of low cost of production. Locally available resources are less expensive. Establishment and running costs of small industries are on the lower side because of low overhead expenses. Infact, the low cost of production which small industries enjoy is their competitive strength.
(vii) Due to the small size of the organisations, quick and timely decisions can be taken without consulting many people as it happens in large sized organisations. New business opportunities can be captured at the right time.
(viii) Small industries are best suited for customised production. i.e. designing the product as per the tastes/preferences/needs of individual customers, say for an example tailor-made shirt or trouser. The recent trend in the market is to go in for customized production of even non-traditional products such as computers and other such products. They can produce according to the needs of the customers as they use simple and flexible production techniques.
(ix) Last but not the least, small industries have inherent strength of adaptability and a personal touch and therefore maintain good personal relations with both customers and employees. The government does not have to interfere in the functioning of a small scale unit. Due to the small size of the organisation quick and timely decision can be taken without consulting many people as in large sized organisations. New business opportunities can be captured at the right time, thus providing healthy competition to big business which is good for the economy.
Role of Small business in rural India
Traditionally, rural households in developing countries have been viewed as exclusively engaged in agriculture. There is an increasing evidence that rural households can have highly varied and multiple sources of income and that, rural households can and do participate in a wide range of nonagricultural activities such as wage employment and self-employment in commerce, manufacturing and services, along with the traditional rural activities of farming and agricultural labour. This can be largely attributed to the policy initiatives taken by the Government of India, to encourage and promote the setting up of agro-based rural industries.
The emphasis on village and small scale industries has always been an integral part of India’s industrial strategy, more so, after the second Five Year Plan. Cottage and rural industries play an important role in providing employment opportunities in the rural areas, especially for the traditional artisans and the weaker sections of society. Development of rural and village industries can also prevent migration of rural population to urban areas in search of employment. Village and small industries are significant as producers of consumer goods and absorbers of surplus labour, thereby addressing the problems of poverty and unemployment. These industries contribute amply to other socio-economic aspects, such as reduction in income inequalities, dispersed development of industries and linkage with other sectors of the economy.
In fact promotion of small scale industries and rural industrialisation has been considered by the Government of India as a powerful instrument for realising the twin objectives of ‘accelerated industrial growth and creating additional productive employment potential in rural and backward areas.’ However, the potential of small industries is often not realised fully, because of several problems related to size. We shall now examine some of the major problems that small businesses whether in urban or in rural areas are encountering in their day-to-day functioning.
4. (a) What do you mean by plant layout? Discuss the various factors that influence the plant layout. 3+8=11
Ans: Meaning and Definition of Plant Layout
The efficiency of production depends on how well the various machines; production facilities and employee’s amenities are located in a plant. Only the properly laid out plant can ensure the smooth and rapid movement of material, from the raw material stage to the end product stage. Plant layout encompasses new layout as well as improvement in the existing layout.
It may be defined as a technique of locating machines, processes and plant services within the factory so as to achieve the right quantity and quality of output at the lowest possible cost of manufacturing. It involves a judicious arrangement of production facilities so that workflow is direct.
Definition: A plant layout can be defined as follows:
Plant layout refers to the arrangement of physical facilities such as machinery, equipment, furniture etc. with in the factory building in such a manner so as to have quickest flow of material at the lowest cost and with the least amount of handling in processing the product from the receipt of material to the shipment of the finished product.
According to Riggs, “the overall objective of plant layout is to design a physical arrangement that most economically meets the required output – quantity and quality.”
According to J. L. Zundi, “Plant layout ideally involves allocation of space and arrangement of equipment in such a manner that overall operating costs are minimized.
Factors Affecting plant layout
While deciding his factory or unit or establishment or store, a small-scale businessman should keep the following factors in mind:
a) Factory building: The nature and size of the building determines the floor space available for layout. While designing the special requirements, e.g. air conditioning, dust control, humidity control etc. must be kept in mind.
b) Nature of product: product layout is suitable for uniform products whereas process layout is more appropriate for custom-made products.
c) Production process: In assembly line industries, product layout is better. In job order or intermittent manufacturing on the other hand, process layout is desirable.
d) Type of machinery: General purpose machines are often arranged as per process layout while special purpose machines are arranged according to product layout.
e) Repairs and maintenance: machines should be so arranged that adequate space is available between them for movement of equipment and people required for repairing the machines.
f) Human needs: Adequate arrangement should be made for cloakroom, washroom, lockers, drinking water, toilets and other employee facilities, proper provision should be made for disposal of effluents, if any.
g) Plant environment: Heat, light, noise, ventilation and other aspects should be duly considered, e.g. paint shops and plating section should be located in another hall so that dangerous fumes can be removed through proper ventilation etc. Adequate safety arrangement should also be made.
Thus, the layout should be conducive to health and safety of employees. It should ensure free and efficient flow of men and materials. Future expansion and diversification may also be considered while planning factory layout.
Or
(b) What is quality control? Explain the various quality control methods that can be used for small enterprise. 3+8=11
Ans: Quality Control in Small Business Enterprises
Quality Control in a manufacturing enterprise means the systematic control of those variables which affect the excellence of the ultimate product. The variables in general are man, machines, materials and manufacturing conditions. Each of these variables is not always uniformly available in the nature. There are differences in them for variety of reasons. For example, due to caprices of nature, materials may differ in their composition and physical characteristics. Similarly, men vary in their degree of skill and proficiency. All machines are not of equal quality as they are made by men by use of materials which vary in several counts. Further, manufacturing conditions such as temperature, humidity, building, vibrations, composition of coolers, dust and dirt in the air are all subject to great variations. The practice of Quality control ensures proper regulation of all these variables so that they do not cause any distortion in excellence of the finished product.
Quality is a related concept, which relates to certain predetermined characteristics such as shape, dimension, compositions, strength, finish, colour, time weight, etc. According to Alford and Beatty, “Quality control is the mechanism by which products are made to measure upto the specifications determined from the customer’s demand and transformed into sales, engineering and manufacturing equipments. It is concerned with making things right rather than discovering and rejecting those made wrong. Quality control is a technique by which the products of uniform acceptable quality are manufactured”.
Quality control techniques are widely used in manufacturing industries for rapid development of the industrial economy. Many improvements are made in the quality of products without any additional capital investment. Several countries of the world have recovered their economies and established firm foreign markets by improving the quality of their products. Among other thing, quality control provides considerable savings at various stages of production. For this purpose, standardization plays a fundamental role in the assessment, specification and measurement of quality of a product. With the help of standardization, it is possible to lay down the basic procedures for ensuring quality control. Thus, standardization and quality control go hand in hand.
Methods of Quality Control
There are two methods of Quality Control as discussed below:
1. Inspection: Inspection pursues the production process step by step till its completion and evaluates the work process with reference to predetermined standards of performance. However, the extent of inspection works differs between companies or between products. Inspection may either be preventive or curative. While preventive inspection is carried out at every stage of a production process to check any imperfection; curative inspection is taken up after the production takes place, to separate the defective goods from the right quality goods.
On the whole, this method examines whether the production is carried out as per the standard set or not. Inspection aims at maintaining quality standard and calls for minimizing product scraping or rejection. As faulty production results mostly from defects in materials or machines, inspection requires testing of materials before their transformation into finished product as well as the checking of machines and tools to ensure their accuracy of performance. Instead of permitting products to be scrapped after manufacturing, inspection is supposed to reduce the cost of rejection by preventing the occurrence of such faulty production.
2. Statistical Quality Control: Statistical Quality Control (SQC) is a special type of technique to control the quality of a product. In this method, statistical techniques are used to gather and analyze data with a view to determining and controlling quality. It is based on sampling, probability and statistical inference. This means that it judges an entire lot by the characteristics of sample. Under this process, a small part of a certain lot of products is inspected and its quality is assumed to be the quality of the entire lot. This is called statistical inference. The Statistical Quality Control system is divided into three steps namely:
a) Analysis of samples;
b) Use of Control Charts and
c) Taking corrective actions.
Statistical Quality Control is a diagnostic and preventive device of quality control. It is an anti-waste device, operated with such scientific thoroughness that it ensures flow of quality goods into the market at least inspection or such other costs. It also enables optimum utilization of resources. It is widely used in process control in continuous process industries producing goods on a mass scale.
ADVANTAGES OF STATISTICAL QUALITY CONTROL: The method of Statistical Quality Control enjoys the following advantages:
a) Lower cost of Inspection: As this method is based on sampling technique, the cost of inspection becomes lower.
b) Ensures quality of work at every individual operation: The use of Control Chart technique informs the management about any imperfection in the production process. This significantly helps in controlling the quality of works done on individual operation when the work is being done.
c) Helps to decide on acceptance or otherwise of products: Statistical Quality Control helps management to decide whether to accept or reject the lots of production already produced or manufactured.
d) Enables prompt remedial actions: Statistical Quality Control sets up levels of deviations (tolerance limits) to be allowed. When these limits are crossed, action is promptly taken.
e) Enhances goodwill of the enterprise: Statistical Quality Control enhances goodwill of the enterprise.
f) Boosts worker’s morale: Statistical Quality Control increases the morale of the workers as they get satisfaction by working in an organisation producing high quality goods.
5. (a) Discuss briefly the major determinants of working capital requirement of an enterprise. 11
Ans: Factors Affecting Working Capital Requirement
The level of working capital is influenced by several factors which are given below:
a) Nature of Small business: Nature of small business is one of the factors. Usually in trading small businesses the working capital needs are higher as most of their investment is found concentrated in stock. On the other hand, manufacturing/processing small business needs a relatively lower level of working capital.
b) Size of Small business: Size of small business is also an influencing factor. As size increases, an absolute increase in working capital is imminent and vice versa.
c) Production Policies: Production policies of a small business organisation exert considerable influence on the requirement of Working Capital. But production policies depend on the nature of product. The level of production, decides the investment in current assets which in turn decides the quantum of working capital required.
d) Terms of Purchase and Sale: A small business organisation making purchases of goods on credit and selling the goods on cash terms would require less Working Capital whereas an organisation selling the goods on credit basis would require more Working Capital. If the payment is to be made in advance to suppliers, then large amount of Working Capital would be required. 286
e) Production Process: If the production process requires a long period of time, greater amount of Working Capital will be required. But, simple and short production process requires less amount of Working Capital. If production process in an industry entails high cost because of its complex nature, more Working Capital will be required to finance that process and also for other expenses which very with the cost of production whereas if production process is simple requiring less cost, less Working Capital will be required.
f) Turnover of Circulating Capital: Turnover of circulating capital plays an important and decisive role in judging the adequacy of Working Capital. The speed with which circulating capital completes its cycle i.e. conversion of cash into inventory of raw materials, raw materials into finished goods, finished goods into debts and debts into cash decides the Working Capital requirements of an organization. Slow movement of Working Capital cycle requires large provision of Working Capital.
g) Dividend Policies: Dividend policies of a small business organisation also influence the requirement of Working Capital. If a small business is following a liberal dividend policy, it requires high Working Capital to pay cash dividends where as a firm following a conservative dividend policy will require less amount of Working Capital.
h) Seasonal Variations: In case of seasonal industries like Sugar, Oil mills etc. More Working Capital is required during peak seasons as compared to slack seasons.
i) Small business Cycle: Small business expands during the period of prosperity and declines during the period of depression. More Working Capital is required during the period of prosperity and less Working Capital is required during the period of depression.
j) Change in Technology: Changes in Technology as regards production have impact on the need of Working Capital. A firm using labour oriented technology will require more Working Capital to pay labour wages regularly.
k) Inflation: During inflation a small business concern requires more Working Capital to pay for raw materials, labour and other expenses. This may be compensated to some extent later due to possible rise in the selling price. 287
l) Turnover of Inventories: A small business organisation having low inventory turnover would require more Working Capital where as a small business having high inventory turnover would require limited or less Working Capital.
m) Taxation Policies: Government taxation policy affects the quantum of Working Capital requirements. High tax rate demands more amount of Working Capital.
n) Degree of Co-ordination: Co-ordination between production and distribution policies is important in determining Working Capital requirements. In the absence of co-ordination between production and distribution policies more Working Capital may be required.
Or
(b) Discuss the various sources available to small-scale small business for raising working capital. 11
Ans: Various Sources of Working Capital
Sources of working capital are many. There are both external and internal sources. The external sources are both short-term and long-term. Trade credit, commercial banks, finance companies, indigenous bankers, public deposits, advances from customers, accrual accounts, loans and advances from directors and group companies etc. are external short-term sources. Companies can also issue debentures and invite public deposits for working capital which are external long term sources. Equity funds may also be used for working capital. A brief discussion of each source is attempted below.
Trade credit is a short term credit facility extended by suppliers of raw materials and other suppliers. It is a common source. It is an important source. Trade credit is an informal and readily available credit facility. It is unsecured. It is flexible too; that is advance retirement or extension of credit period can be negotiated. Trade credit might be costlier as the supplier may inflate the price to account for the loss of interest for delayed payment.
Commercial banks are the next important source of working capital finance commercial banking system in the country is broad based and fairly developed. Straight loans, cash credits, hypothecation loans, pledge loans, overdrafts and bill purchase and discounting are the principal forms of working capital finance provided by commercial banks. They provide loan in the following form:
a) Straight loans are given with or without security. A one time lump-sum payment is made, while repayments may be periodical or one time.
b) Cash credit is an arrangement by which the customers (small business concerns) are given borrowing facility upto certain limit, the limit being subjected to examination and revision year after year. Interest is charged on actual borrowings, though a commitment charge for utilization may be charged.
c) Hypothecation advance is granted on the hypothecation of stock or other asset It is a secured loan. The borrower can deal with the goods.
d) Pledge loans are made against physical deposit of security in the bank's custody. Here the borrower cannot deal with the goods until the loan is setded.
e) Overdraft facility is given to current account holding customers t^ overdraw the account upto certain limit. It is a very common form of extending working capital assistance.
f) Bill financing by purchasing or discounting bills of exchange is another common form of financing. Here, the seller of goods on credit draws a bill on the buyer and the latter accepts the same. The bill is discounted per cash will the banker. This is a popular form.
Finance companies abound in the country. About 50000 companies exist at present. They provide services almost similar to banks, though not they are banks. They provide need based loans and sometimes arrange loans from others for customers. Interest rate is higher. But timely assistance may be obtained.
Indigenous bankers also abound and provide financial assistance to small business and trades. They change exorbitant rates of interest by very much understanding.
Public deposits are unsecured deposits raised by small businesses for periods exceeding a year but not more than 3 years by manufacturing concerns and not more than 5 years by non-banking finance companies. The RBI is regulating deposit taking by these companies in order to protect the depositors. Quantity restriction is placed at 25% of paid up capital + free services for deposits solicited from public is prescribed for non-banking manufacturing concerns. The rate of interest ceiling is also fixed. This form of working capital financing is resorted to by well established companies.
Advances from customers are normally demanded by producers of costly goods at the time of accepting orders for supply of goods. Contractors might also demand advance from customers. Where sellers* market prevail advances from customers may be insisted. In certain cases to ensure performance of contract in advance may be insisted.
Accrual accounts are simply outstanding dues to workers, suppliers of overhead service requirements and the like. Outstanding wages, taxes due, dividend provision, etc. are accrual accounts providing working capital finance for short period on a regular basis.
Loans from directors, loans from group companies etc. constitute another source of working capital. Cash rich companies lend to liquidity crunch companies of the group.
Commercial papers can be used to raise funds. It is a promissory note carrying the undertaking to repay the amount on or after a particular date. Normally it is an unsecured means of borrowing and the companies are allowed to issue commercial papers as per the regulations issued by SEBI and Company’s Act.
Debentures and equity fund can be issued to finance working capital so that the permanent working capital can be matchingly financed through long term funds.
6. (a) Explain the significance of market segmentation for small-scale enterprises. 11
Ans: A market consists of large number of individual customers who differ in terms of their needs, preferences and buying capacity. Therefore, it becomes necessary to divide the total market into different segments or homogeneous customer groups. Such division is called market segmentation. They may have uniformity in employment patterns, educational qualifications, economic status, preferences, etc. Market segmentation enables the entrepreneur to match his marketing efforts to the requirements of the target market. Instead of wasting his efforts in trying to sell to all types of customers, a small scale unit can focus its efforts on the segment most appropriate to its market. It is defined as “The strategy of dividing the market in order to consume them”.
According to Philip Kotler, “It is the subdividing of market into homogenous subsets of consumers where any subset may be selected as a market target to be reached with distinct Marketing Mix”
According to Philip Kotler, market segmentation means "the act of dividing a market into distinct groups of buyers who might require separate products and/or marketing mixes."
According to William J. Stanton, "Market segmentation in the process of dividing the total heterogeneous market for a good or service into several segments. Each of which tends to be homogeneous in all significant aspects."
Advantages / Importance / Significance of Market Segmentation:
The purpose of segmentation is to determine the differences among the purchases which may affect the choice of the market area & marketing strategies. Following are some of the benefits of marketing segmentation.
1) Facilitates consumer-oriented marketing: Market segmentation facilitates formation of marketing-mix which is more specific and useful for achieving marketing objectives. Segment-wise approach is better and effective as compared to integrated approach for the whole market.
2) Facilitates introduction of suitable marketing mix: Market segmentation enables a producer to understand the needs of consumers, their behavior and expectations as information is collected segment-wise in an accurate manner. Such information is purposefully usable. Decisions regarding Four Ps based on such information are always effective and beneficial to consumers and the producers.
3) Facilitates introduction of effective product strategy: Due to market segmentation, product development is compatible with consumer needs as there is effective crystallization of the specific needs of the buyers in the target market. Market segmentation facilitates the matching of products with consumer needs. This gives satisfaction to consumers and higher sales and profit to the marketing firm.
4) Facilitates the selection of promising markets: Market segmentation facilitates the identification of those sub-markets which can be served best with limited resources by the firm. A firm can concentrate efforts on most productive/ profitable segments of the total market due to segmentation technique. Thus market segmentation facilitates the selection of the most suitable market.
5) Facilitates exploitation of better marketing opportunities: Market segmentation helps to identify promising market opportunities. It helps the marketing man to distinguish one customer group from another within a given market. This enables him to decide his target market. It also enables the marketer to utilize the available marketing resources effectively as the exact target group is identified at the initial stage only.
6) Facilitates selection of proper marketing programme: Market segmentation helps the marketing man to develop his marketing mix programme on a reliable base as adequate information about the needs of consumers in the target market is available. The buyers are introduced to marketing programme which is as per their needs and expectations.
7) Provides proper direction to marketing efforts: Market segmentation is rightly described as the strategy of "dividing the markets in order to conquer them". Due to segmentation, a firm can avoid the markets which are unprofitable and irrelevant for its marketing purpose and concentrate on certain promising segments only. Thus due to market segmentation, marketing efforts are given one clear direction for achieving marketing objectives.
8) Facilitates effective advertising: Advertising media can be more effectively used because only the media that reach the segments can be employed. It makes advertising result oriented.
9) Provides special benefits to small firms: Market segmentation offers special benefits to small firms. The resources available with them are limited as they are comparatively new in the market. Such firms can select only suitable market segment and concentrate all efforts within that segment only for better marketing performance. Such firms can compete even with large firms by offering personal services to customers within the segment selected.
10) Facilitates optimum use of resources: Market segmentation facilitates efficient use of available resources. It enables a marketing firm to use its marketing resources in the most efficient manner in the selected target market. The marketing firm selects the most promising market segment and concentrates all attention on that segment only. This offers best results to the firm in terms of sale, profit and consumer support as compared to the results available from spending such resources on the total market.
In conclusion, it can be said that market segmentation offers benefits not only to marketing firms but also to customers. The marketing job will be conducted efficiently and the available resources will be utilised in a better mariner. These advantages also suggest the importance of market segmentation and make a case in its favour.
Or
(b) Discuss the various channels of distribution used in small-scale enterprises.
Ans: Channels of Distribution
One of the important problems of marketing is the distribution of goods & services to the right place, person & the right time. Manufacturers often find it difficult to decide about the effective distribution system. The channel of distributions refers to the group of intermediaries, which perform the distribution functions. A channel of distribution is an organised net-work or a system of agencies and institutions which, in combination, perform all the activities required to link producers with users and users with producers to accomplish the marketing task.
According to Philip Kotler, “The distribution is the set of all firms & individuals that assist in the transferring the little of goods & services as they move from producers to customers.”
According to Richard Buskirk, “Channel of distribution is that system of financial organization by which a producer sends his products to the hands of consumers.”
According to Cundiff and Still, “Channels of distribution are those marketing nets through which the producer flow the products toward the market.”
Types of Channels
A. Zero-level channel (producer to consumer): It is also called as direct marketing or direct selling. This channel consists of the producer who directly sells his products to the ultimate consumers. This is the shortest, simplest, & cheapest form of distribution. Producers are benefited by increased profit, whereas consumers are benefited by reduced price. This is possible because it eliminates the middleman completely. With the development of sophisticated & efficient retailing like supermarkets, chain-stores, automatic selling machine is financially sound follow this channel of distribution. For products like jewelry & industrial goods like machinery, this is the best channel.
B. One-Level Channel (Producers Retailers Consumers or producers Wholesalers Consumers): This is a short channel where the manufacturer may himself perform some of the wholesaler. This is considered to be the best channel as it eliminates some of the marketing intermediaries & at the same time gets advantages of inclusion of retailers. In case of perishable goods, this is the best channel. When there is large scale promotion, inelastic demand & when manufactures are financially sound this channel is preferred.
C. Two-Level Channel (Manufactures Wholesalers Retailers Consumers): This is the traditional channel. It is more useful in the case of buyers, sellers, & manufactures who operate in small scale. The manufacturer sells his products in large quantities to a wholesaler who in turn sells in small quantities to retailers & finally retailers sell to ultimate consumers. Products which have low unit value & which are purchased frequently may be distributed through this channel.
D. Three Level Channel (Manufactures Wholesalers Agents Retailers Consumers): In this method manufactures appoint agent such as consignees to sell their products. It is preferable for exporters or MNCs.7. (a) What are the reasons for sickness of most of the small business enterprises in India? What should an entrepreneur do to prevent sickness? 6+6=12
Or
(b) Examine the effects of capacity under-utilization in a small business enterprise. 12
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