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Notes on Entrepreneurship

Management

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0.1. Defi nition of Entrepreneur.

Ans. The word' entrepreneur' has been taken from the French language where it cradled and originally

meant to designate an organizer of musical or other entertainments. Oxford English Dictionary (in 1897)

also defined an entrepreneur in similar way as "the director or a manager of a public musical institution,

one who 'gets-up' entertainment, especially musical performance". In the early 16th

century, it was applied

on those who were engaged in military expeditions. It was extended to cover civil engineering activities

such as construction and fortification in the 1 7the century. It was only in the beginning of the 18th

century

that the word was used to refer to economic aspects. In this way , the evolution of the concept of

entrepreneur is considered over more than four centuries. Since then, the term 'entrepreneur' is used in

various ways and various views. These views are broadly classified into three groups, namely, risk-bearer,organizer and innovator. Now, we are discussing below each of these views. .

,

Entrepreneur as a Risk-Bearer

Richard Cantillon, an Irish man living in France, was he first who introduced the term 'entrepreneur' and his

unique risk-bearing function in economics in the early 18the century. He defined entrepreneur as an agent

who bUYS factors of production at certain prices in order to combine them into a product with a view to

selling it at uncertain prices in future. He illustrated a farmer who pays out contractual incomes which are

certain to the landlords and labourers and sells at prices that are 'uncertain'. He further states that so do

merchants also who make certain payments in expectation of uncertain receipts. Thus, they too are 'risk-

bearing' agents of production.

Knight also described entrepreneur to be a specialized group of persons who bear uncertainty. Uncertainty

is def\ned as a risk which cannot be insured against and is incalculable. He, thus, draws a distinction

between ordinary risk and uncertainty. A risk can be reduced through the insurance principle, where the

distribution of the outcome in a group of instances is known. On

.. the contrary, uncertainty is the risk which cannot be calculated. The entrepreneur, according to Knight, is

the economic functionary who undertakes such responsibility of uncertainty which by its very nature cannot

be insured, not capitalized nor salaried too.

Entrepreneur as a Organiser

Jean-Baptiste say, an aristocratic, industrialist, which his unpleasant practical experiences developed the

concept of entrepreneur a little further which survived for almost two centuries. His definition associates

entrepreneur with the functions of coordination, organization and supervision. According to him, an

entrepreneur is one who combines the land of one, the labour of another and the capital of yet another and

thus, produces a product. By selling the product in the market, he pays interest on capital rent on land and

wages to labourers and what remains is his / her profit. Thus, say has made a clear distinction between

the role of the capitalist as a financer and the entrepreneur as an organizer. He further elaborates that in

the course of undertaking a number of complex operations like obstacles to be surmounted, anxieties to be

suppressed, misfortunes to

Entrepreneurship Management -2010

be repaired and expedients to be devised, three more implicit factors are deemed to be essential. These

are:

1Moral qualitie~ for work judgment, perseverance and a knowledge about the business world.2Command over sufficient capital and3Uncertainty of profits.

Marshal also advocated the significance of organization among the services of special class of business

undertakers.

Entrepreneur as an Innovator

Joseph A. Schumpeter, for the first time in 1934, assigned a crucial role of 'innovation' to the entrepreneur

in his magnum opus "Theory of Economic Development' Schumpeter considered economic developmentas a discrete dynamic change brought by entrepreneur by instating new combinations of production, Le.

innovations. The introduction of new combination of factors of production, according to him, may occur in

anyone of the following five forms:

1The introduction of a new product in the market.2The instituting of a new production technology which is not yet tested by experience in the branch ofmanufacture concerned.3The opening of a new market into which the specific product has not previously entered.4The discovery of a new source of supply of raw material.5The carrying out of the new form of organization of any industry by creating of a monopoly position orthe breaking up of it.

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Schumpeter also made a distinction between an inventor and an innovator. An inventor is one who

discovers new methods and new materials. And an innovator utilizes inventions and discoveries in order to

make new combinations.

In sum, the concept of the entrepreneur is intimately associated with the three elements -risk breaking,

organizing and innovating. Thus, an entrepreneur can be defined as a person who tires to create

something new, organies production and undertakes risks and handles economic uncertainty involved in

enterprise. .

0.2. What are the Characteristics on an Entrepreneur. 0\

Ans. If we go through the business history of India, we come across the names of persons who have

emerged as successful entrepreneurs. For example, Tata, Sirla, Modi, Dalmia, Kirlosker and others are

well-known names of successful entrepreneurs in the country who started their business enterprises with

small size and made good fortunes. Success or otherwise of a small enterprise is , to a great extent,

attributed to the success or otherwise of the entrepreneur himself Iherself. Then, the question is: What

makes the entrepreneurs successful? Whether they had anything common in their personal

characteristics? The scanning of their personal characteristics shows that there are certain characteristics

of entrepreneurs which are found usually prominent in them. The principal ones are scanned and

discussed here:


1Hard Work: Willingness to work hard distinguishes a successful entrepreneur from unsuccessful one.The entrepreneur '/'Jith his tedious, sweat -filled hours and perseverance revive their business evenfrom on verge of failure. In nutshell, most of the successful entrepreneurs work hard endlessiy,

especially in the beginning and the same becomes their whole life.2Desire for High Achievement: The entrepreneurs have a strong desire to achieve high goals inbusiness. This high achievement motive strengthened them to surmount the obstacles, suppressanxieties, repair misfortunes and devise expedients and only set up and run a successful business.3Highly Optimistic: The successful entrepreneurs are not distribute by the present problems faced bythem. They are optimistic for future that the situations will become favourable to business in future.Thus, they can run their enterprises successfully in future.

.4. Independence: One of the common characteristics of the successful entrepreneurs has been that

they do not like to be guided by others and to follow their routine. They resist to be pigeonholded. They

liked to be independent in the matters of their business.1Foresight: The entrepreneurs have a good foresight to know about future business environment. Inother words, they well visualize the likely changes to take place in market, consumer attitude,technological developments, etc. and take timely actions accordingly.2Good Organiser: Different resources required for production are divorced from each other. It is theability of the entrepreneurs that brings together all resources required for starting up an enterprise andthen to produce goods. .3Innovative: Production is meant to meet the customers' requirements. In view of the changing taste ofcustomers from time to time, the entrepreneurs initiate research and innovative activities to producegoods to satisfy the customers' changing demands for the products. The research institutes / centresestablished by Tata, Birla, Kirloskar, etc. are examples of the innovative activities taken by thesuccessful entrepreneurs in our country.

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i.Innovating Entrepreneurs: An innovating entrepreneur is one who introduces new goods,

inauguratesnew

method of production, discoversnew

DISTINCTION BETWEEN AN ENTREPRENEUR AND A MANAGER 2. 009

Sometimes, the two terms, namely, an entrepreneur and a manager are considered as synonym,

i.e. meaning the same. In fact, the two terms are two economic concepts meaning two different meanings.

The major points of distinction between the two are presented in following table.1.

Table:1 Difference between an Entrepreneur and a Manager

Point EntrepreneurManager The main motive of an

entrepreneurBut, the main motive of a manager

is to start a venture by setting up anis to render his services in an

1.

Motive

enterprise. He understands theenterprise already set up by some

venture for his personalone else.

Qratification. A manager is the servant in the enterprise owned by the

-.An entrepreneur is the owner of the2.

Status

entrepreneur A manager as aenterprise

servant does not bear any riskinvolved in the enterprise.


r----------~----An entrepr~neur be!ng the ~wrieroT T~~~~;~:;-;s a serv~~~~-oe~~;--' '~ 3 Ri k-b ,,'. the enterprise assumes all nsks and , b '....k rid' the>

. ,5 ea,lng rt . t' , , . 'th ear any n" InVu.ve In ~, unce am y InVOlveo :n runnmge It'

t . en erpnse,en erpnse. _____ , ________________~_~ The ~ew~rd a~ entrepi~neur getsfor

IAmanager,getssalary as rew:='fd~ beanng risks Involved In the I for the services rendered by him in4. Reward enterprise is profit which is highly the enterprise. Salary of a manager uncertain.is certain and fixed. Entrepreneur himself thinks over

But, what a manager does is simplywhat and how to produce goods to

to execute the plans prepared bymeet the changing demands of the

5. Innovation the entrepreneur. Thus, a managercustomers. Hence, he acts as an

simply translates the entrepreneur'sinnovator also called a 'change

ideas into practice.aQent'. An entrepreneur needs to

possess On the contrary, a manager needs

qualities and qualifications like high to possess distinct qualifications in6. Qualifications achievement motive, originality interms of sound knowledge in

thinking, foresight, risk bearingmanagement theory and practice.

ability and so on.

After going through the above points of distinctions, it is clear that an entrepreneur differs from a manager.

At times, an entrepreneur can be a manager also, but a manager cannot be an entrepreneur. After all, an

entrepreneur is a owner, but a manager is a servant.

FUNCTION OF AN ENTREPRENEUR

An entrepreneur does perform all the functions necessary right from the genesis of an idea up to theestablishment of an enterprise. These can be listed in the following sequential manner.

Idea generation and scanning of the best suitable idea.

Determination of the business objectives.Product analysis and market research

Determination of form of ownership Iorganization.Completion of promotional formalities.Raising necessary funds.Procuring machine and material

Recruitment of menUndertaking the business operations.

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enterprise. It is important to note that such entrepreneurs can work only whena certain

level of development is already achieved, and people look forwardto

changeand

improvement.ii.

Imitative Entrep'reneurs:Thesearecharacterized by readiness

toadopt successful

innovations inaugurated by innovating entrepreneurs.Imitative entrepreneurs do not

innovatethe

changesthemselves,they

onlyimitatetechniquesand

technology

innovated by others.Such types of entrepreneurs

are

particularly suitable for the

under-developedregions

forbringing

amushroomdriveofimitation

of

new

combinations of factors of production already available in developed regions.Kilby has enumerate about 13 functions of an entrepreneur. While others can also add certain more

functions to this list, the said functions appear to be major ones. For our convenience, we have classified

all the entrepreneurial functions into three broad categories.

i. Risk-bearing

ii. Organisation

iii. Innovation


0.3. Discuss the types cf Entrepreneurs

Ans. Clarene Danhof, on the basis of his study of the American Agriculture, classified entrepreneurs in the

manner that at the initial stage of economic development, entrepreneurs have less initiative and drive and

as economk; development proceeds, they become more innovating and enthusiastic. Basing on this, heclassified entrepreneurs into four types.

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aises funds required for the enterprise.s are not raised by the intrapreneur. An intrapreneur does not fully bear the risk involved in the enterprise.

tes from outside.

iii. Fabian Entrepreneurs: Fabiar.l entrepreneurs are characterized by very great caution and

skepticism in experimenting new change in the their enterprises. They imitate only when it becomes

perfectly clear that failure to do so would result in a loss of the relative position in the enterprise.

iv. Drone Entrepreneurs: These are characterized by a refusal to adopt opportunities to make

changes in production formulae even at the cost of severely reduced returns relative to other like

producers. Such entrepreneurs may even suffer from lossess but they are not ready to make changes

in their existing production methods.

Following are some more types of entrepreneurs listed by some other behavioural scientists:

Solo Operators: These are the entrepreneurs who essentially work alone and, if needed at all, employ a

few employees. In the beginning, most of the entrepreneurs start their enterprises like them.

Active Partners: Active partners are those entrepreneurs who start / carry on an enterprise as a joint

venture. It is important that all of them actively participate in the operations of the business. Entrepreneurs

who only contribute funds to the enterprise' but do not actively participate in business activity are called

simply 'partner'.

Investors: Such entrepreneurs with their competence and inventiveness invent new products. Their basic

interest lies in research and innovative activities.

Challengers: These are the entrepreneurs who plunge into industry because of the challenges it presents.

When one challenge seems to be met, they begin to look for new challenges.

Buyers: These are those entrepreneurs who do not like to bear much risk. Hence, in order to reduce risk

involved in setting up a new enterprise, they like to buy the ongoing one.


Lifetimers: These entrepreneurs take business as an integral part to their life. Usually, the 'family enterprise

and businesses which mainly depend on exercise of personal skili fall in this type I category of

entrepreneuis.

INTRA?RENEUR (Short notes)

Of late, a new breed of entrepreneurs is seen in large industrial organizations. They are called

'intrapreneurs'. They emerge from within the confines of an existing enterprise. In big organizations, the top

executives are encouraged to catch hold of new ideas and then convert these into products through

research and development activities within the framework of organization. The concept of entrepreneurship

has become very popular in developed cou ntries like America. It is found that an increasing number of

intrapreneurs is leaving their jobs in big organizations and is starting own enterprises. Many of such

intrapreneurs have become exceedingly successful in their ventures. What is more that they are causing a

threat to the organizations they left. Such intrapreneurs breed to the innovative entrepreneurs who

inaugurate new products.

Having understood the meanings of entrepreneur and intrapreneur, now the two can easily be distinguished

from each other on the following bases:

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Q.4. Discuss the Concept of Entrepreneurship & Theories.

Ans. Like other economic concepts, entrepreneurship has been a subject of much debate and discussions.

It is an elusive concept. Hence, it is defined differently by different authors. While some call

entrepreneurship as 'risk bearing', others view it "innovating' and yet others consider it 'thrill-seeking'. Let us

consider some important definitions of entrepreneurship to understand what entrepreneurship is all about.

In a Conference on Entrepreneurship held in United States, the term 'entrepreneurship' was defined as

follows:

"Entrepreneurship is the attempt to create value through recognition of business opportunity, the

management of risk-taking appropriate to the opportunity and through the communicative and management

skills to mobilize human, financial ~nd material resources necessary to bring a project to fruition".


In the opinion of A, H, Cole, "Entrepreneurship is the purposeful activity of an individual or a group of

associated indi'Jiduals, undertaken to initja~e, initiate, maintain or aggrandize prOfit by production or

disti'ibution of economic goods and services".

According to Schumpeter, "Entrepreneurship is based on purposeful and systematic innovation. It includednot only the independent business but also company directors and managers who actually carry out

innovative functions".

In all above definitions, entrepreneurship refers to the functions performed by an entrepreneur in

establishing an enterprise. Just as management is regarded as what managers do, entrepreneurship may

be regarded as what entrepreneurs do. In other words, entrepreneurship is the act of being an

entrepreneur. Entrepreneurship is a process involving various actions to be undertaken to establish an

enterprise. it is, thus, process of giving birth to a new enterprise.

Innovation and risk-bearing are regarded as the two basic elements involved in entrepreneurship. Let usunderstand what these two terms actually mean.

Innovation: Innovation, i.e. doing something new or something different is a necessary condition to be

called a person as an entrepreneur. The entrepreneurs are constantly on the look out to do something

different and unique to meet the changing requirements of the customers. They may or may not be

inventors of new products or new methods of production, but they possess the ability to foresee the

possibility of making use of the inventions for their enterprises. Let some facts speak.

In order to satisfy the changing preference of customers, now-a-days fruit juice is sold in small cartons

(Mango Fruity) instead of bottles so that customers can carry it and throwaway the container after drinking

the juice. Let us take another example. Lipton offers its tea in small packs known as 'PUDIYAS' to meetthe requirements of its rural customers. You may have heard of Henry Ford the founder of the Ford Motor

Company in the United States. Remember, Henry Ford himself did not invent the automobile. Foreseeing

the people's desire to have passenger cars at somewhat lower rates, he applied new methods of mass

production to offer passenger cars to the customers at affordable price. Since customers taste and

preferences always keep on changing, hence the entrepreneur needs to apply invention after invention on

a continuous basis to meet the customers changing demands for products.

Risk Bearing: Starting a new enterprise always involves risk and trying for doing something new anddifferent is also risky. The reason is not difficult to seek. The enterprise may earn profits or incur losses

because of various factors like increasing competition, changes in customer preferences. shortage of raw

material and so on. An entrepreneur, therefore, needs to be a risktaker, not risk avoider. His risk-bearing

ability enables him even if he fails in one time or one venture to persist on and on which ultimately helps

him succeed. The Japanies proverb applies to him:

"Fall seven times, stand up eight"

Though the term entrepreneur is often used interchangeably with entrepreneurship, yet they are

conceptually different. The relationship between the two is just like the two sides of the same coin as

depicted in the following table.


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TABLE: Relationship between Entrepreneur and Entrepreneurship

'EntrepreneurPersonOrganiserInnovator Risk-bearer MotivatorCreatorVisualiserLeader Imitator

EntrepreneurshipProcessOrganisationInnovation Risk-bearing MotivationCreation VisionLeadershipImitation

Thus, entrepreneurship is concerned with the performance and coordination of the entrepreneurial

functions. This also means that entrepreneur precedes entrepreneurship.

GROWTH OF ENTREPRENEURSHIP IN INDIA

That a proper understanding of the growth of entrepreneurship'of any country would evolve within the

context of the economic history of the particular country becomes the subject matter of this section.The growth of entrepreneurship in India is, therefore, presented into two sections, viz. Entrepreneurship

during Pre-Independence and Post-Independence.

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Q.5. What is the role of Entrepreneurship in Economic Development.

Ans. The word development is used in so many ways that its precise connotation is often baffling.

Nevertheless, economic development essentially means a process of upward change whereby the real

per capita income of a country increases over a long period of time. Then, a simple but meaningfulquestion arises what causes economic development? This question has absorbed the attention of

scholars of socio-economic change for decades. In this section, we attempt to shed light on animportant aspect of that larger question, the phenomenon of entrepreneurship. The one major issue we

address here is what is the significance of entrepreneurship for economic development? Does it add animportant independent influence to that of other factors widely agreed to promote economic

development?

Adam Smith, the foremost classical economist, assigned no significance to entrepreneurial role in

economic development in his monumental work 'An Enquiry into the Nature and Causes of the Wealthof Nations', published in 1976. Smith extolled the rate of capital formation as an important determinant

of economic development. The problem of economic development was ergo largely the ability of thepeople to save more and invest more in any country. According to him ability to save is governed by

improvement in productivity to the increase in the dexterity of every worker due to division of labour.Smith regarged every person as the best judge of his own interest who should be left to pursue it to his

own advantage. According to him, each individual is led by an 'invisi hie hand' in pursing his I herinterest. He always advocated the policy of Iiassez -faire in economic affairs.


In this theory of economic development, David Ricardo identified only three factors of production. namely,

machinery, capital and labour , among whom the entire prcduce is distributed as rent, profit and wages

respectively. R:cardo appreciated the virtues of profit in capital accumulation. According to him, profit leads

to saving of wealth which ultimately goes to capital formation.

Thus, in both the classical theories of economic development, there is no room for entrepreneurship. And,

economic development seems to be automatic and self -regulated. Thus, the attitude of classical

economists was very cold towards the role of entrepreneurship in economic development. They took the

attitude: "the firm is shadowy entity, and entrepreneur even shadower -or at least is shady when he is not

shadowy"

The economic history of the presently developed countries, for example. America, Russia and

. Japan tends to support the fact that the economy is an effect for which entrepreneurship is the cause. The

crucial role played by the entrepreneurs in the development of the Western countries has made the people

of u.nder developed countries too much conscious of the significance of entrepreneurship for economicdevelopment, it is necessary to increase entrepreneurship both qualitatively and quantitatively in the country.

It is only active and enthusiastic entrepreneurs who fully explore tne potentialities of the country's available

resources -labour, technology and capital. Schumpeter visualized the entrepreneurs as the key figure in

economic development because of his role in introducing innovations. Parson and Smelser described

entrepreneurship as one of the two necessary conditions for economic development, the to other being the

increased output of a capital. Harbison includes entrepreneurs among the prime movers of innovations and

Sayigh simply describes entrepreneurship as a necessary dynamic force. It is also opined that development

does not occur spontaneously as a natural consequence when economic conditions are in some sense

'right': a catalyst or agent is needed, and this requires an entrepreneurial ability. It is this ability that he

perceives opportunities which either others do not see or care about. Essentially, the entrepreneur searches

for change, sees need and then brings together the manpower, material and capital required to respond the

opportunity what he sees. Akio Morita, the President of Sony who adopted the company's products to createWalkman Personal-Stereo and India's Gulshan Kumar of T-Series who skimmed the audio-cassette starved

vast Indian market are the clearest examples of such able entrepreneurs.

The role of entrepreneurship in economic development varies from economy to economy depending upon

its material resources, industrial climate and the responsiveness of the political system to the

entrepreneurial function. The entrepreneurs contribute more in favourable opportunity conditions than in

the economies with relatively less favourable opportunity conditions.

Viewed from opportunity point of view the underdeveloped regions, due to the paucity of funds, lack of

skilled labour and non -existence of a minimum social and economic overheads, are less conducive to the

emergence particularly of innovative enterperneurs. In such regions, entrepreneurship does not emerge

out of industrial background with well developed institutions to support and encourage it. Therefore,

entrepreneurs in such regions may not be an "innovator" but an "imitator" who would copy the innovations

introduced by the "innovative" entrepreneurs of the developed regions. In these areas, according to

McClelland's concept of personality aspect fo entrepreneurship, some people with high achievement

motivation come forward to behave in an entrepreneurial way to change the stationary inertia , as-they

would not be satisfied with the present status that they have in the society.


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Under the conditions of paucity of funds, and the problem of imperfect market in underdevelopedregions, the entrepreneurs are bound to launch their eriterprises on a small -scale. As imit.ationrequires lesser funds that innovation, it is realized that such regions should have more imit:ativeentrepreneurs. And it is also felt that imitation of inno'Jat:ons introduced in developed regions on a

massive scaie can bring about rapid economic development in under -developed regions also. But, itdoes not mean that such imitation requires in any way lesser ability on the part of entrepreneurs. In thisregard, Berna opines : "It involves often what has aptly been called 'subjective innovation', that is, theability to do things which have not been done before by the particular industrialists, even thoughunknown to him, the problem may have been solved in the same way by the others. "These imitativeentrepreneurs constitute the main sprig of development of underdeveloped regions.

Further, India which itself is an under-developed country aims at decentralized industrial structure tomilitate the regional imbalances in levels of economic development, small -scale entrepreneurship insuch industrial structure plays an important role to achieve balanced regional development. It is

unequivocally believed that small-scale industries provide immediate large scale employment, ensure amore equitable distribution of national income and also facilitate an effective resourced mobilization ofcapital and skill which might otherwise remain unutilized. Lastly, the establishment of EntrepreneurshipDevelopment Institutes and alike by the Indian Government dUring the last decades is a goodtestimony to her strong realization about the premium mobile role of entrepreneurship played ineconomic development. The important role that entrepreneurship plays in the economic developmentof an economy can now be put in a more systematic and orderly manner as follows:

1. Entrepreneurship promotes capital formation by mobilizing the idle saving of the public.2. It provides immediate large -scale employment. Thus, it helps reduce the unemployment problem inthe country, Le. the root of all socio -economic problems.

3. It promotes balanced regional development.4. It helps reduce the concentration of economic power.5. It stimulates the equitable redistribution of wealth, income and even political power in the interest ofthe country.

6. It encourages effective resource mobilization of capital and skill which might otherwise remainunutilized and idle.

7. It also induces backward and forward linkages which stimulate the process of economicdevelopment in the country.

8. Last but no means the least, it also promotes country's export trade Le., an important ingredient toeconomic development.

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Thus, it is clear that entrepreneurship serves as a catalyst of economic development. On the whole,the role of entrepreneurship in economic development of a country can best be put as "an economy is

the effect for which entrepreneurship is the cause".

0.6. Discuss the concept of women entrepreneurs.

Ans. Women entrepreneurs may be defined as a woman or group of women who initiate , organize

and run a business enterprise. In terms of Schumpeterian concept of innovative entrepreneurs,

women who innovate, imitate or adopt a business activity are called "women entrepreneurs". The

Government of India has defined women entrepreneurs based on women participation in equity and

employment of a business enterprise. Accordingly, a women


entrepreneur is defined as "an enterprise owned and controlled by a \vomen having a minimum financial

interest of 51 percent of the capita! and giving at least 51 percent of the employment generated in the

enterprise to women". However, this definitio~l is subject to cr!t!cisrn mainly on the condition of employing

more than 50 percent women workers in the enterprises owned and run by the women.

In nutshell, women entrepreneurs are those women who think of a business enterprise, initiate it, organize

and combine the factors of production operate the enterprise and undertake risks and handle economic

uncertainty involved in running a business enterprise.

Growth of Women Entrepreneurship:

Woman in India constitute around half of the country's population. Hence, they are regarded as the "better

half of the society". In the official proclamation, they are at par with men. But, in real life, the truth prevails

otherwise. Our society is still male-dominated and women are not treated as equal partners both inside and

outside four walls of the house. In fact, they are treated as abla, i.e., weak and dependent on mean. Assuch, the Indian women enjoy a disadvantageous status in the society. Some facts be given are The much

low literary rate (40%), low work participation rate (28%) and low urban population share (10%) of women

as compared to 60%, 52% and 18% respectively of their male counterparts well confirm their

disadvantageous position in the society. Our age old socio-cultural traditions and taboos arresting the

women within four walls of their houses also make their conditions more disadvantageous. These factors

combinedly serve as non-conductive conditions for the emergence and development of women

entrepreneurship in the country. Given these unfavorable conditions, the development of women

entrepreneurship is expectedly low in the country. This is well indicated by a dismally low level of women

(5.2% in total self-employed persons in the country. Further women entrepreneurs in India accounted for

9.01% of the total 11.70 million entrepreneurs during 1988 -89.

A cross country comparison reveals that emergence and development of entrepreneurship is largely

caused by the availability of supporting conditions in a country. To quote, with improving supporting

conditions, the share of women owned enterprises in the United States has risen from

7.1 % in 1977 to 32% in 1990. It is likely to reach to 50% by the turn of the 20th

century.

In India, women entry into business is a new phenomenon. Women entry into business, or say

entrepreneurship is traced out as an extension of their kitchen activities mainly to 3 Ps, viz., Pickles,

Powder and Pappad. Women in India plunged into business for both pull and push factors. Pull factors

imply the factors which encourage women to start an occupation or venture with an urge to do something

independently. Push factors refer to those factors, which compel women to take up their own business to

tide over their economic difficulties and responsibilities.

With growing awareness about business and spread of education among women over the period, women

have started shifting from 3 Ps to engross to 3 modern E's viz., Engineering, Electronics and Energy. They

have excelled in these activities. Women entrepreneurs manufacturing solar cookers in Gujarat, small

foundries in Maharashtra and T. V. capacitors in Orissa have proved beyond doubt that given the

opportunities, they can excel their male counterparts. Smt Sumati Morarji (Shipping Corporation). Smt.

Yamutai Kirloskar (Mahila Udyog Limited), smt. Neena Malhotra (Exports) and Smt. Shahnaz Hussain

(Beauty Clinic) are some exemplary names of successful and accomplished women entrepreneurs in our

country.


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In l;ldia, Kerla is a state with highest literacy (including women literary) reflecting a Congenial

atmosphere for the emergence and development of women entrepreneurship in the State. According toa study, the number of women's industrial units in Kerla was 358 in 1981, which rose to 782 ill March

1984. These 782 units included 592 proprietary concerns, 43 partnership firms, 42 charitableinstitutions, 03 joint stock companies and 102 co -operative societies covering a wide range of

activities. On the whole, proper education of women in Kerla resulted in high motivation among them toenter into business. The financial , marketing and training assistance provided by the State Governmentalso helped motivate women to assume entrepreneurial career. Women's desire to work at the plae ofresidence, difficulty of getting jobs in the public and private sectors and the desire for social recognition

also motivated woen in Kerla for self employment. Like Kerla, an increasing number of women areentering the business in the. State of, Maharashtra also.

Q. 7. What are the Problems of Women Entrepreneurs

Ans. Women entrepreneurs encounter two sets of problems, viz, general problems of entrepreneurs

and problems specific to women entrepreneurs. These are discussed as follows:

1. Problems of Finance:

Finance is regarded as "life-blood" for any enterprise, be it big or small. However, women

entrepreneurs suffer from shortage of finance on two counts. Firstly, women do not generally haveproperty on their names to use them as collateral for obtaining funds from external Sources. Thus, their

access to the external sources of funds is limited. Secondly, the banks also consider women less creditworthy and discourage women borrowers on the belief that they can at any time leave their business.

Given such situation, women entrepreneurs are bound to rely on their own savings, if any and loans

from friends and relatives who are expectedly meager and negligible. Thus, women enterprises fail dueto the shortage of finance.

2. Scarcity of Raw Material:

Most of the women enterprises are plagued by the scarcity of raw material and necessary inputs.

Added to this are the high prices of raw materials, on the one hand, and getting raw material at theminimum of discount on the other. The failure of many women cooperatives in 1971 engaged in basket

making is an example how the scarcity of raw material sounds the death-knell of enterprises run bywomen.

3. Stiff Competition:

Women entrepreneurs do not have organizational set up to pump in a lot of money for canvassing andadvertisement. Thus, they have to face a stiff competition for marketing their products with both

organized sector and their male counterparts. Such a competition ultimately results in the liquidation ofwomen enterprises.


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4. Limited Mobility:

Unlike men, women mobility in india i3 highly limited due to various reasons. A single Woman askingfor room is stili looked upon suspicion. Cumbersome exercise involved in starti ng an enterprise

coupled with the officials' humiliating attitude towards women compels them to give up idea of startingan enterprise.

5. Family Ties:

In India, it is mainly a woman's duty to look after the children and other members of the family. Manplays a secondary role only. In case of married women, she has to strike a fine balance between her

business and family. Her total involvement in family leaves little or no energy and time to devote forbusiness. Support and approval of husbands seem necessary condition for women's entry into

business. Accordingly, the educational level and family background of husbands positively influence

women's entry into business activities.

6. Lack of Education:

In India, around three fifths (60%) of women are still illiterate. Literacy is the root cause of socio-economic problems. Due to the lack of education and that too qualitative education, women are not

aware of business, technology and market knowledge. Also, lack of education causes lowachievement motivation among women. Thus, lack of education creates problems for women in the

setting up and running of business enterprises.

7. Male -Dominated Society:

Male Ghauvinism is still the order of the day in India. The Constitution of India speaks of equality

between sexes. But, in practice, women are looked upon as able, I.e. weak in all respects. Womensuffer from male reservations about a woman's role, ability and capacity and are treated accordingly.

In nutshell, in the male dominated India society, women are not treated equal to men. This, in tum,

serves as a barrier to women entry into business.

8. Low Risk -Bearing Ability:

Women in India lead. a protected life. They are less educated and economically not self dependent.All these reduce their ability to bear risk involved in running an enterprise. Risk bearing is an essential

requisite of a successful entrepreneur.

In addition to above, problems, inadequate infra structural facilities, shortage of power, high cost of

production, social attitude, low need for achievement and socia-economic constraints also hold thewomen back from entering into business.

DEVELOPMENT OF WOMEN ENTREPRENEURS -RECENT TRENDS

Days are gone when women in India remained confined to within four walls of their homes and their

immense strength and potential remained unrecognized and unaccounted for. Now, they areincreasingly participating in all spheres of activities. The fact remains that the citadels of excellence in

academic, politics, administration, business and industry are no longer the prerogatives of men inIndia. The general consensus that is emerging in all discussions relating to


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the development of women is that promotion of women entrepreneurs should form an integraI part ofalldevelopment efforts, Te experience ofthe United States where the share of women Owned enterprisesis continuously on increase strengthens the view that the future of small -scale industries depends verimuch on the entry of women into industry. Several national and international organizations and

agencies have appreciated the need for and importance of developing women entrepreneurs in recentyears. A brief review of it is given here.

With a view to develop better half of the society, the United Nations declared the decade 1975 -85 as

the decade for Women. The UNIDO preparatory Meeting on the Role of Women in Industrialization in

Developing Countries held at Vienna during 6-10 February, 1978 identified several constraints such as

social, attitudinal and institutional barriers, inadequate employment opportunities, inappropriate andinadequate training, insufficient information and so on which held women back from participating in

industrial activities. The World Confe"rence of the United Nations Decade for Women held at

Copenhagen in Denmark on 30th

June, 1980 also adopted a programme aimed at promoting full andequal opportunities and treatment of women in employment and their access to non-traditional skilled

trades.

The First National Conference of Women Entrepreneurs held at New Delhi in November 1981advocated the need for developing women entrepreneurs for the overall development of the country. It

called for priority to women in allotment of land, sheds, sanction of power, licensing, etc. The SecondInternational Conference of Women Entrepreneurs organized by the National Alliance of youngEntrepreneurs (NAYE) held in 1989 at New Delhi also adopted certain declarations involving women's

participation in industry.

The Government of India has been assigning increasing importance to the development of womenentrepreneurs in the country in recent years. The Sixth Five Year Plan, for example, proposed for

promoti ng female employment in women owned industries. The Government moved a step forward in

the Seventh Five Year Plan by including a special chapter on Integration of Women in Development.The chapter suggested:

To treat women as specific target groups in all development programmes.To devise and diversify vocational training facilities for women to suit their varied needs and skills.To promote appropriate technologies to improve their efficiency and productivity.To provide assistance for marketing their products.To involve women in decision making process.

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In her recent Industrial Policy 1991, the Government of India further stressed the need for conducting

special entrepreneurship development programmes for women with a view to encourage women toenter industry. Product and process oriented courses enabling women to start small-scale industriesare also recommended in the policy statement.

There are several institutional arrangements both at the centre and the state levels like nationalizedbanks, state financial corporations, state industrial corporations, district industry centres and voluntary

agencies like FICCI's Ladies organization (FLO), National Alliance of Young ~ntrepreneurs (NAYE)

which have been engaged in protecting and developing women entrepreneurs in the country. Added tothese are national and international women associations set up with a purpose to create a congenial

environment for developing women entrepreneurship in rural and urban areas.


0.8. What is Meaning of Rural Entrepreneurship.

Ans. Like entrepreneurship, rural entrepreneurship also conjures different meanings to different people.

Without going into semantics, rural entrepreneurship can simply be defined as entrepreneurship emerging

in rural areas is rural entrepreneurship. In other words establishing industrial units in the rural aieas refersto rural entrepreneurship. Or say, rural entrepreneurship implies rural industrialization.

Let us know, for the sake of our knowledge, the meaning of rural industry.

Rural industries are generally associated with agriculture. According to the Khadi and Village Industries

Commission (KVIC), "village industry or rural industry means any industry located in rural area, population

of which does not exceed 10,000 or such other figure which produces any goods ro renders any services

with or without use of power and in which the fixed capital investment per head of an artisan or a worker

does not exceed a thousand rupees."

The definition of village industry has been recently modified by the government so as to enlarge its scope.

Accordingly, any industry located in rural area, village or town with a population of 20,000 and below and

an investment of RS.3 crores in plant and machinery is classified as a Village industry. As a result of

widening of the scope of village industries, 41 new village industries have been added making a total of

101 as against 70 industries earlier.

All the village industries have been grouped into seven major categories as follows:

(i) Mineral -based industry

(ii) . Forest based industry

(iii) Agro based industry

(iv) Polymer and chemical-based industry(v) Engineering and non -conventional industry

(vi) Textile industry (including khadi), and

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(vii) Service industry.

Having understood the meanings of rural entrepreneurship and rural industry, let us move on to appreciate

the need for and significance of rural entrepreneurship in India.

NEED FORRURAL ENTREPRENEURSHIP

The need for rural entrepreneurship for developing industries in the rural areas in imbued with multiplicity

of justifications as listed below:

1. Rural industries being labour intensive, have high potential in employment generation. Thus,

they serve as an antedote to the widespread problems of disguised unemployment or under

employment stalking the rural territory.

2. By providing employment, these industries have also high potential for income generation in

the rural areas. These, thus, help in reducing disparities in income between rural and urban areas.

3. These industrfes encourage dispersal of economic activities in the rural areas and thus,

promote balanced regional development.

4. Development of industries in the rural areas also helps build up village republics.

5. Rural industries also help protect and promote the art and creativity, Le. the age -01 d richheritage of the country.6. Rural industrialization fosters economic development in rurai areas. This curbs rural urbanrnigration, on the one hand, and also lessens tile disproportionate growth in the cities, reduces

growth of siuITIS social tensions, and atmospheric pollution, on the other.7. Last but no means the least, rural industries being environment friendly lead todevelopment without destruction Le. the most desideratum of the time.

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attitude and competencies among the prospective entrepreneurs through the training interventions

like Entrepreneurship Development Programmes (EDP) VVome:l J

Entrepreneurship Development Programmes and TRYSEM.1One effective '""lay to inculcate the entrepreneurial acumen and attitude may be imparting

entrepreneurial education in the schools, colleges, and universities. That younger minds are moresusceptive to be moulded is well evidenced by the popularly known 'Kakinda Experiments' in AndhraPradesh.2Sometimes the real problem in setting up industries is not the non availability of facilities, but nonawareness of facilities whatever are available. The need is, therefore, to disseminate information aboutall what is a available to provide to the entrepreneurs to facilitate them in setting up industries.3Proper provisions need to be made to impart the institutional training to orient the entrepreneurs inspecific products and trades so that the local resources can be harnessed properly.4Our accumulated experience bears ample evidences to the fact that the non governmentalorganizations, popularly known as NGO's can prove instrumental in developing rural entrepreneurshipin the country. The role of NGO's in developing entrepreneurship is, therefore, discussed separately.

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NGOs AND RURAL ENTREPRENEURSHIP

There is no denying of the fact that development of entrepreneurship has emerged as a national

movement due to its strengths to solve the twin problems of unemployment and poverty. In fact, the need

for development of spirit of enterprise among the target population intensified more during the nineties with

the failure of the trickle down theory to percolate the development benefits to the masses at grass root

level. It is against this back ground, several self employment and anti poverty programmes like PMRY,

TRYSEM etc., involving some entrepreneurial qualities were introduced by the government as a tool of

bottom up mode of development. However, these programmes executed by the Government agenciesproved ineffective due to their weaknesses of one type or other. Such a situation necessitated the NGOs to

come out of their traditional bounds like health, sanitation, education, family planning environment

protection etc., to join a noble mission to entrepreneurise the lesser known target groups. The government

agencies engaged in this activity strengthened the NGOs by co-opting and collaborating with them to reach

the lower rungs of the society.

Today, we have several NGOs contributing to entrepreneurship development in the country. The major

ones are National Alliance of Young Entrepreneurs (NAYE), World Assembly of Small and Medium

Entrepreneurs (WASME), Xavier Institute for Social Studies (XISS), SEWA of Ahmedabad, 'Y Self

Employment of Calcutta, AWAKE (Association of Women Entrepreneurs of Karnataka), and Rural

Development and Self Employment Training Institute (RUDSETls) based in Karnataka.

The NGOs involved n entrepreneurship development can be classified into three types:

1. Primary Level NGOs: The NGOs who mobilize their own resources, operate at international

level and execute developmental activities themselves or through intermediate fall within this

category. ACTIONAID, OXFAM, Christian Children Fund etc. are prominent examples of the primary

level NGOs in India.

2. Intermediate NGOs: These NGOs procure funds from various agencies, import training,and conduct workshops for target work force. SEWA and AWAKe are examples of inte:mediate

NGOs.3. Grass Root Level NGOs: These NGOs are those who conduct field activities by establishing

direct contact with the grass root people (needy). Examples of such NGOs are R UDSETls,ANARDE Foundation (Gujarat). Indian Institute of Youth Welfare (IIYW) of M aharashtra etc.

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The training imparted to the needy by the NGOs can be classified into three broad types:

1Stimulation: Conducting EDPs and other training programmes for the target people with a view tostimulate enterprising attitude among them.2Counseling: Providing counseling and consultancy services to the needy ones how to prepare aproject, feasibility report, purchase of plant and machinery and performing other proceduralactivities.

3Assistance: Assisting the target group in marketing their products and securing finance fromfinancial intuitions.

Q.1 O. Need for financial planning.

Ans. NEED FOR FINANCIAL PLANNING

Financp. is one of the important prerequisites to start an enterprise. In fact, it is the availability of

finance that facilitates an entrepreneur to bring together land, labour. machinery and raw material tocombine them to produce goods. The significance of finance in production is elucidated like a lubricant

to the process of production. There are others also who hold even the metaphorical views that finance

is the life blood of enterprise? The trite phrase "whoever has the gold makes the rule" also underlines

the very significance of finance for small enterprises, in particular, and industry, in general.

Financing an enterprise -whether large or small is a critical element for success in business. Instances

are galore to cite that many enterprises. though potentially successful, failed because they were under

capitalized. Therefore, what follows is that every enterprise should clearly chalk out its future financialrequirements in its very beginning itself.

The decisions taken by the entrepreneur well in advance regarding the future financial aspects of his Iher enterprise is called "financial panning".

In a financial plan I financial forecast, the entrepreneur should clearly answer the following threequestions:

1. How much money is needed?

2. Where will money come from? And

3. When does the money need to be available.

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The answers to these questions are given as follows :

As regards the money needed, it can be estimated by developing a statement of various assets

required by the enterprise. Yes, the structure of assets to be used will vary from enterprise to

Entrepreneurship Management -2010enterprise depending upon the nature ofthe product to be produced or ser/ice tobe rendered, as the case may be. Whileestimating the money needed, theentrepreneur should take the followina

three things into consideration:

'-'

1. There should be adequate money to pay the purchase considerations.2. There should be sufficient capital at his! her disposal to support the business operations up to the threeinitial months of the enterprise.

3. Lastly, enough provision should be made to meet unexpected! unplanned business expenses. Thegeneral practice has been to provide for from 10 to 15 per cent of purchase consideration to cover suchexpenses.

Thus, the total of these three amounts will constitute the total money needed to start the enterprise.

Integral to total amount needed is to decide about its arrangement or sources.

You know that in every business ! enterprise, capital is arranged from two sources internal and external.

Internal sources refer to the owner's own money known as 'equity'. Particularly in the case fo small

enterprises, the owner's money called equity is very thin. Therefore, an overwhelming portion of money

needed is arranged from the external sources like the financial institutions and commercial banks, etc.

There are two ways to classifying the financial needs of an enterprise:

1. On the basis of extent of permanence, the financial needs are classified into two types:

(a) Fixed Capital, and

(b) Working Capital

2. On the basis of period of use, we can classify the financial needs into the following two types:

(a) Long term Capital! Finance, and

(b) Short term Capital! Finance

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Let us understand what do they mean.

Fixed Capital The money invested in some fixed assets or durable assets like land, building,

machinery; equipment, furniture, etc., is known as fixed capital. These assets are required for

permanent use, that is, for a long period of time.

Working Capital -The money invested in current assets like raw material, finished goods, debtors, etc.

is known as working capital. In other words, money required for day to day operations of business I

enterprise is called "working capital'.

Long -term Capital -This is such money whose repayment is arranged for more than five years in

future. The sources of long term finance could be owner's equity, term-loans from financial institutions,

credit facilities from the commercial banks, hire purchase facilities from specific organizations, etc.


Short~term Capital -This is a borrowed capital/ money that is to be repaid within one year. The

sources of short-term finance include bank borrowings for working capital, deposits or borrowingfrom friends and relatives, etc.

IF IN d-1mancla ee 5IIII

Based on PeriodBased onof UsePermanence

II I II

I Short -term

ffd8ffe000104a46494600010201012c012c0000ffe20c584943435f50524f46494c4500010100000c484c696e6f02

1000006d6e74725247422058595a2007ce00020009000600310000616373704d5346540000000049454320735

247420000000000000000000000000000f6d6000100000000d32d485020200000000000000000000000000000

00000000000000000000000000000000000000000000000000000000000000000011637072740000015000000

03364657363000001840000006c77747074000001f000000014626b707400000204000000147258595a000002

18000000146758595a0000022c000000146258595a0000024000000014646d6e640000025400000070646d646

4000002c400000088767565640000034c0000008676696577000003d4000000246c756d69000003f800000014

6d6561730000040c0000002474656368000004300000000c725452430000043c0000080c675452430000043c0

000080c625452430000043c0000080c7465787400000000436f70797269676874202863292031393938204865

776c6574742d5061636b61726420436f6d70616e7900006465736300000000000000127352474220494543363

13936362d322e31000000000000000000000012735247422049454336313936362d322e310000000000000000

00000000000000000000000000000000000000Fixed Capital I Working Capital I I Long term Capital

Capital

Fig. 1 Classification of Financial Needs

The theory of financial management suggests that, in order to ensure sound financial health of anenterprise, short term finance / funds should be utilized for acquiring current assets. Current assets,for example, include the items like raw material, finished goods, semi finished goods, debtors, etc.Basically, these are the items which keep changing their shape. They can normally be convertedinto cash within a period of one year. On the other hand, long term finance should be used foracquiring assets which are of long nature. These are commonly termed as 'fixed assets'. Theexamples of fixed assets could be, land and building, plant and machinery, furniture etc.

SOURCES OF FINANCE

We have already made a mention in the previous section 1 that the various sources from which an

enterprise can raise the required funds could broadly be classified into two sources. These are:

1. Internal Sources

2. External Sources

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Let us have a cursory look at what these sources consist of.

Internal Sources

Under thi s source, funds are raised from within the enterprise itself. The internal sources of financingcould be owner's capital known as equity, deposits and loans given by the owner, the partners, thedirectors, as the case may be , to the enterprise. One source for raising funds internally may be personalloan 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 beraised through the retention of profits or conversion of


some assets into funds. The cardinal principie 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 of raising funds from internal sources particularly in the case of small scale

enterprises remains highly limited.

External Sources In short, funds raised from other than internal sources are from external sources. Theexternal sources usually include the following:

1Deposits or borrowing from relatives and friends and others.2Borrowings from the banks for working capital purposes.3Credit facilities from the commercial banks.4Term loans from financial institutions.5Hire purchase or leasing facility from the National Small Industries, Corporation (NSIC) and StateSmall Industries Corporations (SSICs).6Seed / Margin money, subsidies from the Government and the financial institutions.

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

1Personal funds or Equity Capital.2Loans from relatives and friends.3Mortgage Loans4Term-loans5Subsidiaries.

,

Simply stated, loans taken for a definite period of time are called 'term loans' Based on period, loans are

broadly classified into two types:

1Short-term Loans and2Long term Loans.

The term "Term Loans' is used for long loans. Therefore, let us discuss, in detail, long term loans.

Long Term Loans

These are the loans taken for a fairly long duration of time ranging from 5 years to 10 or15 years. Long

term loans are raised to meet the financial requirements of enterprise / company for acquiring the fixedassets which include the following :

1Land and site development2Building and civil works3Plant and machinery4Installation expenses5Miscellaneous fixed assets comprising vehicles, furniture and fixtures, office equipment and so on.

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In case of units to be located in backward areas, another element of misceilaneous fixed cost includesexpenditure to be incurred in infrastructure facilities like roads, railway sidings, water supply, powerconnection, etc.

Term loans, or say, long term loans are also required for expansion of productive capacity by replacingor adding to the existing equipment.

Source of Term Loans The following are the sources of raising term loans:

1. Issue of shares2. Issue of Debentures3. Loans from Financial Institutions4. Loans from Commercial Banks5. Public Deposits

6. Retention of Profits Look at Figure 3 for various sources adopted by enterprises for raising

term(long) finance / loans. These are explained in the following pages: Shares Share is unit into whichthe total capital of a company is divided. As per Section 85 of the

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Companies Act, 1956, a public limited company can issue the following two kinds of shares: (a)

Preference Shares, and (b) Equity Shares. Preference Shares These are the shares which carry a

preferential right over equity shares with reference to dividend. They also carry a preferential rightover equity shares with reference to the payment of capital at the time of winding up or repayment of

capital.

ISource of Term Loans

i ~ ~~~

Shares

Debentures

Financial CommercialRetention Institutions

Deposits of Profits

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

000088767565640000034c0000008676696577000003d4000000246c756d69000003f8000000146d6561730000040c0000002474656368000004300000000c725452430000043c0000080c675452430000043c0000080c625452430000043c0000080c7465787400000000436f70797269676874202863292031393938204865776c6574742d5061636b61726420436f6d70616e790000646573630000000000000012735247422049454336313936362d322e31000000000000000000000012735247422049454336313936362d322e31000000000000000000000000000000000000000000000000000000 Fig.2 Sources of Raising Term (Long) Loans


The preference shares may be of various types such as cumulative and non cumulative, redeemable and

irredeemable, participating and non participating and convertible and non convertible.

Equity Shares What is not preference share is equity share. In other words, equity shares are entitled todividend and capital after the payment of dividend and capital on preference shares. Based on the types of

shares, there are two types of capitals (i) Preference Share Capital and (ii) Equity Share Capital.

SOURCES OF SHORT -TERM FINANCE

Short term finance is obtained for a period up to one year. These are required to meet the day to day

business requirements. In other words, short term finance is obtained to meet the working capital

requirements of the enterprise.

The sources of short term finance could be

1. Loans from Commercial Banks

2. Public Deposits

3. Trade Credit

4. Factoring

5. Discounting Bills of Exchange

6. Bank Overdraft and Cash Credit

7. Advances from Customers

8. Accrual Accounts.

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These.are also depicted in Figure 3.

ffd8ffe000104a46494600010201012c012c0000ffe20c584943435f50524f46494c4500010100000c484c696e6f021000006d6e74725247422058595a2007ce00020009000600310000616373704d5346540000000049454320735247420000000000000000000000000000f6d6000100000000d32d4850202000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000001163707274000001500000003364657363000001840000006c77747074000001f000000014626b707400000204000000147258595a00000218000000146758595a0000022c000000146258595a0000024000000014646d6e640000025400000070646d6464000002c400000088767565640000034c0000008676696577000003d4000000246c756d69000003f8000000146d6561730000040c0000002474656368000004300000000c725452430000043c0000080c675452430000043c0000080c625452430000043c0000080c7465787400000000436

f70797269676874202863292031393938204865776c6574742d5061636b61726420436f6d70616e790000646573630000000000000012735247422049454336313936362d322e31000000000000000000000012735247422049454336313936362d322e3100000000000000000000000000000000000000000000000000000

0 Commercial Bank

Public Deposit

--i Trade Credits

1::o G)J::U Factoringf/)C_ ra

o .EtJ>LL

Discounting of Bills

8E

~~j4)

ot(/) Bank Overdraft

Accrued Accounts

Advances from'-----I

Customers


Over Capitalisation

Over capitalization si~Jnifies a situation when an enterprise possesses excess of assets in relation to itsrequirement. Such a situation has its beclring on earning capacity of the enterprise. in case of over

capitalization, the actual earnings are lower than the expected ones. On account of lower rates ofreturn, the enterprise becomes unable to pay its fixed obligations, i.e. interest and dividend, at

prescribed rates. Thus, in case of over capitalization, the enterprise fails to pay a fair return on itscapital investments. This point is more clarified with the help of the following example.

Suppose, Cachar Paper Mill, Panchgram earned an annual profit of Rs.50,OOO on its total capital

investment of RS.5,OO,OOO. If the expectation for return is 10%, this mill will be called property

capitalized But, if the mill earns a profit of Rs.40,OOO only as against the general expectation of 10%,it will be said to be over capitalized because it will be in a position to give a return of 8% on its capital

investments or capital employed.

Thus, an enterprise is said to be over capitalized when its earnings are not large enough to yield a fairreturn on its capital employed, Le. on the amounts of shares and bonds.

Now, one important question arises is what causes over capitalization in an enterprise? We turn to thisaspect in the following paragraphs.

Causes ofOver Capitalisation: An enterprise may become over capitalized due to both internal and

external factors. Following are the important reasons causing over capitalization in an enterprise.

1Raising of more money by issue of shares and debentures than what the enterprise can profitablyuse.2Borrowing of large money at a rate of interest fairly higher than the actual rate of return on itscapital employed.3Acquiring fixed assets on excessive amounts.4Inadequate provisions for depreciation and replacement of fixed assets.5Payment of dividend at a fairly high rate.6High rates of taxation imposed by the Government.7Over estimation of earnings for enterprise concern.

Evil Effects of Over -Capitalisation : Over capitalization has the following evil effects on owners,

enterprises and society:

1. On Owners Because of a fall on dividends, the shareholders Iowners lose heavily. Further, theowners are not in a position to dispose of their shares at profitable prices due to fall in the marketvalue of their shares. Thus, the' owners are the biggest losers in case of over capitalization of anenterprise.

2. On Enterprise In over capitalization, the market value of the ente.rprise's stock falls and it findsdifficult to raise capital. Quite often, the enterprises resort to window dressing with questionablepractices. But this only aggravates the evil of over capitalization. The credit worthiness of theenterprise is adversely affected.

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Remedies for Over -Capitalisation: In order to rectify over capitalization, the enterprise may resort tothe following remedies:

1To reduce the claims of shareholders, debenture holders and creditors.2To reduce rte of interest on debentures and the rate of dividend on preference shares.3To reduce the number of equity shares.

4Ifpossible, to reduce the par value of stock.

These all remedial measures leave sufficient funds with the enterprise. The enterprise can make use

of these funds for the purpose of replacement of assets and expansion of business activity. These , inturn, help in increasing the earning capacity of the company and, thus, rectifying over capitalization in

the enterprise.

Under -Capitalisation

Under capitalisation is just the reverse of over capitalisation. Properly speaking, an enterprise is saidto be under capitalized when its actualcapitalisation is lowerthan the proper capitalisation. In case of

under capitalisation, the rate of dividend and the market value of shares are fairly higher than the

market value of shares of similar enterprises.

According to Gerstenberg, "An enterprise may be under capitalized when the rate of profit is

exceptionally high in relation to the return enjoyed by similar situated enterprises in the same industry.The assets may be worth more than the values reflected in the books."

Causes of Under Capitalisation: The causes of under-capitalization are:

1Under-estimation of initial rate of earnings.2Utilization of high efficiency for exploiting every possibility available.3Using lower rate of capitalisation4Under estimation of required funds5Retaining profits because of conservative dividend policy followed by the enterprise.6Setting up of an enterprise in recessionary conditions. After the recession period is over,enterprises start earning profits at an unusually high rate.

7Because of excessive earnings, enterprises are exposed to a heavy incidence Iburden oftaxation.

Effects of Under -Capitalisation -The effects of under capitalisation are:

1It encourages cut throat competition in the market. High profit earning capacities of undercapitalized enterprises lure new entrepreneurs to plunge into the manufacturing.2High rate of dividend given to the shareholders propels to the workers to demand for higherwages and salaries.3Under capitalisation enables management to manipulate the value of shares of enterprises.4The Government charges higher taxation.

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Remedies for Under -Capitalisation -Under capitalisation may be rectified by taking the following

remedial measures:

1. To split up the shares ofthe enterprise.

2. To issue bonus shares.3. To increase the par value of shares /stock4. To declare dividend payable in stock, if large surplus is available.

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Now, it is clear that both over capitalisation and under capitalisation are not desirable as both bear evileffects. Notwithstanding, over capitalisation is more dangerous. Under capitalisation is easily correctedbut over capitalisation not so easily. Further more, under capitalisation is indicative of sound financial

position and efficient management of the enterprises. That is why under capitalisation is not consideredas an economic problem but a problem of adjusting the .capital structure of an enterprise. "Every

enterprise should try to have a proper or faircapitalisation.

VENTURE CAPITAL (short Notes)

Venture capital is a form of financing especially designed for funding high technology, high risk andperceived high reward projects. While a conventional financier seeks to fund projects with proventechnologies and already established markets, a venture capitalist provides funds to the entrepreneurspursuing new and hitherto unexplored avenues and ideas. Thus, venture capital helps theentrepreneurs translate their new ideas into commercial production. It especially helps in financing ofhigh technology projects and helps translate research and development into production. InternationalFinance Corporation, Washington (IFCW) defines venture capital as equity or equity featured capitalseeking investment in new ideas, new companies, new products, new processes or new services that

offer the potential of high returns on investment. It may also include investment in turnaroundsituations.

The origin of the concept of venture capital is traced back to 1946 with the establishment of the

American Research and Development Corporation of General Dohiot. In fact, there is not looking back

since then. Now, it has become a worldwide concept in the field of funding technology based products.

However, the concept of venture capital is of recent origin in India.

In India, the venture capital industry had its formal introduction in the Budget Speech of the Finance

Minister in 1988. Though extremely focused in its technology development objective, the introduction

recognized the need for a source of patient capital with the ability to participate in high risk projects inreturn for high rewards. Coincidentally, around the same time, the Industrial Credit and Investment

Corporation of India Limited (ICICI) came forth with initiatives for addressing technology incentive

projects. One such initiative, the venture Capital Division, was spun off into Technology Development

and Information Company of India Limited (TDICI) which has since emerged as a significant player

and a pioneer in the field of venture capital industry in the country.

Immediately after the Budget Speech announcement , a cess of 5 percent was levied on all payments

for import of technology Iknow how resulting in tlie creation of a sizable pool of funds. The venture

fund that was created out of this cess was to be administered by the Industrial Development Bank of

India (lOBI) for providing financial assistance to industrial enterprises


attempting commercial application of indigenous technology on adapting imported technology to wider

domestic applications. Besides, many of the development banks and development finance institutions

have also entered venture capital business in the recent years. Going purely by the number of venture

capital firrns in India today, one could possibly argue that there exists a venture capital industry in the

country. It augurs well for future industrial development of the country.

The Government of India issued some guidelines on November 18, 1988 mainly to promote a broad

framework for the operations of the venture capital companies in the country. The main features of these

guidelines are given hereunder:

1All India Financial Institutions, the SSI and other scheduled banks are eligible to float such a fund.2Minimum size'of the fund should be Rs.10 crores.

3In the event of public issue, the promoters share is to be more than 40% of the issued capital.4Foreign holding will be allowed up to 25%. provided it comes from multilateral international financialorganizations, developmental institutions or mutual funds.

5The NRls investment is allowed up to 74% in the capital on a non repatriable basis and up to 25 -40%on a repatriable basis.6Debt -equity ratio should be limited to 1:1 :5.

7Venture capital funds are not allowed to operate in money market operations, bill rediscounting,portfolio investments and financial consultancy services.8The venture capitalist will pay tax at the rate of 20% on its dividend income and long term capitalgains. Sut, an investor is entitled to tax exemption on dividends subject to a maximum of Rs.1 0,000and will have to pay tax at 20% on capital gains.

EXPORT FINANCE (Short Notes)

Theterm'exportfinance refersto creditfacilities and techniques ofpaymentsatthepre-shipment and post

shipment stages. Export finance, whether short term or medium term, is provided exclusively by the Indian

and foreign commercial banks which are the members of the Foreign Exchange Dealers' Association. The

Reserve Bank of India and the Industrial Development Bank of India provide refinance facilities to the

commercial banks. Export Import Sank of India (commonly known as EXIM Bank) also extends finance toexporters and to overseas joint ventures and construction projects abroad.

Export finance provided for pre shipment and post shipment purposes are discussed in turn.

Pre shipment Finance

Pre-shipment finance refers to the financial assistance provided to the exporters before actual shipment of

goods. Pre-shipment finance is provided to the exporters for the purposes like purchase of raw materials,

their processing and converting into finished goods and packaging them. For these purposes, the

following pre-shipment finance is made available:

1Packaging credit2Advance against Incentives3Advance against Duty Drawback

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Pre-shipment credits Clre granted by the banks under concessional rates ofinterest at 7.5 percent. Credit can be extended up to a maximum period of6 months.

Post -Shipment Finance

Post shipment finance may be defined as "any loan or advance granted or any other credit provided by a

bank to an exporter of goods from India from the date of extending the credit after . shipment of goods to the

date of realization of export proceeds. "Thus post-shipment finance serves as bridge loan for the period

between shipment of goods and the realization of proceeds. Such loan is usually provided for a maximum

period of 6 months. Interest is charged at the rate of

8.65 per cent.

Business involves risk but export business is more prone to risks. With a view to reduce risk element inexport business, the Government set up the Export Credit and Guarantee Corporation (ECGC) whichprovides export assistance in the form of insurance cover and guarantees. There is also an Export

Inspection Council of India (EICI) which extends financial assistance to the exporters for the qualitycontrol purposes.

HOW TO MANAGE THE SMALL ENTERPRISES?

BASIC MANAGEMENT PRINCIPLES

An entrepreneur has to perform the duty of a manager in a small enterprise. While initially establishingan enterprise, he is to function as an enterprise, he has to function as an entrepreneur but in theoperational stage, he is expected to perform the role of a manager because effective managementcapabilities are the key factors to bring success. Major management tasks are:

1. Planning: It involves setting up a line of action such as marketing resource management,profit generation etc. It involves formulation of policies and strategies to implement the plan, whichmust specify what is aimed at and how to achieve it. As a manager he anticipates the future anddiscover alternative course of action with the help of tactical and strategic policies. He is involved indecision making the process by which a course of action in consciously chosen from availablealternatives for the purchase of achieving desired result.

2. Organizing: Entrepreneurs will have to organize their efforts and actiVities, organizing is aprocess by which the structure and allocation of jobs is determined. The employer employeerelationship, are to be established for maintaining higher worker productivity for economic goal and

survival of the unit.3. Coordinating: Coordination of physical resources needed at various stages likeprocurement of raw materials and consumables, managing financial resources, productive use oflabour and application of appropriate marketing strategies etc, should be done very carefully. Anentrepreneur at the helm of the enterprise is expected to function as a coordinator to bring positiveresults by utilizing whatever resources are in his possession by maximum utilization of the same.

4. Controlling: It means the process that measures current performance and guides it towardssome predetermined goal. . Controlling involves systematic efforts to set performance and to keepperiodical tract of actual performance. It helps to check the cost and wastages in any formresulting from any point within the organization.

5. Leading and Motivating: Motivating them for productive purpose and efficient performanceshould be his vital quality. While performing the job of a manager an entrepreneur requires managerialskills, problem solving skill and a sense of time management. The entrepreneur will have to interactwith many people and in diverse situation and will have to make right decision. Basically an

entrepreneur must pOssess three fundamental skills.

(a) conceptual Skills

(b) Human Relations Skills

(c) Technical Skills

6. Decision Making: Decision making is a process of action consciously chosen from availablealternatives for the purpose of achieving a desired result. A decision involves a choice. If there is butone alternative, no decision is possible. A decision involves mental process at conscious level. Thelogical aspects are important. A decision is purposive. It is made to facilitate the attainment of someobjectives desired for benefit of the unit.

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MARKETING MANAGEMENT

After a product is manufactured, the question arises, how the produce is to each consumer? The route can

be very simple or complex depending on :

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(a) Nature of the product

(b) Location of the market

(c) Price of the product

(d) The availability of middlemen willing to handle it

(e) The sales effort required(f) The resources and capabilities of the produce

The channel management depends on :

1Tarms of contract2Relationship with the middlemen and their cooperation3Sufficient assistances are provided by the manufacturer to enable middlemen to market the productssuccessfully.

Marketing covers :

(a) Pre-selling (Product Selling, Market Research, Marketing Plan formulations)(b) Selling (Product Introduction, negotiation, closing sales)

(c) Post -Selling activities (after sales services, spare parts supply, warranty and guarantees)

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An entrepreneur must very deeply understand that effectiveness of the marketing effort of any product

depends on the decisions made in each of the 4Ps of marketing and their effective combination to

meet the needs of the consumer. The combination of the 4Ps which are also known as Marketing Mix

are :


(a) Product

(b) Price

(c) Place

(d) Promotion

(a) Product

(i) Package / Brand Name

(ii) Additional feature: size, colour, style, model etc.

(iii) After sales service / guarantee / warranty

(b) Price

i) Same as competitors / cheaper / what will market bear

ii) Cost plus overheads plus profit margin

iii) High price, less discount

iv) Credit terms (any secret deal)v) Buy one, get one or two free

vi) Free Gifts, coupons, prizes

vii) Cash Discounts

(c) Place i) Agents / whole sellers / retailers ii)Merchandising iii) Mail Order iv) Direct Selling ofany aggressive type

(d) Promotion

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i) Display

ii) Advertising

iii) Publicity trough sales campaign

iv) Leaflets, handouts through little box, newspaper

v) Telephone Selling

vi) Bill -Board advertisement

vii) Free sampling, gifts, coupons etc.

ADVERTISING

It is the means of informing as well as influencing the general public to buy products or services

and to create awareness through visual or oral messages. It helps to create demand, promote

marketing system and boast economic growth.


Different advertising media are:

(a) Newspaper

(b) Radio

(c) Television

(d) Hoarding and Neon Sings

(e) Taxi, Bus and Train body panels

(f) Bill Boards

(g) Cinema slides and short film ads.

(h) Direct mailing of literature

(i) Demonstrations 0>

Sales campaign .

When sales budget is prepared, a certain amount may be fixed for this activity. An analysis of expenditures

on advertising may be done annually to examine whether it was effective or not. A cost effectiveness may

guide futu

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