PROJECT IDENTIFICATION

PROJECT
It is defined as a typically distinct mission that is designed to achieve a clear
termination point, i.e., the achievement of the mission.
Idea Generation
Internal and external sources of project idea are -
1. Knowledge of potential customer needs
2. Watching emerging trends in demand for certain products
3. Scope for producing substitute product
4. Going through certain professional magazines catering to specific
interest like electronics, computers etc.
5. Success stories of known entrepreneurs or friends or relatives.
6. A new product introduced by the competitor.
Project Selection
Project ideas are analysed using SWOT analysis. On the basis of this analysis,
the most suitable idea is finally selected to convert it into an enterprise.
SWOT Analysis:
• Strengths: (favourable to the business)
1. Currently in a good financial position (few debts, etc)
2. Skilled workforce (little training required)
3. Company name recognized on a National/Regional/Local level
4. Latest machinery installed
5. Own premises (no additional costs for renting)
6. Excellent transport links (ease of access to/from the Company)
7. Little/non-threatening competition
• Weaknesses:
1. Currently in a poor financial position (large debts, etc)
2. Un-Skilled workforce (training required)
3. Company name not recognized on a National/Regional/Local level
4. Machinery not up to date (Inefficient)
5. Rented premises (adding to costs) 6. Too much waste
7. Poor location for business needs (lack of transport links, etc)
8. Stock problems (currently holding too much/too little)
• Opportunities: (targets to achieve and exploit in the future)
1. Good financial position creating a good reputation for future bank loans
and borrowings
2. Skilled workforce means that they can be moved and trained into other
areas of the business
3. Competitor going bankrupt (Takeover opportunity?)
4. Broadband technology has been installed in the area (useful for Internet
users)
5. Increased spending power in the Local/National economy
6. Moving a product into a new market sector
• Threats :
1. Large and increasing competition
2. Rising cost of Wages (Basic wage, etc)
3. Possible relocation costs due to poor location currently held
4. Local authority refusing plans for future building expansion
5. Increasing interest rates (increases borrowing repayments, etc)
6. End of season approaching (if you depend on hot weather, etc)
7. Existing product becoming unfashionable or unpopular
PROJECT APPRAISAL : made for both proposed and executed projects.
• DIMENSIONS OF PROJECT APPRAISAL
1. Economic Analysis: (requirement of raw material, level of capacity
utilization, anticipated sales, anticipated expenses and the probable profits)
2. Financial Analysis: (working capital, fixed capital, fixed asset and current
asset)
3. Market Analysis:
i) Opinion Polling Method -
a) Complete Enumeration Survey b) Sample Survey
c) Sales Experience Method d) Vicarious / Sensational Method
ii) Life Cycle Segmentation Analysis -
a) Introduction b) Growth
d) Maturity d) Saturation e) Decline
4. Technical Feasibility:
i) Availability of land and site
ii) Availability of other inputs like water, power, communication facility.
iii) Coping with anti-pollution law
5. Managerial Competence
• Sources of Product for business:
*Consumers *Existing co’s *Competitors *Existing market
*Existing products / services *Ideas *Needs & Wants
*Substitutes
*Intermediaries / Middlemen *Suppliers *Debtors *R&D
*Government *Channel of distribution
• Methods of New Product Idea Generation:
*Focus groups *Check list *Inventory analysis *Innovation
*Information from publication *Seminars and conferences
*Discussions
*Dreaming / Fantasizing *Demand & Supply *R&D *Profitability
*Marketing Research *Test marketing *Govt. Regulations
*Technological / Financial assistance
PRE-FEASIBILITY STUDY:
Pre-feasibility studies are well researched yet generic due diligence reports
that facilitate potential entrepreneurs in project identification for
investment.
 Steps in pre-feasibility study:
• 1. Preliminary compilation of data
– General Geography of the region
– Climate (temperature, wind, rain, evaporation)
– General socio-economic level of the population
– Preliminary estimate of demand
– Existing products and their market shares
– Availability of land to construct the project
– Availability of energy and cost for energy
• 2. Proposing potential limits of project (physical limits & time horizon)
• 3. Identifying potential alternatives for the project idea.
• 4. Proposing different technology to be deployed.
• 5. Performing a preliminary estimate of the project cost.
• 6. Identifying lacking information which is necessary for feasibility study.
• 7. Identification of potential financial sources for the project.
• 8. Identification of general characteristics of the customers in the region
• 9. Preparing report on the pre-feasibility study, which shall be an input for
the feasibility study.
 Steps in pre-feasibility Analysis:
• 1. Need Analysis – need for project
• 2. Process work – how to accomplish the project
• 3. Engineering & Design – technical study regarding product design
• 4. Cost Estimate – project cost
• 5. Financial Analysis – economic & financial feasibility
• 6. Project impacts – environmental, social, cultural, economic impacts
• 7. Conclusions & Recommendations – overall outcome of the project
analysis – endorsement or disapproval of the project
 Dimensions of pre-feasibility Analysis:
1. Technical feasibility
2. Managerial feasibility
3. Economic feasibility
4. Financial feasibility
5. Cultural feasibility
6. Political feasibility
7. Environmental feasibility
8. Legal feasibility
PRODUCT SELECTION:
Criteria for selection of a product:
*Technical knowledge *Availability of Market *Financial strength
*Position of competition *Priority of products *Seasonal stability
*Restriction on imports *Supply of raw materials
*Availability of incentives & subsidy *Ancillary products
*Location advantage *Licensing system *Govt. policy
BUSINESS PLAN / PROJECT PROFILE PREPARATION: It’s a birds eye view of the
proposed project, used for getting Provisional Registration Certificate from the
DIC, SSIDC, etc. Steps are -
1. Self-Audit – only for existing organization in case of expansion
2. Evaluation of the business environment – Demographic changes, economic
conditions, Govt. fiscal policy and regulations, labor supply, competition,
vendors.
3. Setting objectives and establishing goals
4. Forecasting market conditions
5. Stating actions and resources required
6. Evaluating proposed plans
7. Assessing Alternative strategic plans
8. Controlling the plan through annual budget
BUSINESS PLAN : Sections of the plan include -
• Executive Summary: two pages in length. State the idea, the
opportunity, how much money you need, where you hope to get it,
how it will be spent, and how you will pay it back.
• Your Planned Venture: Describe your idea with diagrams,
photographs. Back up the idea with a description of the target
market; tell why the opportunity exists, and why your idea will
capture that market.
• Market Research: Explain how you determined the product or
service was appropriate to the market. Include explanations of the
"four P's" (price, product, promotion, placement).
• Background and History: Tell who you are, your experience and
skills, whether you are a predecessor or successor. Describe and
explain the successes or failures of past business. Include your
own, short biography here.
• Management Team: Provide the names, and short bios, of the
people you will use to fill the key positions in the business.
• Start-up Plan: Tell when and where you plan to start the business
and why you chose this time frame and location.
• Operational Plan: Describe how your business will operate. Include
diagrams of production or service areas if appropriate.
• Marketing Plan: Describe how you will attract customers or clients
and how you will deliver your product or service to them.
• Financial Plan: Provide a detailed financial plan, including a cash-
flow projection, that accounts for the money you will need (borrow)
and the repayment plan and return on investment to investors.
• Appendix: Include your own and your team's detailed biographies
here as well as additional market research and any other information
that is too detailed to be included in the body of the plan.
• Most entrepreneurs have to come up with their own start-up money
– either from their own savings or from relatives who know and
trust them. But there are other sources of capital out there, that you
might tap into.
FORMS OF BUSINESS ORGANISATION
1. SOLE PROPRIETORSHIP: Oldest, one man business.
MERITS: Low production cost, promptness in decisions, personal
contact, easy to start and wind up, incentive for hard work, business
secrecy, flexibility in business, independence.
DEMERITS: Limited means of production, Limited skills, no economies
of scale, no division of labor due to small business, small income,
instability, unlimited liability, keeps a country economically backward.
2. PARTNERSHIP: 2 & 10 / 20 for banking or other business.
MERITS: Easy to form, commands larger resources, prompt and correct
decisions, use of diverse skills and talents, business secrecy, highly
adaptable to changes, personal contacts, personal interest and
initiative, scope for expansion, sharing risks, unlimited liability helps
borrow bank loans easily.
DEMERITS: Uncertain existence, disharmony among partners, not
suitable for very large business, weak management, non-transferability
of shares, unlimited liability.
3. JOINT STOCK COMPANY: one share one vote.
MERITS: Perpetual existence, Large funds, transferability of shares,
limited liability, suitable for small investors, spreading of risks,
democratic organisation, efficient and economical management,
suitable for large business, effectively controlled by government.
DEMERIT: Complication in formation, democratic only in theory, lack of
motivation for managers, limited liability results in irresponsibility,
delay in decision, no personal touch with employees, lack of secrecy,
concentration of wealth and power in few hands.
4. CO-OPERATIVE SECTOR: voluntary organisation with unrestricted
membership for promotion of economic interest of members.
Registered under cooperative societies Act, 1912. one man vote.
MERITS: Easy formation compared to company, open membership,
democratic control, limited liability, elimination of middlemen’s profit,
state assistance, stable life
DEMERITS: Limited capital, lack of professional managerial talent, lack
of motivation due to service objective rather than profit objective, lack
of co-operation, dependence on govt.
5. JOINT HINDU FAMILY BUSINESS: Joint ownership of all members of HUF,
managed by ‘Karta’ – head of family. It exists as per Hindu Inheritance
Laws of India & governed by Hindu law; only male members get share
in business.
CHARACTERISTICS: Legal status – jointly owned business, governed by
Hindu Law, can enter into partnership agreement.
Membership –only male family members.
Profit sharing – equal
Management – Karta.
Liability - Karta’s liability is unlimited, whereas for others it is limited to
the extent of his share in the business.
Fluctuating share – due to birth and death of family members.
Continuity – Enjoys continuity, other than due to, dissolution through
mutual agreement or by partition.
FINANCING & BUDGETING
TYPES OF ENTREPRENEURIAL FINANCE: Internal & External Sources
 Internal Sources:
1. Retained profits 2. Controlling Working capital 3. Sale of Assets
or renting / hiring assets 4. Owners personal savings
5. Reducing Stocks 6. Trade credit enjoyed by paying off suppliers fast
 External Sources:(Short term & Long term sources of external finance)
 Long term sources of finance:
1. Equity Shares 2. Preference Shares 3. Debentures / Bonds
4. Financial Institutions 5. Public deposits
 Short term sources of finance:
1. Commercial paper: unsecured promissory note issued by firms to raise
short-term funds; not much prominent in India, as USA.
2. Certificate of Deposit(CD): tradable bank deposits – CD issued by banks,
for encouraging short term deposits.
3. Factoring: Co’s can assign their credit mgt and collection to factoring
organisations like SBI, PNB, Allahabad & Canara Bank, which finances the
receivables, but risk of default by debtor is with creditor only.
4. Forfeiting: It’s a form of financing receivables, in international biz.
Banker purchases the trade bill / promissory note without recourse to the
seller – i.e., no risk of non-payment to creditor.
5. Advances from customer: to minimise working capital requirement.
6. Bills discounting: The seller draws a B/E on buyer. This bill may either be
a Clean / Documentary bill. The bank purchases the bill payable on
demand and credits customers a/c with the bill amount; Incase of dishonor
of discounted bill, bank collects the full bill amt from the customer (seller).
7. Indigenous Banker: private money lenders
8. Installment credit: installment credit purchases.
9. Bank credit: secured & unsecured loans as – over draft, loans, advances,
bills discounting, etc.
10. Letter of credit: bank helps credit purchases by giving undertaking to
seller to honor his bills, in case of default by the buyer(bankers customer).
11. Private loans: short term unsecured loan from private people
12. Short term loans from financial institutions – LIC, GIC, UTI, etc give
unsecured loans for 1 yr or so.
 13. Trade Credit: The credit worthiness of the firm and confidence of the
supplier are basis of secrung it; supplier sends goods for future payment, as
per sales invoice terms.
14. Accounts Receivable Financing: Loans secured by use of a/c’s receivable
as collateral security, for working capital requirement.
15. Loans from co-operative banks:
16. Note lending system: Loans taken against promissory note, for 90 days.
Interest is payable on entire loan and the borrower cannot secure interest
relief by repaying loan partially / fully, before maturity period.

CAPITAL STRUCTURE(CS): Capital structure represents the relationship among

different kinds of long term capital. The capital mix includes preference &
equity shares, debentures and loans.
Determinants of Capital Structure:
1. Financial leverage / Trading on Equity: It means use of long term fixed
interest bearing debt and preference shares along with equity shares. The
use of long term debt financing increases the EPS, if the return is higher
than the cost of debt.
2. Flexibility: CS to be flexible, to raise additional funds without delay; to
3. Growth & Stability of sales: This influences CS. If sales expectation is
stable / high then can go for more debt.
4. Nature & size of firm: Public utility co’s can employ more debt due to
regularity of earnings; others need to rely on equity capital.
5. Operating leverage(OL): OL depends on operating fixed cost of the firm.
If more fixed operating cost then more OL. OL measures operating risk of a
firm. There is relation between OL & financial leverage; If operating risk is
very high, financial leverage should be kept low, i.e., more use of equity
capital.
6. EBIT / EPS analysis: It measures co’s performance. A financial plan that
gives high EPS is a desirable mix. If high EBIT, then more debt capital can be
used. EBIT / EPS analysis is a good performance criterion but not a decision
criterion, because it ignores risk.
7. Cost of capital: CS should maximise firms value & minimize overall cost
of capital.
8. Cash flow analysis: For CS decision, ratio of new cash inflows to fixed
charges be considered; If high, stable cash inflows expected, then more
debt can be used.
9. Legal constraints: Firms should comply with legal requirements.
10. Control: Equity share holders have control over co, due to right of vote.
When choice to be made b/w debt & equity to raise funds, debt is preferred by
equity share holders to avoid loss of control. On other hand, Equity share
holders may want to have restrictions on loan agreement, to protect their
interest, when loan provider requires appointment of director, to oversee co’s
activities; also, debt increases financial risk. Hence, its up to company, to decide
on mix of CS.
11. Capital market conditions: CS depends on changes in capital market. At
times capital market favors debenture issue and at other time, it accepts
shares, due to changes in market sentiments.
12. Floatation costs: Cost of debt floatation is lesser than equity floatation.
13. Marketability: It means ability of firm to sell / market particular type of
security, during a period, based on the constraints in the capital market.
14. Asset structure: If more fixed assets, then firm can raise more long term
debts.
15. Purpose of financing: If funds required for productive purpose, then debt
financing to ease out interest pays; if for unproductive purpose or general
development., then equity financing.
16. Period of finance: If required for limited 5/7 yrs only then debentures; else
for long term requirement, equity capital is appropriate.
 Components of Capital Structure:
1. Owners’ Capital:
a. Equity Shares
b. Preference Shares
c. Retained Earnings
2. Borrowed Capital:
a. Debentures
b. Term loans
BUDGETING: Quantitative expression of plan of action relating to a period.
Types of Budget:
1. Based on Functions:
a. Operating budget: Relating to different activities; The number of such
budgets depend on size & nature of business. Types – Sales B, Production
B, Purchase B, Labor B, Overhead B, Material B.
b. Financial budget: Cash B, Working Capital B, Capital Expenditure B, etc.
c. Master budget: Summary budget integrating functional budgets.
 2. Based on Time :
a. Long term budget: 5 to 10 years by top level mgt. (R&D, capital expn.)
b. Short term budget: 1/2 years. Consumer goods industry like sugar,
cotton, etc use it.
c. Current budget: in months / weeks, for current activities.
3. Based on Flexibility :
a. Fixed Budget: prepared for a given level of activity. The changes in expn.
arising out of the anticipated changes will not be adjusted in the budget.
b. Flexible budget: prepared for a series of budgets for different level of
activity, taking into consideration unforeseen changes in the conditions of
business.
MATCHING ENTREPRENEUR WITH THE PROJECT: This matching requires 2
broad aspects – Nature of Project & Traits of Entrepreneur.
 Nature of Project: classified based on – Tangible product, Intangible
product, Craft work & Intellect work. The characteristics required of an
entrepreneur to handle the above project types is given below:
  Matching Entrepreneur with the project:
Types of product (from the project)
Tangible Intangible
(value is in the entity) (value is in the content)
Features: Features:
1. Not done before 1. Non-repetitive, first of its kind
(requires education)

2. Subject to linear logic 2. Creative effort

3. Requires iterations 3. Minimal repetition
Intellect

4. Resources less predictable 4. Resources unpredictable

Type of work or effort (in the project)

Result: Devt of new physical artifact. 5. Exploratory

Eg. New invention, new product Result: Devt of new piece of intellectual
from R&D property. Eg. New book, poem, movie,
software

Features: Features:
1. Much repetitive effort 1. Based on previous model
2. Linear logic applies 2. No iterations, only corrections
3. Learning curve effects 3. Learn by repetition
(requires training)

4. Learn by doing 4. Physical format required only for

5. Resources predictable distribution
Craft

6. Relatively high cost involved 5. Resource predictable

Result: Typical physical artifact. Eg. 6. Relatively low reproduction cost
Building , utility, car, appliance Result: Typical piece of intellectual property.
Eg. Software upgrades, policies,
procedures, manual
  Traits of Entrepreneur: Find below the characteristics and skill set of
the 4 types of entrepreneur:
Explorer Coordinator Driver Administrator

Characteristics :

Vision oriented Mission oriented Goal oriented Objective oriented

Solution seeker Conflict mediator Solution enforcer Conflict solver

Inspiring understanding Hard driving Analytical

Determined Free form Rigid Flexible

Skill set :

Focus long range Focus on Focus short range Focus on solutions

participation
Evokes dedication Obtains willing effort Gets early results Harmonizes effort

Leads by example Develops Uses partnerships Reinforce

commitment commitment
Takes major Reaches closure Makes most decision Implements
decisions decisions
FEASIBILITY ANALYSIS (FA)
• FA is an evaluation of a proposal designed to determine the
difficulty in carrying out a designated task.
 FEASIBILITY REPORT PREPARATION: Components of FA are –
 Marketing feasibility: A study of market regarding - degree of
competition, policies of pricing, promotional measures, consumers,
size of sales, etc.
 Technical feasibility: includes selection of process, scale of operation,
technical know-how, product mix, sorts of machines, processes,
materials, transport, communication, etc.
 Economic feasibility: To demonstrate the net benefit of a proposed
project for accepting or disbursing funds, considering the benefits and
costs to the co, industry, govt., economy as a whole.
 Financial Feasibility: It decides the economic viability of an
investment. It evaluates the financial condition and operating
performance of the investment and forecasting its future condition
and performance. Expected risk and expected return are examined
here.
• Criteria for Financial feasibility: Net present Value method, Rate of
Return Method, Ratio method, Payback method, Accounting
method.
 Guidelines for Feasibility Report Preparation:
• 1. General Information: about company, industry in general.
• 2. Preliminary analysis of alternatives:
• 3. Project Description:
• 4. Marketing Plan:
• 5. Capital requirement and costs:
• 6. Operating requirements and costs:
• 7. Financial analysis
• 8. Economic analysis
• 9. Miscellaneous aspects: eg. Cash flow statement, accounting
method used, use of computer / any other new technology
PROJECT EVALUATION (P.E.)
• P.E. is a step-by-step process of collecting, recording & organising data
about project results, including short term outputs and immediate
and long term project outcomes.
 Evaluating Criteria:
a. Traditional methods: Pay back period method
Accounting / Average Rate of Return
b. Modern methods: Net present value method
Profitability Index
Internal rate of return
 1. Payback period method: Pay back period is the period of time for
the cost of projects to be recovered from the additional cash flows of
the project itself. Projects with least pay off will be accepted.
 2. Accounting Rate of Return (ARR) : ARR takes into account the total
earnings expected from an investment proposal over its full life time.
Projects with higher rate of return than the cut off rate are acceptable
 3. Net Present Value (NPV): NPV is the best method. It recognises
the time value of money & the cash flows arising at different
period of time. Projects with NPV > Zero are accepted.
 4. Profitability Index (PI): PI shows the relationship between
present value of cash inflows and present value of cash outflows.
Projects with PI > 1 are accepted.
 5. Internal Rate of Return method (IRR): IRR is the rate of return at
which the present value of cash inflows and cash outflows are
equal. Projects with IRR > cut off rate are accepted.

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