Entrepreneurship and new ventures-4-project management

1. Entrepreneurship and new ventures-4-project management • Sources of business idea- • Sources of idea- customers, r & d, distributors, employees, etc • Selection of right product- basis-1-Import substitutes, banned items,2- past experience in making, mktg,3- degree of profitability, 4- govt concessions, 5- priority items for sme’s, 6- mkt potential, 7- licensed or delicenced ,8-special concessions under ftz 9- if ancillary to lse’s, also suitable machinery availability, raw material availability, consumer adoption process/levels- for innovative products • Methods of obtaining product- 1-internal development-discoveries/inventions, 2- licensing- contractual, franchising, 3- acquisitions • New product development strategy- mkt penetration , product developments and other mktg strategies-fig 206 • Seven steps of planning and development of new product

2. 1- new product ideas- thru various sources. One may need 60 new ideas to get one commercially viable • 2-Idea screening- process of elimination, delete and choose profitable • 3- concept development- and testing- based on consumer preferences related to product attributes and expected benefits • 4- business analysis- product concept put to rigorous scrutiny to evaluate mkt potential, capital investments, rate of return on capital employed. • BA thru combo of ,MR,+ cost benefit analysis + assessment of demand and competition to get sound and viable product concept offering realistic profit objective. • 5-Product development program- stages- 1- paper idea to prototype dev giving visual image/model, 2-consumer testing of prototype, 3- branding , packaging and labeling, whether for mass or class • 6- test mktg- customer reactions to prototype and make changes thru trial /error • 7- commercialization- finalization of product and issues related to mktg mgt before start of PLC stages

3. Project classification- • What is project- “a productive activity which can b analyzed, appraised and monitored independently” or • “an economic activity with well defined objectives and having a specific beginning and end.” • Components of project- objectives, size , a scheme, organization, IRR and social benefit • Characteristics of project- Investment pattern, benefits or gains, time limits, and location • Project levels- national or sect oral or individual • Project include activities aimed at- 1- increased production of goods / services, 2- increasing the capacity of existing projects, 3- increasing the productivityof goods / services • Classification in various ways- • 1- Quantifiable and non-quantifiable projects - power vs. health • 2-Sectoral projects- agro and allied, transport and comm., social service, irrigation and power, etc

4. 3-Techno economic projects- based on techno eco features and it’s a- intensity- capital or labor intensive, b-cause- demand based or raw material based, c- magnitude-of investment- large , med, small • 4- Fin inst classification criteria's -- new project, expansion projects, modernization, diversification- all r profit oriented • 5-Service projects- welfare project, research and dev project, educational project. • Project cycle- 219 • Project identification- • First step of new venture creation and hence right direction to identify or else failure • Important dimension to identify choices r based on - from product or service, market ,technology, equipments, scale of production, location, incentives, and time phasing • Project Identification interrelated to govt policies, infra dev, and skills of people • Project identification is concerned with collection, compilation and analysis of economic data for the eventual purpose of locating possible opportunities for investment

5. Criteria's for selecting a particular project- • Investment size- not less than 2 crs for start ups- large org can think high investments • Location- backward areas nearby state h.q. facilitates getting suitable manpower, liaison with electricity dept etc • Technology- becomes easier with proven technology • Equipments- to get best seek tech consultancy's views • Marketing-preferably thru institutional, industrial rather than getting in to cut throat thru retail. • Importance of project identification- • To become catalyst of eco dev. • To initiate – employment and income generation • To achieve long term benefits • To provide framework for future activities • Involves substantial financial outlays • Initiates basic infra and environment • Irreversible commitments • Brings social changes • Accelerates socio-cultural dev.

6. Project formulation and design • Careful and critical overall look of idea to build for benefits • Phase of formulation- conception of idea,- analysis of related aspects-, formulation of project- design of a project • Steps in formulation– 1-setting general objectives – broad, +socio-eco benefits, 2- operational objectives- expected results fro the scheme • Sequential stages of project formulation- • 1-Feasibility analysis- based on data related to idea and investment • 2-Techno-economic analysis- estimation of project demand potential and related choice of optimal technology • 3-project design and network analysis- Individual activities and their interrelationship constitute a project so sequence of events with time allocation for each activity presented in network drawing. Provides the way for various inputs qualification and dev of financial and cost-benefit profile. Use of CPM and PERT (program evaluation review technique )

7. 4- input analysis- assessment of total input requirements , its quantity, quality. Materials, human and all recurring and non-recurring resource requirements. availability leading to financial and cost-benefit analysis. • 5-Fiancial analysis- estimating project cost, operating costs and fund requirements. Analytical tools and ratios r used being long term business activity. • 6-cost-benefit analysis- overall worth of project viability , not direct cost and direct benefits as seen thru financials. may b energy sector etc • 7-Pre-investment analysis- clear , formal and final shape of project based on which consultants, promoters, implementing agency can decide. • Other issues during formulation- analytical +evaluation techniques, organizational, commercial and legal aspects • risks and uncertainties in investment decisions- • Price changes of inputs , outputs, technology up gradations, false estimation, length of setting project, changes in envoi, consumer preferences, substitutes

8. Projected views about profitability- capacity expansions, earning capacity, capability to service share capital, surplus fund generation for growth • Issues – effluent disposal, energy conservations, by-product utilization • Detailed check list for feasibility report.249 • Project design- • Project fallows definite path of planning, scheduling and controlling • Design enables to identify the flow of events which must take place as planned for its successful implementation. • Use of CPM and PERT techniques for net-work analysis of project related cost and time estimates and physical progress of the project • Preparation of project report and its presentation. • Report necessary for submission, incorporating -relevant data and details , merits and demerits in allocating resources in production of specific goods and services as it serves guide to institutions.

9. Scope of project report- • 1- economic aspects- justification of investment in present economic environment. mkt potential , growth potential. • 2-Technial aspects- about technology needed, equipments, machinery • 3-Financial aspects-, total investment, sources of funds, comparison of cost of capital with return on capital • 4-Production aspects- criteria used for product selection, if export worthy, design details. • 5-Mangerial aspects- qualification and experience of mgrs in team • Contents of a project report- • 1-objectives and scope of the report • 2- product characteristics- its specs, applications, standards and quality • 3- market position and trends.- export prospects, anticipated demand • 4-raw material- its requirement, prices, sources, properties etc • 5-Manufacturing- process, schedules, technique

10. 6-plant and machinery-, lab , electric/water supply, • 7-land and building- area construction schedule • 8-finnacial implications- fixed and working capital investment, project cost and profitability • 9-marketing channels • Personnel • Proforma-271 • Financial analysis- • Concept and scope- • Def-A process of discovering economic facts about an enterprise and/or a project on the basis of an interpretation of financial data • Provides insight for-1 roi, 2- soundness of financial position. • May b internal and /or external, by dept or by creditors, stakeholders • Financial analysis primarily deals with interpretation of data incorporated in the proforma financial statements of a project and the presentation of the data in a form in which it can be utilized for a comparative appraisal of the project.

11. F.A reveals where co stands for profitability, liquidity, leverage and efficient use of its assets • Provides framework for business planning • Provides utility for appraisal of project, to know the health, to get performance index, and know index of pitfalls • F.A. helps er to meet - 1- ability to analyze financial reports provides ability to mange as per size of unit. 2- fulfill regulatory provisions- govt requirements, 3- submission of income tax accounting, 4-planning for profits, 5- to bankers use, 6-investors, 7- creditors • Project cost estimates- • Estimating operating costs and funds requirements • Costing – a calculation to determine how much each product or service costs to produce and sell • Knowing the costs helps setting prices, reducing costs and improving profits. • Types of costs- • In terms of variability of procduction-1- fixed and 2- variable costs • In terms of identification of costs-1- direct- 2- indirect

12. Direct costs r readily identified- like- raw mat , labor, power etc • Indirect- (overheads)- not readily identified with products or services produced.-office rents, maintenance of machines , building, selling exp, salaries etc • Financial forecasting- • I-Thru-Projected balance sheet- statement of assets and liabilities- • Assets- estimation • 1-cash- minimum amt required to meet cash payments as per size of operations based on past data/experience • 2- Trade debtors, 3- inventories, 4- fixed assets-outlay for land, building, fixtures, vehicles etc • Liabilities- estimation • 1-Trade creditors, 2- loans and advances- thru fair judgments, 3-acrued liabilities- taxes , interests etc to b paid, Provisions for taxes- on future incomes • II-Thru cash budgets- opening cash balance +receipts from debtors- less payments for creditors , wages, selling exp , machinery buy etc- closing CB

13. Forecasting working capital- investments in current assets, and levels of current liabilities, changes in sales revenue, portion of long term sources thru equity capital and long term loans • Operating cycle- raw material to work in process to finished goods to bills/invoices to cash to raw materials • Components of working capital- raw material/consumables, work in process, finished goods, trade debtors-receivables, expenses • Sources to meet working capital needs- • Own funds or equity, sundry creditors, other short term finance, bank borrowings • Operating revenue estimates- • Thru projected profit and loss a/c and fund flow statements - how business obtained funds and utilized. • Prf &los starts with sales realization less variable expenses- r.m, wages etc=contribution less fixed expense- salaries, interest=profit before tax- less tax dividend, transfer to general reserves. • Sources of funds and its application- considering sales increase /decrease, plough back of profits, decrease in term loans, inventory build ups, receivable monitoring

14. Ratio analysis- • Key to know relationship bet profit and loss and so benefits in all areas of mgt,- production to mktg to personnel, financial health of a co. • As a reasoned relationship analytical tool to study linkages thru arithmetic calculations- e.g. ratio of gross profit to sale as 1 : 4 or else 25 % • Can b used for Inter-firm or Intra-firm comparisons. illustrations ,for 1- different methods of trading fallowed , 2- different uses of sources of capital , 3- different policies fallowed • Advantages of ratio analysis- • 1-gives decision makers insights, 2-provides financial picture and recommends course of action, 3- predicting co failures, 4-enables monitoring performance compared to competitors.5- helps diagnosis, 6- tool for CEO of multiunit co, 7- tool for functional mgrs- mktg mgrs, material mgrs. • Limitations- • May not be based on current economic conditions • Not all percentages and ratios r useful • More mathematical than applicable

15. Classification of ratio’s

16. Investment process- • Helps e.r. to make clear assessment of roi long term and short term • E.r. weighs alternatives in accordance to business goals. based on risk, return, safety, utility, liquidity, benefits from investments. • Classification- based on 1-replacements, 2-modernisation,3- rationalization,, 4- expansions, 5-new product inv, 6- r & d,7-nktg and sales invest, 8- hrd inv, 9-welfare, 10-obligatory inv. • inv plays role in eco dev and decides process and direction of growth of enterprise. • Utility of invest- for development, profits, social good, capital generation, acquiring power and wealth. • Returns on investment- • ROI- = profit/capital employed*profit/sales*sales/capital employed. • Capital employed= equity + preference capital+ accumulated reserves and profits • Investment can also b analyzed as –shareholders equity+ long term borrowings+ current liabilities

17. Operating ratio- operating cost/sales .Higher operating ratio indicates inefficient mgt • Use of investment analysis help er to decide its on - 1- choice of type of business-services or trade or manufacturing, 2- scope of operation- volumes levels to b produced and mkt areas to b served.3- degree of control in mgt, 4- amt of capital fund requirements, 5-size of risk, 6- comparative tax advantages,7- adaptability of administration • Brake .Even analysis- • It depicts the relation between total cost and total revenue at the level of particular output. • BEP- point of sales volume at which the total cost and total revenue r identical. It establishes the level of output/production which evenly breaks the costs and revenues. • Bankers as lenders insist upon reasonable margins of safety so that fixed cost r met earlier. • BEP in term of sales=fixed cost/total contribution (selling price less variable cost)* total amt of sales • BEP in terms of capacity utilization- = fixed costs / total contribution * production in terms of percent to installed capacity.

18. Utility of the BE analysis- • For cost - output – profit relationship at varying levels of output • Review of pricing as it bring revenue • Limitations of BE analysis- difficult in case of multi-product co. and for long term planning. • Profitability analysis- • Profit a primary objective of enterprise • Vital for assessment of operational efficiency of a project and its profitability, performance economically, also socially as loss making unit looses its future, managerial efficiency • In accounting sense due to heavy investments in project, profit analysis acts as long term tool to test success of product and its mkt developments • Acts as separator for comparison of annual performance • Profit provides signals for allocation resources. • Profit potential of project depends on ability to price its products thereby deliver value to customer and also to his firm. • Profit is the reward for entrepreneurship • Business Goals inclusive profit-fig

19. Factors affecting profit- 1- changes in product mix, 2- sales volume fluctuations, 3-changes in fixed costs, and variable costs, • Planning for profit- thru budgeting of sales, productions, materials, purchase, manufacturing expenses, inventory and so on before profit plan put in to operations. • Profit planning- its controls- thru proper estimating future, flexibility, sensitivity, excellent directions and controls, top mgr supports. Sound policies, and org structure, participative working, mgt by exception-focus priorities and leave routine, cost consciousness, effective communication systems, time schedules • Advantages of profit maximization- survival of business, socio eco welfare, generation of funds • Social Cost-Benefit analysis. • Tool to evaluate the value of money particularly of public investments. • Involves broad steps- 1-estimation of costs and benefits which will accrue to firm, 2- to member of society, 3-to community,4- to national exchequer, 5- discounting the costs and benefits over a period of time