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Grow More Institute of Business Administration Project Management
GROW MORE INSTITUTE OF BUSINESS ADMINISTRATION
READING MATERIAL
BBA SEM VI (HNGU)
SUB: - PROJECT MANAGEMENT
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Project Management
Introduction:
A project is considered as „non-repetitive activity‟. A project has following characteristics.
1. It is goal oriented: It is being pursued with a particular end or goal in mind. No project can
exist without a definite aim or objective. As the game of soccer cannot be played without
constructing goal posts, a project cannot be undertaken without an objective.
2. It has particular set of constraints: Usually a project needs to be completed within the
limits of time and resources. The required time and cost are estimated before starting project
and efforts are made to complete project within specified limits.
3. Measurable Output: The output of a project is measurable. So that over the period of time
we can measure the progress of the project.
Definition:
“Project management includes planning, organizing, directing and controlling activities in addition
to motivating what is usually the most expensive resource in the project – the people.”
Sources of project idea:

The key to success of any project is the basic idea lying behind it. It is necessary to have good idea.
Following are some of the sources for project idea:
1. Analyse the performance of existing industries: A study of existing industries in terms of
their profitability and capacity utilization can indicate promising investment opportunities –
opportunities which are profitable and relatively less risky. An examination of capacity
utilization of various industries provides information about the potential for further
investment. Such a study becomes more useful if it is done properly.
2. Examine the inputs and outputs of various industries: An analysis of the inputs required
for various industries may throw up project ideas. Opportunities exist when (i) materials,
purchased parts, or supplies are presently being produced from distant sources with
attendant time lag and transportation cost, and (ii) several firms produce internally some
components/parts which can be supplied at a lower cost by a single manufacture who can
enjoy economies of scale. Similarly, a study of the output of the existing industries may
reveal opportunities for adding value through further processing of the main outputs, by
products, as well as waste products.
3. Review import and exports: An analysis of import statistics for a period of five to seven
years is helpful in understanding the trend of imports of various goods and the potential for
import substitution. Indigenous manufacture of goods currently imported is advantageous.
4. Study plan outlays and government guidelines: The government plays a very important
role in our economy. Its proposed outlays in different sectors provide useful pointers toward
investment opportunities. They indicate the potential demand for goods and services
required by different sectors.
5. Look at the suggestions of financial institutions and developmental agencies: In a bid to
promote development of industries in their respective states, state financial corporations,
state industrial development corporations and other developmental bodies conduct studies,
prepare feasibility reports, and offer suggestions to potential entrepreneurs. The suggestions
of these agencies are helpful in identifying promising projects.
6. Investigate local materials and resources: A search for project ideas may begin with an
investigation into local resources and skills. Various ways of adding value to locally
available materials may be examined. Similarly, the skills of local artisans may suggest
products that may be profitably produced and marketed.
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7. Analyse economic and social trends: A study of economic and social trends is helpful in
projecting demand for various goods and services. Changing economic conditions and
consumer preferences provide new business opportunities.
8. Study new technological developments: There is a large network of research laboratories
in India under the umbrella of the Council of Scientific and Industrial Research and other
bodies. New products or new processes and technologies for existing products developed by
research laboratories may be examined for profitable commercialization.
9. Draw clues from consumption abroad: Entrepreneurs willing to take higher risks may
identify projects for the manufacture of products or supply of services which are new to the
country but extensively used abroad. Automatic vending machines, entertainment parks,
pre-fabricated houses and fast food restaurants are examples of projects belonging to this
category.
10. Explore the possibility of reviving sick units: Industrial sickness is rampant in the
country. There are innumerable units which have been characterized as sick. These units are
either closed or face the prospect of closure. A significant proportion of sick units, however,
can be nursed back to health by sound management, infusion of further capital, and
provision of complementary inputs. Hence, there is a fairly good scope for investment in this
area. Such investments typically have a shorter gestation period because one does not have
to begin from scratch. Indeed, in many cases marginal efforts would suffice to revive such
units.
11. Identify unfulfilled psychological needs: For well-established, multi brand product groups
like bathing soap, detergents, cosmetics, and toothpaste, the question to be asked is not
whether there is an opportunity to manufacture something to satisfy an actual physical need
but whether there are certain psychological needs of the consumers which are presently
unfulfilled.
12. Attend trade fairs: National and international trade fairs provide an excellent opportunity
to get to know about new products and developments.
13. Stimulate creativity for generating new product ideas: New product ideas may be
generated by thinking along the following lines: modification, rearrangement, reversal,
magnification, reduction, substitution, adaptation and combination.
Preliminary Screening:
By using the suggestions made in the idea generation section, it is possible to develop a long list of
project ideas. Some kind of preliminary screening is required to eliminate ideas which are not
possible. For this purpose, the following aspects may be looked into:
1. Compatibility with the promoter
2. Consistency with governmental priorities
3. Availability of inputs
4. Adequacy of market
5. Reasonableness of cost
6. Acceptability of risk level.
1. Compatibility with the promoter: The idea must be compatible with the interest, personality,
and resources of the entrepreneur. According to Murphy, a real opportunity has three
characteristics: (i) It fits the personality of the entrepreneur (ii) It is accessible to him and (iii) It
offers him the prospect of rapid growth and high return on the invested capital.
2. Consistency with governmental priorities: The project idea must be feasible given the
national goals and governmental regulations. The questions to be raised in this context are:
 Is the project consistent with national goals and priorities?
 Are there any environmental effects contrary to government regulations?
 Can the foreign exchange requirements of the project be easily accommodated?
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 Will there be any difficulty in obtaining the license for the project?
3. Availability of inputs: The resources and inputs required for the project must be reasonably
assured. To assess this, the following questions need to be answered:
 Are the capital requirements of the project within manageable limits?
 Can the technical knowhow required for the project available domestically at a
reasonable cost? If the raw materials have to be imported, will there be problems?
 Is the power supply for the project reasonably obtainable from external sources?
It may be noted here that Indian business has been traditionally faced with shortage of power,
foreign exchange and important raw materials. So provision of such needs must be done first.
4. Adequacy of the Market: The size of the present market must offer the prospect of adequate
sales volume. Further, there should be a potential or growth and a reasonable return on
investment. To judge the adequacy of the market the following factors have to be examined:
 Total present domestic market
 Competitors and their market shares
 Export markets
 Quality-price profile of the product vis-à-vis competitive products.
 Sales and distribution system
 Barriers to entry for new units.
5. Reasonableness of cost: The cost structure of the proposed project must enable it to realize an
acceptable profit with a price. The following should be examined in this regard.
 Cost of material inputs
 Labor costs
 Factory overheads
 General administration expenses
 Selling and distribution costs
 Service costs
 Economies of scale
6. Acceptability of risk level: The desirability of a project is critically dependent on the risk
characterizing it. In the assessment of risk the following factors should be considered:
 Vulnerability to business cycles
 Technological changes
 Competition from substitutes
 Competition from imports
 Governmental control over price and distribution.
General format of a Project Report:

Following are the details covered in a project report:
Project Scheme for the Manufacture of --------
1. Introduction
Title/Name of the firm
(a) Scope
(b) Product (Give specifications)
(c) Process
(d) Marketability
(e) Location
(f) Sources of finance / repayment schedule
2. Scheme:
(a) land and Buildings (Owned or leased?) : Rs.
(b) Machinery and Equipment Rs.
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(Give detailed specification / capacity / imported or indigenous). For imported machine allowances (for
duty on imported items, dock clearance charges, freight and insurance)
Total: Rs.
(c) Testing Equipment Rs.
(d) Other fixed investments:
(i) Packing and forwarding charges Rs.
(ii) Electrifications and installation charges Rs.
(iii) Cost of tools / jigs / fixtures Rs.
(iv) Cost of office equipment Rs.
(e) Total Non-recurring expenditure (a) + (b) + (c) + (d) Rs.
(f) Staff and Labor:
(i) Indirect labor nos. and wages per month Rs.
(ii) Direct labor nos. and wages per monty Rs.
Total Salaries [(i) + (ii)] Rs.
(g) Raw materials and Consumables (per month on single shift basis with specifications)
(i) Indigenous Rs.
(ii) Imported Rs.
Total: Rs.
(h) Other items of expenditure (per month on single shift basis)
(i) Power and water charges Rs.
(ii) Advertising and travelling Rs.
(iii) Transport Rs.
(iv) Commission to distributors / agents Rs.
(i) Total recurring expenditure: (f) + (g) + (h) Rs.
(j) Working capital for 3 months (3 x recurring expenditure) Rs.
(k) Total Investment required [(e) + (j)] Rs.
(l) Total cost of production:
(i) Total recurring expenditure Rs.
(ii) Depreciation on machinery and equipment Rs.
(iii) Depreciation on building Rs.
(iv) Maintenance charges Rs.
(v) Interest on total investment Rs.
(vi) Welfare of staff Rs.
(vii) Office stationery and postage etc. Rs.
Total Rs.
3. Profitability and Projections (generally about 5 to 10 years)
Phase of activity
Profitability of phases
4. Infrastructure
(i) Locality advantage
(ii) Availability of material / power / water / labor
(iii) Government policy
Break-Even Point Rs.
(i) Fixed Costs
(ii) Variable costs
Q = F / (P-V) where Q = break-even point, F = Fixed Cost,
P = Sale price per unit and V = Variable cost per unit.
5. Name and Addresses of Suppliers
(i) Raw materials
(ii) Machinery and equipment
6. Remarks
Seal and Date (Signature of the Consultant)
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Unit II
Market and Technical Appraisal
Introduction:
The project appraisal many a times begins with an estimation of the size of market. Before, going
through the detailed study of a project, it is essential to know, the size of the market because the
viability of the project depends critically on whether the anticipated level of sales exceeds a certain
volume. Many a times projects has been abandoned because preliminary appraisal revealed a
market of inadequate size.
Before a project is formulated the size and composition of the present effective market demand, by
segment should be determined in order to estimate the possible degree of market penetration by a
particular product. Also, the income from sales should be projected taking into account technology,
plant capacity, production program and marketing strategy. For this purpose one should consider
the following information for market analysis.
Information for market analysis:

The major types of information required for market analysis are:
1. Information about product, its specifications and substitute product: For the market
analysis, we must have the information regarding the product and its detailed description
like characteristics, specifications, uses and applications along with the standards and
qualities of the product. After all we have to sell our product to the customers, so it is
necessary that our customers accept the product and satisfy their needs. Along with main
product, we should think of substitute product and its viability.
2. Information about effective demand and breakdown demand: Demand forecasting is the
main base for market analysis. We have to estimate the potential demand of our product. If
demand for the particular product is not large enough to generate revenue than we have to
rethink about that product. As the revenue generation and in turn profit is one of the most
accepted objectives of business, our product must have reasonable demand. To get a deeper
insight into the nature of demand, the aggregate market demand may be broken down into
demand for different segments of the market.
3. Information about customers and their buying behavior: information about customers
and their buying behavior have immense importance in market analysis. We have to analyze
the consumer based on demographic and sociological variables like age, sex, income,
profession, residence, social background etc. and based on the other factors like intentions,
habits, attitudes etc. The buying behavior of the customer is also required to study for the
purpose of market analyse.
4. Information about competitors and level of competition: For the effective market
analysis, we must know the details of competitors and the level of competition within the
industry. What level of market share each company has? What kind of other marketing
strengths each competitor has? These are the sorts of questions that must be answered while
doing market analysis. Competition from substitutes and near-substitutes should be specified
because almost any product may be replaced by some other product as a result of relative in
price, quality, availability, promotional effort and so on. If there is cut-throat competition
within an industry, then we must have to give best quality product at reasonable prices to
capture more market.
5. Information about quality and price profile: Quality and price profile is also important
information for market analysis. Price statistics must be gathered for analysis. What are the
present prices charged by competitors? Are they affordable to the customers? How much
price customer is ready to pay? What are the prices of other substitute products? These are
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the probable questions raised during the marketing analysis. To answer these, we should
have complete quality price profile.
6. Information about distribution system: Distribution channel or logistic is the essential
part of the market analysis. How your product will reach to the customer? This question is
needed to answer. We must know about the various method of distribution, which may vary
with the nature of product to analyze the marketing aspect of the project. Sound logistic may
improve our sales level. We must have the information about wholesaler or dealer or retailer
of the company then only we can select the best channel for us.
7. Information about sales promotion and Advertising: Sales promotion and advertising are
another area, which need an in-depth observation in market analysis. Various sales
promotion techniques and advertising is having some influence on the demand of the
product. While doing marketing analysis, what types of sales promotion technique used by
present businesses must be known. We should also collect some information on advertising
aspects, which influence the demand of the product.
8. Information about government policy related to marketing: The role of government in
influencing the demand and market for a product may be significant. Government plan,
policies, and legislation have a bearing on the market and demand of the product. These are
reflected in production targets in national plans, import duties, export incentives, excise
duties, sales tax, industrial licensing, subsidies and financial regulations. These information
is very important in marketing analysis.
Sources of information:
There are two major types of information available for market analysis.
1. Secondary information and
2. Primary information
Collection of secondary information:

Secondary information is information that has been gathered for some other purpose and is already
available. Secondary information provides base and the starting point for the market analysis. It
indicates what is known and often provides leads and cues for gathering primary information
required for further analysis. The following are the general sources of secondary information.
1. Census of India: Indian government undertakes census study at the interval of every ten
years. This data given information about population demographic variables. Also it provides
future predictions regarding future status of the population.
2. National sample survey reports: Issued from time to time from cabinet secretariat,
government of India. These reports give information on various economic and social aspects
like patterns of consumption, distribution of household by size of consumer expenditure,
distribution of industries etc.
3. Plan reports: Issued by the planning commission usually at the beginning, middle and end
of the five year plans that gives the wealth of information on plan proposals, physical and
financial targets, actual outlays, accomplishments etc.
4. Statistical abstract of Indian union: an annual publication of the Central Statistical
Organization, which gives the demographic information, estimates of the national income
and agriculture and industrial statistics.
5. India Year Book: An annual publication of the ministry of information and broadcasting, it
provides a wide range of information on economic and other aspects.
6. Statistical Year Book: An annual publication of United Nations. It gives world statistics
relating to the various aspects like population, demography, gross domestic production,
industrial production, international trade etc.
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7. Economic Survey: An annual publication of the Ministry of Finance, it provides the latest
data on industrial production, wholesale prices, consumer prices, exports, agricultural
production, national income etc.
8. Guidelines to Industries: This is an annual publication of the Ministry of Industrial
Development.
9. Annual survey of industries: An annual publication of the Central Statistical Organization,
it contains information on various aspects of industry: number of units and state wise
distribution, average number of working days, employment, materials consumption quality
of products etc.
10. Annual reports of the development wing, ministry of Commerce and Industry: An
annual publication, it gives a detailed review of industries under the purview of the wing. It
also provides information about new items manufactured for the first time in India and the
list of protected industries.
11. Annual bulletin of statistics of exports and imports: An annual publication of the
Ministry of Commerce, it provides data on imports and exports for a very large number of
items and as per international classification.
12. Techno-economic Surveys: The National Council of Applied Economic Research has
conducted and published techno-economic surveys for various states.
13. Industry potential surveys: The Industrial Development Bank of India in consortium with
other financial institutions has conducted and published industrial potential surveys for
several backward areas.
14. The stock exchange directory: This directory, published by the Bombay Stock Exchange,
provides a ten-year picture of performance and financial statements for all listed companies
and other important companies. It contains very valuable information for comparative
analysis. It is periodically updated.
15. Other publications: Among other publications, a mention may be made of the following (i)
weekly bulletin of industrial licenses, import licenses and export licenses (published by the
Government of India) (ii) Studies of the State Trading Corporation (iii) Community reports
and other studies of the Indian Institute of Foreign Trade. (iv) Studies and reports of export
promotion councils and commodity boards. (v) Annual report on Currency and Finance
(issued by RBI).
Evaluation of Secondary Information:

While secondary information is available economically and readily, its reliability, accuracy and
relevance for the purpose under consideration must be carefully examined. The market analyst
should seek to know:
1. Who gathered information? What was the objective?
2. When was the information gathered? When was it published?
3. How representative was the period for which the information was gathered?
4. Have the terms in the study been carefully and unambiguously defined?
5. What was the target population?
6. How was the sample chosen?
7. How representative was the sample?
8. How satisfactory was the process of information gathering?
9. What was the degree of sampling bias and non-response bias in the information gathered?
10. What was the degree of misrepresentation by respondents?
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Primary Information Collection (Conduct of Market Survey):

Secondary information, though useful, often does not provide a comprehensive basis for market and
demand analysis. It needs to be supplemented with primary information gathered through a market
survey, specific to the project being appraised.
The market survey may be census survey or a sample survey. In census survey, the entire
population is covered. Census surveys are employed principally for intermediate goods and
investment goods when such goods are used by a small number of firms. In other cases where
population to be surveyed is large, census may not be feasible. At this time we use sample survey.
Steps in a sample survey:

Typically, a sample survey consists of the following steps:
1. Define the target population: In defining the target population the important terms should
be carefully and unambiguously defined. The target population may be divided into various
segments which may have differing characteristics. For example, all television owners may
be divided into three to four income brackets.
2. Select the sampling scheme and sample size: there are several sampling schemes; simple
random sampling, cluster sampling, sequential sampling, stratified sampling, systematic
sampling, and non-probability sampling. Each scheme has its advantages and limitations.
The sample size, other things being equal, has a bearing on the reliability of the estimates –
the larger the sample size, the greater the reliability.
3. Develop the Questionnaire: The questionnaire is the principal instrument for eliciting
information from the sample of respondents. The effectiveness of the questionnaire as a
device for eliciting the desired information depends on its length, the types of questions, and
the wording of the questions.
4. Recruit and train the field investigators: Recruiting and training of field investigators
must be planned well since it can be time consuming. Great care must be taken in recruiting
the right kind of investigators and imparting the proper kind of training to them.
Investigators involved in industry and trade market surveys need intimate knowledge of the
product and technical background, particularly for products based on sophisticated
technologies.
5. Obtain information as per the questionnaire from the sample of respondents:
Respondents may be interviewed personally, telephonically, or by mail for obtaining
information. Personal interviews ensure a high rate of response. They are, however,
expensive and likely to result in biased responses because of the presence of the interviewer.
Mail surveys by snail mail or e-mail are economical and evoke fairly candid responses. The
response rate, however, is often low.
6. Scrutinise the information gathered: Information gathered should be thoroughly
scrutinised to eliminate data which is internally inconsistent and which is of dubious
validity. For example, a respondent with a high income and large family may say that he
lives in a one room tenement. Such information, probably inaccurate, should be deleted.
7. Analyse and interpret the information: Information gathered in the survey needs to be
analyzed and interpreted with care and imagination. After tabulating it as per a plan of
analysis, suitable statistical investigation may be conducted, wherever possible and
necessary.
Demand forecasting:
According to Philip Kotler, “ The company forecast is the expected level of company sales based on
chosen marketing strategy and other external factors.”
Accurate demand forecasting is essential for a firm to enable it to produce the required quantities at
the right time and arrange well in advance for the various factors of production, viz., raw materials,
equipment, machine accessories, labor, buildings etc. Some firms may as a policy produce to order,
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but generally, firms produce in anticipation of future demand. Forecasting helps a firm to assess the
probable demand for its products and plan its production accordingly. In fact, forecasting is an
important aid in effective and efficient planning. It can also help management in reducing its
dependence on chance.
Methods of demand forecasting

Forecasts by its very definition, involves the future, which is uncertain. Thus, no forecast can be
expected to be cent-percent correct. This together with the essential feature of forecasts argues for a
paradox: forecasts are essential but there is no way to generate absolutely accurate forecasts. This is
true but efforts have to be made to obtain as accurate a forecast as possible. The basic question then
is how to get good forecast?
There is perhaps no unique method for anything because methodology is always plural. Forecasting
methods are no exception to this rule. As is generally the case, there are several methods of demand
forecasting basically for three reasons:
1. No method is perfect and no method is useless

2. No method is the best under all circumstances
3. The best method may not be available in a particular situation due to constraints from data and /
or resources (time and money).
Broadly speaking there are two approaches to demand forecasting: Survey method and statistical
method. Under the first, surveys are conducted about the intentions of consumers (individuals
or/and industries), opinion of experts, or of markets, and through their analysis, forecasts on
demand are made. Such surveys are of two kinds: census and sample. Under the former, all
consumers/ experts/ markets are surveyed while in the latter only a selected subset of them are
surveyed and through their study inferences about the whole population are drawn and forecasts
made.
Under statistical methods, historic data are explored or analyzed through econometric models and
through them forecasts are made.
Before discussing each method in detail, we will discuss their special features. The survey methods
are usually suitable for short-term forecasts and new products‟ demand forecasting. For short term
forecasts because consumers‟ intentions are volatile over time, particularly in the present day world
where new products get available year after year. The survey methods are suited to new products‟
demand forecasting because consumers do not keep systematic data in their past consumption and it
is difficult to recall their purchases after a lapse of time, researchers often survey the dame group of
consumers more than once in a year particularly if the product under demand forecasting happens to
be a seasonal one.
In contrast, statistical methods are common for long-term forecasts and for forecasting demand for
well established (old) products. This is because survey methods are unsuited for these purposes as
just seen, and once the data exists, statistical methods are capable of generating long-term forecasts.
Theoretically speaking, both the groups of methods are at least available for forecasting demand for
old products. For new products, only survey methods will do the job. This is because the data
constitutes the raw material for statistical methods, and if there is no raw material for statistical
methods there can be no finished product.
We will now discuss the various methods of demand forecasting in detail.
Survey methods
1. Survey of consumers’ intention: Under this method, demand forecasts are attempted through
a survey of consumers‟ intentions. Who are the consumers of a good? If the good in question
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happens to be purely a consumer product, then consumers are households. On the other hand, if
the good is purely a producers‟ good, then consumers are industries using that product.
However if the product is used both for final consumption as well as raw material for some
other goods‟ production, then its consumers come both from households as well as industries.
Most goods fall under the last category and thus their demand forecasts calls for a survey of
both the kinds of consumers.
Under this method intentions of the buyers as to what they intend to buy, how much quantity to
buy at different prices etc. are known through personal contacts. Thus, this method shifts the
burden of demand forecasting on to the buyers. This may be done through personal interviews,
mail or postal survey or telephone interview. Questionnaires are prepared to find out the
buyers‟ intentions with regard to say price of the product, its quality, design, packaging etc.
This work of consumers‟ survey is entrusted to trained, reliable and experienced investigators.
Questionnaires should be simple and easy to understand. In personal interview method, door to
door survey is made. One advantage of this method is that the interviewer can explain questions
to the buyers and thus record their opinions in person.
Limitations:
i) This method is expensive and time consuming
ii) In case of postal or mail survey, although the cost is less and larger coverage is possible,
there is no personal meeting and explanation of questions is not possible.
iii) Telephone interviews have the advantage of personal touch and they also save time and
money, but in underdeveloped countries, telephone facilities are not available to all
customers. Besides long and comprehensive interviews cannot be conducted on
telephone.
iv) Buyers‟ intentions regarding purchase of the product are mere wishful thinking rather
than concrete plans of purchase. This method is not suitable for consumer goods as their
buyers are too many. However, it may be tried for producers‟ goods like machinery as
their buyers are few.
For estimating the final consumption demand for a good in future, a survey of households is
conducted. In the survey each potential customer is asked its intentions about purchases of the
product in question in the forecast period. If the method includes surveying all the potential
customers it can be called census or complete enumeration method. Here the demand
forecast for total household consumption is obtained simply by adding the intended demands of
all households. Formula for the same is as following:
DF = ID1 + ID2 + + IDn where,
DF is demand forecasting ID is intended demand for consumers 1,2…. n refers to number of

consumers surveyed. Here the number of consumers equals all the consumers of the
commodity.
Advantages: i) As we are covering all the potential buyers of a commodity we can have very
sharp forecast about the future. ii) This method works best when the number of consumers is
less. iii) If the geographical spread of consumers is less the method proves to be less expensive.
Disadvantages: i) The method takes longer time when the number of consumers is large. ii) It
will be very difficult to survey each and every consumer if they are spread over larger
geographical area. iii) Surveying each and every consumer and analyzing the responses of all of
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them is very time consuming and very costly. iv) If the consumers are not clear about their
intention or if they do not give clear-cut information, the forecasts may be misleading.
In case of survey of sample of households instead of all, then demand forecasts would have to
be obtained differently, depending upon how the sample was drawn. For example if the simple
random sampling is used for the purpose, the population consisted of N households and
sample stood at n, then demand forecast would be given by:
DF = (= ID1 + ID2 + + IDn ) (N / n) Where
DF = Demand Forecasting, ID = intended demand, 1,2 … n means the number of consumers

surveyed, N means the total number of potential consumers.
Alternatively if stratified random sampling is used then the population will be divided into K
groups in which each group has its own common characteristics. Here the forecast for
aggregate demand by the whole household sector would be give by:
DF = N1 (AID1) + N2 (AID2) + … + Ni (AIDi) Where,
DF = demand forecasting Ni = population of households in group i (i = 1, 2, …, k ), k = number of

groups, AID =Average intended demand of the surveyed households in group i (i = 1, 2, .., k )
The end use method would have to be used if the product whose demand forecasts are being
made is wholly or partly used in the process of production of some goods and services. Under
this method, the industry demand for the product is obtained through the use of equations such
as follows:
(DF)I = a1X1 + a2X2 + … + aiXi where,
DFI = demand forecast for the product in question in the forecast period for industrial use.
ai = input requirement of the product per unit of output of industry i (i = 1, 2, .., k )
Xi = production forecast for industry i in the forecast period (i = 1, 2, .., k )
The data for applying the end-use method would come through a survey of firms in all
industries using the product. Once again the survey could be of all selected firms. However, the
choice in this respect would be restricted to firms and not to industries. Since different
industries have different input-output coefficients none could be left out. In this respect,
documents of planning commission would be very useful. These documents, in fact, could form
an alternative to the survey of firms in various user industries, for they might provide reliable
information both on the input-output coefficients as well as on the likely production of various
industries in the forecast period.
It is obvious that consumers‟ intentions survey method of demand forecasting is tedious, time
consuming and costly, particular for goods of common consumption. Yet, if data doesn‟t exist
and forecasts are needed, there is no alternative to it.
2. Expert’s opinion method: Under this method, the researcher identifies the „experts‟ on the
commodity whose demand forecast is being attempted, and probes with them on the likely
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demand for the product in the forecast period. The word „expert‟ is high powered term but it
should be taken to stand for those who possess the requisite expertise on the subject. Thus, if
one were to forecast the demand for say, car, the list of experts would include the Chairman
and Managing directors of various car manufacturing and two-wheeler manufacturing firms,
the important research organisations and individuals engaged in such research, and the relevant
government officials concerned with the automobiles industry and import and export of cars.
Similarly, if the demand for MBA‟s is under forecasting, opinions of major employers of
MBA‟s and the heads of institutions producing them could be sought.
There are two methods for forecasting demand through using expert‟s opinion.
i) Simple Method: If the number of experts is just one, then whatever he/she tells, could be
our forecast, subject to, of course, our own well found modifications. When the number of
experts is more than one, in the simple method we take a simple or weighted average of the
numbers given by various experts, temper with our own well conceived judgments and
arrive at the needed forecasts. Under this situation, the more weight would obviously be
attached to the persons having greater expertise than those having limited expertise.
ii) Delphi method: Under Delphi method, opinions are first collected from experts and then
instead of mathematical averaging efforts are made to mach them. It is true that no two
experts agree, but something could be done to bridge the gap. This is done through
bringing the experts together, arranging one or more meetings and arriving at some narrow
range for the forecast under attempt. The narrow range could, of course, be used to give the
interval forecast directly (i.e. the lower and upper limits within which the demand forecast
to be) and for arriving at a point (specific number) forecast by tempering it with the overall
assessment of the researcher or the coordinator of the forecasting exercise. For example, if
the demand forecast for a product in India is being attempted for the year 2009 through this
method, one could proceed through the following stages:
a) Request all the experts of product X to give their individual estimates for the likely
demand for X in 2009. suppose there are 15 experts and their requisite forecasts are
the following:
100, 110, 190, 200, 210, 225, 240, 240, 250, 250, 260, 275, 300, 310, 400
b) If the difference in forecast is significant, invite the experts for a conference on the
subject, present the problem with regard to differences in their estimates without
spelling out who said what, and request them to resolve the problem. In the debate,
people who either gave too small numbers (100, 110) or too large numbers (400),
whose identity should not be disclosed, would generally be concerned and others
would go on arguing, convincing others or getting convinced by others, through
exchanging new inputs from the colleagues in the conference. Hopefully, this would
lend to narrowing the limits likely demand in 2009.
c) If the coordinator of the conference (researcher) feels that the range of variations is
still larger, he could adjourn the conference for the time being, give lunch break and
invite them for a second round of discussion. This exercise should be repeated.
Iteration of this would continue until the coordinator is able to arrive at an acceptable
range or beyond which he does not see any scope for reduction. Suppose the exercise
leads to the interval of 240 to 280
d) Declare the so arrived range (240 to 280) as the interval forecast for the demand for
product X in the year 2009.
e) Take a simple average of the lower (240) and upper (280) value of the forecast and
declare that (260) as the point forecast for the variable under forecasting. it should be
emphasized that the coordinator would have also participated in the debates and so
his judgment would have also participated in the debates and so his judgment would
have already been reflected in the consensus reached at stage (c) above.
14
Advantages: i) The main advantage of this method is that it is simple, less costly and it
enables the firm to forecast the current demand for the product in the short run. ii) It is also
useful when a firm introduces a new product in the market. iii) It also profits from the
knowledge of salesmen and other experts who have intimate contact with market.
But main limitations of this method are i) The opinion of the experts many a times may be
biased or subjective. ii) Besides they may not be aware of other demand determinants, viz.
changes in national income etc. iii) There may be certain products for whose forecast
sufficient experts might not be available.
It is obvious from the above discussion that the Delphi method is quite sound but it could
be tedious and costly. Thus in the situation where the number of experts is not too large
and they are cooperative, and the researcher has the necessary fund and the authority to
perform the task, the Delphi method could be appropriate for demand forecasting.
Statistical Methods: These methods are based on past data and information to analyze the future
behavior. In this case analysis is based on various facts and figures of past.
1. Trend Analysis (graphical): Under trend method, the past trend and the behavior of variables is
assumed to be followed in future also. This method is based on the assumption that „history
repeats itself‟. It is the passive forecasting method which does not consider the present as well as
possible future changes that can affect final forecasting. in this method a graph of historical data
on the variable under forecasting is drawn, it is then extrapolated (use a fact or conclusion that is
valid for one situation and apply it to larger or different one.) visually up to the forecast period,
and finally the value of the variable in the forecast period is read out from the graph to yield the
requisite forecast.
B1
B2
B3
Years
Above diagram shows the demand estimation for ground nut oil. The dashed lines indicates three
possibilities of future demand. The researcher can forecast according to his assumptions.
15
Advantages of this method includes that it is simple and less expensive.

Limitations But it gives information only about the increasing, decreasing or constant trend and
not the actual quantity likely to be demanded. Besides extension of trend line involves
subjectivity and personal judgment which may vary from person to person. Hence conclusion
drawn by different persons may differ and therefore the results may not be reliable. Also this
method can be used by the companies which have long been in business. It is based on the
assumption that what happened in the past will be repeated in the future which is not always
possible.
It is obvious that the forecasts obtained through the graphical trend method suffer from an
element of subjectivity in the extrapolation of the curve. To minimise this error, efforts would
have to be made to collect data as up to date as possible so as to minimise the extrapolation
period.
2. Economic indicator method: The economic factors affecting the industry directly or indirectly
are the economic indicators that can be used for estimating the future demand. Following are
some of the useful economic indicators:
 National income: It is used for knowing the purchasing power of people.
 Employment: Employment level is used to know the effective demand.
 Price index is used to know the inflation level.
 Industrial output is used to know the capacity of production verities and qualities
 Personal and disposable income
 Stock prices, consumer credit and government policy.
All the above factors are economic variables that can explain the demand estimation of a
commodity for future period.
3. Regression method: Regression method is the most popular method of forecasting among the
economists and statisticians. This method includes economic theory as well as statistical method
for estimating the future demand. It requires past data for the variable and its determinants.
Forecasting through regression deals with relationship between two or more variables when one
variable is dependent and others are independent.
Regression express the extent of relationship between two or more variable. It analysis the
change in dependent variable because of changes in independent variables. The focus of
regression is on how strongly two variables are related to each other. Regression establish the
average relationship between the variables. In regression method we can estimate and forecast
the unknown value of one variable (dependent variable) from the known values of other
variables (independent variables)
The equation for regression function is:

D = a + bP
Here, D means demand for a commodity which is dependent variable
P means price of the product which is independent variable
a means intercept from origin
b indicates slope of the curve
For deriving values of „a‟ and „b‟ the general regression equation can be written as,
Y = a + bX …………….(i)
where Y is demand and X is price.
To derive Normal equations multiply regression function with „‟ and „x‟
So we will get following equations respectively:
Y = na + bX……………..(ii)
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XY = aX + bX2 … ……(iii)
Example: Time: 2002 2003 2004 2005 2006 2007
(X) Firm income: 1000 1100 1400 1500 2000 2100
(Y) Sales of Tractors: 11 13 15 16 18 (?)
Ans:
X Y XY X2
1000 11 11000 1000000
1100 12 14300 1210000
1400 15 21000 1960000
1500 16 24000 2250000
2000 18 36000 4000000
X = 7000 Y = 73 XY = 106300 X = 10420000
2
Y = a+bX,
Y = na + bX
So, 73 = 5a + 7000b and
XY = aX + bX2

So, 106300 = 7000a + 10420000b
Now, comparing above two equations we get,
1022 = 70a + 98000b
1063 = 70a + 104200b
41 = 6200b
b = 41/ 6200, So b = 0.0066
Now replacing the value of b in the above equation we get
73 = 5a + 7000(0.0066)
73 = 5a + 46.2
5a = 26.8
a = 26.8/5
So, a = 5.36
Now replacing the values in the equation Y = a + bX where the quantity of tractors is 2100 we
get the following answer:
Y = 5.36 + (0.0066) (2100)
17
= 5.36 + 13.86
Y = 19.22
Example for exercise
X = 21, 22, 23, 24, 25, 26, 27, 28, 29, 30, 31
Y = 17, 19, 19, 20, 23, 24, 26, 27, 27, 28, ?
(Answers: b = 1.296, a = -10.048 and Y = 30.1)
4. Auto Regression method: In this method, to estimate and forecast future demand the past data
of the demand itself is used. The auto regression is expressed in such a way that the variables
which is to be forecasted is a function of its own lagged values. Auto regression method can also
forecast the behavior of independent variables that effect the dependent variables.
If t = time (2008) and D = demand then the equation for auto regression will be:
Dt = Yf (Dt-1, Dt-2, Dt-3, …, Dt-n)
5. Simultaneous equations method: It is also called the complete system approach to forecasting.
It is the most sophisticated econometric method of forecasting. It involves specifications of a
number of economic relationships, one for each behavioral variable, estimated and solution of
which yield the forecasting equations similar to the estimated regression equation. The equation
here would differ from the regression equation in one special way i.e. this one would contain the
variable under forecasting and a few other variables, all of which would be truly exogenous
(policy and non policy) variable and thus they would pose no problem in forecasting their own
values. Thus, the simultaneous equations method overcomes the major problem of the regression
method, that is, forecasts for the independent variables.
6. Input Output method: Econometric models can be used to forecast changes in demand in one
sector, but such models seldom have the detail necessary to assess the impacts of those changes
on other sectors. But modern economic systems are highly interrelated. Changes in demand in
one sector of the economy can have significant impacts on demand in other sectors. Some of
these impacts are immediate and obvious. For example steel, rubber, glass and plastics are all
important inputs in the production of motor vehicles. Thus an increase in the demand for
automobiles would cause an increase in the demand for those four products.
The direct impact that automobile sales have on the demand for steel, rubber, glass and plastics
is augmented by secondary effects generated in still other sectors. Consider the resulting increase
in demand for steel. As steel output increases to meet the requirements for producing
automobiles, steel industry managers will find it necessary to purchase additional inputs. These
may include iron ore, coal, and electricity. If the increase in demand is expected to be permanent,
management may also decide to expand the capacity of their production facility by acquiring
additional capital goods such as blast furnaces.
In turn, these secondary impacts will affect other parts of the economy. Over time, the increase
in automobile demand may be the cause of change in hundreds of different industries. Input
output analysis is a useful technique for sorting out and quantifying sector-by-sector impacts.
This approach captures not only the direct effects but also related impacts in other parts of the
economy. Input output analysis is based on a table that indicates historic patterns of purchases
and sales between industries. Data for this tables are usually generated from surveying a sample
of firms.
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Criteria of good forecasting technique:

Demand forecasting is useful for the firm to take decisions regarding short term as well as long term
production. Therefore, it is necessary to take great care in making such forecasts. In sound method
of demand forecasting, following standards must be maintained:
1. Accuracy: It is necessary to have accuracy while making demand forecasting. Data of sales must
be collected properly and they must be examined carefully. Efficient staff must be kept to
undertake this responsibility. There must not be more guessing but study all necessary factors
like consumer choice, market share of the product, competition etc. through direct or indirect
contact.
2. Simplicity: Demand forecasting must be made in simple manner which could be understood by
management. The management must be able to deduce required information easily. If
mathematical method is used and if the management cannot conclude it properly, the method
cannot be called good. The method which is easy to understand and reliable can be called sound.
3. Economic: The method of forecasting demand must be economical. It must not be unduly
expensive. Costs must be weighed against the importance of the forecast to the operations of the
business. A question may arise: how much money and managerial efforts should be allocated to
obtain a high level of forecasting accuracy.
4. Effective: The technique employed should be able to produce meaningful results quickly.
Techniques which take a long time to work out may produce useful information too late for
effective management decisions. So the availability of the required forecasts at the right time
should be available for the managers to take decisions about the production.
5. Maintenance of timeliness: The forecast should be capable of being maintained on an up to date
basis. This has three aspects.
i) The relationships underlying the procedure should be stable so that they will carry into
the future for a significant amount of time.
ii) Current data required to use these underlying relationships should be available on timely
basis.
iii) The forecasting procedure should permit changes to be made in the relationship as they
occur.
6. Flexibility: Good demand forecasting method must be flexible. Necessary changes must have
scope in it. The variables used should be such that can be adjusted with changing circumstances.
Conclusion: A carefully chosen demand forecasting technique can help us decreasing the cost of
production as well as it can minimise the cost and complexity involved in the process of forecasting
the future demand.
Technical Analysis:
Analysis of technical and engineering aspects is done continually when a project is being examined
and formulated. The broad purpose of technical analysis is (a) to ensure that the project is
technically feasible in the sense that all the inputs required to setup the project are available and, (b)
to facilitate the most optimal formulation of the project in terms of technology, size, location and so
on. Following aspects are generally covered in technical analysis:
Location and site:
The choice of location and site follows an assessment of demand, size and input requirement.
Though often used synonymously, the terms „location‟ and „site‟ should be distinguished. Location
refers to a fairly broad area like a city, an industrial zone, or a coastal area; site refers to a specific
piece of land where the project would be set up.
The choice of location is influenced by a variety of considerations:
 Proximity to raw materials and markets: an important consideration for location is the
proximity to the sources of raw materials and nearness to the market for the final products.
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In terms of a basic locational model, the optimal location is one where the total cost –
transportation, production, distribution cost – is minimized.
 Availability of infrastructure: Availability of power, transportation, water, and
communications should be carefully assessed before a location decision is made. Adequate
supply of power is a very important condition for location – insufficient power can be a
major constraint, particularly in the case of an electricity-intensive project like an aluminum
plant. Adequate facility of transport i.e. rail, road, water or air transport modes should be
available.
 Labor situation: In labor intensive projects, the labor situation in a particular location
becomes important. The key factors to be considered in evaluating the labor situation are –
availability of labor, prevailing labor rates, labor productivity, state of industrial relations
judged in terms of the frequency and severity of strikes and lockouts and degree of
unionization.
 Governmental policies: Government policies have a bearing on location. In the case of
public sector projects, location is directly decided by the government. It may be based on a
wider policy for regional dispersion of industries. In the case of private sector projects,
location is influenced by certain governmental restrictions and inducements. The
government may prohibit the setting up of industrial projects in certain areas which suffer
from urban congestion. It may offer incentives for starting project in backward areas.
 Other factors: Several other factors have to be assessed as well before arriving at a location
decision. These are – climatic conditions, general living conditions, proximity to ancillary
units and ease in coping with pollution.
Material:
An important aspect of technical analysis is concerned with defining the materials and utilities
required, specifying their properties in some detail, and setting up their supply programme. Material
inputs and utilities may be classified into four broad categories: raw materials, processed industrial
materials and components, auxiliary materials and factory supplies and, utilities.
 Raw materials: Raw materials may be classified into four types (i) Agricultural products:
which include examining quality of agricultural inputs, quantity required, present
marketable surplus, area under cultivation etc. (ii) Mineral products: in assessing mineral
raw materials, information is required on the quantum of exploitable deposits and the
properties of the raw materials. The study should provide details of the location, size and
depth of the deposits and the viability of open cast or underground mining. (iii) Livestock
and forest products: Secondary sources of data on livestock and forest products often do not
provide a dependable basis for estimation. Hence in general, a specific survey may be
required to obtain more reliable data on the quantum of livestock produce and forest
products. (iv) Marine products: Assessing the potential availability of marine products and
the cost of collection is somewhat difficult. Preliminary marine operations, essential for this
purpose, have to be provided for in the feasibility study.
 Processed industrial materials and components: Processed industrial materials and
components represent important inputs for a number of industries. In studying them the
following questions need to be answered: In the case of industrial materials, what are their
properties? What is the total requirement of the project? What quantity would be available
for domestic sources? What quantity can be produced from foreign sources? How
dependable are the suppliers? What has been the past trend in prices? What is the likely
future behavior of prices?
 Auxiliary materials and factory supplies: In addition to the basic raw materials and
processed industrial materials and components, a manufacturing project requires various
auxiliary materials and factory supplies like chemicals, additives, packaging materials,
20
paint, varnishes, oils, grease, cleaning materials etc. The requirement of such auxiliary
material and supplies should be taken into account in the feasibility study.
 Utilities: A broad assessment of utilities (power, water, steam, fuel etc.) may be made at
the time of input study though a detailed assessment can be made only after formulating the
project with respect to location, technology, and plant capacity. Since the successful
operation of a project critically depends on adequate availability of utilities, the following
questions should be raised while conducting the inputs study. What quantities are required?
What are the sources of supply? What would be the potential availability? What are the
likely shortages/ bottlenecks? What measures may be taken to augment supplies?
Product technology / Manufacturing process:

For manufacturing a product/service, often two or more alternative technologies are available. For
example:
 Steel can be made either by the Bessemer process or the open heart process.
 Cement can be made either by the dry process or the wet process.
 Soap can be manufactured by semi boiled process or fully boiled process.
Choice of technology: The choice of technology is influenced by a variety of considerations:
 Plant capacity: Often, there is a close relationship between plant capacity and production
technology. To meet a given capacity requirement, perhaps only a certain production
technology may be available.
 Principal inputs: The choice of technology depends on the principal inputs available for the
project. In some cases, the raw materials available influence the technology chosen. For
example, the quality of limestone determines whether the wet or dry process should be used
for cement production.
 Investment outlay and production cost: The effect of alternative technologies on investment
outlay and production cost over a period of time should be carefully assessed.
 Use by other units: The technology adopted should be proven by successful use by other
units, preferable in India.
 Product mix: The technology chosen must be judged in terms of the total product-mix
generated by it, including saleable by-products.
 Latest developments: The technology adopted must be based on latest developments in order
to ensure inter alia that the likelihood of technological obsolescence in the near future, at
least, is minimized.
 Ease of absorption: The ease with which a particular technology can be absorbed can
influence the choice of technology. Sometimes a high-level technology may be beyond the
absorptive capacity of a developing country which may lack trained personnel to handle that
technology.
Appropriateness of Technology: Appropriate technology refers to those methods of production
which are suitable to local economic, social and cultural conditions. The advocates of appropriate
technology urge that the technology should be evaluated in terms of the following questions:
 Whether the technology utilizes local materials?
 Whether the technology utilizes local manpower?
 Whether the goods and services produced cater to the basic needs?
 Whether the technology protects ecological balance?
 Whether the technology is harmonious with social and cultural conditions?
Site Preparation:
Once the broad location is chosen, attention needs to be focused on the selection of a specific site.
Two to three alternative sites must be considered and evaluated with respect to cost of land and cost
of site preparation and development.
21
The cost of land tends to differ from one site to another in the same broad location. Sites close to a
city cost more whereas sites away from the city cost less. Sites in an industrial area developed by a
governmental agency may be available at a concessional rate.
The cost of site preparation and development depends on the physical features of the site, the need
to demolish and relocate existing structures, and the work involved in obtaining utility connections
to the site. The last element, viz., the work involved in obtaining utility connection and the cost
associated with it should be carefully looked into. It may be noted in this context that the cost of the
following may vary significantly from site to site. Power transmission lines from the main greed,
railway siding from the nearest railroad, feeder road connecting with the main road, transport of
water, and disposal effluents.
Project Engineering (Machinery and Equipment):

The requirement of machineries and equipments is dependent on production technology and plant
capacity. It is also influenced by the type of project. For a process-oriented industry, like a
petrochemical unit, machineries and equipments required should be such that the various stages are
matched well. The choice of machineries and equipments for a manufacturing industry is somewhat
wider as various machines can perform the same function with varying degrees of accuracy. For
example, the configuration of machines required for the manufacture of refrigerators could take
various forms.
To determine the kinds of machinery and equipment required for a manufacturing industry, the
following procedure may be followed: (Estimate the likely levels of production over time. (ii)
Define the various machining and other operations. (iii) Calculate the machine hours required for
each type of operation. (iv) Select machineries and equipments required for each function.
The equipments required for the project may be classified into the following types: (i) plant
(process equipment) (ii) mechanical equipments (iii) electrical equipments (iv) instruments (v)
controls (vi) internal transportation system.
In addition to the machineries and equipments, a list should be prepared of spare parts and tools
required.
Manpower Projections:
Following information must be considered before deciding about the manpower required for the
factory.
 Size of the plant
 Number of machines
 Number of shifts in a day
 Skill level and education of workers
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Unit 3: Financial Projections

Preparation of the projected financial statements:
The projected financial statements that are included in the business plan are the opening-day
balance sheet, the projected income statements, and the projected cash flow and funds flow
statements. Before describing these, a discussion of accounting methods is necessary because
several different methods are used to develop financial statements.
Accounting Methods:
Cash basis: The cash basis is the simplest method and is the easiest to use. The cash basis records a
sale when payment is received from the customer and records an expense when the bill is paid. For
some business (especially service businesses that do not extend credit) this method works well and
can be used for management purposes and for tax purposes. However, the cash basis does not
always provide an accurate picture of the financial status of the company. Also, for companies that
extend credit to their customers, the cash basis does not work well because the cash received from
customers is not necessarily an accurate reflection of sale. Collections from customers may leg
behind sales, making sales appear lower than they actually are.
Accrual Basis: The accrual basis records sales when they are made and records expenses when
they are incurred. This method is not as simple as the cash method but gives an accurate picture of
the financial health of the company. For companies that carry inventory and/or those that extend
credit, the accrual basis is the best method to use.
Completed Contract Method: Some firms, such as construction companies, work on projects that
extend over many months. In these instances, it would give an inaccurate portrayal of the company
if no expenses or income were recorded until the project is completed. For this reason, a method
known as the completed-contract method is used. The customer is often billed as the project
progresses and a corresponding amount of expenses for materials and labor are recorded at the same
time. This presents a more accurate picture of the income and expenses than if the cash or accrual
method were used.
Estimates of Sales and Production:

Typically, the starting point for profitability projections is the forecast of sales revenues. In
estimating sales revenues, the following considerations should be taken into consideration:
1. Low capacity utilization in initial years: It is not advisable to assume high capacity
utilization in the first year of operation. Even if the technology is simple and the company
may not face technical problems in achieving a high rate of capacity utilisation in the first
year itself, there are likely to be other constraints like raw material shortage, limited power,
marketing problems, etc. It is sensible to assume that capacity utilization would be
somewhat low in the first year and rise thereafter gradually to reach the maximum level in
the third or fourth year of production.
2. Production equal to sales: It is not necessary to make adjustments for stocks of finished
goods. For practical purposes, it may be assumed that production would be equal to sales.
3. Present selling price: The selling price used may be the present selling price – it is generally
assumed that changes in selling price will be matched by proportionate changes in cost of
production.
Sales and production are closely inter-related. Hence they may be estimated together. For this
purpose, following format may be used for preparing estimated production and sales.
23
Estimate of production and sales

(Details may be furnished separately for each product and until the plant reaches maximum capacity utilization)
Product Product
1st yr. 2nd yr 3rd yr 4th yr 1st yr. 2nd yr 3rd yr 4th yr
1. Installed capacity (qty. per day per annum)
2. No. of working days
3. No. of shifts
4. Estimated production per day (qty.)
5. Estimated annual production (qty.)
6. Estimated output as % of plant capacity
7. Sales (qty.) (after adjusting sales stock)
8. Value of sales (in „000 of Rs.)
Product
(I)
(II)
(III)
Note: Production in the initial period should be assumed at a reasonable level of utilization of capacity increasing gradually to attain full capacity in
subsequent years.
Cost of production:
Given the estimated production, the cost of production may be worked out. The major components
of cost of production are:
 Material cost
 Utilities cost
 Labour cost
 Factory overhead cost
Materials: The most important element of cost, the material cost comprises of the cost of raw
materials, chemicals, components and consumable stores required for production. It is a function of
the quantities in which these materials are required and the prices payable for them.
While estimating the material cost, following points should be borne in mind.
1. Requirements of various material inputs per unit of output may be established on the basis
of one or more of the following (a) theoretical consumption norms (b) experience of the
industry (c) performance guarantees and (d) specification of machinery suppliers.
2. The total requirements of various material inputs can be obtained by multiplying the
requirements per unit of output with the expected output during the year.
3. The prices of material inputs are defined in CIF (cost, insurance and freight) terms.
4. The present cost of various material inputs is considered.
5. If seasonal fluctuations in prices are regular, the same must be considered in estimating the
cost of material inputs.
Utilities: Utilities consists of power, water and fuel. The requirements of power, water and fuel may
be determined on the basis of the norms specified by the collaborators, consultants etc. or the
consumption standards in the industry, whoever is higher.
The cost of power shown here would include only the cost of bought out power and it may be
estimated on the basis of power tariff structure of the concerned electricity boards. The cost of
captive power would naturally be reflected in the cost of fuel. The cost payable to local authorities
and charges payable to some other firms for water and/or steam supply may be shown separately.
Where the entire water requirement is met out of one‟s own wells, water charge need not be shown
separately. The cost of fuel (furnace oil, coal, firewood etc.) often an important item, is somewhat
difficult to estimate.
Labour: Labour cost is the cost of all the manpower employed in the factory. Labour cost naturally
is a function of the number of employees and the rate of remuneration. The requirement of workers
depends on the number of operators / helpers required for operating various machines and manning
24
various services. The number of supervisory personnel and administrative staff may be calculated
on the basis of the general norms prevailing in the industry.
Labour cost may be calculated for the year in which the maximum capacity utilization is first
achieved. For the earlier years, when the capacity utilization tends to be low, somewhat lower
labour costs, but not proportionately lower in relation to capacity, may be assumed.
Factory overheads: The expenses on repairs and maintenance, tent, taxes, insurance on factory
assets, and so on are collectively referred to as factory overheads. Repairs and maintenance
expenses depends on the state of the machinery – this expense tends to be lower in the initial years
and higher in the later years. Rent, taxes, insurance etc. may be calculated at existing rates. A
provision should be made for miscellaneous factory expenses. In addition, a contingency margin
may be provided on the items of factory overheads.
Working capital requirements and its financing

In estimating the working capital requirement and planning for its financing, the following points
have to be borne in mind:
1. The working capital requirement consists of the following: (i) raw materials and components
(ii) stocks of goods-in-process (iii) stocks of finished goods, (iv) debtors (v) operating
expenses etc.
2. The principal sources of working capital finance are (i) working capital advances provided
by commercial banks (ii) trade credit (iii) accruals and provisions, and (iv) long term
sources of financing.
3. There are limits to obtaining working capital advances from commercial banks. They are in
two forms (i) the aggregate permissible bank finance is specified as per the norms of lending
followed by the lending bank (ii) against each current asset a certain amount of margin
money has to be provided by the firm.
Following format may be used to estimate the working capital requirement, the amount of likely
bank finance available, and the margin money for working capital to be provided from long-term
sources.
Margin money for working capital
Items No. of months requirements Bank margin availability Amount 1Year*
Amt. of bank finance Margin money Amt.
(1) (2) (3) (4) (5) (6) (7)
1. Indigenous raw materials/components
Less: Trade credit
Net indigenous raw materials, components
2. Imported raw materials/components
3. Consumable stores
Less: Trade credit
Net consumable stores
4. Wages and salaries
5. Cost of fuel, light and power, taxes, insurance, rent etc.
6. Cost of repairs and maintenance
7. Packing and sales expenses
8. Stock of finished goods at cost excluding depreciation
9. Stock of goods-in-process
10. Outstanding debtors
11. Other items of working capital if any.
Less: Trade credits available on raw materials and consumables
Net working capital**
Note: 1. The information may be provided for the initial years until the unit reaches maximum capacity utilization.
2. The amounts given here shall agree with the figures in the profitability statements as well as the cash flow statements.
* Similar information has to be furnished for the II, III and IV years.
** Advance payments, if any, from customers against orders should be deducted from the net working capital and margin money.
25
Profitability projections (or estimates of working results)

Given the estimates of sales revenues and cost of production, the next step is to prepare the
profitability projections or estimates of working results may be prepared along the following lines:
A. Cost of production
B. Total administrative expenses
C. Total sales expenses
D. Royalty and know-how payable
E. Total cost of production (A+B+C+D)
F. Expected sales
G. Gross profit before interest
H. Total financial expenses
I. Depreciation
J. Operating profit (G-H-I)
K. Other income
L. Preliminary expenses written off
M. Profit / loss before taxation (J+K-L)
N. Provision for taxation
O. Profit after tax (M-N) less dividend on preference capital and equity capital
P. Retained profit
Q. Net cash accrual (P+I+L)
Following figure shows representation of estimates of working results:

(The statement should be prepared for ten years)
A Cost of production
Administrative expenses
Administrative salaries
Remuneration to directors
Professional fees
Light, postage, telegrams and telephones, office supplies etc.
Insurance and taxes on office property
Miscellaneous
B Total Administrative Expenses
C Total Sales Expenses
D Royalty and know-how payable
E Total Cost of Production (A+B+C+D)
F Expected Sales
G Gross profit before interest (F – E)
Financial Expenses
Interest on term loans
Interest on borrowings for working capital
Guarantee commission
H Total Financial Expenses
I Depreciation
J Operating profit (G – H – I)
K Other income, if any
L Preliminary expenses, written off
M Profit / Loss before taxation (J+K – l)
N Provision for taxation
O Profit after tax (M – N)
Less dividend on
Preference capital
Equity capital
P Retained profit
Add depreciation
Preliminary expenses written off
Q Net cash accruals
Note: Detailed working shall be provided for the calculation of depreciation, interest, taxation etc.
Projected Balance Sheet

The balance sheet, showing the balances in various asset and liability accounts, reflects the financial
condition of the firm at a given point of time. Following table shows horizontal format of balance
sheet prescribed by the Companies Act:
26
Liabilities Assets
Share capital Fixed assets
Reserves and surplus Investments
Secured loans Current assets, loans and advances
Unsecured loans Miscellaneous expenditures and losses
Current liabilities and provisions
The liabilities side of the balance sheet shows the sources of finance employed by the business. The
asset side of the balance sheet shows how funds have been used in the business. For preparing the
projected balance sheet at the end of year n+1, we need information about the following:
 The balance sheet at the end of year n
 The projected income statement and the distribution of earnings for year n+1
 The sources of external financing proposed to be tapped in year n+1
 The proposed repayment of debt capital (long-term, intermediate term. And short term)
during year n+1
 The outlays and the disposal of fixed assets during year n+1
 The changes in the level of current assets during year n+1
 The changes in other assets and certain outlays like preoperative and preliminary expenses
during year n+1
 The cash balance at the end of year n+1
Following is the example of balance sheet.
Projected Balances in Liabilities and Assets Accounts
Account category Op. Bal. Changes during the Year Cl. Bal.
Liabilities
Share capital 100 - 100
Reserves and Surplus 20 +20 (Retained Earnings) 40
Secured loans 80 +20 (Additional term loan) -5 (repayment) 95
Unsecured loans 50 +10 (Proposed increase) 60
Current liabilities 90 - 90
Provisions 20 - 20
------
405
Assets:
Fixed assets 180 +30 (Add. Outlay)-20 (Depreciation) 190
Investments - -
Current assets 180
Cash 20 30*
Inventories 80 +10 (Proposed increase) 90
Receivables 80 +15 (Expected increase) 95
-----
Total 405
* This is the balancing term
27
Projected Cash flow statement:
28
29
30
31
32
33
34
35
36
37
38
Projected funds flow statement:

Funds Flow Statement is a statement prepared to analyse the reasons for changes in the Financial
Position of a Company between two Balance Sheets. It shows the inflow and outflow of funds i.e.
sources and applications of funds for a particular period. In other words, a Funds Flow Statement is
prepared to explain the changes in the Working Capital position of a Company. There are two types
of inflows of funds:
1. Long term funds raised by issue of shares, debentures or sale of fixed assets
2. Funds generated from operations
If the long term fund requirements of a company are met just out of the long term sources of funds,
then the whole fund generated from operations will be represented by increase in working capital.
However, if the funds generated from operations are not sufficient to bridge a gap of long term fund
requirements, then there will be a decline in working capital.
Difference between funds flow statement and cash flow statement:

Both funds flow statement and cash flow statement are used in analysis of part transactions of a
business firm. However, there are some differences between the two as given below:
1. Funds Flow statement is based on accrual system of accounting. However, in case of Cash
Flow statement – only the transactions effecting cash or cash equivalents are taken into
consideration.
2. Funds Flow statement analyses the sources and application of funds of long term nature and
the net increase or decrease in long term funds will be reflected on the working capital of the
firm. The Cash Flow statement only considers the increase or decrease in current assets or
current liabilities in calculating the Cash Flow of funds from operations.
3. Funds Flow statement is more useful for long term financial planning. Cash Flow analysis is
more useful for identifying and correcting the liquidity problems of the firm.
4. Funds Flow statement tallies the funds generated from various sources with various uses to
which they are put. Cash Flow statement starts with the opening balance of cash and reaches
to the closing balance of cash.
Benefits of Funds Flow statement:

Funds Flow statement is useful for long term analysis. It is a very useful tool in the hands of the
management for judging the financial and operating performance of the company. The Balance
Sheet and the Profit and Loss A/c (Income Statement) fail to provide the information which is
provided by the Funds Flow statement i.e. changes in financial position of an enterprise. Such an
analysis is of great help to the management, shareholders, creditors etc. Following are the main
benefits of Funds Flow statement:
1. Funds Flow statement helps in answering the questions like where have the profits gone?
Why is the concern financially solid in spite of losses?
2. The Funds Flow statement analysis helps the management to test whether the working
capital has been effectively used or not and the working capital level is adequate or
inadequate for the requirements of the business. The working capital position helps the
management in taking policy decisions regarding payment of dividend etc.
3. The Funds Flow statement analysis helps in investors to decide whether the company has
managed the funds properly. It also indicates the credit worthiness of a company which
helps the lenders to decide whether to lend money to the company or not. It helps the
management to take policy decisions and to decide about the financing policies and capital
expenditure for the future.
39
Preparation of Funds Flow statement:

Following steps must be followed for preparation of Funds Flow statement:
Step I: Prepare statement of changes in working capital:
For preparing the funds flow statement, the first step is to prepare the statement of Changes in
Working Capital. There may be several reasons for changes in the working capital position of a
company, some of which have been discussed below:
1. Purchase of fixed assets or long term investments without raising long term funds
2. Payments of dividends in excess of the profits earned.
3. Extension of credit to the customers.
4. Repayment of long term liability or redemption of preference share without raising long
term resources.
E.g. From Balance Sheet of X ltd. for the year ending 2010 and 2011, prepare statement of changes
in working capital.
Particulars 2010 2011 Change in Working Capital

Current Assets
Inventory 1524 1491 -33
Sundry Debtors 126 183 +57
Cash and Bank 134 166 +32
Other Current Assets 8 9 +1
Loans and Advances 1176 1474 +298
2968 3323 +355
(Less) Current Liabilities
Liabilities 1776 1483 -293
Provision for Tax 622 745 +123
Proposed Dividend 65 207 +142
2463 2435 -28
Working Capital 505 888 383
Step II: Prepare Funds from Operations

The next step is to prepare the funds generated only from the operating activities of the business and
not from the investing / financing activities for the business. The funds from operations shall be
prepared as follows:
Particulars Amount
Net Income Xxx
ADD
1. Depreciation on Fixed Assets Xxx
2. Amortization of Intangible Assets Xxx
3. Amortisation of Loss on Sale of Investments Xxx
4. Amortisation of Loss on sale of Fixed Assets Xxx
5. Losses from Other Non-Operating Incomes Xxx
6. Tax Provision (Created out of Current Profits) Xxx
7. Proposed Dividend Xxx
40
8. Transfer to Reserve Xxx

(LESS)
1. Deferred credit Xxx
2. Profit on Sale of Investments Xxx
3. Profit on Sale of Fixed Assets Xxx
4. Any written back Reserve & Provision Xxx
Step III: Preparation of Funds Flow Statement

While preparing the Funds Flow statement, the sources and uses of funds are to be disclosed clearly
so as to highlight the sources from where the funds have been generated the uses to which these
funds have been applied. This statement is also sometimes referred to as the Sources and
Applications of Funds Statement or Statement of Changes in Financial Position.
Sources of Funds:
Items to be shown under the head sources of funds are as follows:
1. Issue of shares and debentures for cash: The total amount received from the issue of shares
or debentures is to be shown under this head. But, the issue of bonus shares or conversion of
debentures into equity shares or shares issued to vendors shall not be shown here as there is
no inflow of cash.
2. Long term loans: The amount received on raising long term loans is shown under this head.
Short term loans are not to be shown here as their treatment has already been done while
preparing the statement of changes in working capital.
3. Sale of investments and other fixed assets: The total amount received on the sale of
investments and other fixed assets is to be shown under this head.
4. Funds from operations: The funds generated from operations as computed in step II are also
required to be shown here.
5. Decrease in working capital: This would be the balancing figure of the statement and will
come from change in working capital statement.
Application of funds:
Items to be shown under application of funds are as follows:
1. Purchase of fixed assets and investments: The cash payment made for purchase of fixed
assets and investments is an application of funds. But if the purchase if made by issue of
shares or debentures, such transaction will not constitute application of fund. Similarly, if
the purchases are on credit, these will not constitute fund applications.
2. Redemption of debentures, preference shares and repayment of loan: Payment made
including premium (less discount) is to be taken as fund application.
3. Payment of dividend and tax: Payment of dividend and tax are to be taken as applications
of fund if the provisions are excluded from current liabilities and current provisions are
added back to profit to determine the funds from operations.
4. Increase in working capital: This would be the balancing figure of statement and will
come from change in working capital statement.
As explained above, the Funds Flow statement summarizes for a particular period the resources
made available to finance the activities of an enterprise and the use to which such resources have
been put.
41
Debt Service Coverage Ratio:

Definitions:
Used in Government financing:
It is the amount of export earning needed to meet annual interest and principal payments on a
country‟s external debts.
In corporate financing:
It‟s the amount of cash flow available to meet annual interest and principal payments of debts
(including sinking fund payment loan).
General Definition:
It is the measurement of a property‟s ability to generate enough revenue to cover the cost of its
mortgaged payments.
Equation:
DSCR = NOI
Total Debt
OR
= EBIT
Interest + (principal amount / 1-Tax)
Where NOI = Net Operating Income and EBIT = Earnings Before Interest and Tax
Ideal DSCR ratio = 2:1
Uses:
1. Used to measure the ability to produce enough cash to cover its debts.
2. Used for trend analysis as increase or decrease gives idea related to the firm for liquidity
position.
3. Helps in comparison with other companies in similar industries and also helps to set the
finance management goals.
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Unit IV
Financing the project
Introduction:
Finance is one of the basic requirements of a project, which entrepreneur needs to start within every
stage of the project. Project finance is both for short term and long term. The sources from which
the entrepreneurs can meet their financial needs for their projects are: Internal sources and external
sources. Besides, the entrepreneur raises finance by availing of available subsidies, state aid to
industries etc. Project finance is very crucial to the success of a project.
Project financing:
Project financing concept is very old but it has gained prominence during the last two decades.
There was a time when project finance was a fairly simple banking exercise. That time is now past.
Today, many changes in the economic environment have taken place. The figures for total
investment in almost any major capital plant development has increased to a considerable extent.
That is why, there is a need for national approach to project financing.
The gamut (range, length, scale) of „feasibility‟ covers the following areas:
1. Whether idea is technically sound – Technical Feasibility
2. Would it be commercially viable – Commercial Viability
3. Would it be economically feasible – Economic Viability
4. What financial demand would it make on promoters, the company and outside creditors? To
put it differently, what is the size of funds requirement or cost of the project?
5. What can be the probable sources that can be trapped – Financial plan
6. Would the project be a paying proposition? – Financial Viability
The „Technical Feasibility Analysis‟ is an attempt to study the project basically from a technical
angle.
(i) Understanding a preliminary study of technical requirements to have a quick evaluation.
(ii) The exercise begins with engineering and technical specifications and covers the
requirements of the proposed project as to quality, quantity specifications of each type of
components of plant and machinery, accessories, raw-materials, labour, fuel, power,
water, effluent, disposal, transportation etc.
„Commercial and Economic viability‟

(i) Getting a feel of market
(ii) Assessment of aggregate demand – existing and future
(iii) Determining the extent of supply to meet the expected demand
(iv) Arriving at the physical requirement of production inputs such as raw-material, power,
labour etc. at various levels of output.
(v) Estimating the profitability of the project and BEP
„Financial Appraisal‟ is the most important aspect of project financing. It includes following:
(i) The total capital cost of project
(ii) The means of finance to meet the projected cost
(iii) The projected operating costs, and revenues and prospective.
Institutional finance to entrepreneurs

Introduction:
With the quickened pace of economic development under the impetus of five-year plans, the most
startling change in the Indian economy has been the initiation of an industrial revolution and re-
emergence of small scale industries.
43
Institutional finance:
These far-reaching developments and the scale and scope of operation of entrepreneurs,
particularly, in SSI, have brought to the fore the importance of provision of administrative and
institutional assistance at various levels.
Over the years, financial institutions are playing a key role in providing finance and counselling to
the entrepreneurs to start new ventures as well as modernise, diversify and even rehabilitate sick
enterprises.
Institutional agencies grant financial assistance to small scale units for:
 Participation in equity share
 Acquisition of fixed assets by way of term loans and
 Working capital
Credit facilities granted by commercial banks and state financial corporations are covered under the
„Credit Guarantee Scheme‟ for SSI which offers protection to credit institutions against possible
losses.
Institutions that help entrepreneurs and enterprise:

(a) NSIC: National Small Industries Corporation
SIDO: Small Industries Development Organisation
KVIC: Khadi and Village Industries Commission
Handloom board, silk board, commodity board etc. have schemes to help SSI units in
marketing their products. Some of them also help in promoting exports of goods
manufactured by SSI units.
(b) SIDO is one of the important agencies that help SSI units in marketing their products
through consultancy, testing and marketing facilities. The SIDO functions as a model
agency for formulating, coordinating and monitoring policies and programme for promotion
and development of SSI in the country.
(c) SIDO also promotes ancillary SSI units on taking advantage of SIDO facility and secure a
regular market for their products.
(d) DICs (District Industries Centres) provides marketing and other assistance to SSI units.
(e) SICs (Small Industries Corporation) participate in tender programme of government
purchases and then sub-contracts these tenders to SSI units.
(f) The government of India has established trade centres at various places which disseminate
information on market potentials. Trade centres also organise fairs and exhibitions where
SSI units can exhibit and sell their products.
(g) SISIs (Small Industries Service Institute) have been set up by SIDO at various places for
disseminating market information.
(h) The small scale industrial sector raises term credit and working capital required by it from
commercial banks, cooperative banks and state financial corporations.
Also such development corporations like following provides finance for various firms of medium
and large scale:
1. The Industrial Development Bank of India (IDBI)
2. The Industrial Credit and Investment Corporation of India (ICICI)
3. The Industrial Finance Corporation of India (IFCI)
4. The industrial Reconstruction Bank of India (IRBI)
5. Small Industrial Development Bank of India (SIDBI)
6. State Industrial Development Corporation (SIDC)
7. State Financial Corporations (SFCs)
44
These institutions together with Life Insurance Corporation of India (LIC), General Insurance
Corporation (GIC) and the Init Trust of India (UTI) play a significant role in the rapid growth of
small scale industry.
NABARD (National Bank for Agriculture and Rural Development) has been set up for the supply
of credit to entrepreneurs in agriculture and for small village and cottage industries in rural areas.
SIDCs (State Industrial Development Corporations) were set up in the 1960s to work as catalysts in
the industrial development of states. The SIDCs are established as owned undertakings of the state
governments under the Companies Act, 1956 or as autonomous corporations under specific Acts. In
addition to providing term assistance to industrial projects by way of loans underwriting and
guarantees, the activities of SIDCs also covered promotional functions such as:
 Formulation of project idea through industry potential surveys.
 Preparation of feasibility reports and
 Selection and training of potential entrepreneurs.
Further, activities of SIDCs extended to setting up of industrial project in the medium and large
sectors and in the joint sector i.e. in partnership with private entrepreneurs.
Extension of operation:
Assistance sanctioned by financial institutions rose many folds from one plan too another while it
was Rs. 37.47 crores in the first five year plan, assistance rose to 2,19,933 crores in the eighth plan.
As against this, during the ear 1997-98, financial institutions sanctioned Rs. 81589 crores and
disbursed Rs. 53,832 crores.
Financial Assistance from various Financial Institutions:

After independence, a number of financial institutions have been established which now represent
the most important source of finance for industrial projects. These institutions can be classified into
two categories:
(I) All India Financial Institutions
a. IDBI
b. ICICI
c. IFCI
(II) State Level Institutions
a. SFC (State Financial Corporations)
b. SIDC (State Industrial Development Corporations)
Forms of financial assistance from various funding institutions

Financial institutions can be broadly classified into national financial institutions and state level
institutions. Some schemes of the national institutions are administered through the state level
institutions. National financial institutions cater mostly to large and medium industries. Small-scale
industries get assistance, largely from state level institutions.
All India Institutions

 Industrial Finance Corporation of India (IFCI)
 Industrial Credit and Investment Corporation of India (ICICI)

 Industrial Development Bank of India (IDBI)
 Life Insurance Corporation of India (LIC)
 General Insurance Corporation of India (GIC)
 Unit Trust of India (UTI)
45
 Industrial Investment Bank of India (IIBI) (formerly known as Industrial Reconstruction

Bank of India (IRBI))
 The Export-Import Bank of India (EXIM Bank)
State level Institutions
 State Financial Corporations (SFCs)
 State Industrial Development Corporations (SIDCs)
Forms of Assistance
The forms of assistance can be broadly classified into direct assistance and indirect assistance. The
basic feature of direct assistance is that financial institutions provide funds directly to the project,
whereas, in indirect assistance, the financial institutions provide guarantees on behalf of the
promoter(s) of the project.
Direct assistance or Fund based assistance

In this kind of assistance, term loans are provided in both rupees and in foreign currency. Apart
from this, funds are provided by subscription to the equity shares of the company.
 Rupee term loans
Rupee term loans are extended for site, construction, factory and other buildings; purchase of plant
and machinery, as well as, for technical knowhow, preliminary and pre-operative expenses, and
margin money for working capital. Generally, the repayment period is five to fifteen years with an
initial moratorium of six months.
 Foreign currency term loans
Institutions provide term loans in foreign currency to fund the acquisition of fixed assets like plant
and machinery, as well as to acquire technical knowhow from foreign suppliers. Institutions
generally ask for a first charge on the assets financed by them, and on all other fixed assets of the
borrower, to secure the loans.
 Subscription to Equity Shares
This form of assistance is available to the project only when institutions are sure that the project is
not able to take any more debt, although the proposed venture is worthwhile. It is often a very small
part of the project cost.
 Seed Capital Assistance
This form of assistance is provided by national financial institutions through the State Finance
Corporations (SFCs) and the State Industrial Development Corporations (SIDCs). All borrowers
have to submit their proposals, through their respective SFCs and SIDCs. This assistance carries
interest as low as one percent, and can be payable on easy terms, subject to the applicability of
certain conditions.
 Risk capital assistance
Risk capital assistance is almost the same as seed capital assistance. It is offered by the IFCI
through a society formed under the Society Registration Act. Loans under this scheme are generally
interest free and range between Rs. 15-40 lakhs, depending on the number of the promoters and the
cost of the project.
Indirect Assistance
 Deferred Payment Guarantee
Financial institutions provide this deferred credit facility to the equipment suppliers on behalf of
their clients and charge guarantee commission to the client. Guarantee is provided for the purchase
46
of both indigenous and imported equipment. Most scheduled banks and co-operative banks provide
this facility.
 Guarantee for Foreign Currency Loans
This kind of guarantee is provided to the client as raised term loans from overseas market, directly.
Institutions stand guarantee to the borrower, who is yet to establish him in the overseas market or
does not have high credit standing.
 Underwriting
Institutions usually underwrite the public issue of those clients, who have invested in the project
cost, through term loans.
 Bill Rediscounting Scheme
This scheme has been introduced by IDBI to help domestic producers and dealers of capital goods.
Under this scheme, deferred payment facility is available for the purchase of machinery in all
categories forms of businesses such as proprietary concerns, partnerships, private and public
companies, co-operative societies and corporations.
 Suppliers Line of Credit
This scheme has been floated by ICICI to enable domestic manufacturers and dealers increase their
sales by offering deferred credit to their buyers. This scheme is similar to the Bill Rediscounting
Scheme of IDBI.
 Equipment Finance Scheme
This scheme has been offered by the two institutions- IDBI and IFCI. They provide assistance to
existing units to acquire indigenous/imported equipment.
Financial Institutions:
IDBI – Industrial Development Bank of India:
IDBI was established in July 1964, to act as apex bank in the field of industrial finance and capital
market to provide credit and other facilities for the development of the fledgling Indian industry. It
is currently 10th largest development bank in the world in terms of reach with 1945 ATMs, 1159
branches including one overseas branch at DIFC, Dubai and 779 centers including two overseas
centres at Singapore & Beijing. IDBI Bank is on a par with nationalized banks and the SBI Group
as far as government ownership is concerned. It is one among the 26 commercial banks owned by
the Government of India. The Bank has an aggregate balance sheet size of Rs.2908.37 billion as on
31 March 2012.
Objectives of IDBI:
1. It is the apex institution to co-ordinate, supplement and integrate the activities of all existing
specialized financial institutions.
2. It is in charge of conducting techno-economic studies.
3. It was expected to fulfill the needs of rapid industrialization.
Functions of IDBI
Various functions of or types of assistance to be provided by the IDBI are as follows:
(i) Direct Financial Assistance:

The IDBI provides direct financial assistance to the industrial concerns in the form of (a) granting
loans and advances; and (b) subscribing to, purchasing or underwriting the issues of stocks, bonds
or debentures.
47
(ii) Indirect Financial Assistance:

The IDBI provides indirect financial assistance to the small and medium industrial concerns
through other financial institution, such as, State Finance Corporations, State Industrial
Development Corporations, Cooperative banks, regional rural banks, commercial banks. The
Assistance to these institutions include :(a) refinancing of loans given by the institutions;
subscribing to their shares and bonds; (c) rediscounting of bills.
(iii) Development Assistance:

The creation of the Development Assistance Fund is the special feature of the IDBI. The Fund is
used to provide assistance to those industries which are not able to obtain funds in the normal
course mainly because of heavy investment involved or low expected rate of returns. The financial
resources of the Fund mainly come from contributions made by the government in the form of
loans, gifts, donations, etc; and from other sources. Assistance from the Fund requires the prior
approval by the government.
(iv) Promotional Function:

Besides providing financial assistance, the IDBI also undertakes various promotional activities such
as marketing and investment research, techno- economic surveys. It provides technical and
administrative advice for promotion, expansion and better management of the industrial concerns.
ICICI (Industrial Credit and Investment Corporation of India)

ICICI was established in 1955 and sponsored by World Bank to assist industries in the private
sector. It is pioneer institution to provide foreign currency loans. It actively participates in Equity
finance. It also offers long term loans.
ICICI provides managerial and technical assistance to industrial houses. It helps promoters in
planning and execution of new projects. It has a separate merchant banking division.
Resources:
ICICI has resources in share capital Rs. 49.50 crores, Reserves Rs. 125.48 crores, Borrowings Rs.
1957.70 crores. The total resources at the end of December 1985 were Rs. 2133 crores.
Objectives of ICICI:
(a) To assist in the creation, expansion and modernisation of private concerns.
(b) To encourage the participation of internal and external capital in the private concerns.
(c) To encourage private ownership of industrial investment.
Functions:
ICICI performs following functions:
1. Specialized in getting foreign currency loans.
2. It is a valuable hand to private sector in Indian economy.
3. It provides finance to riskier non-traditional industries.
4. It has established an investment centre to promote foreign collaboration and an institute of
financial management for developing financial executives.
5. It has fostered the growth of healthy capital market in India.
6. It has taken good interest in the development of backward areas as well as in Equity
participation.
7. It has good performance on economic development.
48
Financial Assistance:
The performance of the ICICI in the field of financial assistance provided to the industrial concerns
has been quite satisfactory. Over the years, the assistance sanctioned by the Corporation has grown
from Rs.14.8 crore in 1961-62 to Rs. 43.0 crore in 1970-71 and Rs. 36229 crore in 2001-02.
Similarly the amount disbursed has increased from Rs.8.6 crore in 1961-62 to Rs.29.8 crore in
1970-71 and to Rs. 25831 in 2001-02. Cumulatively, at the end of March 1996, the ICICI has
sanctioned and disbursed financial assistance aggregating Rs. 66169 crore and Rs. 36591 crore
respectively.
IFCI (Industrial Finance Corporation of India)

In 1948 it was IFCI was established to provide medium and long term financial assistance to large
scale industries.
Resources: It has paid up share capital of 45 crores and other resources add up to more than Rs.
150 crores. IFCI accepts deposits from public RBI, IDBI and raises foreign loans from foreign
credit institutions.
Functions:
Following are the functions performed by IFCI
1. Granting loans to industries
2. Underwriting of industrial securities
3. Direct participation in equity and debenture capital.
4. Acting as a guarantor for loans, debentures and for payments against import of capital
goods.
5. Acting as the agent of central government and IDBI in respect of loans sanctioned by them
to industrial concerns.
6. It provides direct assistance to industries in the form of Term Loans.
7. It provides Foreign currency loans to the corporate to encourage foreign trade
8. It encourages the New as well as the existing corporate to raise capital through different
types of securities. IFCI undertakes the function of underwriting of corporate securities.
9. Provides leasing and Hire-Purchase financing to industrial establishments.
10. IFCI provides Merchant Banking services and undertake project counselling, issue
management and debenture trusteeship assignments.
11. It provides soft loans to undertake modernization programmes.
Assistance: In all sectors, minimum Rs. 10 lakhs and maximum assistance is Rs. 1 crore. Maximum
period of loan is 25 years. Rate of interest is 14% on loans, lower rate is charged in backward areas.
IFCI has assisted textile, chemicals, fertilizer, cement metal and metal products, motor, glass,
rubber and food enterprises.
SFC (State Financial Corporations)

Establishment
In order to meet the financial requirements of small scale and medium-sized industries, there was a
need of special financial institutions. With this view, the Central Government passed the State
Financial Corporation Act of 28th September, 1951 which empowered the state government to
establish financial corporation to operate within the state. So far (till now) 18 state financial
corporation have been established in different states.
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Objectives
(i) To establish uniformity in regional industries, (ii) To provide incentive to new industries, (iii) To
bring efficiency in regional industrial units, (iv) To provide finance to small-scale, medium sized
and cottage industries in the state, (v) To develop regional financial resources.
Functions
(i) To provide loans for a period not exceeding 20 years to industrial units. (ii) To underwrite the
issue of shares, debentures and bonds for a period not exceeding 20 years of industrial units. (iii) To
give guarantee to loans taken by industrial units for a period not exceeding 20 years. (iv) to make
payment of capital goods purchased in India by these industrial units. (v) To subscribe to the share
capital of the industrial units, in case they wish to raise additional capital. (vi) To do all such acts as
may be incidental of its duties under this Act.
Management
State Financial Corporation of every State is Governed by a board of directors consisting of 18
directors in all, duly elected and nominated.
 Share Capital: The State Financial Corporation can have share capital ranging from Rs. 50
lakhs to Rs. 5 crores. It can be increased up to Rs. 10 crores with the prior sanction of the
Central Government.
 Bond and Debentures: The State Financial Corporation can issue bonds and debentures to
a maximum of ten times the amount of its paid-up capital and reserve fund.
 Public Deposits: The State Financial Corporation can accept public deposits for a maximum
period of 5 years. However, the total amount received by way public deposits should not
exceed twice its paid-up capital.
 Other Sources: Borrowings from the state government and the Reserve Bank.
Review of Working Progress (Operations)

By now 18 State Financial Corporations have been established almost in all the states. The 18 state
financial corporations in all sanctioned and disbursed a sum of Rs. 31, 172 crores and Rs. 22, 198
crores up to 31st March, 1997. This is evident from the table given below:
Critical evaluation
It has been alleged that the State Financial Corporations are not working in accordance with the
financial needs of the small-scale, medium-sized and cottage industries. The main arguments
against their working are- (i) Inadequate Assistance; (ii) Undue delay in sanctioning and disbursing
loans; (iii) Indifferent attitude towards new business enterprises; (iv) Absence of financial technical
experts; (v) Speed of progress is quite low; (vi) Complex working procedure and full of
unnecessary and unwanted formalities; (vii) Shortage of requisite capital; (viii) Difference between
loans sanctioned and disbursement is quite large; (ix) Lack of requisite training facilities to
employees; and (x) Inadequate underwriting.
SIDCs (State Industrial Development Corporations)

STATE INDUSTRIAL DEVELOPMENT CORPORATIONS (SIDCS)
The State Industrial Development Corporations have been set up by the State Governments as
companies wholly owned by them. At present, 22 such SIDCs are functioning in India. SIDCs are
not merely financing agencies, but are intended to act as instruments for accelerating the pace of
industrialization in the respective States.
Besides providing financial assistance to industrial concerns by way of loans, guarantees and
underwriting of or direct subscriptions to shares and debentures, the SIDCs undertake various
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promotional activities such as conducting techno-economic surveys, project identification,

preparation of feasibility studies, selection and training of entrepreneurs. They also promote joint
sector projects in association with private promoters. In such projects SIDCs take 26% private co-
promoter takes 25% of the equity and the rest are offered to the investing public.
SIDCs also undertake the development of industrial areas, construction of sheds and provision of
infrastructural facilities .and also the development of new growth centres. They also administer
various State Government incentive schemes.
The IDBI grants refinance to SIDCs also against the term loans provided by them. SIDCs also
borrow by way of bonds and from the Government and accept deposits to augment their resources.
Apart from above financial institutions following financial institutions also play an important role to
industrial units.
 NIDC: National Development Corporation – 1959
 SIDC: State Industrial Development Corporation – 1960
 NSIC: National Small Industries Corporation – 1955
 UTI: Unit Trust of India and LIC: 1956
Procedure for procurement of project loan:

Following are the different steps involved in the procedure for acquiring loan for a project:
1. Submission of loan application: The borrower submits an application form which seeks
comprehensive information about the project. The application form covers the following
aspects:
a. Promoter‟s background
b. Particulars of the industrial concern
c. Particulars of the project (capacity, process, technical arrangements, management,
location, land and buildings, plant and machinery, raw materials, effluents, labour,
housing and schedule of implementation:
d. Cost of the project
e. Means of financing
f. Marketing and selling arrangements
g. Profitability and cash flow
h. Economic considerations
i. Government consents
2. Initial processing of loan application: When the application is received, an officer of the
financial institution reviews it to ascertain whether it is complete for processing. If it is
incomplete, the borrower is asked to provide the required additional information. When the
application is considered complete, the financial institution prepares a „Flash Report‟, it is
decided whether the project justifies a detailed appraisal or not.
3. Appraisal of the proposed project: The detailed appraisal of the project covers the
marketing, technical, financial, managerial, and economic aspects. The appraisal
memorandum is normally prepared within two months after site inspection. Based on that a
decision is taken whether the project will be accepted or not.
4. Issue of the letter of sanction: If the project is accepted, a financial letter of sanction is
issued to the borrower. This communicates to the borrower the assistance sanctioned and the
terms and conditions relating thereto.
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5. Acceptance of the terms and conditions by the borrowing unit: On receiving the letter of
sanction from the financial institution, the borrowing unit convenes its board meeting at
which the terms and conditions associated with the letter of sanction are accepted and an
appropriate resolution is passed to that effect. The acceptance of the terms and conditions
has to be conveyed to the financial institution within a stipulated period.
6. Execution of loan agreement: The financial institution, after receiving the letter of
acceptance from the borrower, sends the draft of the agreement to the borrower to be
executed by authorized persons and properly stamped as per the Indian Stamp Act, 1899.
The agreement, properly executed and stamped, along with other documents as required by
the financial institution must be returned to it. Once the financial institution also signs the
agreement, it becomes effective.
7. Creation of security: The term loans (both rupee and foreign currency) and the deferred
payment guarantee assistance provided by the financial institutions are secured through the
first mortgage by way of deposit of title deeds, of immovable properties and hypothecation
of movable properties. As the creation of mortgage, particularly in the case of land, tends to
be a time consuming process, the institutions permit interim disbursements. The mortgage,
however, has to be created within a year from the date of the first disbursement. Otherwise
the borrower has to pay an additional charge of 1 percent interest.
8. Disbursement of loans: Periodically, the borrower is required to submit information on the
physical progress of the projects, financial status of the project, arrangements made for
financing the project, contribution made by the promoters, projected funds flow statement,
compliance with various statutory requirements, and fulfillment of the pre-disbursement
conditions. Based on the information provided by the borrower, the financial institution will
determine the amount of the term loan to be disbursed from time to time. Before the entire
term loan is disbursed, the borrower must fully comply with all terms and conditions of the
loan agreement.
9. Monitoring: Monitoring of the project is done at the implementation stage as well as at the
operational stage. During the implementation stage, the project is monitored through: (i)
regular reports, furnished by the promoters, which provide information about placement of
orders, construction of buildings, procurement of plant, installation of plant and machinery,
trial production etc. (ii) periodic site visits (iii) discussion with promoters, bankers,
suppliers, creditors, and other connected with the project, (iv) progress reports submitted by
the nominee directors and (v) audited accounts of the economy.
During the operational stage, the project is monitored with the help of (i) quarterly progress
report on the project, (ii) site inspection, (iii) reports of nominee directors, and (iv)
comparison of performance with promise.
The most important aspect of monitoring is the recovery of dues represented by interest and
principal repayment.
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Unit V
Project monitoring and control
DEFINITION OF SICKNESS
Industrial sickness has been defined variously. Some of the definitions are given below:
The Reserve Bank of India defined a sick unit as "One which has incurred cash losses for one year
and in the judgment of the financing bank, is likely to incur cash losses for the current as well as
following year and/or there is an imbalance in the unit's financial structure, that is, current ratio is
less than 1:3 and debt/equity ratio (total outside liabilities as a ratio of net worth) is worsening."
Web definition of industrial sickness – Industrial sickness is defined in India as "an industrial
company which has, at the end of any financial year, accumulated losses equal to, or exceeding, its
entire net worth and has also suffered cash losses in such financial year and the financial year
immediately preceding such financial year"
WARNING SIGNALS OF SICKNESS

Sickness does not occur overnight but develops gradually over time. A firm which is becoming sick
shows symptoms which indicate that trouble lies ahead of it. Some of the common symptoms are:
 Irregularity in the bank account.

 Delay or default in payment to banks and financial institutions.
 Non-submission of information to banks and financial institutions.
 Frequent requests to banks and financial institutions for additional credit.
 Decline in capacity utilization.
 Poor maintenance of plant and machinery.
 Low turnover of assets.
 Accumulation of inventories,
 Inability to take trade discount.
 Excessive turnover of personnel.
 Frequent changes in management.
 Decrease in working capital on account of increase in debtors and particularly dues from
selling agents, increase in debtors and/or increase in inventories which may include a large
number of slow or non-moving items.
 Extension of accounting period.
 Decline in the price of equity shares and debentures.
Remedies required:
The problem of sickness can be tackled in two ways i) by devising steps to prevent sickness in the
first place and ii) by taking curative measures to turn around sick units.
In order to tackle the problem of sickness from the two angles, the role of three agencies assume
significance (a) government (b) the financial institutions and (c) the industry association
Preventive measures:
Role of the government
It is the government which provides infrastructural facilities, specialized industrial and financial
institutions, package of incentives for entrepreneurs etc. which ensures growth and development of
the company, industry and country. Equally government‟s ineffective policies, incompetence in
managing the core sector, excessive protection to domestic units and corruption leads to sickness in
Indian economy.
53
In order to prevent the units from being sick government can take punitive actions for management
of units which willfully make units sick.
Under the Sick Industrial Companies (Special Provisions) Act, 1985, the government has set-up a
Board for Industrial and Financial Restructuring (BIFR) which will have to be notified by the
management of companies of their potential sickness. This early warning system may be
supplemented by the government strengthening the monitoring role of the banks and financial
institutions. Not only in the public sector, but also in the private sector, the government can do
much to mitigate the number one cause of sickness – the ineffective management of the unit. The
basic requirement for both sectors is to identify early the competence of the unit‟s management,
help it upgrade itself if there is a potential for improvement or otherwise replace it quickly and
ruthlessly if the level is low and not much potential exists for improvement.
Role of Financial Institutions: (measures offered by financial institutions)

The apex financial institutions like IDBI, IFCI, ICICI and national commercial banks are in an
extremely favorable position to prevent industrial sickness. After all, they are the direct and indirect
suppliers of the bulk of the long-term and working capital needed to run private sector enterprises in
India. They remain in constant touch with the market conditions as well as funded units, and are in
an excellent position for receiving an early warning of sickness.
The following are the ways by which sickness can be prevented by the financial institutions:
A. Continuous monitoring of Unit
i) Monitoring periodic financial reports
ii) Appointing institutional nominees on the board of director of the unit.
iii) Carrying out period inspection
iv) Deputation of institutional advisor to monitor project implementation in risky
ventures.
v) Creating marketing intelligence and industry cell which will take care of monitoring
changes in the external environment and suggest the future actions.
B. Careful project appraisal
i) Independent verification of sales, profits etc. and comparing it with projections /
targets of the client.
ii) Careful scrutiny of technology and plant size, choices of location and quality of
management
iii) Use of external consultants for appraising large or risky projects.
C. Required systems at client’s units
i) Approval of financial institutions for appointing (or removing) internal and statutory
auditors.
ii) Professional management training for managers.
D. Incentives to units to remain healthy
i) Interest relief if unit remains healthy for pre-decided period of time.
ii) Penal interest for avoidable project cost escalation, careless or false sales and profit
projections.
Role of Industry Association:

Industry associations are in better position to help avoiding sickness because they are having total
experience and information about the market. Associations can create self-regulation system for
sickness prevention which also includes representatives from various stake holders – the
government, labor, financial institutions, suppliers and customers.
A good practical review by each industry association of installed and usable capacity in the
industry, capacity utilization, growth trends, problems and opportunities etc., should be useful for
the potential new entrants for deciding whether to enter the industry or not, and for existing firms
for taking strategic diversification, expansion and other decisions related to project. It also helps the
54
financial institutions to formulate industry-specific guidelines about finding project finance requests
and the government to formulate industry-specific policies and guidelines.
The industry association could have some sort of first aid cell which provides specialized
consultancy services as well as technical, managerial and financial help. They can also conduct
training programs for managers, technocrats etc.
Associations can also facilitate acquisition of weaker units by stronger units and other contractual
arrangements to help out ailing units such as sharing of marketing and production facilities, sharing
import of technology etc.
Curative measures:
Prevention is certainly better than cure. But with the best of preventive measures of sickness often
creeps in. following are the agencies which help revival of sick units.
 There is the Industry (Development and Regulation) Act 1951, which provides for takeover
of a sick unit by the government of India. Before resorting to a takeover, other alternatives
like rehabilitation through the concerned state government and financial institutions or for
the merger of a sick unit with a healthy unit could be explored.
 Industrial Companies (Special Provision) Act, 1985 was passed by the parliament and
received the assent of the president in January 1986, which was amended in 1991, provides
for the setting up of a Board for Industrial Financial Reconstruction (BIFR). With the
establishment of BIFR medium and large companies whose net worth has been eroded by
50% or more, will be obliged to report this fact to the board. The board has been given wide
ranging powers in respect of approval of rehabilitation packages for sick industrial
companies, including their reconstruction and revival as well as the change of management
or amalgamation with any other company or sale or lease of a part or whole of the industrial
undertaking or even winding up of the unit.
 Further there is Industrial Reconstruction Bank of India (IRBI), which came into being in
March 1985. IRBI provides assistance for the reconstruction and rehabilitation of sick
industrial units. In addition to granting loans and advances to units, underwriting of shares
and debentures, guarantee of loans and deferred payments, IRBI‟s wide spectrum of
activities also include such development activities as providing infrastructural facilities, raw
materials, consultancy, machinery and other equipment on lease of hire purchase basis for
the purpose of reconstruction and the development of industrial concerns.
 For sick units in the small-scale sector, separate facilities are available. State Financial
Corporations and commercial banks will be asked to devise a scheme for the rehabilitation
of sick units and the assistance given by them for the revival of such units will be eligible
for refinancing by IRBI at a concessional rate of interest.
 Merely providing assistance will not be enough. Here comes importance of effective
management. Ultimately it is in the hands of the management to revive the sick unit and put
it on the profitable track. There are evidences that effective turnaround management can
revive pretty hopeless cases, or at least drastically reduce the extent of sickness.
 Where the sickness is beyond the control the unit should be liquidated and to be closed
down.
Causes of Industrial Sickness:

Industrial units may become sick at different stages and due to different reasons. Indeed, some
industrial units are born sick, some achieve sickness and some have sickness thrust upon them.
Born Sickness:
A study conducted by Institute of Economics, Hydrabad found that 50% of the dead units closed
within three years of opening. This proves that these units never had any reasonable survival
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prospect right from birth. Any one or more of the following factors may cause the birth of sick
units.
2. Wrong selection of project: Lack of experience of the promoters and dreams shown to
them by the so-called consultancy firms, who just work for money by selling ideas and
project reports, misguides the aspirants who wants to be self employed / entrepreneurs and
leads to wrong selection of the project. Which may give birth to sick units.
3. Faulty financial management: Paucity of funds and faulty financial management may
cause birth of a sick unit. Many new units have been found to be underutilized and
undercapitalized when the same becomes operational. In case of some companies, the heavy
investment in non-productive capital assets like staff housing project even before they
commence production distorts the liquidity and causes a lot of problems. Problems may also
crop up due to inadequate provisions for contingencies, faulty funds flow and cash flow
estimates etc.
4. Delayed activities: Particularly in large projects, delays in project commissioning is due to
delay in supply of equipment, both indigenous and imported, slippage in the schedule of
civil works, creation of equipment etc. causes rise in the costs leading to capital shortage,
liquidity problems, hike in the production costs and breakeven point etc.
5. Location problems: Sickness may arise from locational problems also. It has been
observed that, “high-technology based units are established in areas without skilled labour or
supporting infrastructure; industries based on imported raw materials are found in the
regions without adequate transport and communication system.”
6. Technological problems: Technological factors like selection of obsolete or improper
technology or the technology becoming outdated due to innovations while the project is
being executed, sub-standard machinery etc. also causes sickness. According to Tiwari
Committee, 14% of the large sick units suffered from technical factors and faulty initial
planning.
7. Wrong market forecasting: Wrong assessment of the market potential or faulty demand
forecasting, change in the consumer tastes and preferences and competitive situation etc. can
also cause birth of sick units.
Achieved Sickness:
Industries which achieve sickness are those which fail, after becoming operational due to internal
causes. Such common internal causes are presented below:
1. Inefficient Management: Bad management, which covers, “a wide range from
inexperience, lack of professional expertise, neglect and internal disputes and dishonesty”, is
an important cause of sickness. The Tiwari Committee found out that 65% of the large sick
units were affected by the problem of inefficient management.
2. Unnecessary expansion and diversion: Unwarranted expansion and diversion of resources
may also result in sickness. Some concerns tend to expand beyond the resources including
managerial capability. Diversion of resources to start new units or to acquire interest in other
concerns without due regard to the capability of the unit to provide such funds sometimes
lands the unit in trouble.
3. Poor inventory and credit management: Blocking the funds in inventories and giving
more days and amount of credit to the customers can create problems of working capital.
This may lead to shortage of funds and we may not be able to utilize our resources fully.
4. Inability to change: Failure to modernize the productive equipments, change the product
mix and other elements of the marketing mix to suit the changing environment is a very
important cause of the industrial sickness.
5. Labour / personnel problem: Poor labour-management relationship and the associated
poor worker morale and low productivity, strikes, lockouts etc. also may ruin the health of a
unit.
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External Causes: Sickness may be due to factors beyond the controls of an industrial unit. Some of
these external factors are the following:
 Energy crisis arising out of power cuts, shortage of coal, and oil have been a serious
problem for many industrial units in India.
 In a number of cases the units are not able to achieve optimum capacity due to shortage of
raw materials due to production set-backs in supply industries, poor agriculture output due
to natural reasons, change in the import conditions etc.
 Infrastructural problems like transport bottlenecks also sometimes cause serious problems.
 It is a general complaint of the industries that they are unable to accumulate necessary
working capital. According to Tiwari Committee, 24% of the large sick units were affected
by shortage of working capital.
 Government controls on the product mix and prices caused serious problems for certain
industries. Sometimes, it is not possible to automate or rationalize due to unfavorable
government policy.
Thus there are many internal and external factors which can cause industrial sickness. In many
cases, sickness is caused by a combination of factors.
Revival of a sick unit

When an industrial unit is identified as sick, a viability study should be conducted to assess whether
the unit can be revived/rehabilitated with reasonable period. If the viability study suggests that the
unit can be rehabilitated a suitable plan rehabilitation must be formulated. If the viability study
indicates that the unit, is "better dead than alive", steps must be taken to liquidate it expeditiously.
Viability study:
A reasonably comprehensive assessment of the various aspects of the working of a unit, a viability
study generally covers the following:
Market Analysis
 Market share behaviour over the past few years
 Growth rate of the total market
 Emergence of competition
 Comparative price and cost analysis
 Order book position
 Unique selling proposition, if any. Employed by the firm
 Consumer attitudes, preferences, and needs
 Promotional strategies of the firm and its consumers
 Distribution channels used by the firm
Distribution cost analysis

Production/Technical Analysis
 Technological capability of the firm
 Plant condition
 Degree of balance in the capacities at different stages of manufacturing
 Manufacturing process
 Quality control
 Plant maintenance system
 Availability of power, water, fuel, and other utilities
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 Supply of raw materials
Finance
 Liquidity position
 Leverage analysis
 Turnover of assets
 Profitability
 Estimate of working capital needs
 Balance sheet and income statement projection
 Budgetary control and responsibility accounting
 Cost control and reduction;
Personnel and Organisation

 Human resources
 Employee motivation, morale, and commitment
 Leadership
 Manpower in relation to needs
Environment
 Supply of raw material
 Availability of power, fuel, and water
 Governmental policies with respect to excise duties, customs duties, export duties, reservations,
etc.
 Industrial licensing policy
 Lending policies of financial institutions and commercial banks
 General industrial relations situation
 Competitive developments.
Revival Program / Rehabilitation of sick unit:

The revival or rehabilitation program usually involves following:
1. Settlement with creditors: A sick unit is normally in straitened financial circumstances and
is not able to honour its commitments to its creditors (financial institutions, debenture
holders, commercial banks, suppliers, and government authorities). To alleviate its financial
distress, a settlement scheme has to be worked out which may involve one or more of the
following: rescheduling of principal and interest payment; waiver of interest; conversion of
debt into equity; payment of arrears in installments.
2. Provision of additional capital: Typically a revival program entails provision of additional
capital. This may be required for modernization and repair of plant and machinery, for
purchase of balancing equipment, for sustaining a new marketing drive, and for enhanced
working capital needed to support a higher level of operations. The additional capital has to
be provided on concessional terms, at least for the initial years, so that the financial burden
on the unit is not high.
3. Divestment and disposal: The revival program may involve divestment of unprofitable
plants and operations and disposal of slow moving and obsolete stocks. The thrust of these
actions should be to strengthen the liquidity of the unit and facilitate reallocation of
resources for enhancing the profitability of the unit.
4. Reformulation of product-market strategy: Many a business failures can be traced to an
ill-conceived product-market strategy. For reviving a sick unit, its product-market strategy
may have to be significantly formulated to improve the prospects of its profitable recovery.
This, of course, calls for a great deal of imagination and penetrating analysis.
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5. Modernization of plant and machinery: In order to improve manufacturing efficiency,

plant and machinery may have to be modernized, renovated, and repaired. This may be
essential for attaining certain cost standards and quality norms for competing effectively in
the market place.
6. Reduction in manpower: Generally, sick firms tend to be over-staffed. The revival
program must seek to reduce superfluous manpower. Remember an old managerial saying:
„The leaner the organization, the greater are its chances of survival.‟ Often a „Golden
Handshake‟ involving paying significant retrenchment compensation is a better proposition
than carrying redundant manpower.
7. Strict control over costs: A profitable organization can afford wastefulness and laxity in its
expenditures. A tottering (faltering, stumbling) firm, seeking to regain its health and vigor,
has to exercise strict control over its costs, particularly over its discretionary expenses. A
zero-base review of all the discretionary expenses may be undertaken to eliminate
programmes and activities which are a drain on the finances of the firm.
8. Streamlining of operations: Manufacturing, purchasing, and selling operations have to be
meticulously examined so that they can be streamlined. Value engineering, standardization,
simplification, cost-benefit analysis, and other approaches should be exploited fully to
improve the efficiency of the operations.
9. Improvement in managerial system: The managerial system in the unit must be
strengthened. In this exercise greater attention may be paid to environmental monitoring,
organizational structure, responsibility accounting, management information system and
budgetary control.
10. Workers’ participation: In general workers‟ participation in management enhances
employee commitment, motivation and moral. Further, the suggestions offered by the
workers result in improvements that lead to higher manufacturing efficiency and
productivity. A sick organization, which is being revived, can perhaps benefit even more
from workers‟ participation in management. During the revival phase, the dedication,
commitment, and support of workers is indispensable and meaningful workers‟ participation
and involvement goes a long way in ensuring this.
11. Change of management: A change in management may be necessary where the present
management is dishonest and/or incompetent. It has been observed that a new chief
executive who is competent, committed and up righteous, can often bring about dramatic
results. The classic example of this phenomenon was the dramatic turnaround of Chrysler
Corporation under the stewardship of Lee Iococca.
Package of Rehabilitation:
For facilitating sick units, the government has from time to time announced various measures and
policies like soft loan scheme, fiscal concession under section 72(A) of the Income Tax Act, the
1980 policy guidelines on sick units, and the strategy of 1981. It also set up the Industrial
Reconstruction Corporation of India which was later transformed into the Industrial Reconstruction
Bank of India (IRBI) in 1984.
A review done in the mid-eighties suggested that the existing institutional arrangements for
rehabilitating the sick units seemed to suffer from several inadequacies:
(i) Lack of effective coordination among the multiple agencies and regulations dealing with
sick industrial units.
(j) Time-consuming and dilatory procedures.
(k) Half-hearted endeavors.
To overcome these shortcomings, the Sick Industrial Companies (special provisions) Act, 1985
(SICA) was passed. This Act seeks to (i) facilitate timely detection of sick and potentially sick
59
companies and (ii) provide speedy determination of the preventive, ameliorative, remedial, and
other measures. In accordance with this Act, two bodies have been set up (i) Board for Industrial
and Financial Reconstruction (BIFR) and (ii) Appellate Authority for Industrial and Financial
Reconstruction (AAIFR)
SICA defines a „Sick industrial company‟ as an “industrial company (being a company registered
for not less than seven years) which has at the end of any financial year accumulated losses equal to
or exceeding its entire net worth and has also suffered cash losses in such financial year and thee
financial year immediately preceding such financial year.”
The provisions of SICA are applicable to all small, medium and large firms, which belong to a
schedule industry and are incorporated under the Companies Act. All such firms have to
compulsorily register themselves with BIFR.
The procedure followed by BIFR in its attempt to revive a sick company is broadly as follows:
1. BIFR appoints an operating agency which may be a public financial institution (IDBI,
ICICI, IFCI or IRBI) or a leading commercial bank to prepare a rehabilitation plan.
2. The rehabilitation scheme is prepared by the operating agency ordinarily within 90 days.
This scheme may contain elements like change in management, strengthening of the existing
management, amalgamation with some other unit, sale or lease of a part or whole of the
assets, grant of financial assistance (loan, advances and guarantees) and sanction of reliefs
by the central and state governments, banks, financial institutions, and other bodies.
3. The rehabilitation scheme may be accepted by BIFR with whatever modifications it deems
necessary after holding a hearing to which all the concerned parties are invited.
4. A copy of the rehabilitation scheme is sent to the company and all the concerned parties for
their consent.
5. If the consent of all the parties required to provide reliefs and financial assistance is
received, the rehabilitation scheme is sanctioned. (In case the rehabilitation scheme
envisages amalgamation with some other company, the approval of the amalgamation by the
shareholders of both the companies is required.)
6. In the absence of consent of various parties involved, BIFR may consider other measures
including thee winding up of the sick company.
Feasibility Report on New Business Development:

What is a Feasibility Study?
As the name implies, a feasibility study is an analysis of the viability of an idea. The feasibility
study focuses on helping answer the essential question of “should we proceed with the proposed
project idea?” All activities of the study are directed toward helping answer this question.
Feasibility studies can be used in many ways but primarily focus on proposed business ventures.
Farmers and others with a business idea should conduct a feasibility study to determine the viability
of their idea before proceeding with the development of a business. Determining early that a
business idea will not work saves time, money and heartache later.
A feasible business venture is one where the business will generate adequate cash-flow and profits,
withstand the risks it will encounter, remain viable in the long-term and meet the goals of the
founders. The venture can be either a start-up business, the purchase of an existing business, an
expansion of current business operations or a new enterprise for an existing business.
A feasibility study is only one step in the business idea assessment and business development
process. Reviewing this process and reading the information below will help put the role of the
feasibility study in perspective.
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Evaluate Alternatives
A feasibility study is usually conducted after producers have discussed a series of business ideas or
scenarios. The feasibility study helps to “frame” and “flesh-out” specific business scenarios so they
can be studied in-depth. During this process the number of business alternatives under
consideration is usually quickly reduced.
During the feasibility process you may investigate a variety of ways of organizing the business and
positioning your product in the marketplace. It is like an exploratory journey and you may take
several paths before you reach your destination. Just because the initial analysis is negative does not
mean that the proposal does not have merit. Sometimes limitations or flaws in the proposal can be
corrected.
Pre-Feasibility Study
A pre-feasibility study may be conducted first to help sort out relevant scenarios. Before proceeding
with a full-blown feasibility study, you may want to do some pre-feasibility analysis of your own. If
you find out early-on that the proposed business idea is not feasible, it will save you time and
money. If the findings lead you to proceed with the feasibility study, your work may have resolved
some basic issues. A consultant may help you with the pre-feasibility study, but you should be
involved. This is an opportunity for you to understand the issues of business development.
Market Assessment
Also, a market assessment may be conducted that will help determine the viability of a proposed
product in the marketplace. The market assessment will help to identify opportunities in a market or
market segment. If no opportunities are found, there may be no reason to proceed with a feasibility
study. If opportunities are found, the market assessment can give focus and direction to the
construction of business scenarios to investigate in the feasibility study. A market assessment will
provide much of the information for the marketing feasibility section of the feasibility study.
Results and Conclusions

The conclusions of the feasibility study should outline in depth the various scenarios examined and
the implications, strengths and weaknesses of each. The project leaders need to study the feasibility
study and challenge its underlying assumptions. This is the time to be sceptical.
Don‟t expect one alternative to “jump off the page” as being the best scenario. Feasibility studies do
not suddenly become positive or negative. As you accumulate information and investigate
alternatives, neither a positive nor negative outcome may emerge. The decision of whether to
proceed is often not clear cut. Major stumbling blocks may emerge that negate the project.
Sometimes these weaknesses can be overcome. Rarely does the analysis come out overwhelmingly
positive. The study will help you assess the trade off between the risks and rewards of moving
forward with the business project.
Remember, it is not the purpose of the feasibility study or the role of the consultant to decide
whether or not to proceed with a business idea. It is the role of the project leaders to make this
decision, using information from the feasibility study and input from consultants.
Go/No-Go Decision
The go/no-go decision is one of the most critical in business development. It is the point of no
return. Once you have definitely decided to pursue a business scenario, there is usually no turning
back. The feasibility study will be a major information source in making this decision. This
indicates the importance of a properly developed feasibility study.
61
Reasons to Do a Feasibility Study

Conducting a feasibility study is a good business practice. If you examine successful businesses,
you will find that they did not go into a new business venture without first thoroughly examining all
of the issues and assessing the probability of business success.
Below are other reasons to conduct a feasibility study.

 Gives focus to the project and outline alternatives.
 Narrows business alternatives
 Identifies new opportunities through the investigative process.
 Identifies reasons not to proceed.
 Enhances the probability of success by addressing and mitigating factors early on that could affect
the project.
 Provides quality information for decision making.
 Provides documentation that the business venture was thoroughly investigated.
 Helps in securing funding from lending institutions and other monetary sources.
 Helps to attract equity investment.
The feasibility study is a critical step in the business assessment process. If properly conducted, it
may be the best investment you ever made.
Questions for discussion:

1. Discuss in detail different sources of project idea.
2. Discuss different aspects of preliminary screening.
3. Discuss about the general format and information covered in a project report
4. What information will be required for market analysis? Explain in detail.
5. Explain different sources of market information.
6. Write a detailed note on methods of demand forecasting.
7. Explain different criteria for selecting demand forecasting method.
8. Write notes on following
 Location and site
 Material
 Product technology
 Site preparation
 Project engineering
9. Which different financial estimates / statements are required before starting a project?
10. Explain in detail projected cash flow statement
11. Explain different steps involved in preparation of projected funds flow statement.
12. What is the difference between cash flow and funds flow statement?
13. Write a note on Debt-Service Coverage Ratio
14. Write about different institutions covered under All India Financial Institutions.
15. Explain about State level Institutions providing financial assistance.
16. Explain about the forms of financial assistance provided by various financial institutions.
17. Explain in detail the procedure to obtain loan for a project.
18. Write different warning signals which suggest possible sickness of a unit.
19. Explain different remedies for industrial sickness.
20. Write a note on different causes of industrial sickness.
21. Write a note on package of rehabilitation for sick units.
22. Explain different measured to be taken by financial institutions for industrial sickness.
23. Write a note on feasibility report on new business development.
62

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Grow More Institute of Business Administration Project Management

GROW MORE INSTITUTE OF BUSINESS ADMINISTRATION

BBA SEM VI (HNGU)

SUB: - PROJECT MANAGEMENT

Sources of project idea:

General format of a Project Report:

Information for market analysis:

Collection of secondary information:

Evaluation of Secondary Information:

Primary Information Collection (Conduct of Market Survey):

Steps in a sample survey:

Methods of demand forecasting

1. No method is perfect and no method is useless

DF = ID1 + ID2 + + IDn where,

DF is demand forecasting ID is intended demand for consumers 1,2…. n refers to number of

DF = (= ID1 + ID2 + + IDn ) (N / n) Where

DF = Demand Forecasting, ID = intended demand, 1,2 … n means the number of consumers

DF = N1 (AID1) + N2 (AID2) + … + Ni (AIDi) Where,

DF = demand forecasting Ni = population of households in group i (i = 1, 2, …, k ), k = number of

(DF)I = a1X1 + a2X2 + … + aiXi where,

ai = input requirement of the product per unit of output of industry i (i = 1, 2, .., k )

Xi = production forecast for industry i in the forecast period (i = 1, 2, .., k )

Advantages of this method includes that it is simple and less expensive.

The equation for regression function is:

XY = aX + bX2 … ……(iii)

Example: Time: 2002 2003 2004 2005 2006 2007

(X) Firm income: 1000 1100 1400 1500 2000 2100

(Y) Sales of Tractors: 11 13 15 16 18 (?)

XY = aX + bX2

1022 = 70a + 98000b

1063 = 70a + 104200b

b = 41/ 6200, So b = 0.0066

Now replacing the value of b in the above equation we get

Y = 5.36 + (0.0066) (2100)

(Answers: b = 1.296, a = -10.048 and Y = 30.1)

Dt = Yf (Dt-1, Dt-2, Dt-3, …, Dt-n)

Criteria of good forecasting technique:

Product technology / Manufacturing process:

Project Engineering (Machinery and Equipment):

Unit 3: Financial Projections

Estimates of Sales and Production:

Estimate of production and sales

Working capital requirements and its financing

Less: Trade credits available on raw materials and consumables

Net working capital**

Profitability projections (or estimates of working results)

Following figure shows representation of estimates of working results:

Projected Balance Sheet

Projected Cash flow statement:

Projected funds flow statement:

Difference between funds flow statement and cash flow statement:

Benefits of Funds Flow statement:

Preparation of Funds Flow statement:

Particulars 2010 2011 Change in Working Capital

Step II: Prepare Funds from Operations

8. Transfer to Reserve Xxx

Step III: Preparation of Funds Flow Statement

Debt Service Coverage Ratio:

Ideal DSCR ratio = 2:1