Small Business Management Notes - Introduction to Small Business Enterprises | B.Com Notes

The term ‘business’ includes in its purview both industrial and commercial activities. An official definition is available only for ‘small industry’ and not for a ‘small commercial business’. A small commercial business may, however, he described in terms of its characteristics which may also apply to a small industry.

Professors H.N. Broom and Justice G. Longenecker gave an outline of qualitative characteristics, as prepared by the Committee for Economic Department, to describe the American small business. The authors of this book feel that these characteristics can be applied to describe a small business in any country. The characteristics of a small business are as given below:

The definition used by the Government of India to describe small industries is based on the investment in plant and machinery. This measure seeks to keep in view the socio-economic environment in India where capital is scarce and labour is abundant. One more important point to note is that a definition exists only for small and tiny units but not for large and medium units. Medium and large sized enterprises are not defined. Anything that does not fall under the definition of small can be large or medium. Taking capital invested as the basis the small business units in India can fall under any of the following categories:

(i) Small scale industry: A small scale industrial undertaking is defined as one in which the investment in fixed assets of plant and machinery does not exceed rupees one crore. However, to cater to the needs of small industries whose thrust is on export promotion and modernisation, investment ceiling in plant and machinery is rupees five crores.

(ii) Ancillary small industrial unit: The small scale industry can enjoy the status of an ancillary small industry if it supplies not less than 50 per cent of its production to another industry, referred to as the parent unit. The ancillary small industry can manufacture parts, components, subassemblies, tools or intermediate products for the parent unit. Apart from catering to the needs of the parent unit, it can do business on its own. Ancillary units have the advantage of assured demand from parent units. Normally, the parent unit assists the ancillary unit by giving technical guidance as well as financial help.

(iii) Export oriented units: The small scale industry can enjoy the status of an export oriented unit if it exports more than 50 per cent of its production. It can avail the incentives like export subsidies and other concessions offered by the government for exporting units.

(iv) Small scale industries owned and managed by women entrepreneurs: An enterprise promoted by women entrepreneurs is a small scale industrial unit in which she/they individually or jointly have share capital of not less than 51 per cent. Such units can avail the special concessions offered by the government, like low interest rates on loans, etc.

(v) Tiny industrial units: A tiny unit is defined as an industrial or business enterprise whose investment in plant and machinery is not more than Rs. 25 lakhs.

(vi) Small scale service and business (Industry related) enterprises: A small scale service and business enterprise is one whose investment in fixed assets of plant and machinery excluding land and building does not exceed Rs. 10 lakhs.

(vii) Micro business enterprises: Within the tiny and small business sector, micro enterprises are those whose investment in plant and machinery does not exceed rupees one lakh.

(viii) Village industries: Village Industry has been defined as any industry located in a rural area which produces any goods, renders any service with or without the use of power and in which the fixed capital investment per head or artisan or worker does not exceed Rs. 50,000 or such other sum as may be specified by the central government, from time to time.

(ix) Cottage industries: These are also known as Rural Industries or Traditional industries. They are not defined by capital investment criteria as in the case of other small scale industries. However, cottage industries are characterised by certain features like the following:

Large business enterprises are treated as competitors of small business enterprises. But the small scale industries can have the following types of relationship with large industries:

Difference between large and small business enterprises

Small Scale Industries in India enjoy a distinct position in view of their contribution to the socio-economic development of the country. The following points highlight their contribution.

(i) Small industries in India account for 95 per cent of the industrial units in the country. They contribute almost 40 per cent of the gross industrial value added and 45 per cent of the total exports (direct and indirect exports) from India.

(ii) Small industries are the second largest employers of human resources, after agriculture. They generate more number of employment opportunities per unit of capital invested compared to large industries. They are, therefore, considered to be more labour intensive and less capital intensive. This is a boon for a labour surplus country like India.

(iii) Small industries in our country supply an enormous variety of products which include mass consumption goods, readymade garments, hosiery goods, stationery items, soaps and detergents, domestic utensils, leather, plastic and rubber goods, processed foods and vegetables, wood and steel furniture, paints, varnishes, safety matches, etc. Among the sophisticated items manufactured are electric and electronic goods like televisions, calculators, electro-medical equipment, electronic teaching aids like overhead projectors, air conditioning equipment, drugs and pharmaceuticals, agricultural tools and equipment and several other engineering products. A special mention should be made of handlooms, handicrafts and other products from traditional village industries in view of their export value.

(iv) The contribution of small industries to the balanced regional development of our country is noteworthy. Small industries which produce simple products using simple technologies and depend on locally available resources both material and labour can be set up anywhere in the country. Since they can be widely spread without any locational constraints, the benefits of industrialisation can be reaped by every region. They, thus, contribute significantly to the balanced development of the country.

(v) Small industries provide ample opportunity for entrepreneurship. The latent skills and talents of people can be channelled into business ideas which can be converted into reality with little capital investment and almost nil formalities to start a small business.

(vi) Small industries also enjoy the advantage of low cost of production. Locally available resources are less expensive. Establishment and running costs of small industries are on the lower side because of low overhead expenses. Infact, the low cost of production which small industries enjoy is their competitive strength.

(vii) Due to the small size of the organisations, quick and timely decisions can be taken without consulting many people as it happens in large sized organisations. New business opportunities can be captured at the right time.

(viii) Small industries are best suited for customised production. i.e. designing the product as per the tastes/preferences/needs of individual customers, say for an example tailor-made shirt or trouser. The recent trend in the market is to go in for customized production of even non-traditional products such as computers and other such products. They can produce according to the needs of the customers as they use simple and flexible production techniques.

(ix) Last but not the least, small industries have inherent strength of adaptability and a personal touch and therefore maintain good personal relations with both customers and employees. The government does not have to interfere in the functioning of a small scale unit. Due to the small size of the organisation quick and timely decision can be taken without consulting many people as in large sized organisations. New business opportunities can be captured at the right time, thus providing healthy competition to big business which is good for the economy.

Role of Small business in rural India

Traditionally, rural households in developing countries have been viewed as exclusively engaged in agriculture. There is an increasing evidence that rural households can have highly varied and multiple sources of income and that, rural households can and do participate in a wide range of nonagricultural activities such as wage employment and self-employment in commerce, manufacturing and services, along with the traditional rural activities of farming and agricultural labour. This can be largely attributed to the policy initiatives taken by the Government of India, to encourage and promote the setting up of agro-based rural industries.

The emphasis on village and small scale industries has always been an integral part of India’s industrial strategy, more so, after the second Five Year Plan. Cottage and rural industries play an important role in providing employment opportunities in the rural areas, especially for the traditional artisans and the weaker sections of society. Development of rural and village industries can also prevent migration of rural population to urban areas in search of employment. Village and small industries are significant as producers of consumer goods and absorbers of surplus labour, thereby addressing the problems of poverty and unemployment. These industries contribute amply to other socio-economic aspects, such as reduction in income inequalities, dispersed development of industries and linkage with other sectors of the economy.

In fact promotion of small scale industries and rural industrialisation has been considered by the Government of India as a powerful instrument for realising the twin objectives of ‘accelerated industrial growth and creating additional productive employment potential in rural and backward areas.’ However, the potential of small industries is often not realised fully, because of several problems related to size. We shall now examine some of the major problems that small businesses whether in urban or in rural areas are encountering in their day-to-day functioning.

Small scale industries are at a distinct disadvantage as compared to large scale industries. The scale of operations, availability of finance, ability to use modern technology, procurement of raw materials are some of these areas. This gives rise to several problems. Most of these problems can be attributed to the small size of their business, which prevents them from taking advantages, which accrue to large business organisations. However, the problems faced are not similar to all the categories of small businesses. For instance, in the case of small ancillary units, the major problems include delayed payments, uncertainty of getting orders from the parent units and frequent changes in production processes. The problems of traditional small scale units include remote location with less developed infrastructural facilities, lack of managerial talent, poor quality, traditional technology and inadequate availability of finance. The problems of exporting small scale units include lack of adequate data on foreign markets, lack of market intelligence, exchange rate fluctuations, quality standards, and pre-shipment finance. In general the small businesses are faced with the following problems:

(i) Finance: One of the severe problems faced by SSIs is that of non availability of adequate finance to carry out its operations. Generally a small business begins with a small capital base. Many of the units in the small sector lack the credit worthiness required to raise as capital from the capital markets. As a result, they heavily depend on local financial resources and are frequently the victims of exploitation by the money lenders. These units frequently suffer from lack of adequate working capital, either due to delayed payment of dues to them or locking up of their capital in unsold stocks. Banks also do not lend money without adequate collateral security or guarantees and margin money, which many of them are not in a position to provide.

(ii) Raw materials: Another major problem of small business is the procurement of raw materials. If the required materials are not available, they have to compromise on the quality or have to pay a high price to get good quality materials. Their bargaining power is relatively low due to the small quantity of purchases made by them. Also, they cannot afford to take the risk of buying in bulk as they have no facilities to store the materials. Because of general scarcity of metals, chemicals and extractive raw materials in the economy, the small scale sector suffers the most. This also means a waste of production capacity for the economy and loss of further units.

(iii) Managerial skills: Small business is generally promoted and operated by a single person, who may not possess all the managerial skills required to run the business. Many of the small business entrepreneurs possess sound technical knowledge but are less successful in marketing the output. Moreover, they may not find enough time to take care of all functional activities. At the same time they are not in a position to afford professional managers.

(iv) Labour: Small business firms cannot afford to pay higher salaries to the employees, which affects employee willingness to work hard and produce more. Thus, productivity per employee is relatively low and employee turn over is generally high. Because of lower remuneration offered, attracting talented people is a major problem in small business organisations. Unskilled workers join for low remuneration but training them is a time consuming process. Also, unlike large organisations, division of labour cannot be practised, which results in lack of specialisation and concentration.

(v) Marketing: Marketing is one of the most important activities as it generates revenue. Effective marketing of goods requires a thorough understanding of the customer’s needs and requirements. In most cases, marketing is a weaker area of small organisations. These organisations have, therefore, to depend excessively on middlemen, who at times exploit them by paying low price and delayed payments. Further, direct marketing may not be feasible for small business firms as they lack the necessary infrastructure.

(vi) Quality: Many small business organisations do not adhere to desired standards of quality. Instead they concentrate on cutting the cost and keeping the prices low. They do not have adequate resources to invest in quality research and maintain the standards of the industry, nor do they have the expertise to upgrade technology. In fact maintaining quality is their weakest point, when competing in global markets.

(vii) Capacity utilisation: Due to lack of marketing skills or lack of demand, many small business firms have to operate below full capacity due to which their operating costs tend to increase. Gradually this leads to sickness and closure of the business.

(viii) Technology: Use of outdated technology is often stated as serious problem in the case of small industries, resulting in low productivity and uneconomical production.

(ix) Sickness: Prevalence of sickness in small industries has become a point of worry to both the policy makers and the entrepreneurs. The causes of sickness are both internal and external. Internal problems include lack of skilled and trained labour and managerial and marketing skills. Some of the external problems include delayed payment, shortage of working capital, inadequate loans and lack of demand for their products.

(x) Global competition: Apart from the problems stated above small businesses are not without fears, especially in the present context of liberalisation, privatisation and globalisation (LPG) policies being followed by several countries across the world. Remember, India too has taken the LPG path since 1991. Let us look into the areas where small businesses feel threatened with the onslaught of global competition.

(a) Competition is not only from medium and large industries, but also from multinational companies which are giants in terms of their size and business volumes. Opening up of trade results in cut throat competition for small scale units.

(b) It is difficult to withstand the quality standards, technological skills, financial creditworthiness, managerial and marketing capabilities of the large industries and multinationals.

(c) There is limited access to markets of developed countries due to the stringent requirements of quality certification like ISO 9000.

Small- scale industries have been defined as those units that have investment in plant and machineries up to Rs. 1crore. This sector has occupied a place of prominence in our economy. But this sector is suffering from various problems which hamper its growth.

Prospects of small- scale industries: The small- scale industries play an important role in the development of the economy. Even in developed countries, they occupy an important place. In under-developed countries also, they make great contributions towards economic development. The prospects of small- scale industries in North- East Region may be discussed as under: 

By enacting the Micro, Small and Medium Enterprises Development Act, 2006, the Government has recently fulfilled one of the needs felt and articulated by this segment for long. This Act seeks to facilitate promotion and development and enhancing competitiveness of these enterprises. It provides the first-ever legal framework for recognition of the concept of “enterprise” (comprising both manufacturing and services) and integrating the three tiers of these enterprises, namely, micro, small and medium. Apart from clearer and more progressive classification of each category of enterprises, particularly the small, the Act provides for a statutory consultative mechanism at the national level with wide representation of all sections of stakeholders, particularly the three classes of enterprises.

1. Section 7 of Act provides for the following classification in respect of industries engaged in production or manufacture of goods or rendering service enterprises:

2. Filing of Memoranda by MSMEs: Process of two-stage registration of Micro and Small Enterprises dispensed with and replaced by filing of memoranda. 1. Filing of Memorandum optional for all Micro and Small Enterprises. 2. Filing of Memorandum optional for Service Sector Medium Enterprises. 3. Filing of memorandum mandatory for Manufacturing Sector Medium Enterprises.

3. Constitution of National Board: National Board for Micro, Small and Medium Enterprises (MSME) to be headed by the Central Minister in-charge of MSMEs and consisting of 46 members from among MPs and Representatives of Central Ministries, State Governments, UT Administration, RBI, SIDBI, NABARD, Associations of MSMEs including women etc.

Functions of the National Board: Examine the factors affecting the promotion and development of MSMEs and review the policies and programmes of the Central Government in this regard.

4. Advisory Committee Headed by Central Government Secretary I/c of MSMEs and including not more than five officers of the Central Government and not more than three representatives of State Governments; and One representative each of the Associations of micro, small and medium enterprises.

5. Functions of the Advisory Committee

6. Promotional and Enabling Provisions Central Government to notify programmes, guidelines or instructions for facilitating the promotion and development and enhancing the competitiveness of MSMEs. Central Government to administer the Fund or Funds for purpose mentioned in Section 9 and coordinate and ensure timely utilization and release of sums with such criteria, as may be prescribed.

7. Credit: The policies and practices in respect of credit to the MSMEs shall be progressive and such as may be specified in the guidelines or instructions issued by the Reserve Bank of India, with the aims of:

8. Procurement Policies: Central Government or a State Government to notify preference policies in respect of procurement of goods and services produced and provided by MSEs, by its Ministries, departments or its aided institutions and public sector enterprises.

9. Provisions to Check Delayed Payments:

10. Facilitating Closure of Business: Central Government may (within one year of the commencement of the Act) notify a scheme for facilitating closure of business by a micro, small or medium enterprise. The objectives of the rehabilitation policy are to give guidelines in the following areas:

This is the apex body for promotion and development of micro, small and medium enterprises in India. On enactment of the MSME Act 2006, MSME – DO came into being after revocation of the Small Industries Development Organisation (SIDO). The MSME – DO is headed by the Additional Secretary and Development commissioner under the Ministry of Micro, Small and Medium Enterprises.

Functions: The major functions of the organisation are:

The District Industries and Commerce Centre (DI&CC) operate from the District head quarters of Assam. The centres work in close association with the Commissioner of Industries and Commerce, Guwahati. All the preliminary works relating to availing of the Govt. policy supports by the entrepreneurs in the form of schemes and incentives are done at the DI&CC level.

Functions of DI&CC: The DI&CC words at the grass-root for promotion and development of indigenous entrepreneurship in the state through policy supports initiated by the central and the state Governments. The major functions include the following:

It is a statutory body created by an Act of Parliament in 1956 and became operative from April 1957 by taking over the work of the erstwhile “All India Khadi and Village Industries Board” set up in 1950. The Commission is engaged in the task of promoting and developing Khadi and Village Industries (KVI) with a view to creating employment avenues in the rural areas thereby strengthening the rural economy of India. It functions under the administrative control of the Ministry of Micro Small and Medium Enterprises, Govt. of India.

KVIC has its central office at Mumbai. It has 36 State and Divisional offices, 6 Zonal offices, 15 Departmental and 23 Non-Departmental Training Centers and a number of accreted Training Centers in addition to 13 Departmental Sales Outlets. The KVIC operates through 33 Boards spread over in different states and union territories of the country, in addition to thousands of institutions and co-operatives including DIC/DICCs.

Objectives: The broad objectives of the KVIC are of three-fold as under:

Functions: The crucial functions which the KVIC performs towards attainment of its avowed objectives are as follows:

It is a state level statutory body formed by an Act of the concerned state legislature. In India, at present there are 33 KVIBs in different States and Union Territories. The Assam Khadi and Village Industries Board Act was passed in the year 1955. The basic objective of the Board is to work towards organizing, developing and regulating the village industries in the state.

Functions: As a statutory Body of the Govt. of Assam the KVIB is required to perform numerous functions for promotion and development of Khadi and Village Industries in the State. The most important functions of the Board as enumerated in the Assam Khadi and Village Act, 1955 are listed below:

On the basis of the above board outline of functions as assigned to the Board and stipulated in the Act, the KVIB of Assam undertakes the following activities.

The North Eastern Development Finance Corporation Ltd (NEDFi) is a Public Limited Company registered under the Companies Act 1956 on 9^th August, 1995. It is notified as a Public Financial Institution under Section 4A of the said Act and was registered as an NBFC in 2002 with RBI. The shareholders of the Corporation are IDBI, SBI, LICI, SIDBI, ICICI, IFCI, SUUTI, GIC and its subsidiaries. The management of NEDFi has been entrusted upon the Board of Directors comprising representatives from shareholder institutions, DoNER, State Governments and eminent persons from the NE Region and outside having wide experience in industry, economics, finance and management.

NEDFi provides financial assistance to micro, small, medium and large enterprises for setting up industrial, infrastructure and agri-allied projects in the North Eastern Region of India and also Microfinance through MFI/NGOs. Besides financing, the Corporation offers Consultancy & Advisory services to the state Governments, private sectors and other agencies. NEDFi conduct sector or state specific studies under its Techno-Economic Development Fund (TEDF) and is the designated nodal agency for disbursal of Govt. of India incentives to the industries in the North-East India under North–East Industrial and Investment Promotion Policy 2007 (NEIIPP 2007).

Objectives: The main objective of NEDFi is to provide finance and other facilities for promotion, expansion and modernization of industrial and infrastructure projects in the NE-region.

Functions: The NEDFi aims to be a dynamic and responsive organization catalyzing the economic development of the North East India. It assists in the efficient formation of fixed assets by identifying and nurturing eco-friendly and commercially viable industrial and infrastructure projects in the region. Thus, the NEDFi prime role is to enhance the wealth of the region and prosperity of its people. The major functions of the NEDFi are as follows:

IMPORTANT FINANCE SCHEMES OF THE NEDFI

The NEDFi finances a wide spectrum of activities which include agro-processing, mining, shipping, leasing, transport, tourism, information technology, medical & health services generation and distribution of electricity, setting up and development of industrial estates and other commercially viable infrastructure facilities. Some important financing schemes of the NEDFi are highlighted below:

The North Eastern Industrial and Technical Consultancy Organization Limited (NEITCO) is a premier consultancy organization setup in 1973 by the all India financial institutions, nationalized banks and state development corporations under the aegis of the Industrial Development Bank of India (IDBI) to cater to the consultancy needs of the north eastern states of India. The co-promoters are ICICI, IFCI, IIBI, SBI, UCO BANK, UBI, AIDC, MIDC and APIDFC. The NEITCO pioneer in systematic entrepreneurship development movement in the entire North Eastern Region, has been organizing and conducting Entrepreneurship Development Programmes (EDPs) in the region since 1982 under the sponsorship of North Eastern Council (NEC), IDBI, SIDBI, IFCI, ICICI, NABARD, SBI, Department of Science and Technology, Govt. of India and state Governments of North Eastern Region. The organization operates from its head office at Guwahati in addition to branch offices at Shillong and Itanagar.

Functions: The NEITCO performs the following functions ‘to provide the quality, cost effective and timely services’ to its clients.

Indian Institute of Entrepreneurship (IIE) is an autonomous organization under the Ministry of Skill Development & Entrepreneurship. The main aim of the Institute is to provide training, research and consultancy activities in Small and Micro Enterprises (SME), with special focus on entrepreneurship development. The Indian Institute of Entrepreneurship (IIE)  registered under the Societies Registration Act,1860  was established in the year 1993 in Guwahati by the erstwhile Ministry of Industry (now the Ministry of Micro, Small and Medium Enterprises), Government of India. The Institute began operating from April 1994 with the North East Council (NEC), Governments of Assam, Arunachal Pradesh and Nagaland and SIDBI as its other stakeholders. IIE has been transferred to the Ministry of Skill Development & Entrepreneurship on 22nd May’2015. The head quarter of IIE is situated in Guwahati.

OBJECTIVES OF IIE

FUNCTIONS OF IIE

The National Small Industries Corporation (NSIC) was set up by the Government of India in 1955 with the aim of promoting, aiding and fostering the growth and development of the MSMEs in the country. Over a period of close to six decades of transition, growth and development, the NSIC has proved its strength within the country and abroad by promoting modernization, up gradation of technology, quality consciousness, strengthening linkages with large and medium enterprises and enhancing export-projects and products from small industries. The NSIC operates through country wide network of 123 offices and Technical Centres. In addition to this, The NSIC has 48 Training cum-Incubation Centres with a large professional manpower; the NSIC provides a package of services as per the need of MSME sector.

NSIC IN THE NORTH – EAST INDIA

The present North Eastern Region of India comprises of eight states including Sikkim. The abundance of natural resources like cane, bamboo, silk and cotton has yielded a fine heritage of handicrafts and handloom products of daily use. From the ancient times these products have catered the rather than commercial uses.

Apart from other activities, the NSIC undertakes the task of promoting and marketing of these unique products in the country and abroad through its strong network in and around the country as well as abroad, by imparting training to the traditional artisans to improve their technology and productivity and subsequently displaying the products by organizing / participating in different trade fairs and exhibitions.

To create awareness amongst the unemployed youths and budding entrepreneurs of the North East, the NSIC imparts need based training both within and outside the region from time-to-time. The training programmes include the trades like TV & Mobile Repairing, Computer Hardware Maintenance, Electrical Goods Repairing, Leather Footwear, Machinist, Two-wheeler & Four-wheeler Repairing, Fashion technology, Beautician Programme, Electrician, Export Linkage and Export Management, Food Processing Technology, Hospitality and Tourism Management, Catering and Banking Technology, and Advance Welding.