Small Business Management (SBMT) Solved Question Papers
2018 (May)
COMMERCE (General)
Course: 604 (Small Business Management)
Time: 3 hours
The figures in the margin indicate full marks for the questions
(New Course)
Full Marks: 80
Pass Marks: 24
1. (a) Write true or false: 1x8=8
(i) Market promotion is an external problem of small business enterprises. True
(ii) The small business are financed by the state government. False
(iii) The first step for the product planning is idea formulation. True
(iv) The life of product is increased by product modification False, It increases sales
(b) Fill in the blanks with appropriate words:
(i) Small-scale industries are ____________ (Capital intensive/Labour intensive)
(ii) ________ enterprises are privately owned and operated business. (Small-scale/Large-scale)
(iii) The Government of India constituted SSIB in ____________ .(1954/1956)
(iv) The Small Industries Service Institutes (SISIs) are set up to provide consultancy and __. (Capital/training)
2. Write short notes on (any four): 4x4=16
(a) Role of 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.
(b) Features of the Micro, Small and Medium Enterprise Act, 2006: Salient features of Micro, Small and Medium Enterprises Development Act, 2006 are as follows
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:
| Class | Manufacturing Enterprises – Investment in Plant & Machinery | Services Enterprises – Investment in Equipment |
| Micro | Less than Rs. 25 lacs | Less than Rs. 10 lacs |
| Small | Greater than Rs. 25 lacs but up to Rs. 5 Cr. | Greater than Rs. 10 lacs but upto Rs. 2 Cr |
| Medium | Greater than Rs. 5 Cr. but up to 10 Cr. | Greater than Rs. 2 Cr. but upto Rs. 5 Cr. |
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.
(c) Importance of product design:
(d) Significance of working capital: Working Capital means excess of current assets over current liabilities. Such Working Capital is required to smooth conduct of small business activities. It is as important as blood to body. An organisation’s profitability depends on the quantum of Working Capital available to it. Adequate Working Capital is a source of energy to any small business organisation. It is the life blood of an organisation. The following points will highlight the need of adequate working capital:
a) Enables a company to meet its obligations: Working capital helps to operate the small business smoothly without any financial problem for making the payment of short-term liabilities. Purchase of raw materials and payment of salary, wages and overhead can be made without any delay. Adequate working capital helps in maintaining solvency of the small business by providing uninterrupted flow of production.
b) Enhance Goodwill: Sufficient working capital enables a small business concern to make prompt payments and hence helps in creating and maintaining goodwill. Goodwill is enhanced because all current liabilities and operating expenses are paid on time.
c) Facilitates obtaining Credit from banks without any difficulty: A firm having adequate working capital, high solvency and good credit rating can arrange loans from banks and financial institutions in easy and favorable terms.
d) Regular Supply of Raw Material: Quick payment of credit purchase of raw materials ensures the regular supply of raw materials fro suppliers. Suppliers are satisfied by the payment on time. It ensures regular supply of raw materials and continuous production. Prompt payments to its creditors also enable a company to take advantage of cash and quantity discounts offered by them.
e) Smooth Small business Operation: Working capital is really a life blood of any small business organization which maintains the firm in well condition. Any day to day financial requirement can be met without any shortage of fund. All expenses and current liabilities are paid on time.
(e) Small-scale industries vs. large-scale industries: Difference between large and small business enterprises
| Large Scale Industry | Small Scale Industry |
| (i) These industries employ a larger number of persons and capital. (ii) The work is done mostly by larger machines and laborers. (iii) Raw materials and used is large and there is mass production. (iv) They are located in urban centres and are in the public sector or run by big industrialists, e.g., Cotton textiles, Jute textiles. | (i) These industries employ less number of persons and capital. (ii) Most of the work is done by manpower, small machines and tools. (iii) Raw materials used are less and the production is consequently less. (iv) They are scattered in rural and urban areas and are in the private sector, e.g., cycle, T.V., radio. |
(f) Market Assessment: Market Assessment is the evolution of market for a product or service including the analysis of the market trends, assessing the competitions and conducting market studies. It is a type of market research which is conducted before investing a great amount of time and money into a business. It is also a way to determine a clear understanding of the market environment in which the firm hopes to operate.
Market Assessment covers a scan of the competitive landscape, the value chain and the structure of the industry, the trends of a particular sector or sub-sector, the size of the addressable market and the underlying behaviours and needs of potential or existing customers.
Uses of Market Assessment
There are many uses for which market assessments are made. However, the primary reasons for undertaking such research are as follows:
1. To determine if a market or the product is worth the time and effort to pursue. The assessment can provide insights that may change the entrepreneur’s business direction and product plan perhaps abandoning either together.
2. To help in collecting information that will be used for business planning and in the preparation of materials for presentation to potential inventors.
To support management’s decision making as to whether to invest money for market expansion or additional product development.
3. (a) Discuss the industrial policies of central and state government for the promotion and management of micro, small and medium enterprises in Assam. 11
Ans: Salient features of Micro, Small and Medium Enterprises Development Act, 2006 are as follows
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:
| Class | Manufacturing Enterprises – Investment in Plant & Machinery | Services Enterprises – Investment in Equipment |
| Micro | Less than Rs. 25 lacs | Less than Rs. 10 lacs |
| Small | Greater than Rs. 25 lacs but up to Rs. 5 Cr. | Greater than Rs. 10 lacs but upto Rs. 2 Cr |
| Medium | Greater than Rs. 5 Cr. but up to 10 Cr. | Greater than Rs. 2 Cr. but upto Rs. 5 Cr. |
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
a) To examine the matters referred to it by the National Board;
b) To advise Central Government on matters relating to classification of MSMEs, programmes, guidelines or instructions for the promotion and development and enhancing the competitiveness of MSMEs.
c) To advise State Governments on matters specified in the rules related to repeal of, “The Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act, 1993, including anything done or any action taken under the Act so repealed.
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:
a) Ensuring smooth credit flow to the MSMEs,
b) Minimizing sickness among them, and
c) Ensuring enhancement of their competitiveness
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:
a) Provisions related to delayed payments to micro and small enterprises (MSEs) strengthened.
b) Period of payment of MSEs by the buyers reduced to forty-five days.
c) Rate of interest on outstanding amount increased to three times the prevailing bank rate or Reserve Bank of India compounded on monthly basis.
d) Constitution of MSE Facilitation Council(s) mandatory for State Government.
e) Declaration of payment outstanding to MSE supplier mandatory for buyers in their annual statement of accounts.
f) Interest (paid or payable to supplier) disallowed for deduction for income tax purposes.
g) No appeal against order of Facilitation Council to be entertained by any Court without deposit of 75% of the decreed amount payable by buyer.
h) Appellate Court may order payment of a part of the deposit to the supplier MSE
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:
a) Identifying the sickness at an early stage.
b) Initiating remedial measures promptly with a pro active approach
c) Formulation and implementation of rehabilitation package for potentially viable sick MSME units
Or
(b) What is the rationale behind the development of small-scale industries in India? 11
Ans: Rationale of development of Small Business in India
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.
Rationale of Development 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.
4. (a) Explain the various quality control methods that can be used for small enterprises. 11
Ans: Quality Control in a manufacturing enterprise means the systematic control of those variables which affect the excellence of the ultimate product. The variables in general are man, machines, materials and manufacturing conditions. Each of these variables is not always uniformly available in the nature. There are differences in them for variety of reasons. For example, due to caprices of nature, materials may differ in their composition and physical characteristics. Similarly, men vary in their degree of skill and proficiency. All machines are not of equal quality as they are made by men by use of materials which vary in several counts. Further, manufacturing conditions such as temperature, humidity, building, vibrations, composition of coolers, dust and dirt in the air are all subject to great variations. The practice of Quality control ensures proper regulation of all these variables so that they do not cause any distortion in excellence of the finished product.
Methods of Quality Control
There are two methods of Quality Control as discussed below:
1. Inspection: Inspection pursues the production process step by step till its completion and evaluates the work process with reference to predetermined standards of performance. However, the extent of inspection works differs between companies or between products. Inspection may either be preventive or curative. While preventive inspection is carried out at every stage of a production process to check any imperfection; curative inspection is taken up after the production takes place, to separate the defective goods from the right quality goods.
On the whole, this method examines whether the production is carried out as per the standard set or not. Inspection aims at maintaining quality standard and calls for minimizing product scraping or rejection. As faulty production results mostly from defects in materials or machines, inspection requires testing of materials before their transformation into finished product as well as the checking of machines and tools to ensure their accuracy of performance. Instead of permitting products to be scrapped after manufacturing, inspection is supposed to reduce the cost of rejection by preventing the occurrence of such faulty production.
2. Statistical Quality Control: Statistical Quality Control (SQC) is a special type of technique to control the quality of a product. In this method, statistical techniques are used to gather and analyze data with a view to determining and controlling quality. It is based on sampling, probability and statistical inference. This means that it judges an entire lot by the characteristics of sample. Under this process, a small part of a certain lot of products is inspected and its quality is assumed to be the quality of the entire lot. This is called statistical inference. The Statistical Quality Control system is divided into three steps namely:
a. Analysis of samples;
b. Use of Control Charts and
c. Taking corrective actions.
Statistical Quality Control is a diagnostic and preventive device of quality control. It is an anti-waste device, operated with such scientific thoroughness that it ensures flow of quality goods into the market at least inspection or such other costs. It also enables optimum utilization of resources. It is widely used in process control in continuous process industries producing goods on a mass scale.
Or
(b) Describe the various stages of new product development. 11
Ans: Stages in New Product Development Process
The introduction of new product usually passes through various stages. In each stage, the management must decide whether to move on to next stage with the product idea or not. Practically, in this process some of the ideas will be eliminated at every step. There are six stages involved in the new product development. The stages are given below:
(I) Idea generation: New products are produced on the basis of new ideas. Ideas may be generated from various sources like customers, dealers, distributors, salesman, top executive, consultancy organisation, Research and Development Department etc. The first step is to collect ideas as many as possible so that the company can find out one of the best idea out of those ideas to convert the same in to actual product.
(II) Screening of Ideas: All new ideas cannot be converted into products as it requires heavy capital investments. Those ideas should be screened and all unworkable ideas should be dropped. Only most viable, feasible and promising one should be selected for further processing. The company uses the concept testing method. In this method, consumer response to a description or picture or drawings is measured even before the product is actually produced. The purpose is to find out few best ideas.
(III) Business Analysis: During this stage, an attempt is made to predict the economic consequences of the product for the company. In these stages, the management should perform the following:
(a) Identify product features.
(b) Estimate market demand and product profitability.
(c) Establish a programme to develop the product.
(d) Assign responsibility for further study of the product feasibility.
(IV) Product Development or Prototype testing: This step consists of the following:
(a) Prototype development giving visual image of the product.
(b) Consumer testing of the model or prototype product.
(c) Branding, packing and labeling of the product.
The marketing people determine an appropriate brand name, package and price and making sure that both tangible and intangible features are considered and included. Focus groups, target market surveys and other market research techniques with the physical product give the marketer additional information.
(V) Market Testing: Test marketing involves placing a full developed new product for sale in one or more selected areas and observing its actual performance under a proposed marketing plan. In the words of P. Kotler- “Test marketing is the stage at which the product and marketing programme are introduced into more realistic market settings”. The basic purpose is to evaluate the product performance and marketing programme in a real setting prior to the commercialization. This step provides the scope of correction and modification of the product as well as marketing programme. Many products fail after commercialization because of lack of test marketing. In this process, the marketers approach the trial purchasers and first repeat purchaser to know their feelings and reaction about the product as well as marketing programme. On the basis of their opinions the marketers make certain required modification in the product as well as marketing programme. After the favourable result usually, products are sent for commercialization.
(VI) Commercialization: After favourable response in test marketing, full scale production and marketing programme are planned and then the product is launched. It may be in phased manner or the product may be introduced simultaneously depending on the company’s plan and resources available. The phased manner introduction helps to avoid short supply of the product due to initial gaps in production and distribution.
5. (a) What is working capital? Discuss the various sources of working capital. 3+8=11
Ans: Meaning and definition of Working Capital
The capital required for a small business is of two types. These are fixed capital and working capital. Fixed capital is required for the purchase of fixed assets like building, land, machinery, furniture etc. Fixed capital is invested for long period, therefore it is known as long-term capital. Similarly, the capital, which is needed for investing in current assets, is called working capital. The capital which is needed for the regular operation of small business is called working capital. Working capital is also called circulating capital or revolving capital or short-term capital.
In the words of John. J Harpton “Working capital may be defined as all the shot term assets used in daily operation”.
According to “Hoagland”, “Working Capital is descriptive of that capital which is not fixed. But, the more common use of Working Capital is to consider it as the difference between the book value of the current assets and the current liabilities.
From the above definitions, Working Capital means the excess of Current Assets over Current Liabilities. Working Capital is the amount of net Current Assets. It is the investments made by a small business organisation in short term Current Assets like Cash, Debtors, Bills receivable etc.
Various Sources of Working Capital
Sources of working capital are many. There are both external and internal sources. The external sources are both short-term and long-term. Trade credit, commercial banks, finance companies, indigenous bankers, public deposits, advances from customers, accrual accounts, loans and advances from directors and group companies etc. are external short-term sources. Companies can also issue debentures and invite public deposits for working capital which are external long term sources. Equity funds may also be used for working capital. A brief discussion of each source is attempted below.
Trade credit is a short term credit facility extended by suppliers of raw materials and other suppliers. It is a common source. It is an important source. Trade credit is an informal and readily available credit facility. It is unsecured. It is flexible too; that is advance retirement or extension of credit period can be negotiated. Trade credit might be costlier as the supplier may inflate the price to account for the loss of interest for delayed payment.
Commercial banks are the next important source of working capital finance commercial banking system in the country is broad based and fairly developed. Straight loans, cash credits, hypothecation loans, pledge loans, overdrafts and bill purchase and discounting are the principal forms of working capital finance provided by commercial banks. They provide loan in the following form:
a. Straight loans are given with or without security. A one time lump-sum payment is made, while repayments may be periodical or one time.
b. Cash credit is an arrangement by which the customers (small business concerns) are given borrowing facility upto certain limit, the limit being subjected to examination and revision year after year. Interest is charged on actual borrowings, though a commitment charge for utilization may be charged.
c. Hypothecation advance is granted on the hypothecation of stock or other asset It is a secured loan. The borrower can deal with the goods.
d. Pledge loans are made against physical deposit of security in the bank's custody. Here the borrower cannot deal with the goods until the loan is settled.
e. Overdraft facility is given to current account holding customers t^ overdraw the account upto certain limit. It is a very common form of extending working capital assistance.
f. Bill financing by purchasing or discounting bills of exchange is another common form of financing. Here, the seller of goods on credit draws a bill on the buyer and the latter accepts the same. The bill is discounted per cash will the banker. This is a popular form.
Finance companies abound in the country. About 50000 companies exist at present. They provide services almost similar to banks, though not they are banks. They provide need based loans and sometimes arrange loans from others for customers. Interest rate is higher. But timely assistance may be obtained.
Indigenous bankers also abound and provide financial assistance to small business and trades. They change exorbitant rates of interest by very much understanding.
Public deposits are unsecured deposits raised by small businesses for periods exceeding a year but not more than 3 years by manufacturing concerns and not more than 5 years by non-banking finance companies. The RBI is regulating deposit taking by these companies in order to protect the depositors. Quantity restriction is placed at 25% of paid up capital + free services for deposits solicited from public is prescribed for non-banking manufacturing concerns. The rate of interest ceiling is also fixed. This form of working capital financing is resorted to by well established companies.
Advances from customers are normally demanded by producers of costly goods at the time of accepting orders for supply of goods. Contractors might also demand advance from customers. Where sellers* market prevail advances from customers may be insisted. In certain cases to ensure performance of contract in advance may be insisted.
Accrual accounts are simply outstanding dues to workers, suppliers of overhead service requirements and the like. Outstanding wages, taxes due, dividend provision, etc. are accrual accounts providing working capital finance for short period on a regular basis.
Loans from directors, loans from group companies etc. constitute another source of working capital. Cash rich companies lend to liquidity crunch companies of the group.
Commercial papers can be used to raise funds. It is a promissory note carrying the undertaking to repay the amount on or after a particular date. Normally it is an unsecured means of borrowing and the companies are allowed to issue commercial papers as per the regulations issued by SEBI and Company’s Act.
Debentures and equity fund can be issued to finance working capital so that the permanent working capital can be matchingly financed through long term funds.
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(b) Discuss the determinates of working capital in small business enterprise. 11
Ans: Factors Affecting Working Capital Requirement: The level of working capital is influenced by several factors which are given below:
a. Nature of Small business: Nature of small business is one of the factors. Usually in trading small businesses the working capital needs are higher as most of their investment is found concentrated in stock. On the other hand, manufacturing/processing small business needs a relatively lower level of working capital.
b. Size of Small business: Size of small business is also an influencing factor. As size increases, an absolute increase in working capital is imminent and vice versa.
c. Production Policies: Production policies of a small business organisation exert considerable influence on the requirement of Working Capital. But production policies depend on the nature of product. The level of production, decides the investment in current assets which in turn decides the quantum of working capital required.
d. Terms of Purchase and Sale: A small business organisation making purchases of goods on credit and selling the goods on cash terms would require less Working Capital whereas an organisation selling the goods on credit basis would require more Working Capital. If the payment is to be made in advance to suppliers, then large amount of Working Capital would be required. 286
e. Production Process: If the production process requires a long period of time, greater amount of Working Capital will be required. But, simple and short production process requires less amount of Working Capital. If production process in an industry entails high cost because of its complex nature, more Working Capital will be required to finance that process and also for other expenses which very with the cost of production whereas if production process is simple requiring less cost, less Working Capital will be required.
f. Turnover of Circulating Capital: Turnover of circulating capital plays an important and decisive role in judging the adequacy of Working Capital. The speed with which circulating capital completes its cycle i.e. conversion of cash into inventory of raw materials, raw materials into finished goods, finished goods into debts and debts into cash decides the Working Capital requirements of an organization. Slow movement of Working Capital cycle requires large provision of Working Capital.
g. Dividend Policies: Dividend policies of a small business organisation also influence the requirement of Working Capital. If a small business is following a liberal dividend policy, it requires high Working Capital to pay cash dividends where as a firm following a conservative dividend policy will require less amount of Working Capital.
h. Seasonal Variations: In case of seasonal industries like Sugar, Oil mills etc. More Working Capital is required during peak seasons as compared to slack seasons.
i. Small business Cycle: Small business expands during the period of prosperity and declines during the period of depression. More Working Capital is required during the period of prosperity and less Working Capital is required during the period of depression.
j. Change in Technology: Changes in Technology as regards production have impact on the need of Working Capital. A firm using labour oriented technology will require more Working Capital to pay labour wages regularly.
k. Inflation: During inflation a small business concern requires more Working Capital to pay for raw materials, labour and other expenses. This may be compensated to some extent later due to possible rise in the selling price. 287
l. Turnover of Inventories: A small business organisation having low inventory turnover would require more Working Capital where as a small business having high inventory turnover would require limited or less Working Capital.
m. Taxation Policies: Government taxation policy affects the quantum of Working Capital requirements. High tax rate demands more amount of Working Capital.
n. Degree of Co-ordination: Co-ordination between production and distribution policies is important in determining Working Capital requirements. In the absence of co-ordination between production and distribution policies more Working Capital may be required.
6. (a) What is packaging? Explain the role and functions of packaging? 3+8=11
Ans: Packaging: In this age of competition, good and appropriate packaging occupies much significance. The policies pertaining to the packaging are a part of the product planning and product development program.
Some of the main definitions of 'packaging' are being given hereunder:
In the opinion of Prof. Rustom S. Davar, Packaging is that art and/or science which is related to the development and use of materials, methods and equipment, for the packing of the goods in some containers, so that the product, while passing through various stages of distribution, could remain fully safe.
William Stanton has opined that the meaning of packaging is the total group of activities under the product planning which are related to the chalking out of a design of the outer cover of a product and the concerned production.
Functions of Packaging
1. Product Identification: Packaging help in identification of the product.
2. Product Protection: The main function of the packing is to provide protection to the product from dirt, insect and breakage.
3. Convenience: It provides convenience in carriage, stocking and in consuming.
4. Product Promotion: Packaging simplifies the work of sales promotion.
Importance of Packaging
a) Safety of the Products. The main function of packaging is to protect the things from dust, water, moisture, insects, etc. Good packing saves the products against perishing, loss and other damages.
b) Facility in Marketing Activities. Due to the packing, the movement of the products, shifting, preserving, opening, collecting and storage, become economical and easier for both the middlemen as well as the consumers.
c) Advertisement. One of the functions of packing is advertisement too. Till there exists any product packet, it keeps us aware of the same.
d) Facility in Collecting. It is easier to store the packaged goods. Due to packing, the products remain safe in the godowns.
e) Information to the Customers. While making the product attractive, the packing could also make the product useful and informative. It can extend necessary instructions and information more effectively to the customer regarding the use of the product.
Or
(b) What do you mean by marketing management? Discuss its functions. 11
Ans: Meaning of Marketing and Marketing Environment: Marketing is everywhere and it affects our day- to-day life in every possible manner. Formally or informally people and organizations engage in a vast number of activities that could be called as marketing. Good marketing is no accident, but a result of careful planning and execution. It is both an art and science.
Marketing management is the art and science of choosing target markets and getting, keeping and growing customers through creating, delivering and communicating superior customer value. In short Marketing is “Meeting needs profitably”. Marketing has been defined by different authors in different ways:
In1985 AMA redefined marketing as “Marketing is the process of planning and executing the conception, pricing, promotion and distribution of ideas, goods and services to create exchanges that satisfy individual and organizational goals.”
In the words of Philip Kotler “Marketing is the human activity directed at satisfying needs and wants through an exchange process.”
Functions of Marketing Management:
1. Marketing Research: Marketing research involves collection and analysis of facts relevant to various aspects of marketing. It is a process of collecting and analysing information regarding customer needs and buying habits, the nature of competition in the market, prevailing prices, distribution network, effectiveness of advertising media, etc. Marketing research gathers, records and analyses facts for arriving at rational decisions and developing suitable marketing strategies.
2. Product Planning and Development: As you know marketing starts much before the actual production. The marketers gather information regarding what are the needs of the consumers and then decide upon what to produce. So, the task of marketing begins with planning and designing a product for the consumers. It can also be done while modifying and improving an already existing product.
3. Buying and Assembling: Buying and assembling activities as a part of marketing refer to buying and collection of required goods for resale. This function of marketing is primarily relevant to those business organisations that are engaged in trading activities. In the context of manufacturing organisations, buying and assembling involves buying raw materials and components required for production of finished goods.
4. Packaging: Packaging involves putting the goods in attractive packets according to the convenience of consumers. Important considerations to be kept in view in this connection are the size of the package and the type of packaging material used. Goods may be packaged in bottles (plastic or glass), boxes (made of tin, glass, paper, plastic), cans or bags. The size of the package generally varies from a few grams to a few kilograms, one piece to a number of pieces of a product, or in any other suitable quantity in terms of weight, count, length etc. Packaging is also used as a promotional tool as suitable and attractive packages influences the demand of the products. It may be noted that packaging is different from packing, which refers to putting goods in suitable containers for transportation purposes.
5. Standardisation and Grading: Standardisation refers to development of standards for production of goods with respect to shape, design, colour and other characteristics. If products are standardised, customers are able to identify a product and its characteristics very well. So goods can be sold by sample or description. Standardisation helps in promoting the sale of the product by increasing consumers’ confidence in the product quality. Grading involves separating products into different classes on the basis of certain predetermined standards relating to size and quality. Grading is required in case of agricultural, forest and mineral products such as cotton, sugar cane, iron ore, coal, timber, etc.
6. Branding: Branding means giving an attractive name, symbol or identity mark to the product to make a product different from others so that it is known by that name or symbol or mark.
7. Pricing the Product: Pricing involves decisions regarding fixation of product prices, keeping in view the product costs, the capacity of customers to pay, and the prices of the competitive products. It is an important decision as it influences the sales and so also the profits. So pricing has to be done very carefully.
8. Promotion of the Product: Promotional activities include advertising, personal selling, sales promotion and publicity. All promotional activities involve communication with the existing and prospective customers whereby they are made aware of the product, its distinctive features, price, availability etc. The objective of promotional activities is to motivate the customers to buy the product.
9. Distribution: Distribution refers to those activities that are undertaken for sale of products to the customers and the physical transfer thereof. The first aspect i.e., sale of product involves use of middlemen such as wholesalers and retailers whose services are used for making the products available at convenient points and helping in their sale to the ultimate consumers. The second aspect i.e., physical transfer involves warehousing and transportation of goods from the point of production to the point of sale or the consumer. The objective of distribution activities is to ensure that consumers get the goods and services at the place and time most convenient to them and in the desired quantity.
10. Selling: Selling is an important function of marketing whereby the ownership of goods and services is transferred from the seller to the buyer for a consideration known as price. To initiate and complete the process of selling, the seller has to inform the prospective buyer about availability of goods, the nature and uses of products, their prices and the needs of the customers that may be effectively satisfied by the product. In the process, he arouses customers’ interest in the product and persuades them to buy it.
7. (a) Examine the impact of pricing decision in small business enterprises. 12
Ans: Price is defined as the amount we pay for goods or a service or an idea. Price is the only element in the marketing mix of a firm that generates revenue. All other elements generates only cost. Price is a matter of importance to both seller & buyer in the market place. Only when a buyer & a seller agree on price, we can have exchange of goods and services leading to transfer of ownership.
The term ― Price need not be confused with the term ― Pricing. Price is the value that is put to a product or service and is the result of a complex set of calculations, research and understanding and risk taking ability. A pricing strategy takes into account segments, ability to pay, market conditions, competitor actions, trade margins and input costs, amongst others. It is targeted at the defined customers and against competitors.
Importance of Pricing for Small Scale industries:
Importance of pricing is spelled out by the following points.
1. Price Regulates Demand: Price increase or decrease the demand for the product. Marketing strategy can be easily implemented to meet the rising demand for goods & service.
2. Price is the competitive weapon: The marketers have to perform in a highly competitive environment. Price is a very important instrument to fight competition. It is the competition that contributes maximum to the importance of pricing. Pricing is a highly dynamic function. Because of the immense competition and in meeting competition, pricing decisions acquire their real importance.
3. Price is the Determinants of profitability: Price determines the profitability of firm by influencing the sales revenue. Low price is not always necessary to increase profit. A right price can increase the sales volume and there by profit. The impact of price rise of fall is reflected instantly in the rise or fall of the product profitability.
4. Price is a Decision Input: Pricing is highly risky decision area & mistakes in pricing might reasonably affect the firm, its profits, growth and future.
5. Marketing Communication: Price plays an important role in marketing communication. High price may indicate higher quality. Price communicates value to the consumer. Customers are basically value-maximizes. They want to have the maximum value from a given purchase. They form an expectation of value and act on it. A buyer’s satisfaction is a function of the product’s perceived performance and the buyer’s expectations. So, if the product meets the expectations of consumers and their value definitions at the given price point, price is seen as acceptable. Otherwise consumers tend to be dissatisfied. They may say that the product is overpriced and they may reject the offer.
The above discussion indicates that pricing is a critical element in any small company’s marketing plan, because it directly affects revenue and profit goals. Effective pricing strategies must consider costs as well as customer perceptions and competitor reactions, especially in highly competitive markets. Today, many firms are trying to follow the low-price trend. At the same time, many marketers have been successful in selling more expensive products and services by combining unique product formulations with engaging marketing campaigns.
Or
(b) What do you mean by channels of distribution? Explain the major channels of distribution used in marketing products. 2+10
Ans: Channels of Distribution
One of the important problems of marketing is the distribution of goods & services to the right place, person & the right time. Manufacturers often find it difficult to decide about the effective distribution system. The channel of distributions refers to the group of intermediaries, which perform the distribution functions. A channel of distribution is an organised net-work or a system of agencies and institutions which, in combination, perform all the activities required to link producers with users and users with producers to accomplish the marketing task.
According to Philip Kotler, “The distribution is the set of all firms & individuals that assist in the transferring the little of goods & services as they move from producers to customers.”
According to Richard Buskirk, “Channel of distribution is that system of financial organization by which a producer sends his products to the hands of consumers.”
According to Cundiff and Still, “Channels of distribution are those marketing nets through which the producer flow the products toward the market.”
Types of Channels
A. Zero-level channel (producer to consumer): It is also called as direct marketing or direct selling. This channel consists of the producer who directly sells his products to the ultimate consumers. This is the shortest, simplest, & cheapest form of distribution. Producers are benefited by increased profit, whereas consumers are benefited by reduced price. This is possible because it eliminates the middleman completely. With the development of sophisticated & efficient retailing like supermarkets, chain-stores, automatic selling machine is financially sound follow this channel of distribution. For products like jewelry & industrial goods like machinery, this is the best channel.
(Old Course)
Full Marks: 80
Time: 3 Hours
1. Write true or false: 1x8=8
(a) Small-scale industries are capital intensive.
(b) Service enterprises are engaged in the production of goods.
(c) Finance is the lifeblood of business.
(d) The Micro, small and medium enterprises Act was passed in the year 1986.
(e) Innovation is important in modern times because of stiff competition.
(f) Small- scale industries are suited for creation of employment.
(g) Political instability is an important internal cause of industrial sickness.
(h) The first step for product planning is commercialization.
2. Write short notes on (any four) 4x4=16
(a) Role of small business
(b) Quality control technology for small business
(c) Production planning
(d) Fixed vs. working capital
(e) Sales promotion
(f) Sickness signals in small enterprise
3. (a) Define small-scale industry. Discuss the relationship between small-scale and large-scale industries. 3+8=11
Or
(b) What is the rational behind the development of small-scale industries in India? 11
4. (a) What do you understand by plant location? Discuss the different factors to be taken into consideration while selecting the location of an industrial unit. 3+8=11
Or
(b) State the importance of product design. Discuss the different factors to be taken into consideration for product designing. 4+7=11
5. (a) Write a note on the sources of working capital for small-scale industries. 11
Or
(b) Discuss the importance of working capital for successful functioning of a small enterprise. 11
6. (a) Define marketing. Discuss the various marketing problems faced by the small-scale enterprises. 3+8=11
Or
(b) Explain the advantages and limitations of advertising. 6+5=11
7. (a) Discuss the causes and symptoms of small-scale industries sickness. 6+6=12
Or
(b) Explain the concept of capacity utilization with the help of installed capacity and idle capacity. 12
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