Business Plan

Chapter 4

Business Plan

What is a Business Plan?
A business plan is a blueprint and communication tool for business. A device to help, the owner, set out how he intends to operate his business. A road map to tell others how the entrepreneur expects to get there.

Business plan is a written document that describes a business, its objectives, strategies, market and financial forecast.

Business plan is document that spells out a company's expected course of action for a specified period, usually including a detailed listing and analysis of risks and uncertainties. For the small business, it should examine the proposed products, the market, the industry, the management policies, the marketing policies, production needs and financial needs. Frequently, it is used as a prospectus for potential investors and lenders.

Business plan is a comprehensive planning document which clearly describes the business developmental objective of an existing or proposed business. The plan outlines what and how and from where the resources needed to accomplish the objective will be obtained and utilized.

A business plan is a summary of how a business owner, manager, or entrepreneur intends to organize an entrepreneurial endeavour and implement activities necessary and sufficient for the venture to succeed. It is a written explanation of the company's business model.

A business plan is any plan that works for a business to look ahead, allocate resources, focus on key points, and prepare for problems and opportunities. Unfortunately, many people think of business plans only for starting a new business or applying for business loans. But they are also vital for running a business, whether or not the business needs new loans or new investments. Businesses need plans to optimize growth and development according to priorities.

What's a Start-up Plan?
A simple start-up plan includes a summary, mission statement, keys to success, market analysis, and break-even analysis. This kind of plan is good for deciding whether or not to proceed with a plan, to tell if there is a business worth pursuing, but it is not enough to run a business with.



Is There a Standard Business Plan?
A normal business plan (one that follows the advice of business experts) includes a standard set of elements. Plan formats and outlines vary, but generally a plan will include components such as descriptions of the company, product or service, market, forecasts, management team, and financial analysis.


Your plan will depend on your specific situation. For example, description of the management team is very important for investors while financial history is most important for banks. However, if you're developing a plan for internal use only, you may not need to include all the background details that you already know. Make your plan match its purpose.

What is most important in a Plan?
It depends on the case, but usually it's the cash flow analysis and specific implementation details.

Cash flow is both vital to a company and hard to follow. Cash is usually misunderstood as profits, and they are different. Profits don't guarantee cash in the bank. Lots of profitable companies go under because of cash flow problems. It just isn't intuitive.
Implementation details are what make things happen. Your brilliant strategies and beautifully formatted planning documents are just theory unless you assign responsibilities, with dates and budgets, follow up with those responsible, and track results. Business plans are really about getting results and improving your company.

Can you suggest a Standard Outline?
If you have the main components, the order doesn't matter that much, but here's the outline order we suggest in Business Plan Pro software:

1. Executive Summary: Write this last. It's just a page or two of highlights.
2. Company Description: Legal establishment, history, start-up plans, etc.
3. Product or Service: Describe what you're selling. Focus on customer benefits.
4. Market Analysis: You need to know your market, customer needs, where they are, how to reach them, etc.
5. Strategy and Implementation: Be specific. Include management responsibilities with dates and budget.
6. Management Team: Include backgrounds of key members of the team, personnel strategy, and details.
7. Financial Plan: Include profit and loss, cash flow, balance sheet, break-even analysis, assumptions, business ratios, etc.

An expanded plan outline
We don't recommend developing the plan in the same order you present it as a finished document. For example, although the Executive Summary comes as the first section of a business plan, we recommend writing it after everything else is done.

Contents of your Business Plan
The Executive Summary:
1. Para 1 which is common;
2. Para 2 which is focused to the specific reader.


The Nature of your Business:
1. Vision Statement
2. Mission Statement
3. Long-term objectives
4. Short-term objectives
5. Key Personnel
6. Legal Structure (ownership structure)
7. Professional Advisors
8. Contact Details (Address, Tel. No.,Fax No. , E-mail ID, Website)

Brief Description of your Business
Product / Service being offered
Your USP (Unique Selling Point)
IPR Issues
Legal and Statutory requirements


The Market & the Competition
1. Target Market
2. Market Positioning
3. Clients
4. Strategies
5. Public Relations

Marketing Plan
1. Anticipated Demand
2. Marketing Methods
3. Sales and Distribution Network
4. Pricing and Promotional Policies

Financial Plan
1. Requirement of Fixed Assets
2. Requirement of Working Capital
3. Sources of Funds (Long & Short-term)
4. Projected Profit & Loss Statement
5. Projected Balance sheet
6. Projected Cash Flow Statement
7. Financial Ratios
8. Concessions and Subsidies

Operational Plan
1. Your Location
2. Infrastructure needed and available
3. Choice of technology
4. Project implementation schedule
(Bar Chart; PERT/CPM)
5. Factory Layout (optional)
6. Insurance


HR Plans
1. Manpower Planning
2. Organization Structure
3. Departmentation
4. Recruitment policies
5. Training & Development


Who Needs a Business Plan?
You need a business plan if you’re running a business. A business plan is like a map and a compass for a business. Without it you’re travelling blind. With a plan you set objectives, establish priorities, and provide for cash flow.

You need a business plan if you’re applying for a business loan. Most banks require it, and even those that don’t strictly require it expect it. They expect it to be a summary of the business, with some predictable key points.

You need a business plan if you’re looking for business investment. The plan won’t get you the investment, but not having a plan will mean you won’t get investment. Investors require a business plan. They invest in the people, the idea, the track records, the market, the technology, and other factors; but they look to the business plan to define and explain the business. You need a business plan if you’re working with partners. The business plan defines agreements between partners about what’s going to happen.

You need a business plan to communicate with a management team. The day-to-day business routine is distracting, problems come up, opportunities appear, and commitments should be followed and tracked. How do you know where you are in business without establishing where you started and where you intended to go? How can people commit to a plan they can’t see? You need a business plan to sell a business, or to set a value on a business for tax or other purposes such as estate planning, or divorce.

Sadly, many of the people who need a plan don’t know they need it. They get trapped by the myths of business planning. They don’t realize that plans are not just for start-ups, loans, or investment. They don’t realize that business plans are easier to develop than most people think to succeed in business you simply must plan the steps, set priorities, allocate resources, and manage the cash. Sure, some people say they don’t plan, but if they’re successful then they’re actually always planning in their heads. And you can keep that plan in your head if your business is very simple, cash flow is always adequate, and you don’t work with other people, and you don’t need to communicate your business plan with other people either.

Don't accept disadvantages in business. Don't try to run without a plan. Doing a plan is probably much easier than you think, and much more valuable.

The Different Types of Business Plans
Business plans are also called strategic plans, investment plans, expansion plans, operational plans, annual plans, internal plans, growth plans, product plans, feasibility plans, and many other names. These are all business plans.

In all these different varieties of business plan, the plan matches your specific situation. For example, if you're developing a plan for internal use only, not for sending out to banks or investors, you may not need to include all the background details that you already know. Description of the management team is very important for investors, while financial history is most important for banks.

Some of these specific case differences lead to different types of plans:

The most standard business plan is a start-up plan, which defines the steps for a new business. It covers standard topics including the company, product or service, market, forecasts, strategy, implementation milestones, management team, and financial analysis. The financial analysis includes projected sales, profit and loss, balance sheet, cash flow, and probably a few other tables. The plan starts with an executive summary and ends with appendices showing monthly projections for the first year.

Internal plans are not intended for outside investors, banks, or other third parties. They might not include detailed description of company or management team. They may or may not include detailed financial projections that become forecasts and budgets. They may cover main points as bullet points in slides (such as PowerPoint slides) rather than detailed texts.

An operations plan is normally an internal plan, and it might also be called an internal plan or an annual plan.

It would normally be more detailed on specific implementation milestones, dates, deadlines, and responsibilities of teams and managers.

A strategic plan is usually also an internal plan, but it focuses more on high-level options and setting main priorities than on the detailed dates and specific responsibilities. Like most internal plans, it wouldn’t include descriptions of the company or the management team. It might also leave out some of the detailed financial projections. It might be more bullet points and slides than text.

A growth plan or expansion plan or new product plan will sometimes focus on a specific area of business, or a subset of the business. These plans could be internal plans or not, depending on whether or not they are being linked to loan applications or new investment. For example, an expansion plan requiring new investment would include full company descriptions and background on the management team, as much as a start-up plan for investors. Loan applications will require this much detail as well. However, an internal plan, used to set the steps for growth or expansion funded internally, might skip these descriptions. It might not include detailed financial projections for the whole company, but it should at least include detailed forecasts of sales and expenses for the company.

A feasibility plan is a very simple start-up plan that includes a summary, mission statement, keys to success, basic market analysis, and preliminary analysis of costs, pricing, and probable expenses. This kind of plan is good for deciding whether or not to proceed with a plan, to tell if there is a business worth pursuing.

Who Needs a Business Plan?
You need a business plan if you’re running a business. A business plan is like a map and a compass for a business. Without it you’re travelling blind. With a plan you set objectives, establish priorities, and provide for cash flow.

You need a business plan if you’re applying for a business loan. Most banks require it, and even those that don’t strictly require it expect it. They expect it to be a summary of the business, with some predictable key points.

You need a business plan if you’re looking for business investment. The plan won’t get you the investment, but not having a plan will mean you won’t get investment. Investors require a business plan. They invest in the people, the idea, the track records, the market, the technology, and other factors; but they look to the business plan to define and explain the business. You need a business plan if you’re working with partners. The business plan defines agreements between partners about what’s going to happen.

You need a business plan to communicate with a management team. The day-to-day business routine is distracting, problems come up, opportunities appear, and commitments should be followed and tracked. How do you know where you are in business without establishing where you started and where you intended to go? How can people commit to a plan they can’t see? You need a business plan to sell a business, or to set a value on a business for tax or other purposes such as estate planning, or divorce.

Sadly, many of the people who need a plan don’t know they need it. They get trapped by the myths of business planning. They don’t realize that plans are not just for start-ups, loans, or investment. They don’t realize that business plans are easier to develop than most people think To succeed in business you simply must plan the steps, set priorities, allocate resources, and manage the cash. Sure, some people say they don’t plan, but if they’re successful then they’re actually always planning in their heads. And you can keep that plan in your head if your business is very simple, cash flow is always adequate, and you don’t work with other people, and you don’t need to communicate your business plan with other people either.

Don't accept disadvantages in business. Don't try to run without a plan. Doing a plan is probably much easier than you think, and much more valuable.

How Will You Use Your Plan
The classics are seeking investment, applying for a loan. There are also the obvious communications with employees, partners, family members, consultants. And there is valuation, sometimes for tax purposes, sometimes for growth, divorce, estates.

Too many people think of business plans as something you do to start a company, apply for a loan, or find investors. Yes, they are vital for those purposes, but there's a lot more to it. Preparing a business plan is an organized, logical way to look at all of the important aspects of a business.

First, decide what you will use the plan for, such as to:
 Define and fix objectives, and programs to achieve those objectives.
 Create regular business review and course correction.
 Define a new business.
 Support a loan application.
 Define agreements between partners.
 Set a value on a business for sale or legal purposes.
 Evaluate a new product line, promotion, or expansion.

Executive Summary
This is a summary of the main highlights of your plan. Even though the topic appears first in the printed document, most business plan developers leave it until the end. This summary is the doorway to the rest of the plan. Get it right or your target readers will go no further. As a general rule, for a standard plan, the first paragraph should include:

 Business name

 Business location

 What product or service you sell

 Purpose of the plan
Another paragraph should highlight important points, such as projected sales and profits, unit sales, profitability and keys to success. Include the news you don't want anyone to miss. This is a good place to put a Highlights Chart, a bar chart which shows sales, gross margin, and profits before interest and taxes for the next three years. Normally you should mention those numbers in the text.

An internal plan, such as an operations plan, annual plan, or strategic plan, doesn’t have to be as formal with its executive summary. Make the purpose of the plan clear, and make sure the highlights are covered, but you don’t necessarily need to repeat the location, product/service description, or other details.

Never waste words in a summary.
If you’re looking for investment, say so in your executive summary, and specify the investment amount required and the percent of equity ownership offered in return. You should probably also add some highlights of your management team and you competitive edge.

If you’re looking for a loan, say so in the executive summary, and specify the amount required. Leave loan details out of the summary. Experts differ on how long an executive summary should be. Some insist that it takes just a page or two; others recommend a more detailed summary, taking as much as 10 pages, covering enough information to substitute for the plan itself.

Don’t confuse an executive summary with the summary memo. The executive summary is the first chapter in a business plan. A summary memo is a separate document, normally only 5-10 pages at most, which is used to substitute for the plan with people who aren’t ready to see the whole plan.

Keys to Better Business Plans
1. Use a business plan to set concrete goals, responsibilities, and deadlines to guide your business.
2. A good business plan assigns tasks to people or departments and sets milestones and deadlines for tracking implementation.
3. A practical business plan includes 10 parts implementation for every one part strategy.
4. As part of the implementation of a business plan, it should provide a forum for regular review and course corrections.
5. Good business plans are practical.
6. Business Plan "Don'ts"
7. Don't use a business plan to show how much you know about your business.
8. Nobody reads a long-winded business plan: not bankers, bosses, nor venture capitalists. Years ago, people were favourably impressed by long plans. Today, nobody is interested in a business plan more than 50 pages long.

Do You Need Funding
Most businesses need financing. Cash flow is different than profits, so profits don’t guarantee money in the bank. There’s financing needed to manage starting costs, inventory, waiting to get paid, and other factors. Much of that is what we lump together as “working capital.”

Most people think of financing as debt, borrowed money. In this context it also includes investment capital. Either debt or investment is outside financing that helps a business meet expenses and grow. While some smaller businesses get by without financing, and even some medium and large businesses that are mature and stable and conservatively managed can get by without financing, most businesses need some outside money to get started, to expand, and to supply their regular needs for working capital. (Working capital, by the way, normally means cash in the bank to cover cash flow deficits caused by normal flow of the business. Technically, it is current assets less current liabilities. )

Your business plan should tell you whether or not you need financing, and how much. The plan should estimate cash flow for your company and if cash flow is negative for any good reason – and there are good reasons – then you plan to add money as either loans or investment. The most common reason for needing financing, by far, is “Accounts Receivable.” That is the accounting term for the amounts of money a business is waiting to receive from customers for sales already made but not paid for. Most business-to-business sales involve delivering an invoice and waiting to get paid. Businesses that sell this way have to deal with collecting money owed, and while they wait to collect, they have bills to pay. Therefore, they need financing.

Another common reason for financing is paying for inventory. To sell things you need to buy them first. Often you have to pay for your inventory before you sell it. That means you need financial resources to deal with pay cycles.

Start-up businesses often need financing to cover their initial costs and expenses while they are starting, before they can start selling.

A correct business plan process will point out the gaps that need to be filled with financing. For a start-up company, use the plan to help calculate needs and early expenses and the early deficits as the company gets started, and then plan to fill those needs with borrowed money or investment. If you can’t get enough finance to cover the needs, then you must either change the plan to reduce the needs, or don’t start the company. For an ongoing company, use the plan to calculate cash flow from normal operations, and turn to financing as needed to support working capital requirements.

Don’t be surprised by needing financing. Most businesses do. Some smaller, cash-only businesses get by without financing. They sell for cash, buy in cash, and don’t spend what they don’t have. It’s easier to get by without financing as a service business than a product-based business, because you don’t have to deal with inventory. A home office is less likely to need financing than a business location you rent. A one-employee-business is less likely to need financing than a business needing employees.

Purpose of writing the business plan
While you write the document down, one should appreciate that the purpose of writing the business plan is not to impress someone into believing in your business. The purpose is to make sure that you have indeed thought through all the issues and also to uncover for yourself, what you do not know. A business plan, written well, helps to attract the right talent and the right kind of investors. It becomes the basis for negotiation while attracting investment. Remember, when you raise equity, you are in effect, giving away ownership. A good business plan, written well, will set the tone for negotiating how much ownership you have to trade for how much money?

Persuading the bank to invest in your business

There comes a time in a business' life when investment and growth plans mean that additional funding is needed, and many businesses choose to borrow from their bank. When such funding is required, how can a business ensure that it presents a convincing case to the bank and secures the right finance?

The following tips for businesses when meeting with their bank manager.

1. First of all, you will need a good idea of the aims and objectives for your business, as well as how you intend to cope with any eventualities, all clarified in a business plan. This gives the bank manager the confidence that you understand your market and have thought about the development of your business.

2. Present yourself positively and demonstrate your commitment and enthusiasm for your business. Bank managers place a great deal of importance on this when assessing proposals.

3. Demonstrate that you have the appropriate experience, training and drive to plan and run your business effectively. An up-to-date copy of your Curriculum Vitae will provide evidence of your abilities.

4. Show that you have the ability to produce up-to-date and accurate financial information to reassure the bank about your control over the business. It is important that you know its current position.

5. Explain in detail your reason for seeking bank funding. This will enable the bank to inform you of the most appropriate type of funding to meet your business' needs.

6. Ensure that you establish the correct amount that needs to be borrowed, allowing for unexpected expenses. Borrowing too much will cost you more interest than you need to pay, and too little may mean you need to return to the bank at a later date.

7. Be clear about the source of repayment. Develop cash flow and budget forecasts that accurately show what you expect to happen to your business over the period of your facility and outline the sources from where you expect repayments to be met.

8. Protect yourself and your business. Take steps to protect the repayment of your loan, in case you are unable to meet the cost of borrowing from normal trade due to unforeseen circumstances. This may mean taking out insurance to cover you and key personnel in the event of an accident or illness.

Bank Mangers endeavour to be open and honest in their dealings with their customers and are always keen to explain how they assess business proposals. Bank managers look first and foremost at the character, ability and experience of the business owner and the cash generating capacity of the business itself. In this respect, it is essential to stress the importance of proper planning and forecasting before any meeting with the bank manager.


Alternatives

If the bank won't lend you money, a finance broker may be able to find an alternative source of finance.



Chapter
Steps in starting a new venture

1. Idea Generation
2. Idea screening
3. Concept development
4. Market study.
5. Swot analysis
6. Project Report
7. Project Implementation
8. Project Appraisal or feasibility study

PROCESS OF GENERATING BUSINESS IDEAS - SCREENING AND SELECTION
1. Idea generation
2. Sources of new ideas
3. Methods of generating ideas
4. Stages in product planning and development

1. IDEA GENERATION:
Idea generation about a few projects provides a way out of above tangle. Project selection process starts with the generation: of a product idea. In order to select the most promising project, the entrepreneur needs to generate a few ideas about the possible projects he/she can undertake.

2. Sources of new ideas

The project ideas can be discovered from various internal and external sources.

These may include:
1. Knowledge of potential customer needs
2. Watching emerging trends in demands for certain products
3. Scope for producing substitute product
4. Going through certain professional magazines catering to specific interests, like electronics, computers etc.
5. Success stories of known entrepreneurs or friends or relatives,
6. Making visits to trade fairs and exhibitions displaying new products and services,
7. Meeting with the Government agencies,
8. Ideas given by the knowledgeable persons.
9. Knowledge about the Government policy,
10. concessions and incentives,
11. List of items reserved for exclusive manufacture in small- scale sector, and a new product introduced by the competitor.

All of these sources putting together may give a few ideas about the possible projects to be examined as the final project. This is also described as 'opportunity scanning and identification:

The main sources of the identification of potential business opportunities are as follows:
1. Observation:
Observation is one of the most important sources of project ideas. The observant mind continuously comes across situations which can be utilized to develop new opportunities. The observation may be made during the course of one's routine occupation or otherwise the dearth of a particular article or service may lead to the development of an industry, which can provide the article or service in short supply

2. Trade & Professional magazines:
Trade and professional magazines provide a very fertile source of project ideas.
The statistics and information provided by these magazines and reports and records of professional bodies often reveal opportunities, which can be eventually developed into investment propositions.

It is very important for every person who is involved in the process of development of new investment opportunities to remain in touch with the latest developments in his own field of specialization and also in the other fields. Thus, technical and professional literature stimulates and helps in the process of development of new project ideas.

3 Bulletins of Research Institutes
Bulletins of Research Institutes are also a very fertile source of information for the development of new project ideas. These bulletins generally give the broad outlive of the new processes or products developed" by Research Institutes and are very useful in identification of new opportunities.

4. The Plan document published by the Government:
In most developing countries, where planned developments has been accepted as an approach towards the removal of poverty the plan document published by the Government provides a very- useful source of project ideas.

The plan document generally analyses the existing economic situation in a country and also points out the investment opportunities, which fit into the overall planning effort. Considerable information can therefore be gathered from the plan


5. Departmental Publications
Departmental publications of various departments of Government also provide useful information, which can help in the development of new project ideas. These publications are either periodical in character or are issued on special occasions.

The census document, which is a periodical publication, is a very useful source of information about the economic structure of the society, various trends in the growth of economy and purchasing power and can be used to develop new ideas

3. Methods for generating ideas
Even with a wide variety of sources available, coming up with an idea to serve the basis for a new venture can still be a difficult problem. The entrepreneur can use several methods to help generate and test new ideas, including focus group, brainstorming, and problem inventory analysis.

a. Focus Groups:
A moderator leads a group of people through an open, in-depth discussion rather than simply asking questions to solicit participant response; for a new product area, the moderator focuses the discussion of the group in either a directive or a nondirective manner. The group of 8 to 14 participants is stimulated by comments from other group members in creatively conceptualizing and developing a new product idea to fulfill a market need.

b. The brainstorming
The brainstorming method for generating new product ideas is based on the fact that people can be stimulated to greater creativity by meeting with others and participating in organized group experiences. Although most of the ideas generated from the group have no basis for further development, often a good idea emerges.

This has a greater frequency of occurrence when the brainstorming effort focuses on a specific product or market area.

When using this method, the following four rules should be followed:
1. No criticism is allowed by anyone in the group-no negative comments.
2. Freewheeling is encouraged-the wilder the idea the better.
3. Quantity of ideas is desired-the greater the number of ideas, the greater the likelihood of useful ideas emerging.
4. Combinations and improvements of ideas are encouraged- ideas of others can be used to produce still another new idea.
The brainstorming session should be fun, with no one dominating or inhibiting the discussion.

c. Problem Inventory Analysis:
Problem inventory analysis uses individuals in a manner analogous to focus groups to generate new product ideas. However, instead of generating new ideas them-selves, consumers are provided with a list of problems of general product category.

They are then asked to identify and discuss products in this category that have the particular problem. This method is often effective since it is easier to known products to suggested problems and arrives at a new product idea than generate an entirely new product idea by itself.

Problem inventory analysis can also be used to test a new product idea.

4. Product planning and development process:
Once ideas emerge from idea sources or creative problem solving, they need further development and refinement into the final product or service to be offered. This refining process-the product planning and development process-is divided into five major stages:
1. Idea stage,
2. Concept stage,
3. Product development stage,
4. Test marketing stage, and
5. Commercialization, and it results in the start of the product life cycle.

1. Idea Stage
Promising new product ideas should be identified and impractical ones eliminated in the idea stage, allowing maximum use of the company's resources. One evaluation method successfully used in this stage is the systematic market evaluation checklist, where each new product idea is expressed in terms of its chief values, merits, and benefits.

Consumers are presented with clusters of new product values to determine which, if any, new product alternatives should be pursued and which should be discarded. A company can test many new product idea alternatives with this evaluation method; promising ideas can be further developed and resources wasted on ideas not compatible with the market's values. It is also important to determine the need for the new product as well as its value to the company.

If there is no need for the suggested product, its development should not be continued. Similarly, the new' product idea should not be developed if it does not have any benefit or value to the firm. In order to effectively determine the need for a new product, it is helpful-to define the potential needs of the market in terms of timing, satisfaction, alternatives, benefits and risks, future expectations, price-versus-product performance features, market structure and size, and economic conditions.

The need determination should focus on the type of need, its timing, the users involved with trying the product, the importance of controllable marketing variables, the overall market structure, and the characteristics of the market. Each of these factors should be evaluated in terms of the characteristics of the new idea being considered and the aspects and capabilities of present methods for satisfying the particular need.

This analysis will indicate the extent of the opportunity available. In determining the value of the new product to the firm, financial scheduling, such as cash outflow, cash inflow, contribution to profit, and return on investment, needs to be evaluated 'n terms of other product ideas as well as investment alternatives. Using the dollar amount of each of the considerations important to the new product idea should be determined as accurately as possible so that a quantitative evaluation can be made.

These figures, can then are revised as better information becomes available and the product continues to be developed.

2. Concept Stage:
After a new product idea has been identified in the idea stage as having potential, it should be further developed and refined through interaction with consumers. In the concept stage, the refined product idea is tested to determine consumer acceptance without necessarily incurring the costs of manufacturing the physical product.

Initial reactions to the concept are obtained from potential customers or members of the distribution channel when appropriate. One method for measuring consumer acceptance is the conversational interview, in which selected respondents are exposed to statements that reflect the physical characteristics and attributes of the product idea. Where competing products exist, these statements can also compare the primary features of existing products.

favourable as well as unfavourable product features can be uncovered from analyzing consumers responses, with favorable features being incorporated into the product features, price, and promotion should be evaluated for both the concept being studied and for any major problems in the product concept, research and development can be directed to develop a more marketable product or the concept can be dropped.

3. Product development Stage:
In the product development stage, consumer reaction to the physical product is determined. One tool frequently used in this stage is the consumer panel, in which a group of potential consumers is given product samples.

4. Test Marketing Stage:
Although the results of the product development stage provide the basis of the final marketing plan, a market test can be done to increase the certainty of successful commercialization.

This last step in the evaluation process-the test marketing stage-provides actual sales results, which indicate the acceptance level of consumers. Positive test results indicate the degree of probability of a successful product launch and company formation.
































How to Perform SWOT Analysis

A valuable step in your situational analysis is assessing your firm's strengths, weaknesses, market opportunities, and threats through a SWOT analysis. This is a very simple process that can offer powerful insight into the potential and critical issues affecting a venture.

The SWOT analysis begins by conducting an inventory of internal strengths and weaknesses in your organization. You will then note the external opportunities and threats that may affect the organization, based on your market and the overall environment. Don't be concerned about elaborating on these topics at this stage; bullet points may be the best way to begin. Capture the factors you believe are relevant in each of the four areas. You will want to review what you have noted here as you work through your marketing plan. The primary purpose of the SWOT analysis is to identify and assign each significant factor, positive and negative, to one of the four categories, allowing you to take an objective look at your business. The SWOT analysis will be a useful tool in developing and confirming your goals and your marketing strategy.

Some experts suggest that you first consider outlining the external opportunities and threats before the strengths and weaknesses.


Strengths
Strengths describe the positive attributes, tangible and intangible attributes, internal to your organization. They are within your control. What do you do well? What resources do you have? What advantages do you have over your competition?

You may want to evaluate your strengths by area, such as marketing, finance, manufacturing, and organizational structure. Strengths include the positive attributes of the people involved in the business, including their knowledge, backgrounds, education, credentials, contacts, reputations, or the skills they bring. Strengths also include tangible assets such as available capital, equipment, credit, established customers, existing channels of distribution, copyrighted materials, patents, information and processing systems, and other valuable resources within the business.

Strengths capture the positive aspects internal to your business that add value or offer you a competitive advantage. This is your opportunity to remind yourself of the value existing within your business.

Weaknesses
Note the weaknesses within your business. Weaknesses are factors that are within your control that detract from your ability to obtain or maintain a competitive edge. Which areas might you improve?

Weaknesses might include lack of expertise, limited resources, lack of access to skills or technology, inferior service offerings, or the poor location of your business. These are factors that are under your control, but for a variety of reasons, are in need of improvement to effectively accomplish your marketing objectives.

Weaknesses capture the negative aspects internal to your business that detract from the value you offer, or place you at a competitive disadvantage. These are areas you need to enhance in order to compete with your best competitor. The more accurately you identify your weaknesses, the more valuable the SWOT will be for your assessment.

Opportunities
Opportunities assess the external attractive factors that represent the reason for your business to exist and prosper. These are external to your business. What opportunities exist in your market, or in the environment, from which you hope to benefit?

These opportunities reflect the potential you can realize through implementing your marketing strategies. Opportunities may be the result of market growth, lifestyle changes, resolution of problems associated with current situations, positive market perceptions about your business, or the ability to offer greater value that will create a demand for your services. If it is relevant, place timeframes around the opportunities. Does it represent an ongoing opportunity, or is it a window of opportunity? How critical is your timing?

Opportunities are external to your business. If you have identified "opportunities" that are internal to the organization and within your control, you will want to classify them as strengths.

Threats
What factors are potential threats to your business? Threats include factors beyond your control that could place your marketing strategy, or the business itself, at risk. These are also external – you have no control over them, but you may benefit by having contingency plans to address them if they should occur.

A threat is a challenge created by an unfavorable trend or development that may lead to deteriorating revenues or profits. Competition – existing or potential – is always a threat. Other threats may include intolerable price increases by suppliers, governmental regulation, economic downturns, devastating media or press coverage, a shift in consumer behavior that reduces your sales, or the introduction of a "leap-frog" technology that may make your products, equipment, or services obsolete. What situations might threaten your marketing efforts? Get your worst fears on the table. Part of this list may be speculative in nature, and still add value to your SWOT analysis.

It may be valuable to classify your threats according to their "seriousness" and "probability of occurrence."

The better you are at identifying potential threats, the more likely you can position yourself to proactively plan for and respond to them. You will be looking back at these threats when you consider your contingency plans.

The Implications

The internal strengths and weaknesses, compared to the external opportunities and threats, can offer additional insight into the condition and potential of the business. How can you use the strengths to better take advantage of the opportunities ahead and minimize the harm that threats may introduce if they become a reality? How can weaknesses be minimized or eliminated? The true value of the SWOT analysis is in bringing this information together, to assess the most promising opportunities, and the most crucial issues.


An Example
AMT is a computer store in a medium-sized market in the United States. Lately it has suffered through a steady business decline, caused mainly by increasing competition from larger office products stores with national brand names. The following is the SWOT analysis included in its marketing plan.

Strengths
Knowledge. Our competitors are retailers, pushing boxes. We know systems, networks, connectivity, programming, all the Value Added Resellers (VARs), and data management.
Relationship selling. We get to know our customers, one by one. Our direct sales force maintains a relationship.
History. We've been in our town forever. We have the loyalty of customers and vendors. We are local.

Weaknesses
Costs. The chain stores have better economics. Their per-unit costs of selling are quite low. They aren't offering what we offer in terms of knowledgeable selling, but their cost per square foot and per dollar of sales are much lower.
Price and volume. The major stores pushing boxes can afford to sell for less. Their component costs are less and they benefit from volume buying with the main vendors.
Brand power. Take one look at their full-page advertising, in color, in the Sunday paper. We can't match that. We don't have the national name that flows into national advertising.

Opportunities
Local area networks. LANs are becoming commonplace in small businesses, and even in home offices. Businesses today assume LANs are part of normal office work. This is an opportunity for us because LANs are much more knowledge and service intensive than the standard off-the-shelf PC.
The Internet. The increasing opportunities of the Internet offer us another area of strength in comparison to the box-on-the-shelf major chain stores. Our customers want more help with the Internet and we are in a better position to give it to them.
Training. The major stores don't provide training, but as systems become more complicated with LAN and Internet usage, training is more in demand. This is particularly true of our main target markets.
Service. As our target market needs more service, our competitors are less likely than ever to provide it. Their business model doesn't include service, just selling the boxes.

Threats
The computer as appliance. Volume buying and selling of computers as products in boxes, supposedly not needing support, training, connectivity services, etc. As people think of the computer in those terms, they think they need our service orientation less.
The larger price-oriented store. When they have huge advertisements of low prices in the newspaper, our customers think we are not giving them good value.





PROJECT FORMULATION

We know from available literature on development of entrepreneurship what do entrepreneurs do but relatively little about how they do it. We are making a beginning from this discussion onwards to make you know how entrepreneurs make their enterprises as running concern. We also know when intelligent people start on a long trip, they always make plans. They decide, for example, where they are going and how they plan to get there. Generally longer the trip, more they plan. Small entrepreneurs also need to draw the business plans because right from the conception of a business idea up to production involves numerous decisions to be taken. Formulation of project report/business plan is one of the first corner stones to be laid down in setting up an enterprise. This discussion is devoted to make you know what is and how to make a right project report or the business plan as it is sometimes called.

MEANING OF PROJECT REPORT
Webster New 20th Century Dictionary defines a project as a scheme, design, a proposal of something intended or devised. In simple words, project report or business plan is a written statement of what an entrepreneur proposes to take up. It is a kind of guide frost or course of action what the entrepreneur hopes to achieve in his business and how is he going to achieve it. In other words, project report serves like a kind of big road map to reach the destination determined by the entrepreneur. Thus, a project report can best be defined as a well-evolved course of action devised to achieve the specified objective within a specified period of time. So to say, it is an operating document.

SIGNIFICANCE OF PROJECT REPORT
An objective without a plan is a dream. The preparation of a project report is of great significance for an entrepreneur. The project report serves the two essential functions:
First and most important, the project report is like a road map. It describes the direction the enterprise is going in, what its goals are, where it wants to be, and how it is going to get there. It also enables an entrepreneur to know that he is proceeding in the right direction. Some hold the view that without well spelled out goals and operational methods/tactics, most businesses flounder on the rocks of hard times.
The second function of the project report is to attract lenders and investors. Although, it is not mandatory for the small enterprises to prepare project reports, yet it is useful and beneficial for them to prepare the project reports for various reasons. The preparation of project report is beneficial for those small enterprises, which apply for financial assistance from the financial institutions and the commercial banks. It is on the basis of project report that the financial institutions make appraisal if the enterprise requires financial assistance or not. If yes, how much. Similarly, other organisations that provide various assistance such as work shed; raw material, seed/margin money, etc. are equally interested in knowing the economic soundness of the proposal. In most cases, the quality of the firm's project report weighs heavily in the decision to lend or invest funds.

CONTENTS OF A PROJECT REPORT
Having gone through the significance of project report, it is now clear that there is no substitute for a well-prepared business plan or project report and also there are no short¬cuts to preparing it. The more concrete and complete the business plan, the more likely it is to earn the respect of outsiders and their support in making and running an enterprise. Therefore, the project report needs to be prepared with great care and consideration.

A good project report should contain the following contents:
1. General Information: Information on product profile and product details.
2. Promoter: His/her educational qualification, work experience, project related experience.
3. Location: Exact location of the project, lease or freehold, location advantages.
4. Land and Building: Land area, construction area, type of construction, cost of construction, detailed plan and estimate along with plant layout.
5. Plant and Machinery: Details of machinery required, capacity, suppliers, cost, various alternatives available, cost of miscellaneous assets.
6. Production Process: Description of production process, process chart, technical know how, technology alternatives available, production programme.
7. Utilities: Water, power, steam, compressed air requirements, cost estimates, sources of utilities.
8. Transport and Communication: Mode, possibility of getting, costs.
9. Raw Material: List of raw material required by quality and quantity, sources of procurement, cost of raw material, tie-up arrangements, if any, for procurement of raw material, alternative raw material, if any.
10. Manpower: Manpower requirement by skilled and semi-skilled, sources of manpower supply, cost of procurement, requirement for training and its cost.
11. Products: Product mix, estimated sales, distribution channels, competitions and their capacities, product standard, input-output ratio, product substitute.
12. Market: End-users of product, distribution of market as local, national, international, trade practices, sales promotion devices, proposed market research.
13. Requirement of Working Capital: Working capital required, sources of working capital, need for collateral security, nature and extent of credit facilities offered and available.
14. Requirement of Funds: Break-up of project cost in terms of costs of land, building, machinery, miscellaneous assets, preliminary expenses, contingencies and margin money for working capital, arrangements for meeting the cost of setting up of the project.
15. Cost of Production and Profitability of first ten years.
16. Break-Even Analysis (Refer to Formulation of a Project for details).
17. Schedule of Implementation (Refer to Formulation of a Project for details).

FORMULATION OF A PROJECT REPORT
Normally, small-scale enterprises do not include sophisticated technique, which is used for preparing project reports of large-scale enterprises. Within the small-scale enterprises too, all the information may not be homogeneous for all units. In fact, what and how much information will be given in the project report depends upon the size of the unit as well as nature of the production. Vinod Gupta3 lists a general set of information given in any project report in his study on "Formulation of a Project Report". We are reproducing it here.

Project formulation divides the process of project development into eight distinct and sequential stages. These stages are:
1. General Information.
2. Project Description.
3. Market Potential.
4. Capital Costs and Sources of Finance.
5. Assessment of Working Capital Requirements.
6. Other Financial Aspects.
7. Economic and Social Variables.
8. Project Implementation.

The nature of information to be collected under each one of these stages has been given below.


General Information
The information of general nature given in the project report include the following:
Bio-data of Promoter: Name and address of entrepreneur; the qualifications, experience and other capabilities of the entrepreneur; if these are partners; state these characteristics of all the partners individually.
Industry Profile: A reference of analysis of industry to which the project belongs, e.g., past performance; present status, its organization, its problems etc.
Constitution and Organization: The constitution and organizational structure of the enterprise; in case of partnership firm, its registration with the Registrar of Firms; application for getting Registration Certificate from the Directorate of Industries/District Industry Centre.
Product Details: Product utility, product range; product design; advantages to be offered by the product over its substitutes, if any.
Project Description
A brief description of the project covering the following aspects is given in the project report.
Site: Location of enterprise; owned or leasehold land; industrial area; No Objection Certificate from the Municipal Authorities if the enterprise location falls in the residential area.
Physical Infrastructure: Availability of the following items of infrastructure should be mentioned in the project report:
(i) Raw Material: Requirement of raw material, whether inland or imported, sources of raw material supply.
(ii) Skilled Labour: Availability of skilled labour in the area, arrangements for training labourers in various skills.
Utilities: These include:
(i) Power: Requirement for power, load sanctioned, availability of power.
(ii) Fuel: Requirement for fuel items such as coal, coke, oil or gas, state of their availability.
(iii) Water: The sources and quality of water should be clearly stated in the project report.
Pollution Control -The aspects like scope of dumps, sewage system and sewage treatment plant should be clearly stated in case of industries producing emissions.
Communication System -Availability of communication facilities, e.g., telephone, telex etc. should be stated in the project report.
Transport Facilities -Requirements for transport, mode of transport, potential means of transport, distances to be covered, bottlenecks etc., should be stated in the business plan.
Other Common Facilities -Availability of common facilities like machine shops, welding shops and electrical repair shops etc. should be stated in the report.
Production Process -A mention should be made for process involved in production and period of conversion from raw material into finished goods.
Machinery and Equipment -A complete list of items of machinery and equipments required indicating their size; type, cost and sources of their supply should be enclosed with the project report.
Capacity of the Plant -The installed licensed capacity of the plant along with the shifts should also be mentioned in the project report.,
Technology Selected -The selection of technology, arrangements made for acquiring it should be mentioned in the business plan.
Research and Development -A mention should be made in the project report regarding proposed research and development activities to be undertaken in future.
Market Potential
While preparing a project report, the following aspects relating to market potential of the product should be stated in the report¬
(i) Demand and Supply Position -State the total expected demand for the product and present supply position. This should also be mentioned how much of the gap will be filled up by the proposed unit.
(ii) Expected Price -An expected price of the product to be realised should be mentioned in the project report.
Marketing Strategy -Arrangements made for selling the product should be clearly stated in the project report.
After-Sales Service -Depending upon the nature of the product, provisions made for after-sales service should normally be stated in the project report.
Transportation -Requirement for transportation means indicating whether public transport or entrepreneur’s own transport should be mentioned in the project report.

Capital Costs and Sources of Finance
An estimate of the various components of capital items like land and buildings, plant and machinery, installation costs, preliminary expenses, margin for working capital should be given in the project report. The present probable sources of finance should also be stated in the project report. The sources should indicate the owner's funds together with funds raised from financial institutions and banks.

Assessment of Working Capital Requirements
The requirement for working capital and its sources of supply should be carefully and clearly mentioned in the project report. It is always better to prepare working capital ¬requirements in the prescribed formats designed by limits of requirement. It will minimise objections from the banker's side.

Other Financial Aspects
In order to adjudge the profitability of the project to be set up, a projected Profit and Loss Account indicating likely sales revenue, cost of production, allied cost and profit should be prepared. A projected Balance Sheet and Cash Flow Statement should also be prepared to indicate the financial position and requirements at various stages of the project.
In addition to above, the Break-Even Analysis should also be presented in the project report. Break-even point is the level of production/sales where the industrial enterprise shall earn neither profit nor incur loss. In fact, it will just break even. Break-even level indicates the gestation period and the likely moratorium required for repayment of loans. Break-even point (BEP) is calculated as follows:
BEP = F  S-V  100

where, F = Fixed Cost
S = Sales Projected
V = Variable Costs
Thus, the break-even point so calculated will indicate at what percentage of sales, the enterprise will break even.

Economic and Social Variables
In view of the social responsibility of business, the abatement costs, i.e., the costs to controlling the environmental damage should be stated in the project. Arrangement made, for treating the effluents and emissions should also be mentioned in the report.
Besides, the socio-economic benefits expected to accrue from the project should also be stated in the report itself. Following are the examples of socio-economic benefits¬
(j) Employment Generation.
(ii) Import Substitution.
(iii) Ancillarisation.
(iv) Exports.
(v) Local Resource Utilization.
(vi) Development of the Area.

Project Implementation
Last but no means the least, every entrepreneur should draw an implementation scheme or a Timetable for his project to ensure the timely completion of all activities involved in setting up an enterprise. Timely implementation is important because if there is a delay, it causes, among other things, a project cost overrun. In India, delays in project implementation have become a common feature. Delay in project implementation jeopardizes the financial viability of the project, on the one hand, and props up the entrepreneur to drop the idea to set up an enterprise, on the other. Hence, there is a need to draw up an implementation schedule for the project and then to adhere to it.

PLANNING COMMISSION'S GUIDELINES FOR FORMULATING A PROJECT REPORT
In order to process investment proposals and arrive at investment decisions, the Planning Commission of India has also issued some guidelines for preparing/formulating realistic industrial projects. So far as feasibility report is concerned, it lies in between the project formulating stage and the appraisal and sanction stage. The project formulation stage involves the identification of investment options by the enterprise and in consultation with the Administrative Ministry, the Planning Commission and other concerned authorities.

Realizing the usefulness of these guidelines, we now are presenting these guidelines in a summarised manner.
1. General Information: The feasibility report should include an analysis of the industry to which the project belongs. It should deal with the past performance of the industry. The description of the type of industry should also be given, i.e., the priority of the industry, increase in production, role of the public sector, allocation of investment of funds, choice of technique, etc. This should also contain information about the enterprise submitting the feasibility report.

2. Preliminary Analysis of Alternatives: This should contain present data on the gap between demand and supply for the outputs which are to be produced, data on the capacity that would be available from the projects that are in production or under implementation at the time the report is prepared, a complete list of all existing plants in the industry, giving their capacity and level of production actually attained, a list of all projects for which letters of intents/licenses have been issued and a list of proposed projects. All options that are technically feasible should be considered at this preliminary stage. The location of the project as well as its implications should also be looked into. An account of the foreign exchange requirement should also be taken. The profitability of different options should also be given. The rate of return on investment should be calculated and presented in the report. Alternative cost calculations vis-à-vis return should be presented.

3. Project Description: The feasibility should provide a brief description of the technology /process chosen for the project. Information relevant to determining optimality of the locations chosen should also be included. To assist in the assessment of the environmental effects of a project, every feasibility report must present the information on specific points, i.e., population, water, air, land, flora and fauna, effects arising out of project's pollution, other environmental discretions etc. The report should contain a list of the operational requirements of the plant, requirements of water and power, requirements of personnel, organizational structure envisaged, transport costs, activity-wise phasing of construction and factors affecting it.
4. Marketing Plan: It should contain the following items:
Data on the marketing plan.
Demand and prospective supply in each of the areas to' be served.
The method and data used for main estimates of domestic supply and selection of the market areas should be presented. Estimates of the degree of price sensitivity should be presented.
It should contain an analysis of past trends in prices.

5. Capital Requirements and Costs: The estimates should be reasonably complete and properly estimated. Information on all items of costs should be carefully collected and presented.

6. Operating Requirements and Costs: Operating costs are essentially those costs which are incurred after the commencement of commercial production. Information about all items of operating cost should be collected; operating costs relate to the cost of raw materials and intermediates, fuel, utilities, labour, repair and maintenance, selling expenses and other expenses.

7. Financial Analysis: The purpose of this analysis is to present some measures to assess the financial viability of the project. A proforma Balance Sheet for the project data should be presented. Depreciation should be allowed for on the basis of specified by the Bureau of Public Enterprises. The Department of Economic Affairs should clear foreign exchange requirements. The feasibility report should take into account income-tax rebates for priority industries, incentives for backward areas, accelerated depreciation, etc. The sensitivity analysis should also be presented. The report must analyse the sensitivity of the rate of return of change in the level and pattern of product prices.

8. Economic Analysis: Social profitability analysis needs some adjustment in the data relating to the costs and returns to the enterprise. One important type of investment involves a correction in input and costs, to reflect the true value of foreign exchange, labour and capital. The enterprise should try to assess the impact of its operations on foreign trade. Indirect costs and benefits should also be included in the report. If they cannot be quantified, they should be analysed and their importance emphasised.

9. Miscellaneous Aspects: The preceding three areas are deemed appropriate to almost every new small enterprise. Notwithstanding, depending upon the size of the operation and peculiarities of a particular project, other items may be considered important to be applied out in the project report. To mention, probable use of minicomputers or other electronic data processing services, cash flow statements, method of accounting etc., may be of great use in some small enterprises.



It is a well-established fact that every industrial project involves risk. There are certain ways and means to reduce risk involved in it. Project appraisal is one of them. This chapter deals with the concept and methods of project appraisal.

Concept of project appraisal or feasibility study
Simply speaking, project appraisal means the assessment of a project. Project appraisal is made for both proposed and executed projects. In case of former, project appraisal is called 'ex-ante analysis' and in case of latter 'post-ante analysis'. Here, project appraisal relates to a proposed project.
Project appraisal is a costs and benefits analysis of different aspects of proposed project with an objective to adjudge its viability. A project involves employment of scarce resources. An entrepreneur needs to appraise various alternative projects before allocating the scarce resources for the best project. Thus, project appraisal helps select the best project among available alternative projects. For appraising a project, its economic, financial, technical, market, managerial and social aspects are analyzed.

Financial institutions do project appraisal to assess its credit-worthiness before extending finance to a project. For a financial institution, project appraisal is a process whereby a leading financial institution makes an independent and objective assessment of the various aspects of aspects of an investment proposition for arriving at a financial decision and is aimed at determining the viability of a project and sometimes, also in modifying its scope and content so as to improve its viability. However, sometimes project appraisal and project evaluation are used inter¬changeably.

METHODS OF PROJECT APPRAISAL OR FEASIBILITY STUDY
Appraisal or feasibility of a proposed project includes the following analyses:
1. Economic Analysis
2. Financial Analysis
3. Market Analysis
4. Technical Feasibility
5. Managerial Competence

These are discussed in turn.

Economic Analysis
Under economic analysis, the aspects highlighted include requirements for raw material, level of capacity utilization, anticipated sales, anticipated expenses and the probable profits. It is said that a business should have always a volume of profit clearly in view which will govern other economic variables like sales, purchases, expenses and alike. It will have to be calculated how much sales would be necessary to earn the targeted profit.

Page No. 2
Undoubtedly, demand for the product will be estimated for anticipating sales volume. Therefore, demand for the product needs to be carefully spelt out as it is, to a great extent, deciding factor of feasibility of the project concern. How to estimate demand for the project is discussed later.

In addition to above, the location of the enterprise decided after considering a gamut of points also needs to be mentioned in the project. The Government policies in this regard should be taken into consideration. The Government offers specific incentives and concessions for setting up industries in notified backward areas. Therefore, it has to be ascertained whether the proposed enterprise comes under this category or not and whether the Government has already decided any specific location for this kind of enterprise.

Financial Analysis
Finance is one of the most important pre-requisites to establish an enterprise. It is finance only that facilitates an entrepreneur to bring together the labour of one, machine of another and raw material of yet another to combine them to produce goods. In order to adjudge the financial viability of the project, the following aspects need to be carefully analyzed:

1. Assessment of the financial requirements both - fixed capital and working capital - need to be properly made. You night know that fixed capital normally called 'fixed assets' are those tangible and material facilities, which purchased once are used again and again. Land and buildings, plants and machinery are the familiar examples of fixed assets/capital. The requirement for fixed assets/capital will vary from enterprise to enterprise depending upon the type of operation, scale of operation and time when the investment is made. But, while assessing the fixed capital requirements, all items relating to the asset like the cost of the asset, architect and engineer's fees, electrification and installation charges (which normally come to 10 per cent of the value of machinery), depreciation, preoperational expenses of trial runs, etc., should be duly taken into consideration. Similarly, if any expense is to be incurred in remodeling, repair and additions of buildings should also be highlighted in the project report.

2. In accounting, working capital means excess of current assets over current liabilities. Current assets refer to those assets, which can be converted into cash within a period of one week. Current liabilities refer to those obligations which can be payable within a period of one week. In short, working capital is that amount of funds which is needed in day today's business operations. In other words, it is like circulating money changing from cash to inventories and from inventories to receivables and again converted into cash. This circle goes on and on. Thus, working capital serves as a lubricant for any enterprise, be it large or small. Therefore, the requirements of working capital should be clearly provided for. Inadequacy of working capital may not only adversely affect the operation of the enterprise but also bring the enterprise to a grinding halt.
What constitute working capital and what factors decide working capital requirements are discussed in detail in later topic.

The activity level of an enterprise expressed, as capacity utilization needs to be well spelt out. However, the enterprise sometimes fails to achieve the targeted level of capacity due to various business vicissitudes like unforeseen shortage of raw material, un¬expected disruption in power supply, inability to penetrate the market mechanism, etc. Then, a question arises to what extent an enterprise should continue its production to meet all its obligations/liabilities. 'Break-even analysis' gives an answer to it.

Page No. 3
In brief, break¬even analysis indicates the level of production at which there is neither profit nor loss in the enterprise. This level of production is, accordingly, called 'break-even level'. We have already discussed Break-even analysis in our topic – Project Evaluation.

Market Analysis
Before the production actually starts, the entrepreneur needs to anticipate the possible market for the product. He/she has to anticipate who will be the possible customers for his product and where and when his product will be sold. This is because production has no value for the producer unless it is sold. It is said that if the proof of pudding lies in eating, the proof of all production lies in marketing/ consumption. (1) In fact, the potential of the market constitutes the determinant of probable rewards from entrepreneurial career.

Thus, knowing the anticipated market for the product to be produced becomes an important element in every business plan. The various methods used to anticipate the potential market, what is named in 'Management Economics' as 'demand forecasting', range from the naive to sophisticated ones. The commonly used methods to estimate the demand for a product are as follows:

1. Opinion Polling Method: In this method, the opinions of the ultimate users, i.e. customers of the product are estimated. This may be attempted with the help of either a complete survey of all customers (called, complete enumeration) or by selecting a few consuming units out of the relevant population (called, sample survey). Let us discuss these in some details.

(a) Complete Enumeration Survey: In this survey, all the probable customers of the product are approached and their probable demands for the product are estimated and then summed. Estimating sales under this method is very simple. It is obtained by simply adding the probable demands of all customers.
(b) Sample Survey: Under this method, only some number of consumers out of their total population is approached and data on their probable demands for the product during the forecast period are collected and summed. The total demand of sample customers is finally blown up to generate the total demand for the product.

(c) Sales Experience Method: Under this method, a sample market is surveyed before the new product is offered for sale. The results of the market surveyed are then projected to the universe in order to anticipate the total demand for the product.

(d) Vicarious Method: Under the vicarious method, the consumers of the product are not approached directly but indirectly through some dealers who have a feel of their customers. The dealers' opinions about the customers' opinion are elicited. Being based on dealers' opinions, the method is bound to suffer from the bias on the part of the dealers. Then, the results derived are likely to be unrealistic. However, these hang-ups are not avoidable.

2. Life Cycle Segmentation Analysis: It is well established that like a man, every product has its own life span. In practice, a product sells slowly in the beginning. Backed by sales promotion strategies over period, its sales pick up. In the due course of time, the peak sale is reached. After that point, the sales begin to decline. After some time, the product loses its demand and dies. This is natural death of a product. Thus, every product passes through its 'life cycle'. This is precisely the reason why firms go for new products one after another to keep the firm alive.
Based on above, the product life cycle has been divided into the following five stages: 1. Introduction
2. Growth
3. Maturity
4. Saturation
5. Decline
The sales of the product varies from stage to stage and follows S-shaped curve as shown in Figure below:







Technical Feasibility
While making project appraisal, the technical feasibility of the project also needs to be taken into consideration. In the simplest sense, technical feasibility implies to mean the adequacy of the proposed plant and equipment to produce the product within the prescribed norms.

As regards know-how, it denotes the availability or otherwise of a fund of knowledge to man the proposed plants and machinery. It should be ensured whether that know-how is available with the entrepreneur or is to be procured from elsewhere. In the latter case, arrangement made to procure it should be clearly checked up. If project requires any collaboration, then, the terms and conditions of the collaboration should also be spelt out comprehensively and carefully.

In case of foreign technical collaboration, one needs to be aware of the legal provisions in force from time to time specifying the list of products for which only such collaboration is allowed under specific terms and conditions. The entrepreneur, therefore, contemplating for foreign collaboration should check these legal provisions with reference to their projects.
While assessing the technical feasibility of the project, the following inputs covered in the project should also be taken into consideration:
1. Availability of land and site.
2. Availability of other inputs like water, power, transport, communication facilities.
3. Availability of servicing facilities like machine shops, electric repair shop, etc.
4. Coping-with anti-pollution law.
5. Availability of work force as per required skill and arrangements proposed for training-in-plant and outside.
6. Availability of required raw material as per quantity and quality.
7.
Management Competence
Management ability or competence plays an important role in making an enterprise a success or otherwise. Strictly speaking, in the absence of managerial competence, the projects, which are otherwise feasible, may fail. On the contrary, even a poor project may become a successful one with good managerial ability. Hence, while doing project appraisal, the managerial competence or talent of the promoter should be taken into consideration. Research studies report that most of the enterprises fall sick because of lack of managerial competence or mismanagement.