Business Planning It All Begins with an Idea...The overriding reason for anyone to think of establishing a business is - opportunity. An opportunity to be your own boss, to provide a product or service, to implement your ideas, which can generate sufficient surplus. To be successful - to stay in business - you need a combination of hard work, skill and perseverance.
1. Business Concepts
Generally, people who start their own businesses can be grouped into two broad categories. The first group consists of people who know exactly what they want to do and are merely looking for the opportunity or resources to do it. These people may have already developed many of the skills necessary to succeed in their chosen field and are also likely to be familiar with industry customs and practices, which can help during the startup phase of a new business. The second group consists of people who want to start their own business, but don't have any real definite ideas about what they'd like to do. They may have developed skills in the course of their employment or education, but may not be interested in opening a business in the same field of endeavour. To start any business big or small, one needs to start with developing a Business Plan. Business Plan A business plan is a documented step by step guide which will guide an entrepreneur and help him/ her in translating his/ her ideas to a successful reality. A Business Plan is not just for a start up company but also for established businesses to navigate their future roadmap. Start a business plan with describing your business and product or services. Write about the market you are targeting and the stage of development your company is in. If you get stuck up on a particular part of the plan, leave it for time being and come back later and finish it. You can't make a perfect first draft, so just get some thoughts down to start the process and you can always come back and change it or polish it up later. While making a business plan, keep the following points in mind : Keep Target Audience in Your Mind While writing your business plan, keep in mind the intended audience and why you are writing the plan. For example, if you are trying to get debt financing, emphasis should not be on the huge profit potential - but on the certainty that the debt can be repaid. If you are writing a plan to help you run the business better you may start with general background information on the company and the industry, and focus on the areas of your plan that are currently most important to you. Strategy - Core of Your Business Plan The first part of the business plan should be geared towards helping develop and support solid business strategy. The plan should explain the market, the industry, target customers and competitors. Write about customer needs and the benefits of the current products and services. Evaluate the strengths and weaknesses of each competing firm and draw out the opportunities for your product or service in the marketplace. All of these steps largely aim to help you in creating a strategy for your business. The second half of the business plan should explain how to execute your selected business strategy. Your products and services, your marketing and operations should all closely tie in with your strategy. Have a strategy that will set the course for your business rather than having a smart-sounding strategy for your plan, Think Competitively Throughout Your Business Plan In the present competitive market, you would probably be facing some serious competition sooner or later no matter how unique your business idea is. You need to think competitively throughout your business plan. As an entrepreneur, you need to identify where you will do things in similar manner as your competitors, where you will do things differently, what will be your real strengths and real weaknesses, where will you create your niche. Focus your plan on being different than your competitors and compete with existing players less directly. Find a particular market niche to focus on. Think over the points, can you find a unique strategy? Can you position your products differently? Can you use different sales or marketing vehicles? Your business plan should be able to answer these questions. Be Realistic With Your Business Plan Lots of business plans sound good on paper, but don't work in the real world marketplace. It's difficult to attract people to a new product or service, just because it's better. People or companies have established buying patterns and are currently doing business with someone else. To do business with you, it takes more than attracting them to your business. You've got to steal your customers from someone else's business and create your own base of loyal customers. It is possible that your competitors may launch new products or services or cut their prices to counter your entry in the current market. For a new start up company it's easy to overestimate sales projections as it's easy to underestimate costs. There are always going to be some unseen expenditure, hefty amount of cost overruns, expensive problems and items that you simply overlooked. So forecast conservatively and try to have an extra cushion of cash tucked in reserve. Tips on Creating Business Plans People In seeking fund from banks, venture capitalists or other outside investors, you will increase your chances of success if you get someone committed to your management team who at least has a recognizable name. Alternately, you can include as exhibits to your plan any positive media clippings you can find, such as items from trade publications, about members of your management team. If you don't have any clippings, try contacting relevant publications to get media coverage-perhaps about your start-up business proposal. Keep Your Business Plan Factual and Succinct Try to keep the plan factual, don't use generalisations to describe the potential of your business. Don't put too much detail when creating plans. If a business plan is too long, the focus on what is really important might be lost. Involve Everyone Use expert opinion or key employees to create a business plan. Then work with them until you are satisfied. Have key people get together to get the plan in a synchronised fashion. The more input people have in creating the plan, the more responsibility they will feel towards it.
2. Start a New Business:-
Decision to be an Entrepreneur Understanding the Responsibilities of Ownership Before starting a business, an entrepreneur should know what is involved in owning a business and what are the roles she or he will have to play? Most important fact to keep in mind is - Owning a business is not just another job but a lot more than that. You are totally and completely responsible for its growth, development and its future. It's a completely different lifestyle. Entrepreneurs have to ask themselves whether they are ready for a complete commitment to the success of their business. As a business owner, entrepreneurs are going to have less time for their personal life and probably be using much of what they own as collateral to raise money for the business. The pros and cons of owning a business are listed below. Pros:- You'll be your own boss and the boss of other people and make the decisions that are crucial to the business' success or failure.
- You'll have the chance to put your ideas into practice.
- You will make money for yourself rather than for someone else.
- You may participate in every aspect of running a business and learn more about every aspect of a business and gain experience in a variety of disciplines.
- You'll have the chance to work directly with your customers.
- You'll have the personal satisfaction of creating and running a successful business.
- You'll be able to work in a field or area that you really enjoy.
- You'll have the chance to build retirement value (for example, by selling the business when you retire).
- Last but not the least, no one can fire you.
Cons:
- You may have to take a large financial risk and will probably have to work long hours and may have fewer opportunities to take vacations.
- You may end up spending a lot of your time attending to the details of running a business and less time on those things you really enjoy.
- You may find that your income is not steady and that there are times when you don't have much income coming in at all.
- You may have to undertake tasks you find unpleasant, such as firing someone or refusing to hire a friend or a relative.
- You may have to learn many new disciplines, such as filing and bookkeeping, inventory control, production planning, advertising and promotion, market research and general management.
3. Setup a Sole Proprietor:-
Many first time entrepreneurs do not have a clear perspective of the issues, legal or otherwise, involved in choosing one or the other form of a business. This often results in avoidable mistakes, which later cost time and money to rectify. Throughout the world, three main types of legal forms are used predominantly to run business organisations:
- Sole proprietorship where generally only one person funds the business activities.
- Partnerships, where two or more people work together to finance or run a venture.
- Corporations / Limited companies where it is possible for many thousands to subscribe for a share in business ownership and, in theory at least, in its governance and direction.
- Co-operative is a fourth form of company where the people working in the organization own it.
Sole Proprietorship The vast majority of new businesses set up each year in India choose to do so as sole proprietors. The form has the merit of being relatively formality-free; there are no rules about the records you have to keep. Nor is there a requirement for your accounts to be audited, or for financial information on your business to be filed at the registrar of companies. As a sole proprietor, there is no legal distinction between you and your business-your business is one of your assets, just as your house or car is. It follows from this that if your business should fail your creditors have a right not only to the assets of the business, but also to your personal assets, subject only to the provisions of the Bankruptcy Act (these allow you to keep only a few absolutely basic essential for yourself and family). It is possible to avoid the worst of these consequences by ensuring that your private assets are the legal property of your spouse, against whom your creditors have no claim. (You must be solvent when the transfer is made, and that transfer must have been made at least two years prior to your business running into trouble.)
However, to be effective such a transfer must be absolute and you can have no say in how your spouse chooses to dispose of his or her new-found wealth.
The capital to get the business going must come from either you or from loans.
There is no access to equity capital, which has the attraction of being risk free.
In return for these drawbacks you can have the pleasure of being your own boss immediately, subject only to declaring your profits on your tax return. (In practice you would be wise to take professional advice before doing so).
Although there is nothing you are required to do legally as a sole proprietor, it is sensible to do the following :
- Open separate bank accounts for the business.
- Do not pay for business expenses from personal accounts.
- Also, withdraw your personal expenses regularly from the business accounts.
- Get your accountant to give you some indication of allowable business expenses.
- Take out full insurance cover against possible loss or damage to any equipment-if you have invested in any.
- Take out personal injury/illness insurance.
Advantages
- Easy to set u-you can start the business in a small way, from your home if you want to.
- You are the boss.
- You can run the business at your own pace and in your own way.
- Your keep the profits.
- You can offset some business expenses against earnings for tax purposes.
- No public disclosure of your affairs.
- Profit or loss in one trade can be set off against profit and loss in any other business you run.
Disadvantages
- You are totally responsible for any debts your business incurs.
- If you go bankrupt, your creditors are entitled to seize and sell your possessions - personal as well as business.
4. Partnership Option:-
Partnerships Partnerships are effectively a collection of sole proprietors and there are very few restrictions to setting up in business with another person (or persons) in partnership and several definite advantages. By pooling resources you may have more capital, several sets of skills to the business and if you are ill, the business can still carry on.
There are two serious drawbacks that merit particular attention.
- First, if your partner makes a business mistake, perhaps by signing a disastrous contract, without your knowledge or consent, every member of the partnership must shoulder the consequences. Under these circumstances, your personal assets could be taken to pay the creditors even though the mistake was no fault of your own.
- Second, if your partner goes bankrupt in his personal capacity, for whatever reason, his or her share of the partnership can be seized by his creditors.
As a private individual you are not liable for your partner's private debts, but having to buy him or her out of the partnership at short notice could put you and the business in a financial jeopardy. Even death may not release you from partnership obligations and in some circumstances your estate can remain liable. Unless you take 'public' leave of your partnership by notifying your business contacts, and advertising your retirement, you will remain liable indefinitely.
The legal regulations governing this field are set out in the Act, which in essence assumes that competent businessmen and women should know what they are doing. The Act merely provides a framework of agreement, which applies `in the absence of agreement to the contrary'. It follows from this that many partnerships are entered into without legal formalities and sometimes without the parties themselves being aware that they have entered a partnership.
The main provisions of the Partnership Act are as follows :
- All partners contribute capital equally.
- All partners share profits and losses equally.
- No partner shall have interest paid on his or her capital.
- No partner shall be paid a salary.
- All partners have an equal say in the management of the business.
- It is unlikely that all these provisions will suit you so you would be well advised to get a `partnership agreement' drawn up in writing by a solicitor at the outset of your venture.
Why you might consider a Partnership As a means of starting up with increased capital (presuming both you and partners put money in.) You might not feel confident to start a business entirely on your own and would prefer to share the responsibilities with someone else. You have complementary skills - one of you may have specialist skills and the other, management flair, or one the money, the other, the ideas.
Choosing a Partner If the business is going to have any chance of success, it is essential that the partners trust each other and can work together harmoniously. Also, since you and your partner(s) have unlimited financial liability for the firm, if things go wrong regardless of whose fault it is - creditors can claim the personal possessions of each and every partner. If you are considering a partnership, ask yourself first if you have the right temperament to be a partner. Some people are too independent to be able to cope with pooling their ideas and resources on an equal footing. There are no hard-and-fast rules about selecting a partner, but the most successful partnerships do seem to be those where the partners have known each other for some time - either as friends or business associates and where they have complementary skills and personalities. For instance, one partner may be a technical person who looks after the manufacturing side of the operation while the other is good at dealing with people and looks after sales, or the combination may be of an ideas person with a down-to-earth sort of person who can implement the ideas. Matching entrepreneurial skills also helps in selecting a partner.
Partnership Agreements As already stated, the provisions of the Partnership Act apply if there is no other agreement between the partners, but it is sensible, if not essential, to get a solicitor to draw up a deed of partnership between you and your partners. You may want to vary the rules laid down in the Partnership Act and to cover points not mentioned. This documents also regulates exactly how the business is run. It should cover the points listed below.
- Profit Sharing: How profits and losses are to the divided. If, for example, one partner has sunk more capital into the business than the other, profits won't be shared in equal proportions or you may decide to distribute profits according to the number of contracts completed, the number of hours worked, or by some other methods.
- Withdrawing Money: It is important to limit the amount of money each partner can take out of the business each month, otherwise you may find you have insufficient working capital.
- Time off: The length and frequency of holidays should be laid down, as well as what rules apply if a partner is incapacitated through illness. The partner will be entitled to a share of the profits, so you may consider it important to stipulate a time limit after which the partnership can be dissolved.
- Duration of Partnership: How long do you want your partnership to last - one, three, five or ten years? Or you might prefer it to be for an indefinite period, terminating after, say, three months notice.
- Admitting or Expelling a Partner: The consent of every partner is necessary before a new partner can be admitted. If you want the right to have a relative, say your wife, admitted as a partner later, this should be stated in the agreement. Unless the agreement states otherwise, you must get a court order if you want to expel a partner, so the partnership deed should set out in detail the circumstances in which a partner can be expelled.
- Dissolving or Rescinding The Partnership: Dissolution will occur automatically on the death or bankruptcy of a partner - unless the partnership agreement provides otherwise. If you discover your partner has given you false information you may apply to the court to rescind the partnership agreement.
- Getting Capital Out: When dissolution occurs, a partner is entitled to have the partnership property sold and all assets distributed. After the assets have been realised and outstanding debts paid, any surplus must be distributed among the partners in equal shares - unless you make a different arrangement in the partnership deed. The proceeds from the sale of assets must be applied in the following order: -
- Payment of creditors who are not partners R
- Repaying loans made by the partners
- Paying back partners their capital contribution
- Surplus divided among partners. If there aren't enough assets, partners must make up the deficiency in the proportions in which they shared profits.
- Notice of Withdrawal from a Partnership: The agreement should state how much notice should be given to each of the other partners if one partner wants to withdraw. Remember, if you are withdrawing, that you are still responsible for all obligations, which your firm incurred while you were a partner. Give notice to all customers and suppliers that you are withdrawing and make sure your name is removed from the stationery. Advertise the fact in the newspaper.
- Conflicting Interests: Partners are free to engage in other business activities unless the partnership agreement prohibits this. However, no partner may engage in any activity, which competes with the partnership business. It might be sensible to provide for limited partnerships.
5. Limited Liability Company:-
Limited Liability Companies as the name suggests, in this form of business, your liability is limited to the amount you contribute by way of share capital. A company registered in accordance with the Companies Act is a separate legal entity, distinct from both its shareholders, directors and managers. The liability of the shareholders is limited to the amount paid or unpaid on issued share capital. A company has unlimited life and no limit is placed on the number of shareholders.
The Companies Act does, however, place many restrictions on the company.
- It must maintain certain books of accounts, appoint an auditor and file an annual return with the registrar of companies which includes the accounts as well as details of directors and mortgages.
- A minimum of three shareholders and one of these as the Managing Director is required to form a company.
- There are in fact two types of companies limited by shares.
- The first is a ‘Public Limited Company which has a minimum authorised and allotted share capital. This is a company which, according to its memorandum of association, may invite the public to subscribe to its shares.
- Any company, which is not ‘public', is called ‘private'. Public companies have further onerous legal requirements and restrictions placed upon them. Generally, most companies start life as `private' and only become `public' when they need funds from a wider range of shareholders. Companies pay ‘corporate tax' on their taxable profits.
Advantages of the limited company Members' (the directors and shareholders) financial liability is limited to the amount of money they have paid for shares. The management structure is clearly defined, which makes it easy to appoint, retire or remove directors. If extra capital is needed, it can be raised by selling more shares privately. It is simple to admit more members. The death, bankruptcy or withdrawal of capital by one member does not affect the company's ability to trade. The disposal of the whole or part of the business is easily arranged. High status.
Disadvantages of the limited company Requirement to register the company with the registrar of companies and provide annual returns and audited statement of accounts. All details of the company are available for public inspection so there can be no secrecy. There are penalties for failing to make returns. Can be more expensive to set up. May need professional help to form. As a director, you are treated as an employee and must pay tax. The advantages of limited liability status are increasingly being undermined by banks, finance house, landlords and suppliers who require personal guarantees from the directors before they will do business.
Requirements for a Private Limited Company
- A Registered Business Name: This must be followed by the word ‘Limited' or ‘Ltd'. The Companies Registration Office exercises some control over the choice of name, it cannot be identical (or very similar to) the name of an existing company. It won't be considered if it is offensive or illegal and the use of certain words in a company (for example, `Institute', `National') can only be used in certain circumstances. The company name must be displayed in a conspicuous place at every office, or other premises where the company carries out business.
- A Registered Office: This need not necessarily be the same address as the business is conducted from. Quite frequently the address used for the registered office is that of the firm's solicitor or accountant. This is the address, through, where all official correspondence will go.
- Shareholders: There must be a minimum of two shareholders (also described as `members' or `subscribers'). A private company can have up to fifty shareholders.
- Share Capital: The company must be formed with a stated, nominal share capital divided into shares of fixed amounts. Small companies are frequently formed with a nominal share capital of Rs.100.
- Memorandum of Association: The memorandum is the company's charter. It states the company's name; the situation of its registered office; its share capital; the fact that liability is limited and, most importantly, the object for which the company has been formed. In theory, the company can only operate in the areas mentioned in the objects clause but in practice the clause is drawn to cover as wide an area as possible, and anyway a 75 per cent majority of the members of the company can change the objects whenever they like. Nevertheless, it is worth bearing in mind that directors of the company will incur personal liability if the company engages in a type of business which is not authorised by the objects clause. The memorandum must be signed by at least three shareholders.
- Articles of Association: The document contains the internal regulations of the company, the relationship of the company to its shareholders and the relationship between the individual shareholders. Many companies don't bother to draw up their own articles but adopt (sometimes with some modifications) articles set out in the Companies Act.
- Certificate of Incorporation: This is the document, which the registrar of companies issues to you once he has approved your choice of name and your memorandum. When you receive this document your company legally exists and is ready to trade.
- Auditors: Every company must appoint a qualified auditor. The auditor's duty is to report to the treasurer whether or not the books of the company have been properly kept, and that the balance sheet and profit and loss account presents (or doesn't present) a true and fair view of the company's affairs and complies with the Companies Act. Auditors are appointed or re-appointed at general meetings at which annual accounts are presented, and they hold office from the conclusion of the meeting until the next general meeting.
- Accounts: The Companies Act lays down strict rules on accounting. Every company must maintain a set of records, which show the financial position at any one time with reasonable accuracy. The accounts comprise a profit and loss account and balance sheet with the auditors' and directors' reports appended. A new company's accounting reference period begins on its incorporation and runs until the following 31st March - unless the company notifies the registrar of companies otherwise. Within ten months of the end of an accounting reference period, an audited set of accounts must be laid before the shareholders at a general meeting and a set delivered to the registrar of companies.
- Registers, etc.: In addition to the accounts books, companies are required to have: a register of members and share ledger; a register of directors and secretaries; a register of share transfers; a register of charges; a register of debenture holders; a book can be purchased to hold all of the above. This will be provided automatically if you buy a running concern.
- Company Seal: All companies must have an engraved seal. This must be impressed on share certificates and must be used whenever the company has to execute a deed. Again, this is included in the ready-made company package.
6. Co-operatives:-
Co-operative is an enterprise owned and controlled by the people working in it. Co-operatives are governed by an Act, whose main provisions state:
- Each member of the co-operative has equal control through the principal of ‘one person one vote'.
- Membership must be open to anyone who satisfies the stipulated qualification.
- Profits can be retained in the business or distributed in proportion to members' involvement, for instance, hours worked.
- Member must benefit primarily from their participation in the business.
- Interest on loan or share capital is limited in some specific way, even if the profits are high enough to allow a greater payment.
- It is certainly not a legal structure designed to give entrepreneurs control of their own destiny and maximum profits.
- However, if this is to be the system adopted, you can register with the registrar of companies.
- You must have at least seven members at the outset.
- They do not have to be full-time workers at first.
- As in a limited company, a registered co-operative has limited liability for its members and must file annual accounts, but there is no charge for this.
- Not all co-operatives bother to register, as it isn't mandatory, in which case they are treated in law as a partnership with unlimited liability.
- Co-operatives are not common throughout the entire entrepreneurial world, although some countries provide for companies with a structure similar to the Indian-style co-operatives.
Franchising Franchising is something of a halfway house, lying somewhere between entrepreneurship and employment. It holds many of the attractions of running a small business whilst at the same time eliminating some of the more unappealing risks. For example, the failure rate for both franchisers and franchisees is much lower than for the small business sector as a whole.
Types of Franchising A Distributorship: This could be for a particular product, such as a make of car. It is also sometimes referred to as an agency, but there is a fundamental difference between these two concepts. An agent acts on behalf of a principal (even though he or she may have an agency for the products and services of more than one principal), what the agent does, says or represents to third parties is binding on the principal in question, as if they were employer and employee. A distributorship, however, is an arrangement where both parties are legally independent, as vendor and purchaser, except that the purchaser, in exchange for certain exclusive territorial rights, backed up by the vendor's advertising, promotion and possibly, training of staff, will be expected to hold adequate stock and maintain the premises in a way that reflects well on the vendor's product or service.
A License to Manufacture: This applies to a certain product within a certain territory and over a given period of time. The licensee may have access to any secret process this involves and can use the product's brand name in exchange for a royalty on sales. This arrangement resembles a dictatorship. Licenser and licensee are independent of each other, except that the licenser will no doubt insist that the licensee complies in order to preserve the good name of the product. The arrangement is often found in industry and a well-known example is Modi Xerox's license to produce the photocopying devices pioneered by the Xerox Corporation.
The Use of a Celebrity Name: The name of a well-known person can be used to enhance the sales appeal of a product and guarantee, at least by implication, its quality. The most common example is the endorsement, by a sports personality, of equipment associated with the sports person's field of sport and bearing his or her name, in return for a royalty payment by the manufacturer.
The Use of A Trade Mark: Here a widely recognised product is exploited commercially for a fee, subject to certain licensing conditions, rather than the name of an individual. An instance with which many readers will be familiar was Rubik's cube, always shown with the symbol TM beside it.
7. Franchisee Option:-
The Franchisee From the point of view of the franchisee also there are certain plus and minus points. Advantages A business format or product which has already been market tested and, presumably, been found to work. As a consequence, major problems can be avoided in the start-up period. A recognised name of which the public is already aware and which has credibility with the suppliers. Publicity, both direct, in that the franchiser advertises his product or services, and indirect promotion through signage and other corporate image promotion in all the franchiser's outlets.
Although taking up a franchisee is not cheaper than starting on your own, it is considered that the percentage of expensive errors made by individuals starting on their own is substantially reduced by the adoption of a tested format. Direct and close assistance during the start-up period. A period of training on production and management aspects. A set of standard management, accounting, sales and stock control procedures incorporated in an operating manual. Better terms for centralised bulk purchase negotiated through the franchiser, though he may be looking for mark-ups in this area as a source of revenue from the franchise. The benefit of the franchiser's research and development in improving the product. Feedback throughout the network on operating procedures and the facility to compare notes with other franchisees. Design of the premises to an established scheme saves on interior design fees and may eliminate these altogether where the franchiser has a set of specifications. The benefit of the franchiser's advice on equipment selection and initial inventory levels, though this may be partial where the franchiser is also the supplier. Help with site selection, negotiating with planning officers and developers. Possibly, though not universally, access to the franchiser's legal and financial advisers. The protected or privileged rights to the franchise within a given area. Improved prospects of obtaining loan facilities from the bank. The backing of a known trading name when negotiating for good sites with letting agents or building owners. Disadvantages Business format franchising is something of a cloning exercise. There is virtually no scope for individual initiative in matter of product, service or design. However, the franchiser will demand uniformly high standards of maintenance, appearance and packaging in whatever the franchise entails. These are usually monitored by regular inspection. The royalty (sometimes called a management fee) paid to the franchiser. This is usually based on gross turnover or on profit. The problem here is that if the franchiser and the franchisee are not fully satisfied with each other’s roles, the royalty can be subject to bitter dispute. The franchisee may than feel justified in withholding all or part of the royalty on the grounds of non-performance by the franchiser, but this is always a difficult matter to prove in the courts. Furthermore, the franchiser's resources to conduct a long-drawn-out proceeding will usually be greater than the franchisee's. A further problem is that a high turnover does not necessarily imply a highly profitable operation. If the franchiser's income is wholly or partially based on turnover, he or she may try to push for this at the expense of profitability. The franchisee is not absolutely at liberty to sell the franchise even though he is in many respects operating the business independently. The sale has to be approved by the franchiser, who is also entitled to vet the vendor and charge the cost of any investigations made to the existing franchise. Furthermore, although the business would be valued as a going concern in trading terms, the goodwill remains the property of the franchiser. Again, the franchisee may feel that, at least to some extent, the goodwill has been built up by his or her own efforts. Territory agreements may be difficult to enforce in practice. For instance, the hypothetical firm of Calorie Countdown may have the exclusive rights in the suburb in which it is located, but there is nothing to prevent the citizens of that suburb from buying their slimmer's meals in some other neighboring Calorie Countdown outlet. The failure of a franchiser may leave the franchisee with a business, which is not viable in isolation.
8. Finance and Working Capital:-
Arranging Finance To start and set up their business, all businesses need monetary support. Before seeking funds, estimate the cost including that of working capital required for a minimum of 6-8 months and always keep a provision for buffer. You can take help of a Chartered Accountant or concerned officials in Entrepreneurship Development Institutes to work out the total financial cost of your project. Decide the form in which you are going to raise the capital i.e. should it be equity finance, debt finance, loans or a combination of these. The financial assistance in India is available from various Banks, Venture Capitalists, Financial Institutions etc. For SSI units, funding is available from a variety of institutions, such as : SIDBI- Small Industries Development Bank of India (refinance and direct lending) SFC's: State level Financial Corporations NSIC: National Small Industry Corporation. Small Industry Development Corporations of various states. Commercial/Co-operative Banks. DIC: District Industry Centre. In addition, large term loans are also available from financial institutions and banks such as IDBI, IFCI and ICICI. The EXIM Bank (Export Import Bank of India) and the ECGC (Export Credit and Guarantee Corporation) are Federal agencies which provide credit for export/import and exim guarantees respectively. This need for finance can be classified into the following types: Long and medium term loans Short term or working capital requirements Risk Capital Seed Capital/Marginal Money Bridge loans For SSI Units, long and medium term loans are provided by State Financial Corporations, SIDBI and State Industrial Development Corporations. Banks also finance term loans. This type of financing is needed to fund purchase of land, construction of factory building/shed and for purchase of machinery and equipment.
The term loans are secured against mortgage of assets such as land, building, machines, equipment and other stocks.
The short-term loans are required for working capital requirements, which fund the purchase of raw material and consumable, payment of wages and other immediate manufacturing and administrative expenses. Such loans are generally available from commercial banks.
There is, however, a SINGLE WINDOW SCHEME, for SSI units. Under the scheme, one agency, either the bank or the financial institution, funds both the term loan and working capital requirements. This scheme applies to all SSI projects with project cost up to Rs 50 Lakhs.
The working capital loan is generally secured against Pledging of stocks, raw materials and finished goods, Advances against work-in-progress (WIP), Advance against bills. For loans from financial institutions and commercial banks, a formal application needs to be made. The details of documentation that need to be provided with the loan application are shown here. Documentation for Loan Application Balance Sheet and Profit Loss Statement for last three consecutive years of firms held by promoters Income Tax Assessment Certificates of Partners/Directors Proof of Possession of Land/Building Architects estimate for construction cost Partnership deed/Memorandum and Articles of Associations of Company. Project Report Budgetary Quotations of Plant and Machinery A sanction or rejection letter is issued by bank after its assessment of the application. After receiving a sanction letter applicants need to indicate in writing their acceptance of terms and conditions laid down by FI/ Banks. Subsequent loan is disbursed according to the phased implementation of the project. In today's environment there are other choices apart from commercial banks and Government owned financial institutions. These options include venture capital funds and non-government finance companies.
9. Making a Product Choice:-
Make a careful analysis of the product or service you are choosing, sometimes in short run, there is a shortage of a particular commodity in the market, you may even come to know you will get almost two weeks in advance to supply fresh stock. Does that mean you can jump into that business. First thing in such a condition is to analyse the situation. Keep in mind that shortages may occur due to a number of reasons and a good entrepreneur always examine the pros and cons before setting up a business. It may tempt you to think that perhaps you have found a good businesses idea. But do not be easily influenced by these temporary shortages. Carefully analyse the future demand-supply position of the product, say for the next 3 to 5 years. Only when you are certain that the shortage will remain there for considerable period of time and you would be able to generate enough profits in the very first or second year of operation and that you can produce quality item within an acceptable pricing, then only you should venture into such a business. There are many organizations which are in possession of information on business opportunities, you can contact these organisations to get an idea about product. 1. District Industry Centres 2. Technical Consultancy Organizations 3. Centres for Entrepreneurship Development 4. Small Industry Service Institutes 5. Lead Bank 6. Industrial Extensions Bureaus (These exist in several states) They are known by such names as iNDEXTb, Udyog Mitra, Udyog Sahayk and so on). 7. National Industrial Development Corporation, New Delhi 8. Khadi and Village Industries Commission, New Delhi 9. Commissioner of Cottage Industries 10. Entrepreneurship Development Institute of India, Ahmedabad 11. National Institute of Entrepreneurship and Small Business Development, New Delhi 12. National Institute of Small Industry Extension and Training, Hyderabad 13. Small Industries Development Bank of India, Lucknow. This information could be in the form of: Project profiles Feasibility studies Industry studies Area development studies. Industry-Specific Agencies For a given industry, there are in organizations which undertake monitoring, research, market - development, export promotion or such other work. In a project conceptualisation stage while making a product choice following factors related to the product needs to be considered: Easy availability of raw-material Process Technology Easy accessibility in the market Incentive and support from Government Product Line - Depth, Width Market information Packaging Branding Warranties After Sales Service Another point to keep in mind while deciding about products is to avoid the Products, which are likely to have a number of players in the market. Some such products in the recent past have been, plastic footwear, audio cassettes, disposable gloves and bulk drugs. In case the entrepreneur is looking for a product which has export potential, s(he) should consider the following additional questions : What should be the contents of export-product portfolio ? What are the special requirements for packaging if one has to export the products ? What product adaptations are needed to be made for exporting a product to a specific country? Does it meet the product's quality specification of the country concerned? The development of export-product portfolio can be done by considering 4 parameters viz. External demand conditions Internal supply capability Complexity of Marketing Tasks Amount of investment required to penetrate the market Analysis can be conducted using this four dimensional model. The choice should be a product which scores a high rating on first two parameters and low rating on last two parameters. EXIM (Export Import Bank of India) Bank has also developed an excellent model to conduct the export-product portfolio analysis based on three parameters viz. Supply Capability in product group Domestic environment Export market attractiveness This analysis gives rise to product groups with high potential or low potential. Some high potential areas are: Leather Garments Yarns and Thread Apparel - Woven and Knitted B & W TV Sets Costume Jewellery With regard to special packaging requirements one has to be careful about laws of the country one is exporting to. Product adaptations for country's specific needs look into things like whether voltage supply is 220 V or 110 V for electric appliances and for automobiles whether left-hand drive or right-hand drive is appropriate. Products for Small Scale Unit In India products have been Reserved for exclusive manufacture in the SSI Sector for promoting this sector. Currently the investment limit for items to be manufactured in SSI is 1 crore. At present 812 items are reserved for manufacture in this sector. This Policy got a legal backing when the I (D&R) Act was amended in March, 1984 empowering the Government to reserve items under this Act. This Act also provided for the Constitution of an Advisory Committee headed by Secretary (SSI & ARI). Criteria For Reservation The overwhelming consideration for reservation of an item is its suitability and feasibility for being made in the small scale sector without compromising quality aspects.
10. Location of the Business:-
After deciding the issues of product, the next important question is, where to set up the unit ? For many tiny units and service based units, the home is perhaps the best starting point. But not all type of SSI can be set up in home either due to size or due to nature of the industry. Then the entrepreneurs may like to locate their business in industrial estates, areas, parks, complexes developed by concerned state government organisation or private bodies or in a privately leased land subject to approvals by various state and municipal bodies. State level Government agencies like DSIDC, HPSIDC, GIDC, TIDCO, UPSIDC assist entrepreneurs in identifying suitable locations/sites for the project, besides helping in the process of getting all the necessary clearances for the project. All utilities such as power, water supply etc. are available at site in case the units are located in any of the industrial estates developed by these agencies. Of late, private sector has also got into development of industrial parks; an example being the Mahindra Auto-ancillary park being developed jointly by the Mahindra group and TIDCO. Ideally, identify two or three locations and then select a few possible sites at each of these locations. Next, compare these locations/sites in relation to your requirements. Checklist of points to be considered for evaluation of land /sites are as follows : Checklist for Location and Site Selection A. General Considerations Location (city/town/village) Nearest large city (name and distance) Connections to nearest and major cities (rail, road, air-distance, frequency) Distance from important geographical markets and to relevant ports (in case of export/import oriented enterprises) Distance from major raw material sources Availability of manpower with required skills and prevailing wage rates Law and order situation in the area Level of industrial development in the area and anticipated tempo Composition on industrial development (in terms of types of industry and size/health of existing enterprises) Whether built up factory shed is available at the location and whether its size confirms to your need B. Industrial Infrastructure Position Land: availability and price Existence of an organized industrial estate Water Supply : source (river, canal, tube well), distance, quality (PH, hardness), rate, common storage facility, operating authority (Public Works Department, Estate-Corporation, Municipality) Power supply : nearest substation, feeder type (industrial/rural) availability, quality of power etc. Effluent treatment and disposal (if relevant): disposal point (land, sea, river), arrangement for treatment (individual, common), drainage arrangement for conveying the effluent (open, underground), treatment and conveyance charges Approach road/internal roads, Street lighting Responsibility for maintaining roads, drainage and street lighting (single or multiple agencies) Postal, telegram and Telecommunication facility (availability of new telephone connections, manual or automatic exchange, STD facility, telex facility, etc.) Bank facility Transport-operator facility Typing/photocopying Warehousing facility (if required) Proximity of offices of law-enforcing agencies (excise, sales tax, labour laws, factory inspection, pollution control etc.), Proximity of offices of industry - assisting agencies (State Financial corporation, industrial infrastructure corporation, raw material/marketing corporation, district Industries Centre which sanctions and disburses financial incentives) Building/electrical/fabrication contractor facility Shops for building material, spare parts and such other things Motor-rewinding, painting, gas-supply and such other industrial service Professional resource position (management/industrial consultants, financial/legal advisers, management/productivity associations). C. Financial Incentive Position Investment subsidy (Central Govt./State Govt.) Income-tax concession Sales tax exemption/interest-free sales-tax loan Promoter's contribution (margin) and interest-rate policy followed by State Financial Corporation Octori-exemption, electricity-duty exemption, local-tax exemption and such other incentives. D. Social Infrastructure Position Housing: availability, quality, price (ownership and rent), public housing (actual and planned housing by State Housing Board, infrastructure corporation or such other agencies) Education: primary, secondary and university education facility (quality, number of seats, ease of admission, medium of instruction) Health: dispensary, hospitals, specialties E. Site-specific Considerations Vantage or otherwise location (e.g. on the highway), frontage, approach etc. Direction of town-growth with reference to the site Non-agricultural status of the site Site-contours ( levelled, hilly, pits, ravines, brick-kilns), site-shape (regular/irregular) Proximity to railway line, national highway, state highway * Overhead telephones or power lines or underground water/drainage/gas line passing through the site* Access to national/state highway or other roads provided by the state Wind direction in relation to the site # Soil-type + Omit the items in list, depending on circumstances, points or items that are not very relevant to your project. Similarly, in many cases just preliminary or qualitative information may be enough. Note : * This may imply leaving out some portions of a plot for building purpose. # In India, normal wind-direction, except during winter, is north-south. If there is a dense population concentration in south, a factory involving gas/smell emission may cause a problem + Loose soil may increase construction cost. Business Operating From Homes There are many businesses especially in the service sector which can be run efficiently from home.
11. Infrastructure Land, Building, Water and Power:-
Land and Construction of Building After deciding the location and site three important factors to be kept in mind before purchasing/ leasing the land are : Availability of basic amenities like power, water, Connectivity to nearest rail, road or port and Price of the land. Purchase/ lease the land judiciously, because once you have committed, most probably you will be working there for next 10 year or so. Once an industrial plot for the unit is secured, then the next job is that of finding a suitable architect to design the outlay of area and factory. Design of factory building has to be in consonance with the type of industry. Have an appropriate plant layout. If you are setting business in home, plan the area which is to be used as your production centre or office judiciously. You may like to take help of a professional to ensure that the area is utilised optimally. An architect's estimate of building construction is essential for loan applications. Further, architect's certificate for money spent on building is needed for disbursement of loan. Incentives The state government offers incentives like land and building tax concessions, providing land at cheaper rates through the state government agencies to new and existing entrepreneurs. Getting the Utility Connections Among the utilities, of prime importance are power and water. Other utilities that might be required are steam, compressed air, fuel. Assess your requirement of such utilities, make arrangement to get these and ascertain the cost of consuming these. Water Supply : Check out what is source of your water supply is it river, canal, tube well or something else, how far is it from your land, quality of water (PH, hardness), does it meet you specific requirements, rate/ water charges applicable, common storage facility, who is the operating authority (Public Works Department, Estate-Corporation, Municipality). Power Supply : Nearest substation from where you will get power, power tariff rate, feeder type (industrial/rural) availability, quality of power, duration etc. In many cases getting power connection causes delay in setting up of plant. Therefore it is imperative to commence work on these aspects with diligent follow up. Power connections are generally of either LT (Low Tension) or HT (High tension) type. If connected load is up to 75 HP, LT connection is provided. For connected loads of 130 HP or higher only HT connection is provided. A formal application needs to be made in a specific form to the state electricity board. An electrical inspector is deputed for evaluation of application to factory site, after which the load is sanctioned. In areas of power shortage, it is advisable to augment the power supply with a captive generating set. Water connection is also obtained likewise by applying in advance in formal forms. The water supply can be augmented by installation of tube well. Incentives: The State Government offers a number of concessions and incentives to industry like Concessions in water tariff, Power subsidy, Subsidy on Generating sets, Transport Subsidy, Incentive for Pollution control and quality equipment depending on the location, size of investment and category of the industry.
12. Purchase,Sourcing Raw Materials, Machinery:-
Process Selection Choices of process technology emerge once the product is finalised. For some complex products, process know-how has to be imported. In such cases agreements for technology transfer should be made with due care to safeguard interest. A lot of appropriate technology is being developed at CSIR and Defence Research Labs and some of these technology can now be bought. There are some intermediaries like APCTT, TBSE, which can help you to locate the relevant technologies. Besides there are some In-house R & D centres of companies which develop technologies and sell them to interested parties. Indigenously developed process know-how has intrinsic benefits such as appropriateness, relative inexpensiveness and possibility to work with technology developer. While checking out on a process technology, the following things need to be considered with utmost care: Whether Process requires very high level of skilled workers or complex machines ? Whether Process requires large quantities of water and / or power ? Whether any Process or Product patent needs to be honored while utiising the selected process technology. Any special Pollution or Environmental regulation. The appropriateness to the Indian environment and conditions. Raw Materials Materials procurement and planning are critical to success, of a start-up SSI unit. Inventory management can lead to manageable cash flow situations, otherwise if too much is ordered too soon considerable amount of working capital gets locked up. On the other hand, non-availability may result in production hold-ups, and idle machine and manpower, hence increased cost. For essential imported raw material whose lead time are large proper planning is all the more essential. Buy raw materials from reputed dealers and agencies only, before ordering compare the prices and get quotation from at least 3-4 places and also check whether price is inclusive or exclusive of transportation cost. While receiving the delivery check the quality and quantity of the materials. Machinery and Equipments Choosing and ordering of right machinery is also of paramount importance. In many cases technology or process provides us with specifications which is not provided, then an extensive techno-economic survey of machinery and equipment available must be carried out. International trade fairs and engineering fairs are good places to look at available options. The entrepreneur must also consult experts, dealers / suppliers as well as users, prior to making a selection of equipment and machinery. The advice of DIC, SISI and NSIC can also be sought. Many SSI entrepreneurs buy second hand machines and equipments. This leads to one of the major deficiencies in the small industry that of the prevalence of outdated production and management methods hindering the efficient operation of small scale units. It was also found that the most important reason for the reluctance of the small industrialists to install modern machinery and equipment was the lack of invest able funds. The main objective of National Small Industries Corporation (NSIC) is to provide machinery and equipment to small industrial units offering them long repayment period with moderate rate of interest. NSIC Procedures For Hire Purchase Of Machinery The hire purchase application is to be made on the prescribed form. The Director of Industries of the State under whose jurisdiction the applicant falls, forwards the application to the head office of the NSIC at Delhi with his recommendation and comments. All applications for indigenous or imported machines are considered by acceptance committees comprising of the representatives of the Chief Controller of Imports, Development Commissioner, Small Scale Industries and other concerned departments. Decision of these committees are conveyed to the parties concerned with copies to the regional offices of the NSIC and the concerned Directorate of Industries. It is open to an applicant whose case has been rejected to get his application reviewed by a high powered committee known Performa invoice. Once all these formalities are completed by the hirer, instructions are sent to the suppliers to despatch the consignment (duly insured for transit risk) to the hirer and to send the R/R or C/R as the case may be, to the regional office. The NSIC after ensuring that all dues have been paid by the hirer, releases the R/R or C/R to him for taking delivery of the machines. In case of imported machines, the procedure is slightly different in as much as the shipping documents are sent to the clearing agents for clearing the consignment from the Customs and dispatching it to the hirer. Value Of Machines That Can Be Supplied : Rs. 7.5 lakhs, F.O.R. or landed cost as the case may be. Earnest Money: 5% or 10% of the value of machinery depending on whether the equipment is imported or indigenous. In the case of furnaces and a few other items of equipment, the rate of earnest money is different. Interest 9 per cent per annum with a rebate of 2 per cent on prompt payment. This interest is calculated on the value of machines outstanding after deducting payment of earnest money. Administrative Charge: 2 per cent on the sales value of machines and its recovery by the NSIC is spread over the total installment period. Period of Repayment: The value of the machines, after deducting the earnest money received, called the Balance Value, is payable along with interest and administrative charge in 7 years. -+ The first installment is payable after one year and six months from the delivery of machines The second and subsequent installment are payable half-yearly thereafter. Gestation Period : In case of certain type of machines which become operative immediately on installation in the service sector industries and job order establishment, a gestation period of only 6 months shall be allowed both to the new and existing units. A rebate of 2% per annum is allowed on the interest rates, in case an installment is paid on or before the due date. In case the payment of installment is not made within one month of its separate due date, interest @ 2% per annum over and above the normal rate is charged on the defaulted amount from the date of default to the date of actual payment. Remission in interests is allowed in case one or more than one installment is paid in advance of the due date(s).
13. Production:-
Today's competitive market, it is difficult to maintain stable relationships with suppliers, customers, brokers, distributors, and even your own company personnel. Competitors are stealing your best customers. To maintain the edge entrepreneurs need to sychronise their production process, capacity, and delivery schedule. Layout Plan out your work area keeping in mind the requirement of your business. More often than not the area available to small businesses is limited and within that area all the work needs to be carried out, right from storing the raw materials to the final product. The space for each of these should be clearly chalked out. The distance between one facility and another or one machine and another should be fixed. Design the work place so that there is least amount of repetitive movements, the place is safe for workers and area is properly allotted for each process. You (or your technical adviser) should work out where exactly each facility like raw material storage, individual machines, packaging, finished goods storage and quality control unit will be located. The flow of the production process and the space requirement for material handling as well as manpower requirement determine the layout. Capacity The total capacity of business needs to be planned beforehand keeping in consideration the market demand and future supply and demand condition. While purchasing machinery the capacity should be such that there should be provision for future expansion. Delivery Schedule In the initial phase of setting up an enterprise to establish the credibility in the market make it a point to deliver in scheduled fashion. There should be no or least amount of damage to the product, if the product is fragile package and mark it accordingly. Ensure that it reaches its destination in time. Quality In present environment commitment to quality is essential for a small business to compete against its competitors. TQM For Small Business A new company or a small business has limited financial, personnel, and capital plant/equipment resources and is especially vulnerable to instability brought on by rapid changes in customer behavior. One way to ensure business success is to make quality number one priority for all employees in your company. Quality work and customer satisfaction must be a commitment of all employees. Improving quality and customer satisfaction must also be a commitment of all employees. Every company activity must incorporate quality and customer satisfaction, including all communications with customers and suppliers. It doesn't have to cost more to make quality and customer satisfaction your priority. Significant changes may be required to make quality and customer satisfaction improvements. Small advantages in all company functions can set your quality and customer satisfaction apart from the competition. Government of India encourages and offers incentives to small scale industries to get ISO 9000 certificate. Govt. of India also helps them to set up their own R & D centre.
14. Sales & Pricing:-
In India, price is often affected by excise duty, sales tax and local taxes like octroi, thereby making it difficult to maintain a uniform price throughout the country. You may opt for any of the following policies or modify and combine them depending upon your objective or you can have your own pricing policy : "Return on Investment" pricing: The price is fixed after taking into consideration the financial aspect. 'Amount spent and return expected' is the key factor in deciding the price. This has relation with the sales forecast too. "Penetrating the Market with a Low Price": This involves selecting the lowest yet profitable price per unit so that you can sell a maximum number of units. Once your product is in demand or is accepted in the market, you can increase the price of your product. Introducing A Product At A Premium" Price Policy: When a product is innovative and competition is low or non existent, this policy can be applied. You can make optimum profit. When you face competition later, you can lower the price. "Ethical" Pricing: Price is fixed keeping the welfare of the society in mind. For many life saving drugs, this particular policy is used. The product is sold at the lowest possible price with either a very reasonable margin or no profit at all. Profit may be earned from other products. "Full Line" Pricing: If you are selling a range of particular product for example pickles, then you price the product in a particular range, this way you may earn more profit in one flavour and less on the other. But, you cannot sell only the one that gives you maximum profit, or else a customer may switch over to another brand where he would be able to exercise an option for other flavours. "Pricing On The Basis Of Competition": In this case, you follow the leader for fixing the price. "Rasna" is the leader in the area of synthetic sherbets. Pricing of a similar product will have to be decided based on the price of "Rasna". Before fixing the price of product, ask yourself is the price reasonable, would you buy the product at the price you have decided upon if you were a customer. You must also ascertain: The retail prices of competing brands The commission offered to traders/distributors/stockists by competitors The ex-factory price (including taxes) of the competing brands The pricing strategy you want to adopt The special features of your product that would not hinder the customers from buying your products if you are charging higher price than that of your competitor.
15. Paying Back Loans and Profit Generation:-
Manage your cash Flow to pay back your loans, debts or credits. A healthy cash flow is an essential part of any successful business. If you fail to have enough cash to pay your suppliers, creditors, or your employees, chances are you will be out of business very soon. You should pay back the loans so that when you need loans in future, you get one. You can pay the loans or debts as per terms and conditions initially agreed upon, if you can't pay in time inform the creditor, ask for an extension stating the reasons. Proper management of your cash flow will ensure the same and is a very important step in making business successful. To handle your business properly learn the basics of accounting, inflow and outflow of cash. You can take help of your accountant, get help from a friend or family member in the initial stages. There is nothing in finance that can not be understood by a common person. To manage finance properly Understand Cash Flow. It is the first step in effectively managing your cash flow. There's more to it than just a the movement of money into, and out of, your business checking account. It is an essential ingredient for running a business successfully, the better you understand it less are the chances that you will be in financial mess or worse have a case of money swindling . Analysing Your Cash Flow will help you spot some of the problem areas in the cash flow cycle of your business. As in any good analysis, you need to look individually at each of the important components that make up the cash flow cycle, to determine if it's a problem area or not. Have A Cash Flow Budget is good way of predicting your business's cash flow for the next month, six months, or even the next year. Improving Your Cash Flow will, without a doubt, make your business more successful. Accelerating your cash inflows and delaying your cash outflows are key factors for improving and managing your cash flow. The cash flow budget is also a handy tool to use in the improvement and management of your cash flow. A good cash flow will ensure a healthy profit. Fill Your Cash Flow Gaps: from time to time, almost every business experiences the need for more cash than it has. If you find yourself in this position, you may have to borrow money to fill the gap. Handling Any Cash Surplus Or Profit is just as important as the management of money into and out of your cash flow cycle. With the proper management of your cash flow, you might find yourself with a little extra cash, on which you can earn investment income or utilise it during lean times. Basics of Accounting There are a few (and only a few) things you need to understand in order to make setting up your accounting system easier. They're basic (trust me), and they will probably clear up any confusion you may have had in the past when talking with your CPA or other technical accounting types. Debits and Credits These are the backbone of any accounting system. Understand how debits and credits work and you'll understand the whole system. Every accounting entry in the general ledger contains both a debit a/c and a credit a/c. All debits must equal all credits. If they don't, the entry is out of balance. Out-of-balance entries throw your balance sheet out of balance and shows something is amiss somewhere. so start from beginning. Depending on what type of account you are dealing with, a debit or credit will either increase or decrease the account balance.
Debits and Credits vs. Account Types Account Type Debit Credit Assets Increases Decreases Liabilities Decreases Increases Income Decreases Increases Expenses Increases Decreases In above figure for every increase in one account, there is an opposite (and equal) decrease in another, this keeps entry in balance. Also to be noted is the fact that debits always go on the left and credits on the right. Let's take a look at two sample entries and try out these debits and credits: In the first stage of the example we'll record a credit sale: Accounts Receivable Rs. 15,000 Sales Income Rs. 15,000 If you looked at the general ledger right now, you would see that receivable had a balance of Rs. 15,000 and income also had a balance of Rs. 15,000. Now we'll record the collection of the receivable: Cash Rs. 15,000 Accounts Receivable Rs. 15,000 See how both parts of each entry balance, how in the end, the receivables balance is back to zero? That's as it should be once the balance is paid. The net result is the same as if we conducted the whole transaction in cash: Cash Rs. 15,000 Sales Income Rs. 15,000 Of course, there would probably be a period of time between the recording of the receivable and its collection. Assets and Liabilities Balance sheet accounts are the assets and liabilities. When we set up your chart of accounts, there will be separate sections and numbering schemes for the assets and liabilities that make up the balance sheet. Assets increase with a debit and decrease with a credit. Liabilities increase with a credit and decrease them with a debit. Identify Assets Simply stated, assets are those things of value that your company owns. The cash in your bank account is an asset. So is the company car you drive. Assets are the objects, rights and claims owned by and having value for the firm. Since your company has a right to the future collection of money, accounts receivable are an asset-probably a major asset. The machinery on your production floor is also an asset. If your firm owns real estate or other tangible property, those are considered assets as well. If you were a bank, the loans you make would be considered assets since they represent a right of future collection. There may also be intangible assets owned by your company. Patents, the exclusive right to use a trademark, and goodwill from the acquisition of another company are such intangible assets. Their value can be somewhat hazy. Generally, the value of intangible assets is whatever both parties agree to when the assets are created. In the case of a patent, the value is often linked to its development costs. Goodwill is often the difference between the purchase price of a company and the value of the assets acquired (net of accumulated depreciation). Identifying Liabilities Liabilities as the opposite of assets. These are the obligations of one company to another. Accounts payable are liabilities, since they represent your company's future duty to pay a vendor. So is the loan you took from your bank. If you were a bank, your customer's deposits would be a liability, since they represent future claims against the bank. We segregate liabilities into short-term and long-term categories on the balance sheet. This division is nothing more than separating those liabilities scheduled for payment within the next accounting period (usually the next twelve months) from those not to be paid until later. We often separate debt like this. It gives readers a clearer picture of how much the company owes and when. Owners' Equity After the liability section in both the chart of accounts and the balance sheet comes owners' equity. This is the difference between assets and liabilities. Hopefully, it's positive-assets exceed liabilities and we have a positive owners' equity. In this section we'll put in things like: Partners' capital accounts Stock Retained earnings Another quick reminder: Owners' equity is increased and decreased just like a liability: Debits decrease Credits increase Retained earnings are the accumulated profits from prior years. At the end of one accounting year, all the income and expense accounts are netted against one another, and a single number (profit or loss for the year) is moved into the retained earnings account. This is what belongs to the company's owners-that's why it's in the owners' equity section. The income and expense accounts go to zero. That's how the new year with a clean slate against which to track income and expense. The balance sheet, on the other hand, does not get zeroed out at year-end. The balance in each asset, liability, and owners' equity account rolls into the next year. So the ending balance of one year becomes the beginning balance of the next. Think of the balance sheet as today's snapshot of the assets and liabilities the company has acquired since the first day of business. The income statement, in contrast, is a summation of the income and expenses from the first day of this accounting period (probably from the beginning of this fiscal year). Income and Expenses Further down in the chart of accounts (usually after the owners' equity section) come the income and expense accounts. Most companies want to keep track of just where they get income and where it goes, and these accounts tell you. For income accounts, use credits to increase them and debits to decrease them. For expense accounts, use debits to increase them and credits to decrease them. Income Accounts If you have several lines of business, you'll probably want to establish an income account for each. In that way, you can identify exactly where your income is coming from. Adding them together yields total revenue. Typical income accounts would be Sales revenue from product A Sales revenue from product B (and so on for each product you want to track) Interest income Income from sale of assets Consulting income Most companies have only a few income accounts. That's really the way you want it. Too many accounts are a burden for the accounting department and probably don't tell management what it wants to know. Nevertheless, if there's a source of income you want to track, create an account for it in the chart of accounts and use it. Expense Accounts Most companies have a separate account for each type of expense they incur. Your company probably incurs pretty much the same expenses month after month, so once they are established, the expense accounts won't vary much from month to month. Typical expense accounts include Salaries and wages Telephone Electric utilities Repairs Maintenance Depreciation Amortization Interest Rent,
RAJESH NAIR
The author is CEO, RajRak Advisors. He can be reached at rajeshnair72@gmail.com
