Step-by-step approach / Important stages in starting a new

venture
An enterprise also means an undertaking, a business firm or venture. Here is a step-by-step
approach for starting a new venture. These can be divided into three stages:

1. Pre-launch Stage
2. Launch Stage
3. Post launch Stage

A step by step approach is provided to assist the potential entrepreneur.

1. Pre launch Stage

The following steps are involved in a Pre-launch stage in starting of a new venture.

1. Identify, Analyze and Decide on the business idea.

2. Analysis of strengths, weaknesses, opportunities and threats.

3. Analyze competition and select the positioning strategy.

4. Estimate and forecast the market size, growth and marketing feasibility which involves
measurement of demand — supply gap.

5. Whether to be an ancillary unit.

6. Understand the technology, process and selection of the idea.

7. Decide on the size of the enterprise in terms of production capacity, employees.

8. Decide on the location of the venture.

9. Identify the incentives given by the Government to promote the small and medium
industries.

10. Understand the relevant laws which are applicable for the business.

11. Analyse the business idea as opportunity in terms of Profit, costs, expenditure, income,
sales, market share.

12. Estimation of manpower requirements.

Pre-Launch Stage of a new venture involves collection of information through primary and
secondary sources of data. It is a critical stage. The skills that are required are entrepreneurial
skills of business opportunity identification and analytical skills.

The functional areas of marketing and finance dominate this stage. Forecasting skills are also
required in this stage.
2. Launch Stage

1. Selection of the Name of the enterprise.

2. Hiring or construction of building

3. Deciding on the ownership pattern — sole proprietor, partnership, private or public limited
company and limited liability partnership.

4. Registration of the firm. If it is a partnership firm, then agreements has to be signed. The
registration processes of SMEs have been streamlined.

Now provisional registration certificate can be obtained online with District Industries Centre.

5. Preparation of business plan and project report.

6. Deciding on the product mix and markets to serve.

7. Application for loan to banks. If private or public, issue of shares.

8. Raising of finance.

9. Ordering and installation of machinery.

10. Recruitment of people.

11. Deciding on the channel of distribution.

12. Sources of raw materials to be finalized and purchases made.

13. Production started.

14. Products to be made available in the market.

In Launch stage of a new venture, operational actions and decisions are taken. It requires
managerial skills of coordination with the various agencies. Project management skills are
required.

There is lead time from planning to implementation stage. Close monitoring has to be made to
see that the launch is as per the plan. Delay will increase the cost and have impact on the
finances of the firm.

3. Post Launch

1. Teething problems to be solved.

2. Systems to be developed in all the areas of management

3. Feedback on the product

4. Changes if needed to be introduced.

5. Expansion decisions.

After launch of the business, the gestation period varies from one to three years. The
provisional certificate is valid for a year. After commencement of business, permanent
certificate is to be obtained from District Industries Centre.

An entrepreneur has to plan and prepare for this critical period. The profits will start flowing
once the business settles down. All the businesses may not succeed, so mental preparation for
failure and exit route should also be a part of the business plan.

Stages in starting a venture

1. 1. STAGES IN STARTING A VENTURE OBJECTIVES OF THE PROJECT To

know various stages involved in starting a venture To know the different sources
through which market research can be conducted To understand the cost of starting a
venture To understand the various modes of financing a business To check the legal
formalities of starting a venture
2. 2. RESEARCH METHODOLOGY I have completed the project Stages In Starting A
Venture using the secondary data like Internet and various research, Management and
news portals. Time constraint and the maximum limit in the number of pages are the
reasons of not preparing the project report in detail as I wanted it to be but still I have
tried to explain in general, the way a venture is normally started in India.
3. 3. Introduction Many people dream of starting their own businesses, but not everyone
is cut out for the challenge of starting their own business. Being employed by
someone else offers a slew of advantages, from health insurance and matching
retirement contributions to a regular schedule and the company of coworkers. There
are several personality traits that are common among successful entrepreneurs,
including discipline, frugality, self-confidence, good communication skills, humility,
honesty and integrity, superb record-keeping skills, motivation, good health, optimism
and more. Before one quits his job to become an entrepreneur, one must first think of
a concept, product or service that will generate a steady stream of income. This may
sound easy, but for most people, this is actually the hardest part. One should conceive
a plan that puts his knowledge, experience and expertise to use in the most profitable
way possible. One should try to start with areas where one already has a great deal of
interest in, and equipment and materials for. This will help cut down startup costs.
Doing something one likes isn't the only consideration. One need to get an idea of the
prospects for the potential business and try to find out the answer to some questions
like Is it a business with a market? Can one make money at it? This will require some
research into the marketplace as well as how other similar businesses have fared. So,
starting a business can also be very stressful or unprofitable if one does not take the
necessary steps to ensure success. If a person is considering to start a new business, he
4. 4. has to make sure that he will effectively plan every aspect of his business. This will
lead to a solid business strategy, which will help one to increase the chances of
success. The task of starting a business can be invigorating and eagerly fulfilling but it
is not easy. There are so many challenges to face and decisions to make. Many
startups face a lot of trouble in running the business and making it profitable. The
pressure can cause a person to make a poor decision which can, in turn, negatively
impact the business potential and give it a major setback. So one should spend quality
time in planning and considering the possible obstacles the new business might
encounter in the long run. Therefore, one has to go through various stages to start his
business and to ensure its success.  Identifying Business Opportunities Identify
productive inefficiency If a person is able to produce any given output at a lower
cost—or could produce more output for given cost, then he may think of entering into
that business. For example, a company that is inefficient will have higher operating
costs and will be at a competitive disadvantage (or have lower profits than other firms
in the market). E.g. Nirma Detergent in India identified productive inefficiency by
offering its detergent at a very low price as compared to other foreign brands which
were charging exorbitantly high prices.
5. 5. Remove Key Hassles One can take a look at some of the key hassles customers
face when buying or using a product or a service. One doesn’t necessarily have to
have a new product or service. One can be innovative and improve a product, a
service or a business process. Purchasing processes in some products categories are
still a major source of irritation for customers. One can think how he can improve and
provide a superior alternative. For example, look at how the search engine market
developed. There were millions of websites on the Internet and it was often very hard
for customers to find what they were looking for. Searching an index of webpages (on
Google, or Yahoo) made it much easier for customers to find information they were
seeking. Customers Desire to Experience Something New One may or may not have a
new business idea or business process to serve a market. And perhaps there may be no
market inefficiencies for a person to exploit. But sometimes, gauging the customers’
desire to experience something new can be a successful strategy. Pick a Growing
Sector/Industry When considering a new business, it is important to look at whether
or not one’s idea is in a growing sector or industry. For example, a lot of start-ups in
the IT sector in India did very well because there was huge demand in that industry
and the growth was outpacing other industries. Investing in a stagnant sector/industry
may not best serve a person’s interests, unless he identifies a market inefficiency that
he can exploit.
6. 6. Product Differentiation Creating superior products or services vs. alternatives is
important for winning in the market place. What factors will set one’s product apart
from the existing ones? If there is no such differentiating factor, the potential
customers may just stick to the existing product rather than adopt his product. Cash
Flow Considerations At the start-up stage, cash flow considerations are just as
important as any other business function. If one runs out of cash, despite holding
inventory or other assets, his business will risk failure. There are some types of
businesses in which cash is typically held up for a long time. If a person is in
manufacturing for example, his cash flow can be held up for long periods of time, or
money may be stuck in receivables. When picking the right business, a person should
consider one that provides fairly regular cash inflows and with slower outflows (if
possible). It is imperative that one understands the need for constant cash flow in his
business. Without cash flows, no matter how good a person’s idea or business process
is, he might be destined for failure. Seasonal Business or All Seasonal Business When
 picking a new business – it is to be seen whether it is seasonal or the year round. If a
person decides on a seasonal business, then he will need to consider how to operate
during off-season months. Managing the cash one makes during the season will help
him get through off-season. Financial planning will be of utmost importance.
7. 7.  Checking the Feasibility of the identified opportunity After thinking of a
business idea and envisioning all the possibilities, one should make sure that his
Business Idea is indeed viable and that he is not getting carried away by the sheer
excitement. Industry - Its size, its growth and its future. One should understand the
prevailing trends, Analyse Strengths as well as Weaknesses of existing players;
Analyse Opportunities as well as Threats to figure out whether a business opportunity
exists. He should make sure that the Business Opportunity is large enough to be
attractive and the cost of doing business is reasonable enough for the business to be
viable. Competition: One should study all aspects of Competition - Direct as well as
Indirect. He should dig deeper to find Gaps in Competition's Offerings and the
Hassles faced by customers. The existing competition in the market will pose a
considerable threat to a person’s startup when he launches his business. He should be
aware about the activities of his competition in the market, their business strategy,
new partnerships, enhancement of products etc. His competition will have a better
knowledge about the market than him. He should always ensure that he is updated
about all the crucial developments in the market and prepared to adapt to the changes
that take place. He should pay attention to his Competitiors, see what changes they are
making and observe whether they have made any changes in recent months or years.
He should also observe if their products have changed, or have they started to offer
new services. His competitors may be making changes as a result of the changing
market needs.
8. 8. Conducting Market Research Market Research can be an expensive and time
consuming task depending on the methods of market research one chooses. However
the information he obtains from it can be very valuable to his business. It helps to
understand what are the unmet needs and what needs improvement. It is very
important to meet and really understand the current purchasers / users of his
competitors products. One can decide to hire a market research firm or can do his own
market research. 1) Primary market research - Primary Market Research is first hand
information from customers and potential customers. Primary market research is more
expensive and time consuming to perform than secondary market research, however
the information it offers can be much more specific and valuable. Market Research
Surveys- Surveys by phone, mail or in person are used to assess the potential success
of a product or service. Surveys are a highly used method of small business market
research. Market Research Focus Groups- A Focus Group is a group of people
(usually 6-10) who gather around to talk about a particular product, service, problems
they have and more. A focus group can help a person gain valuable insight about
potential customers, by discovering their likes, dislikes and problems.
9. 9. Market Research Individual Interviews- Instead of conducting a group interview
(focus group) one can also conduct individual interviews. Conducting Market
Research Interviews provides him with the opportunity to meet individually with his
target market. Instead of conducting a group interview such as a focus group he can
also conduct individual interviews. In an individual interview the researcher asks the
targeted buyer questions similar to those in a focus group. The researcher asks about
the interviewees’ likes, dislikes, problems and opinions of a product or service. One
can choose to conduct the individual interview in person or over the phone. One
disadvantage of individual interviews over focus groups is that the interviewees don’t
 get to interact with one another. For example in a focus group, one person may say
something that causes a reaction in another and suddenly bursts of ideas start
sprouting. In individual interviews there isn’t that same kind of interaction. However
an advantage of individual interviews is that one gets to talk to his target buyer one-
on-one and get more information about that individual and their specific thoughts and
opinions. 2) Secondary market research - Secondary market research is far more easer
to conduct as the information is readily available on the public domain. Reports/
Studies (University studies) Local Newspapers and business magazines -Many local
newspapers and business related magazines offer demographic data.
10. 10. Library- In the reference section of the library one will find financial data and
statistics pertaining to the customer segments. Market Research Statistics- There are
many websites online that offer statistics for small business market research. Statistics
such as Demographics can help you get a sense of population characteristics of your
location. Trade associations- There is a trade association for just about any industry.
There is usually a fee to join but it is an opportunity to network with other
professionals in the industry. One will also have access to market research which they
conducted.  Finding the niche It is important to find a target segment which
identifies the benefits a person offers significantly more than alternatives If the
segment is distinct and its size economically viable, he may have discovered a
profitable niche Finding one’s Niche is also important because he cannot afford to be
everything to everyone. A profitable product / service must stand out and find quick
acceptance amongst happy & satisfied customers
11. 11. Defining ones Niche What is the person Selling? Who are his Target Customers?
What benefits is the Target Customer Seeking? How the Product or Service is
different from one’s Competitor's Offerings? How is a person’s Product / Service
Superior v/s the Competition for the Target Segment? Which benefits / differentiators
make one’s product unique?  Deciding the Location of Business Location of the
business is the most important factor influencing its success or failure. It is a long-
term decision which should take into consideration not only the present requirements
of the organization but also its future expansion plans. Choosing the right location for
a startup will depend on the business one intends to run. If a person is starting a
restaurant or a retail business, he should choose a location that is accessible and
familiar to everyone. In case it is a manufacturing business, one can opt for a location
that will save up the cost for transportation of goods. Location of a plant has a bearing
on the layout of machinery and equipment as well as on the process of production.
One should keep in mind the convenience of the employees since it will help save
time which is a critical factor while managing a startup. The choice of location
depends on several
12. 12. important factors. Selecting a location for setting up an enterprise is dependent on
the following factors: Availability of raw materials The availability of good quality
raw materials in required quantity at close hand is very crucial for the success of a
new enterprise. The region must have abundant supplies of atleast the chief raw
material required by the firm. Such a location helps to ensure continuity of production
and reduces the transport costs. Few raw materials such as minerals, perishable food,
cotton etc. play a vital role in influencing the location of the plant. For e.g, paper
manufacturing plants require a regular supply of a large quantity of pure water and
are, therefore, generally located near river banks. Supply of Labour The availability of
the required grade of labour i.e. skilled, semi-skilled or unskilled is an important
factor influencing the location of the industry. Besides, the cost and productivity of
labour, attitude of trade unions and the state of industrial relations in a particular
 region are also important. This also explains concentration of certain industries in
certain states. Proximity to the Product Market An industry should ideally be located
close to the market for the product produced by the firm. This on one hand reduces
the cost of transporting the finished product to the market. On the other hand it
ensures maximization of profits by selling the goods at a competitive
13. 13. price. Generally, in case of the industries having national and international
markets, plants are spread over wide geographical areas to have close proximity to all
markets. In case of regional demand, plants are located near to the immediate market.
Availability of transport facilities A factory requires transport facilities both for
getting its raw materials as well as for reaching its finished products to the market.
Hence, location is to be chosen in such a way that its total transport cost is the lowest.
Of the two elements of transport cost, which one will have a decisive influence on the
decision of location will depend on the characteristics of the raw materials and the
nature of the manufacturing process. If the factory requires bulky commodities like
iron ore, limestone, etc., it should be situated nearer to the source of these raw
material. But, if the manufacturing process is such that the raw materials loose a
substantial part of its weight like in the case of the chemical and pharmaceutical
products, the factory should be located nearer to the market. Therefore, a region
which provides adequate transport facilities attracts industrialists. Supply of Power
With increased mechanisation, a location which ensures a regular and adequate supply
of power and fuel for the business has become an indispensable requirement.
14. 14. Climatic factors Certain types of industries require a particular type of climate.
E.g. flour mills need a dry climate while cotton mills require a humid climate. Natural
factors are particularly important in extractive industries like plantations, fishing,
agriculture, etc. Climate influences even the capacity to work on the part of the
workers. But, the technological advancements like, artificial humidification and air
conditioning have reduced the importance of climate as a factor. Government
Regulations and Policies Central Government and the State Governments have made
several policy announcements from time to time in order to encourage development of
industries. Various incentive schemes have been provided to attract investment
especially in backward areas. All this has become an important factor while selecting
a suitable location. Law and Order Every entrepreneur is concerned about law and
order as well as the political stability of the area around which he wants to set up his
industry. It is only natural for every entrepreneur to locate his unit in those areas
which are not subject to riots and political disturbances. No industrialist can ignore
such national and strategic considerations while selecting the location of the industry.
15. 15. Existence of complementary and competitive industries Such a location on one
hand provides backward and forward linkages for the industries and on the other hand
it provides a competitive environment for them. It increases the supply of the required
raw materials and enhances the demand for the goods produced. It improves the
labour market by attracting both skilled and unskilled manpower. It also improves the
banking, credit and communication facilities in the area. It brings into existence
various commercial services like warehousing, packing, forwarding, grading,
appraising, advertising, etc which helps in the growth and expansion of all the
business firms in the particular area. Price of Land It is an important factor while
choosing the exact site for locating the business because high price of land may wipe
out the advantages provided by the availability of the other factors. If it is proposed to
lease out the land then the question of rent and taxes must be considered as such
charges will add to the working expenses. Also, the plot of land being considered
must be big enough to meet the needs of future expansion of the business.
16. 16.  Deciding the legal structure / form of organization There are several forms of
business organizations that one may consider for his company. Understand forms of
Legal Structure and the factors one should consider while deciding on the form of
business organisation Nature of business: - The organisation of one’s business will
depend on the nature of his business. Scale of operations: - Volume of business and
size of market area are key considerations. Large market operations are better catered
to by public or private companies. Small operations are set up as partnerships or
proprietorships. Degree of Control: - If one wants direct control, then proprietorship is
a good option. Incorporation of a business involves separation of ownership and
management. Amount of Capital: - As need for resources grow, then for example, a
partnership may be converted into a company. Volume of Risks & Liabilities: -
Willingness of owners to bear risk. A sole proprietorship bears high risk, whilst public
or private companies have lower risks for owners, as there is separation of the legal
entity and ownership.
17. 17. Comparative tax liability- An organisation’s tax liability will depend on the form
of business organisation one choose. Forms of Business Organisations in India
Different forms of business organizations are as follows after having considered the
necessary factors for a business: 1) Sole Proprietorship This is the oldest and most
common form of business. Main features of this form are: Ease of formation (no
elaborate legal formalities) Capital to be provided by owner himself Complete control
No separation of ownership Unlimited liability Lack of continuity- the business
ceases to exist if the owner dies Difficulty in raising capital Advantages: Ease of
formation Incentives to owner to do well
18. 18. Quick decisions and flexibility Secrecy of business Disadvantages: Limited
capital Limited managerial ability Limited life Unlimited liability Suitable for:
Businesses involving moderate risk Small financial resources and small capital
requirements. 2) Partnership Firm A partnership can be defined as a relation between
two or more persons who have agreed to share the profits of a business carried on by
all of them or any of them acting for all. Main features of this form are: Easy to form
(no elaborate legal activities). Registration not essential. Minimum partners – 2,
Maximum partners – 10 (in banking), 20 for all other businesses. No separation of
legal existence. Ownership of property carries right of management for each partner
19. 19. Liability of partners is unlimited Restrictions on the transfer of interest Limited
span of life (must be dissolved if one partner is unable to continue). Difficult to raise a
large amount of capital Governed by Indian Partnership Act, 1932 Advantages: Ease
of formation Greater capital and credit resources Better judgment and more
managerial activities Disadvantages: Absence of ultimate authority Liability for
actions of other partners Limited life Unlimited liability Suitable for: Medium size
businesses, involving limited capital. 3) Limited Liability Partnership (LLP) The
Limited Liability Partnership (LLP) is viewed as an alternative corporate business
vehicle that provides the benefits of limited liability but allows its members the
flexibility
20. 20. of organizing their internal structure as a partnership based on a mutually arrived
agreement. The LLP form would enable entrepreneurs, professionals and enterprises
providing services of any kind or engaged in scientific and technical disciplines, to
form commercially efficient vehicles suited to their requirements. Owing to flexibility
in its structure and operation, the LLP would also be a suitable vehicle for small
enterprises and for investment by venture capital. It is governed by the provisions of
the Limited Liability Partnership Act, 2008. Salient features: Separate legal entity
Perpetual succession- entity survives if the partners die (or unable to continue)
 Provides flexibility in devising partnership agreement. The duties and obligations of
Designated Partners shall be as provided in the Limited Liabilities Partnership Act,
2008 Partners not accountable for actions of other partners. Liability is limited to their
contribution in the LLP. Share transfer restricted At least 2 partners needed to form a
LLP, with a maximum of 50 Obligation to maintain annual accounts Central
government has investigative powers A firm, private company or an unlisted public
company is allowed to convert into a LLP Provisions of The Companies Act, 1956
may also be included Indian Partnership Act, 1932 shall not be applicable.
21. 21. 4) Private Limited Company A private limited company is defined as a voluntary
association of not less than two and not more than 50 members, whose liability is
limited, the transfer of whose shares is limited and not allowed to invite the general
public to subscribe to its shares or debentures. Main features are: Independent legal
existence Less cumbersome to organise and operate as it has been exempted from
many rules and regulations a public limited company is subjected to. Some of them
are: o Need not file a prospectus o Need not obtain a Certificate for Commencement
of business o Need not hold statutory general meeting nor need it file the statutory
report o Restrictions placed on the directors of the public limited company do not
apply to its directors. Liability of its members is limited Shares allotted are not freely
transferable between members Enjoys continuity of existence Need a registered office
and name Requires signed Memorandum of Association and Articles of Association.
Advantages: Continuity of existence
22. 22. Limited liability Less legal restriction Disadvantages: Shares not freely
transferable Not allowed to invite public to subscribe to shares Suitable for: people
seeking to take advantage of limited liability, but at the same time desire to keep
control over the business within a limited circle and maintain the privacy of their
business. 5) Public Limited Company A public limited company is a voluntary
association of members which is incorporated and, therefore has a separate legal
existence and the liability of whose members is limited. Main features are: Separate
legal existence Governed by The Indian Companies Act, 1956 Minimum of 7
members, no upper limit Collects capital via shares
23. 23. Shares are freely transferable, without any prior notice to the company Liability of
a member of a company is limited to the face value of the shares he/she owns.
Shareholders do not own management rights. This ensures separation of ownership
and management. Power of decision making given to Board of Directors. Existence of
company not threatened by insolvency, death of its shareholders. Advantages:
Continuity of existence Larger amount of capital Unity of direction Efficient
management Limited liability Disadvantage: May be subject to higher regulation than
other business forms  Creating a Business Plan Every new venture should have a
business plan. A business plan is the formal written expression of the entrepreneurial
vision, describing the strategy and operations of the
24. 24. proposed venture. The business plan also goes by other names, depending on its
intended audience. Presented to a banker, it may be called a "loan proposal." A
venture capital group might call it the "venture plan" or "investment prospectus." The
business plan should include the following points – Description Goals Marketing Plan
Financial Plan Management Plan The advantages of writing a business plan far
outweigh the costs. The purpose of the plan is to enable the top executives of the firm
to think about their business in a comprehensive way, to communicate their objectives
to individuals who may have a stake in the firm's future, to have a basis for making
decisions, and to facilitate the planning process. Entrepreneurs should undertake the
task of preparing the business plan personally. Although outsiders - consultants,
 accountants, and lawyers - should be tapped for their advice and expertise, the
promoter or the initial top management team should be responsible for the writing.
Personally drafting the plan will enable the entrepreneurs to think through all aspects
of the proposed business and ensure that they are familiar with all the details, for they
will have to make decisions about the new venture and be responsible for those
decisions. Moreover, investors expect the founders to be involved in
25. 25. and knowledgeable about the proposed enterprise. The Benefits of Business
Planning The business plan can personally benefit the entrepreneurial team. Founding
a new business can be enormously fulfilling and exhilarating, but it is also an anxiety-
ridden and tense experience. Usually a great deal of money is at stake, and the
consequences of poor decisions can affect many people for a long time. In developing
and writing a business plan, the entrepreneurial team reduces these anxieties and
tensions by confronting them in advance. By projecting the risks of the new venture
into the future, the team comes to grips with potential negative outcomes and the
possibility of failure. The knowledge that comes from this experience can reduce the
fear of being taken by surprise by problems that could have been foreseen and
provided for at the very outset.  Understanding the Startup Costs Depending on the
business, the startup cost will vary. The startup cost would majorly comprise of Sales
costs: Product inventory, raw materials, manufacturing equipment Professional fees:
Setting up legal structure of your organisation, trademarks, copyrights, patents,
drafting partnership
26. 26. Administrative costs: Various types of business insurance, office supplies,
licenses and permits, express shipping and postage, product packaging, parking, rent,
utilities Technology costs: Computer hardware, computer software, printers, cell
phones, website development and maintenance, high-speed internet access, security
measures Wages and benefits: Employee salaries, workers compensation, payroll
taxes, benefits Sales and marketing costs: Marketing materials, advertising, trade
association membership fees, event or trade show attendance or sponsorship It is
important to decide whether each cost is essential or optional. Depending on this, the
decision to incur this cost is taken.  Financing of Business Finance is required by a
business enterprise at almost every stage of the business life cycle. MSMEs often find
it difficult to arrange adequate finance for their operations as well as for expansion
and growth. These enterprises can raise finance by various methods. Below are some
of the ways to raise long term and short term capital. Sources of Long Term Capital
Reinvestment of Profits Profitable companies do not generally distribute the whole
amount of profits as dividend but, transfer certain proportion to reserves. This may be
regarded as reinvestment of profits or ploughing back of profits. As these retained
profits actually belong to the
27. 27. shareholders of the company, these are treated as a part of ownership capital.
Retention of profits is a sort of self financing of business. The reserves built up over
the years by ploughing back of profits may be utilised by the company for the
following purposes: Expansion of the undertaking Replacement of obsolete assets and
modernisation Meeting permanent or special working capital requirement Redemption
of old debts The benefits of this source of finance to the company are: It reduces the
dependence on external sources of finance It increases the credit worthiness of the
company It enables the company to withstand difficult situations It enables the
company to adopt a stable dividend policy It increases the debt raising capacity of the
company Loans from Commercial Banks / Financial Institutions Medium and long
term loans required for setting up projects can be obtained from banks and or financial
instituitions for all viable projects. Similarly, funds required for modernisation and
 renovation schemes can be borrowed from them. Such loans are generally secured by
mortgage of the Company's properties, pledge of shares, personal guarantees etc.
28. 28. Public Deposits Companies often raise funds by inviting their shareholders,
employees and the general public to deposit their savings with the company. The
Companies Act permits such deposits to be received for a period up to 3 years at a
time. Public deposits can be raised by companies to meet their medium-term as well
as short-term financial needs. The increasing popularity of public deposits is due to:
The rate of interest the companies have to pay on them is attractive. These are easier
methods of mobilising funds than banks, especially during periods of credit squeeze
They are unsecured Issue of Shares It is the most important method. The liability of
shareholders is limited to the face value of shares, and they are also easily
transferable. A private company cannot invite the general public to subscribe for its
share capital and its shares are also not freely transferable. But for public limited
companies there are no such restrictions. There are two types of shares :- Equity
shares: the rate of dividend on these shares depends on the profits available and the
discretion of directors. Hence, there is no fixed burden on the company. Each share
carries one vote.
29. 29. Preference shares: dividend is payable on these shares at a fixed rate and is
payable only if there are profits. Hence, there is no compulsory burden on the
company's finances. Such shares do not give voting rights. Issue of Debentures
Companies generally have powers to borrow and raise loans by issuing debentures.
The rate of interest payable on debentures is fixed at the time of issue and the
debentures have a charge on the property or assets of the company, which provide the
necessary security. The company is liable to pay interest even if there are no profits.
Debentures are mostly issued to finance the long-term requirements of business and
do not carry any voting rights. Sources of Short Term Capital Trade Credit
Companies buy raw materials, components, stores and spare parts on credit from
different suppliers. Generally suppliers grant credit for a period of 3 to 6 months, and
thus provide short-term finance to the company. Availability of this type of finance is
connected with the volume of business. When the production and sale of goods
increase, there is automatic increase in the volume of purchases, and more of trade
credit is available.
30. 30. Factoring The amounts due to a company from customers, on account of credit
sale generally remain outstanding during the period of credit allowed i.e. till the dues
are collected from the debtors. The book debts may be assigned to a bank and cash
realised in advance from the bank. Thus, the responsibility of collecting the debtors'
balance is taken over by the bank on payment of specified charges by the company.
book debts may be assigned by the seller to a FACTOR, who who will provide about
80 - 85 % or more of the value of the book debt, as advance to the seller. The
FACTOR will also undertake the task of collecting the amount representing the debt
(credit sales) from the debtors. Factoring is an important avenue of raising short funds
against the receivables for the MSME units. The charges payable to the FACTOR is
treated as cost of raising the funds. Discounting Bills of Exchange This method is
widely used by companies for raising short-term finance. When the goods are sold on
credit, bills of exchange are generally drawn for acceptance by the buyers of goods.
Instead of holding the bills till the date of maturity, companies can discount them with
the commercial banks on payment of a charge known as bank discount. The rate of
discount to be charged by banks is prescribed by the Reserve Bank of India from time
to time. The amount of discount is deducted from the value of bills at the time of
discounting. The cost of raising finance by this method is the discount charged by the
31. 31. bank which discounted the bill. Bank Overdraft and Cash Credit It is a common
method adopted by companies for meeting short-term financial requirements. Cash
credit refers to an arrangement whereby the commercial bank allows money to be
drawn as advances from time to time within a specified limit. This facility is granted
against the security of goods in stock, or promissory notes bearing a second signature,
or other marketable instruments like Government bonds. Overdraft is a temporary
arrangement with the bank which permits the company to overdraw from its current
deposit account with the bank up to a certain limit. The overdraft facility is also
granted against securities. The rate of interest charged on cash credit and overdraft is
relatively much higher than the rate of interest on bank deposits. Rating Parameters
used by the Lenders before financing The lenders (Banks/ Venture Capitalists, etc.)
carefully assess one’s credit worthiness and assign ratings by analyzing his business
information with respect to various parameters. The main parameters that are
generally used to rate business entities are provided below 1) Management Some of
the key parameters considered include:
32. 32. Background Industry experience and knowledge Past conduct of borrower with
banks Qualifications Background and Capability of the Promotors Organisation's
Preparedness for meeting Challenges Combined net worth of promoters Associate
concerns 2) Financial Some of the key parameters considered include: Current ratio
Debt equity ratio Average turnover Net profits Income growth Net cash accruals
Financial Projects and Debt Servicing Capabilities Provision of security for proposed
assistance Quality of collateral security
33. 33. 3) Operational Some of the key parameters considered include: Proximity to
branch Location of unit Borrowers proximity to market Type of technology
Equipment supplier Quality certifications 4) Industry Some of the key parameters
considered include: Nature of industry – cyclical/ seasonal Eligibility under assistance
scheme, if any Competitive advantage Branding of product Number of applications of
product/ machinery 5) Past Loan Performance Some of the key parameters considered
include: Re-payment history Missed installments Revision in interest rates/ period
34. 34. Prepayments Defaults Month of default Amount of default Reason of default, if
provided Security re-sale value Capital loss to bank  Hiring Human Resources
Human Resource is also an important determinant of business location and
functioning. Factors such as the availability of labour of different skill levels,
productivity and cost of labour, flexibility of labour, attitude and behaviour patterns of
labour, nature of trade unionism etc. are important to a business. The whole process
begins with the task of hiring manpower for starting a business for filling the present
and prospective vacancies in the company. The objective of hiring manpower is to
procure the right number of employees, with the required qualifications to do the right
type of jobs. The hiring process involves four main steps i.e. manpower planning,
recruitment, selection and placement. Each of these steps and sub-steps help the
employer obtain more and more information about the candidates and thus help in
obtaining the best possible manpower for the firm. This function must be performed
carefully because any error committed at the time of hiring manpower may prove to
be very costly for the firm both in the short as
35. 35. well as long term. These costs will be in the form of waste of time, money and
energy in repeated hiring process. The training costs incurred on them will go waste.
The efficiency of the organisation will go down due to hiring of unsuitable candidates.
At the same time the rate of absenteeism and labour turnover will be higher. Hence,
an effective hiring procedure includes the answers to the following questions :- 
What are the requirements of the jobs to be filled?  What kind of persons are
 needed?  How many persons are needed?  What sources of recruitment may be
utilised?  What steps should be taken to select the right type of candidates for
employment?  Fulfilling the legal requirements pertaining to the Business Once a
person has validated his idea with the necessary steps, it is time to delve into the
legalities and paperwork involved in launching the business. The main legal steps that
is taken is as follows: Company Incorporation – Initial Steps: • One should file the
desired company name with the Registrar of Companies and make sure it is available
for use.
36. 36. • Then the person has to submit the main objectives of the company to the
Registrar of Companies (ROC) for scrutiny. He will be informed of approval or any
objections within 10 days. • Then he has to obtain a Director Identification Number
(DIN) online from the Ministry of Corporate Affairs portal. This process calls for
submitting attested support documents as proof of identity and address. • He has to
then obtain a Digital Signature Certificate – a requirement for all those who have to
sign ROC forms and related documents. The certificate can be obtained from one of
the private agencies authorized by MCA 21. Stamping of Documents: • One should
pay stamp duties and submit various incorporation forms and documents, including
unsigned copies of the Memorandum and Articles of Association for stamping. -
Memorandum of Association – This lists the main, ancillary, subsidiary and other
parts of the company. It also lists the authorized share capital of the company and the
names of theauthorizeddirectors. - Article of Association – describes the rules and
procedures for the routine conduct of thecompany. - These documents have to be
executed by the promoters in their own hand and in the presence of witnesses.
37. 37. Certificate of Incorporation: • One has to submit digital and physical copies of the
following documents to the ROC in order to obtain the Certificate of Incorporation:
Forms e-form 1 (stating that all requirements of the incorporation process have been
completed), e-form 18 (informing the ROC of the location of the registered office of
the company) and e-form 32 (stating the appointment of proposed directors) have to
be filed electronically by him. Signed and stamped forms of the Memorandum and
Articles of Association On initial consent of directors Original approval of name letter
Stamped Power of Attorney documents Tax-related Procedures • Permanent Account
Number (PAN) – A PAN card can be obtained by filing an application with the
Income Tax department using Form 49A along with supporting documents. In recent
years, the government has tried to simplify this process through service centres such
as UTI Investor Services Ltd or TIN Facilitation Centers. • Tax Account Number
(TAN) – This is required for anyone responsible for deducting or collecting tax. Use
Form 49B for this and submit it at any TIN Facilitation Centre authorized to receive
e-TDS returns
38. 38. • There is a mandatory registration process for Value-Added Tax (VAT) and other
tax requirements such as professional tax and service tax Labour Law Procedures •
Registration with the Office of Inspector, Shops, and Establishment Act: The steps
involved in this may vary by state. • Registration with the Employees’ Provident Fund
Organization: This is required only if the number of employees is 20 or more. •
Registration with the Employees’ State Insurance Corporation – A social security
scheme to provide protection to workers in the organized sector and their dependents
in contingencies such as sickness, maternity, death, disablement or occupational
disease The steps and procedures described above may vary depending on the state
and type of business. One should tackle these in a proactive and systematic manner to
ensure that he does not get caught in a legal tangle that will delay the launch of his
business or hamper its operation.  Officially starting the venture Now after
 completing all the basic formalities along with the legal requirements, the Business
would be able to start its operations in full flow. The workers, employees and
39. 39. the managerial staff being recruited for the Business will be assigned various job
roles as per their abilities and skill. In the case of any manufacturing or trading
concern, orders for the raw materials of the Business would be given to the suppliers
and vendors after negotiating with them regarding the price of the raw material, the
payment terms and the credit period to be offered. Then as the raw materials would
reach the organization, it would start its production process whereby it will try to
minimize the cost of production by making optimum use of its available resources
ensuring very little or no wastage. Then as the products are ready to be sold, the firm
would be undertaking marketing activities in order to attract its customers and hoping
to sell its product successfully. In the case of service oriented organizations, they
would look to make a name for themselves in the market as a credible and trustworthy
organization by providing good customer services which would enhance their
reputation leading to increase in their customer base.  Periodic Review / Follow Up
Now, after starting the business operations, the owner/owners of the organization
should continuously monitor the performance of their Business. They should see
whether their Business is performing well as expected by them . They should find out
whether their product is getting good response in the market which will in turn
translate to more sales. If not, they should try to analyze the reason for the same. They
should look to address those issues at the earliest. Even if the business is not making
profits in the beginning, it should be at least ensured that the business is not making
huge losses which may even
40. 40. affect the survival of the organization. The organization should simply try to
deliver as per the opportunities identified within the market by following the best
practices in the organization which would enable the Business to sustain itself in the
market. Conclusion There are few things more satisfying and rewarding than
launching and running a business, but before diving in, a person should be sure to do
his homework. Making a business work is not an easy task, but proper planning along
with following the above steps would definitely increase its chances of success.
41. 41. SUBMITTED BY SREENIVAS SANKAR IYER