UNIT-3 SYLLABUS

Project formulation, Analysis of Market Demand, Demand

Supply Gap, Financial and Profitability Analysis and
Technical Analysis, Project Financing in India.
SHORT ANSWERS
Necessary for incorporating profitability analysis in
formulation of project:
The necessaries for incorporating profitability analysis in
project formulation are,
(1) Market potential.
(2) Capital cost.
(3) Sources of finance.
(4) Financial aspects.
(5) Economic and social variables.
(6) Utilities.
(7) Cost-benefit analysis.
Project formulation:
Project formulation is defined as taking a first look carefully
and critically at a project idea by an entrepreneur to build up
an all round beneficial to project after carefully weighing its
various components.
Technical analysis in project management:
Technical analysis is widely used by engineering to examine
and formulate the Project. The main use of technical analysis
is applied by technical expert, and financial analyst while
participating project appraisal. The various aspects to be
examined will vary from project to project.Following are the
most commonly used aspect for technical analysis
(1) Manufacturing process/technology.
(2) Technical arrangements.
(3) Material inputs and utilities.
(i) Material inputs.
(ii) Utility.
(4) Product mix.
(5) Plant capacity,
(i) Feasible normal capacity.
(ii) Nominal maximum capacity!
(6) Location and site.
(7) Machineries and equipments.
(8) Structure and civil works.
(i) Site preparation and development.
(ii) Buildings and structures.
(iii)Outdoor works.
(9) Environmental aspects.
(10) Project charts and layout.
Project report:
A project report is a record of any sort of project. It cover all
aspects of business from analyzing the market, confirming
availability of various necessities such as manufacturing plant,
detail project report, profile, business plan, industry trend
market research etc.
Feasibility analysis of a project:
Feasibility analysis (FA, also called feasibility study) is used
to assess the strengths and weaknesses of a proposed project
and present directions of activities which will improve a
project and achieve desired results. The nature and
components of feasibility studies depend primarily on the
areas in which analyzed projects are implemented.Feasibility
studies are useful to businesses in many ways. Some of the
reasons organizations conduct feasibility studies are as
follows:
(1) Not every project is durable.
(2) Not every project should be taken up. This will engage
otherwise useful resources and block their use on other tasks.
(3) Not every project makes effective use of the resources of
an organization.
Five areas of project feasibility
(1) Technical Feasibility : Assessment is centered on the
technical resources available to the organization. It helps
organizations asess if the technical resources meet capacity
and whether the technical team is capable of converting the
ideas into working systems. Technical feasibility also involves
evaluation of the hardware and the software requirements of
the proposed system.
(2) Economic Feasibility: It helps organizations assess the
viability, cost, and benefits associated with projects before
financial resources are allocated. It also serves as an
independent project assessment, and enhances project
credibility as a result. It helps decision-makers determine the
positive economic benefits to the organization that the
proposed system will provide, and helps quantify them. This
assessment typically involves a cost/ benefits analysis of the
project.
(3) Legal Feasibility: Investigates if the proposed system
conflicts with legal requirements like data protection acts or
social media laws.
(4) Operational Feasibility: This involves undertaking a study
to analyze and determine whether your business needs can be
fulfilled by using the proposed solution. It also measures how
well the proposed system solves problems and takes
advantage of the opportunities identified during scope
definition.
(5) Scheduling Feasibility: It is the most important for project
success. A project will fail if not completed on time. In
scheduling feasibility, we estimate how much time the system
will take to complete, and with our technical skills need to
estimate the period to complete the project using various
methods of estimation.
Simple forecasting techniques for product:
Simple forecasting techniques of a product are,
(1) Substitute Approach: It is based on the assumption that a
new product will be analyzed as a substitute of an existing
product. In this method, the demand of substitute product is
analyzed and on the basis of such analysis (or Survey)
forecasts are made for the new product to be introduced in the
Market,
(2) Evolutionary Approach : This method of sales forecasting
is based on the assumption that the new product will be
considered an improvement over existing products. It is
further assumed that the new product can follow some life-
cycles as of existing products. The sales of existing product
are analyzed and efforts are made to forecast the sales of the
new product of the enterprise on this basis.
(3) Sales Experience Approach (or) Market Test Method: In
this method, product is offered for sale in a sample market for
a fixed period. The results of the sales of the product are
considered to be the base of forecasting the demand for the
new product. The results of sales of the product in these
segments are collected and deeply analyzed.
Marketing analysis:
A Marketing Plan should concisely answer the questions.
What are the industry and market trends for my product? Who
are my customers? Who is my competition? What can I
charge? and How will I promote my product throughout the
year?
Articulating well-researched answers to these questions is one
of the most important steps you can take toward your success,
Market and demand analysis are carried out by the project
manager in the process of evaluating a project idea. There are
six steps in the market and demand analysis,
(1) Situational analysis and objectives specification,
(2) Collection of data.
(3) Market survey.
(4) Market description.
(5) Demand forecasting.
(6) Market planning.
The market and demand analysis helps the project manager to
understand how the firm’s abilities can be synchronized with
market requirements.
Market analysis studies market needs and consumer
preferences for a given project idea and demand analysis aims
at calculating the aggregated demand for a particular product
or service.
Objectives of analysis of market:
Objectives of market analysis are,
(1) To identify the depth and breadth of demand.
(2) To determine the flow of stock to be maintained in the
market.
(3) To determine the number, size and types of competitors in
the market.
(4) To identify the customers status, buying capacity,
preferences, etc.
Analysis of demand:
Without a reasonable demand, no one will build a business.
Initially, a business building or development plan is triggered
by the existence of demand. Demand can be interpreted as
“market” in a narrow meaning. Demand can be defined as a
quantity of goods bought at a certain price.
Gap analysis:
Gap analysis involves the comparison of actual performance
with potential or desired performance. If an organization does
not make the best use of current resources, or forgoes
investment in capital or technology, it may produce or
perform below its potential. This concept is similar to an
economy’s being below the production possibilities frontier.
Financial analysis:
Financial analysis statements is the process of identifying the
financial strengths and weaknesses of the firm by properly
establishing relationship between the items of the Balance
Sheet and Income Statement.
Objectives of financial analysis:
The important objectives of financial analysis are given
below,
(1) To measure the enterprise’s short-term solvency.
(2) To measure the enterprise’s long-term solvency.
(3) To measure the enterprise’ operating efficiency and
profitability.
(4) To compare intra-firm position, inter-firm position and
pattern position within industry.
Profitability analysis:
An important part of the planning process is to define and lay
down rules and techniques to form what is called profitability
analysis. It is essential for Management to define what is
meant by a profitable project or investment.
Ideal measures for profitability analysis:
The ideal measures of profitability should have the following
characteristics,
(1) It must be suitable for comparing and ranking the
profitability of available investment alternatives.
(2) It should account for the time value of money.
(3) It should provide a means for telling whether profitability
exceeds some minimum cut-off (threshold) requirement of the
organization.
(4) It should be able to include probability estimates to
generate expected values.
(5) If possible, it should reflect other factors such as corporate
goals, decision makers risk preferences and corporate asset
position.
Different sources of project finance in India:
There are different sources available for financing. They are,
(1) Permanent/Fixed/Long-term Finance : Firms must raise
permanent working finance, so that it can be useful for a long
period of time. Permanent or long- term working capital can
be raised from five sources.
They are,
(i)Shares. (iv)Ploughing Back of Profits
(ii) Debentures. (v)Financial Institution Loans
(iii) Public deposit.
(2) Financing of Temporary / Variable or Short-term Finance
A company can raise short-term working capital from the
important sources of finance such as
(i) Commercial banks.
(ii) Indigenous bankers.
(iii) Trade credit.
(iv) Installment credit.
LONG ANSWERS
PROJECT FORMULATION
Project formulation and different steps involved in it:
Project formulation is defined as taking a first look carefully
and critically at a project idea by an entrepreneur to build up
an all round beneficial to project after carefully weighing its
various components.
If the initiator wishes to proceed, he or she must identify a
fund source and confirm the source with the business manager
of facilities finance and administration. When confirmed, the
project is placed in the project management queue for an
assignment to the next available project manager.
The various stages of project formulation are,
(1) Feasibility Analysis
(i) First stage in project formulation.
(ii) Examination to see whether to-go in for a detailed
investment proposal or not.
(iii) Screening for internal and external constraints.
Conclusion could be,
(i) The project idea seems to be feasible.
(ii) The project idea is not a feasible one.
(ii) Unable to arrive at a conclusion for want of an adequate
data.
(2)Techno-Economic Analysis
(i) Screens the idea to Estimate of potential of the demand for
goods/services.
(ii) Choice of optimal technology.
(iii) This analysis gives the project a platform for preparation
of detailed project design.
(3)Project Design and Network Analysis
(i) It is the heart of the project entity.
(ii) It defines the sequence of events of the project.
(iii) Time is allocated for each activity.
(iv) It is presented in a form of a network drawing.
(v) It helps to identify project inputs, finance needed and cost-
benefit profile of the project.
(4) Input Analysis
(i) Its asses the input requirements during the construction and
Operation of the project.
(ii) It defines the inputs required for each activity.
(iii) Inputs include materials, human resources.
(iv) It evaluates the feasibility of the project from the point of
view of the availability of necessary resources.
(v) This aids in assessing the project cost.
(5) Financial Analysis
(i) It involves estimating the project costs, operating cost and
fund requirements.
(ii) It helps in comparing various project proposals on a
common scale.
(iii) Analytical tools used are discounted cash flow, cost
volume profit relationship and ratio analysis.
(iv) Investment decisions involve commitment of resources in
future, with a long-time horizon.
(v) It needs caution and foresight in developing financial
forecasts.
(6) Cost- Benefit Analysis :
(i) The overall worth of a project is considered.
(ii) The project design forms the basis of evaluation.
(iii) It considers costs that all entities have to bear and the
benefit connected to it.
(7) Pre-investment Analysis
(i) The results obtained in previous stages are consolidated to
arrive at clear conclusions.
(ii) Helps the project-sponsoring body,the project
implementing body the external consulting agencies to
accept/reject the proposal.
The results of the project formulation process are
documented in a project report. This report is used to
convince investors that the project will be profitable and
generate enough returns to repay any borrowings.The project
formulation process is usually a collaborative effort between a
team of experts. Each team member should be familiar with
the project's strategy, objectives, and other aspects.
Project report and it’s contents:
A project report is a record of any sort of Project. It cover
all aspects of business from analyzing the market ,confirming
availability of various necessities such as manufacturing plant,
business plan, industry trend, market research etc…
A project report includes information about the project's
goals, feasibility, and financial requirement.A project report
includes financial projections such as capital investment
requirements, operating costs, revenue projections, and
profitability analysis.A project report includes information
about potential risks that could affect the project's completion
and how to recover from them.A project report can help
entrepreneurs obtain loans from banks or financial
institutions.When finalized, a project report should be
submitted to relevant stakeholders, including investors,
regulatory authorities, and project team members. The report
should be presented in a clear and professional manner.
A good project report must have the following information,
(1)General Information: A project must contain the history
and profile of the products and its details.
(2)Promoter: An entrepreneur's educational qualification,
work experience and any related experience should be
enclosed in the project.
(3)Location : The place where the project will be carried on
i.e., the correct location of the project, whether the place is
taken on lease or freehold basis and also the locational
benefits must be included in the project.
(4) Land and Building : The information regarding the area of
land, construction site, cost of construction with detailed plan,
budget along with the plant layout must be provided in the
project report.
(5) Plant and Machinery : The cost of acquiring machinery,
capacity, supplier and the cost of additional assets required
must be enclosed in a project report.
(6)Production Process : A project report should disclose all the
details of the process of production, process chart, technical
knoweldge,how technology alternatives available with the
production program.
(7) Utilities : Utilities in a project report contains cost
estimation of water, power, steam,compressed air
requirements etc,
(8) Transport and Communication : A project report must
enlist the cost of mode of transport and communication to be
used for a project.
(9) Raw Materials : A project report must include the details
of quantity and quality of raw materials required, types of.
raw materials, their cost and other alternatives associated with
raw materials.
(10) Manpower : A project report must be inclusive of the
detailed information of the skilled and semi-skilled human
power requirement, sources of manpower supply, cost of
hiring them and the cost of training given to the manpower.
(11) Products : An exclusive details of the product mix,
product's substitutes, the network and the distribution channel,
competition and their capabilities, input ratio must be
included in the project report.
(12) Market: A list of market details such as the consumer list,
types of market i.e., local,National or international, sales
promotion practices and devices intended market research
must be included in the project report.
(13) Working Capital Requirement : the extent of working
capital required, sources of Working Capital, the credit facility
offered and available must be enclosed in a project report.
(14) Funds : Division of project costs in terms of cost of
machinery, land and building, miscellaneous assets and money
(funds).required to meet the working capital requirements of
the project.
(15) Others :
(i) Cost of production and returns in terms of profits of first
ten years.
(ii) Break-even analysis of the project.
(iii) Schedule of implementation of the project.
Detailed project report for any product of your choice by
highlighting marketing and technical analysis:
INTRODUCTION TO SSI
Cottage & small scale industry have flourished in India since
the early times. Even today they are a principal source of
income & employment and their product find ready market in
the country as well as abroad.
Small scale industry in India roughly provides employment to
about 4.4 million people and constitutes a large position of the
country’s exports. The govt of India is well aware of the
importance of small scale industry in our economy and
growth of small scale industry i.e., establishment of various
SSIs. All India Boards that give technical, financial and-other
relevant guidance to small scale industries, other benéfits &
concessions.
INTRODUCTION TO THE PRODUCT
Today Jeans are become popular product in the casual
garment. The demand for Jeans is increasing day by day with
the increase in population, with the adoption of western
culture & industrial growth the demand for Jeans is increasing
like anything. Jeans have left behind the tailor made cloth, It
is been used all classes of people. Even in villages Jeans have
become popular and people have started using it.
Jeans get a wider market in India. It has become very popular
due to entry of the multinational companies in India and huge
advertisement campaign. There is a large market in Gujarat as
they Jeans factory has not developed in Gujarat as compared
to Maharashtra & U.P. even in Mumbai. So, JRV Jeans Mill
has great opportunities to expand the market and can get
heaviest rush of fashionable customers.
JUSTIFICATION OF LOCATION
Location of any industry plays a dominant role in the success
or failure of any company. It has been rightly said that the
mistake of selecting wrong site cannot be corrected without
heavy losses. Selecting a proper site for establishing SSI thus
increase, as finance is a major constraint for a SSI unit.
The proposed location for the establishment of manufacturing
facilities for my unit is GIDC, metoda, Kalavad Road, Rajkot.
Govt has declared this area as an industrial area in past. Due
to Govt. incentives and initiatives, this has developed very
well with easy availability of infrastructure facilities,
the unit enjoys the following benefits of the location,
(1)Raw Materials : Raw materials is the basic constraint for
all industries. Regular supply of raw material is very crucial to
maintain the flow of production thus subsequently the cost of
production can be reduced.
(2) Labour Force : Cheap & semi skilled labour force is easily
available in large quantity in this area. Therefore, the
availability of labour is convenient & economic.
(3) Transportation : Transport facilities are mainly required for
distribution of finished products to the retailers and
wholesalers. The transportation cost is comparatively less as
the market place is away at a distance of 13 kms.
(4) Power : Power is available from Gujarat Electricity Board
(GEB) at subsidized rates, since the unit is located in an
industrial area.
All the above mentioned factors are very crucial as they affect
the cost of production as well as profitability and ultimately
the success of the unit.
(5) Other Locational Advantages : In addition to above
mentioned advantages of GIDC,Metods, Rajkot, there are
several other benefits for having the project located at
GIDC, Metoda, Rajkot.
Product Detail
Raw Material : The main raw materials required to produce
the Jeans are Denim & cotton Clothes, thread, button, rivet,
zip, stickers.
Product& its use : The popularity and the demand of Jeans is
increasing day by day. Jeans have left behind the tailor made
cloth. Consumer can wear Jeans casually with shirts& T-
shirts. Today, consumers wear Jeans even with blazers. Even
in villages people have started wearing Jeans. Each & every
Class of people wear Jeans. So, we can say that it can be
matched in any style and it can be changed your style.
Market Potential
Marketing now a days has become more important and
complex than before. It is very essential to have a sound
marketing system which includes a well selected distribution
channel, well worded and attractive advertisement, reasonable
as well as Affordable Price and above all a good quality
product.
Quality: Our Maximum emphasis is given on quality. The
quality of our product is not only competitive because we
know that more competitiveness is not sufficient for Viability.
We always to be one step ahead from others.
Price : The prices of our products are affordable to middle
class people who are our target Market. Our firm understands
“Value for money” very well and so “High sales at low
margins” is our motto.
Distribution Channel
For distribution our products to our valuable customers We
have not to chosen an complex channel but we have adopted
one level channel involving only one intermedia i.e. retailers.
This is only to ensure the availability of our products on
demand. Due to adoption of such type of channel we have
been able to change reasonable price for our Product as it is
well known that every new addition in channel costs
something extra to its ultimate customer.

Manufacturer Costumers

Money flow Product flow

Retailers

Flow of Distribution Channel

Advertising : Advertising is an important element of
marketing mix, particularly of promotion mix.
As our firm is still in the infancy stage and the market is
limited, it is not possible to bear the heavy expenditure on
advertising. The product is advertised on a small scale through
big wall painting and banners in different town and villages
and in local newspapers and magazines.
COMPETITION AND COMPETITIVE STRATEGY
Jeans are high fashioned products which are
continuously affected by the change in fashion, preference etc.
So to stand with and face the competition in our field we have
to continuously watch the changes going in our field. We
introduced same new designs new styles, high fashioned Jeans
also in the market to overtake the competitors.
We remain continuously in touch with the fashion and
style introduced in foreign markets so that we can give totally
new styles & designs to home market.
PRODUCTION PROCESS
Production is the basic activity of all industrial units. All
other activities revolve around this activity. The end product
of the production activity is the creation of goods & services
for the satisfaction of human wants. Production means to
make finish product from the raw material & semi finished
goods production. Process means how to produce product
with the use of man, machine, material and management.
Following are the steps of the Production process of the jeans,
(1)Cutting : JRV Jeans Mill uses computerized machine to cut
the Jeans. First of all the designer give the programmed of all
detail about Jeans, which include size and shape in computer.
In the computer arrange the machine’s part for the
cutting and the cutting man put 10 pieces of clothes under
cutting table then he starts the machine to cut the entire cloth
into needed pieces when all the pieces of cloth are ready for
the over lock process.
(2) Over Lock: The over lock knight the cloth border so that
cloth can’t be scattered. In the process of over locking the
machine operator over lock the needed pieces of cloth for
stitching.
(3)Embroidery Work: The JRV Jeans Mill use the
computerized embroidery machine for the embroidery work.
The designer gives the programme in computer and makes
article design in cloths.
(4)Stitching : The stitching of Jeans is divided into 20 parts of
work division among the 20 machines. In this process the
Jeans is to be stitched through 10 chain stitch machines and
10 simple stitch machines.
The machines are arranged according to the stitching
process. There are 3 departments of the Jeans stitching.
Finally Jeans go for the further production Process.
(5)Fitting : Fitting means to attach the button and make button
holder through the Machine in the Jeans. After if the Jeans go
for the rivet attach in the machine and then they are ready for
the acid wash.
(6)Washing : After fitting the Jeans waterman wash the Jeans
in acid and detergent powder in the washing machine and dry
it in a drier and then Jeans are ready for Ironing.
 COST ANALYSIS
Particulars Amt(rs) Amt(rs)
Variable cost
Raw material
Denim cloth 28,80,000
Cotton cloth 14,40,000
thread 1,80,000
Button 2,94,000
zip 2,88,000
stickers 6,33,000
Pocketing cloths 48,800
Other contingency 36,600 57,96,000
Semi variable costs
utilities 1,32,000
Administrative Expenses 96,000
Man power(low level) 4,80,000 7,08,000
Fixed cost
Preliminary & Pre-operative expenses 50,000
written off
Man power(middle&top level) 4,08,000
Interest on capital 6,55,696
Depreciation 7,49,500
Repairs &maintenance 1,77,500 20,40,696
Total cost 85,44,696
 FUTURE PLAN
Future plan is advance thinking of the future activity. Every
company has ambition to achieve bright future. So, they are
starting at present to achieve the future target.Future plan is a
presentation of future activity and position
From the above discussion JRV Jeans Mill has an ambition to
achieve bright future
The following are the future plans of JRV Jeans Mill
(1) JRV Jeans Mill has an ambition of leading company in the
garment world.
(2) Company want to launch other items like shirt, trouser, T-
shirt and even under garment in future.
(3) JRV jeans mill wants to have it’s retail stores all over india
as well in abroad.
(4)JRV Jenas mill wants to do business abroad and compets
with the company
From the above we can say that JRV Jeans Mill wants to earn
more & more prestige in the garment world.
CONCLUSION
Today's generation is very much conscious about the
garments. The consumption of new fashionable garments
increase day by day especially Jeans. A Jeans became popular
garment in all over the world. So, the demand increases day
by day and the fashion trend changes every day in jeans. So,
the Jeans is a forever product in the garments. It indicate that
the demand of the Jeans will increase in India as well as
foreign culture the company has wide spread market.
It indicate future expansion and development of the project
according to proposed project is consider to have better
prospects.
Short notes on project report:
The project report is treated as the administrative record
where in all the information related to the common project
including functional and technical components are presented.
The project manager and his team members take time to
prepare a project report which includes the time, budget,
relevant areas of concern, processes, strengths, Weaknesses,
feasibility studies, technical and non-technical areas of project
concern. It should also highlight the errors encountered during
the project life-cycle. A good project report has to evaluate
organizational factors including,
(1) Project Performance : Project performance has to reflect
its achievements according to its stated goals and plans.
Project performance has to evaluate its strengths and
Weaknesses, budget usages, time utilization, criticism from
internal and external Stakeholders, technical goals and
customer satisfaction. All of these factors contribute to the
success of a project. If project performance evaluation gives
results negative, a good remedial mechanism must be
developed so as to prevent committing the same mistakes or
errors in the future.
(2) Administrative Performance: Administrative performance
is related to the administrative control taking place in the
organization. Administrative performance has its effect on
project performance. Organizational structure is hierarchical
in nature. Any decision has to come from the top-level
management to the subsequent levels of management. There
may be a time delay or lag in decision making among the
various levels of management. If the customer or a client ask
for a change in the project or product, the decision may not be
instantly taken. It has to follow the bureaucratic procedure
whether to accept or reject the change request.
(3)Organizational Structure : The final project report should
include comments on, organizational operating structure
which has either caused damage or helped the project team in
the project success. Any changes suggested also must be
incorporated in the project report
(4)Team Performance : The final project report has to reflect
the effectiveness performance, dedication and involvement of
the project manager and his team member. It should also
measure the stated performance with the actual performance,
(5)Techniques of Project Management : The project report has
to reflect the techniques adopted to optimize the project
duration, cost, resources and scheduling. The techniques
which are adopted previously and given positive results can
be used for future applications. Project management may use
the latest technology like scheduling software, new rules and
producers etc
(6)Benefits to the Organization and the Customer : The final
project report has to be prepared keeping in view the
organizational goals and objectives. The final project has to
highlight the benefits to the sponsoring organization and to the
projects clients. It should focus more on the present and future
benefits to the customers/ clients, at the same time to the
organization. It should explain the project accomplishments
and lay the path for successful future projects
Various aspects of project formulation:
The various aspects of project formulation are,
(1) Commercial/Market Analysis
To assess the commercial aspects of a project
comprehensively, both input and output factors must be
carefully analyzed to ensure feasibility and profitability.
Output Considerations: This involves analyzing the demand
and market conditions for the project's products. Key
questions include:
Where will the products be sold?
Is the market large enough to absorb the additional production
without depressing prices?
If prices are affected, to what extent might this occur?
What share of the total market can the project capture?
Are there adequate facilities for managing and distributing the
new production?
Input Requirements: Securing reliable supplies of essential
inputs (such as fertilizers, pesticides, high-yield seeds, or new
technologies) is critical. Questions include:
Are there established and capable market channels for
distributing these inputs?
Can these channels meet new demand on time?
What financial arrangements are in place for suppliers and
farmers to access these inputs, including credit?
This framework ensures that all commercial aspects of a
project are analyzed and planned, supporting both market
entry and sustained operations.
(2)Technical Analysis
(i) The technical analysis concern projects inputs (supplies)
and outputs (production) of real goods and services.
(ii) It is extremely important and the project framework must
be defined clearly enough to permit the technical analysis to
be thorough and precise.
(iii) The other aspects of project analysis can only proceed in
light of the technical analysis.
(iv) Good technical staff are essential for this work, they must
be drawn from consulting firms or technical assistance
agencies abroad.
(v) Technical analysis may identify gaps in information that
must be filled either before project planning or in early stages
of project implementation.
(vi) Technical analysis gives an indication of the capacity of
operations within the project.
(vii) It also include the quality of machinery and equipment’s.
(viii) There should be provision for maintenance of the
machinery and equipment’s.
(ix) The location-and layout of the project is also part of the
technical analysis.
(x) This also include appropriateness of technology this will
depend on the level of development in the community.
(3) Organizational Analysis:
(i) A whole range of issues in project preparation revolves
around the overlapping Institutional, organizational and
managerial aspects of projects.
(ii) This factors clearly have an important effect on the project
implementation.
(iii) Frequent questions asked is whether the institutional
setting of the project is apropriate and, whether the socio-
cultural patterns and institutions of those Communities that
the project will serve must be considered.
(iv)E.g does the project design take into an account the
customs and culture of the farmers who will participate? Or
will the project involve disruption of the ways in which
farmers are accustomed to working?
(v) For Projects to be carried out successfully, they need to
relate properly to the institutional structure of the country and
region.
(vi) This may include structure of companies, partnership and
other organizational set ups.
(vii) Other factors may include the projects manpower
requirements ,transportation of machinery, maintenance and
commissioning e.g for the turn key Projects
(vii)Terms and conditions which are adhered to by contactors
must be Careful weighed to ensure that they are in line with
the overall project Objectives.
(4)Financial Analysis
(i) The financial aspects of project preparation and analysis
include the financial effects of a proposed project on each of
its various participant.
(ii) In agricultural projects, the participants include farmers,
private sector firms, public corporations, project agencies and
perhaps the national treasury.
(iii)A major objective of the financial analysis of farms is to
judge how much farm families who are participating in the
project will have to live on.
(iv) The analyst will need budget projections that estimate
year by year future gross receipts and expenditures, this
should include the costs associated with production and the
credit repayments farm families must make to determine what
remains to compensate the family for its labour, management
skills and capital.
(v) The questions to be asked include : what investment funds
will the Project need and when?, what will be the operating
expenses when the project is underway?, will these expenses
depend on budget allocations or will the project produce
sufficient revenue to cover for its administration costs?
(5)Economic Analysis
(i) Economic analysis is basically concerned with the
following,
-How to identify effects of a proposed Project to the society.
Quantification of the effects of the Proposed project.
-Pricing of costs and benefits to reflect their values to the
society.
-In economic analysis, shadow prices are used while in
financial analysis the market prices are used.
(ii) The economic aspects of project preparation and analysis
require a determination of the likelihood that a proposed
project will contribute significantly to the development of the
total economy and that its contribution will be big enough to
justify using the scarce national resources it will need.
(iii) The point of view taken by economic analysis is that of
the society as a whole.
(iv) The financial and economic analysis are thus
complementary the financial analysis takes the viewpoint of
the individual participants while the economic analysis take
the viewpoint of the society
(v) However, because the same discounted cash flow
measures are used in financial analysis to estimate returns to a
project participant and in the economic analysis to estimate
returns to society, confusion between the two analysis always
arises, but there are three important distinctions between the
two analyses approaches.
(vi) First in economic analysis, taxes and subsidies are treated
as transfer payments i.e the new income generated by a
project include taxes the project can bear during production
and any sale taxes buyers are willing to pay when they
purchase the projects products.
(vii) These taxes which are part of the total projects benefit
are transferred to the government which acts on behalf of the
society as a whole and are not treated as costs.
 (viii)Conversely, a government subsidy to the project is a cost
to the society, since subsidy is an expenditure of resources that
the economy incurs to operate the project.
(ix) In financial analysis, such adjustments are normally
unnecessary, since the taxes are usually treated as a cost and
subsidies as a return.
(x)These takes into an account taxes and subsidies and from
these market prices, comes the data used in the economic
analysis.
(xi) In economic analysis, however, some market prices may
be changed so that they more accurately reflect the social or
economic values
(xii) In economic analysis, interest on capital is never
separated and deducted from the gross return because it is part
of the total return to the capital available to the society as a
whole and additionally, it is this total return including interest
that the economic analysis is designed to estimate.
(6) Social Analysis
(i) We have mentioned that projects should consider the social
patterns and Practices of the client the project will serve.
(ii) More frequently, project analysts are expected to examine
carefully the broader social implications of proposed
investments.
(iii) Social consideration should be carefully considered to
determine is a proposed project is responsive to national
objectives e.g in the case of creating employment
opportunities and also issues that are dealing with income
distribution within the society.
(iv) For social reasons, when governments what to emphasize
on growth in particular regions, they would encourage
projects that can be implemented in these areas.
Various elements to be considered in project formulation:
In order to process investment proposals and arrive at
investment decisions, the planning commission has issued
guidelines for preparing/formulating industrial projects,
The guidelines have been summarized as follows,
(1) General Information: The feasibility report should include
an analysis of the industry to which the project belongs. It
should deal with the past performance of the industry, The
description of the type of industry should also be given, i.e.,
the priority of the industry, increase in production, role of the
public sector, allocation of investment of funds, choice of
technique, etc. The above information should be included
while submitting the feasibility report.
(2) Preliminary Analysis of Alternatives : This should contain
present data on the gap between demand and supply for the
outputs which are to be produced, data on the capacity that
would be available from projects that are in production or
under implementation at the time the report is prepared, a
complete list of all existing plants in the industry, giving their
capacity and their level of production actually attained, a list
of all projects for which letters of intent licenses have been
issued and a list of proposed projects. All options that are
technically feasible should be considered at this preliminary
stage. The location of the project and its implications should
also be looked into An account of the foreign exchange
requirement should be taken.
The profitability of different options should also be looked
into. An account of the foreign exchange requirement should
be taken. The profitability of different options should also be
given. The rate of return on investment should be calculated
and presented in the report. Alternative cost calculations Vis-
a-vis return should be presented.
(3) Project Description : The feasibility report should provide
a brief description of the technology/process choosen for the
project. Information relevant for determining the optimality of
the location chosen should also be included, To assist in the
assessment of the environmental effects of a project every
feasibility report must present the information on specific
points, i.e., population, water, land, air, flora, fauna, effects
arising out of the project’s pollution, other environmental
destruction, etc. The report should contain a list of important
items of capital equipment and also the list of the operational
requirements of the plant, requirements of water and power
requirements of personnel, organizational structure envisaged,
transport costs, activity wise phasing of construction and
factors affecting it.
(4)Marketing Plan : It should contain the following items,
data on the marketing plan, demand and prospective supply in
each of the areas to be served. The methods and the data used
for making estimates of domestic supply and selection of the
market areas should be presented. Estimates of the degree of
price sensitivity should be presented. It should contain an
analysis of past trends in prices.
(5)Capital Requirements and Cost : The estimates should be
reasonably complete and properly estimated. Information on
all items of costs should be carefully collected and presented.
(6)Operating Requirements and Costs : Operating costs are
essentially those costs which are incurred after the
commencement of commercial production. Information about
all items of operating cost should be collected. Operating
costs relate to cost of raw materials, and intermediaries, fuel,
utilities, labour, repair and maintenance, selling expenses and
other expenses.
(7)Financial Analysis : The purpose of this analysis is to
present some measures to asses the financial viability of the
project. A Performance balance sheet for the project data
should be presented. Depreciation should be allowed on the
basis specified by the Bureau of Public Enterprises. Foreign
exchange requirements should be cleared by the Department
of Economic Affairs. The feasibility report should take into
account income tax rebates for priority, industries, incentives
for backward areas, accelerated depreciation, etc. The
sensitivity analysis should also be presented. The report must
analyze the sensitivity, of the rate of return on the level and
pattern of Product prices.
(8)Economic Analysis : Social profitability analysis needs
some adjustments in the data relating to the costs and return to
the enterprise. One important type of adjustment involves a
correction in input and cost, to reflect the true value of foreign
exchange, labour and capital. The enterprise should try to
assess the impact of its operations on foreign, trade. Indirect
costs and benefits should also be included in the report. If they
cannot be quantified they should be analyzed and their
importance emphasized.
ANALYSIS OF MARKET DEMAND, DEMAND SUPPLY
GAP
Analysis of market and it’s objectives:
Analysis of market involves the detailed study of various
market segments in terms of customer preferences,
competitors, demand, the revalent trade Practices, etc. Before
an entrepreneur embarks upon his journey of business, it is
essential to analyze the project from the market and demand
perspectives.
Objectives of market analysis are,
(1) To identify the depth and breadth of demand.
(2) To determine the flow of stock to be maintained in the
market.
(3) To determine the number, size and types of competitors in
the market.
(4) To identify the customers status,buying capacity,
preferences, etc.
Various steps involved in analysis of market:
The scope of market analysis activities can be grouped into 4
activities. They are,
(1) Analysis on Product Market: What is meant by product
analysis here is the qualitative analysis on product to be
marketed which covers,
(i) Product Identity: The purpose of product identity is to
make it easier to find out various data needed in market
analysis, such as data on import tariff (incoming tax), data on
market demand, data on supply and data on export import of
that product.
By knowing the identity of a product it will be easier for us
to find market opportunity both in local and international
market as well, which is needed in the business building and
development plan.
(ii) Analysis on the Usage, Namely: Consumer products,
Convenience goods, Shopping goods, Specialty goods,
Unsought goods, Industrial Products, Raw materials, Capital
goods, Accessories and business service.
(iii) Durability and Materiality: Non-durable goods, Durable
goods, Service.
(iv)Value of Product’s Benefit: Core benefit, Basic product,
Expected product, Augmented product, Potential product.
(2) Analysis on Demand : Without a reasonable demand, no
one will build a business. Initially, a business building or
development plan is triggered by the existence of demand.
Demand can be interpreted as “market” in a narrow meaning.
Demand in a market can be distinguished into 2 classes,
namely,
(i) Effective Demand: It is the demand on a quantity of
products that are projected to be certainly bought. In the
practice, effective demand can be classified further namely,
Current Demand: Under current demand, current
quantity of sale at a company operating already.
Future Demand: It is the demand based on sale and
purchase contract for a certain term. Particularly in an
industrial business to be jointly built (joint venture), where the
first party will buy the product and second party will prepare
the smoothness of raw materials, capital, etc., this system is
widely applied between Indonesian conglomerates in. the
context of expanding their business to the upstream: This
system is known as “Conglomeration”.
(ii) Potential Demand: While potential demand is the demand
on a quantity of product possibly to be bought by the public or
industry in the future. The magnitude of potential demand on
some products or services that still can be absorbed by the
market is also called as “Market Opportunity” or “Market
Space” In summary
· Effective Demand is actual, willing-to-pay demand at current
prices.
· Current Demand is the existing demand level at present.
· Future Demand is anticipated demand based on market
projections.
· Potential Demand is the theoretical maximum demand under ideal
conditions.
In general, to calculate the magnitude of effective
demand in the past up to the present, it can be used 2 methods,
namely, Production and Import-Export Approach, that the
demand is products added by import, subtracted by export and
stock difference. With the formulation as follows,
D=P+I- (E + (Sin - Sfs))
Where,
D = Demand.
P= Local products.
I = Import.
E = Export.
Chain Ratio Method: Chain ratio method is the calculation on
smaller elements of a supply chain sequence on the concerned
Product. The formulation used is,
D = NP x IC x X, x X,... x X
Where,
D = Demand.
NP = Number of population.
IC = Income per Capita.
XI-n = Sequence of supply chain.
This formula can be used on the building of a trade
business or industry,
(3) Analysis on Supply: Analysis on supply is an activity
carried out to analyze the Progress of future supply based on
the progress of past supply and the influencing factors.
To calculate the supply of a product, it can be used an
approach that supply is the aggregate of local product added
by import product, in other words
Supply = Local product + Imported
The calculation of supply prospect with the above approach
is done by collecting data/information on the progress of
production and the import of goods as follows,
(i) Local Product
The existing industry with the real and installed capacity,
as well as their expansion plan.
 Industry, to be built, according to the business licenses that
have been issued by technical ministries.
(ii) Import of Goods Product : Import is one of the variables
that indicate the magnitude of supply in the past while for the
future, it is an effort to fulfil the demand failed to fulfill by
local industry.
(4)Analysis on Market Opportunity : Analysis on market
opportunity can also be called as analysis on demand and
supply balance. If the supply is bigger than demand, then it
can be said that market has been saturated.
In case the demand is bigger than supply, then the market
opportunity is still available.
The market opportunity can be formulated as follows,
Demand - Supply = Balance
(or) Demand —- Supply = Opportunity
Market analysis done by entrepreneurs and demand for a new
product or innovated product for Project formulation:
Economic analysis focus on market and demand analysis of a
product i.e., new product which are supposed to launch or an
innovated product. Entrepreneurs need to be integrated into
both market and demand analysis. Entrepreneurs refers to all
innovative and creative endeavours, whether they results in
project formulation of new or innovative product.
Fig shows the study to help the way to increase the product
performance based on market and demand analysis.
 MARKET AND DEMAND ANALYSIS

Demand forecast in a market analyze in an activity to

quantitative estimation on the demand in the future and based
on objectivity. Objectivity is an analysis supported by relevant
data (effective demand).
The analysis on the demand forecast (potential demand) to
be more accurate, then the calculation on effective demand
must be calculated back to 5 years age and data obtained
e.g., BPS/BPSD (Central Bureau statistic/Regional Central
Bureau of Statistic), ministry of industry and trade, export
association, import association and other associations
(instances) that relate to the product.
To make the illustration of potential demand closer to
reality and the historical data search (data of effective
demand) more accurate on the targeted market share, then it
needs to pay attention on some important factors below,
(1) Segment of the target market.
(2)Market prospect, which means the market acceptance
power Capability (“Market Opportunity” or “Market Space”).
(3)Competitor in similar products.
(4)The policies of competing companies, covering, price,
delivery, discount, promotion.
To calculate demand forecasting following method are used,
(1)Collective Opinion Survey : This method involves
collecting opinion of customers. Each salesperson makes an
estimate of the expected sales in their respective area,
territory, state and/or region. These estimates are collected,
reviewed and revised to take into account changes in features
or design of products, changes in selling prices, projected
advertising, sales promotion campaigns and anticipated
changes in competitors, marketing policies, etc. Opinions of
all the managers involved at various levels of organization are
also included in the survey. Such collective opinions form the
basis of market analysis and demand forecasting.
(2)Survey of Customer’s Intention: This method surveys
consumers preferences and intentions to buy. If the product is
sold to large industrial buyers, survey would involve
interviewing them. If it is a consumer durable product, a
sample survey is carried out for questioning a few
representative consumers about what they are planning or
intending to buy. It is neither realistic nor desirable to query
all consumers. These surveys serve useful purpose in
establishing relationships between demand and price.
(3)Delphi Method of Demand Forecasting: Delphi method is a
group decision-making Process and aims at achieving a
‘consensus’ of the members. Here in experts in the field of
marketing research and demand forecasting are engaged in
analyzing economic conditions carrying out sample surveys of
market conducting opinion polls.
(i) Identify problem.
(ii) Gather experts. .
(iii) Propose problem to experts.
(1v) Record solution/recommendations from experts,
(v) Compile and summarize experts responses,
(vi)Share responses with all others.
(vii) Collect experts comment on others ideas and Propose
solution.
(viii) Compile and present solutions,
(4) Nominal Group Technique: This is a further modification
of Delphi method of forecasting. A panel of 7-10 experts is
formed and allowed to interact, discuss and rank all the
suggestions in descending order as per the following
procedure,
(i) Define the problem.
(ii) Silently generate ideas,
(iii) State and record ideas.
(iv)Clarify each on the list.
(v) Rank items silently.
(vi)Tally rankings. Group decision is announced based on this
ranking.
Gap analysis with suitable example:
Gap analysis involves the comparison of actual performance
with potential or desired performance: If an organization does
not make the best use of current resources, or forgoes
investment in capital or technology, it may produce or
perform below its potential. This concept is similar to an
economy’s being below the production possibilities frontier.
Gap analysis identifies gaps between the optimized
allocation and integration of the inputs (resources) and the
current allocation-level. This may reveal areas that can be
improved. Gap analysis involves determining, documenting
and approving the difference between business requirements
and current capabilities.
The below Fig gives us classic example of a gap analysis.
The horizontal axis is time and the vertical axis is always one
related to business performance, in this case Profitability. The
base line of the business is, in this case, one of decline which
is typically the norm under a ‘do-nothing’ plan unless
competitor conditions are actually relaxing.
Strategic gap analysis
Strategic objective
Profitability
Business under development

Existing business
time

The next Planning line reflects projects under

development. It would be an accident if the base line of the
business plus projects under development (whether break
through or simply continuous improvement) happened to
deliver business objectives (the top line in Fig). These
business objectives or strategic operations, are frequently of a
higher Order, basically due either to,
(1) The requirements to deliver growth in shareholder value
anyway.

(2) The need to stretch managers thinking about the art of the
possible, Making them more entrepreneurial and less
bureaucratic in their style.A "stretch manager" is a leader who
actively seeks to extend their team’s capabilities beyond their
current limits by setting ambitious, challenging goals that
require innovative thinking, resourcefulness, and sometimes
untested approaches.
(3)The tendency for top managers to see their jobs as being
one of “artificial stretch”. "Artificial stretch" is a management
technique in which leaders intentionally set goals or targets
much higher than what they realistically need or expect to
achieve.
Certainly, the first two reasons for gap analysis above
(shareholder value and creative stretch) are laudable. The third
area (artificial stretch) is more dubious. Although one cannot
change how Organizations actually want to behave, it is
worthwhile highlighting the downsides of artificial stretch in
gap analysis. These downsides include,
(1) Managers taking stretch goals at face value, then trying to
achieve them by trying to force the pace and by squeezing the
results out of them, resulting in energy burnout, a loss of
commitment and enthusiasm.
(2) Projects being taken-on with stretch goals but which are
doomed to delay or failure because of insufficient resources.
(3) The unreality of project goals causes a cerebral
disconnection in managers because they have been asked to
do mission impossible they never even get off the cerebral
starting line of thinking step-by-step how they are going to get
there and with what cunning plan of strategy.
(4) The organization as a whole may have taken on too many
projects generally. This culminates in harmful inter project
rivalry, excess competition for resources unhelpful politics
and sometimes a performance inferior to that from doing even
half that number of strategic projects.
Gap analysis, which identifies the gap between a
company’s current state and its desired future state, may fall
short if not grounded in strategic thinking. When gap analysis
is used superficially—without considering how a project will
be executed to outpace competitors—it becomes "CRAP
analysis" (Creating Artificial Plans), yielding plans that are
disconnected from real-world impact and competitive
strategy.For gap analysis to be effective, it must go beyond
simply identifying gaps. It should include strategic insights on
how to bridge those gaps in ways that deliver a competitive
edge. This means that the plan should include not only what
needs to be achieved but also specific tactics that differentiate
the company from its competitors
Different steps involved in gap analysis:
The different stages of gap analysis can be listed as below,
(1) Review System : Reviewing the current information
system, in order to understand the current processes, features
and functionalities.
(2) Develop Requirements : It explains the strategic objectives
that an organization wishes to implement and the development
of the requirements needed by the “new system”.
(3) Comparison : It deals with comparing the different
attributes and features of the current and proposed processes.
(4)Implications : It describes the risks involved in the
development of the new process.
(5) Recommendations : Taking the feedback and actions taken
in order to fill the gaps described at above stages are
considered under this stage.
FINANCIAL AND PROFITABILITY ANALYSIS AND
TECHNICAL ANALYSIS
Financial analysis and it’s objectives:
Financial analysis statements is the process of identifying the
financial strengths and Weaknesses of the firm by properly
establishing relationship between the items of the balance
Sheet(Assets,Liability,Equity) and Income Statement.

Assets: Assets are resources owned by a company that have

economic value and are expected to provide future benefits
Liabilities : Liabilities are obligations the company owes to
outside parties, which need to be settled in the future.
Equity : Equity represents the residual interest in the company
after deducting liabilities from assets. It belongs to the
shareholders.

Assets=Liabilities+Equity
The Income Statement, also known as the Profit and Loss
Statement, provides a summary of a company's revenues,
expenses, and profits (or losses) over a specific period.
The important objectives of financial analysis are given below
(1) To measure the enterprise’s short-term solvency.
(2) To measure the enterprise’s long-term solvency.
Solvency refers to a company’s ability to meet its long-term
financial obligations and sustain its operations over time.
(3) To measure the enterprise’ operating efficiency and
profitability.
Operating efficiency measures how effectively a company
uses its resources to generate revenue and minimize costs.
Profitability measures a company’s ability to generate
earnings compared to its expenses
(4) To compare intra-firm position, inter-firm position and
pattern position within industry.

Intra-Firm Position : This focuses on comparing different

divisions, departments, or product lines within the same firm.
Inter-Firm Position : This involves comparing a firm's
performance with that of other firms in the same industry.
Pattern Position :This examines the overall trends and
patterns in the industry to position a firm in relation to the
industry average or norms
Thus, the basic purposes of financial analysis are as under,
(1) To identify the magnitude and direction of changes in
enterprise’s financial Position and performance.
(2) To ascertain the strengths and weaknesses of the enterprise
in terms of liquidity,profitability, solvency etc.
Liquidity: Deals with the short-term ability to cover
immediate liabilities using current assets
Financial analysis of project formulation:
Financial analysis is the use of financial statements to analyze
a company’s financial position and performance and to assess
future financial performance. Several questions can help focus
financial analysis. One set of questions is future oriented. For
example, does a company have the resources to succeed and.
grow? Does it have resources to invest in new projects? What
are it sources of profitability? What is the company’s future
earning power? A second set involves questions that assess a
company’s track record and its ability to deliver on expected
financial performance. Financial analysis and appraisal covers
a large and decisive, gamut of activities in the total scheme of
project appraisal and financing. In the case of a new project
by a first time entrepreneur it will cover the following aspects,
(1) Assessment and firming up of the cost of project.
(2) Structuring of the means of finance.
(3) Preparation of projected financial statements,
(i) Estimates of financial expenses.
(ii) Projected profitability estimates.
(iii) Projected balance sheets.
(iv) Projected cash flow statements.
(v) Detailed accompanying schedules leading to the
preparation of above statements.
(4) Financial evaluation.
(5) Risk management.
(6) Term Joan pricing.
(7) In the case of a new project/expansion/diversification by
an existing operating company the financial appraisal would
also include the evaluation of past performance for at least
three years.
Profitability analysis of small scale engineering industry:
The main objectives of an individual, a firm or a
company in investing on a project is to earn the maximum
possible returns for the investment. Accordingly the project
promoters are solely interested in wealth maximization.
Hence, the project promoters focus only on commercial
profitability of the project.
There are some projects that may not offer attractive
returns so far as commercial profitability is concerned but
even then such project are taken since they have social
implications. Such projects include public projects like road,
railway bridge and other transport projects, power projects
etc. Such projects are analyzed for their socio-economic
benefits and the profitability analysis of such projects is
known as national profitability analysis, which is noting but
the socio-economic cost-benefit analysis done at the national
level. It may be noted that the benefit derived from any
project will also be of two types.Viz., direct benefits and
indirect benefits. The national profitability analysis, in other
words, the socio benefit analysis differs from commercial
profitability in two ways,
(1) As against the market prices of direct cost and direct
benefits considered in commercial profitability analysis, the
social cost benefit analysis takes into account the ‘real cost’ of
direct costs and ‘real benefit’ of direct benefits.
Example : Some of the inputs (say power charges) may be
subsidized. Only the Subsidized prices of inputs are relevant
for assessing commercial profitability. The social cost benefit
analysis takes into account the real cost of inputs i.e., the cost
of inputs had they not been subsidized. Accordingly, the
required adjustments to direct cost of inputs are made for
social cost benefit analysis. Similarly, cost adjustments may
also be required for the benefits.
(2) Socio-economic cost benefit analysis takes into account
the indirect costs and indirect benefits to the nation, whereas
for commercial profitability of a’ project direct cost and
benefits are considered. While the nation bears the indirect
cost, the people of the nation enjoy the indirect benefits. It is
however difficult to assess the quantum of indirect costs and
indirect benefits.
Example : Consider the case of a pharmaceutical company
manufacturing life saving drugs. For calculating the
commercial profitability of the project the market price of the
life Saving drug will be considered. The drug also improves
the well-being of the society.
Its contribution to the society will be more than the price paid
for the drug. Thus, the Social benefits that accrue to the
pharmaceutical company may be much more.
Profitability analysis with an example:
An important part of the planning process is to define and lay
down rules and techniques to form what is called profitability.
analysis. It is essential for management to define what is
meant by a profitable project or investment. In order to
achieve this objective, management must provide a way to
choose between alternative schemes of carrying out a given
investment or project. The overall capital expenditure plan of
an oil company consists of a series of unique capital
projects/investments. These may include,
(1) Exploration for oil and gas.
(2) New oil and gas fields development.
(3) Infill drilling.
(4)Facilities replacements/upgrades.
(5)Installation of new facilities such as artificial lift systems
and pressure maintenance.
(6) Secondary and enhanced oil recovery projects.
(7) A variety of downstream projects.
Major capital additions should be accorded special analysis,
management evaluation judgement. Approaches to determine
their investment worth should loom large in the decision
making process.
To judge the attractiveness of any investment, three main
elements are considered:
(1) Investment amount.
(2) The operating benefits.
(3) The economic life.

The economic life of an investment is the time Period where

positive net benefits are expected from the investment
alternative. For example, A company is considering investing
in a solar power system for its manufacturing facility.The
total cost of installing the solar power system is $200,000.The
solar system will reduce electricity bills by $30,000 per
year.The solar power system has an economic life of 20
years.similarly,the economic life of equipment may be shorter
than its physical life. Therefore, all investment analysis must
combine these three elements in a logical manner in order to
provide a clue to whether or not the investment is worthy of
consideration. These basic conditions are true of all
investment proposals under Consideration.
On the other hand, the cash flows are normally restricted to
accommodate up to a 4-year project implementation period
(construction period), followed by a period of about 25 years
of production. For example A power plant project with:
 Construction period: 4 years.
 Production period: 25 years.
 Discount rate: 8%.

Cash flows beyond 25 years contribute less than 5% to the

NPV(Net Present Value) due to heavy discounting.
Attempting to model 30–40 years might yield negligible
changes to project economics while increasing complexity
and uncertainty.The ideal measures of profitability should
have the following characteristics,
(1) It must be suitable for comparing and ranking the
profitability of available investment alternatives.
(2) It should account for the time value of money.
(3) It should provide a means for telling whether profitability
exceeds some minimum cut-off (threshold) requirement of the
organization.
(4) It should be able to include probability estimates to
generate expected values.
(5) If possible it should reflect other factors such as corporate
goals, decision makers risk preferences and corporates asset
position.
Technical analysis of project formulation:
Technical analysis is widely used by engineering to
examine and formulate the project. The main use of technical
analysis is applied by technical experts and financial analyst
while participating project appraisal. The various aspects to be
examined will vary from Project to project.
Following are the most commonly used aspect for technical
analysis in order to formulate the project,
(1) Manufacturing Process/Technology : Manufacturing
process or technology is a collection of technologies and
methods used to define how product are to be manufactured.
The choice of manufacturing a product is done by selecting
two or more available technologies.
Example
(i) Steel making by Bessemer process or open heart process.
(ii) Cement making by dry or wet process.
(iii) Soap making by semi boiled or fully boiled process.
(iv) Paper making by Kraft or soda or simon cusi process.
Following are the factors involved while selecting a
technology,
(i) Plant capacity.
(ii) Material inputs.
(iii) Production cost.
(iv) Technological obsolescence:Technological obsolescence
occurs when a technology, product, or process becomes
outdated or irrelevant.
(v)Ease of adoption or absorption:Ease of adoption or
absorption refers to how readily a new technology, process, or
system can be integrated into existing infrastructure,
operations, or user behavior.
A technology is considered appropriate only if it is assessed to
be Satisfactory and relevant to the following aspects in lie
specific situation of a project.
Based on the following questions an evaluation of appropriate
technology Were considered,
(i) Does the technology utilizes local raw materials.
(ii) Does the utilization of technology is done through local
manpower?
(iii) Does the whole goods and services are produce according
to the basic needs?
(iv) Does the technology protects ecological balance?
(v) Does the technology is harmonious with social and
cultural conditions?
(2)Technical Arrangements :
Based on the needs of manufacturing process the whole
satisfactory arrangement is applied. Following aspects of
arrangement were involved,
(i) Nature of support by collaborators.
(ii) Process and performance guarantee.
(iii) Level of equity participation and control sharing.
(iv) Period of collaboration agreement.
(v) Price of technology.
(vi) Agreement representation and termination.
(vii) Continuing benefits of R and D.
(viii)Assistance and/or restrictions on export.
(3)Material Inputs and Utilities :
Technical analysis is concerned with defining materials and
utilities required, specifying their properties and setting up
their supply program.
(i) Material Inputs : These relate to the Operation phase of the
project, but need to be identified at this stage of the feasibility
study to examine the technical feasibility of the proposed
system. For this, classification of the inputs into following
categories will be found useful,
-Raw material,Processed material.
- Components and subassemblies.
- Spare, wear and tear parts, and Gas, fuel and electricity.
 Next, their qualitative and quantitative requirements
(including buffer stock, where applicable), availability,
feasibility, alternative and reliable sources of supply should be
carefully ascertained and record. The problems involved in
their storage and handling should be also assessed.
(ii) Utility : It involves power, water, steam, fuel as an
assessment at the time of input study and also formulate the
project based on technology, plant location and plant capacity.
Following should be kept in mind while taking decisions,
- Physical properties of material.
- Transportation, handling and storage cost.
- Quality available for domestic and foreign sources.
- Past and future trends in prices and Potential availability.
(4) Product mix:A product mix is the full range of products or
services that a company offers to its customers. It's also
known as a product assortment or product portfolio.
A product mix can include:
Product linesThese are different types of products offered by a
company. For example, Coca-Cola's product lines include
Coca-Cola, Dr. Pepper, Glaceau Smartwater, and Sprite.
Individual products:These are the products available for sale
within a product line. For example, Coca-Cola's product line
includes original Coca-Cola, Diet Coke, Coke Zero.
(5) Plant Capacity : Plant capacity is also known as
production capacity. It is the number or volume of products
that can be generated by production plant or enterprise in a
given period by using current resources. It is the task of the
project manager to determine the feasible normal capacity and
nominal maximum capacity for the project.
(i)Feasible Normal Capacity : It is defined as a volume or
number of units that can be produced during a given period or
the output expectations from the production of a plant. It is
computed keeping in mind the following factors,
-Install capacity.
-Technical condition of plant.
-Normal stoppage.
- Downtime for maintenance.
- Tool charger.
(ii) Nominal Maximum Capacity : It refers to capacity that is
technically obtainable through use of machines. It is usually
the capacity guaranteed by the supplier, of machinery. .
(6)Location and Site : Location means deciding a suitable area
or place with in or around city where the machines will start
functioning. Site is the specific area or piece of land where
project will be set-up. To select a site various critical
assessment need to function based on demand, size of plant
and input requirements is conducted which involve examining
the following factors,
(i) Proximity of land to market.
(ii) Availability of raw materials.
(iii) Availability of labour.
(iv) Existing infrastructure i.e., road, electricity, power, water,
supply etc.
(v) Cost of land.
(vi) Government policies.
Several other factors has to be ascertain before arring the
location decision,
(i) Climate conditions.
(ii) General living conditions.
(iii) Proximity to auxiliary inputs/units.
(iv) Ease of waster disposal and dumping.
(7)Machineries and Equipments : Based on the machinery and
equipments requirements . While conducting a technical
analysis of a project following steps must be used to select
machinery and equipments,
Step 1 : Estimate level of production over time.
Step 2 : Define various machining and operations.
Step 3 :Calculate machine hours required for specific
operations individually.
Step 4 : Selection of machineries and equipments for specific
functions.
Following types of machinery and equipments required based
on the project,
(i) Plant equipment (process)
(ii) Mechanical equipments.
(iii) Electrical equipments.
(iv) Spare parts and tools required with the original
equipments and for operational wear and tear.
Following need to considered while selecting machinery and
equipments, -
(i) Availability of power to run machines.
(ii) Transporting heavy equipments.
(iii) Ease use of machines by worker and to control the
equipments.
(iv) Import policies of governments if the machines and to be
imported from a foreign country.
Procurement of plant and machines is done by two ways,
(i) Placing order to different- supplier.
(ii) Through a turn key contract.
Following are the factors involved in procurement of plant
and machinery,
(i) Desired quality of machines.
(ii) Level of technological sophistication.
(iii) Suppliers reputations.
(iv) Expected delivery schedule.
(v) Payment terms.
(vi) Performance guarantees.
(8)Structure and Civil Works : Structure and civil work is
divided into three types,
(i) Site Preparation and Development : Technical analysis of a
project for building, structures and civil works involves
preparation and development of site which includes,
- Grading and leveling of site.
- Demolition(destroying) of existing structures.
- Relocation of pipeline, cables and roads.
- Reclamation of sewers and drainage.
- Connection of utilities.
- Arranging for electricity, water etc.
(ii)Buildings and Structures : It involves constructions of,
- Factory building: Includes manufacturing activities.
- Ancillary building: Supports manufacturing activities.
- Administrative area : Management activities.
- Residential quarters : Housing purposes.
-Non-factory buildings like cafe, medical center etc.
(iii) Outdoor Works : It involves the following,
-Supply and distribution of utilities.
-Handling and treatment of emission, wastes, effluents.
- Outdoor lighting,Transportations,Landscaping.
-Enclosure and supervision - boundary, fence, barriers, gates,
doors, security posts etc.
(9) Environmental Aspects : Environment are highly influence
the different causes and factors. The project must comply will
all environmental rules and regulations. The key issues
considered with respect to the project based on environment
are,
(i) Different types of effluents and emission granted.
Effluents refer to liquid waste or discharge released from
industries, factories.
Emissions refer to gaseous or particulate waste released
into the atmosphere from industrial processes, vehicles, or
other human activities.
(ii) All effluents must be disposed-off property.
(iii) Eco-friendly standards must be adopted in the production
Process.
(10) Project Charts and Layout : As the project manager get
sufficient data relating to market size, plant capacity,
production technology, civil work, machineries and
equipments etc. He prepares charts and layouts for the
proposed projects. Project charts and layout helps to,
(i) Define the scope of the project
(ii) Provide basis for detailed project engineering,
(iii) Estimating investment and production cost.
The different charts and layout used by the project manager
are,
(i) General functional layout.
(ii) Material flow diagram.
(iii) Production line diagram.
(iv) Transport layout.
(v) Utility consumption layout.
(vi) Communication layout.
(vii) Organizational layout.
 Plant layout is concerned with the physical layout of
the factory. It is depends upon the production process adopted
for the project. Following important consideration were
identified for preparation of plant layout,
(i) Consistency of layout with production process and
technology.
(ii) Smooth flow of goods from beginning to end of the stage.
(iii) Efficient utilization of space.
(iv) Scope for further expansion.
(v) Minimization of production cost.
(vi) Employees or workers. safety.
After conducting technical analysis, a project
implementation schedule is prepared with reflects the plan of
action regarding installation of machinery and operation of
plant.
PROJECT FINANCING IN INDIA
Sources of finance:
Financing is an essential to any growing business. It helps
keep business current and competitive in market. Every firm
requires a minimum level of current assets to carry on its
routine operations, this results in fixed or permanent
financing. Temporary financing is that pat of working capital
which is used to meet the seasonal needs.
There are different sources available for financing. They are,
 SOURCES OF FINANCE

(1) Permanent/Fixed/Long-term Finance : Firms must raise

permanent working finance,so that it can be useful for a long.
period of time. Permanent or long-term working capital can be
raised from five sources.
They are,
(i) Shares :A big amount of capital required is collected
through the shares issued to public. Shares can be issued at
any time generally these are issued at the time of starting of
new business expending or reorganizing the existing concern.
Amount to be collected by shares is first decided. When
shares are issued to the public, their value or price is carefully
determined, and it should not exceed certain thresholds based
on legal or financial constraint.
(ii) Debentures : When company desire the required finance
through loans instead of scale of share, then debenture are
issued. In this way it is advantageous because debentures
holder can not claim for ownership and he is to be paid
interest only. Debenture may be issued either for initial needs
of the enterprise for the development and extensions.
Debentures holder has no liabilities to debentures holders is
on to the liabilities for which the shareholder is responsible.
Debenture provides finance for a specified period and the
company can adjust its financial plan accordingly.
(iii) Public Deposit : Simple and convenient source of finance
is public deposits, which has recently became popular for
raising long-term deposits. These deposits directly accepted
from public. Public deposits provide various advantages to
thecompany such as taxation benefits, trading on eaquity
etc…
(iv) Ploughing Back of Profits : When a company re invest its
surplus profits in its business it is known as ploughing back of
profits. Though it is advantageous but not appropriate for a
newly setup firm for its expansion, modernization and
replacement etc.
(v) Loan from Financial Institutions : There are many
specialized financial institutions established by the Central
and State governments which give long-term loans at
reasonable rate of interest. Some of these institutiolis are,
- Industrial Finance Corporation of India (IFCI).
- Industrial Development Bank of India (IDBI).
- Industrial Credit and Investment Corporation of India
(ICICI).
(2)Financing of Temporary / Variable or Short-term Finance :
A company can raise short-term working capital from the
important sources of finance such as,
(i) Commercial Banks : The institution which organize all
kind of banking business and generally finance trade and
commerce are called commercial bank. It act as public sector
with operating joint stock banks. They main aim is to develop
the various sector such as industries, mobilization of resources
etc.
(ii) Indigenous Bankers : Indigenous bankers were private
money lenders and other country bankers. They were enjoying
the monopoly power in the market. But after establishment of
commercial banks they are not so popular. Indigenous bankers
treat customers in unfarily manner and charge high rate of
interest.
(iii) Trade Credit : Trade credit is an important source of
raising short-term capital.In trade credit, supplier of goods
provide goods on credit basis and buyer makes the payment in
future. It is easy and convenient way for raising funds.
(iv) Installment Credit : Installment credit is a short-term
source of finance. In this method an asset is purchased by
giving some down payment and the rest of the amount is paid
on installments over a specified period of time.
(v) Advances : Advances are obtained from customers and
agents against orders.Companies use this advances as a short-
-term source of Finance.
(vi) Factoring or Accounts Receivalble Credit : Short-term
funds can be raised from accounts receivable credit provided
by commercial banks and factors. Factor is also a financial
institution which provide different services such as
discounting of bills, maintenance of sales ledger, credit
control and protection from bad debts.
(vii) Accrued Expenses : When a firm takes advantage of the
services provided but not yet paid for them are known as
accrued expenses. They can be used as short-term finance.
Accrued expanses of a firm are wages, salaries, taxes and
interest.
(viii) Deferred Incomes : It is an income gained by the firm in
the form of advance before supply of goods or services.
Deferred income is provided to ony these which Produce good
quality of goods and have goodwill in the market.deferred
income can be used as short-term funds.
(ix) Commercial Paper : Commercial papers are issued for
raising short-term finance its maturity period is between 91 to
180 days. It is an unsecured Promissory note issued by firm
on discount and redeemable on face value in future data.
Sources of finance for small scale sector:
A small business needs money to operate. It is always a
desirable situation for any small business that the company
revenue will be enough to sustain the organization,but that is
not always the case. The proactive small business owner is
constantly searching out sources of finance for his small
business to fund new projects and ongoing operations,
(1)Internal Sources : The main internal sources of finance for
a start-up are as follows,
(i) Personal Sources : These are the most important sources of
finance for a start-up and we deal with them in more detail in
a later section.
(ii) Retained Profits : Retained profits, also known as
retained earnings, are the portion of a company's net income
that is kept within the business rather than distributed to
shareholders as dividends. These profits are reinvested into
the company to support its growth, expansion, or financial
stability For example, a start-up sells the first batch of stock
for Rs. 5,000 cash, which it had bought for Rs. 2,000. That
means that retained profits are Rs. 3,000.
(iii) Share Capital : Share capital refers to the funds a
company raises by issuing shares to investors. It represents the
equity financing of a company, where investors receive
ownership in the form of shares in return for their investment.
(2)External Sources
(i) Loan capital:This can take several forms, but the most
common are a bank loan or bank overdraft.
A bank loan provides a longer-term kind of finance for
a start-up, with the bank stating the fixed period over which
the loan is provided (e.g. 5 years), the rate of interest and the
timing and amount of repayments.The bank will usually
require that the start-up provide some security for the loan,
although this security normally comes in the form of personal
guarantees provided by the entrepreneur, Bank loans are good
for financing investment in fixed assets and are generally at a
lower rate of interest that a bank overdraft. However, they
don’t provide much flexibility:
A bank overdraft is a credit facility provided by banks
that allows a business or individual to withdraw more money
from their account than the available balance, up to an agreed
limit. It is essentially a short-term loan or credit extension,
giving the account holder temporary access to extra funds. As
a result, an overdraft is a flexible source of finance, in the
sense that it is only used when needed. Bank overdrafts are
excellent for helping a business handle seasonal fluctuations
in cash flow or when the business runs into short-term cash
flow.
(ii)Share Capital - Outside Investors : For a start-up, the main
source of outside (external) investor in the share capital of a
company is friends and family of the entrepreneur. Opinions
differ on whether friends and family should be encouragedto
invest in a start-up company. They may be prepared to invest
substantial amounts for a longer period of time, they may not
want to get too involved in the day-to-day operation of the
business. Both of these are positives for the entrepreneur,
However, there are pitfalls. Almost inevitably, tensions
develop with family and friends as fellow shareholders.
(iii) Business Angels : These are the other main kind of
external investor in a start-up company. Business angels are
professional investors who typically invest Rs. 10k- Rs. 750k.
They prefer to invest in businesses with high growth
prospects. Angels tend to have made their money by setting
up and selling their own business in other words they have
proven entrepreneurial expertise. In addition to their
money,angels often make their own skills, experience and
contacts available to the company. Getting the backing of an
Angel can be a significant advantage to a start-up, although
the entrepreneur needs to accept a loss of control over the
business.
(3) Personal Sources : As mentioned earlier, most start-ups
make use of the personal financial arrangements of the
founder. This can be personal savings or other cash balances
that have been accumulated. It can be personal debt facilities
which are made available to the business. It can also simply
be the found working for nothing.
The following notes explain these in a little more detail.
(i) Savings : An entrepreneur will often invest personal cash
balances into a start-up. This is a cheap form of finance and it
is readily available. Often the decision to start a business is
prompted by a change in the personal circumstances of the
entrepreneur e.g., redundancy or an inheritance. Investing
Personal savings maximises the control the entrepreneur
keeps over the business. It is also a strong signal of
commitment to outside investors or Providers of finance.
Re-mortgaging is the most popular way of raising loan-related
capital for a start-up. The way this works is simple. The
entrepreneur takes out a second or larger mortgage on a
private property and then invests some or all of this money
into the business. The use of mortgaging like this. Provides
access to relatively low-cost finance, although the risk is that,
if the business fails, then the property will be lost too.
(ii)Borrowing from Friends and Family : This is also common
Friends and family who are supportive of the business idea
provide money either directly to the entrepreneur or into the
business. This can be quicker and cheaper to arrange(certainly
compared with a standard bank loan) and the interest and
repayment.However, borrowing in this way can add to the
stress faced by an entrepreneur, particularly if the business
gets into difficulties.
(iii)Credit Cards : This is a surprisingly popular way of
financing a start-up. In fact,most common source of finance
amongst small business.It works like this Each month, the
entrepreneur pays for various business-related expenses on
credit card 15 days later the credit card statement is sent in the
post and the balance is paid by the business with in the credit-
free period. The effect is that the business gets acces to a free
credit period of around 30-45 days.
Project financing for large scale industries in india:
Project financing is the financing of long-term infrastructure
industrial projects and public services based on non-resource
or limited resource financial structure. Project finance is a
loan structure that relies primarily on the project cash flow for
repayments, with the project assets, rights and interests held
as security.
Large scale industries require long-term loans to meet
their fixed or block expenses. The different sources for
financing large-scale industries are,
(1)Equity Share : A project may be finance by equity in a
company specifically setup to undertake the project, or by
new equity introduced into an existing company. Equity
shares means the ownership of the company’s financial
structure. A public limited company may raise funds from
public or promoters as equity share capital by issued ordinary
equity share. The main function of equity share capital is to.
provide finance to purchase building, machinery and
equipments.
It is advantages for a firm to finance its fixed working.
capital requirements out of the proceeds of the issue of shares
which is common parlance goes by the name of ownership
capital.
Equity share capital offers following advantages,
(i) It act as a long-term source of funds for a company.
(ii)There is no fixed charges attached to ordinary shares. If a
company earn enough divisible profits it will be able to pay
dividends but there is no legal obligation to pay dividends.
(iii)Equity share capital does not have any maturity date and
hence the company has no obligations to redeem.
(2) Debentures : According to companies act, 1956, debenture
includes debenture stock,bonds and other securities of a
company whether or not constituting a charge on the assets of
the company.
A debenture is a document of acknowledgement of a debt with
a common seal of the company. It contains the terms and
conditions of loans, payment of interest,redemption of loans
and security offered by the company.
Debenture holders are the creditor of the company. They have
no voting rights in the company. Debentured interest on
debentures is payable to debenture holders even when the
company does not make profit.
The various types of debentures are,
(i) From the Point of View of Security : There are two types of
debentures from this point of view - secured and unsecured
debentures. Secured debentures are those debentures where a
charge is created on the assets of the company for the purpose
of payment in case of default. The charge may be fixed or
floating. A fixed charge is created on a specific asset whereas
a floating charge is created on the general assets of the
company.
 Unsecured debentures do not have a specific charge on the
assets of the company. However, a floating charge may be
created on the debentures by default. Normally, these kinds of
debentures are not issued.
(ii) From the Point of View of Tenure : From this point of
view, there are two types of debentures - redeemable
debentures and irredeemable debentures.
Redeemable debentures are those which are payable on the
expiry of the specific period either in lump sum or in
installments during the life time of the company. Debentures
can be redeemed either at par or at a premium. .
Irredeemable debentures are also known as perpetual
debentures. Because the company does not undertake for the
repayment of money borrowed by issuing such debentures.
These debentures are repayable on the winding-up of a
company. .
(iii) From the Point of View of Convertibility : There are two
types of debentures -convertible debentures and non-
convertible debentures. Debentures which are convertible into
equity shares or in any other security either at the option of
the debenture holders are called convertible debentures.
The debentures which cannot be converted into shares or
in any other securities are called non-convertible debentures.
Most debentures issued by the companies fall in this category.
The advantagees of debentures are,
(i) It is desirable to raise a part of long-term finance by issuing
debentures.
(ii) Fixed rate of interest is paid every year the cautious
investors prefers to invest the money in debentures rather than
shares.
(3) Preference Share : Preference share are such shares which
enjoy the two Preferential rights,
(i)Payment of Dividend : Rights as payment of dividend at a
fixed rate during the life of the company.
(ii)Payment of Capital : Rights as to return of capital in case
of winding up of the company over the equity shareholders as
per Indian Companies Act.
Preference shares may be classified according to the rights
attached to them as follows,
(i)Cumulative and Non-cumulative Preference Shares :
Cumulative preference shares enjoy the right to receive the
dividend in areas for the years in which company earned no
profits or insufficient profits. In other words, dividend on
these shares will go on accumulating until it is paid in full
with arrears, before any dividend is paid on equity
shareholders. In case of non-cumulative preference shares,
dividend does not accumulate and there, no areas of dividend
would be paid in the year of profits. If a company does not
have any profits in a year, no dividend will be paid to non-
cumulative preference shareholders.
(ii)Redeemable and Irredeemable Preference Shares :
Redeemable preference shares,can be redeemed on or after a
period fixed for redemption under the terms of issue or after
giving a proper notice of redemption to preference
shareholders.The act, however, imposes certain restrictions for
the redemption of preference shares. Irredeemable preference
shares are those shares which cannot be redeemed during the
lifetime of the company.
(iii)Convertible and Non-convertible Preference Shares :
Where the preference shareholders are given a right to convert
their holding into ordinary shares, within a specified period of
time, such shares as known as convertible preference shares.
The holders of non-convertible preference shares have no
such right of conversion.
(iv)Participating and Non-participating Preference Shares :
The holders of participating preference shares have a right to
participate in the surplus profits of the company left after
paying dividend to the ordinary shareholders and preference
shareholders at a fixed rate. The preference shares which do
not have such right to participate in surplus profits are known
as non-participating preference shares.
Preference share offers following advantages,
(i)It does not cause any economic burden to company.
(ii)The controlling rights is not transferred since preference
shareholders have no voting rights.
Institutions for project financing in India for small and
medium scale entrepreneurs?
The various institution for project financing in India for small
and medium scale entrepreneurs,
(1) Industrial Finance Corporation of India (IFCI) : It is the
oldest SFI set up in 1948 with the primary objective of
providing long-term and medium-term finance to large
industrial enterprises. It provides financial assistance for
setting up of new industrial enterprises and for expansion or
diversification of activities. It also provides support to
modernisation and renovation of plant and equipment in
existing industrial units. It can grant loan or subscribe to
debentures issued by companies repayable in not more than
25 years. It can also guarantee loans raised from other sources
or debentures issued to the public and take up underwriting of
the public issue of shares and debentures by companies. For
ensuring greater flexibility to meet the needs of the changing
financial system IFCI now stands transformed to IFCI Ltd.
with effect from 1 June 1993.
(2)Industrial Credit and Investment Corporation of India
(ICICI) : It was set up in 1955 for providing long-term loans
to companies for a period upto 15 years and subscribe to their
shares and debentures. However, the proprietary and
partnership firms were also entitled to secure loans from
ICICI. Like IFCI, the ICICI also guarantees loans raised by
companies from other sources besides underwriting their issue
of shares and debentures. Foreign currency loans can also be
secured by companies from ICICI,In the context of the
emerging competitive scenario in the finance sector, ICICI has
merged with ICICI Bank Ltd., with effect from 3 May 2002.
Consequent upon the Merger, the ICICI group’s financing and
banking operations have been integrated into a single full
service banking company.
(3)Industrial Development Bank of India (IDBI) : It was set
up in 1964 as a subsidiary of Reserve Bank of India for
providing financial assistance to all types of industrial
Enterprises without any restriction on the type of finance and
the amount of funds, It could also refinance loans granted by
other financial institutions and offer guarantees for the loans
raised from the capital market or scheduled banks. It also
discounts and rediscounts the commercial bills of exchange
and undertakes underwriting, of the public issues. IDBI, like
ICICI, has also transformed into a commercial bank and has
been retitled as IDBI Ltd. with effect from 4 October 2004
with IDBI Bank merged into it.
(4)Industrial Investment Bank of India (IIBI) : The former
Industrial Reconstruction Bank of India (IRBI), an institution
which was set up for rehabilitation of small units has been
reconstituted in 1997 as Industrial Investment Bank of India.
It is a full fledged all purpose development bank with
adequate operational flexibility and autonomy,After the
reconstruction its focus has changed from rehabilitation
finance to development banking.
(5)Small Industries Development Bank of India (SIDBI) : It
was set up in 1990 as a principal financial institution for the
promotion, financing and development of small-scale
industrial enterprises. It is an apex institution of all the banks
providing credit facility to small-scale industries in our
country. It offers refinancing of bills, rediscounting of bills
and several other support services to Small Scale Industries
(SSI). It undertakes a wide range of promotional and
development activities for improving the inherent strength of
SSI units and creating avenues for the economic development
of the rural poor.
(6) State Financial Corporations (SFCs) : In order to provide
financial assistance to all types of industrial enterprises
(proprietary and partnership firms as well as companies) most
of the states of our country have set up SFCs. The primary
objective of these corporations is to accelerate the pace of
Industrial development in their respective states. SFCs
provide finance in the form of long-term loans or through
subscription of debentures, offer guarantee to loans raised
from other sources and take up underwriting of public issues
of shares and debentures made by companies. However, they
cannot directly subscribe to the shares issued by the
companies. The SFC(Amendment) Act, 2000 has provided
greater flexibility to SFCs to cope with the changing
economic and financial environment of the country.
(7)State Industrial Development Corporations (SIDCs) :
These corporations were set up in 1960s and early 1970s by
most state governments for promotions and development of
medium and large-scale industries in their respective states. In
addition to providing financial assistance to industrial units,
they also undertake a variety of promotional activities. They
also implement the various incentive schemes of the central
and state governments.
(8)Other Financial Institutions : Apart from the above special
financial institutions, there are a few other organizations,
which act as important source of long-term finance. These are,
(i) Life Insurance Corporation of India (LIC) : It was set up in
1956 on nationalisation of life insurance business in India.
Primarily it carries on the business of life insurance and
deploys the funds in accordance with national priorities and
objectives. It invests mainly in government securities and
shares, debentures and bonds of companies. It also extends
financial assistance to banks and other institutions for social
development and infrastructure facilities. It also underwrites
new issues of shares and grant loans to the corporate sectors.
Its performance with regard to assistance to corporate sector
has been significant both in terms of sanctions and
disbursements.
(ii)General Insurance Corporation of India (GIC) :It was
established in 1973 on nationalization of general insurance
business in India Like LIC, its investment priority is socially
oriented sectors of the economy and invests its funds in
government securities and share and debentures of companies.
It also provides term loans and underwriting facility to new
and existing industrial undertakings.
(iii)Unit Trust of India (UTI) : It was set up in 1964 as an
investment trust with capital of Rs. 5 crore subscribed by
Reserve Rank of India, LIC, State Bank of India and other
financial institutions. It has been playing an important role in
mobilizing the savings of the community through sale of units
under various: schemes (most well known being US-64 and
master shares) and channalising them into corporate
investments. It has also been extending financial assistance to
the companies by way of term loans, bills rediscounting,
equipment leasing and Hire purchase financing.
(iv)Export and Import Bank of India (EXIM Bank) : The
Export and Import Bank of India was set up on January, 1982
to take over the operations of international finance wing of the
IDBI and act as an apex institutions in the field of financing
foreign trade.
The main functions of the Bank are,
-Financing of export and import of goods and services.
-Granting deferred payment credit for medium and long term
duration.
-Providing loans to. Indian parties to enable them to
contribute to share capital of joint ventures in foreign
countries.
.- Extending refinance facilities to commercial banks in
respect of export credit Recently it has introduced production
equipment finance programme under which it provides rupee
term finance to export oriented units for acquisition of
equipment.
(v)Venture Capital Institutions : Venture Capital is a form of
equity finance designed specially for funding high risk and
high reward projects of young entrepreneurs. It helps them to
turn their research and development projects into commercial
ventures by providing them the initial capital and managerial
experience.The initial captial is provided in the form of equity
participation through direct purchase of the share and
debentures of the enterprise set up for the purpose. The
institutions providing venture capital also actively participate
in the management of the entrepreneurs’ business. By actively
involving and supporting the enterprises, thev able to protect
and enhance the value of their investment.
The development of venture capital institutions is of
recent origin in India. The concept was formally introduced in
1986-87 when the Government announced the creation of a
venture fund to be operated by IDBI. It was followed by
ICICI, IFCI and two public sector banks (State Bank of India
and Canara Bank) who set up separate companies for the
purpose.
Importance of project financing companies especially
addressing the needs of skill manpower of entrepreneurship.
Project finance is a useful tool for companies that wish to
avoid the issuance of a corporate repayment guarantee, thus
preferring to finance the project in an off-balance sheet
manner.
Project finance also permits the sponsors to share the
project risks with other stakeholders. The basic structure of
project finance demands that the sponsors spread the risks
through a network of security arrangements, contractual
agreements and other supplemental credit support to other
financially capable parties willing to assume the risks.This
helps in reducing the risk exposure of the project company.
The major importance of project finance companies
addressing the needs of skill manpower of entrepreneurship
are,
(1) Allows the promoters to. undertake projects without
exhausting their ability to borrow amount for traditional
projects.
(2) Limits financial risks to a project to the amount of equity
invested.
(3) Enables raising more debts as lenders are sure that cash
flows from the project will not be siphoned off for other
corporate uses,
(4) Provides stronger incentives for careful project evaluation
and risk assessment
(5) Facilitates the projects to undergo careful technical and
economic review
(6) Eliminates the dependency on alternative nature of
funding a project.
(7) Facilitates the arrangement.of liability financing and credit
improvement, accessible to the project but unavailable to the
project sponsor
(8) Enables the diversification of the project sponsor's
investments to reduce political risk.
(9) Gives more incentive for the lender to cooperate in an
atmosphere of a troubled loan.
(10) Enables to have prolonged credit opportunities.
(11) Matches specific assets with specific liabilities.
SIDO’s functions in assisting SSI’s:
State International Development Organization (SIDO) is a
subsidiary unit and organization that works under the
Supervision of SSI and ARI. It is an agency for formulating,
coordinating and monitoring the policies and programmes for
promotion and development of small scale sector. The head of
SIDO is a development commissioner who is assisted by a
group of directors and’ advisers in the implementation of
various plans and policies.
The important functions of SIDO are,
(1) Coordination.
(2) Industrial development.
(3) Extension.
SIDO has 27 offices, 31 SISIs (Small Industries Service
Institutes), 37 extension centres, 3 product-cum-process
development centres and 4 production centres.
All SSIs excluding those under the specialized boards and
agencies such as KVIC,Coir Boards, Central Slik Board fall
under SIDO.
(1) Coordination : The SIDO aims at development of small
scale industry by implementing national policy. It coordinates
the policies plans and programmes of various state
governments and development and establishment of industrial
estates for the benefit of SSI's, to cooperate with central
ministries, state governments, planning,commission etc.
(2) Industrial Development :
(i) To reserve certain items to be produced by the small scale
industries.
(ii)Gathering information on imported customer product and
setting up units to manufacture those products within the
country.
(iii) Providing guidance and advice to the customers to
participate in government stores purchase programme.
(iv) To provide needed help in developing the ancillary units.
(3) Extension : Extension is provided for updating and
improving the technical process service to strengthen the
SSI’s competitive ability, to assist in economic information
collection and to provide marketing assistance and technical
services.