Introduction to small scale enterprises

This presentation covers the topic of small scale enterprises, it sheds light on its definition, types, features, relation to large scale enterprises and role played by it in economic development. It also covers the concept of ownership, the various forms ownership structure and selection of an appropriate ownership structure. It uses the study note format. Enjoy learning!

1. Introduction to small scale enterprises Prepared by- Amanda Bvera

2. Definition of small Scale enterprises A business which functions on a small scale and involves less capital investment, a smaller number of labour and few machines to operate is known as a small business. Small scale Industries or small business are the type of industries that produces goods and services on a small scale. These industries play an important role in the economic development of a country. The owner invests once on machinery, industries, and plants, or take is a lease or hire purchase. These industries do not invest more than one crore. Few examples of small-scale industries are paper, toothpick, pen, bakeries, candles, local chocolate, etc., industries and are mostly settled in an urban area as a separate unit. These industries can be set up easily and have a smaller gestation period. Hence, they accelerate the process of balanced regional development.

3. Characteristics of small scale enterprises Ownership: They have single owner, so it is also known as sole proprietorship. Management: All the management works are controlled by the owner. Limited reach: They have a restricted area of operation. So they may be a local shop or an industry located in one area. Labour intensive: Their dependence on technology is very little because they are dependent on labour and manpower. Flexibility: As they operate on a small scale, they are open and flexible to sudden changes, unlike large industries. Resources: They utilize local and immediately available resources. They do a better utilization of natural resources and have lesser wastage.

4. A small enterprise has a lesser gestation period compared to a larger industry. Small enterprises generally carry out their operation so as to cater to the local and regional markets. Using local resources, small units are decentralized and dispersed to rural areas and smaller towns. They are the backbone of the industrial activity in the country and are playing a very important role in improving the socio-economic conditions of the people. A small scale enterprise is generally a ‘one-man show’. They require lesser capital investment and do not need expensive technology. They bring out the creative abilities of the people engaged in them. There are various kinds of small scale industries engaged in various fields such as manufacturing and services. They provide livelihood to many people.

5. Advantages of small scale enterprises There are several advantages to small scale enterprises. These can be shown as follows: They create greater employment opportunities through labour intensive processes and thereby help in tackling the unemployment problem. They have low gestation period and thereby expensive financial resources are not idled unproductively for long periods. They can be set up easily in rural and backward areas. They need small, local or regional markets. They encourage the growth of local entrepreneurship. They create decentralized pattern of ownership. They foster diversification of economic activities. They innovate and introduce new products particularly to cater to local needs. They influence and improve standard of living of local people. They provide equitable dispersal of enterprises throughout rural and backward areas. They earn vital foreign exchange for the country through their export of goods and services. They increase revenue to central and state governments by way of taxes paid by them.

6. types of small scale enterprises Based on capital investment, small business units can be divided into the following categories: Small Scale Industry Ancillary Small Industrial Unit Export Oriented Units Small Scale Industries Owned by Women Tiny Industrial Units Small Scale Service and Business Micro Business Enterprises Village Industries Cottage Industries

7. Small scale industry: They invest in fixed assets of machinery and plant, which does not surpass than one crore. For export improvement and modernization, expenditure ceiling in machinery and plant is five crores . Ancillary Small industrial unit: This industry can hold the status of an ancillary small industry if it supplies a minimum 50 per cent of its product to another business, i.e., the parent unit. They can produce machine parts, components, tools or standard products for the parent unit. Export oriented units: This industry can possess the status of an export-oriented unit if it exports exceeds 50 per cent of its manufactures. It can opt for the compensations like export bonuses and other grants awarded by the government for exporting units. Small scale industries owned by women: An enterprise operated by women entrepreneurs in which they alone or combined share capital minimum of 51 per cent. Such units can opt for the special grants from the government, with low-interest rates on loans, etc. Tiny industrial units: It is an Industrial or a company whose expenditure on machinery and plant does not exceed Rs. 25 lakhs.

8. Small scale service and business: It is a fixed asset investment on machinery and plant excluding land and building should not surplus Rs. 10 lakhs. Micro Business Enterprises: It is a tiny and small business sector. The investment in machinery and plant should not exceed Rs.1 lakh. Village industries: The industries which are in rural areas and manufacture any product performs any service with or without the utilization of power is called village industries. They have fixed investments on capital as per head, workers, and artisan, which does not exceed Rs.50, 000. Cottage industries: It is also known traditional or rural industries. These industries are not covered by the capital investment criterion. These are organized by a single person, with private resources. Use family labour and local talent. Simple instruments are used. Small capital investment is involved. Simple products are made. Indigenous technology is utilized.

9. Sno. Basis Small scale units Large scale unit 1. Definition Small scale units are those in which investment in plant and machinery should not exceed 1 crore. The government revises this limit from time to time. Large scale units are those in which investment in plant and machinery can go beyond the government specified limit. It has large investment in fixed assets. 2. Technology It uses local and indigenous technology. It uses state of the art technology. 3. Raw material It procures raw materials from local producers. It procures raw material from various sources inside and outside the country. 4. Labour It requires semi-skilled labour. It requires highly skilled labour. 5. Geographical reach It has a small reach and covers only local market. It has a huge reach and covers wider portions of markets. 6. Objective To cater to the local markets and improve rural areas and the rural community. To cater to both domestic and foreign markets and make the country more self-reliant. 7. Profits Earns a modest income to support a simple life style. Earns a huge profit to support a luxurious life style. DIFFERENCE BETWEEN LARGE SCALE & SMALL SCALE ENTERPRISES

10. Relationship between large scale & small scale enterprises The objectives of small scale as well as large scale industries complement each other beautifully. Small scale industries are labour-intensive whereas large scale industries are capital-intensive . Small scale enterprises aims to create employment for local residents while using less capital. It helps in eradicating backwardness from rural areas, which results in decreasing regional imbalances, as it raises the income level and improves the standard of living. Large scale industries are the backbone of the economy, as they facilitate in the production of those consumer goods and capital goods which are imported from abroad, which encourages self-reliance. Further, they provide employment to many people belonging to different areas. In addition to this, exports are promoted which increases the country’s revenue. A successful partnership between both the types of enterprises is essential for economic development. Both small scale industries and large-scale industries occupy a significant place in the development of the country, not just because they provide employment to many people but also because they contribute to the country’s GDP. Moreover, they help in raising the standard of living of the people.

11. Role of small scale enterprises in economic development Small scale enterprises play a crucial role in the economic development of the country. They provide numerous benefits to the rural community and enhance the level of production in the local areas. They also contribute a substantial amount of revenue to the central and state governments. Here are some of the important roles played by small scale enterprises in economic development: Employment generation Self-employment Optimum use of capital Facilitate entrepreneurial development Use of local resources Balanced regional development Conservation of foreign exchange Equal distribution of income Supporting agriculture and large industries Increase in industrial output.

12. Employment Generation: The rise in small scale enterprises helps to tackle the unemployment problem in the country. These business units help to spread jobs in the rural and backward areas, thus helping the rural community stay afloat. Employment is an important indicator of the level economic development of a country, hence small scale industries improve the quality and quantity of labour in the country. Self-employment: Self-employment is the process through which an individual decides to initiate, organize and manage an enterprise, instead of working as an employee in an organization. This implies that there is one less job-seeker in the country. Thus small enterprises have the advantage of easy set-up which promotes self-employment in the nation. This further results in the creation of more jobs and creates an environment of healthy competition in the economy. Optimum use of capital: Small enterprises require less investment in capital, they have a lower gestation period and hence capital resources are not idled unproductively for long periods of time. Thus, small scale enterprises lead to an optimum use of capital. Facilitate entrepreneurial development: The growth of small scale enterprises facilitates entrepreneurial development in many ways. It removes the apprehensions of the people regarding an entrepreneurial career and it also boosts the level of production from the rural and urban areas. Use of local resources: Small enterprises generally procure the raw materials required for their operation from the local producers. Therefore, the local resources are used to their fullest capacity. This helps the local producers stay afloat and preserves the natural goods and occupations of the rural community.

13. Balanced regional development: One of the major hindrances to economic growth in India is unbalanced regional development. Certain regions of the country seem to be bustling with trade and commerce whereas other areas are ever-sinking into poverty. The dispersion of small scale enterprises into such areas, facilitates balanced regional development. It creates employment and improves the standard of living of the people residing in those areas. Conservation of foreign exchange: Small scale enterprises help in the conservation of foreign exchange, by reducing the amount of imports of the country. With more business units engaged in domestic production, it leads to the nation becoming more self-reliant. Thus, reducing the need to import goods from abroad. These units also earn a substantial amount of foreign exchange for the country. Equal distribution of income: The growth of small scale enterprises leads to a more equitable distribution of income, due its decentralized and dispersed nature. The small scale enterprises are set up with the objective of improving the livelihoods of the people living in that area, and to provide a stable and decent source of income for them and their families. Supporting agriculture and big industries: Agriculture is of primary importance in a country such as India. It provides jobs to numerous people in India, upgrading the agricultural sector with the latest agricultural techniques and practises is crucial. Small scale industries help to achieve this by supplying valuable tools and implements to the sector. It also supports large scale industries in its operations . Increase in industrial output: Small scale enterprises lead to an increase in industrial output. They encourage more production in the economy. As the level of production increases, so will the level of employment and income. Thus it improves the standard of living of the people.

14. Meaning of ownership structure According to Gareth R. Jones “Organisational structure is the formal system of task and authority relationships that control how people coordinate their actions and use resources to achieve organisation’s goals. The principle purpose of organisational structure is one of control: to control the means used to motivate people to achieve these goals.” The question of ownership is a primary question in small business management. Every entrepreneur should have a clear vision about the nature of the business he or she is running, this along with several other factors determine the ownership structure of the organisation. Ownership is represented by the right of an individual or a group of individuals to acquire the legal title to assets for the purpose of managing an industrial operation.

15. Types of ownership structures Small industrial units are by and large, started by persons who value independence and are desirous of obtaining the highest rewards for their initiative, innovation, technical skills, business acumen and experience. The chief forms of ownership structure are as follows:

16. Sole proprietorship Sole proprietorship is a form of business organisation in which an individual invests his own capital, uses his own skill and intelligence in the management of its affairs and is solely responsible for the results of its operation. The individual, with the assistance of the other workers or by his own labour and capital, may run the industry. This form of entrepreneurship is also known as individual entrepreneurship. It is the oldest and the most sought after form of enterprise in the field of small scale industry, and the easiest and simplest form of entrepreneurship from the operational entrepreneurship. The following are the salient features of sole proprietorship: Sole ownership One-man control Unlimited risk Undivided risk No separate entity of the firm No government regulations

17. The following are the merits of sole proprietorship: Easy and simple formation Smooth management Promptness in decision-making Direct motivation and incentive to work Personal touch with the customers Secrecy Social advantages The following are the limitations of sole proprietorship: Limited financial resources Limited managerial ability Unlimited liability Lack of continuity In spite of the above limitations, this form of business organisation occupies a prominent place in the business world. In advanced and in developing countries such as India, it plays an important role.

18. Partnership organisation Partnership organisations grew and gained importance as an individual is not competent enough to possess enormous capital and knowledge or competence to manage everything. With the expansion of business and enlargement of the scale of its operations it became necessary for a group of persons to join hands together and supply the necessary capital and skills. According to the Indian Partnership Act, 1932. Section 4 of this act defines partnership as “ the relation between persons who have agreed to share profits of a business carried on by all or any of them acting for all.” Persons who enter into partnership are collectively known as firm and individually known an partners. Here are the basic features of a partnership organisation: Number of persons Contractual relationship No legal distinction between a firm and its partners Unlimited liability.

19. The advantages of partnership organisation are as follows: Easy formation Flexibility Pooling of resources and skills Division of risk Strong credit position Less incidence of tax Encouragement of mutual trust, personal element in the business The disadvantages of partnership organisation are as follows: Limited resources Unlimited liability Instability Lack of harmony of interest Partnership organisations grew essentially out of the failures and limitations of sole proprietorship. Small entrepreneurs often lack the capital or competence to manage an enterprise entirely by themselves, hence partnerships helped to solve this issue. About 35% of the small scale industries in India existed as partnership organisations.

20. Co-operative society A co-operative society is essentially an association of persons who join together on a voluntary basis for the furtherance of their common economic interests. The International Labour Organisation (ILO) defines a cooperative as “an association of persons usually of limited means, who voluntarily join together to achieve a common economic end through the formation of a democratically controlled business organisation, making an equitable contribution to the capital required and accepting a fair share of the risks and benefits of the undertaking. This type of organisation has not made much of an appreciable impact on the small-scale industrial sector. Of the total small-scale units, only 0.7% are organised as co-operative societies.

21. The advantages of co-operative societies are as follows: Easy to form Open membership Democratic management Limited Liability Stability Economical operations Government patronage Low management cost Mutual co-operation No speculation Economical advantages Service motive Internal financing Income tax exemption Durability Cheaper goods State patronage Elimination of middlemen Equality Perpetual existence Scope for self-government

22. The disadvantages of co-operative resources are as follows: Limited capital Inefficient management Absence of motivation Differences and factionalism among members Rigid rules and regulations Lack of competition Cash trading Lack of secrecy Weightage to personal gains Lack of incentive and initiative Corruption Limited consideration High interest rate Undue government intervention Difference of opinions among the members Lack of expertise State control Lack of loyalty Lack of understanding of the principle of co-operative societies Lack of universal applicability.

23. Joint-stock company Definition: A company is a voluntary association of persons who contribute to its capital but their liability remains limited. It carries on business for profit as a legal entity. It can sue and be sued in its own name. Thus a corporation is an artificial being, invisible, intangible and existing only in the contemplation of law. Being a more of a creation of law, it possesses only those properties which the charter of its creation confers upon it, either expressly or as incidental to its very existence. The growth of joint-stock companies constitute an important step in the historical evolution of forms of ownership of business enterprises. With the enlargement of the scale of operations, it became difficult for a sole trader or partnership firm to cope with the problems of finding more resources and arranging for more specialised management. A joint-stock company exists as a separate legal entity quite apart from that of the members comprising the organisation unlike a partnership. In other words, the company is considered to be a ‘person’ in the eyes of the law. Also these companies possess the rights to own and transfer property.

24. Comparison of different forms of ownership Including Private limited and Public limited companies.

25. Basis of comparison Sole proprietorship Partnership organisation Private limited company Public limited company Formation Easiest, no legal formalities. Easy, only an agreement is required. Difficult, some legal formalities are present. Very difficult, several legal formalities are there. Registration Not necessary Optional Compulsory Compulsory Membership One man show single membership. Minimum of 2 participants, maximum of 10 people in banking and 20 in others. Minimum: 2 Maximum: 50 Minimum: 7 Maximum: not limit. Legal status No separate legal existence No separate legal existence. Separate legal entity Separate legal entity Liability of members Unlimited, full risk Unlimited, joint and several, risk shared. Limited Limited Financial capacity and suitability Limited capital suitable for small business. Pooling of capital suitable for medium size. Large capital, suitable for medium scale business. Very large capital suitable for large scale operations. Sharing of profits All to the owner As per the agreement made On the basis of the shares held. On the basis of the shares held. Winding up At will At will Under the act Under the act Governing Act General law Partnership act, 1932 Companies Act, 1956 Companies Act, 1956

26. Basis of comparison Sole proprietorship Partnership organisation Private limited company Public limited company Management and control Quick decisions, no specialisation, management and ownership lie in the same hands. Unanimous decisions, limited specialisation, management lies where ownership is. Board decisions, greater specialisation, ownership and control go together. Board decisions, specialisation, divorce between ownership and management. Business secrecy Perfect secrecy, no audit or reports. Secrets limited to partners, no audit or reports. Shared secrets among members, audits and reports are compulsory. Secrets shared with public, audits and reports are compulsory. State regulation and flexibility Practically none, full flexibility of operations Sufficient flexibility Considerably limited flexibility, privileges and exemptions. Excessive, no flexibility. Transferability of interest At will With mutual consent Restricted as articles of association Freely transferrable Tax burden Low at small level of income, progressive rate. Low at small level of income, progressive rate. Low at medium rate of income, flat rate, double taxation. Low at high rate of income, flat rate, double taxation. Stability or continuity Unstable, fully dependent on the owner. Less stable, maybe dissolved by death, insolvency, etc. of a partner. Perpetual existence Perpetual existence

27. Selection of an appropriate ownership structure The selection criteria for a proper form of organisation is crucial for the success of a business enterprise. Every entrepreneur has to decide, at the outset, about the type of organisation which he plans to select for his private enterprise. It is an important entrepreneurial decision. This choice is by and large influenced by the socio-cultural norms and then prevailing industrial environment. The decision of an entrepreneur depends on a number of variable factors. Among the many, the following factors are given weightage in making a choice of a suitable form of organisation which is most suited to one’s enterprise. The deciding core factors are as follows: Type of business- service, trade, manufacturing. Selection of industry and area of operation. Scope of operation, volume of business and the size of the market, including its expected growth potential.

28. Amount of capital funds required- initial capital, working capital. Possibility of raising resources from the market- institutions, subsidies and other incentives. Costs and procedures and relative freedom from government regulation. Comparative tax advantages. Size of the risk. Continuity of the enterprise. Degree of direct control and adaptability of administration. By and large, the final organisational choice is a compromise that is most suitable to the entrepreneur’s needs. The above ten factors are the major factors that will influence the choice of a proper form of an organisation, which will withstand all the stresses and pressures and strive for its smooth progress on an ongoing basis. The aim of entrepreneurial development programmes in India should not be to treat the small entrepreneurs as small, but to help the more promising and efficient ones among them to grow big. This will mobilise the productive resources of the country, contain the monopoly of a few large enterprises, and increase income, profits and employment. The objective is to accelerate the process of innovative entrepreneurial development in the country.

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