CHAPTER – 10 : ESTABLISHMENT OF A BUSINESS UNIT
Introduction :
While establishing a business unit, the promoter of the business has to ponder upon certain problems, e.g. determining the aims, the types of business, selection of location arrangement of capital, etc. The more the promoter is careful to ponder upon these problems the easier will be the working of business. And business will be successful. Otherwise the possibilities of its failure will increase. We shall study in detail the points like factors to be considered for starting a business, for determining the form of ownership and scope for starting a small business in this chapter.
[1] Determining the form of ownership of business :
After the aims and type of business are to be determined, the form of ownership is to be determined. Sole proprietorship, partnership, company and co-operative society each of these forms has its advantages and limitations. Selecting the most favourable out of these is a question which requires pondering. It is the selection of right form which contributes significantly in the development and success of a business. Following factors should be considered while selecting the form of ownership :
(1) Type of business (6) Duration of business
(2) Size of business (7) Preference-of directors
(3) Requirement of capital (8) Interference of government
(4) Degree of risk (9) Tax burden
(5) Need of managerial skill
(1) Type of Business : The type of business is determined by the field of economy which business activities are undertaken. The selection of form of business ownership mostly dependent upon the type of business. In the business of purchases-sales permanent capital requirement is low whereas that of working capital is high so sole proprietorship and partnership are more favourable. If business is involved in production activity the proportion of permanent assets is high, so the requirement of permanent capital is high. Therefore, partnership and company are more favourable. Thus, type of business plays a major role in determining the form of ownership.
(2) Size of business : Mostly, size of business is determined by the sales turnover. It size of the unit is small, requirement of capital remains low. Therefore, sole proprietorship and partnership forms remain favourable but with the increase in the size of unit the requirements of capital and managerial capacity increase. Hence, selection of forms like company or co-operative society in place of partnership has to be made.
(3) Capital requirement : The requirement of capital in a business unit is dependent upon its type, size of unit and technology. Sole proprietorship or partnership remains favourable for those units having low capital investment but units having large capital requirement selection of company or any other corporate forms has to be made.
(4) Degree of risk: Those units which face high degree of risk, forms having limited liability are more favourable (e.g. company, co-operative society). Those units which face low degree of risk, forms having unlimited liability (Sole proprietorship or partnership) easily selected.
(5) Need of managerial capacity : When the size of a business unit is small the need of managerial capacity remains limited. So, sole proprietorship form is favourable for those units (e.g. grocery shop, stationery store) but need of managerial capacity increases when the size of the unit is big. At that time, Company form is more favourable. Company form is more favourable; when large capital investment is to made and skilled managers-experts are required in big number.
(6) Business duration : Some business activities are run on temporary basis, e.g. kite business. Here, sole proprietorship or partnership may work. Where long term planning of development of business is required only a company form is proper because company has permanent existence under the law.
(7) Preference of directors plays a major role in determining the form of unit. If secret of the business is to be kept confidential and if the promoters want to keep business under their complete control, sole proprietorship will be selected. However, if management insists on modern management and broad-based units, intend to distribute authority and responsibility by putting faith in others, partnership and company forms will be selected.
(8) Government interferences : The interference of government in sole. Proprietorship and partnership is comparatively less, so these forms are selected more. Government regulations are comparatively more in company and co-operative forms. If promoters are ready to accept government regulations they will select company or co-operative form. Promoters willing to have freedom and avoiding governmental interferences will select sole proprietorship and partnership.
(9) Tax burden : The burden of taxes is different roil different forms of business units. The burden of taxes on company is more than sole proprietorship and partnership. That form will be selected on which the burden of taxes is light. Above mentioned factors are mutually connected. The need of capital is dependent upon business activities, size and technology. Likewise the degree of risk is dependent upon capital. If degree of risk is more only then promoters will be ready to share profit with others. Thus each factor is dependent upon other. Besides, a form selected once can be transformed into another according to the need. (e.g. sole proprietorship into partnership and partnership into company) Same form may be favourable or unfavourable for different business units.
[2] Factors to be taken into account while starting a business :
If a promoter takes faulty decision in haste to grab a chance of earning profit while starting a business, he will be ruined economically. It is difficult to start a new business in today’s cut-throat competition. A business established without proper thinking and calculations will not be successful for a long time.
Generally the promoter of a business has to consider primarily a business opportunity and examine it firstly and then to think over the risk in it, the necessity of capital, availability of personnel, sustaining capacity in the changing circumstances, entrepreneural abilities and profitability of business. After studying the demand for and supply of products or services only then new enterprise should be established. Project report should be prepared with the, help of experts and following factors should be taken into account:
(1) Market (2) Location (3) Financial requirement (4) Government Policy (5) Efficiency – preference of promoter.
(1) Market : It is necessary to study the situation of the product or service which promoter wants to supply by starting a business. Demand, supply, customers, price, place of competitor producers in market are to be taken into account while starting a business.
(2) Location : Location of business or industry is an important factor affecting the cost of product or service. After considering the availability of raw materials, skilled personnel electricity, climate, transport, banking service, telegram, postal, telephone services, economic situation, location is to be selected. Improper selection of location may cause heavy damage to the business. Incentives received for backward and hilly areas are also to be considered.
(3) Financial requirement : Finance is a life of business. When, how much and of what form. financial requirements will arise are to be considered while establishing a business. After estimating properly the requirements of long-term ( permanent ) and short-term (working) capital and preparing project report for it, sources of satisfying those requirements are to be thought of and then to start a business.
(4) Government policy : Which type of government policy is implemented for the type of business activities which are to be started has to-be taken into account. Government gives incentives to certain activities (e.g. subsidy, excise exemption ). It is not desirable to start business against the government policy.
(5) Efficiency of promoter : For starting a business the qualities of promoters like experience, willingness to take risk, economic solvency, capacity to collect more finance, personal credit, prestige of promoter, specialized knowledge required for business, patience are to be taken into account. Sometimes, an enterprise which suffers a loss may prove to be profitable and efficient in long-term.
Besides these, a new enterprise should be started only after considering the factors like possibility of business development, plant layout, the expected size of business, availability of right personnel, availability of raw materials and energy and market situation; counseling of experts may be taken if required. Aims are to be determined form of ownership is to be selected with reference to these aims only.
[3] Scope for starting a small business :
In modern times businesses are developing quickly and on a big scale, yet small businesses have survived and are developing in certain fields. Small businesses are very much useful in increasing employment opportunities and for balanced economic development. So government has also provided certain incentives to small units. Following factors are helpful in starting small businesses:
(1) Limited resources : Less resources are required in small business. A person having less capital is motivated to start a small business by relying on his know-how. Long legal procedure is also not required to start a small business.
(2) Flexibility : The owner himself runs a small business. He initiates quick changes in business method and can cope with the changing circumstances.
(3) Personal contact : The owner takes personal interest in day to day activities in small business. He maintains personal contact with customers and personnel. e.g. hair cutting saloon.
(4) Limited scope : Small business succeeds where the market of product or service is limited. Big businesses do not enter into small fields as they.do not get enough earning. e.g. vegetable shop.
(5) Personal reasons : Certain persons do not like to work under others. A person starts his small business if he wants to be free.
(6) Helpful for, big units : Small units become useful to big units, e.g. distributorship. Certain big units invite small businesses to help, e.g. certain automobile producers are dependent on small businesses for spare-parts.
(7) Limitations of big units : Small businesses have remained popular because of limitation of big units like absence of personal interest, inability to be careful for financial transactions and absence of personal contacts.
In short, in developing countries like India
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