Unit IIUnit II

Project IdentificationProject Identification

Meaning of A ProjectMeaning of A Project

The very foundation of an enterprise is the project. The very foundation of an enterprise is the project.

According to encyclopedia of Management ; “A project is an According to encyclopedia of Management ; “A project is an organized unit dedicated to the attainment of a goal- the organized unit dedicated to the attainment of a goal- the successful completion of a development project on time, within successful completion of a development project on time, within budget, in conformance with pre-determined programme budget, in conformance with pre-determined programme specifications”.specifications”.

The very foundation of the enterprise is the project. Hence The very foundation of the enterprise is the project. Hence the success and the failure of an enterprise largely depends the success and the failure of an enterprise largely depends upon the project.upon the project.

Thus in simple words a project is an idea or a plan that is Thus in simple words a project is an idea or a plan that is intended to be carried out.intended to be carried out.

The dictionary meaning of a project is that it is a scheme, design The dictionary meaning of a project is that it is a scheme, design a proposal of something intended or devised to be achieved. a proposal of something intended or devised to be achieved.

Project Identification Project Identification

Project identification is concerned with the Project identification is concerned with the collection, compilation and analysis of economic collection, compilation and analysis of economic data for the eventual purpose of locating possible data for the eventual purpose of locating possible opportunities of investment and with the opportunities of investment and with the development of the characteristics of such development of the characteristics of such opportunities opportunities

According to Drucker opportunities are of the According to Drucker opportunities are of the following kinds:following kinds:

a.a. additive additive

b.b. Complementary Complementary

c.c. Break-throughBreak-through

Project identification cannot be complete without Project identification cannot be complete without identifying the characteristics of the project.identifying the characteristics of the project.

Every project has three basic dimensions- inputs, Every project has three basic dimensions- inputs, outputs and social costs & benefitsoutputs and social costs & benefits

The input characteristics define what the project will The input characteristics define what the project will consume in terms of raw materials , energy, consume in terms of raw materials , energy, manpower , finance and organizational set up.manpower , finance and organizational set up.

The output characteristics defines what the project The output characteristics defines what the project will generate in the form of goods and services, will generate in the form of goods and services, employment , revenue etc. employment , revenue etc.

In addition to inputs and outputs every project In addition to inputs and outputs every project has impact on the society, it inevitably affects the has impact on the society, it inevitably affects the equilibriums of demand and supply in the equilibriums of demand and supply in the economy. economy.

Projects do not emerge themselves the inputs to Projects do not emerge themselves the inputs to set up a project can come from different sources set up a project can come from different sources such as Government agencies, credit and such as Government agencies, credit and financial institutions, non-governmental financial institutions, non-governmental organizations like chambers of commerce and organizations like chambers of commerce and industry, international collaborations etc.industry, international collaborations etc.

Once the venture ideas have been developed they have to Once the venture ideas have been developed they have to be screened and evaluation keeping in mind some be screened and evaluation keeping in mind some internalinternal and and externalexternal constraints. constraints.

Internal Constraints arise on account of the limitations of the Internal Constraints arise on account of the limitations of the management system which will eventually be responsible management system which will eventually be responsible for the implementations of the project.for the implementations of the project.

Some of them are narrated as below:Some of them are narrated as below: Entrepreneurs while implementing projects rely more on Entrepreneurs while implementing projects rely more on

outside consultants for preparation of feasibility reports.outside consultants for preparation of feasibility reports. For early implementation of the projects within the For early implementation of the projects within the

budgeted cost and time schedule all the entrepreneurs budgeted cost and time schedule all the entrepreneurs cannot develop project management systems, cannot develop project management systems,

organization structure network analysis and other organization structure network analysis and other elements.elements.

• Lack of physical (finance, personnel, inventory etc) and Lack of physical (finance, personnel, inventory etc) and non-physical resources( patents , experience , skills non-physical resources( patents , experience , skills etc)etc)

External ConstraintsExternal Constraints The external environmental factors like nature, size, The external environmental factors like nature, size,

location etclocation etc Government policies and regulations ( getting Government policies and regulations ( getting

approvals of industrial licensing, foreign collaboration, approvals of industrial licensing, foreign collaboration, environmental clearance, foreign exchange permit etc)environmental clearance, foreign exchange permit etc)

Financial institutions and banks are the external Financial institutions and banks are the external financial resources, long and cumbersome financial resources, long and cumbersome procedures are the external constraints.procedures are the external constraints.

PROJECT LIFE CYCLEPROJECT LIFE CYCLE

Like human beings projects also have a life cycleLike human beings projects also have a life cycle

It consists of three main stagesIt consists of three main stages The pre-investment phaseThe pre-investment phase The construction PhaseThe construction Phase The Normalization phaseThe Normalization phase

Pre-investment phase is primarily concerned with objective formulation, demand forecasting, selection of optimal strategy, projection of financial profile, etc. This is the first phase in the life of the project.

The construction phase begins after investment decision is taken. Resources are invested during this phase in building the basic assets of the project. It consists of mainly developing the infrastructure and is the one time effort.

The normalization phase starts after the trial run of the project framework developed during the construction phase.

Project FormulationProject Formulation

““Devising plans and methods to operate the project to earn Devising plans and methods to operate the project to earn desired returns”desired returns”

It is a systematic development of a project idea for the It is a systematic development of a project idea for the eventual objective of arriving at an investment decision.eventual objective of arriving at an investment decision.

It involves a step by step investigation and development of It involves a step by step investigation and development of project ideaproject idea

It is process of involving the joint efforts of experts of It is process of involving the joint efforts of experts of different fields.different fields.

Project team normally should consist of the Project team normally should consist of the followingfollowing

One industrial economist One industrial economist One market analystOne market analyst One or more technologists/engineer One or more technologists/engineer One mechanical/industrial engineerOne mechanical/industrial engineer One civil engineer if neededOne civil engineer if needed One management accounting expertOne management accounting expert

Steps in Project Steps in Project FormulationFormulation

Steps in Project FormulationSteps in Project Formulation As mentioned earlier, a project comprises a series of As mentioned earlier, a project comprises a series of

activities for achieving predetermined objective or set of activities for achieving predetermined objective or set of objectives. In view of this, to begin with the objective (s) of objectives. In view of this, to begin with the objective (s) of the project should be defined as precisely as possible. The the project should be defined as precisely as possible. The objectives may be social, economic or a combination of objectives may be social, economic or a combination of both and they can be defined under the following both and they can be defined under the following categories:categories:

i. General objectives andi. General objectives and ii. Operational objectives.ii. Operational objectives.

A general objective merely states in broad A general objective merely states in broad terms the achievement expected whereas terms the achievement expected whereas an operational objective specifically an operational objective specifically mentions results expected from the mentions results expected from the implementation of the project or scheme. implementation of the project or scheme. The definition of objective in clear terms The definition of objective in clear terms helps in quantifying physical, financial, helps in quantifying physical, financial, human and other resources requirements.human and other resources requirements.

Following this, the next strategy concerns itself with the Following this, the next strategy concerns itself with the locationlocation

and size of the project. The location of the project is and size of the project. The location of the project is influenced byinfluenced by

the availability or existence of various resource and thethe availability or existence of various resource and the infrastructural facilities. Examination of infrastructural facilities. Examination of

availability/existence ofavailability/existence of these resources/facilities at one or more sites should lead these resources/facilities at one or more sites should lead

to a to a decision on the selection of the location of the project and decision on the selection of the location of the project and

thus thus facilitate exploitation of the available resources/ facilities to facilitate exploitation of the available resources/ facilities to

the the advantage of the investor or the community at large or advantage of the investor or the community at large or

both.both.

Sequential Stages of Project Formulation

The process of project development has been categorized into seven distinct and sequential stages. They are

1. Feasibility Analysis. 2. Techno-Economic Analysis. 3. Project Design and Network Analysis 4. Input Analysis. 5. Financial Analysis. 6. Social Cost-Benefit Analysis 7. Pre-Investment Analysis

1. Feasibility Analysis: This is the very first stage in project formulation. At this stage, the project idea is examined from the point of view of whether to go in for a detailed investment proposal or not. As project idea is examined in the context of internal and external constraints three alternatives could be considered. First, the project idea seems to be feasible; second, the project idea is not a feasible one and third, unable to arrive at a conclusion for want of adequate data. If it is feasible, we proceed to the second step, if not feasible, we abandon the idea and if sufficient data are not available, we make more efforts to

collect the required data and design development.

Techno-Economic Analysis: In this step, estimation of project demand potential and choice of optimal technology is made. As the project may produce goods or services, it is imperative to know the market for such goods or service produced. Market analysis is also in-built in this step. The choice of technology itself will be based on the demand potential and aid in project design. Techno-economic analysis gives the project a unique individuality and sets the stage for detailed design development.

3. Project Design and Network Analysis: This important step defines individual activities, which constitute the project and their inter-relationship with each other. The sequence of events of the project is presented. A detailed work plan of the project is prepared with time allocation for each activity and presented in a network drawing.

Project design is the heart of the project entity. This paves the way for detailed identification and qualification of the project inputs, an essential step in the development of the financial and cost-benefit profile of the project.

4. Input Analysis: The step assesses the input requirements during the construction of the project and also during the operation of the project. In the earlier step, a project was divided into several activities. Now it is better to see to the inputs required for each activity and sum it up to get at the total input requirements on qualitative and quantitative terms.

Inputs include materials, human resources. Input analysis, also considers the recurring as well as non-recurring resource requirements of the project and evaluate the feasibility of the project from the point of view of the availability of theses resources. This will aid in assessing the project cost itself which in turn is necessary for financial analysis or cost benefit analysis.

5. Financial Analysis: This stage mainly involves estimating the project costs, estimating its operating cost and fund requirements. Financial analysis also helps in comparing various project proposals on a common scale. thereby aiding the decision maker. Some of the analytical tools used in financial analysis are discounted cash flow, cost-volume profit relationship and ratio analysis. It is very essential to take caution in preparing financial estimates.

The objective of this strategy caution is to develop the project taking into consideration resources and also to identify these characteristics. Investment decisions whether made for the provision of goods or services involve commitment of resources in future. Since investment proposition has a very long time horizon, it is absolutely necessary to exercise due care and foresight in development project financial forecasts.

6 Cost- Benefit Analysis. The overall worth of a project is the main consideration here. While financial analysis will go to justify a project from the profitability point of view, cost benefit analysis will consider the project from the national viability point of view. Here again, the project design forms the basis of evaluation. When we talk of cost-benefit analysis, we not only take into account the apparent direct costs and direct benefits of the project but also the costs which all entities connected with the project have to bear and the benefits which will be enjoyed by all such entities. This strategy is now taken to be the internationally recognized system of project formulation.

7. Pre-investment Analysis: The project proposal gets a formal and final shape at this stage. All the results obtained in the above steps are consolidated and various conclusions arrived at to present a clear picture. At this stage, the project is presented in such a way that the project-sponsoring body, the project-implementing body and the external consulting agencies are able to decide whether to accept the proposal or not.

The sum total of the pre-investment appraisal is to present the project idea in a form in which the project-sponsoring body, the project-implementing body can take an

investment decision regarding the project

Project Appraisal

Project appraisal is an exercise whereby a lending financial institution makes an independent and objective assessment of various aspects of an investment proposition to arrive at the financing decision. Appraisal exercises are basically aimed at determining the viability of a project and sometimes, also in re shaping the project so as to upgrade its viability.

The factors generally considered by institutions while appraising a project includes technical, financial, commercial, economic, ecological, social and managerial aspects. This makes it necessary to recognize the inter-relationship underlying the various aspects of a project. For example, the size of the initial market and the estimates for demand build-up would determine the profitability, which, in turn, would determine the means of financing.

Location also has an important bearing on project cost and cost of production. Above all, the management behind the project has a decisive influence on most of these aspects. These considerations imply that project appraisal is viewed as a composite process as against the approach of viewing each aspect individually.

The exercise of project appraisal simply means the assessment of a project in terms of its economic, social, and financial viability.

This exercise is critical as it calls for a multi-dimensional analysis of the project that is, a complete scanning of the project.

Financial institutions and banks make a critical appraisal of projects, which are submitted to them by the entrepreneurs for getting loans.

Profitability Appraisal Methods

Pay back period Return on investment Discounted cash flow Internal rate of return Net present value Profitability index

PROPRIETORSHIP

A sole proprietorship is the most common type of business. There are sole proprietorships everywhere. Small grocery stores, STD booths are mostly proprietorship businesses.

A “Sole Proprietorship” business means that there is only ONE owner. There may be employees or helpers hired under the owner, but there is only one “head” who administers and runs the show.

The definition of a Sole Proprietorship is: A business enterprise exclusively owned, managed and controlled by a single person with all authority, responsibility and risk.

The basic advantage of a sole proprietorship is that since you are the only owner, you are free to run the business just the way you want to run it. Also, in a sole proprietorship you get to keep all the profits.

The biggest disadvantage is that there is “unlimited liability” on the “Sole Owner” and limited availability of funds.

In the case of “Sole Proprietorship”, the Govt. does not see any difference between the firm and the individual. If you are a plumber named Raju Sharma and you start a plumbing service firm called “Flush” which is a sole proprietorship, the government does not differentiate between “Flush” and “Raju Sharma”

This means that if someone sues “Flush” and “Flush” owes that person a huge sum of money, it is as good as Raju Sharma owes that person a huge sum of money. Raju Sharma's bank accounts, property and even his house may be used to settle the claim.

This is the biggest disadvantage of sole proprietorships. Because of this reason, sole proprietorships are generally started if the business is small and there is “not much risk involved”.

Merits

Ease of Formation Direct Motivation Independent Control Quick Decisions Business Secrecy Personal Touch Freedom from Govt. Control Flexibility of operations

Demerits

Limited Capital Unlimited Liability Uncertain Life Limited Size Lack of managerial expertise

Partnership

When one is starting a business, one may form a sole proprietorship when the business is small. The problem with this kind of business is that it cannot grow beyond a certain limit. This is because a sole proprietorship will not be readily sponsored by banks other sources of finance.

Also the amount of money that the sole proprietor can contribute to the business “alone” is not very high. Besides this, the sole proprietor has to take wise decisions in running the business. If he is unable to do so, the business will not be very successful and will not grow.

A sole proprietor might be an expert at marketing or might be technically strong. But it is not likely that he will be strong in all the fields that are important for making wise and successful business decisions.

For all the above reasons, one may choose to form a partnership firm right from the start or later change their firm to a partnership firm. So, one may start a partnership firm with the objective of pulling in people so that more capital is generated or making specifically skilled people partners so that wise business decisions may be made.

Hence a partnership is an association of two or more persons to carry on as co owners of a business and to share its profits and losses.

Section 4 of the Partnership Act defines partnership as “the relation between persons who have agreed to share the profits of a business carried on by all or any one of them acting for all.” ‘Persons who have entered into partnership with one another are called individual partners and collectively a firm and the name under which their business is carried on is called the firm name”.

Characteristics of Partnership

FormationAccording to the Partnership Act of 1932, there is no

special mode for the creation of a partnership. If persons between 2 and 20 enter Into agreement oral or verbal for carrying on a business, with a private gain, then partnership is formed (10 in case of banking business). To avoid misunderstanding, it is desirable that the articles of partnership be prepared in writing with legal assistance. The articles of partnership should cover the rights, duties, obligations and the arrangements which the parties have mutually agreed upon.

FinancingThe capital is made available to the firm by the

partners as per terms of the agreement. It is not necessary that all the partners should contribute equally to the partnership. A person who has special skill or ability can be admitted to the partnership without any capita contribution.

ManagementIn a partnership business, every partner has a right

to take part in its management. The important business decisions are taken with the consent of all other partners.

Restriction on Transfer of InterestNo partner can transfer his share to any other

person without the prior consent or willingness of all other partners.

Unlimited Liability The liability of the partners of a firm is unlimited. If

the business suffers losses and the assets of the partnership are not sufficient to meet its obligations, then the creditors may sue any one or all of the partners to satisfy the debt.

DurationThe partnership is a temporary form of business

ownership. It operates at the pleasure of the partners. The partnership can come to an end, if a partners leaves, dies, declared bankrupt or insane , it is also dissolved by the partners by obtaining a degree from the court.

Taxation. If a firm is registered under the Income Tax Act, the profit of the firm is first divided among the partners and then assessed separately. In case, it is not registered within the meaning of Income Tax Act, the firm will be assessed on total profit.

Implied AuthorityEach partner is an agent of the other partners and

at the same time of the firm. This is an implied authority the moment the agreement is entered into between the partners, this authority automatically comes to each of the partners. The regular acts of business such as buying, selling of goods, hiring of employees etc. by a partner is considered the act of the firm or the act of all the partners.

Formation

Before a partnership is formed, a “partnership deed” should be prepared. This partnership deed may be oral or in writing. However it is wise to make sure that the partnership deed is in writing so that future conflicts may be resolved.

A Partnership Deed must be signed by all the partners and should be properly stamped. It can be altered with the mutual consent of all partners.

A partnership deed usually contains the following details :

1) Name of the firm2) Names and addresses of all the partners 3) Nature of the firm’s business4) Date of agreement5) Principal place of the firm’s business6) Duration of partnership, if any7) Amount of capital contributed by each partner8) The proportion in which the profits and losses are

to be shared.

9) Loans and advances by partners and interest payable on them.10) Amount of withdrawal by each partner11) Amount of salary or commission payable to any partner12) The duties, power and obligations of all partners13) Maintenance of accounts and audit.14) Mode of valuation of goodwill on admission, retirement or

death of a partner.15) Procedure for dissolution of the firm and settlement of

accounts16) Arbitration for settlement of disputes among the partnership.17) Arrangements in case a partner becomes insolvent 18) Any other clause (s) that may be found necessary in

particular kind of business.

Registration of Firms

The Partnership Act , 1932 provides for the registration of firms with the Registrar of Firms appointed by the Government. The registration of a partnership firm is not compulsory but desirable.

Procedure for Registration A partnership firm can be registered at any time by

a statement in the prescribed form. The form should be duly signed by all the partners. It should be sent to the Registrar of Firms along with the prescribed fee.

The statement should contain the following particulars: Name of the Firm Principal place of its business. Name of other places where the firm is carrying on business. Name in full and permanent addresses of all the partners. Date of commencement of the firm’s business and the dates

on which each partner joined the firm. Duration of the firm , if any Nature of the firm’s business

On receipt of the statement and the fee, the Registrar makes an entry.

Advantages of Advantages of PartnershipsPartnerships

Easy to Form Availability of large resources:Availability of large resources: Better decisions:Better decisions: Flexibility in operations:Flexibility in operations: Sharing risks:Sharing risks: Protection of interest of each partner:Protection of interest of each partner: Benefits of specialization:Benefits of specialization:

Disadvantages

Unlimited liability:Unlimited liability: Uncertain life:Uncertain life: Lack of harmony:Lack of harmony: Limited capital:Limited capital: No transferability of share:No transferability of share:

Dissolution of Firm

A distinction should be made between the “dissolution of partnership” and dissolution of firm.

Dissolution of partnership implies the termination of the original partnership agreement or change in contractual relationship among partners.

A partnership is dissolved by the insolvency, retirement, incapacity, death, or on the expiry / completion of the term/venture of partnership.

The remaining partners can continue business by entering into a new agreement.

On the other hand , dissolution of firm implies dissolution between all the partners

The business of the firm comes to an end . Its assets are realized and creditors are paid off.

Thus, dissolution of firm always involves dissolution of partnership, but the dissolution of partnership does not necessarily mean dissolution of the firm.

Mode of Dissolution1) Dissolution by agreement: mutual consent in accordance with the terms

of agreement.

2) Dissolution by notice: In case of partnership at will, a 2) Dissolution by notice: In case of partnership at will, a firm may be dissolved if any partner give a notice in firm may be dissolved if any partner give a notice in writing to other partners. In such a case the dissolution writing to other partners. In such a case the dissolution takes place with effect from the date mentioned in the takes place with effect from the date mentioned in the notice. If no date is mentioned , the firm would be notice. If no date is mentioned , the firm would be dissolved with effect from the date of receipt of the dissolved with effect from the date of receipt of the notice by the partners. notice by the partners.

3) Contingent Dissolution: A firm may dissolve on the 3) Contingent Dissolution: A firm may dissolve on the happening of any one of the followinghappening of any one of the following

a) on the expiry of the term, if for a fixed perioda) on the expiry of the term, if for a fixed period

b) on the completion of the firm’s ventureb) on the completion of the firm’s venture

c) On the death of a partnerc) On the death of a partner

d) On the adjudication of a partner as insolventd) On the adjudication of a partner as insolvent

4) Compulsory dissolution 4) Compulsory dissolution

when all partners are declared insolventwhen all partners are declared insolvent

when the business of the firm becomes unlawful.when the business of the firm becomes unlawful.

5) Dissolution through court: Court may order 5) Dissolution through court: Court may order dissolution of the firm in the following casesdissolution of the firm in the following cases

a)a) When partner becomes of unsound mindWhen partner becomes of unsound mind

b)b) When a partner becomes permanently incapable of When a partner becomes permanently incapable of performing his duties as a partnerperforming his duties as a partner

c)c) When a partner is guilty of misconduct which is likely to When a partner is guilty of misconduct which is likely to affect prejudicially ( e.g. moral turpitude, misuse of affect prejudicially ( e.g. moral turpitude, misuse of money) the business of the firm.money) the business of the firm.

d)d) When a partner willfully and persistently commits breach When a partner willfully and persistently commits breach of the partnership agreement.of the partnership agreement.

e)e) When a partner unauthorized transfers the whole of his When a partner unauthorized transfers the whole of his interest or share in the firm to a third person.interest or share in the firm to a third person.

f)f) When the business of the firm cannot be carried on When the business of the firm cannot be carried on expect at a loss.expect at a loss.

Settlement of Accounts

When a partnership firm is dissolved, its assets are disposed off and the proceeds there from are utilized in paying the creditors. If the amount realized by sale of assets is not sufficient to discharge the claims of the creditors in full, the deficiency can be recovered proportionately from the personal properties of the partners. If any partner becomes insolvent, the remaining solvent partners will bear the loss in their capital ratio. In case the assets of the firm are more than sufficient to meet the liabilities in full, then the surplus may be utilized to pay off the loans and capitals contributed by the partners.

Section 48 of the Partnership Act , 1932 lays down the following procedure for the settlement of accounts between the partners after the dissolution of the firm:

a) Losses including deficiency of capital should be made good: i) first out of profits ii) then out capital iii) if need be, out of personal contributions of partners

in their profit sharing ratio.b) The assets of the firm including any sum contributed by

partners to make up deficiencies of capital will be applied for setting the debts of the firm, in the following order, subject to any agreement to the contrary:

i) First in paying off the debts of the firm due to third parties

ii) Then in paying to any partner any advances or loans given by him in addition to or part from his capital contribution;

iii) If any surplus is available after discharging the above liabilities, the capital contributed by the partner may be returned , if possible, in full or otherwise ratably

iv) The surplus, if any, shall be divided amongst the partners in their profit sharing ratio.

Government Incentive and Assistance

The term incentive is a general one and includes concessions, subsidies and bounties . Subsidy denotes a single lump sum which is given by a government to an industry, in the national interest. The term bounty denoted bonus or financial aid which is given by a government to an industry to help it compete with other units of the nation or in foreign market.

Bounty confers benefits on a particular industry or firm, while subsidy is given in the interest of the nation.

Advantages

They act a motivational force They encourage the entrepreneurs to start industries

in backward areas By providing subsidies and incentives the government

can:- Bring uniform industrial development in all region Develop and encourage more entrepreneurs Increase the ability of entrepreneurs to face

competition successfully. Reduce overall problems of small scale

entrepreneurs.

Need for Incentives

To remove regional disparities in development To promote entrepreneurship and strengthen the

entrepreneurial base in the economy. To provide competitive strength, survival and

growth. To generate more employment.

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