Financial management refers
to that part of the management activity which is concerned with the planning
and controlling of firm's financial resources. It deals with finding out
various sources for raising funds for the firm. The sources must be suitable
and economical for the needs of the business. The most appropriate use of such
funds also forms a part of financial management.
OBJECTIVES
OF FINANCIAL MANAGEMENT OR GOALS OF BUSINESS FINANCE
1.
Profit Maximisation, and
2.
Wealth Maximisation
Profit Maximization
Profit Maximization is the capability of the firm in
producing maximum output with the limited input, or it uses minimum input for
producing stated output. It is termed as the foremost objective of the company.
It has been traditionally recommended that the
apparent motive of any business organisation is to earn a profit, it is
essential for the success, survival, and growth of the company. Profit is
a long term objective, but it has a short-term perspective i.e. one financial
year.
Profit can be calculated by deducting total cost from
total revenue. Through profit maximization, a firm can be able to ascertain the
input-output levels, which gives the highest amount of profit. Therefore, the
finance officer of an organization should take his decision in the direction
of maximizing profit although it is not the only objective of the company.
Wealth Maximization
Wealth maximization is the ability of a company to
increase the market value of its common stock over time. The market value of
the firm is based on many factors like their goodwill, sales, services,
quality of products, etc.
It is the versatile goal of the company and highly
recommended criterion for evaluating the performance of a business
organization. This will help the firm to increase their share in the
market, attain leadership, maintain consumer satisfaction and many other
benefits are also there.
It has been universally accepted that the fundamental
goal of the business enterprise is to increase the wealth of its shareholders,
as they are the owners of the undertaking, and they buy the shares of the
company with the expectation that it will give some return after a period. This
states that the financial decisions of the firm should be taken in such a manner
that will increase the Net Present Worth of the company’s profit. The value is
based on two factors:
1. Rate of Earning per share
2. Capitalization Rate
FINANCE FUNCTION
Finance
function is the most important of all business functions. It remains a focus of
all activities. It is not possible to substitute or eliminate this function
because the business will close down in the absence of finance. The need for
money is continuous. It starts with the setting up of an enterprise and remains
at all times. The development and expansion of business rather needs more
commitment for funds. The funds will have to be raised from various sources.
The sources will be selected in relation to the implications attached with
them. The receiving of money is not enough, its utilisation is more important.
The money once received will have to be returned also. If its use is proper
then its return will be easy otherwise it will create difficulties for
repayment. The management should have an idea of using the money profitably. It
may be easy to raise funds but it may be difficult to repay them. The inflows
and outflows of funds should be properly matched.
APPROACHES
TO FINANCE FUNCTION
1. The Traditional Approach
2. The Modern Approach
- The
Traditional Approach : According to this
approach, the scope, of finance function was confined to only procurement
of funds needed by a business on most suitable terms. The utilisation of
funds was considered beyond the purview of finance function. It was felt
that decisions regarding the application of funds are taken somewhere else
in the organisation. However, institutions and instruments for raising
funds were considered to be apart of finance function. The scope of the
finance function, thus, evolved around the study of rapidly growing capital
market institutions, instruments and practices involved in raising of
external funds. The traditional approach to the scope and functions of
finance has now been discarded as it suffers from many serious limitations
:
(i)
It is outsider-looking in approach that
completely ignores internal decision making as to the proper utilisation of
funds.
(ii)
The focus of traditional approach was on
procurement of long-term funds. Thus, it ignored the important issue of working
capital finance and management.
(iii)
The issue of allocation of funds, which
is so important today is completely ignored.
(iv)
It does not lay focus on day to day
financial problems of an organisation.
2. The Modern Approach
: The modern approach views finance function in broader sense. It
includes both raising of funds as well as their effective utilisation under the
purview of finance. The finance function does not stop only by finding out
sources of raising enough funds, their proper utilisation is also to be
considered. The cost of raising funds and the returns from their use should be
compared. The funds raised should be able to give more returns than the costs
involved in procuring them. The utilisation of funds requires decision making
Finance has to be considered as an integral part of overall management. So
finance function, according to this approach, covers financial planning,
raising of funds, allocation of funds, financial control etc The new approach
is an analytical way of dealing with financial problems of a firm. The
techniques of models, mathematical programming, simulations and financial
engineering are used in financial management to solve complex problems of
present day finance. The modern approach considers the three basic management
decisions; i.e., investment decisions, financing decisions and dividend
decisions within the scope of finance function.
FINANCIAL
DECISIONS
Investment Decision
One of the most important finance functions is to
intelligently allocate capital to long term assets. This activity is also known
as capital budgeting. It is important to allocate capital in those long term
assets so as to get maximum yield in future. Following are the two aspects of
investment decision
- Evaluation of new investment in terms of profitability
- Comparison of cut off rate against new investment and prevailing
investment.
Since the future is uncertain therefore there are
difficulties in calculation of expected return. Along with uncertainty comes
the risk factor which has to be taken into consideration. This risk factor
plays a very significant role in calculating the expected return of the
prospective investment. Therefore while considering investment proposal it is
important to take into consideration both expected return and the risk
involved.
Investment decision not only involves allocating capital
to long term assets but also involves decisions of using funds which are
obtained by selling those assets which become less profitable and less
productive. It wise decisions to decompose depreciated assets which are not
adding value and utilize those funds in securing other beneficial assets. An
opportunity cost of capital needs to be calculating while dissolving such
assets. The correct cut off rate is calculated by using this opportunity cost
of the required rate of return (RRR)
Financing decision
Financial decision is yet another important function
which a financial manger must perform. It is important to make wise decisions
about when, where and how should a business acquire funds. Funds can be
acquired through many ways and channels. Broadly speaking a correct ratio of an
equity and debt has to be maintained. This mix of equity capital and debt is
known as a firm’s capital structure.
A firm tends to benefit most when the market value of
a company’s share maximizes this not only is a sign of growth for the firm but
also maximizes shareholders wealth. On the other hand the use of debt affects
the risk and return of a shareholder. It is more risky though it may increase
the return on equity funds.
A sound financial structure is said to be one which
aims at maximizing shareholders return with minimum risk. In such a scenario
the market value of the firm will maximize and hence an optimum capital
structure would be achieved. Other than equity and debt there are several other
tools which are used in deciding a firm capital structure.
Dividend Decision
Earning profit or a positive return is a common aim of
all the businesses. But the key function a financial manger performs in case of
profitability is to decide whether to distribute all the profits to the shareholder
or retain all the profits or distribute part of the profits to the shareholder
and retain the other half in the business.
It’s the financial manager’s responsibility to decide
a optimum dividend policy which maximizes the market value of the firm. Hence
an optimum dividend payout ratio is calculated. It is a common practice to pay
regular dividends in case of profitability Another way is to issue bonus shares
to existing shareholders.
FACTORS
INFLUENCING FINANCIAL DECISIONS
There
are a number of (both external as well as internal) factors that influence the
financial decisions. A list of the important external as well as internal
factors influencing the decisions is given below:
External
Factors :
•
State of economy
Structure
of capital and money markets.
•
Requirements of investors
•
Government policy
•
Taxation policy
•Lending
policy of financial institutions.
Internal
Factors :
• Nature
and size of business
• Expected
return, cost and risk
• Composition
of assets
• Structure
of ownership
• Trend
of earnings
• Age of the
firm
• Liquidityposition
• Working capital
requirements
• Conditions
of debt agreements.
AIMS OF FINANCE FUNCTION
1
Acquiring Sufficient Funds. The main aim of finance
function is to assess the financial needs of an enterprise and then finding out
suitable sources for raising them. The sources should be commensurate with the
needs of the business. If funds are needed for longer periods then long-term
sources like share capital, debentures, term loans may be explored. A concern
with longer gestation period should rely more on owner s funds instead of
interest-bearing securities because profits may not be there for some years.
2
Proper Utilisation of Funds. Though raising of funds
is important but their effective utilisation is more important. The funds
should be used in such a way that maximum benefit is derived from them. The
returns from their use should be more than their cost. It should be ensured
that funds do not remain idle at any point of time. The funds committed to
various operations should be effectively utilised. Those projects should be
preferred which are beneficial to the business.
3
Increasing Profitability. The planning and
control of finance function aims at increasing profitability of the concern. It
is true that money generates money. To increase profitability, sufficient funds
will have to be invested. Finance function should be so planned that the
concern neither suffers from inadequacy of funds nor wastes more funds than
required. A proper control should also be exercised so that scarce resources
are not frittered away on uneconomical operations. The cost of acquiring funds
also influences profitability of the business. If the cost of raising funds is
more, then profitability will go down. Finance function also requires matching
of cost and returns from funds.
4
Maximising Firm's Value. Finance function also
aims at maximising the value of the firm. It is generally said that a concern's
value is linked with its profitability. Even though profitability influences a
firm’s value but it is not all. Besides profits, the type of sources used for
raising funds, the cost of funds, the condition of money market, the demand for
products are some other considerations which also influence a firm’s value.
SCOPE OF FINANCE FUNCTION/FINANCIAL MANAGEMENT
1. Estimating Financial Requirements: The
first task of a financial manager is to estimate short-term and long-term
financial requirements of his business for this purpose, he will prepare a
financial plan for present as well as for future. The amount required for
purchasing fixed assets as well as needs of funds for working capital will have
to be ascertained. The estimations should be based on sound financial
principles so that neither there are inadequate nor excess funds with the
concern. The inadequacy of funds will adversely affect the day-today working of
the concern whereas excess funds may tempt a management to indulge in
extravagant spending or speculative activities.
2. Deciding Capital Structure: The
capital structure refers to the kind and proportion of different securities for
raising funds. After deciding about the quantum of funds required it should be
decided which type of securities should be raised. It may be wise to finance
fixed assets through long-term debts. Even here if gestation period is longer,
then share capital may be most suitable. Long-term funds should be employed to
finance working capital also, if not wholly then partially. Entirely depending
upon overdrafts and cash credit for meeting working capital needs may not be
suitable. A decision about various sources for funds should be linked to the
cost of raising funds. If cost of raising funds is very high then such sources
may not be useful for long. A decision about the kind of securities to be
employed and the proportion in which these should be used is an important
decision which influences the short-term and long-term financial planning of an
enterprise.
3. Selecting a Source of Finance: After preparing a capital structure, an appropriate
source of finance is selected. Various sources from which finance may be raised,
include: share capital, debentures, financial institutions, commercial banks,
public deposits, etc. If finances are needed for short periods then banks,
public deposits and financial institutions may be appropriate; on the other
hand, if long-term finances are required then share capital and debentures may
be useful. If the concern does not want to tie down assets as securities then
public deposits may be suitable source. If management does not want to dilute
ownership then debentures should be issued in preference to shares. The need,
purpose, object and cost involved may be the factors influencing the selection
of a suitable source of financing.
4. Selecting a pattern of investment: When funds have been procured then a decision about
investment pattern is to be taken. The selection of an investment pattern is
related to the use of funds. A decision will have to be taken as to which
assets are to be purchased? The funds will have to be spent first on fixed
assets and then an appropriate portion will be retained for working capital.
Even in various categories of assets, a decision about the type of fixed or
other assets will be essential. While selecting a plant and machinery, even
different categories of them may be available. The decision-making techniques
such as Capital Budgeting, Opportunity Cost Analysis etc. may be applied in
making decisions about capital expenditures. While spending or various
assets, the principles. One may not like to invest on a project which may be
risky even though there may be more profits.
5. Proper Cash Management: Cash management is also an important task of
finance manager. He has to assess various cash needs at different times and
then make arrangements for arranging cash. Cash maybe required to (a) purchase
raw materials, (b) make payments to creditors, (c) meet wage bills; (d) meet
day-to-day expenses. The usual sources of cash may be: (a) cash sales, (b)
collection of debts, (c) short-term arrangements with banks etc. The cash
management should be such that neither there is a shortage of it and nor it is
idle An shortage of cash will damage the creditworthiness of the enterprise.
The idle cash with the business will mean that it is not properly used. It will
be better if Cash Flow Statement is regularly prepared so that one is able to
find out various sources and applications. If cash is spent on avoidable
expenses then such spending may be curtailed. A proper idea on sources of cash
inflow may also enable to assess the utility of various sources. Some sources
may not be providing that much cash which we should have thought. All this
information will help in efficient management of cash.
6.Implementing Financial Controls: An efficient system of financial management necessitates the use of various control devices.
Financial control devices generally used are,: (a) Return on investment, (b)
Budgetary Control, (c) Break Even Analysis, (d) Cost Control, (e) Ratio
Analysis (f) Cost and Internal Audit. Return on investment is the best control
device to evaluate the performance of various financial policies. The higher
this percentage better may be the financial performance. The use of various
control techniques by the finance manager will help him in evaluating the
performance in various areas and take corrective measures whenever needed.
7. Proper Use of Surpluses: The utilization of profits or
surpluses also an important factor in financial management. A judicious use of surpluses is essential for
expansion and diversification plans and also in protecting the interests
shareholders. The ploughing back of profits is the best policy of further
financing but it clashes with the interests of shareholders. A balance should
be struck in using funds for paying dividend and retaining earnings for
financing expansion plans, etc. The market value of shares will also be
influenced by the declaration of dividend and expected profitability in future.
A finance manager should consider the influence of various factor, such as: a)
trends of earning of the enterprises, (b) expected earnings in future, (c)
market value of shares, (d) need for funds for financing expansion, etc. A
judicious policy for distributing surpluses will be essential for maintaining
proper growth of the unit.
RELATIONSHIP
OF FINANCE WITH OTHER BUSINESS FUNCTIONS
1.
Purchase Function. Materials required for
production of commodities should be procured on economic terms and should be
utilised in efficient manner to achieve maximum productivity. In this function
the finance manager plays a key role in providing finance. In order to minimise
cost and exercise maximum control, various material management techniques such
as economic order quantity (EOQ), determination of stock level, perpetual
inventory system etc. are applied. The task of the finance manager is to
arrange the availability of cash when the bills for purchase become due.
2.
Productivity Function. Production
function occupies the dominant position in business activities and it is a
continuous process. The production cycle depends largely on the marketing
function because production is justified when they are resulted in revenues
through sales. Production function involves heavy investment in fixed assets
and in working capital. Naturally, a tighter control by the finance manager on
the investment in productive assets becomes necessary. It must be seen that
there is neither over-capitalisation nor under-capitalisation. Cost-benefit
criteria should be the prime guide in allocating funds and therefore finance
and production manager should work in unison.
3.
Distribution Function. As goods produced are
meant for sale, distribution function is an important business activity. It is
more important because it provides continuous inflow of cash to meet the
outflow thereof So while choosing different distributing channels, media of
advertisement and sales promotion devices, the cost benefit criterion should be
the guiding factor. If cost reduction in distribution function is effected
without compromising efficiency, it will lead to increased benefit to the
enterprise in the form of higher profit and to the consumers in the form of
lower cost. As every aspect of distributory function involves cash outflow and
every distributing activity is aimed at bringing about inflow of cash, both the
functions are closely inter-related and hence should be carried out in close
unison.
4.
Accounting Function. Charles Gastenberg
visualises the influence of scientific arrangement of records, with the help of
which inflow and outflow of funds can be efficiently managed and stocks and
bonds can be efficiently marketed. Moreover, the efficiency of the whole
organisation can be greatly improved with correct recording of financial data.
All the accounting tools and control devices, necessary for appraisal of
finance policy can be correctly formulated if the accounting data are properly
recorded. For example, the cost of raising funds, expected returns on the
investment of such funds, liquidity position, forecasting of sales, etc. can be
effectively carried out if the financial data so recorded are reliable. Hence,
the relationship between accounting and finance is intimate and the finance
manager has to depend heavily on the accuracy of the accounting data.
Accounting
and Financial Management Relationship
5.
Personnel Function. Personnel function has
assumed a prominent place in the domain of business management. No business
function can be carried out efficiently unless there is a sound personnel
policy backed up by efficient management of personnel. Success or failure of
every business activity boils down to the efficiency of otherwise of the men
entrusted with the respective function. A sound personnel policy includes
proper wage structure, incentives schemes, promotional opportunity, human
resource development and other fringe benefits provided to the employees. All
these matters affect finance. But the finance manager should know that
organisation can afford to pay only what it can bear. It means that expenditure
incurred on personnel management and the expected return on such investment
through labour productivity should be considered in framing a sound personnel
policy. Therefore, the relation between the finance and personnel department
should be intimate.
6.
Research and Development. In the world of
innovations and competitiveness, expenditure on research and development is a
productive investment and R and D itself is an aid to survival and growth of
the firm. Unless there is a constant endeavour for improvement and
sophistication of an existing product and introduction of newer varieties, the
firm is bound to be gradually out marketed and out of existence. However,
sometimes expenditure on R and D involves a heavier amount, disproportionate to
the financial capacity of the firm. In such a case, it financially cripples the
enterprise and the expenditure ultimately ends in a fiasco. On the other hand,
heavily cutting down expenditure of R and D blocks the scope of improvement and
diversification of the product. So, there must be a balance between the amount
necessary for continuing R and D work and the funds available for such a
purpose. Usually, this balance is struck out by joint efforts of finance
manager and the person at the helm of R & D.
FUNCTIONS
OF A FINANCE MANAGER
1
Financial Forecasting and Planning. A
financial manager has to estimate the financial needs of a business How much
money will be required for acquiring various assets? The amount will be needed
for purchasing fixed assets and meeting working capital needs. He has to plan
the funds needed in the future. How these funds will be acquired and
applied is an important function of a finance manager.
2
Acquisition of Funds. After making financial
planning, the next step will be to acquire funds. There are a number of sources
available for supplying funds. These sources may be shares, debentures,
financial institutions, commercial banks, etc. The selection of an appropriate
source is a delicate task. The choice of a wrong source for funds may create
difficulties at a later stage. The pros and cons of various sources should be
analysed before making a final decision.
3
Investment of Funds. The funds should be
used in the best possible way. The cost of acquiring them and the returns
should be compared. The channels which generate higher returns should be
preferred. The technique of capital budgeting may be helpful in selecting a
project. The objective of maximising profits will be achieved only when funds
are efficiently used and they do not remain idle at any time. A financial
manager has to keep in mind the principles of safety, liquidity and soundness
while investing funds.
4
Helping in Valuation Decisions. A number of mergers
and consolidations take place in the present competitive industrial world. A
finance manager is supposed to assist management in making valuation etc. For
this purpose, he should understand various methods of valuing shares and other
assets so that correct values are arrived at.
5
Maintain Proper Liquidity. Every concern is
required to maintain some liquidity for meeting day-to-day needs. Cash is the
best source for maintaining liquidity. It is required to purchase raw
materials, pay workers, meet other expenses, etc. A finance manager is required
to determine the need for liquid assets and then arrange liquid assets in such
a way that there is no scarcity of funds.
SOURCES
OR MEANS OF FINANCE
There
are basically two sources available for financing project- internal sources and
external sources. If the size of the project is large, the fund requirement
will have to be financed from external sources. The technique of raising
capital from multiple sources is known as layered financing. The following shows
the various sources of project finance.
SOURCES
OF LONG TERM FUND (FINANCE FIXED CAPITAL REQUIREMENT):-
1)
Issue of shares.
2)
Issue of debentures.
3)
Term loans from specialized financial
institutions like IFCI, IBRD etc.
4)
Venture capital.
B)
SOURCES OF MEDIUM TERM
FUNDS (FINANCE FIXED WORKING CAPITAL REQUIREMENT):-
1)
Public deposits.
2)
Deferred credits.
3)
Lease finance.
4)
Subsidy and other incentives/assistance
from the government.
5)
Hire purchase.
C)
SOURCES OF SHORT TERM
FUNDS (FINANCE WORKING CAPITAL REQUIREMENT):-
1)
Trade credit.
2)
Commercial banks.
3)
Accounts receivable.
The important means of finance are discussed as
follows:
1)
SHARE CAPITAL: - Shares may be issued by a
company after its incorporation or by an existing company. There are two
types of share capital.
A) Equity Share Capital: - Equity shares are the main source of finance of a
firm. It is issued to the general public. Equity shareholders do not enjoy any
preferential rights with regard to repayment of capital and dividend. They are
entitled to residual income of the company, but they enjoy the right to control
the affairs of the business and all the shareholders collectively are the
owners of the company.
B)
Preference Share Capital: - They enjoy a
preferential right in respect of dividend and also repayment of capital
in case of winding up in priority to equity shareholders. Financing through
preference shares is much cheaper than the equity shares. -
2)
DEBENTURE CAPITAL: - It refers to
borrowings. Debenture holders being creditors have neither voting powers
nor control in policy making. They get a fixed rate of interest even if the
company incurs losses.
3)
TERM LOANS: - It is granted on the basis of a
formal agreement between the borrower and the lending institution. Long
term capital provided directly by a lender in the form of a negotiated contract
according to all details of the agreement is called term loan.
4)
VENTURE CAPITAL: - It refers to giving capital to
enterprise that has risk and adventure. It is a financial investment in
a highly risky project with the objective of earning a high rate of return.
5)
PUBLIC DEPOSITS:
- A company can raise deposits to meet its capital needs directly from the public
at an interest rate generally above the bank rate.
6)
DEFERRED CREDITS:
- Under this arrangement payments to suppliers of plant and equipments
are made in agreed instalments over a specified period of time at some agreed
rate of interest on the outstanding balance.
7)
INCENTIVE SOURCES:
- The government and its agencies may provide financial support as incentives
to certain types of promoters or for setting up industrial units in certain
locations.
8)
LEASE FINANCING:
- it can be explained as a contract between the owner of the asset and the user
of the asset whereby the owner of the asset gives it to the user for a
consideration. The owner of the asset is called the lessor and the user of the
asset is called the lessee. The consideration which is required to be paid by
the lessee for using the asset is called lease rental.
9)
INSTITUTIONAL FINANCE:
- There are several financial institutions for giving financial assistance
to entrepreneurs. Some of them are IDBI, IFCI, SIDBI, NABARD etc.
CHARACTERISTICS OF SSIs
a) They are generally organized
and run by individual entrepreneurs.
b) They require less capital.
c) They are fundamentally
labour-intensive units facilitating greater utilization of man power.
d) They involve the use of
simple technology, intensive utilization of individual skill leading to
professional specialization.
e) They cater the individual
tastes and fashions and render personalized service to consumers.
f) They are highly localized
industries. Using local resources SSIs are decentralized and dispersed to rural
areas.
g) They are eligible for govt.
assistance and patronage and for concessional finance by banks, financial
institutions etc.
h) They are flexible to a large
extent. They are more susceptible to change and highly reactive and receptive
to socio-economic conditions.
i)
They are free from red-tapism and bureaucratic handicaps.
j)
Compared to large units, SSIs has a lesser gestation period. ie, the
period after which the on investment
starts.
OBJECTIVES OF SSIs
a) To provide increased
employment opportunities.
b) To provide production of
large variety of goods especially consumer goods through labour-intensive
methods.
c) To bring backward areas too
in the mainstream of national development.
d) To improve the level of
living of people in the country.
e) To create a climate for the
development of self-employed experts, professionals and small entrepreneurs.
f) To ensure more equitable
distribution of national income.
g) To ensure balanced regional
development as regards industries.
h) To encourage the adoption of
modern techniques in the unorganized traditional sector or the industry.
ADVANTAGE OF SSIs
a)
They are relatively more environmental friendly.
b) They are generally based on
local resources.
c)
They provide ample opportunities for creativity and experimentation.
d) They facilitate equitable
distribution of income and wealth.
e)
SSI enjoys the government support and patronage.
f)
These helps in the balanced regional development.
g)
It is possible to make necessary changes as and when required.
h) These help in reducing
prices.
i)
There is a close and direct personal contact with the customer and
employees.
j)
They create more employment opportunities. They are labour intensive.
They offer ample scope for self employment.
k) They require only less
capital. It is a boon to a country like India where capital is deficient.
l)
SSIs alone can satisfy individual tastes and offer personalized service
to the customers.
DISADVANTAGES OF SSIs
a)
SSIs suffer from lack of funds. They are financially weak.
b) They suffer from lack of
managerial and other skills. They cannot employ highly paid officials.
c)
MSMEs always face tough competition from large businesses.
d) They are not well equipped
to make advantage of the latest technology and modern methods.
e)
There is only a little scope for division of labour and specialization.
f)
MSMEs cannot afford to spend large sums of money on research and
experiments
g)
They cannot survive in times of adversity.
h) They cannot secure cheap
credit.
ROLE/ IMPORTANCE OF SSIs IN DEVELOPING COUNTRIES
1) Large Employment Opportunities: MSMEs are generally
labour-intensive. For every Rs. 1 lakh of fixed investment, SSIs sector
provides employment for 26 persons as against 4 persons in the large scale
sector. Thus in a country like India where capital is scarce and labour is
abundant, SSIs are especially important.
2) Economical Use of Capital: SSIs need relatively small amount of
capital. Hence it is suitable to a country like India where capital is
deficient.
3) Balanced Regional Development: Generally small
enterprises are located in village and small towns. Therefore it is possible to
have a balanced regional growth of industries. India is a land of villages.
4) Equitable Distribution of Income and Wealth: It removes the drawbacks of
capitalism, abnormal profiteering, concentration of wealth and economic power
in the hands of few etc.
5) Higher Standard of Living: SSIs bring higher national income, higher
purchasing power of people in rural and semi-urban areas.
6) Mobilization of Locals Resources: The spreading of
industries even in small towns and villages would encourage the habit of thrift
and investment among the people of rural areas.
7) Simple Technology: New but
simple techniques of production can be adopted more easily by SSIs without much
investment.
8) Less Dependence on Foreign Capital: SSIs use relatively low
proportion of imported equipment and materials. The machinery needed for these
industries can be manufactured within the country.
9) Promotion of Self Employment: SSIs foster individual
skill and initiative and promote self-employment particularly among the
educated and professional class.
10) Promotion of Exports: With the establishment of a large number of
modern SSIs in the post independence period, the contribution of the small
scale sector in the export earnings has increased much.
11) Protection of Environment: SSIs help to protect the environment by
reducing the problem of pollution.
12) Shorter Gestation Period: In these enterprises the time-lag between
the execution of the investment project and the start of flow of consumable
goods is relatively short.
13) Facilitate Development of Large Scale Enterprises: SSIs support the development
of large enterprises by
meeting their requirements of inputs of raw materials, intermediate goods,
spare parts etc. and by utilizing their output for further production.
PROBLEMS OF SSIs
1)
Lack of managing experience: They may not be having specialised knowledge
in the different fields of management. At the time of initiating the project,
they are not in a position to anticipate correctly their financial requirements
and the size of market for their products.
2)
Inadequate Finance: Generally MSMEs are not in a position to arrange full
finance from their own sources. They obtain finance from unorganized finance
sector at higher rate of interest.
3)
Lack of proper machinery and equipment: Many SSIs use inefficient and
outdated machinery and equipment. This affects the quality of production.
4)
Lack of technical know-how: Do not have the knowledge about different
alternative technologies and processes available for manufacturing their
products to improve the quality of products and reduce costs.
5)
Run on traditional lines: They have not yet adopted modern methods and
techniques of production. They have not taken adequate interest in research and
development efforts. Hence they cannot be run efficiently.
6)
Irregular supply of raw materials: The majority of SSIs depends on local
sources for their raw material requirements. Small entrepreneurs are forced to
pay high prices for materials because they purchase materials in small
quantity.
7)
Problem of marketing: The brand name of the products of SSIs is acute due
to tough competition from large industries. It cannot afford to costly
advertisement and network of distribution system. There are delays in the
payment of bills by large purchasers resulting in inadequate working capital.
8)
Personnel problems: It is difficult for them to get qualified persons to
run the business. They cannot provide much training facilities to employees.
9)
Lack of clear-cut policy of the govt: The Govt. may take decisions
relating to SSIs on the basis of political consideration rather than on economic
consideration.
10) Other problems: Like
inefficient management, non-availability of cheap power, burden of local taxes
etc.
STEPS FOR STARTING SSIs
As soon as a person decides
to become an entrepreneur and to start a MSME, he is required to take a number
of steps and formalities one after the other. They are as follows:
1) Scanning of Business Environment: it is essential on the part
of the entrepreneur to study and understand the prevailing business
environment. Entrepreneur should scan the business opportunities and threats in
the new environment. To study the administrative framework, procedure, rules
and regulations and other formalities implemented by the government. The
potential entrepreneur must assess his own deficiencies, which he can compensate
through training.
2) Selection of the Product: The very success of one’s
venture will depend on the rationality of his decision in this regard. The
economic viability of the product can be ascertained by considering certain
demand aspects such as volume of demand in the domestic market, volume of
demand in the export market, volume of potential demand, a degree of
substitution of an existing product etc. The prospective entrepreneur has to
identify the product based on market research or market survey.
3) Selection of Form of Ownership: He has to select sole
proprietorship or family ownership or partnership or private limited company as
the form of the ownership.
4) Selection of Location and Site: Location is selected after
considering certain factors such as nearness to market, sources of material and
labour, modern infrastructure facilities etc. The entrepreneur has to choose a
suitable plot for the factory. He may purchase land directly or choose from an
industrial area developed by State Development Corporations like SIDCO, or
Directorate of Industries. In order to stimulate industrial growth, the
government of Kerala is providing infrastructural assistance by way of
(1). Developing areas.
(2). Development Plots.
(3).Industrial estates, and
(4). Mini industrial units.
5) Designing Capital Structure: Apart from the own
capital, he may secure finance from friends and relatives, term loans from
banks and financial institutions.
6) Acquiring Manufacturing Know-How or Technology: Many institutions of
government, research laboratories, research and development divisions of big
industries and certain consultancy agencies provide the manufacturing know-how.
7) Preparation of Project Report: The report
usually covers important items like sources of finance, availability of
machinery and technical know-how, sources of raw material and labour, market
potential and overall profitability.
8) Registration as a Small Scale Industry: Registration with Department
of industries and Commerce is only optional. There is no statutory obligation,
but small scale industries can avail various facilities, incentives and
concessions offered by the state as well as central government only if they
registered as SSI. The registration would be done in two stages.
Ø Provisional Registration: It
will be valid for one year with possible three extensions of six months each.
It helps entrepreneur to take necessary steps to bring the units into
existence. The provisional registration may enable the party to:
a.
Apply to NSIC/SIDO and other institutions for
procuring machines on H.P basis.
b.
Apply for power connection.
c.
Apply to local Bodies for permission to construct
the shed to establish a unit.
d.
Apply for financial assistance to SFC/Banks or other
financial institutions on the basis of project report.
e.
Obtain sales tax, excise registration etc whenever
required.
f.
Apply for a shed in an industrial estate/
development site in an industrial area/ material for construction of shed as
the case may be.
9) Obtaining Statutory Licence: Any person should obtain
the following licences and certificates
before starting the venture:
(A) Licence from Local Bodies
For
(1) Construction of the
building.
(2) Installation of plant and
machinery.
(B) Licence from the Directorate
of Factories and Boilers For:
(1) Approval of factory
building.
(2) Registration under section
6, 7 and 85 of the Factory Act.
(C) No Objection Certificate
from State Pollution Control Board.
10) Apply for Power Connection: There are 2 categories of
power, the Low Tension (LT) and High Tension (HT). A consumer can avail LT only
if the connected load is 75 HP and below. If connected load is between 75 HP
and 130 HP, the consumer has the option to avail either LT supply or HT supply.
11) Arrangement of Finance: Entrepreneur needs to
acquire assists of 2 kinds namely Fixed assets and current assets. Long term
finance is needed to acquire fixed assets like land, building, plant and
machinery and for security deposits. Short term funds are required for
acquiring current assets.
Current assets are essential
for the day to day working of the industry. Long term funds includes owner’s
capital, subsidy from central/ state govt., personal borrowings from friends
and relatives
and long term loans from
financial institution like KFC and KSIDC.
12) Registration under the Sales Tax Act: Business enterprises are
subject to three important taxes- Income Tax, Excise Duty and Sale Tax. Income
tax is levied on income as defined under the IT Act of 1961. It is revenue of
Central Government. Excise duty is a tax levied by the central Government. It
is the duty levied on the cost of goods manufactured within a country. Sales
tax is levied whenever goods are purchased from within the state. When goods
are purchased from outside the state, Central Sales Tax is levied. Application
for registration should mention all places of business dealer including the
godown in which the goods are stored. The following papers are to be submitted
for registration.
a) Application for registration
in Form 1 duly signed.
b) Counterfoil of challan for
Rs. 100 towards registration fees.
c) Return of Estimated Annual
Turnover in Form No. 10.
On the basis of declaration
of the anticipated turn over and nature of turnover, registering authority may
demand security, which is normally ½ times of the anticipated tax due.
13) Installation of Machinery: Machinery should preferably be installed as
per the plant layout.
14) Recruitment of Manpower: The number and type of
workers is to be decided. After this, the required workers should be recruited.
15) Procurement of Raw Material: The raw materials may be
procured indigenously or may have to be imported by the entrepreneur. The next
step is to start production, which is taken up in two stages- Trial production
and Commercial production having successfully test marketed the product,
commercial marketing can be undertaken.
16) Application for Permanent
Registration: For this, application form has to be made to the GM of DIC
through IEO/ Taluk Industries Officer. The GM should inform the entrepreneur of
the date and time of inspection of the unit. On being satisfied a registration
certificate may be issued by the Directorate of Industries within one month of
the receipt of the application. The period of the certificate whether
provisional or permanent will be for a period of 2 years. Renewal certificate
would be affected by the GM (DIC) within a period of 3 months from the date of
expiry of certificate.
FINANICAL INSTITUTION
Industrial Finance Corporation of India (IFCI)
IFCI was established in July
1948 under a special statute, as the first development bank in the country with
the main object of making medium and long term credits available to industrial
concerns. It’s primary role is to provide financial assistance to medium,
medium-large and large scale industries in all aspects and spread
industrialization in the country.
Industrial Development Bank of India (IDBI)
IDBI was set up in July
1964. It is the apex financial institution among the development banks of the
country for co-ordinating the activities of various financial institutions
including banks, engaged in financing and promoting the industries spreading
entrepreneurship development in the country.
The various industries
eligible to get finance from IDBI includes the industries engaged in the
manufacture, processing or preservation of goods, mining, shipping, transport,
hotel industry, generation or distribution of power, fishing, repairing,
testing or servicing of machinery or vehicles, vessels etc., setting up of
industrial estates, research and development of
any process or product in
providing special or technical knowledge or other services for the promotion of
industrial growth. Besides, IDBI has the following main objectives.
a)
To plan and promote the development of industries in the backward areas.
b)
To provide financial and promotional assistance to all types of
industries including for modernization and expansion of the units.
c)
To undertake, market and investment surveys and also research activities
to help the entrepreneurs.
The Industrial Credit and Investment Corporation of
India (ICICI)
ICICI was set up in 1955 to
encourage assist industrial development and investment in India. ICICI provides
finance in the form of long and medium term loans or equity participation
sponsoring and underwriting issues of shares and debentures, guaranteeing rupee
and foreign currency loans from other sources making funds available for
reinvestment and providing technical and administrative advice to Indian
industry. Besides, it offers a wide range of services to eater for the variety
of needs of the entrepreneurs viz.,
National Bank for Agriculture and Rural Development
(NABARD)
It has been established for
promoting agriculture and rural development in the country. They provide direct
finance and refinance facilities to State Cooperative Banks, RRBs and other
financial institutions. They take steps for promoting integrated rural
development and to provide all sorts of production and investment credit for
agriculture and rural development.
State Financial Corporations (SFCs)
They play a pivotal role in
the development financing system of the concerned state. They provide financial
assistance to promote small and medium scale industries so as to bring balanced
regional development in the country. They are performing multiple roles such as
providing financial assistances through various schemes, imparting training
schemes and also undertaken all sorts of promotional efforts. There are 18 SFCs
functioning in our country. They provide financial support for transport
operators, setting up hotels, hospitals and tourism related activities. They
have special schemes for women entrepreneurs, schedule caste schedule tribe,
ex-servicemen and physically handicapped.
SMALL INDUSTRIAL DEVELOPMENT ORGANISATION (SIDO)
The SIDO was formed under
the Ministry of Industry. It is a policy making, co-ordinating and monitoring
agency for the development of small scale industries. It maintains a close
liaison with the government, financial institutions and other agencies which
are involved in the promotion and development of small scale units. It provides
a comprehensive range of consultancy services and technical, managerial,
economic and marketing assistance to the small scale units. It has launched
various technology support programmes for the benefit of small scale industries
in the country through a number of steps. The steps include establishment of
(a) process-cum-product development centres, (b) tool rooms and training
centres. (c) specialized institutes and (d) regional testing centres with its
field testing stations.
FUNCTIONS OF SIDO
1) To estimate the requirements
of raw material for the small scale sector and to arrange their supply.
2) To collect data on consumer
items which are imported and encourage the setting up of new units by giving them
co-ordinated assistance?
3) To prepare project reports
and other technical literature for prospective entrepreneurs.
4) To secure reservation of
certain products for the SSIs.
NATIONAL SMALL
INDUSTRIES CORPORATION (NSIC)
It was set up in 1995 to provide machinery to small scale units on hire
purchase basis and to assist these units in obtaining orders from government
departments and officies. Its head office is at Delhi. It has four regional
offices at Delhi, Mumbai, Chennai and Calcutta. It has eleven branch offices
also.
FUNCTIONS OF
NATIONAL SMALL INDUSTRIES CORPORATION
1) To develop small scale units
as ancillary units to large scale industries
2) To impart training to
industrial workers.
3) To market the product of
SSIs at home and abroad.
4) To help the small scale
industries in procurement of scarce and imported raw material.
5) To obtain orders for SSI
units from government department and offices.
6) To provide machinery to SSI
units on hire purchase basis.
7) To construct Industrial
Estate and establish and run proto-type production-cum-training centres.
NATIONAL
ALLIANCE OF YOUNG ENTREPRENEURS (NAYE)
It is a national level apex organization of young entrepreneurs. It
assists in promoting new enterprises through first generation entrepreneurs.
NAYE sponsored an Entrepreneur Development Scheme with Bank of India in August
1972 on pilot basis. The scheme is known as BINEDS. It is operative in the
states of Punjab, Rajasthan, Himachal Pradesh and Union Territories of
Chandigarh and Delhi. NAYE has entered into similar arrangement with Dena Bank,
Central Bank Of India and Union Bank of India .NAYE strives hard for upliftment
of young entrepreneurs especially women. It holds workshops, conferences,
training programmes etc. to create awareness in entrepreneurs.
TECHNICAL
CONSULTANCY ORGANISATION (TCOs)
It was established in different parts of the country to provide
consultancy services to small and medium enterprise at reasonable costs. The
TCO was established in Kerala( KITCO) in June 1972.Functions and activities of
TCOs include:
(a) Industrial potential
surveys.
(b) Preparation of profits and
feasibility studies.
(c) Evaluation of project.
(d) Conduct of EDPs.
(e) Assisting in the
modernization, technical upgradation and rehabilitation programmes etc.
(f) Undertaking market research
and surveys for specific products.
(h) Offering merchant banking services.
SMALL INDUSTRIES
SERVICE INSTITUTES (SISIs)
Small Industries Service Institutes have been established in each state
in 1956 as agencies of SIDO. The objective is to develop small scale
industries. The functions performed may be summarized as follows:
1) It promotes entrepreneurship
and development of SSIs in rural and other underdeveloped areas.
2) It supplies market
information in selected cases and undertakes market distribution surveys for
industrial enterprises.
3) It conducts various
programmes for workers in other organizations as well as in small industry in
certain trades.
4) It assesses the capacities
of small units for imported/controlled materials.
5) It provides technical guidance
on the efficient use of wastages and scraps.
6) It prepares designs and
drawing for production equipment and accessories.
7) It ensures that small
industry development in India is being done in right lines.
8) It provides workshop common
facilities to industrialists at reasonable charges.
9) It conducts detailed plant
studies to locate production and other problems. It initiates and co-ordinates
modernization of selected industries.
10) The institute assists in
rehabilitation of sick units.
11) It helps to develop
ancillary industries. It registers SSI units with NSIC to supply their products
to government.
12) The institute conducts
modernization studies for technology upgradation.
13) It undertakes quality
control, energy conservation and pollution control, specialized training
programmes on export marketing.
14) The institutes also conduct
surveys and studies for identification of industries having scope of promotion
and development.
15) It
advises the Govt. of India and state government on policy matters relating to
small industry development.
KHADI AND VILLAGE INDUSTRIES COMMISSION
KVIC makes finance available to the implementing agencies in the form of
capital expenditure loans. It also extends assistance for setting up of retail
sales outlets and also for strengthening of the capital base of the registered
institutions and cooperatives. It also assists individual artisans besides
formulating liberal pattern of assistance for identified hill, border and
weaker sections. The loans for Khadi are interest free, while those for village
industries have an interest at the rate of 4% per annum.
FUNCTIONS OF KVIC
(1) To train the artisans.
(2) To assist village industries in procuring raw
materials.
(3) To assist and support through marketing of finished
products of village industries.
(4) To provide equipment and machinery to producers on
concessional terms.
(5) To undertake R and D programmes for improved
implements for silk reeling, more efficient extraction of oil in power ghanis,
manufacture of panel boards from banana stems and improved ‘charka’ and looms.
The main thrust of KVIC is to alleviate rural poverty and to make the
village artisan more productive through improved technology and market support.
SCIENCE AND TECHNOLOGY ENTREPRENEUR PARKS (STEP)
STEP is an
area where applied research
on high tech
projects is conducted
with the
collaboration of multinational companies, universities, technological
and research institutes. In
1972 a conventional ‘Techno Park’ was set up by the Birla Institute of
Scientific Research.
SMALL INDUSTRIES DEVELOPMENT BANK OF INDIA (SIDBI)
SIDBI was set up on April 2, 1990 as a wholly owned subsidiary of IDBI.
It is operating through its Head Office at Lucknow and a network of 5 Regional
Offices and 25 Branch Offices in all the states. It is an apex institution for
promotion, financing and development of industries in small scale sector and
co-ordination of functions of other institutions engaged in similar activities.
FUNCTIONS OF SIDBI
1) Taking steps for technological upgradation and modernization
of existing units.
2) Providing services like factoring, leasing etc. to
industrial concerns in the small scale sector.
3) Extending financial support to National Small
Industries Corporation for providing leasing hire-purchase and marketing
support to SSI units.
4) Expanding the channels for marketing the products of
SSI sector in domestic and international markets.
5) Promoting
employment oriented industries especially in semi-urban areas to create more
employment opportunities and thereby checking migration of people to urban
areas.
6) Refinancing
of loans and advances extended by the primary lending institutions to
industrial concerns in the small scale sector and also providing resource
support to them.
7) It
also offers bills discounting and rediscounting facilities. It also has a few
schemes of direct assistance.
THE NATIONAL INSTITUTE FOR ENTREPRENEURSHIP AND SMALL BUSINESS
DEVELOPMENT (NIESBUD)
It is an apex body established in 1983 by the
ministry of Industries, Government of India, for coordinating, training and
overseeing the activities of various institutions/agencies engaged in
entrepreneurship development, particularly in the area of small industry and
small business. The Institute which is registered as a society under Government
of India Societies Act started functioning from 6th July, 1983.The
policy, direction and guidance to the institute is provided by its governing
council whose chairman is the minister of SSI. It has an executive committee.
OBJECTIVES OF NIESBUD
a)
To evolve standardized materials and processes for selection, training,
support and sustenance of entrepreneurs, potential and existing.
b) To share internationally,
its experience and expertise in entrepreneurship development.
c)
To train the trainers, promoters and consultants in various areas of
entrepreneurship development.
d) To provide
national/international forums for the interaction and exchange of experiences
helpful for policy formulation and modification at various levels.
e)
To provide vital information and support to trainers, promoters and
entrepreneurs by organizing research and documentation relevant to
entrepreneurship development.
FUNCTIONS OF NIESBUD
(a) Evolving effective training
strategies and methodology.
(b) Standardizing model syllabi
for training various target groups.
(c) Formulating scientific
selection procedures.
(d) Developing training aids,
manuals and tools.
(e) Facilitating and supporting
central/state/other agencies in organizing entrepreneurship development
programmes.
(f) Conducting training programmes for promoters,
trainers and entrepreneurs.
COMMERCIAL BANKS
It plays an
important role in the growth and
development of economy in general and
enterprise sector in particular. Commercial Bank in
India comprises the State Bank of India (SBI)
and its subsidiaries, nationalized Banks, foreign
banks and other scheduled commercial banks, regional rural banks and
non-scheduled commercial banks. The period for which loan is granted varies
from 7 to 10 years. These loans are repayable in half yearly or yearly
installments. Most commercial banks have got specialized units in their
administrative structure to take care of the financial needs of the small scale
industrial units. The fixed capital needs or the long and medium term needs of
the small scale industrial units are presently being taken care by the banks
under their integrated scheme of credit for the small entrepreneurs. The rate
of interest charged normally from the small scale industrial units is between
12% and 15% against 18% from the large scale units.
Commercial Banks
Commercial banks play a vital role in providing
financial assistance to all types of entrepreneurial activities. They
participated in lending programme sponsored by the Government for the benefit
of SSIs, agriculture rural industries. They have wider network of branches in
India which facilitate them to serve the people living in rural areas and
remote villages. Priority sector lending is a specific lending programme of the
commercial banks. Around 40% of the net bank credit is earmarked for priority
sector lending. They provide term loan and working capital finance to
industrial sector by means of assisting self employment opportunities in the
rural and urban areas.
Types of Assistance
The All India Financial Institutions provide the
following kinds of assistance:
➢➢
Term
loans 1. Rupee loan 2. Foreign currency loan
➢➢
Underwriting
of equity / preference shares /bonds and debentures
➢➢
Direct
subscription to the capital
➢➢
Issue
Guarantee (IFCI, ICICI)
➢➢
Bills
discounting scheme (IDBI)
➢➢
Operation of Technical Development fund (IDBI)
➢➢
Soft
Loan schemes (IDBI)
➢➢
Seed
capital Assistance (IDBI)
➢➢
Risk
Capital Assistance (IFCI)
➢➢
Direct
loans scheme
➢➢
Refinance
of Industrial Loan Scheme
➢➢
Refinance
Scheme for industrial rehabilitation
➢➢
Refinance
scheme for modernization
➢➢
Development
Assistance Fund
➢➢
Merchant
banking
➢➢
Facilities
for non-resident Indians
➢➢
Letters
of credit
➢➢
Project
Promotion
➢➢
Backward
Area Development
However, the major function of all the institutions
are to provide term loans. The State Level Institutions provide besides term
loan, the following assistance.
➢➢
Underwriting of shares
➢➢
Direct subscription to capital
➢➢
Providing guidance in selection of project site etc.
➢➢
Operations of various incentives schemes
➢➢
Central Investment subsidy
➢➢
Sales tax loan / sales tax exemption
➢➢
Operation of transport subsidy
➢➢
Leasing finance scheme
Thus, SFCs contribute about 20% of the total
assistance sanctioned by all institutions taken together.
INCENTIVES AND SUBSIDIES
In India Entrepreneurs are offered a number of
incentives because they fulfil two main objectives of economic development.
Firstly, they facilitate decentralization of industries. They assist in the
dispersal of industries over the entire geographical area of the country.
Secondly, they facilitate the transformation of a traditional technique into
modern technique characterized by improved skills, high production and higher
standard of living.
INCENTIVES
It is the financial and promotional assistance
provided by the government to the industries for boosting up industrial
development in all regions particularly in backward areas. Incentives include
concession, subsidies and bounties. ‘Subsidy’ denotes a single lump-sum
which is given by
a government to an entrepreneur to cover the cost.
It is granted to an industry which is considered essential in the national
interest. The term Bounty denotes bonus or financial aid which is given
by a government to an industry to help it compete with other units in home
market or in a foreign market. Bounty offers benefits on a particular industry;
while a subsidy is given in the interest of the nation. The object of
incentives is to motivate an entrepreneur to start new ventures in the larger
interest of the nation and the society.
ADVANTAGES OF INCENTIVES AND SUBSIDIES
a)
They act as a motivational force which makes the potential entrepreneur
to enter into business activities.
b)
They encourage the entrepreneur to start industries in the backward
areas.
c)
They help the government to get a balanced regional development.
d)
They help to develop new enterprises which lead to economic development.
e)
They make the entrepreneur to face competition successfully.
f)
They help to reduce the overall problems of small scale entrepreneurs.
NEED FOR INCENTIVES AND SUBSIDIES
The need for incentives and subsidies arises for the
following reasons:
1) To Remove Regional Disparities in Development: Industries may
be concentrated and overcrowded in some regions, in order to correct this
regional balance, incentives are provided to entrepreneurs. They will start new
ventures in such backward areas. Thus the backward areas become developed and
regional imbalances are corrected.
2) To Provide Competitive Strength, Survival and Growth: several
other incentives are provided for the survival and growth of industries. For
example, reservation of products, price preference etc. will improve the
competitive strength. Other concessions like concessional finance, tax relief
etc., contribute their survival and growth.
3) To Generate More Employment and Remove Unemployment: Market adjustments and
external economies play a significant role in the economic development of a
country. Subsidies cause movement of entrepreneurs from developed areas to
developing or backward areas. In short, incentives and subsidies serve as a
catalyst to start a dynamic process of development.
4) To Promote Entrepreneurship: Industrial estates,
availability of power, concessional finance, capital investment subsidy,
transport subsidy etc, are few examples of subsidies which are aimed at
encouraging entrepreneurs to take up new ventures.
PROBLEMS RELATING TO SUBSIDIES
a)
A subsidy may remain unutilized.
b) If the administration is
inefficient or corrupt, subsidy will not produce the desired results.
c)
It is very difficult to measure the impact of subsidies.
d) Subsidies may lead to
inefficiency in the long run.
e)
Subsidies once introduced are difficult to withdraw.
f)
The administrative procedure must be effective.
g)
The cost of administering a subsidy should be considered.
h) The subsidy scheme should be
communicated to prospective beneficiaries.
i)
The quantum of subsidy should be adequate to produce the desired results.
j)
The target groups to whom the subsidy is to benefit should be clearly
determined.
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