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Setting up A New Business

A business enterprise cannot come into existence without the pioneering efforts of a person or a group of persons known as entrepreneurs or promoters. It is the entrepreneur who conceives the idea of a business enterprise, analyses its prospects, works out the tentative scheme of organization, brings together the requisite men, materials, machines, money and managerial ability and floats the new enterprise. The decisions which an entrepreneur or promoter takes to bring a business into existence and known as entrepreneurial decisions. Entrepreneurial decisions are taken to tackle the problems in setting up a new enterprise. An entrepreneur or a businessman who wants to launch a new business enterprise has to take decisions with regard to the following factors:

1.    Selection of Line of Business: The process of setting up a new business enterprise being went eh businessman has some idea which can be implemented to earn profits. The businessman will analyses the proposed idea to find out whether the business would be profitable or capital required for this purpose. He will conduct a survey of various business opportunities in order to know the various lines of business which he can take up. He will also study the market demands of the various products which he wants to produce or manufacture and the costs which he would incur for procuring different factors of production. He will prepare a systematic report of the exercise he undertakes. This is known as ‘feasibility report’ or ‘project report’. The project report will show the data collected, estimates of cost and income, options of experts in different fields, etc. What is intended to arrive at by the project report is whether the estimated revenues will be large enough to take care of the estimated operational costs, interest on borrowings an return to owners for the capital invested and the risks undertaken.

2.    Choice of Form of Ownership : On the basis of ownership, a business organization may take the form of sole proprietorship, partnership, or joint stock company. The choice of the form of organization will determine the authority of the entrepreneur launching the business. However, certain lines of business there is no choice left in the selection f the form of organization. For instance insurance and baking business can be done only by the joint stock companies. Size of the business will also determine the form of organization. Company form of organization is more suitable in case of large scale operations. Sole tradership or partnership are suitable for small scale and medium scale operations. The other factors which effect eh choice of form of ownership are capital requirements, managerial skills requirement, market coverage, limit of liability, tax liability, legal formalities, etc.

3.    Size of Business: Size of the firm is influenced by various factors like technical, managerial, financial and marketing. Some factors favour the larger size while others operate to restrict the scale of operations. Where the entrepreneurs are confident that they will be able to market their products and raise sufficient amount of capital, they will start their operations on a large scale. Usually, the businessmen start their operations at small or medium scale. If new ideas are to be tried out, it is preferable to start with small scale operations. This will help in adapting to changes without much loss. Moreover, huge investment will not be blocked in permanent assets. Forces of risks and uncertainty compel the business to restrict the scale of their operations. A good businessman should always consider the impact of various forces which determine the scale of operation. The basic purpose of the optimum size is to achieve maximum output at minimum cost. This will help in earning higher profits.

4.    Financing the Proposition: The promoters or the entrepreneurs have to make available sufficient amount of capital for the initiation and continuation of the business enterprise. Capital is required for investment in fixed assets like land, buildings, machines and equipment and in current assets like materials, supplies and book debts. Capital is also needed for meeting day-to-day expenses of the business. In case of small enterprises, the promoters can provide funds from their own savings. But in case of large enterprises, funds have to be raised form various sources like general public, commercial banks, financial institutions etc. It is of utmost importance to have adequate captain for meeting the initial needs and future requirements of the business. Managerial decisions are required to be taken with regard to the following:

(i)    The amount of long-term capital required ;
(ii)    The amount f short-term capital required ;
(iii)    The cost of raising funds ;
(iv)    The determination of an optimum capital structure ;
(v)    The estimation of return f investment ; and
(vi)    The determination of the time appropriate for raising funds from various resources.

5.    Location of Business: The location of business enterprise is an important problem which its promoters have to tackle. The promoters have to take adequate car while selecting the location of the proposed business activities. They are to search out that location at which the organization will have easy access to raw materials, labour, power, markets and certain services like banking, transportation, communication, insurance and warehousing. As far as possible, the location must be optimum so that the costs of production and distribution are the lowest possible. if the location of a plant is not appropriate, it will cause many problems. The cost of production may increase and the growth of the firm may be restricted. Once the site is selected for the business operations, it is very difficult to change it. Therefore, attempt should be made to choose that location where the various costs will be minimized.

6.    Machines and Equipment : The choice of machines and equipment is a delicate problem before starting a new business. It will depend upon various factors like availability of funds, size of production, and the nature of production process. The benefits to be derived from the machines and equipment must justify the amount of investment made on them. Greater machination should not be resorted to look modern, but to have higher Productivity. There is no use of installing a plant unless right types of workers are available. Availability of repair and maintenance services and spare parts is also an important consideration while selecting a particular machine or equipment. Special purpose machines should be installed only when the scale of operations is very large.

7.    Plant Layout : Plant layout should be efficient to achieve economy and efficiency in operations. An efficient plant layout is one that allows materials to move through necessary operations rapidly and in the most direct way possible. It takes care of intensity of in-process and tries to shorten all heavily traveled routes. This reduces transport, materials handling, clerical and other costs and increases inventory turnover. It also minimizes the space required.
Services of experts may be hired to design a suitable layout of the physical facilities. The layout should be such that it leads to optimum utilization of men, machines, equipment, ad space. It should also reduce the chances of delays and bottlenecks in the production system. The type or pattern of layout will depend upon the space available and the nature of production system to be followed.

8.    Human Resources : The entrepreneur cannot run the business himself along. He has to take the help of a number of persons including skilled and unskilled workers and managerial staff. The employment of right type of persons for the enterprise is necessary, otherwise there will be huge wastage of time, money and effort. After the placement of personnel, they have to be given the necessary training. Motivation of the personnel is another area which deserves attention of the entrepreneur. The work-force must be motivated to contribute effectively for the achievement of the objectives of the enterprise.

9.    Procedural Formalities : In almost every type of business, some procedural formalities have to be observed while starting a new enterprise. In case of a sole proprietorship or a partnership, there are practically no procedural formalities. Only permission form the municipality is to be taken to start the specified business activity. Registration of a partnership firm is not compulsory. Government regulation is the minimum possible if the partnership firm operates on a small or medium scale. Bu a joint stock company is exposed to greater procedural formalities both at the time of incorporation and during its life. Incorporation of a company is compulsory. For this purpose, many documents have to be prepared and fee deposited with the Registrar of Companies. A public company has also to secure a certificate to commence business before it starts its operations. After this, the company is required to send periodical returns to the Registrar of Companies and stock exchange authorities.

10.    Tax Planning : Tax planning has become an essential task these days because of a number of tax laws prevailing in the country. The promoter of the business has to visualize well in advance the various taxes which the enterprise will have to pay. Of all the taxes, income tax is the most important factor which determines the type of ownership organization. Company form of organization is not preferred because profits of the company are taxed twice: firstly, as the income of the company and secondly, as the dividend of the shareholder. Form this point of view, sole proprietorship is considered as a better form of organization. But companies are subjected to uniform rate of taxation. The rate of tax remains the same irrespective of the volume of profits. Profits earned by a sole proprietorship or a partnership firm are subjected to a progressive rate of taxation. The rate of tax goes on increasing with the increase in the volume of profits. It can be said that if the expected profits are huge, it is better to start the business in the form of a company organization. If it is not so, the sole proprietorship or partnership will be more suitable.

11.    Launching the Business Enterprise : As this stage, the promoter arranges for the acquisition of necessary men, material, machinery money and managerial ability. After getting these resources, he will develop an organization structure and divide work among the personnel. After this, the production will start taking into consideration the needs of the customers. Various departments like production, financing, marketing, personnel, etc. are created to accomplish the objectives of the enterprise. Management coordinates the working of these departments and communicates the availability of the products to the prospective customers through advertising and sales promotion activities.

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