NCERT Solutions For Class 11 Entrepreneurship Chapter 4 Resource Mobilisation

Micro-Business enterprise is the unit in which investment in plant and machinery does not exceed ₹25 lakh.

Enterprises can be classified on the basis of their investment in plant & machinery (i.e. excluding land and building). Medium enterprises are the ones with the investment above ₹5 crore and upto ₹10 crore.

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Units whose investment in plant and machinery is upto Rs. 25 lakhs. There is a state support to these units in the form of land allotment, electricity connection, etc.

To seek information regarding plant and machinery, SFC (State Finance Corporation) is available at state level and CCIE (Chief Controller of Import and Export) at central level.

Main producers of information are government Publications, Semi-government Publications, Reports of Committees and Commissions, Journals and Newspapers, Publications of Research Institutions, Publications of International Bodies, etc.

Census method comprises of survey which includes every part of data. Investigator collects information from each and every element of data.

In the group mentoring, mentor works with 4-6 mentees at one time whereas in case of peer mentoring, a mentee gets advice from more than one mentor.

Business mentor is a person capable and willing to offer invaluable advice, support and guidance to a new entrepreneur.

Mentor is a person who is experienced, provides guidance and advice.

Raw-materials are purchased from working capital i.e., short term capital.

Equity shareholders are the owners of the company. Company has no obligation to pay dividend or principal amount to equity shareholders. Debenture holders and preference shareholders get preference over equity shareholders in terms of receiving interest/ dividend and repayment.

Debenture is the document or certificate issued by a company under its common seal, as an acknowledgement of it’s debt with an undertaking to repay the principal and interest on prescribed dates.

Public financing is the deposits raised by enterprises directly from the public. Depositors earn interest higher than those offered by banks & companies obtain funds at lower rates than those borrowed from banks.

Financial plan helps in estimating fund requirement of a business and specifying sources of funds.

The decision of financing pattern of a business is deciding its ‘Capital Structure. Capital Structure refers to the mix between Owner’s Funds (Equity) and Borrowed Funds (Debt).

The requirement of funds by business to carry out its various activities is called ‘Business Finance.’

Capitalisation is the total of long term funds available to a company. It includes retained earnings also.

There are unique functions performed by independent contractors or consultants. An entrepreneur can procure their assistance on regular basis, by contractual arrangements or even by captive unit arrangement.

State level organisations, which provide information about the infrastructural facilities are:

• District Industries Centre
• Electricity Board

Resource mobilisation is the process of acquiring resources in the timely and cost-effective manner. It ensures that organisation's work is done and goals are met on time.

Human activity is directed towards producing or acquiring wealth through buying and selling of goods. Businesses need resources to produce goods and services.

Resources are the tangible or non-tangible means required to support the activities of an organisation to achieve pre-determined organisational goals.

Business Activities are the activities performed with a view to earn livelihood. This can be business, profession or employment.

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Size of a business depends on its volume. Volume can be:

• Volume of Enterprise
• Volume of capital invested
• Volume of output
• Number of workers

• For perceiving and sensing the opportunity, an entrepreneur needs to collect information and investigate it further.
• Parameters to be investigated by an entrepreneur are:

• Feasibility of the data
• Current market conditions i.e., demand, supply, competitors
• Resources required, suppliers and availability
• Profitability forecast
• Impact of environment and its factors

Major small scale industry groups in India as per MSMED: are:

• Food products
• Chemical and chemical products
• Rubber and plastic products
• Paper products and printing
• Basic metal industries
• Cotton textiles

Role played by mentor can be understood from the following points:

• Mentors provide support, identify strengths and weaknesses and help mentee to deal with them effectively
• Enables a mentee to assess his/her weakness and strengths by providing critical feedback in key areas
• Assists in finding necessary information
• Assists in process of documentation for enterprise and enterprise support programmes
• Gives consultation, and coordinates activities that aim at accessing funds, new technologies, etc.

Informal mentoring has no formal relationship between mentor and mentee. It is same as when a person seeks advice from his friends or family. This can also be seen when managers accept mentoring requests from other member, outside formal hierarchical structure in an organization.

This refers to the funds arranged by an entrepreneur himself without seeking outside help. This initial investment can be in the form of personal cash or assets. This can be from personal savings, from friends and relatives, chit funds, etc.

In terms of tax benefits, debentures are preferred by the organization as the interest paid is a tax deductible expense.

Major sources of capital of a Public Limited Company are shares, debentures and bank loans.

On the basis of duration, sources of finance can be classified as:

Sources of long term finance: These are equity financing, debt financing, bank loan, etc.

Sources of short term finance: These are trade credit, overdraft, customer advances, cash credit, etc.

Fixed capital is the investment in assets with more than one year. The nature of business affects the requirement of fixed capital.

• Organisation operating at higher scale require higher investment in fixed assets.
• Manufacturing units require more fixed capital to be invested in machinery, land, etc.

Major areas of financial decision-making by the entrepreneur are:

• Estimating funds requirement
• Utilisation of funds

Finance is the life blood of the business. A business requires:

• Start-up capital to start a new business
• Working capital for day to day expenses such as payment of electricity bills, wages, raw material, etc.
• Fixed Capital to purchase building, machinery, replace old parts, etc.
• Funds for capital expenditure such as investment in latest technology
• Funds for expansion of business, diversification, research and development, etc.

Considerations to be kept in mind for selecting physical resources are:

• Cost of capital involved
• Access to other resources
• Transport and communication cost
• Labour cost

Expert professional assistance required to start a school are third party arrangements for leasing the place, regular basis skilled teachers, contractual basis transport services (bus, van, etc.) and unskilled staff on contractual basis.

Basic resources are the ones that are required by all the organisations. These are land, labour and capital.

Requirement of resources depend upon:

• Nature & size of activity
• Specification of product
• Type of business activity
• Business strategy adopted by them

Physical resources are the resources made by humans through their abilities and skills. These include operational resources concerned with physical capability of enterprise such as land & building, machinery, tools, etc.

Moral responsibilities of the entrepreneur in utilisation of resources are:

• Plan the requirement of resources
• Minimising use of resources when possible by adopting a systematic approach
• Adopt resource scheduling, smoothing, and leveling
• Tracking utilization of resources

Benefits of mentoring to an organization are:

• It enhances the strategic business initiatives
• Reduces turnover costs by supporting retention
• Improves overall productivity
• Discourages 'silo mentality' that hinders cooperation among company departments or divisions
• It also increases the level of knowledge transfer and enhances professional development

Resource mobilisation is about having the right type of resource, at the right time, at right price with rightly using acquired resources thereby ensuring optimum utilisation of the same.

For effective procurement of resources, a plan with following steps is required:

• Planning for inventory management for procured resources
• Arranging funds for acquiring resources
• Identifying problems related to mobilization of resources
• Evaluating quality and quantity of resources
• Contacting and communicating with suppliers
• Locating availability of resources
• Identifying the type of resources and judging need for resources

Methods to collect the required data are:

• Direct Personal Investigation: It is also known as ‘Interview method’ by which data is collected by investigator from the informants through a proper interview. The data is more informative, transparent and accurate through this process.
• Indirect oral investigation: In this, an investigator approaches certain sources that are related with the information directly or indirectly.
• Local correspondents: For this, an Investigator appoints local agents or correspondents in different parts of area under investigation
• Mailed Questionnaire: An investigator prepares a list of questions pertaining to field of investigation and send it to informants. Filled questionnaire is sent back to investigator confidentially within a stipulated time period.
• Questionnaire through enumerators: For this, enumerators go to informants along with questionnaire to help them record the response.

This is an informal mentoring wherein there is no formal relationship between mentor and mentee. It is same as when a person seeks advice from his friends or family.

This type of informal mentoring can be classified as peer mentoring in which a mentee gets advice from more than one mentor. It helps in the all-round development of a mentee.

Patterns of capital structure available to Mukesh are:

Option 1: Only Equity shares

Option 2: Equity and debentures

Option 3: Both equity and preference shares

Option 4: Equity, preference and debentures

• Equity shares: It is a permanent and long term source of finance with no fixed obligation of paying dividend. There is no charge over assets.
• Debentures: Document or certificate issued by a company under its common seal, as an acknowledgement of it’s debt with an undertaking to repay the principal and interest on prescribed dates. Interest is paid at a fixed rate every year, irrespective of availability of profits.
• Preference share: These are the shares that enjoy a preferential position over equity shares with respect to ‘Claim of dividend’ and ‘Repayment of capital.’

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According to Herbert G Hicks and C Ray Gullet, The people working in a firm make it what it is. For competent workforce for her proposed plant, right people at right job and at right time shall be ensured. This will ensure:

• Benefits of specialisation to firm
• Minimising wastages of resources
• Reducing inefficiencies and labour turnover ratio
• Saving cost of production

Sources to the company from where they can raise finance for expanding its production capacity by modernizing its plant and machinery are:

Loans from Banks: Long term loans can be obtained from the bank at prevailing interest rates in economy. Loans are repaid either in lump sum or in installments.

Equity financing: It is a permanent and long term source of finance with no fixed obligation of paying dividend. There is no charge over assets.

Factors are required to be planned and paid attention to at this time are:

• Cash flow situation: While making a choice of the capital structure, the future cash flow position should be kept in mind. Debt capital should be used only if the cash flow position is really good because a lot of cash is needed in order to make payment of interest and refund of capital.
• Interest coverage ratio (ICR): This ratio helps in finding out how many times is the EBIT available to the payment of interest. The capacity of the company to use debt capital will be in direct proportion to this ratio.
  • • ICR = EBIT
      • • Interest
• Debt service coverage ratio (DSCR): This ratio tells about the cash payments to be made and the amount of cash available. Better ratio means the better capacity of the company for debt payment.
  • • Debt Service coverage ratio= PAT+ Dep +Interest+ No cash exp. Pref Div + Interest + Repayment Obligation
• Floatation costs: It refers to those expenses which are incurred while issuing securities. For example, commission to underwriters, brokerage etc. The cost of issuing debt capital is less than the share capital. This attracts the company towards debt capital.
• Tax rate: The rate of tax affects the cost of debt. If the rate of tax is high, the cost of debt decreases. The reason is the deduction of interest on the debt capital from the profits considering it a part of expenses and a saving in taxes.

For procurement of physical resources, it is important that careful selection is done as many allied issues are affected by the 'place', selected, such as capital cost, access to other resources, cost of transport and communication, etc. Resources such as machinery, tools, equipments, process, technology, raw material, etc. also require a thorough investigation as they will have bearing on both short term and long term cost of the project, durability and utility, possibility of growth potential, etc.

Outdated and obsolete machinery results not only in bad capital budgeting decisions but also affects the innovation and creativity of an entrepreneur.

Printing machinery and its tools are physical resources. Before buying these, Anurag should consider following points:

• An entrepreneur has to first decide location and place for enterprise
• Factors such as cost of the project, use of these assets, growth potential, quality concerns, etc.

Cottage industry is an industry which is run either as whole-time or part-time occupation with the full or partial help of the members of the family. Characteristics of these industries are:

• Run only by members of family at their home
• Does not involve much capital
• Mostly fulfills requirements of a local region
• Manufactures traditional items such as mats, shoes, pottery, etc.

On the basis of size, business enterprises can be classified as:

Small scale industries: Industrial units with investments in plant and machinery of not more than ₹ 5 crores

Medium scale Enterprises: Units with investment above ₹5 crore and upto ₹10 crore

Larger scale enterprises: Units with investment in plant & machinery above ₹10 crore

Primary sources are the sources of original and first hand data collected directly from the field. It is more accurate, has detailed information from field source , collected for some necessary purpose, not for every study and more authentic.

Methods of Collecting Primary Data are:

Direct Personal Investigation: It is also known as ‘Interview method’ by which data is collected by investigator from the informants through a proper interview. The data is more informative, transparent and accurate through this process.

Indirect oral investigation: In this, an investigator approaches certain sources that are related with the information directly or indirectly.

Local correspondents: For this, an Investigator appoints local agents or correspondents in different parts of area under investigation

Mailed Questionnaire: An investigator prepares a list of questions pertaining to field of investigation and send it to informants. Filled questionnaire is sent back to investigator confidentially within a stipulated time period.

Questionnaire through enumerators: For this, enumerators go to informants along with questionnaire to help them record the response.

(a) ISI (India Standards Institute), RT (Register of Trade Mark)

(b) DDCA (Directorate of Drug Control Association), CIPET (Central Institute of Plastic and Engineer Tool)

(c) DIC (District Industrial Centre), IIC (Indian Investment Centre), SFC. (State Finance Corporation)

(d) NSIC (National Small Industrial Corporation), CCIE (Chief Controller of Import and Export), STC (State Trading Corporation)

Mentoring is the personal development tool that involves open communication between mentor and mentee to achieve something. A Mentor creates an informal environment in which the other person i.e., mentee is encouraged to discuss things comfortably and confidently.

Example:

• A teacher teaching her students or a coach guiding the students
• Friend providing career consultation and guidance on the basis of his experience and knowledge

Benefits of mentoring to a mentor can be seen in following points:

• It Helps in the mentor's professional and personal development as he gets insights from mentee's background and history
• Mentorship re-generates the mentor's career
• It also helps in promoting organisation's well-being and in Knowing more about other areas within the organisation

Debt financing is funds raised by way of borrowings or credit from the public, commercial banks or financial institutions.

Banks provide short/ medium term loans such as Cash Credits, Term Loans, Overdrafts, Discounting of Bills, etc. Loans are repaid either in lump sum or in installments and they carry a charge on the assets of borrowing company.

• Loans & Advances: An advance made in lump sum to the borrower that is usually secured against pledge of specific assets
• Cash credits: Arrangement wherein business can draw from the account up to a specified limit. Secured against stock of raw materials or finished goods of business, which may be in possession of banks or business
• Discounting of Bills: Banks discount bills of exchange & promissory notes in lieu of commission
• Bank Overdrafts: Arrangement wherein business can overdraw from the current account upto a specified limit
• Factoring: Financial service rendered by ‘factors’, in exchange of fees, involving discounting of bills and collection of debts
• Term loan: Loans extended by the banks to their customers for buying machinery, trucks, etc.

On the basis of ownership, sources of finance can be:

Owner’s funds: Equity share capital, preference share capital and retained earnings form part of owner’s funds. These funds strengthen control of an entrepreneur. Return is in the form of dividend. These are not secured by any charge on assets. and repaid only at the time of winding up of the company. Owners have voting right in the company.

Borrowed funds: Debentures, loan from banks & financial institutions form part of borrowed funds. These funds do not dilute the control as they don’t have right to vote. Return is in the form of fixed interest. The amount is secured by creating a charge on assets and is to be repaid by the company, at the pre-determined date.

Venture capital is the equity financing that is involved in new, high potential, high-technology oriented entrepreneurial ventures.

New enterprises find it difficult to raise external equity to meet the needs of

• Early stage financing
• Expansion or development buyouts
• Acquisitions and leveraged buyouts

Venture capital fulfils financial needs of new ventures through equity. Venture capitalists and angel investors are two such mushrooming sources of finance.

a) Preference shareholders

(b) Equity shareholders

(c) Debenture holders

(d) Lease

• Financial institutions provide both ‘Own Capital’ and ‘Loan Capital’ for long / medium term requirements
• They fulfill the requirement of large funds for expansions, re-organisation and modernisation of business
• They Encourage setting up of industries in backward areas
• Support traditional financial agencies like commercial banks
• Provide technical assistance to industrial units and develop investment markets

Public deposits are the deposits raised by enterprises directly from the public. Depositors earn interest higher than those offered by banks & companies obtain funds at lower rates than those borrowed from banks. These are a good source of raising medium term finance as:

• Acceptance of Public Deposits is regulated by RBI
• Companies can invite deposits from public up to a period of three years
• Person can deposit money by filing prescribed documents and company acknowledges the debt by issuing a ‘Deposit Receipt’

(a) Small. Trading organisation needs to maintain only stock of finished goods, hence needs lower amount of working capital

(b) Large. Liberal credit policy to customers results in higher amount of debtors, thus requiring higher working capital.

(c) Small. Trading organisation needs to maintain only stock of finished goods, hence needs lower amount of working capital

(d) Small. Capital intensive technology makes more use of fixed capital.

Objectives of financial planning are:

Ensuring availability of funds when required: Financial planning facilitates estimation of funds required for various purposes- for purchase of fixed asset or for working capital requirements

Ensuring that unnecessary funds are not raised: Unnecessary funds add to cost of business, so financial planning ensures that excess funds are not raised.

Capitalisation is the total of long term funds available to a company. It includes retained earnings also. It is determined by factors such as cost of capital, trading on equity, etc.

Capital Structure refers to the mix between Owner’s Funds (Equity) and Borrowed Funds (Debt). It is determined by earning capacity of the business.

Right people at right job at right time ensures:

• Benefits of specialisation to firm
• Minimising wastages of resources
• Reducing inefficiencies and labour turnover ratio
• Saving cost of production

Efficient utilization of resources means having right people at right job at right time. Factors that should be considered primarily for building up efficient human resources are kind of people required and number of people required.

Professional assistance is important

• For different aspects of business such as production, distribution, marketing, legal researching, etc.
• For meeting never ending requirements of the enterprise

Industrial units with investments in plant and machinery of not more than ₹5 crores are SSIs. These are:

Tiny units: Units whose investment in plant and machinery is upto ₹ 25 lakhs.

Ancillary/ Auxillary units: Units that supply at least 50% of its production to another unit i.e., the parent unit.

Micro Enterprises: Units in which investment in plant and machinery does not exceed ₹ 25 lakh.

Small-scale units owned and managed by women entrepreneurs: Units in which a woman or a group of women individually or jointly, own at least 51% of the share capital

Export oriented units: Small-scale unit that exports more than 50% of its production is an export oriented unit

Cottage and Rural Units: Cottage industry is an industry which is run either as whole-time or part-time occupation with the full or partial help of the members of the family.

Intangible resources cannot be seen or touched, but they enable a business to continue to earn a profit over the normal basic rate of profit earned by other business of similar nature. Goodwill, Intellectual Property, Brands, etc.

Mentoring is the personal development tool that involves open communication between mentor and mentee to achieve something. Mentor creates an informal environment in which the other person i.e., mentee is encouraged to discuss things comfortably and confidently.

Characteristics of mentoring are:

• It is not the same as relationship of manager-employee
• Mutual consent of a mentor and mentee is there
• This relationship focusses on professional development
• It is a personal relationship in which a mentor provides both professional and personal support
• Relationship may be initiated by mentor or mentee through match initiated by organization.
• It crosses the job boundaries

Mentors provide support, identify strengths and weaknesses and help mentee to deal with them effectively. Role and importance of mentoring can be highlighted from the following points:

Benefits of mentoring for Mentees:

• Helps in understanding work culture to define and understand current situations in the enterprise
• Enables a mentee to assess his/her weakness and strengths by providing critical feedback in key areas
• Assists in finding necessary information
• Assists in process of documentation for enterprise and enterprise support programmes
• Helps to identify, procure and utilise resources required for proposed enterprise
• Gives consultation, and coordinates activities that aim at accessing funds, new technologies, etc.
• Helps mentee to learn specific skills, knowledge and rules critical for success of business
• Serves as source of introducing mentee to threats and risks of market as mentor has experience of witnessing highs' and 'lows' of initial stages of venture

Benefits for Mentors

• Helps in mentor's professional and personal development as he gets insights from mentee's background and history
• Re-generates the mentor's career
• Helps in promoting organisation's well-being
• Know more about other areas within organisation

Benefits for Organisations

• Enhances strategic business initiatives
• Reduces turnover costs by supporting retention
• Improves productivity
• Discourages 'silo mentality' that hinders cooperation among company departments or divisions
• Increases level of knowledge transfer and enhances professional development
• Provides employees with valuable knowledge and required information
• Take advantage of own employees as internal experts for professional development
• Creates multicultural workforce by establishing relationship among diverse employees and allowing equal access to mentoring

Mentoring can be through construction mode or delivering mode.

Construction mode: It refers to the way mentorship is structured i.e., informal or formal.

Informal: There is no formal relationship between a mentor and a mentee. Same as when a person seeks advice from his friends or family. This can also be seen when managers accept mentoring requests from other member, outside formal hierarchical structure in an organisation.

Formal: This provides an opportunity in an organised mentoring programme. Mentor and mentee join this programme by completing a mentoring profile. Mentees are matched with a mentor either by a programme administrator or a mentoring committee according to the programme format.

Delivering mode: It is the way mentorship is administered. This can be:

One-to-one mentoring: It is mostly face to face activity involving one mentor and one mentee. There is a two-way learning process where personal and reciprocal relationship is established through mutual exchange of ideas and views.

Group mentoring: In this, a Mentor works with 4-6 mentees at one time. It is mostly the case when an organisation has more mentees than it has mentors.

Online mentoring: It is a mentoring programme that is conducted through computers. There is a use of e-mail and smart technologies such as online or web-based tools, video links or mobile phones as way to communicate.

Peer mentoring: In this a mentee gets advice from more than one mentor. It helps in all-round development of mentee.

Working capital is the investments in current assets and is used for meeting day-to-day requirements of finance for business operations. Factors that help determining the working capital requirement of a company are:

Nature of Business: Manufacturing organisation needs higher amount of working capital as compared to trading concerns.

Scale of operations: Business with large scale of operations requires large working capital since it has high volume of inventory & debtors.

Business Cycle: In periods of boom, volume of production & sales may be higher, for which business would require higher amount of working capital.

Production Cycle: Business with longer production cycle, has funds blocked for a longer time, thus requires larger working capital

Factors affecting capital structure are:

Cash flow position: Cash Flow must be adequate for payment of the following obligations:

• Normal business operations
• Repayment obligations
• Meeting Interest on debt

If a business has strong Cash flows, it may go in for borrowed funds.

Level of fixed operating costs: If business has high fixed operating cost, it should opt for lower fixed financing cost, i.e. less Debt

Risk considerations: If a company’s business risk is low, its capacity to use debt (high risk fund) becomes higher & vice-versa.

Cost considerations: Increase in debt of a company, increases the financial risk, which may increase the shareholders return. Hence, usage of debt beyond a point may increase the cost of equity & decrease the share price, despite increased EPS.

Return on investment: If the ROI is higher than the cost of Debt, the company can issue more debt. However, if the ROI is lower than cost of Debt, company has to fall back on Equity.

Tax rate: Interest on debt is tax deductible for the company, which reduces the after tax cost of debt. Higher tax rate makes debt relatively cheaper, which may induce companies to opt for debt in their capital structure.

Capital invested in assets of the business for more than one year is fixed capital. Factors affecting fixed capital requirements are:

Nature of Business: Organisation operating at higher scale require higher investment in fixed assets

Scale of Operations: Trading concern require lower investment in fixed assets as compared to manufacturing concern

Choice of Technique: Capital intensive organisations require more investment in fixed assets

Technology Upgradation: Organisations where assets become obsolete require more fixed capital for their replacement

Growth Prospects: Higher growth of an organisation requires higher amount of fixed assets

Diversification: If firm chooses to diversify its operations, it will require more fixed capital

Method of acquiring an asset: Developed financial market may provide option of leasing an asset

Level of Collaboration: Organisations that share facilities will require less fixed capital

Factors that determine the amount of working capital required by an enterprise are:

Nature of Business: Manufacturing organisation needs higher amount of working capital as compared to trading concerns.

Scale of operations: Business with large scale of operations requires large working capital since it has high volume of inventory & debtors.

Business Cycle: In periods of boom, volume of production & sales may be higher, for which business would require higher amount of working capital.

Production Cycle: Business with longer production cycle, has funds blocked for a longer time, thus requires larger working capital

Credit Allowed: A liberal credit policy to customers results in higher amount of debtors, thus requiring higher working capital

Credit Availed: Business which enjoys liberal credit policy from suppliers, can manage with lower working capital, since purchases are on credit

Availability of Raw Material: Business which has un-interrupted supply of raw materials, along with small lead time, requires lower stock levels, thus requiring lower amount of working capital

Growth Prospects: If a business has high growth potential, it will require higher working capital to manage its production & sales targets

Level of Competition: Stiff competition from similar businesses may necessitate maintenance of higher stock levels to meet urgent customer orders & allowance of liberal credit period, both requiring higher working capital

There are some operations such as combining raw material, processing and assembling, etc. to be carried out whether a business enterprise markets a product or a service.

Arrangement needs to be there to convert raw material into finished products with value addition

Important decisions to be made by the entrepreneur while planning are:

• Installed capacity and size of the unit
• Machinery and the technical know-how of machinery
• Training
• Requirement of quality control systems
• Technical staff required
• Cost of maintenance, wear and tear of assets, etc.
• Spares parts and support services required
• Raw materials required
• Supplies of the raw material, their number and location