documents of drugs

1. 5
How to Establish
A Business Enterprise
5.1 Introduction
In the previous lesson you have learnt that one can start a business of
ones own. A person can choose any business as a career. A small
business is a profitable economic activity which can become an avenue
of employment.
You may think that it is easy to start a business if you have necessary
money required to establish a business. But actually it is not an easy
task howsoever small the business may be. It requires so many decisions
and steps to be taken at various stages. At first you have to prepare a
plan. You have to take decisions about the nature of business location
and sources of raising necessary capital. You have also to take a decision
regarding physical and material resources. Though the procedure for
setting up a business is not the same for all types of business, there
are certain steps which you have to take to start any business. In this
lesson you will learn how to establish a business and how to expand
its activities whenever opportunity arises.
5.2 Objectives
After studying this lesson you will be able to :
• appreciate the role of Small Industries Service Institutes in
establishing a small business unit;100 :: Commerce (Business Studies)
• prepare a plan for setting up a small business unit,
• identify various factors that affect the decision regarding location;

2. • identify the various sources of raising fixed capital and working
capital;
• prepare a project for loan to be submitted to an agency which
grants loans;
• describe the methods of obtaining regular and adequate supply
of raw materials and man power;
• keep in view the legal and other formalities required to be
complied with to establish a business unit;
• evaluate business performance within a short period after its
commencement;
• identify the various measures of quality control; and
• decide the time and scope of expansion of business.
5.3 Role of SISIs (Small Industries Service Institutes)
relating to establishing a small business unit
Dear learner, in case you decide to establish a business unit of your
own and manage its affairs, you can take the help of any SISI. SISIs
have been set up by the government in state capitals and other big
cities all over the country. There are 28 SISIs and 30 branches set up
in state capitals and other places SISIs render assistance in the following
areas:
1. Guidance in financial requirements:
An SISI may guide you in determining the capital requirements as
well as selecting the sources of raising finance.
2. Trade and market information:
SISIs conduct market surveys and give advice to entrepreneurs

3. regarding market conditions and demand for products to be sold.Self Employment in Business :: 101
3. Project Reports:
SISIs help in preparing project reports which are to be submitted
to licensing authorities or to banks and other financial institutions
for loans and credit facilities.
4. Training Programme:
SISIs organise training programmes regarding establishment of a
business and running it. It also arranges training in various fields
of manufacturing, such as electroplating and power coating, heat
treatment, die and tool making, electronics, repair works, cane
and bamboo works etc.
5. Modernisation:
They also help existing units in the modernisation of
manufacturing techniques by giving advice regarding its
possibilities and the steps to be taken.
Thus, once you decide to start a business, you can go to SISI unit of
your area. You can seek advice from the experts and select the type of
business you can start. These institutes help in selecting the line of
business, explain legal formalities to be complied with, prepare project
reports and give such advice which may help one in establishing a
business. If necessary you can get technical training also. Suppose you
decide to establish a unit of Die and Tool making, you can attend the
training programmes in which you can learn how to make dies and
machine-tools. With that technical knowledge you can easily start a
business.

4. Intext Questions 5.1
Fill in the blanks
(i) SISI stands for __________________.
(ii) _______________ SISIs have been set up in the country.
(iii) SISI s give advi c e to ent r epr eneur s r ega rding ma rke t
conditions as they conduct _______________ .102 :: Commerce (Business Studies)
(iv) They organise _______________ programmes regarding
establishment of a business and running it.
5.4 Preparing a plan of action
Once you decide to establish a business unit, you will have to prepare
a plan of action. You will have to decide in advance each and every
step you are going to take in that connection till it starts functioning
which is helpful in avoiding delay at the initial stages of starting
business. The following aspects of the action plan should be kept in
view before deciding on the course of action.
1. Selection of the line of business:
At first decision is to be taken about the line of business. The
main considerations will be its profitability, risk involved and
the amount of capital required. You may consider other business
opportunities along with the market demand for the goods.
2. Choice of form of organisation:
A small business may be organised as a sole proprietorship or a
partnership firm. Advantages and disadvantages of both the forms
will have to be considered and decision is to be taken. As a sole
proprietor you will have the authority of managing the business

5. and will be entitled to the entire profit generated, but then you
will also have to bear the risk of loss involved. In partnership
there will be others to share the risk and contribute capital and
help in management. But then the profit earned will also be
distributed among the partners. A company form of organisation
may also be considered for the purpose.
3. Financial Planning:
A business cannot be started and run without sufficient amount
of capital. Capital is required to buy fixed assets like land,
building, machines and equipment. Capital is also required to
buy raw material and meet day to day expenses of the business
like wages, electricity charges, carriage, etc. Decision has to beSelf Employment in Business :: 103
taken in advance regarding the amount of capital required for the
various purposes and regarding the sources of raising it, what
amount is to be contributed by the owners and the amount to be
borrowed from financial institutions, banks, etc.
4 . Location of business:
Where to establish a business is also to be decided in advance.
A business established at a particular location cannot be shifted
to other location easily. Decision regarding location of the
business unit consists of decision regarding the choice of locality
and selection of site. The deciding factors are nearness to the
source of supply of raw material, nearness to the market,
availability of labour, transportation and banking facilities.
Selection of the site depends on cost of land, development cost,

6. etc.
5. Physical facilities:
Decisions have to be taken regarding plant and machinery and
equipments to be provided for the business, building and other
physical facilities like water and power supply, transportation,
etc. The factors that may affect the decisions in this regard are
the size of business, techniques of production to be used,
availability of funds, etc.
6. Plant layout:
After selecting the machinery and equipments required, it is
necessary to decide about their installation in a proper manner.
This is called plant layout. A good layout makes the operations
efficient and economical. It reduces the costs of material handling,
storage of inventory, use of space, etc. It helps in optimum
utilisation of all resources.
7. Man Power and Raw Materials:
The number and type of employees to be enrolled have to be
estimated and decided in advance. Decision is also to be taken
regarding source of procurement, development and training of
the employees.104 :: Commerce (Business Studies)
Raw material is also very important for producing goods. To
maintain continuity of production, raw materials must be available
in adequate quantity and at regular intervals . Quantity and quality
of materials to purchased and sources of supply should be decided
in advance.

7. 8. Production process and operations:
The whole production process is to be visualised and the various
activities of the business operation are to be decided in advance.
Action plan should be prepared with great care because it
determines the course of action to be adopted.
Intext Question 5.2
Following are the aspects of business action plan and the areas they
cover listed in columns A and B. Match them:
A B
(a) Lay Out (i) decision regarding the amount of
capital and sources of raising it
(b) Line of business (ii) De c i s i o n r e g a r d i n g t h e p l a c e
whether business is to be set up.
(c) Financial planning (iii) De c i s ion r ega rding pl ant and
machinery, equipment, building
etc.
(d) Location of business (iv) Type and nature of business
(e) Physical facilities (v) The manner in which machinery
and equipments are to be
installed.Self Employment in Business :: 105
5.5 Deciding the nature of business and its location
Nature of business:
To decide about the nature of business the entrepreneur wants to launch,
he has to consider the following factors : (i) Whether the business would
be profitable, (ii) How much capital would be required, (iii) What would

8. be the degree of risk, (iv) Whether there would be sufficient market
demand for the goods, (v) Whether there would be opportunities to grow
and expand.
The above factors will help him to decide as to which line of business
he can successfully pursue.
Location of business:
Once the nature of business has been decided upon the decision will
have to be taken regarding the location of the place of business. Special
care should be taken while making such selection because the place of
business cannot be changed easily. In case of a manufacturing unit the
factors that determine location are:
( i ) Nearness to the source of raw material particularly when the cost
of transporting the raw material is high and these are bulky or
heavy in relation to their value. Examples of such raw materials
are timber, sugar cane, jute, iron ore, etc.
(ii) Availability of rail or road transport facilities. This will make it
convenient to bring raw materials to the factory and transporting
finished goods to the market.
(iii) Av a i l a b i l i t y o f b a n k i n g f a c i l i t i e s a n d p o s t a l a n d o t h e r
communication facilities. Business cannot be run smoothly without
c ommu n i c a t i o n wi t h b u y e r s a n d s u p p l i e r s . B a n k s h e l p i n
transmitting money which is necessary to receive payments and
make payments
(iv) Adequate supply of power and water is another requirement of
a factory. Availability of power and water is also a deciding

9. factor.
(v) Business unit should be located near the market, particularly when106 :: Commerce (Business
Studies)
the finished product is expensive to carry because of its bulk,
weight and perishability.
(vi) Availability of labour at low cost and at ease is also a factor to
be kept in view while deciding the location.
In case of a trading business, the best location is the main market area
of a commercial city or town. It should have its own godowns preferably
near the railway station. There should be enough scope of selling the
products.
Intext Questions 5.3
(A) Fill in the blanks
(i) Considerations that will help in the selection of the line
of business are:
(a) ____________________
(b) ____________________
(ii) A small business may be organised as:
(a) ____________________
(b) ____________________
(iii) Capital is required to buy fixed assets like:
(a) ____________________
(b) ____________________
(iv) A good plant layout will make the operations:
(a) ____________________
(b) ____________________

10. (B) Write True and False against the following statement as the case
may be :
(i) Place of business is changed frequentlySelf Employment in Business :: 107
(ii) Availability of power and water is an important determinant
of location of business
(iii) Opportunities to grow and expand explain the nature of
business
(iv) A trading business can be established anywhere.
(v) While deciding about the location of your business you
will care least for the cost of labour.
5.6 Sources of raising finance
You are well aware that business cannot be run without capital.
Adequate capital is required to establish a small business. The capital
required for a business are of two types
(a) Fixed capital, and (b) Working capital
Fixed capital refers to funds necessary to acquire fixed assets like land,
building , machinery and equipments. Such assets cannot be easily moved
from the business site. They provide the base or foundation of the
business.
Factors determining Fixed Capital:
As fixed capital is needed to meet the long term requirements of the
business, it is necessary to estimate the amount with utmost care.
Following are the factors that may be kept in view for estimating fixed
capital requirements.
(a) Nature of Business:

11. The business may be a manufacturing concern or a service
undertaking or a trading concern. In a manufacturing firm larger
amount of fixed capital is required for building, machine etc. which
require more funds to be invested. In a trading concern fixed capital
required is smaller as the fixed assets like furniture etc. do not
involve large investment.108 :: Commerce (Business Studies)
(b) Size of business:
The amount of fixed capital required depends upon the size of
business i.e. larger the size greater will be the need for fixed
capital.
(c) Types of goods produced:
If a business manufactures consumer goods like soap, hair oil
etc smaller amount of capital is required but if it manufactures
industrial goods like machine tools and equipments, more fixed
capital will be required.
(d) Production Technology :
In a capital intensive production unit the amount of fixed capital
required will be more while it will be less if labour intensive
technology is used.
(e) Method of acquisition of fixed assets:
Fixed assets may be purchased or may be acquired on lease or
on hire purchase. If the fixed assets are purchased it will require
more fixed capital initially than if the assets are procured on
lease or hire purchase.
Sources of fixed capital

12. Following are the main sources of fixed capital:
1. Ownership Capital:
The entrepreneur or partners may invest their own savings as
capital. This amount of capital is not returnable. In case of a
company, share holders contribute the capital as owners.
2. Borrowed Capital:
Long term loans may be arranged from different sources, such as
(i) Commercial banks, and (ii) financial institutions. Banks grant
term loans for two to ten years as per the government’s credit
policy for small scale industries. The banks exntend credit to
such industries as part of priority – sector lending.Self Employment in Business :: 109
Then there are all–India and state–level financial institutions.
Besides there is the Small Industries Development Corporations
and Small Industries Development Bank of India which extend
long term loans on easy terms to small scale units.
Factors that determine working capital needs:
Working Capital is the capital required to meet day to day expenses
like wages, rent, electricity and water charges, and to be invested in
the current assets, such as stock of raw materials, semi finished goods,
finished goods etc. Working capital is also called circulating capital.
This is because investment in current assets are recovered and reinvested
repeatedly in course of business operations. Going by the above meaning
of working capital, its requirements may be met by short term funds.
however, since the business is a continuing concern it must at all times
have a certain amount of working capital which would be needed again

13. and again. This may be regarded as the permanent part of working
capital.
Following are the various factors that need to be considered to estimate
the amount of working capital needed.
1. Proportion of cost of raw materials to total cost:
If the raw materials account for a major portion of the total cost
of the finished product, more working capital is required.
2. Cost of labour:
If labour intensive methods of production are used more working
capital will be required.
3. Length of operating cycle:
If more time is taken in the completion of the production process
and the sale of the products, higher investment will be required
in inventories and wage bills and hence more working capital
will be needed.
4. Terms of purchase and sale:
If raw materials and other services are available on credit and
goods produced are sold for cash, less working capital investment110 :: Commerce (Business Studies)
will be involved. On the other hand, if raw material is to be
purchased for cash and goods produced are sold on credit, larger
working capital will be necessary.
5. Current Assets turnover:
The current assets turnover is measured by the ratio of sales to
current assets. In other words, more rapid is the use of raw
materials in the production process and more rapid the sale of

14. goods produced lesser will be the amount of working capital
needed. For instance if sales over a year amount to Rs. 12 lac
and the current assets on the average during the year has been
worth Rs. 2 lac, the current assets turnover will be Rs. 12 lac/
Rs.2 lac=6 times. In other words the current assets are used and
raised every 2 months during the year. A business having the use
and reuse every two months will naturally require more working
capital than the business where the use and reuse is every one
month. More rapid the flow of working capital lesser is the need
for working capital and vice versa.
6. Cash requirements:
Needs for cash to meet the operating expenses like wages, rent,
freight, taxes etc, also determine the amount of working capital.
7. Seasonal operations:
Business units engaged in manufacturing seasonal goods are
required to have a relatively larger amount of working capital.
The recovery of working capital through sales of such products
is limited to a particular period, and hence a large amount of
working capital is required to meet off–season requirements.
Sources of short term finance/working capital
Following are the main sources of raising finance to meet working
capital requirements:
1. Trade credit:
It is the credit extended by sellers to the buyers. Raw material
in case of manufacturing business and finished goods in case of

15. trading business may be purchased on credit. The period of creditSelf Employment in Business :: 111
depends upon the prevailing custom and trade practices and terms
of supply , but it generally ranges from 15 days to 3 months.
No security is required for availing of trade credit.
2. Bank credit:
Commercial banks are the most important sources of short term
finance. The various types of short term credit facilities that
banks provide are: (a) outright loans to be paid back in one
single instalment, (b) Cash credit which is a facility of borrowing
upto a certain limit, (c) Overdraft which is a facility given to
firms having current accounts to overdraw, (d) Discounting of
bills implying procurement of cash from a bank in exchange for
credit instruments like bills of exchange, promissory notes hundis,
etc.
3. Advances from Customers:
Customers may pay in advance a part of the price of the goods
ordered to be supplied later.
Intext Questions: 5.4
Following statements relate either to Fixed Capital or Working Capital.
Classify them:
1. Capital required to buy fixed assets like machinery, building,
etc.
2. Manufacturing seasonal goods require more capital
3. A higher ratio of the cost of raw material to the total cost is an
important determinant.

16. 4. Bank credit is an important source of raising finance.
5. A manufacturing concern requires more of this capital than a
trading concern.
6. Borrowing from financial institutions such as Small Industries
Development Corporation and Small Industries Development is
an important source of raising capital.112 :: Commerce (Business Studies)
5.7 Project for Loan
Once the financial requirements, both long term and short term for
fixed and working capital, are finalised and it is decided to raise capital
by borrowing money from banks and other financial institutions, a
project report will have to be prepared. A project report is a document
which contains the estimated amount of fixed investments and working
capital to produce or manufacture an estimated quantity of products. It
also contains the methods and techniques of production to be used,
estimated number of workers to be employed, and expected sales
revenues during the next one or two years.
How to prepare a Project–report?
A project report contains the estimates and course of action regarding
the following for an estimated number of years, say five years:-
1. Items to be manufactured and production capacity:
The item or items of goods to be manufactured are specifically
mentioned. For example the items may be optical lenses and
glasses which may be bifocal and unifocal. The number of
working days in a year and per month and the working hours per
day have to be shown in the report.

17. This clause will also show the installed capacity in terms of
quantity and the capacity utilisation of the plant year–wise for
the years for which the report is prepared. In our example, the
installed capacity may be 2,000 pairs of lenses per month or
24,000 pairs per annum. Estimated utilisation may be 7% , 80%,
90%, 100%, & 100% respectively during the next five years.
2. Use of the products:
In this clause the various uses of the item or items of goods to
be manufactured are mentioned. It also explains the marketing
feasibilities, areas and channels of marketing, etc.Self Employment in Business :: 113
3. Manufacturing process:
This clause contains the basic raw material to be used and the
whole process of converting it into finished product.
4. Status of the project:
It explains the stage of completion of the project. For example,
land has been acquired and construction work is complete, plant
and machinery to be used and the sources from which these will
be purchased are identified, provisional registration form SSI is
obt a ined, provi s iona l s a l e s t ax r egi s t r a t ion ha s be en done ,
temporary power connection is there, etc. The date by which
production is expected to start is also mentioned.
5. Total cost of the project:
This clause contains details of the total estimated cost of the
project clearly dividing it into fixed investment requirements and
working capital requirements and showing the total capital

18. requirements and the calculations in details. Mention is also to
be made of the owners, proposed contribution and the funds to
be raised through loans.
6. Expected Sales Revenue:
Details will have to be given of the annual expected sales for
the number of years for which the report is prepared and the
revenues expected from sales.
7. Projected profitability statement:
This clause shows the estimated profit expected to be earned
during the project period.
The project report is an important document and should be prepared
carefully. On the basis of this report banks and other financial institutions
decide whether loan should be granted, and if granted, the amount that
should be sanctioned.114 :: Commerce (Business Studies)
Intext Questions 5.5
Column A contains the name of the clause of a project and Column B
explanation of the clauses. Match the two:
A B
(a) Status of the project (i) Shows the estimated profits.
(b) Use of products (ii) C o n t a i n s t h e p r o c e s s o f
conve r t ing r aw ma t e r i a l s into
finished goods.
(c) Project profitability (iii) Shows number of working days
in a year and hours per day.
(d) Assumptions and (iv) Explains the stage of production

19. capacity empletion of a project.
(e) Manufacturing (v) Explains the marketing process
feasibilities.
5.8 Supply of manpower and raw materials:
In case the business is not so small as to be run single handed, the
owner will have to employ persons to help him. These workers can be
unskilled, semi–skilled and skilled. To run a business smoothly it has
to be ensured that sufficient manpower is available at the right time and
at competitive rate. The whole process which ensures a regular supply of
required manpower of right type is called recruitment. The various sources
of recruitment are:
( 1 ) Employment Exchange
( 2 ) Technical institutions and institutes of education and training like
ITIs, and
( 3 ) Through news paper advertisement.
These sources are useful for skilled workers. For unskilled labour,
sources of recruitment are (i) those available at factory gate,
(2) through contractors, (3) reference by the existing employees.Self Employment in Business :: 115
The owner should find out the going rate of wages and decide about the
wages, particularly of the skilled workers. It should be satisfactory, lest
they leave the job as soon as they get a better paid job elsewhere. However
some workers may also be employed on trial basis. If found suitable they
may be made permanent later.
As a regular and adequate supply of manpower is necessary, so is the
regular supply of raw materials necessary. Depending on the nature of

20. products, there may be need for different types of raw material. For
example, furniture making requires timber, for making ready made
garments cloth is required and so on. To maintain continuity of production,
raw materials must be available in adequate quantity at regular intervals.
Suppliers should be identified and enquiries made regarding price, cost
of transport and terms of payment. Keeping in view the time taken by the
suppliers to supply raw material, adequate stock has to be maintained. If
there is apprehension of rise in price of raw materials, quantity of purchase
can be increased. But some factors are to be kept in view while deciding
on the quantity to be held in stock. These are (1) Storage cost, (2)
working capital, (3) risk of loss or damage of materials held in stock,
(4) insurance premium to be paid, (5) discount available if purchased in
bulk and so on.
Intext Questions 5.6
Fill in the blanks with suitable words.
1. Man power consists of (a) ________ (b) ___________
and (c) _________ wokers.
2. ITIs are sources of recruitment for _________ workers.
3. Contractors are sources of recruitment of ____________
workers.
4. Discount on bulk purchase will decide ___________ of
purchase.
5. T h e r a w m a t e r i a l r e q u i r e d f o r f u r n i t u r e m a k i n g i s
__________ .116 :: Commerce (Business Studies)
5.9 Legal Requirement

21. To establish a business unit many legal and other formalities are to be
fulfilled which are as follows :
(A) Form of organisation:
Sole Proprietorship
There is no legal formality necessary to set up a sole
proprietorship business.
Partnership
An a g r e eme n t b e twe e n t h e p e r s o n s wh o wa n t t o f o rm a
partnership firm is necessary. As far as possible it should be in
writing. A partnership firm should be registered with the Registrar
of firms.
Joint Hindu Family
No legal formality is required. A Joint Hindu Family business is
run as per Hindu Law.
Joint Stock Company
It must be registered under the Indian Companies Act. It may be
a Private Limited Company or a Public Limited Company.
Cooperative Society
If the business is organised as a cooperative society, it is required
to be registered with the Registrar of Cooperative Societies of
the State in which societies registered office is to be situated.
B. Other l egal requirements and formalities which are
applicable to all forms of organisations:
1. License is to be obtained from the Ministry of Industries
if manufacturing activities are taken up. However industrial

22. units employing less than 50 workers with power or less
t h a n 1 0 0 w o r k e r w i t h o u t p o w e r, h a v e b e e n g i v e n
exemption.Self Employment in Business :: 117
2. Registration with the Registrar of Small Scale Industries of
the state in which the unit is to be set up is compulsory.
3. Registration with the Labour Commissioner of the state in
which the unit is set up is also compulsory. This is
necessary so that there is compliance of various labour
laws and the Factories Act.
4. Environmental clearance certificate has to be obtained from
the state Pollution Control Board. However except for 17
categories of heavily polluting industries, such as fertilizer,
sugar, chemicals, etc., sending an application is sufficient.
5. The industrial unit has to get it registered with the excise
department so that it can get concession under General
Excise Duty exemption scheme.
6. The firm has to be registered with Sales Tax Authorities
and a Sales tax number is to be obtained.
7. If it is a trading concern it is to be registered with the
Shop and Establishment Authorities.
Intext Question 5.7
Which the following statements are true and which are false ?
1. Partnership is formed by an agreement
2. No legal formality is required to form a Joint Stock Company.
3. License is to be obtained from the Ministry of Industries if more

23. than 100 workers are employed without use of power.
4. Registration with the Registrar of Small Scale Industries is
compulsory.
5. Environmental clearance certificate has to be obtained from the
State Pollution Control Board.118 :: Commerce (Business Studies)
5.10 Evaluation of business Performance
Evaluation of business performance means reviewing the performance
of business activities to ascertain how far the predetermined objectives
of business have been achieved. It is a system of finding out the
difference between the planned performance and the actual performance
so that the reasons of the difference can be ascertained and corrective
measures can be taken.
Once all the formalities have been completed and business is started
i . e . , the bus ine s s uni t s t a r t s func t ioning, i t s eva lua t ion be come s
necessary. It may be done say after one or two months.
The purpose of evaluation of business performance is to ascertain
whether the performance of the business is as per plans or not.
Evaluation is necessary to maintain the progress of business on the
right lines. In the project report, a certain percentage of estimated
capacity to be utilised in the very first year of business is shown. If
the performance is not as indicated in the project report, the loan
extending agencies may review their decision. Performance appraisal
within a short period after commencement of business activities helps
in evaluating the plans and making amendments whereever necessary.
The owner may revise the targets or make amendments in the methods

24. of production and marketing if the performance is not as per plans. If
the management of operations has not been perfect that may also be
improved upon.
Performance evaluation is done in terms of :
(a) Profitability:
This is to ascertain how far the estimated profit expected to be
earned during the given period has been earned.
(b) Capacity utilisation:
This is to ascertain whether the production is equal to the quantity
planned or not.
(c) Quality of product & service:
This is another field of evaluation. Goods produced or servicesSelf Employment in Business :: 119
to be provided should be us per the standards laid down in the
plan.
(d) Volume of Sales :
This is to determine whether sales in terms of quantity and
revenue are as per estimates or not.
(e) Expenses incurred :
This is to find out whether expenses under various heads such
as labour, raw material, etc. are as estimated or not.
Intext Question 5.8
Fill in the blanks with suitable words:
(i) Evaluation of business means evaluating the _________
of business.
(ii) The purpose of evaluation of business performance is to

25. s e e wh e t h e r t h e p e r f o rma n c e o f b u s i n e s s i s a s p e r
___________ or not.
(iii) Performance evaluation in terms of _____________ means
to ascertain how far the estimated profits have been earned.
(iv) Goods produced should be as per the standards fixed is
performance evaluation in terms of _________.
5.11 Measures of Quality Control.
For success in business, ‘customers’ confidence should be won by
standard quality of products. In other words, products should not only
be of good quality but the quality should also be maintained. Quality
products find ready market and can fetch higher price. Therefore you
will have to take a decision about setting a particular standard of
quality and adopting measures for quality control.
The term quality has got different meaning for different products. For
example in case of medicines it is the genuineness. In case of household120 :: Commerce (Business
Studies)
appliances it is the durability and safety, and in case of ready-made
garments it is the design and the fastness of colours and so on. Basically,
quality means conformity with standards set on the basis of customers’
requirements. It is not simply glitter or gloss or beauty.
Quality control refers to the use of operational techniques and activities
to maintain the standard quality of product or service that will satisfy
the needs of users.
Aims and Objectives of Quality Control :
1. The first and foremost aim of quality control is that the goods
are produced according to the quality decided upon.

26. 2. Quality control helps in increasing sales as it enhances the
reputation of the product in the eyes of the consumers.
3. It helps in bringing about uniformity in the ingredients and raw
materials used in the of manufacturing process and thus helps in
establishing a brand name.
4. It enables a firm to compete with other firms because, given the
same price, the consumers generally prefer qualitatively superior
products.
5. Quality control helps in reducing the cost of production by
reducing the rejection rate.
6. In some cases it is legally compulsory to maintain a particular
standard of quality. The Bureau of Indian Standards (BIS) sets
such quality standards. For example wearing helmet is compulsory
for a scooterist in Delhi and the helmet should bear the ISI mark.
Similarly for supplies to the government departments the goods
should bear ISI mark.
Measures of Quality Control :
Following are some of the measures of quality control :
1. Inspection
2. Statistical quality control (SQC)
3. Quality circles (QC)Self Employment in Business :: 121
1. Inspection :
It is a simple and direct method in which each and every item
produced is inspected as per the specifications laid down. Those
found not in conformity with specifications are rejected. This

27. may include inspection of raw materials or the goods in process
of manufacturing.
2. Statistical Quality Control :
It is an application of the statistical methods in controlling, the
quality of manufactured products. In this method, sampling and
tests of significance are carried out. The characteristics of the
product are noted and compared with the specifications. The
variations are then shown in a chart. It is called a control chart.
A tolerance limit is decided by the management in advance. Say
it is 5%. If the variation is within this limit the entire lot is
taken to be in conformity with the standard quality. If it exceeds
the tolerance limit the whole lot is rejected.
3. Quality Circles :
This method originated in Japan and is widely used now. It is a
method of involving workers in quality analysis and quality
improvement. It is a voluntary group of workers who have a
shared area of responsibility. They meet at short intervals to
discuss, analyse and resolve the quality problems.
Intext Question 5.9
(A) Match the following :
AB
(a) Quality (i) method of involving
workers in quality analysis
and quality improvement
(b) Inspection (ii) application of statistical methods

28. to control the quality of goods
produced.122 :: Commerce (Business Studies)
(c) Quality Circles (iii) conformity with standards or
requirements.
(d) Statistical (iv) physical verification of products
Quality Control to ascertain whether the same are
according to specifications or
not.
(B) Fill in the blanks :
(i) A ____________ chart contains the variation between the
characteristics of a product and the specifications.
(ii) In case of medicines quality means _____________
(iii) BIS stands for _____________
(iv) Quality Control helps in __________ which is necessary
to build up a brand image for the product.
5.12 Expansion of business
Once you have established yourself in the market, you are Free to sell
your products as well as efficiently manage your organisation. Now you
can think of increasing your sales and adding other items to the existing
products. That means you can think of extending or broadening the
operation or area of business. This is called expansion or growth of
business:
For example, if you are in the business of readymade garments of
gents and ladies, you can now also manufacture children’s wear. You
can start manufacturing jeans. You can decide to export your products.

29. This is growth or expansion of your business.
Need of expansion :
1. It is a universal truth that survival depends upon growth. It is
very difficult to keep your operations at a particular level because
all the factors may not always be available in desired quantities
for an ideal combination.Self Employment in Business :: 123
2. The volume may be increased so that the machinery, building and
other resources can be utilised to the maximum extent.
3. A true entrepreneur is never satisfied with what he has achieved.
He sets new targets and accepts new challenges. So he either
takes up intensive growth of business or extends his operations
in other spheres.
4. Expansion is also done to exploit new opportunities of business
and to increase profits. Proper planning is required before taking
the decision of expansion. Following points are to be considered
to determine the scope of expansion:
(i) Market Potential:
The scope to increase sales is found out through market research.
To what extent sales can be increased either in the same market or
in new markets can be estimated on the basis of potential demand.
( i i ) Scope of increase in production:
To increase production new machines must be installed, more
workers will have to be employed more capital will be required
both for fixed assets and for working capital. Generally the area
of factory is limited and it limits the scope of expansion.

30. ( i i i ) Management capability:
Management capability is another factor that is to be kept in
mind. With the expansion of business, management problems
increase.
(iv) Favourable conditions:
Generally the boom period is the best period for expansion of
business activities. Supply of labour, of raw material and of
electricity should be adequate. Various state agencies also come
forward with assistance for expansion programmes of the existing
business units during periods of rising demand.124 :: Commerce (Business Studies)
Intext Questions 5.10
Fill in the blanks with suitable words:
( i ) Extending or broadening the operations or area of business
is called ____________.
(ii) Generally the ___________ period is the best period for
expansion.
(iii) E x p a n s i o n i s d o n e t o e x p l o i t t h e n e w
_______________opportunities.
(iv) Since the area of factory is generally___________, it limits
the scope of expansion.
(v) I t i s a n u n i v e r s a l t r u t h t h a t s u r v i v a l d e p e n d s u p o n
_________.
5.13 What You Have Learnt
Small Industries Service Institutes help in establishing small businesses.
They help in preparing project reports, arrange training and give trade

31. and market information.
To start with, a plan of action will have to be prepared. It consists of
deciding about the line of business, the type of organisation, financial
requirements, location of business, plant layout and estimates of raw
material and manpower requirement.
Profitability, capital requirements, scope of expansion and degree of
risk involved will be other deciding factors of the nature of business.
The factors that will determine the location of business are nearness to
the source of raw materials and the market, availability of power, water,
cheap labour, banking and transport facilities and the concessions to be
given by the government.
Two types of capital are required to run a business (a) Fixed Capital, and
(b) Working Capital. Requirement of both will have to be estimated.
Fixed capital will be provided by owners’ investment and by borrowing
from banks and loans from SIDC and SIDB. Working capital can be raisedSelf Employment in Business ::
125
through (i) trade credits, (ii) Bank Credit, (iii) discounting of bills, (iv)
advances from customers.
A Project report contains the estimates and course of action for some
years regarding (a) items to be manufactured, assumptions and production
capacity, (b) uses of products, (c) manufacturing process, (d) status of
the project, (e) total cost of the product, (f) expected sales revenue and
(g) projected profitability.
Sufficient man power & raw material of the right quality is to be made
available. The various sources of recruitment are employment exchange,
technical institutes and advertisement for skilled workers and recruitment

32. at factory gate, through contractors and reference of the exhisting
employees for unskilled workers. Wages should be satisfactory. Adequate
stock of raw material is to be maintained. More purchases can be made
to bear the impact of expected rise in price of raw materials.
Legal formalities may divided into two categories, viz., (A) As regard
form of organisation (B) Those that apply to all organisations. No legal
formalities are required for sole proprietorship and Joint Hindu Family
business. As for as possible agreement for partnership should be in writing
and is to be registered with Registrar of Partnership, where as joint
stock company should be registered under Companies Act and a
cooperative society under the Co-operative Societies Act.
Other legal formalities which are required to be fulfilled for all forms
of organisation are: (i) License from Ministry of Industries, (ii)
R e g i s t r a t i o n wi t h t h e R e g i s t r a r o f Sma l l S c a l e I n d u s t r i e s , ( i i i )
Registration with the Labour Commissioner, (iv) Environmental clearance
from State Pollution Control Board, (v) Registration with excise
department, sales tax department and income tax department, (vi) A
trading concern is to be registered with Shop and Establishment
Authorities.
Evaluation of business is required to ascertain whether the performance
of the business is as per plans or not. In case of deviations either
targets are revised or methods of production and marketing are changed.
Quality Control means use of operational techniques and activities to
maintain the given quality of a product. It helps in (i) increasing sales,
( i i ) making the produc t s compe t i t ive , ( i i i ) r educ ing the cos t of126 :: Commerce
(Business Studies)

33. production. In case of certain products it is legally compulsory to maintain
a particular standard. Methods of quality control are: (a)
Inspection (b) Statistical quality control (c) Quality Circles.
Extending or broadening the operation or area of business is called
expansion. Expansion in necessary (i) for survival, (ii) to make full use
of building, machinery etc., (iii) to be a true entrepreneur, (iv) to
exploit new opportunities in business. Factors determining the scope of
expansion are: (i) Potentiality of the market, (ii) scope of increase in
production, (iii) limits to management capabilities, (iv) favourable
conditions.
5.14 Terminal Exercise
1. E x p l a i n t h e r o l e o f Sma l l I n d u s t r i e s S e r v i c e I n s t i t u t e i n
establishing a business.
2. Enumerate the various aspects of an action plan.
3. Explain the factors that determine the location of a business.
4. State the meaning of working capital.
5. Enumerate the various sources of raising working capital.
6. State the meaning of a project report.
7. How is a project report prepared?
8. List out the main sources of recruitment of skilled workers.
9. List out the factors determining the quantity of stock of raw
materials.
10. Explain the various legal formalities to be complied with to run
a small business.
11. State the meaning of evaluation of business performance.

34. 12. What is meant by quality control? Explain its objectives.
13. Explain the various methods of quality control.
14. State the meaning of expansion of business.
15. Explain the need for business expansion.Self Employment in Business :: 127
5.15 Answers to Intext Questions
5.1 (i) Small Industries Service Institute
(ii) 28
(iii) market surveys
(iv) training
5.2 (a) & (v);
(b) & (iv);
(c) & (i);
(d) & (ii);
(e) & (iii)
5.3 A) (i) (a) Whether the business would be profitable
(b) How much capital would be required
(ii) (a) Sole proprietorship
(b) Partnership
(iii) (a) Land and Building
(b) Plant and Machinery
(iv) (a) Efficient
(b) Economical
B) (i) False
(ii) true
(iii) true

35. (iv) False
(v) False .
5.4 Fixed Capital : 1, 5, 6
Working Capital : 2, 3, 4
5.5 (a) & (iv);
(b) & (v);
(c) & (i);
(d) & (iii);
(e) & (ii);128 :: Commerce (Business Studies)
5.6 (1) unskilled, semiskilled & skilled
( 2 ) skilled
( 3 ) unskilled
( 4 ) quantity
(5) Timber
5.7 (1) True
(2) False
(3) True
(4) True
(5) True
5.8 (i) performance
(ii) plans
(iii) profitability
(iv) Quality of product and services.
5.9 (A) (a) & (iii);
(b) & (iv);

36. (c) & (i);
(d) & (ii);
(B) i) Quality Control
(ii) Genuineness
(iii) Bureau of Indian Standards
(iv) Standardisation
5.10 (i) expansion of business
(ii) boom
(iii) business
(iv) limited
(v) growth.