Section – C : Chapter – 11

PROJECT REPORT – A KEY DOCUMENT FOR SSIA project report provides all necessary information about the unit to be set up. It is useful

for the entrepreneur and for various development agencies who will help the entrepreneur

setting up the unit. If the unit is well prepared, it will obviate various difficulties that

could arise while setting the unit. If the report is well prepared, it will obviate various

difficulties that could arise while setting up the project, especially while obtaining loans.

A wealth of information is available in the country today, which helps the entrepreneur in

preparing the project report. This information is available through the various branches of

SISI (Small Industries Services Institute) works through the SIDO (Small Industries

Development Organisation). This works under the Ministry of Industries. It publishes

Guidelines on Industries, which contains a lot of statistical information on a large number

of items. For each item the information deals with:

Present installed capacity

Production & capacity utilization

Government approach towards the item.

This information helps to ease the task of the entrepreneur. All the entrepreneur has to do

now is

Decide on the production and activity level

Match financial resources with the amount required

Prepare the project report.

Institutions that help the entrepreneur in preparing the project report are

SISI’s

SIDC’s (State Industrial Development Corporations) and SSIDCs(State Small

Industries Development Corporation’s).

Technical Consultancy organizations set up by IDBI.

Specialized cells set up at Nationalized Banks.

The size of the project report depends upon the following:

The size of the unit to be set up.

The nature of production and the product

The amount of financial assistance required.

Project report consists of seven sections

Project Description

Market Potential

Capital Cost and Sources of Finance

Assessment of Working Capital Requirements

Other Financial Aspects.

Economic and Social Variables.

1. General Information:

This part must provide the following information:

Name and address of the entrepreneur

His/her qualifications, experience and capabilities

If there are any partners then the above details of the partners must also be included.

Sleeping Partners, if any, also must be mentioned. Bankers would like to assess the

project and also all the people behind the project.

Reference to the industry in which the product is to be manufactures must also be

included the following details must be presented:

Trends in industry

Past production trends

Future demands

A mention about the organization structure and the constitution of the firm

In case of a partnership, information regarding whether the firm is registered with the

Registrar of Firms of the Director of Industries must also be given. The provisional

certificate number and other details pertaining to the registration may be mentioned.

While registration with the Directorate of Industries is not compulsory in that the banks

will still entertain the proposal, it is always preferable because it proves helpful in the

following ways:

In obtaining power connection from the SEB’s

In obtaining RM quotas when RM is in short supply

While dealing with other govt. agencies

Utility of the product and the range of products to be produced

Substitutes of the product, if any & also mention why the product will find a better

marketability than the substitutes e.g. Plastic buckets v/s Galvanized iron buckets:

Project Description:

This section must contain the following information:

Mention the site, indicate the town, street or industrial estate

Whether the land is owned or leased

In case the project is being set up in an approved industrial area whether permission has

been taken. If the project is not to be set up in the approved industrial area then indicate

whether a NOC (No Objection Certificate) has been obtained from the Local Municipal

Corporation.

Some suggestions on the choice of location: This would depend on the type of industry.

Industries may be classified into: Demand based , Resource based, Skill based, Footloose

Industries.

In case of demand-based industries, the location must be near the market.

In case of resources based industries (e.g. sugar industries), the location must be close

to the resource base.

In case of skill-based industries (e.g. carpet weaving, brassware), the location must be

close to the skill center.

For industries where open area is essential, mention about the covered and the open areas

must also be mentioned.

The physical infrastructure facilities available

The Raw Material – whether imported on locally available, licensed or controlled. The

price availability and method procurement of the RM.

Availability of skilled labor communication facilities, transportation facilities, power and

fuel.

Availability of water: This assumes importance in industries such as ice plants, tanneries

and breweries.

Method of waste disposal.

How environment hazards are being dealt with – noise pollution, effluent treatment

machine vibrations, etc.

The technology selected – whether indigenous or imported. If imported, the name of the

foreign collaborator and the method of technology transfer.

Details of the manufacturing process.

Draw the production flow chart, if the manufacturing process is known, then mention the

following

Machines required for each sub-process

Their specifications, cost and capacity

Balancing equipment required and their cost. This will help in determining the additional

investment required and the additional number of units that can be produced

Quality Control arrangements and the testing and inspection equipment to be used.

Mention must also be made about arrangements made to obtain Agmark (for food based

industries) or ISI certification. & Market Potential:

This part must contain The total demand and supply position at present

Future demand and supply position

The demand – supply gap. In case demand is greater than supply, mention how this will

affect profitability.

The expected price to be realized i.e. justify the price.

Statement of competitor’s prices

If your prices are greater then those of components. Justify how the high price has been

arrived at and why will your product sell at that price.

While some may argue that this would be tantamount to disclosure of your marketing

strategy, it is also true that banks would interested in how you are going to realize a price

that is higher than the prevailing market price.

Details of the Marketing Strategy. This should include the following

How is the product proposed to be sold? That is, what is the distribution network? Are

there any arrangements with distributors or suppliers?

Will you be an ancillary for another unit or will your product be sold by a reputed

marketing organization under it’s own brand name

What is the proposed after-sales service? This is particularly relevant in the consumer

durables industry.

In the case of seasonal items, what would be done during off-season?

How are the goods going to be transported? In case the FG is bulky, then the

transportation factor assumes greater importance.

4. Capital Cost & Sources of Finance?

There are two types of Capital Costs

One time costs e.g. costs incurred on vehicles, land & building, furniture, jigs, plant &

machinery, preliminary expenses, contingency expenses, etc. each cost item must be

mentioned separately.

Working Capital costs: This includes costs incurred in RM, WIP & FG inventory and

accounts receivables.

5. Assessment of Working Capital Requirements:

Planning for WC is very crucial. Most units fall sick because of inadequate assessment of

WC requirements. The components of WC costs have already been mentioned in order to

assess the WC component for Acc. Rec., the average credit period needs to be calculated

on the basis of the industry average.

When Working capital requirement is assessed. It is generally observed that

entrepreneurs assess the WC requirements in their own way. This often becomes a

problem because banks have their own assessment techniques. Banks have 3 different

forms and recast Working capital requirements according to their forms. The forms are:

Form for WC requirement less than Rs.25000.

Form for WC requirement between Rs. 25000 & Rs. 2,00,000.

Form for WC requirement greater than Rs. 2,00,000

Hence, it is good idea to calculate WC requirements according to the banks format.

A question may arise as to what must be done in case one experiences WC shortage or

RM shortage for 2 yrs. After operations have begun? In such cases, banks do provide

help but it is not easy to convince them. Hence it is most essential to anticipate such

shortages and plan your WC requirements well.

6.Other Financial Aspects:

The following are the other financial aspects that must be included in the project report

Prepare the projected B/S.

Prepare the projected P&L account

Prepare the projected cash flow statement.

Calculate the break Even point of the unit BE Point F*100/(S – V), where

F= Fixed Cost, S = Sales at Full Capacity, V=Variable cost

Calculate the following ratios

Profitability Ratio: Net Profit * 100 / Sales

ROI: Net Profit * 100 / Capital Employed

D/E ratio: Debt/Equity

DSCR: (NPAT + D+I) / (Installments+I)

Where, DSCR=Debt Service Coverage Ratio; NPAT=Net Profit After Tax;

D=Depreciation; I=Interest .

The DSCR indicates to the banker of the financial institution about the capacity of the

unit to repay its loan installments and interest. The DSCR must work out to 2.1 or more.

For presenting the above -mentioned information, the help of an expert may be required.

7. Economic & Social Variables:

Here, the entrepreneur must perform a Cost-Benefit analysis with respect to its impact on

the rational economy and on society.

As a portion of Costs, the entrepreneur must include Abatement Costs or costs incurred to

control environmental damage. It is the value of additional engineering and technology

required for treating effluents, reducing noise pollution, etc.

The following social and economic benefits could be mentioned

Promoting Employment: The number of persons the unit proposes to employ vis-à-vis the

current employment situation in the area.

Import substitution: How much foreign exchange the unit will save. What is the proposed

indigenisation program?

Ancillarisation: if any work would be sub-contracted. What will be the level of

ancillarisation and the additional employment thus generated? How will the unit help in

the overall development of the area?

Finally, it would still be wise to include of the plant layout. Because ultimately, the

project must serve as a blueprint for the entrepreneur and a plant layout would be very

useful to him.

The project implementation schedule must also be mentioned. For large units, this would

entail preparation of PERT & CPM charts.

For SSI’s however, it would suffice to include a simple project implementation schedule.

List out various activities and the time required for carrying out each activity, when the

activity would commence and when it would terminate. Without the project

implementation schedule, projects tend to get delayed. As a result, of this projects costs

shoot up. This may prevent banks from sanctioning further funds

The various activities could include the following:

Acquiring Land

Registration

Obtaining bank loans

Construction of building

Ordering plant and machinery

Supply and installation of plant and machinery

Recruitment of personnel

Training of personnel

Trial production

Commercial production