Chapter 5

Forms and Formation of Business Enterprises

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5.9 Factors to be Considered for Starting a Business

Starting a business involves many crucial decisions. Correct decisions taken at the initial stage is important for the survival and stability of the business. Following are some of the important factors to consider at for starting a business:

1. Market Analysis

Market analysis will indicate if there is enough demand for supporting a business. There should be potential for growth and expansion of the business.

2. Development and Production Analysis

Analysis of various stages and processes involved is important. The production planning is essential to organize machines, materials and skills at the right places. By working out the details of production process the management can allocate sufficient resources for each stage of production.

3. Financial Analysis

Financial analysis involves the estimation of funds requirement and the source of funds. A person intending to start a business must have a fairly accurate idea of the funds required for the project. Either he should have the funds or the position to mobilize it. Cost of finance is also an important factor. Sufficient finance when the need arises is an important factor for the business success.

4. Location of Business

Location of business is a decision to be taken on the basis of several factors. Ideal location will greatly help the progress of business. Similarly unsuitable location can become the greatest handicap of a business. To set up a business in a city the investor has to spend a lot of money initially because of high cost of land or high rent. But it pays back itself because of higher demand or lesser transport cost. Similarly if a business is using bulky raw materials, it would be better to set up the business near the source of raw materials to reduce the cost of transportation. In addition to cost of transportation or rent there are several other factors such as availability of power, labour supply etc. before making a final decision to locate a business.

5. Personal Characteristics

A businessman needs to be different form a common man in his approach towards problems and opportunities. This difference in attitude decides his success or failure. Businessman has inherent ability in finding opportunities in many of the problems. Success in business is said to be the reward for risk taking. If a person is too cautious in every step of his life better that he does not attempt business.

6. Government Policy

Attitude of government is very important for the success of business. Before deciding on starting a business it is essential to study the legal and social environment. Without government support and the safety of legal system, no business can flourish. Liberal import policies, clear tax structure, transparent labour laws and favourable social climate will attract more and more investments in a place.

5.10 Scope for Setting up Small Business

Despite the growth of large scale industry, there is a special place for survival and growth of small scale businesses. The following factors contribute to the existence of small scale business.

1. Limited Resources

Resource availability is the first factor determining the size of a business. Small scale business, as the name suggests, does only limited business. There are a large number of business activities that can be successfully operated with limited capital. Small scale businesses operate in those specialized areas. Formalities in setting up such business are very limited.

2. Flexibility

Small businesses are generally owner-operated. The owner can make decisions according to circumstances. This is not possible in a large scale business where decisions have to be taken and implemented through established channels. Thus small business can introduce new products, services, withdraw products all without much administrative formalities.

3. Personal Touch

Small businesses generally cater to the need of small number of known customers. Owner himself directly controls most of the work. There is greater degree of personal touch in dealing with the customers. This personal touch is the secret of the success of many of the small scale businesses.

4. Limited Demand

There and products or markets that are not sufficient to sustain large business. Small scale businesses operate in such areas efficiently, because the limited demand is sufficient for the limited quantity of goods and services they produce.

5. Supplying the Needs of Large Corporations

Many large corporations depend of small businesses to supply their needs. Many of the products that come with big labels are in fact manufactured by small scale businesses on sub-contract basis. There are several components in products that are better manufactured by small scale businesses. For example, car manufacturers depend on small suppliers for the supply of seats, rubber parts etc. according to their specifications and quality requirements.

6. Individual Temperament

Some individuals are too much independent by nature. In spite of their sincere efforts they cannot adjust with the discipline requirements of a large organization. Small self managed business ventures are suitable for such people.

7. Inherent Disadvantage of Large Business

Large scale business suffers from several inherit problems such as potential for too much concentration of economic power, inefficiency in management and lack of personal touch in dealing with customers or employees.

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End of Chapter 5