• 1.

Introduction to MSMEs

• MSMEs (Micro, Small, and Medium Enterprises) are integral to economic development,
especially in developing countries like India. They are businesses categorized by the size of their
investment in plant/machinery and turnover. MSMEs serve as a significant source of
employment, foster entrepreneurship, and promote regional development.

 Contribution to GDP: MSMEs contribute around 30% to India's GDP.

 Employment: Over 110 million people employed in this sector.

 Rural and Urban Reach: MSMEs help bridge the urban-rural divide, fostering inclusive growth.

• Key Points:

 MSMEs help in economic decentralization.

 They are key drivers of innovation and new job creation.

 Critical for achieving global sustainability goals.

• 2. Definition of MSMEs (As per MSME Act)
• Under the MSME Act 2006, revised in 2020, MSMEs are classified
based on investment in plant and machinery (or equipment) and
annual turnover.
Enterprise Investment Turnover
Micro Enterprises Less than ₹1 crore Less than ₹10 crore
Small Enterprises Less than ₹10 crore Less than ₹50 crore
Medium Enterprises Less than ₹50 crore Less than ₹250 crore

• These classifications help the government tailor policies and

financial support to MSMEs based on their size, fostering targeted
development.
• 3. Characteristics of Small Enterprises

• Small enterprises exhibit several defining characteristics:

 Labor-Intensive: Unlike large firms, small enterprises rely more on human capital than
automation.

 Local Focus: They typically serve regional markets, although some scale to national or
international levels.

 Flexibility: Small firms are often more adaptable to changing market conditions than large
corporations.

 Low Investment: They require lower capital outlay, making them accessible to first-time
entrepreneurs.

 Personalized Customer Service: Due to their size, small enterprises tend to have close
customer relationships and personalized services.
• 4. Need for Small Enterprises

• Small enterprises are crucial for the following reasons:

 Balanced Regional Development: They prevent the concentration of economic power in

large cities, promoting economic activity in smaller towns and rural areas.

 Job Creation: Small enterprises are labor-intensive and, thus, provide large-scale
employment, especially in non-urban areas.

 Promoting Innovation: Small businesses often lead in niche markets and are more willing
to innovate and experiment than large corporations.
• 5. Advantages of Small Enterprises

 Lower Costs: Due to their smaller scale, small businesses often have lower operational
costs (e.g., wages, rents, and utilities).
 Government Support: Many governments, including India's, provide numerous benefits
to small businesses, such as tax exemptions, subsidies, and easier access to credit.
 Innovation and Growth: Small enterprises are known for their innovation, particularly in
tech and niche markets, due to their agility and close market relationships.

• Additional Benefits:

 Access to government tenders reserved for MSMEs.

 Easier approval for loans and financing.

 Potential tax breaks and subsidies to encourage their growth.

• 6. Steps in Setting Up a Small Enterprise
• Step-by-Step Process:
1. Idea Generation: Identify a business opportunity by assessing market demand.
2. Feasibility Study: Conduct market research to ensure the business idea is viable
and profitable.
3. Business Plan: Draft a detailed plan covering goals, strategies, financial
projections, and marketing.
4. Legal Registration: Register the business with appropriate authorities (e.g., as an
LLP, private limited company, or sole proprietorship).
5. Licensing and Compliance: Obtain necessary licenses and adhere to regulations.
6. Securing Financing: Approach banks, venture capitalists, or angel investors for
funding.
7. Marketing and Sales Strategy: Develop a marketing plan to attract customers.
8. Operations: Set up production processes, hire employees, and begin operations.
• 7. Institutional Support for MSMEs (State Agencies)

• Several state and central institutions provide support to MSMEs. Key State Agencies include:

 TECSOK (Technical Consultancy Services Organization of Karnataka): Provides

consultancy services for project reports, business plans, and feasibility studies.

 KIADB (Karnataka Industrial Areas Development Board): Assists MSMEs in acquiring

industrial land to set up factories and operations.

 KSSIDC (Karnataka State Small Industries Development Corporation): Provides

infrastructure support, assists with procurement of raw materials, and promotes industrial
clusters.

 KSFC (Karnataka State Financial Corporation): Offers financial assistance, including

loans and credit lines, to MSMEs to fund machinery, technology upgrades, and working
capital.
• 8. National Schemes for MSMEs

• The central government supports MSMEs through various institutions and schemes:

 MSME-DI (Development Institutes): Provide training programs, technical assistance, and

consultancy services to MSMEs.

 NSIC (National Small Industries Corporation): Focuses on marketing and technology

support, facilitating raw material procurement and promoting trade fairs to showcase
MSME products.
• SIDBI (Small Industries Development Bank of India): Provides financial services,
including credit schemes, venture capital, and refinancing to MSMEs. SIDBI also supports
MSMEs in obtaining working capital and equipment financing.
• 9. Sources of Financing for MSMEs

• Securing finance is critical for MSMEs at different stages of growth. Key Sources include:

 Venture Capital (VC): VC firms invest in MSMEs in exchange for equity. This is a common
option for high-growth businesses in technology and innovation sectors.

 Angel Investors: These are individual investors who provide early-stage funding in
exchange for ownership equity or convertible debt.

 Series A, B, C Funding:

o Series A: The first significant round of venture funding used to scale product offerings.

o Series B: Funds used to expand market reach and scale operations.

o Series C: Financing for further scaling, product diversification, or international

expansion.
• 10. Financial Statements

• Understanding Financial Health:

 Balance Sheet: Shows the company's assets (what it owns), liabilities (what it owes), and
shareholders’ equity at a specific point in time. It provides a snapshot of the company’s
financial position.

 Profit and Loss (P&L) Account: A statement that summarizes revenues, costs, and
expenses incurred during a specific period, usually a fiscal quarter or year. It shows whether
the company made a profit or a loss during that period.
• 11. Financial Ratio Analysis

• Key Ratios for MSMEs:

 Liquidity Ratios:
o Current Ratio: Current assets divided by current liabilities; measures a company’s ability to
cover short-term obligations.
o Quick Ratio: (Current Assets - Inventory) / Current Liabilities; a more stringent test of liquidity.

 Profitability Ratios:
o Return on Assets (ROA): Net income divided by total assets; measures how efficiently a
company is using its assets to generate profit.
o Net Profit Margin: Net income divided by revenue; indicates how much profit a company
makes from its sales.

 Leverage Ratios:
o Debt-to-Equity Ratio: Total liabilities divided by shareholders’ equity; shows the proportion of
company financing that comes from debt versus equity.
 Example of a Financial Statement
Company Name: XYZ Enterprises
Industry: Manufacturing
Year: 2023
Balance Sheet (as of Dec 31, 2023)

Assets Amount (₹) Liabilities & Equity Amount (₹)

Current Assets Current Liabilities
Cash and Bank Balances ₹5,00,000 Accounts Payable ₹4,00,000
Accounts Receivable ₹8,00,000 Short-term Loan ₹3,00,000
Inventory ₹10,00,000
Total Current Assets ₹23,00,000 Total Current Liabilities ₹7,00,000

Non-Current Assets Non-Current Liabilities

Property, Plant, Equipment ₹20,00,000 Long-term Loan ₹10,00,000

Total Non-Current Assets ₹20,00,000 Total Non-Current Liabilities ₹10,00,000

Total Assets ₹43,00,000 Total Liabilities ₹17,00,000

Shareholder's Equity ₹26,00,000

Total Liabilities & Equity ₹43,00,000

Profit and Loss Account (For the Year 2023)

Particulars Amount (₹)

Revenue
Sales Revenue ₹50,00,000
Other Income ₹2,00,000
Total Revenue ₹52,00,000

Expenses
Cost of Goods Sold
₹25,00,000
(COGS)
Employee Wages ₹10,00,000
Rent ₹2,00,000
Interest on Loans ₹1,00,000
Depreciation ₹3,00,000
Miscellaneous Expenses ₹2,00,000
Total Expenses ₹43,00,000

Profit Before Tax (PBT) ₹9,00,000

Tax (30%) ₹2,70,000
Net Profit (After Tax) ₹6,30,000
• Example of Financial Ratio Analysis
• Based on the above balance sheet and profit & loss account, we can calculate
some key financial ratios:
• ________________________________________
• 1. Liquidity Ratios
• Liquidity ratios measure a company’s ability to pay off its short-term liabilities.
• Current Ratio
• The current ratio shows a company’s ability to pay its short-term obligations
using its current assets.
• Current Ratio=Total Current Assets /Total Current Liabilities
• =₹23,00,000/ ₹7,00,000=3.29
•• Interpretation: A current ratio of 3.29 means that XYZ Enterprises has
₹3.29 in current assets for every ₹1 of current liabilities. This indicates a strong
liquidity position.
• Quick Ratio (Acid-Test Ratio)

• The quick ratio excludes inventory from current assets to provide

a more stringent measure of liquidity.
• Quick Ratio=(Current Assets−Inventory)/Current Liabilities

• =(₹23,00,000−₹10,00,000)/₹7,00,000=1.86

• Interpretation: A quick ratio of 1.86 means that even without

inventory, the company has ₹1.86 in liquid assets for every ₹1 in
liabilities. This is a healthy sign of liquidity.
• 2. Profitability Ratios
• Profitability ratios show how effectively a company generates profit from
its operations.
• Net Profit Margin
• The net profit margin reveals the percentage of revenue that turns into net
profit after all expenses.
• Net Profit Margin=(Net Profit/Total Revenue)×100
• =(₹6,30,000/₹52,00,000)×100=12.12%
• Interpretation: XYZ Enterprises has a net profit margin of 12.12%, which
means that for every ₹100 in sales, the company earns ₹12.12 in profit
after all expenses.
• Return on Assets (ROA)
• ROA indicates how efficiently a company is using its assets
to generate profit.
• ROA=(Net Profit/Total Assets)×100
• =(₹6,30,000/₹43,00,000)×100=14.65%
• Interpretation: An ROA of 14.65% indicates that the
company generates ₹14.65 in profit for every ₹100
invested in assets.
• 3. Leverage Ratios

• Leverage ratios assess the level of debt the company has compared to its
equity.

• Debt-to-Equity Ratio

• The debt-to-equity ratio shows the proportion of the company’s financing

that comes from debt compared to equity.

• Debt-to-Equity Ratio=(Total Liabilities/Shareholder’s Equity)

• =(₹17,00,000/₹26,00,000)=0.65

• Interpretation: A debt-to-equity ratio of 0.65 indicates that the company

uses ₹0.65 of debt for every ₹1 of equity. This is considered a moderate level
of debt, reflecting balanced leverage.
Summary of Ratios

Ratio Value Interpretation

Strong ability to cover short-
Current Ratio 3.29
term liabilities
Sufficient liquidity even without
Quick Ratio 1.86
inventory
Net Profit Margin 12.12% Good profitability from sales
Return on Assets Efficient use of assets to
14.65%
(ROA) generate profits
Debt-to-Equity Moderate reliance on debt;
0.65
Ratio healthy capital structure