How to Start a Small Manufacturing Business

Do you want to start a manufacturing business? Here in this article, we list down all the steps one must follow to start a small-scale manufacturing unit with low capital investment.

The setup and financing of a manufacturing business require in-depth planning and plentiful resources. The manufacturing industry is also heavily regulated by different Government Authorities. Here we cover important aspects to consider in starting a small business manufacturing in India.

11 Steps to Start a Small Manufacturing Business

Step 1. Learn the Trade

It is without saying, launching a manufacturing business involves a lot of planning and dedication. In most cases, setting up a manufacturing business calls for an up-front financial investment for specialized facilities, equipment, and raw material. Identifying the proper human resource requirement and recruiting skilled personnel is also important.

Manufacturing processes come in different shapes and sizes, such as manual, semi-automatic, and fully-automatic operations.

Related: Things To Consider In Starting a Product-Based Business

Step 2. Selecting the Product

Selecting the right product is the primary issue in getting success in the manufacturing business. In a project conceptualization stage while making a product choice following factors related to the product need to be considered:

• Product Line – Depth, Width
• Packaging
• Branding
• Warranties
• After Sales Service
• Ease of availability of raw material
• Process Technology
• Accessibility to the market
• Incentives and support from the Government

If you are looking for a product that has export potential, the following additional factors need to be considered:

• Contents of export product portfolio
• special requirements for packaging to export the products
• What product adaptations are needed to be made for exporting a product to a specific country?
• WTO conditions involved e.g. “child labor free”, ISO 9000 certified, GMP followed, etc.

Step 3. Create a Business Plan

In starting a manufacturing enterprise, you need to give careful consideration to a variety of concerns. You may have selected a great product, but the choice of becoming a manufacturer involves a lot more than selecting a perfect product. Ask yourself these questions before moving forward into a manufacturing business operation.

• Do I have it in me to be a manufacturing business owner?
• What product will I manufacture?
• How will I protect my rights to the product?
• What is the most effective method to manufacture my product?
• How much will it cost to produce the product?
• How much will my product sell for and what is my profit margin?
• What is the market for my product; who will buy it; how will I market my product?
• How can I arrange finance for my enterprise?
• What are my tax obligations and can I get incentives or tax breaks for starting my business?
• How will I protect myself and the business from liability risks?
• What are other sources of information available for manufacturing business owners?

Step 4. Technology & Machinery

The choice of technology and process involves the selecting right machinery. Only a customized detailed project report can give you the solution about the machinery and process with project cost.

For some complex products, a process knows how has to be imported. In such cases, agreements for technology transfer should be made with due care to safeguard interests.

A lot of appropriate technology is being developed at CSIR and Defense Research Labs and some of this technology can now be bought. Indigenously developed process know-how has intrinsic benefits such as appropriateness and relative inexpensiveness.

Step 5. Arranging Finance For Small Business Manufacturing

No manufacturing business can take off without monetary support. This need for finance can be classified into the following types:

• Term Loan (long & medium term)
• Working Capital Loan
• Seed Capital
• Hire Purchase Leasing For Machinery
• Angel Investment
• Loan Against Property
• Unsecured Business Loans  

In arranging the finance you must consider the several Government schemes and grant specially designed for SMEs. Regardless of the bank or types of loan, you are applying for, these documents are generally required for a loan application:

• Documentation for Loan Application
• Balance Sheet and Profit Loss Statement for the last three consecutive years of firms owned by promoters
• Income Tax Assessment Certificates of Partners/Directors
• Proof of Possession of Land/Building
• An architectural estimate for construction cost.
• Partnership deed/Memorandum and Articles of Associations of Company
• Project Report

Step 6. Unit Setup For Small Business Manufacturing

Setting up a manufacturing unit requires negotiating a favorable plot or shed purchase, organizing for proper construction of the building, design of interiors, and finding good deals on equipment and machinery.

The design of factory buildings has to be in consonance with the type of industry and must have an appropriate plant layout.

An architect’s estimate of building construction is essential for loan applications. Further, the architect’s certificate for money spent on the building is needed for the disbursement of that loan.

Among the utilities of prime importance are power and water. In many cases getting a power, connection causes a delay in setting up the plant. Therefore, it is imperative to commence work on these aspects with diligent follow-up.

Power connections are generally of either LT (Low Tension) or HT (High-tension) type. If the connected load is up to 75 HP, an LT connection is provided. For connected loads of 130 HP or higher, only an HT connection is provided.

You also need to obtain a water connection. The water supply can be augmented by the installation of the tube-well or submersible pump.

7. 3M’s to Follow in Manufacturing Business

a) Manpower

Projections for manpower and staffing are made in the project report. However, it is necessary to time the induction of manpower in a planned manner. The engineers and operatives must be available before the installation of the machinery.

b) Machinery

Choosing and ordering the right machinery is also of paramount importance. In many cases technology or process provides us with specifications that are not provided, then an extensive techno-economic survey of machinery and equipment available must be carried out. The entrepreneur must also consult experts prior to making a selection of equipment and machinery.

c) Material

Materials procurement and planning are critical to the success, of a start-up with a small-scale manufacturing unit. Inventory management can lead to managing cash flow situations; otherwise if too much is ordered too soon the considerable amount of working capital gets locked up.

On the other hand, non-availability may result in production hold-ups, and idle machines and manpower. For essential imported raw materials whose lead-time is large proper planning is all the more essential.

8. Entrepreneurs Memorandum

Registering the company with ROC is a must. As per your desired ownership pattern, you can register your manufacturing business in the following ways:

• One Person Company
• Private Limited Company
• Limited Liability Partnership
• Public Limited Company

Section 8 of the Micro, Small, and Medium Enterprises Development (MSMED) Act, 2006 provides for the filing of a memorandum by a Micro, Small, or Medium Enterprise. Sub-section (2) of section 8 stipulates that the form of the Memorandum, the procedure of its filing, and other matters incidental thereto shall be such as notified by the Central Government.

The memorandum may be filed by all three categories of enterprises with the District Industries Centre in the jurisdiction of which the enterprise is (or, is proposed to be) located.

Every SSI unit has to comply with various regulations in force. These include regulatory, taxation, environmental, and certain product-specific clearances. This section looks into the methodology for obtaining these approvals and clearances.

9. Exemption from Compulsory Licence

Licensing in the Industries sector is governed by the licensing exemption notification issued by Govt. of India on July 25, 1991, under the Industries (Development and Regulation) Act, 1951. In SSI, there are virtually no licensing restrictions. No industrial license is required except in the case of 6 product groups included in compulsory licensing (these product groups mainly cover products that can only be made in the large sector).

But if a small-scale unit employs less than 50/100 workers with/without power then it would not require a license from the Govt. of India even for the 6 product groups covered in licensing under Schedule II of the notification.

Subject to this, an entrepreneur can set up an SSI unit anywhere in the country without any restriction. The units are, of course, subject to the locational/land use and zoning restrictions in force under the local laws.

10. Clearance For Small Business Manufacturing

In initiating a small business manufacturing in India, according to the product entrepreneurs need to obtain several different clearances from different Government Authorities.

Regulatory or Taxation Clearances:

1. Registration under Sales Tax Act – Commercial Tax officer of the area concerned
2. Registration under Central Excise Act – Collector of Central Excise or his nominee for area
3. Payment of Income Tax – ITO of the area concerned
4. Registration of Partnership deed – Inspector General of the area concerned
5. Calibration of weights & measures – Weights and Measures Inspector of State
6. Power Connection – Designated Officer of State Electricity Board
7. Employee strength exceeding 10 with power connection or 20 without power – Chief Inspector of Factories

Environment & Pollution Related Clearances:

The method of granting consent underwater and air pollution to SSI units has been simplified. Except for 17 critically polluting sectors given below, in all other cases SSI units will merely have to file an application and obtain an acknowledgment which will serve the purpose of consent:

1. Fertilizer (Nitrogen/Phosphate)
2. Sugar
3. Cement
4. Fermentation & Distillery
5. Aluminum
6. Petrochemicals
7. Thermal Power
8. Oil refinery
9. Sulphuric Acid
10. Tanneries
11. Copper Smelter
12. Zinc Smelter
13. Iron & Steel
14. Pulp & Paper
15. Dye and Dye intermediates
16. Pesticides manufacturing and formulation
17. Basic Drugs and Pharmaceuticals

Product Specific Clearances:

1. Establishing a Printing Press – District Magistrate
2. License for Cold Storage Construction – Designated Official in State
3. Pesticides – Central/State Agricultural Department – Ministry of Agriculture
4. Drugs and Pharmaceuticals – Drug license from State Drug Controller
5. Safety Matches/ Fireworks – License under Explosives Act from Directorate of Explosives, Nagpur
6. Household Electrical Appliances – License from Bureau of Indian Standards
7. Wood Working Industry within 8 km from the forest – District Forest Officer
8. Milk Processing & Milk products manufacturing units – Approval under Milk and Milk Products Order from State Agricultural/ Food Processing Industries Department above a designated capacity.

11. Quality Certifications

Quality certification has become extremely important in competitive markets and especially in gaining a foothold in exports. To avail of the certification of ISO-9000, a unit has to undertake significant costs; the small-scale industries have been found wanting mainly on account of resource crunch to implement quality systems to obtain this certification.

There is a scheme to give financial incentives to those SSI units who acquire ISO-9000 certification, by reimbursing 75% of their costs of obtaining certification, subject to a maximum of Rs. 0.75 lacs per unit.