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1. OVERVIEW OF ENTREPRENEURSHIP
1.1. Defnition
and concept of Entrepreneurship.
Entrepreneurship is an organizational and management approach that
enables persons to respond to change and solve problems in
whatever situation (either business or non-business) they may fnd
themselves.
here are fve elements o! entrepreneurship" observing the
environment# identi!ying opportunities# gathering the necessary
resources# implementing the activity and receiving rewards !or
engaging in the activity.
Entrepreneurship involves the use o! economic resources (money and
e$uipment) as well as individual human resources (energy# s%ills#
%nowledge# time).
Defning an Entrepreneur
An entrepreneur"
&. 'bserves the environment#
(. )dentifes opportunities in the business or non-business
environment
*. +athers the necessary resources
,. )mplements the activity and
-. .eceives fnancial or social rewards.
1.2. Reasons for Entrepreneurship in Business.
Principles ! Entrepreneurs"ip
)t has been said /i! a man0woman builds a better mousetrap# the
world will beat a path to his0her door1. )n a mar%et economy there is
an opportunity !or proft# recognition and service !or those with the
imagination# energy and drive to do a 2ob better# or provide a better
service than others. he essence o! the !ree enterprise system is
competition. )t is competition that ma%es those doing a good 2ob try
harder.
3ompetition provides a better standard o! living !or consumers by
o4ering choices.
3onsumers /shop1 to get the best value and $uality goods and
services. 5hen a purchase is made# the money paid is /votes1 in
!avor o! the product or the service chosen. hose products or stores or
services which do not receive su6cient support (sales) in the way o!
/dollar-votes1 !rom customers will !ail.
Entrepreneurs who want to be success!ul provide a little e7tra service
or a little better product than their competition. 8any businesses !ail
each year# but many succeed.
)n!ormation sheet 9age 1
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hose that succeed per!orm services or o4er merchandise in such a
way to satis!y their customers.
As the population e7pands# there develops a need !or more
businesses. Every year several million babies are born and these
/babies are big business1. 5hen these babies grow they become the
children# the learners# the wor%ers# the managers and the customers
o! tomorrow.
An entrepreneur does not have to be the best manager# or have the
biggest store# to compete success!ully. )! entrepreneurs see a need !or
a new store in a growing community and begin operating be!ore
others# they can get a head start on their competition.
Anyone with imagination and a little courage to ta%e a chance on
his0her own ability and ambition can generally be success!ul in
business provided the individual has progressed to the point o! being
a good business ris%. 'ne must have the basic education# s%ills#
%nowledge and maturity to reduce the chances o! !ailure. Any
business is a ris%. he chances o! !ailure can be greatly reduced by
education# e7perience and the e7ercise o! good 2udgment.
here is an element o! chance in all businesses. :ome entrepreneurs
are luc%y# but you must not depend on luc% alone;
Features ! Entrepreneurs"ip
E#ONO$I# PRIN#IP%ES
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<EE?E? 9.'?A3:0:E.>)3E
<E5 8A.KE:
ENTREPRENEURI&% #O$PETEN#IES
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Entrepreneurial Re'ar(s an( E)rts
REWARDS FOR BEING AN ENTREPRENER!
:el!-actualization0personal !ulfllment
Deeling o! !reedom and independence
9roviding 2obs and benefts (investors# suppliers# ban%ers#
subcontractors# wor% !orce# customers)
Economic goods (product0service# incomes !or wor%ers# profts
!or shareholders0partners)
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PERSON&% EFFORTS TO *E &N ENTREPRENEUR
5or%ing long hours
Bigh Energy
:acrifcing other important aspects o! li!e
@imited social li!e
@ess time with !amily and !riends
@arge fnancial investment
1.+. Function of Entrepreneurship in "usiness.
Entrepreneurial Dunction in Business
a) Entrepreneurs are the pri,e ,-ers in the business or social
sectors. 5ithout entrepreneurs# there would be no business or
social development. hey are the ones who i(enti!. gaps in
t"e ,ar/et and then turn these gaps into business
opportunities.
b) )t is the entrepreneur who 0tains fnances !or the business.
A!ter identi!ying a business opportunity# the entrepreneur
mobilizes the necessary resources to implement the opportunity
and becomes the fnancier o! the enterprise. he entrepreneur
does not o! course have to fnance the business !rom personal
savings alone. he necessary fnances and other resources
could be borrowed. )t is# there!ore# a !unction o! the
entrepreneur to provide fnancing !or the business.
c) Another !unction o! the entrepreneur is to ,anage t"e
0usiness. his is also a !unction that he0she can delegate to
other people. Even where other people are employed to manage
the business# the ultimate responsibility !or management
remains with the entrepreneur. 8anagement !unctions involve a
wide range o! activities such as organizing# coordinating#
leading# recruiting# rewarding and evaluating employees. he
entrepreneur manages production# mar%eting# personnel and all
other aspects o! the business.
d) he entrepreneur also has the !unction o! 0earing t"e
uncertainties an( ris/s o! the business. Entrepreneurs try to
avoid ris% situations whenever possible. Entrepreneurs ta%e only
calculated ris%sE be!ore ta%ing a ris%# they %now the costs and
the benefts o! the ris% situation.
e) hrough the entrepreneurial !unction# many 2obs are created in
the economy. )n addition# wealth is made available to the
individual# the community and society through the actions o!
entrepreneurs. Entrepreneurs encurage c,petitin# which
is critical in sustaining a !ree mar%et system and promotes
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economic growth# social progress and the spread o! prosperity
among a countryFs population. Entrepreneurship is an e4ective
mechanism !or ensuring innovation and creativity as well as
achieving economic development at the grassroots level.
1.1. Fr,s of Enterprises.
#eanin$ and Scope of Enterprisin$
'n a personal level# enterprising can be any identifed idea that a person
can translate into a planned and satis!actorily implemented activity. )n
the business sense# enterprising re!ers to the implementation o! a
business venture or underta%ing.
9ractically all underta%ings can be re!erred to as enterprising# i.e. idea
identifcation# planning# implementation# success!ul completion o! an
activity and receiving the rewards.
=ou are enterprising i! you !ollow the above process whenever you are
involved with issues in your li!e. By understanding the enterprising
concept# you can appreciate that all people have the potential to be
enterprising. :ome people are enterprising when they own a business.
Enterprising men and women are able to deal positively with the
challenges and problems they !ace in their daily lives.
Being enterprising can bring benefts to you and also help you to become
a valued member o! your !amily# community# place o! wor% and society.
By adopting an enterprising approach to your activities# you will %now
what to do in whatever circumstances you fnd yoursel! in. his %ind o!
approach will enable you to appreciate the challenges o! li!e because you
will be able to translate challenges into positive results.
Enterprisin$ %o&en and &en e'hi"it the fo((o%in$
characteristics!
E2Energ..
5or%ing hard# but in a smart way# is %ey to being enterprising. @ots o!
mental and physical energy is needed to provide solutions to issues and
!or the success!ul completion o! pro2ects. o sustain this energy# you need
to stimulate your brains and all your senses G sight# hearing# touch# smell
and taste G so that they all stay alert in identi!ying what needs to be done
in variety o! situations. =ou also need to be healthy and physically ft# and
this can be achieved through diet and e7ercise.
N2 Nee( t ac"ie-e.
=ou need to have the motivation to achieve success and accomplish all
the activities you engage in. =our positive attitude and perceptiveness will
enable you to achieve acceptable results whenever you do something.
his approach enables you to wor% harder than ordinary people.
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T2 Tas/ riente(.
o gain satis!ying rewards# tas%s have to be well e7ecuted and completed
on time.
E6ciency# e4ectiveness and time management are important aspects
that enable you to complete tas%s. Docusing on results helps you to
concentrate on whatever you set out to do.
E2 E,pat"..
=ou are able to mentally put yoursel! in the position o! the people you
intend to inHuence. =ou try to !eel what they are !eeling. =ou are able to
put yoursel! in their shoes. )n the case o! owning a business enterprise
you are able to imagine how a potential customer would !eel.
R2 Resurce!ulness.
=ou are able to provide the leadership and guidance needed to manage
the enterprise.
)dentifcation# mobilization and e4ective utilization o! both the physical
and the nonphysical resources needed in underta%ing a venture are very
important in managing the enterprise.
P2 Planning.
o see the total picture o! the enterprise# it is necessary to establish a
written plan.
his will help clari!y the situation and permit decisions regarding whether
an enterprise should be initiated or not. hrough planning# 2udgments
regarding profts or losses will be made.
R2 Ris/2ta/ing.
he decision to go ahead and start the enterprise or underta%e the
activity must be made. All enterprising men and women ta%e ris%s only
a!ter they have conducted research# so that they can achieve the desired
results and receive the rewards. =ou will always have to ta%e this frst
step# as it mar%s the di4erence between enterprising and non-
enterprising men and women. :uccess begins with the decision to move
in the desired direction.
I2 Inn-atin.
he ability to apply new ideas that will enable you to underta%e uni$ue
activities is another hallmar% o! enterprising people. hrough individual
initiative# imagination# intuition and insight you will be able to devise new
ways o! doing things to accommodate whatever new situation you may
fnd yoursel! in. +athering in!ormation is an important input !or being
innovative. Enterprising men and women there!ore place great value on
in!ormation and are always alert and constantly engaging in research.
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S2 S/ills.
Enterprising men and women have the ability or %now-how that enables
them to underta%e and complete activities. 8ost men and women have a
certain amount o! %nowledge# attitudes and practical s%ills that can be
use!ul when realizing an enterprise. =ou should there!ore evaluate the
talents and level o! s%ills you have and how they can be harnessed to
realize an enterprise. alents and ac$uired s%ills have to be constantly
utilized and applied# otherwise they can also be !orgotten and wasted.
I2 In(epen(ence.
)ndependence means !reedom !rom dependence on others. Enterprising
people are able to ma%e their own decisions and are sel! reliant. hey
e7ercise their own will without the control o! others.
N2 Net'r/ing.
<etwor%ing is important because through this activity# enterprising
people obtain in!ormation and learn !rom !eedbac% they receive !rom
others. Enterprising people see% the advice o! others and through the
e7change o! in!ormation !ormulate their own ideas and belie!s.
32 3al riente(.
Enterprising people are results-oriented e7perts at setting their own
goals. hey have personal control over their own activities. heir goals
are usually challenging# but attainable. hese goals are a mi7 o! long-
term goals and short-term goals. hese goals are specifc in the sense
that they can be measurable.
Di)erent Fr,s ! Enterprise
9eople in a community have many interests and di4erent needs and wants.
Enterprising men and women are able to identi!y these needs and wants and
establish specifc enterprises to satis!y them. Enterprises can provide
satis!ying rewards !or those who success!ully establish them.
erms used to classi!y enterprises include private# public# !ormal# in!ormal#
individual# community# local# !oreign# small# large# business# social#
manu!acturing# and service# consumer goods or industrial goods. Enterprises
that succeed# irrespective o! their nature# come up with valued approaches
to providing solutions to problems# and satis!ying the desired needs and
wants. he %ey di4erence between all types o! enterprise lies in the rewards
they provide. Business ventures provide profts as rewards# while non-
business ventures provide other types o! rewards that could be either
physical or psychological. Entrepreneurs engage in enterprises depending on
what %ind o! rewards they e7pect !rom them.
Enterprises in a community have the potential to beneft !rom each other.
'utput !rom one enterprise normally becomes input !or other enterprises#
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and this helps in money circulation among the enterprises within the
community. he more money circulates in the community# the more
prosperous the community becomes. he synergistic nature o! all enterprises
in a community creates an environment where there are lots o! opportunities
to be e7ploited by enterprising men and women. )t is up to these men and
women to identi!y the opportunities available and e7ploit them. Almost all
communities have lots o! une7ploited opportunities that can create more
advantages !or everyone.
8en and women ac$uire di4erent s%ills that lead to di4erent careers. hey
are applied in trade# services# manu!acturing# !ood processing# recreation#
in!ormation and communication# and other !orms o! enterprises. he
e7istence o! many types o! enterprise in your community o4ers you
opportunities to apply the s%ills you have ac$uired. All types o! s%ill learnt
have a chance to be applied i! opportunities are sought in all types o!
enterprise. )t is normal !or men and women to consider the compatibility o!
personal values# interests and e7pectations with the type o! enterprise they
desire.
he frst step is to evaluate the various enterprises in your community and
note their potential. he ne7t step is to identi!y how your s%ills match the
various possible enterprises. =ou can# there!ore# do what you can# with what
you have# where you are# and still succeed.
#lassifcatin ! Enterprises
9rivate >s 9ublic
9roft vs <on-proft
Dormal vs )n!ormal
)ndividual vs 3ommunity
@ocal vs Doreign
Business vs :ocial (non- business)
:mall vs @arge
8anu!acturing vs :ervice
3onsumer vs )ndustrial
).*. S&a(( and &ediu& enterprises.
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#eanin$ of S&a(( Business
&. Ele,ents cnstituting t"e ,eaning ! s,all 0usiness4
I )ndependent management
I 'wner supplied capital
I 8ainly local area o! operation
I .elatively small size within an industry
*. Defnitins ! s,all 0usinesses
I /A business is small i! the owner has direct lines o! communication with
the operating managers and has personal contact with a large proportion
o! the wor% !orce# including %ey personnel.1
I /)ndividually owned and operated business1
I /A business employing not more than f!ty people1 (this number may
di4er !rom one country to another)
Wea/nesses an( Strengt"s ! S,all Enterprises
S#A++ ENTERPRISE WEA,NESSES!
Financial li,itatins4
Balancing /cash in1 and /cash out1 is a struggle# especially when trying to
e7pand. )nstead o! receiving the red carpet treatment by fnanciers when
as%ing !or a loan# the small businessperson is o!ten made to !eel li%e a
second-class citizen. :mall enterprises canFt use credit as a selling tool as
readily as companies with large fnancial reserves. Additionally# many
small enterprises have trouble staying aHoat while waiting !or their
products to win acceptance in the mar%etplace.
Sta5ng pr0le,s4
:mall companies cannot pay top salaries and provide the opportunities
and status normally associated with a big company 2ob. :mall enterprise
owners must also concentrate on the day-to-day problems o! running the
business and generally have little time le!t to thin% about ob2ectives.
Hig"er (irect csts4
A small enterprise cannot buy raw materials# machinery or supplies as
cheaply as a large company# or obtain a large producerFs economies o!
scale. :o per unit production costs are usually higher !or a small
enterprise# but overhead costs are generally somewhat lower.
T ,an. eggs in ne 0as/et4
A large diversifed company can ta%e a lic%ing in one sector o! its business
and still remain strong. his is not so !or the small business with only a
!ew product lines. A small company is vulnerable i! a new product doesnFt
catch on# i! one o! its mar%ets is hit by a sharp recession# or i! an old
product suddenly becomes obsolete.
%ac/ ! cre(i0ilit.4
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he public accepts a large companyFs products because its name is well
%nown and usually respected. A small enterprise must struggle to prove
itsel! each time it o4ers a new product or enters a new mar%et. )ts
reputation and past successes in the mar%etplace seldom carry weight.
S$&%% ENTERPRISE STREN3THS4
Persnal tuc"4
3ustomers will o!ten pay a premium !or personalized attention. )n !act# in many
industries where product and price di4erences are minimal# the human !actor emerges
as a prime competitive advantage.
3reater ,ti-atin4
Key management o! a small enterprise normally consists o! the owner(s). 3onse$uently#
they wor% harder# longer and with more personal involvement. 9rofts and losses have
more meaning to them than salaries and bonuses have to the employees o! a larger
company.
3reater 6e7i0ilit.4
A small enterprise has the prime competitive advantage o! He7ibility. A big business
cannot close a plant without opposition !rom organized labour# or even raise prices
without possible intervention !rom the government# but a small enterprise can react
$uic%ly to competitive changes. A small enterprise also has shorter lines o!
communication. )ts product lines are narrow# its mar%ets limited and its !actories and
warehouses close by. )t can $uic%ly spot trouble or opportunity and ta%e appropriate
action.
%ess 0ureaucrac.4
+rasping the big picture is di6cult !or e7ecutives o! large companies. his
/management myopia1 leads to redundant actions and bureaucratic ine6ciencies. )n a
small business the whole problem can be understood readily# decisions can be made
$uic%ly and the results can be chec%ed easily.
Un0trusi-e 8less cnspicuus94
Because it is not $uite as noticeable# the small company can try new sales tactics or
introduce new products without attracting undue attention or opposition. @arge
companies are constantly !aced with pro7y battles# antitrust actions and government
regulations. hey are also inHe7ible and hard to change or restructure.
-. *ec,ing an entrepreneur
1.1.Sel! e,pl.,ent an( sel! ,anage,ent.
Sel! e,pl.,ent
=our personal values and interests are things you thin% are most
important. =our choice o! 2ob may depend on what you value and what
interest you most.
&. he 2ob you choose may a4ect where you live. )! you choose to be a
!orest ranger# you will probably have to live near a national !orest. )!
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you choose to wor% in the movie business# you will probably have to
live near a big city.
(. he amount o! money you earn may a4ect how you live. Dor
e7ample# i! your 2ob earns you &J#JJJ a year# you will live di4erently
than someone earning &JJ#JJJ a year. =ou need to decide how
important money is to you.
*. he 2ob you choose may a4ect how you live.
I Alemayehu# a nurseFs assistant# o!ten has to wor% late hours or
overnight and cannot always count on a !ull nightFs sleep. But he
li%es to help people !eel better.
I Datie wor%s in a plastics !actory. :he wor%s the night shi!t and
sleeps during the day. But she li%es the night shi!t because she
earns more money# and she li%es wor%ing with machines and tools.
I Amha# a salesman# o!ten wor%s KJ hours a wee%# including travel.
But he li%es to see new places.
,. he 2ob you choose may a4ect who your !riends are. 8any o! your
cowor%ers will become you !riends. =ou may lose touch with !riends
you have now.
-. he 2ob you choose may a4ect your !amily li!e. Dor e7ample# :usan# a
hotel manager# wor%s LJ hours a wee%. :he has decided she does not
have time !or relatives or children.
M. he 2ob you choose may a4ect your personality. :ome 2obs put more
pressure on you than others. his pressure may ma%e you nervous or
grouchy.
On(. .ou can decide ho% .ou %ant to (i/e. 0hoose a career that
fts %hat .ou /a(ue &ost.
A!ter graduation# you may have an opportunity to get employment in a 2ob
carrying any o! the titles listed below. )denti!y two 2obs !rom the !ollowing list.
Dor each 2ob title identi!y a corresponding sel!-employment opportunity and
its title.
9oliceperson
3arrier (mail)
Assembly line wor%er
.ailway car loader
Auto repair person
3ar washer
3arpenterNs helper
3arpenter
:mall motor
repairpersonNs helper
Appliance service
person
ypist
elephone operator
Darm laborer
9layground assistant
Belper in bowling
alley
Army soldier
Beautician
:hoe repair person
.eceptionist
:ales cler%
<ursery school helper
Baby sitter
<urseNs aide
+uard O watchperson
:treet wor%er
Dor%li!t operator
?riverNs helper
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9etrol station
attendant
9lumber O pipe ftter
:heet metal wor%er
3ement mason
9ainterNs helper
9ainter
a7icab driver
Bousehold wor%er
Auto or truc%
mechanic
Butcher
@ibrary cler%
3attle raiser
?airy person
+ol! course
handyman0
Bandy woman
@aundry route person
3ustodian02anitor
3ustodianNs helper
5aiter or waitress
3oo%
Bospital dietician
helper
9ractical nurse
Ba%erNs helper
?ishwasher
Dood store chec%er
+as meter person
Dorest ranger
5indow display
person
8otel maid
3oo%Ns helper
?iesel mechanic
Barber
Entrepreneurial Sel!2$anage,ent
1. #,plete Hig" Pririt. Tas/s First.
8ost people do the easy tas%s frst. 5hat o!ten happens# however# is that
di6cult tas%s donFt get done because too much time is spent doing the easy
tas%s. =ou may run out o! time to do the di6cult tas%s. 8ost entrepreneurs
do the important tas% frst when their energy level is high. )! time is available
at the end o! the day# the low priority tas%s are completed.
2. Use ! Ti,e.
As% yoursel!# /5hat is the most important use o! my time right nowP1 As%ing
this $uestion will help !ocus on /important tas%s.1
+. Delegate Tas/s t Su0r(inates.
his is an essential tas% !or entrepreneurs. Entrepreneurs must be able to
delegate wor% to sta4. ?elegating tas%s is a good way to build sta4 morale
and allows the entrepreneur to !ocus on other essential tas%s. As a general
rule# i! a wor%er can do the tas% almost as well as the entrepreneur# then the
tas% should be delegated to an employee.
1. 3rup Tas/s.
his step will minimize interruptions and economize on the utilization o!
resources and e4orts. Dor e7ample# instead o! ma%ing calls sporadically
throughout the day# ma%e out-going calls at specifc times each day.
Dre$uent callers can also be in!ormed o! the best time to call you.
:. $aintain a #lean O5ce.
ry to clear your des% o! everything e7cept the wor% you intend to do
immediately. E4ective entrepreneurs are organized and wor% !rom clear
des%s.
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;. *e Rea(. t Sa. <n=>
)! sta4 can have you do their wor%# they will do it. 8ost stress comes !rom
the entrepreneurFs lac% o! the s%ill to /2ust say no1 !or !ear o! upsetting
people. 9eople are always as%ing !or o! an entrepreneurFs time. )nstead o!
being honest and saying /no1 to the re$uest# the tendency is to end up
accepting a responsibility you neither want nor have time to per!orm. :aying
/no1 ta%es courage and tact.
?. Ha-e Dail. O0@ecti-es.
hose entrepreneurs who accomplish the most during the day %now e7actly
what they want to accomplish. Bowever# many people thin% that goals and
ob2ectives should only be prepared on a monthly or yearly basis. ?efne
ob2ectives as clearly as possible. 'ne !actor that mar%s success!ul
entrepreneurs is their ability to wor% out what they want to achieve and have
written ob2ectives that they can review constantly. @ong- term ob2ectives
should impact on daily activities and be included on a daily /to do1 list.
5ithout ob2ectives# entrepreneurs become ine4ective.
A. DnBt Tr. t ( t ,uc".
8any entrepreneurs !eel that they have not accomplished enough and donFt
give themselves enough time to do important tas%s properly.
C. #ntrl Paper Fl'.
?eal with each piece o! paper 2ust once. Being a paper shuQer wastes time.
Keep important papers and throw away the rest.
1D. Plan E)ecti-el..
:ome people say they donFt have time to plan. hese individuals may be
very busy# but they probably are not very e4ective. By ta%ing time to plan#
you will actually save time. ?evelop a daily /' ?'1 list !or doing the
essential tas%s that must be completed in the available time.
11. *e Practi-e.
?onFt avoid ma%ing decisions. .educing the amount o! time you use to ma%e
a decision can substantially increase the amount o! time available to you.
1.2.&(-antages an( (isa(-antages ! Sel!
e,pl.,ent.
).&(-antages ! sel! e,pl.,ent
hose who choose sel!-employment as a career usually do so !or fve
basic reasons" personal satis!action# independence# profts# 2ob security
and status.
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a. Persona( satisfaction"
o some people# the chie! reward o! wor%ing !or yoursel! is personal
satis!action. 9ersonal satis!action means doing what you want with your
li!e. Being sel!-employed will enable you to spend each wor% day in a 2ob
you en2oy. Dor e7ample# i! you li%e photography# you may start your own
studio. Each time a customer is pleased with a portrait# you will receive
personal satis!action.
=ou may receive satis!action !rom aiding the community in which you
live.
:el!-employed persons supply goods and services and create 2obs !or
others.
hey also buy goods and services !rom other local enterprises# borrow
money !rom local ban%s# and pay ta7es.
". In(epen(ence4
Another advantage o! being a sel!-employed person is independence.
)ndependence is !reedom !rom control o! others. =ou are able to use your
%nowledge# s%ills and abilities as you see ft. 5hen you are sel!
employed
you are driven by spirit o! sel!-reliance and individual survival.
3ompared to those who wor% !or others# sel!-employed persons have
more !reedom o! action. hey are in charge and can ma%e decisions
without frst having to get the approval o! someone else.
c. Prft an( inc,e" 'ne o! the ma2or rewards e7pected when
starting a new business is proft. 9roft is the amount o! income le!t a!ter
all e7penses have been paid. 9rofts go to the owner o! a business. Being
sel!-employed# you would be able to control your income. >ery o!ten#
increased time and e4ort put into the enterprise results in increased
income. his is not o!ten the case when you wor% !or someone else. Bow
much do you want to earn each year a!ter your business is running
smoothlyP ?o you want to ma%e (#JJJ# -#JJJ# &J#JJJ or more a yearP
)tFs important to decide on income because di4erent types o! businesses
have di4erent income potentials. A !ast-!ood restaurant has one income
potential while a small manu!acturing business may have $uite another.
)tFs probably tempting to set your goal at a very high level G say &-#JJJ
a year. 8any businesses have the long-run potential o! being success!ulE
however# many businesses donFt become proftable operations very
$uic%ly. 'ne way to establish a personal income goal is to answer the
$uestion /Bow much do ) want to be ma%ing (per year) si7 years !rom
nowP1
d. E0 securit.4 8any enterprises are created by persons who are
see%ing the %ind o! 2ob security that is not available elsewhere. Rob
security is the assurance o! continued employment and income. :el!-
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employed persons cannot be laid o4# fred# or !orced to retire at a certain
age.
e. Status" :tatus is a term used to describe a personFs social ran% or
position. :el!-employed persons receive attention and recognition
through customer contact and public e7posure. As a result# they may
en2oy status above that o! many other types o! wor%ers. 3losely related
to social status is pride in ownershipE most people en2oy seeing their
names on buildings# vehicles# stationery and advertisements. o some
degree# all people see% status.
Businesses have their status too. here are high-status businesses and
lowstatus businesses. Dor e7ample# garbage collection is a low-status
business. :ome people are very interested in the status o! their business
and others are not interested at all. )t may be an important
consideration in selecting the type o! business !or you. he %ey is to
choose a business that has a status that youFll !eel com!ortable with.
f. Fle7i0ilit.4 )ndividuals who become sel!-employed have options to
start enterprises in all categories and sizes depending on their
capabilities. :el! employment also gives the individual the 2ob o! being
an employer and a leader rather than an employee and a !ollower.
2. Disa(-antages ! sel! e,pl.,ent
)n addition to %nowing the advantages o! sel!-employment# you should
also be !amiliar with the disadvantages" possible loss o! invested capital#
uncertain or low income# long hours and routine chores.
a. Pssi0le lss ! in-este( capital4 'ne ris% o! being sel!-
employed is the possibility o! losing your invested capital. he term
invested capital re!ers to the money the entrepreneur put into starting
the enterprise. As a general rule# the ris%ier the business# the greater
the proft potential. )! the enterprise succeeds# profts may be high. )!
the business !ails# invested capital may be lostE the entrepreneur stands
to lose a li!etime o! personal and !amily savings.
)t may ta%e years to repay ban%s# suppliers and individuals who loaned
the money to get the business started.
". Uncertain r l' inc,e4
Another disadvantage o! owning your business is the possibility o!
uncertain or low income. Anli%e the salaries o! employed wor%ers#
profts usually vary !rom one month to another. his is true even in well-
established businesses. 5hen income is available# there still may not be
enough to meet personal and !amily needs. his is o!ten the case
during the frst si7 to twelve months o! operation.
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c.%ng 0usiness "urs4
Entrepreneurs do not wor% 2ust !orty hours a wee%E they do not punch
time cloc%s. 8any sel!-employed persons wor% !ourteen or more hours a
day# si7 or seven days a wee%. he owner is o!ten the frst to arrive at
the business in the morning and the last to leave at night. Business
hours are set at the convenience o! customers# not the desire o! the
owner.
Dor e7ample# many mar%et shops are open !rom L"JJ a.m. to S"JJ p.m.
:ome entrepreneurs !eel they cannot leave their businesses !or more
than one or two days at a time.
d. Rutine c"res4
.unning your own business may involve routine chores you do not li%e
to do. =ou also need to be a 2ac% o! all trades. his can sometimes be a
challenge i! you do not 2oin with others in a partnership or you cannot
raise su6cient !unds to allow you to employ other people.
e. Ris/s4
=ou stand the best chance o! success i! you are prepared to ta%e
calculated ris%s. 3alculated ris%s allow you to estimate the chances o!
!ailure or success without ta%ing a gamble. >ery low ris% ventures have
less reward in terms o! profts and may lead to limiting your ideas and
their !ollow-up.
1.+.Entrepreneurial c"aracteristics an( traits.
I,prtant Entrepreneurial Traits
1. Har( Wr/ing" running a business re$uires a lot o! energy and drive.
his involves the ability to wor% !or long hours when necessary# to wor%
intensely in spurts and to cope with less than a normal amount o! sleep.
2. Sel!2#nf(ent" to succeed# entrepreneurs have to believe in themselves
and in their ability to achieve the goals they have set !or themselves. his
is o!ten shown by a belie! that /i! you want something badly enough and
are prepared to wor% at it# youFll usually get it1.
+. *uil(s !r t"e Future4 the goal !or most success!ul business people is to
build a secure 2ob and income !or themselves and improved livelihood and
wealth !or their !amilies# which is based on their own abilities. his means
entrepreneurs understand that it may ta%e several years to build up
business income to a reasonable standard.
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1. Prft2Oriente(4 interest in generating money is a clear indicator o! an
entrepreneurFs suitability !or being a business owner. his means
recognizing that the business comes frst and competing !amily care roles
might need to be reorganized. 'nce profts are generated# the
entrepreneur can ma%e decisions about how the profts can be used G to
e7pand the enterprise or !or personal or !amily use.
:. 3al2Oriente(4 success in business depends upon being able to set
realistic goals or targets and to wor% with determination to achieve them.
his ability to set goals (!or things the person thin%s are worthwhile) and
to wor% to achieve them is !undamental to being an entrepreneur.
;. Persistent4 all businesses have their problems and disappointments.
Being persistent in solving a problem is one o! the %eys to being a
success!ul entrepreneur.
?. #pes 'it" Failure" all business ventures inevitably contain
disappointments and !ailures as well as successes. 3oping with !ailures
involves recognizing these !ailures# learning !rom them and see%ing new
opportunities. 5ithout this characteristic# early !ailures may end a
personFs attempt at sel!-employment.
A. Respn(s t Fee(0ac/" entrepreneurs are concerned to %now how well
they are doing and to %eep trac% o! their per!ormance. 'btaining use!ul
!eedbac% and advice !rom others is another important characteristic o!
entrepreneurs.
C. De,nstrates Initiati-e" research shows that success!ul entrepreneurs
ta%e the initiative and put themselves in positions where they are
personally responsible !or success or !ailure.
1D. Willing t %isten4 the success!ul entrepreneur is not an inward
loo%ing person that never uses outside resources. :el!-reliance does not
e7clude the ability to as% !or help when needed !rom such people as ban%
o6cials# accountants and business advisers. Being able to listen to the
advice o! others is a %ey characteristic o! an entrepreneur.
11. Sets O'n Stan(ar(s4 setting standards o! per!ormance and then
wor%ing to achieve them is another indicator o! a success!ul entrepreneur.
hese standards can be income# $uality# sales or product turnover. 8ost
entrepreneurs want to do better each year# to set and achieve higher
standards !rom year to year.
12. #pes 'it" Uncertaint." being an entrepreneur is much more
uncertain than employment. his uncertainty is about sales and turnover#
but it o!ten also e7ists in other areas such as material delivery and prices#
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and ban% support. An ability to cope with this uncertainty without
becoming too stressed is a necessary trait o! being an entrepreneur.
1+. #,,itte(4 starting and running an enterprise demands total
commitment by the entrepreneur in terms o! time# money and li!estyle. )t
has to be a ma2or priority in the entrepreneurFs li!e. 3ommitted individuals
fnd it easier to gain the support o! others to their business pro2ect.
11. *uil(s n Strengt"s4 success!ul business people base their wor%
upon the strength(s) they have# such as manual s%ills# interpersonal s%ills#
selling s%ills# organizational s%ills# writing s%ills# %nowledge o! a particular
product or service# %nowledge o! people in a trade and ability to ma%e and
use a networ% o! contacts.
1:. Relia0le an( Has Integrit." the $ualities o! honesty# !air dealing and
reliability in terms o! doing what one has promised to do are essential
traits o! an entrepreneur.
1;. Ris/2Ta/er" being an entrepreneur involves some ris%s. Entrepreneurs
have the ability to ta%e measured or calculated ris%s. :uch ris%s involve
wor%ing out the li%ely costs and gains both on the business and on private
li!e# the chance o! success and the belie! in onesel! to ma%e the ris% pay
o4. Entrepreneurs may be considered ris% avoiders when they reduce
their ris%s by having others assume part o! the ris%. hose who assume
the entrepreneurFs ris% may be ban%ers# suppliers and customers.
&.,. &ssessing Entrepreneurial ptential
1.:.#,petencies ! success!ul entrepreneurs.
$a@r #,petencies ReFuire( !r Success!ul Entrepreneurs"ip
3ompetencies may be defned as"
I a body o! %nowledge
I a set o! s%ills
I a cluster o! traits
DEFINITIONS
Gn'le(ge consists o! a set or body o! in!ormation stored# which may
be recalled at an appropriate time.
S/ill is the ability to apply %nowledge.
Trait is the total o! peculiar $ualities or characteristics that constitutes
personal individuality.
Dig.&. 3ompetencies <eeded to Be an Entrepreneur
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here are three ma2or competencies !or success!ul entrepreneurship. hese
may be defned as"
I a body o! %nowledge
I a set o! s%ills
I a cluster o! traits.
&. Gn'le(ge has been defned as a set or body o! in!ormation stored#
which may be recalled at an appropriate time. Knowledge in the conte7t o!
business may be mani!ested by in!ormation on# or !amiliarity with aspects
such as"
I A business opportunity I the mar%et
I 3ustomers I competitors
I 9roduction processes I technical matters
I Business management I sources o! assistance
Knowledge o! business or entrepreneurship# however# is not enough !or
success in setting up and operating a business G in the same way as# !or
e7ample# reading or learning about Hying# driving or swimming will not on its
own enable you to Hy a plane# drive a car or swim in a pool.
*. S/ill has been defned as the ability to apply %nowledge and can be
ac$uired or developed through practice# e.g. Hying# driving or swimming. )n
the conte7t o! business# it is possible to distinguish between s%ills o! a
technical and managerial nature. :ome e7amples are listed below"
Tec"nical $anagerial
I Engineering I 8ar%eting (including selling)
I 3omputing I ime management
I :ewing I Dinancial management
I 3arpentry I 'rganization
I 8echanics I 9lanning
I 3atering I @eadership
)n many societies women and men are directed toward ac$uiring only some
technical and managerial s%ills# which are considered appropriate !or
individuals o! their se7. his is o!ten why women and men tend to
concentrate on specifc business sectors# even when these are not the most
proftable ones. )n many societies women have less access to training and
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education. =et# both women and men can ac$uire %nowledge and s%ills
relatively easy i! given ade$uate support.
Bowever# traits ta%e time to develop and are not easily changed or ac$uired.
#. Traits have been defned as the aggregate o! peculiar $ualities or
characteristics which constitutes personal individuality. )n a cross-cultural
study o! )ndia# 8alawi and Ecuador# &, personal entrepreneurial
characteristics (9E3s) that appear to depict the behaviour o! success!ul
entrepreneurs were identifed. he research was !unded by A:A)? and
underta%en by 8cBer O 3ompany and 8anagement :ystems )nternational.
he &, 9E3s can be summarized as !ollows"
& success!ul entrepreneur4
I a%es initiative I :ees and acts on opportunities
I )s persistent I 9ersonally see%s in!ormation
I )s concerned !or high $uality I )s committed to !ulflling
contracts
I )s oriented to e6ciency I 9lans systematically
I :olves problems in original ways I ?emonstrates sel!-
confdence
I a%es calculated ris%s I )s assertive
I )s persuasive I Ases inHuential strategies
)t is more li%ely than not that a person who does not have all * competencies
in his0her business will encounter di6culties in operating the venture
success!ully.
5hat would happen i! a person had"
I Gn'le(ge an( s/ills nl.H
An individual with only %nowledge and s%ills is unli%ely to survive !or long#
even i! he0she manages to start at all. Dor e7ample# without the traits# he0she
might e7hibit little persistence when !aced with ma2or obstaclesE or the
person may neither see nor act on opportunitiesE or he0she might simply be
unwilling to ta%e the calculated ris% o! venturing into business in the frst
place.
I Gn'le(ge an( traits nl.H
A person with only %nowledge and personal traits might fnd nothing o! value
to which these might be applied# without technical s%ills. 'r they may fnd
that they are too dependent on outsiders and# there!ore# possibly too
vulnerable. he solution might be to fnd a partner or employ people with the
re$uisite s%ills.
I S/ills an( traits nl.H
A potential entrepreneur with s%ills and entrepreneurial traits# but lac%ing in
%nowledge# might be able to start a business. )n a competitive environment#
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however# the lac% o! %nowledge or !amiliarity with# !or e7ample# customers#
or the mar%et (including trends) could lead to !ailure. )n!ormation is essential
!or any business to succeed.
Unit +. OrganiJing an enterprise
+.1. I,prtance ! *usiness Entrepreneurs"ip in Sciet.
T"e Operatins ! an Ecn,.
8uch o! the economic activity o! a country is based on decisions made in the
private sector o! the economy. here is a circular How o! money spent by
3'<:A8E.: and BA:)<E:: D).8: in one direction (output mar%et)# and a
corresponding How o! goods and services !rom .E:'A.3E: '5<E.:# and
BA:)<E:: D).8: (input mar%et) in the opposite direction. his Hows show
how the )<9A 8A.KE and the 'A9A 8A.KE are 2oined together to
coordinate and determine how resources are used in a basically private
enterprise economy. )t also show the position o! government# which is
normally the custodian o! the regulations and also re!eree. 5ealth is made
available to all when resources are processed into goods and services and
success!ully sold in the mar%ets.
T"e Rle ! *usiness Entrepreneurs"ip in Sciet.
)t is now generally accepted that the private sector is more cost-e4ective
and e6cient in per!orming certain basic economic !unctions than the public
sector. Entrepreneurs play a %ey role in business and the private sector. 8ost
o! the wealth in a society or nation is created by business activity.
1. Pr(ucts an( Ser-ices
he !undamental economic !unction o! business is to ma%e and distribute the
products and services that people want. Business entrepreneurs !ulfl the role
both to discover consumer demands and to do whatever is re$uired to satis!y
them
2. E,pl.,ent
Business ventures are the ma2or providers o! /real1 2obs G i.e. employment
!or people who need and want to wor%. he level o! gain!ul employment is
crucial to a nationFs well-being.
+. Inc,e
hrough its employment creation# business provides an income base to its
sta%eholders in terms o! salaries# wages# profts and ta7es.
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+.1 WagesK Salaries an( Prfts
he tas% o! business to enable the earning o! wages# salaries and profts is o!
crucial importance in order to pay ta7es and to provide disposable income to
fnance consumer spending and savings (investment capital).
1. Ta7es
5ithout ta7es on the incomes o! individuals and businesses# social
institutions and services cannot be a4orded.
:. Dispsa0le Inc,e
?isposable income re!ers to income a!ter ta7es available !or spending on
consumer goods# or !or savings.
:.1 #nsu,er Spen(ing
3onsumer spending is not only re$uired !or basic needs satis!action# but also
to create a demand !or the production o! goods and services.
:.2 Persnal Sa-ings
9ersonal savings represent income not allocated to immediate consumption
e7penditure.
;. In-est,ent in Pr(ucti-e &ssets
Business investment !unding is generated either through provisions# retained
profts borrowings or through sale o! e$uity. Dor non-proftable business such
sources o! !unding will become limited. A business needs capital investments
to create productive capacity" innovative technology# modernization# and the
e7pansion o! its productive assets.
?. Natinal Well20eing
8ost o! the capital goods# commercial and social services as well as
technological %now-how re$uired to satis!y our needs come !rom business
activity# i.e. through economic development o! privately owned resources.
Entrepreneurs &ns'er t De,an( !r, t"e Sciet.
I WH&T IS TO *E PRODU#EDH
:ince two-thirds o! the total production o! goods and services !ocus on the
consumer sector# consumers comprise the group who determines what is to
be produced.
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I FOR WHO$ IS IT TO *E PRODU#EDH
)n the economy# the /Dor 5hom1 $uestion is generally defned as whoever
has the most money to buy the items which are made !rom the !actors o!
production. +enerally spea%ing# the people with the most money are those
who own a success!ul business (consumers want their goods and services)
and0or those who are in occupations in high demand (businesses want their
s%ills).
I HOW WI%% IT *E PRODU#EDH
his is determined with the consumer in mind# primarily through the
interaction o! businesses and consumers. Dor e7ample# the .olls .oyce is a
lu7urious car made with high e7penses and lasts a long time. 8any
consumers however cannot a4ord a .olls .oyce. Entrepreneurs note this
point and produce less e7clusive cars at a lower price in order to satis!y the
needs and wants o! those who cannot a4ord a .olls .oyce.
)n addressing these $uestions# it is important to point out how the mar%et
operates in each one. Dor e7ample# i! consumers do not buy certain items
which are produced# this is a signal to business to stop producing them (what
is to be produced). )! consumers will not pay the price !or an item# even
though it is o! high $uality# producers might have to fnd ways to use other
technologies !or the item in order to ma%e it less e7pensive (how to
produce). hose people who choose to enter occupations or establish
businesses# which produce goods and services that are in big demand# will
get more o! the output (!or whom).
#"aracteristics ! an Enterprising Sciet.
- Ase!ul goods and services constantly produced0provided
- 5ide distribution o! needed goods and services throughout the
population
- <ew ideas continuously in!used !or revitalization and growth o!
economy
- 3ontinuous discovery o! unidentifed needs o! :ociety
- 3onstant solving o! problems e7perienced in society
- Avoids stagnation through giving individuals a chance to be innovative
and creative
Entrepreneurs"ip Pr-i(es Sciet. 'it" S,all Enterprises W"ic"4
- +row into medium and large enterprises
- 9romote potential innovators !or new services# new processes# new
products G !or the good o! the society
- :erve as suppliers# customers and subcontractors o! larger
organizations G a big mar%et in the society
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- 9rovide competition throughout the economy among small# medium
and large frms ali%e# leading to improved products# services and
e6ciency in society G !or the good o! the society
Ecn,ic 3als ! a Sciet.
- Dull employment
- :table growth
- Dreedom o! choice
- E$uality o! opportunities !or women and men
- Economic security
- Economic 2ustice
- )nternational economic balance
#ntri0utin ! entrepreneurs t Ecn,ic 3als
- )ncrease o! the $uantity o! productive resources
- )mprovement in the $uality o! resources
- Advances in technology
- +reater e6ciency
3als ! in(i-i(uals an( sciet.
:etting goals# and then wor%ing to achieve them# is a sign o! maturity and
responsibility in a society# 2ust as it is a sign o! maturity in an individual.
5hat goals have people set !or themselves in their economic li!eP And how
well are these goals being achievedP hese are the $uestions discussed in
this handout. 'ne important goal that the people have set !or their economy
is
FU%% PRODU#TION
)n order to achieve !ull employment. 5e want to ma%e !ull use o! the
productive resources that are available Glabour# capital and natural resources
G and use these resources e6ciently.
Bow well are we achieving the goal o! !ull employment and !ull productionP
he nation canFt realistically e7pect to provide 2obs continuously !or &JJT o!
the men and women who are able and willing to wor%. here will always be
some unemployment G roughly ( to -T o! the labour !orce. But when millions
o! people are unnecessarily unemployed# it means they are not ma%ing a
productive contribution to the country and they are not earning an income.
Dor this reason# the goal o! !ull production G which re$uires both !ull
employment and e6ciency G is one o! the most important in our economy.
A second ma2or goal is :AB@E +.'5B. 5e want the economy to become
bigger and better through the years. 5e measure the amount o! our national
output o! goods and services by loo%ing at statistics o! +ross <ational
9roduct. Economic growth is a steady increase in +<9 per person (total +<9
divided by the nationFs population). 5e want +<9 to increase more or less at
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a steady rate G about , or -T each year (in!ormal sector estimate) G without
having business recessions or rapidly rising prices (inHation)# or increases in
unemployment. 9roduction# employment and growth o! +<9 are all pretty
easy to measure. 5hen we come to certain other economic goals# however#
we have to tal% about them in more general terms.
D.EE?'8 'D 3B')3E is a goal that practically everyone would include high
on the list. But what does it mean in concrete termsP Economists have
pointed out that !reedom o! choice is important !or consumers# !or wor%ers#
and !or business. Dreedom o! consumer choice means that consumers will be
able to select the goods they want to buy !rom a !airly wide range o!
alternatives# according to individual needs and pre!erences. 5e are not
satisfed with a system where the consumer is told" /=ou can have any size
and colour that you want G as long as itFs medium and blac%;1
Dreedom o! occupational choice is an important area o! economic !reedom.
8en and women want to be able to choose the %ind o! wor% they will en2oy
doing and that will provide ade$uate wages and personal satis!action.
Dinally# there is much tal% about the importance o! /!ree enterprise1. his is
an important aspect o! !reedom o! choice. )t gives people the !reedom to
start their own business and use the !actors o! production in such a way as to
ma%e a proft. 8uch o! the current economic system is built on the
!oundation o! this particular !reedom.
EUAA@)= 'D '99'.A<)= !or men and women in the society is another
goal. )t re!ers to women and men having e$ual human and wor%ers rights
and e$ual chances as consumers# wor%ers and entrepreneurs. +ender
e$uality is about a 2ust society# in which responsibilities# opportunities#
wor%load# decision ma%ing and income are distributed !airly. 5omenFs
economic empowerment leads to economic growth and poverty reduction.
9romoting gender e$uality# there!ore# is not only the right thing but also the
smart thing to do.
he goal o! E3'<'8)3 :E3A.)= means that we want the members o! our
economic society to have enough money to be able to buy ade$uate !ood#
clothing# shelter and other necessities. 5idespread poverty not only means
!ailure to achieve the goal o! economic security !or these people# but it also
raises serious $uestions about whether we are achieving the goal o!
E3'<'8)3 RA:)3E in society. <ot everyone agrees on the meaning o!
!airness and 2ustice in economic li!e# but it is a goal that nearly everyone
!eels is important to defne and wor% toward.
Dinally# there is one economic goal that is not limited to the boundaries o! the
country# but spreads overseas to other countries. his is the goal o!
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)<E.<A)'<A@ BA@A<3E. 5e want to maintain a strong and balanced
relationship in !oreign trade and international payments. Dailure to achieve
this goal not only causes serious economic problems at home and abroad#
but also increases international tensions that threaten world peace.
+.2. . Ge. Success Factrs in Setting up a S,all
*usiness
Key success !actors in setting up a small business
&. 8otivation and determination
(. )dea and mar%et
*. .esources
,. Ability
-. 9lan
M. 'rganization and 8anagement
Ge. Success Factrs in Setting up a S,all *usiness
Bow do ) become an entrepreneurP Bow can ) set up a success!ul businessP
hese are $uestions that people o!ten as%. An!ortunately# however# no
!oolproo! answer or !ormula has been identifed as yet. <otwithstanding this#
success G according to the literature# observations and e7perience G depends
on that peculiar ability to spot opportunities in the mar%et and act on them
by organizing the necessary resources to o4er something attractive to
customers and ta%e on the attendant ris%s. his is the essence o!
entrepreneurship in a business conte7t. he crucial ingredient in the whole
process is the entrepreneur. Be0she ta%es the initiative and also bears the
ris% in creating and0or organizing an attractive o4er o! value to potential
customers. he entrepreneurFs ability to do this success!ully depends on ,
!actors# namely" 8otivation# Ability# )dea and .esources. he acronym G 8A).
G may help you remember these !actors more easily. hese are e7plained in
turn
I(ea an( $ar/et
he important issue to be determined here is the viability o! the idea#
pro2ect# product or service to be o4ered. )n other words# does the idea#
product or service meet a need or want !or which there are customers who
can a4ord it and are willing to use0purchase it in su6cient $uantities to ma%e
the whole pro2ect worthwhile (i.e. return a proft# in a business conte7t)P Bow
the proposition to be o4ered is more desirable or better than what is
currently available and how will competitors reactP
$ti-atin an( Deter,inatin
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)t is widely ac%nowledged that# to be success!ul# the individual or group
needs to be highly motivated and determined to set up the business to ma%e
it succeed. his will be reHected# !or e7ample# in how persistent they are in
overcoming obstacles that might get in the way# how they go about see%ing
in!ormation and how they act on opportunities. Additional indicators might
be their commitment and attitude to wor% ($uality# e6ciency# long hours)#
previous attempts to set up a business and the support o! !amily or partners.
&0ilit.
Another important $uestion is whether the individual or others involved have
particular abilities these may be %nowledge# technical or managerial s%ills.
Resurces
Dinally# the e7tent to which the person(s) involved can ac$uire or organize
resources in ade$uate measure will not only inHuence per!ormance but also#
in some cases# whether they start at all. E7amples here include capital# cash#
premises# materials# e$uipment and labour. he availability o! in!rastructure
(e.g. utilities li%e electricity# telephone# roads) and support services might
also be important.
*usiness plan
)n order to turn the above , components into reality# a plan would be
re$uired. )n business# this is normally re!erred to as a Business 9lan. 'n the
whole a business plan should show !our main things# namely"
I 5here you currently are with your idea# pro2ect or businessE
I 5hat you wish to doE
I Bow you propose to go about itE
I And that the pro2ect is worthwhile.
OrganiJatin an( $anage,ent
he business then needs to actually start operating and# once this is done# it
would need to be managed. )n setting up the business# or be!ore starting to
operate# there may be legal or other statutory re$uirements to be met. here
may be a need to consult pro!essionals such as lawyers# accountants and0or
sta4 !rom small business support agencies !or advice. he whole business
and the process need to be managed# and how well this is done G in
particular# fnding and dealing with customers# management o! cash and
fnances# mar%eting# handling employees# dealing with suppliers# control
systems G will all a4ect per!ormance.
Ge. Success Factrs in Setting up a S,all *usiness L E7a,ple ! an
Internet #a!M
Resurces
I ?es%top 93s# all networ%ed
I ?ial-up# broadband or wireless connection
I Account with an )nternet :ervice 9rovider ():9) or satellite provider
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I :o!tware to manage transactions and accounts
I ?es%s and chairs
I Air conditioners or !ans
I :ta4 to run0supervise
&0ilit.
I ) or computing %nowledge and s%ills
I Able to install so!tware and do routine maintenance and repair
I Boo%-%eeping and basic organization
I Able to teach0train clients in basic computing and internet browsing
I Damiliar with internet search engines0e-mail
$ti-atin an( Deter,inatin
I Able to wor% or operate long hours !or M or K days a wee%
I )nnovative
I Able to use inHuential strategies
I 9roblem-solver
I a%es initiative
I 3oncern !or e6ciency
I(ea an( $ar/et
I >iability" number and nature o! internet or cyber ca!Vs in the
neighbourhood or within# say# a * %ms radius G the !ewer the better
I :peed and prices vis-W-vis other ca!Vs in area G should be competitive
I <umber o! people living and0or wor%ing in the area G the more# the better
I 9rofle o! people living or wor%ing in the area" low to middle income best G
not so rich as to be able to a4ord their own 93s and internet connection# but
not so poor as not to be able to a4ord the service
I <ice ambiance G with so!t drin%s and snac%s !or saleE and bac%ground
music in a well-ventilated room
I 9rovision o! ancillary services !or sale# such as !a7# printing# photocopying#
sale o! dis%ettes# 3?-.'8s# etc.
+.+. 3enerating 0usiness I(eas
W"at is a *usiness I(eaH
1. A business idea is the response o! a person or persons# or an
organization to solving an identifed problem or to meeting
perceived needs in the environment (mar%ets# community# etc.).
2. Dinding a good idea is the frst step in trans!orming the
entrepreneurFs desire and creativity into a business opportunity.
W". 3enerate *usiness I(easH
&. =ou need a great idea to start a new business
(. Business ideas need to respond to mar%et needs
*. Business ideas need to respond to changing consumer wants and
needs
,. Business ideas help entrepreneurs to stay ahead o! the competition
-. Business ideas use technology to do things better
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M. Business ideas are needed because the li!e cycles o! products are
limited
K. Business ideas help to ensure that businesses operate e4ectively and
e6ciently
W". S"ul( .u 3enerate *usiness I(easH
here are many reasons why entrepreneurs or would-be entrepreneurs need
to generate business ideas. Bere are 2ust a !ew"
I Nu nee( an i(ea G and a good one at that G !or business. As
indicated earlier# in loo%ing at the rationale !or this topic# a good idea
is essential !or a success!ul business venture G both when starting a
business and to stay competitive a!terwards.
I T respn( t ,ar/et nee(s. 8ar%ets are made up essentially o!
customers who have needs and wants waiting to be satisfed. A
business can become success!ul i! it provides new products or
services# or manages to reach a new group o! clients# or fnds a new
channel to reach customers better. 8any businesses starters who
copy the business idea o! others# are not success!ul because they do
not respond to a mar%et need.
I #"anging !as"ins an( reFuire,ents provide opportunities !or
entrepreneurs to respond to demand with new ideas# products and
services.
I T sta. a"ea( ! t"e c,petitin. .emember# i! you do not come
up with new ideas# products and services# a competitor will. he
challenge is to be di4erent or better than others.
I T e7plit tec"nlg. G do things better. echnology has become a
ma2or competitive tool in todayFs mar%ets# with the rate o! change
!orcing many frms to innovate. here are several companies in the
world# operating in the electronics and home appliances industries#
which come up with dozens o! new products every month. Dor these
and many others in todayFs global mar%ets# generation o! business
ideas is crucial.
I *ecause ! pr(uct li!e c.cle. All products have a fnite li!e. As the
product li!e cycle chart shows# even new products eventually become
obsolete or outmoded. hus# there is a need to plan !or new products
and the growth o! these. he frmFs prosperity and growth depends on
its ability to introduce new products and to manage their growth.
I T sprea( ris/ an( all' !r !ailure. @in%ed to the product li!e
cycle concept is the !act that over LJ per cent o! new products !ail. )t
is there!ore necessary !or frms to try to spread their ris% and allow !or
!ailures that may occur !rom time to time by constantly generating
new ideas.
Surces ! *usiness I(eas
Bobbies09ersonal )nterests
9ersonal :%ills and E7perience
Dranchises
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8ass 8edia (newspapers# magazines# ># )nternet)
Business E7hibitions
:urveys
3ustomer 3omplaints
3hanges in :ociety
Brainstorming
Being 3reative
H' D I Fin( a 3( *usiness I(eaH
A good business idea is essential# or even a prere$uisite# !or a success!ul
business venture. Bowever# good business ideas do not usually 2ust occur to
an entrepreneur. .ather# they are the result o! hard wor% and e4ort on the
part o! the entrepreneur in generating# identi!ying and evaluating business
ideas that can be developed into a business opportunity.
W"at is a *usiness I(eaH
A business idea is the response o! a person or an organization to solving an
identifed problem or to meeting perceived needs in the local environment
(mar%ets# community# etc.). Dinding a good idea is the frst step in
trans!orming the entrepreneurFs desire and creativity into a business
opportunity.
wo things should however be noted"
(a) although it is a prere$uisite# a business idea is only a toolE
(b) an idea by itsel!# however good# is not su6cient !or success.
)n other words# notwithstanding its importance# an idea is only a tool that
needs to be developed and trans!ormed into a viable business opportunity.
'ut o! *J business ideas# there may be only one good business opportunity.
W"at is #reati-it.H
3reativity is the ability to design# !orm# ma%e or do something in a new or
di4erent way. he ability to come up with creative solutions to
needs0problems and to mar%et them o!ten mar%s the di4erence between
success and !ailure in business. )t also distinguishes high-growth or dynamic
businesses !rom ordinary# average frms. .eal# success!ul entrepreneurs are
creative in identi!ying a new product# service or business idea and turning it
into a business opportunity. o be creative# you need to %eep your mind and
eyes open as you wor% through the sources o! business ideas e7plained
below# and apply the techni$ues.
Surces ! *usiness I(eas
here are millions o! entrepreneurs throughout the world and their
testimonies suggest that there are many potential sources o! business ideas.
:ome o! the more use!ul ones are outlined below.
H00iesOInterests
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A hobby is a !avorite leisure-time activity or occupation. 8any people# in
pursuit o! their hobbies or interests# have !ounded businesses. )!# !or
e7ample# you en2oy playing with computers# coo%ing# music# traveling# sport
or per!orming (to name but a !ew)# you may be able to develop this
hobby0interest into a business. o illustrate this# i! you en2oy traveling#
per!orming and0or hospitality# you may consider going into tourism# which is
one o! the biggest industries in the world.
Persnal S/ills an( E7perience
'ver hal! o! the ideas !or success!ul businesses come !rom e7periences in
the wor% place. Dor e7ample# a mechanic with e7perience in wor%ing !or a
large garage who eventually sets up his0her own car repair or used car
business. hus# the bac%ground o! potential entrepreneurs can play a crucial
role in the decision to go into business as well as the type o! venture to be
created. =our s%ills and e7perience are probably your most important
resource# not only in generating ideas but also in capitalizing on them to
develop a good business opportunity.
Franc"ises
A !ranchise is an arrangement whereby the manu!acturer or sole distributor
o! a trademar%# product or service gives e7clusive rights !or local distribution
to independent retailers in return !or their payment o! royalties and their
willingness to con!orm to standardized operating procedures. Dranchising
may ta%e several !orms# but the ones o! interest to potential entrepreneurs
are the types that o4er a name# image and method o! doing business and
operating procedures.
)n the &SSJs !ranchising e7perienced tremendous growth# becoming a much-
used method o! going into business !or the millions o! enterprises that were
starting up in the A:A and Europe. )n the &SSJs# there were over (#JJJ types
o! !ranchise businesses# accounting !or over A:X*JJ billion in annual sales
revenue and about a third o! all retail sales in the Anited :tates. here are
many directories and handboo%s as well as associations# including the
)nternational Dranchise Association# which can provide !urther in!ormation.
$ass $e(ia
he mass media is a great source o! in!ormation# ideas and o!ten opportunity.
<ewspapers# magazines# television# and the )nternet are all e7amples o!
mass media. a%e a care!ul loo%# !or e7ample# at the commercial
advertisements in a newspaper or magazine and you may well fnd
businesses !or sale. 'ne way to become an entrepreneur is to buy an
e7isting business.
Articles in the printed press or on the )nternet or documentaries on television
may report on changes in !ashions or specifc consumer needs. Dor e7ample#
you may read or hear that people are now increasingly interested in healthy
eating or maintaining their physical ftness. =ou may also fnd
advertisements calling !or the provision o! certain services based on s%ills#
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!or e7ample accounting# catering or security. 'r you may discover a new
business concept# but investors would be needed.
E7"i0itins
Another way to fnd ideas !or a business is to attend e7hibitions and trade
!airs. hese are usually advertised on the radio or in newspapers. By visiting
such events regularly# you will not only discover new products and services#
but you will also meet sales representatives# manu!acturers# wholesalers#
distributors and !ranchisers. hese are o!ten e7cellent sources o! business
ideas# in!ormation and help you in getting your business started. :ome o!
them may also be loo%ing !or someone 2ust li%e you to be a business partner.
Sur-e.s
he !ocal point !or a new business idea should be the customer. he needs
and wants o! the customer# which provide the rationale !or a new product or
service# can be ascertained through a survey. :uch a survey might be
conducted in!ormally or !ormally by tal%ing to people. :urveys may be
conducted using a $uestionnaire# through interviews or through observation.
=ou may start by tal%ing to your !amily and !riends to fnd out what product
or service they thin% is needed or wanted but is not available in the mar%et.
'r# !or e7ample# whether they are dissatisfed with an e7isting product or
service and what improvements or changes they would li%e to see. =ou can
then tal% to people who are part o! the distribution chain that is
manu!acturers# wholesalers# distributors# agents and retailers. )t would be
use!ul to prepare a set o! $uestions which might be put on a $uestionnaire or
used in an interview. +iven their close contact with customers# these people
have a good sense o! what is re$uired and what will sell and what will not
sell. Dinally# you should tal% to as many customers as possible (both e7isting
and potential customers). he more in!ormation you can get !rom them# the
better.
Besides tal%ing to people# you could also get in!ormation through
observation. Dor e7ample# in deciding whether to open a shop on a particular
street# you can observe and count the number o! people going past on given
days and compare these numbers to other sites. 'r# i! you are interested in
an area !re$uented by tourists# you might sell products !rom a cra!t business.
'r you may have noticed that there is no decent restaurant or hotel on a
tourist route or in a given town.
'ne way o! ensuring that you are not negligent in identi!ying new business
ideas is to be alert at all times to customer needs. 'ne entrepreneur
apparently went round at every coc%tail party as%ing i! anyone was using a
product that did not ade$uately !ulfl its intended purpose. Another
monitored the toys o! a relativeFs children loo%ing !or ideas !or a mar%et
niche.
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#,plaints
3omplaints and !rustrations on the part o! customers have led to many a
new product or service. 5henever consumers or customers complain bitterly
about a product or service# or when you hear someone say /) wish there
was .....1 or /)! only there were a product0service that could ....1# you have
the potential !or a business idea. he idea could be to set up a rival frm
o4ering a better product or service# or it might be a new product or service
which could be sold to the frm in $uestion and0or to others.
#"ange
he world is constantly changing. 3hange can be a threatE however# most
entrepreneurs consider change as a challenge and opportunity to trigger new
needs !or products and services. An innovative entrepreneur always
responds to changes in a positive manner.
*rainstr,ing
Brainstorming is a techni$ue !or creative problem-solving as well as !or
generating ideas. he ob2ective is to come up with as many ideas as
possible.
+.1. I(enti!.ing an( &ssessing *usiness Opprtunities
W"at is a *usiness Opprtunit.H
A business opportunity may be defned simply as an attractive investment
idea or proposition that provides the possibility o! a monetary return !or the
person ta%ing the ris%. :uch opportunities are represented by customer
re$uirements and lead to the provision o! a product or service which creates
or adds value !or the buyers or end-users.
Distinctin 0et'een i(eas an( pprtunities
Y A good idea is not necessarily a good business opportunity. 3onsider# !or
e7ample# that over LJT o! all new products !ail.
Y :o# what turns an idea into a business opportunityP
Y o put it simply in economic terms# )ncome must e7ceed 3osts to earn a
9roft.
Y he characteristics o! a good business opportunity need to be care!ully
e7amined.
I(enti!.ing *usiness Opprtunities
:eeing# see%ing and acting on opportunities is one o! the characteristics o!
success!ul entrepreneurs. )t is also the basis !or starting and maintaining
success!ul ventures. )t involves not only generating ideas and recognizing
opportunities# but also screening and evaluating them to determine the most
viable# attractive propositions to be pursued.
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W"at is a 0usiness pprtunit.H
A business opportunity may be defned simply as an attractive idea or
proposition that provides the possibility o! a return !or the investor or the
person ta%ing the ris%. :uch opportunities are determined by customer
re$uirements and lead to the provision o! a product or service which creates
or adds value !or its buyers or end-users.
Bowever# a good idea is not necessarily a good business opportunity. Dor
e7ample# you may have invented a brilliant product !rom a technical point o!
view and yet the mar%et may not be ready !or it. 'r the idea may be sound#
but the level o! competition# and the resources re$uired may be such that it
is not worth pursuing. :ometimes there may even be a ready mar%et !or the
idea# but the return on investment may not be acceptable. o underscore the
point !urther# consider the !act that over LJT o! all new products !ail. :urely#
to the inventors (and their bac%ers) the idea seemed a good one# yet clearly
it could not withstand the test o! the mar%et.
5hat turns an idea into a business opportunityP A simplifed answer is when
income e7ceeds costs and generates a proft. )n practice# to be
comprehensive# you need to e7amine the !actors listed below.
#"aracteristics ! a g( 0usiness pprtunit.
o be a good business opportunity# it must !ulfl# or be capable o! meeting#
the !ollowing criteria"
I .eal demand" responds to unsatisfed needs or re$uirements o!
customers who have the ability to purchase and who are willing to
buy
I .eturn on investment# provides acceptable returns or rewards !or the
ris% and e4ort re$uired
I Be competitive" be e$ual to or better (!rom the viewpoint o! the
customer) than other available products or services
I 8eet ob2ectives" meet the goals and aspirations o! the person or
organization ta%ing the ris%
I Availability o! resources and s%ills" the entrepreneur is able to obtain
the necessary resources.
&ssessing *usiness Opprtunities
)deas and opportunities need to be screened and assessed !or viability once
they have been identifed. his is not an easy tas%# and yet at the same time#
the assessment o! business opportunities is e7tremely important. his
assessment can ma%e the di4erence between success and !ailure# between
ma%ing a !ortune and losing everything. 5hile the assessment e7ercise does
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not guarantee success# it certainly helps in minimizing the ris%s and reduces
the odds !or !ailure.
)denti!ying and assessing business opportunities involves# in essence#
determining ris%s and rewards0returns reHecting the !ollowing !actors
discussed below.
In(ustr. an( ,ar/et
he %ey $uestion to be answered is whether there is a mar%et !or the idea. A
mar%et in this conte7t consists o! customers G potential or actual G who have
needs and wants# and who have the ability to purchase your intended
product or service. here is also a need to consider whether what the
customer wants can be provided at the right price# in the right place# and in
a timely manner.
Another important consideration is the size o! the mar%et and the growth
rate o! the mar%et. he ideal situation is a mar%et that is large and growing#
where getting even a small mar%et share can represent a signifcant and
increasing volume o! sales.
Dor this assessment e7ercise# the would-be entrepreneur needs to gather
in!ormation. )! some potential entrepreneurs are tempted to thin% that it
involves too much hard wor%# they might ta%e some com!ort !rom the saying
that the data available about mar%ets (size# characteristics# competitors etc.)
is o!ten inversely related to the real potential o! an opportunity. )n other
words# i! mar%et data is readily available and i! the data clearly shows
signifcant potential# then it is li%ely that a large number o! competitors will
enter the mar%et and the opportunity will not be as good. here are several
sources o! published in!ormation (also called secondary in!ormation)#
including libraries# chambers o! commerce# investment promotion centres#
government ministries# universities# !oreign embassies# the )nternet#
newspapers# and so on.
)n addition to the above# there is o!ten the need to collect in!ormation at the
source (also called primary research) by interviewing %ey people# such as
customers and suppliers. )n that case# you will need to conduct survey
research.
%engt" ! t"e P'in(' ! pprtunit.Q
'pportunities are said to have a Zwindow o! opportunity.F hat is# they do
e7ist# but they do not remain open !orever. 8ar%ets grow at di4erent rates
over time# and as a mar%et gets bigger and more well-established# conditions
!or success are not as !avorable. iming is there!ore important. he issue
then is to determine the length o! time the window will be open# and whether
the opportunity can be created or seized be!ore the window closes.
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Persnal gals an( c,petencies ! t"e entrepreneur
An important $uestion !or anyone venturing into business is whether they
want to underta%e that particular venture. 9ersonal motivation is an essential
attribute o! a success!ul entrepreneur. Anless a person really wants to do
that %ind o! business# he or she should not venture into it.
A related $uestion is whether the potential entrepreneur has the necessary
competencies (including the %nowledge# s%ills and abilities) !or the
re$uirements o! the business and# i! not# whether other people could be
brought in. 8any small business owners0managers have entered into
business based on the strengths o! their own s%ills and ability.
5hen the above aspects are combined# the issue then becomes one o!
whether there is a good ft between the re$uirements o! the business and
what the entrepreneur wants or desires. his is important# not only !or
success# but also !or the entrepreneurFs happiness. As the saying goes#
/:uccess is getting what you wantE happiness is wanting what you get.1
$anage,ent tea,
)n many ventures# particularly those involving a large amount o! capital# high
ris%# sophisticated mar%ets and high competition# the management team is
usually the most important dimension in determining the success o! a
business. he e7perience and s%ills that the team possess in relation to the
same or a similar industry o!ten determine success or !ailure o! a new
business. his e7plains why venture capitalists# or those people who provide
fnance !or businesses# put so much emphasis on the management !actor.
)nvestors o!ten say that they would rather have good management with an
average idea0product0service than a brilliant idea0product0service with bad
management.
#,petitin
o be attractive# an opportunity must have a uni$ue competitive advantage.
Dor e7ample# a business may have a competitive advantage by lowering
costs in terms o! production and mar%eting. 'r better# a business may o4er
better $uality. )n addition# the availability o! entry barriers G which could ta%e
the !orm o! high amounts o! capital re$uired# protection such as patents or
regulatory re$uirements# contractual advantage such as e7clusive rights to a
mar%et or with a supplier G can ma%e the crucial di4erence between a ZgoF
and a Zno goF investment decision. )! a business cannot %eep most would-be
competitors out o! its mar%et# or i! it !aces e7isting entry barriers# then the
opportunity may not be very attractive.
#apitalK tec"nlg. an( t"er resurce reFuire,ents
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he availability and access to capital# technology and other resources such
as s%ills determine the e7tent to which certain opportunities can be pursued.
As a general rule# the more di6cult the resource re$uirements are to obtain#
the more attractive the proposition# provided o! course that there is a mar%et
!or the idea0product0 service. o give an e7ample# while mar%eting a
brea%through product based on a patented technology is no guarantee o!
success# it certainly creates a !ormidable competitive advantage.
*usiness en-irn,ent
he environment within which the business will operate has a great inHuence
on the attractiveness o! any opportunity. By business environment# we are
re!erring not only to the physical environment# which is important and
increasingly so# but also the political# economic# geographical# legal and
regulatory conte7ts. 9olitical instability# !or e7ample# renders business
opportunities unattractive in many countries# especially !or those ventures
re$uiring high investment with a long paybac% period. :imilarly# inHation and
e7change rate Huctuations# or a wea% 2udiciary system# are not a good
environment to start a business# even i! the potential returns are high. he
lac% o! in!rastructure and services (such as roads# electricity# water supply#
telecommunications# transportation# and even schools and hospitals) also
a4ect the attractiveness o! an opportunity in a given environment.
*usiness Plan
he process o! e7amining the !actors discussed above is o!ten the initial step
in developing a business plan. )nvestors and lenders may re$uire these
issues to be considered and set out in the !orm o! a business plan.
I(enti!.ing an( &ssessing *usiness Opprtunities
<ot an easy tas%. 'ut o! appro7imately *J business ideas# there may
only be one good business opportunity
A good business opportunity should ta%e into account"
)ndustry and mar%et# real demand !or a product or service
@ength o! the Zwindow o! opportunityF
9ersonal goals and competencies o! the entrepreneur
8anagement team (human resources)
3ompetition
3apital# technology and other resource re$uirements
Business environment (political# economic# legal# government
regulations etc.)
+.: Surce ! fnance t start an Enterprise
:etting up a business re$uires a certain amount o! money that has to be
spent be!ore the business activities can start to generate income though
sales. '!ten potential entrepreneurs underestimate the amount needed
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because they only ta%e into account the e7penditures !or investment items
such as machines and e$uipments# cars# and so on. hey are not aware that
during the frst wee%s or months o! operations (trading# manu!acturing or
providing services) the sales revenues do not cover the e7penditures !or
running the business. his can lead to a problem o! li$uidity whereby the
entrepreneur cannot pay salaries or suppliers.
I he amount needed as start-up capital is generally much higher than the
money the !uture businesswoman or businessman has at her0his disposal. As
the di4erence has to be !ound !rom other resources# it is important to %now
e7actly how much money is needed.
Esti,ating t"e Start2Up #apital
)! someone wants to start a business he0she must be aware that a certain
amount o! money is needed during the start-up process o! a business !or
payments be!ore the business begins to earn its own income. his money is
called start-up capital. )t serves two purposes.
I Pre2peratin pa.,ents r in-est,ent capital4 his means money
that a person starting a business will have to pay be!ore his business starts
operating. he money needed !or these payments is invested in the business
as long as the business is operating.
Buying land# constructing a wor%shop# purchasing machinery# tools#
e$uipment o6ce !urniture# etc. are all pre-operation payments# as are legal
!ees# connections !or water# electricity and telephone# publicity and
advertisement be!ore opening# and so on.
Business starters# are generally aware that they need money !or machines#
tools or e$uipment !or a shop. Bowever# in particular young people# very
o!ten do not realize that a number o! other payments have to be made
be!ore they can really start their business. Dor e7ample# the cost !or
installation o! machines and the training o! wor%ers to use them can
constitute $uite a high percentage o! the total cost o! the machines. Dees !or
licenses and insurance are also part o! investment capital.
I Initial peratin pa.,ents r 'r/ing capital" )nitial operation
payments will occur when a new business starts to operate# to cover
immediate e7penses until revenues !rom sales How bac% into the business.
his time span depends on the nature o! the business. )n general# in trading
activities this period can be less than one month while in manu!acturing
activities the time span between the starting date o! the production
(processing time o! the product# the time it remains in the distribution
system# e.g. store o! fnished goods in the !actory# delivery to wholesalers or
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retailers or to the customer) and receipt o! money in the ban% account or
cash bo7 can be several months.
his money is also invested permanently in the business and is wor%ing
capital. 5hen the business e7pands the wor%ing capital needs to be
increase. he need !or wor%ing capital is also o!ten underestimated. Business
starters thin% they will be paid immediately. his is o!ten the case in trading
activitiesE however# the shop owner has to have a stoc% o! goods because
she0he cannot replace every article sold immediately. :ometimes customers
who place bigger orders as% !or credit and payments are not always made on
time. )n manu!acturing activities# wor%ing capital has to cover a longer
period that can last several months. )! the wor%ing capital is underestimated#
an entrepreneur may have a Hourishing business# but may run out o! money
to pay salaries# buy additional merchandise !or sale# or is not able to ma%e
ban% repayments. )t is recommended that a certain percentage is included in
the investment capital !or un!oreseen items. 5or%ing capital should also
include additional !unds !or un!oreseen e7penses.
he distinction between these two categories o! payments depends on the
moment when the payments are made" either be!ore the business starts to
operate (investment capital) or a!ter it has started (wor%ing capital). he
start-up capital !or a new business is the sum o! the e7penditures !or the
investment items and the wor%ing capital. he !uture entrepreneur needs to
have this amount o! money by" using his0her own savings# fnding partners
and negotiating loans with ban%s. As a general rule# *JT o! the start-up
capital should be !rom the entrepreneurFs own resources.
Pre2peratin Pa.,ents !r In-est,ent Ite,s
)nvestment item :pecifcation Amount
@and
Building
.egistered capital
3onsultancy !ees
9ower connection %>A
5ater connection 9ipe diameter
9hone connection lines
8achinery0E$uipment
(technical
specifcations)
)nstallation o!
machines
(technical
specifcations)
>ehicles
'6ce !urniture
Y '6ce e$uipment
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@icences0permits
:ta4 training
'wnerFs salary
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'ther
otal )nvestment
Surces ! *usiness Financing
8any prospective entrepreneurs have promising business ideas and plans.
Bowever# the capital necessary to initiate their plans may not be readily
available. As a result# many prospective small enterprises never become
operational. he small business owner will have to invest a certain amount o!
personal money to start a business.
Bowever# with sound preparation and planning# fnancing can be obtained
!rom other sources. he two primary sources o! fnancing to establish a
business may be (a) the ownerFs e$uity or (b) borrowing !rom lending
institutions.
1. EFuit. fnancing
he main source o! e$uity fnancing !or most entrepreneurs is their personal
savings. Dinancial e7perts say that one-hal! o! the money needed to start a
small business should come !rom the owner. his means !uture owners must
wor% and save to have enough money to start a business. Another popular
source o! e$uity fnancing is money !rom other sources such as !amily#
!riends# venture capitalists# or another business that is generating surpluses.
Bowever# there are a !ew points to consider. Dor e7ample# will such investors
want to get involved with operating the businessP 5hat will happen i! the
business doesnFt succeedP 5ill it ruin your relationship# especially with !amily
and !riendsP
E$uity fnancing can also be obtained by selling part o! the business to one
or more partners. 5ith partners putting in money# it is usually easier to raise
the total amount needed. Bowever# partners must be able to get along and
sometimes this is not easy.
:ince many people starting their own business want to ma%e their own
decisions# the partnership alternative may not be a good idea.
2. *rr' !r, len(ing institutins
5hen e$uity sources are not enough# the entrepreneur has the option o!
borrowing !rom other sources. @enders will usually lend money !or starting a
business to people they %now and trust. @enders are care!ul not to lend
money i! the ris% is too great. @enders do not want to lose money i! the
business !ails. 8ost lenders will# there!ore# review the business plan very
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care!ully. his plan should describe how the business will be operated# how
much money will be needed and how it will be used# and at what point the
business will be proftable.
8ost people thin% o! ban%s when borrowing money. Bowever# it is not always
easy !or small enterprises to borrow !rom ban%s. Ban%s only lend money
when the ris% o! losing it is very low. Dre$uently# they will only lend to
customers whom they have %nown !or a long time. )! someone is thin%ing o!
borrowing money at some time in the !uture# it might be a good idea to
develop a good personal relationship with a local ban%er as soon as possible.
3. #nsi(eratins in appl.ing !r a 0usiness lan
?i4erent lending institutions have di4erent procedures which have to be
!ollowed by the loan applicant. 5hile lending institutions want to help
potential borrowers# theseinstitutions have to be assured that repayment o!
the loan will ta%e place as agreed by the borrower. )t is necessary to
understand the !ollowing !actors that are ta%en into consideration when a
ban%er is appraising a loan application.
I ype o! loan" short-term (up to one year) or long-term (longer than one
year).
I 9urpose o! the loan" it is essential to determine that the applicant will not
invest the money in a business venture which is illegal# not !avoured by
government policy# or is viewed un!avourably by the local community.
I 3redit worthiness and integrity o! the borrower. 3an the borrower be
trustedP
I 3apability" the business profle o! the applicant becomes an indicator o! the
entrepreneurFs capability to operate the pro2ect with pro!essional e7pertise
and e4ectiveness. 3apability helps the lender to understand whether the
borrower will be able to utilize the loan !or the intended purpose.
I .epayment period" this is a very important re$uirement !or both the
borrower and the lender. he lender needs to %now whether the o4er o! the
borrower to repay is realistic. he lender can ascertain this through statistical
and fnancial pro2ections and advise the applicant regarding a realistic
repayment period as well as other details such as the amount o! monthly
instalments.
I :ecurity" security or collateral !or the loan must be acceptable to the
lender. Even i! all other conditions are !ulflled# the lender may not grant the
loan i! security conditions and terms re$uired by the ban% are not satisfed.
his is
especially true when applying !or a business loan !or the frst time.
I +uarantors" some lenders call !or security both in the !orm o! property and
tangible assets and guarantees !rom !riends.
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I Business plan" this is the ma2or instrument used by any lending institution
to decide whether a loan applicant deserves a loan. A business plan discloses
whether the intended business is viable or not. A loan applicant may have his
own e7pert prepare a business plan to prove that the loan he is applying !or
deserves due consideration by the lending organization. he lender always
appraises the business plan presented by the applicant and comes to his
own conclusions# or prepares his own !easibility study to assess and appraise
the viability o! the proposed business. A very signifcant aspect o! the
business plan is the cost involved and the cash How. 3ash How# as well as
fnancial and statistical pro2ections# indicates whether the pro2ect can
generate more money than the costs incurred. hese results will indicate to
the lender whether the loan is sa!e and the borrower can repay according to
the agreed terms.
I 3urrent customers o! a lending institution have an easier position when
applying !or a business loan i! the loan is to be used as wor%ing capital. he
ban% will study the customerFs past fnancial records and these fnancial
records will
help the ban%er to decide what action to ta%e. )! the customer intends to
start a new business# then the procedures will almost be similar to that o! a
new applicant. By %eeping written fnancial records# the entrepreneurs will
have written proo! o! the past history o! the business.
here are several sources o! money available to entrepreneurs. Dre$uently#
the %ey decision is to determine which source o! money is most appropriate
!or their current needs. :election o! the right source o! fnancing !or their
needs can have a pronounced e4ect on the !uture o! their business.
.eceiving a short-term ban% loan when a longer-term loan is re$uired can
soon create a crisis. :elling a part o! the business to raise capital that could
have been borrowed
may be e7tremely costly. 'ver-e7tended credit to customers can be costly
and restrict operations. here are many opportunities !or mista%es in the
choice o! capital source. Bowever# the right choice o! fnancing the business
can provide the capital needed while !reeing entrepreneurs !rom
unnecessary costs# ris%s# or the possibility o! losing control o! their own
business.
:ources o! Business Dinancing E$uity Dinancing
I 9ersonal savings
I Baving one or more partners
Borrowing !rom @ending )nstitutions
3onsiderations in applying !or a business loan
I ype o! loan
I 9urpose o! loan
I 3redit worthiness and integrity
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I 3apability
I .epayment period
I :ecurity
I +uarantors
I Dle7ibility o! pro2ect
I 3ustomer status with ban%s
+.;4 Selecting a Suita0le $ar/et
I A business is more li%ely to succeed i! it is based on a
product or service that enough customers will buy to generate
a pro!it. Dor a business to be success!ul and pro!itable there
must be an ade$uate mar%et !or its products or services.
I 8any small business !ailures can be traced to this problem o!
determining a suitable product and mar%et. he
enthusiasm o! the prospective entrepreneur can o!ten
cause him or her to overloo% this most basic business
concept" /he basic purpose o! a business is to satis!y customer
needs and wants1. Be!ore starting a business# it is essential to
determine whether a mar%et e7ists !or a speci!ic product or service.
I he purpose o! this topic is to discuss the elements o! a
mar%et and identi!y characteristics that should be %nown
about the customers and the competitors within the
mar%et. 8ar%et research will give the answer to what mar%et
share potential entrepreneurs can e7pect !or the products or
services they want to sell. his is particularly important when
they plan to start a business because all decisions concerning
the amount o! space needed !or the business# e$uipment#
materials or !inished goods to buy# the sta4 to hire all depend
on a realistic estimate o! the potential mar%et the business
intends to serve.
$ar/et In!r,atin
&) 5hat is a suitable mar%etP
he mar%et !or a business is all the people within a speci!ic
geographical area who need a speci!ic product or service and are
willing and able to buy it. Every business sells some type o!
product or service to people. 9otential customers can be
described as"
&. 9eople who need or want the product or service.
(. 9eople who are able to buy the product or service.
*. 9eople who are willing to buy the product or service.
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3ompetition must be considered. )! competitors are serving the
same mar%et# it must be decided i! the mar%et is large enough
to support another business. )t should also be determined
how the product or service is uni$ue and di!!erent !rom that
o! the competitors.
() 5hat should entrepreneurs %now about
potential customersP
a. Know the customers"
he mar%et can be segmented either by dividing it into
meaning!ul buyer groups or dividing it according to
characteristics such as age# se7# marital and !amily status#
employment# income and trends regarding any o! these
characteristics.
b. Know what di4erent customer groups wants"
By segmenting the mar%eting into groups# it is easier !or
entrepreneurs to determine what products or services each group
wants or needs.
c. Know where the customer buys"
Entrepreneurs need to !ind out where the customers in their
mar%et are presently buying# and determine what !actors will
cause them to switch and buy !rom their new businesses.
d. Know when the customer buys"
By %nowing when customers buy (daily# wee%ly# monthly#
yearly# seasonally)# entrepreneurs will be able to determine such
things as possible hours o! operation# when to advertise and
$uantity o! merchandise to have on hand at speci!ic times o! the
year. e. Know how the customer buys" Knowing how the
customer pays !or products and services can help the
entrepreneur to determine a credit policy as well as a pricing
policy !or the business.
+.?. Selecting a *usiness %catin
%cating t"e *usiness
:electing the business location is one o! several !actors which is vitally
important to the success or !ailure o! a small business. )n many instances#
the small business owner loo%s no !urther than the nearest vacancy sign !or
locating the business. o increase the chances o! success# it is important that
considerable thought and research be given to selecting a location. )t should
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be emphasized that although a good location may allow a mediocre business
to survive# a bad location may spell !ailure !or even the best planned
business.
Analysis o! the location should be a continuous process throughout the li!e o!
the business. :uch !actors as changing population# changes in customer
buying habits# new methods o! transportation and the direction o!
community growth can adversely a4ect the suitability o! the business
location. wo basic aspects o! selecting a location !or a business are"
(&) deciding on a particular community# and
(() selecting a particular site within that community.
I,prtance ! *usiness %catin
@ocation is more important !or some types o! businesses than !or others. he
right location is very important !or retail stores and service businesses.
3lothing stores# dry cleaning establishments and service stations all depend
on a great deal o! customer tra6c to survive. hese types o! businesses
must locate near their customers to succeed.
Dor other types o! retail and service businesses and most wholesale
businesses# location is not as important in attracting customers. .etail stores
that sell high-cost items such as !urniture and appliances draw customers to
them. :ervices such as accounting and ta7 frms and wholesale businesses
can be located /o4 the beaten path1 and still have high sales. 3ustomers will
spend time searching !or the product or service o4ered by these businesses.
8anu!acturing# construction and some o! the other services are not
interested in attracting customers on the basis o! the frmFs location. hese
types o! frms fnd customers through either personal selling or advertising.
he location o! these businesses may be selected on the basis o! costs#
environmental impact# or supply o! raw materials.
Economics# population and competition are important !actors to consider
when selecting a business location. hese !actors will also help in selecting a
promising city or town in which to locate the business.
3eneral Factrs in Selecting a *usiness %catin
E#ONO$I#S
A ma2or concern in choosing a community in which to initiate a small
business is the economic base o! the community. 5hy do people live in the
areaP 5hat is their standard o! livingP 5hy are other businesses located in
the areaP A study should be made o! the industries in the area. ?o LJ per
cent o! the people wor% in one industry or very !ew businesses# or does the
community contain a variety o! businessesP )s the industry healthy in the
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areaP )s the business activity in the community seasonalP Are businesses
moving in or moving out o! the communityP =ou will need to study the e4ect
the responses to these $uestions will have on your business.
Bow much people in an area earn determines the demand !or goods and
services.
Entrepreneurs should there!ore gather in!ormation about income in the area
they have selected. :pecifc $uestions include" 5hat is the average !amily
incomeP 5hat are the income levels (low# medium# high) in the areaP 5hat
are the employment0unemployment trendsP 'ther important economic
!actors might include good highways and access to railroads.
POPU%&TION
Entrepreneurs should identi!y the groups o! people who will be their
customers. Dor e7ample# i! you are interested in opening a music store# it
would be important to %now where the greatest population o! teenagers and
young adults is located because they buy the most music 3?s. 'ther
population !actors include" Bow stable is the areaP ?o people move in and
out regularlyP )s the population growing or decliningP )! the area is rapidly
growing# there will probably be a large number o! young !amilies. All these
!actors need to be considered when locating a business.
#O$PETITION
=ou must study your competitors by gathering in!ormation on their strengths
and wea%nesses. =ou should %now how many competitors you have and
where they are located. =ou should also fnd out how many businesses
similar to yours have opened or closed in the past two years. )ndirect
competition that provides similar %inds o! goods and services should also be
studied.
here are three !avourable conditions !or opening a new frm. Dirst# no
competitors are located in the area. :econd# competitorsF businesses are
poorly managed. hird# customer demand !or your product is growing.
Basic site !actors to be reviewed !or every type o! business include" lease-
purchase terms# competition# par%ing and costs o! operating at the location.
)n addition to these basic concerns# some specifc $uestions also need to be
answered that depend on whether you plan to open a retail establishment# a
manu!acturing frm# a wholesale business or a service business.
%catin 0. T.pes ! *usinesses
RET&I% FIR$S
9ar%ing !acilities and access to ma2or roads have become a prime problem
!or many retailers. .etailers located in shopping malls have less par%ing
problems. .etailers need to consider the types o! businesses that surround a
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site. Dor e7ample# studies have shown that clothing stores should not be
located ne7t to service stations.
he number o! persons wal%ing by a business location is also important to a
retailer. Dor e7ample# the retailer should as% /are the pedestrians who pass
this site on their way to public transportation or to the local theatreP1 hose
going to the theatre are not li%ely to stop and ma%e purchases.
WHO%ES&%E FIR$S
5holesale frms buy products !rom manu!acturers in large $uantities and
then sell their products to retailers in smaller $uantities. wo ma2or !actors
should be considered in selecting a wholesale site. 'ne ma2or !actor is a
good transportation service# including rail and road. Another ma2or !actor is
proper !acilities which include buildings# f7tures and public utilities. 5ithout
these !acilities# a wholesaler may not be able to maintain inventories large
enough to handle customer needs. 8ost cities have zoning laws that restrict
the location o! wholesale frms. hese laws need to be %nown. 5holesale
frms should also be located as close as possible to their customers.
SERVI#E FIR$S
Being close to a large shopping centre is usually considered ideal !or service
businesses. Bowever# it is not necessary !or a > repair shop# a dry cleanerFs#
a dentistFs# a shoe repair shop or a child-care !acility to be located in high-
rent locations. 3ustomers are willing to see% out and go !urther away to
obtain a good service. hese establishments can be located somewhat /out
o! the way1. But even among service frms there are important di4erences as
to which site is better. Dor e7ample# a dry cleanerFs located near a grocery
store and drugstore is usually a good choice. he same location may not be
suitable !or a dentist# who does not re$uire the tra6c movement and
convenient drop-o4 point that ma%es a dry cleanerFs success!ul.
$&NUF&#TURIN3 FIR$S
:ites that are suitable !or manu!acturing frms di4er !rom sites that are good
!or retailers# wholesalers and services frms. 5hen considering opening a
manu!acturing frm# chec% transportation !acilities and distance !rom raw
materials. <earness to customers# proper !acilities and zoning laws are other
important !actors. As you study the general and specifc !actors o! a business
location# %eep in mind !uture as well as present location needs.
I,prtance ! *usiness %catin
&. 5hy is location important to business successP
(. wo basic aspects o! selecting a location"
a. deciding on a particular community
b. deciding on a particular site within that community
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*. 5hy is location more important !or some businesses than !or other
businessesP
,. Dactors to consider when selecting a location"
a. economics (local economy)
b. population
c. competition
-. @ocation !actors based on type o! business
a. retail frms
b. wholesale frms
c. service frms
d. manu!acturing frms
Prce(ures !r Selecting a Specifc %catin
he !ollowing procedures are recommended when selecting a business
location"
&. 8a%e a list o! !actors you !eel are /necessary1 !or considering a business
location.
Also include a list o! !actors that would be /desirable1 but are not necessary.
(. Dind all the possible locations in a community that meet your list o!
!actors.
*. >isit the locations to get an idea o! their general appearance and eliminate
those locations that are not suitable !or your needs. .educe the number to (
or * locations that appear suitable.
,. >isit the locations again and use a chec%list to compare locations against
the !actors you have identifed. 3onsider the !actors that are critical to the
success o! your business.
-. .eturn to the locations at various times o! the day and evening to get a
better understanding o! the suitability o! each location.
M. 3onduct a tra6c count at each location. 3ount the number o! cars and
pedestrians that pass each location at various times to calculate the number
o! potential customers.
K. As% the opinion o! e7perienced consultants and business people in the
area to help you decide on one location.
L. Analyse all the !acts and opinions you have gathered be!ore ma%ing a fnal
decision regarding the location o! your business.
Specifc %catin Factrs
ra6c (potential customers) and accessibility are more important to some
businesses than others. hin% about how you will sell your products and
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services to your customersE what %ind o! business do they e7pect you to runP
5hat is really important to themP =ou will need to balance the advantages
and disadvantages o! the specifc sites !or your business.
:uppose you have identifed the best neighbourhoods or shopping areas !or
your business. <ow# you are ready to begin loo%ing at specifc locations
within these areas. =our frst concern will be !or tra6c patterns and
accessibility o! customers to your business. =ou must have a good customer
base in the areas youFve targetedE the tas% will then be to fnd the best
location within each area.
)n central and suburban business districts# small retail stores depend upon
tra6c generated by large stores. @arge stores and small stores ali%e must
attract business !rom the e7isting How o! tra6c. he same is true !or
restaurants and other businesses that depend on buyers who decide
impulsively on the basis o! convenience. )! you operate one o! these %inds o!
businesses# the more money you spend on getting a good location# the less
money you will have to spend on advertising. :tudy the How Know About
Business. o! tra6c# especially around shopping centres and large stores.
<ote one-way streets# street widths and par%ing lots. @oo% !or the best tra6c
situation !or your needs.
5hen you have narrowed down your site alternatives to a !ew# determine
how important tra6c will be to your business success. ?epending upon how
important you ran% tra6c# consider the !ollowing !actors. 9ublic
transportation may be important !or both customers and employees. 9ay
attention to locations in or near public transportation terminals.
9ar%ing availability will be important to drive-by tra6c. 3ost and access to a
par%ing lot are the most important considerations. .emember# it should be
easy !or the customer to stop and buy. @ocating your business on a busy
street will not help i! your customers canFt par% their car. ?istance !rom
residential areas or other business areas will be important !or some types o!
businesses. ra6c congestion can cause some people to actually avoid an
intersection or shopping centre. )! there is too much tra6c around the
business# it will hurt sales.
he side o! the street the business is located on may be important. .esearch
done !or petrol service station locations applies to many other businesses
that would sell to the customer driving by. 9eople want to buy certain things
on their way to or !rom their homes. Dor e7ample# newspapers and petrol are
bought on the way to wor%# while !ood is purchased and dry cleaning
collected on the way home. )! you sell better during the a!ternoon# cater to
the a!ternoon rush-hour on the side o! the street that carries the outbound
tra6c going home.
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he width o! the street may be important. :treet width indicates how well-
travelled the road is or will be. +enerally# the wider the road# the better the
location. A main thorough!are is a better location than a /!eeder1 street
because more potential customers per day travel on it. A wider road is easier
!or customers# too. .emember to thin% li%e a prospective customer in a hurry"
5ill there be tra6c 2ams because o! double-par%ed carsP
he part o! the bloc% in which you locate your business may be important. A
corner is more visible than a mid-bloc% location because it can more easily
be noticed !rom the crossroads. Bowever# rental rates are usually higher !or
corner locations.
<eighbors can be your greatest help i! you choose your location well.
<eighboring stores may do a lot o! advertising to increase sales. :ome
business owners may pool a portion o! their promotion money to !und
merchantFs associations that promote a distinct shopping district.
Selecting a Specifc %catin
- @ist /necessary1 and /desirable1 location !actors
- )denti!y potential sites that match location !actors
- >isit sites and select ( or * best sites
- 3ompare locations to /necessary1 and /desirable1 location !actors
- >isit sites at various times o! day and evening and conduct tra6c
count
- As% e7perienced business people and consultants to help
- Analyse all !acts and opinions
- 8a%e fnal decision on business location
+.A. %egal Fr,s ! *usiness O'ners"ip
.A)'<A@E"
A. 'ne o! the frst decisions a small business owner must ma%e is to
determine the legal !orm o! ownership o! the enterprise. Bowever# this initial
decision may not be fnal. <ot only may the business grow and alter its
operations over time# but fnancial and ta7 situations may a4ect the
advantages and disadvantages o! the various legal !orms o! ownership.
B. he vast ma2ority o! all legal business enterprises are organized in one o!
the !ollowing !our legal !orms" sole proprietorships# partnerships# limited
companies or cooperatives. @earners should have a basic %nowledge o! all
the legal !orms o! ownership available and be aware o! the relative
advantages and disadvantages o! each !orm o! ownership. 3ompetent legal
advice should be sought when deciding which legal !orm to adopt.
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3. his topic will identi!y the advantages and disadvantages o! each o! the
!our basic !orms o! legal ownership with regard to si7 areas o! concern to a
business"
&. legal costs and procedures necessary !or starting the business#
(. liability o! the owner(s)#
*. continuity o! the business#
,. management o! the business#
-. ac$uiring additional capital# and
M. ta7ation.
Ruestins #ncerning *usiness O'ners"ip
&. Bow many owners are there in a sole proprietorship# a partnership# a
limited company and a cooperativeP
A. he sole proprietorship has only one owner.
B. A partnership has two or more co-owners.
3. A limited company is an association o! stoc%holders or owners
chartered by the government. )t has the authority to transact business
in same manner as one person.
?. A cooperative is a group o! people operating a business through a
2ointly owned and democratically run organization.
(. 5hat are the legal costs and procedures !or starting all !our types o!
business ownershipP
&. Sle prprietrs"ip. he re$uirements are to determine (a) i! a licence
is re$uired !or the particular business# (b) i! a ta7 or licence !ee must be paid.
he sole proprietorship is the easiest business to start and the initial
costs are usually lower than those !or other legal !orms.
*. Partners"ip. )n addition to any necessary licences# it is recommended
that a partnership agreement# called the Articles o! 9artnership# be prepared
in writing by a competent attorney. he Articles o! 9artnership should contain
at least the !ollowing provisions"
I division o! proft or loss
I compensation to each partner
I distribution o! assets in the event o! dissolution
I duration o! the partnership
I duties o! each partner
#. %i,ite( c,pan.. )t is more di6cult to !orm a limited company than the
other two types o! business given above# and it is usually more costly. his
%ind o! business is usually in the best position to obtain additional capital.
)n addition to pledging corporate assets as collateral# a limited company may
sell additional stoc% in the company to raise !unds.
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D. #perati-e. he cost o! registering a cooperative is usually lower than
the cost or registering a limited company. A written cooperative agreement is
re$uired and must be fled with the appropriate government authorities.
)n some countries the cost o! registering a business is high and the
procedure is long. he costs and procedures di4er !rom country to country
*. 5hy consult a lawyer when starting a new businessP
All !orms o! legal ownership should be discussed with a competent attorney
be!ore any decision regarding the !orm to select is made. he attorney will
need to %now as much about the business and its owner(s) as possible#
including the personal fnancial position(s) o! the owner(s)# so that sound
recommendation can be made.
,. 5hat liability is involved in the !our types o! business ownershipP
A. :ole proprietorship. A sole proprietor is personally liable !or all the debts o!
the business. )! necessary# this liability includes all o! the proprietorFs
personal property and assets.
B. 9artnership. Each member o! a general partnership is !ully liable !or all the
debts owed by the business regardless o! their personal investment in the
business# and this liability includes all personal property and assets. Each
partner is also responsible and liable !or the acts o! the other partners with
regard to business obligations.
3. @imited company. he stoc%holders# or owners# o! a corporation are liable
only !or the amount corresponding to their investment. 5hile stoc%holders
may lose the money they have invested in the business# they cannot be
!orced to pay o4 company debts with additional money !rom their personal
!unds.
?. 3ooperative. Each member o! the cooperative is !ully liable !or the debts
o! the cooperative.
-. Bow does the legal ownership a4ect the continuity o! the businessP
A. :ole proprietorship. he business is terminated upon the death or
incapacity o! the owner.
B. 9artnership. he partnership is terminated upon the death# incapacity or
withdrawal o! any one o! the partners# unless the remaining business
partners buy the deceased# incapacitated or withdrawn partnerFs interest.
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3. @imited company. his %ind o! company has a separate and continuous li!e
o! its own# and does not dissolve i! a stoc%holder dies or the stoc% is sold to
another person.
?. 3ooperative. he cooperative has a li!e o! its own. & )nternational Dinance
3orporation# ?oing Business in (JJ,
K. Bow does the legal structure a4ect management o! the businessP
A. :ole proprietorship. he sole proprietor may operate the business in
any way he or she li%es# as long as the law is not bro%en. 5hen all
management decisions are made by one person# it can be a
disadvantage.
B. 9artnership. )n a general partnership# each partner typically has an e$ual
role in management with the various duties divided among them. heir
combined abilities and %nowledge may give the partnership an advantage
over the sole proprietorship regarding management. he division o!
management duties may# however# lead to disagreements.
3. @imited company. @egal procedures must be !ollowed strictly according to
company law. he o6cials o! the limited company must fle a special
document# called the Articles o! )ncorporation# with the government# pay
initial ta7es and fling !ees# and hold o6cial meetings to deal with specifc
details o! operation and organization.
?. 3ooperative. he management o! a cooperative is elected by the
members o! the cooperative.
K. Bow will the legal structure a4ect ta7esP
A. :ole proprietorship. 9ersonal income ta7 must be paid on all business
profts.
B. 9artnership. 9ersonal income ta7 must be paid by all partners on their
individual share o! the business profts.
3. @imited company. )t is ta7ed twice. Dirst there is ta7 on the amount o! the
business profts. hen the owners are also ta7ed on any dividends they may
receive.
?. 3ooperative. ?epending on government regulations# ta7es may be paid by
the cooperative.
Uuestions 3oncerning Business
'wnership
&. Bow many owners are there in a sole proprietorship# a partnership# a
limited company and a cooperativeP
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(. 5hat are the legal costs and procedures !or starting all !our types o!
business ownershipP
*. 5hy should a lawyer be consulted when starting a new businessP
,. 5hat liability is involved in the !our types o! business ownershipP
-. Bow does the legal ownership a4ect the continuity o! the businessP
M. Bow does the legal structure a4ect management o! the businessP
K. Bow will the legal structure a4ect ta7esP
L. Bow will the legal structure a4ect conditions o! employmentP
&(-antages an( Disa(-antages ! Di)erent Fr,s ! O'ners"ip
OWNERSHIP FOR$ &DV&NT&3ES DIS&DV&NT&3ES
:ole 9roprietorship
A?>A<A+E:
&. @ow costs to start
(. 8inimum regulations
*. ?irect control o! business
,. @ow wor%ing capital re$uirements
-. a7 advantages
M. 'wner receives all 9rofts
?):A?>A<A+E:
&. Anlimited liability
(. @ac% o! continuity
*. ?i6culty in raising capital
,. .esponsible !or all ?ecisions
9artnership
Advantages
&. Easy to !orm
(. @ow costs to start
*. Added capital sources
,. :hared management
-. 9ossible ta7 advantages
?isadvantages
&. Anlimited liability
(. @ac% o! continuity
*. :hared authority
,. ?i6culty in raising additional capital
-. ?i6culty in fnding suitable partners
@imited 3ompany
Advantages
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&. @imited liability
(. 8anagement can specialize
*. rans!erable ownership
,. 3ontinuous e7istence
-. @egal entity
M. 9otential ta7 advantages
K. Easier to raise capital
?isadvantages
&. 3losely regulated
(. 8ost e7pensive !orm to organize
*. 3harter restrictions
,. E7tensive record %eeping re$uired
-. ?ouble ta7ation (company and stoc%holders)
3ooperatives
&DV&NT&3ES
&. 8eans to empower poor
(. Roint sel!-help
*. 'rganizational structure helps all members
,. :hared ris%-ta%ing
-. Easier to raise capital
M. 3ombines individual :%ills
DIS&DV&NT&3ES
&. Bard to %eep $ualifed members
(. 8embers contributing to cooperative une$ual
*. :hared authority
,. +ender issue
1. Operating an Enterprise
1.1. Wa.s ! getting in t 0usiness
1.1.1. Starting a ne' 0usiness
8ost people who want to be entrepreneurs thin% that the best
approach is to start their own new business and not to buy one that
already e7ists. his approach gives the potential owner a great deal o!
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satis!action. )t also means ta%ing a relatively high ris% compared to
buying an established business.
:tarting a new business means allocating a great deal o! time to
planning and investigating the potential mar%et !or the products or
services to be sold by the new business.
1.1.2. *u.ing an e7isting 0usiness
)! someone has never owned a business# buying and operating an
e7isting business o4ers many advantages such as established
customers and business procedures# trained employees# inventory
and premises which are in place and a business which already has a
name in the mar%et.
here are many $uestions which the potential entrepreneur needs to
as% about any business which is !or sale"
I 5hy do ) want to buy this businessP
I 5hy does the owner want to sellP
I ?oes the business have a !uture where it is and the way it is
operatingP
I 5ill ) be happy operating this businessP
I ?o ) have the s%illsP
he $uestion o! price is a di6cult one. 3onsider what you are getting
!or the price you are paying.
I Are you getting land and buildingsP
I Are you buying the stoc%# !urniture and appliancesP
I Are you buying the name o! the business and the rights to use
that name !oreverP
I Are you paying !or the present owner o! the business not to set
up another business nearbyP
here are several ways o! putting a price on a business. By comparing
several similar businesses you will get a /!eel1 !or a reasonable price.
Bowever# no matter how much you pay# that amount is your
investment in the new business.
1.1.+. Franc"ising
Dranchising is a system where a !ranchiser has developed and
implemented a business that he o4ers !or replication to a !ranchisee. he
!ranchisee opens a business by using the business idea o! the !ranchiser
against a !ee. )n return# the !ranchisee gets training# the mar%eting
concept# the brand name and the product or service. Be also has the
guarantee that no other !ranchisee !rom the same !ranchiser will have
the right to do business in the same area.
All these elements are f7ed in a !ranchising contact that is binding !or
both parties. Dranchising lowers the ris% as the product is usually well
%nown in the mar%et. 'n the other hand it limits entrepreneurial
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decision-ma%ing and shrin%s the proft margin as a !ee or a percentage o!
the turnover has to be paid to the !ranchiser.
1.-. $anaging PEOP%EK S&%ES an( TI$E.
I. $anaging peple
Hiring an( Orienting Ne' E,pl.ees
&. T"e Hiring Prcess
Biring a new employee is as important to the entrepreneur as it is to the
person hired. )t can either be the beginning o! a mutually rewarding
relationship# or the beginning o! a long series o! mista%es.
wo o! the ma2or inHuences on high employee turnover are the recruiting
and selection procedures used. he way entrepreneurs advertise a
position# handle applications# conduct interviews# and select and
introduce a new wor%er to a 2ob are all elements in the e4ort to cut down
on employee turnover.
&. :ources o! 9otential Employees
I 5ithin the business
I 5ant advertisements
I Employment agencies
I Educational institutions
I Dormer employees
I 3urrent employees
(. :election 9rocedures
I Application !orm
I )nterview
I 3hec%ing o! re!erences
I esting applicantFs s%ills
:uccess!ul entrepreneurs hire sta4 on the basis o! their s%ills# motivation
and e7perience# not on the basis o! their se7# ethnic origin or disability.
*. Orientatin Prcess
As a general rule# on their frst day new employees should be shown
around the business. he new employee should be introduced to the rest
o! the employees# given an overall view o! the entire operation# and
shown e7actly how their 2obs ft into the total operation o! the business.
:uch small gestures ta%e little e4ort and will probably save both time
and money in the long run.
.emember# it is important to start the new employee o4 on the right
!oot. 9roper orientation will help a great deal in getting a more
productive# long-term employee.
&. Dour Basic .ules o! 'rientation
I 9repare the employee
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I 9resent the wor%
I ry the employee out under supervision
I Dollow-up
(. :i7 !actors in preparing !or the orientation o! a new employee
I Know the 2ob
I Bave a current employee serve as a mentor
I 9repare a simple 2ob brea%down
I :et a training timetable
I Arrange the wor% area
I Evaluate new employeeFs wor% on a daily basis
#. E,pl.ee #nsi(eratins
9ay 9lans. o employees# wages are an important part o! their 2obs. hey
e7pect their pay to reHect the s%ills and energy they put into a business. )!
entrepreneurs want to attract and %eep good wor%ers# they must ta%e into
consideration the rate paid by other frms !or a similar 2ob.
Fringe *enefts. '! all !ringe benefts# those !or sic% leave and holidays are
the most widely appreciated by employees. Entrepreneurs should have a set
policy regarding all !ringe benefts.
E,pl.ee Relatins. +ood pay and !ringe benefts arenFt all it ta%es to
ma%e employees happyE 2ob satis!action means much more to them.
Entrepreneurs have a responsibility to provide the best %ind o! physical
surroundings and to ma%e sure that there is always two-way communication
with the sta4.
Wr/ing #n(itins. he health# com!ort and sa!ety o! employees# as well
as decent wor%ing conditions# should be o! genuine concern to
entrepreneurs. A good environment can do much to encourage e6ciency and
good attitudes in addition to preventing accidents. he premises should have
good ventilation# su6cient heating and cooling# good lighting and proper
sanitation# and sa!ety !acilities. Baving a frst-aid %it and a doctorFs
telephone number are necessities in a health and sa!ety programme in any
business.
II. $anaging sales
he success o! a business depends on the art o! selling. )! entrepreneurs ta%e
advantage o! the opportunity to serve people# to satis!y their needs and to
solve their problems# there will be satisfed customers. :atisfed customers
continue doing business with an entrepreneur and recommend the products
and services to others.
<o matter what type o! business# the entrepreneur must !ocus not only on
producing the product or service# but on selling the product or service as
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well. Entrepreneurs are salespersons in the sense that they are always
selling their products0services to the public. hey must maintain their sales
image wherever they go and whatever they do in the community.
Selling ReFuires #,,unicatin
5hen selling# you communicate to prospective clients something about
yoursel! and the product or service you are selling. his process can be
viewed as a series o! steps# and each step involves a higher level o!
communication.
:tep &" approach the prospective customer and introduce yoursel! and
your company
:tep (" speci!y your reason !or approaching the prospective customer
:tep *" show or describe the product0service you are selling
:tep ," demonstrate how the product0service will beneft the
prospective customer
:tep -" negotiate terms and conditions o! the sale
:tep M" as% the prospective customer to ma%e a decision regarding the
purchase o! the product0service.
:tep K" once customers do start to buy your product or service#
develop strategies to help you to %eep your customers. 'ne
research study has indicated that it costs &J times as much to
attract a new customer than it does to %eep an old customer.
@i%e e4ective communication# selling is a two-way process. :elling is more o!
an art than a s%ill. =ou have to be good at as%ing $uestions and being an
active listener to understand customer needs and interests. =ou have to
adapt your message and communication style to the personality and buying
motives o! the prospective customer. hrough e4ective communication# you
build a relationship with the customer based on trust and confdenceE this
!orms the !oundation !or the present sale transaction and !or !uture sales as
well.
#"aracteristics ! Success!ul Salespersns
&. .esults 'riented
(. Bighly 8otivated
*. :el!-3onfdent
,. 9ro!essional Appearance
-. Bonest
M. ?ependable
K. Knowledge o! 9roducts
L. +ood @istener
S. Enthusiastic
&J. 9leasing 9ersonality
&&. 3ommunicator
&(. :ociable
&*. 3ourteous
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III. $anaging ti,e
$anaging Ti,e
o be success!ul# all entrepreneurs must be good managers. Bowever# most
managers are not entrepreneurial. 9eople are the most important resource in
a business. )t is important !or entrepreneurs to hire the best $ualifed people.
All employees are really members o! a team# and !or the business to succeed
the team members must cooperate with each other in their wor%.
)n addition to managing people# managing money is also a critical !unction in
operating a business. Entrepreneurs need to balance the fnancial needs o!
operating a business with the fnancial resources within the business. 8oney
coming into the business through sales# and money going out o! the
business# re$uires the entrepreneur to %eep accurate written fnancial
records. Because entrepreneurs are generally very optimistic and aggressive
people# accurate fnancial records will provide a more realistic fnancial
picture o! the business.
8any entrepreneurs use cell phones to help them not only to manage their
business activities# but also to manage their home responsibilities as well.
8anaging sales is essential. Anless sales are at a level that covers all
business e7penses and provides a proft# the business cannot succeed.
Business success is ultimately determined by the level o! sales.
Entrepreneurs must be able to manage their time i! they are to be
success!ul. )n many instances# they are multi-tas%ing by being involved in
several tas%s at one time. /)! you want to have something done# have a busy
person do the tas%.1 )n most instances# this $uote is true. )t is also true that
entrepreneurs are busy people# but they have the s%ill o! managing their
time and resources to accomplish their business goals.
Ti,e $anage,ent Tec"niFues
)denti!y specifc goals with deadlines
Be motivated
Ase telephone0cell phone
a%e notes
?o only essential activities
5or% in bloc%s o! time and $uestion your use o! time.
As% $uestions
Be action-oriented
Be reHective
9lan !or each dayFs wor%
@earn !rom e7perience
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Uuestion your use o! time
1.2. Selecting Suppliers.
Ding *usiness 'it" Suppliers
Entrepreneurs should !ollow specifc procedures when purchasing goods#
materials and e$uipment !rom suppliers.
Step 14 Deter,ine .ur 0usiness nee(s. By conducting mar%et
surveys you will %now who your customers are and what products they
want. hese customer needs will determine"
I 8aterials and e$uipment your business will need to produce
goods !or sale to customers.
I fnished goods to buy !rom suppliers !or resale to customers.
I Amount o! each product to buy as inventory.
I 9rice to pay !or $uantities o! goods purchased !rom suppliers.
I :pecifc times goods and materials need to be received !rom
suppliers.
Step 24 I(enti!.ing ptential suppliers. ?etermine which suppliers
sell the goods# materials or e$uipment you need by"
I As%ing people who wor% with you# your business !riends and
others. ry to fnd out where your competitors buy.
I 3ontacting organizations that support small businesses# !or
e7ample# the local chamber o! commerce may be able to identi!y
honest and reliable suppliers.
I .eviewing newspapers# magazines# trade 2ournals and
businesses in the telephone directory !or names and addresses
o! potential suppliers.
I ?etermining what goods# materials or e$uipment each supplier
has to sell and the prices# discounts# credit and delivery service
they provide.
I ?etermining with the help o! other entrepreneurs the reliability
o! each supplier.
Dor e7ample" ?oes the supplier usually deliver on timeP ?oes the
supplier accept returned goods or materialsP Bow responsible is
the supplier !or the $uality o! goods or materialsP )s the supplier
honest in conducting businessP
Step +4 #ntact a supplier either by visiting the supplierFs o6ce
personally# telephoning the supplier# or writing a letter to the supplier.
Each potential supplier should provide written in!ormation to you
regarding the %inds o! goods# materials or e$uipment each supplier can
provide. :pecifc $uestions include"
?oes the supplier have what you need in the $ualities and $uantities you
needP
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I 5hat is the smallest $uantity you can purchaseP
I ?o you need to pay cash or can you get creditP
I Bow much credit can you get and how soon do you need to pay it
bac%P
I 3an you get discounts i! you buy large $uantities or pay $uic%lyP
I Bow much discount can you getP
I 5ill the supplier deliver to your businessP
I Bow soon a!ter the order is placed will they deliverP
I ?o you have to pay !or transport or is delivery !reeP
<ote" 8a%e sure that the supplier provides a response to your $uestions in
writing. As% !or a written $uotation. )! there are any disagreements between
you and your suppliers at a later date# a written $uotation ma%es them
easier to resolve.
Step 14 Select t"e 0est suppliers. 3ompare the $uotations received
!rom various suppliers to determine what each o! the di4erent suppliers
can o4er. A $uotation is a written response to your en$uiry to the
supplier. )n a $uotation# the supplier provides you with detailed
in!ormation about the goods# materials or e$uipment# prices# payment#
delivery and any other conditions related to your order.
he entrepreneur must decide what conditions and priorities are most
important in selecting suppliers. )s it credit# reliability# prices# discounts
or other considerations.
5hen a decision has been made regarding the suppliers who best match
the needs o! the business"
I try to negotiate with the suppliers to receive even better conditions.
I choose the best suppliers !or your business.
Step :4 Or(er g(sK 0ut ,a/e sure .ur r(er is in 'riting.
hin% care!ully about the $uantities you need"
I 5hat is the smallest $uantity you can orderP
I Bow much is there in each bul% pac%ageP
I 3an you order less than one bul% pac%ageP
Step ;4 #"ec/ t"e g(s as sn as t"e. are recei-e(. he
supplier usually sends a delivery note with the goods or materials. he
delivery note lists details o! the goods. he supplier will want you to sign
the delivery note as proo! that you have received the goods listed.
:ome suppliers send an invoice instead o! a delivery note. 3hec% the
goods against the invoice. )! you yoursel! collect the goods or materials
!rom the supplier# the type and $uality should be chec%ed be!ore ta%ing
them away.
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3hec% the delivery note or invoice against your order. 3hec% that
everything ordered has been received on time. )! there is something
wrong# noti!y the supplier immediately. ?o not sign the delivery note or
pay !or the goods until the problem has been resolved.
Step ?4 #"ec/ t"e invoice because the invoice lists what you have
bought and when and how the supplier is to be paid. 8a%e sure that the
invoice is correct. )! you are buying on credit# compare the invoice with
the delivery note. he list o! goods or materials must be the same on
both. 8a%e sure that you have received everything you are as%ed to pay
!or and that the prices and totals are correct. )! the invoice is not correct#
noti!y the supplier immediately and determine the best way to solve the
problem.
Step A4 $a/e t"e pa.,ent t t"e supplier 0. cas" r c"ec/. 8a%e
sure to get a receipt so there is proo! o! payment.
1.1. Using tec"nlg. in S,all *usiness
)ntroducing new technology# such as a computer or cell phone# into a
business helps to improve productivity and product innovation. )n small
businesses# simple technological innovations help to improve product $uality
and product design# as well as reducing production costs.
Entrepreneurs should be made aware o! new technologies by attending trade
e7hibitions# contacting small business development agencies# and visiting
other areas o! their own country as well as neighboring countries to gain
ideas regarding technologies which would be appropriate to their local
conditions. )n some countries# government agencies# business associations
or <+'s o4er specialized services to women entrepreneurs to overcome
di6culties in accessing new technology# since this has been identifed as one
o! the ma2or barriers to women entrepreneurship.
:ponsorships and subsidies to encourage women entrepreneursF
participation to trade !airs are sometimes available through chambers o!
commerce and business development programs.
Tec"nlg. !r S,all Enterprises
echnology is constantly changing the demands o! consumers. Businesses
use new technologies to produce new products and services. Entrepreneurs
should realize that new technological developments such as the internet and
cell phones increase the e7change o! in!ormation and may have an e4ect on
the operations o! their business.
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Entrepreneurs may not be aware o! the nature and e4ects o! all new
technologies# yet# they must try to determine technical developments which
are li%ely to have the greatest impact on their business operations.
:mall businesses are He7ible and can innovate and introduce new products.
3onversely# small businesses may not have the e7pertise# time or capital to
develop and mar%et a new product. A small business must be realistic in
2udging" the demand !or a new product# the fnancial aspects o! developing a
new mar%et and the time re$uired to introduce the new technology.
hrough planning and !orecasting# it may be possible to predict some
technological changes that might a4ect sales o! current products and the
potential !or developing new products. 9urchasing new technologies# such as
a computer# implies a long-term commitment o! resources# which most small
businesses do not have. Because o! day-to-day operational problems#
entrepreneurs have little time to do long-range planning# even though new
technologies may have a great impact on their businesses in the !uture.
:maller companies must develop products and mar%ets where they have a
chance to succeed and be competitive. Because o! shortage o! capital
resources# entrepreneurs must be able to react $uic%ly to changes in the
mar%et and be concerned with the !uture needs o! their customers.
#"aracteristics ! &pprpriate Tec"nlgies
he appropriateness o! technology !or use in a small business is determined
by a number o! characteristics. Dor the !ollowing seven characteristics#
e7plain how the purchase o! a cell phone will increase the e6ciency and
e4ectiveness o! an accounting frm that serves MJ local businesses.
1. SI$P%E" Dor technology to be considered appropriate# it must be simple
to operate. he user o! such technology must be able to apply it without
encountering problems.
(. EFFE#TIVENESS4 E4ectiveness o! technology is 2udged by how well it fts
in with the ob2ectives o! the user.
+. &V&I%&*I%ITN4 :ome technology may be appropriate !or certain purposes
but not available locally. )n!ormation technology# !or e7ample# may be the
most appropriate !or certain tas%s# but it may not be readily available locally.
1. F%ESI*I%ITN4 As time changes so do the re$uirements o! technology.
Appropriate technology must be He7ible enough to adapt to changing times
in the !uture.
:. DUR&*%E4 echnology that is durable re$uires less maintenance and
repairs.
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;. EFFI#IENT4 echnology should be e6cient in its utilization o! local
resources.
?. #OST EFFE#TIVE4 he cost o! technology should be 2ustifed by the
benefts achieved. he overall benefts should be greater than the cost o! the
technology.
1.3. Gn'ing t"e #sts ! an Enterprise
Direct an( In(irect #sts
Every business generates costs even i! there is no ongoing production#
service or trading activities. o understand this# it is essential to %now
that there are direct costs and indirect costs.
?irect costs are those that only occur when an enterprise is
manu!acturing goods or producing a service or buying goods to resell.
hese costs depend directly on the number o! products# services or
goods produced.
?irect costs are composed o! two cost sub-groups"
Direct ,aterial csts4
E7penditures !or all items that become part o! a product or are used to
produce a service or are bought !or resale enter into the category o!
direct material costs.
3osts lin%ed to the ac$uisition o! raw materials such as transport !rom
the supplier to the enterprise are included in the direct costs.
Direct la0ur csts4
All wages !or wor%ers and helpers that are directly involved in the
production or the delivery o! services. his also includes costs !or social
security.
:ta4 wages !or the retailer and wholesaler are not considered as direct
costs because one person generally sells many di4erent items.
)ndirect costs are all other costs generated !rom business activities that
are not direct costs.
hese are costs that cannot directly be attributed to a specifc product or
service# !or e7ample rent !or the o6ce premises# salary !or the
boo%%eeper# interest on the ban% loan# telephone costs# fre and car
insurance# etc.
)n wholesale or retail business all sta4 costs are indirect costs. o be able to
calculate the manu!acturing costs o! one single product or one single service#
the indirect costs have to be attributed proportionally. )! the business
produces a single product or service# or i! the products are $uite similar# !or
e7ample chairs# beds# trousers or shirts# the indirect costs are divided by the
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number o! products and this proportion is added to the direct costs to
calculate the total cost per unit o! an item. )n a service business the indirect
costs are generally calculated on the basis o! wor%ing hours and added to
the time spent in delivering the service.
)ndirect costs are also called overhead costs.
o ma%e the distinction between direct costs and indirect costs is not always
easy# !or e7ample the glue used in !urniture ma%ing. he $uantity used !or
one chair is so small that it represents only a very small portion o! the price
o! the glue. he e7penditure !or a pot o! glue is there!ore considered as an
indirect cost. Also# i! a helper serves several wor%ers# his0her salary cannot
be attributed to one single product. he salary will there!ore be counted as
an indirect cost.
otal cost o! a product or service"
:um o! ?irect 8aterial 3osts
[ :um o! ?irect @abour 3osts
[ 9roportion o! indirect costs
4 Tota( cost per product or ser/ice
1.5. $anaging $ne..
Business money and private money should always be %ept separate.
5here the business money and the household money is %ept together#
money will lea% and be spent !or private e7penses. At the end o! the
month# the entrepreneurs will not be able to calculate whether the
business made a proft or not.
>arious people will want to %now about the fnancial conditions o! a
business. Ban%ers may be interested because you have applied !or a
fnancial loan. a7 collectors are interested in your business condition# as
are partners# relatives and others who may have lent you money.
:uppliers will also want to %now things about the fnances o! your frm#
because when they ship you merchandise !or which you have not yet
paid# it is as though they are e7tending a !orm o! credit.
An e6cient record %eeping system is re$uired !or any business. All
business transactions should be !ully recorded on paper. 8any small
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businesses !ail because o! inade$uate record %eeping. he business may
have an e7cellent product# a high sales volume and a good proft margin.
Bowever# without proper records the business is inviting disaster. oo
o!ten# small business owners have the attitude that %eeping records is
not necessary in a small business. he person who owns a small
business is con!ronted with problems and decisions every day. :ound
decisions re$uire a anger who is in!ormed about all aspects o! the
business.
9roper record %eeping system can provide the fnancial in!ormation
necessary to solve management problems more easily and to ma%e
sound business decisions what %inds o! records should a small business
%eepP
&. Pa.rll. he owner must %now the amount paid to himsel! or hersel!
and to employees. his in!ormation alone re$uires a mini-accounting
system to %eep
things accurate and in order.
*. #as" *alance. he owner must %now how much cash is available at
any given time to determine i! bills can be paid. 8oney comes into and
goes out o! the frm every day# but without records entrepreneurs would
not %now what they can a4ord.
#. &ccunts Recei-a0le. Ander certain conditions# the owner e7tends
credit to some customers. he money owed is called accounts
receivable. hey are important records. 5ithout them# how would the
owner %now when to bill and !or how muchP 5hen to discontinue creditP
5hen to ma%e aggressive e4orts to collect overdue billsP 5hen to
charge interest# i! anyP
D. &ccunts Pa.a0le. he amount o! money owed by a business to
others (such as suppliers) is called accounts payable. hese bills need to
be paid on time !or two reasons"
(&) sometimes by paying a bill on time you will receive a cash discount#
and
(() you must maintain a good reputation in relation to those with whom
you do business. 5ithout accurate records you may ma%e mista%es.
E. In-entr. Recr(s. Even in a small retail business# an owner must
have control o! inventory. 5hat products are sellingP 5hat products
arenFt movingP
)s there a good supply on handP Entrepreneurs can %eep some o! this
in!ormation in their head# but not enough to do the %ind o! 2ob necessary
to ma%e a proft.
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F. 3-ern,ent ReFuire,ents. he owner must fle fnancial
statements !or ta7 purposes. a7es are calculated on the proft a
business earns. Even a small retail business must fle certain reports.
3. Financial State,ent. At least once a year the owner should have a
comprehensive fnancial statement on the business prepared G this is
similar to an individual having an annual medical chec%-up. Bow well did
the business do in terms o! total salesP 5hat were its e7pensesP 5hat
are its profts be!ore and a!ter ta7esP 5hat can the owner do to improve
things ne7t yearP 5hen borrowing money# entrepreneurs must present
such a statement to a ban%erE i! they want to sell their business# they
must show fnancial statements to prospective buyers.
1.*. Preparing Si,ple Financial State,ent.
Dinancial statements help to determine the fnancial per!ormance o! a
particular business. By using fnancial statements# the business can
compare current per!ormance with per!ormance in previous years. hese
comparisons are essential !or planning the !uture and also highlighting
the strengths and wea%nesses o! the business operation.
Anderstanding fnancial statements is important because they are the
primary means o! determining the fnancial health o! the business.
Entrepreneurs need to be able to"
I prepare simple fnancial statements
I interpret and analyze the in!ormation contained in the statements
I identi!y strengths and wea%nesses in the fnancial condition o! the
business based on the statements
I ma%e changes in business operations to improve the fnancial
conditions o! the business
Prft an( %ss State,ent
A proft and loss statement helps to determine whether a business is
operating at a
proft or a loss !or a given time period o! one month to one year.
he more !re$uently you calculate your profts and losses# the sooner you will
%now the fnancial position o! the business.
here are fve specifc steps to calculating the proft and loss statements"
1. Sales4 including sales !or cash and credit#
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2. #st ! 3(s Sl(4 this is the price paid by the business !or
merchandise soldE it can be computed by adding the value o! the goods
purchased during the period to the initial stoc% (the initial stoc% fgure can be
obtained !rom the previous income statement)# and then subtracting the
value o! the stoc% on hand at the end o! the period.
+. 3rss Prft4 calculated by subtracting the cost o! goods sold !rom sales
1. E7penses4 this includes labour costs and other costs o! operating the
business
:. Net Prft4 this is the amount remaining when the e7penses are
deducted !rom the gross proft.
T"e *alance S"eet
he balance sheet is a fnancial statement which indicates what you own and
what you owe on any given day in the li!e o! a business. he fnancial fgures
on the balance sheet change !rom day to day because money is always
coming in and going out o! the business. A primary reason !or preparing a
balance sheet is to determine i! the business is ma%ing a proft or a loss.
he !ormula used to prepare a balance sheet is"
Assets \ @iabilities [ <et 5orth
&ssets4 hese include everything a business owns# such as cash#
e$uipment# buildings and inventory.
I 3urrent assets include cash and anything that can be converted into cash
within twelve
months. 3urrent assets include cash# ban% accounts# accounts receivable
(what people
owe you)# and inventory.
I Di7ed assets are things that cannot be changed into cash easily (within
twelve
months). hey are items that the business ac$uired !or long-term use. Di7ed
assets include land# buildings# machinery# e$uipment# and vehicles.
%ia0ilities4
hese include anything that the business owes. @iabilities might include
loans# credit
notes# ta7es and mortgages.
I 3urrent liabilities" a current liability is anything you owe that has to be paid
by using a current asset. 3urrent liabilities are usually items to be paid within
twelve months# including ta7es# loans and bills due to creditors.
I @ong-term liabilities" any debt that cannot be paid within twelve months#
such
as a mortgage.
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Net Wrt"4
his is what is actually owned by the business a!ter subtracting liabilities. )t
represents the initial investment o! the owners and retained earnings.

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