Debre-Markos University

College of Technology
Mechanical Engineering Department

lecture note on Entrepreneurship for Engineers

Contents
Part
Part
Part
Part
Part
Part

1
2
3
4
5
6

Introduction to

Entrepreneurship
Choosing The Legal Form Of an

Ownership
Setting a Business enterprise
Marketing in Business enterprises
Financing and accounting in
business
Risk and insurance of Business
enterprises

Chapter one
Entrepreneurship

Entrepreneur
Entrepreneurship

Meaning of the terms Entrepreneur,

Entrepreneurship, Owner-Manager
What is Entrepreneur?
Entrepreneurs are action-oriented, highly
motivated individuals who take risks to
achieve goals.
Entrepreneurs are people who have the
ability
to see and evaluate business opportunities,
to gather the necessary resources to take

advantage of them; and

to initiate appropriate action to ensure success.

Economists may view entrepreneurs as

those who bring resources together in

unusual combinations to generate profits.
Psychologists tend to view entrepreneurs in
behavioral terms as those achievementoriented individuals driven to seek challenges
and new accomplishments.
Peter Drucker states, as Entrepreneur is
someone who always searches for change
responds to it, and exploits it as an
opportunity.
Example: It is the entrepreneur who only
knows

What is Entrepreneurship?

Entrepreneurship is the dynamic process of

creating incremental wealth. This wealth is
created by individuals who assume the major
risks in terms of equity, time and /or career
commitments of providing value for some
product or service. The product or service itself
may or may not be new or unique but value
must somehow be infused by the entrepreneur
by securing and allocating the necessary skills
and resources
Robert Ronstadt
Entrepreneurship is very rarely a get rich-quick

What Is An Entrepreneur
& Entrepreneurship ?
ENTREPRENEUR
A vision-driven individual who assumes
significant personal and financial risk to
start or expand a business.

ENTREPRENEURSHIP
The pursuit of opportunity through
innovation, creativity and hard work
without regard for
the resources currently controlled.

The Entrepreneurial Process

It is opportunity/market driven
It is driven by a lead entrepreneur

and an entrepreneurial team

It is resource parsimonious and creative
It depends on the fit and balance among
these
It is integrated and holistic

The entrepreneur versus the owner

manager (similarities and differences)
Entrepreneur
a.Entrepreneurial function is the
organization of production:
Entrepreneurship is an economic concept.

Economics describes four factors of

production, namely, land, labor, capital and
entrepreneurial ability (organizational
skill).

b. Decision-making and calculated risk

bearing:
c. An entrepreneur has an all-round
personality:
d. High levels of achievement

Owner Manager
They may or may not be entrepreneurs.
They own and manage a small enterprise, in a

way, which fits with their personal

motivations.
They are more intent on survival than seeking
innovative change and growth.
1. Limited scope for innovativeness, creativity and

imagination
2. Managerial jobs are transferable

-As a manager in the business

organization, his job is transferable from office
to office, from one unit and location to another
location
3. Managers do not bear-risk

Characteristics of Entrepreneurs
1. Need for Achievement:- vision

2. Willingness to take risks:-financial, careers,

family ,
3. Self-Confidence:- internal and external locus of
control
4. Innovation:-. The entrepreneurial manger is constantly
looking for innovations, not by waiting for a flash of
inspirations, but through an organized and continuous
search for new ideas
5. Total Commitment

6. All-rounders
7. A need to seek refuge:- escape from

Other types of refugees mentioned are the

following:
1.The parental (paternal) refugee
Who leaves a family business to show the parent that
I can do it alone.
2.The feminist refugee
Who experiences discrimination and elects to start a
firm in which she can operate independently male
chauvinist.
3.The housewife refugee
Who starts her own business after her family is
grown or at some other point when she can free
herself from household responsibilities.
4.The educational refugee

Motivation for starting a

business?

Motivation for starting a business

The reason for small firm formation can be divided
between pull and push influences.

I.Pull Influence
Some individuals are attracted towards small

business ownership by positive motive such

as a specific idea which they are convinced
will work. Pull motives include:

a. Desire for independence

b. Desire to exploit an opportunity
c. Turning a hobby or previous work experience in
to a business
d. Financial Incentive
The promise of long-term financial

Push Independence
Many people are pushed into founding a new

enterprise by variety of factors including:

1.Redundancy==>Being without a job (idleness)
2.Unemployment (or threat of)
3.Disagreement with previous
employer==>Uncomfortable relation at work has
also pushed new entrants into small business.
The dividing line between those pulled and

those pushed is often blurred.

Outcomes of Entrepreneurship
Economic growth
New industry formation
Job creation

Success factors for entrepreneurs

Most new ventures succeed because their founders are capable
individuals.

1.The entrepreneurial team

2.Incremental growth of product or
services

Weakness of entrepreneurship
a. Limited resource:- entrepreneurship
mostly starts from small investment or
contribution of owners are more than one
individual
b. Lack of experience:- most of
entrepreneurs have no experience and this
may lead to in efficiency
c. Disagreement between member: if the
owner of entrepreneur is more than one
person, disagreement between them can be
created. This disagreement can limit the
operation of the business.

e. Risk:- starting or buying a new business

involves risk and the higher rewards the
greater the risk entrepreneurs usually face.
This is why entrepreneurs tend to have
evaluate risk very carefully
f. Lower quality of life until the business
gets established:- the long hour and hard
work needed to launch a business can take
their tall in the rest of the entrepreneurs life
g. Complete responsibility:- it is great to be the
boss but many entrepreneurs find they must
make decision on issues about which they
are not knowledgeable. When there is no one

Elements involved in
Entrepreneur
1.RISK:- Simply stated risk is a
condition in which there is a
possibility of an adverse deviation
from a desired outcome that is
expected or hoped from applied to a
business risk translates in to the
possibility of losses associated with
the assets and the earning potential
of the firm.

Business risks can be classified in to two

broad category market risk and pure risk.
Entrepreneurs face a number of different
types of risk. These can be grouped in to
basic areas.
a. Political risk:b. Business risk:c. Economic risk:d. property risk
e. Personal risk

2.Information
Information gives the following importance to
the businessmens
To know the position of their competitors
that is their strength and weaknesses,
business strategy they use and their long
term plan.
To know threats and opportunity in doing
business
Helps to design long term objectives and
goals indicate capital requirement (labor,
capital and machinery)

Sources of information
Information are obtained from two main
methods of data collection. That is primary data
collection and secondary data collection
1.Collection of primary data:
Observation method
Interview method
Through questioner
Other methods which includes warranty

cards, consumer panels, etc

2. Collection of secondary data:-Secondary

data are available in
Various publication of the central state and

local government
Various publications of foreign government
or international bodies and their subsidiary
organization.
Technical and trade journals
Books, magazines and newspapers
Reports
Public records and statistics, historical
documents.

By way of caution, the entrepreneur before

using secondary data must see that the
process following characteristics
1.Reliability of data
a. Who collected the data?
b. What were the sources of data?
c. Were they collected by using proper
methods?
d. At what time they collected. Etc.

2.Suitability of data:- the data that are

suitable for one enquiry may not be suitable
for another enquiry, then the researcher has
to check the suitability of the data properly.

Kinds of Entrepreneurship
1.Women Entrepreneurs.
2.Founders and other Entrepreneurs.
a. Founding Entrepreneurs /Founders/
b.General mangers and
c.Franchisees

3.High-Growth and low-Growth Firms

a.Marginal Firms
b.Attractive Small Companies and
c.High potential ventures.
Assignment One: What is franchise & franchisee
in business? [max 1page]

Starting Technology based

new venture
Introduction
The innovative capacity of an entrepreneur and
more accurately, of companies operating in that
field, is a key determinant of its capability to
enhance the economic development and to
upgrade the standard of living of a country. It is
widely accepted that one of the indicators of this
innovative capacity is the rate of creation of New
Technology-Based firms (NTBF).
The nurturing of small firm formation and growth
has become increasingly important to the health
of developed economies in general, and to the
creation of new innovative industrial sectors in

Contd
Technology incubators, which play a role in

accelerating the commercialization of R&D

outputs and the transfer of technology, have
contributed to startups of high technology-based
enterprises in the newly industrializing
economies of developing and developed
economies of the world.
Strengthening and promoting technology based
ventures through incubation programmes for new
technology based enterprises is necessary for
them to survive in a competitive society.

How to form and develop Technology based

ventures?

Government policies:
Credit programmes with State-subsidized rates
Share programmes by Government venture-capital

companies
Grants by the Government, especially for creating jobs
and for research
Security programmes by the Government for taking over
part of the risk of the credit institutions for enterprises
Advisory services.

Other support activities for enterprises with

both public and private sector involvement,

Contd
Technical consulting services: More

specialized services are provided such as

networking assistance between enterprises
and science and technology organizations,
technology transfer, the exchange of similar
experiences and the identification of
potential for cooperation
Financing support activities: Offer
optimal conditions to enterprises, especially
SMEs, in terms of rent and costs of spaces,
infrastructure and services. Offer also
assistance with accessing and using financial
sources such as corporate financing, business
angels, venture capital, and so forth;
Intellectual property assistance:
Assistance with developing and patenting
new and improved technology, including

Factors contributing to the Success of High

Technology based Enterprises

The main catalytic factors for the success of

high technology-based enterprises are :
national policies,
research and development institutions
technological entrepreneur development
innovative finance support systems &
protecting intellectual property
science and technology parks
promoting and developing strategic business
alliances and networking
standardization, quality control and
marketing.

Technology transfer for business

development
Technology transfer is the process by

which existing knowledge, facilities or

capabilities are utilized and marketed to
fulfill public and private needs.
It is the process by which basic science
research and fundamental discoveries are
developed into practical and commercially
relevant applications and products.
Technology transfer processes constitutes
technology transfer, technology promotion,
technology deployment, technology
innovation, technology development,
technology research, technology

Drive for acquiring new

technology
Cost: Technology can cut costs in many ways:
reducing material, labor or distribution costs.
Example: material costs can be reduced by
replacing lower cost material or by reducing the
material required to make a product.
Speed of delivery: The key competitive priority

may be the speed of delivery, as measured by lead

time required to deliver a product. Example,
Automated guidance vehicle(AGV), Electronic Data
Interchange(EDI)
Quality: Technologies help to improve the quality and
reduce the production costs.

Flexibility and customization: The global market

place of 1990s is characterized by short product lifecycles,
increased product veriety, and extensive customization. To
retain and increase market share in such competitive

The Entrepreneurship
Process

Entrepreneurship and Technological

Change

New Industry Formation &

technology
New industries are born when technological

change produces a new opportunity that an

enterprising entrepreneur seizes.
Disruptive or metamorphic technologies that
destroy previous technologies and create new
industries display a different pattern of
behavior.
The pattern of growth, shakeout, stabilization,
and decline of industry can be interrupted at
any time by the entry of another disruptive
technology.
Reading assignment
*Steps in Technology Transfer

In The Beginning..
The World was round..

And Now.?

Companies worldwide are finding they must either convincingly justify their
prices or differentiate themselves with some kind of perceived recognizable
value.

Technology is always evolving, and

companies, not just search companies,
cant be afraid to take advantage of
change.-Eric Schimdt

The use of technology as an integral

and key element in the transformation
of goods or services. Randall Stross

Definition
Technopreneurshipis the Result of uniting

Technology with Entrepreneurship

This is not just the effect of technology on

businesses but rather the process where

progression in the lives of the people happens.
It is the process of using the developments
brought about by specialized knowledge to come
up with innovations in all the aspects of human
life with the aid of a creative and skillful mind.
Birth of this field provides every entrepreneur a
challenge of exploring an untraveled path
towards greater success.

Technopreneurshipcan be
defined as..
Integration of Technology, Innovation

and Entrepreneurship
Act of turning something into a
resource of high value by converting
good ideas into business ventures that
relies heavily on the application of
human knowledge for practical
purposes.
Entrepreneurship in the field of
technology.
Firms in which technology plays a
critical role in their operations.

Definition Continues.
Application of the newest inventions

and advancements in coming out with

new and innovative products through
the process of dissemination.
Manufacturing of hi-tech products or
making use of hi technology to deliver
product to consumers.
Exhaustive use of and Exploitation of
technology in making profit.

Some Thoughts from Definition- The Meruvian

Roadmap

Who Has Been?

Steve Jobs

Bill Gates

Who has Been..?

Mark Zuckerberg

Sergey Brin and

Larry Page

Key Ideas

Discovering Gaps

Seeking and Creating

Opportunities
What do you See?
Problem or a

Challenge?

Always Distinguish

Between Risk and

Uncertainty
Uncertainty is an

opportunity for
Innovation

Opportunities

Abound, See or
Create them

Knowing and Leveraging your

Strengths
Areas of Expertize
What comes to you

Naturally
Areas you can
Leverage in a
Synergy
Skills, Knowledge,
Proven Abilities

Defining and Assembling Your

Audience
Define your Market
Segment your

Audience
Assemble the
Audience and
Target the Share
of Mind
Create Top of
Mind Awareness

Developing a Viable Business

Model

Monetizing your Creation

Revenue

Models
Subscription
Advertising
Outright Sales
Sales and

Service

Various Possible Funding

Models

Final Thoughts

If you really want it, youll find a way If

you dont, youll find an excuse!
- Jim Rohn
If I had asked people what they
wanted, they would have said faster
horses.
-Henry Ford

Part two: Choosing The Legal

Form
Of
an
Ownership
2.1 Forms of Ownership and legal
requirement
2.2 Advantage and disadvantage for
each types of ownership

Forms of ownership and legal

requirements
Those

forms have been modified over the

course of time to keep pace with business
needs and the custom of society.

Ownership of business is represented by the

right of individual or a group of individuals to

acquire legal title to property (assets) for the
purpose of controlling them and to enjoy the
gains of profits from such possession and use.

The most common forms currently in wide

use by small business are:

Sole proprietorship
Partnership
Corporations and
Cooperatives
Each form of ownership has a characteristic
internal structure, legal status, size and
field to which it is best suited.

1) Sole proprietorship
It is an individual or single ownership
The sole proprietorship is a form of business

organization in which
o An

individual introduces his capital,

o Use of his own skill and intelligence in the
management of its affairs and
o It is solely responsible for the results of its
operation.
This form is known also as individual or single

proprietorship, sole ownership or individual

enterprise.
Example: Photo studio, bookshop, bakeries, small

town restaurants, retail stores, radio and watch

proprietorships
a. Ease and low cost of formation and
dissolution:-there are no restrictions on either
starting or terminating small business operations.
b. Direct motivation and personal care
c. Freedom and promptness of action
The sole proprietor can take his own decision and
there is none to question his authority. the sole
proprietor can take prompt/quick decisions
especially when an emergency arises.
d. Business confidentiality
e. Single Tax:-The proprietorship does not pay tax
as a business; the profits from the business are
the personal income of the owner and are declare
on his individual income tax return.

Disadvantages of sole
proprietorship
a. Limited resources and size:-the capacity and

skill are very limited. Lending institutions and

suppliers may not be willing to cooperate because
it is neither safe nor dependable which results in
making the business to remain limited in size.

b. Limited Managerial Skill:- in complex and

difficult
condition
expertise knowledge

which

requires

different

c. Unlimited liability:-The sole proprietor will be

legally liable for all debts of the business , a source
of courage and real devotion, limit his activities
only in specified areas
d.

Uncertain

future/Death

of

the

owner

2. Partnership**
The association of two or more persons to

carry as co-owners of a business where the

relationship is based on agreement is
called partnership.
This form of a business requires the existence

of two or more persons entering into a

contractual relationship.
This contract, which is an agreement between

the parties, is known as a memorandum of

association or article of partners deed.

Kinds of Partners
1.A general partner
Assumes unlimited liability and is usually active in

managing the business. Most partners are general

partners.

2.A limited or special partner

Assumes limited liability, risking only his /her
investment in the business. Limited partners may
not be active in management, and their names are
not used in the name of the business.
3.A secret partner
Takes an active role in managing a partnership but

whose identities are unknown to the public. i.e the

general public does not know of this persons
partnership status.

4.A silent partner

5.Senior partners
Assume major roles in management because of the
long tenure (possession), amount of investment in
the partnership, or age. They normally receive
large shares of the partnerships profits.
6.Junior partners
Are generally younger partners in tenure, have
only small investment in the firm, and are not
expected to make major decision. They assume
limited role in the partnerships management and
receive a smaller share of the partnerships profits.
See others

Advantages of partnership
1. Ease of starting
2. Increased source of capital:-Partnership can
offer creditors less risk than a sole
proprietorship; it is often an attractive
investment.
3. Combined managerial skill
4. Definite legal status
Todays partner can be assured that a
competent lawyer can answer virtually any
questions he/she might have about this form of
ownership. i.e lawyers can provide a sound
legal advice about partnership issues.
6. Motivation of important employees

Disadvantages of partnership
1.Unlimited liability
2. Risk of implied authority
The fault and miss judgment made by a single
partner binds the firm and the remaining
partners. Thus, they are liable for the debts
made by the partner.
3. Lack of harmonyagrmnt or synchronizatn
4. Lack of continuity/instability/
If any one of the general partners dies,
withdraws because of mentally or physically
incapable (injured), the partnership ends.
5. Investment withdrawals difficulty
/frozen-investment/

3. Corporation***
A corporation is an artificial person authorized

and recognized by law, with distinctive name, a

common seal, comprising of transferable
shares of fixed values, carrying limited liability
and having a perpetual or continued or
uninterrupted succession

Characteristics of Corporation
1. Separate legal entity
It can sue or be sued.
It has the right to manage its own affairs.
Shareholders cannot be liable for the acts of the
corporation
2. Limited liability
Since the corporation has separate legal entity its
debts are its own. The assets and liabilities, rights
and obligations incidental to the companys activities
are assets and liabilities, rights and obligations
respectively of the company and not of its members.

3.Transferiablity of shares
It is easy to transfer ownership in a corporation. A

4.Perpitual existence
Death, insanity, retirement and withdrawal of
shareholders will not affect the company.
5.Common seal
A corporation has a common seal with the
name of the company engraved on it, which is
used as a substitute for its signature through it
acts through its agents.
6.Separation
of
ownership
from
management
7.Supervision
8.Written Constitution
On the creation of a company, the promoters
must file certain documents with the Registrar
of Companies. These include the Article of

Advantages of a
corporation
1. Financial strength
2. Limited liability
3.Scope of expansion
Corporations have greater potential than sole

proprietorship or partnerships

4. Managerial efficiency
Corporations enjoy the advantage of efficient

management by hiring specialists skilled

persons to become members of the board of
directors to mange the corporation

5. Ease in transferring ownership

6. Legal entity status
A corporation can purchase property, make
contracts, sue and be sued in the corporate

Disadvantages of a corporation
1. Difficulty of formation
It is time consuming and cumbersome/not
managable to establish corporations unlike the
other forms of businesses.
2. Lack of owners/managers personal interest
These forms of organizations are managed by
directors, hired officials, and employees who
may not be expected to have such an interest
in the success of the business as the individual
owner or partner would have in his own
business.
3. Delay in decision-makingit needs official meeting of
managers or board

4.Lack of secrecy.opennesslack of privacy

4.Corporatives(*)
It

is
an
organization
owned
by
members/customers who pay an annual
membership fee and share in any profits (if it is
profit making organization).
It has to adopt the following principles:
Members have an equal vote in decisions
Membership is open to every one who fulfills
specified conditions (e.g. Number of hour worked)
Assets controlled and usually owned jointly by
members
Profit shared equally between members with
limited interest payment on loans made by
members;

5.Other forms of business

Franchises
A franchise is a business in which the owner of
the name or method of doing business (called
the franchisor) allows a local operator (called
the franchisee) to set up a business under that
name.
Management buy-outs and buy-ins
In recent years the traditional separation of
shareholders and management has been
eroded
by
the
growing
popularity of
management buy-outs. This is where a
group of members pool their resources to buy
the business they have been running, usually

Part Three: Setting a Business

enterprise
3.1 Small Business as Basic
components of Economy
3.2 What is basic business idea
3.3 Steps in business setting
3.4 Developing a Business Plan

What is small business?

There are two approaches to define small
Business. They are:
1. By some measure of size
2. using an economic /control definitions.
what r msr of size?
wt r economic criteria?

1. Size Criteria
Examples of criteria used to measure size are:
1. Number of employees
2. Sales
volume
3. Asset size
4. Insurance
enforce
5. Volume of deposits
Although

the first criteria located above,

employee, is the most widely used yardstick;
the best criteria in any given case depends
upon the users purpose.

To provide a clear image of the small firms, the

following general criteria for defining a small
business are suggested:
A). Financing of the business is supplied by one
individual or a small group.
b) Except for its marketing function, the firms
operations are geographically localized.
c) Compared to the biggest firms in the industry
is small
d) The number of employees in the business is
usually fewer than 100

Economic /Control Criteria

The economic /control definition cover:
a)Market share:- The characteristics of a small

firms share of the market is that it is not large

enough to enable it to influence the prices of
national quantities of goods sold to any significant
extent.
b)Independence:- Means that the owner has control

of the business himself.

c)Personalized management:- Is the most

characteristics factor of all. It implies that the owner

activity participates in all aspects of the
managements of the business, and in all major
decisions-making processes. There is no delegation
of authority.

Types of small business

1. Family Enterprises
Family owned business varies widely and can

include retail stores, contracting businesses,

small manufacturing firms, and restaurants
among others. In the absence of a successor,
the life of a venture is limited to the working
life of its founder. Succession is a serious
problem.
2. Personal service Firms(PSF)
3. Franchise:-The franchisee may receiver
Francis help, training, a protected market, and
technical assistance with matters such as site
selections, purchasing, accounting, and

Why are small business important

to economy?
They make exceptional contributions as they
provide
a. New jobs as populations and economy grow,
small business provide new job opportunity.
b.Introducing innovations-many scientific
breakthrough originated with small organization.
Photocopies, etc
c. Stimulating Economic competitions.

Reasons for the more rapid growth of small firms in

most developed countries.
1.New technologies, such as numerically controlled

machine tools, may permit efficient production

on a smaller scale
2.Greater flexibility is required as a result of
increased global competitions
3.Consumers may be coming to prefer personalized
products over mass produced goods.

Causes for small business failure

Incompetence- The owners simply do not know how

to run the enterprise.

Unbalanced experience- do not have rounded
experience in the major activities of business
production.
Lack of managerial experience. Do not know how
to manage production.
Lack of experience in the line- the owner has
entered a business field in which he or she has very
little knowledge.
Neglect- the owner does not pay sufficient attention
to the enterprise.
Fraud- involves intentional misrepresentations or
deception (purchasing materials or goods for him/her

The following are specific managerial causes of

small business failure
Inadequate records- unable to establish an
adequate record keeping system.
Expansion beyond resources
Lack of information about customer
Failure to diversify market
Lack of marketing research.
Legal problems
Nepotism- favoritism toward family members
One person management
Lack of technical competence
Absentee management the owner stayed away
for long period

Strength and weakness of small

business
Strength
1. Independence
Most small business owners enjoy being their
own boss, they like the freedom to do things than
way.
2. Financial opportunities
Many small business owners make more money
running their own company than they would be
working for someone else.
3. Community services
if the person has reason to believe the public will
pay for such output, he/she will start a company

4. Job security
when one owns a business, job security is
ensured.
5. Family employment (benefits)
create the employment in the family
higher moral and trust occur in family-run
business
is times of server economic downturn
6. Challenge.
They want to win or lose on their own
abilities the challenge gives them
psychological satisfaction

Weaknesses
1. Sales fluctuations
in some months sales are very high, while in
other they drop off dramatically. The individual
must balance cash inflows with cash outflows.
2. Competition- Owning a business is the risk of
competition (eg. Restaurants)
3. Increased responsibilities- owner is often a
bookkeeper, accountant sales person, personnel
manager.
4. Financial loses- when the owner makes all
major decisions

What is basic business idea?

It is logical to think of a goal for the unit in long

run rather than to look for the immediate

tomorrow. This long-term thinking is called basic
business idea

Businessmen/businesswomen

should think of
long-term goal and the profit when they start a
business.

The basic business idea, which is at the top of

the hierarchy, is to meet the broadest needs of

the customers, and has the long life perhaps
from 5-50 years.

The basic business idea facilitates choice of

product under an overall plan.

Thus, entrepreneur may think of being in the

entertainment
film,
in
automobiles,
medicines, in services, in industries, etc.

in

In a dynamic business scheme, one has to

carefully watch is one of the basic idea
degenerating as regards
Its

ability to generate quick returns.

Its ability to permit quick changes in the
products.

What project an entrepreneur

should have?
A project is a complex of economic activities in

which the key players commit scarce/limited

resources in the expectation that the benefits
gained will exceed these resources.
Also, a project, broadly defined, in a way of

using
resources:
a
decision
between
undertaking and not undertaking a project is a
choice between attentive ways of using
resources.
The project should have to consider the SWOT

and should be designed accordingly.

The SWOT approach compels individuals to

Strength: is an inherent capacity, which an

organization can use to gain strategic

advantage over its competitors.
Weakness: is an inherent limitation or
constraint, which creates a strategic
disadvantage
Opportunity: refers to any factor that offer
promise or potential for moving closer or more
quickly towards the firms goal
Threat: is any factor that may limit or impede
the business in the pursuit of its goals

To be a successful entrepreneur, one major

determinant factor is the choice of a good
business idea. To select the best business
idea, the following steps needs to be pursued.
Identify your problem
Define your objectives
Identify, develop and analyze the possible

alternative
Select the best alternative in light of the
specific criteria set to the better fulfillment of
the objective.

Steps in business setting

1. The first key to success in any
manufacturing activity is to select the right
product. These must be examined with a
view to assess:
The marketing aspects
Technical aspects
Financial aspects

2. Having selected a product, a detailed

project report to be prepared. This will
cover the following aspects.
A detailed estimate of demand is to be made.
Technical specifications of the process should

be carefully studied.
The equipment required and their sources are
to be specified
Requirement of space.
The total cost of the project to be worked out,
the means for financing it identified
The economics of the entire scheme at
projected operating level is to be assessed.

3. Implementation of the detailed project report.

Includes:
a. Deciding on form of ownership and registration
b. Obtaining finance ,Obtaining license
c. Establishing necessary infrastructures
4. Once all the required authorizations and sanctions
have been obtained, simultaneous action is to be
taken for the following. Pre-commissioning
requirement
Ordering machinery from suppliers
Obtaining utilities like power and water
connections after constructions of shed, if
necessary.
Recruitment of staff,
Arranging supplies of materials

5. Once these are complete, the plant is ready for

commissioning trial run may be made.
Commissioning of plant, Includes:
a. Trial run of machineries
b.Promotional activity for the product
c. Introduce the product to the market and obtain

feedback
6. The unit
production.

is

then

ready

for

commercial

a. Commercial production

This is all about the feasibility study +pre&after

implementation

DEVELOPING A BUSINESS PLAN

WHAT IS A BUSINESS PLAN?
A business plan is a comprehensive set of

guidelines for a new venture.

A business plan is also called a feasibility plan

that encompasses the full range of business

planning activities, but it seldom requires the
depth of research or detail expected for an
establishment enterprise.
A business plan would present your basic

business idea and all related operating,

marketing, financial and managerial

What ever the name, it should lay out your

idea, describe where you are, point out where

you want to go, and how you propose to go
there.
The business plan may present a proposal for

launching an entirely new business. More

commonly, perhaps; it may present a plan for a
major explanation of a firm that has already
started operation

THE PURPOSE OF BUSINESS

PLAN
1.It can help the owner/manager crystallize and

focus his/her idea.

2.Although planning is a mental process, it must

go beyond the realm of thought. Thinking about

a proposed business becomes more rigorous as
rough ideas must be crystallized and quantified
on paper.
3.It can help the owner/manager set objectives

and give him a yardstick against which to

monitor performance.
4.It can also use as a vehicle to attract any

5.It can convince investors that the

owner/manager has identified high
growth opportunities.
6. It entails taking a long-term view of the
business and its environment.
7. It emphasizes the strengths and
recognizes the weaknesses of the
proposed venture.
8. The plan can uncover weakness or alert
the entrepreneur to sources of possible
danger

WHEN THE BUSINESS PLANS ARE

PRODUCED?
At the start up of a new

business:
Business purchase:
On going:
Major decisions:

WHO PRODUCED THE BUSINESS PLAN?

o Managers:, Owners:, Lenders:
WHY THE BUSINESS PLANS ARE
PRODUCED?
Assessing the feasibility and viability of the

business/project: it is in every ones interests to make

mistakes on paper, hypothetically testing for
feasibility, before trying the real thing.
Setting objectives and budgets: having a clear

financial vision with believable budgets is a basic

requirement of everyone involved in a plan.
Calculating how much money is needed: a detailed

THE FORMAT OF A BUSINESS PLAN

1. Where are we now?
An analysis of the current situations of the
market place, the competitions, the business
concept and the people involved. It will include
any historical background relevant to the
positions to date.
2. Where do we intend going?
Qualitative expression of the objectives,
quantifiable targets will clarify and measure
progress towards the intended goals.

3. How do we get there?

COMPONENTS OF BUSINESS PLAN (OUT LINE OF A

BUSINESS PLAN)

I.Analysis of the current situation (where

areofwe
1. Identification
the now?)
business
a. Introduction
- relevant history and background
- Proposed date for commencement of trading
/beginning of a plan
b. Names
-name of the business and trading name
- name of the managers/owners
c. Legal identity
-company/partnership/sole-trade/cooperative
- details
of share or capital structure

2. The key people

a. Existing management- Outline of
background experience
, skills and knowledge.
-Names of the management
team
b. Future requirement -gaps in skills and
experience and how they will be filled ,future recruitment intentions

3.The nature of the business

a. Product(s)or service(s)-Description and

applications

-Key suppliers
-Planned developments of
product or service
b. Market and customers
Definition of target market,
classification of customers

- Trend in market place

c. Competition- description of competitors;

II. FUTURE DIRECTION (where do we intend

going?)

III. IMPLEMENTATION OF AIM (how do we get

there?)
1. Management of resources
a) Operation:-premises, materials, equipment,
insurance, management information system.
b) People/Human resource/- employment practices,
recruitment, team management, training etc

2. Marketing plan
a)Competitive edge- unique selling point of
business (Critical products or service characteristics
or uniqueness in relation to competitors)
b) Marketing objectives - specific aims for product
or service in the market place
c) Marketing methods- product, pricing, promotion,
distributions=4ps

3. Money: financial analysis

a. Funding requirement- start up capital,
working capital, asset capital, timing of funds
required, security offered.
b. Profit and loss:-- 3 years forecast, sales
variable costs, profit, overheads, net profit
c. Cash flow:-- 3 years forecast, receipts,
payments, monthly and cumulative cash flow
d. Balance sheet
- use of funds, source
funds

Assignment 2: write the difference b/n

feasibility study and business plan (brief

Part four: Marketing in Business

enterprises
4.1 The Marketing Perspective
4.2 Marketing Mix-product, price, place,
and promotion,
4.3 Marketing segmentation and
market research,
4.4 Factors affecting the Business
Environment

THE MARKETING
PERSPECTIVE
Definition of Market:
Market is a group of potential customers
having needs to satisfy, ability to buy &
willingness to pay in order to satisfy these
needs.
OR

A social & managerial process by which

individuals & groups obtain what they need &

want through creating & exchanging products
& value with others.

The main concepts of marketing

Marketing activities are integrated
Organizations are market oriented
Marketing focuses on selected markets
Customer satisfaction is the core of marketing
Marketing starts early before production &

continues after sellingT/Fdiscuss?

THE MARKETING MIX

A marketing organization has to concentrate

on four important aspects known as the 4Ps

of marketing.
The marketing manager has to combine these

4 Ps (PRODUCT, PRICE, PROMOTION and

PLACE.) in such a way that the combination
provides satisfaction to the customer and profit
to the manufacturer.
When these elements (4 Ps) are combined

together they are called as The Marketing

Mix.

3. Place mix
(Physical
1.The product mix: Includes:
distribution mix):
Product planning and
Channels of
development
distribution
Branding
Packaging
Transportation
Labeling
Warehousing
2.The price mix: Includes
Price polices
Skimming pricing (Pricing
above the market)
Penetration pricing (Pricing
below the market)
Premium pricing (Pricing
with the market)
Discounts
Quantity discount Seasonal

4. Promotion mix:
Includes
Advertising
Personal selling
Sales promotion
Publicity

I. THE PRODUCT MIX

Product: Is any commodity that satisfies the needs &

wants of customer.
It is a bundle of tangible & intangible attributes, which

satisfy the needs, & wants of customers.

In today market, a product can be

o A person (soccer players),

Organization
(privatized firms),
o Places (leased land),
Objects
(items),
o Idea (business plans or project proposal),
o Services (medication or barber), or mixes of
these elements.
So, a product can be defined as anything, which

1.Product planning and development

Product planning includes three major types of
decisions:
Development and introduction of new
products
Modifications of existing products in keeping
with the changing tastes and preferences of
the target customers and
Elimination of unprofitable or obsolete
products

2. Branding
Brand name: the part of a brand, which consists of

word, letters and/or numbers, which can be

vocalized. Eg. OMO, Coke
Brand mark: the part of a brand that can be

recognized but is not utter able. It can appear in the

form of symbol, design, distinctive coloring or
lettering.
Trademark: a brand or part of a brand that has

been given legal protection so that the owner has

exclusive rights to its use. After companies identify
their trademark, they entail a term or
Trade Name: Trade name is the name of the

business organization. A trade name may also

Importance of a brand
The brand makes it easier for the seller to process

orders and track down problems.

The sellers brand name and trademark provide legal

protection of unique product features.

Branding gives the seller the opportunity to attract a

loyal profitable set of customers and helps to

increase the control and share of the market.
Branding helps the seller to segment markets and

expand the product mix.

Good brand help to build the corporate image

because it advertises the quality and size of the

company.
Brands make it easy for customers to identify

Requirements of a good brand

Be easy to pronounce, recognize and

remember
Be distinctive.
Suggest something about the products

benefits or characteristics
Suggest about the product qualities such as

action or use.
Be large enough to be applicable to new

products that may be added to the product

line.

3.Packaging
Packaging is a marketing process concerned
with the design and production of the
container or wrapper for a product.
The container or wrapper or covering is called
the package.
Importance of packaging
1.Packaging serves several safety and utilitarian

purposes
2.Packaging may implement a companys
marketing program.
3.Well-packaged products may increase profit
possibilities in that it stimulates customers to
pay more just to get the special package.

4.Labeling
1.Brand label: simply the brand alone applied to

the product or to the package.

2. Grade label: a label, which identifies the
quality with, a letter, number or word.
3. Descriptive label: it gives objective
information about the use, construction, care,
performance or other features of the product.
Sometimes it is called informative label.
Eg. medicines

II. THE PRICE MIX

WHAT IS PRICE?
Is the amount of money consumers have to

pay to obtain the product.

Price has operated as the major determinant

of user choice traditionally.

Although non-price factors have become more

important in recent decades price still remains

one of the most important element
determining market share and profitability.
Different companies set the price haphazardly

as based on cost.

METHODS OF PRICING
1.Cost plus pricing/ Mark Up pricing/
2. Skimming pricing
The following conditions should be satisfied
1.A sufficient number of buyers have a high
current demand.
2.The high initial prices do not attract more
competition to the market.
3.The high price communicates the image of a
superior product.
3.Penetration pricing: below market price
4. Premium pricing: with market

The major objectives of pricing are:

Achievement of target return
Maximization of profit
Increase of sales volume
Maintenance or increase of market share
Stabilization of prices &
Meeting competition

Direct channel
1.Door-to-door selling
2.Manufacturers sales branches
3.Direct mail

Indirect channel
1.Merchant Middlemen: Whole seller:- Eg. Petram PLC and East Africa

Trading are wholesalers of consumer products.

Retailer:- Eg. Hadiya supermarket, and several
Kiosks are found closer to sell the items to
residential houses.
1. Agent Middlemen
Commission agent, Brokers, Selling agents,
Eg. -Sony Glorious, is an agent to Sony
Electronics products,

Channel levels
Zero-level
Manufact
urer

One-level
Manufact
urer

Two-level
Manufact
urer

Three-lev
el
Manufact
urer
Agent

Wholesa
ler

Consum
er

Wholesa
ler

Retaile
r

Retaile
r

Retaile
r

Consum
er

Consum
er

Consum
er

IV. PROMOTION MIX

Is sometimes known as marketing

communication.
Means activities that communicate the

merits of the product & persuade target

customers to buy it.
Promotional objectives:
Informing the product
Increasing sales
Stabilizing sales / profit
Positioning the product

The promotional mix consists of four major

tools
Advertising: such as informative Ad, Persuasive

Ad and Reminder Ad
Personal selling Oral presentation in

conversation with one / more consumers for the

purpose of making sale
Sales promotion Includes: gifts, games,

sampling, coupons, and window displays.

Publicity Any information about the

organization, its personnel or its products that

appears in any medium on a non - paid basis.

MARKET SEGMENTATION
Market segment is a group of individuals or

organizations within a market that share one or

more common characteristics.
The process of dividing a market in to segments is

called market segmentation.

Bases for market segmentation
1.Geographic segmentation:- Region Urban,
Suburban, Rural, Market density, Climate, Terrain
(land, topography), City size, Country size, State size
2.Demographic segmentation:- Age, Gender, Race,
Ethnicity, Income, Education, Occupation, Family size,
Family life cycle, Religion, Social class
3.Psycho graphic segmentation:- Personality,

MARKET RESEARCH
1.Marketing research is the systematic
recording and analysis of data about
problems relating to marketing.
AmericanMarketing Association
2.Marketing research is the application of
scientific method to the solution of
marketing problems.
Luck, Wales, Taylor
It is important for any business to conduct it
before established ,ongoing business and
futurity.

Part five: Financing and

accounting in business
5.1 Financial requirement
5.2 Sources of finance,
5.3 control of financial resource
5.4 financial analysis and accounting
(reading ass..)

DEVELOPING FINANCIAL PLAN

Project implementation requires bringing

together the inputs of land, labor,

machinery, staff etc.
Finance is required to assemble these

inputs.
Proper financing of business is essential for

success in both small and large enterprises.

Financial

planning is the process of

formulating policies and strategies relating to
the
procurement,
investment
and
administration of funds for an enterprise.

While

formulating a financial plan, the

entrepreneur has to answer the following
questions:
How

much money is needed?

Where the money comes from?
When should the money be available?
These

three
questions
are
concerned
respectively with the estimation of financial
needs, sources of finance, and the time of
raising funds.

SOURCE OF FINANCE

A. Internal sources (Equity capital)

Owners capital or owners equity represent

the personal investment of the owner or

owners in a business, and it is sometimes
called risk capital because these investors
assume the primary risk of losing their funds
if the business fails.

It requires no repayment in the form of debt

and much safer for new ventures than debt

financing.

It also requires sharing the ownership and

profits with the funding sources.

Source of equity capital:

1. Personal savings

The first place entrepreneurs should take for

start up money is in their own pockets or on
their poolofpersonalsavings.

It is the least expensive source of funds

available.

As a general rules, entrepreneurs should

expect to provide at least half of the start up
funds in the form of equity capital.

If the entrepreneur is not willing to risk his

own money potential investors re not likely

2. Friends and relatives:

Because

of their relationships with the

founder, these people are most likely to
invest. But having them invest can lead to
controversy if their participation is not clear to
everyone.

To avoid such problems, and entrepreneur

must honestly present the investment

opportunity and the nature of risks involved to
avoid alienating friends and family members if
the business fails.

3. Angels
These private investors (or angels) are

wealthy individuals, often entrepreneurs

themselves, who invest in business start ups
in exchange for equity stakes
inthecompanies.
Due to the inherent risks in start up

companies, may venture capitalists have

shifted their investment portfolios away form
startups toward more established firms.
Angles will often finance the deals that no

venture capitalists will consider most angles

have substantial business and financial

4.Partners:
Whenever an entrepreneur gives up equity in

his/her
business
(through
what
ever
mechanisms), he/she runs the risk of losing
control over it.
As the founders ownership is a company

becomes increasingly diluted, the probability

of losing control of its future directional and
the entire decision making process increases.

5. Venture capital companies

venture capital companies are private, for profit

organizations that purchases equity positions in

young businesses they believe have high
growth and high profit potential.
They provide start up (seed money) capital to
new ventures,
Development funds to businesses in their
early growth stage, and
Expansion funds to rapidly growing ventures
that have the potential to go public or that
need capital for acquisitions.

6. Public stock sale (going public)

This is an effective method of raising large

amounts of capital, but it can be an

expensive
and
time-consumingprocessfilledwithregulato
rynightmares

B. External source (Debt capital)

Borrowed capital or debt capital is the

external financing that a small business

owner has borrowed and must repay with
interest.
Small enterprises have few choices than large

firm for obtaining debt financing.

Although borrowed capital allows

entrepreneurs to maintain complete

ownership of their business, it must be
carried as a liability on the balance sheet as
well as be repaid with interest at some point

1.Commercial banks
In most cases commercial banks give
Short-term loan (repayable with in one year or

less) and
Medium term loan (maturing in above one year

but less than five years) as a working capital.

Long term loans (maturing in more than five

years) for the purchase of property or equipment

or as a project loan, with the purchased asset or
the project itself serving as collaterals.

unsecured and secured loans

An unsecured loan is a loan in which collateral

is not requested.
That is the loan is granted against personal

guarantee or corporate customers of the bank.

Unsecured loans will have high interest

charges but this may not be necessarily

applicable by all banks

To secure a bank loan, an entrepreneur

typically will have to answer a number of

question, together with descriptive
commentaries
What do you plan to do with the money

(credit facility)?
How much do you need?
When do they need it?.
How long will you need it?
How will you repay the loan?

2.Trade credit
It is credit given by suppliers who sell

goods on account.

This

credit
is
reflected
on
the
entrepreneurs balance sheet as account
payable and in most cases it must be paid
in 30 to 90 or more days interest free
because of its ready availability

Getting suppliers to extend credit in the

form of delayed payments usually is much

easier for a small business than obtaining
bank financing.

3.Equipment suppliers
Most equipment vendors encourage business

owners to purchase their equipment

offering to finance the purchase

by

In some cases, the vendors will repurchase

equipment for salvage value at he end of its

useful life and offer the business owner
another credit agreement on new equipment.

5. Accounts receivable financing

Short term financing that involves either

the pledge of receivables as collateral for a

loan or the sale of receivables (factoring).

Account receivable bank loans are made on

a discounted value of the receivables

pledged.

6. Credit Unions:
7. Insurance Companies:
8. Bonds
9. Treasury bill
How to prepare financial statement n

accounting .read
If time c sm pts abt accounting.

Part six:- Risk and insurance of Business

enterprises
6.1 Definition of Risk,
6.2 The process of Risk
management,
6.3 Classifying risks by Type of
Asset,
6.4 Insurance of the Small
Business

DEFINITION OF RISK
Risk

exists whenever the future is

unknown. Because the adverse effects of risk
have plagued mankind since the beginning of
time, individuals, groups and societies have
developed various methods for managing risk.
Since no one knows the future exactly,
everyone is a risk manager for himself. I.e.,
not by choice, but by sheer necessity.
o Example: In buying a tire, we may have a
choice. There is no sheer necessity

The term risk used in different ways. The

following definitions given by different scholars

and practitioners in the field:
Risk

is the channel of loss

Risk is the possibility of loss
Risk is uncertainly
Risk is the dispersion of actual from expected
result
Risk is the probability of any outcome different
from the one expected
Generally, it has bad/negative connotation

Business risks can be classified into two broad

categories:
1.Market risk is the uncertainty associated with an
investment decision. An entrepreneur who invests in
a new business hopes for a gain but realizes that the
eventual outcome may be a loss.

2.Pure risk is used to describe a situation where only

loss or no loss can occur-there is no potential gain.
A pure risk exists when there is a chance of loss but
no chance of gain/profit. Example: Owner of an
automobile faces the risk of a collusion loss. If
collusion occurs, he will suffer a financial loss. If
there is no collusion, the owner will not gain

RISK MANAGEMENT
The complexity of the business environment

calls for or demand for a special attention to a

risk:
The special task to
Identify
Analyze
Combat and the operating risks are referred to as

risk management.
below

Some of the factors, which increase the

complexity of environment, are:

Inflation
Growth of internal operation

What

is
risk
management?
Risk
management is a systematic way of protecting
business resources and income against losses
so that the organizations aims are reached
without interruption, creating stability and
contributing to profit.

Risk management is broader than insurance

management in that it deals with both

insurable and uninsurable risks.
Insurance
management for most part it is restricted to
the area of those risks that are considered to
be insurable.
The emphasis in the risk management concept

is on reducing the cost of safeguarding against

risk by whatever means.

2.To estimate the frequency and size of

loss, i.e., to estimate the probability of loss
from various sources. It is also called as risk
measurement.
Risk measurement means
i. Determination of the chance of an occurrence

or relative frequency.
ii. Determination of the impact of losses upon
financial affairs.
iii.The ability to predict the losses that will
actually occur during the budget year.

3.To decide the best and most economical

method of handling the risk if loss.
i.e. Selection of the proper tool for
handling risk
4. Implementing the decision
5.Revaluating the decision

Tools of Risk Management

1. Avoidance
One way to handle a particular pure risk is to avoid
the property, person or activity with which the risk
is associated.
Two approaches of risk avoidance:
i. Refusing
e.g. For instance, a firm can avoid a flood loss by
not building a plant in a place where flood is
frequently affecting. In case of refusing, we are
discontinuing the activity
ii. Abandonment
e.g. A firm that produces a highly toxic product
may stop manufacturing that product.

2. Retention
Bearing all the risk by that person/organization.
Types of retention
i. Planned/conscious/ active risk retention
It is characterized by the recognition that the
risk exists, and tacit agreement to assume the
losses involved.
The decision to retain a risk actively is made
because there are no alternatives more
attractive.
Self-insurance is a special case of active
retention. Self-insurance is not insurance,
because there is no transfer of the risk to an
outsider.
o E.g. A firm may keep some money to retain

ii.
Unplanned/Unconscious/
Retention

Passive

Passive risk retention takes place when the

individual exposed to
recognize its existence.

the

risk

does

not

In this case, the person so exposed retains the

financial consequence of the possible loss

without realizing that he does so.

4. Separation /Diversification
Separation of the firms exposures to loss instead of

concentrating them at one location where they

might all be involved in the same loss.
Separation==>Dispersion/Scattering the exposure
in different places.
Dont put all your eggs in one basket

Example: Instead of placing its entire inventory in

one warehouse, the firm may elect to separate this

exposure by placing equal parts of the inventory in
ten widely separated warehouses.

5. Transfer
It is also called as shifting method.
When a business organization cannot afford to

cover the loss by itself, it may look for/transfer

institutions.
Insurance is a means of shifting or transferring
risk.

CLASSIFYING RISK BY TYPE OF ASSET

1.Property risks
Property-oriented risks involve tangible and highly
visible assets. Many property-oriented risks are
insurable; they include:
Fire , Natural disasters, Burglary, Business
swindles (or fraudulent transactions) and,
Shoplifting.
2.Personnel risks
Personnel-oriented losses occur through the actions
of employees. The three primary types of
Personnel-oriented risks are:
Employee dishonesty, Competition from former
employees, Loss of key executives

3.Customer risks

Customers are the source of profit for small

business, but they are also the source of an
ever-increasing amount of business risk. Much of
these risks are: On-premises injuries and Product
liability

On-premises injuries:
Customers may initiate legal claims as a result of

on-premises injuries.
When a customer breaks an arm by slipping on icy
steps while entering or leaving a store;
Inadequate security, which may result in robbery,
assault, or other violent crimes; Customers who are
victims often look to the business to recover their
losses.
Product liability:
A product liability suit may be filed when a customer

INSURANCE FOR THE SMALL BUSINESS

1. Basic principles for a sound insurance
program
Basic principles in evaluating an insurance
program include:
Identifying insurable business risks
Limiting coverage to major potential losses and
Relating premium costs to probability of loss

2.Requierments for obtaining insurance

1. There must be a sufficiently large number of
homogenous exposure units to make the losses
reasonably predictable.
o Insurance is based on the operation of the law of
large numbers.
o There must be a large number of exposures and

2. The loss produced by the risk must be definite and

measurable.
The loss must have financial measurement or
financial implication.
The risk must be calculated
Example: For instance a person may purchase
disability insurance. How do we know that the
person is unable to do? Thus, the risk must be
definite and measurable.

3. The loss must be fortuitous or accidental.

i.e. the loss must be the result of a contingency, i.e.,

it must be something that may or may not happen.

It must not be something that is certain to happen.
Wear and tear or depreciation, which is a certainty,
should not be insured. No protection is given by
insurance.

4. The loss must not be catastrophic

All or most of the objects in the group should not

suffer loss at the same time because the

insurance principle is based on a notion of
sharing losses.
Example: Damage which results from war,

flood, windstorm and so on would be

catastrophic in nature and hence do not have
insurance.

5. The loss must be large loss.

The risk to be insured against must be capable of

producing a large loss, which the insured could not

pay without economic distress.
Incase the loss occurs, it must be severe that must

6. Reasonable cost of transfer

i.e: the probability of loss must not be too high

because the cost of transfer tends to be excessive.

To be insurable, the chance of loss must be small.

The more probable the loss, the more certain it is to

occur.
The more certain it is, the greater the premium will

be. But to make insurance attractive, the premium

has to be for less than the face of the policy. For
instance, a life insurance company to issue a birr
1000 policy on a man aged 99. The net premium
would be about birr 980.

The end

 Risk management is the identification,

measurement and treatment of liability, property

and personal pure risks that the business
organization is facing.
It is the science that deals with the techniques of

forecasting future losses so as to plan, organize,

direct and control the adverse effect of risk.
i.e., Risk management is defined on the base of
managerial functions.
It is the reduction and prevention of the unfavorable

effects of risk at minimum cost through its

identification, measurement and control.
It is a discipline / a profession that systematically

identifies and analyzes the various loss exposures

faced by a firm or an organization and employees

5. Combination
Risks

are pooled when the number of

independent exposure units under observation
is increased.

Unlike separation, which spreads a specified

number of exposure units, combination

increases the number of exposure units under
the control of the firm.
In the case of firms, combination results in the

pooling of resources of two or more firms. The

new
firm
has
more
building,
more
automobiles, and more employees than either
of the original companies. This leads to
financial strength, thereby minimizing the
adverse effect of the potential loss.

6. Neutralization
Neutralization, which is very closely related to

transfer.
It is the process of balancing a chance of loss
against a chance of gain.
Eg. An excellent example is the process of making
commitments on both sides of transaction in such
a way the risks compensate each other.
The following matrix can determine which risk

management be used.

ACCOUNTING FOR SMALL BUSINESS

Proper financial and accounting records make it

possible for the owner to exercise effective

control of funds and overall performance of
his/her business.
Such records also make it possible to know

whether the firm is earning profits or loss.

Accounts

also help to know the financial

position of the business at any time and at the
end of the fiscal year.

BUSINESSTRANSACTIONANDACCOUNTI
NG EQUATION
A business transaction is the occurrence of an

event or of a condition that must be recorded.

The

payment of a monthly telephone bill,

The purchase of merchandise on credit and
The acquisition of land and a building are
examples of business transactions
A particular business transaction may lead to an

event or a condition that result in another

transaction.
For example, the purchase of merchandise on
credit will be followed by payment to the
creditor, which is another transaction

The accounting equation

Assets are the properties owned by a business

enterprise or any thing of value owned by a

business enterprise.
The rights or claims to the properties are

referred to as equities.
The sum of assets is equal to that of the sum of

equities.
Equities may be subdivided into two principal

types:
o the rights of creditors and
o the rights of owners.

Rights of creditors represent debts of the

Expansion of the equation to give recognition

to the two basic types of equities yields the

following, which is known as the accounting
equation:
o Assets = equities
o Assets = creditors equities + owners
equity
o Assets = liabilities +capital
It is customary to place liabilities before

owners equity in the accounting equation

because creditors have preferential rights to
the assets.

Assets
Assets: any physical thing (tangible) or right

(intangible) that has a monetary value is an

asset. Assets are customarily divided into two:
Current assets: are cash and other assets

that may reasonably be expected to be realized

incase or sold or used up usually within one
year or less, through the normal operations of
the business.
Example:cash,accountsreceivable,notesreceiva

ble,supplies,prepaid expenses, stock (inventory),

etc
Plant assets: are tangible assets used in the

businesses that are of a permanent or relatively

Liabilities:
Liabilities: are debts owned to outsiders

(creditors) . Liabilities are frequently described on

the balance sheet by titles that include the word
Payable.
1.Current liabilities: are liabilities that will be due
within a short time (usually one year or less) and
that are to be paid out of current assets.
Example: notes payable, accounts payable,
salaries payable, interest payable, taxes
payable.
2.Long-term liabilities: are liabilities that will be
due for a comparatively long time (usually more
than one year) it is also known as fixed liabilities.

Owner equity
Owner equity: is the residual claim against

the assets of the business after the total

liabilities are deducted. For a corporation,
owners equity is frequently called stockholders
equity, shareholders equity or stockholders
investment.
Capital: is the owners equity in a sole proprietorship

(and partnership)
Capital stock: represents the investment of the

stockholders.
Retained earnings: represents the net income

retained in the business.

Dividends:

represents the
earnings to stockholders.

distribution

of

Revenue: is the amount charged to customers

for goods or services sold to them It is an

increase in capital that resulted from the
normal operation of the business. Example:
Professional fees, commissions revenue, fares
earned, interest income, etc
Expense: costs that have been consumed in

the process of producing revenue are expired

costs or expenses. It resulted in a decrease in
capital. Example: Wages expense, rent
expense, supplies expense, utilities expense,
etc

Preparation of financial
statements
Financial statements: After the effect of the

individual transactions has been determined, the

essential information is communicated to users. The
account statements that communicate this
information are called financial statements.
The principal financial statements are the income

statements the statement of owners equity, the

balance sheet and the statement of cash flow.
The
financial
statements
prepared
for
sole
proprietorship, partnership and corporation are almost
the same.
The major difference is in the capital section of the

balance sheet.

Income statement: a summary of the revenue

and the expenses of a business entity for a

specific period of time, such as a month or a
year.
ABC trading
Income statement
For month ended December 31, 2004
Sales
10,000
Operating expenses:
Wages expense
3,000
Rent expense
2,000
Suppliers expense
2,000
Utilities expense
750
Miscellaneous expense 250

Statement of owners equity is a summary of

the changes in the owners equity of a business

entity that have occurred during a specific period
of time such as a month or a year.
ABC trading
Statement of owners equity
For month ended December 31, 2004
Investment during the month
15,000
Net income for the month
2,000
Less withdrawals
500
Increase in owner equity
1,500

 Balance sheet: is a list of the assets, liabilities and

owners equity of a business entity as of a specific

date, usually at the close of the last day of a month or
year.
ABC trading
Balance sheet
December 31, 2004
Assets

Cash
10,000
Supplies
1,000
Land
8,000
Total asset
19,000
Liabilities

Statement of cash flows

It is a summary of the cash receipts and cash

payments of a business entity for a specific

period of time, such as a month or a year.
It is customary to report cash flows (cash

receipts and cash payments) in three sections:

1. Operating activities
2. Investing activities, and
3. Financing activities

ABC trading
Statement of cash flows
For month ended December 31,2004

Cash flows from operating activities:

Cash received from customers
10,000
Less cash payments for expense and payments to
creditors (7,300)
Net cash flow from operating activities
2,700
Cash flows from investing activities:
Cash payments for acquisition of land
(8,000)
Cash flows from financing activities:
Cash received as owners investment

January Projections
1. ABC projects a beginning cash balance of $20,000.
2. Cash receipts. Product manufacturing will not be
completed until February, so there will be no sales.
However, service income of $4,000 is projected.
3. Interest on the $20,000 will amount to about $100 at
current rate.
4. There are no long-term assets to sell. Enter a zero.
5. Adding 1, 2, 3, and 4 the Total Cash Available will be
$24,100.
6. Cash payments. Product will be available from
manufacturer in February and payment will not be due
until pickup. However, there will be prototype costs of
$5,000.
7. Variable (selling) expenses. Estimated at $1,140.
8. Fixed (administrative) expenses. Estimated at $1,215.

11. Payments on long-term assets. ABC plans to

purchase office equipment to be paid in full at the
time of purchase $1,139.
12. Loan repayments. No loans have been received.
Enter zero.
13. Owner draws. Owner will need $2,000 for living
expenses.
14. Total cash paid out. Add 6 through 13. Total
$10,494.
15. Cash balance. Subtract Cash Paid Out from Total
Cash Available ($13,606).
16. Loans to be received. Being aware of the $30,000 to
be paid to the manufacturer in February, a loan of
$40,000 is anticipated to increase Cash Available.
(This requires advance planning.)

February Projections
1. February Beginning Cash Balance. January
Ending Cash Balance ($58,606).
2. Cash receipts. Still no sales, but service
income is $2,000.
3. Interest income. Projected at about $120.
4. Sale of long-term assets. None. Enter zero.
5. Total cash available. Add 1, 2, 3, and 4. The
result is $60,726.
6. Cash payments. $30,000 due to
manufacturer, $400 due on packaging
design.
7. Continue as in January. Dont forget to

Common Accounting Transactions

Lets suppose that Lykun and Gelila have opened a local
feed and pet supply store. During their first month of
business several accounting transactions take place.
Owner Investments Lykun and Gelila file articles of
incorporation and receive their charter and business
license and begin their business as LGM, Inc. They have
$75,000 of cash to invest in their new business. The first
balance sheet of LGM, Inc. would show the asset Cash
and the Equity of the owners

As of right now, LGM has no liabilities and assets equal

equity. The labels Cash and Net Worth are called

Purchase of Assets with Cash LGM decides to

purchase a small land for $10,000 and building

for $40,000. This transaction doesnt change
LGMs total assets, liabilities, or equity, but it does
change the composition of the assets. A key point
to remember is that the purchase of an asset
doesnt affect owners equity. The transaction
decreases Cash and increases two new accounts
called Land and Buildings:

 Purchase of Assets by Incurring a Liability Assets

may be purchased with credit instead of with cash.

However, by using credit the business agrees to
pay the liability at a later date. Lets suppose that
LGM buys pet supplies for $1,000 on credit. The
transaction increases the assets (Pet Supplies) and
increases the liabilities of LGM, Inc. Assets
purchased on credit are still recorded for the full
amount at the time of purchase. It should be
pointed out that this type of transaction increases
both sides of the accounting equation to $76,000.
The liability creates a new account called Accounts
Payable:

Payment

of a Liability Shortly after

purchasing the pet supplies, LGM decides to
pay $500 of the $1,000 owed for the supplies.
As a result, both assets (Cash) and liabilities
(Accounts Payable) decrease, but Pet Supplies
is unaffected. Payment of a liability doesnt
affect equity or the asset purchased with
credit. Both sides of the equation are still equal
although they now have a new value of
$75,500:

 Revenue Revenues equal the price charged for

the sale of goods or services. LGM, Inc. earns

money (Revenue) by selling feed and pet supplies.
Sometimes these supplies are paid to LGM
immediately in the form of cash and sometimes a
customer asks for a credit account and agrees to
pay within 30 days. In either case, the sale is
recorded when it is earned. Suppose LGM sells
horse feed to a customer for $2,000 and is paid in
cash. This transaction increases both assets (Cash)
and owners equity (Net Worth):

 Now suppose that LGM sells $1,000 of steer ration

to a 4-H member and agrees to wait for the

payment until after the local youth show and sale.
Because the money has been earned now, a bill or
invoice is sent to the youth and the transaction is
recorded now. Revenues are recorded when they
are earned, not necessarily when payment is
received. This revenue increases both assets and
owners equity as before but a new asset account
(Accounts Receivable) is also created:

Collection of Accounts Receivable Lets say

that immediately after the youth show and

sale the 4-H member comes in and pays $500
of the $1,000 that he/she owes. The asset Cash
increases and the asset Accounts Receivable
decreases. The transaction doesnt affect
owners equity because the revenue was
already recorded in transaction 6 above. It
should be noted that the balance for Accounts
Receivable is $500 indicating that another
$500 is still to be paid to LGM:

 Expenses Expenses are recorded when they are

accrued just as revenue is recorded when earned.

Expenses may be paid in cash immediately or later
on. If an expense is going to be paid later on, a
liability (Accounts Payable or Wages Payable) is
created. In either case, owners equity decreases.
Suppose that LGM, Inc. pays $1000 to rent some
equipment for their office and $400 in wages to a
part-time worker. Each of these transactions reduce
assets (Cash) and equity (Net Worth):

Lets also assume that LGM has not paid a $400

bill for utility expenses incurred the previous

month. In this transaction, the effect on owners
equity is the same as when the expense is paid in
cash, but instead of a decrease in assets there is
an increase in liabilities (Accounts Payable):

Break even analysis

One of the most common tools used in

evaluating the economic feasibility of a new

enterprise or product is the break-even
analysis.

The break-even point is the point at which

revenue is exactly equal to costs. At this point,

no profit is made and no losses are incurred.

The break-even point can be expressed in

terms of unit sales or dollar sales. That is, the

break-even units indicate the level of sales
that are required to cover costs.

Sales above that number result in profit and

sales below that number result in a loss. The

break-even sales indicates the dollars of gross
sales required to break-even.

Break-even analysis is based on two types of

costs: fixed costs and variable costs.

Fixed costs are overhead-type expenses that
are constant and do not change as the level of
output changes.
Variable cost are not constant and do change
with the level of output. Because of this,
variable expenses are often stated on a per
unit basis.
Once the break-even point is met, assuming

no change in selling price, fixed and variable

cost, a profit in the amount of the difference
in the selling price and the variable costs will
be recognized.

 One important aspect of break-even analysis is

that it is normally not this simple. In many

instances, the selling price, fixed costs or variable
costs will not remain constant resulting in a
change in the break-even.

And these changes will change the break-even.

So, a break-even cannot be calculated only once.

It should be calculated on a regular basis to
reflect changes in costs and prices and in order to
maintain profitability or make adjustments in the
product line.

There are three basic pieces of information

needed to evaluate a break-even point:

Average Per Unit Sales Price
Average Per Unit Variable Cost
Average Annual Fixed Costs

Profit = revenue-cost
Profit=(revenue)-(fixed cost (Cf) + variable cost)
Revenue =(selling price (P))* quantity sold (Q))
Variable cost = (quantity sold * variable cost per unit
(Cv))
In break even point the profit is assumed to be zero
0= (P*Q)-(Cf + (Q*Cv))
(P*Q)-(Q*Cv)=Cf
Q(P-Cv)=Cf
Q=Cf/P-Cv
The basic equation for determining the break-even units
is=
Average Annual Fixed Cost
(Average Per Unit Sales Price - Average Per Unit Variable
Cost)

Example: A local livestock producer utilizes

compost waste to develop an organic fertilizer
product. The fertilizer is prepared for retail sale
in 50 pound bags. The retail sales price is $5.00
per bag. The average variable cost per bag is
$2.80 and average annual fixed costs are
$60,000. These three pieces of information are:
Average Per Unit Sales Price = $5.00 per bag
Average Per Unit Variable Cost = $2.80 per

bag
Average Annual Fixed Costs = $60,000.00

The above assumption can be utilized to

calculate the number of bags that must be

sold in order to break-even as well as the total
dollar of sales needed to break-even. Using
the formulas explained earlier, the following
calculations can be made:
Break-Even Units: $60,000.00 ($5.00 $2.80) = 27,273 bags
Break-Even Sales: $60,000.00 1 - ($2.80
$5.00) = $136,365
Therefore, no profits are made from the sale
of this product until more than 27,273 bags
are sold or more than $136,365 in gross sales
is generated.

ILLUSTRATION
4:
Jacks
Grocery
is
manufacturing a store brand item that has a
variable cost of Rs. 0.75 per unit and a selling
price of Rs. 1.25 per unit. Fixed costs are Rs.
12,000. Current volume is 50,000 units. The
Grocery can substantially improve the product
quality by adding a new piece of equipment at
an additional fixed cost of Rs. 5,000. Variable
cost would increase to Rs. 1.00, but their
volume should increase to 70,000 units due to
the higher quality product. Should the
company buy the new equipment? What are
the break-even points (Rs. and units) for the
two processes? Develop a break-even chart.
218

SOLUTION
Profit = TR TC
Option A: Current Equipment
BEP Sales in value (Rs.)
BEP Sales in Quantity (Units)
Option B: Adding New Equipment
BEP Sales in value (Rs.)
BEP Sales in Quantity (Units)
Profit = 50000 * (1.25 0.75) 12000 = Rs.13000.
Option B: Add equipment:
Profit = 70000 * (1.25 1.00) 17000 = Rs.500.

Therefore, the company should continue as is with

the present equipment as this returns a higher
profit.
219

220

221

FACTORS AFFECTING THE BUSINESS

ENVIRONMENT
1.The macro environment (far environment)
i. Economic forces
A. Rising income
B. Inflation
C. Recession:-A recession is a period of
economic activity when income, production, and
employment tend to fall-all of which reduce demand.
Thus businesses are expected to design different
strategies that enable them overcome the problems
of inflation and recession.

ii. Legal and political factors

A. Federal and state laws

iii. Social forces

A. Demographic forces
i. Population growth
ii Age distribution
B. Cultural forces
C. The consumer movement:-Is a connection
of individuals, organizations and groups
whose objective is to protect the rights of
consumers
iv. Technological forces

2.The microenvironment (The near

environment)
The microenvironment refers the competitive

situation of an industry.
The competitive environment refers to the
number of competitors a firm must face, the
relative size of the competitors, and the degree
of interdependence within the industry.
Competition in an industry arises from
i. The power of buyers
ii. The power of suppliers
iii. The threat of new entrants
iv. The threat of substitutes

Porter claims that five forces determine

competitiveness. These are shown in figure

below:

Economies of scale (i.e. the average size

of business varies from industry to

industry .For example, the average size of
chemical firms is very large, where as the
average size of retail firms is relatively
small. The most fundamental reason for
these differences in the extent of
economies of scale in an industry. i.e how
the total cost per unit produced
changes as more units are produced.)

Where to invest to get profit,

What to do about an employee who is always late,
What subject will have top priority in meeting, etc.

Decision-making is not a separate, isolated function

of management but it is an integral component of
every managerial function (i.e. in planning,
organizing, staffing, directing, & controlling ).

Decision-making:-It is the process of

selecting or choosing, based on some
criteria, the best alternative among
alternatives

Types of Decision
Programmed decisions :-Are the decisions

that managers make in response to

repetitive & routine problems.
These decisions are Programmable

because they are based on organizational

established policies, procedures & rules

Examples: i. In Collage Enrolment,

ii. In Payroll processing

Non-programmed decisions: Are those made by

managers in a naval, complex, or/and extremely

important problem situation.
They are called non-programmed because established
policies, rules & procedures cant be employed & it is
decision makers insights, judgment & creativity, which
have paramount importance.
They

are going to deal with unusual types of

problems or /exceptional or special types of
problems/.
They are time consuming in defining, identifying,
evaluating & selecting one alternative.
They are broad, long-range & made by
higher-level personnel.
The conditions for non-programmed decisions are

Steps in the process of rational

decision-making:
Identify & Define the problem

Problem is anything that hampers the achievement of goals.

Problem is a necessary condition for a decision, i.e., there

would be no need for decisions if problems did not exist.

Establish decision criteria

Identifying those characteristics that are important in

making the decision.

Develop Alternatives
Develop & list as many possible alternatives solutions to the
problem as you can.
Formulate
Goals

Evaluate &
Follow up

Evaluate
Decision
Situations

Implement
Decision

Analyze
Alternatives

Select
Alternatives

Analyze the alternatives

What are the advantages & disadvantages of

each alternative?

Select the best alternative

Select the best alternative that suits to solve

our decision problem. In selecting the best

alternative, factors such as risk, timing &
limiting factors should be considered
adequately.

Implement the solution

Putting the decision into action.

Establishing a control & Evaluation

System

Ongoing actions need to be monitored.

Following up decisions

Decision Making Under Different

Conditions
a. Decision under certainty
Example: If you decide to invest your money in
saving account in the Commercial Bank of Ethiopia,
You are certain that you will earn ten percent.

b. Decision under uncertainty

Example: A corporation that decides to expand
its operation in a strong country may know little
about its culture, laws, economic environment, or
politics. The political situation may be so volatile
that even experts cannot predict a possible change
in government.

c. Decision under risk

Example: If we gamble by tossing a fair coin,