Course Number - Mgmt 3101

Course Title Entrepreneurship and Small Business Management

Chapter I - Entrepreneurship and Free Enterprise
1.1 Definition and Philosophy
Entrepreneur is an Economic Agent who plays a vital role in the economic development
of a country. Economic development of a country refers steady growth in the income
levels. This growth mainly depends on its entrepreneurs. An Entrepreneur is an
individual with knowledge, skills, initiative, drive and spirit of innovation who aims at
achieving goals. An entrepreneur identifies opportunities and seizes opportunities for
economic benefits. Entrepreneurship is a dynamic activity which helps the entrepreneur
to bring changes in the process of production, innovation in production, new usage of
materials, creator of market etc. It is a mental attitude to foresee risk and uncertainty
with a view to achieve certain strong motive. It also means doing something in a new
and effective manner.
CONCEPT OF ENTREPRENEUR
The word Entrepreneur is derived from the French verb entrepredre. It means to
undertake. In the early 16th century the Frenchmen who organized and led military
expeditions were referred as Entrepreneurs. In the early 18th century French
economist Richard Cantillon used the term entrepreneur to business. Since that time
the word entrepreneur means one who takes the risk of starting a new organization or
introducing a new idea, product or service to society.
According to J.B. Say, An Entrepreneur is the economic agent who unites all means of
production, land of one, the labour of another and the capital of yet another and thus
produces a product. By selling the product in the market the pays rent of land, wages to

labour, interest on capital and what remains is his profit. Thus an Entrepreneur is an
organizer who combines various factors of production to produce a socially viable
product. An entrepreneur can be regarded as a person who has the initiative skill and
motivation to set up a business or enterprise of his own and who always looks for high
achievements. He is the catalyst for social change and works for the common good.
They look for opportunities, identify them and seize them mainly for economic gains. An
action oriented entrepreneur is a highly calculative individual who is always willing to
undertake risks in order to achieve their goals.
According to Joseph Schumepeter, An entrepreneur in an advanced economy is an
individual who introduces something new in the economy, a method of production not
yet tested by experience in the branch of manufacture concerned, a product with which
consumers are not yet familiar, a new source of raw material or of new market and the
like.
According to Cantillon An entrepreneur is the agent who buys factors of production at
certain prices in order to combine them into a product with a view to selling it at
uncertain prices in future. To conclude an entrepreneur is the person who bears risk,
unites various factors of production, to exploit the perceived opportunities in order to
evoke demand, create wealth and employment.

CONCEPT OF ENTREPRENEURSHIP
The term entrepreneurship is often used synonymously with the term Entrepreneur
though, they are two sides of the same coin, conceptually they are different.
Entrepreneurship is the indivisible process flourishes, when the interlinked dimensions
of individual psychological entrepreneurship, entrepreneur traits, social encouragement,
business opportunities, Government policies, availability of plenty of resources and
opportunities coverage towards the common good, development of the society and
economy.

Entrepreneurship is the process of identifying opportunities in the market place,

arranging the resources required to pursue these opportunities and investing the
resources to exploit the opportunities for long term gains. It involves creating wealth by
bringing together resources in new ways to start and operate an enterprise. According
to Cole Entrepreneurship is the purposeful activity of an individual or a group of
associated individuals undertaken to initiate, maintain and aggrandize profit by
production or distribution of economic goods and services.
According to Higgins Entrepreneurship is meant the function of foreseeing investment
and production opportunities, organizing an enterprise to undertake a new production
process, raising capital, hiring labour, arranging the supply of raw materials, finding site,
introducing a new technique, discovering new resources or raw materials and selecting
top managers for day to day operations of the enterprise. The above definitions
highlights risk bearing, innovating and resource organizing aspects and an individual or
group of people achieve goal through production or distribution of products or services.
To conclude entrepreneurship is set of activities performed by an entrepreneur thus,
entrepreneur proceeds entrepreneurship.

1.2 The Historical development of entrepreneurship

The concept and definition of entrepreneurs and entrepreneurship differs:

From time to time
Country to country
From economic system to economic system and
Among different system Due to this, despite the long history of the development
of the concept entrepreneurship, there is no one definition on which consensus
is reached.

To understand how the latest definitions of its concept lets see some of the definitions
and concepts attached to the term entrepreneurship in time, discipline, and economic
system.
Entrepreneurs in 13th and 14th C were taken as those people who are able to manage
large production projects such as big public buildings, cathedrals, castles, etc. And it
was the architectures and contractors who were considered as entrepreneurs. Here the
person didnt take any kind of risk but the responsibility is to manage the process.
In 17th C., the entrepreneur is the person who enters into a contract with the
government to perform or produce a certain kind of product and provide it with fixed
price. The entrepreneur agrees to provide the product despite the price fluctuation on
inputs and its subsequent impact on the cost of providing the output. In this aspect the
entrepreneur took risk.
Following the industrial revolution of the 18 thC those people who were able to produce
something were not always those who possess money. Those individuals who have the
idea to do something need to contact those having capital so as to put their idea into
practice. During this period, the entrepreneurs were differentiated from venture
capitalists or capital owners.
Until the mid 20thC entrepreneurs were equated with managers. Entrepreneurs were
considered as those individuals who combine means of production with his/her own
initiative. Skill and ingenuity in undertaking the managerial functions and be able to
cover the cost of all kinds of inputs and gain profit as return of his or her contribution.
The profit was the reward for the entrepreneurial contribution of the manager. It was in
the mid of the 20th century that the

concept entrepreneurship was attached with the

concept of innovation. Innovation in this context is the introduction of something new

into the economy. The trend towards defining the concept of entrepreneurship, thus,
goes from merely managing large projects with out taking risk to introducing something
new into the economy.

An entrepreneur is also defined differently in developing and developed countries. In

developed country, an entrepreneur is the one who is involved in innovation process.
Innovation either in terms of:
Producing new product that is not known by the customers
New method of doing things (technology) that is not tried or used in an industry
before and improve the performance of the firm in one way or another
Finding new source of inputs (this can be use of inputs that were not used for
production of a specific kind of product)
Opening new market (this can be introducing the product in the international
market; or
A combination of one or more of the above means.
In developing countries the person who is able to imitate is also considered as
entrepreneurs. An entrepreneur in developing country is the one who start a business
(old or new), undertake risk, bear uncertainty, and perform the managerial function of
decision making and coordination. Unlike the developed countries, emphases are not
put only on innovation-in the context of introducing something new into the economy. In
fact, it cannot be said that the person is out of innovative activities, what makes it
different from others is that of the degree of innovation. If the person imitates the
technology outside the country and put it into her/his country, then the person is able to
introduce something new to the economy of the country.
Entrepreneurship includes the existence of the spirit of venturing into the enterprise
through innovation, creation and translation of such spirit into reality in various fields of
the industry and commerce by entrepreneurs. In so doing entrepreneurs play a
significant role in a certain economic system. The economic system intern affects the
nature, scope and environment of entrepreneurship. Economic systems can be
socialism or communism, mixed economy and capitalism. The role, function and
importance and form of existence of entrepreneurs vary in the three kinds of economic
system.

In capitalist economic system, it is a free enterprise system where individuals have the
freedom to save, invest, and encourage healthy competition. Entrepreneurs are free in
investing and they are assumed to be the catalyst for economic growth. With this
attitude towards entrepreneurs necessary assistances of financial or non-financial is
provided to potential entrepreneurs to play a role in the economy.
In the mixed economy, as well, entrepreneurs are considered as important for economic
development and they are involved in production, distribution of goods and services in
an economy. But unlike the case in the capitalist economy the governments role passes
beyond stabilizing the economy using policies. It is also involved in the production of
capital goods and distribution of basic social services. At different degree attempts are
also made towards strengthening entrepreneurs.
In contrast; in socialist or communist economy entrepreneurs and private investors are
considered as parasites of the economy that exploit the efforts and contribution of the
work force. So they are discouraged not to evolve in an economy. If they are to be
called entrepreneurs, it is those who are working in the central planning and financial
authority that are allowed to strategize the resource allocation, deployment of resources
in sense of equitability with out any profit motive but for social good. Entrepreneurs,
therefore, are seen differently and are playing a different role in different economic
system.
Entrepreneurs are considered differently in different disciplines.
For sociologists an entrepreneur is a person who is molded by various practices, social
enforcements and in a way that are sensitive to business and social environment that is
capable of seeing and exploiting opportunities that wouldnt have been seen by others.
For Psychologists entrepreneurs are those people, who are achievement oriented,
vigorously apply personal energy towards long cherished goals.
For economist entrepreneurs are individuals who can bring incremental wealth into the
economy.

In almost all definitions of entrepreneurship, there is an agreement that we are talking

about those people:

Who are initiative taking

The acceptance of risk of failure

Who put their idea into practice by bringing together means of production,
organizing and coordinating the efforts towards the predetermined goal?

Who come up with something new

Characteristics of an entrepreneur
Entrepreneur is a key figure in economic progress. He is the person who introduces new things in
the economy. He is considered as the business leader and not as simple owner of capital. He is a
person with telescopic faculty, drive and talent who perceives business opportunities and
promptly seizes them for exploitation. To be successful, an entrepreneur should have the
following characteristic features.
1. Need to achieve: Entrepreneurs have got strong desire to achieve higher goals. Their inner
self motivates their behaviour towards high achievement: most of the people dream of success
but do not take any action towards achieving these dreams. Entrepreneurs with high n-Ach factor
act continuously to achieve the goal and make their dreams come true. For them, winning is
achievement.
2. Independence: Most of the entrepreneurs start on their own because they dislike to work for
others. They prefer to be their own boss and want to be responsible for their own decisions.
3. Risk-bearing: Entrepreneurs are the persons who take decisions under uncertainty and thus
they are willing to take risk, but they never gamble with the results. They choose moderate risk
rather than play wild gamble. They, therefore, undertake calculated risk which is high enough to
be exciting, but with a fairly reasonable chance to win.

4. Locus of control: According to Rotters locus of control theory, an individual perceives the
outcome of an event as being either within or beyond his personal control. Entrepreneurs believe
in their own ability to control the consequences of their endeavour by influencing their socioeconomic environment rather than leave everything to luck.
5. Perseverance: Entrepreneur has got the quality of sticking to job he decides to undertake.
Once committed to a specific goal and course of action, entrepreneurs become absorbed to it.
They personally solve the problems that come across their way while setting up the project. They
also work sincerely until the whole project is successfully implemented.
6. Positive self-concept: Entrepreneurs are always positive in their action. Being an achiever, he
directs his fantasies and dreams towards achievement of worthwhile goals and sets extraordinary
standard of excellence in what he is doing. This is based upon his awareness of SWOT analysis,
i.e. his strengths, weaknesses, opportunities and threats. He utilizes his positive knowledge to
support his thinking. He never exhibits any negative attitude.
7. Ability to find and explore opportunities: Entrepreneurs are always alert to opportunities.
They are very much quick to see and grab opportunities. They exhibit an innovative turn of mind
and convert the problems into viable opportunities. They plan intellectually and anticipate
carefully how to achieve their goals in realizing an opportunity.
8. Hope of success: Hope of success is a significant quality of entrepreneurial personality.
Entrepreneurs set their goals with a hope of success rather than fear of failure. This is because
they set their goals on the basis of facts and their ability to maneuver them to their advantage.
9. Flexibility: Most of the successful entrepreneurs measure the pros and cons of a decision and
tend to change if the situation demands. They never feel reluctant to revise their decisions. They
are the persons with open mind without rigidity.
10. Analytical ability of mind: Entrepreneurs are unaffected by personal likes and dislikes.
They stand beyond these types of prejudices as they are realistic in their approach. At the time of

their need they select experts rather than friends and relatives to assist them. They usually avoid
emotional and sensitive attitude towards their business or problem.
11. Sense of efficacy: Entrepreneurs are always oriented towards action for accomplishment of
their goals. Being confident of their abilities, they find themselves as problem solvers rather than
problem avoiders. They chalk out their goals for future and make planning to achieve them.
12. Openness to feedback and learning from experience: Successful entrepreneurs like to
have immediate feedback of their performance. They modify their plans on the basis of the
feedback they receive from the environment around them. They learn from their experience and
never get discouraged having received unfavorable information. On the contrary, they are
stimulated by unfavorable information to involve themselves sincerely in their own tasks to
reach their desired goals.
13. Confronting uncertainty: Successful entrepreneurs are always optimistic and take every
odd as the opportunity. They maneuver their environment in such a way that the works get
accomplished rationally. Thus, they win by the application of their extraordinary insight and
skill.
14. Interpersonal skills: Entrepreneurs are always comfortable while dealing with people at all
levels. They interact with raw material suppliers, customers, bankers, etc.. for different activities.
As successful entrepreneurs, they should be persons who like working with others possessing the
much needed quality of interpersonal skill to deal with people.
15. Need to influence others: Once the entrepreneurs set their goals, they have to play the roles
of manager too. For influencing others (n Power), a low need to establish emotional relationship
(low n Affiliation), and a high need to discipline ones own self (to inhibit over expression of
their personality) are essential.
16. Stress takers: Entrepreneurs are capable of working for long hours and solving different
complexities at the same time. As the captain of an industry or an enterprise, an entrepreneur

faces a number of problems and in right moment he takes right decisions which may involve
physical as well as mental stress. He can face these challenges if he has the capability to work for
long hours and keep himself cool under monotony.
17. Time orientation: Entrepreneurs anticipate future trends basing upon their past experience
and exposure. They stick to the time pragmatically while doing their jobs.
18. Innovators: Successful entrepreneurs are innovators. They constantly put their efforts in
introducing new products, new method of production, opening new markets and recognizing the
enterprise.
19. Business communication skill: In order to motivate others in the business entrepreneurs
must possess good communication skill. Both written and oral communication skills are
necessary for the entrepreneurs for running enterprise efficiently.
20. Leadership: Entrepreneurs should possess the quality of leadership. Leadership is the ability
to exert interpersonal influence by means of communication towards the achievement of goals.
Entrepreneurs as the leaders should provide the necessary spark to motivation by guiding,
inspiring, assisting and directing the members of the group for achievement of unity of action,
efforts and purpose. Hence, entrepreneurs by their own leadership styles and behaviour reduce
the problems by proper handling of situations. Good administrative work depends upon effective
leadership of the entrepreneur.
21. Business planning: Planning implies deciding in advance what, when and how to do a thing.
Entrepreneurs should be equipped with skill and knowledge to prepare their business plan. A
successful entrepreneur always follows the principles of management while planning for his
business. The planning can act as a bridge between the present position and expected future
shape of the enterprise. It provides a sense of vision to the entrepreneurs to cope with risky and
uncertain situation.

22. Decision making: Decision-making skill is a fundamental characteristic of an entrepreneur.

This implies the function of choosing a particular course of action at every stage of creation of an
enterprise out of several alternative courses for the purpose of achieving specified goals. Hence,
decision making is necessary at all times and mostly at conditions of uncertainty and risk.
23. Ability to mobilize resources: Entrepreneurs must have the ability to marshal all the inputs
to obtain the end product. They have to mobilize 6Ms, i.e. Man, Money, Material, Machinery,
Market and Method effectively to realize the final product as entrepreneurship is a function of
gap filling and input completing.
24. Self-confidence: Entrepreneurs must have self-confidence to accomplish the task effectively
and efficiently. They must take decisions on their own in uncertain and risky situation and should
stick to it confidently even if there occurs initial setbacks.

1.3 ROLE OF ENTREPRENEURSHIP IN ECONOMIC DEVELOPMENT

Economic development is the effect for which entrepreneurship is a cause Economic
development essentially means a process of upward change whereby the real per
capita income of a country increases over a period of time .Entrepreneurship has an
important role to play in the development of a country. It is one of the most important
inputs in economic development. The number and competence of entrepreneurs affect
the economic growth of the country.
The economic history of the presently advanced countries like USA, Russia and Japan
supports the fact that economic development is the outcome for which entrepreneurship
is an inevitable cause. The crucial and significant role played by the entrepreneurs in
the economic development of advanced countries has made the people of developing
and under developed countries conscious of the importance of entrepreneurship for
economic development. It is now a widely accepted fact that active and enthusiastic

entrepreneurs can only explore the potentials of the countries availability of recourses
such as labour, capital and technology.
The role of entrepreneurs is not identical in the various economies. Depending on the
material resources, industry climate and responsiveness of the political system, it varies
from economy to economy. The contribution of entrepreneurs may be more in
favourable opportunity conditions than in economies with relatively less favourable
opportunity conditions. Entrepreneurship helps in the process of economic development
in the following ways.
1) Employment Generation
Growing unemployment particularly educated unemployment is the problem of the
nation. The available employment opportunities can cater only 5 to 10 % of the
unemployed. Entrepreneurs generate employment both directly and indirectly. Directly,
self employment as an entrepreneur and indirectly by starting many industrial units they
offer jobs to millions. Thus entrepreneurship is the best way to fight the evil of
unemployment.
2) National Income
National Income consists of the goods and services produced in the country and
imported. The goods and services produced are for consumption within the country as
well as to meet the demand of exports. The domestic demand increases with increase
in population and increase in standard of living. The export demand also increases to
meet the needs of growing imports due to various reasons. An increasing number of
entrepreneurs are required to meet this increasing demand for goods and services.
Thus entrepreneurship increases the national income.
3) Balanced Regional Development
The growth of Industry and business leads to a lot of Public benefits like transport
facilities, health, education, entertainment etc. When the industries are concentrated in
selected cities, development gets limited to these cities. When the new entrepreneurs

grow at a faster rate, in view of increasing competition in and around cities, they are
forced to set up their enterprises in the smaller towns away from big cities. This helps in
the development of backward regions.
4) Dispersal of economic power
Industrial development normally may lead to concentration of economic powers in a few
hands. This concentration of power in a few hands has its own evils in the form of
monopolies. Developing a large number of entrepreneurs helps in dispersing the
economic power amongst the population by weakening the harmful effects of monopoly.
5) Better standards of living
Entrepreneurs play a vital role in achieving a higher rate of economic growth.
Entrepreneurs are able to produce goods at lower cost and supply quality goods at
lower price to the community according to their requirements. When the price of the
commodities decreases the consumers get the power to buy more goods for their
satisfaction. In this way they can increase the standard of living of the people.
6) Creating innovation
An entrepreneur is a person who always looks for changes. apart from combining the
factors of production, he also introduces new ideas and new combination of factors. He
always try to introduce newer and newer technique of production of goods and services.
An entrepreneur brings economic development through innovation.
7) Capital formation
Entrepreneurship promotes capital formation by mobilizing the idle saving of the public
and put it under continues transaction so as to improve the value of the capital by
utilizing in a profitable way under different stages of enterprise.

8) Resource mobilization
The natural resources including the human resource skill can be effectively utilized for
functioning of an enterprise towards economic development which might otherwise
remain unutilized and idle.
9) Backward and forward linkages
Entrepreneurship will give the opportunity for the people to involve at different levels
starting from production to ultimate consumption, the backward and forward linkages
which stimulate the process of economic development in the country.
10) Promotes countrys export trade
It also promotes countrys export trade i.e., an important ingredient to economic
development.

1.4 Entrepreneurship, creativity and Innovation

Creativity
Creativity is marked by the ability to create, bring into existence, to invent into a new
form, to produce through imaginative skill, to make to bring into existence something
new. Creativity is not ability to create out of nothing but the ability to generate new ideas
by combining, changing, or reapplying existing ideas. Some creative ideas are
astonishing and brilliant, while others are just simple, good practical ideas that no one
seems to have thought, of yet. Creativity is also an attitude, the ability to accept
change and newness, a willingness to play with ideas and possibilities, a flexibility of
outlook, the habit of enjoying the good, while looking for ways to improve it. Creativity is
also a process. Creative person work hard and continually to improve ideas and
solutions, by making gradual alterations and refinements to their works. Contrary to the
mythology surrounding creativity, very few of creative excellence are produced with a
single stroke of brilliance or in a frenzy of rapid activity. Much closer to the real truth are
the stories of companies which had to take the invention away from the inventor in order
to market it because the inventor would have kept on tweaking it and fiddling with it,,
always trying to make it a little better.

Entrepreneurship

The entrepreneur is primarily concerned with developing new products, processor

markets, and the ability to bring something new, product, processes or markets, the
ability to bring something new into the market. The entrepreneur indulges in original
thinking more than any other person thinks and he is able to produce solutions that fly in
the face of established knowledge. Entrepreneurs are inclined to be more adaptable
and are prepared to consider a range of alternative approaches. They challenge the
status quo, which can sometimes bring them into conflict with their colleagues.
Innovation
Innovation is the process of bringing the best ideas into reality, which triggers a creative
idea, which generates a series of innovative events. Innovation is the creation of new
value. Innovation is the process that transforms new ideas into new value- turning an
idea into value. You cannot innovate without creativity. Innovation is the process that
combines ideas and knowledge into new value. Without innovation an enterprise and
What it provides quickly become obsolete.
The dictionary defines innovation as the introduction of something new or
different. Innovation is the implementation of creative inspiration. The National
Innovation Initiative (NII) defines innovation as the intersection of invention and insight,
leading to the creative of social and economic value Innovation is value the creation
of value adding value to customers satisfaction- delighting the customers .Innovation
is the basis of all competition advantages, the means of anticipating and meeting
customers needs and the method of utilization of technology.

Chapter 2 Small Business

1.1

Definition and Importance

Small businesses are privately owned corporations, partnerships, or sole

proprietorships that have fewer employees and/or less annual revenue than a regularsized business or corporation. What businesses are defined as "small" in terms of being
able to apply for government support and qualify for preferential tax policy varies
depending on the country and industry.
Small businesses range from fifteen employees under the Australian Fair Work Act
2009, fifty employees according to the definition used by the European Union, and
fewer than five hundred employees, to qualify for many U.S. Small Business
Administration programs. While small businesses can also be classified according to
other methods, such as annual revenues, shipments, sales, assets, or by annual gross
or net revenue or net profits, the number of employees is one of the most widely used
measures.
Small businesses in many countries include service or retail operations such as
convenience stores, small grocery stores, bakeries or delicatessens, hairdressers or
trade people (e.g., carpenters, electricians), restaurants, guest houses, photographers,
very small-scale manufacturing, and Internet-related businesses such as web design
and computer programming. Some professionals operate as small businesses, such as
lawyers, accountants, dentists and medical doctors (although these professionals can
also work for large organizations or companies). Small businesses vary a great deal in
terms of size, revenues and regulatory authorization, both within a country and from
country to country. Some small businesses, such as a home accounting business, may
only require a business license. On the other hand, other small businesses, such as day
cares, retirement homes and restaurants serving liquor are more heavily regulated, and
may require inspection and certification from various government authorities.
Characteristics of Small-Scale Industries:

(i) Ownership:
Ownership of small scale unit is with one individual in sole-proprietorship or it can be
with a few individuals in partnership.
(ii) Management and control:
A small-scale unit is normally a one man show and even in case of partnership the
activities are mainly carried out by the active partner and the rest are generally sleeping

partners. These units are managed in a personalized fashion. The owner is activity
involved in all the decisions concerning business.
(iii) Area of operation:
The area of operation of small units is generally localised catering to the local or
regional demand. The overall resources at the disposal of small scale units are limited
and as a result of this, it is forced to confine its activities to the local level.
(iv) Technology:
Small industries are fairly labour intensive with comparatively smaller capital investment
than the larger units. Therefore, these units are more suited for economies where
capital is scarce and there is abundant supply of labour.
(v) Gestation period:
Gestation period is that period after which teething problems are over and return on
investment starts. Gestation period of small scale unit is less as compared to large
scale unit.
(vi) Flexibility:
Small scale units as compared to large scale units are more change susceptible and
highly reactive and responsive to socio-economic conditions.
They are more flexible to adopt changes like new method of production, introduction of
new products etc.
(vii) Resources:
Small scale units use local or indigenous resources and as such can be located
anywhere subject to the availability of these resources like labour and raw materials.
(viii) Dispersal of units:
Small scale units use local resources and can be dispersed over a wide territory. The
development of small scale units in rural and backward areas promotes more balanced
regional development and can prevent the influx of job seekers from rural areas to
cities.

2.3 Small Business Failure Factors

Entrepreneurs face problems in the beginning. He/She is confronted with problems
when the enterprise is alive and kicking. If it is sick, there comes another set of problem.
We may divide the problems of industries in to two external and Internal. External
problems are those, which results from external business environment. And these
factors are beyond the control of the Entrepreneur. Internal factors are those, which are
not influenced by external forces. The internal problems attesting the industries relate to
organization, structures, production channel, distribution channel, technical knowhow,
train inning and inadequacy of management, etc. However these two kinds of problems
are mutually exclusive they are co-related.
It is obvious that all industries whether they are small or not, face the above mentioned
problems. But large companies since they are organized and financially very strong,
because they often have large amount of resources. Their resources enable them to
face and solve their problem more effectively. Because of their weak financial structure,
the resources of small sector are limited while large companies can employ trained and
experienced managers. Large companies can influence their raw material suppliers,
their customers, and sometimes the government, but small entrepreneurs are helpless
in this respect.
a) Choice of Idea
Identification and evaluation of business idea is a most difficult task. Most good
business idea does not appear suddenly rather the entrepreneur should be alert to
identify potential opportunities. Most small businesses starters do not have the formal
mechanism of identifying business opportunities. Business ideas can be a raised from
consumers, business associates, members of distribution system. Often, consumers
who purchase products are the best source of ideas for new business. Due to their

close confect with the end-user, channel members of the distribution system also see
new product needs.
Whether the opportunity is identified with the input from consumers, business
associates, channel members, or technical people, each opportunity must be carefully
screened and evaluated. The evaluation of the opportunity is perhaps the most critical
element. But entrepreneurs often fail to evaluate opportunities due to their limited skill
and this results poor assessment of the specific products or senesces more profitable.
They also fail to determine risk involved with each opportunity and rewards that can be
exploited.
Determining opportunity requires assessment of the market size, level of competition,
technology, and the amount of capital involved.
Opportunity analysis, or what is frequently called an opportunity assessment plan, is not
a business plan. Composed to a business plan, it should be shorter; focus on
opportunity not the entire ventured, this provide the basis to make the decision of
whether to act on opportunity
Analyzing an opportunity involves:

Describing the product or service;

An assessment of opportunities;

An assessment of the entrepreneur and the team;

Specification of an the activities and resources needed to translate the

opportunity in to promising business venture

The source of capital to finance the initial venture as well as future growth

The most difficult and critical aspect of opportunity analysis is the assessment of the
opportunity. This requires the following questions to be answered:

What market need does it fill?

What personal observation have you experienced or recorded with regard to

the market need?

What social condition underlies this market need?

What market research data can be gathered to discuss this market need?

What competition exists in this market? How would you describe the
behavior of this competition

B. Faulty Plan
Planning plays an important role for successful attainment of small business. It is
externally important in the early stages of new small businesses. Failure in preparation
of good plan obviously real to negative consequences to the new Business Faculty that
leads to poor planning can be categorized classified as technical feasibility, and
economic viability. Technical feasibility factors include Inadequate technical know-how,
vocational disadvantage, and outdated production process.
There are different techniques and types of planning that help entrepreneurs develop a
promising plans. But most of them are not aware of the techniques and procedures
those result good plan. Goals and objectives must be specific and feasible.
Entrepreneurs should not be ambitions. Goals and objectives that are too general and
not feasible make the business plan difficult to control and implement. Entrepreneurs
expert time and energy to prepare a plan, without studying the feasibility and any
barriers to success feasibility study require useful information about marketing, finance,
and production. But Entrepreneurs rarely gather n formation about the three aspects of
the business mentioned about. And the main reason is skill how to collect the
information how to interpret and manipulate the information in a meaningful manner.
Identification of possible sources of this information is also another problem.
Poor selection of operation locations plays its own role for poor planning. Poor site
location creates another problem to the business in many ways. For example; selecting
site far from customers or resource area increases distribution & transportation of costs.
This in turn creates financial problems and reduction in profit.
Most small businesses undertake their businesses using out dated or archaic
production equipments. It is obvious production technology has a clear impact on the

quality of the product service there by the competitiveness of the business. Due to
outdated production tools small businesses becomes unable to compete with these with
advanced production technologies. Thus, small business operators have to make sure
that their production facilities capable of producing the planned quantity and quality of
products and/or services.
Economic feasibility factors such as high cost of input, too high breakeven point,
uneconomic size of business, under-estimation of financial requirements, and over
estimation of demand causes planning failure.
C. Cost of input
High cost of input is one reason to the failure of small businesses. They buy input with a
high price and this may force them to spend substantial amount of their capital on
material inputs. This can be due to poor purchasing activities. They may lack the skill to
identify possible alternative supplier through fathering information and carefully
evaluating each supplier based on clearly stated criteria's or areas of performance.
D. Uneconomic size of project
Poor determination of the size of the firm is also observed from small business starters.
The size of the firm should be with the size that can be implementing with the available
financial and human resource of the firm. Entrepreneurs also fail to correctly estimate
the financial requirement of the size of the project. They underestimate the money
requirement of the project and leads to problems in the implementation of the project.
They may run out of money and interruption may occur if there is no immediate source
of finance.
E. Wrong Estimation of Demand
Entrepreneurs should estimate demand by through carefully study of the market. Lack
of knowledge about the market whether it is growing or declining, the possibility of new
competitors to enter, possible changes in consumer needs lead them to over-estimation
of demand. Thus, additional marketing research about the demand for the business's
product and serine will be required.

F. Implementation environment change

A plan, which is prepared without undertaking careful analysis about the future, will
create problem in the phase of implementation. One reason is that the plan we develop
today may not work for tomorrow because the environment in which businesses operate
is extremely dynamic. Problems that may our in the implementation phase includes:

Cost overruns resulting from delays in getting license and mater

G. In appropriate product mix

Small business starters show weakness in selection of appropriate product-mix. They
should conduct customer analysis by which they can obtain basic information analysis
by which they can obtain basic information about the needs and wants of their target
customers.
H. Poor inventory control
Inventory is an important cost control and customer service activities that need to be
carefully monitored too much inventory to meet customer needs can tie up cash. On the
other hand, too little inventory can also increase cost. Sales may be lost; customers
may become unhappy and choose another firm. Most small business makes mistakes in
controlling inventory. In other words, they face problems in making trade-off between too
much and too little inventory. They make them unable to determine the optimum level of
inventory.
I. Poor marketing skill
Marketing skills are essential to small Businesses continual success. As the company
grows, it will need to develop new products and services to maintain its
competitiveness. They should be an angering process based on information regarding
changing customer needs and competitors strategies. For small businesses in is difficult
to engage in some of these kinds of formal procedures for developing new products
because of lack of skilled manpower and financial resources.

J. Poor time management

Time management involves investing time to determine what the entrepreneur wants
out of the firm. Few entrepreneurs use time effectively, and none of them reaches
perfection.
K. Inadequate cash reserves. If you don't have enough cash to carry you through the
first six months or so before the business starts making money, your prospects for
Success are not good. Consider both business and personal living expenseswhen
determining how much cash you will need.
L. Failure to price your product or service correctly: You must clearly define your pricing
strategy. You can be the cheapest or you can be the best, but if you try to do both, you'll
fail.
M. Believing you can do everything yourself. One of the biggest challenges for
entrepreneurs is to let go. Let go of the attitude that you must have hands-on control of
all aspects of your business. Let go of the belief that only you can make decisions.
Concentrate on the most important problems or issues facing your company. Let others
help you out. Give your people responsibility and authority.

2.4 Setting up of a Small Business

Following are the major steps in setting of the small business:

(i) Information Collection
(ii) Information Organization
(iii) Acquiring Required/Vocational Skills
(iv) Financial Requirements
(v) Market Assessment

(vi) Provision for Crisis

(i) Information Collection:

The first step involved is to decide which enterprise one wants to set up. This begins
with collecting information about the units already working in that field of concern. This
can be done by various ways such as going through the telephone directories or by
visiting the registrars office of the small-scale units.
This will enable the prospective entrepreneur to make an assessment of the present
market situation in that business activity. Based on this information, they can weigh the
pros and cons involved in entering into that business activity.
For example, they can come to know that the medical transcription and call centers
have been doing very well in the service sector enterprises in the country. This is
because of high labour cost in high income countries; the multinational companies have
gradually started shifting their labour-intensive manufacturing activities to the
developing countries.
In view of this, there is a great opportunity to tap those products which would be
outsourced by the Multi-National Companies (MNCs) through quality vendors. Similarly,
the rapid increase in the tourist influx in Ethiopia due to improvement and restoration of
peaceful law and order situation indicates very good prospects for service providing
enterprises like travel, tour, and hospitality industry in the region.
(ii) Information Organization:
Having collected information about enterprise concern, the prospective entrepreneur
needs to organize the same in an orderly and systematic manner to derive the
meanings from them. This will help to make assessment about the minimum
requirements to start an enterprise in a particular business line.
Here, one generally undertaken exercise is to prepare a checklist for ready reference of
all required and available resources in terms of space, fund, training and development,
and manpower requirements. Once this exercise is over, the step involved will be to
prepare a summary of how the checklist will be transformed into the desired products
and services. Here we are presenting you one exercise based on your above
understanding.

(iii) Acquiring Required/Vocational Skills:

The third step is to understand the need for upgrading ones vocational skills if it is a
pre-requisite for your Small Enterprise Unit (SEU). The importance of acquisition of
required skills is justified by the statement that it is better to teach a man to fish than to
provide him with fish everyday.
There is a need to build on ones strengths in order to gain and feel confident of
implementing your project of setting an SEU. Awareness and training in required subject
can remove structural barriers. You will feel sure of yourself in taking loans and as also
taking risk. Risk is a part of setting up an SEU.
Once your clients have set up their SEU, updating themselves on the latest
developments in the field should be a continuous process. They can also hire skilled
workers and staff to carry out the major tasks at their SEU.
(iv) Financial Requirements:
The fourth step involved is ascertaining the financial requirements for setting up a small
business enterprise. This is particularly important because generally small
entrepreneurs do not have their own funds. Hence, they depend upon borrowed funds
from family members or relatives or friends or financial institutions.
While planning for finance, the prospective entrepreneur needs to consider issues like
sources, availability, estimation and management of working capital. One should have
the basic knowledge of preparing income and expenditure statements.
One should also go for insurance cover provided by the concerned financial institutions.
Providing financial services in a commercial way is gaining a lot of credence these days.
There are well-planned credit schemes for small enterprises available offered by the
banks and co-operatives.
(v) Market Assessment:
No business enterprise can be thought of without market. Enterprise exists, survives
and thrives because of market. Production has no value or meaning if it is not sold
/marketed. Therefore, while planning for establishing a small business enterprise, the
prospective entrepreneur needs to know who will buy his/her product.
Here, the trite saying about the importance of market seems worth citing: A
manufacturer of iron mails must know before manufacturing who will buy his/her iron
nails. In sum and substance, a prospective entrepreneur needs to identify market for
his/her product before it is actually produced. Market survey or market research helps
the entrepreneur assess market for his/ her product.

(vi) Provision for Crisis:

The last but not the least step involved in setting up a business enterprise is the
preparedness to manage crisis situations, if any. Yes, some may not consider it as a
necessary step because foreseeing any crisis and its handling is simply an additional
step.
Even many may view why to think in a negative way for the worst which may not
happen at all. Admitting that optimism helps, there is no harm in being prepared for any
eventuality, if it arises. It is always useful to remain prepared for something unexpected
in terms of resources, policies, finances and natural calamities takes place. Seeking
insurance cover is the best way to deal with these situations.

Chapter Three: Business Plan

For a person who has the knowledge about business courses, it is normal and natural to
know about planning, how to plan, challenges to planning and the relevance of
planning. Planning is anticipating the future courses of actions that are needed to be
taken to achieve a certain objective. Plans are of many types, depending on the
parameters used for classifying them. Planning is a dynamic and ever ending process,
challenging in a dynamic environment and yet pertinent for organizations be if small or
large, business or public organizations.
Planning is important in early stages of any new venture when entrepreneurs need to
think of establishing a new business. Business plan, although often criticized for being
reams of glory is probably the most important document to an entrepreneur at a start
up stage. Business plans tend to be treated as an academic exercise by many writers
and consultants. They talk about such things as the planning process, driving
strategy, the organizational strategy, and modeling approach; however, planning
shouldnt be viewed as an academic exercise. Entrepreneurs can enhance their chance
of success by taking time or write a business plan. The process of thinking about your
business venture and then articulate it on a paper will assist you in thinking through how
you are going to accomplish your goal. There are many successful entrepreneurs who
are not the only business people who tells you that their business plan was instrumental
in keeping them focused on their objectives. Entrepreneurs are not the only people who
write and use business plans. Many large businesses are engaged in planning. The
anatomy of their plans resembles in many aspects the basic plan.

What is a business plan?

As basic as a question may seem, it is the most appropriate place to begin the planning
process. Having the right view of the business plan will help you develop the kind of
plan that will allow you/ your business to be successful. All kinds of definitions are given
by different authors but with similar key concepts.
1. A business plan is a document that convincingly demonstrates that your business
can sell enough of its product or service to make a satisfactory benefit and be
attractive to potential partners.
2. A business plan is a written summery of entrepreneurs proposed business
venture, its operational, financial details, marketing opportunities and strategies
and the managers skill and ability.
3. A business plan is a selling document. It should sell your business and its
executives to potential backers of your business, from bankers to investors to
partners to employees.
4. A business pan (road map) is a written document prepared by the entrepreneur
or her close assistants that describes external and internal factors that are
pertinent to address issues such as where I am?, Where I want to go?, and How
can I get there? This plan thus is composed of mission, goal and objective and
the strategy of materializing the objectives. It often involves the integration of
functional plans such as marketing, manufacturing, human resource and financial
plans.
A business plan thus describes the direction the company is following what its goals are,
and where it wants to go and how it is going to get there. Be aware that a business plan
is not a simple assignment that can be completed in an over night. It is a result of many

weeks and months of research and evaluation. A business running without a plan is
reactive rather then being proactive. It todays dynamic world a business must plan in
order to successfully operate the business. Without a plan it is not possible event o
forecast short term sales, human resources requirement, material requirement and
financial demands let alone the impact of the external environment to the business. In
short the business plan is entrepreneurs insurance against launching a business
destined to fail or mismanage a potentially successful company.
Many entrepreneurs agonize about writing a business plan because they find it so
difficult to get started. When the entrepreneur decides to develop a business plan she
must be quite sure of having knowledge about planning, forecasting, accountancy,
marketing, research, sales, human resource management, legal issues in establishing a
business, and product development. Knowledge is lacking in either one or more of them
the entrepreneur can seek assistance from experts in the area who later on are going to
be partners in the organization. As you go through the start up process of evaluating
ideas, considering prospective employees and calculating cash flow needs, you should
take various points that rose in this section. The business allows the entrepreneur to
exploit the opportunities that arise in the life of a business. A written business plan
becomes entrepreneurs business representative during sales person or executive
serves as its representative during sales and conference presentations and meetings.
Every entrepreneur has a business plan. The problem is that more often that not it is
within her mind and is not written down. The problem is, a plan is in the entrepreneurs
head is very much different from the one that is written down. The written one is precise,
more fluid where as in the former it is unknown to others working with the entrepreneur.
The difference between unwritten plan and written plan is explained by the challenge
faced by the entrepreneur during transferring the plan in mind to the paper. If you talk to
an entrepreneur who passed through writing a business plan you will lean that it is one
of the most difficult task they ever accomplished.
A plan is a reflection of the creator. .It should demonstrate that the entrepreneur has
thought seriously about the venture and what will make it succeed. Preparing a solid

plan demonstrates that the entrepreneur has taken the time to commit the idea to
prepare. Building the plan forces the entrepreneur to consider both the positive and
negative aspects of the business. A detailed and thoughtfully developed business plan
makes a positive first impression on those who read it. In most cases potential lenders
and investors read a business plan before they meet the entrepreneur. Sophisticated
investors will not take time to meet with the entrepreneur whose business plan tends to
reflect a series investment of time and energy. They know that an entrepreneur who
lacks the discipline to develop a business plan likely lacks the discipline to run a
business.
An entrepreneur cannot allow others to prepare the business plan for her because
outsiders cannot understand the business nor envisioned the proposed company as
well. The entrepreneur is the driving force behind the business idea and is the one who
can best covey the mission and the enthusiasm she has for transforming the idea in to
successful business. Also because the entrepreneur will make the presentation to
potential lenders and investors she must understand every details of the business plan.
Advantages of writing a business plan
1. Obtaining Bank Finance
For most banks it is usually enough that an applicant provides past and current financial
statement to get a formal hearing of loan if the business is not new. But in todays world,
just getting hearing is not enough. Because more businesses are seeking bank
financing than can be financed by the bank, it is only those businesses that present the
best case that are financed. Therefore, the business plan helps you to present the
business in convincing and feasible manner and be financed. Since bankers are risk
averse a written business plan carries an important message even before it is read. It is
an indication the companys executives are serious enough to do formal planning and
the project to be financed is a well thought over and articulated business idea which can
serve as an assurance for being financed.
2. Seeking investment fund

Venture capitalist and others require a business plan from any company that want to be
taken seriously for financing. Business plan is the most important one in this condition
just like the curriculum Vetae for job application. Venture capitalists use business plans
to screen out those businesses to be financed. From among the potential applicants for
fianc those which are more convincing, well articulated, feasible in terms of profitability
and continuity will be selected. So a well written business plan expands the chance of
being financed.
3. Arranging strategic alliance
Strategic alliances are arrangements between large and small companies to carry out
joint research, marketing and other activities. For small business arranging strategic
alliance with a large company can mean gaining access to important financial,
distribution and other resources. But before a large company will even consider a
strategic alliance, its executive will want to examine a smaller companys business plan.
4. Obtaining large contract
Smaller companies seek to obtain a large chunk of business from major corporation can
encounter a common obstacle. It comes when the corporation representatives says
something like everyone knows who we are and we will be around long enough to fill
all+ the obligations, but very few people know the small and new business. At this point
producing a business plan can go a long way towards reassuring a corporation that we
will be around and will discharge our responsibility that arises from the contract. The
business plan demonstrates that you have thought well for longer period for several
years and have plans for what you have accomplished.
5. Attracting key employees
When a new or early stage company goes to hire top level managers, it faces difficulty
unlike large companies. A prospective manager your company wants to hire may be
considering leaving a secure job with a larger business and wandering how long your
company is going to be around. If he/she feels to unsecured you cannot convince that

person to join your company. Therefore, availability of a business plan can serve as an
indication of long sighted nature of your business.
6. Completing merger and acquisition
Whether you want to acquire a new business or want to sell you business can also be
indicated in your business plan and the action of doing this will not be reactive as things
are available to you but it will be proactive and actions will move together with your plan.
7. Motivating your management Team
One of the major problem confronting growing companies is communicating companies
strategy and business approach within the company so that every one will work towards
the same goal. When individuals in a business have different visions about the company
strategy, customers will be confused about what the company is trying to accomplish. A
written business plan that is based on inputs from all members of the companies
management team and distributed to all managers ensure that every one understands
what where the company is headed. In the process, the plan serves as a motivational
tool by laying out the companies financial, marketing and production goals. Other
benefits are derived from a business plan fro both the entrepreneur and the financial
sources that read it and evaluate the venture. Writing a business plan particularly for
entrepreneurs have the following merits.

The time, effort, research and fund spent to formulate the business plan forces
entrepreneurs to view the venture critically and objectively.

The competitive, economic and financial analysis included in business plan

exposes the entrepreneur to closely scrutinize his. Her assumptions about the
ventures success Since all aspects of the business venture must be addresses in
the plan the entrepreneur developments and examine operating strategies and
expected results from outside evaluators

The business plan tries to quantify objectives, provide measurable benchmarks

with comparative forecasts with actual results.

The completed business plan provides the entrepreneur with a communication

tool for outside financial sources as well as a operational tool for guiding the
venture towards success. Whereas for potential financers the business plan
provides the following information

Provides information about the detail potential market for the product, and plans
for alternative sources of securing the fund

Through prospective financial statement, the financial statements in the business

plan illustrates the businesss ability to pay back debt and distribute adequate
equity to shareholders

The plan identifies and indicates possible risks and crucial events with
presentation of contingent plan that can be an outlet for success of the business

Indicates the managerial and planning ability and commitment of the

entrepreneur

The information gained from business plan also makes potential financing
institutions to reasonably decide on financing the business

Elements of a Business Plan

There are no substitutes for a business plan and there is no short cut to produce a
business plan. Each of it is unique in terms the nature and the special contribution of the
business to the economy. The elements of a business plan may be started but how
entrepreneurs tell their story should be unique and reflect their personal excitements
about the new venture. Although building a business plan doesnt guarantee success, it
it does raise an entrepreneurs chance of succeeding in a business.

A business plan typically ranges from 25-55 pages length. Shorter plans typically are
too sketchy to be of any value and those much longer ones. The following are part of a
business plan.
Introductory Page
This is the title or the cover page that provides a brief summery of the business plans
content. It contains
The name and address of the company
The name of the entrepreneur and addresses ( tele, fax, website, etc)
A paragraph describing the company and the nature of the business
The amount of financing needed and probably the combination of sources (stock, debt,
and their one investment) A statement of confidentiality of the report so that the idea will
not be taken by some body without the consent of the author.
This page summarizes basic information that could take to much time and effort to
extract form the body of the report.
Table of Contents
This includes the logical listing of all the business plans section together with section
titles and page numbers. Be sure to list the major section as well as for important subsections. This section enables potential reviewers or reader of the business plan to
quickly go and read the particular section of the business plan in which they are
interested among other parts of the business plan.
Executive Summery
This part of the plan is prepared after the total plan is written. This part should stimulate
the reader to go further and read the entire business plan. This is important section that
shouldnt be written without proper care because investors and other potential sources
of finance decide whether reading the entire plan or not by reading this part of the plan.

It on average is written on two to three pages. An executive summery among other

things should contain at least the following.

Brief discussion of the business concept

The facts that support the relevance or opportunities of establishing the

business should be mentioned. This is the change in the economy, industrial
expansion, information technology expansion etc that are supported by facts
should be presented

The strategy that is designed to exploit this opportunity by establishing this

business should be briefly discussed. The kind of marketing strategy,
management system, the technique employed to pursue that opportunity and
what makes this strategy to be different from other which are being practiced
in other organizations

The potential benefits that can be accumulated by pursuing that strategy and
the financial feasibility of operating it should be presented

In addition to this other information which is believed to have positive impact

on investors can be included in this part of the business plan.

Environment and Industry Analysis

It is important to put a new venture in proper context by conducting environmental
analysis to identify trends and changes that is occurring in a national and international
level that may affect the new venture. The environmental analysis include the following
Economy: The entrepreneur should consider trends in the gross national product,
unemployment by geographic area, disposable income of residents, the saving habit of
people and so on.
Culture: An evaluation of cultural change may consider shifts in population, value
system towards for instance fashion, work, saving, safety, health and nutrition etc.

Technology: Although advances in technology are difficult to predict the entrepreneur

should consider some potential changes in technology by considering resources
allocated for technological advancement by different organization. Being in a market
that is rapidly changing due to technological development will require the entrepreneurs
to make careful short term decisions as well as to be prepared with contingency given
any new technological development that may affect the product.
Legal Concerns: There are many important legal issues in starting a new venture. The
entrepreneur should be prepared for any future legislation that may affect the product or
service, channel of distribution, price or promotion strategy. The deregulation of price
restriction on media advertisement, safety regulation affecting the product or packaging
should be assessed.
Such external variables are generally uncontrollable yet have impact on the business
operation. Ones an assessment of the environment is complete, the entrepreneur
should make industrial analysis that will focus on specific industrial trends. Two of them
are the industrial demand and completion.
Industrial Demand
It is often available from published sources. Knowledge about whether the market is
growing or declining, the number of new competitors, and the possible changes in
consumers needs are important issues in trying to ascertain the potential business that
might be achieved by the new venture. The demand for entrepreneurs product requires
marketing research that is going to be discussed I the marketing plan component of the
business plan.
Competition
Most entrepreneurs generally face threats from larger corporation. The entrepreneurs
must be prepared for these threats and must keep him/her informed about who the
competitors are and what their strengths and weaknesses so that effective marketing
strategy is put into effect. The industrial analysis should finally need to have a briefing of
the potential customers and their profile; their location and trends occurring in the

market area, and the market segment where by the venture will serve and compete
with.
Description of venture
This section begins by mission statement of the enterprise. This statement describes
the nature of business and what the entrepreneur hopes to achieve with the business.
This mission statement is also called the definition of business will guide the firm
through long term decision-making. After a mission statement important that provide
clear description and understanding of the business venture is discussed. Some of the
vital areas described here are the following

Product

The business owner should describe the companys over all product line, giving an over
view of how customers use goods and services. Drawing, diagrams and illustration may
be required if the product is complicated. It is best to write product description so that
any one can understand it. The entrepreneur should include a summery of any patent,
copyright or trademark protecting the product from infringement by competitors. Finally
the owner should honestly compare its product with that of competitors citing specific
advantages that makes the businesss product different fro others.

Location

The location of the business is vital for success of the business particularly if the
business is retail or involves service delivery. Thus the emphasis of location in the
business plan is a function of the type of business. In assessing the building or space
that the business is going to occupy, the entrepreneur is going to evaluate such factors
as parking, access from road way to facility, and access to customers, suppliers,
distributors, delivery rates, town regulations, or zoning laws. Too many entrepreneurs
never look for location beyond their own home cities or towns. When entrepreneurs try
to stay in this comfort zone, they often fail to discover location that would be far

superior and contribute significantly to the success of their own venture. Consider these
questions while addressing this section of the business plan
What does the location needs?
What kind of space will you need?
What are the things desirable (building, new, old)
Is that leased, rented, owned?
Is it easily accessible?
What are the facilities available (light, water, transportation, telephone access e.t.c.)
Production Plan
If the venture is a manufacturing company, there is s need to have a production plan.
This plan should describe the complete manufacturing process. If some or all of the
manufacturing process is to be sub-contracted or outsourced then the production plan
should describe the location of the contractors, why they are selected, cost of contact
and if possible terms of contract, for how long the contract is signed etc. Whereas if part
or all of the manufacturing is being done by the new enterprise, then the entrepreneur
should describe the physical layout, the machinery and equipment needed, the from of
arising those equipment that is purchasing or leasing. In addition the availability of raw
material, the possible sources or potential suppliers name, address, cost of the raw
materials, cost of manufacturing and other additional physical capital required need to
be maintained. Moreover, the detail operational plan also indicates the amount of
production produced in months, or years. This can be derived from the forecast of the
market and expected demand of the product.
If the enterprise, however, is non-manufacturing one like merchandising and service
delivery organization, this part of the plan is named as operational plan. It indicates the
steps or processes in procuring the products, storing and selling them. The inventory

control techniques employed to avoid wastage, spoilage of resources and ensuring the
continues availability of products to customers.
Marketing Plan
The marketing plan is the major component of a business plan which indicates how the
entrepreneur has planned to be effective in competing and implementing in the market
place and be able to achieve goals for which the business is initially established. Every
entrepreneur must, therefore, describes the companies target market and its
characteristics. Defining the target market and its potential is the most important and
difficult part of developing a business plan. Building a successful business depends on
the entrepreneurial ability to attract those customers that are willing and able to spend
money to buy the product of the enterprise. Perhaps the worst error an entrepreneur
commits is failing to define his target market. This is one of the major tasks that is
accomplished in preparing the marketing plan part of the business plan. As part of a
business plan the marketing plan should focus on the strategies for the first few years.
Each year the entrepreneur should prepare annual marketing plan before any decision
is made regarding production, personnel and financial plans. Then the annual plan
becomes a basis for planning other aspects of the business mentioned previously.
Information for development of marketing plan may require undertaking of research in
order to know the potential customers, the size of the potential market, the price of the
product and its affordability for potential customers, the effective form of proportional
strategy and appropriate distribution channel. Since conducting marketing research
costly, the entrepreneur needs to assess available sources and information needed to
determine the marketing mixes and potential customers. Research techniques that are
not costly and sources of information that are free or cheaper will be preferred by
entrepreneurs.
Before conducting a research, entrepreneurs should be clear with the objective of
conducting it. The main objective of entrepreneurs is to know the target market
(potential customers) and demographic data about them. Moreover, the study could be
conducted to define different kinds of marketing mixes (about pricing, promotion,

distribution, and kind of product and test of customers to the product). Information for
the research can be collected from secondary sources such as government offices,
research findings in universities, libraries etc. and/.or primary data can also be collected
through observation, focus group discussion, interviews and so on. Analysis of these
data collected trough different techniques and sources will enable entrepreneurs to
know about the kind of customers, size of the market, the test and preference of
customers and the kind of strategies used in utilizing the marketing mixes. Sometimes,
this research may reveal that there is enough market to exploit or there is no enough
market and the business is not feasible. So it is a valuable part of the business plan.
A marketing plan answers three basic questions of a business. One is it enables us to
know the current condition of the enterprise. The background of the company, its
strengths and weakness, some back ground on the competition, strength and weakness
of the company and the possible opportunities that can be exploited or threats that may
challenge the performance of the business.
It also tells us where we want to go in the marketing aspect of the business at least in
the short run. In addition it also tries to address the specific marketing strategy that will
be implemented, when the strategy is going to be used and who is responsible to do so.
Steps in preparing marketing Plan
1. Defining the Business situation
This is like assessment of the business environment which could be done in industrial
and environmental analysis part of the business plan. So here we need to revise what
we have done in the first part of the business plan.
2. Define the target market
From the marketing research, the entrepreneur should have a good idea of who the
customers or target market will be. Knowledge of the target market provides a basis for
determining the appropriate marketing action and strategy that will efficiently meet its

needs. The defined target market will usually represent one or more segments of the
entire market.
3. Considering Strengths and Weaknesses
The entrepreneur should genuinely present the weakness and strength of the business.
Strengths of a new business could be the experience of the entrepreneur in working on
businesses that are related the newly established business and the skill, knowledge and
working experience of the management team. The weakness can also be the limited
financial, technological and channel of distribution of the business etc.
4. Establishing a goal or objective
Here the goal of the enterprise will be presented. The goal answers the where we want
to question This part tries to specify such things as the market share of the business in
the industry, profit, market penetration, number of distributor, pricing policy, sales
promotion and advertisement support.
5. Defining the market strategy and Action Program
This strategy and action plans respond to the strategy of the organization and on
marketing mixes. Some of the decisions to be taken on marketing mixes and customers
can be the following
Product
This element of the marketing mix indicates a description of the product to be marketed
in the enterprise. Product description involves the package, the brand name, price,
warranty, image, service, delivery time feature and style and so on.
Pricing
Determining the price of the product is the more difficult part of the decision. A product
with quality and expensive component will require a high price to maintain the proper
image. The entrepreneur must also consider many other factors such as cost discount,

freight, and markups. The problem in estimating price is often associated the difficult
task of estimating cost. Marketing research can also indicate the reasonable price the
customers are willing to pay for the product.
Distribution
This factor provides place utility for customers by providing the product on the right
place available when it is needed. There are many options for entrepreneurs to be
considered in distributing the product. Issues such as type of channel of distribution,
member of intermediaries, and location of channel members should be described in this
section of the marketing plan.
Promotion
It is necessary for entrepreneurs to inform potential consumer about the products
availability. This informing, persuading and instructing of potential customers can be
done using various media such as television, radio, prints etc. Promoting products can
be done with or with out payment. Those paid promotional methods are advertisement
and personal selling where as the unpaid promotional method is publicity. Particularly
unique and creative marketing ideas are often special interest to the media. Local news
papers radios and magazines can publicize the marketing idea. Depending on the
outreach and market size of the product the entrepreneur needs to select the best
channel of promotion that is cost effective and can reach potential customers.
All these marketing mixes need to specify in the marketing plan on the business plan.
Equally or more importantly there is a need to develop a strategy on meeting the needs
of customers better than competitors are doing. For these different activities should be
performed of which following are worth mentioning.

Develop a statement of customers service principles that are known and be

followed by the employees.

Provide training particularly to those customers who have direct contact with
customers on how to serve customers, how to persuade customers, how to
maintain customers and so on and reward those employees who are high quality
customers service.

Make regular contact with consumers using different methods so as to know their
suggestions, complaints and inform new progresses in the services or goods of
the business.

In so doing the business should be able to meet customers expectation more than
competitors are doing. Satisfying customers are another technique of advertisement
because they can also good mouth and attract potential customers without any
promotional expense.
Developing Capital and Operational Budget
Business plan can be complete when the marketing plan is accompanied by budget for
operation and procurement of capital for the business. Depending on the legal form of
the business that is sole proprietorship, partnership and co-corporation either the owner
her-self is responsible to develop the budget or other assistants employees or
management tem help her in developing the plan. The capital budget states the budget
required to provide a basis for evaluating expenditure that will impact the business for
more than one year. The capital budget projects the financial requirement to acquire
new equipment, vehicle, building etc.
It may also consider evaluating the cost of making or buying decision in manufacturing,
Moreover, the capital budget also can consider possible investment options that can be
considered and evaluated using different techniques of which the pay back criterion, the
Internal rate of return, and net present values of the investment. Such kinds of capital
budget are experienced when the business wants to expand by being involved in
different projects. But fro a small business which is looking for a fund for the first time
the business it self is a project and more attention will be on operational budget that

covers the cost of running the business. But capital budget component of such
businesses include costs of fixed capital that must be acquired to run the business.
The initial data required for budgeting and development of Performa income statement
, cash flow and balance sheet that can be present for potential investors is the sales
forecast. Based on the sales forecast the entrepreneur will then develop the cost of
sales. In manufacturing venture the entrepreneur can compare the cost of producing the
products internally or through subcontracting them to another manufacturer. This
determination of cost of sales includes the cost of the ending inventory that should be
available in case of possible market fluctuation.

Sample manufacturing budget derived from sales forecast in terms of (0000 birr) for five
subsequent months
Sep

Oct

Nov

Dec

Forecasted Cost of sales

200

250

300

300

Ending Inventory required

20

20

20

20

Total available for sale

220

270

320

320

Less Beginning inventory

20

20

20

250

300

300

Total production (purchase required) 220

After determining the sales budget, the entrepreneur focuses on operating costs. From
the total operating costs some are fixed and some are variable. Fixed costs include
salary, depreciation, utility and other overhead costs.
Performa Income statement

Using the forecasted sales volume and the operation costs that are derived from the
sales forecast income statement is developed. Sales can be forecasted using survey of
buyers intension, composition of sales forecast, expert opinion or time series analysis.
The Performa income statement also provides projection of operation expenses and for
each of the months that leads to the determination of net profit. Each of the expenses
should be properly projected and exhaustively mentioned so that any probable change,
modification or addition of other operating expense that may not be present in the
previous months.
Example of Performa income statement below in (000 birr)
Months

Sep.

Oct.

Nov.

Dec.

Jan.

Feb

Sales

30

40

45

43

50

51

Less cost of goods sold 15

20

23

22

27

26

Gross profit

20

22

21

23

25

Wage and salary expense

6.5

6.5

Office supplies

Interest expense

0.5

0.6

0.6

0.5

.5

0.4

Depreciation

.5

.5

.5

.5

.6

.6

Advertisement

3.5

3.5

3.5

Miscellaneous

.5

.5

.5

.4

.5

.5

17.5

17.6

16.6

17.4

18.6

15

Less Operating Expense

Selling expense

Total Operating Expense

6.5

18

Profit (Loss) before tax (2.5)

2.6

5.4

3.6

4.4

Income tax (10%)

.26

.54

.36

.44

.7

Net income after tax

(2.5)

2.36

4.86

3.24

3.96

6.3

The items presented in the operating expense section of the Performa income
statement should reflect the potential and planned changes with regards to different
activities in the business. For instance advertisement expense could be high in the first
few months because there is a need to promote our product to our potential customers.
Moreover there may be an increase in wage and salary expense as time passes
because the enterprise may need to employee additional staff as the business keep on
growing and expanding. Moreover, it is expected usually the new businesses will not
profitable at the beginning of their establishment because the produce is new to the
customers and there are fixed costs that should be covered by the time the business is
established. So observing losses on income statement for some months or even years
is not a surprise even for investors. Performa income statement is also prepared for the
coming two, three years at least in gross terms so that the profitability of the business
can be assessed by potential investors.
Performa Cash Flow
Cash flow statement indicates the difference between actual cash received and cash
actually dispersed. Cash flows only when actual payments are received or made. So
sales made on account and purchases made on account dont show any cash inflow or
cash out flow. In addition cash payments to reduce principal on loan dont constitute a
business expense but reduces the cash on hand. Receiving of cash in return for
accounts receivable does also have an effect on amount of cash at hand but doesnt
have impact in increasing net income or profit. It is important for the entrepreneur to
make monthly projection of the cash flow. The numbers in the cash flow statements are
modification of those in the income statement. Modification made on the numbers of the
income statement is on those accounts for the expected timing of the changes in cash
on some current asset or liability is made.

An analysis of cash flow is useful for short run planning. A firm needs sufficient cash to
pay debts maturing in the new future, to pay interest and other expenses and to pay
dividends to stockholders. The firm can make projection of cash inflows and outflows for
the near future to determine the availability of cash. This cash balance can be matched
for the enterprises need for cash during the period and arrangements can be made to
meet deficit or invest the surplus temporarily. A historical analysis of cash flows provides
insight to prepare reliable cash flow projects for the immediate future. The Performa
cash flow statement helps to answer the following questions.

The liquidity position of the firm

The causes fro changes in the enterprises working capital or cash position

What fixed assets are acquired by the firm

Whether the enterprise pay dividend to the stockholders

Whether the firm used external sources of finance to meet its need for fund

Did the enterprise sell any of its non-current asset

Performa Balance Sheet

This statement shows the condition of the business at the end of the first year. The
balance sheet will require the use of Performa income and cash flow statements to help
justifying some of the figures. It reflects the position of the business at the end of the
first year. It summarizes assets, liabilities and capital of the business at a certain point in
time.
The balance sheet also reflects the fixed asset and current asset of the business and at
the sometime the liability of the business.
The Organization Plan

The organization plan part of the business plan presents the management team, the
legal form of the business and the design of the organization. The management team of
the organization that is committed to the goals of the new venture. The management
team should be able to work together effectively towards this end. Investors will demand
that the management team must attempt to operate full time in that organization, they
should not work as a par-time while they are an employee of another organization. It is
also not necessary for entrepreneurs to take large amount of money from a newly
established business as a salary because it could be perceived by investors that the
owner is not committed to ensure the continuity of the business by reducing the amount
of expenditure of this kind.
Assessment of risks
The entrepreneur should know potential risks and design a strategy to prevent and or
minimize it.