SMALL BUSINESS MANAGEMENT A business that is a privately, independently owned , managed , and operated for profit with a small

number of employees , is not dominant in its field /industry/market and does not engage in new or innovative activities/practices. 1. 2. 3. 4. 5. 6. 7. 8. The business must be independent in terms of ownership and operation. The business is not dominant in the industry/market it is operating in. Firm size in terms of number of employees . Operators of the small business are their own bosses Lack of innovative/new business practices. Local operation: Motivation for establishing the business. Profit. The capital invested in the business is mainly supplied by an individual or small group of individuals/ persons or shareholders 9. Legal form/status. Sole, 10. Composition of the management team. More than 50% men and 20% are women both.

WHY PEOPLE START SMALL BUSINESSES 1. Satisfying personal objectives: To achieve independence i.e. the freedom from interference or control by superiors. To obtain additional income. Order to obtain the much needed income. To support family members:motivated by personal and family considerations

2. To achieve business objectives : The interrelated business objectives of entering into business include: Service motive: Profit motive. Social motive. Growth motive:

GENERAL FEATURES OF SMALL BUSINESSES IN KENYA 1. 2. 3. 4. 5. 6. 7. 8. Absence of functional managers: On the job -learning: Investment and resources: money invested in the business is often personal Informal systems and procedures: Decision making: is less formal and more personalized . Organizational structure: Lack of formal structure due to lack of large volume of work Control: there is no hierarchical boundary in levels of management or decision Business planning: there is lack of formal written business p3an.

9. Financing/funding: this is mainly from personal savings, relatives at the initial stages and some secured credit later if the business is growing. However the biggest challenge in securing external credit by small businesses include the following: i) Lack of a business plan ii) Small businesses are not a good risk: suppliers of credit want assurance. iii) New small businesses do not have any track record: that can help in assessing their management. iv) It is not cost effective to provide small amounts of money: Due diligence ( checking the business and monitoring its investment regularly) may not be cost effective . v) Small businesses are equity-averse: The owners are averse to sharing equity and therefore the ownership of the business with anyone else .Investors often like to take some equity because it gives some control over their investments and an opportunity to make greater returns 10. Discontinuous growth: small business growth is often discontinuous unlike big businesses. 11. Small business support networks: many small business owners are inherently suspicious of others who seem to want to interfere in their business, including those who may be doing it for their best interest such as governmental agencies.. 12. Small business and social engineering: Many small businesses have the potential to address issues of disadvantage in society such as unemployment, underemployment, community leadership etc.. 13. High failure rate: Advantages And Disadvantages Of Small Business Operations Advantages 1. There is a relatively small amount of capital needed to start and operate the businesses. Very minimal investment is required and is inexpensive to operate. This is a very strong point as banks might not be willing to lend large amounts of money to businesses that are new. 2. These businesses are good for those people who have experience in a field but do not have an adequate amount of resources. 3. Small businesses ownership gives the independence and the freedom not enjoyed in the corporate world. I t allows an individual to be his/her own boss by choosing what to sell, where to sell , the way to work, when to ( operating hours, when to take breaks during the day or when to take a day off) etc. 4. If the business is a sole proprietorship, then the owner has complete right over the profit 5. Small businesses give personal contact or attention to their customers . Small businesses provide the ability to connect with other small businesses through networking 6. Starting ones own business from scratch has the potential to increase income to the operator or owner from sales, capital gains and /or royalties 7. Most small business operators do what they enjoy or love doing as the business may be out of a hobby or part- time job 8. They provide employment to a very large number of people. In some economies, they employ more than half of the total employees 9. They act as competitors to larger firms which will help improve their efficiency and lower the prices offered to the consumers. 10. Small businesses provide employment to people who want to work near their homes and to spend time with their families.

11. Easier record management because of the fewer transactions compared to large businesses .Thus most accounting responsibilities are highly manageable. 12. Management of the assets and liabilities of the business is not a difficult task. For instance, assets include current and savings accounts while liabilities may include money owed to others. Additionally, maintaining a cash transaction record is easy in small businesses. 13. Customers provide immediate feedback to the small business operators due to the familylike operating environment. 14. Neighborhood loyalty. Small businesses have the ability to better connect with the local community since many customers are suspicious of big business. Local small businesses use this competitive advantage . 15. Flexibility: They are Adaptable to change and are not tied to any bureaucratic inertia makes them typically easier to respond to the marketplace 16. Small Businesses are the backbone of the economy : 17. Small businesses provide better customer care: small businesses tend to provide better customer service. . 18. Advantages of small businesses is that the investment for running the business is not a major issue. Small business grants, financial aid and economic support is readily available to persons owing a small scale business. 19. Another advantage of small businesses is that it is very easy to record business transactions. Disadvantages 1. Small businesses do not have economies of scale, the ability to cut costs by increasing production. 2. It is often very difficult to raise the capital needed for startups or expansion. Even if the capital is available, there will be high cost e.g. high interest rates from the banks. 3. Due to limited product range offered by the small businesses, they can go bankrupt if there is a decrease in the demand of the only products they offer 4. It is often very difficult for small businesses to find suitably premises for rent. The rents might be initially very high. 5. Poor people management i.e. Poor human resource management strategies 6. Lack of access to markets and procurement 7. Poor financial management 8. Poor marketing strategies 9. Lack of authenticity. Most people prefer to do business with established businesses rather than put their trust in small businesses which have several risk factors. 10. Inability to attract talent : REASONS FOR THE GROWING INTEREST ON SMALL BUSINESS About 70 % of the businesses registered with registrar of business has increased to over 1000000 per year. 1. 2. 3. 4. 5. 6. Job creation:. Alleviation of poverty: Increasing micro-finance activities: Academic attention:. Growing interest at educational institutions: Creation of self- employment:.

The current work restructuring or reorganization and the greater tendency toward self-employment : 7. Advent of information technology ( ICT): 8. Increased Media attention: 9. Contribution to National Gross D omestic Product: 10. Promotion of market competition:. 11. Providing a variety of learning experiences: 12. Increasing global economic opportunities caused by globalization. 13. Small businesses offer job security: 14. Contribution to large businesses: 15. The increased strive for national independence from overdependence on large businesses supported by large international financiers. 16. They provide an element of local control and quick way of responding to local needs 17. Small firms might come up with very innovative ideas which can lead to mass production of products and exports to foreign markets which has huge advantages for the economy. 18. The privatization of state owned enterprises. Official government policy shows that there is a shift of emphasis on the management of the country's economy. The shift favors the development of the informal sector 19. Redistribution of wealth, income and opportunities; 20. It has reduced the dependence on government and large firms on salaried employment. This is evidenced from the liberalisation policy of the government in the telecommunication and education sectors as a lot of companies have been established to provide support staff and employment for Kenyans. 21. Small scale industries have stimulated rural development and the achievement of a 22. It has uplifted the dignity of labour. There is the spirit of ME TOO, I can do it attitude. People deriving joy in working for themselves and seeing their businesses grow and mature to conglomerates and deriving joy in being a source of employment to other Kenyans. 23. It has upgraded the social status of Kenyans youths, by showcasing them as very successful entrepreneurs and operators of small scale industries. This is evidenced in the many success stories of small scale industries as recorded by the print and electronic media houses.

FACTORS RESPONSIBLE FOR THE SUCCESS OF SMALL BUSINESS Customer Focus: Listening to feedback from customers is important in any business, but especially so for new firms whose reputations are being established in the marketplace. Workforce: choosing the right business partners is a critical success factor for new businesses. Employees in start-up businesses must be multi-talented, highly adaptable, committed to organizational success and willing to lay their egos aside for the good of the firms Cost Control : Keeping costs under control is vital in new businesses that do not have previous years' expense data to guide their budgeting and spending decisions. New businesses often rely heavily on debt to finance their early operations; it is important to use borrowed money in the most productive and efficient manner possible to ensure that loan payments are made on time with room for profit-taking by the company Financial Management: Money is what keeps a business venture afloat. It is an essential part of buying inventory, paying employees, marketing the business, buying or repairing business tools and paying his own salary.

Business Plan: A business plan is the blueprint you should use to operate your business. When you are contemplating the opening of a business, you need to create a business plan that outlines all of your business operations, including personnel needs, all budgets, sales and marketing procedures, manufacturing processes and revenue projections. Adaptation/flexibility : Adaptation is essential in an factor in the beginning a life of a new business . Owners of small business must learn how to adapt during the business planning and operations when a lot of things change. E.g technological change, changing economic circumstances , etc so as to remain competitive Target the Right Customers : Identify and serve customers who are likely to patronize your business more often. These customers might be defined by demographic characteristics, attitudes or usage rates. Therefore, the owner should focus promotions on people from that particular segment. Product differentiation: All products have a lifespan called the product life cycle. Stages of the product life cycle include introduction, growth, maturity and decline. Product differentiation becomes particularly important during the maturity stage. Location: Choose appropriate location for your business. Moving your business closer to those key locations can cut down costs, and make you one of the companies closest to where your customers. Location can be critical in the success of a business. Effective human resource management : Ability to hire, train , compensate and motivate workers. If your employees do not take initiative, make suggestions, happily stay late when necessary and strive to do their best work all the time, your business will certainly stagnate. A key business success factor is a motivated and committed workforce. Technology Utilization: Businesses that utilize technology to open up new markets, serve customers, increase efficiency and new product and service development have the better chance of beating competition. In today's world of instant communication, you have the ability to share information, develop new products and open new markets more easily than ever before. Examine ways to expand globally and make it a part of your plan that is continually reviewed and graded. Compliance Requirements: Being able to comply with regulatory requirements is a key factor in successful operations. Natural environmental factors affect a business' operations as well as its ability to expand or take on new operations. In effect, companies must comply with environmental regulations in all stages of a business' development.

Characteristics of the owners of small business :

1. Sacrifice for the sake of the continuation of the businesses highly valued by ,most successful businesses owners:A successful small business owner always forgoes payments to himself/ herself for the sake of his/her employees, suppliers and banker The owner must also sacrifice his/her time (free) for the sake of the business e.g. no necessary trips or holidays 2. Strong sense of enterprise/initiative that gives them a desire to use their ideas, abilities, and
aspirations t the greatest degree possible: They are able to conceive, plan and carry out ideas fro new products or innovations to a successful conclusion. They are ambitious and persevering individuals who will work hard to achieve their objectives 3. A great desire for independence- the desire to be free form control and to enjoy freedom that comes form doing their own things and making their own decisions

4. Flexibility i.e. ability to react quickly to changes(environmental changes): Successful business owners learn from their immense failures and success and exercise flexibility and readiness to change when need arises in order to take advantages of opportunities presented by such environmental changes 5. Dedication to their business n terms of energy, time emotions ad money. Hence and commitment that often lack in managers of large businesses. 6. Motivation by personal and family considerations:- besides the profit motive, small business owners are motivated by personal and family reasons. In many case, they start and operate their businesses to help their parents children and other family members .Furthermore, small business operations can afford owners the flexibility of planning and discussing business wit family members- hence business decisions are largely affected the family. There is a growing trend of small businesses being operated by family members (couple or with children) 7. Expectation of quick and concrete results i.e. they expect quick investment returns(in terms of time and capital ) .They do wish to engage in long-term planning that is common in large buses operations but instead expect quick returns from their invest met in the business. Hence , they become quickly impatient and discouraged when these results are not forthcoming as were expected 8. They enter(start) business by chance ad not by design: They differ form small business owners who attend school and college with the managers and who gear their academic programmes towards stalling and managing their own small business 9. Personal skills, abilities, experiences & behavior of successful small owners include: a. Strong leadership ad organizational skills e.g. interpersonal and mgt skills b. Ability to source enough capital for starting and running their business e.g. from personnel sources, family, friends, relatives and financial institutions (micro -lenders ). They must have the ability to develop and write effective small business plans to present to lenders c. Identifying and serving adequate and well-defined market i.e. unsatisfied market ad designing a product to satisfy that unmet need. d. Effectively recruiting and using quality workforce (Effective use of human resources) i.e. should have the ability to use highly motivated workers (hence the need for effective recruitment and retention of employees) e. Searching and utilizing timely information because information is a powerful weapon in competitive business environments f. Successful small business owners stay tuned to information on financial marketing technology, economic, political/legal and other pertinent issues . Hence, the need for the proper utilization of ICT in business operations g. Handling government regulations effectively:- i.e. adhering and coping with government regulations e.g. licensing and registration paying taxes, quality and safety laws, environmental protection laws and community concerns/social responsibility h. Past business and training experience that's helpful in dealing with routine problems based on historical experience. There is need for some solid business experience and training to start and run a business effectively

FACTORS RESPONSIBLE FOR THE FAILURE OF SMALL BUSINESSESCURRENT CHALLENGES FACING SMALL BUSINESS Managerial incompetence. Weak Organization and Management: Small scale firms are generally managed by the owner who very often does not posses the skills required for the efficient management of the enterprise. There is lack of proper division of work and the benefits of specialisation are not available, some owner-managers are reluctant to adopt

modern methods of organisation and management. There is instability in business because the sickness and death of the owner manger directly affect the survival and growth of the small firm. Some managerial problems include the absence of strategic management skills and attitudes, the inability to respond to threatening environmental conditions, lack of clearly defined objectives, lack of delegation, inability to select appropriate equipments and resources, and the faulty design, implementation and evaluation by small scale businesses Most small business owners are unfamiliar with many usual business activities and problems. This is due to their incompetence resulting from inability to overcome conditions evidenced by symptoms including heavy operation expenses, inadequate sales, competitive weaknesses, inventory difficulties or buying too much inventory, poor location, poor debtors management, maintaining excess fixed assets. Lack of managerial know-how places significant constraints on small business development. As the company grows, you may surpass certain individuals' ability to manage and plan. If a change becomes necessary, don't lower your standards just to fill vacant positions or to accommodate someone within your organization. Decide on the skills necessary for the position and insist the individual has them.

1. Poor financial management : lacked adequate accounting records. The other two areas were market competitiveness and growth and expansion. There is also the lack of credit control, as money could be brought in and taken out of the business easily for personal and not for business purposes. The problem is compounded by the inability to repay loans or debt. Failure to repay loan will impose serious economic consequences on the operator who is liable to be sued by the loan provider. Inadequate recordkeeping is also a major cause of business failure. In most cases this is not only due to the low priority attached to it by new entrepreneurs, but also to the lack of basic business management skills. Most business owners end up losing track of their daily transactions and cannot account for their expenses and profits at the end of the month. Good recordkeeping provides a small business with accurate information on which to base decisions, such as projecting sales and purchases, determining break-even points, and making other financial analyses. The prevalent lack of proper records has led to the closure of some businesses, thereby making it a significant issue for business success. 2. Lack of access to information: Lack of easy, affordable and timely access to information and analysis about ICT-related issues. But while the main problem for developed countries might be "information overload", the main problem for developing countries is still very much one of information scarcity. 3. Poor Location: location is critical to the success of any business. Whereas a good location may enable a struggling business to ultimately survive and thrive, a bad location could spell disaster to even the best-managed enterprise. Some factors to consider: Where your customers are, Traffic, accessibility, parking and lighting , Location of competitors and Condition and safety of building

5. Socio-cultural obstacles which include the lack of entrepreneurial culture and education, Kenyas social system limits opportunities for creative activities, and the limiting role of most relying beliefs which bars admission to initiatives 6. Lack of business planning as reflected in lack of a clear vision of exactly where the business should be in the future and a detailed document about the business (operational plan, marketing plan, organizational plan and contingency plan ). It is critical for all businesses to have a business plan. Many small businesses fail because of fundamental shortcomings in their business planning. Components may include: In addition, most bankers request a business plan if you are seeking to secure addition capital for your company. 7. Lack of expertise : lack of business knowledge or expertise despite being passionate about the business . When youre not experienced at marketing or sales or systems or budgeting, get help 8. Poor customer service: Lack of customer care results in their disloyalty. There is need to pay attention to the wants of the customers and know how this changes over time. 9. Under -capitalization and Lack of access to Finance: The most critical problem that constrains the operation of most start up small businesses is their lack of adequate financing. It cannot be overemphasized that the shortage of startup and working capital is the greatest problem facing small business owners. This has been brought about by stringent collateral requirement by formal lenders like banks, lack of bankable business plans and high cost of credit to small businesses. Small business owners cannot easily access finance to expand business and they are usually faced with problems of collateral , feasibility studies etc This means that they cannot access finance to enable them to borrow to grow. Finance as a constraining factor to small business growth may include collateral, interest rates, extra bank charges, inability to evaluate financial propose and lack of financial management skills. Under developed financial markets impose additional constraints as there are no financial instruments and independent financial sources that are market driven and attractive for small businesses. Without adequate funds, one is unable to acquire and maintain facilities, hire and compensate trained and experienced employees, produce and market a product, or do the other things necessary to run a successful busmen Lack of development capital may be suicidal to growing businesses since successful innovations cannot be financed comfortably. 10. Low-level technology : Due to their size, small businesses lack access lo modern technologies required for manufacturing demanded products and services. Instead, they small businesses end up using cheap and rudimentary technologies, which arc usually not top of the range. This results into high costs of production and competitiveness. For instance small businesses cannot afford to use computers and even where a computer exists, they cannot afford lo continuously upgrade their equipment. Therefore they cannot compete i large enterprises. Outdated Technology: Majority of the small units use old techniques of production and outdated machinery and equipment. They cannot afford new machines and equipment and are, therefore not in a position to use the latest techniques of production. They have difficulties in gaining access to appropriate technologies and information on available techniques. This limits innovation and competitiveness. 11 Inadequate Marketing Facilities: Small scale units have to face several difficulties in the marketing and distribution of their products. Most of them do not have their own marketing network. They find it difficult to sell their output at remunerative prices due to

higher cost of production and non-standardised quality of products. Small Scale industries cannot afford to spend much on advertising, sales personnel, marketing research, etc. They have to sell their products at throwaway prices due to weak bargaining power and immediate need for money. They also face stiff completion from large firms. Lack of market opportunity or poor domestic demand which indicates that there are marketing constraints. Also, inefficient distribution channels often dominated by larger firms pose important limitations to market access for small . Lack of Trained Personnel: There is lack of trained and experienced employees because small firms cannot pay high salaries and cannot spend much on training of employees. Small scale firms find it difficult to recruit and motive skilled managerial and technical personnel as they look for better opportunities in the large scale industries. Therefore, they get the second rate talent or have to depend on family members who do no have diversified skills. Lack of adequate market information and opportunity : In Kenya as it is in other poor countries, effective demand and consequently market opportunity is a constraining factor for small business, which is not the case in the developed countries. Incomes are low in Kenya and there is low purchasing power. Consequently, even if there is opportunity to exploit, it may be difficult to realise because of lack of market. Poor market research leading to an inaccurate understanding of the target customers wants and needs. Businesspeople fail when they neglect to research to determine whether there is a demand for a particular product or service, and if there is enough traffic for their area of business. They also fail when they don't spend time on keyword research. Keyword research tells them what words or phrases people use to search for a business like theirs and knowledge of this skill is imperative for an e-business to succeed. Fewer new businesses use advanced technology. Failure to make a proper market research by small business owners means that they have no idea who their customers will be and how to cater to them properly. They have the tendency to concentrate on the broadest market possible, while their focus should be on a niche market. Targeting a niche market gives the small business owner the advantage of being ahead of competition, as the competition may not even be aware of the niche market.
Poor or low sales due to such factors as fierce competition, poor customer relations, drastic environmental changes and poor inventory management systems or simply operating without an effective sales plan

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Poor security. Security threats pose a great challenge to businesses and many business owners and managers employ various means to help prevent or deter would-be criminals. Many small businesses make use of security firms or guards to safeguard their businesses and this implies higher cost of doing business as they respond to the security challenges. Inhibiting and un-enabling business environment: While Kenya has acknowledged that small enterprises have an important role in its economy, not much effort has been

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done to facilitate their growth. They have to compete for finance, markets, personnel, and utilities like any other business unit. In a few countries especially India, there has been affirmative action to promote small enterprises over a lung pencil. It is easier for larger businesses to obtain land for industrial development and a license to operate the business than the small owner. The business environment in Kenya is therefore not conducive to small businesses. The environment has a high controlled regulatory system evidenced by constant harassment of small business owners by the local authorities who interfere with business operations by confiscating wares or merchandise from owners. 18. Regulatory Constraints/ An unfavorable legal environment: in terms of high start-up costs for firms, including licensing and registration requirements, can impose excessive and unnecessary burdens on small business. In Kenya , prohibitive laws like The Business Licensing Act, The Electricity Act, The Control of Goods Act, and The Export Incentives Act, have severely constrained small development These cumbersome government bureaucracy subject small firms to many regulations which they find often complex and contradictory .This explains why small business managers find it so difficulty to comply with government requirements. The reality is that most small business owners purposely evade these issues or just disobey the regulations, but some them are just unaware of the regulations

19 High operating costs: small businesses face a variety of constraints owing to the difficulty of absorbing large fixed costs, the absence of economies of scale and scope in key factors of production, and the higher unit costs of providing services to smaller firms .The high cost of obtaining local raw materials that may stem from their poor cash flows i.e. input constraints due to high cost of raw materials. 20 Inadequate premises: inadequate premises is a problem to the growth of the business. Poor financial management: lacked adequate accounting records. The other two areas were market competitiveness and growth and expansion. 21 Stiff competition : They face the inability to compete with larger retailers, a lack of product differentiation and many small businesses are now faced with greater external competition due to trade liberalization, limited international marketing experience, poor quality control and product standardization and little access to international partners, impede expansion into international markets. Most of the output from small firms is for the domestic market and not for export . 22 Poor inventory control that results in loss of sales opportunity. Low skills levels and inexperience in the field of business, particularly a lack of technical knowledge 23 Corruption : Small businesses are adversely affected by illicit, improper, or illegal business conduct that are used to criminalize their activities . Those in positions of control and influence can make fast and illegal money. In addition to undermining the legal framework, national integrity, and regulatory system, corruption also undermines the trust and confidence of business owners. Corruption threatens good governance, sustainable development, democratic process, and fair business practices. Unresponsive public services and public procurement systems that seems to largely work in favors of

politically connected individuals have contributed to high incidences of corruption in Kenya. Corruption feeds ongoing political and economic failures in Kenya by impeding market development, driving away investment, increasing the cost of doing business, and eroding the legitimacy of the law. 24 Poor infrastructure directly affects small businesses. Power failures affect the production of goods and services and inaccessible roads affect their distribution and increase transportation costs. For example, businesses may find it problematic to operate in rural areas that are not accessible despite high demand for their products. This limits their ability to expand and the opportunity to generate profit. 25 Tribalism : Kenya was burning during the 2008 post-election violence due to tribalism and ethnicism. Political and ethnic loyalties have long intertwined in Kenya as this shows how volatile the mix can be. Every thing that is wrong with Kenya can be traced to tribalism. No matter how hard Kenya try to progress, no substantive achievements will be made so long as it rely on tribalism. The tribalists are willing to hire people from their tribe who may not otherwise be the qualified for the given job. Such actions deprive the nation of the right people for the right job, Therefore they look for ways that will strengthen their tribes at the expense of the nation thus divert national attention and resources.

Mistakes Common to Many Owners of Small businesses There are many mistakes that small business owners make that are suicidal to the success of their business. The following are therefore some of the deadly mistakes that are common to majority of entrepreneurs small business owners. , 1. Having unworkable idea and sticking to it too long. Do not be in crazily In love with a single idea and remember that ideas are the currency of entrepreneurs. Therefore, play with many ideas and see when one brings money and financial success. 2. Having no marketing plan. marketing plan creates the kind of attention you need to get in front the right type of people companies etc. it is therefore what attracts people to your business. A good marketing plan implemented effectively, efficiently, elegantly and consistently will eliminate the need for cold calls to potential customers. 3. Having no Sales plan. A sale plan assist in measuring the financial growth and progress of your small business. You must therefore have a clear road map of where sales will come from and how they will come and from whom. Thus without it, you do not know where you are and where you arc going. 4. No knowledge of ones customers. Changes in your customers' preferences for products and services can through you off-board unless you get to know the customers very well. Lack of knowledge of what they want now and will likely want in the future, what their buying patterns will be and is likely to be, and how you can be important to them even if you do not have the required product is suicidal for small businesses.

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Ignoring the cashflow trends/ Uncontrolled Cash Flow. Customers will not always respond to your new product just like that or as you expect them .This means that you to have adequate cash and other working capital that can sustain you. People fail because they run out of money. When you run out of cash, you crash. So, prepare your cash flow projections for expansion very conservatively. In projections, be sure to: a. Provide for contingencies b. Forecast income (sales) very low c. Forecast expenses very high

6. Lack of performance evaluation. Have someone to bounce ideas and get an objective opinion from is very crucial. Your family members or friends whom you trust can do a good job here. Let them be your mastermind. Ask them to compare and review your planed results and actual result. This performance evaluation is critical so that you are able to chart the right path. 7. Ignoring your workers, if have employees, coach, motivate and manage them effectively. This is one of your most tough duties as an owner of small business. Have patience, persistence and people's skills to avoid your problems multiplying. Otherwise, you will destroy easily the productivity, morale and profits potential of your workers and business. 8. Failure to adequately train develop, compensate and motivation workers i.e. ignoring workers
that leads to low productivity, morale and reduced profitability

9. Lack of delegation. Do not be alone ranger. You maybe the key person, you ear yourself and growth at the same time. Unless you hire some people overwhelm you, thus delegate authority to others. 10. Lack of commitment / Inability to Commit : Even though most people would like to start their own business, only a small percentage actually do it. When push comes to shove, most lack the self-confidence to make a decision and act on it. In order for the business to succeed, they must be able to gather information, weigh the facts and then make a prompt decision. 11. Failure to recognize your own strengths and weaknesses. Identifying and understanding the strengths and weaknesses of your business can minimize chances of failure. Successful small business owners know their strong areas and recognize that they have certain limitations. These may include weaknesses in skill sets or expertise or might include broader issues like limitations in access to financing. The common key to these weaknesses is the value of outside expert help; a successful entrepreneur will seek help where needed. 12. Unrealistic Expectations : Many individuals assume not only that most businesses succeed, but that they're lucrative from the get-go. This is definitely not the case. Generally speaking, it usually takes at least a year to develop a profitable business. The first year's goal is usually earning back your investment. Even then, the money has to be reinvested in the business. In other words, in your first year, you should have other sources of income to live on. 13. Overexpansion : A leading cause of business failure, overexpansion often happens when business owners confuse success with how fast they can expand their business. A focus on slow and steady growth is optimum. Many a bankruptcy has been caused by rapidly expanding companies. At the same time, you do not want to repress growth. Once you have an established solid customer base and a good cash flow, let your success help you set the right measured pace. Some indications that an expansion may be warranted include the

inability to fill customer needs in a timely basis, and employees having difficulty keeping up with production demands 14. Low motivation and lack of confidence: most small business operators believe they cannot make it, in the face of competition by the bigger companies. The desire and motivation to succeed is reduced. 15. Burnout. Owning a business requires huge investments of time , money and emotion . It is however easy to work long hours or days and forget to take time off leading to burnout. Burnout kills motivation and creativity and this results in pessimistic attitudes . Many small business owners cannot balance between business and personal life and both suffer. There is need to schedule self-care time and observe it religiously or faithfully. 16. Lack of diversification or putting eggs in one basket. There is need to spread out risk through different products, customers or industries. Too often, many small business operators rely heavily on one product or customer because it brings good revenue. The business will fail if something goes wrong .Diversification cushions against turbulent times. 17. Poor time management: time wasting on unimportant tasks while critical tasks pile up and putting off tasks one does not enjoy

SMALL BUSINESS DEVELOPMENT PROCESS A business is a distinct entity with a life and personality of its own. Just like an organism goes through various stages of biological growth and decline to complete a single life cycle, a business also goes through various stages conception to death or termination. A business goes through stages of development similar to the cycle of life for the human race. Every business has its life cycle that it undergoes during the course of its entire existence. All these stages that define the journey of a business from inception to decline are collectively known as the stages of business development

This is the process of business development from "pre-start up" to termination" or exit. Not every business or firm goes through all the stages progressively. Some firms may go through all stages while others may go through a few of them .As the business passes from one stage to another it is said to encounter a new management crisis because of the demands of the new stage in terms of resources, systems & controls. Thus ,in small business life cycle not every business will go through every stage, and not all small businesses will succeed as a result of these stages . Each stage of the business life cycle may not occur in chronological order. Some businesses will be "built to flip"; quickly going from start-up to exit. Others will choose to avoid expansion and stay in the established stage. Whether the business is a glowing success or a dismal failure depends on the ability to adapt to it's changing life cycles. What the firm focuses on and overcomes today will change in the future. Understanding where the business fits on life cycle will help to foresee upcoming challenges and make the best business decisions. There are different growth patterns of small businesses and common problems that arise at key stages of small business development. The Small Business Development Model or framework is based on the fact that all businesses experience common problems that arise at similar stages in

their development. It will be faced with a different cycle throughout its life and each cycle is characterized by unique focuses, challenges and needs that will require different approaches to be successful. Businesspeople need to know that every business undergoes certain stages that may greatly affect its course later on. They must be aware that they can never avoid any of these stages but have the power to manipulate the development their business. There are a lot of things that they can do in order to make their business stable and competitive. The organizational environment at each stage is unique and every stage has its share of difficulties. Addressing and overcoming the issues at each stage propel the organizational development forward. Some of the crises that the small business will face in each of the different stages will be control, leadership, autonomy and bureaucracy which may be handled by different management styles, strategic focus, collaboration, coordination, delegation, direction and creativity. During these stages, a firm will often require different levels of capital, experience varying degrees of competition and see dramatic swings in sales growth. The stages in the development process of business can be based the size of the firm as measured in terms of total sales or total assets or of the number of employees. The stages involved in business development process are:1. 2. 3. 4. 5. 6. 7. 8. Awareness Pre-Start/ Preparation Start -up / Inception Growth Expansion Maturity Decline Termination

Each of stages is explained in details below:1. Awareness Awareness stage involves thinking of starting a business and that business is likely to survive as influenced by the underlying culture. The underlying culture helps to nurture awareness , interest, ideas and embryonic businesses .The surrounding culture helps to prepare individuals for business growth .A variety of antecedent factors may be relevant in this awareness stage including:1. Family and religious background 2. Education background ' 3. Psychological make-up 4. Age at the time of maximum external opportunity and organizational push 5. Earlier career experience 6. Geographic location 7. Nature of Skill and knowledge acquired 8. Experience in small business setting 9. Societal attitudes towards business 10. Ability to save capital 11. Opportunity for interim consulting

12. Economic conditions ; 2. Pre-Start/Preparation a) Business idea/conception of business idea : This involves of thinking of the idea of starting a business and that business is likely to survive. No business can come into being without an idea of it being conceived in the mind of the business owner. This is also know as the seed stage because the idea of a business is the seed which leads to start-up and growth into established business. This is the very conception or birth of a new business. Businesses start with the identification of a suitable opportunity or idea, acquiring the necessary knowledge and skills and locating the contacts who will help. The idea can cover both the idea of starting a business and the product idea for a particular business. When conceiving an idea of a business the following aspects should be taken into account: The economic environmental aspects to be taken into consideration include such as the specific industry, level of competition, availability of resources, market and customers, etc. Financial estimates of the extent of investment required, the amount of earnings expected and the ratio between investments and earnings. financial estimates are drawn up to get an idea of the extent of investment required, the amount of earnings expected and the ratio between investments and earnings This is the stage where the business blueprint is developed. It's like a couple deciding that they are ready for a child and making preparations for it's arrival. There has to be the willingness to stall a business based on its perceived desirability and feasibility i.e. a recognition that there arc rewards to be gained from starting a business and a desire for those rewards together with a belief that the rewards can be achieved and a desire to proceed, then it is important to known how. Business ideas may originate from sources such as: a) Turning a hobby into a business based on a long standing passion and backed up by persona! connections, b) Becoming a professional consultant / trainer:- due to specialized knowledge backed by professional contacts c) Acquiring existing business:- due to managerial and marketing skills backed by available financial resource d) Taking on a franchise due to organizational ability based on or backed by financial and marketing resources. e) Creating a business of your own due to an enterprising spirit on the springboard of the market place. f) Developing your vision:- Due to personal Charisma and inspiration on the springboard economic and social need potential. g) Engage in social conversations with other people e.g. friends , colleagues, family members including bankers. consultants, salespeople, and anyone else can be good sources of ideas. Looking into the future requires extensive reading and making contacts with a wide variety of people

h) Constant questioning of changes that are occurring and critical analysis of products and services being received provide ideas. Innovation is alive and well and will continue its surge ahead. Each new idea spawns other ideas for new businesses The main challenge in the this stage is identifying a niche opportunity to pursue with the potential for profitability. Thus the focus at this stage of the business is on 1. 2. 3. 4. Matching the business opportunity with your skills, experience and passions. Deciding on a business ownership structure, Finding professional advisors, Business planning.

b) Know how:Relates to a number of areas of knowledge and skills needed by the owner - manager of small business if that business is to be successful. It covers dimensions such as:1. Functional knowledge and skills:-The technical knowledge and abilities appropriate to the business 2. Business and strategic awareness : Understanding the bigger picture conceptual skills analysis, synthesis 3. creativity and opportunity spotting 4. Generic management knowledge and skills : Planning organizing staffing time mgt negotiating coordinating respires, problems solving 5. Personal competences : Results orientation initiative interpersonal skills, enthusiasm, perseverance, commitment, leadership etc 6. Communications skills : The ability to relate to and exchange appropriate information within people who matter to the business including staff suppliers customers finders and advisers .This is necessary in building up and using and appropriate personal network of contacts c) Know-who: This relates to the previous social networks or connections of an individual that are important for the success small business i.e. previous personal and commercial relationships of an individual that will be critical in successful business operations. Networking is important because: 1. Information: Social networks can be used to signal intentions and to gather information about potential opportunities 2. Sponsorship and support:- Family and friends will provide introductions to appropriate networks as well as the emotional and tangible support 3. Credibility: Membership of the network provides added weight to the evaluation of skills 4. Control: Membership of the network and assistance from it requires certain standards of behaviour .Owner managers who do not conduct their business in a way that is acceptable to the community will quickly find themselves and their businesses isolated 5. Business networks : Involves networks of firms working together in collaboration and market networks of customers, supplier and partners 6. Resources: Family and friends can also provide sources of resources for a new small business and many business are assisted by the informal venture capital market that their owner access through their network 7. Economic co-operation:-Networks provide economic co-operation necessary in all markets. The networks are characterized by:

o Personal contacts not official links o Flexible i.e. Being built up and maintained specifically to suit the purpose of their members o Assist members to meat quickly to new development d) Finding / identifying a needed product Proper planning does not ensure success but improves the chances of succeeding. Planning starts with searching for a good or service to sell. Success of small business requires an understanding of an industry and the ability to perceive some need or service that no one else has seen, that is , finding a needed product in the market others have not identified. The best place to start searching is to find an appropriate market niche. This process is called niche marketing, which is the process of finding a small but profitable demand for something others have not identified, then producing a custom-made product for that market. Finding or recognizing an appropriate product requires observation, study., vision, and luck. The search for and identification of a product require innovative and original thinking, including putting the ideas together in an organized form. For example, if the chosen product is now being provided by competitors, determine what changes are necessary to compete successfully or avoid competition. e) Studying the market for the product f) Choosing the Business to Enter : Choosing the business to enter requires eliminating the least attractive ideas from consideration and then concentrating on selecting the most desirable one. It is important to eliminate ideas that will not provide the challenges, opportunities and personal, and the financial rewards that you are seeking? Concentrate on the thing(s) you would like to do and can do but not on what someone else wants for you. After eliminating the unattractive ideas, get down to the serious business to which you plan to devote your energy and resources One way of doing this is to talk to friends, various small business owners, relatives, financial advisers, or lawyers to find out what kinds of products are needed but not available, try to get them to identify not only existing types of business but also new kinds. Then consider the market for the kinds of products and businesses the suggested. But do not let someone talk you into something that you are not comfortable with To avoid the possibility of choosing a wrong business requires \answering the following questions (Use the following criteria to help decide on the appropriate business for you) 1. How much capital is required to enter and compete successfully in this business? i.e. required capital 2. How long will it take to recoup my investment? i.e. investment recovery period 3. How long will it take to reach an acceptable level of income? 4. How will I live until that time? 5. What degree of risk is involved and the willingness to accept it? degree of risk involved . 6. Can you make it on your or will you need the help of family or others? 7. How much work is involved in getting the business going and running it and whether you are willing to put out that much effort? Amount of work involved and the willingness to shoulder it

8.

Do you want to acquire a franchise from an established company or do you want to start from scratch and go it on your1 own? independent ownership or franchise 9. What is the potential of this type of business and your chances of achieving that potential? Potential of the business 10. Is there sufficient information available to permit reaching a meaningful decision? If so, what are the sources of information? i.e. sources of data . 11. Is it something you would enjoy? Selection Strategy Selecting the wrong business is the most frequent mistake that start-up entrepreneurs make. Here is a checklist to help you select a successful one: Take your time and wait for the business that is just right for you. You will not be penalized for missing opportunities. The selection process takes a lot of planning and experience and complete knowledge is vital for success when learning how to start your own business. 1. Don't tackle businesses that may be too challenging. It is better to identify a one-foot hurdle than try to jump a seven-footer. 2. Try to identify a business that has long-term economic potential. "Go to where the puck is going, not to where it is." 3. Look for a business that will grow in today's and tomorrow's markets. Many small retail stores are no longer in business because huge stores such as Uchumi , Tuskeys , Woolmart and Nakumatt provide more choices to the customer and often at a cheaper price. 4. Look for businesses that focus on a "consumer monopoly" with pricing power and long-term predictable growth prospects like Coca-Cola . 5. Businesses to avoid are "commodity" businesses where you must compete entirely on price and in which you must have the lowest cost to survive. It is said that "In a commodity type business you're only as smart as your dumbest competitor." 6. Most service businesses have pricing power. 7. If you intend to manufacture a product, consider the pros and cons of contracting out production to a low-cost supplier. In other words, operate a "hollow corporation." A "hollow corporation" is a company that subcontracts manufacturing and packaging. 8. Avoid impatience 9. Do not let overconfidence short-circuit you from analyzing your selection of businesses carefully. You must not fear of hearing the negative aspects; it is much better to be aware of them and face them early on. 10. Be realistic. Do not become lured by high rewards. They will come if you choose the right business and if you understand every aspect of the business before you open its doors. How to choose the right Small business opportunity in Kenya This is a major life decision, so take the time and effort to carefully consider your options and choose the right path. 1. Your Passion: Choose a business that suits your passion and true skills. As a business, owner, you'll log more hours than you ever dreamed, so if you do something you love, you'll have a much better chance of success. If you enjoy community activities and interacting with people, a retail operation might be for you.

2. Risk Tolerance: Be aware of your tolerance for risk. If you create a truly revolutionary concept, the upside of your business could be tremendous. But with the potential for success, the risk involved also goes up. 3. Financing: Carefully consider your business financing requirements. Some businesses are much less capital intensive to start than others. However, if you need outside financing, getting money for an existing business is generally easier than financing a start-up, due to the fact that the business has a proven track record. Starting businesses that offer the promise of accelerated upside potential, such as high-tech companies, are an option. But remember, these fast-growing businesses also require significant amounts of outside capital in the early stages. 4. Market: Before you even think about starting your business you must find out if there is market for your business idea. Because finding out if you have customers who are willing to pay for your products and services will lower your risks. 5. Be prepared for the worst: Think through every decision. Plan for the worst case scenario so that when it happens, you dont collapse. Brainstorm more than one solution to every problem that you think you will face. Be ready for anything and you will not be surprised. 6. Be unoriginal: Many people dont get to start their own businesses because they are waiting for the perfect idea that has not been used. You dont need to reinvent the wheel instead you should focus on using an existing idea and making it better. Give it a spin. Find new ways of marketing, improve customer relations. If you wait for the perfect virgin idea be prepared to wait for eternity. 7. Low Cost Start-up is the way to go: Start a business that demands low start up capital. Dont over commit yourself financially at the beginning otherwise it might be the beginning of a disaster. Take time to grow systematically. One step should lead to another. If you commit all your financial resources at the start, you will not be able to weather any storms that will come your way. Avoid borrowing large sums of money to spend on your business. You might find yourself in a debt pit that is almost impossible to get out of. 8. Ease of entry. Think both of the costs of entering the business and of the competitive barriers that might exist. For example, a service business that you can run from your home might be relatively inexpensive to start, but if several others are already providing that service, entry in the field may be difficult. 9. Uniqueness. Uniqueness does not necessarily mean that literally no one else is providing the same product or service; it can mean that no one else is providing the product or service in the same way you intend to provide it, or it can mean that no one else is providing that product or service in your area. Youre looking for some way to distinguish your product or service from others who are already in business. Types of Business Organizations

When organizing a new business, one of the most important decisions to be made is choosing the structure of a business. Factors influencing your decisions about your business organization include:

Legal restrictions. Liabilities assumed. Type of business operation. Earnings distribution. Number of employees. Tax advantages or disadvantages. Length of business operation.

The advantages and disadvantages of a sole proprietorship, partnership or corporation structure follow: Sole Proprietorship: This is the easiest and least costly way of starting a business. A sole proprietorship can be formed by finding a location and opening the door for business. There are fees to obtain business name registration, a fictitious name certificate and other necessary licenses. Attorney's fees for starting the business will be less than the other business forms because less preparation of documents is required and the owner of the business has absolute authority over all business decisions Advantages:

Easiest to get started. Freedom of action. Maximum authored. Tax advantages in very small firms, Social Security advantages to owner. 3. Unlimited liability of owner.

Disadvantages

Illness or death endangers or ends business. Growth limited to personal ambition. Family or personal affairs easily mixed with business.

Partnership: There are several types of partnerships. The two most common types are general and limited partnerships. A general partnership can be formed simply by an oral agreement between two or more persons, but a legal partnership agreement drawn up by an attorney is highly recommended Legal fees for drawing up a partnership agreement are higher than those for a sole proprietorship, but may be lower than incorporating. In Florida, a limited partnership limits the personal liability of each partner to their capital investment. Control of the business is shared by the partners. A partnership agreement could be helpful in solving any disputes. However, partners are responsible for the other partner's business actions as well as their own. A partnership agreement should include the following:

Type of business. Amount of equity invested by each. Division of profit or loss. Partners' compensation. Distribution of assets on dissolution. Duration of partnership. Provisions for changes or dissolving the partnership. Dispute settlement clause Restrictions of authority and expenditures. Settlement in case of death or incapacitation.

Advantages

Two or more heads better than one. Additional sources of capital. Better credit rating than corporations of similar size.

Disadvantages

Death, withdrawal; or bankruptcy of one palrtner. Difficulty in dissolving partnership. Debt of one partner becomes the debt of all partners. Growth inhibited by size of partnership. No clear line of authority.

Corporation: A small business may form a private corporation .It requires a minimum of two directors .The corporate structure is usually the most complex and more costly to organize than the other two business formations. Control depends on stock ownership. Persons with the largest stock ownership control the corporation, not the total number of shareholders. With control of stock shares or 51 percent of stock, a person or group is able to make policy decisions. Control is exercised through regular board of directors meetings and annual stockholders meetings. Records must be kept to document decisions made by the board of directors. Small, closely-held corporations can operate more informally but keeping minutes of company meetings cannot be eliminated entirely. Officers of a corporation can be held liable to stockholders for improper actions. Liability is generally limited to stock ownership, except when fraud is involved. Advantages

Limited liability for stockholders.. Continuity. Transfer of shares. Easier to raise capital. Change in ownership need not effect management.

Disadvantages

Heavier taxes than any of the other businesses . Management control is limited by charter. Less freedom of activity' Legal formality. Expensive to start.

Most popular forms of small business There are lots of low-cost small business opportunities in Kenya today. Let me wet your appetite a little with these tidbits from the Small Business Magazine. These are 10 of the one hundred hottest small business opportunities in Kenya today. 1. Computer Consulting: This is one of the hottest in demand businesses that you can start. If you know computers, your biggest problem will be not having enough hours in the day to serve all the clients. Computer consultants take a broader view of an organization and its computer needs in an effort to help them solve information-management problems of all kinds. They combine hardware and software expertise to explore possibilities for how a computer can help them accomplish their goals. Computer consultants do different types of work: Business requirements analysis, technical support, management of the system, maintenance of the system, software analysis, hardware acquisition and installation, periodic evaluations/audits, etc. 2. Tutoring: Tutoring is one of the cheapest, easiest and profitable businesses to start, with a few business cards, brochures and flyers you can be in business today. The prospects for tutoring look good in the years to come. The growing dissatisfaction in the quality of classroom education propels the growth of scholastic tutoring, both in subject areas and in preparing students for qualifying examinations. A tutor has an advantage of being able to offer individual attention. And he/she can particularize and customize what he/she teaches to the level and needs of each student. Many people prefer such individual instruction because it allows them to learn at their own pace without the pressure of peers or authorities. 3. Advertising Agency: If you ever dream of launching your own small business, you cant find a better opportunity today than the advertising field! Why? Because advertising is a growth industry and advertising agency has low cost of entry, high profit margins and huge potential earningsprovides arguably one of the greatest small business opportunities. Advertisers spend billions of shillings each year to get their messages and products to their potential customers. 4. Photographing and Videotaping Service: You may not win a producer-of-the-year award, but you'll win the appreciation of your clients when you capture their weddings, graduations, parties, reunions, birthdays and more on your camcorder. Keep the film rolling at special events, and then edit a final version for clients' own special screenings. 5. Computer Repairs and supplies 6. Public Relations Agency 7. Graphic design and custom printing 8. Real Estate Agency 9. Real Estate Marketing 10. Travel Agency 10. Restaurant 11. Retail (e.g. mini-supermarket ) 12. Stationary supplies 13. Mobile phone supplies and accessories

3. STARTING & OPERATING A SMALL BUSINESS There are three possible ways of entering into small business : (a) Start-up i.e. starting a new business from scratch (b) Buying existing business (c) Buying a franchised business Deciding whether to start a new business, buy an existing one, or buy a franchise is a very crucial stage .Having done an economic feasibility study of an industry and its potential business, the next step is to decide whether to start a new business from scratch, buy an established business or buy a franchise. A. BUYING AN EXISTING BUSINESS Buying an existing business can be a much less risky and more quickly profitable venture than starting your own business from scratch. But it's not entirely risk free and your success will depend heavily on how wisely you choose and evaluate the business you buy. Buying a business can mean different things to different people. It may mean acquiring the total ownership of an entire business, or it may mean acquiring only a firm's assets, its name, or certain parts of it. Keep this point in mind as you study the following material. Also remember that many small business operators find that taking over an existing business is not always a "piece of cake." Reasons for buying an existing business Some reasons for buying an established business are: 1. Personnel are already working. If employees are on board, they are probably already experienced in the business. 2. The facilities are already available i.e. most necessary equipment is probably already on hand. 3. A product is already being produced for an existing market. 4. The location may be desirable. Prior successful operation at a specific location increases your chances of success at the same location. 5. Relationships have been established with banks and trade creditors. 6. Revenues and profits are being generated. If the business has been profitable or is headed toward profit, you will be profitable sooner than if you start up your own business 7. Goodwill already exists. 8. Requires less amount of time for planning to buy an ongoing business than would be to start a new business. Much of the hard work of start-up is avoided, including finding the location, purchasing the equipment, and so forth 9. There is an already established market i.e. ready customers or clientele. 10. Already established suppliers. 11. Ready inventory on hand that will mean no loss of the time necessary for selecting, ordering, and waiting for the order to arrive before you can make your first sale. 12. Most of the financing that will be necessary for purchasing the business may be more easily obtained. Many financial institutions will be ready to finance an established business than a completely new venture 13. You may be able to buy the business at a bargain price and may even be able to finance all or part of the purchase price through a note to the owner.

14. The business already has a track record for you to look at. Existing records of the business may help you and guide you in running the business 15. You will acquire the benefit of the experience of the prior owner. Disadvantages of buying an existing business : Some reasons for not buying an ongoing business are: 1. The physical facilities may be old or obsolete. Modernization of the physical facilities may be needed. ' 2. The accounts receivable may be past due or uncollectible. 3. The location may be bad or inappropriate for your type of business. The business location may be a drawback. 4. The financial conditions and relations with financial institutions may be poor with the seller. 5. T he inventory may be obsolete or of poor quality. 6. You will inherit any bad will that exists because of the way the business has been managed. 7. The employees who are currently working for the company may not be the best or the best for you and the way you manage i.e. the employees may have a poor performance record or attitude. 8. The image of the business is already established and if negative, it will be difficult to change 9. Precedents have already been set by the previous owners and may be difficult to change them. The purchase price may create a burden on future cash flow and profitability. 11. It is possible that you can overpay due to misrepresentation or an inaccurate appraisal of what the business is worth. 12. You may be liable for contracts entered into by the previous owners Evaluating/Assessing Business Buy Opportunities Evaluating a business buy opportunity requires involves asking basic questions to assist in deciding whether to purchase the business or not. The evaluation or assessment process involves the following: 1. Preliminary Evaluation /screening of business buy opportunity: This stage requires 1. Asking some basic facts about the business including its location, annual sales, annual profits and such information. Pay attention to any information that may disqualify the business from further evaluation to prevent wasting time. 2. Assess how the business is by observing the caliber of the clientele or customers who may come in, the attitude of the owner and especially his or her capabilities and personal integrity. 3. Find out about the history of the business including how it was established, how it has been performing and other background information. 4. Determine the real reason for selling the business .Even though the owner may give poor health or impending retirement, this may not always be the truth, but a cover of a poor investment , declining sales, possible change in the neighborhood that is causing business to be lost or to be less favorable, new competition or new technology on the scene, the products are obsolete, loss of key employee(s), problems with creditors. Determine whether you can solve some of these problems and be able turn the whole situation around to your advantage. 2. In-Depth Analysis of the business opportunity: If the business still interests you then further detailed evaluation is necessary and should involve: Asking other businesspeople in the location for their opinion of the business and the owner; Talking suppliers about their experiences in dealing with this owner and the business Talking to customers

Talking to key employees and ex-employees who will be more than willing to volunteer information about the business and the owner Talk to the bank about their business relationship with the owner Call the trade association and consumer rights groups to see whether customers have complained about the business. The following aspects of the business should be thoroughly assessed before you decide on whether or not to buy: 1. Profits and Sales: analysis of pat and future potential profits and sales. Find out the owner's income from his or her business income tax returns, records of bank deposits, and similar sources. You should also get actual figures on past profit sales, operating ratios, and other like information from the firm's books and auditor reports. .If for any reason the seller cannot or will not supply records for your analysis, this should be a very clear warning signal to you that something is amiss. Once these records have been obtained and audited, you should analyze for profitability with your improvements. Analyse both financial statements and tax returns from the past 3-5 years to judge both the current fiscal health and financial trends. Make sure you see figures that are accompanied by an audit letter from a reputable CPA firm. Don't accept a simple financial review or a compilation, because those are based on figures supplied by the company. Financial statement analysis will help determine whether the business is in sound financial condition, sales and operating ratios are in line with the industry average and the net worth of the business Understand how the current sales and marketing of the products is accomplished and how the sales staff are compensated (commissions or salary). Changes in compensation structure can be disruptive. Understand all of the products and services currently provided and they fit with your value proposition. You should have ideas as to how you will bring your unique value to the companys customer base. 2. Expense analysis: You should also analyze expenses for the business and see whether they are in line for a business of this type. Once you have your figures and expenses straight, and your own plans for what you might do in order to increase profitability, you should project sales and profits forward for a period of one to two years. Then analyze these figures to see whether the investment that you must make will bring you a better return than would starting a similar business of your own from scratch. 3. Inventory: have an independent appraisal of inventory to determine its true value .This may require examining the inventorys age, salability, quality, style, condition, and whether it is in line with the product line that you plan. 4. Appearance and condition of physical facilities: Analysis of capital equipment, furniture, fixtures, and the building: find out the real market value of all these fixed assets and whether they need replacement if they are old. If it must be replaced, when must it be replaced? Determine whether the equipment is modern and in good condition and whether you can make use of the equipment or will it just be sitting around taking up space? The environment in which a company operates can tell you a lot about it. Take some time to eyeball the company's physical location. How does this place look to you? Did you have a good first impression when you entered? How well is it maintained? Is there any outstanding

maintenance work to be done - leaky roof, peeling paint, poor signage? Is the place well organized out front and in the back where inventory is kept? 5. Accounts Receivable analysis: closely analyze accounts receivable in terms of their age, term of collection, the credit standing of the accounts, what the business is doing on credit and what the credit collection rate is. If much business is done on credit with long payments, it will mean that you will have a shortage of working capital even if the accounts are eventually paid. Analyze the situation and think through the results if you employed a stricter credit policy. Would you lose some customers? What percentage of the customers and what percentage of sales could you be expected to lose? Inspect the accounts receivable with a skeptical eye; often their stated value is somewhat inflated. Take a close look at the dates on them to determine how many are delinquent and by how long. This is important because the older the receivable, the lower its value and the greater the chance that it will never be paid. While you're at it, make a list of the business's top ten accounts and run a credit check on them. If the majority of customers or clients are creditworthy but late to pay, you may be able to solve the problem with a more rigorous collections policy. If the clientele is financially unstable, start looking for another business. 6. Contracts analysis: Determine what significant contracts the business is subject to. Sometimes the contracts are for continuing sales to customers. Many times you will want to assume them as they may have unfavorable terms. The same issues apply to vendor contracts and leases. Analyze contracts including leases on rented equipment or buildings, for their true value and check on the transferability of these contracts to you as the buyer and, if the contract can be renewed, the terms of renewal. Specifically check how long the lease is for and how much time is left on it. Also check all the terms and options of the contracts and lease. 7. Analysis of customers: check for the kinds of customers the business is dealing with and whether some these customers will stay with you once the business is transferred. Determine whether key contracts transferable or will you lose them once you buy the business? If possible obtain the customer lists to help find out if you will own these lists yourself on purchase and that the seller will no longer have the right to use them. Obtain various specifics such as the size of the customer base, the number of first-time buyers by year, sales value of initial purchase, sales values of subsequent purchases as well as their frequency, attrition rate of the active list, and information on revenues from list rental. These are the most important asset you may be buying with the business. Make sure they're as solid as the other tangible assets you'll be acquiring. Does the clientele have a special relationship with the current owner (long-time friends or relatives)? How long have these accounts been with the business and what percentage of the income do they represent? Will they leave or stay when the business passes to new hands? Does the current owner or manager seem to have good relationships with the customers? Is there a written policy for handling. 8. Goodwill/public image : Determine the business goodwill as seen by the business's reputation, its established patronage, and its established image. Good will is worth something and should be considered an asset. How a business is perceived can be a serious asset or a liability that can't be judged from a balance sheet. There are a wide range of intangibles that you need to consider when you're evaluating a business such as the way it services its

customers , how it answers the phones , whether or not it supports the community or the industry. Goodwill information can be obtained by talking to customers, suppliers, competitors, banks, and owners of other businesses in the area to learn more about this firm's reputation. Remember that it is very difficult to change a negative perception 9. Analysis of key personnel: Determine whether the personnel who know the business well intend to stay with the business once it is transferred to you .Talk to the key personnel of the possibility of signing temporary employment agreement if not willing to sign a long term contract. Key personnel are an important asset to many businesses. You need to determine how critical the employees are to the success of the business. You also need to look at their work habits to determine if these are people that you can work with. How long have these key employees been with the company? Will these people remain with the company after a change of ownership? What incentives will you have to provide to get them to stay? Can any key employees be easily replaced? What are their relationships with customers, and would customers follow any of these employees if they were to leave? Also look at the role the current owner plays in the company. Is this a role you want to play? Are there any current employees who can take over those responsibilities if necessary? 10. Analyze the real value of proprietary items such as copyrights, trademarks, patents, secret processes, and even a business name. Again, you must look at the situation closely to decide the real value of these items. Foe patents examine the remaining life and whether they have been invalidated by the courts. 11. Suppliers. Check business relations with suppliers to make sure they will continue to supply you. You should also find out whether or not the business is committed to any supplier and how satisfactory each supplier has been in the past in supplying what was needed in a timely fashion. 12. Payables analysis : Check the dates on invoices to see the business is keeping up with its bills. Normal payment times vary from industry to industry, but generally 30 to 60 days is standard. If bills are being paid 90 or more days past the invoice date, the owner may be struggling with cash flow. Also find out whether any liens have been placed against the business because of unpaid bills. 13. Liabilities: Every aspect of the business thus discussed can be either positive or negative; it can be either an asset or a liability. But it is particularly important that you identify every liability. Look for unpaid bills, back taxes owed, pending lawsuits, and so forth. Again, you must get the help of professionals for your investigation, including a lawyer and an accountant. This costs money, but the money that you save may save the business or save your investment for the future. Every liability that you will assume in the business should be put in writing (this goes for assets, too!) and a statement in the sales contract should indicate that all claims against the business now shown are assumed by the seller of the business. 14. Competition. It is extremely important to know what competition, both current and future, you may expect in this business. Again, you must do more than just talk to the current owner. Much can be revealed about competition by looking at sales trends over the past few years as well as talking to other businesses in your area or the trade association in which the business is a member. When you're buying a business, you need to understand the competitive environment in which it operates. Pay attention to industry trends, and how they might affect the company

you're considering. How competitive is this industry? Who are your competitors and what are their tactics? Are price wars common in this business? How has the competitive environment changed recently? Have any competitors gone out of business? Why? You can track this information by contacting an industry association or reading trade publications. 15. The Market : Is the market, including the community that is being served, growing or has the growth leveled off? Is the market actually on the decline? Watch for things like traffic routing, new shopping centers, or regulations that may affect your business. A highway, freeway, or expressway going through the area can totally change the market that was formerly served by businesses in the area. Also, look for changing neighborhoods. A neighborhood that is being renovated may have a positive effect on the business, but it may have a negative effect instead, so you must check this carefully. 16. Industry analysis: Determine the future of the industry. Is the industry is growing, static or declining? Is there new innovation in the industry that will require significant changes in how you do business? What are the trends? A new innovation on the horizon may point to further growth or make you obsolete. You need to research this industry and know what to expect in order to best understand how to buy a business that will succeed. You can't change the industry so you must understand if there is opportunity for you within it. 17. Examine the existing business's organizational structure: This is critical if the business is a private corporation. Ascertain that the company has been functioning as outlined in their articles of incorporation and/or bylaws. If it has shareholders, then you must determine if all of them are willing to sell. If they are, what do they expect in terms of compensation for that sale? If they are not, what do they expect from you as the business continues? Can you live with that? This can become a major sticking point for the purchase of an existing business. Obtain a certificate of good standing from the trade association . This validates the business you are thinking of buying has not previously broken any laws and/or isn't currently or has never been under investigation. Determine if you must continue that organizational structure or if you have the ability to change it, in the event you want to do so. 18. Determine if the business has any environmental issues : Check with the environmental agency (NEMA) to make certain that the business has maintained those standards and to determine what you will need to do in the future. In some instances, existing businesses are "grandfathered" in when new environmental regulations are established. However, when the business is sold to someone new, they are then expected to bring the business up to code. This can sometimes be an expensive situation so it is important that you understand your rights and obligations in this area. 19. Registrations, licensing and zoning requirements: Make sure that key business licenses and other legal documents can be easily transferred. Determine what the process for transfer would be, and what it would cost, by contacting the proper state and local authorities. If a company is a corporation, what state is it incorporated in? Is it operating as a foreign corporation in its home state? 20. Location analysis: Check out locations for the business if you are not purchasing the building as part of the deal : You may wish to keep the business located where it is, which means you will have to negotiate a lease with the property owner. In some instances that can be a problem because they want to raise the rent or they will want the owner to be responsible for all of the building maintenance (which you might not have counted on in your business plan financial statement). In such instances you may have to look for alternative locations for the business. Or you may just want to relocate business for your own reasons. Perhaps it is no longer in the pathway of its customer base or it could be located in a dying

part of town. At any rate, location is critical for any business, so this factor will require thorough examination and detailed planning before moving forward. Location is especially important if you are buying a retail business. How important is location to the success of the business? How good is the location of this particular business? Is there sufficient parking to make it easy for customers to visit? How dependent is the business on walk-in trade? What does the future hold for the area? Is it in the process of rapid change from new residential or business complexes on the way? Will the location become more or less desirable because of contemplated changes in the neighborhood? 21. Financial requirements and financing decisions: Determine how much money you will need to have to purchase the business, get it started the way you want, and grow it within the first three years. If you have the ready cash on hand, then you are prepared to move forward. However, if you do not, then you will have to look for partial or total funding. Decide the type of funding you want to explore, if you require more money than you have on hand. There are lots of possibilities. Seek guidance through experts in the field who can help you determine the best way to fund your business. The options may include: a. Self-funding: you must determine how you can raise the money. b. Partnership: If you need additional funding but don't want to go into heavy debt, then you might want to consider a partnership with someone else who can also bring experience, management skill, and funding to the business. c. Venture capital: seek a business "angel;" or someone who likes to help new businesses get started. d. Shareholder capital through incorporation: You can also incorporate your business and sell shares of stock to raise funding. e. Loans: You can look for an small business loan through the small business lenders.

22. Circumstances Unique to the Owner: Sometimes a business is based on a particular owner, his or her family, the relations, religion, ethnic group, membership in certain social or political organizations. These may be the reasons he business and sales are at a certain level. You, coming into this business and not being of the same ethnic group, religion, family, social group, or whatever may lose a great portion of the former sales. This is not always the case, but gain you should be aware of the possibility. 23. Family involvement: Family involvement in a business is often a good thing. However, when you are buying and family members are involved in the business there are certain issues. Many times a family member is either not paid or is working at discounted rates. Once you take over you may need to replace them at costs far in excess of what shows up on their financial statements. Therefore, when considering how to buy a business that has significant family involvement, be very careful to evaluate the services each provides and the rate of pay they receive. You will need to replace those individuals and it may cost more to do so. 24. Special Requirements : Check for licenses, permits, and other legal requirements for building, health, fire, and the like. This is especially important in some areas in which the local government will permit old businesses to operate under old laws, but upon sale they are considered new businesses and the new owners must abide by the new laws. Your attorney can help you out here.

25. Economic Outlook : Economic conditions vary over time and geographic location. Regardless of a past history of successful operations, these conditions can seriously affect the future demand for a firm's products or services, its ability to borrow money or maintain its source of inventory or raw materials, and the like. They may increase the risks to you and should be analyzed and considered in your evaluation of the opportunity that purchase of the business! represents. 26. Determine a valuation for the business: Most industries have a standard method and concentrate on a multiple of the previous year's revenue (the exact multiple will depend on the industry). If the business has a lot of capital equipment (a manufacturer, for example), the market value of the equipment is taken into account. Fast-growing businesses in a hot market are usually valued higher, as future potential is factored into the selling price. Once you've determined a valuation, or come to an understanding on price, run your own analysis to see if it fits your needs. Calculate a break-even on the business. If you're 10 years from retirement, does it make sense to buy a high-priced business that won't show decent returns for 15 years? Buy Business Valuation Methods Buying and selling a business requires determining its market value. The value of the business will rely on an analysis of the firms cash flow or its ability to generate consistent profits will ultimately determine its worth in the marketplace. Business valuation should be considered a starting point for buyers and sellers. It is essential that the parties involved in the buying and selling of a business understand how the value of a small business is determined. Below is an outline of methods and rationale necessary to get a fundamental understanding of valuing a small business (common methods used to come up with a value) .

Asset valuation Capitalization of income valuation Owner benefit valuation Multiplier or market valuation 1. Asset Valuation /Asset Based Valuations ( Asset-based approaches)

Basically these business valuation methods total up all the investments in the business. This method places the lowest value on the assets of the business. The assumption when using this method is that in the worst case scenario the buyer could liquidate the assets without sustaining a loss. There is no goodwill in this method and the value will be largely dependant on the offers that are put forward from interested parties. There can be some guidance taken from the asset register and book value of the assets but when using this method the old saying that it is only worth what someone is prepared to pay for it definitely rings true. Asset-based business valuations can be done on a going concern or on a liquidation basis.

A going concern asset-based approach lists the business net balance sheet value of its assets and subtracts the value of its liabilities. A liquidation asset-based approach determines the net cash that would be received if all assets were sold and liabilities paid off.

An asset-based valuation requires establishing a fair market value of the assets of a business. Inventory value at cost can generally be determined relatively easily. The balance of the fixed assets including furniture, fixtures, equipment, machinery, and leasehold improvements, are a challenge. The book value reflected on the financial statements of a business is not a realistic indication of current market value. The value of used business "assets" is highly subjective and it is unlikely the buyer and seller will agree on fair market asset value; both will have a defendable but different perception of value. For instance , a four year old computer used in the business for instance, the seller cannot do business without the computer and perceives its in place value as the cost of an immediate replacement with a new computer (say ksh20,000). If the old computer where offered for sale it is likely to have little if any value (maybe ksh 2000). Here the seller is justified in maintaining that the computer has a ksh 20000 value to the business. The buyer is equally justified in valuing the computer at ksh 2000.The sale of a business is not a liquidation of used assets. It is reasonable to maintain that you would have to duplicate the assets with new replacements. Likewise, it is reasonable to maintain that the assets are used and have some minor percentage of their original value. Asset valuation is used when a firm is asset-intensive. Retail businesses and manufacturing companies fall into this category. This process takes into account the following figures, the sum of which determines the market value:

Fair market value of fixed assets and equipment (FMV/FA) - This is the price you would pay on the open market to purchase the assets or equipment. Leasehold improvements (LI) - These are the changes to the physical property that would be considered part of the property if you were to sell it or not renew a lease. Owner benefit (OB) - This is the seller's discretionary cash for one year; you can get this from the adjusted income statement. Inventory (I) - Wholesale value of inventory, including raw materials, work-in-progress, and finished goods or products.

2. Earning value approaches These business valuation methods are predicated on the idea that a business's true value lies in its ability to produce wealth in the future. The most common earning value approaches include: Income Multiple Based Valuations /Capitalizing Past Earning: The valuator determines an expected level of cash flow for the firm using a firms record of past earnings, normalizes them for unusual revenue or expenses, and multiplies the expected normalized cash flows by a capitalization factor i.e. it is a method of applying a capitalization rate to actual historical income ( earnings) data rather than future income projections .The capitalization factor is a reflection of what rate of return a reasonable purchaser would expect on the investment, as well as a measure of the risk that the expected earnings will not be achieved. In order to be meaningful earnings must be clearly defined before establishing a multiplier and may be defined as after tax net income, earnings before interest and taxes (EBIT), earnings before interest, taxes, depreciation, and amortization (EBITDA), a modified EBITDA, or seller discretionary earnings (SDE). SDE is often referred to as seller's cash

flow. This approach finds the value of a business by using an "industry average" sales figure as a multiplier. This industry average number is based on what comparable businesses have sold for recently. The industry multipliers range from .05 to 1.5 depending on the industry. To find the right multiplier for your industry, you can try contacting your trade association utilize the services of an appraiser who specializes in businesses such as yours Discounted Future Earnings/ Discounted Cash Flow Valuation: uses an average of the trend of predicted future earnings that are divided by the capitalization factor. This method works on the assumption that the value of the business is based on the future net cash flow. When these calculations are made they will normally be discounted back to the present rate. This is probably one of the most complex forms of valuation, if you have a business that is to be sold in this way it will be crucial to take professional advice. Well established businesses with a history of strong earnings and good market share might often trade with a capitalization rate of, say 12% to 20%. Unproven businesses in a fluctuating and volatile market tend to trade at much higher capitalization rates, say 25% to 50%." Capitalization of income valuation/ Income Capitalization Based Valuations: Generally, a future income stream is calculated based upon a variety of assumptions about future operations and revenue projections, and a return on investment analysis is then applied to that future income stream. Income Capitalization is most suitable and applicable for large businesses with substantial revenues and reasonable expectation forecasts will be realized. Market volatility, along with the arbitrary nature of assumptions made to generate future revenue, projections may make this methodology inappropriate and rarely meaningful for "small" businesses. This method places no value on fixed assets such as equipment, and takes into account a greater number of intangibles. This valuation method is best used for non-asset intensive businesses like service companies. The following factors have to be considered in the use of this method : Owner's reason for selling, length of time the company has been in business, length of time current owner has owned the business, degree of risk , profitability , location, growth history ,competition, entry barriers, future potential for the industry , customer base, technology etc Profit Based Valuation: The method places importance only on overall or gross profits and ignores wages of the owner This is a method which will not work for a larger business, when there is substantial profit. In this case there will need to be calculations made for return on investment. When using the quick method there is not too much importance placed on the wages of the owner because they are part of the overall profit. When looking at larger businesses the owners wage will be deducted before putting a figure on overall profitability of the company. This method is widely accepted for valuation of small businesses and the value is calculated as follows: Value = Plant and Equipment + Annual Net Profit before deductions of Interest, tax, depreciation, and salary of the owner. 3. Market value approaches These methods are also known Owner benefit valuation/ Comparable Sales. Market value approaches to business valuation attempt to establish the value of your business by comparing your business to similar businesses that have recently sold. The methods attempt to establish

recent selling prices of similar businesses. What have other businesses in the same industry sold for and how do they compare with the business that the evaluation is being done on. This information is very helpful and should make the evaluation a little more realistic. Methods only work well if there are a sufficient number of similar businesses to compare. The sales figures help to set the tone for how other businesses have been rated and should help in setting an asking price that represents the current value of the firm. When using this method to value your own business you must be careful not to assume current market value. Many people make the mistake of looking through business for sale listings, picking out similar businesses and assuming that theirs must be worth the same. It is crucial to remember that this is not a reflection of current market value but merely a reflection of what other business owners feel that their businesses are worth. You would be well advised to speak to a few brokers and gauge their feeling for the value. They will know what similar businesses are selling for, and how the market is at that particular time. The difficulty with this style of valuation is that no two businesses are the same. While it is impossible to find any two businesses that are the same, we can obtain a substantial amount of data on the sale of very similar businesses. The data is most useful in establishing a reasonable range for the multiple of earnings. The main focus is on the seller's discretionary cash flow and is used most often for valuing businesses whose value comes from their ability to generate cash flow and profit. 5. Rules Of Thumb: Over the years some business types have developed a common expectation of value. Value is calculated by applying an industry multiplier to the gross sales, or the gross profit of the business ( often based on a multiple or percentage of gross revenue ). This is accepted by the respective industry because cost structures are commonly definable. This method is also applied when the business is being sold to another business in the same trade. This is because certain cost elements can be adsorbed by the purchaser and the purchaser will be able to benefit from economies of scale. These types of sales are known as trade sales or synergistic sales. It is surprising however that the results of further valuation methods often result in a value very close to the rule of thumb. However, when using this method it is important to remember that any form of valuation that involves applying a multiplier to industry norms is risky in a fluctuating market. Businesses which are typically valued using this method are: Retail Butchers ,Legal Practices ,Real Estate offices ,News agencies ,Taxis ,Milk Runs ,Medical Centres ,Accountancy Practices ,Service Stations In determining the market value of a business the following factors are taken into account : Several years in business, substantial hard asset value, owner retirement, absentee ownership, stable management team in place, long-term quality employees and customers, a broad diverse customer base. apparent competitive advantages, proprietary or exclusive products, obvious opportunity for growth and/or obviously under-performing, very clean books and records, up to date assets and premises in superior condition, highly favorable lease terms or ownership of real property, desirable location, a high demand enterprise (manufacturing, distribution, or business to business service), favorable seller financing and easy to understand motivation for selling The following attributes of the businesses can justify a lower market vale: an inconsistent record of historical profitability, less than 3 years in business, little if any hard asset value , owner critical to operations, professional practices, or consulting, substantial involvement of

family or partners in operations, few employees or a high employee turnover ,small customer base , a few customers accounting for substantial percentage of revenue, no apparent barrier for completion to enter the business ,no clear opportunity for growth and/or improvement in operations , questionable financial records , out dated assets in need of replacement or heavy maintenance , obvious deferred maintenance or capital reinvestment, premises in disarray and/or unsuitable for operations , unfavorable terms on leases, undesirable location , a low demand enterprise (retail, bar, restaurant, or personal services), unfavorable terms owner unwilling to finance, all cash required and questionable rationale for sale B) BUYING A FRANCH1SED BUSINESS: Franchising is the practice of using another person's business model/business concept. The franchisor/seller grants the independent operator the right to distribute its products, techniques, methods, processes and trademarks for a percentage of gross monthly sales and a royalty fee. The business is essentially the same as all other business being run under the same name. Various tangibles such as products , tools , machinery and equipment etc and intangibles such as advertising, training and other support services are commonly made available by the franchisor (the company that owns the rights to the business). The business relationship between the franchisor and franchisee is governed by a franchise agreement with premature cancellations or terminations of most contracts bearing serious consequences The contract allows the franchisee to capitalize on business format, trade name, and support system provided by the franchisor. Franchise agreement terms typically result in a loss of the sunk costs of the first-owner franchisees who build out the branded physical units and who lease the branded name, marks, and business plan from the franchisors if the franchise is canceled or terminated for any reason before the expiration of the entire term of the contract is a popular method of doing business that offers the buyer the advantage of the franchisor's experience and assistance. The business can be started with greater efficiency, proven products or methods, public recognition and higher expectation of success. The initial investment of a franchise can involve several thousand shillings and there may be royalty fees based on the percent of sales. Any franchise should be investigated thoroughly before a contract is signed. Danger signs include inflated promises of large returns on a small investment and sales tactics that pressure the buyer to act immediately. If it appears the franchisor primarily makes money from an up-front sales fee with no care about whether the franchise is a success, the buyer should always act with considerable caution. Businesses for which franchising is said to work best have the following characteristics: 1. Businesses with a good track record of profitability. 2. Businesses built around a unique or unusual concept. 3. Businesses with broad geographic appeal. 4. Businesses which are relatively easy to operate. 5. Businesses which are relatively inexpensive to operate. 6. Businesses which are easily duplicated. ; Advantages

There are countless benefits to becoming a Franchisee, which is why Franchising is one of the fastest-growing sectors of the global business such as: 1. The Franchisee has the incentive of owning their own business with the additional benefit of continuing assistance from the Franchisor. 2. Franchise agreement provides a complete package - The guesswork usually associated with starting a business is taken care of. The total package can include trademarks, easy access to an established product; a proven marketing method; equipment; inventory; etc. 3. The Franchisee benefits from operating under the name and reputation (brand image) of the Franchisor, which is already well established in the mind and eye of the public. 4. The Franchisee will usually need less capital than they would if they were setting up a business independently because the Franchisor, through their pilot operations and buying power, will have eliminated unnecessary expense. 5. The Franchisor provides the advice and/or help in identifying suitable trading locations or operating territories for the Franchisee. 6. The Franchisor helps the Franchisee obtain occupation rights to the trading location, comply with planning (zoning) laws, prepare plans for layouts, shop fitting and refurbishment, and provide general assistance in calculating correct level and mix of stock for the opening launch of the business. 7. The Franchisor trains the Franchisee (and very often, the Franchisee's staff as well) in all areas of the business such as; manufacture, preparation, accounting, business controls, marketing, promotion and merchandising. 8. The franchisor can assist in the financing arrangement of the franchisee. The Franchisor may negotiate better rates of finance, or more favorable conditions, for Franchisees with financial institutions. 9. Business processes/systems - Many franchisors provide their franchisees with various proven systems including financial and accounting systems; ongoing training and support; research and development; sales and marketing assistance; planning and forecasting; inventory management; etc. They'll show you the techniques that have made the business successful and help you utilize them in developing your own business. The Franchisee can call on the specialized and highly-skilled knowledge and experience of the Franchisor's head office organization, while remaining self-employed in their business. 10. Reduced business risks: The support and benefits provided by a Franchise system greatly reduce a Franchisee's business risks. Franchises traditionally have a much lower failure rate than other start-up businesses because they are based on business concepts where most of the kinks/obstacles have already been worked out by someone else. 11. The Franchisee has the services of the field operational staff of the Franchisor who are there to assist with any problems which may arise from time to time in the course of business. 12. The Franchisee has access to use of the Franchisor's patents, trade marks, copyrights, trade secrets, and any secret processes or formulae. 13. The Franchisee has the benefit of the Franchisor's continuous research and development programs, which are designed to improve the business and keep it up-to-date and competitive. 14. Protection against competition: Defined territories of operation within the Franchise can help protect the Franchisee from competition. 15. A Franchisee can always speak to their Franchisor or a fellow Franchisee to discuss their business challenges or problems - something a non-franchised business can almost never do.

16. The established name recognition it provides to the business. If a small business is associated and linked with a big business then there is a high probability that the small business would propel due to the firm backup and support of an established big business. Running a small business under the franchisor's name and organization is very beneficial for businesses that can't afford much finance and capital investment for their own business. 17. Corporate marketing provided by the franchisor. The fact that when a business is associated with a franchisor then the big-business themselves help in corporate marketing of the small industry or business they are providing support for. Having the interest of bigbudget industries in a low-budget business is a very effective marketing tactic and these franchises policy ensures the proper marketing of a small business .i.e. the Franchisee receives the benefit of the Franchisor's advertising and promotional activities at a lower cost than if they were to attempt such marketing themselves. 18. Bulk purchasing power given to small business and industries. Since most of the initial financial burden is provided to the business once it's franchised by the franchiser therefore this enables the business to buy equipments, products and other necessities to run the business with ease and without worrying about the financial investment. Furthermore, the franchisee benefits from the strength in numbers where they have the buying power of the entire network, which can help them get product and compete with larger national chains. 19. The training and management facilities the franchisor provides to the business. A company which provide capital and investment to any small business have vested interest in the success of the small business. Therefore the companies that provide franchise ensure that the business in which the money is being invested is run and manage properly. The bigbusinesses and industry provides all the necessary training to the small business staff and provide additional resources and decision-making capabilities to a small business. 20. Provides expansion opportunities for the franchisor : Franchising is one of the only means available to access venture investment capital without the need to give up control of the operation of the chain in the process. After the brand and formula are carefully designed and properly executed, franchisors are able to sell franchises and expand rapidly across countries and continents using the capital and resources of their franchisees, and can earn profits commensurate with their contribution to those societies while greatly reducing the risk and expense that would be inherent in conventional chain operations. Additionally, the franchisor may choose to leverage the franchisee to build a distribution network 21. Legal considerations/advantages : The franchisor is relieved of many of the legal requirements necessary to start a new outlet, such as obtaining the necessary licenses and permits. Legal liability: The franchisor is also relieved of the obligation to carry liability insurance on the independently owned franchise units that produce the gross sales of the franchised system because this is the obligation and responsibility of the franchisees under the franchise agreement. As long as the franchisor's operational manuals are efficient and followed by the franchisees, the franchisors are generally almost always protected from any liability for any incident that occurs on the property of the franchisee. Operational benefits: Franchisors can maximize their profits on the gross sales of the franchisees and avoid the operational expenses for the physical units that wear their brand names. Franchisors can minimize their risk and thus increase their profits because their franchisees bear the expense of operating

Disadvantages 1. The relationship between the franchisor and franchisee involves the imposition of controls. These controls will regulate the quality of the products to be provided or sold by the franchisee to the consumer. The creative control that a small business owner have is often hinder when franchising in done. Any decision which is to be made is to be consulted and approved by the franchisors. This limits the authoritative control of the small business owner to a great extent. 2. Each bad franchisee has an adverse effect, not only on his own business, but indirectly on the whole of the franchised chain and as such, all other franchisees. The franchisor, will, therefore, impose standards and demand that they are maintained so that the maximum benefit is derived by his franchisee (and indirectly the whole of the franchised chain) from the operation of the franchisee's business. 3. The franchisee will not be able to make any contribution or impose their own personality on their business. Most franchisors do encourage their franchisees to make contributions to the development of the business of the franchised chain which their individual talent and qualities permit. 4. Cost: It can take a good deal of cash to open and operate a franchise. Upfront costs can be significant, and ongoing royalty fees will have a major impact on cash flow of the franchisee. The franchisee pays the franchisor the initial cost of the franchise ,for the services provided and for the use of the system. 5. A lot of time is required while selecting a franchise. A complete and through research is required to select the right franchise and to determine whether it would work for the business or not. 6. The prospective franchisee may find it difficult to assess the quality of the franchisor. This factor must be weighed very carefully by the potential franchisee for it can affect the franchisee in two ways. The franchisor's offer of a business-format package may not amount to what it appears to be on the surface. The franchisor may be unable to maintain the continuing services which the franchisee is likely to need in order to sustain their business. 7. The franchise contract will contain some restrictions against the sale or transfer of the franchised business. This is clear inhibition of the franchisee's ability to deal with their own business but. as with most of the restrictions, there is a proper reason for it. This provision is in the contract because the franchisor will have already been most meticulous in their choice of the franchisee as the original holder of the franchise for this particular outlet. Why then should they be any less meticulous in their approval of a replacement? Naturally, they will want to be satisfied that any successor to the original franchisee is equally suitable for that purpose. In practice, there is normally very little difficulty in the achievement of successful assignments of the franchised business. Some agreements provide for the payment of fees to the franchisor to cover the costs of dealing with applications and training the new, replacement franchisees. 8. Franchisees may find themselves becoming too dependent upon the franchisor and fail to produce the personal drive which the system provides. Some franchisees lose their perspective. They delude themselves into believing that m the franchisor has a duty to be so involved with their particular business to ensure that it has a flow of customers, and to I provide a day-to-day involvement, which is inconsistent with franchising as a concept. 9. The franchisor's policies may affect the franchisee's profitability. For example, the franchisor may wish to see his franchisee build up to a higher turnover from which he gets

his continuing franchise fee, while the franchisee may be more concerned with increasing his profitability, which does not always necessarily follow from increased turnover. 10. The franchisor may make mistakes in their policies. They may arrive at decisions, relating to innovations in the businesses, which turn out to be unsuccessful and detrimental to the franchisee. This is why franchisors are always urged to market test innovations thoroughly in their own company-owned outlets, and to be able to demonstrate to franchisees the cost effectiveness of introducing new ideas. 11. The good name of the franchised business and its brand image may become less reputable for reasons beyond their own control. 12. Conflicts: The franchisor-franchisee relationship can easily cause conflict if either side is incompetent (or acting in bad faith). Often there are numerous instant during the business when heated discussion and disputes occurs between the small business and franchisor. An incompetent franchisor can destroy its franchisees by failing to promote the brand properly or by squeezing them too aggressively for profits. Franchise agreements are unilateral contracts or contracts of adhesion wherein the contract terms generally are advantageous to the franchisor when there is conflict in the relationship. Evaluating a franchise opportunity Assessment of a franchise opportunity is critical to avoid making any wrong business decision. Professional assistance may be sought from lawyers, accountants or business advisors in learning adequately about the franchisor. The following considerations may help in the selection of the franchised business: 1. Track record : Find out whether the franchisor has a track record of success by learning all about the franchisor's personal and business names, its organization; its background; and its financial history. Estimate whether the franchisors success can be duplicated in your proposed area of operation. Ensure that the franchise has a track record of success by observing the that it has succeeded elsewhere Know who the Franchiser is by visiting at least one of the firm's franchisees. Ask for a list of all of the firm's current franchisees and make sure that you select the one to visit. Avoid calling those names recommended by the franchisor. When you meet with the franchisees, observe their operation, discuss expenses and ask how well the franchiser supports the franchise units. Establish the stability and financial strength of the franchiser determine how long the franchisor has been in the industry or how long has the firm granted franchises, current number of franchisees and how many in your proposed area of operation. Examine the attitude of the franchisor toward you, concern about your qualifications , interest in establishing a long-term relationship or just does the interest seem to end after signing the agreement and are you being rushed to sign the agreement A decision has to be made on whether to start an established or emerging franchise. A franchise with an established track record has many benefits -- significant name recognition; proven marketing methods; entrenched business plans and training systems; strong management; and a history that is easy for you to investigate. On the downside, the franchisor may already be saturated in the market (so good locations may not be available, or other outlets may encroach on your area); fees may be higher; and you may find that the larger the company, the harder it is for you to be heard should any disagreements arise.

An emerging franchise may give an opportunity to get in on the ground floor of what could be a highly profitable growth opportunity. Newer franchises also tend to have lower upfront and royalty fees, and they may be more willing to negotiate and accommodate individual franchises. On the other hand, smaller franchise opportunities may lack name recognition; they may not have enough experience to make their system work; you may find yourself being a test-case for their procedures; and the chance of franchisor failure could be much greater

2. Franchise package or Cost: Determine the complete list of fees that will be required to pay both to start the franchise and operate it ( e.g. the initial franchise fees and royalty fees) . It will also tell you other obligations, such as inventory or equipment that must be purchased from the franchisor. Note that you are purchasing the rights to use the franchisor's trademarks, business methods, and distribution rights. This licensing charge can be significant, especially for a well-known, established franchise - it's not unusual for it to be in the tens of thousands of KES. Often, it is also based on the value of the territory or trading area, so the larger your market, the more you could end up paying. Be aware that this upfront/initial fee may be in addition to any other start-up costs you will have to incur. The initial franchise fee may or may not include things like training costs; start-up promotional fees; inventory; build-outs (some franchisors require your space to have specific architectural elements); equipment/fixtures (you may be required to purchase or lease specific equipment and fixtures from the franchisor); and any other costs that are necessary to open your business. What is the full initial cost and what does it cover? a. Licensing fee? b. Land purchase or lease? c. Building construction or renovation? d. Equipment? e. Training? f. Starting inventory? g. Promotional fees? h. Use of operations manuals? You will also have to pay ongoing fees to maintain the rights to your franchise. Most franchisors charge a royalty fee, typically a percent of your gross sales, not your profits. This royalty fee can range from 1 percent to as much as 15 percent, although 5 percent is typical. Remember, you are paying this royalty on gross sales (your total receipts, less sales tax, returns and refunds), so it can potentially take a significant bite out of your profits. Some franchisors charge a regular fee (payable weekly, monthly or quarterly) in lieu of royalty payments. This type of fee may also be part of the mark-up you are charged for goods or services you are required to purchase. It is also common for franchises to pay a portion of the franchisor's local, regional and national advertising and promotional costs. These fees are usually put into a cooperative advertising fund that ultimately What ongoing costs are paid to the franchiser? a. Royalties? b. Ongoing training? c. Cooperative advertising fees?

d. Insurance? e. Interest or financing 3. Territorial restrictions: Determine whether your territory or area of operation will be exclusive. Determine whether or not the franchisor can open other stores in the area, or even sell its product by mail order to customers in your region. 4. Determine how you will receive inventory and supplies : In many cases, franchisors supply franchisees with the inventory and products they need to do business. It's important to inquire about how you can expect to receive those supplies as well as how much they will cost. Order lead time and a current price list are a couple of important issues you'll need to address. Are you required to purchase supplies from the franchiser or a designated supplier? Are the prices competitive with other suppliers? 5. Products to sell and how to sell them: Franchise arrangements allow franchisees to sell certain products may limit the ways to sell them. 6. Services to be provided by the franchisor : Establish the nature of services to be provided by the franchisor before and after the start of the business such as training , advisory services , trademarks , patents 7. Determine the financing options: Many franchisors provide financing for their franchisees. Ask for details about your franchisor's financing program and compare it with other lenders in your area. The franchisor's financing terms may be better or worse than other lenders. It's up to you to find out. 8. Determine if there are any outstanding or pending lawsuits /legal actions such as those involving violation of franchise law, fraud, embezzlement, or unfair business practices, bankruptcy . And be sure to read financial statements closely. 9. Expected returns from the business: Carefully examine the financial statements of the franchisor and make hypothetical cost, revenue and profit projections by taking into account the fact that economic conditions vary from region to region, so these figures do not assure success of a particular outlet. Make sure that both the franchisor and individual franchisees are healthy in terms of profitability. 10. Effective financial management and other controls - A strong monitoring system will help you identify your problems and deal with them more effectively. 11. A good image - It's important that the public has a positive image of the franchisor, since you're basing your business on its reputation. Also, look for a concept that can expand nationally so your business can grow locally. 12. Integrity and commitment thoroughly assess the integrity and commitment of the franchisor and franchisees as your success will be greatly impacted by this . 13. Industry Success : Look for opportunities in industries that are growing or successful. Evaluation process : Learn as much as possible before purchasing any kind of business so as to allow making an informed decision. Sources of learning about a franchise opportunity include : 1. Interviewing the franchisor - Make sure that you feel comfortable with the franchisor, and that all your questions can be answered to your satisfaction. 2. Interviewing sting franchisees - Speak with current franchisees to see how they feel about the business. Are they happy with their investment? Are they making as much money as the expected?

3. Reading business and trade press - Spend some time in the library or on the Internet looking through the media. Often, you'll learn a lot more about the company than they volunteer in disclosure documents. 4. Checking references - Don't just speak to franchisees. Call bank and other business references supplied by the franchisor. 5. Go to independent agencies - Find out whether any complaints have been lodged against the company. Contact professional or trade associations to know if any complaints have been registered against the business C) Starting A New Business/ Business Start-Up The decision to start a business from scratch is a daunting one as the business concept selected is often new with new demands and challenges. This is the stage when a new business is born and now exists legally. Products or services are in production and the business has the first customers. Thus a small business start-up is a new venture i.e. start of a new small business venture The main motivations for starting a new business include: The desire to make others to recognize that the success of the business is all theirs. The business idea selected is new The businesses for sale at the time may not be desirable The desire to determine the size of the company, fresh inventory, new personnel, and a new location for the new venture. However, a new venture is also challenging because everything about it is new, it demands new ideas. and it must overcome difficulties. Moreover, because everything is newer, a larger investment may be required. Reasons For Starting A New Business: Some reasons for starting a new business lie in the owner's freedom to: 1. Define the nature of the business. 2. Create the preferred type of physical facilities. 3. Obtain fresh inventory. 4. Have a free hand in selecting and developing personnel. 5. Take advantage of the latest technology, equipment, materials, and tools to cover a void in acceptable products available. 6. Select a competitive environment. Reasons For Not Starting A New Business: Some reasons for not starting a new business are: 1. Problems in finding the right business. 2. Problems associated with assembling the resources, including the location, building, equipment, materials, and work force. 3. Lack of an established product line. 4. Production problems associated with starting a new business. 5. Lack of an established market and channels of distribution. 6. Problems in establishing basic management systems and controls. 7. The risk of failure is higher in small business start-tips than in acquiring a franchise or even buying an existing business.

Business Characteristics Of Small Business Start Up: Upon business formation the main focus include: i. Generating profit and coping with administrative demands ii. Emphasis needs to be on obtaining customers and achieving economic productivity. Small business owners are most concerned about finding and signing up customers and being able to deliver their products and services. They are grappling with the question of whether they will get enough customers and deliver enough products/services to become a viable business iii. The owner normally works very long ours and management roles only involves supervision iv. Formal planning is seldom a part of the process. Firm is likely to be unstructured v. No formalized market research vi. Reliance on simple book keeping vii. Financing: Concerned with whether they have the financial resources. Sources of finance are likely to come from the ownership , friends, relatives, leasing and some micro-credit viii. Cash generation will tend to be negative and major investments will be used for plant and equipment ix. The firm is likely to have a single product line x. The business is likely to have very limited distribution channels Business Needs: At the inception stage a small business needs include:1. Business formation Business names Registration Account opening Taxation i.e. registration for taxes 2. Financial resources : the main sources of capital or funds most likely come from personal savings, friends and relatives, suppliers, leasing , grants and limited micro credit 3. Family support and the confidence to move on 4. Establishing a customer base 5. Establishing a market presence in terms of size, location 6. Creating channels of distribution 7. Finding suppliers 8. Hiring employee / workers 9. Facilities premises 10. Creating a management structure , organization structure and culture 11. Management skills that may be provided internally through training or externally thro consultancy An assessment of these needs help on risk assessment of starting or not staring a small business a business plan may be helpful to determine the feasibility of the business idea Challenges: Small businesses face distinctive barriers at this stage that include: 1. Credibility problem i.e. Problem of how to acquire credibility in order to get the resources necessary to prove what you can do .They face credibility issues from customers, suppliers, money lenders , employees, premises owners.

2. Entry barriers :- Entry barriers into business will depend on the amount of investment technology and labour skills required or an the availability of niches or of gaining markets 3. Survival barriers: Barriers of survival once the business has bee started which may occur when there is intense "^Competitions, saturated markets, excess capacity and changing technology or product quality requirement. 4. Burden of government bureaucracy i.e ignorance of dealing with legal / government requirement and the attendant penalties .However, full compliance can be very costly for small business 5. The business plan:- Business plan are often appropriate lor small business and when asked for small businesses and when asked for them causes irritation . Many business operators become frightened because developing a business plan can be time consuming and they lack the knowledge of how it is done 4. Growth Stage Of Small Business: Growth in the business may imply the movement into bigger premises, hiring more workers, significant sales turnover, higher profitability, newer or more product lines (s), buying another business etc after start-up. Money Sources: Banks, profits, partnerships, grants and leasing options. Thus growth stage is when a business will experience its largest increases in sales and profits. Characteristics The firm has grown and is well known in the marketplace and the community. Profitable but most of the case generated is used to finance the increase in working capital needed for growth e.g. some retained earnings. Profits are strong as profit margins also tend to increase Revenues and customers are increasing with many new opportunities and issues. Competition becomes stiffer Management roles focus on coordination and delegation Organizational structure assumes for greater importance and displays evidence of becoming functional and channeled through line management. Managers take over the owner's operational duties, and the strategy is to essentially maintain a status quo. Marketing may now get designated as a function and research becomes necessary to underpin new product development Cash flows stabilize and establishment of marketing networks and operational channels are completed. Systems and controls assume greater importance e.g. financial reporting because evidence. Financing : the business is often faced with having to tolerate a high debt-equity ratio Services of finance broaden to include banks and partners Distribution of product(s) through multiple channels Growth life cycle businesses are focused on running the business in a more formal fashion to deal with the increased sales and customers. New employees will have to be hired to deal with the influx of business. As the scale of production and other commercial activities (such as transportation, storage, bulk raw material purchase, etc.) increases, the business will earn what is technically known as economies of scale. This usually happens when optimum utilization of production, storage and transportation capacities take place with an increase in the scale of production Its products and services are gaining acceptance in the marketplace and customers are patronizing them in increasing numbers i.e. some level of customer loyalty. Customer loyalty

as there is a significant high volume of repeat business. There is a stable and faithful customer following Brand loyalty is clearly visible especially is the business is manufacturing. The respective brands become well known. This is an ideal time for businesses to consider expansion or diversification.

Business Needs: (a) The courage by the owner to take the risk in transition of the business. This is a pivotal time when the owner needs to decide whether to become a big business or sell the business at a significant profit . Be cautious as success has a dangerous way of making owners feel omnipotent which can lead to rapid expansion they cant finance or a complexity you cant manage. (b) The business must ensure the availability of resources for continued quality product and or process innovation (c) Delegation and co-ordination by top management. Owners grapple with structural organizational issues of how build the business and how to delegate to these managers, and in what way. Competent management to handle growth, a complex business, and an evolving business environment (d) Both operational and strategic planning are needed .A more formal and deliberate management style is necessary (e) A functional and centralized structure (f) Possibility of new product development as the firm grows new product lines are added (g) Research for new markets to sell their products. (h) Better accounting and management systems will have to be set-up. Aggressive management of cash flow and expense controls become evident. Challenges:(a) Competitive reactions from other firms. Firms attempt to differentiate themselves from their competitors as either price or value leaders (b) Demands on time and resources resulting from entry into new products or markets (c) Liquidity may be a problem especially if there is overtrading and growth gets out of hand (d) If a decision to grow is made, then delegation and financing become key problems. (e) Theres always a danger that the business climate will change, but dramatic change just as you start an aggressive climb can be devastating. (f) The focus is on whether the firm is able to finance growth in order to earn an economic return on assets and labor. Small Business Growth Strategies Small businesses have a scope for growth but the owner needs to know effective paths to growth. Owners need a lot more than just passion and zeal to make sure their businesses (their babies) grow. It needs determination and smart actions. The following are some of the strategies that can take your "little baby all the way to college": 1. Pricing strategies :

Penetration Pricing: In this strategy you keep your pricing as low as possible (lowest in the market) so that your product becomes the obvious choice for the buyer.

Price Skimming: In case of certain luxury products and niche services, a certain level of pricing (high) needs to be maintained to keep a client filter and stipulate a market for yourself.

2. Product strategies : Mass production to capitalize on economies of scale. Innovate new uses for your product or services. This will multiply your market and target clientele. It can also really add value to your sales pitch visibility. 3. Distribution strategy: Increase outlets: Increasing outlets can help your organization to gain from economies of scale. This means, if you offer more, your cost per unit will be less; hence, more profit. 4. Strategic alliances (leverage of Tie-up/Alliance): Tie-ups or mutual understandings with other organizations with related production/services can really help in building and developing more business for both the entities. Like a bakery could tie-up with a restaurant. This would bring better sales for the bakery and reduction in cake production cost for the restaurant. A business can grow by forming an alliance with another party. A business alliance is formed between two businesses who wish to expand by sharing the cost of expansion. The parties agree to share the risk and profit associated with the process of expansion. An alliance can be a joint venture, investment alliance, sales alliance, locationspecific alliance or a solution-specific alliance. 5. Market development strategy: Generate new Value propositions by identifying new segments ( niche market segment) that are developing speedily and reach out to them. This way the market will be captured by you before it reaches its peak itself. This will allow building more goodwill and trust factors with the customers before anybody else. 6. Operational/production Efficiency: Keep the in internal costs and overheads as low as possible. Maintain the operating expenses as low as possible but make sure that all the available resources are completely and optimally utilized and with efficiency. 7. Location of production facilities: In case of manufacturing - oriented organizations, make sure that the production happens closer to the source of the low-cost raw material etc. This can help in keeping the transportation cost at a negligible level and, again, keep the cost as low as possible. This can lead to better profit margins. 8. Promotion strategy: make use of loyalty programs such as discounts or free samples, commissions for business referrals , personal selling ( such as house to house sales ) , advertising in various media such as local radio stations or TV stations , Participate in public relations and publicity activities such as exhibitions and trade shows and in charitable and community-based programs. 9. Staff motivation: Keep your staff as motivated as possible so that they work to the maximum capacity. Performance incentives and a comfortable work atmosphere can have tremendous positive impact on the profitability of any organization e.g. giving personalized company t-shirts or caps (with the logo) to all employees. 5. Expansion Stage Of Small Business This is the controlled increase in market share, asset value and business size after the first growth phase. This stage is often the choice of the small business owner to gain a larger market share and find new revenue and profit channels.

Characteristics: Use of financial system and controls i.e. firm moves beyond simple control and accounting systems to budgeting system monthly sales and production reports for delegated control Sources of finance will include retained profits, new partners, joint ventures, new investors and partners and secured long-term loans This life cycle is characterized by a new period of growth into new markets and distribution channels. Business needs: Financing the firm's growth Maintaining control Delegation by top management i.e. focusing on more strategic roles A professional and administrative management style i.e. utilizing professional managers in a functional structure New product development /innovation and market research e.g. extended product rage Challenges: The introduction of new partner may mean that the founder may lose absolute control painfully. Good management becomes necessary to maintain expansion .The expansion may point to the need for professional manager who may not have the same commitment as the owner Top management adjusts its role and may be distant form the detail of the business which can be a source of crisis Lack of product differentiation that is necessary for creating competitive advantage Pressure for longer term funds for investing in new operating units. Moving into new markets requires the planning and research of a seed or start-up stage business. Focus should be on businesses that complement your existing experience and capabilities. Moving into unrelated businesses can be disastrous. Addition of new products or services to existing markets or expand existing business into new markets and customer types. The business require infusion of additional capital to buy capital equipment to increase production (for manufacturing businesses), to establish additional service network (for service providers) or procure more goods for trade (for trading businesses). Expansion strategies: 1. Differentiation strategy: Small business can differentiate themselves via innovation and being on the cutting edge. In defining a business expansion plan, it's critical to define whether you will be a niche player or not. To survive in a hypercompetitive environment, one can either be big which will offer a cost advantage or offer something unique which can command a premium. When it is not very easy to scale up the operations, smaller firms should look for other ways to distinguish themselves in the marketplace. For example, smaller firms can develop innovative new technologies, products or services that customers are willing to pay more for.

2. Geographic Expansion versus Business Line Expansion strategies: Should operations be expanded via more products/services or should the reach be expanded geographically? Or should you use a blended strategy of geographic expansion and product line expansion? 3. Financing expansion: Study carefully the financial implications of an expansion, and whether the cash flow can support the additional investment. Can the expansion be financed through internal accruals or are you willing to relinquish control if you are seeking expansion capital from investors? Many small businesses have met untimely deaths with an overly aggressive expansion strategy, finding themselves either buried deep in debt or with insurmountable cash flow problems. There are some best practices to avoid financial problems when expanding a business. For example, as you grow, make sure you retire costly sources of debt from time to time and be open to diverse financing options. 4. Licensing: Gaining a license reduces the risk for a specific product or service, of being illegally used by someone else. This is a low-cost method of expansion by which the license holder can enjoy royalties, by allowing other businesses to sell the product, without actually getting involved in the manufacturing or selling process. This is the safest method to maintain ownership over the product and earn profits. 5. Leverage on competitive advantage: Focus on what you do what you are best at. Over the course of your initial years running a business, you should have figured out the key aspects that offer the firm a sustainable competitive advantage. Your expansion plan should leverage those key success factors of the business or core competencies. In fact, your expansion plan should free up other resources to allow those core competencies to shine even more. 6. Franchising: Creating a chain or starting a franchise is an expansion option. If your type of business can be easily duplicated in a new location, such as a bookstore or a restaurant. Franchising may however be a less risky way to expand though you lose control over the way the franchise locations are operated. Franchising has lately become one of the most successful methods of business expansion. It provides the owner some control over the business. Internal processes can be uniformly maintained among all the franchisees, thereby, creating a unique brand image. This is necessary to catch the eye of prospective customers who can later become real customers. Franchising does not require significant financial input on the part of the franchisor and also helps in earning fees from franchisees. By doing so, a business can enhance its visibility in many locations without making any significant investment. 7. Acquisition of a Business: Business acquisitions help in acquiring new customers and increasing income. When a business is acquired, the parent company gets charge of its employees, assets and all other belongings. This helps in expansion and increasing the worth of the parent company. Most of the time, businesses choose to acquire companies that are smaller in size and worthy as compared to them. In some cases, smaller companies develop control over the management of a larger firm and retain its name and customers. Small business expansion through integration seeks to increase the size of the organization and in doing so increase its internal economies of scale. This expansion thus allows for product/service diversification and a potential reduction of competition. Horizontal integration is made possible when a business acquires business interests on a similar value chain level as itself. This type of integration can see a business acquire

another that offers similar products. A business can also acquire another which offers products that are substituted for its own. It may also involve acquiring a firm that offers products which together with its own will form a complete product range. Horizontal integration also involves the acquisition of competitors. There are a couple of benefits that come with horizontal integration including enjoying economies of scale and economies of scope (synergies), reduced competition, strength against substitute products, and more leverage over customers or suppliers. On the other hand, horizontal integration may only result in imaginary synergies. It may be quite difficult to make the acquisition arrangement a market success. Reduced competition may suddenly cast doubts on product/service quality. Vertical integration as a small business expansion strategy is aimed at taking over the operations of a business' suppliers and/or distributors. This strategy is achieved in one of three ways i.e. backward vertical integration, forward vertical integration and balanced vertical integration. Backward vertical integration sees a business form a subsidiary that will produce inputs that it (the business) uses in production. Forward vertical integration sees a business form a subsidiary that will market or distribute what it produces. Balanced vertical integration sees the formation of separate subsidiaries for supply and distribution purposes. This form of integration gives a business added economies of scale, cost reduction capacities, increased market competitiveness, increased value chain control etc. On the other hand the business may have difficulties knowing which direction of integration gives most benefits. Managing all these interests effectively may be quite difficult a proposition. 8. Diversification: Diversification is a strategy used by many businesses for expansion. It involves developing new products and entering new markets, so as to increase the profitability of the organization. A variety of items in the product basket of the organization serve as multiple sources of income and help in maintaining profits, even if, some of the products fail to perform well for a certain time period. A business can diversify by entering into related segments, for instance, a notebook manufacturing company can add other stationery in its product basket so as to cater to a larger customer base. This basically involves diversifying your product offering. This involves expanding your business or product line to include a range of products in a different market. For instance, a shoe store may decide to sell related products such as exercise clothing in addition to shoes. Or it may decide to add something unrelated to shoes such as coffee shops. Small business expansion through diversification can be done through offering existing customers new products and services, through finding new markets for existent products, and through finding new markets for new products. All these diversification strategies must be informed by thorough customer and market research, clear introduction and development strategies, and the setting up of supply, marketing and sales chains that can support the new product/service and the expected demand. Diversification presents a business with real growth opportunities and increased market assertiveness. This strategy also comes with some inherent risks. Errors that result from inexperience and poor timing may have costly implications. A business may also diversify too rapidly and in so doing erode its core product/service' reputation.

9. Market penetration or Current Market Expansion : This involves selling more products to consumers you already serve or you have already developed a relationship with in your current market. Tactics that can be used to achieve this may include changing your marketing plans, adjusting your prices, and increasing the quantities of products or services available to customers who already recognize your brand . 10. Outsourcing: Focusing on your areas of core competency and outsourcing the non-core part of the work will maximize the utilization of available resources. Even big companies around the world are hiving off non-core business entities even if they are very profitable and successful. Some choose to expand by moving into areas higher up the value chain. 11. New product development : There are many cases where picking up an unrelated business can help expand your business network, leverage shared resources, and make both businesses more profitable in the process. "Product Development" involves offering new products or services or innovative ways of delivering the products. If you can determine a market need and create a new product to fill that need, you increase your business' footprint in that market,. For example, if your business is an independent fast food restaurant you may see your sales increase if you provide customers menu items they regularly request. 12. Timing business expansion well : Timing is crucial in expanding a business. The business environment should support the expansion. Consider expansion when proven demand exists for your products or services. Expand when you spot untapped opportunities that can benefit your business, a niche market that can be captured or a location not serviced by the competitors. 13. New market development/Expanding to New Markets: A business can expand by opening outlets at new locations, so that customers of those areas can make use of the product or service offered. Setting up new outlets requires a lot of money, therefore, businesses must undertake feasibility studies to learn the pros and cons associated with it. This form of expansion is good for businesses that have a consistent source of income. Assess your risks or weigh the pros and cons of moving into a new market. Determine whether to physically expand to a new location, purchase or merge with a competitor, open your business to a new set of customers. Establish whether you are doing well enough in your current markets that you can sustain your expansion in the face of new competitors. Further, you must weigh whether your business can survive an unsuccessful foray into the new market. Geography places certain limitations on growth. Setting up or buying an operation in another geography means looking at different codes, regulations, taxes and laws to deal with. Remember, bigger isn't always better. As you contemplate how to expand a business, be sure to keep your original future visualization of what you want the company to look like top of mind. 14. Customer care / Listening skills are critical to healthy business expansion: Be receptive to customers' needs and that will show the direction that your business ought to grow in. For companies operating in industries that are heavily influenced by scientific developments, it is also critically important to keep a watch on the emerging trends, to be quick to exploit technological advancements and to meet changing customer preferences. After all, first mover advantage is, at times, the only difference between a mediocre venture and a great firm .

15. Balance Your External and Your Internal Focus: Business expansion can be powered by things you do externally and/or by things you do internally. Keep both in mind as you plan for business expansion. Externally, for example, a re-branding exercise might be needed from time to time to either re-emphasize or change the way the customers perceive your firm. Equally important are the internal changes, be it building teams or grooming employees or reorganizing the structure functionally or divisionally. Organizations need appropriate personnel across various functions in terms of knowledge, skills and attitudes. Part of your internal expansion plan should be to make your own role in the business less mission-critical as your talents should be used for strategic planning. Unsure there a set of people in the venture (analogous to the middle management in big corporate entities) who can effectively manage the operations in your absence. If not, you need to develop a plan to expand your management team's capabilities before you expand the business.

7. Maturity Stage Of Small Business The maturity stage is sometimes called the business saturation stage. Sales and profits have leveled off and there is no room for growth in the current market.. However, unless the business continues to find new markets or some competitors go out of business, the firms business will start to enter into the decline stage of its life cycle. This means that in the face of increased competition and the low prices offered by the new competitors, the existing business faces a decline in terms of competition and cost of operations. The business gets established and starts manufacturing at optimal capacity which slowly loses out on the economies of scale. In fact, in order to maintain the established business, market its products and kill market competition, a business is compelled to undertake certain costs (advertisements, sales promotions, product cannibalization, cost of communication, inelasticity of supply, too large market share, risk of over capitalization, etc.) which are technically known as diseconomies of scale as these costs increase the per unit production cost of the goods Characteristics a. Some limited/slow growth but Sustaining growth b. The business experiences market pressures from all quarters, and is unable to handle them successfully. The inevitable is cash flow drying up and losses mount up and most businesses fold up during this phase. However, there are resilient businesses that do survive this phase and go on to succeed on a new lease of life. c. Cash flows stabilize and establishment of marketing networks and operational channels are completed. d. The respective brands become well known and there is a stable and faithful customer following. e. Many businesses at this stage have passed the peak of their product life cycle or they may be on verge of moving out of the definition of small business

f. Management is facing a transition phase in which the management structure has to be replaced by a formal system to cope with the larger organization and more decentralization g. The stage may therefore be a transition either onwards to bigger and better things or sideways towards eventual decline. h. The firm is enjoying retained earnings and may even paying higher dividends than in the previous growth stage i. It has a decentralized management structure with experienced, senior staff and all necessary systems are in place. j. Succession planning/ Management succession i.e. considering who should succeed the owner in the management of the business k. The business is seriously involved in cost-cutting efforts. Business needs: Encouragement and incentive to either encourage expansion or to prevent decline Expenses control. Productivity increase Senior management to play the role of strategic character of monitoring relationships over junior managers A decentralized functional structure with dispersed power and authority Formal control system for objectives and budgets i.e. MBO is likely to be a major control system Further long-term debt

Challenges Controlling substantial financial resources of the business But the biggest challenge of all will be cultural. In a rapidly changing world, flexibility and agility are crucial. Maturity strategies 1. Niche marketing - entry into riche markets especially if the industry is declining to offset any potential decline 2. Diversification may be an option if sufficient capital to enter new business is available 3. Product innovation : product innovation through market to replace products towards the end of their life cycle aimed maintain the firms order-winning criteria 4. Market development : Developing fresh/new consumer bases in those markets based upon the strength of their brand reputation 8. DECLINE STAGE OF SMALL BUSINESS This is the stage where the business is experiencing market pressures from all quarters in terms of loss of the ability to sustain itself at the previous higher level. Most businesses fold up during this phase. Decline can come at any stage from start-up onwards and if nothing is done , it will in all probability lead to termination. There are resilient businesses that do survive this phase and go on to succeed on a new lease of life.

The decline stage is when most firms make the decision to sell their business or valuable assets. Some firms may be able to sell existing product lines. Others may try to adapt to their declining market and offer new services. However, most firms will ultimately need to cease operations during the decline stage. Characteristics Declining market share and profitability brought by changes in the economy, society, or market conditions Sources of funds include suppliers, customers and owners. Challenge: Falling sales, profits, and negative cash flow. Financial resources to support business since there negative cash flows. Decision on possible exit strategies .

Needs Search for new opportunities and business ventures. Cutting costs and finding ways to sustain cash flow.

TERMINATION OR EXIT STAGE OF SMALL BUSINESS : This is the stage when a business ceases to exist or otherwise changes its identification. This may represent a big opportunity for the business to cash out on all the effort and years of hard work or it can mean shutting down the business. A business may be terminated for any of the following reasons: 1. 2. 3. 4. 5. Closure due to retirement of the business owner Closure due to relocation Closure due to better business opportunities elsewhere Forced closure when the business is unable to meet its financial obligations Liquidation to cash in on profits from proceeds of the sale of assets

Challenge: Selling a business requires your realistic valuation. It may have been years of hard work to build the business, but what is its real value in the current market place. If you decide to close your business, the challenge is to deal with the financial and psychological aspects of a business loss.

Needs 1. Get a proper valuation on your firm. 2. Look at your business operations, management and competitive barriers to make the firm worth more to the buyer. 3. Set-up legal buy-sell agreements along with a business transition plan.

4.

Business consultancy or financial advisory on the sale or close-out down of the business. This will be beneficial in : i. Preventing wastage of resources ii. Can save ideas for adoption elsewhere iii. Can help people to help learn and try again instead of being put off completely from trying business again 5. Legal advice on the termination process so as to get the best way to handle employees, customers , suppliers, and financiers Exit Strategies for Your Small Business A viable exit strategy for a small business is a plan that allows the owners of or investors in a small business to walk away with what they want to walk away with. The "what they want" at the end of their period of ownership or investment may be money. An investor is often looking for a particular percentage of return on her investment, for instance, and obviously a business owner who is selling a business wants to make a profit. However, exit strategies for small businesses are not just about making money; business owners often have other goals that they want their exit strategies to accomplish, such as establishing a legacy, ensuring that the business remains in their family, or continuing to have a say in what happens in the business. When it's time to sell your business, you must ask an all-important question: "What am I doing to increase the asset value of my business?" To prepare for selling your business, start with these exit strategy pointers: 1. Quantify Your Business Value: No one will price your business without knowing its exact worth. You need to identify which assets to include or exclude from the sale. You also have to list your risks. Then you'll have a better idea of the value of your business. It may not be worth as much as you'd like, but now you have a realistic idea about price expectations and goals to meet with your exit strategy. 2. Eliminate Worthless Inventory and Debtors: No one wants a business with out-of-date stock. So, if you want to sell your business, get rid of it. Same with long-term non-payers. Make them an offer they can't refuse or write them off. Both outdated inventory and debtors weigh down a sale. 3. Straighten Financial Records: Buyers want the facts, and they will be asking scores of financial questions. You must be prepared to answer everything and anything about the reporting end of your business. This includes balance sheets, assets and liabilities and the taxation position. They all need to be clean and ready to view when you're selling your business. 4) Audit Your Books: More specifically, before you sell your business, your CPA needs to audit your business records to include extensive verification, confirmation, and performance. An evaluation of internal controls can be considerable help to both you and the buyers. 5) Strengthen Legal and Contractual Affairs: Buyers will also have many legal questions when you sell your business. What is the ownership and structure of your business? Have you

been compliant with the regulations for your particular business? What contracts do you have with customers and vendors? What is their status? What is outstanding? 6) Install and Improve Systems: Owners are the main source for daily operations. Unfortunately, such details are often only stored in their brains. Department manuals are a big plus when you're trying to sell your business. You need just enough to cover the basics and relieve your potential buyers' anxieties about your absence. 7) Prepare Your Management Team: Even better than the written manuals is having someone in place who can personally answer questions. The buyer may want to know what manager (s) will help with the transition. Who will be the knowledge bank? How long will this source (s) be staying? The Best Exit Strategy The best exit strategy is the one that best fits your small business and your personal goals. Decide first whether walk away with. If it's just money, an exit strategy such as selling on the open market or to another business may be the best pick. If your legacy and seeing the small business you built continue are important to you, then an exit strategy such as family succession or selling to employees might be best for you. Exit strategies are something that every investor in a business looks for. But even if you are running a one person sole proprietorship, you need an exit strategy. The biggest question to address should be how you going to get your money out of the business and how much money are you going to get. Having an exit strategy worked out in advance gives you some control over your small business's future. Here are six exit strategies for small businesses to choose from: 1) Liquidation: This is the close up shop and sell all the assets exit strategy. To make any money with such an exit strategy, your business has to have valuable assets to sell, such as land or expensive equipment. And profits from selling assets have to go to pay creditors first. 2) Keep your business in the family/ family succession plan: The dream of many small business owners is to keep their business in the family so as to ensure that your legacy lives on. As an exit strategy, it can also give you the opportunity to groom your own successor and even perhaps give you some continued say in the business. On the downside, developing a family succession plan can be enormously difficult because of the emotions and issues involved. 3) Sell your business to employees: Current employees and/or managers may be interested in buying your business. Arranging an employee buyout can be a win-win situation as they get an established business they know a great deal about already and you get enthusiastic buyers that want to see your business continue to thrive. An employee buyout doesn't have to involve a stock equity plan though. It might be as simple as having one of your current employees take over the business. 4) Sell the business in the open market: This is the most popular exit strategy for small businesses. At a certain point in time, often when he or she is ready to retire, the small business

owner puts the business up for sale for a certain price - and hopefully walks away with the amount of money she wanted to get for it. If this is your exit strategy, you should spend some time grooming your business for sale, making it as attractive as possible to potential buyers. 5) Sell to another business: Positioning your small business to be a desirable acquisition can be a very profitable exit strategy. Businesses buy other businesses for all kinds of reasons such as using a new acquisition as a quick path to expansion and buying out a business as a way of getting rid of the competition.

BUSINESS FINANCING Money (also referred to as capital, funds, and financing) is a critical factor in starting and running a business. It is required to buy fixed assets such as vehicles, equipment, machinery, land, building, fixtures, supplies and for operating expenses such as inventory, rent, taxes, salaries and wages, advertising, utilities, etc. The amount required to start and run a business will depend largely on the type of industry (manufacturing or service sector) the business is in. Methods of Financing your Business: Small businesses can be financed through the following primary sources : Debt capital: borrowed funds which must be paid back to the creditors with interest on the principal at some future time Equity capital : funds invested in the business by the owner(s). A combination of debt and equity Equity Financing This represents the amount of money that is invested into the business by the owners and or other investors. While investors share in the profits (or losses) of the business, their investment is not a loan. Sources of equity financing: 1. Personal Investment/ self-financing: this may involve personal savings and sale of securities, real estate and other personal assets are the most important source of capital for equity financing. Personal sources give the total control of how such funds are used Disadvantages The funds are usually very limited. 2. Donations form family members, friends, and relatives: The family, friends and relatives may provide additional sources of funds. This may include funds obtained through inheritance and invested in the business. Advantages: Convenient, no nonsense Fewest contractual strings attached Available quickly

i) ii) iii)

May allow small business owners to obtain capital from several individuals and not overburden one friend or family member.

Disadvantages : Limited one-time source of funding

3. Partner investment: Additional sources of equity capital may come from partner (s) willing to invest in the business. Obtaining capital from a partner means that ownership of the business, including its profits and liabilities are normally shared. Partners can have limited liability and limited control or unlimited in terms of liability and control. Thus, having business partners means that the owner is relinquishing some control in decision making even though the owner gains from the diversified business expertise and injection of additional capital of the partners. Advantages Increased revenue/profit. Perhaps you have found a competitor that is getting ready to go out of business, but still has great contacts and contracts. Bringing him on could translate into an immediate increase in sales. Disadvantages : i) If the partner is weak in any of the other areas that we have discussed throughout this guide, then they could make your situation worse! What you do not want to do, is give up a portion of your company to someone that does not actually help your loan request. ii) The biggest areas to watch out for are their levels of personal expenses and their other sources of income, as these are the most difficult and quirky to calculate. For example, if you have low levels of cash and your prospective partner is strong in this area, but he has high levels of personal debt (relative to his other sources of income), this could eat up your businesses existing cash flow solving one problem, but creating another one for you Other sources of income, such as other businesses that they own, are also very problematic. If the other business(es) has declining gross sales or low cash flow, etc this could drag down your loan . This has a lot to do with whats called Global Income, which refers to calculating all sources of a borrowers business and personal income and expenses, and applying a Debt Coverage Ratio onto them all.

iii)

4. Shareholder investment: this involves selling part of the business equity to others by incorporating a business as a private corporation. A private corporation can consist of up to 50 shareholders, but it cannot sell shares to the general public. The vast majority of new small business investment corporations are private. A corporation sells its equity or shares to the investors to raise additional capital to start and run their business. However, the business must demonstrate viability and profit potential to attract shareholders or investors. 5. Angel investors are wealthy individuals or networks or groups of individuals who invest money or equity financing in start-up or early stage small businesses. "Angels" have earned their name by typically being friendly and patient about their investments and by providing their business wisdom and valuable relationships along with their money. They are investors who usually provide private equity or second-round funding for growing, profitable small businesses who need money to continue to grow.

After family and friends, as well as the small business owner, provide the seed money for startup businesses , the businesses then have to turn to either debt or equity financing in order to survive and move forward. If debt financing is not available due to tight credit markets or the perceived risk of the venture, then investors and private equity financing would be the next logical source of financing, if available. Some angels want to be involved in the companies in which they invest. Others don't care for any or much involvement. Angel investors are not a homogeneous group. Angel investors all have one thing in common, however. They will only invest in small businesses in which they think they can earn a high return on their investment - perhaps as high as 20% - 40%. It is a reasonably complicated and time-consuming process to secure angel funding. Angel investors are taking a huge risk on a relatively unproven venture. Angels require air-tight business plans. They conduct due diligence, perform competitive analysis, and eventually dismiss up to 90% of the applications they get. Small business owners may have to make several rounds of presentations to the angel investor or group to possibly secure their equity investment. Securing funding from angel investors is a difficult process. The odds are long that you will be successful. However, you may make excellent contacts for getting funding in the future. You may meet people who can give you valuable business advice. Even going through the process of giving multiple presentations is invaluable for the future. You may just secure that angel funding that you need. Advantages

More than money, they invest business smarts and networking opportunities Relatively patient about their investments

Disadvantages:

Often difficult to find Can be hard to manage the divergent interests of a large group of angels

6. Venture Capital: Venture capitalists are individuals or firms that invest primarily in businesses that promise the potential to grow very rapidly in revenues and profits such as high technology, medical or real estate. Thus, venture capitalists are people with money who look for investment opportunities. Venture capitalists seek out businesses with high-growth expectancies and demand considerable equity in a business when they choose to invest in it. The firms providing capital for ventures offer financing do so in exchange for ownership in the business. If you get a venture capitalist interested in your business, you will give up a portion of your ownership and will probably have a representative of the venture capital firm on your Board of Directors. Venture capitalists are looking for high rates of return where they invest their money. Unless your business can offer them a high rate of return, they will probably not be interested. Venture capitalists generally prefer to see a business in operation before they can invest in such firms. They expect a healthy return on their investment for taking such high level of risk that is

inherent in such fast growing business. While most venture capitalists do not wish to become involved in the day-to-day operations of the business, they will require representation in the board of directors. Some venture capital sources may consider equity participation if your venture meets their criteria. Venture capitalists often loan money for business investments where they can earn a significant financial return. These formal investment agreements may require the entrepreneur to give venture capitalists a say in management operations or collateral against potential business failure. Venture capital involves the provision of investment finance to small businesses in the form of equity or quasi-equity instruments not traded on a recognized stock exchange. It is long-term risk finance whose primary return to the investor are capital gains rather than income. Venture capital investors actively get involved in the management of the companies that they invest in to ensure the success of the venture. Venture capital firms who make an investment in a small business take an equity or ownership stake in the business. They usually want one or more seats on the Board of Directors. They also want access to the financial information of the company. Small businesses who accept venture capital investments have to be willing to share decision-making power with the venture capitalists that have a stake in their firm. Choosing a Venture Capitalist Finding the Right Venture Capitalist for Your Firm can be a big challenge but examine these key considerations when working with a venture capitalist for the very first time. 1. Check the venture capital firm's references: Check the references of a venture capital firm to ascertain how many successful deals has the venture capital firm put together. Establish whether the firm worked with a firm like yours and successful the deal was .Find out about deals that didn't work out and how the venture capital firm handle them. 2. Determine the Venture Capital Firm's Financial Strength: Obviously, venture capital firms must have the financial strength to support your operation and probably several other businesses. Venture capital firms have portfolios of businesses to spread their risk; otherwise, they take on too much risk. Funding is generally in stages with venture capital funds and you must make sure that the firm you are associated with has enough funding to see you through those stages. 3. Establish whether there is integration between the Venture Capital Firms business style and yours : Often, venture capital firms wish to be very involved with the business of the firm they are financing. They may wish one or more seats on the Board of Directors and a stake in the ownership of the firm in the form of preferred stock. If you don't mind relinquishing some control of your firm, then no problem. However, some venture capital firms are satisfied with monthly or quarterly reports, but obviously still have a stake in the firm since they bought an ownership interest. A large venture capital firm may have more rigid requirements than a smaller firm. Choose a firm that most suits your own business style. 4. Determine how well the Venture Capital firm is networked: Venture Capitalists are Networkers. The venture capital market is a networking and communications market. Of course, the venture capital firm you choose will help you with finance and management. The firm may also be able to offer you valuable introductions to potential customers, suppliers, banks, accountants, attorneys, and other valuable contacts. 5. Know the Exit Strategy of the Venture Capital Firm you Choose: Venture capitalists are usually short-term investors. You should discuss with your venture capital firm when they will "cash out" of the business so you can plan for the future. Advantages:

Invest smarts and networking in addition to money Typically have more money if you need more to grow Disadvantages:

Must be a fast growth startup business Must be interested in selling the business or going public within three to five years Must be prepared to share control

6. Retained earnings: Involves using undistributed profits generated from the business to expand and / or operate the business. 7. Bootstrapping : Bootstrapping is the self-financing of your business. As a bootstrapper, you spend your own money and savings on your small-business expenses. Any income that is generated by your business goes back into the business. The businesss deficits are covered by your own personal finances. This can be a risky venture if not carefully planned. You must consider your own personal financial responsibilities and expenses, as well as the businesss expenses. However, small businesses that carefully plan and combine saving with bootstrapping can eventually emerge as completely debt-free companies. 8. Grants: A grant is a money gift that does not have to be repaid.. Public sources, such as government agencies, also fund grant programs to finance the operations of small businesses. Grants are given to applicants that meet the eligibility requirements of the funding program. Recipients can also be required to satisfy obligations during the award period to continue receiving funds. Unlike loans, grants do not have to be repaid, which allows small businesses to avoid going into debt. Grants can be sponsored by private sources, such as corporations, organizations and other businesses. Government grants: Public sources, such as government agencies, also fund grant programs .These grants can be described as financial support that is provided by the government to any applicant, where the applicant is not required to pay back the money. First of all, the government mostly provides grants to the specific applicants who have lagged behind for the overall development of the nation. This is the reason why in almost all the countries, the women and the minorities are always given preference in providing the grants. Thus, all the small business operators cannot get the government grants and it is really very difficult to get these. Also, the government provides a percentage of the total financial requirement of a small business unit as grant and the rest has to be arranged by the business owner. Grants can be sponsored by private sources or foundations such as corporations, organizations and other businesses. Advantages: Free money Investors love the leverage that grants provide Disadvantages: Highly competitive How you use the funds is strictly defined Advantages of equity financing

1.

Avoids the burden of debt: You can use your cash and that of your investors when you start up your business for all the start-up costs, instead of making large loan payments to banks or other organizations or individuals. You can get underway without the burden of debt on your back. No debt payments means more cash on hand. Moreover, if no profit materializes, you arent obligated to pay back equity contributions. If you have prepared a prospectus for your investors and explained to them that their money is at risk in your brand new start-up business, they will understand that if your business fails, they will not get their money back. May benefit from investor assistance: Depending on who your investors are, they may offer valuable business assistance that you may not have. This can be important, especially in the early days of a new firm. You may want to consider angel investors or venture capital funding. Choose your investors wisely! Disadvantages of Equity Financing:

2.

3.

4.

1.

Shared ownership: Remember that your investors will actually own a piece of your business; how large that piece is depends on how much money they invest. Investors do expect a share of the profits where, if you obtain debt financing, banks or individuals only expect their loans repaid. If you do not make a profit during the first years of your business, then investors don't expect to be paid and you don't have the monkey on your back of paying back loans. Loss of total control of the business: You probably will not want to give up control of your business, so you have to be aware of that when you agree to take on investors. As such, you will be relinquishing not just financial control, but will no longer be the sole arbiter of the businesss creative and strategic direction.

2.

3.

Possible conflict of interest: Since your investors own a piece of your business, you are expected to act in their best interests as well as your own, or you could open yourself up to a lawsuit
Debt Financing : Debt financing is capital borrowed from banks ,finance companies , insurance companies and other lenders and must be repaid with interest. Debt financing is basically money that you borrow to start and/or run your business. Debt financing can be long term debt financing and short term debt financing. Long Term Debt Financing usually is use for capital expenditure such as purchasing, such as equipment, buildings, land, or machinery. With long term debt financing, the scheduled repayment of the loan and the estimated useful life of the assets extends over more than one year. Short Term Debt Financing usually is money needed for the day-to-day operations of the business, such as purchasing inventory, supplies, or paying the wages of employees. Short term financing is

referred to as an operating loan or short term loan because scheduled repayment takes place in less than one year. A line of credit is an example of short term debt financing. Lenders assess a variety of factors to determine the borrowers ability meet its obligations on the loan such as the strength of the business plan with financial projections, management capabilities, and past credit record as reflected in the latest financial statement including any tax returns of the business or personal financial statement for sole traders. Generally, lenders look at five additional aspects of the business owner(s) background before extending any loan facilities. These elements are sometimes known as the five Cs of credit and include: Character owner (s) record of fulfilling commitments Capacity- refers to the business ability to make periodic interest payments and to repay the principal due. Credit rating _ the business owners or the firms reputation within the financial community for paying financial obligations on time Collateral assets to be given as a security in case of any default. Condition _ refers to current economic conditions such business cycles. Advantages : 1. Dont have to give up equity 2. Available to companies that cant get equity funding 3. This method of financing allows you to have the ultimate control of your own destiny, in regards to your business. You will not have investors or partners, that you have to answer to, and you can make all the decisions. You will also own all the profit you make. Debt financing allows you to have control of your own destiny regarding your business. You do not have investors or partners to answer to and you can make all the decisions. You own all the profit you make. 4. The lender(s) from whom you borrow money do not share in your profits. All you have to do is make your loan payments in a timely manner. 5. You can apply for a government guaranteed loan that has more favorable terms for small businesses than traditional commercial bank loans. 6. The interest you repay on your loan is tax-deductible, if you finance your business using debt. This means that it shields part of your business income, from taxes and lowers your tax liability every year. In addition, there are many tax benefits available to small businesses. Disadvantages: 1. Must pay interest 2. Limited networking 3. May require personal collateral such as home 4. Risk of default and its attendant consequences: You may have large loan payments at precisely the time you need funds for start-up costs. If you don't make loan payments on time to credit cards or commercial banks, you can ruin your credit rating and make borrowing in the future difficult or impossible. If you don't make your loan payments on time to family and friends, you can strain those relationships. 5. Collateral using personal asset : For a new business, commercial banks may require you to pledge your personal assets before they will give you a loan. If your business goes under, you will lose your personal assets.

Some will tell you that if you incorporate your business, your personal assets are safe. Don't be so sure of this. Even if you incorporate, most financial institutions will still require a new business to pledge business or personal assets as collateral for your business loans. You can still lose your personal assets.

6. Higher risk of bankruptcy: Any time you use debt financing, you are running the risk of bankruptcy. The more debt financing you use, the higher the risk of bankruptcy. Calculate the debt to equity ratio to determine how much debt your firm is in compared to its equity. Types of debt financing: They include bank loans, lines of credit, credit cards, term loans, leasing and supplier credit : i) Loans : Bank loans: Formal financial institutions such as commercial banks, agricultural development banks, savings banks, and non-bank financial institutions that offer a wider range of financial services, and control a branch network that can extend across the country and internationally. However, they have proved reluctant to adopt social missions, and due to their high costs of operation, often can't deliver services to poor or remote populations. Bank loans can be either secured or unsecured . Most unsecured loans are short-term in nature ( mature within one year) and are known as demand or short-term loan . Business owners use short-term loans to cover cashflow shortages, to purchase inventory, or to take advantage of supplier discounts. The loans are usually repaid. Secured loans are backed by specific types of assets of a business such machinery , equipment , automobiles , land , buildings , furniture etc. The lender secures the loan with a lien on specific assets Government guaranteed loans: The government provides financial assistance to the small business enterprises is by way of guaranteeing the loans that are provided by the various financial institutions. This is particularly the case for most of the small businesses because they have no sufficient assets to cover bank loans and as such the financial institutions are reluctant to provide credit facilities to the small business sector. But when the government provides the necessary guarantee for the loans, the credit facilities are easily made available to the small business enterprises. This is another way by which the government helps the small business sector to fulfill their financial needs. Informal financial service providers: These include moneylenders and shylocks. Because they know each other well and live in the same community, they understand each others financial circumstances and can offer very flexible, convenient and fast services. These services can also be costly and the choice of financial products limited and very short-term. Informal services that involve savings are also risky; many people lose their money. Personal Loans i.e. possible Loans from friends or relatives: such loans may require signed documentary proof of credit. Almost any list of sources of start-up capital will include loans from friends and family. This form of financing is common for start-up small businesses who need all the money they can get from as many sources as Micro-finance lending : Microfinance (micro-credit) is the provision of financial services to low-income clients or solidarity lending groups including consumers and the self-employed, who traditionally lack access to banking and related services. Micro-credit is provision of credit services to poor clients who plan to start business to uplift their economic status. These microcredits may be provided by: a. Member-owned organizations lending: These include self-help groups, credit unions (Saccos), and a variety of hybrid organizations like 'financial service associations'. These are generally

small and local, which means they have access to good knowledge about each others' financial circumstances and can offer convenience and flexibility. Since they are managed by poor people, their costs of operation are low. However, these providers may have little financial skill and can run into trouble when the economy turns down or their operations become too complex. Unless they are effectively regulated and supervised, they can be 'captured' by one or two influential leaders, and the members can lose their money. b. NGOs lending: there are MFIs run by NGOs that are spread around the developing world. They have proven very innovative, pioneering banking techniques like solidarity lending, village banking and mobile banking that have overcome barriers to serving poor populations. However, with boards that dont necessarily represent either their capital or their customers, their governance structures can be fragile, and they can become overly dependent on external donors c. Government sponsored MFIs such as FAULU to channel funds for starting and running small businesses However, the following obstacles or challenges to building a sound commercial microfinance industry : ii) iii) iv) v) vi) vii) Inappropriate donor subsidies Poor regulation and supervision of deposit-taking MFIs Few MFIs that meet the needs for savings, remittances or insurance Limited management capacity in MFIs Institutional inefficiencies Need for more dissemination and adoption of rural, agricultural microfinance methodologies

Advantages of a Loan i) ii) Loans are a relatively fast way to obtain funds for especially for purchases involving large amounts of capital . They are suitable for expensive purchases that require immediate payment, allowing you to spread the cost of the purchase and manage your short term finances more easily, especially if your loan has a fixed interest rate. Can negotiate better terms and conditions .There is a high level of competition amongst lenders, which usually makes it possible for you to negotiate a cheaper interest rate than the one which you are initially quoted. You can get a specialist lender who can provide loans tailored to your specific purpose, for example buying a car, since they may offer you a cheaper or more suitable loan.

iii)

iv)

Disadvantages of a Loan i) Regular or monthly repayments : Applying for a require analysis and calculation of exactly how much can afforded to be borrowed based on how much money can be spent on repayments each month, once their other financial commitments have been honoured. Possibility of default of repayment. If you cannot afford to make repayments when they are due, you may face a penalty. Loss of personal assets if case loans secured by assets such as houses, land , cars etc. For this reason it is important to read all the 'small print' of any loan contract to see what

ii) iii)

iv) v)

penalties could be levied, and consider whether or not you should be applying for a loan at all. Credit rating /standing : if you default on the loan, your credit rating and ability to access credit in the future will be detrimentally affected Penalty for early repayment: You are usually penalised for making a large lump sum repayment to pay off your loan sooner than agreed. Although most loan companies will allow you to do this, they may charge you an early repayment fee. For anyone wishing to borrow only a small amount that they aim to pay back within a short period of time, a credit card may be a more suitable solution because the balance can usually be paid off in full at any time without incurring early repayment fees. Similarly, an overdraft may be a more effective option for those who require a relatively small amount of credit in an emergency. However, interest charges for overdrafts and credit cards are usually much higher than for personal loans, so it is inadvisable to use them for long-term borrowing.

viii)

Line of credit: is also known as an operating loan and is secured by the business accounts receivables or inventory or other assets. A line of credit means that the bank allows the customer or business to borrow upto a specified amount over a relatively short period, usually six months. It provides a business with money to cover day-to-day expenses. As funds are used, the established credit line is reduced. The line of credit is replenished when payments are made towards it. The loan has a limit and you pay interest only on the amount outstanding, usually on a daily basis. Business lines of credit are similar to credit cards in that they are considered revolving debt. Lines differ from credit cards in that they have finite terms, such as a year or two, after which they need to be paid off in full or renewed. You will need to show the lender the same documentation to receive a line of credit as you would to obtain a business loan, though the approval process will be much quicker with a line of credit. Expect to pay a higher interest rate and fees with a line of credit.

ix)

x)

Credit cards: Several banks and other financial institutions have recently introduced a number of card-based products that access business lines of credit. Credit card debt is usually a poor choice of financing because of the interest rate on credit cards is often several times the rate that would be paid on a line of credit or bank loan. Owners can apply to banks for business lines of credit, and take out cash advances for capital or charge equipment, supplies and inventory onto their card. Owners can apply for business credit cards to protect their personal credit if they were to default on payments. However if the business is classified as a sole proprietorship, owners can be held personally responsible. Although this may be an easier route for financing your business, the high interest rates, which are typically higher than bank loans, can make it an expensive option in the long run. Leasing: Leasing has been an alternative means of financing capital investment of small business operations with minimum initial outlay. Leasing is the most important source of financing fixed assets such as machinery and equipment, land, buildings, tools etc.. In a leasing agreement, the owner (lessor) allows the user (lessee) to use the asset for periodic payments for a specific period of time. At the end of the lease, you don't automatically own the asset - you have the option to buy it at its residual value. A lease requires little or no money down and is an alternative to purchasing such items as cars, machinery or office equipment. By leasing instead of buying, your business can usually write off the monthly lease expenses

xi)

xii)

Supplier credit/ Credit Purchase Financing: Although there is no official data on the magnitude of credit purchases, this has been a very popular way in which small business operations buy raw materials for processing and goods for sale ( especially by retailers) .Those in retail business have benefited having to pay for stocks only after sales have taken place. This type of financing has depended largely on the trust and the reputation of the small business operators with their suppliers. Many manufacturers of cars, machinery or computers have developed credit programs that are variations on debt financing. They provide the goods; you pay for them, with interest, over a specified period. In addition, some suppliers will offer various terms of sale, letting you take three months to pay, for example or they may offer discounts for prompt payment. Inventory financing is similar to accounts receivable financing. Inventory financing is also a line of credit granted a firm, but the line of credit is based on a percentage of the value of a firm's inventor)'. Like accounts receivable financing, inventory financing is short term in maturity. Small business owners should realize that both inventory' financing and accounts receivable financing are considered more risky than other types of bank loans and, therefore, will carry a higher interest rate. This type of financing is considered risky because a financially strong firm can borrow on its own strength (unsecured loan) or on its expected cash flows especially when the loan is backed by fixed assets. When a firm has exhausted these stronger sources of loans, then it turns to weaker sources such as its accounts receivable or inventory Factors in Business Financing While every business is different, the basic factors involved in business financing are constant and enduring. Business financing is more complex than personal or other secured loans, with added evaluations used for business financing. Still, as experienced lenders note, all good loans are based on the same factors. Understanding these factors brings more than knowledge; it can bring you business success.

1. Ability to Repay: The most constant factor in business financing, the ability to repay is paramount. Your business must display this ability before other factors are considered. You must offer evidence that your business has sufficient cash flow, above operating expenses, to repay the loan. 2. Historical Record of Repayment: A businesss recorded history of timely repayment is a critical factor in business financing. If your business has an unblemished record of loan repayment, you should get the financing you need. Should your business have had past problems, you'll need to prepare a letter of explanation and show that repayment problems have been corrected. 3. Business History of Cash Flow: While highly profitable businesses are always impressive, consistent cash flow is an even more important factor in commercial lending. Lenders know that cash flow gives you the ability to repay, not paper profits. Therefore, even if your business displays historically modest profits - even close to break-even levels - should your company display consistently high cash flows, lenders look favorably on loan requests. 4. Start-up business Financing Factors: If you are just starting your business, additional considerations come into play. Since you lack prior performance records, you require : prepare a comprehensive business plan to pledge some personal assets - homes, autos, investments - to get a positive financing decision.

Your personal credit rating is an important factor for small business start up financing. 5. Funding Availability: determine what your range of financing options are available. Most small businesses start-ups are commonly financed by sources as : personal savings , banks , friends/relatives , individual investors , government-guaranteed loans and venture capital firms . Most people will not be able to rely on a single source, since banks expect the business owner to put some of his own money at risk in the venture 6. Cash Needs: Determine how much money you need by assessing all capital needs to start and run the business successfully. For a new business venture, determine how much capital you need to run the business for one year and make provisions for growth and contingencies. The ability to closely estimate your cash needs is critical when deciding where to go to satisfy it. Maybe you can use personal savings for all but a small amount, and you can then ask the bank for the rest. Or you may need to ask the bank for most of the amount. 7. Repayment Terms: Consider how long the financing arrangement is structured to last. Longer loans can build up a significant amount of interest over time, but loans with shorter terms can require larger periodic payments. Consider the amount of the periodic payment and how often you are required to pay. Also take into account the allocation of each payment to principal and interest; look for loans with a higher allocation to principal to minimize the total long-term cost. 8. Interest and Fee Structures: Add up all of the costs associated with each financing method before making a decision. Common costs for loans include interest rates, origination fees and brokers' fees. Financing through investment can carry much different costs. Money from

venture capitalists, for example, may not require repayment for years, at which time the investor may expect to be repaid at a steep premium all at once. Financing through stock offerings can lead to a change in management and a shifting in strategic focus. 9. Financing Requirements: Lending: Consider the personal requirements each lender and investor places on applicants. Pursue financing from sources whose requirements you meet in full. Common financing requirements include credit score/rating requirements and specific financial ratio tests, such as the debt-to-equity or interest coverage ratios. Discuss the requirements placed on applicants with each lender before preparing a loan application package. Investment financing: If you are thinking about financing your business through investment, look into all the ramifications of your decision before moving ahead. Venture capitalists often require an ownership stake in the business , which they expect you to buy back at a premium after a period of rapid growth. Before you buy the ownership stake back, however, the investor may assert a great deal of influence on managerial and strategic decisions. Shareholder investment: Selling shares of stock to finance a business has its own set of vital considerations, including the possibility of losing managerial control in the future and falling victim to a takeover from a larger company.

10. Purpose of the capital: Financiers or lenders are keen to know why capital is needed to help them determine eligibility. Is the money to be used for reinvestment in the company (e.g. the purchase of new equipment, to expand company operations, to make up for low sales, etc.?) Consider the urgency of the purpose of the cash needs. If the business needs capital desperately right away or immediately, it is likely that it will not be able to secure terms as favorable as if it had been able to shop around, but, if the answer is that the company needs the money now, the question must also be posed as to how the company ended up in such desperate straits and whether it is rational to continue in the current structure.

11. Business Leverage: For existing businesses, the current leverage structure of the business must be considered. Specifically, if the debt-to-equity ratio of the business is high, debt should be avoided at all costs. Not only is it difficult to attract financing when debt is high, but the survival of the business is jeopardized. Conversely, while a high level of equity interest may not deter future financing, if too much equity is released, the firm may find that it does not have enough ownership interest to run the business as its founders or leaders see fit. 12. Determine the degree of the risk involved in financing options : Risk is an important issue when seeking financing. Questions, such as what the performance of the industry is like, how consumer spending is structured, what buying patterns are and similar questions, must be answered. The greater the risk the financier is exposed to, the greater capital will cost the company, be it through ownership interest or interest rates.

Most businesses have a mix of debt and equity financing. Too little equity could prevent you from securing or repaying loans, while carrying little or no debt could indicate that you are too risk-averse, and that your business might not grow as a result. Check with your industry association to find the average debt-to-equity ratio for your sector

PLANNING FOR SMALL BUSINESSES The use of formal business planning has increased significantly over the past few decades. The increase in the use of formal long-range plans reflects a number of significant factors:
1. 2. 3. 4. 5. 6. 7.

Competitors engage in long-range planning. Global economic expansion is a long-range effort. Taxing authorities and investors require more detailed reports about future prospects and annual performance. Investors assess risk/reward according to long-range plans and expectations. Availability of computers and sophisticated mathematical models add to the potential and precision of long-range planning. Expenditures for research and development increased dramatically, resulting in the need for longer planning horizons and huge investments in capital equipment. Steady economic growth has made longer-term planning more realistic. STRATEGIC PLANNING FOR SMALL BUSINESSES:

Strategic planning has become a concept that is commonly suggested as the "solution" to many business problems. Some days it appears that the chief product of many businesses is their strategic plan. Don't misunderstand me, strategic plans are wonderful when used appropriately, but they do need to be a tool of a business, not a goal unto themselves. And, most definitely, they should not be a major consumer of valuable employer/employee time. Strategic Plan A strategic plan usually refers to the overall direction you wish your business to take over the longer term. Consequently, a long-range plan and a strategic plan are often used synonymously. Within that overall strategy a business will have shorter term financial goals, marketing goals, production goals, and human resource goals that will each need some type of plan if they are to be achieved. Many small businesses mistakenly belief that strategic planning is only for large businesses that can afford the time and personnel to develop a sound plan. However, if you are to compete in the marketplace against the "big guys", you need to learn some of their gameplans - and strategic planning is a major part of any successful, large business. That does not mean that your startup needs all the bells and whistles of the more complex plans. You can in a matter of hours sketch out a good working draft that will help keep you on course to becoming a solid competitor. Let's take a look at the basics that will get your business strategically positioned to develop in the direction you want it to go. Just because a strategic plan is longer term does not mean it is never changed, however. One of the most serious mistakes businesses make is not revising their strategic plan regularly. The

environment the business is operating in is changing constantly. The plan must be revisited at regular intervals to reflect the impact on the business of these external factors. There are some universal principles that are true across all types of planning. Before tackling more specific planning models, it is wise to gain an understanding of the basic principles of general planning. The most important strategic thing a small organization can do is prepare to do battle with the future, which entails five steps.

Step 1: Anticipate both threats and windows of opportunities for the vision and mission of the business. Step 2: Decide how to respond to these emerging threats and opportunities. Step 3: Identify the source which those risks and opportunities will come from. Step 4: Figure out when the risks will hit or if the opportunity is truly valuable. Step 5: Execute actions to mitigate the threats or take advantage of the opportunities.

What is Strategic Planning? What is strategic planning and how does it differ from other types of planning? Strategic planning involves setting up a strategy that your business is going to follow over a defined time period. It can be for a specific part of the business, like planning a marketing strategy, or for the business as a whole. Usually a board of directors sets the overall strategy for the business and each area of the company plans their strategy in alignment with the overall strategy. Differing businesses use various time periods for their strategic planning. The time period is usually dependent on how fast the industry is moving. In a fast-changing environment like the internet, 5-year plans don't make sense. In industries that change

Strategic planning involves formulation of policies and business growth strategies over a defined period of time. The time period would typically depend upon the kind of your business. Certain businesses like the Internet or mobile technology have to deal with changing trends very frequently, hence formulating a five year plan for such businesses is not a feasible option. business plan. Strategy planning covers the small business opportunities from start-up to growing the business and the methods of harnessing those opportunities. Without a strategy plan, a business has no direction. The chances of succeeding in a business that has no strategy plan diminish significantly. Hence, strategic planning for small business is very important. How do you create a strategic plan for you business? 1. First, know what your vision for your company is. If there were no barriers, nothing stopping you from taking your company as far as you could what would that look like? 2. Next, identify your companys core operating values? What are its guiding principles? In other words, why are you in business and how do you do business?

3. Now create a 3 to 5 year plan. Your long-term plan is based on the broad objectives that will help you get from where you are now, to where you want to be. 4. Develop a plan for this year. These are the specific objectives you plan to accomplish this year that will lead you closer to your long-term goals. Remember to be SMART when setting your annual goals (Specific, Measurable, Attainable, Realistic, Time-oriented). Include a list of the barriers that are stopping you from getting where you want to go. Figure out what resources youve already got, and what resources you need to get you past those barriers. And then create an action plan that clearly lays out how you will achieve your goals. Involve key employees with this part of the planning process. 5. Create a set of milestones or benchmarks. This is very important, so that you can measure your progress. 6. Share the plan with your employees, and anyone else who will be involved in the process. Your annual strategy is the roadmap that will make sure everyone ends up at the same destination but to be effective, everyone needs the same map! 7. Put the plan into action. Now that you have the roadmap, its time to begin the journey. 8. Check your progress. Just like any trip, you need to check the map every now and then; to be sure youre still on the right road. If something isnt working, the sooner you figure it out and make the necessary adjustments, the sooner youll be back on track. 9. Follow the same cycle next year Basic Model for Strategic Planning There is no definite model for small business growth strategies. Every business formulates its own model that has a potential to work for that particular business. No matter which model you choose, the critical components of strategy plan remain the same. These components include: Business Purpose Business purpose explains the whole idea of why the business exists. It is also sometimes called the 'mission of the business.' It need not be complicated and should only focus on the ultimate objective of the business. i.e. It is a brief statement about why the business exists - what you want to achieve. This does not need to be complicated, but it must sum up the essence of what you are trying to do as a business Organizational Objectives Goals are the ends to which your efforts are aimed - how you plan on accomplishing your purpose or mission. Organizational objectives are the ultimate goals at which all the organizational efforts are targeted. These are the goals which help you to achieve the mission of the business. Set goals that are practically achievable within the defined time period. SWOT analysis is an effective tool that can be used to set goals. SWOT stands for strengths, weaknesses, opportunities and threats. To conduct this type of analysis, one assesses each of these factors for not only your business, but also for your competitors and the industry as a whole. While it can be a time consuming project, the information gained is very useful. If this is

your first strategic planning venture, perhaps a good goal would be to conduct a SWOT over the course of the next year or whatever timeframe is workable for you. Once you have it developed, it is available for future planning efforts with minor updates. Formulation of strategy: Strategies are the approaches you are likely to adopt to accomplish each goal. It is possible that a certain strategy may not work for a certain goal at a particular point of time, hence make provisions for checkpoints, which will allow you to ascertain if the strategy is working or not. Devise alternative back-up plan for every strategy, in case it backfires. Interestingly, this is the part of your plan that may change most frequently. You may discover that one strategy is not working and look for other ways to get the result you want. The important thing in this step is to build in checkpoints to ascertain that the strategy is working and to be flexible about changing if need be. Action Plans (implementation of strategies) These are actual activities that are to be implemented as per the strategy plan. An action plan is a set of all the activities that ultimately focus on accomplishing the goals. Action plans are the specific activities that you will be using to implement the strategy. Often these are stated as objectives. For instance, on our quality goal, an objective might be to have only one percent reject rate at a certain rating point in the process. It is good to have this step stated as precisely as possible so that you can measure progress towards its achievement .If multiple departments are involved and each department has its own set of goals, then it is important that the action plans for all the departments work in sync with each other. Monitoring Implementation of Strategy Plan Most businesses formulate an intelligent strategy plan, but fail to monitor its effectiveness. The whole purpose of strategic planning gets defeated if you cannot invest time to monitor its implementation. Periodically monitor the implementation of strategic plans and revise it, if necessary. Here is where many, many strategic plans fail. If you don't follow through on whether the plan is being implemented and how it is doing, you might as well have not spent the time doing it in the first place. Put checkpoints on your calendar and make it a point to not let them pass unnoticed. Include benchmarks in your financial reporting system. This is your chance to not only verify that you are on track towards your goal, but it gives you an opportunity to make modifications if they seem needed. Considerations go into the formulation of a strategic plan Many considerations go into the formulation of a strategic plan, including financial, economic and industry conditions. 1. Competition: A strategic plan scrutinizes the competition to assess its strengths and weaknesses. Businesses attempt to gain an edge by outperforming their competition on the weaknesses and try to emulate the strengths of its competitors. Thus, an integral part of a strategic plan is adopting the best ideas of its competitors and learning from the worst ones.

2. Industry Considerations: Events in the business's specific industry are typically reviewed as part of a strategic plan. Industry considerations also include possible legislation. Specific industries most susceptible to legislation include power companies, banking, health care, insurance and waste companies. One strategic consideration for heavily regulated businesses could include exerting resources on lobbyists to persuade politicians to vote a certain way. 3. Core Competency Evaluations: Successful businesses routinely assess the best and worst parts of their operations. Facets of the company that are subject to review include staffing, level of capital and stock price valuation. Businesses also review their sales data and customer feedback as part of strategic planning. From there, the management team assesses which part of its operations need improvements. Such an evaluation could mean allocating more funds for the research and development department, hiring more workers in the customer sales center or improving employee training in a certain division. 4. Forecasting: "Strategic Business Forecasting," explains that the goal of forecasting is reducing the risk involved with decision-making. Strategic planning involves preempting possible changes and forecasting into the future. A strategic forecasting analysis makes predictions by extrapolating information from variables such as previous sales data and expected economic conditions. Most forecasters provide several possible scenarios for the business to evaluate. 5. Funding: One of the main reasons why many small business owners create business plans is to seek funding from lenders or investors. Financial planning is a very important part of starting up a new company. The way you choose to spend money at startup, as well as during the ongoing operation of your new business, is key to the fate of the business . People: A prudent business owner must consider the people he will need to help him achieve his goals. That includes employees or independent contractors, consultants, lawyers, bookkeeping professionals and possible business partners. It also includes the people he plans to turn into customers. It's important to get a clear idea of the company's target market for its various products and services in the planning stages of the business. Location: Whether it's an online or offline business, location is key. An offline business, such as a retail store or business office, must perform planning and research activities to determine an ideal physical location for the company. Online business owners must also decide in advance on an ideal domain name and format for the website, as well as techniques to draw traffic into this online location. Marketing: Planning for marketing success involves the four Ps of the marketing mix product, price, promotion, and place. The smart business owner will take plenty of time to develop his product or service, decide on a price that people would be willing to pay for the item, come up with a well-designed promotional or advertising campaign, and also figure out how he will distribute the product to the public.

6.

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9. Focus: When you create your business plan, it needs to have a focus on the key areas of your business. Business plan focus needs to dig down to the core of business functions and create plans based on business-specific issues. You need to use that as a general statement and then create bullet point lists of specific attributes and actions that will help you reach that goal. Speaking in general terms in a business plan will not help you compete in your industry. 10. Market Share Capturing market share is one of the planning factors that drives many of the other attributes of your business planning. You and your competition are trying to reach the same target audience, so you need to determine those things that help separate you from the competition. Look at areas such as product support, upgrade features and product features that are relevant to your industry. For example, if you sell inventory software that helps customers project costs based on different levels of contract pricing but your competition does not, use that in your marketing. You can also create your advantage in areas such as pricing, product availability and online support. 11. Customer Service One of the key planning factors in customer retention and maintaining a high customer-appreciation rating is good customer service. Efficient customer service does not happen by accident; it is the result of careful planning. Create a training schedule that will allow your customer service representatives to continually hone their skills. Develop a customer survey system that allows you to reach out to customers and ask important questions about such areas as product support, shipping and warranty satisfaction. To stay ahead of the competition, you need to know what your customers expect and what keeps them satisfied. 12. Product Quality To stay ahead of the competition, you need to make sure that the quality of your product remains high. Defective product costs you money in repairs and replacement products, and it costs your customers time and money as well. Develop a product inspection standard that makes sure each product is operational when shipped, and create a manufacturing standard that offers a return on your customers' investment through durability and reliability. Developing The Business Plan Definitions of Business plan 1. This a written document prepared by the business owner that describes all the relevant external and internal elements involved in starting a new business venture i.e. it game plan or a road map that answers questions such as where the business is , where it is going and how it will get there or 2. A business plan is a written document that summarizes a business opportunity and defines how the identified opportunity is to be exploited i.e. it is blue print or road map for operating the ongoing business and not just simply for the start-up phase. or 3. A business plan is document that presents the basic idea for the venture and includes the descriptions of where the business is how, where it is in and how it intends to get there. 4. A business plan is a written outline that evaluates all aspects of the economic viability of a business venture including a description and analysis of the business prospects.

Purpose of Business plan 1. Clarify Direction The primary purpose of a business plan is to define what the business is or what it intends to be over time. Clarifying the purpose and direction of your business allows you to understand what needs to be done for forward movement. Clarifying can consist of a simple description of your business and its products or services, or it can specify the exact product lines and services you'll offer, as well as a detailed description of your ideal customer. 2. Future Vision: Businesses evolve and adapt over time, and factoring future growth and direction into the business plan can be an effective way to plan for changes in the market, growing or slowing trends, and new innovations or directions to take as the company grows. Although clarifying direction in the business plan lets you know where you're starting, future vision allows you to have goals to reach for. 3. Attract Financing: The Small Business Administration states, "The development of a comprehensive business plan shows whether or not a business has the potential to make a profit." By putting statistics, facts, figures and detailed plans in writing, a new business has a better chance of attracting investors to provide the capital needed for getting started. 4. Attract Team Members: Business plans can be designed as a sale tool to attract partners, secure supplier accounts and attract executive level employees into the new venture. Business plans can be shared with the executive candidates or desired partners to help convince them of the potential for the business, and persuade them to join the team. 5. Manage business: A business plan conveys the organizational structure of your business, including titles of directors or officers and their individual duties. It also acts as a management tool that can be referred to regularly to ensure the business is on course with meeting goals, sales targets or operational 6. Maintaining Focus : A business plan contains all of your product information, manpower and financial estimates and your plans for the future. As you look to grow your business, you should refer to your business plan, according to the Small Business Administration. When you decide to make changes to your business, those changes should be reflected in your business plan. When you make updates to your business plan, you get to see how your proposed changes will affect your entire business. Your business plan reminds you of why you started your business in the first place, what your original goals were and how business changes will affect your original vision. 7. Securing Financing : As you start your business, and even as your business moves along, you will constantly need to concern yourself with financing your business. Financing concerns begin with the start-up costs and then continue with business expansion and new product development. When you look for outside financing, one of the first things the investor will want to see is your business plan, according to Inc.com. Private investors, banks or any other lending institution will want to see how you plan on running your business, what your expense and revenue projections are and whether or not your plans for the future are attainable with the business you have created. All of this can be answered by a well-written and thorough business plan. 8. Fueling Ambitions : Starting your own business can seem like a daunting task if you have never done it before. When you break down your business into a business plan, it can motivate you because it presents the business in an organized fashion, according to the University of Colorado. When you spend the time to outline your business in detail, you begin to understand what it will take to get your dream off the ground. Following a business

plan can help you to map out the growth of your company and give you confidence when you need it. 9. Enlightening Executives: As your business grows, you will need to consider adding executives to your team that can help move your company in the right direction. A business plan will help executive talent see your business vision and determine whether or not your company is a worthwhile investment of time and resources. Importance of business planning :A good business plan is essential for successful entrepreneurial venture ( in terms of launching and managing it} . Planning serves several functions such as 1. Planning serves lo bridge the gap between the present and the future i.e. involves knowing where the firm is, where it wants to be and what to do to reduce any uncertainties (helps the small owner to see and anticipate problems and risks) 2. It is a developmental tools for organizational founders: Provides checks and balances for the founder during the identification and assessment of business opportunities and threats 3. It provides organization direction by clarifying the vision , mission and goals and how such goals will be measured 4. It serves as the evaluation guidelines for managing the ongoing business venture i.e. guides decision-makers on planning and evaluation issues throughout the life of the business. 5. It helps to keep employees on track 6. Tool for securing Financial resources i.e. potential lenders, investors and suppliers will require some financial analysis and projections before making decision on whether to provide a loan or invest capital in the business for supply goods and services on credit i.e. it serves as an important tools in helping lo obtain financing Thus a business plan aids in obtaining funding as potential investors will have a variety of questions about your potential or existing business. A complete business plan not only provides them with answers, but shows that you are organized and have considered all of the marketing, legal, financial, human resources and other aspects of running a business. A thorough business plan will increase your chance of obtain venture capital and bank loans. 7. Tool for guiding the future growth well written business plan can lay the foundation for growth to happen i.e. provides road map for pursuing the opportunities that wait (guide future growth) 8. It serves as an effective marketing tool by enhancing the firm's credibility with prospective customers, suppliers and investors. 9. Business plan gives direction to the firm in the form of clarified goals and a description of how they will be achieved. Provides the framework for the firm's decisions and actions. 10. Planning eliminates uncertainties and guess work by ensuring that the organization is doing the right things at the right time. 11. Planning forms the foundation on which the firm's resources can be allocated i.e I he plans provide the criteria for allocating resources. 12. It defines and focuses the business objective using appropriate information and analysis. 13. It is a marketing tool in dealing with important relationships with lenders, suppliers, investors and banks. 14. It can uncover or reveal any omissions and/or weaknesses in the planning process 15. Communication tool : a business plan communicates to your readers (stakeholders) who might be customers, investors or employees about what exactly your business is about. Its likely you dont have time to communicate these things verbally, so the business plan gives you a forum and a mechanism for communicating what matters to you about your business.

16. It helps to identifies problems : A thorough business plan addresses all areas of starting and running your business plan. As you research the information you wish to include in your business plans, you may learn that suppositions you made about your marketing budgets, cost of materials, licensing and permitting, labor costs, real estate or leases and other critical aspects of your business are incorrect. Learning this before you launch your business gives you time to make adjustments before you have signed contracts and committed funds. Business plans include budgets that help you manage cashflows which are critical to keeping your business running. 17. Provides Exit Strategy : In addition to providing benchmarks for success, a good business plan sets realistic criteria for shutting down the business to prevent your throwing good money after poor business performance. A business failure can be very emotional and business owners are often not objective in the face of that reality. Solid numbers that tell you the business is untenable will help you make the decision to shut down a failing business easier and will prevent you from losing more of your or your investors' money than necessary. 18. To test the feasibility of your business idea; Writing a business plan is the best way to test whether or not an idea for starting a business is feasible, other than going out and doing it. In this sense, the business plan is your safety net; writing a business plan can save you a great deal of time and money if working through the business plan reveals that your business idea is untenable. Often, an idea for starting a business is discarded at the marketing analysis or competitive analysis stage, freeing you to move on to a new (and better) idea. 19. To give your new business the best possible chance of success: Writing a business plan will ensure that you pay attention to both the broad operational and financial objectives of your new business and the details, such as budgeting and market planning. Taking the time to work through the process of writing a business plan will make for a smoother startup period and fewer unforeseen problems as your business becomes established. 20. To attract investors : A business plan will be used to attract potential investors to the business and as such be prepared for your business plan to be scrutinized; by prospective partners, venture capitalists etc who will want to conduct extensive background checks and competitive analysis to be certain that what's written in your business plan is indeed the case. Limitations of planning:1. Planning creates rigidity formal planning efforts can lock an organization into specific goals to he achieved within specific timetables even the environment changes 2. Plans cannot be feasibly developed for a dynamic environment (or chaotic environment) 3. Formal planning kills or discourages creativity and innovation. In the world of business, there are so many unknowns that it is comforting to have something on paper that will help determine whether or not your business will be successful. Many people may get so discouraged by what is revealed in the business plan they give up before they even open the doors. If you see opportunities beyond what the business plan reveals, taking a risk may be the only way to find out if you're right. 4. Planning focuses operators attention on today's competition but not on tomorrow survival i.e. focuses existing opportunities at the expense of reinvention or creativity in the industry 5. Formal planning reinforces success which may lead to failure especially in an environment of uncertainty 6. Planning creates a false sense of security in the firm as the owner business owner may feel that all the problems of the business will be taken care of by the plan.

7. Poor goal setting due to expertise in management planning i.e. selling of unrealistic or unattainable goals can minim is the effectiveness of planning. Many business plans fail because those involved do not spend the time or energy, or have the expertise, necessary to make the plan comprehensive enough to have true value. Shortcuts are often taken and as such an incomplete business plan could lead you to invest resources unwisely and cause a financial collapse. 8. Timeconsuming : In business, time is money, and coming up with a business plan does nothing to directly sell a product or service. Therefore, many may consider the time it takes to develop a business plan as a big disadvantage, and it could be. Coming up with a comprehensive business plan could take 400 or 500 hours .If you work 40 hours per week, this process could take 10 straight weeks at a minimum. 9. Expensive: The time spent in man-hours translate into loss in production and if the outsourcing is preferred , then this may turn out to be very costly .could Some service companies specialize in helping you write a business plan. In fact, a consultant will meet with you, get the details of what you hope to do and where you hope to do it, conduct all the rest of the research necessary and then write a plan. Depending on how comprehensive you want this plan to be, it can be a very expensive option. Considerations in developing a business plan The following considerations should prove helpful to the business owner about to write a business plan: a. Avoid making statements which cannot be substantiated by fact or evidence. b. Avoid a tendency to generalize in order to disguise a weakness in your knowledge. c. Avoid being nave and unrealistic by presenting yourself as over-ambitious. d. Ask yourself about every piece of information ,claim or prediction how: It will be received by your readers ? 'If you were the reader what would you think of it? 'What questions will this statement give rise to?' If you believe that any of the claims made in the plan give rise to a question, try to anticipate the question and then answer it in the plan. e. Avoid including information which might be considered by someone else as redundant by asking yourself the relevance and importance of the information put in the document. Determine if the information will help to advance your purpose by allowing the reader to make a decision. f. Care should be taken to ensure that grammar, spelling and punctuation are accurate. Obtain help if necessary. Remember, the plan is an attempt to inform and to manage the impression others have of your business. The presentation of your document is therefore, of importance. g. Ephasize on the quality of the management team , describe the product in plain terms and thoroughly analyse the market h. Keep the presentation to a reasonable length and ensure a professional appearance i. Provide financial statements that are neither overly stated nor incomplete. j. Do not hide weaknesses by attempting to identify any fatal potential flaws. k. The plan should be understood by the reader, assist him to see the same business opportunity that you see and be able to make a decision. l. Place some reasonable limits on long-term, future projections. (Long-term means over one year.) Better to stick with short-term objectives and modify the plan as your business

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progresses. Too often, long-range planning becomes meaningless because environmental changes . Avoid optimism by being extremely conservative in predicting capital requirements, timelines, sales and profits. Few business plans correctly anticipate how much money and time will be required. Do not ignore stating what strategies to be used in the event of business adversities. Use simple language in explaining the issues. Make it easy to read and understand Don't depend entirely on the uniqueness of your business or even a patented invention. Success comes to those who start businesses with great economics and not necessarily great inventions.

Factors That Influence Business Planning Planning for the success of your new small business is often an overwhelming experience especially when you're brand new to the process. Business planning starts with your concept and then eventually extends to your written business proposal, which will help guide you through the start-up and maintenance of your new business . New businesses must address a few key planning stages in the planning stages. 1. Funding : One of the main reasons why many small business owners create business plans is to seek funding from lenders or investors. Financial planning is a very important part of starting up a new company. The way you choose to spend money at startup, as well as during the ongoing operation of your new business, is key to the fate of the company. 2. People : A prudent business owner must consider the people he will need to help him achieve his goals. That includes employees or independent contractors, consultants, lawyers, bookkeeping professionals and possible business partners. It also includes the people he plans to turn into customers. It's important to get a clear idea of the company's target market for its various products and services in the planning stages of the business. 3. Marketing : Planning for marketing success involves the four Ps of the marketing mix product, price, promotion, and place. The smart business owner will take plenty of time to develop his product or service, decide on a price that people would be willing to pay for the item, come up with a well-designed promotional or advertising campaign, and also figure out how he will distribute the product to the public. 4. Competition : Examining the actions, successes and failures of competition can help you learn what might work for your own business. It's also important to include a competitive analysis in your business plan to assure that your company can enter the market successfully. 5. Economy: The overall economy or health of the company's industry also may negatively affect a manager's ability to plan. When sudden downturns occur, planning must be stopped, adjusted or taken in a new direction. If the economy improves significantly, managers may scrap former plans and begin new ones. Managers must be flexible to changing outside economic conditions even when they are in the midst of planning a project of special interest to them. 6. Managers : Managers themselves also affect their own planning function. If they are not good planners in general or do not have the experience, education or background in planning required to be successful, they are more likely to plan poorly. They may not fully commit to the planning process, as it can be complicated and time-consuming. They also may sacrifice their visions of the long term for solving short-term problems. Managers may rely too much on their planning departments to construct and organize the vision for a project. The

responsibility to plan still rests with them. Managers also may focus too much on the variables they can control instead of the variables that they cannot, such as the economy. 7. Information: When planning occurs, it is vital to have accurate information from consumers, the market, the economy, competitors and other sources. Managers who do not have accurate and timely information are more likely to plan poorly and inadequately 8. Company Resources : Having an idea and developing a plan for your company can help your company to grow and succeed, but if the company does not have the resources to make the plan come together, it can stall progress. One of the first steps to any planning process should be an evaluation of the resources necessary to complete the project, compared to the resources the company has available. Some of the resources to consider are finances, personnel, space requirements, access to materials and vendor relationships. 9. Contingency Planning : To successfully plan, an organization needs to have a contingency plan in place. If the company has decided to pursue a new product line, there needs to be a part of the plan that addresses the possibility that the product line will fail. The reallocation of company resources, the acceptable financial losses and the potential public relations problems that a failed product can cause all need to be part of the organizational planning process from the beginning. Contents Of The Business Plan:A good business plan should contain the following: 1. Introductory page, 2. Table of contents , 3. Executive summary, 4. Description of the venture, 5. Opportunity analysis Environmental analysis Industrial analysis 6. Functional plans Production/operational plan, Marketing plan, Financial plan Organizational plan, 7. Contingency plan 8. Summary 9. Appendices 1. Introductory Page This also known as the title or cover page. The purpose of a cover page is to tell the reader what he or she is about to read and how to contact the writer. A cover page is also a way to get the business plan noticed and thus putting your cover page on quality stock paper, may catch the attention of the readers given that they see dozens of business plans in a week The cover page should say the words "Business Plan," and should include the following information:

name and business name

company logo address telephone number fax number E-mail address

Name and personal details of the principal(s)such as telephone, e-mail address, website address, fax, number, postal address etc Nature of business i.e. brief description of the company and the nature of business Statement of financing i.e. amount of financing needed in terms of stock or debt Statement of confidentiality of the report for security reasons The date on which the plan was prepared

2. Table Of Contents Provides a sequential listing of the sections and subsection of the plan with page numbers. 3. Executive SummaryThe executive summary is an overview of the business plan itself. This section summarizes some the key pieces of information discussed in the body of the business plan i.e. it is simply a summary of everything that is explained in detail within the main body of the business plan . Essentially, this is where the prospective investor is being told everything he is about to learn in a succinct overview. By looking at the executive summary, many investors will know whether the investment meets their needs prior to reading the entire plan. An executive summary is an initial interaction between the writers of the report and their target readers: decision makers, potential customers, and/or peers. A business leaders decision to continue reading a certain report often depends on the impression the executive summary gives. The purpose of the executive summary of the business plan is to provide your readers with an overview of the business plan. Think of it as an introduction to your business It summarizes the key points the small business owner wants to make about the venture in about 3 to 4 pages . Usually prepared after the total plan has been written to highlight concisely and convincing key points in the business plan. The executive summary may include a short summary paragraph on each or consolidated sections of the business plan. It should have these contents: Description of the business opportunity : Brief statements of vision and mission, primary goals and objectives and history of the venture Key people involved in the venture i.e. management team Industry overview Target market including competitors . Concise product descriptions. Competitive advantage Proposed strategies i.e. how opportunity will be pursued Summary of financial information i.e. expected key financial results Data supporting the opportunity for this venture be briefly stated by opportunity analysis

Business concept. Describes the business, its product and the market it will serve. It should point out just exactly what will be sold, to whom and why the business will hold a competitive advantage. Financial features. Highlights the important financial points of the business including sales, profits, cash flows and return on investment. Financial requirements. Clearly states the capital needed to start the business and to expand. It should detail how the capital will be used, and the equity, if any, that will be provided for funding. If the loan for initial capital will be based on security instead of equity, you should also specify the source of collateral. Current business position. Furnishes relevant information about the company, its legal form of operation, when it was formed, the principal owners and key personnel. Major achievements. Details any developments within the company that are essential to the success of the business. Major achievements include items like patents, prototypes, location of a facility, any crucial contracts that need to be in place for product development, or results from any test marketing that has been conducte

4. Description Of The Business/Venture: This deals with the purpose and background of the business. It provides a complete overview of products and operations of the new venture i.e. specifics of how the business owner will capture, seize and exploit the identified and analysed opportunities (how the business owner is going to organize, launch and manage the venture . It provides a detailed description of the business in terms of the business, products, location , market and services as well as a thorough description of what makes the business unique It provides an explanation of the following: Legalities - business form: proprietorship, partnership, corporation. The licenses or permits you will need. Business type: merchandizing, manufacturing or service. Is it a new independent business, a takeover, an expansion, a franchise? Why you believe the business will be profitable, growth opportunities etc? The venture's vision and mission A description of the desired organizational culture Reasons for going into business Why the business-owner believes the business will be successful or profitable Indicate any developmental works accomplished to date. Give detailed description of the strengths and weaknesses A description of the products including patent, copyrights or trademarks. Describe the benefits of the goods and services from the customers' perspective. Successful business owners know or at least have an idea of what their customers want or expect from them. This type of anticipation can be helpful in building customer satisfaction and loyalty. And, it certainly is a good strategy for beating the competition or retaining your competitiveness.

Describe What you are selling, how the product will benefit the customers and what is different about the product your business is offering. The location and buildings including reasons for selection i.e. provide detailed description of the premises in terms of ownership, leasehold, freehold, adequacy. The location of the business can play a decisive role in its success or failure. The location should be built around the customers, it should be accessible and it should provide a sense of security. Consider these issues when addressing this section of your business plan: What your location needs are , what kind of space will you need, why is the area and building are desirable, whether the area is easily accessible , availability of public transportation adequacy of street lighting and whether there are market shifts or demographic shifts occurring that will affect suitability of the location. The type of equipment and machinery needed including whether they will be leased or purchased Type of personnel/staff requirements in terms of quality and quantity. Background of the small business owner including qualifications, professional training and experience and show the kind of experience necessary fro successful implementation of this venture

5. Opportunity Analysis: 1. Environmental and Industry Analysis : Put the venture in proper context by conducting environmental analysis to identify and anayse opportunities perceived opportunities . Analyse environmental factors such as: Economy: (rends and changes of GNP, unemployment, incomes, inflation, savings and investments data, consumer spending, interest rate. Economic Assessment: Provide a complete assessment of the economic environment in which your business will become a part. Explain how your business will be appropriate for the regulatory agencies and demographics with which you will be dealing. If appropriate, provide demographic studies and traffic flow data normally available from local planning departments. Technology: potential technological developments Legal environment: legal issues such as new laws and regulations on business formation and operations, deregulation and regulation of prices, media advertising distribution channels, product development e.t.c Political environment: concerns or political developments such as constitution making, party system, political stability e.t.c Social cultural trends: such as cultural changes, demographic trends or the target markets e. t. c. population growth , occupational changes, tastes and preferences, values and beliefs, 2. Industry analysis (Industry trends). Industry analysis involves reviewing industry trends and competition strategies with specific focus on: Industry demand (future-outlook trends): knowledge of growth rates, number of competitors. possible consumer needs changes (demand for products). Competition analysis :-Who and how many competitors are there in the industry, their strengths and weaknesses Market analysis- description of target market, geographic segmentation, demographic profile e.t.c. that will help to prepare the market plan Industry forecasts to show the potential of the venture -

6. Functional Plans: a) Production/Operational Plan A detailed description of the products and services that will be manufactured or delivered. It is a production plan if it involves manufacturing and an operation plan if it involves service delivery. When writing the business plan, the operating plan section describes the physical necessities of your business' operation, such as your business' physical location, facilities and equipment. Depending on what kind of business you'll be operating, it may also include information about inventory requirements and suppliers, and a description of the manufacturing process. You need to show what you've done so far to get your business off the ground (and that you know what else needs to be done) and demonstrate that you understand the manufacturing or delivery process of producing your product or service. Demonstrate awareness of your industry's standards and regulations by telling which industry organizations you are already a member of and/or which organizations you plan to join, and telling what steps you've taken to comply with the laws and regulations that apply to your industry. Explain what you've done "to date" to get the business operational, followed by an explanation of what still needs to be done. Provide details of the Production Process on the business' day to day operations. You must demonstrate your understanding of the manufacturing or delivery process for your product or service. Make sure you include all these details of your business' operation i.e. The document must describe in clear or rudimentary manner that lay people can understand the plan in terms of the following : a) General: Do an outline of your business' day to day operations, such as the hours of operation, and the days the business will be open. If the business is seasonal, be sure to say so. Location of the physical plant including the reasons for the choice and costs involved The physical plant: What type of premises are they and what is the size and location? If it's applicable, include drawings of the building, copies of lease agreements, and/or recent real estate appraisals. You need to show how much the land or buildings required for your business operations are worth, and tell why they're important to your proposed business. A detailed description of the plant layout with diagrams showing the manufacturing steps should be provided. Equipment: The same goes for equipment. Besides describing the equipment necessary and how much of it you need, you also need to include its worth and cost, and explain any financing arrangements. Explain the type of machinery and equipment needed to perform the manufacturing process including any future capital expenditure needs.

b) c)

d) e)

f) g)

h)

i)

j) k) l) m)

Assets: Make a list of your assets, such as land, buildings, inventory, furniture, equipment and vehicles. Include legal descriptions and the worth of each asset. Special requirements: If your business has any special requirements, such as water or power needs, ventilation, drainage, etc., provide the details in your operating plan as well as what you've done to secure the necessary permissions, such as zoning approvals. Materials: Tell where you're going to get the materials you need to produce your product or service, and explain what terms you've negotiated with suppliers. Give names and addresses of suppliers of raw materials and their costs Production: Explain how long it takes to produce a unit, and when you'll be able to start producing your product or service. Include factors that may affect the time frame of production and how you'll deal with potential problems such as rush orders. The manufacturing/production process, indicating whether the firm will be responsible for the entire production or there will be subcontracting . If subcontracting will be involved , give the names of subcontractors , reasons for their choice and the cost of subcontracting Inventory: Explain how you'll keep track of inventory. Feasibility: Describe any product testing, price testing, or prototype testing that you've done on your product or service. Cost: Give details of product cost estimates. The document must describe in clear or rudimentary manner that lay people can understand the plan in terms of the following Explain who your suppliers are and their prices, terms, and conditions. Describe what alternative arrangements you have made or will make if these suppliers let you down . .Explain the quality control measures that you've set up or are going to establish.

Operational plan: The document gives details of chronological steps in completing non-manufacturing business transactions such an retail shop, insurance services, banking, restaurant, hair saloon/ barber shop , secretarial services , business consultancy etc which are known as operations. The business plan should detail ( in case of a retail shop/store): a) b) c) d) e) f) g) h) i) j) k) l) Physical location of the business Facilities and equipment to be used The process of purchasing merchandise from which suppliers (give names) Purchasing arrangements Mode of transportation to be used How the merchandise will be stored and presented for sale Operating schedule in terms of opening and closing hours Operation of an inventory control system i.e. Inventory levels and stock control plans Capacity - potential and effective Sources of supply of key resources Quality control plans The chronological steps involved in typical business transaction

b) Marketing Plan: It is a written statement of marketing objectives , strategies and activities to be followed in the business plan. It describes : conditions (situational analysis) and strategy/ programme related to how the product /services will be distributed and promoted by the firm . It should contain the following specific information:

a. Customer characteristics in terms of their location - who they are : ho\v much they buy , where the\ buy and why they buy b. Product Description: A product can be a physical item, a service, or an idea. Describe in detail your products or services in terms of the features and benefits they offer customers. Describe what you need to have or do to provide your product or service (how it's produced). c. Pricing strategy Describe your pricing strategy or indicate which approach (es) will be used such as markup pricing, cost-plus pricing , breakeven pricing , competition pricing etc. indicate any price changes and their cause . List the price of your products and List price ranges for product lines. Describe any price flexibility or negotiating room, as is common with large purchases such as houses or cars. Outline any discounts you offer for long-term customers, bulk purchases or prompt payment. Include the terms of sale, such as "net due in 30 days," extended payment plans, and whether you accept credit cards The pricing strategy is one of the marketing techniques that can used to improve overall competitiveness. Compare your pricing strategy with the competitors in order to determine if your prices are in line with competitors in the market area and if they are in line with industry averages. Some of the pricing strategies are: retail cost and pricing competitive position pricing below competition pricing above competition price lining multiple pricing

Pricing methods Competition based pricing Pricing strategies are listed below that take into account the break-even point, but are heavily weighted with subjective judgments - not just the numbers. 1. Price the same as competitors. This strategy is used when offering a commodity product, when prices are relatively well established (such as with professional services) or when you have no other means to set prices. Your challenge then becomes to determine how to lower your costs so you can produce a higher profit than your competitors.

2. Establish a low price (compared to the competition) on a product in order to capture a large number of customers in that market. This strategy may also be used to achieve nonfinancial objectives such as product awareness, meeting the competition or establishing an image of being low-cost. It works if you are able to maintain profitability at the low price, or if you're able to maintain an acceptable level of sales should you later raise prices. 3. If your product has a mystique and uniqueness that is valuable to customers, you might have the ability to charge a very high price relative to your cost. Also, if your target market is affluent and you are positioning your product as a "prestige" product, an especially high price could be in order. This strategy of charging "what customers are willing to pay" even though it's high - requires alertness and a willingness to change on your part because customers (and competitors) might decide that you're making too much of a profit. Cost-Based Pricing After you've determined your break-even points which establish floors for your price, there are strategies for establishing pricing based upon additional financial objectives, such as: 1. Market skimming : Establishing a high price to make high profits initially. This strategy is used to recover high research and development costs or to maximize profits before competitors enter the market. 2. (Market penetration pricing: Setting a low price on one or more products to make quick sales to support another product in development. (Some companies also employ this strategy when they need to increase cash flow.) 3. Setting prices to meet a desired profit goal. For example, if the desired profit per unit is 20 percent and unit costs are ksh10 (taking into account your fixed and variable costs), set your price at ksh 12. 4. Break- even pricing: You may also determine how many units you will need to sell to meet a profit goal by using the following formula. 5. Break-Even Unit Volume = (Fixed Costs / Unit Contribution Margin)* * Unit Contribution Margin = Selling Price per Unit - Variable cost Costs to be included are ( for service business ) service costs and pricing service components material costs labor costs overhead costs

Other overhead costs that must be included are :

Advertising (Yellow Pages, newspapers, and trade journals)

Business and professional meetings (lunches, room rentals, and taxis; any direct cost should be billed to the client) Car expense (actual, or .31 [1996] per mile) Depreciation on equipment (e.g., if it will last 5 years, then 20% of the price) Dues, publications, professional fees Education and training Insurance (fire, liability, malpractice) Interest (if you borrow) Professional fees (accounting, legal, financial) Printing (brochures, stationery) Rent (allocate even if you use your home) Repairs and maintenance Secretarial services Supplies and postage Taxes (real estate and personal property) Telephone Travel expenses Utilities

Thus the price set should be guided by : 1. Cost of production and marketing that should form the floor : You must set your price above the surface to cover costs or you will quickly drown into the ocean . Of course, there will be times when you decide to set prices at or below cost for a temporary, specific purpose, such as gaining market entrance or clearing inventory. 2. Customer perception: How the customer perceives the value of the product determines the maximum or ceiling price customers will pay. This is sometimes described as "the price the market will bear." Perceived value is created by an established reputation, marketing messages, packaging, and sales environments. An obvious and important component of perceived value is the comparison customers and prospects make between you and your competition. This is a Value-based pricing that makes you think about your business from the customer's perspective. If the customer doesn't perceive value worth paying for at a price that offers you a fair profit, you need to re-think your game-plan. 3. Charge as much as possible for the merchandise or services by considering such factors as kind of customer you want to appeal to, competition, selling for cash or credit, your willingness to accept returns, guarantees 4. Do not let an offer of the lowest prices possible lead you to give up amenities that others in the industry offer: personal attention, delivery service, prompt replacement of defective merchandise, unquestioned refunds, and/or easier credit terms. If you don't offer such service, be prepared to lose shoppers who want it and are willing to pay for it. Many businesses fail to realize that, with low-cost competitors, it's often more effective to position a product/service higher upscale than it is to cut the selling price.

5.

Lower than average prices generally fail to increase sales enough to raise profits if any of the following are true: You fail to advertise low prices widely Items are rarely bought Customers lack a clear basis for comparison Luxury items are involved

d. Promotional strategy: A promotion plan describes the tools or tactics used to accomplish your marketing objectives and the strategies may include advertising . personal selling , sales promotion, direct selling or public relations to be used relative to those of the competitors A promotion plan outlines the promotional tools or tactics you plan to use to accomplish your marketing objectives. To the new or inexperienced marketer, the promotion plan might be mistaken as the entire marketing plan because it outlines where the majority of the marketing budget will be spent. It is, however, just one component of the marketing plan - there are additional strategy and planning components described in a marketing plan. You might choose to include the following components in your promotion plan: Description (or listing) of the promotional tactics you plan to use. Projected costs for the year. Explanation of how your promotion tactics will support your marketing objectives. Description of promotional adjustments for cyclical businesses, if yours is indeed cyclical.

Advertising Devise a plan that uses advertising and networking as a means to promote your business. Develop short, descriptive copy (text material) that clearly identifies your goods or services, its location and price. Use catchy phrases to arouse the interest of your readers, listeners or viewers. In the case of a franchise, the franchisor will provide advertising and promotional materials as part of the franchise package, you may need approval to use any materials that you and your staff develop. Whether or not this is the case, as a courtesy, allow the franchisor the opportunity to review, comment on and, if required, approve these materials before using them. Make sure the advertisements created are consistent with the image the franchisor is trying to project. Remember the more care and attention you devote to your marketing program, the more successful your business will be. Types of advertisement: 1. Print advertising such as that in programs for events, trade journals, magazines, newspapers 2. Direct mail

3. Outdoor advertising, such as billboards and bus boards 4. Broadcast advertising on radio and TV (or Internet sites) 5. Promotion materials include : brochures, newsletters , flyers, posters Also be sure your package design is appropriately informative and catchy. (For a service business, your "package design" will be the atmosphere of your office, the design of your company collateral and, most importantly, the appearance of you and your staff.) Promotional Activities (sales promotions) Sponsorships for special events marathon , cross country Participation in community projects and boards of directors Trade Shows the product or service might be one that is suited to exhibiting at a trade show attended by your target audience. Trade shows are typically one- or two- day events that allow businesses to set up exhibits or booths showcasing their products or capabilities. Fairs (like Health Fairs, Job Fairs) Give- aways (like baseball caps and mugs with your logo) Coupons and free samples Conducting contests

Public Relations Public Relations (often referred to as PR) includes activities intended to promote understanding of your company or product and to promote goodwill toward you, your company and its products. Through PR activities you may assess and influence public opinion by delivering messages without incurring direct media costs. Public Relations is often confused with advertising. In fact, it is often considered to be "free advertising." Some of the tools commonly used in Public Relations are: 1. Community Outreach. Help build community by participating in local events, donating to non-profit organizations, networking and educating its citizens. 2. Special Events. Build your company's reputation and influence in your industry by taking part in trade shows, conferences, training seminars, in-store demonstrations and trial offers. 3. Marketing Communications. Keep in continuous touch with your market and community by publishing newsletters and informational booklets and brochures, inserting slip sheets in your invoices, and writing personal notes and letters. 4. As with all aspects of your business, public relations should not be left to random chance. It is important to think through the best ways to promote your business to help define your business image. Take time to define an appropriate media campaign and put together a press

kit so you will have something to give the media when they are writing something about your business. Speaking and Conferences: making speeches at conferences, professional association meetings and other events positions you and your company as a leader in your field. Attending conferences is also an opportunity to make valuable contacts that lead to sales. Publications such as newsletters, trade journals and books. Media Relations Campaigns: A campaign is your overall plan for contacting and staying in touch with targeted members of the media (reporters). Develop a media relations campaign if it would benefit your company to be mentioned in newspaper, magazine or TV broadcasts viewed by your target audience. Developing press releases, press kits and public service announcements could be included in your media relations campaign.

Public Relations: it is used to manage people's opinions about a firm and its activities, to manage crises that may confront a firm and to can be coordinated with any Personal Selling, Advertising, or Sales Promotion strategies Public Relations is a very visible expression of corporate vision and culture. It is not a theme or a slogan that changes with the advertising agency or at the whim of a single person. It is a management function and a statement of corporate values and beliefs e. Competition: indicate the nature of competition including the consumer's attitudes toward competition, who they are, where they are, and their strategies. Business is a highly competitive, volatile arena. Because of this volatility and competitiveness, it is important to know your competitors. The following questions like these can help you: Who are your direct competitors? Who are your indirect competitors? How are their businesses: steady? increasing? decreasing? What have you learned from their operations? from their marketing strategies ? What are their strengths and weaknesses? How does their product or service differ from yours?

Start a file on each of your competitors in terms of promotional, distribution, production and pricing strategy techniques. Analysis of these techniques can help you to understand your competitors better and how they operate their businesses. Competitor Analysis should address the following issues:

Names of competitors: Identify actual and potential. List all competitors and include information on any that might enter the market in the future .

Summary of each competitor's products : This summary should also include their location, quality, advertising, staff, distribution methods, promotional strategies, and customer service. Competitors' strengths and weaknesses : It's important to see your competitors' strengths and weaknesses from your customer's viewpoint, not yours. List their strengths and weaknesses. State how to will capitalize on their weaknesses and meet the challenges represented by their strengths. Competitors' strategies and objectives : This information might be easily obtained by getting a copy of their annual report. Conduct an analysis of many information sources to understand competitors' strategies and objectives. Strength of the market : Is the market for your product growing sufficiently so there are plenty of customers for all market players? Or, is the market so tight you are selling primarily to your competitors' customers?

Here are some ideas for finding competitive information:

Personal visits: Visit your competitors' locations and observe how employees interact with customers, how their premises look like and how their products displayed or priced Talk to customers : Learn what your customers and prospects are saying about your competitors - and about you, too. Competitors' ads : Analyze competitors' ads to gain information about their target audience, market position, product features, benefits, and prices. Speeches or presentations : Attend speeches or presentations made by representatives of your competitors. Trade show displays: View your competitor's display with a critical eye to determine their display "say" about their company. Also observe which trade shows or industry events competitors attend to gather information on their marketing strategy and target market. Written sources:

General business publications Marketing and advertising publications Local newspapers and business journals Industry and trade association publications Industry research and surveys Computer databases (available at many public libraries) Annual reports Yellow Pages

f. Channels of distribution : Describe how your products will be distributed i.e. show how the products and /or services will be delivered or distributed including the distribution chain from the manufacturer /producer/supplier to the final customers

Describe your distribution system. Where will your product be placed so customers have access to it? A few points about distribution to address in your marketing plan are: 1. Is the exchange of the product made in a store through the mail and through a direct sales representative? 2. What are your production and inventory capacities? (How quickly can you make products and how many can you store?) 3. Are there cyclical fluctuations or seasonal demands for your products? For example, if you produce Christmas decorations, how will you manage peak production and sales periods as well as slow periods? 4. Do you sell to individuals or to re-sellers? Your company may use more than one method. For example, you may sell directly to customers who place large orders but also sell to customers who buy small quantities of your product through retail outlets. 5. Show the nature of customer service required to meet customer needs, create customer loyalty and satisfaction by training and motivation of employees,

g.) Warranties and guarantees: of the products after sale including repairs - money-back guarantees if products do not meet needs, h) Public image the firm wants to project through its product offering such as emphasis on low price, high quality, personal service courteous employees etc i) Marketing budgets and controls of the marketing activities to maintain the plan. Estimate the cost of the marketing activities described in the marketing plan so you will have a budget to keep everyone on track over the course of the year. Typical marketing expense categories are marketing communications, market research, promotions, advertising, events and public relations. A popular method with small business owners for apportioning costs is to allocate a small percentage of gross sales for the most recent year. This usually amounts to about two percent for an existing business. However, if you are planning on launching a new product or business, you may want to increase your marketing budget figure, to as much as 10 percent of your expected gross sales. Another method used by small business owners is to analyze and estimate the competition's budget and either match or exceed it.

j) Implementation and monitoring of the plan c. Financial plan The Financial Plan/ Financial forecast describes each of the activities, resources, equipment and materials that are needed to achieve organizational objectives, as well as the timeframes involved i.e. deals with a business's financial affairs. It involves making projections of key financial data that determine the financial commitment needed for the business venture. It

indicates the economic feasibility of the venture and thus needs to be as accurate as possible. All assumptions must be indicated in the financial analysis.

The Financial information required in the financial plan includes the following Identifying the types of resources needed to achieve objectives Calculate the total cost of each type of resource Operational and capital budgets i.e. summarize the costs to create a budget Identify any risks and issues with the budget set Pro-forma income statement i.e. statement of sales and net profits Pro-forma balance sheet i.e. summary of projected assets , liabilities and net worth of the business at some specific future date. Cashflow statement/ projections i.e. statement of monthly cash receipts and disbursements Investment appraisal - payback and discounted cash flow Ratio analysis: net profit margin, Gross profit margin, return on capital employed, liquidity and solvency analysis Break-even analysis i.e. volume of sales where the business will neither incur losses nor make profits. Financing required o Details of capital required and uses o The plan must include details of the external finance required o This will be equal to the finance required less finance raise internally from existing owners and from operations o The plan will outline how it is proposed to raise the finance o Sources of finance: Short, medium and long term; Debt v equity o Application of the sources of funds o Financial control systems

Performing Financial Planning is critical to the success of any organization because : 1. It provides the business plan with rigor, by confirming that the objectives set are achievable from a financial point of view. 2. The financial plan helps the owner gain a full understanding of the financial needs of the business while giving serious thought to where the money is going to come from and how it is going to be paid back if borrowed. 3. A financial plan also outlines for investors and lenders the time it will take for your business to become profitable, and exactly how much debt will be accumulated along the way. 4. It also helps the owner-manager to set financial targets for the organization, and reward staff for meeting objectives within the budget set. 5. A financial plan can also be an estimation of cash needs and a decision on how to raise the cash, such as through borrowing or issuing additional shares in a company 6. Cash Management: The plan helps a small business owner to better manage cash flow by preparing for situations that could result in cash shortages, such as seasonal fluctuations in revenues. Many businesses have monthly or seasonal variations in revenues, which translate

into periods when cash is plentiful and times when cash shortages occur. In building the financial plan, the owner takes these cycles into account to keep a tight rein on expenditures during the forecast low revenue periods. Poor cash management can result in negative consequences such as not being able to make payroll. Having a financial plan that is structured so there is always a cash cushion helps the business owner sleep better at night. The cash cushion allows the business to take advantage of opportunities that arise, such as the chance to purchase inventory from a supplier at temporarily reduced prices 7. Long-Range orientation: In business it is easy to become focused on the crises or issues that must be dealt with on a daily basis. The price for being too short-term oriented is that the owner may not spend enough time planning what needs to be done to grow the business longterm. The financial plan, with its forward looking focus, allows the business owner to better see what expenditures need to be made to keep the company on a growth track and to stay ahead of competitors. The financial plan is a blueprint for continual improvement in the business performance. 8. Spotting Trends: A business owner makes so many decisions over the course of a month that it can be difficult to tell which decisions resulted in success and which ideas or strategies did not work. Preparing the financial plan involves setting quantifiable targets that can be compared to actual results during the year. The owner can see, for example, whether an increase in advertising expenditures led to the hoped-for jump in sales. Trends in the sales of individual products help the owner make decisions about how to allocate marketing financial resources 9. Prioritizing Expenditures: Conserving financial resources in a small business is a critical element of success. The financial planning process helps a business owner identify the most important expenditures, those that bring about immediate improvements in productivity, efficiency, or market penetration, versus those that can be postponed until cash is more plentiful. Even the largest, most well-capitalized corporations go through this prioritization process, comparing the cost to the benefits of each proposed expenditure. 10. Measuring Progress: Especially in the early stages of their ventures, small business owners work long hours and deal with numerous challenges. It can be difficult to tell whether progress is being made or whether the business is mired in mediocrity. Seeing that actual results are better than forecast provides the small business owner needed encouragement. A chart showing steady growth in revenues month by month, or a rising cash balance is a great motivating factor. The financial plan helps the owner see, with the clarity of hard data, that the business is on its way to being D. Organizational Plan This plan describes the form of business ownership, lines of authority and responsibility of members of the organization. The organizational plan provides information to potential investors on who controls the business and how the members will interact in performing their functions. The plan should contain the following details: The form of business ownership i.e. sole proprietorship, partnership or private company If it is a partnership, identify the partners and if it is a company, identify the shareholders and their contributions If a company , all the details as required by the companies Act such as the form of share capital, voting rights ,BODs , authority of the co. officers etc

The management team in terms of : o Their background/business experience in this business? o Their qualifications of key functional managers to convince potential investors that they are capable of doing the job. o What are their strengths/weaknesses? o What are their duties and are these duties clearly defined? o The roles and responsibilities of the employees in terms of their job descriptions and job specifications. o Indicate the role of the BODs i.e. the functions of the Board of Management including how the members will be appointed and terminated o If a franchise, what type of assistance can you expect from the franchisor? o Will this assistance be ongoing? o If a franchise, are these issues covered in the management package the franchisor will provide? o If a franchise, the operating procedures, manuals and materials devised by the franchisor should be included in this section of the business plan. Study these documents carefully when writing your business plan, and be sure to incorporate this material. The franchisor should assist you with managing your franchise. Take advantage of their expertise and develop a management plan that will ensure the success for your franchise and satisfy the needs and expectations of employees, as well as the franchisor. Draw an organizational chart to show the line of authority and responsibility of the members of the organization. Indicate the span of control/ management Indicate the number of employees that will be needed including how many have currently been hired , their skills and qualifications and plans for hiring and training personnel, what salaries, benefits, vacations, holidays will you offer

7. Contingency Plan: This is an alternative action program in case the initial plan fails i.e. it is a plan to prevent , minimize or respond to risks if they materialize . It involves the identification of possible risks, assessment of their possible impact to the business and the alternative strategies to realize organizational objectives. Risk is one of the most overlooked areas in small businesses in spite of the fact that it is clear to most small business owners that operating any business involves risk. While taking a risk and winning is fun, prudent business owners take care to minimize the risk, just as you would in any other type of risky venture you undertake. A good risk management system is a continuous process of analysis and communication. A risk management system needs to be put in place and a contingency plans in place for whatever "surprises" might occur and how to handle these "surprises

The organization has to evaluate the weaknesses of the business relative to the competitors in terms of production/operations, marketing, finance, management team, ICT strategy, etc that might render the plan obsolete or redundant. Develop a back-up plan based on the results of risk assessment of the businesses opportunity Risk management involves five steps: 1. 2. 3. 4. 5. Identifying risk Measuring it Formulating strategies to limit it Carrying out specific tactics to implement those strategies Continuously monitoring the effort

8. Summary Highlight and summarize the most important points that have been discussed in details in each of the previous sections .Have a short summary paragraph of each or consolidated sections. The summary provides a good place to repeat and re-emphasize key arguments in favour of the business venture. 9. Appendices This contains back-up materials or supporting documents of the plan that may not necessarily in the body of the plan. Any references to these documents in the appendives should be made in the plan itself. The may contain : Any letters from customers , suppliers , distributors , contractors etc Market research data Sample of advertisements Any agreements or contacts such as leases Any price lists including those of competitors and suppliers Break-even computations CVs of key personnel e.g. managers Letters of recommendation or commitment to do business with the business Descriptions and diagrams of the product Any vital information not captured in the body of the plan

Appraisal Of Business Plans By Banks Banks utilize a common set of criteria which will help managers to probe for relevant information, and each bank will originate its own criteria to help it to standardize its lending decisions. However, the various frameworks used by the banks have much in common. The strength of the criteria below is evident in the way it guides bank managers in their attempt to interrogate owners and their business proposals. Furthermore, the criteria are not so narrow as to restrict scope for discretion and interpretation.

To know the criteria by which the application will be judged is invaluable for the owner-manager about to negotiate with his/her bank. The owner-manager should know the following things in advance of meeting the bank manager : That the business plan will not be judged wholly on its style. However , this is not an excuse for preparing a business plan that is weak in-style and presentation. The history of the bank's relationship with business will be taken into account The character of the owner-manager which is often difficulty to convey in a business plan will be taken into account .This will be assessed during the interview Examples Of Lending Criteria The owner managers need to understand how their plans are assessed by bank managers. Bank managers use two frameworks : CAMPARI MODEL PARSR MODEL A. THE CAMPARI MODEL: Character Ability Management Purpose Amount Repayment Insurance Character Personal track record in business and persona! credit history with the bank. Personal impression: physical and mental. History of business transactions; any court judgements against the owner Level of commitment as shown by your own personal financial investment in the business, and what you personally stand to lose. Your understanding of your own business proposal, its level of sophistication, and your ability to present a convincing case for your business proposition. Ability Management ability & capacity to manage the, resources of the business. Financial and business acumen and ability to Keep records. Ability to present and provide information, Management Quality of key personnel. Relevant experience of those who will be in a decision-making role within the business. The level of education and training displayed by key personnel. Purpose Why is the banking facility needed? Is the purpose to which the facility is to be put against any bank policies or government policy? Is the requested facility actually in the customer's own best interest? Will all the facility be used for trading purposes, or will some of it be used for other purposes?

 Will the facility be used to purchase fixed assets? Amount What will be the customer's stake, and how much money will customer invest directly in the business? Is the amount requested correct?-Have all associated costs included? Ensure that the customer's money is injected before the bank lends. Repayment Will the business generate enough cash to service the debt? Will there be sufficient reserves for contingencies? Remember profit may not equal cash What will be the source from which repayment interest will be paid? Will it come from sale of assets, or from profits ? Is the proposed repayment period realistic ? Insurance 1 Is security necessary? Are security values correct m-fee-present climate"? Is the business adequately insured against all the usual risks? Are the key personnel adequately insured against accidents, sickness, death? The CAMPARI is a framework, consisting as it does of common sense questions intended to test the strength of the people behind the business, their proposal and the business itself. Where the emphasis would be placed within CAMPARI will, to an extent, depend upon the personal relationship established between the bank manager and the business owner, and the level of knowledge and trust which the bank has in the business. There is usually room for interpretation and discretion for negotiation. A good business plan will create the right impression for negotiation to take place. PARSR MODEL Person Amount Reward Security Risk This model is worth considering for its reinforcement of the benefits which come from trying to see a business proposal from a bank's point of view. PARSR is another attempt to provide a guiding set of criteria against which to appraise a business plan /application. To the question 'What is a bank looking for from a small business? PARSR is an attempt: to test whether or not a business is viable has good-quality management is capable of providing the bank with quality information, has a convincing business plan 'based on thorough preparation. Person Ability and background. Track record and relevant and real experience (evidence of experience versus claimed experience). The proposer s financial position.

 The proposer's understanding of his/her own business plan. Amount: How much, and what for? Assumptions made in the business plan. The quality of the research underpinning sales claims, or assumptions about demand Justification for sales income and the timing anticipated as to when the income will be received Are all costs included. What will be the structure of the borrowing funds Has too much or too little been requested? The customer's own stake? Is it high enough? Repayment: Is it realistic? What will be the breakeven point? Have fixed costs and variable costs been identified and categorized correctly Have allowances been made for contingencies Security Is the business proposal viable without security? What does the risk assessment reveal? Is there a secondary source of repayment? Does the owner enjoy income from a job? How comprehensive is the owner's personal insurance cover? Is business fully insured, and with whom? What types of security are available: for example, premises, policies, share certificates etc Has the owner taken legal and other necessary advice? Reward What will be the source of profit for the bank? Should interest rates be fixed for the business in question, or these be negotiated? Will the bank set a fee for setting up the account, or not? What will be the security deposit fees? Which written terms, agreements and conditions should in respect of the business?

TYPES OF SMALL OF SMALL BUSINESSES IN KENYA There are Different variations of small business based on the following categorizations: 1. Development stages model i.e. Business life cycle stages 2. By type of industry / sector 3. Legal structure or form of ownership : sole traders, partnerships, corporations 4. Social enterprises e.g. community businesses .These are businesses set up in disadvantaged communities where owners use the returns for the benefit of the community. These are not a legally recognized form of business 5. Family owned- businesses 6. Women- owned businesses FAMILY OWNED BUSINESSES: Family-owned business is any business in which two or more family members have significant or majority ownership and / or control i.e. a business in which one or more members of one or

more families have a significant ownership interest and significant commitments toward the business' overall well-being. Family businesses provide the only setting for an unusual social phenomenon with overlap of family issues and business issues. The family business offers two separate but connected systems of family and business with uncertain boundaries, different rules, and differing roles. Family businesses may include numerous combinations of family members in various business roles, including husbands and wives, parents and children, extended families, and multiple generations playing the roles of stockholders, board members, working partners, advisors, and employees. Conflicts often arise due to the overlap of these roles Characteristics of family businesses: 1. Ownership: ownership is by family members (family unit) who are related by marriage or kinship, who live and work in the same location and provide majority of the capital for the business Management. T 2. Control or management : two or more members have to are involved in the management of the business 3. Degree of family involvement in the business: The transactions represent the interactions of two separate systems of the business and the family with a lot of overlapping cycles depicting unclear boundaries between business and family. There is a lot of interaction and specific family involvement in business decisions and actions 4. Intergenerational ownership and management transfer: There is the intention and practice of transferring business ownership and management /control from one generation to another. However, they have a smaller potential of survival beyond the founders i.e. intergenerational transfer does not usually extend beyond the first generation 5. Influences on family businesses include: The age , size, number of the founders, whether the family is increased , stable or declining, family feelings , values and dynamism 6. Reward system: is given to family members based on their membership to the family and need 7. Promotions of family members are based on longevity and the system is very inflexible 8. Training is implicit and non-standard 9. Family businesses tend to be long-lived compared to non family businesses 10. The management of family business has longer tenure compared to non-family ones Challenges or problems facing Family owned - businesses 1. Family businesses are keen on controlling the issue of shares and not keen on selling shares to raise finance for growth 2. Informality. Absence of clear policies and business norms for family members. Most family business are informal and do not have much structure or policies. 3. Limited Opinion/ Static thinking or stagnation due to the pre-eminence of the controlling family, centralized decision- making and lack of new ideas for long-term development from outside. As the family business usually hires family members, there may be lack of outside opinions and this restricts on the diversity of ideas required to expand the business. 4. Emotions. Family problems will affect the business. Divorce, separations, health or financial problems also create difficult political situations for the family members. 5. Limited vision/ Tunnel vision. Lack of outside opinions and diversity on how to operate the business. Lack of outside input on how to operate the business, as well as competing visions

held by various family members may limit new opportunities. Each family member has a different vision of the business and different goals. 6. No written strategy. Long and short-term plans often remain undocumented. 7. Lack of proper accountability/ role confusion. Poor definition of roles and responsibilities limits accountability and efficiency. It is difficulty to know who is in charge of what 8. Lack of succession planning. Most family organizations do not have a plan for handing the ownership and control to the next generation, leading to great political conflicts and divisions.Uncertainty as to if, how and when the next generation will take control is the omnipresent elephant in the room. There is the reluctance by parents to let go the reins and develop successors. They fear loss of the business to their children who may not have the competence and commitment to continue with the business. The grooming, training, and development of talent in the next generation should start in the preadolescent years. Most family businesses do not have a succession plan and this becomes critical in the event of a sudden death or illness . Often the remaining family members do not know where to begin to pick up the pieces. This is the reason most family businesses do not survive beyond the next generation. Thus, determining who will take over leadership and/or ownership of the business when the current generation retires or dies becomes a very big challenge. This problem emanates from the significance that is attached to the business as being an important part of the parents' life. 9. Poor training. There should be a specific training program when you integrate family members into the business. This should provide specific information related to the goals, expectations and obligations of the position.Integrating family members into the business is often automatic rather than systematic. Family members may be placed into positions which are not good fit for them, and it is done so due to relationship in the family. There is often no formal training, documentation or business continuity plan if a family member has to retire or leaves the business. 10. Resistance to change/Overly conservative. As most family owned businesses are run by older family members, there is a resistance to changes and new ideas proposed by younger family members. Older family members try to preserve the status quo and resist change. Especially resistance to ideas and change proposed by the younger generation. The desire to keep the status quo can frustrate younger family members and prevent the adoption of new ideas. 11. Communication problems (Poor communication within the family cycles).Communications may be informal and may be influenced by political divisions or other relationship problems. Relationships within the family, rather than a clear process, drive communications, leaving them subject to motivation by anger, frustration or envy. Communication problems are often provoked by role confusion, emotions (envy, fear, anger), political divisions or other relationship problems. Often business relationships among siblings or between parent and child deteriorate due to an underlying difficulty in communication within the family. This behavior erupts into criticisms, judgments, conservatism, lack of support-and lack of trust all elements that affect the business. 12. Business valuation/valuation questions. There is no knowledge of the worth of the business, and the factors that make it valuable or decrease its value. There is lack of focus on what the business is worth or what will make it more or less valuable puts family members at odds with the marketplace.

13. Control of operations/ Control issues. It is ddifficult to control other members of the family. Family members with little day-to-day participation may have unusually high levels of control. Family members dominate boards and senior management positions. Reluctance to use outside advisers but instead preferring the counsel of the family when exploring business matters. Some family members may resent outsiders being brought into the firm and purposely make things unpleasant for non-family employees. But outsiders can provide a stabilizing force in a family business by offering a fair and impartial perspective on business issues. 14. High turnover of non-family employees. Outsider employees may sense that family members will always advance quicker; also they may become frustrated with family-directed management. When employees feel that the family will always promote over outsiders and when employees realize that management is incompetent they will leave or when employees feel that the family mafia will always advance over outsiders and when employees realize that management is incompetent. 15. No clear exit strategy. Little or no attention may be paid to how to sell, close or merge the business. There is no clear plan on how to sell, close or walk away from the business. Family businesses usually run till they fail and there is no point of the business do they call for a valuation or plan to increase or decrease its value. Rivalries between siblings and multiple family members which negatively impacts, management decisions and diverts attention to gaining power and influence by means of serious warfare. 16. Conflict and dispute resolutions are very difficult as they are transposed from the business to the personal or family arena. Often times conflicts are suppressed but not resolved and any open discussion of issues is often avoided .This inhibits rational decision making which may take a back seat in favour of family preferences. 17. Managerial succession due to lack of succession planning as is often a problem as is usually evidenced by serious succession conflicts. Transition of power and control from one CEO to another can be often difficult. This unprofessional behaviour comes about because owners: Face up to their limited lifespan. May unconsciously care little about what happens when they are gone may resent their successors may have an aversion to planning Succession is one of the largest challenges facing family businesses, and in most cases the process is resisted. Succession becomes an issue when the senior generation does not allow the junior generation the necessary room to grow, effectively develop, and eventually assume the leadership of the business 18. Lack of skills and talent. Family members may lack the skills and abilities necessary for their positions but it may be impossible to fire them. Hiring family members for high positions may prevent really good talents from joining the company as there is a "glass ceiling" Some family members may even lack the skills required for the job, and firing a family member is hard.

Family businesses often face pressure to hire relatives or close friends who may lack the talent or skill to make a useful contribution to the business. Once hired, such people can be difficult to fire, even if they cost the business money or reduce the motivation of other employees by exhibiting a poor attitude. 19. Compensation issues. Dividends, salaries, benefits and compensation for non-participating family members are not clearly defined and justified. Compensation and benefits for various family members may not reflect their actual participation or may conflict with non-family compensation packages. Paying salaries to and dividing the dividends among the family members who participate in the firm. But in order to grow, a small business must be able to use a relatively large percentage of profits for expansion. But some family members, especially those that are owners but not employees of the business, may not see the value of expenditures that reduce the amount of current dividends they receive. Advantages of family business 1. They have a long-term orientation or permanent management atmosphere .A permanent atmosphere is developed through strong family management which encourages long lasting relationships with customers, suppliers and other contacts. This enables business to take a long term strategy 2. Creates a sense of belonging and commitment to staff .The togetherness is a very powerful asset that energizes all involved with customers. 3. There is greater independence of action hence no pressure from the stock market to produce quick results because they are not quoted on the stock market and have no institutional shareholders. 4. Family culture serves as a source of pride and is evidenced by stability, strong identification .commitment, motivation and conformity in leadership 5. Greater resilience in hard times i.e. willingness to plough back profits. There arc financial benefits and the possibility of greater success. 6. Less bureaucratic and impersonal practice : greater flexibility in terms of working practices, working hours and remuneration 7. Quicker decision-making i.e. family can respond rapidly to changing technological, sociological and economical conditions 8. Provides for hands-on training and early exposure of the next generation to the business. There is the knowing of business due to early training from family members. This early exposure enables them to hear, see. observe, and absorb the business environment. This experience can teach children about the value of money, customer relations, dealing with employees, and how an organization operates. 9. Exposure to various aspects of the business positively affects children. As they grow they assume new and varied roles, developing skills m the business as they take on new roles. 10. Job opportunities to children of the business owners. It provides an opportunity to join the company needs to be _.\! to die children as a career option. Not all children will join the family business, but they should knew how to fully take advantage of the opportunity if they so choose. Throughout this training process children and parents who see each 'ineras peers have an optimal relationship. 11. The permanence of family business management tends to allow behavioural norms or traditions to emerge and a recognized way of doing things can develop. 12. Family-owned businesses typically have a set of shared traditions and values that are rooted in the history of the firm. Family businesses can honor their traditions if they realize they can

be guides to selecting the best course of action when there is a recognized need for change. It makes sense to honor traditions and trust them; they have survived because they have helped the family business prosper. Disadvantages of family owned businesses: , 1. Growth of the business is curtailed or hindered by limited access to capital markets or lack of capital, talents, new investments or resistance to reinvest in the business, family businesses often face challenges in growing or expanding regionally or internationally. There are growth limitations because of lack of capital and resistance to re-investment in the business 2. Nepotism as evidenced by tolerance of inept family members as managers, inequitable reward system and greater difficulties in attracting professional management 3. Constant family struggles i.e. family disputes and conflicts spillover into the business. 4. Paternalistic leadership. Control is centralized and influenced by tradition instead of good management practices. Tradition and family respect tend to override the pursuit of improved management practices. The paternalistic or autocratic leadership is characterized by resistance to change , high level secrecy and attraction of dependent personalities 5. Financial strain or problems due to milking of the business by family members and disequilibrium between contribution and competition 6. Succession dramas or disputes between parents and children , between siblings and between family . Most family organizations do not have a plan for handing the power to the next generation, leading to great political conflicts and divisions. 7. Unclear and confusing organizational structure: This soft structure is often manifested in frequent lack of clear policies and business norms for family members may lead to operational confusion. Confusing organization structure without clear division of tasks or division of labour 8. Cannot attract high quality personnel due lo the stereotypical image of the family firms. They arc regarded as dismal working environment which offer very little opportunity for non-family personnel. Attracting and retaining non-family employees can be problematic, for example, because such employees may find it difficult to deal with family conflicts on the job, limited opportunities for advancement, and the special treatment sometimes accorded family members. 1. Many family businesses also have trouble determining guidelines and qualifications for family members hoping to participate in the business. Some businesses try to limit the participation of people with certain relationships to the family, such as in-laws, in order to minimize the potential for conflicts. 9. Family conflicts often arise between parents and their off-springs , between siblings and between family and non-family business personnel. Often non-business issues greatly influence business operations. Family problems, including health issues, marital affairs and financial problems create difficult political situations for other family members Family Business Succession Planning Definition: Business succession planning is the process of deciding who will take over a business when the owner and other key leaders leave or pass on. It involves preparing how the business will be managed when the owner retires or departs due to death or incapacitation .It deals with setting up a mechanism for a smooth transition between the current business owners and the future owners of the business. i.e. it involves ensuring the continuation of the business

by identifying possible successors and preparing those people to step into leadership positions when needed. A succession plan is thus the method by which a business owner transfers ownership of the business to another party upon his departure, whether it's due to death, retirement or disability. The process also involves the assignment of assets and wealth accumulated by the business. Succession planning is especially crucial for small businesses, which often rely on just one or two top managers. If one of these people should become ill or retire suddenly, the business could fail unless steps have been taken to ensure someone is ready to step in. Some small business owners assume that a family member will take over the business, but it is best to create a formal plan and discuss any issues with the potential successor you have in mind. Perhaps this is why more than 70 percent of family-owned businesses do not survive the transition from founder to second generation. Succession planning is a long process that owners normally wait too long to address. The grooming, training, and development of talent in the next generation should start in the preadolescent years. Most family businesses do not have a succession plan. This becomes crucial in the event of a sudden death because the remaining family members do not know where to begin to pick up the pieces. At some point in the life of the business the owner should begin the process of turning the business over to others. No one likes to think about death or creating an exit plan. But failure to take on this responsibility will not only be costly to the owner but also to the family, employees and can lead to unnecessary and ruinous outcomes. Planning for family succession is one of the exit strategies of the founders of the business. If children or other family members are interested and qualified to run the business someday, now is the time to begin establishing a strategy to implement a successful transition plan. If planning for succession is absent, then someone is going to end up dictating how the business assets are transferred and/or who will assume the management of the family business. The issues involved in succession are too numerous to leave to chance, and without planning, it is likely the family business will not successfully continue. A carefully planned, documented and maintained succession plan is like maintaining insurance in place to assure the maximum potential for good fortunes for the business. Not having a plan in place is like "going naked" on insurance coverage, where you are betting the business that an adverse event will not take place Succession planning process should cover both the management and ownership of the business since the two are not necessarily one and the same. The owner may decide, for instance, to transfer management of the business to just one of the children but transfer equal shares of business ownership to all the children, whether they're actively involved in operating the business or not. Succession planning process: Family business succession planning takes into account the needs and interests of all family members involved with the business. The formation of a group called a family council often guides the communication process between family members and management. They address

issues such as rules for entry, conduct, and community relations. The succession plan of family businesses is a four-stage process 1. Initiation phase is where possible successors are introduced to the business and guided through a variety of work experiences of increasing responsibility. 2. Selection phase is where a successor is chosen and a schedule is developed for the transition. 3. Education phase is where the business owner gradually hands over the reigns to the successor, one task at a time, so that he or she may learn the requirements of the position. 4. Transition is where the business owner removes himself or herself from the daily operations of the firm. This final stage can be the most difficult, as many business owners experience great difficulty in letting go of the family business. It may help if the business owner establishes outside interests, creates a sound financial base for retirement, and gains confidence in the abilities of the successor. Challenges of implementing succession planning: The lack of planning, particularly in first to second generation businesses, is often the fault of the founder himself/herself. Many small family businesses lack succession planning due to : 1. It is expensive. Transferring business control and assets requires expensive, highly qualified professionals. 2. It is complex as it involves issues of transfer of management and ownership of the business. 3. It will take away time from the daily business responsibilities. 4. The process is often neglected by the founders who devote all their energies to the complexities of operating their businesses. Business owners may be reluctant to face the issue because they do not want to relinquish control, feel their successor is not ready, have few interests outside the business, 5. The apparent reluctance of the founder to give up leadership of the business that they have developed from obscurity. Usually the business is such an extension of his life that he has few outside interests and cannot imagine leaving the helm. As a result, his business dies with him. 6. Lack of interest on the part of the children to take over the family business may complicate the succession process 7. Lack of knowledge of the importance of succession planning to the owners themselves , their families and their business. 8. Others who recognize these issues too late in life may hastily turn over the business to an illprepared child, only to have him fail. 9. Some business owners wish to maintain the sense of identity work provides and unwilling to initiate the succession process 10. Succession planning for family businesses can be especially complicated because of the relationships and emotions involved - and because most people are not that comfortable discussing topics such as aging, death, and their financial affairs Benefits of succession planning: 1. Starting succession planning early provides adequate time to evaluate different options for succession as the children are growing up. Over time the founder can evaluate the

2.

3.

4.

5.

6.

7.

children's qualifications and earnestness to carry the business forward. The children can gain work experience in the business to evaluate if they wish to take over the business or to pursue other goals. An offspring can demonstrate performance ranging from exceeding your fondest expectations to the unhappy conclusion that the offspring is hopelessly unqualified to carry on the business. It will be important that their personal feelings and goals be considered. Evaluate the strengths and weaknesses of all potential successors, keeping in mind what will be best for the business. Succession planning facilitates on-the-job training to begin early enough with emphasis on a start-at-the-bottom approach to experience in job responsibilities. The more formal training the better the offspring will be prepared to keep abreast highly trained business rivals. Get the potential successors involved in job responsibilities that will give them insights in every facet of the business. A succession plan will have a much better chance if the successor works in the business long before taking it over. Allows for formal business education for the family business successor including a college degree in business administration including accounting and preferably going on to a masters degree in business. Succession planning helps to resolve sibling rivalries as the goal of a succession plan will be to accommodate each family member. Part of the plan may involve separating the business from the family assets. Family members who are not active in the business get family assets, while those who work in the business get shares. Business Lives On and Grows: Succession planning provides continuity of operations, including a seamless transition from one leadership team to another. Without a succession plan, the business expires with the owner. When you make plans for a successor to take over your business, you ensure that your business can live on even after you are gone. If you want your business to continue to grow to higher levels, from a small business to a mid-level or large corporation, it will take time. So one clear advantage of succession planning is that you allow your business time to grow and evolve into an even stronger entity. Eliminates Confusion. Succession planning helps eliminate confusion as to who will carry on the legacy of the business when the owner is no longer available to make decisions. It defines the new owner and a point person for matters pertaining to the business to limit family or business associate disputes. The succession plan outlines specific details of importance (such as the transfer of ownership for business bank accounts and assets) for a smooth transition between owner and successor. Peace of Mind. Appointing a successor formally helps to give the owner a peace of mind while running the business. Since the owner, has taken the time out to carefully select this person (or people) to run the business, he/she can be rest assured that it is in good hands when he/she leaves. The owner has plenty of time to train this person on the day-to-day duties and larger concerns regarding the business by having a succession plan in advance of his/her departure. Senior Management In Family-Owned Businesses

Senior Management in a Family Business Senior managers are an essential part of the family business governance structure and their quality directly affects the performance and family wealth. The senior managers are in charge of implementing the strategic direction set out by the board of directors and managing the daily

operations of the business . Having the right managers at the head of the business is a key element of family business success. Family vs. Non-Family Managers During the first years of their existence, family businesses are usually directed and managed by the founder(s). Their management structure may remain quite informal and the decision-making power is concentrated in the hands of the founder(s) and a few close relatives. This management structure usually works well during the early stage of development of the business . A driven and hard-working founder(s) is usually the main reason for the success of a family business at this stage. As the business grows in size and its business operations become more complex, a more formal management structure, a decentralized decision-making process, and a qualified management body become necessary to deal with the complexity of the business and the more challenging day-to-day operations. Unfortunately, many family businesses ignore the need for professionalizing their businesses and keep senior management positions exclusively for family members. Although many of these family members are skilled managers that add value to their business, often they are not qualified to perform such duties. Even in the cases where all family members are good managers, they may not have the specialized skills and expertise that the growing and more complex company requires. Successful families in business understand that in the longer term, some family members should step down and be replaced by more professional and skilled outsiders. Ensuring that the family-owned business has the right senior managers is a process that should start early, even as early as during the founder(s) stage of the family business. Some of the steps of this process are: 1. Analyzing the organizational structure and contrasting the current and optimal roles and responsibilities (compared to peer businesses ) of each senior manager. 2. Designing a formal organizational structure that clearly defines the roles and responsibilities of all senior managers. This should be based on the business current and future business operations needs. 3. Evaluating the skills and qualifications of the current senior management based on the new organizational structure. 4. Replacing and/or hiring senior managers. 5. Decentralizing the decision-making process and approval levels as necessary. Decisionmaking powers should be linked to the roles/responsibilities of managers and not to their ties to the family. 6. Establishing a clear family employment policy and making its content available to all family members 7. Developing an internal training program that allows skilled employees to be prepared for taking on senior assignments in the future. 8. Establishing a remuneration system that provides the right incentives to all managers depending on their performance and not their ties to the family. The following table summarizes how family businesses address some employment issues depending on whether they are prioritizing the family or the business:

Issue

Family First organizations

Business First organizations

Employment Open door policy for all family members. Only qualified family members join the company. Conditi The family-owned company often for family employment are clearly set and contain Policy becomes a safety net for those who can requirements concerning education and prior work experie not succeed outside the business. outside of the family business.

Compensation Equal pay for all. Everyone is paid the same, regardless of their experience and contribution to the business. Competent family members are expected to care for (via compensation, benefits, etc.) their less-than-competent siblings or cousins.

Compensation is based on performance and responsibility. Compensation is based on market and industry measures, n on family needs. Accountabilities and reporting relationsh are clearly communicated and understood. High performer highly paid. Family members may be terminated for poor performance.

Leadership

Leadership is based on seniority, rather than demonstrated competences or successes. Longevity in the family business may be more highly valued than working and succeeding outside the business.

Making sure leadership is earned. The family mantra is to the best and the brightest running the business: family o non-family. Non-family senior executives may be recruite from within the industry although some companies successfully grow their own top managers.

Business Resources Allocation

Business resources are used for family Business resources are used strategically. There is a clear members personal needs (housing, cars, separation of business and family assets. Budgeting and personal purchases, etc.). planning are important; earnings are used for growth initia or paid out as dividends.

Training

No formal training programs. Family Need for formal training is timely recognized. Trainings ar members are expected to intuitively learn scheduled and delivered to teach family members necessar business practices. business practices.

CEO and Senior Management Succession CEO and senior management succession is probably the most important issue that confronts businesses , including family-owned ones. This is because a business top managers are usually the drivers of its performance, growth, and survival. The issue of management succession is even more important for family businesses as it becomes particularly thorny as the family grows larger and several potential senior management candidates from different branches of the family become available. Many family businesses put off the succession planning of their senior managers until the last minute, which leads to crises that sometimes can cause the death of the family business. Poor senior management succession planning could indeed be one of the reasons most family businesses disappear before they reach their third generation.

Families in business might ignore the necessity of planning for the succession of their CEO for a multitude of reasons. Some of these reasons include: 1. Family members delaying the decision in order not to create potential frictions among family members in case several potential CEOs are available within the family. 2. Family members delaying the decision because no current family member or outsider is deemed capable of replacing the current CEO. 3. Family members avoiding to address this issue in order not to discuss the topic of the eventual loss of a family leader (the current CEO). 4. Current CEO refusing to admit that the business can survive without him/her and/or is afraid of retirement and refusing to address succession issues. Importance of a Formal Senior Management Succession Plan Senior management succession is a process that follows several steps in order to ensure proper succession to key management positions including the CEO one. A formal succession plan: 1. Ensures business continuity and thus increases the chances of survival of a family business as it is handed over from one generation to the next. 2. Ensures the skills and leadership necessary to replace any outgoing senior manager are available when needed. 3. should allow for the selection of the most competent person (whether it is a family member or not) as the next CEO. 4. It is crucial to involve all family members, the board, key senior managers, and other important external stakeholders in the selection process and make sure they agree on the next CEO choice. 5. A solid succession plan is crucial to sustaining a profitable business. This is often an unpleasant topic for business owners, so they ignore the problem until forced into a rush decision because of health and other problems. Unfortunately, hasty decisions like these can send a once-successful company into disarray as the inexperienced leader tries to learn the duties of his job with little preparation. 6. A smart small-business owner is a forward-thinker. He knows that at some point in the future there may come a time when he needs to pass the reigns of the company onto someone else, whether it's a family member or trusted employee. Succession planning is a logical step for a business owner who wants his company to keep running even when he's no longer able to head up operations. 7. Like a business plan, a succession plan is important because it gives the owner and her workers a guide for conducting businessonly this specific guide pertains to the circumstances that will transpire if the current owner leaves. Without a succession plan the business's fate is uncertain and could be left in the hands of a court. Also, if the business owner has multiple children or family members, it could cause disputes within the family about who should take over the company. One of the major reasons why a succession plan is important is that it helps maintain peace within a family or group of people in case the owner is no longer there to give his opinion in the matter. Steps of a Formal CEO Succession Plan

The CEO succession planning process usually differs from one family business to another depending on the complexity of the business, the degree of involvement of the family in it, and the availability of competent CEO candidates from within the family. The following is a step-by step process that can help family businesses get better prepared for their CEO succession: 1. Starting Early: Many family business advisors recommend starting the selection process of the next CEO as early as when the current CEO is appointed. This will ensure the continuity of the business and provide the company with a new CEO that was carefully chosen and well-prepared to succeed to the current one. The early start of the CEO selection process is particularly important if the next CEO is expected to be chosen from within the family. In this case, the process of selecting and grooming the next CEO from the younger generation would take longer than if the CEO is to be chosen from outside the family. In most family businesses, it is the current CEO who initiates the succession planning process. An active board can also play an important role by insisting on the establishment of a succession plan in case the current CEO is not taking this on early enough. 2. Creating Career Development Systems: A successful succession plan is one that selects the best possible candidate for the job, regardless of whether this candidate is related to the family or not. If the next CEO will be chosen from the family or its current employees, a rigorous career development system should be developed to prepare the potential CEOs. Such a system would enhance the competence of the CEO candidates by offering them any necessary education, training, and by giving them periodic feedback on their performance within the company. Some family businesses decide to hire an external CEO if no good CEO candidates are available from within the family or its employees. In this case, a committee of the board (Nomination Committee for example) should lead the succession planning of the CEO. The committee would start by setting the selection criteria for the next CEO before searching for suitable candidates. In addition, many family-owned businesses find it useful to employ professional headhunters to get access to a wider pool of candidates. 3. Seeking Advice: Particularly while narrowing the list of potential successors, the CEO should get advice from the external independent directors of the board. If these dont exist, trusted senior non-family managers should be consulted. Some families also find it useful to get the opinion of the family council in the selection process, especially if the CEO candidate is from the family. 4. Building Consensus: The success of the future CEO is largely dependent on his/her acceptance by the key stakeholders involved in the company. It becomes then mandatory to involve all key stakeholders in the CEO selection process including the board of directors, senior non-family managers, and family members. 5. Clarifying the Transition Process: Once an adequate succeeding CEO has been selected, a clear transition process for both the current CEO and the successor should be developed. This transition process would specify the transition date and also define the levels of involvement of the current CEO after retirement (advice to the successor, board membership, additional activities, etc.). 6. Emergency Succession : Many small businesses do not plan for emergency succession because they do not want to think about the occurrence of emergencies. But without an

emergency plan in place, the business could fail. Succession expert Every business should have an emergency succession plan that identifies skills and abilities interim leaders will need; regularly evaluates top employees for these skills and abilities; and takes into account the loss of more than one top manager. Businesses should identify areas where they might be at risk for losing key staff members, identify potential candidates internally to fill those positions and identify the need for training and development activities designed to close any gaps that may exist. 7. Listing Skills and Competencies : Effective succession planning requires the specific consideration of key skills and competencies that the organization will need. Beyond simply identifying positions that may become vacant, businesses need to look at the types of skills gaps that may exist when employees leave or retire or when new business requirements emerge. For instance, the increasing prominence of social media for many organizations means that skills in this area are important. 8. Identifying Internal Potential : One of the key benefits of succession planning is providing opportunity for internal growth and development. By matching skills needs with the availability of potential internal candidates, companies not only limit their risk, but also provide important opportunities for employees. Identifying potential internal talent can occur interactively; managers can ask employees to self-identify, indicating areas of interest they would like to develop. 9. Providing Training : Once identified, those with the potential to move into future vacant positions may have training and development needs that the company can address through coaching, training and educational opportunities. Providing those opportunities is an important way to ensure candidates will be able to move into positions as they become vacant.

WOMEN OWNED BUSINESS Woman owned business is a form of business that is started and run by a female or is a business in which women have significant ownership and management interests. The proportion of women owned businesses has substantially increased since 1980s.becuase of the increasing unemployment levels and interest in promotion of economic opportunities for women . Reasons for entering small businesses 1. Economic necessity. Some women are working full-time and still cant make ends meet. With the current strain on the economy having extra money coming in is not an option but a necessity. Some women are laid-off so being self-employed becomes the best alternative 2. Solving problems and sharing solutions. : For some women its not about the money its about solving a problem or sharing a solution. Inventors usually design new products to solve problems. 3. Hitting the corporate glass ceiling: Some corporate women feel like theyve taken their career as far as it will go. Theyre taken their career as far as it will go. Theyre dissatisfied by their options and want a career that will be more fulfilling. Small business is often the answer for these driven women who enjoy being their own boss

4. Freedom and flexibility: These are the two big reasons for moms, especially moms with young children, to start their own business. They can work from home, choose their own hours and have the flexibility to juggle their work life with their family life. Women need to have clarity about what drives them and what they want to accomplish with their business. 5. The desire to make a social contribution. Some women become business owners as a way of helping others 6. Women owned business owners are motivated by the need for independence-and achievement arising from the job frustration. This contrasts with men who are driven by the desire to be in control and to make things happen Characteristics of women owned business: Fits the profile of high energy, courage , discipline ,goal orientation, vision, enthusiasm and hard work Women tend to be more flexible , balanced, tolerant and realistic than their male counterparts Research indicates that women business owners are more prudent, less aggressive and easier to persuade Have inferior leadership and problem solving abilities when making serious decisions Women are less likely to break promises and less likely to disclose positive information to take advantage of confidential information Women are less likely to give gifts in order to obtain business Majority of women rely on personal and family savings or borrowing from friends and relatives or micro- credit lenders Most women start business in their late 20s and early 30s and majority lack any related business experience Most women often enter business without prior experience Most businesswomen tend to be more compassionate and caring and fellow women may feel comfortable approaching them with various issues. Women usually want to hear from everyone and will often base their decisions on consensus other than their own beliefs. This can be good, or bad i.e. women are generally indecisive and embrace the concept of empire building. Most women often go with their heart and not their brain. Men are all about getting down to business and because they are less emotional by nature, they have an easier time separating their feelings from their business. Women on the other hand, have a much more difficult time Challenges facing women-owned business 1. They tend to suffer from stereotypical problems such as not being taken seriously and lack of self-confidence. 2. Finance. Credit is one of the biggest problems, which businesswomen face in Kenya. They complain about the rigid formalities and procedures for availing credit. Women have limited access to material resources such as land and capital. Banks and other financial institutions are hesitant while providing finance to businesswomen because they dont have property rights and security. Banks ask for guarantee from their fathers and husbands which they seldom get. Banks also demand collateral for getting loans and as women have fewer rights to parents and spouses property they are unable to offer collateral which further restricts their access to bank credit .Due to weak social position, they are not allowed to seek finance themselves instead their husbands or brothers seek finance on their behalf

3. Survival rate. Women low survival rate compared to male owned business due to Undercapitalization of female firms at start-up Their life experiences in which they focus more on relationships and integrate business relationships into their lives unlike their male counterparts who are more profit and growthoriented 4. Multiple roles. Businesswomen all over the world find it difficult to balance work with family. Women play multiple roles that leave with less time to devote to business. Their duties are given priority as a wife, mother, daughter-in-law and daughter of the family. Duties as owners of small business come last in order of priority. Trying to cope up with the home front and work units is exceptionally demanding The huge amount of family responsibilities that put pressure on women to run a home, look after children and care for the husband and family limit women time for the business. 5. Family policies. Balancing work and family is very important for businesswomen all over the world and the role of family policy has been identified as very crucial in this regard. It is understood that with greater availability of child care facility women will tend to increase their time for participation in business activities. Lack child facilities and the absence of government aid nor policies that guarantee access to child care, inhibit the growth of women owned businesses. 6. Psychological factors/behavioural barriers. The psychological factors often pose insurmountable obstacles for women even when credit, capital and skills are made available to them . The subjective perception about ones own skills, likelihood of failure and the existence of opportunities are all highly and significantly correlated to a womans decision to start new business . The subjective perception of having sufficient skill has also been an important factor in starting a new venture. Majority of women do not believe they have the skills and knowledge necessary to start a new business. Gender stereotyped perception of self, lack of confidence and assertiveness appear to be major Barriers that hinder Women Entrepreneurs in Kenya from Risk Taking 7. Lack of knowledge and experience. Many times businesswomen are not fully conversant with the various laws, formalities and regulations on the formation and operation of business. Many of them are unfamiliar with market techniques, or do not possess the experience and ability needed to expand their businesses. Women find it difficult to manage business due to their lack of business and managerial experience prior to start-up 8. Education. Education in the area of business helps people to develop skills and knowledge which can benefit them in starting, organizing and managing their own enterprise. In general, better education is expected to yield better results in business performance as good academic background makes women confident in dealing with the problems in business in an effective manner. Women lacking education also lack information. As businesswomen are mostly illiterate they are prone to be financially exploited by others and tend to operate in the informal sector through out their life. In addition women complain of lack of knowledge of existing national support programmes and the credit agencies 9. Lack of training. There is inadequate training on basic areas of business management such as business planning, budgeting, financial controlling, human resource management, marketing skills etc 10. Poor infrastructure. The country has weak infrastructure which hampers the growth of business. Women have problem in accessing appropriate and affordable premises. 11. Networking .Networks are a major source of knowledge about womens business opportunities and they are increasingly recognized as a valuable tool for its development and

promotion. Networks are providers of information, possibilities and support. In Kenya women have significantly small networks 12. Role models. Lack of women role models in Kenya has contribution negatively to the growth of business. There exist a strong connection between the presence of role models and the emergence of business development. There exists a strong positive and significant correlation exists between knowing other business owners and a womans involvement with starting a new business. The influence of role model is gender related. That is an individual will be more influenced by another individual of the same sex, as ones aspirations and choices tend to be more influenced by persons of the same sex 13. Low Savings. Women in developing countries have low savings and with a low income it is difficult to save money and hence the probability of becoming a business owner diminishes as well. It is very difficult to save money for women for business purpose because at any moment a male family member (husband, brother, brother-in-law) can confiscate the accumulated capital for no other reason than that he is allowed to and there exists no protection for women in this respect. There is a strong positive relationship between income, saving and propensity to engage in business. Thus the higher the ability to save the higher is the probability to enter into self-employment. 14. Poor Access to Justice. Poor Access to Justice is a Challenge facing Business Women in Kenya. Access to justice is essential for ensuring smooth business operations, and it spans issues such as enforcing contracts and employment disputes. Yet Business Women in Kenya have difficulties when accessing justice. Using the formal courts in Kenya can be costly, complex, and time consuming for entrepreneurs. For women who are burdened with their multiple responsibilities in the household and at work and who do not have the know-how to navigate the government process, dealing with the complicated and often corrupt bureaucracy is another reason for avoiding the process. 15. Lack of management skills /Managing Employees. Managing employees is another challenge that Business Women in Kenya face. Finding and retaining good employees is essential for the success of a business, but can be difficult for businesswomen. Since women-owned businesses tend to be smaller, they are often less likely to provide job security and retain good talent. Some women find that they are not taken seriously by their employees, especially in non-traditional sectors, and they have to make a special effort to win their respect. 16. Socio-cultural constraints have limited womens access to a meaningful business opportunities and experience 17. HIV/AIDS . HIV/AIDS has a direct effect on womens business development in Kenya as a lot of resources are diverted to take care of those affected by the epidemic . It is imperative that all community/family/ business networks be engaged in the process of building the social and cultural capital required to address the problems 18. Competition. Competition is seen in form of the size of Market Share in the Rural Setting. There is limited expansion in these settings. New Competitors such as mini-super Markets with wide varieties of products for those who were engaged in selling household products are emerging. 19. Lack of accurate information. There is lack of knowledge on Business Management which include; management of debtors and proper Record Keeping. There is also need for Effective Communication to negotiate/bargain favourable with the Customers. 20. Lack of support. Many rural Women business owners in Kenya are unaware of support mechanisms that include key Stake Holders like the Government or other income generating activities. In the absence of such coordinated effort, these Entrepreneurs will continue to

suffer eking a living at survivalist level only. This is coupled with the reluctance of the formal Public Institutions to help women in micro- and small-scale enterprises. Intervention/Support of women businesses While Kenya has long recognized the need to support business development to boost economic growth and job creation, the existing policy interventions and programmes are not having the anticipated impact. The narrowing of the gap between the growth in women business development and the contextual reality is contingent on skills training and tertiary education; removal of hidden and subtle gender discrimination; change in existing prejudices and stereotypes regarding the role of women in a male-dominated economy; the demand for socioeconomic rights; and policy advocacy. The effective voice of women in business must shift from the survivalist sector to small business ventures and medium to large-scale enterprises. As women are an emerging sector in the global business environment, support is a potentially important means of raising the level of entrepreneurship in society overall. Women business owners and working women face certain challenges and obstacles that men do not. Working women who have children experience even more demands on time, energy and resources, and women face gender discrimination in business and on the job. But women are not less successful than men, in fact, statistics show that women are starting businesses at more than twice the rate of all other businesses. Women are resourceful, and able to succeed, despite many challenges. Support for women in business encompasses the following interventions: 1. Education. The probability of a woman becoming ana business owner can be increased by exposure of the individual to formal learning experiences and to the tasks associated with owning a business. There is need for education from dependency and entitlement to selfsufficiency and economic growth; 2. Mentorship programmes: This exposure can be accomplished through mentors or role models in the workplace, home, career guidance, internships, 3. Networking programs: Effective networking that aims to inform women entrepreneurs about policies may have secondary benefits in terms of encouraging women in business. Establishment of networking links, international partnerships, community participation and access to national and global markets. Information dissemination: there is a pervasive lack of information about disability issues in business development. Promotion of networks with other women ( nationally and globally) : success depends on association with other entrepreneurial women with great ideas, and a broader, more creative perspective. Networks and Resources For Overcoming Women's Challenges in Business. Two of the most effective tools in overcoming challenges working women face include networking and finding a mentor. And two of the biggest challenges women face are finding funding and getting government contracts. 4. Training /Access to information and training. Provision of business skills training, facilitation of business incubation, mentoring and support services. In an effort to support women's business development in Kenya, MOTI, MOA and MOE&NR provide training services. The following training is now on offer: training in business management; information on import and export trade, marketing, training in agro-processing and agribusiness as a whole, information on counterfeit products and access to business advisory

services. This information is disseminated through chief's gatherings (barazas), seminars, workshops and the media as is appropriate 5. Government policies. Establishment of appropriate changes to trade, investment and tax policies that promote sustainability and does not stifle the economic dream of women business owners .Primary research has revealed that only a small percentage of women businesses disabilities has benefited from the government's policies and strategies. Except for some grants they receive through the Ministry of Gender, there are no policies that secure assistance in their favour. For the other women , it is just as difficult to measure the impact that a few favourable policy elements have on their businesses. The government spokespersons interviewed indicate that women are becoming increasingly aware of the benefits of belonging to a women's group. Though still only a small percentage, there are an increasing number of women who attend training and participate in export marketing. As a result, employment has been created, incomes have increased and generally business growth is being realized by the women. It should be noted however, that the impact is not widespread: many women do not participate in the initiatives available to them; in particular, most women with disabilities. In general, they have remained isolated and as such they are largely unaffected by the help on offer. Those who have benefited are the ones in receipt of special services; an example outlined is a group of women businesses with disabilities involved in beekeeping and raising tree seedlings for sale in Karatina. These activities are coordinated by the Forest Department in the Ministry of Environment and Natural Resources. 6. Review/changing of regulatory frameworks that stifle business women and accelerate economic growth 7. Family support: Married Women should be given support by their spouse in respect of Finances, motivational encouragement, advice and actual involvement in the running of Business. 8. Financing : Access to Credit by women at the level of Micro and Small-scale businesses , should be facilitated through innovative Programs and Financing arrangements by the Government and other Finance Institutions. Improving knowledge about the financing of women-owned businesses and removing obstacles in this area. The establishment of the Women Enterprise Development Fund (Women Fund) The setting up of the Women Fund is expected to greatly empower women toward growing their businesses. The respondents agree that for a long time women have been at a disadvantage in comparison to their male counterparts. This is especially felt in their ability to access business finance because of the stringent loan conditions in lace at the commercial banks

9.

Overcoming Gender Discrimination Against Women in Business : Gender lines are drawn early, and exclusions for women continue throughout adulthood. Not only are women discriminated against in private businesses, but also by the central government. Gender bias begins in elementary school continuing on into college. Even though more women hold higher degrees than men, they are still passed over for jobs that go to less-educated and lessqualified males, and they also receive less compensation than men for the same job. 10. Government support : The relevant government ministries, in conjunction with other stakeholders, need to develop and implement comprehensive policies that will encourage and support women's entrepreneurship on a sustainable basis. MSE development comes under the remit of several Kenyan government ministries, namely, the Ministries of Labour and Human

Resource Development (MLHRD), Trade and Industry (MOTI), Youth Affairs (MOYA) and Gender, Sports, Culture and Social Services (MGSCSS). But even within these Ministries, there are only a handful of initiatives which directly concern the development of women's entrepreneurship. The role of the government appears to be that of regulator as well as that of policy maker with regard to the development of the MSE sector. 11. Provide technology transfer that will lead to increased participation of women-owned businesses in international trade and the global economy, in particular through the use of new technologies and international networking. The need for global integration of the economy for women-owned businesses. For example, the internationalization of capital could provide new and diverse sources of finance for women-owned businesses and fulfill their needs for funding and additional services. Development/facilitation of information and communication technologies that bridge the gap between new enterprises and established businesses New technologies would have important implications for the development and expansion of women-owned businesses, in terms of bringing entrepreneurs and investors together, the internationalization of business activities, and entrepreneurial education 12. Role of Non-Governmental Organisations (NGOs) : Several NGOs are involved in the promotion of women's entrepreneurship. These include MFIs such as Kenya Women Finance Trust (KWFT), Kenya Rural Enterprise Programme (KREP), Faulu Kenya, Jitegemee, Kenya Ecumenical Loan Fund (K-Eclof), Organization of Women in International Trade (OWIT), United Disabled Persons of Kenya (UDPK), Federation of Kenya Employers (FKE), National Council of Women of Kenya and the Kenya Institute of Management, to mention a few. UDPK is involved in developing disability policies, inputs in HIV/AIDS policies, training disabilities' organizations, capacity building for disadvantaged groups and networking with MFIs to provide initial capital for WEs with disabilities. Overall, UDPK has been greatly involved in creating awareness and assisting in the economic empowerment of women with disabilities and the parents of children with disabilities. The MFIs provide financial services and training to their clients. KWFT is the only MFI that is dedicated solely to WEs. However, the other MFIs have a large number of women clientele and are worth mentioning in this study. Examples of MFIs offering finance and capacity building to WEs are mentioned above. The team learned that K-REP Bank is one of the three participating banks which disburses funds under the Growth Oriented WEs Programme. (OWIT) is primarily involved in formulating gender policies and facilitating networking for women in international trade with a view to capacity building, market access and information dissemination. In summary, many of the NGOs are involved in providing credit to MSEs, capacity building and helping them to access markets. The Kenya Institute of Management (KIM) is a key player in supporting women's entrepreneurship. It does this through training, consultancy services and research and information dissemination. KIM has also made a remarkable contribution by providing training material for clients involved in training women in business start-up, management and planning. A recent contribution by the KIM is the development of business planning modules for the ILO/AfDB GOWE programme which is being implemented by IFC.

The Chamber of Commerce Women SACCO organizes trade fairs and exhibitions and continually conducts feasibility studies on market information for WEs. The main support the SACCO accords business women is helping them access credit for capital and investments through the cooperation enjoyed with equity and co-operative Banks. The Chamber helps women with product development, capacity building of upcoming SACCOs, business linkages and HIV/AIDS support. The SACCO has branches across the country and is expanding its outreach. The Federation of Kenya Employers (FKE) has the role of building the capacity of WEs Associations (WEA) by providing a voice and improving lobbying skills. It also facilitates meetings with stakeholders in gender mainstreaming, coordinates skills training in collaboration with ILO, promotes awareness on HIV/AIDS through WEs and offers information to WEA on organizing trade fairs. FKE houses the ILO/Irish Partnership Programme which deals with gender mainstreaming, disability and HIV/AIDS issues in so far as they affect women's entrepreneurs. 15. Role of donors : Since the 1980s and increasingly through the 1990s to the present, donor organizations have been involved in promoting small business in Kenya. Some of these include United Nations Development Programme (UNDP), United Nations Industrial Development Organization (UNIDO), Netherlands Development Organization (SNV), and International Finance Corporation (IFC), Department for International Development (DFID) and United States Agency for International Development (USAID). UNIDO is involved in product design and development, packaging, branding and e-commerce. It also assists in developing agricultural value-added products. In addition, UNIDO provides capacity building and industrial services. The SNV, on the other hand, specializes in advocacy, lobbying, capacity building and the promotion of Information Communication Technology (ICT) in rural SACCOS. UNDP is primarily involved in capacity building, collaboration linkages, policy formulation and offering support to stakeholders, e.g. government and the private sector. In this regard, the Kenyan Government has received a lot of support towards the implementation of the Youth Fund and the Women's Fund. The recently launched Women's Fund is collaboration between UNDP and Equity Bank. The International Finance Corporation is implementing a special programme targeting Growth Oriented women business , with funding from the African Development Bank's (AFDB) Credit Guarantee Facility. This programme provides business planning, training and technical assistance, project financing and access to business information to WEs with a growth strategy. Some of the Growth- Oriented women business should ultimately benefit from this programme. The International Labour Organization (ILO) is involved in gender mainstreaming in business development services provision, capacity building, promoting advocacy and voice and organizing trade fairs, trade links and value chain analysis. Through its work with WEDGE, ILO is involved in developing innovative support services and products such as technical tools. Finally, the research team has learned that gender issues are at the heart of USAID's intervention. Apart from funding the Omena Fish Women Traders in Kisumu and linking it to overseas markets, its strategy supports intermediaries, particularly Kenya Women Finance Trust (KWFT) and the Association of Microfinance Institutions (AMFI). The impact of the Omena project is

limited to the Kisumu area only. This study did not come across any specific programmes, supported by donors, which target women business with disabilities.

PROMOTING SMALL BUSINESSES (INTERVENTION)

Intervention is an attempt by government and its agencies to improve the economy in a way which is intended to produce an increase in economic benefits which would not have happened had everything been left solely to market forces. Much of the economic intervention is needed to promote more business enterprise through small businesses. The governments national small business strategy seeks to address the following common problems faced by small businesses :

1. 2. 3. 4. 5.

An unfavorable legal environment Lack of access to markets and procurement Lack of access to finance and credit Low skills levels Lack of access to information 6. Shortage of effective supportive institutions 7. Socio-cultural barriers : Cultural barriers: Variations in levels of small business can be seen in different regions of the country. It has been argued that some societies have economic and social structures that encourage and facilitate enterprise while others do not. On the other hand , some societies have been observed to have a dependency culture that does not allow them to start business or even think of self reliance. The individuals in these societies lack the knowledge/ skills and the mindset to pursue any business opportunities that may exist among them. This social disadvantage can be tackled through entrepreneurial facilitation or entrepreneurial process even though government intervention is always viewed with suspicion because; it can have political overtones

8.

Education Barriers: Lack of the right type of attitudes and behaviours.in individuals can be a big impediment to small business development. Enterprising people are characterized by a self reliant approach to life and exhibit behaviours ranging from persuasion and problem solving to independent action and these are supported by a collection of skills and attributes 9. Gender Barriers:- there are obstacles which exist for women based on gender discrimination. Discrimination against women is seen in raising business finance for start-ups and operating existing . Economic gender discrimination occurs when women are given different financial terms there is also institutional discrimination where women are presumed to operate their business less successfully.
Intervention has costs and should be considered only if it is likely to result in a net benefit .The intended outcomes of the government small business strategy or the main objectives of promoting or of the development policy of small business include :

1. Alleviating poverty, by making it possible for poor people to generate income to meet basic needs; 2. Reducing poverty through employment creation i.e. to create more employment opportunities to reduce the unemployment situation in the country The main aim is thus to increase

employment and reduce unemployment especially 0n areas where big businesses cant operate e.g. rural Kenya, e.g. restaurants, repairs, convenience shops. 3. The creation and redistribution of wealth, income and opportunities 4. Contributing to economic growth, by improving innovation and thus competitiveness. 5. The national small business development strategy also seeks to strengthen cohesion amongst small enterprises and to level the playing field between big and small business 6. Make an important contribution to the infrastructure needed to support larger competitive businesses 7. Small Businesses can help to counter regional economic decline or regional economic imbalances 8. Provide increased competition against larger businesses which are forced to improve quality and prices. Increase competition by increasing wealth of small businesses i.e. to promote and protect the survival of firms that are not fit to compete in the global free markets i.e. promote competition or the competitiveness of small firms. 9. Economic regeneration and revitalization i.e. move towards economic renewal 10. Social cohesion i.e. increase in social togetherness of members of the community 11. Promote efficient markets and in the process increase wealth. 12. Promote technology diffusion through the increase of wealth. 13. Move toward self-reliance: To encourage people particularly in rural areas to be self reliant and prevent deprivation. 14. Part of Industrialization policy: Creation of an environment for industrial policy that encourages people to start new businesses.

Government promotion of small businesses :

1. Business management support services : The government and its agencies provide a wide range of business management support services to small enterprises, such as:

Developing business plans Doing market research Managing a small business Legal requirements of small businesses Marketing Business development Advice on government tender processes, etc

2. Access to loans for starting or expanding small business: The Government provides financial assistance on priority basis to small scale industries in the form of subsidized loans, credit guarantees, grants, subsidies, etc. Lack of access to finances continues to be the major problem faced by people who want to start their own businesses, or to expand their businesses to become more profitable. Commercial banks generally do not regard the majority of people as bankable or creditworthy. An important part of the national small business strategy is therefore to create an enabling environment for entrepreneurs and small businesses to access finances. Although a number of institutions have been set up, we still have a very long way to go.

Grants : The first and the foremost form in which the government provide financial assistance to the small business sector are the grant. Grant can be described as financial

support that is provided by the government to any applicant, where the applicant is not required to pay back the money. The government provides a percentage of the total financial requirement of a small business unit as grant and the rest has to be arranged by the entrepreneur. Also, the grant is passed on to the small business enterprise through the various government offices and the financial institutions. Loans: The government provides the financial assistance to the small business enterprises is by way of guaranteeing the loans that are provided by the various financial institutions. It has been observed that in many cases, due to the small business enterprise being new or there are not sufficient assets to cover the loan etc, the financial institutions are reluctant to provide credit facilities to the small business sector. But when the government provides the necessary guarantee for the loans, the credit facilities are easily made available to the small business enterprises. This is another way by which the government helps the small business sector to fulfill their all the financial needs. Apart from all these, the various government offices concerned with the development of the small business enterprises also provide the necessary training and counseling to the small business enterprises. Business Formation: Government's role in business includes recognizing business entities and permitting their operation. This includes charters for corporations and registrations, licenses and permits at the local levels of government. 4. Sound Business Infrastructure: Government bears the responsibility to ensure that the country has a sound business infrastructure. This includes maintaining a level playing field for businesses, regulating commerce and enforcing the laws of the land---civil and criminal, including property rights, contract law and the resolution of commercial disputes. 5. Business Promotion: Government has a responsibility to promote a healthy business environment. This includes implementing growth-oriented taxation policies, negotiating healthy trade agreements with foreign institutions, providing educational assistance and guidance to businesses and stimulating business investment. This agency is tasked with helping entrepreneurs obtain capital financing, teaching business skills and sharing business ideas. Government has a responsibility to enforce laws related to business operation. 6. Education and training : Development of positive attitudes toward business development and to make them realize that business development is their best option out of their situations. Thus, there is need for government educational interventions to: develop the right competencies (Skills and attributes) and behaviors- associated with business orientation. Education can be useful in the economy for : Encouraging commercial awareness Raising the social standing of the business owner Creating awareness of small business ownership as a career option. Developing the necessary business skills Stimulating the application of business knowledge a qualities Providing individual s with a sense of autonomy, independence and self - confidence and these qualities are necessary in starting a business Broadening the horizons of individual thereby making them better equipped to perceive business opportunities 7. Addressing regional economic imbalances through the redistribution of resources to encourage an environment of entrepreneurship or business development
3.

8. Affirmative action in the form of government procurement policy ration of government contract on the basis of gender removal of institutional gender discrimination Justification for intervention. Government justifies intervention because there are obstacles and barriers preventing small business development and that these obstacles occur because there has been failure of some sort and that intervention is to correct this failure. The failure can be in the market, in government or economic systems which will determine the nature of intervention. Thus there is no justification for intervention if there is no failure. Some of the obstacles cited by government to justify intervention include: 1. Market failure: Small businesses face greater challenges than bigger businesses such as:a) Large businesses possess certain advantages over small businesses including: 1. Discriminatory barriers or existence of imperfections in markets: large businesses have the power to dominate the markets and use it by means of marketing manipulation, products differentiation and predatory practices. This results in many market failures that leave small businesses at a disadvantage and are likely to be there permanently unless steps are taken to address the situation. 2. Large businesses use their high turnovers, size, economic power to dominate consumer and factor markets in terms of marketing expenditure to make it difficult for new entrants to gain foothold in their market. 3. Large businesses have several economies of scale in terms of procurement where they take advantage of quantity discounts, organize just-in-Time contracts that shift their burden of stockholding to the suppliers. 4. In the labour market, they can attract the best staff with their competitive remuneration packages and career prospects for employees. 5. Compliance : Large business also find it relatively easy to comply with statutory and administrative regulations imposed by government These regulations can impose relatively heavier costs fixed on small business. b) Small businesses face several barriers and obstacles that result in market failure 1. Lack of economies of scale, 1. Lack of proportionate market information 2. Limited supply of resources (human, financial and technical) 3. Technology gaps -have difficulty evaluating benefits of adopting new technologies due to dependence on external sources of scientific technological/information and the need for tailored technical responses. 4. Financing, small businesses have more problems obtaining bank loans and other capital due to lack of collateral, unproven track record, risk a verse investors and lack of information on alternative financing sources. Thus these market imperfections or market failures need to be addressed and hence the need for small business support or .intervention. 2 Economic System Failures : both national and international policies . 1. System failures also occur on an international scale as national-policies on small business sometimes contradict and cancel each other .National policy measures may lead to limited impacts on smaller firms in other countries . 2. Various factors may interact to cause discrimination against newcomers e.g. registration procedure, standards , norms , labour and product market regulations e.t. c. that are particularly disadvantageous to small business

3. National competition policies also vary widely across countries in their treatment of small business for which abuse of market power is a formidable problem .Such cross boundary effects raise the question of how countries can take advantage of the opportunity created by the trend toward globalization and how together they can alleviate unnecessary obstacles to the international activities of smaller firms Arguments against intervention:2. Intervention should only be justified if overall welfare improvements resulting from such efforts justify the associated costs and that there is no better way of achieving the same 3. Supporters of a free enterprises economy argue against interference in the market forces of supply and demand through the price system. They contend that only those who are capable of accurate interpretation of the forces of the market can reap economic rewards and this will consequent result in efficient utilization of economic resources. It is therefore argued that there is no need for intervention to promote enterprises or small business as enterprising people will avail themselves of opportunities which will result in far greater welfare than decision made by central govt. 4. Critics argue that if there is need for services such as information, advice and training then these businesses should pay the market price for consultancy service an offer 5. Many small businesses do not want to grow as they are lifestyle businesses. Any government assistance to such businesses may not achieve the objectives of intervention, hence wasting the taxpayers money 6. Government intervention has been criticized for encouraging a culture of dependency (handouts or the grant mentality) and discourages small businesses from creation of a competitive strategy for their business. 7. Job creation i.e. an attempt to deal with a serious unemployment problem (to achieve desired benefits of more jobs).However , there is need to consider other factors which may affect the reasoning in support of job creation such as:- The transfer effect i.e. some jobs in small businesses may be the result of transfer of work from bigger businesses, which in turn may have resulted in efficiency gains but may not lead to net job creation .

SMALL BUSINESS RISK MANAGEMENT Concept of Business Risk Risk means that there is a chance that you wont receive a return on investment. It is an exposure to the possibility of the variability of expected outcomes from the business . The business owners have to consider the kinds of events that could pose a risk to their business and take steps to mitigate them. A business's exposure to risk negatively relates to worth. A business more exposed to risk is worth less than an identical business exposed to less risk. Reducing risk is therefore important not only in helping your business succeed but also in maximizing its value. Effective financial management is a key to success for any small business. Business owners must be adept at balancing income, expenses and debt in a way that ensures the financial sustainability and growth of the organization. Being aware of external and internal factors of financial risk is vital to mastering the art and science of financial management. Types of risks:

Business Investment Risks Making business investments usually carries different risks. Two types of risk found in the economic marketplace are systematic and non-systematic risk. Systematic risk is also known as market risk; it includes the risk involved in the overall economy or investment market. Nonsystematic risk usually relates to a single company or a single type of investment. Different types of risks affect how business owners approach investment decisions Systematic Risk: Systematic risk refers to the chance an entire market or economy will experience a downturn or even fail. Economic crashes, recessions, wars, interest rates and natural disasters are common sources of systematic risk. Any business operating in the market is exposed to this risk, and the amount of systematic risk does not vary between businesses in the same market. Therefore there is little small business owners can do to decrease their exposure to systematic risk. Unsystematic Risk: Unsystematic risk describes the chance a specific business will experience a downturn or even fail. Unlike systematic risk, unsystematic risk can vary greatly from business to business. Sources of unsystematic risk include the strategic, management and investment decisions a small business owner faces every day. Investors decrease their exposure to unsystematic risk by diversifying their portfolio and holding ownership in a variety of companies operating in a variety of industries.

Strategic Risks. Strategic risks result directly from operating within a specific industry at a specific time. So shifts in consumer preferences or emerging technologies that make your product-line obsolete or other drastic market forces can put your business in danger. To counteract strategic risks, youll need to put measures in place to constantly solicit feedback so changes will be detected early. Legal Risks/ Compliance Risk. Risks associated with compliance are those subject to legislative or bureaucratic rule and regulations, or those associated with best practices for investment purposes. These can include employee protection regulations like those imposed by the Occupational Safety and Health Administration (OSHA), or environmental concerns like those covered by the Environmental Protection Agency (EPA) or even state and local agencies Changes in tax laws and industry regulations can eat into small business profit margins. Companies might find themselves unable to meet debt obligations due to large unforeseen expenses, such as the mandatory installation of new safety systems or a hefty tax on carbon emissions. New laws can even push companies out of business entirely, such as when popular pharmaceuticals or food products are banned by a government authority. In the case of regulatory and tax changes, keeping enough cash on hand to cover unforeseen obligations and remaining aware of expected tax changes can help reduce the risk of default. In the case of banned products, companies must be adaptable enough to change products or business models quickly to survive.

Business Risk/ Market Risk. : Business risk refers to the chance a business's cash flows are not enough to cover its operating expenses like cost of goods sold, rent and wages. Unlike financial risk, business risk is independent of the amount of debt a business owes. There are two types of business risk: systematic risk and unsystematic risk. Business risk is the risk that results from your decisions about the products and services you offer. When you decide to develop and market a particular product, there's a risk that the product won't work as well as you hoped or that your marketing campaign will fail. Other business risks include changes in the cost of raw materials or shipping and managing technological developments that affect sales or manufacturing Current market conditions and trends pose a risk to new businesses. Market can affect new businesses depending on the nature and location of the business, prospective competition and product pricing. Markets that are overly saturated with the same products and services can be detrimental to a new business ability to gain significant market share. Business owners can effectively manage market risk by performing a market analysis, which helps determine the market potential for their particular product or service. A marketing plan can help define marketing areas as well as uncover customer needs. Properly identifying market risk is necessary to manage and/or avoid the risk all together. There's rarely a 100 percent safe path in the business world. Developing a new product or moving into a new market carries a risk of losing money, but not expanding or growing can be just as risky, allowing more daring competitors to gain market share. When weighing alternatives, look at the probability of business risk from each choice and the consequences if the worst happens. Then you have to balance the chance of success against the loss to your company if you fail.
Economic Risks: Companies are exposed to financial risk from various aspects of the overall economy. Weakness in the economy, specific markets, industries or demographic groups can cause sudden drops in demand for particular goods or services, leaving small businesses with less money than they had anticipated. Negative shifts in demand can cause prices to drop across entire industries, putting all businesses at risk by quickly lowering profit margins and weakening income statements. Economic risk factors are uncontrollable from within an organization. Creative companies find ways to adapt their product offerings and business models to changing economic conditions, and are able to pay their debts and obtain new financing on a consistent basis.

Interest Rate Risk. Interest rate risk occurs when changes in the overall economic market affect specific types of investments. This type of risk commonly affects the bond market. As interest rates increase, new bonds must be issued with higher interest rates to attract investors. This drives down the value of old bonds issued at lower interest rates. The opposite occurs when interest rates lower in the overall bond market. Inflation Risk. Inflation occurs in an economy when too many dollars are chasing too few goods. Rising economic inflation reduces the purchasing power of an investors dollar. Not only can investors purchase fewer investments, investors will also face lower returns on current investments as inflation eats away at the overall return percentage of

investments. To offset inflation risk, investors will demand higher interest rates, which may create an imbalance in the investment market. Currency Risk. Currency risk occurs when business investments in foreign companies or economic markets increase or decrease in value based on the current currency exchange rate. Investors may also face currency risk if they invest money in mutual funds or money markets that offer international investments. Currency risk may be mitigated by investing in multiple international markets at one time. Liquidity Risk. Liquidity risk is the inability to buy or sell investments quickly on the open market. This risk may also occur when investors are unable to buy or sell investments at a reasonable price. Investors often face higher liquidity risk in over-thecounter markets and small-cap stocks. This risk is higher because investments in these markets usually have lower investment demand.

Financial Risk. Financial risk refers to the chance a business's cash flows are not enough to pay creditors and fulfill other financial responsibilities. This is the probability of a financial loss, which would prevent the business from seeing a positive return on its investments or business practices. With proper risk management, businesses can turn a potential financial pitfall into an advantage by working to mitigate losses or turning downturns in revenue into tax benefits at the end of the year. The level of financial risk, therefore, relates less to the business's operations themselves and more to the amount of debt a business incurs to finance those operations. The more debt a business owes, the more likely it is to default on its financial obligations. Taking on higher levels of debt or financial liability therefore increases a business's level of financial risk. Direct financial risks have to do with how the business handles money including accounts receivables, debt load, sources of income, interest rates and foreign exchange rates. Accounts receivables risks may arise when a few major close their doors or refuses to pay their bills which consequently affects the ability of your business to meet its own current obligations. If your business model brings in both up-front payments and receivables, keep the proportion of your up-front business large enough to meet current expenses in case receivables turn sour for a month or two. If your business relies completely on receivables, build up a cash reserve dedicated to meeting up to three months , current expenses to stay afloat in case of nonpayment issues. There are Risks of Financing small business through debt. Debt financing is viewed by many businesspeople as a necessity for growth and expansion in a small business, but there are a number of risks associated with financing a company from any source other than earned income. Debt financing can impose a large burden on companies and their owners if it is not managed properly. Manage your company's debt wisely and familiarize yourself with the risks of financing a small business to avoid the following pitfalls: Personal Liability: One of the greatest financing risks for a small business is the personal liability implied in a sole proprietorship or partnership's debt. If your business closes its doors before it is able to pay its debt, you could find yourself with a personal debt burden that could take years to repay, and might even end in a personal bankruptcy. Finance growth

at an easy pace in the first few years of operations to avoid accumulating too much debt before your business model begins to sustain your operations. Credit Risk : Credit risk occurs when companies are unable to repay investors or pay out investment contracts, such as fixed annuities. Credit risk also relates to bond issuers who cannot pay interest or principal at maturity date of the bond.. Relying too much on debt financing can have detrimental effects on your personal or company credit score if you do not make payments reliably. Debt restructuring, missed payments and defaults all serve to lower your credit score. Avoid taking on debt from too many sources; focus on repaying a few creditors at a time before borrowing from anyone else.

Interest Rate Risk : The risk of fluctuating interest rates on new loans is inherent in any borrowing transaction. If you borrow at a fixed interest rate before the prevailing rate on new loans goes down, you may find yourself making larger interest payments than competitors who took loans at the lower rates. This can impose an opportunity cost on your business, cutting into the profits that would be attainable by paying a lower interest rate. This factor can, of course, work in your favor, if prevailing rates shift higher after you enter into a borrowing agreement. Investor Control: Large investors, such as venture capital firms, often require you to give up an ownership stake in the business. While an investor owns a stake in your company, he will likely exert a great deal of control over organizational strategy and decisions, according to Business Knowledge Source. This can cause your company to take strategic directions contrary to your original vision, often in favor of short-term profits and at the expense of long-term sustainability. You must eventually buy out an investor's ownership share, at a cost considerably higher than the original investment, to regain managerial control. Incorporation Risks: If you decide to finance your small business through a stock offering, you will face a number of risks related to the dilution of company ownership. Rather than having one or a few investors making managerial decisions, as with angel investors, a publicly traded company must serve the needs and desires of hundreds or thousands of individual owners. Stockholders usually have the right to vote on board member elections, board members have the power to appoint key executives, and executives control company operations. This system can cause an original business owner to eventually lose all control of the business.

Operational Risks/ Performance Risks : Operational risks result from internal failures e.g. businesss internal processes, people or systems fail unexpectedly or due unforeseen external events such as transportation systems breaking down, or a supplier failing to deliver goods. The risk of failure cannot be discounted when considering financial risk factors. Sole proprietors take on personal liability for all company financing; if the company closes its doors, the business owner can find himself in serious financial trouble, possibly resulting in personal bankruptcy. The risk of failure is an ever-present reality that entrepreneurs must face with confidence and caution. Aside from outright failure, a businesss income statements may turn out weaker than expected in a given quarter or year, leaving it with less money to repay debts, and weaker valuations to show to lenders. A number of factors can cause weaker-than-expected performance; new competition, quality issues and ineffective planning are just a few. Operational risks exist in the way the business tries to carry out your decisions. Even if you decide on the right product to manufacture, weaknesses in your supply chain, outdated manufacturing equipment or a poor sales force can make it impossible to generate the profits you anticipate. A risk-management strategy that focuses on management decisions and ignores how the staff operates can leave you with a dangerously high risk level. If your IT department doesn't maintain Internet security, for example, one hacking incident could cost you vital corporate information or customers' credit card numbers. Strategic business decisions may seem full of risk, but lower-level operational risks can be a bigger challenge, as there are so many points where your operations can go off the rails. What you can do is make sure there are control systems in place to keep your staff following the right

procedures. Other protective steps include insurance and having a contingency plan in place. If your equipment breaks down, for instance, having a plan to keep operating until insurance covers the losses could be vital. Reputational Risk. Loss of a companys reputation or community standing might result from product failures, lawsuits or negative publicity. Reputations take time to build but can be lost in a day. In this era of social networking, a negative word of mouth by a customer can reduce earnings overnight. Political Risk. Political risk occurs in business investments when domestic or international regions make significant changes to the business environment. Common political risks include increased government regulation, heavy taxation rates, military coups or terrorist attacks and war. This risk may create significant disruptions to international markets where free enterprise conditions may be less favorable. Advantages and Disadvantages of Financial Risks Within Companies 1. The is the probability of a financial loss, which would prevent your company from seeing a positive return on its investments or business practices. 2. With proper risk management, business can turn a potential financial pitfall into an advantage by working to mitigate losses or turning downturns in revenue into tax benefits at the end of the year. 3. Risk Management Planning : Knowing the financial risks your company is facing can be an advantage because it allows you develop strategies for mitigating or eliminating those risks. For example, if you can determine periods in your company's yearly business cycle when revenues are low, you can develop cost-cutting strategies to mitigate the damage caused by the dip in profits. 4. Alternatively, you might increase your marketing and promotional campaigns during those periods of the year in an attempt to increase revenues and eliminate the revenue drop altogether. 5. You may also spread this loss over several years if the loss relates to a capital asset, including stock market and real property investment, allowing your company to reduce its income and tax liability over a longer period of time. Risk management can help your business plan for downturns in revenue to provide you with loss tax benefits without damaging your businesss long-term viability. Disadvantages 1. Personal Financial Liability: Poor financial risk management for a sole proprietorship can lead to the collapse of your company, resulting in creditors moving to seize your personal assets for the payment of business debts. This can also occur for legal entities with limited liability protection, including a business partnership and a corporation, if you personally guarantee any of the company's debts. 2. Unplanned Financial Catastrophe: Unexpected financial risks can cause a collapse in your business's revenue stream if your company hasn't made appropriate preparations by creating a risk management strategy. For example, a sudden collapse of your restaurant's grill and oven at a time when revenues are already low could lead to a shutdown of your business if

you can't afford to pay for the repairs. Having a risk management strategy with a fund set aside for emergency repairs can help you get through a sudden equipment failure and keep your business running unable to pay back what you already owe. You know that money will be available when you need it.

3. Planning : When you manage your business funds, reviewing the financial data allows you to identify specific trends and make some forecasts for the future. Because your finances connect directly to what you can do in the business, this lets you develop new strategies for your operations and plan what you're going to do from both the short- and long-term perspectives. You also can assess your areas of risk and take steps to fix problems. 4. Accountability: Financial management forces you and everyone else in the business to make a case for everything on which they're spending. With proper financial controls, you also can prevent instances of fraud. Financial management thus is a major tool for keeping everyone in your business accountable. 5. Confidence: Proper financial management usually means that a company can grow in one or more areas, or at the very least, remain stable. It also provides you with an opportunity to follow through on your policies and plans. When these things happen, your employees and investors may have more confidence in you as a business leader. This often translates into continued loyalty.