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HAND OUT 3: SMALL BUSINESS DEVELOPMENT

Definition of a Small Business

A small business is defined in various ways by using terms: micro and small enterprises (MSE),
small and medium scale enterprises (SMEs) interchangeably. The commonly used yardstick in
categorizing small businesses include the total number of employees, total investment and sales
turn over.

In the context of Tanzania, micro enterprises are those engaging up to 4 people employing
capital amounting up to Tsh. 5.0 million. The majority of micro enterprises fall under the
informal sector.

Small enterprises are mostly formalized undertakings engaging between 5 to 49 employees or


with capital investment from TShs. 5 million to TShs.200 million.

Medium enterprises employ between 50 and 99 people or use capital investment from TShs.200
million to TShs.800 million.

Large enterprises employ over 100 people or use capital investment from above TShs.800
million

Table 1: Categories of Enterprises in Tanzania

Category Employees Capital Investment in Machinery (TShs)


Micro enterprise 1-4 Up to 5 million
Small enterprise 5-49 Above 5 million to 200 million
Medium enterprise 50-99 Above 200 million to 800 million
Large enterprise 100 + Above 800 million

Characteristics of Small businesses

Simple in organization structure


Owner makes most decisions
Open communication at a personal levels

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Employees do a variety of tasks


Planning is primarily short term
Strong link between ownership and management
Low job security
High responsibility/accountability
Continuous problems in financial matters
Flexible
Vulnerable
Decisions may be more subjective than objective
Less specialization
Individual ideas/talents spotted and promoted
Privately owned/business owner cannot be separated from his/her business
Short decision making time
There are opportunities for cooperation

Paid Employment And Self Employment

Paid employment

Paid (wage) employment is the act of supplying some form of human labour to the production
process with the aim of getting remuneration. It is a type of employment where a person is
employed in an organization (public/private) for a specific monthly wage. Wage earners
generally have little or no investment in the business they work for. The only form of investment
can be in form of insurance and provident fund where they contribute a minimum sum of money
commonly deducted from the salary for maintaining the security of an employee.

Advantages of paid (wage) employment:

i. There is job security for employees, this is covered in the labour laws which protect
employees from employers unjust treatment.

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ii. Assurance of getting a uniform and predictable salary regardless of whether the
organization is working profitably or not. So there is minimal risks in terms of payment
schedules.
iii. Employees have a potential for advancement based on how well their work performance
is, how well they get along with the boss and fellow workers, and whether the
organization can give the employees opportunities to advance.
iv. There are some benefits accrued from being a wage employee, including paid holidays
and vacations, maternity leave for females, sick leave, overtime, entitlement to pension
and other social security funds at the end of employment period or death.
v. There are regular and fixed working hours. Working longer than the specified time leads
liability to overtime payments.
vi. The employees do not bear a risk of losing income (in form of capital) through business
failure.

Disadvantages of paid (wage) employment

i. The work is organized in such a way that every employee is furnished with
responsibilities, rules and regulations. They are liable for punishment if they fail to
perform as required and are unable to comply with the specified rules and regulations so
there is no independence since the employees have to follow orders.
ii. There is risk of losing job by being laid off.
iii. The employees do not have the right to any profit as they are not owners of the business
and the income is fixed.
iv. There is a limitation of action, responsibility and decision making due bureaucracy. This
limits personal freedom and professional growth of employees and makes it difficult to
implement ideas.
v. Individual ability not easily recognized.
vi. There is high dependence on the employer.

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Self-Employment

This is the type of employment where a person engage himself/herself in an economic activity
for gaining income in a profitable business.

Advantages of self-employment

i. Being the boss and leader so enjoying the thrill of success.


ii. Being independent and experiencing pride in ownership.
iii. Deriving great satisfaction from offering a product or service which has good market
value and beneficial to the community.
iv. Implementation of own ideas.
v. Utilizing a unique skill related to modern technology as a personal initiative and ability to
respond to market opportunities.
vi. Dealing directly with people who are part of your business stakeholders allows close
business contact on a personal basis which provides a good learning ground for exchange
of business information.
vii. Being better placed to cater for specific needs and tastes of specific groups of customers.
viii. Being creative
ix. Potential income is unlimited.
x. Owner can control work environment
xi. Owner can give orders for implementation.
xii. Creation of jobs.

Disadvantages of self-employment

i. Inherent management weaknesses due to lack of certain aspects of management skills


personally and also unavailability of adequate support services in different management
areas.
ii. Inadequate financial resources due to inability to raise funds required for capital for
proper establishment and/or operation of the business.
iii. Personal concerns which is exhibited in form of taking risks of possible business failure
and its effect on oneself, family and other stakeholders.

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iv. Independence versus dependence condition: There is a need to cope with a wide range of
stakeholders ie. customers, employees, suppliers, tax-people, government authorities etc.
most whom can dictate and or influence business operations, business status, and the
marketability and sale-ability of the products/service etc. So there is no complete
independence because there is dependence on the stakeholders who have also depend
on the business.
v. There are long irregular hours of work.
vi. There are broad responsibilities.
vii. Income is not stable or guaranteed.
viii. There are no fringe benefits.
ix. Owner always involved in finances
x. The future is uncertain due to perpetual changes in the business environment which is
influenced by many factors such as the market trends, customer tastes, technological
advancements etc.
xi. The owner have to learn always
xii. It is hard to delegate
xiii. Involves a lot of paper work

Reasons for people to engage in self-employment:

These reasons fall into two categories: The PUSHES and the PULLS.

The reasons that push people to go into business are:

To utilize the skills and knowledge which one possesses.


To supplement income from salary for paying living expenses or invest in real estate
To make a living and obtain the basic needs of life.
To make more money so as to increase own and/or family wealth.
To engage oneself in an income generating activity due to lack of job placement after
graduation.
To do something one likes/enjoys most for personal satisfaction.

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To engage oneself after retirement from a paid job or retrenchment


To continue with family background ie. inherit family business from parents or other
close relatives.
To develop a common cause for the family by creating jobs for family members.
To avoid working for someone else.
To avoid taking orders from other people.

The reasons that pull people to go into business are:

To achieve a specific status, fame and recognition in the society


To utilize the available resources.
To make excess money.
To be a boss of oneself.
To provide services/products which are required in the society/do something worthwhile
to the community.
To reap unlimited profits.
To be a leader rather than a follower
Experience shows that those who are pushed into business because of having no other option are
not likely to go beyond an informal sector level. Those pulled into business are motivated and
decide to go into business voluntarily and they normally go further in business.

Stages of Business Development

Every business has to pass through various stages of development regardless of its size. These
stages include Start-up Phase, Survival Phase, Growth Phase and Stabilization Phase. Some
businesses start fast, grow fast, and fail or succeed fast. Others start small and stay small, by
design. Many small businesses start slowly, then build fast, grow faster, buy other companies, or
get sold and melded into larger organizations.

Business Start-up Phase

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Start-up phase is that phase during which a business comes into existence. The process begins
by acquiring motivation, finding/generation business idea, validating the idea, identifying the
resources, `negotiating to get into business and birth of the business. In this process business
planning is carried out once a business idea is confirmed to be valid.

Acquiring Motivation

Finding the Idea

Validating the Idea

Identifying the Resources

Negotiating to get into Business

Birth

i. Acquiring motivation

This is the process of finding the stimulus and commitment to pursue the objective of
setting up a business. In this process it is important to assess and develop ones
capabilities for setting up and running a business. Therefore there is a need to expose and
familiarize oneself to entrepreneurial and managerial tasks and determine the rewards
involved in setting up and running a small business.

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ii. Finding the idea

Business ideas come from:

Yourself guided by life/work experience, skills interests and hobbies

Discussions/brainstorming with friends and relatives/family members

Copying other businesses

Utilizing available resources

Newspapers, radio, TV and trade fairs/exhibitions

Surveying to find out: Community needs not presently met, Inadequately met
markets/demands, Support needs of existing businesses in the are e.g. sub-
contracting opportunities.

iii. Business Idea Validation

This is the act of justifying the strength of the business idea in terms of its viability,
practicability and achievability when it is transformed into a business. The best method to
do this is through carrying out a market research in order to collect information/ data on
customers, competitors, machinery/technology etc.

iv. Identification of Resources :

Resources required for business development include human resources, financial


resources, technology (machinery and equipment), physical resources ie. land and
buildings etc.

Human resources
This is the manpower required for production and other business operations which can be
identified through knowledge about:

-Types of skills and expertise and experiences needed for business operations
-Functions, types of jobs and tasks in relation to skills and experience in business
operations

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-Benefits and remunerations that the business owner can afford to pay
-Sources of recruitment i.e. your own family and friends, persons working in other
industries, employment centres, newspaper advertisements. Universities, Colleges and
other Institutions.

Financial Resources
These include money that is required to start and operate the business. identification of
financial resources is guided by:

-Investment capital requirements ie. how much capital you need for investment in terms
of business premises (decision should be made if the premise has to be constructed,
bought, rented of the business will be run form home) and equipment: machines,
vehicles, workshop fittings, furniture etc. (decisions have to be made if the equipment
will be purchased or leased).
-Working capital requirements ie. the money required to pay expenses. These cover the
costs of raw materials and other supplies, wages, rent, insurance, advertisement &
promotion and other costs needed for business operations.
-Sources of finance which include (a) internal sources of finance such as own savings,
Personal borrowing from relatives and friends and money raised through mortgage of
personal assets like land, buildings etc. and (b) External sources of finance such as
government funds through its ministries and organizations eg. SIDO, NGOs providing
short term credits and grants, commercial banks, venture capital fund and private money
lenders.

Technology: Machinery and Equipment

Technology encompasses the knowledge and skills and machinery, equipment and tools
applicable for production purposes in both industries and other similar settings.
Identification/choice of technology is guided by:

-Plant size and capacity ie. how large the industry/ machines are, and the number
/volume of units that can be manufactured by the machines in a given period.

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-Sources of technology: local suppliers or international suppliers of the equipment.

-Ease of installation, operation, maintenance and repair of the equipment plus


availability of spare parts.
-Types of products/services
-Efficiency and flexibility of the machine in production.
-Cost of the technology in relation to efficiency and rate of deterioration and becoming
obsolete.
-Type of technology: labour intensive or capital intensive.
-Laws and regulations pertaining to accessibility and usage of the technology.
-Availability of reputable firms/organizations/ consultants for providing technical advice
and assistance on the selection and installation of equipment.
-Principal inputs required for machine operations and production ie. electricity and other
utilities etc.

Materials and Supplies:

-Availability of essential input materials and supplies locally


-Suppliers, their reliability and prices
-Types and cost of materials which have to be imported
-Custom regulations, import duties and other legislative controls which will assure
regular and orderly inflow of the imported supplies.

Infrastructure:

-Transport system ie. roads, rail, shipping facilities


-Utilities: water and electricity supplies availability, accessibility and cost
-Information and Communication Technology (ICT) infrastructure, availability,
accessibility and cost.
-Sewage and waste disposal system accessibility, how to incorporate the system in the
industry and the cost.
-Premises ie. the business location in form of a building or workshop to house the
business.

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v. Negotiating to get into business


This process involves contacting various government ministries/departments and
development agencies including NGOs, Commercial Banks and other Institutions that
provide guidance, assistance and support for business development. Most important
elements in this include:
- Obtaining funds for investment and working capital requirements

- Deciding on the type of business ownership , business registration, obtaining licenses


and complying with relevant regulations. Establish contracts to formalize ownership
structure.

- Acquiring business location: Deciding and developing type of premise,


plant/office/facilities power and other utilities.

-Purchasing and installation of machinery and equipment

-Advertisement and recruitment of qualified key staff for performing various tasks and
duties
-Purchase of raw materials and other supplies and storage

- Acquiring membership of relevant business Insurance companies for business


security. Types of insurance include (i) Property insurance for fire, burglary and theft,
special perils eg earthquake, marine insurances(ii) Motor insurance (iii) Liability
insurance ie. public liability, personal liability, workmens compensation (iv)
Guarantee insurance (v) Engineering insurance (vi) Life insurance (vii) Social
insurance.

vi) Birth

This is the process of implementing the business plan. It involves the actual business

operations in which products/services are produced and marketed in accordance to the

business plan.

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Legal Forms of Business:

Sole proprietorship

This is a type of business formed, owned and controlled by one person. The business owner is
not legally separated from the business. It has less government control and there is no income tax
on the business only on the owner. The business is terminated upon the death of the owner.
(N.B. Most SMEs in this country operate in this form of business ownership).

Advantages:

i. Simple in organization.

ii. Owner free to make all decisions.

iii. Owner enjoys all the profit.

iv. There are few legal restrictions.

v. Easy to discontinue business operations.

Disadvantages:

i. Owners lack of ability and experience might hinder progress/growth of the business.
ii. Difficult to attract and keep good employees.
iii. Difficult to raise capital required by the business.
iv. Proprietor has unlimited personal liability for business debts.
v. Proprietor takes responsibility of all losses made by the business.

Partnership

This is a type of business formed by two or more persons who come together for the purpose of
establishing and running a business and sharing profits. Business partners have to enter into a
partnership agreement. This agreement should cover:

What line of business the partners are going to be in


How the profit or loss is going to be divided by the partners
Duties of each partner

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There is general partnership in which all partners are active in management and are jointly
responsible for the business and all its debts. There is also limited partnership in which there is
one or more who manage the business while other partners contribute to capital but do not
manage the business. Limited partners are not jointly responsible for all the debts of the business.

Advantages:

Easy to start, organize and discontinue.


Combines individual talents, skills and judgment.
There is increased sources of capital for business development.
There is definite legal status of the business under law.
Has certain tax advantages.

Disadvantages

Partners have an unlimited and mutual liability for business debts.


Life of business may be limited with enforced termination.
There is a possibility of disagreements among partners.

Limited Company

This is a form of business which is legally a separate body from persons ie. shareholders who
own it. The company owns assets, makes contracts and conducts business transactions in its own
capacity as legal entity. Memorandum of Articles of Association is filed by the Registrar of
Companies for registration who the issues a certificate of incorporation signifying that the
limited company is formed. A company is owned by one or more people. It may offer
shares/issue stock to the public, in this case it is termed as public company..

Advantages:

Stakeholders have limited liability for business debts


The business has a perpetual life
It is easy to transfer ownership

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Is easy to expand the business


It is applicable to both small and large businesses

Disadvantages

It is expensive to register, organize and manage.


Starting the business is complicated
There are many government regulations to consider

Cooperative

A cooperative is formed by a number of people who decide to work together voluntarily. All
members are equal and have equal voting powers. A cooperative must be registered with the
Registrar of Cooperatives.

Advantages

Low cost to start the business


There is no personal liability by the members for the debts

Disadvantages

It is complicated in the procedure of starting the business.


.

Franchise

This is a business involving buying trade rights from a large business. For example Coca-Cola
Production company.

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Business Survival Phase

This is the stage in which the business has demonstrated that it is a workable business entity. It
is widely accepted that three out of five businesses cease to trade in the first five years. Therefore
to avoid failure, this stage should be considered as a period of learning even when the business
has enough customers and satisfies them sufficiently. This can be done by assessing important
business issues. These include:

Idea

Whether product/service meet customers needs by checking what they buy


Customer feedback on the product/service by checking for complaints/ praises
Whether customers are sufficient or not
Whether product /service is the same as that of established competitors
Inconsistency in quality and service
The easiness or difficulty of reaching the market
Whether customers are able to pay the price set

In this case it is important to (i) keep a data- base on customers (ii) improve business by
providing better, cheaper and faster services (iii) and search for new markets for
products/services.

Resources

Adequacy of the stocking levels


Reliability of the suppliers
Whether working capital requirements are sufficient or not
Whether work in progress is adequate or excessive
Whether wastage is excessive or not
Quality maintenance

This involves keeping staff records on their performance & productivity and putting in place a
system to control utilization, efficiency, wastage and quality standards.

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Finance

Whether Cash flow projection was adequate or not


Whether cash generated is enough to break-even and cover repair or replacement of
capital assets as they wear out
Whether too much cash is taken out of the business too early or not
Controlling debtor/creditor relationship
Whether there is under-pricing or not
Whether cash flow generated is enough to stay in business and finance growth that is
sufficiently large in that industry to earn an economic return on assets and labour.

Therefore it is important to plan for a good cash flow management and develop appropriate
trading, profit and loss forecast and budget systems.

Management

Attitudes towards decision making


Strengths/ Weaknesses in personal /technical managerial skills critical to business
success
Adequacy/inadequacy of management control

Furthermore it is crucial to monitor changes in family circumstances, key personnel in the


external environment (bankers and suppliers), regulatory environment and also political,
economic and technological changes. This is required for development of contingency plans for
unforeseen problems that can occur in the business due to these changes. It is also important to
select and use professional advisers who can give counseling/advice in financial, legal, technical,
marketing issues.

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Business Growth Phase

Framework for Growth

Business growth is in terms of increasing in size, profitability, turnover, capital etc. Businesses
grow by developing profitable products or markets, by improving the processes ie. becoming
more efficient or by combination of the above. There are a number of factors that influence the
capacity of small business to grow. These include the three Ps of growth which are:

i. The Performance- Past and present: How good is the business performance in the
market, in its operations and in financial terms.
ii. The Potential- Capacity of the business to grow: How strong is the business potential for
growth in terms of resources, experience, control, ideas and leadership.
iii. The Project- The specific growth plan: How sound is the specific growth project in terms
of objectives, the scale of resources requirement, management ability & commitment
and financial projections.

Fig: 1 Diagrammatic Representation of Business Growth

2. Objective: Where do you want the business to be

3. Planning

4. How to get there

(The project)

1. Current state of the business: Where is the business now?

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Evaluating the Project

Market

Proposed product/service
Evidence of customer acceptability at the price, ability to manufacture/service,enough
customers, ability to enter market, ability to match competition or better, how to reach
customers
Market potential trends
Competitive advantage

Resource Requirements

Scale of operations planned


Additional physical resources requirements: land, premises, machinery
Additional financial resource requirements and how to acquire them
Additional people/skills required

Management Ability and Commitment

Specific new abilities required


How existing abilities match new requirements
What is the proposed level of managerial resources
How committed they are
How well it has been planned
Risk awareness

Financial projections

Additional costs involved and payback


Balance sheet and Profit& Loss projections
Cash flow projections
Funding needed and sources

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Contingency provision

Small businesses have to plan development around opportunities presented by products, markets
and processes. According to Igor Asoff business growth can be achieved through market and
product.

Fig: 2 Growth Model according to Igor Asoff.

Market Market
Old Product Penetration Development Old Product

Old Market New Market

Product Diversification

New Product Development New Product

Old Market New Market

Most important, results of project evaluation are important in ensuring business growth is
successfully achieved.

During growth:

(i) Businesses experience expansion of its activities and enhancement of its customer base.
(ii) Products and services are gaining acceptance in the marketplace and customers are
patronizing them in increasing numbers.
(iii) Profit margins tend to increase.
(iv) 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).

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Maturity/Stabilization Phase:

This is the third stage of a business development. During this phase cash flows stabilize and
establishment of marketing networks and operational channels are completed. The respective
brands become well known and there is a stable and faithful customer following.

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