wegogwe@gmai.com.

ENTREPRENUERSHIP

NOTES

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CHAPTER 1: ENTREPRENEURIAL LIFE

Entrepreneurs are those individuals who discover market needs and launch new firms to
meet those needs. These are risks takers who provide an impetus for change, innovation
and progression in economics life.

Entrepreneur a person who is relentlessly focused on an opportunity, in either a new or

an existing business, to create value while assuming both the risk and the reward for his
or her effort.
Other entrepreneurs engage in what is called bootstrapping: which means doing more
with less in terms of resources invested in a business, and where possible controlling the
resources without owning them.

Small business small businesses have geographically localized operations, financed by

only a few individuals, and have a small management team.

The rewards and pay-offs of entrepreneurship.

The reasons why people consider running their own business are varied. These reasons
include the following:

Making money (profit/financial wealth)

Entrepreneurship provides for ones financial needs, in as much as any other type of job
would do. It is claimed that self employed individuals are four times likely to be
millionaires than those who are formally employed .From an economic ankle the
financial return of a business should compensate its owner not only for his time and
investment of personal time but also for any personal money invested in the business.

Be your own boss (independence)

Most people leave employment for reason i.e. to be their own bosses. Many people have
a strong desire to make their own decisions , take risks and reap the rewards
.Entrepreneurs in general appreciate the independents inherent in their chosen career.
They do things their own way, reap their own profit and set their own schedules

Escape a bad situation (freedom)

Some people if not satisfied in their jobs will try to set up a business of their own while
other may seek change out of necessity .E.g. being laid off from employment those with
experienced in managerial ,professional , technical and even relatively unskilled positions
often contemplate the possibility of starting their own ventures. Individuals who enter
into business ownership because of financial hardships or other severe negative
conditions are called reluctant entrepreneurs. A person who becomes an entrepreneur to
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escape undesirable situations is known as a refugee e.g. women who form businesses due
to failure to reach higher positions in male dominated businesses.

Enjoy a satisfying life (personal satisfaction)

Some entrepreneurs refer to their work as fun because of the satisfaction they derive from
working for themselves. Most of this satisfaction comes from independence. The reward
may be derived from a pleasurable activity, from enjoyable associations, from respect in
the community etc.

Contribute to the community (personal fulfillment)

Certain individuals will get involved in running their own shops just to contribute to the
community.

Classification of types of entrepreneurs

i. Founder entrepreneurs vs. Other Business Owners and franchisees

Founder entrepreneurs are considered to be pure entrepreneurs, founders may be
investors who initiate businesses on basis of new or improved products or services. These
may also be artisans who develop skills and then start their own businesses.
Founders bring firms into existence by surveying the market, raising funds
and arranging for the necessary facilities. New firms can be established when it may be
purchased or taken over by a second generation family members.
The second stage member or entrepreneur does not necessarily differ
greatly from founding entrepreneurs in the way they manage their businesses.
Another category of entrepreneurs comprises franchisees. The difference
between franchises and other businesses is the degree of independence, franchising
entrepreneurship is limited entrepreneurship because of contractual arrangements.

ii. High potential ventures, ventures, attractive small firms and Micro businesses.
Promising start ups are those with the potential for attaining significant size and
profitability while marginal start up lacks such prospects. Those businesses with glowing
prospects for growing are called High potential ventures or gazelles
Attractive small firms offer substantial financial rewards for their owners. In US$ terms
these ventures produce entrepreneurial income ranging from US$100 000 to US$300 000.
Micro - businesses are the least profitable firms. E.g. dry cleaners, beauty shops,
appliance repair etc. Their distinguishing feature is their limited ability to generate
significant profits.

iii. Entrepreneurial teams

This consists of 2 or more individual who combine their efforts to function in the capacity
of entrepreneurs. The major advantage of this type is that resources such as skills
experience and talent are concentrated on one venture.

iv. Artisan and opportunistic entrepreneurs

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Artisan entrepreneurs - have technical job experience but typically lack good
communication skills and managerial training. This approach to business is characterised
by the following features:
They are reluctant to delegate authority.
They are paternalistic; they guide their businesses much as they might guide their
own families.
Primarily use personal selling efforts.
Their time orientation is short, with little planning for future growth or change.
They use few resources to create their firms.
They define marketing strategy in terms of the traditional components of price,
quality and company reputation.

Opportunistic entrepreneurs is one who has supplemented his / her technical

education paternalism , the delegate authority as necessary for growth, employ various
marketing strategies and types of sales efforts, obtain original capitalization form more
than two sources and plan for the future growth.

How entrepreneurs gain a competitive advantage

How will small firms make a competitive advantage in the wilderness of competition
where big firms invincible?

a) Customer focus
Customer service comes from focused organizations. Businesses of any size can be
successful as long as they understand the needs of their customers in a closer manner. If
properly managed small firms entrepreneurial firms have the advantage of being able to
service customers directly and effectively without struggling through layers of
bureaucracy or breaking corporate policies that had to stifle employee initiative.

b) Quality performance
The owner of a small establishment can insist on high levels of quality without
experiencing the frustration of a large company CEO who may have to push a quality
philosophy through many layers of bureaucracy.

c) Integrity and responsibility

The future is bright for firms that add to excellent produced quality and good customer
service a solid reputation for honesty and dependability. Customers are now well
informed of their rights and respond to evidence of integrity because they are aware of
ethnical issues.

d) Innovation and globalisation

Not only large companies are sources of new products and ideas. Many entrepreneurs are
innovators who try to address customer needs in a different way. Research departments of
large firms usually emphasize upgrading of existing products but with entrepreneurs it is
different. Entrepreneurs can complete with companies of all sizes through the use of
innovation.
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e) Special Niche
By finding a niche a small business will avoid direct and intense competition from big
businesses. The niche might consist of a uniquely specialized services or product, or it
might be focus on serving particular geographic area.

Getting started in entrepreneurship

The processes of starting a business venture are fraught with risk even though one can
find it exciting. Special concerns of individuals who are to get their feet wet in
entrepreneurial waters include:-

Age and entrepreneurial opportunity.

We often ask the question what the right age to become an entrepreneur is. There
is no answer to this question. Some ventures require one to accumulate experience first
and almost all venture require that one should build their financial resources first. It is
wise therefore to gain education, experience and financial resources.
Young people are often discouraged from entering entrepreneurship careers by
inadequacies in their preparation and resources.
Older people develop family, financial and job commitments that make
entrepreneurship seem to risky, they may have acquired interest in retirement programs or
achieved promotions to positions to positions of greater responsibility and higher salaries.
Research have concluded that the right time to get started in entrepreneurship lies
somewhere between mid 20s and the mid 30s, when there is a balance between
preparatory , experience on the one hand and family obligations one the other.

Characteristics of successful Entrepreneurs

No well defined entrepreneurial profile exists but some qualities are common, however
among entrepreneurs and probably contribute to their success. According to Trimmons
and Spinelli the common characteristics of successful entrepreneurs can be classified into
the following categories:-

Commitment and determination is an attitude that results in tenacity in the face of

difficulty and a willingness to work hard. They do not give up.
Leadership such entrepreneurs are self starters and team builders and focus on honesty
in their business relationships.
Opportunity obsession they are aware of market and customer needs.
Tolerance, risk, ambiguity and uncertainty they are risk takers, risk minimizes and
uncertainty tolerators.

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Creativity, self-reliance and adaptability - They are open minded, flexible, and
uncomfortable with the status quo and quick learners.
Motivation to excel - Such entrepreneurs are goal oriented and are aware of their
weaknesses and strengths.

NB: attitudes and behaviours that should be avoided at all costs include the following:
I. Over estimate what you can do
II. Lack an understanding of the market
III. Hire mediocre people
IV. Fail to be a team player, which is usually the result of taking oneself to seriously
V. Be a domineering manager
VI. Not share ownership in the business in an equitable way

Taking the plunge

To start a business there comes a point to which the entrepreneur must take the plunge.
This phase is scary but entrepreneurship is not for the faint hearted. For this to happen it
has to bee hastened by some precipitating event e.g. one may be fired or discovers an
unusual opportunity with strong potential. Growing and managing the business.
Entrepreneurs start firms and should therefore control and guide them.

SUCCESS IN BUSINESS AND SUCCESS IN LIFE

Looking back at an entrepreneurial career.
When an entrepreneur exists business they become history and forgotten. Reflecting on
their lives and business at the point in their journeys, numerous entrepreneurs have come
face to face to questions, which include the following: was it a good trip? What kind of
meaning does it hold for me now? Can I feel good about it? What are my
disappointments? How did I make a difference? Such questions lead entrepreneurs to
reassess their values, priorities and commitments. By anticipating these questions,
entrepreneur can identify his/ her most basic concerns early in the journey. Without such
reflection, the entrepreneurial journey and its ending may prove disappointing.

Evaluating accomplishments
To evaluate anything criteria should be set. There is no one way which fit all situations
but different criteria can be applied in different situations. E.g. measuring success in
dollar means one has to look at his bank account. In looking ahead to this time of looking
back, one naturally think in terms of a legacy. A legacy consists of those things posed on
and left behind. In a narrow sense it describes material possessions bequeathed to nones
heirs. In a broader sense, it describes everything that one leaves behind material items,
good or bad family relationships, and a record of integrity or avarice, a history of
explanation or contribution.

Winning the wrong game

It is easy for entrepreneurs to get caught up in an activity trap, working harder and harder
to keep up with their busy pace of life. Ultimately, such entrepreneurs may find their
business accomplishments overshadowed by the neglect or sacrifice of something more

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important to them. Its possible to score points in the wrong game or win battles in the
wrong war.

Crafting a worthy legacy

What is worthy legacy? A business that operated within the law provides jobs and serves
the public a good foundation for satisfying entrepreneurial experience. A business can
make money and make a lot of it through a destructive character e.g. a firm that is
wealthy through selling pornography on internet will be of a destructive character. One
entrepreneur launched a firm whose primary objective was to provide good, low cost
housing to families who cannot afford it.

Beginning with the end in mind.

An entrepreneur builds a business, a life and a legacy by day, starting with initial launch
and proceeding through the months and years of operation that follow. A person existing
an entrepreneurial venture has completed the business part of his or her legacy it must
be constructed during the life of the business itself. This is why we say the entrepreneur
should begin the end in mind.

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CHAPTER 2: Integrity, Ethics and

Entrepreneurship

Decision makers regularly face dilemmas and temptations to compromise principles for
the sake of business or personal advantage. This strikes the heart of integrity.

What is integrity?
Corporate misdeeds happen when individuals compromise their personal integrity i.e. not
doing what they believe to be right and proper. They hallmarks of business integrity
include values such as honesty, reliability and fairness. Money is important, but it cannot
be the only goal of interest. Excessive focus on financial gain can quickly lead to
distortions in business behaviour. It is certainly the root cause of many ethnical failings.

Doing the right thing

The notion of integrity is closely tied to ethical of issues of which involve questions of
what is right and wrong. This goes beyond what is legal and illegal but entrepreneurs
should make decisions regarding what is fair, honesty, ethical and respectful.

An Ethical Decision-Making Process

Ethical decision making often is not a very clear-cut process. In fact, even after much
thought and soul searching, the appropriate course of action may still not be apparent in
some business situations. The six-step decision-making process helps small business
owners to make better, more ethical decisions.43
Step 1: Define the problem. How you defi ne the problem is important because this will
guide where you look for solutions. Looking for the root of the problem is the best place
to start in your search for a solution to a challenging ethical problem, whether it is a
customer who is slow to settle his accounts or an overseas client who wants to give you a
tip to overlook a questionable practice.
Step 2: Identify alternative solutions to the problem. Its tempting to go with the
obvious solution or the one that has been used in the past, but this is often not the best
answereven if it is ethical. Be open-minded, and consider creative alternatives. Many
times, an innovative solution is available that is consistent with your personal ethics,
protects the interests of other parties, and offers superior outcomes. Seeking advice from
trusted friends and advisors who have faced similar situations can spur your thinking and
lead to options that you might otherwise overlook.
Step 3: Evaluate the identified alternatives. Rotary Club International, a worldwide
organization of business and professional leaders, has set a high standard for business
conduct. It calls on its members to ask the following four questions when they prepare to
make a decision about the things they think, say, or do
1. Is it the TRUTH?
2. Is it FAIR to all concerned?
3. Will it build GOODWILL and BETTER FRIENDSHIPS?
4. Will it be BENEFICIAL to all concerned?

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Taking a similar approach, you might ask yourself, How would I feel if my decision
were reported in the daily newspaper? Or, the question can be even more personal:
How well could I explain this decision to my mother or children? The answer could
help to steer you away from unethical behavior.
Perhaps the most widely recommended principle for ethical behavior is simply to follow
the Golden Rule: Treat others as you would want to be treated. This simple rule is
embraced, in one form or another, by most of the worlds religions and philosophies. You
might list the ethical pros and cons of each alternative or identify the impact of each
option on every person or company that will be affected.
Another possibility is to rank all potential options based on their overall merits and then
narrow the list to the two or three best solutions so that you can consider these further.
This will allow you to organize your thoughts and make a better selection.
Step 4: Make the decision. The next step is to choose the best ethical response, based
on your evaluation of all possible alternatives. On the surface, this sounds easy enough,
but unfortunately no single option will completely solve the problem in most cases; in
fact, you may not even be able to identify an obvious winner. No matter how you go
about making the decision, keep your vision and core values firmly in mindthis is
essential to making solid decisions that do not compromise your ethical standards.
Step 5: Implement the decision. This may seem like a no-brainer, but entrepreneurs
sometimes put off responding to ethical challenges because the solution is not apparent or
because any response will be bad news for someone involved. But putting off the
decision may allow a small problem to grow into a major crisis. Even if the decision is
not pressing, delaying your response will cause you to spend more time thinking about
the dilemma when other important matters deserve your attention.
Step 6: Evaluate the decision. The goal of making a decision is to resolve an ethical
dilemma. So, how has your response panned out? Has the situation improved, gotten
worse, or stayed about the same? Has the solution created ethical issues of its own? Has
information come to light indicating that your decision was not the most ethical course of
action? Everyone makes mistakes. You may very well need to reopen the matter to make
things right. But remember, if your decision was based on the best of intentions and
information available at the time, you can wade back into the waters of ethical turmoil
with a clear conscience, and there is no substitute for that.

A framework of integrity.
Ethical issues that affect small business owners range from their relationship with
customers and competitors, relationship with employees, etc.
The entrepreneur should juggle the interests of the following stakeholder groups:

i. Promoting owners interests

There is only one social responsibility of business to use its resources and engage in
activities designed to increase its profits so long as it stays within the rules of the game,
which is to say, engages in open and free competition without deception or fraud.
Use of the firms resources is justified only if it enhances the firms value. It is
undeniable that the owner of a business has a clear and legitimate right to benefit form
the financial performance of the company.
In a case were a business has more than one owner higher standards of integrity require
an honest attempt to protect the interests of all the owners, which include a commitment
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to financial performance and protection of the firms proper owners have no direct
involvement in its operation questions concerning proper conduct can show up e.g.
entrepreneurs sometimes face ethical issues when reporting financial information could
easily persuade the other owners to make poor decisions regarding the investment in the
company.

ii. Respecting customers

Customers are an important stakeholder to the trading company. Entrepreneurs who treat
customers with integrity and care about them as individuals are apt to have more of them.
These customers are likely to continue coming back because of this attitude. Marketing
decisions such as advertising content must sell the product or service but also tell the
truth, the whole truth nothing but the truth.

iii. Valuing Employees

The level of integrity in a firm is reflected in the amount of respect given to employees.
Fairness, honesty and impartiality should be practiced regarding hiring, promotions,
salary increases, dismissals, layoffs and work assignments. Employee privacy, safety and
health issues should be seriously considered.
Showing proper appreciation for subordinates as human beings and as valuable members
of the team is an essential ingredient of managerial integrity.
In some cases, employees may engage in unethical behaviour at their employers
expense. They may fail in their ethical obligation to do an honesty days work. Loafing
on the job, working too slowly / and taking unjustified sick leave are leave all examples
of such failure. Employees can feign injuries, steal and embezzle millions of dollars per
year.

iv. Social responsibility and small business

An ethical business is one that not only treats customers and employees honesty but also
acts as a good citizen in its community. This is what is referred to as social responsibility.
The public has certain expectations regarding business behaviuor, not all of which are
required by law; they regard some socially responsible expenditure as proper, even when
they are costly. Companies have responded by being socially responsible through reacting
jobs, contributing to taxes and even giving back to the communities and in return they
benefit goodwill.

Entrepreneurs must reconcile their social obligations with the need of the firm to earn
profits. These expectations are expensive as this may require a company to purchase new
equipment and technology. Recognizing a social obligation does not change a profit
seeking organization into a charitable organization. Earning a good profit is absolutely
essential. Without profits, a firm will not long be in a position to recognize its social
responsibility.

v. Government laws and regulations

Government intervenes in the economy when it establishes laws to ensure healthy
competition. Entrepreneurs should adhere to government rules in order not to spend
money. These rules include workplace safety, equal employment opportunities, fair play,

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clean air and safe products. Tax evasion is a major problem by entrepreneurs this is done
through fraudulent reporting of income and expenses.

CHALLENGES AND BENEFITS OF ETHICAL BEHAVIOUR

1. Vulnerability of small companies

A lack of resources may make it difficult for owners of a small company to resist
extortion by public officials. Because a small firm is at a disadvantage relative to large
competitors that have superior resources, the owner may be tempted to rationalize bribery
as way offsetting what seems to be a competitive disadvantage and securing an even
playing field. Obvious a special temptation exists for entrepreneurs who are strongly
driven to earn profit. Decision making about ethical issues often calls for difficult choices
on the entrepreneur.

2. The integrity edge

The price of integrity is high, but the potential rewards are incalculable. The
entrepreneurs, who make honorable decisions, even when it comes to small things, can
take satisfaction in knowing that he or she has done the right thing, even if things do not
turn out as planned .Integrity is an important ingredient for success. Though an
entrepreneur may lack personal integrity and still achieve financial success, he/ she must
swim against as swift current to do so. Integrity means the company should not only look
at its shareholders but focus should be on all stakeholders, customers, employees
stockholders and the community.
The benefits include the following:
- Improved financial performance
- Enhanced brand image and reputation
- Increased sales and customer loyalty
- Improved productivity and quality
- Better recruitment and reduced employee turnover
- Fewer regulatory inspections and less paper work
- Improved access to capital

Research have discovered that even though doing the right thing does not guarantee
financial success, it suggests that exhibiting integrity in business does not rule out
financial success. The greatest benefit of integrity is trust in generates.

3. Integrity in an expanding economy

An entrepreneur with integrity may find his decisions being complicated by emerging
developments in the world economy. Operating across international boundaries means
that ethical standards that exists in other cultures should be considered as well, this often
differ from country to country. Internet use is also another area, which gives a serious
concern for expanding entrepreneurs.

4. Integrity and the internet

Issues of honesty, deception and fraud are fund on the internet as they are in traditional
commerce. Of great concern to internet users is individual privacy.
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Business and consumer often disagree about how private the identity of visitors to web
sites should be.
The extent to which an employer can monitor an employees internet activity is also
being wholly debated. Employees classify this snooping and invasion of privacy.
Employers are however concerned those employees may be wasting time dealing with
personal email, shopping online and surfing on the internet.
A number of business firms have developed privacy policies they either will not share
personal data or will not share it if customer requires privacy.
Widespread use of the internet has also focused attention on the issue of intellectual
property.
Protection of intellectual property is a political as well as ethical issue.

5. International Issues and Integrity

Countries face questionable business behaviour within their boarders. In extreme cases,
criminal gangs engage in business operations that might be better are characterized as
evil rather than unethical. E.g. Italian authorities conducted raids and discovered gangs
who brought Chinese Immigrants to Italy and forced them to work 12 to 15 hours with
little or on pay. The greatest concern in the area of global business ethics is the following
question:-
Does a payment to a customer employee or to a well connected, helpful individual
in another country constitute a trip, extortion, a consulting fee or a bribe?
The size of the payment usually answers this question. Cultures differ in what they
condone as ethical and condemn as unethical.

Building a business with integrity

Entrepreneurs, who would like to build businesses of integrity, must provide the right
leadership, culture and instruction.

i. A strong foundation
Integrity requires tough choices. An entrepreneur who has strong, widely recognized
moral values will still do the right thing simply because it is the right thing to do. Values
that serve as a foundation for integrity in business are based on personal views of
universe and the role of humankind in that universe. These values find their origin in
basic philosophical and or religious connections.
Entrepreneurs who are deeply committed to underlying values of integrity operate their
businesses in ways that reflect their personal interpretation of those values. An example
of a business that places the entrepreneurs personal value above dollars is Ukrops
Supermarkets, a Richmond, Virginia area supermarket chain that does not sell alcohol,
closes every Sunday and donates 10% of profits to charity.

ii. Leading with integrity

Ethical entrepreneurs use their influence as leaders and owners to urge and even insist
that everyone in their firms display honesty and integrity in their operations. Leaders in
organizations should spell what is ethical and what is not so that those at lower ranks can
follow. The influence of the leader is more pronounced in a small organization than in a
large one.
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iii. A supportive organizational culture

For integrity to be build successfully within an organization a supportive organizational
culture should be there. Every one within the organization should do the right thing. The
owner of the firm should formulate a code of ethics similar to that of most big
organizations. The code of ethics should define the companys position in terms of
acceptance of gifts or favors from suppliers.
Every employee should be made aware of this code of ethics understand it and sign for it.

iv. Better Business Bureaus

The use of bait advertising is questionable. Bait advertising is when the seller lures
customers in with a deceptive offer to sell a product at an attractive price, only to try to
convince them to purchase more expensive products.

This kind of practice is not good for integrity. Privately owned business firms in many
cities in USA have joined together to form Better Business Bureaus.
The mission of these organizations is to promote integrity on the part of all business firms
in the community. A Better Business Bureaus function is twofold.

It provides free buying guidelines and information a customer should have

about a company prior to completing a business transaction.
It attempts to resolve questions or disputes concerning purchases.
This will result in a decline in improper business practices in a community served by a
Better Business Bureau.

Environmentalism- Cost or Opportunity

Any number of organization and lobby a groups have been formed to force organizations
and lobby the government to come up with rules, which will make sure that organizations
operate in ways which do not harm the environment.

The burden of environmentalism

Environmentalism- refers to the efforts to preserve and redeem the environment thus
direct directly affecting business operations. Major areas of concern have been noise of
industrial works into the areas of operations, discharge of waste into stream and
discharging of gasses into the air. Small business owners and environmentalists should
not be viewed as to be conflict. They should work together e.g. some companies have
acquired equipment which reduces gasses emitted and noises that come from their
operations.The cost of adjusting to the requirements of environmentalists especially
where equipment have to be changed led to other small companies to close down. This is
so because it is usually difficult for a small business to pass own high costs to its
customers.

The potential of environmentalism

Environmentalism represents a cost to some several small businesses; it opens up great
opportunities for other. A number of companies have been formed e.g. those involved in
recycling of tyres.The emerging view of environmentalism goes well beyond recycling.
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According to the fortune magazine, this movement could lead to some interesting
products. The ultimate goal is to save the planet.

CHAPTER 3: STARTING THE BUSINESS

Opportunity recognition refers to identification of potential new products or services

that may lead to promising businesses.

Entrepreneurial alertness means readiness to act on existing but unnoticed business

opportunities.

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Identifying Startup Ideas

Not all good ideas will be winning ideas. To qualify as a good investment, opportunity a
product or service must meet real market need with respect to its function, quality,
durability and price. Success will only come if customers see value in using the product
against existing competing ones.

Reasons for starting a new business from scratch rather than buying a franchise or
existing business.

Having a personal desire to develop the commercial market for a recently

developed product/service.
Tapping into new resources that are available, such as an ideal location, new
equipment technologies, or exceptional employees, suppliers and bankers.
Avoiding undesirable features of existing companies such as unfavorable
precedents, policies, procedures and legal commitments.
Wanting the challenge of succeeding (or failing) on your own.

Finding startup ideas

Business ideas are different in terms of potential. Recognizing the nature and origin of
startup ideas the entrepreneur can broaden the range of new ideas available for his or her
consideration.

Types of startup ideas

Type A ideas
Those directed at coming up with a product or service that does not exist in a particular
market but exists somewhere else.

Type B ideas
This involves a relatively new technology

Type C ideas
Those ideas based on offering customers benefits from new and improved ways of
performing old functions, probably account for the largest number of startups. These are
me too kind of products and services.

Sources of startup ideas

i. Personal Experience
This can be acquired from work or home. Experience of working with a certain company
presents an opportunity to modify an existing product, improving a service or duplicating
a business concept in a different location.

ii. Hobbies
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Hobbies may grow beyond being a leisure activity to become business. Someone who
loves fishing may start a fishing business.

iii. Accidental discovery

This involves serendipity (chance) or seemingly the ability to discover something by
accident. Anyone may stumble across a useful idea in the course of day to day living.

iv. Deliberate Search

Startup opportunities may also emerge an entrepreneurs deliberate search for new ideas.
In fact this kind of exploration may be especially useful because it stimulates a readiness
of mind, which motivates prospective entrepreneurs to be more receptive to new ideas
from any source. This can take any of the following forms:-

v. An eye on change
Large organizations are usually content with the status quo, entrepreneurs are much more
likely to recognize change as an opportunity and to have the creativity and flexibility to
adjust to it. According to Dreickel innovation is The means by which the entrepreneur
either creates new wealth producing resources with enhanced potential for creating
wealth. Entrepreneurship harnesses the power of creativity to provide innovative products
and services.

Other idea leads

This includes the following:
Tapping personal contracts with potential customers and suppliers,
professors, patent attorneys, former or current employees or co-workers, venture
capitalists and chamber of commerce.
Visiting trade shows, production facilities, universities and research
institutes.
Observing trends related to material limitations and energy shortages,
emerging technologies, recreation, fads, pollution problems, personal security and social
movements.
Reading trade publications, bankruptcy announcements, commerce department
publications and business classifieds.

There are many ways one can find venture ideas, those listed above are just a few
suggestions

Using innovative thinking to generate business ideas

The following suggestions are designed to help guide your search for that one great idea
for startup. They can also help keep an existing business fresh, alive and moving forward:
1. When it comes to ideas, borrow heavily from existing products and services or
other industries.
2. Combine two business ideas into one to create a market opening
3. Begin with a problem in mind or think of a pain that you can relieve
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4. Recognise a hot trend and ride the wave

5. Study an existing product or service and explore ways to improve its function
6. Think of possibilities that would streamline customer activities\
7. Consider ways to adapt a product or service to meet customer needs in a different
way
8. Imagine how the market for your product or service could be expanded
9. Study a product or service to see if you can make it green.
10. Keep an eye on new technologies

Internal and external analysis to evaluate an opportunity.

There are 2 general approaches for evaluating business opportunities i.e. outside in and
inside out.
Entrepreneurs can evaluate their own capabilities and then look at new products / services
they might be able to offer to the market.( Inside out).They can first look for needs in
them market place and then relate those opportunities to their own capabilities (outside
in).
An opportunity is not just an idea it is a business opportunity that must grow from an idea
with the potential to develop into an enterprise that has a reasonable chance to succeed.

(A) Outside in analysis

Successful organizations are those that analyse the context in which they will do
business. This outside in analysis should involve both general environment and the
industry environment.

i. The general environment

This is made up of segments depicted in following figure

Political Sociocultural
Legal

Global Macroeconomic
Ii.Industry environment
Michael Porter identified 5 factors that offset the potential attractiveness and profitability of a
target market;
1. New competitors
2. Substitute products or services
3. rivalry
4. suppliers
5. buyers

iii.Competitive environment
Every aspiring entrepreneur should answer several questions about the competitors he/she
is likely to encounter in the market place:
1. Who would be the ventures current competitors?
2. What unique resources do they control?
3. What are their strengths and weaknesses?
4. How will they respond to the new ventures decision to enter the industry?
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5. How can the new venture respond?

6. Who else might see and exploit the same opportunity
7. Are there ways to co-opt potential or actual competitors by forming alliances?

(B)Inside-Outside Analysis
Consider resources, capabilities, and core competencies.
Once the environment has been appraised, and strengths, weakness, opportunities and threats
identified, the entrepreneur must decide on appropriate strategy among the following

1. DIFFERENTIATION BASED STRATEGY

2. COST BASED STRATEGY

3. FOCUS STRATEGIES

CHAPTER 4: FRANCHISES AND BUYOUTS

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Definition of franchising: a business relationship in which an entrepreneur can reduce risk a

benefit from the business experience of all members of the franchise system. It is a marketing
system revolving around a two party legal agreement whereby one party (franchisee) is
granted the privilege to sell a product or service and conduct business as an individual owner
but is required to operate according to methods and terms specified by the other party
( franchisor).

Franchising terminology
Franchisor the party in a franchise contract that specifies the methods to be followed and the
terms to be made by the other party

Franchisee an entrepreneur whose power is limited by a contractual relationship with a

franchising organisation.

Franchise contract the legal agreement between the franchisor and the franchisee.

Franchise the privileges conveyed in a franchise contract

Types or forms of franchising

1. Product and trade name franchising a franchise agreement granting the right to use
a widely recognised product or name e.g. ABI which has the right to bottle and use the
widely recognised Coca Cola brand name.

2. business format franchising is where by Entrepreneurs receive an entire marketing

and management system e.g. Total, well known in the petroleum industry for providing
the entire marketing and management system to franchisees

3. A master license is a form or individual having a continuing contractual relationship

with a franchisor to sell its firm will be acting in the capacity of an intermediary. Their
responsibility is to find new franchisees within their territories. At times they provide
support services such as training and warehousing e.g. Toyota South Africa which was
granted the right to find other franchisees who are dealerships who sell and offer repair
services in South Africa

4. Multiple unit ownership

Is a single franchisee who owns several units of the franchised business? These are also called
developers i.e. individuals or firms that the legal right to open several outlets in a given area.
Common with fast food outlets e.g. an individual receiving the right to open several Chicken
Inn outlets from Innscor

5. Piggy back franchising

Is the operation of a retail franchise within the physical facilities of a host store e.g. selling ice
cream within a Spar supermarket.

6. Multi-brand franchising - The operation of several franchise organisations within a

single corporate structure e.g. Innscors chicken inn, bakers inn, creamy inn brands.
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7. Co-branding bringing two franchise brands together under one roof e.g A&W and
KFC

The pros and cons of franchising

Advantages (pros)
1. Training support
This provides management expertise to the franchisor. It can be conducted for an initial few
days or weeks at a central training school or any location, which may include the franchisees
suite. McDonalds a famous franchisor, is known for its offsite franchisee. The training received
in valuable to many small entrepreneurs as it compensates for weaknesses in their managerial
skills.

2. Financial support
If the franchisor sees the prospective businesses as a promising venture it frequently extends a
helping hand financially. Finances are difficult to come by at this stage on the entrepreneur side
because he lacks the credibility and power required to borrow.

The franchisor can also allow franchisee to take a long period of time to pay for goods
delivered to him thats allowing him more working capital.

3. Operation manual
Most franchised products are reputable and more promoted brands. E.g. travelers may
recognize a hotel such as Holiday Inn and like it because of their past experience with it in
some other country. Thus franchising offers both a proven line of business and products /
services identification. An operations manual may be the single most valuable tool provided to
a franchisee. Following the path laid out in the manual helps the owner to avoid mistakes that
often occur with a startup business e.g. employing unqualified personnel, failing to control
costs, wrong equipment or inventory e.t.c.

4. Trade names and trademarks

When you open your own business it can take a long time and a lot of money to get your name
established and customers in your door or to your website. With franchising, the franchisor has
already laid the ground work and the entrepreneur uses the franchisors nationally advertised
trademark or brand name (which may be reputable and popular). Success of most businesses
today depend on such intellectual property like trade names and trademarks.

5. Economies of scale
Joining a franchise network makes the entrepreneur part of a larger organisation which
provides significant economies of scale. This is common with the purchasing function as the
cost per unit falls due to centralised purchasing activities.

Limitation of franchising (cons)

1. Costs of franchising
Successful franchises are characterized by high costs and these can be categorized into:
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a. Initial franchise fee This is a lump sum paid in the initial stages of a franchising business.
b. Investment costs includes startup costs such as equipment, rents, insurance premiums and
legal fees
c. Royalty payment This is a percentage of the franchisees total income which have to be paid
to the franchisor on a regular interval (annual, quarterly etc)
d. Advertising costs many franchises require that franchises contribute to an advertising fund to
promote the franchise.

2. Management issues
Image is important for success and franchisors will make every effort to try and control the
operations of franchisees. It means the franchisee will be restricted to use his own initiatives to
run the business. The most common restrictions are
Restricting sales territories.
Requiring site approval for the retail outlet and improving requirements regarding outlets
appearance.
Restricting goods and services offered for sales.
Restricting advertising and hours of operation.

3. Financial issues
Perceived lack franchisor support sometimes creates disputes, especially when the franchisee
believes the franchisor is not honoring its commitments. New franchisees of some franchise
organisations have felt mislead about their earning opportunities. Some franchisors are said to
engage in churning actions by franchisors to void the contracts of franchisees in order to sell
the franchise to someone else and collect additional fee.

4. Franchisor competition
In some cases franchisors have actually competed directly against their franchisees on
occasion. This can occur when a franchisor opens a corporate owned store near the franchisees
location, a practice known as encroachment. Encroachment means the franchisors selling of
another franchise location within the market area of an existing franchisee

Evaluating franchise opportunities

This describes what the entrepreneurs have to do after having identified a franchise candidate.
The following factors have to be used in evaluation.

1. Selecting a franchise
Personal observation many spark interest, or awareness may begin with exposure to an
advertisement in a newspapers or magazine or on the internet. These adverts usually say a lot
about the financial rewards, which entrepreneurs will be seeking.

2. Investigating the potential franchise

Because of the levels of commitment and investment need in a franchise enough investigations
have to be carried out before one commits resources. The evaluation process is two way
effort. The franchiser wants to investigate the franchisee and the franchisee wants to investigate
the franchise and the type of opportunity being offered. A lot of time is required to do this
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evaluation. Entrepreneurs should be skeptical of a franchiser who pressures them into signing a
contract. What should be the prospective entrepreneurs 1st step in evaluating opportunity?
What sources of information are available? Do government agencies provide information on
franchising? Three sources of information should be examined.

a. Independent, 3rd party sources of information

The state usually requires franchises to be registered so a prospective franchisee should not
overlook state offices, Business publications are also excellent of franchiser ratings e.g.
Fortune, entrepreneur, Wall Street journal etc. A search on the Web also provides franchise
information.
Franchise consultants have also appeared in the market place to assist individual seeking
franchise opportunities.

b. The franchiser as a source of information communicating directly with the franchisor will
provide lots of information about their operations. Information on brochures and tapes can be
provided on request this will include royalties expected and startup costs.

c. Existing and previous franchisees as sources of information.

Franchises that have left the business can be called or contacted on e-mail. These still in the
franchise can also be probed to provide information.

3. Finding global franchising opportunities

The restructuring of the EU and the passage of the North America Free Trade Agreement
(NAFTA) have opened foreign markets for USA and other entrepreneurs who would like to try
their luck abroad. In order to be successful in international markets one should have excelled in
the home market. The financial position must be secure and with surplus resources.

4 Legal issues in franchising

a. The franchise contract
This is the document which controls the relationship between the franchisee and the
franchisor. It should never be signed without legal counsel. On top of the consulting legal
counsel the franchisee should approach a banker and an accounting firm to help in evaluating
the franchise contract.

b. Franchise disclosure requirements

Information such as litigation and bankruptcy history, investment requirement and conditions
that would affect renewal, termination or sale of the franchise should be disclosed.

Buying an existing business

Buying an existing business should only be done after carrying out a thorough analysis of the
advantages and disadvantages of taking that route.

Reasons for buying existing business

These can be grouped into 4 categories
1. To reduce some of the uncertainties and unknown that must be faced in starting a business
from the ground.
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2. To require a business with ongoing operations and established relationships with customers and
suppliers.
3. To obtain an established business at a price below what it would cost to start a new business or
buy a franchise.
4. To begin a business more quickly than by starting from scratch.

a) Reduction of uncertainties
A successful business has already demonstrated its ability to attract customers, control costs
and make a profit. Future operations may be different but uncertainties are removed because of
the current and past experience.

b) Acquisition of ongoing operations and relationship

Buying an existing business means acquiring its personnel, inventories, physical facilities,
established banking connections and ongoing relationships with trade suppliers and customers.
Building these from scratch means that a lot of time would be invested.

c) A Bargain price
If the seller is more eager to sell than the buyer is to buy, an existing business may be
available at what seems to be the quickest way to begin a business.

d) A quick start
Waiting months or years to start up a business may not be the best option. Buying an existing
operation may be the quickest way to begin a business.

Finding a business to buy

In some cases sales reps of a manufacturer may be offered a retail outlet for sale. At times the
buying organizations have to involve itself into some active search to find it there is any
organization on sale. Sources of leads about businesses to buy include suppliers, distributors,
trade associations and even bankers.
There are also specialized organizations called matchmakers, that handle all the arrangements
of closing a buy outs. Some of these specialize with mergers and acquisitions of small and mid-
sized companies.

Investigation and evaluating available business

A business opportunity requires a careful evaluation some call this due diligence. The buyer
has to do some background investigation and this can be obtained though observation or
speaking to the seller. Also information can be obtained from suppliers, bankers, employees
and customers of the business.

a. Relying on professional
Due diligence is required but even though the buyer can also rely on 3rd party experts.
Examples of most valuable outside experts are accountants and lawyers.

.
Non quantitative factors in valuing a business
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Competition
The extend, intensity and location of competing businesses is the business gaining or losing
against its competition.

Market
Is the market capable of supporting all the existing businesses including the buyout candidate?
Such information can be obtained through marketing research, personal observation at each
competitors place of business.

Future community development

Examples of future developments in the community that could have an indirect impact on a
business include a change in zoning ordinances already enacted but not yet in effect and a change
from a two-way traffic flow.

Legal requirements
These may include contingent liabilities, unsettled lawsuits, delinquent tax payment, missed
payrolls, overdue rent or installments and mortgages of record against the real property acquired.

Union contracts
The buyer should determine what type of labour agreement if any, is enforce as well as the
quality of the firms employee relations.

Buildings
Quality of the building should be checked against potential hazards such as fires. Restrictions to
access the building should also be checked.

.Product prices
The buyer should compare the prices of the sellers products with those listed in the
manufacturers wholesalers catalogue and also against competing products in the locality. Also a
buyer can approach those who have bought a business before to learn from their experience.
Time invested on securing professional help in investigating a business can pay big dividends,
especially when the buyer is inexperienced. The buyer will bear all the final decision to the
experts alone.

b) Finding out why the business is for sale

Usually these reasons are not listed and the buyers should find out why the business is being
disposed. The business could be currently badly therefore affecting future success. The most
common reason why businesses are also includes:

Old age or illness.

Desire to relocate in a different section of the country.
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Unprofitability of business.
Loss of an exclusive sale franchise.
Maturing of the industry and lack of growth potential.

c) Examining the financial data

The 1st thing would be to examining final statements and tax returns for the last five years or
even more years available. This financial information is used for evaluating the trends of the
business.
The buyers should not believe so much in the financial statements because these could be
misleading and they require normalizing.
Buyers should also analyse the sellers balance sheet to see if whether asset book values are
realistic.

d) Valuing the business

Once investigating has been competed then it means the buyer can estimate the fair value of the
business. This is not an easy process even if all information requested is made available. It is
important to evaluate invoices to customers, invoices from suppliers and bank statements. The 3
most commonly used approaches to valuing a business are:
Asset based evaluation
Market comparable valuation.
Cash flow based valuation

Chapter 5: FAMILY BUSINESS

Family a group of people bound by a shared history and a commitment to share a future
together, while supporting the development and well being of individual members.

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Owner-managed business a venture operated by a founding entrepreneur.

Sibling partnership a business in which children of the founder become owners and
managers.

Cousin consortium a business in third and subsequent generations when children of the
siblings take ownership and management positions.

Family business an organisation in which either the individuals who established or acquired
the firm or their descendants significantly influence the strategic decisions and the life course
of the firm

Family and business overlap

Although family and business are different institutions each with its own members, goals and
values, they overlap in family business. The family exists for care and nurturing of family
members, while the business is concerned with the production and distribution of goods and
services. Individual members goal differs according to their particular situations. Differing
interests can complicate the management process, creating tension and sometimes leading to
conflict. Relations between family members are more sensitive compared to those with no
relations. Disciplining an employee relative is very difficult. Performance review sessions
between parent-boss and child subordinate can also be difficult.

Competition between Family and Business

What comes first the business and family? Most people say its the family. E.g. because of a
sense of family responsibility someone feels its not worthwhile spending more time with the
business than children. Many families are accustomed to making minor sacrifices for the good
of business.
Others claim that loyalty is with their families but their behaviours testify the opposite.
If a family business is to grow and survive, its interest cannot be unduly compromised to
satisfy family wishes. Families must recognize that professional management is needed and
that family interests must sometimes be secondary.

The explanation is that family business but that membership in the family does not
automatically endow with abilities needed in key positions.
Appointment of a family member to a position of higher authority should be done in
consultation with the family board directors as well as inviting opinions from outsiders.

Advantages of a family business

Family business culture and values providing guidance towards accomplishing

shared goals.
Commitment the passion that grows out of a familys sense of responsibility

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Knowledge applied as a competitive advantage by family members who have

learned through intimate involvement
Long range thinking looking toward the next generation, not just the next quarter
A stable culture typically found in durable, low profile, profitable niche entreprises
Speedy decisions a function of trust among family members
Reliability and pride recognised by customers, suppliers, creditors and other
outsiders

Disadvantages of a family business

Conflict may arise among family members. The spouse, parents or in-laws may accuse a
budding entrepreneur of putting the family at risk when launching the business. This
often leads to either failure of the business or failure of marriage.
In some cases the entrepreneur is accused of gambling with retirement savings, childrens
college funds or even home mortgage.
When the business grows differences may also arise especially to do with competence
and merit, perpetuating traditions versus innovation and cases of nepotism.

Culture of the family business

Families develop certain ways of doing things and these patterns of behaviours and
beliefs comprise the firms organizational culture. When new employees and family
members join the organization they will follow these:

a) The founders imprint on culture

What motivates the entrepreneur in the early stages may help create a competitive
advantage for new firm. The new firm can work beyond industry practices in
making the customer satisfied. In a family business the founders core values
may becomes both part of the business culture and the family code- things we
believe as a family. Ivan Lansberg discusses the possibility of a founders
negative imprint on the organizations culture. Successful business founders may
develop an unhealthy narcissim, or exaggerated sense of self-importance. Since
individuals occasionally develop a craving for attention, a fixation with success
and public recognition and lack of empathy for others.

b) Cultural partners
Culture of a firm includes its numerous distinctive beliefs and behaviours.
According to Gibbs Dyer Jnr a set of cultural partners that characterize the family
business include the business partners, family pattern and the governance pattern.
When the leader of a firm consistently demonstrates a commitment to serving
customers he or she encourages others to appreciate the same.

c) Culture and leadership succession

Lets think about the paternalistic/patriarchal cultural configuration. Charging
conditions may render that cultural configuration ineffective. When a family
business grows it requires a greater measure of professional expertise. The firm
will be forced to prop the paternalistic mold, which gives priority to family
authority and less attention to professional abilities.
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Commitment of family members

1. Desired based commitment commitment based on a belief in the purpose of a

business and the desire to contribute to it (genuinely want to)
2. Obligation based commitment commitment that results from a sense of duty or
expectation (really opt to
3. Cost based commitment commitment based on the belief that the opportunity for
gain is to great to pass up (have to)
4. Need based commitment commitment based on an individuals self-doubt and
believe that he/she lacks career options outside the current business (need to )

Fear of commitment
Typical fears include the following:
1. Fear of failure
2. Fear of success
3. Fear of commitment
4. Fear of disappointing your parents
5. Fear of disappointing others

Family roles and relationship

The overlapping of family and a business makes the family firm incredibly difficult to
manage.
a) Mom or dad, the founder
Entrepreneurs who have children typically think in terms of passing the business
on to the next generation, parental concerns associated with this process include:
Does child possess the temperament and ability necessary for business leadership
How can I, the founder, motivate my child to take an interest in the business?
What timetable should I follow in employing and promoting the child?

b) Husband and wife terms (co-preneur)

Those businesses, which are operated by husband and wife should have roles
allocated depending on expertise and experience. The major advantage of this
type of business is the opportunity it affords a couple to share more of their lives.

c) Sons and daughters

These should be groomed for family business. Children are usually pushed to
become part of the family business either openly or subtly. The problem is that
the child could be having different talents, aptitude or temperament. E.g. they
prefer music or sport.
The major issue today is personal freedom society today values that children
should make their own choices.

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d) Sibling cooperation, sibling rivalry

Several children usually take positions within the family business because of their
stake as heirs or potential owners. Some families collaborate very well in the
business as brothers and sisters. They can also be sibling rivalry within a family
business. Business issues tend to generate competition and competition affects
family. This can eventually leads to the splitting of the firm.

e) In-laws in and out of the business

When children grow they marry and in-laws become part of the business when
they accept positions in the forms problems will arise when there is a
disagreement on how compensation should be handled especially if it
made equitable to sons and in-laws. The solution will be to assign them to
different branches.

f) Entrepreneurs spouse
Usually it is man who enters into business first and then invites their wives but of
late wives have been getting in business first and then inviting their husbands.
For the spouse to play an important role in the entrepreneurs career there must be
communication between the spouse and the entrepreneur and the spouse must be a
good listener. The spouse has to know whats happening in the business
otherwise he/she might feel detached and may compete for attention.

Professional management of the family business

Need for good communication

Good management is necessary for the firm either family or non-family.
Comprise of this will affect the competitiveness of the firm. Observing this will
help the family business thrive and permit the family to function as a family.

Non family employees in the firm

These are affected by family considerations e.g. if there is somebody being
groomed for future leadership this may limit the potential advancement of those
non family employees irrespective of how good he may be.

Family retreats
This is a family meeting usually at a remote location to discuss family business
matters. This may be threatening to some family members, so some families may
avoid extensive communication feeling that it might stir up trouble. They think
that making decisions quieting or secretly will preserve harmony. This will
conceal serious differences that become increasingly troublesome.
To make a family business retreat successful the following guidelines are suggested:
1. Be clear about the purpose of the retreat
2. Set small attainable goals
3. Use an agenda and stick to it
4. Give everyone a chance to participate
5. Know the difference between consensus and agreement
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Family councils
This functions as the organizational and strategic planning arm of a family. It
formalizes the participation of the family in the business to a greater extent than
the does the family retreat. It should be a formal organization that holds meeting,
keeps minutes and makes suggestions to the board of directors. The younger
generation should be encouraged to participate so that they can learn and prepare
them for the future.

Family business constitutions

Experts believe that family business should have a constitution, which is a
statement of principles intended to guide a family firm through times of crisis and
change including the succession.
The following topics may be included in a family business constitution:
1. The core values that all family members should follow
2. A process for decision making
3. The benefits that family members may receive from the business
4. A mechanism for introducing younger members to the family business and its
governance structures
5. A dispute resolution procedure
6. The philanthropic ambitions of the family

The process of leadership succession

Available family talent

A stream can rise no higher than its source and the family firm can be no more
brilliant than its leader. If there is no available talent in the firm the owner should
consider bringing outsider.
The person chosen as a successor should undergo mentoring program. Mentoring is
the process by which a more experienced person guides and supports the professional
progress of a new or less experienced employee.

Preparing for succession

Responsibilities of the senior generation
- Communication
- Planning
- Accountability
- Owner development
- Long-term planning

Responsibilities of the junior generation

- be open to communication
- develop a personal action plan
- implement the personal action plan
- prepare for ownership
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- design life plans

Stages in the succession process

i. Pre-business stage
The potential successor becomes acquainted with the business part of growing up.
E.g a child accompanies a parent to the office, store, warehouse.

ii. Education and Personal Development stage

Potential successor goes on to study at a particular college or university. This is
the growing up stage.

iii. Proof of competence stage

The son and daughter begins to function as an employee, often working for other
companies. Independent achievements will speak for themselves.

iv. Formal start stage

Begins when the potential successor enter fulltime employment in the family
business. Prior to moving into a management position, the son or daughter may
work as an accountant, a salesperson, possibly gaining experience in a number of
departments.

v. Declaration of succession stage

The son or daughter exercise control but the parent is still in the background.
Thee predecessor may be reluctant to give up all decision making to the child.
Son or daughter becomes general manager or president of the family firm.

CHAPTER 6: BUSINESS PLAN

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A business plan is a document that outlines the basic idea or concept underlying a business and
describes how the concept will be realised.
3 BASIC OBJECTIVES OF A BUSINESS PLAN
1. To identify the nature and the context of the business opportunity i.e. why does such an
opportunity exist?
2. To outline the approach the entrepreneur plans to use to exploit the opportunity.
3. To recognise factors that will determine whether the business plan will successful.

USERS OF A BUSINESS PLAN

1. Internal users
Entrepreneur and management team to be aware of entrepreneurs vision
Employees assist them in knowing whether the business is an ongoing venture, if
there is business security e.t.c.

2. External users
Potential customers
Lenders
Suppliers
Investors i.e. family and friends, private investors, venture capitalists

PREPARING A BUSINESS PLAN

The business plan should give thorough consideration to the following basic factors:
a. The opportunity it should reflect the potential and the attractiveness of the market and
the industry (Porter)
b. Critical resources they include money, human assets (suppliers, accountants, lawyers
e.t.c.) and hard assets (accounts receivables and inventories). Entrepreneur should seek
ways to minimise resources required for the start-up.
c. Entrepreneurial team they must possess integrity, breadth and depth of experience.
d. Financing structure i.e. how the firm is financed, debt vs equity. Also includes how the
ownership percentage is shared by the founders and investors. The percentage share of
the owner has direct effect on the owners motivation
e. The context (external factors) it includes the regulatory environment, interest rates,
demographic trends, inflation and any other factors not controlled by the entrepreneur.

CONTEXT AND FORMAT OF A BUSINESS PLAN

1. Cover page
- It should contain company name, address, phone number, fax number and website.
- Tagline and company logo, name of contact person, mail address, phone number, and
email address should be included.
- It may also consist of the date it was prepared as well as number of copies.

2. Table of contents
- Provides a sequential listing of the sections of the plan and their page numbers.

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3. Executive summary
- This is a section of the plan that conveys a clear and concise overview of the overall
picture of the proposed venture.
- It should include the following subsections:
Description of opportunity
Explanation of the business concept
Industry overview
Target market
The competitive advantage you hope to achieve in the market
Economics of the opportunity
Management team
Amount and purpose of the money being requested ( the offering) if you are seeking
financing

NB: an executive summary can e written as a synopsis or as a narrative

4. Industry, customer and competitor analysis
- Presents the opportunity and demonstrates why there is a significant market to be served
it should describe the broader industry in which business will be conducted, industry size,
growth rate, fundamental trends and major players.
- The different segments of the industry should be identified as well as the niche in which
your own company will operate in.
- Customers should be described in terms of demographic and psychographic variables

5. Company overview
- This is the brief description of the firm including its history. The section will provide the
firms objectives, where it is located whether it serves local/international markets
- This section should answer the following questions:
When and where should the business be started?
What is the history of the company?
What are the firms objectives?
What changes have been made in structure and/or ownership?
In what stage of development is the firm?
What has been achieved to date?
What is the firms distinctive competence?
What is the basic nature and activity of the business?
What is the primary product/service?
What is the firms form of organisation?
What are the current and projected economic states of the industry?
Does the firm intend to sell to another company, investment group e.t.c.?

6. Product/Service plan
- This section describes the products and/or services to be provided and explains its
merits.
- Unique, innovative features should be identified, any patent, protection, trademarks
should as well be identified.

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7. Marketing plan
- The marketing plan describes the user benefits of the product/service and the type of the
market that exists.
- Essentially it describes the target market, the value offered by the company through its
marketing mix strategies and how it intends to create a competitive advantage.

8. Operations and development plan

- Offers information on how a product will be produced or a service provided.
- It discusses items such as location and facilities, whether in-house production or
outsourcing will be done, how labour and raw materials are to be acquired, processing
requirements, quality control methods e.t.c.

9. Management team
- This section describes a new firms organisation structure and the background of the key
players.
- It describes the qualifications and experience of the key management personnel.

10. Critical risks

- This section identifies the potential risks that may be encountered by the entrepreneur
e.g. financial risks, competition, and technological changes e.t.c.

11. The offering

- This section summarises the sources of funds and how they are going to be used

Sources
Bank loan $10 000
Equity
Ownership equity $12 000
Family $3 000
Friends $2 000

Uses
Rent $6 000
Salaries $9 000
Inventory $10 000
Other $2 000

12. The exit strategy

- These are actions for cashing out of the investment.
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13. Financial plan

- This section projects the companys financial position based on well substantiated
assumptions and explains how the figures have been determined.
- The entrepreneur can compile proforma statement which projects the companys financial
statements for up to 5 years, including the balance sheet, income statement and cash
flow statement.

14. Appendix of supporting documents

- This is supplementary material usually provided as evidence to facts in plan

ADVICE FOR WRITING A BUSINESS PLAN

1. Analyse the market thoroughly
- The following are basic questions that must be answered in a market analysis:
a. What is your target market?
b. How large is the target market?
c. What problems concern the target market?
d. Are any of these problems greater than the one you are addressing?
e. How does your product or service fix the problem?
f. Who will buy your product or service?
g. How much are they willing t pay for it?
h. Why do they need it?
i. Why would they buy from you?
j. Who are our competitors?
k. What are their strengths and weaknesses?

2. Provide solid evidence for any claims.

- A plan becomes believable only if it offers solid evidence.
- Photographs of products, certificates of registration and other factual information ca be
used to back any claims.

3. Think like an investor

- Investors have one goal that is to maximise on the potential return on investment.
- Most entrepreneurs rely on very few yet small sources of funding and hence fail to grow.
- Therefore, when presenting the business plan it is critical to provide an investors
perspective e.g. and executive summary that is exciting and which attracts the investor to
read further.

4. Dont hide weaknesses, identify potential fatal flows

- Entrepreneurs who want to make a big impression may become infatuated by the
opportunity that he or she cant see potential fatal flows.
- Entrepreneurs could get carried away and fail to notice the impact of new technology, e-
commerce or changes in consumer demands.

5. Maintain confidentiality

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- It is important to indicate that all information in the business is proprietary and

confidential.
- New technology should be patented, new products should have trademarks or logos and
business plan itself must carry a disclaimer.

6. Remember that the little things are the big things

- The following suggestions will help your attend to the little things:
a. Use good grammar
b. Limit the presentation to a reasonable length
c. Go for an attractive, professional appearance i.e. make liberal but effective use of visual
aids e.g. graphs, tables, exhibits e.t.c.
d. Describe your product or service in lay terms.

UNDERSTANDING THE BUSINESS MODEL

Business Model
It is an analysis of how a firm plans to create profits and cash flows given its revenue sources, its
cost structures and the required size of investment.
A basic business model framework consists of a revenue model, cost structures and maximum
investment.

a. Revenue model
- It is a component of the business model that identifies the different types of revenue
streams a firm expects to receive.

Types of revenue models

I. Single stream
- A firms revenue comes from a single product or service.

II. Multiple streams

- A business realises revenues from a combination of multiple products and services.

III. Interdependent streams

- A companys revenue comes from selling one or more products and/or services as a way
to generate revenues from other products and/or services such as printers and printer
cartridges.

IV. Loss leader

- One or several revenue streams are sold at a loss in order to create sales in a profitable
revenue stream.
-
NB: the following are common types of revenue models
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I. Volume or unit based revenue model customers pay a fixed price unit in exchange
for a product/service.
II. Subscription/membership revenue model customers pay a fixed amount at regular
intervals prior to receiving a product/service.
III. Advertising based revenue model customers pay only a fraction of the true value of
the product/service.
IV. Licensing revenue model customers pay a onetime licensing fee in order to use or
resell the product/ service (trading license)

b. Cost structures
- Refers to the component of the business model that provides a framework for estimating
the nature and types of costs and expenses a firm may incur.
- Common types of cost drivers include:
Cost of goods sold
Payroll
Marketing activities
Administrative costs

The following are categories of costs:

Fixed costs they dont vary with volume
Variable costs expenses that vary directly and proportionally with changes in volume.
Semi variable costs expenses that include both variable and fixed costs e.g. telephone
bill.

c. maximum investment
- it the component of the business model that provides estimates of the types and amounts
of investments required to achieve positive profits and cash flows.

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CHAPTER 7: THE MARKETING PLAN;

DEVELOPING THE MARKETING PLAN

What is Small Business Marketing

Small Business Marketing consist of those business attributes that relate directly to
identify a target market.
Determining target market potential and preparing, communicating and delivering a
bundle of satisfaction to the target market.

Market Philosophies

Production oriented emphasizes the product as the most important part of the
business. The firm concentrates on producing the product in the most efficient manner
even if this means slighting promotions distribution and other marketing activities. Sales
oriented deemphasizes production efficiencies and customer preferences in favour of
making sales.
Customer oriented expresses the firms belief that everything including production and
sales depends on consumer needs. Customer satisfaction is not a means of achieving a
certain goal it is the goal. Factors that affects marketing philosophies are:
State of competition if there is little or no competition a company emphasizes
production efficiencies or when demand exceeds supply (short term measure which might
lead to disaster).
Small business managers may have a range of interests and abilities that are good at
production skills but weak at marketing. They emphasize production efficiencies.
Engrossed in the present that is pushing sales to customer may lead to customer
dissatisfaction high pressure selling with little regard to customer needs.

The Formal Marketing Plan

After the market analysis is completed, the entrepreneur is ready to write the formal
marketing plan. A marketing plan should include section on market analysis, the
competition and marketing strategy.

Marketing Analysis
Description of the target market, which is known as customer profile.
A discussion on the major benefits to customers provided by the new product or
service should be included.
If an entrepreneur envisions several target markets, each segment must have a
corresponding customer profile.
It is desirable to include most likely pessimistic and optimistic sales forecasting
scenarios. Marketing research information from secondary and primary data maybe used
to construct the customer profile.

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The Competition
Existing competitors should be studied carefully and their key management personnel
profiled.
Competitors overall strengths and weaknesses should be part of this section.
Related products currently being marketed or tested should be noted and likelihood
that that these firms will enter the entreprenuers target market.
Competitors can be monitored by visiting their websites or using search engines.

Marketing Strategy
The information on marketing strategy forms in the most detailed section of the
marketing plan and in respects is subject to the closest scrutiny from potential investors.
Four areas should be addressed:
i. Product decision to transform product / service idea into a bundle of satisfaction
ii. Distribution regarding delivery of product to customers
iii. Pricing to set an acceptable value on total product/service
iv. Promotion communications necessary to target markets

The Product and / or Service Section

Name of product or service and why it was selected should be included. Any legal
protection that has been obtained for the name should be described.
Explain logic behind name selection. Other components such as packaging should be
presented and customer service plans such as warranties and repair policies.

The Distribution Section

Often new ventures will use established intermediaries as their channels of distribution.
How intermediaries will be persuaded to carry the new product should be explained. Any
intentions to license the product should be covered.
Layout and configuration of retail stores should be explained.
Discuss relevant laws and regulations governing that activity when product delivery
involves exporting.

Pricing Section
At the very minimum, the price of a product or service must cover the costs of bringing it
to customers. Pricing plan must include a schedule of both production and marketing
costs. Break even computations should be included for alternative prices. A closest
competitor may be analysed on what he is charging.

The Promotional Section

The promotional plan should describe the entrepreneurs approach to creating customer
awareness to the product or service and motivating customers to buy. Promotional
options are personal selling and advertising. It should state number of sales people to be
employed and how they will be compensated and the proposed system of training. If
advertising is to be used list specific Medias to be used and the advertising themes. Seek
the services of a small advertising agency, that is, name and credentials.
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Marketing Research for the New Venture

Marketing research may be defined as the gathering, processing reporting and
interpreting of marketing information. Small business typically conducts less marketing
research than a big business because of expenses involved and lack of knowledge.
Managers should compare the costs benefits of marketing research. Internet is an
excellent resource for marketing research data and most of the information found there is
at reduced costs.

Steps in the Marketing Research Process

Identifying the informational needs this may seem too obvious to mention, the fact is
that entrepreneurs sometimes conduct surveys without pin pointing the specific
information that is relevant to their venture. The information needs should be well
defined to help in the research.

Searching for Secondary Data this is information that has already been compiled.
This is less expensive than gathering new or primary data. Marketing decisions can be
made on the basis of secondary data. Secondary data can be internal or external. Internal
data is data that exists within the firm. External data could be periodicals, trade
publications, government publications etc. However secondary data can be outdated or
the units of measure in the secondary data may not fit the correct problem and its
credibility may be questionable as some secondary data are less trustworthy.

Collecting Primary Data this is new market information that is gathered by the firm
conducting the research. The techniques used may be:
Observation is the oldest form of research and can provide useful information for
small businesses. It can be economical and avoid potential business that ca result from
contract with respondents.
Questioning Methods surveys and experiments are both examples of questioning
methods. Surveys can be conducted by mail, telephone or personal interviews. Telephone
surveys and personal interviews have high responds although personal interviewing is
expensive. On line questioning can also be used.
A questionnaire is the basic instrument of guiding the researcher and the respondent. A
questionnaire should be carefully developed and pre-tested before use. Considerations
should be made:
Ask questions that relate to the issues under consideration.
Select the form of question that is most appreciate to the subject and conditions of the
survey e.g. open ended.
Carefully consider the order of questions.
Ask the more sensitive questions near the end of the questionnaire e.g. , age, income)
Carefully select the words in each (simple, clear)
Pretest the questionnaire by administering it to a small sample of respondents
representative of group to be surveyed.

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Interpreting the data after the necessary data have been gathered, they must be
transformed into usable information. Methods of simplification include tables, charts and
other graphic methods. Use of descriptive statistics e.g. mean, mode median can also
help.

Understanding Potential Target Markets

A small business can be successful only if an adequate market exists for its products or
service. A sales forecast is a typical indicator of market adequacy.

Ingredients of a market
A market is a group of customers or potential customers who have purchasing power and
unsatisfied need. Three ingredients in a market are:
Market must have buying units or customers these may be individuals or business
entities.
Customer must have purchasing power customers who have unsatisfied needs but lack
money or credit do not constitute a variable market.
Customer must have unsatisfied needs they should be motivated to recognize in
unsatisfied needs.

Market Segmentation and its Variable

Determining Market Potential is the process of locating and investigating buying units
that have purchasing power and needs that can be satisfied with the product or service
that is being offered.

Market Segmentation this is defined as the division of the market into smaller groups
with similar needs, such that each group is likely to respond favorably to specific
marketing strategy.

Segmentation Variable These are parameters used to distinguish one form of market
behavior from another.

There are two broad sets of segmentation variables that represent major dimensions of
market; these are Benefits Variables and Demographics Variables.

Benefits Variables
These are specific characteristics that describe customers and their purchasing power.
Small businesses commonly use demographic variables as part of market segmentation.
Demographic variables are age, marital status, occupation, gender, small life style,
income, education, religion, race and nationality.

Market Segmentation Strategies

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There are several types of market segmentation strategies but at this point we would like
to discuss the following types: unsegmented, multi segmentation and single
segmentation strategies.

Unsegmented Strategies.
This is also known as the marketing strategy. This is a strategy that defines the total
market as the target market. It assures that all customers desire the same basic benefit
from the product or service. With unsegmented strategy, the firm develops a single
marketing mix that is one combination of product, promotion and distribution. The
traditional argument for mass marketing is that it will lead to the lowest costs and prices
and creates the largest potential market.

Example
Small business - (Community Writing Company)

Marketing Mix 1
Product: Lead pencil
Price: $0.00
Promotion: Television
Distribution Extensive

Market

All potential users of a writing instrument

The Multi Segmentation Strategy

It is a strategy that recognizes different preferences of individual segments and develops a
unique marketing mix for each segment.
The traditional argument for multi segmentation is that customers have different tastes
and their tasks change over time. Customers seek change and variety e.g. Company
Writing has recognized three separate market segments students, professors and
executives. Following multi segmentation strategy approach, the company develops a
competitive advantage with three marketing mixes based on differences in pricing,
promotion, distribution or the product itself.

Small businesses: (Community Writing Company)

Marketing Mix 2 Marketing Mix 1 Marketing Mix 3

Product : felt tip pen Product: felt tip pen Product : felt tip pen
Price: $15 000-00 Price: $10 000.00 Price: $20 000.00
Promotion: Professional Magazines Promotion: Campus newspapers Promotion: Personal Selling

Distribution: direct from factor Distribution: Bookstore Distribution: Department store

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Market Segment B Market Segment A for Market segment C

Professors students Executives

The Single Segmentation Strategy

This is a strategy where a company recognizes the existence of several distinct market
segments but focuses on only the most profitable segment. The single segmentation
approach is probable the most suitable strategy for small business to use during initial
marketing efforts. It allows a small firm to specialize and make better use of its limited
resources once the reputation has been built, the firm will find it easier to enter new
markets.

Small business: (Community Writing Company)

Product: Felt tip pen
Price: $10 000.00
Promotion: Campus newspaper
Distribution: Book store

Market Segment A
Students

Market Segment B Market Segment C

Professors Executives

The Community Writing Company decides to pursue a single segmentation approach and
selects the student market segment.

Estimating Market Potential

The Sales Forecast
This is a prediction of how a product or service will be purchased within a market during
a specified time period measured in dollars or units. It is useful tool in production
schedules, inventory, policies, personnel decisions.

Limitations in Forecasting
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Entrepreneurial experience coupled with a new idea.

Small business manager maybe unfamiliar with methods of quantitative analysis
Entrepreneur lacks familiarity with the forecasting process or personnel with such skills

Dimensions of Forecasting Difficulty

Conditions that make forecasting Conditions that make forecasting

easy difficult

Established business
New venture

Experienced business Forecast Limited Entrepreneur/

Entrepreneur familiar with Poor understanding of

Small firms should attempt to overcome these by keeping in touch with industry trends,
reading trade publications and economic newsletters, government publications or
subscribing to professional forecasting services.

The Forecasting Process

The forecasting process is characterized by:

The point at which the process is stated

The nature of the predicting variable

The Starting Point

A breakdown process (chain ratio method) is used which begin with a larger scope
variable and works down to the sales forecast.

A buildup process is also used which calls for identifying potential buyers in the various
submarkets and the estimated demand is added up. The forecaster can obtain information
on member of establishments, geographical location, number of employees, annual sales.

The Predicting Variable

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The direct forecasting method is used in which sales is the estimated variable.
The indirect forecasting method will also be used to project the future sales e.g. using
figures for birth to forecast industry sales.

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CHAPTER 8: SELECTING THE

MANAGEMENT TEAM AND FORM OF
ORGANISATION

(MANAGERS, OWNERS, ALLIES AND DIRECTORS)

The entrepreneurs talents must be supplemented with experience and abilities of other
individuals who should be competent, resourceful and tenacious. The ownership
structure depends on legal form of the organisation whether entrepreneur chooses sole
proprietorship, partnership, corporation. The selection should take into account needs of
the organisation including tax implications, alliances and objectives of the board of
directors.

BUILDING A MANAGEMENT TEAM

The management team consists of individuals with supervisory responsibilities as well as

non-supervisory personnel who play key roles in the business.
A management team bringing greater strength to a venture than does an individual
entrepreneur because of diversity in talent, assurance of continuity in the case of
departure or in high-tech start-ups.
The competence required in a management team depends on the type of business and
nature of operations e.g. software development and restaurant. Whatever the business,
small firms need managers with an appropriate combination f educational background
and experience.

ACHIEVING BALANCE

If one member has expertise in finance, another should have adequate marketing
background to create balance.
Planning the companys leadership should produce a management team able to give
competent direction to the new firm. The team should be balanced in terms of covering
various functional areas and offering the right combination of education and experience.
It may comprise both insiders and outside specialists e.g. law firms, commercial bank and
certified public accounting firm.

SPECIFYING STRUCTURE

The entrepreneur must design an internal management structure that defines relationships
among members of the organisation advertising manager, marketing director, financial
officer, human resources manager. These relationships need to be planned carefully to
guide operations and avoid overlapping of responsibilities that invites conflicts.

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CHOOSING A LEGAL FORM OF ORGANISATION

The entrepreneur must choosen a form of legal organisation which will determine who
actual owners of the business are: The most basic options are the sole proprietorship:
Partnership and corporation.

THE SOLE PROPRIETORSHIP OPTION

This is a business owned by one person who has title to all business assets and is subject
to the claims of creditors. The owner receives the firms profits but also assumes losses,
bear all risks and pay all debts. The owner of the business has unlimited liability-
Thus their personal assets can be taken by business creditors if the enterprise fails. Sole
proprietors are free from interference by partners, shareholders and directors. The death
of the owner terminates the legal existence of a sole proprietorship. It is important to
have a will which empowers executor to run business on behalf of heirs until they can
take over or it can be sold. In the event of possible incapacity of the sole proprietors e.g.
accident and period of hospitalization legal power of attorney can be granted to guard
against this.

THE PARTNERSHIP OPTION

A partnership is a legal entity formed by two or more co-owners to operate a business for
profit. It pools the managerial talents and capital of those joining together as business
partners. As in sole proprietorship, the owners share unlimited liability.

QUALIFICATIONS OF PARTNERS

Any person capable of contracting may legally become a business partner. Individuals
may become partners without contributing capital or having a claim to assets at the time
of dissolution: such persons are partners only in regard to management and profits. A
strong partnership requires partners who are honest, healthy, capable and compatible.

ADVANTAGES OF PARTNERSHIPS
Sharing workload
Sharing emotional burden
Procuring executive talent not otherwise affordable
Sharing financial burden
Companionship

DISADVANTAGES OF PARTNERSHIP
Interpersonal conflicts
Dissatisfaction with partner
Absence of one clear leader
Dilution of equity
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Frustration of not being able to call ones own shots

FEATURES/ FACTORS TO BE CONSIDERED BEFORE PARTNERSHIPS

To make the most of partnership, the partners should consider the following features or
factors before entering into partnership.

1. Capitalize on the unique advantages of partnership

It is important to recognize the advantages of partnership and build on the
synergies that can result from them. Thus when partners are devoting full time on
the business, working together can increase quality of efficiency of decision
making by focusing more energy and thought on the challenges being faced at any
given time.

2. Choose your partner carefully

Partnerships are like marriages, some work, some dont. Long term partnership
depends first on picking the right partner. The partner identified need to match in
terms of goals, value, work habits and the skills should be complimentary.
Because partnership is a legal entity, the partner can legally bind you. Partners
can be found in any of the following sources, trade magazines, client contact,
professional associations, and online matching services like business partner.com
e.t.c.

3. Be open but cautious about partnerships with a friend because partnership can
quickly can quickly ruin a very important relationship. Valued relationships can
take a quick turn for the worse when a business deal gets rocky.

4. Test drive the relationship, if possible

It is sometimes important before finalizing the partnership deal to actually give a
try to see whether you can work well with the potential partner. This will help
you to assess the partners strength and weakness before committing a long term
relationship.

5. Create a combined vision for the business

It is important that the partners should have the same vision for the business. This
takes time, patience and a lot of conversion. The partners should see business in
the same way. The following important matters should be discussed and agreed
before partnering that is expectation of all partners in terms of contributions of
time, money, expertise e.t.c. planned division of work, anticipated vacation time
and the division of profits and losses.

6. Prepare for the worst

Some of the partnerships fail. As a contingent plan for the failure of the
partnership, the partners should have exit strategy from the beginning.

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Partnership can fall apart because of market conditions shift, involvement of a

partner in another business

Venture or personal circumstances change. E.g birth of child, sudden divorced,

unexpected death of spouse.

Rights and duties of partners

Freid Steingold, author and practicing business attorney in his book, legal Guide for
Starting and Running a Small Business: recommends that partners sign a written
partnership agreement. This is a document that states explicitly the rights and duties of
partners. Unless the articles of partnership agreement specify, a partner is recognized as
having certain implicit rights e.g. sharing profits or losses equally, unless they have
agreed to different ratio.

In a partnership, each party has agency power: - the ability of anyone partner to legally
bind the other partners even if the other partners were not consulted in advance or did not
approve agreement or contracts. The assets of the business are at risk including personal
assets:- homes, cars and bank accounts. Partners cannot compete in another business and
remain a partner or use business information solely for personal gain.

Help for ailing partnership

Ailing partnership start when problems emerge and trust begins to break down. Partners
should move quickly to resolve underlying issues if they fail to solve the problems, they
should hire a business mediator to resolution. This should be done as last resort because
hiring a business mediator is expensive.

Termination of a partnership

Partnership can be terminated by any of the following:

Death of any partner
Incapacity of any partner
Withdrawal of any partner
The above can necessitate the end of partnership and necessitates liquidation or
reorganization of the business, which should be stipulated in the articles that surviving
partners can continue the business after buying the decedents interests.

The Corporation option

This is an ordinary corporation often called C corporation to distinguish it from more
specialized forms. Corporation is an ordinary corporation taxed by the government as a
separate entity. The corporation is recognized by the Supreme Court as legal entity
meaning that a corporation can sue and be sued, hold and sell property, and engage in

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business operations that are stipulated in the corporate charter or articles of incorporation
(articles of association and memorandum agreement).

Corporate charter
This is a document that establishes the organizations existence. The corporation is
chartered under state laws. The length of corporation life is independent of its owners
who are liable for the debts of business. The directors and officers serve as agents to bind
the corporation.

The corporate charter

The corporation is formed through an application to the secretary of state by one or more
persons for permission to incorporate. The application is approved by the secretary of
state after payment of incorporation fee. After this, the corporate charter is declared a
legal document.

A corporate charter should be brief in accord with state law by outlining basic rules for
ongoing formalities and decisions of corporate life, scheduling of directors and
shareholders meeting, number of votes to approve corporate decisions.

Rights and status of stockholders

Stock certificates which stipulates the number of shares owned by a stockholder is the
evidence of ownership in a corporation. Ownership gives the stockholder the right to
receive dividends in proportion to stockholding but does not give them a legal right to act
for the firm or management of the firm. Ownership of stock carries a preemptive right.
Preemptive right is the right of stockholders to buy shares of stock before they are offered
to public.

In many small businesses the ownership typically serves both as directors and managing
officers. A person who owns most or all of the stocks can control a business effectively
as if it were a sole proprietorship. This form of organisation works well for individual
and family owned business, where maintaining control of the firm is important.

The working relationship and legal relationships for all owners of the corporation must be
sound for the success of the business. The owners and management team must define
clearly their expectations about working relationships in order to have harmony in the
operations of business.

Limited liability of stockholders

Limited, liability is a major advantage of the corporate form of organization, to most
stockholders. The financial liability of the stockholders is limited to the amount of
money they invest in business. Thus creditors cannot require them to sell personal assets
to pay corporation debt.

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Small corporation during the early years of operation are asked by banks if they borrow
money to assume personal liability from the firms debts by signing promissory notes not
only as representative of the firm but personally as well. In the event the corporation
fails to pay the loan, the banker will recover it through personal assets.

Death or withdrawal of stockholders

Unlike in partnership, ownership in a corporation is readily transferable. Exchange of

shares of stock is sufficient to convey an ownership interest to a different individual.
Stock of a large corporation is exchanged constantly without noticeable effect on the
operation of business. For a small corporation, a change of ownership though legally
similar can involve numerous applications such as:
Difficulty in finding a buyer for the stock of the small firm.
Vulnerability of minority stockholder in a small firm if for example two or three
stockholders sell their stocks to outsiders.

The death of a major stockholder can have an unfortunate repercussion in a small firm.
An heir, the executor or a purchase of the stock might insist on direct control, which will
cause effects to the other stockholders. To prevent problems of this nature, legal
arrangement should be made at the outset to provide management continuity by surviving
and fair treatment of the stockholders heir.

Maintaining corporate status

The corporation can retain its status as a separate entity as follows:

Holding annual meetings for both the shareholders and board of directors
Keeping minutes to document the major decisions of shareholders and directors
Maintain bank accounts that are separate from owners bank accounts
File a separate income tax return for the business.

Criteria for choosing an organizational form

Choosing a legal form for a new business deserves careful attention because sometime
conflicting features of each organizational option. The following criteria are considered
when choosing an organizational form.

Initial organizational requirements and costs.

The organizational requirements and costs increase as the formality of the organization
increases. That is a sole proprietorship is typically less complex and less expensive to
form than corporation.

Liability of owners

A sole proprietorship and a partnership have an inherent disadvantage of unlimited

liability for the owners. In contrast, the firms limit the owners liability to their

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investment in the business. If the corporation is small its owners are often required to
guarantee a loan personally.

Continuity of business
A sole proprietorship is immediately dissolved on the owners death with partnership,
termination is on death or withdrawal of a partner, unless the partnership agreement state
otherwise. On the other hand, a corporation offers continuity and the status of individual
investor does not affect the corporations existence.

Transferability of ownerships
Ownership is easily transferred in the corporation. With partnership, it requires the
consent of all partners and with sole proprietorship ownership may be transferred in
company name and assets.

Management control
A sole proprietorship has absolute control of the firm. In partnership control is normally
based on the majority vote. An increase in the number of partners reduces each partners
voice in management. Within a corporation, control has the following two dimensions:

The formal control vested in the stockholders who own the majority of the voting
common shares.
Functional control exercised by corporate officers in conducting business operations
in a small corporation, these two forms of control usually rest in the same individuals.

Attractiveness for raising capital

A sole proprietorship and partnership discourage new investors because of unlimited
liability. In contrast, a corporation has a distinct advantage when raising new equity
capital, due to the ease of transferring ownership through the sale of common shares and
the flexibility in distributing the shares.

Income taxes
Income taxes frequently have a major effect on an owners selection of a form of
organization.

Sole proprietorship
Self employed individual who operate business are taxed on the rates set by law for
individuals.

Partnership
Income from the partnership is taxed as personal income to the partners.

C Corporation
The C Corporation is taxed on its income from the business operations profits and the
shareholders are taxed if and when dividends are received.

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Specialized forms of organization

The majority of new and small business use one of the above-mentioned forms: sole
proprietorship partnership and C Corporation. There are, however other forms of
specialized types of organization which can be used by small firms such as limited
partnership, the corporation and limited liability company.

Limited partnership

The limited partnership is a special form of partnership involving at least one general
partner and one or more limited partners. The general partner remain personally liable
for the debts of the business and the limited partners have limited personal liability as
long as they do not have an active role in the management of partnership. Limited
partners only risk the capital they invest in the business without exposing their personal
assets to liability claim that might arise through activities of the business. If the limited
partner becomes actively involved in management of the partnership business, the limited
liability is lost. The limited partnership comes into effect when the proper state office
approves a certificate of limited partnership.

The S Corporation

The designation of S Corporation or Sub-chapters Corporation is derived from sub

chapter S of the internal revenue code, which permits a business to retain the limited
liability feature of a C Corporation while being taxed as a partnership.

A Corporation must meet the following requirements in order to obtain S Corporation

status.
No more than 75 stockholders are allowed (wife and husband count as one)
All stockholders must be individuals or certain qualifying estates and trusts
Only one class of stock can be outstanding
Fiscally, the corporation must operate on a calendar year basis.
Non-resident alien stockholders are not permitted

The S Corporation does not pay corporate taxes instead passes taxable income or losses
to stockholders. This allows stockholders to receive dividends from corporation without
taxation on the corporations profits. A tax attorney should be consulted before S status is
elected as a tax law charges have considerable effect on the S Corporation arrangement.

(3) The Limited Liability Company

The limited liability company is the newest form of organization in which the
stockholders have limited ability and no tax is paid on corporate income but simply pass
that income on to their owners who pay taxes on it as part of their personal taxes.

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A limited company might not be the best way to go as under the following conditions it
will be better to use a C corporation.

You want to provide extensive fringe benefits to owners or employees. The C

Corporation can deduct these benefits and are not treated as taxable income to
employees.
You want to offer stock options to employees. Since limited liability companies do
not have stock, they cannot offer such incentives.
You hope to go public or sell out at some time in future. A C corporation can go
public or sell out to another corporation in a tax free, stock for stock exchange.
You plan to convert a C corporation eventually. You cannot change from a pass
through entity like a limited liability company without paying additional taxes.

KEY TERMS

Ordinary Income- Income earned in the ordinary course of business including any
salary.

Capital gains and losses Gains and losses incurred from sales of property that are not a
part of the firms regular business operations.

Section 1244 Stock - Stock that offers some tax benefit to the stock holder in the
case of corporate failure.

Limited Partnership - A partnership with at least one general partner and one or
more limited partners.

General Partner - A partner in a limited partnership who has unlimited

Liability
Limited Partner - A partner in a limited partnership who is active in the
management of the business and has limited personal
liability.
S Corporation - S Corporation or Subchapters Corporation is a type
of
corporation that is taxed by federal government as a
partnership.

FORMING STRATEGIC ALLIANCES

Strategic Alliance

Strategic Alliance is an organization relationship that links two or more independent

business entities in some common endeavour. They can enter into long term or short
term relationships or contracts with their trading partners. A strategic alliance provides a
way for firms to improve their individual effectiveness by sharing certain resources
without affecting the independent legal status of the participating business partners.

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Strategic alliances with large companies

The strategic alliance created between small firms and large companies are important for
the complementary skills and expertise of partnered firms, in order to promote the
competitive edge/advantage of both partners.

Large companies, sometimes team up with small firms in product development efforts.
The financial resources of large firms and creativity of small firms can be combined to
the benefits of both businesses. Giant retailers can form alliances with smaller suppliers
so as to work hand in hand to achieve specific quality requirements and meet demanding
delivery schedules.

Combining the speed, flexibility and creative energy of a small business with the
infrastructure of large corporation can be a winning strategy. Alliance with large firms
can give a tremendous boost to the business of small firms.

Advantages of strategic alliance of small firms and large firms

Combined skills and expertise of partnered firms

Financial stability of large firms (financial strengths)
Reputation of large companies
Speed, flexibility and creative energy of small firms
Developed infrastructure of large corporation.

Disadvantages
Bureaucratic complications in large firms
Potential downside to being so dependent on a single relationship

Strategic alliance with small firms

Small business can form strategic alliance with other small firms in ways that enhance
mutual competitive strength. Strategic alliances hold great promise for small
entrepreneurships businesses. By combining resources with carefully selected partners,
small firms can increase their competitive strength and reach goals that would otherwise
be too costly or too difficult for them to accomplish their own.

Setting up and maintaining successful strategic alliances

Strategic alliances are important growth but finding a suitable partner can be challenging.
For contracts of strategic alliance, many entrepreneurs consult strategic alliance
matchmakers. These are brokers who provide the following:
They maintain a wealth of contract with decision makers at corporations that have
resources small companies need to fill in the gaps in their operations.
They help entrepreneurs to fine tune their alliances proposals o ensure that
corporate insiders take them seriously.

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STEPS TAKEN TO IMPROVE THE CHANCES OF SUCCESSFUL STRAGEGIC

ALLIANCES.

1. Establish a healthy network of contacts

2. Identify and contact individuals
3. Do your homework, and you will win points for being prepared
4. Learn to speak and understand the language of your partner
5. Make sure any alliances offer is clearly a win-win opportunity
6. Continue to monitor the progress of the alliance to ensure that goals and
expectations are being met, and make changes as they become necessary.

BOARD OF DIRECTORS
Board of Directors is a governing body for corporate activity, elected by the stockholders.
The board of directors in turn elects the firms officer, who manages the enterprise with
the help of management specialist. The directors also set or approve management
policies, consider reports on operating results from the officers and declare dividends (if
any). In entrepreneurial firms the board of directors tends to be small, usually five or six
members.
The majority shareholders in small corporations appoint a board of directors, often only
to fulfil a legal requirement or as a mere window dressing for investors. Very little or no
use of directors in managing the firm and the entrepreneur may resist efforts of these
directors to provide managerial assistance. Entrepreneur of this nature when appointing
board of directors tends to select from personal friends, relatives or business persons who
are busy to analyse the firms operations.
The growing complexities of small business arising from globalisaiton and technological
developments makes the expertise of well chosen directors especially valuable. The
board need to be both practical and beneficial, well informed, skeptical and independent.

Contributions of Directors
The compensation paid to board members is not stipulated but varies greatly with
companies and small firms pay no fees at all. Compensation is usually offered in the
form of annual retainer, board meeting fees and pay for committees work. Directors
may serve on committees that oversee executive compensation, audit the companys
financial reports and perform other critical functions. Board membership is less likely to
be limited to local talent is the company is willing to pay directors travel expenses when
they attend meetings. Some small business also offer board members stock option
packages depending on industry practice and plans for growth. Modest compensation
offered for the services of well qualified directors suggests that financial compensation is
not their primary motivation for serving on a board. Reasonable compensation is
appropriate, however if directors are making important contributions to firms operations.

An alternative: An Advisory Council

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Increased attention has been directed to the legal responsibilities of directors because
outside directors may be held responsible for illegal company action even though they are
not directly involved in wrong doing.

Some small companies use an Advisory Council as an alternative to a board of directors.

Qualified outsiders are asked to serve on a council as advisors to the company,
functioning in the same way as a board of directors although actions are only advisory in
nature.

The legal liability of an advisory council does not constitute the personal liability of
members. The council posses less threat to the owner and possibly work more
cooperatively than a conventional board.

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CHAPTER 9: THE LOCATION PLAN

The importance of a Location Decision

The choice of a location is a one-time decision drawn from the following:
i. Brick and mortar store the traditional physical building
ii. The entrepreneurs home
iii. Website on the internet

Key Factors in Determining / Selecting a Good Location

There are five key factors that guide the location selection process namely:
a) Customer accessibility
b) Business environment conditions
c) Availability of resources
d) Personal preference of the entrepreneur
e) Site availability and costs

Customer Accessibility
Customer accessibility is generally an important consideration in selecting a location.
Retail outlets and service firms are examples of businesses that must be located so as to
make access convenient for target customers. Customers are rarely willing to travel long
distances for shopping.

Customer accessibility is vital in industries in which the cost of shipping the finished
product is high relative to the products value, e.g. packaged ice and soft drinks must be
produced near consuming markets, because transporting these products can be an
expensive process.

Business Environment Conditions

Environmental conditions are important consideration for new ventures or startup
businesses. They can hinder or promote the success of the business e.g. weather.
Environmental factors such as competition, legal requirements and tax structure
economic and technology are a few of many critical factors that influence the location of
a business. The main objective of the entrepreneur is to make profit and all factors
affecting this endeavour are of great concern. The state and local government can help
hinder a new business by forgiving or levying taxes.
To attract establishment of new business, many states offer location incentives such as
enterprise zones: state areas designed to bring jobs to deprived regions. The new
ventures are offered regulatory and tax relief in exchange for locating or expanding in
these areas such as total exemption from the property taxes.

Availability of Resources
The availability of resources associated with producing a product and operating a
business should also be considered in selecting a location. Some factors such as raw
materials, labour supply and transportation have an important bearing in the selection of

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location. Nearness to raw materials and suitability of labor supply are particularly critical
considerations in location of a manufacturing business.
Nearness to raw materials: a region in which materials are available offers a special
location advantage. For a business is dependent of bulky or heavy raw materials that
lose much of their bulk of weight in the manufacturing process, proximity to these
materials is a powerful force driving the location decision e.g. sawmill business must
stay close to its raw material in order to operate economically.

Suitability of labor supply A manufacturers labor requirements depend on the

nature of its production process. Availability of workers, wage rates, labor
productivity and a history of peaceful relations with employees are particularly
important considerations for labor-intensive firms. In some cases, the need for semi-
skilled or unskilled labor justifies locating in an area with surplus labor.

Availability of Transportation Access to good transportation is important to almost

all firms. Evaluation of trucking routes that support transport needs, considering
costs of both transporting supplies to the manufacturing location and shipping
finished product to customers, should be done in order to know whether costs will
allow product to be competitively priced.

Personal Preference of the Entrepreneur

Many entrepreneurs tend to have a personal preference of locating a business in their
home community, discounting other factors such as customer accessibility, availability of
resources and business environment conditions. Locating business in ones home
community is not necessarily illogical but offers certain advantages such as:
The entrepreneur generally appreciates and feels comfortable with the home
community atmosphere.
Easy establishment of credit
Hometown bankers can be dealt with more confidently
Help from close business persons in evaluating opportunities
Better understanding of potential customers tastes and preferences
Potential customers from friends and relatives
Relatives and friends as first customers may help advertise products/services

Site availability and Costs

The availability of potential sites and the costs associated should be considered in
selecting a location for the business.
Site Availability Many entrepreneurs, because of lack of knowledge, seek
professional assistance in determining site availability and appropriateness. Local
realtors (real estates) can serve as a good source of insight. As an alternative,
entrepreneurs may consider business incubators. A business incubator is a facility
that provides shared space, services and management assistance to new businesses,
which helps to lower operating costs. The purpose of business incubator is to see new
business hatch, grow and leave the incubator.

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Site Costs Site selection process must depend on evaluation of relevant costs.
Entrepreneurs are frequently unable to afford the best site and the costs involved in
building a new site. When a suitable building is available the entrepreneurs must
decide to lease because leasing has the following benefits than to buy:
A large cash outlay is avoided
Risk is reduced by avoiding substantial investment and by positioning commitments
for space until the success of the business is assured and the nature of building is
better known.

When leasing, entrepreneur should check with landlords insurance policies with the
attorneys assistance to cover risks.

Challenges of Designing and Equipping the Physical Facilities

A location plan should describe physical space where business will be housed including
equipments.

Challenges in Designing Physical Facilities

Entrepreneurs must avoid committing to a space that is to large or luxurious but one that
fits well with the operations. These include fire hazards, heating / air conditioning,
lighting, restroom facilities, entrances and exists. Considerations should be made for
factory operations, wholesale or retail, which possesses comfort, convenience and safety
to business employees and customers.

Challenges in Equipping the Physical Facilities

The tools for the physical facilities could be purchased or leased since manufacturing,
retailing and office equipment requires different tools and equipments.

Manufacturing Equipment
General-Purpose equipment:
These require minimal investment and serves many functions in the production process
e.g. lathe drill presses, ripsaw, planning mills and jigs. The equipment contributes
flexibility in industries when products are new and technology is not yet developed.

Special-purpose equipment:
These can include in industries with established technology and are designed to serve
specialized functions in the production process e.g. bottling machine, automobile
assembly and a milking machine in a diary. The use of special-purpose machines results
in greater output per unit of the product although initial cost of equipment is much higher.

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Retails Store Equipment

Small retailers need merchandise display racks/counters, storage racks, shelving, mirrors,
seats for customer, pushcarts, cash registers. If the store will serve high-income
customers, the fixtures should display elegance and style expected by such customers e.g.
polished mahogany showcases with bronze fittings and lend a richness with indirect
lighting, thick rugs and big easy chairs to the atmosphere. In contrast, stores catering for
lower income customers should concentrate on simplicity as luxurious fixtures create an
atmosphere inconsistent with low prices.

Office Equipment
These include furniture, storage cabinets, computers, fax machines, copiers, printers,
telephone systems adaptable to advances in technology. The equipment selected will
assist in planning for the funding of their purchase.

Business Image
The appearance of the workplace should create a favourable impression about the quality
of a firms product or service whether they are retailers, wholesalers, manufacturers or
service providers. The physical facilities convey the image of a stable and professional
company.

Locating the Startup in the Entrepreneurs Home

Home based business is a business that maintains its primary facility in the residence of
the owner (garage, basement or spare room).

The attraction of Home Based Business

Why do many entrepreneurs find operating a business at home so attractive?
The main attractions of a home based relate to financial and family life considerations.

1. Financial Considerations
The main objective of a home based business is to earn money. Thus locating at home
helps to increase profits by reducing costs.

2. Family Lifestyle Considerations

Entrepreneurs who locate their business operations in the home are frequently motivated
by the desire to spend more time with the family members.

Challenges of home based businesses

1. Legal Considerations
Some local laws pose a problem for home-based business. The local laws regulate the
type of enterprises permitted in various geographical areas. Some cities outlaw any type
of home-based business within city limits. The intent of such laws is to protect a
neighbourhoods residential quality by preventing commercial signs and parking
problems (zoning ordinances local laws regulating land use).
2. Professional image
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Maintaining a professional image when working at home is a major challenge for many
home based entrepreneurs. Young children may answer the telephone, a dog barking or
baby crying in the background any undermine a companys image

Entrepreneurs Reasons for Operating a Home Based Business

Primary Income 18%
Second Income 36%
To be own boss 21%
Family responsibilities 125
Health, no work, new ideas/others 12%

Other Challenges of Home Based Business

Tax Issues
There is also a tax issue related to home based business. Generally a separate space must
be clearly devoted to business activities in order for the entrepreneurs to claim a tax
deduction.

Insurance Considerations
Insurance considerations may also affect a home-based business. An entrepreneurs
policy is not likely to cover business activities, liabilities and equipment.

World Wide Web (WWW) A subset of the internet that is accessible through the use of
HTTP to link document at various URLs that are composed in HTML
HTTP Hyper Text Transfer Protocol
URL Uniform Resource Locator

Benefits of E-Commerce to startups(locating the startup on internet)

It offers the new firm the opportunity to compete with bigger business on a more level
playing field using limited resources. Thus e-commerce allows any business access to
customers almost anywhere. The internet is proving to be a great equalizer, giving small
firms a presence comparable to that of the giants in the market place.

E-Commerce operation reduces the sales cycle time thereby helping startup business with
cash flow problems sales cycle. The time when the order is generated, received and
converting the sale to cash. It is also designed to generate an order, authorize credit card
purchase, contact supplier / shipper timeously without human interference.

E-Commerce enable small firms to build long-term relationship with customers.

Electronic Customer Relationship Marketing (ECRM) is an electronically based system
that emphasis customer relationships, with the goal of building customer loyalty. The
ECRMM system allows integration of data from websites, call centres, sales force reports
and customer contact points.

E-Commerce Business Models

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Business Models
The terms business model describes a group of shared characteristics, behavior and goals
that a firm allows in a particular business situation. Poorly designed business models can
be a major factor in business failure.

E-Commerce Business Models

Business to Business (B2B)

Type of customer served
Business to Consumer (B2C)

Consumer to consumer (C2C)

Content based
Degree of online Presence
Information based

Transaction based

Emerging based

Brick and mortar firms are classified as manufacturers, wholesalers, retailers.

There are three types of e-commerce business models:

a) Business to business (B2B) (Selling to business customers)
b) Business to Consumer (B2C) (Selling to final Consumers)
c) Auction Sites (Lists Products for bidding)

Business to Business Models

Business to business (B2B) models are based on selling to business customers
electronically. The dollar amounts generated by firms using a business to business (B2B)
model are significantly greater than those listed with business to consumer model.

Business to Consumer Models

Business to Consumer (B2C) a business model based on selling to final customers
electronically. A Business to Consumers (B2C) model has final customer as customers
e.g. Amazon.com, ebay. The B2C model introduces another alternative for consumers
buying online. The B2C ventures are extremely diverse in the products they sell, with
offering ranging from clothing to items, computer software, toys and groceries. The B2C
models offers three main advantages over brick and mortar retailing.

Speed of Access
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Speed of Transaction
Round the clock access to products or services often referred to as 24/7 e-tailing

24/7 e tailing electronic retailing providing round the clock access to products and
services.
However, consumers tend to avoid online shopping because of reluctance to send credit
card data electronically and purchasing a product without first seeing it. The (B2C)
dot.com business have availability and capability to change merchandise mixes, prices
and appearance of the store (website).
Disintermediation-no intermediaries involved. Bzns wholesaler buy pass middle
man in order to sell the product directly to the consumer.

Consumer to consumer models

A business model usually set up around internet auction sites that allow individuals and
companies to list items available for sell to potential bidders. Commonly these are known
as auction sites.
Some entrepreneurs sell their wares over the internet without either a website or a store
front by means of e-commerce sites based on the auction site model. Internet auction
sites are web based businesses offering participants primarily final consumers but also
businesses the ability to list products for bidding by potential buyers. Revenues to the
auction site are derived from listing fees and commissions on sales e.g. Ebay,yahoo.com.

Auction Sites web based businesses offering participants the ability to lists products for
bidding.

Nature of Online Presence

This is a second broad way of categorizing e-commerce models relates to the firms
intended level of online presence. The role of a website can range from merely offering
content and information to enabling complex business transactions.

Content Based Model a business model in which the website provides the users the
privilege of connecting and gaining access to its contents. The website charges a fee for
access but does not allow the user to buy or sell products or services.

Information Based Model a business model in which the website build on this model
contains information about the business, products and other related matters but does not
charge for its use. Orders can be placed by linking to another site.

Transaction Based Model a business model in which the website provides a

mechanism for buying or selling products or services. The transactions based model
which is at the heart of e-commerce calls for websites to be online stores where visitors
got to stop, click and buy. Eg ebay ,amazon, book hotels n flights online

Emerging models the internet is well known for rapid changes and therefore new
models continue to emerge due to entrepreneurial minds. blogs, popups

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Some Unique Properties of the Internet

Asynchronous Nature 24/7, 365 days a year, time zone does not hinder customers.

Instantaneous Communications Companies communicate internally and externally

with speed e.g. queries.

Cost Structure of Information Goods firms whose distribution is unique and can be
transformed into digital code and downloaded e.g. books, music.

Network Effects Network becomes valuable if more people use it.

Disintermediation cost effective by bypassing intermediaries

The internet as an Equaliser cost efficiency in setting a website as small companies

will also compete with large companies.

Extract from: e-commerce a South African perspective by Kerry Chipp and Zenobia
Ismail.

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CHAPTERS 10; 11; 12: THE FINANCIAL

PLAN

Part 1
Projecting Financial Requirement

Financial Statements /Accounting Statements

Reports of a firms performance and resources, including an Income Statement, Balance
Sheet and Cash Flow Statement.

Income Statement / Profit and Loss Account

A financial report showing profit or loss from a firms operations over a given period of
time usually monthly or yearly.
In its basic form the income statement may be presented by:
Sales (revenue) - Expenses = Profit

Cost of goods sold

The cost of producing or acquiring goods or services to be sold by the firm.

Gross Profit - Sales less cost of goods sold

Operating Expenses- consists of marketing and selling expense, general and
administrative expenses and depreciation expenses.
Operating Income- this is also called earnings before interest and taxes. This is
earning or profits after operating expenses but before interest and taxes are paid.
The operating income of a firm includes the results of the following activities:
Sales revenue derived from selling the companys products
The cost of producing or acquiring the goods or services to be sold (cost of goods sold)
Operating expenses which include marketing and selling expenses, general and
administrative expenses and depreciation expenses.
Financing cost of doing business such as interest
Tax payments

Financial costs the amount of interest owed to lenders on borrowed money.

Earnings before taxes earning of profits after operating expenses and interest expenses
but before taxes.
Net income this is the result when taxes are subtracted from earnings before taxes. This
is income that may be distributed to the owners or reinvested in the business.
Depreciation expense costs related to a fixed asset, such as building or equipment
allocated over its useful life.

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The Income Statement

Operating Activities
Sales Revenue XXX
Less cost of goods sold XXX

Gross Profit XXX

Operating Expenses
Marketing and selling expenses XXX
General and administrative Expenses XXX
Depreciation expenses XXX

Total Operating expenses XXX

Operating Income XXX

Financing activities
Interest expense . XXX

Earnings before taxes .. XXX

Income tax (%) .. XXX
Net Income .. XXX

Net income . XXX

Less dividends paid .. XXX

Charge in retained earnings .. XXX

THE BALANCE SHEET

The financial report showing a firms assets, liabilities and ownership equity at a specific
point in time.

Total assets = Oustanding debt + Ownership equity

Assets
Current Assets (gross working capital) assets that can be converted into cash within the
firms operating cycle. Current assets include cash, accounts receivable and inventories.

Cash

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The size of a firms cash reservoir is determined not only by the volume of sales but also
by the predictability of cash receipts and cash payments. The firm needs cash for current
business operations.

Accounts Receivable consists of payments from its customers from previous credit
sales (The amount of credit extended to customers that is currently outstanding).

Inventory the firms raw materials and products held in anticipation of eventual sale.

Fixed assets relatively permanent assets intended for use in the business such as plant
and equipment.

Depreciable assets assets whose value declines or depreciate over time.

Gross fixed assets original cost of depreciable assets before any depreciation expenses
has been taken.

Accumulated Depreciation total depreciation expenses taken over the assets life.

Net fixed assets gross fixed assets less accumulated depreciation

Other assets those are assets other than current assets and fixed assets such as patents,
copyrights and goodwill.

Debt and Equity

Debt business financing provided by creditors account debt (short term liabilities)
(Borrowed money that must be repaid within 12 months) and long term debt (borrowed
money with repayment period terms of more than 12 months).
Financing comes from two main sources:
Debt
Ownership equity (money that the owners invest in a business)

Sources of current debt

Accounts payable (trade credit) outstanding credit payable to suppliers for purchases of
inventories.
Accrued expenses short term liabilities that have been incurred but not paid e.g. accrued
taxes that are owed but not paid, employees may have performed work for which they
will not be paid until the following week or month.
Short term notes are cash amounts borrowed from a bank or other lending sources that
must be repaid within a short period of time such as 90days
Long term debt includes loans from the bank or other sources with repayment period
terms of more than 12 months. This can be in form of mortgage which is a loan from
creditor for which real estate is pledged as collateral.
Ownership equity owners investment in the company plus profits retained in the firm.
Retained earnings this is profits made by the firm less withdrawals (dividends) over the
life of the business.
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Earnings retained within the business

Ownership equity = owners investment + cumulative - cumulative

Profit dividends paid to owners

BALANCE SHEET
Assets
Fixed Assets
Gross fixed assets XXX
Accumulated depreciation (XXX)

Net fixed assets XXX

Current Assets
Cash XXX
Accounts Receivable XXX
Inventories XXX
Total Current assets XXX

Total assets XXX

Debt (liabilities) and equity

Current liabilities
Accounts payable . XXX
Short term notes .. XXX

Total current liabilities . XXX

(debt)
Long term debt . XXX
Total debt . XXX

Ownership equity
Common stock . XXX
Retained earnings . XXX
Total ownership equity . XXX
Total debt and equity . XXX

Cash flow Statement

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Cash flow Statement a financial report showing the firms sources of cash and its uses.
It answers the question where did the cash come from and where did the cash go.

Accrual Basis Accounting a method of accounting that matches revenue when they
are earned against the expenses associated with those revenues, no matter when they are
paid.

Cash Basis Accounting is a method of accounting that reports cash transactions only
when cash is received or a payment is made.

Cash flow distinguishes between:

Cash that occur from operating the business (operating activities)
Cash flow received from or paid to lenders and investors i.e. cash flows from financing
(financing activities)
Cash flow related to the investment in or sale of assets (investment activities)

Cash from assets indicate whether the firm can support sustainable growth i.e. growth
that can be financed from cash flows generated from operating the business.
Cash flow statement measures a firms cash inflows and outflows.
Items needed to complete a cash flow statement come from the Income Statement and
Balance Sheet.

Cash flow from operating net cash flows generated from operating a business,
calculated by adding back to operating income, depreciation, deducting income taxes,
factoring in any changes in net working capital.

CASH FLOW STATEMENT

Operating Activities

Sources of Income
Operating Income .. XXX Income Statement
Depreciation .. XXX Income Statement
Income Tax .. (XXX) Income Statement
Adjusted Income . XXX

Changes in the companys working capital

Decrease or increase in
Accounts receivable XXX Balance Sheet
Inventories.. XXX Balance Sheet
Accounts payable XXX Balance Sheet
Accruals... XXX
Change in net working capital XXX

Cash flows from operations XXX

Investment Activities
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Increase or decrease in
Gross fixed assets (XXX) Balance Sheet

Financing Activities
Interest Expenses .XXX.. Income Statement
Dividends .XXX.. Income Statement
Increase or decrease in
Short term notes .XXX Income Statement
Long term debt .XXX Balance Sheet
Total financing activities XXX

Increase or decrease .. XXX

Components of the cash flow statement

Operating activities cash flows from operations of a business, which covers sales
(revenues) less costs of goods less operating expenses.
Investment activities this is when some equipment or other depreciable assets are sold
or purchased. In this regard cash flows occur that are not shown in the income statement.

Financing activities : This is a cash statement that presents the cash inflows and
outflows resulting from financial activities. These includes (1) payment of dividends and
interest expense (2) increasing or decreasing short term and long term debt which means
borrowing more money (increase in debt) or paying off debt (a decrease in debt) (3)
issuing stock (source of cash) or repurchasing stock (use of cash).

Adjusted Income after tax cash flow

Net Working Capital money invested in current assets other than cash less accounts
payable and accruals.

INCOME STATEMENT AND BALANCE SHEET

Income Statement (Profit and loss statement) at 31 December 2005

Sales $850 000.00

Cost of goods sold $550 000.00
Gross Profit $300 000.00

Operating expenses
Marketing expenses $ 90 000.00
General and Administrative expenses $ 80 000.00
Depreciation Expenses $ 30 000.00

Total operating expenses $200 000.00

Operating income $100 000.00
Interest expense $ 20 000.00
Earnings before tax $ 80 000.00
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Income tax (255) $ 20 000.00

Net Income $ 60 000.00

Net income $ 60 000.00

Dividend paid $ 15 000.00

Change in retained earning $ 45 000.00
Changes December 31 2004 to December 2005
Balance Sheet
Assets
Cash $ 5 000.00
Accounts receivable $ 5 000.00
Inventories $ 40 000.00
Gross plant and equipment $100 000.00

Debt and Equity

Accounts payable $ 5 000.00
Short term notes $ 20 000.00
Long term debt $ 5 000.00
Common stock $ 0

Cash flow Patterns

Cash flow Patterns Operations Investment Financing
1 + - +
2 + - -
3 - + +
4 - - +

Pattern 1
A firm with this cash flow pattern has positive cash flows from operation, negative
investment and positive cash flow from financing. The company swings is cash flows
from operations and new financing to expand the firms operations.

Pattern 2
Cash flow pattern 2 depicts a firm that is using cash flows from operations to expand the
business pay down debt or pay its owners.

Pattern 3
This pattern describes a company that is encountering negative cash flows from
operations, which are being covered by selling assets and by borrowing or acquiring more
equity finance.

Pattern 4
This shows a firm has negative cash flow from operations and is growing the companys
fixed assets through increased financing. This pattern would describe a startup business
that has yet to break even, investing in fixed assets to produce future cash flows and has
to raise capital to make that happen.
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CASH FLOW STATEMENT

Operating activities Source of Information

Operating Income $100 000.00 Income statement
Depreciation Expenses $ 30 000.00 Income statement
Income tax ($20 000.00) Income statement
Adjusted income 110 000.00

Changes in companys working capital

Increase in accounts received ($ 5 000.00 Balance sheet
Increase in inventories ($ 40 000.00 Balance sheet
Increase in accounts payable $ 5 000.00 Balance sheet
Change in networking capital ($40 000.00)

Cash flow from operations $ 70 000.00

Investment Activities
Gross fixed assets ($100 000.00)

Financing Activities
Interest expense ($20 000.00) Income statement
Dividend ($15 000.00) Income statement
Short term notes ($20 000.00) Balance sheet
Long term debt $50 000.00

Total financing activities $35 000.00

Increase in cash $ 5 000.00

Financial forecasting
The purpose of proforma financial statements is to help answer the following:

1. The profitability of the firm given projected sales levels and expected sales
expenses relationships.
2. How much type of financing to be used (debt or equity)
3. Will the firm have adequate cash flows and their utilization?

Forecasting profitability

a) Amount of sales
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Dollar amount of sales = price of product / service x number of units sold/service

rendered.
b) Cost of goods sold and operating expenses
It includes costs of producing goods/services, marketing and distributing
expenses, general and administrative expenses and depreciation. They can be
fixed (those not varying with change in sales volume) or variable (those changing
proportionally with sales).
c) Interest expense
Interest paid for borrowed money
d) Taxes
Taxable income payable as a percentage (earnings before taxes)

Small firms requiring large sums of money for capital investment (assets) try to
do without anything not essential and spend less money on those essential items.
The goal is to minimize and own resources. These can be lease than buy,
negotiate with suppliers for inventory (just in time) collect money owed before
paying bills which is normally referred to as bootstrapping minimizing a firms
investments.

Determining assets requirements

Small firms can use the percentage of sales technique a method of forecasting asset
investments and financing requirements.

Worked Example

Projected sales Year 1 Year 2

250 000 400 000

Assets Percentage of sales

Cash 5%
Amounts receivable 10%
Inventories 25%

Computations
Sales Year 1 Year 2
250 000 400 000
Assets Assumptions
Cash 5% of sales 12 500 20 000
Accounts receivable 10% of sales 25 000 40 000
Inventories 255 of sales 62 500 100 000
Total current assets 100 000 160 000
Gross fixed assets (equip and buildings) 50 000 50 000
Accumulated depreciation 4 000 annually (4 000) (8 000)
Net fixed assets 46 000 42 000
TOTAL ASSETS 46 000 202 000
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Determining Financial Requirements

1. A firm with rapid sales growth has greater asset requirements, which calls for
extra financing. This puts pressure on the organization and the pressure can be
intolerable if not managed carefully.

2. A firm should finance growth to maintain liquidity (degree to which a firm has
working capital available meet maturing debt obligations). It is also measured by
current ratio which compares firms current assets to its current liabilities.
Current ratio = Current assets
Current liabilities

The general rule maintains a current ratio of at least 2 current assets equal to twice
current liabilities (2:1).

3. The total debt in financing a business is limited by funds provided by owners, as

banks will not provide all the financing. The business plan should specify that at
least half of firms financing will come from the owners and the rest from the debt
so as to limit debt ratio a measure of fraction of firms assets that are financed by
debt, determined by dividing total debt by total assets.

Debt ratio = Total debt

Total assets

4. Some types of short term debt accounts payable and accrued operating expenses
maintains a constant relationship with sales as they rise or fall spontaneously as
firms sales increase or decrease.

Spontaneous financing short term debts such as accounts payable that

automatically increase in proportion to a firms sales.

5. Equity can be internal or external and is described as the investment owners make
in the firm.

External equity capital that comes from the owners investment in the firm.
Internal equity capital that comes from the retaining profits within the firm.
Profit retention reinvestment of profits in a firm.
Total assets requirements = total source of financing = spontaneous
financial + profits retained within the business + external sources of
debt + external sources of equity.

Practical Suggestion when Making Financial Forecasts

a) Develop Realistic Sales Projections
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Entrepreneurs are over ambitious when it comes to forecasting future sales which when
graphed resemble a hockey stick. Sales are flat or rise slightly at first (like hockey stick
blade) then soar upward like a hockey stick handle. These projections are suspect but can
be justified by business or market conditions.

b) Build Projections from Clear Assumptions about Marketing and Pricing Plans
There must not be vagueness but the marketing plan such as customers to be attracted
should be explained fully.

c) Do not use unrealistic profit margins

Profit margins (Profit sales) become unrealistic when they become higher or lower than
average figures in that industry where firms with similar revenues and employees exist.
Entrepreneurs assume that as the company grows, gross and operating profit margins will
improve which will achieve economies of scale.

d) Do not limit Projections to an Income Statement

Entrepreneurs are not eager to provide a balance sheet and cash flow statement but
projecting sales and profits.

e) Provide Data for Upcoming Year and Annual Data for Succeeding Years
Monthly or annual data used should be thoroughly scrutinized since projecting for year
two, three to five might be different.

f) Avoid Providing Too Much Financial Information

Spreadsheets might be used to show the base case; which shows what the business is
expected to do and break-even; which shows level of sales to break-even.

g) Be Certain that the Numbers Reconcile

Figures should not be plugged to make things work as this can result in credibility loss.

h) Follow the plan

After preparing the proforma financial statements, they should be checked against actual
results at least once a month and modify projections as needed.

CASH BUDGET

Cash budget- is a listing of cash receipts and cash displacements usually for relatively
short time period such as week or month

Steps in preparing a cash budget

1. determine amount of collection each month based on projected sales plans
2. estimate the amount in timing of the following cash desbasements inventory
purchases n payments
b. advertising, wages and utilities r paid in the month incurred.
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3. Calculate the cash flows from operation activities.(cash receipts n decpaymnts)

4. Recognize any investment contribution by the owner.
5. Note any investmnts into
6. Show the loan obtained fron the bank to h
7. Determine the beginning of month cash balance (ending cash balance from the
previous mnth)
8. Compte the end of cash balance.

SOURCES OF FINANCING/TRADE OFFS

Evaluate the choice between debt financing and equity financing
1. Potential profitability (equity is preferred bcz it has no interest exchange)
2. Financial risk- debt is risky bcz wen the firm ends profits creditors have to be repaid, if
the firm fails to earn profits its assets recover the debts.
3.voting control-equity result in dilution of control hence debt capital will b prepared.

IDENTIFY DIFFERENCE SOURCES OF FINANCE

PERSONAL SAVINGS-EQUITY
FRIENDS and FAMILY-EQUITY
OTHER INDIVIDUAL INVESTORS-EQUITY N DEBT
COMMERCIAL BANKS-DEBT
BUSINESS SUPPLIERS-DEBT
ASSET BASED LENDERS-EQUITY
GOVERNMENT SPONSORED PROGRAMMES-DEBT
VENTURE CAPITAL FIRMS-EQUITY
COMMUNITY BASED FINANCIAL INSTITUTIONS-debt
LARGE CORPERATIONS-equity n debt
PUBLIC SALE OF STOCK- equity

5cs
-Capacity to repair the loan
-Owner capital invested in the business
-Borrowers character.
-collateral to secure the loan.
-industry n economic conditions

ASSET BASED LENDERS

Some firms offer equipment loan , the entrepreneur will have to pay installmnts for the
use of machinery.
Asset based loan is a line of credit secured by wekn capital asset

Debt Factoring-involves obtainin cash by selling accounts receivable to another firm

PRIVATE EQUITY INVESTORS-these is the fastest growing source of financing

equillium .fall into two categories:
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a) Business angels-are private inviduals who invest in early stage companies. They
are the oldest and largest source or early stage equity capital.
Type of finance they provide is
- informal venture capital
-formal venture capitalist-individuals who form limited partners for the purpose of raising
venture capital from large institutional firms

CHAPTER 13: THE HARVEST PLAN

The Importance of the Harvest

Harvesting or existing
This is the process used by entrepreneurs and investors to reap the value of a business
when they leave it. Entrepreneur must develop effective harvest plans in order to capture
the frill value of the business they have worked so hard to create. An entrepreneur needs
to understand that harvesting encompasses more merely that selling and leaving a
business. Harvesting involves the following:
Capturing value of the investment
Reducing risk
Creating future options

METHODS OF HARVESTING A BUSINESS

There are four options or methods available to harvest an investment in a privately owned
company namely:
Selling the firm
Releasing the firms cash flow to its owners
Offering stock to the public through an initial public offering
Issuing a private placement of the stock

Diagrammatic Methods for Harvesting a Business

Harvesting Options

Selling the company Releasing cashflows Going public (IPO) Using private equity

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Strategic sales Financial sales Sales to employees

Selling the Company

This is a method of harvesting an investment in a privately owned company by the owner
where the business is sold to any interested buyer. The sale of the company can be
reduced into three types, based on the motives of the buyers:
Sales to strategic buyers
Sales to financial buyers
Sales to the employees

Sales to Strategic Buyers

The strategic buyers purchase the business because of life synergies that can be gained
from the business with the complementary businesses. The main value of the business to
the buyer is stand-alone characteristics and its synergies. This often contributes to high
price offered by the strategic buyer than financial year. The important issue of
acquisition is the long-term sustainable competitive advantages that the buyer would get
which will necessitate to pay a premium price for the firm.

Sales to Financial Buyers

The main motives for financial buyers to acquire the new firm are the firms stand alone
characteristics and value derived from cash generation. To be able to realize its value, the
financial buyers will make some change in the firms operation, which may lead to layoff
of existing employees in order to, stimulate growth and maximize profit. Financial
acquisition is not popular among small business owners.

Leverage Buyout (LBO)

This is a purchase heavily financed with debt, when the future cash flow of the target
company is expected to be sufficient to meet debt payment.

Bust up Leveraged Buyout

This is the purchase heavily financed by debt, in which the new owners expect to pay
down the debt rapidly by selling off the acquired assets.

Built up Leveraged Buyout

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A leveraged buyout involving the purchase of a group of similar companies with the
intent of making firms into one large company that might eventually be taken public via
initial public offering. The newly combination is operated privately for 5 to 7 years in
order to establish a successful record and it is taken public.

Management Buy Out (MBO)

A leveraged buyout in which the firms top managers becomes significant shareholders of
the acquired firm.

Sales to Employees
The main interests by employees to acquire the firm are to preserve employment and
participate in the success of the business. The purchase of the firm by employees is
normally done through employee stock ownership. The plan is sold either in part or in
total to its employees.

The employees retirement contribution is used to buy the stock from the own and hold s
it in trust over time. In a leveraged buyout employee stock ownership plans, the stock is
purchased with borrowed money. Employee ownership has been advocated that it
improves motivation, leading to greater effort and reduced waste.

Releasing the Firms Cash Flows

This is the second strategy of harvesting a business where the owner simply stops
growing the business so as to increase the cash flow, which they can orderly withdraw
over time. The withdrawal process could be immediate, where the owner simply sells off
the assets of the firm and cease business operations but for a value creating firm, this
does not make economic sense.

Advantages of Releasing the Firms Cash Flows

The owners can also retain control of the firm while they harvest their investment
The owners do not seek out a buyer of incur the expenses associated with
consummating a sale.

Disadvantages
Reducing reinvestment when the firm faces valuable growth opportunities results in
lost value creation, which could leave a firm unable to sustain its competitive
advantage.
Unintended reduction in harvestable value below the potential value of the firm as a
long term going concern.
Tax effect to an orderly liquidation as compared to other harvest methods e.g. if the
firm distributes the cash as dividends, the income may be taxed both as corporate
income and as personal income to the stockholders.
The entrepreneur who is involved in the day to day operations might be tired and
impatient to withdraw cash overtime which can destiny this strategy to fail unless
there are qualified people to take the management of the firm from the owner.

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Going Public
This is a harvest strategy where the firm offers stock to the public through an initial
public offering. Initial public offering is the first sale of shares of a companys stock to
the public.

The Initial Public Offering as a Harvesting Strategy

An initial public offering (IPO) is used primarily as a way to raise additional equity
capital to finance company growth and only secondarily as a way to harvest the owners
investment.

Other reasons for going public (by lisa d stein, vice president of Solomon smith
barney)
To raise capital to repay outstanding debt
To fund future acquisitions
To create a liquid market for the companys stock

To broaden the companys shareholders base

To create ongoing interest in the company and its continued development
To support future growth.

The IPO Process

The basic steps in the IPO process are as follows:
The firms owners decide to go public
If not already completed an audit of the last three years financial statements is
conducted
An investment banker is selected to guide management in the IPO process
An S-I Registration statement is filed with SEC (the registration statement is subject
to SEC review period of approximately 30 to 35days.
Management responds to comments by the SEC and issues a Red Herring/Prospectus,
describing the firm and the offering.
Management spends the next 10 to 15days on the road explaining the firms
attributes to potential investors.
On the day before the offering is released to the public, the actual offering price is
decided upon. Based on the demand for the offering, the shares will be priced to
create active trading of the stock.
Months of work come to fruition in a single event, offering the stock to the public
and seeing how it is received.

Using Private Equity

This is a forth method of harvesting where the firm issues a private placement of the
stock. The private investors who may be individuals or small groups of individuals
invest in the companies by buying shares, which facilities transfer of ownership to them.

FIRM VALUATION AND THE HARVEST

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As the firm moves towards the harvest, two issues regarding value are of primary
importance:
The harvest value
The method of payment

The Harvest Value

Valuation of a company is more important at the time of existing than during the life of
business. Owners can harvest the value created. Value is created when the firms
invested capital is earned on the investment of similar risk.
The specific methods of valuing a company are:
Asset based valuation
Valuation based of comparables
Cash flow based valuation

Asset Based Valuation

This is the determination of the value of a business by estimating the value of its assets.
Under this method are three variations:
Replacement value method this is the cost of replacing the firms assets
The liquidation value of assets this is determination of the value of the business by
estimating the money that would be available if the firm were to liquidate its assets.
Modified book value method the determination of the value of a business by
adjusting book value to reflect obvious differences between the historical cost and the
current market value of assets.

Valuation Based on Comparables

This is the method of determining the value of the business by considering the actual
market price of the firms that are similar to the firm being valued. The earning multiple
ratio earnings (operating income) also called value to earnings ratio.

Cash Flow Based Valuation

This is the method of determining the value of a business by estimating the amount of
timing of its future cash flows from the three-step process:
Project firms expected cash flows
Estimate investors and owners required rate of return on their investment
Using rate of return as the discount rate, calculate present value of firms expected
future cash flows which equals value of firm.

The Method of Payment

Harvesting owners can be paid in cash or in stock of acquiring the firm, with cash
generally being preferred over stock.

DEVELOPING AN EFFECTIVE HARVEST PLAN

Suggestions or Advices on Crafting an Effective Exit Strategy
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Question: You are a marketing consultant with strong knowledge of harvesting

businesses. An entrepreneur has approached you and you are expected to provide
sound advlan.ice on developing an effective harvest. What advice will you offer (12
marks)
(Answer below)
Get Good Advice
Entrepreneurs can develop an effective harvest plan by getting advice, both from
experienced professionals and from those who have personally been through a harvest.
Professional advice is vital but entrepreneurs stress the importance of talking to other
entrepreneurs who have sold a firm or taken in public.
Getting good advice will help the entrepreneur to develop an effective harvest plan,
which is very important to avoid crisis or unanticipated event.

Understand What motivates you

Entrepreneurs should think very carefully about their motives for existing and what they
plan to do after the harvest. Peer Hermann gave an advice on understanding what you
want as, searching your soul and make a list of what you want to achieve with the exit.

Is it dollars, health of the company, your management team or an heir apparent taking
over. Entrepreneurs are well advised to be aware of potential problems that may arise
after exit.

Manage for the Harvest (Anticipate the harvest)

Entrepreneurs need to be concerned about how to exit the business as investors.
Entrepreneurs dont need to stumble into exit but should plan for it. Owners are advised
to start thinking about how they are going to exit 2 or 3 years ahead so they can correctly
position their companies. This type of advice is particularly important when planning an
initial public offering. Unlike private companies, public companies require information
disclosure to stockholders. This specifically means:
Maintaining an accounting process that clearly separates the business from the
entrepreneurs personal life.
Selecting a strong board of directors that can and will offer valuable business advice
Managing the firm so as to produce successful track record of performance.

Expect Emotional and Cultural Conflict

Some Entrepreneurs plan to stay with the firm after a sale. The very qualities that made
the entrepreneur successful can make it difficult for them to work under a new owner.
There is danger of culture conflict between the acquiring firm and the acquired firms
management. Conflicts of varying degrees occur when the entrepreneur who stays with
the company should expect emotional and cultural convict. The cultural and emotional
conflict can cause the entrepreneur to be disillusioned and end up leaving prematurely.

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CHAPTER 19: PROFESSIONAL

MANAGEMENT AND LEADERSHIP

WHAT IS LEADERSHIP?
Richard Barton former president and CEO of Expedia ,Inc., to the question How do you
define leadership?
Leadership to me means leaning forward ,looking ahead ,trying to improve ,being fired
up about what you are doing and being able to communicate that ,verbally and non-
verbally, to those around you .
Leadership involves pointing the way and getting others to follow willingly

Leadership Qualities of Founders

The entrepreneur is the trailblazer who enlists others, both team members and outsiders,
to work with him and her in creative endeavor .Others may then buy into this vision for
the ventures as they join their efforts of those of entrepreneur .new venture ,the leader
faces major uncertainties and unknowns. Therefore, individuals who are launching
promising start ups having the prospect of attaining significant size or profitability need
to have certain qualities.

What makes a leader effective

Leaders exhibit a resolve and a determination to do whatever is needed to lead their
companies to success .it seems clear that effective leadership is based not on a larger
than life personality but instead on a focus on reaching business goals .In most small
firms, leadership of the business is personalized. The owner manager is not a faceless
unknown, but an individuals whom employees see and relate to in course of their normal
work schedules .

Leaderships styles
1. Visionary leaders- mobilize people toward a shared vision

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2. Coaching leaders- develop people ,establishing a relationship and trust

3. Affinitive leaders -promote emotional bonds and organizational harmony
4. Democratic leaders- build consensus through participation
5. Pacesetting leaders- set changeling and exacting standards and expects excellence
6. Commanding leaders- demand immediate compliance

Managers may carry this leadership approach to level called empowerment .The manager
who uses empowerment goes beyond solicitation business of employees opinions and
ideas by increasing their authority to act on their own and make decisions about the
process thy are involved with .Some companies actually carry employee participation a
step further by creating self-managed work teams .Each work team is assigned a given
task or operation ,its members manage that task or operation without direct supervision
and assume responsibility for the results

Leaders shape the culture of the organization

An organization tends to take on a life of its own companys culture does not merge
overnight, it unfolds over the lifetime of the business and usually reflects the character
and style of the founder. Because of its power to shape how business is conducted ,the
culture of the organization should not be left to chance .if a founder is honest in in his or
her dealings ,supportive of employees and quick to communicate ,he or she will likely set
a standard that others will follow .

Distinctive characteristics of small firm management

1. Professional level There is of course, much variation in the way business and
organization are managed .Between the extremes of very unskilled and highly
types of management lies a continuum .At the less professional end of the range
are entrepreneurs and others who rely largely on past experience ,rules of thumb
and personal whims in giving direction to their business .Other entrepreneurs and
managers displays much more professional.
2. Limitations of founders as managers founders of new firms are not always
good organization members .As discussed in Chapter 1 ,They are creative
,innovation risk-taking individuals who have the courage to strike out on their
own .Indeed ,they are often propelled into entrepreneurship by precipitating
events ,sometimes involving their difficulty in fit very into convectional
organizational roles .but even very capable entrepreneurs may fail to appreciate
the need for good management practices as the business grows
3. Managerial weakness in small firms many small firms are marginal or
unprofitable businesses, struggling to survive from day to day .At best ,they earn
only a meager living for their owners .They operate ,but to say that they are
managed would be an exaggeration
4. Constraints that hamper management managers of small firms ,particularly
new and growing companies are constrained by conditions that do not trouble the
average corporate executive they must face the grim reality of small bank
accounts and limited staff. Small firm often lacks the money for slick sales
brochures and it cannot afford much in the way of marketing research .
5. Firm growth and managerial practices as newly formed business becomes
established and grow ,its organizational structure and pattern of management
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change .To some extent ,the management in any organization must adopt to
growth and change .However, the changes involved in the early growth stages of a
new business are much more extensive than those that occur with the growth of a
relatively mature business.

Managerial responsibilities of entrepreneurs

QUESTION: Identify and briefly discuss the entrepreneurs managerial tasks.

1. Planning activities beyond creating an initial business plan to guide the launch
of a new venture (the focus of chapter 6), most entrepreneurs also pln for the
ongoing operation of their enterprises
Types of plans
A firms basic path to the future is spelled out in a document called a long range
plan or strategic affirm overall plan for future
Short range plan are plans governs firms operations for one year or less
Planning time-small business managers all too often succumb to what is sometimes called
the tyranny of the urgent they can easily become distracted by pressing problems.

2. Creating an organizational structure the unplanned structure in small

companies, the organizational structure tends to evolve with little conscious
planning. Certain employees begin performing particular functions when the
company is new and retain those functions as it matures
As it grows a planned structure develops with
a. Chain of command the official ,vertical channel of communication in an
organization
b. Line organization a simple organizational structure in which each person reports
to one supervisor
c. Line and staff organization an organizational structure that includes staff
specialists who assists management
d. Span of control the number of subordinates supervised by one manager

3. Understanding informal groups all organizations also have informal groups

composed of people with something in common, such as a particular job, hobby,
carpool or affiliation with a civic association .Although informal groups are not
created by management, managers should observe them and evaluate their effect
on the functioning of the total organization .

4. Delegating authority a manager grants to subordinate the right to act or to make

decisions .Turning over some functions to subordinate by delegating authority
fresh the superior to perform more important tasks .Many entrepreneurs have
become accustomed to doing everything themselves, which makes it difficult to
turn over some tasks to others when the business grows and they truly need help
with their expended responsibilities

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5. Controlling operations despite good planning, organizations never function

perfectly .As a result, managers must monitor operations to discover deviations
from plans and ensure that the firm is functioning as intended .Managerial
activities that check on performance and correct it when necessary are part of
managerial control ,they serve to keep the business on course .The control process
begins with the establishment of standards which are set through planning and
goal setting .
Stages in the control process
a. Preventive control
b. Concurrent control
c. Corrective control

6. Communicating is key to a healthy organization is effective communication that

is getting managers and employees talk with one other and openly share problems
and ideas .To some extent ,the management hierarchy must be set aside so that
personnel at all levels can speak freely with those higher up. To communicate
effectively ,mangers must tell employees where they stand ,how the business is
doing and what firms plans are for future .many practical tools [and techniques
can be used to stimulate two-way communication between managers employers.
Here are some that may work for you and your enterprise
Periodic performance review sessions to discuss employees ideas ,question,
complaints and job expectations
Bulletin boards (physical and electronic )to keep employees informed about
developments affecting them or the company
Blogs (using generated websites entries are made in journal style)for internal
communication ,especially in companies that have open organizational cultures
and truly want transparency dialogue.
Suggestion boxes to solicit employees ideas
Wikis (websites that allows visitors to add ,remove edit ,and change content )set
up to bring issues to the surface and draw feedback from the employees
Formal staff meeting to discuss problems and matters of generated concern
Breakfast or lunch with employees to socialize and just talk

7. Negotiating when operating a business ,entrepreneur and managers must

personally interact with other individuals much of the time .Some contracts
involve outsiders ,such as suppliers ,customers ,bankers ,realtors and business
service providers

Outside management assistance

Need for outside assistance entrepreneurs often lack opportunities to share ideas with
peers ,given the small staff in most new enterprises .Some entrepreneurs reduce their
feeling of isolation by joining groups such as Entrepreneurs Organization and the youth
Presidents Organization ,which allow them to meet with peers from other firms and
share problems and experiences .

Sources of management assistance

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1. Business incubators are an organization that offers both space and managerial
and clerical services to a new business.
Services provided by business incubators to new firms
a. Low cost space
b. Practical business advice and assistance
c. Accounting legal and professional services
d. Networking opportunities strategic partner linkages
e. Business
f. Access to bank loans programs and loan guarantee programs
g. Contract with legal investments and venture capital
h. Help with management team formation
i. Advisory board and mentor support
j. Receptionist and clerical services
An incubator provides a supportive atmosphere for a business during the early the months
of existence, when it is most fragile and vulnerable to external dangers and internal errors
.if the incubators work as it should ,the fledging business gains strength quickly and soon
leaves the incubator setting .

2. Education institutions many colleges and universities have student consulting

teams willing to assist small businesses. These teams of upper-class and graduate
students ,under a direction of faculty member, work with owners of small
ventures. In analyzing and devising solutions to their business problems .it
provides students with practical view of business management and supplies small
firms with answers to their problems.
3. Services corps of retired executives (score)-by containing an SBA field office
,small business managers can obtain free management advice from a group called
service corps of retired executive or score .Score is an organization of retired
business executives who serve as consultant to small business managers
4. Small business development Centre (SBDCs)-patterned after the Agricultural
Extension Service ,small business development centers (SBDCs) are affiliated
with colleges or universities as a part of the SBAs overall program of assistance
to small business .SBDCs provide direct consultation ,continuing education
,research assistance and export services .
5. Management consultants management consultants serve small business as well
as large corporations .Types of consultants range from Large global firms to to
one-and two for a host of reasons .
6. Entrepreneurial networks the processes of developing and engaging in
mutually beneficial relationships
7. Other business and professional services variety of a business and professional
groups provide management assistance .In many cases, such assistance is part of
the business relationships. Sources of management advice include bankers,
certified public accountants, attorney, insurance agents, suppliers and trade
associations and chamber of commerce.

Chapter 19 Questions
1. Explain the 6 leadership styles
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2. Identify and discuss the managerial tasks and functions of the entrepreneur

CHAPTER 20: MANAGING HUMAN

RESOURCES

Recruiting Personnel

Recruitment
Is the process of attracting a pool of applicants for the positions within the organization.

Selection
Is the process of actually choosing the right candidate for the position from the available
candidates.

The need for quality employees

There is need for quality employees or the right employees in the right places in order to
provide a strong foundation for the business. By recruiting the best possible personnel,
the firm can improve its returns on each payroll dollar. The quality of the firms
employees determines its potential growth and profitability.

The lure of entrepreneurial firms (advantages of working for small firms)

The opportunity to make decisions and to obtain general management or professional
experience at significant level.
Small firms can structure their work environment to offer professional managerial and
technical personnel greater freedom than they would normally have in larger
businesses, individual contributions can be recognized.
Compensation packages can be designed to create powerful incentives
Flexibility in the work scheduling and job sharing

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Sources of employees
1. Help wanted advertising
Hanging a help wanted in the window (traditional way) and advertising in the
classified sections of local newspapers. Positions such as technical, professional
and managerial may be advertised in trade professional journals.

2. Walk-ins
Individuals walking into a business place seeking employment, less expensive and
ideal for hourly work. The applicant varies and those for qualified personnel
should not put on file for future reference.

3. Schools
Applicants are drawn from secondary schools, trade schools, colleges and
universities particular for those requiring no specific experience.
Secondary/colleges have internship programs enabling students to gain practical
experience in business firms. Management positions in technical / professional
positions can be supplied by colleges or universities.

4. Public employment offices

Employment offices offering information on applicants seeking employment and
administering the states unemployment insurance programme. They are located
in major cities and useful source of clerical workers, unskilled laborers,
production workers and technicians. The offices assist in counseling those who
come in but do not offer recruitment services.

5. Private employment agencies

Numerous private firms offer services as employment agencies whilst applicants
pay a fee for the agency who specialize in accountants, computer operators and
managerial positions.

6. Executive search firm

They locate for qualified candidate for certain positions
Headhunters search firms that locate qualified candidates for executive
positions.

7. Employee referrals
Recommendations of suitable candidates by good current employees who will
have the ability to do the job.

8. Internet recruiting
Recruiters are seeking applicants on the internet who submit their resumes for
considerations.

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9. Temporary help agencies

Agencies supplying (tempo for short period of time) e.g. word processors, clerks,
accountants, engineers, nurses.

Diversity in workplace
Workforce diversity: differences among employees in terms of such dimensions as
gender, age, ethnicity and race.

Job Descriptions
This is the statements which lists and describes the personal traits and abilities a person
should have to perform the tasks and meet the responsibilities involved. They give
employees focus in their work, direction in training and framework for performance
review.

Job analysis
Determination of what activities, tasks, responsibilities and environmental influence
involved in the job. Knowing the job requirements permits more intelligence selection of
applicants for specific jobs based on their individual capabilities and characteristics.

Job specification/job qualification

A list of skills and abilities needed to perform a specific job.

The owner must be knowledgeable about job description and job specification in order to
recruit and select the right candidate to fill the vacant position.

Evaluating prospects and selecting employees

(steps taken in evaluating job applicants)
Step 1 using application forms
Used to collect enough information to determine whether the candidate is minimally
qualified and provide basis for further evaluation. Typical application forms asks for
candidate name, address, social security number, educational history, employment history
and references.

Step 2 interviewing the applicant

Help the employer to get some idea of the applicants appearance, job knowledge,
intelligence and personality. The interview can follow these generally accepted
guidelines:
Determine job related questions to be asked before the interview
Conduct interview in quit setting
Give attention to applicant
Put applicant at ease
Never argue, listen attentively
Keep conversation at level appropriate for applicant
Observe applicant speech, mannerism and attire if they correspond to the job.
Avoid unduly influence by applicant trivial mannerisms or superficial resemblance to
other people you know.

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The applicants evaluate employer while employer does the same. The applicants make
informed decisions when they are clear with the job entails and should be given an
opportunity to ask questions.

Interview forms / methods

The interviewer can use any of the following interviewing forms / methods
1. Structured interview
2. Unstructured interview

Step 3 Checking references and other background information

Careful checking with former employers, school authorities and other references can help
an employer avoid the serious consequences of hiring mistakes.

Step 4 Testing the applicant

Psychological test
Selection tools used to measure an applicants mental disabilities and personal
traits. The most common tests are intelligent tests, aptitude and personality tests
e.g. keyboard for a clerical job.

Intelligent test
Used to determine whether the applicant has sufficient mental ability to perform the job
successfully.
Aptitude tests
Used to determine interest and ability to perform certain tasks and activities

Personality tests
Used to evaluate applicants on numerous tests such as sociability, aggressiveness,
independence, empathy with others and ego drive e.t.c. Useful tests of any kind must
meet the criteria of validity and reliability. For a test to be valid, its results must
correspond well with the job performance that is the applicants with the best test score
must generally be the best employees for a test. To be reliable, it must provide results,
when used at different times or by various individuals which should be consistent in
measuring job performance ability.

Step 5 Physical examination

The primary purpose of physical examination is to evaluate the ability of applicants meet
the physical demand of a specific job. Care must be taken to avoid discriminating the
physically disabled thus requiring adaptations. Local doctors can perform physical
examinations e.g. screening.

Training and Development Employees

Purpose of Training and Development

To prepare the new recruits to perform the duties which he or she has been hired for
To improve skill and knowledge (for experience existing employees) especially if
there is change in products, technology, policies and procedures.
Preparation for advancement in the organization (promotion)
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Improve morale
Lower Turnover Training leads to improve morale, which eventually lower turnover

ORIENTATION FOR NEW EMPLOYEES

Orientation
It is the process of familiarizing the new employees with the companys environment.
This helps the newcomer to minimize his or her uneasiness in the setting. Orientation can
be accomplished by informal methods and formal methods. Orientation takes the form of
explanation of specific job duties, companys policies, procedures, performance criteria
e.t.c.

Steps in Job Instruction Training

Step 1: Prepare the employee

Put the employee at ease
Place them in appropriate jobs
Find out what they know
Get them interested in learning

Step II: Present the operations

Tell, show and illustrate the task
Stress key points
Instruct clearly and completely

STEP III: Try out performance

Have employee perform the task
Have them tell, show and explain
Ask employee questions and correct any errors

STEP IV: Follow up

Check the employees frequently
Tell them how to obtain help
Encourage questions

The firm can facilitate the orientation process by providing a written practice and
procedures in the form of an employee handbook. The handbook will include
information about work hours, paydays, breaks, lunch hours, absences, holidays, names
of supervisors, employee benefit e.t.c. Good orientation of newcomers will help them to
settle quickly and become productive.

Training to improve quality

Employee training is an integral part of comprehensive quality management programs.

Training programs can be designed to promote high quality workmanship, which will
contribute to profit maximization through customer satisfaction. Training for quality
performance should be on going process to management and non-management
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employees. In addition, special classes and seminars can be used to teach employees
about the importance of quality control and ways in which to produce high quality work.

Training of non managerial employees

Job descriptions or job specifications can be used to determine the requirements of

appropriate type of training for non-managerial employees.

Steps in Job Instruction Training

Development of Managerial and Professional Employees
Small firms have strong need to develop managerial and professional employees so that
individuals can be able to carry out their responsibilities assigned to them effectively and
efficiently. Training will also prepare staff members to take key positions in case key
individuals retire or leave the firm for other reasons.

Factors to be considered for management training program

i) The need for training training needs, type of training and how much training are
needed to meet the demands of the job description.
ii) A plan for training how individuals can be trained? Do they have enough
responsibility to permit them to learn? Can they be assigned additional duties?
iii) Time table for training When should training start?
iv) Employee counseling Explaining to employees the need for training, nature of
training.

Compensation and incentives for employees

Types of compensation
Small firms can use the following types of compensation.

1) Wage and Salary

Wage and salary must be competitive in order to attract and retain well-qualified
personnel.
2) Financial Incentives
a) Stock option plan This is used to attract and motivate employees to increase
productivity. This is when employees are given stock by the firm in order to
attract and hold key personnel or employees.
b) Incentive Plan Such as commission for sales people
c) Piecework Payment to production employees according to number of units they
produce.
d) Bonus This is performance based compensation which should consider the
following key factors.
Set attainable goals, performance based compensation when workers meet targets.
Include employees in planning, employees should assist in performance measures and
work systems.
Keeping updating goals, performance plans must be updated changing needs of
workers and customers.
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Fringe benefits This is payment by the employer for such items as social security,
vacation time, holidays, health insurance and retirement compensation. This is designed
to be attractive and beneficial to employees.

Employee stock ownership plans

These are plans through which a firm is sold either in part or in total to its employees,
(ESOPS) provide a way for owners to cash out and withdraw from a business without
selling the firm to outsiders.

Special Issues in HR Management

Employee Leasing

The renting of personnel from an organization that handles paper work and administers
benefits for those employees.

Professional Employment Organization (PEO)

A personnel Leasing company that places employees on its payroll and then rents them to
employers on a payment basis. The small firm when they engage the professional
employment organization, they must bear the cost of insurance and other benefits
obtained through leasing company, in addition to a basic service fee.

Legal Protection of Employees

Employees are afforded protection by a number of federal and state laws. Civil rights act
is one of the most far-reaching statutes originally enacted in 1964. The law prohibits
discrimination on the basis of race, colour religion, sex or national origin. Other laws
extend similar protection to the aged and handicapped. The civil rights act includes
protection against sexual harassment.

Civil Rights Acts

Legislation prohibiting discrimination based on race, religion, sex or national origin.

The following practical action steps have been expressly recommended for small
business:

1. Establish clear and meaningful policies and procedures regarding sexual

harassment in the workplace.
2. Meet with employees and supervisory personnel to discuss the policies
3. Investigate any and all complaints of sexual harassment fairly and thoroughly
4. Take timely and appropriate action against all violators.

Occupational Safety and Health Act 1970 (OSHA)

This is the legislation that regulates the safety of workplace and work practices.
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This law, implies to business firms of any size to create the occupational safety and health
administration to establish and enforce necessary safety and health standards.

Fair Labour Standards Act

Federal law that establishes a minimum wage and provides for overtime pay

Family and Medical

Leave Act

Legislation that assures employees of unpaid leave for childrens birth or other family
needs. The employee must have been employed by the firm for 12 months and have
worked for at least 1250hours.

Labour Unions
Most entrepreneurs prefer to operate independently to avoid unionization. If employees
wish to bargain collectively, the law requires the employer to participate in such
bargaining. Constructive human resource policies minimizes the likelihood of labour
organization or improve relationship between management and union.

Formalising of employer-employee relationships

Large numbers of employees cannot be managed effectively without some system for
regulating employer employee relationships. Another way to harmonize these
relationships is to prepare a personnel policy manual or employee handbook which meets
communication needs by letting employees know firms basic rules and company
philosophy.

The need for a human resources manager

A firm with only few employees cannot afford a full time HR manager to deal with
personnel problems.
Conditions favourable for appointing an HR Manager in small business

1) There are substantial numbers of employees (100 or more)

2) Employees are represented by a union
3) The labor turnover rate is high
4) Te need for skilled or professional personnel creates problems in recruitment or
selection
5) Supervisors or operative employees require considerable training
6) Employee morale is unsatisfactory
7) Competition for personnel is keen

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CHAPTER 21: MANAGING OPERATIONS

Operations process
Refers to the activities involved in creating value for customers and earnings their dollars.

a. Inputs
b. Process
c. Outputs

Inputs
I.e. electricity, information, raw materials, equipment

Process
I.e. printing, storing, informing

Outputs

Products Services

Types of manufacturing operations

There are 5 main types of manufacturing operations.

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1. Job shops i.e. a manufacturing operation in which short production runs are
used to produce small quantities of items. The method produces products based on
consumer specifications e.g. individual houses.
2. Project manufacturing these are operations used to create unique but similar
products, e.g. cluster houses.
3. Repetitive manufacturing these are operations designed for long production
runs of high volume products e.g. assembly line production of televisions or cars.
4. Continuous manufacturing this is a form of repetitive manufacturing with
output that closely resembles a stream of products than individual products e.g.
water treatment.
5. Flexible manufacturing these are operations that involve computer controlled
equipment that can turn out products into small or more flexible quantities e.g. ice
cream machine.

QUALITY GOALS OF OPERATIONS MANAGEMENT

Quality as a competitive tool

Quality characteristics of a product / service that determine the ability to satisfy stated
and implied needs.

Total Quality Management (TQM) A quality focused management approach to provide

products and services that satisfy customer requirements through focus on customers:
Supportive Organizational Structure: use of appropriate tools and techniques.
There are three features of TQM, which are:
- Customer driven
- Organisation commitment
- Culture of continuous improvement

Customer focus on TQM

A firms quality management efforts should begin with a focus on the customers who
purchase its products or services.
The firm should know what products, attributes, benefits or service required by
customers.
Organisations that focus on customer needs and satisfaction can easily obtain competitive
advantage.
The entrepreneur should understand that:
1. Retail is detail operating details are crutial to the success of a business.
2. Customer feedback listening attentively to customers opinions can provide
information about their level of satisfaction. Employees who have direct contact
with customers can serve as the eyes and ears of the organisation

INSPECTION PROCESS

Examining part or a product to determine acceptability in meeting quality standards. It

often uses gauges starting from the receiving room (material checks from suppliers) to

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the process points and finally finished products. 100% inspection might not be feasible
but might use other methods e.g.
- Attribute inspection, determination of product acceptability whether I will or not
work.
- Variable Inspection, Based on variables such as weight or length.

STATISTICAL METHODS OF QUALITY CONTROL

- The use of statistical methods to analyze quality objectives by a qualified
employee by either

Acceptance Sampling using random representative portion to determine acceptability of

the entire or
Statistical process control using statistical methods to assess quality during operations
process.
Control chart Graphical illustration of the limits used in statistical process control by
using computer based technology.

INTERNATIONAL CERTIFICATION FOR QUALITY MANAGEMENT

ISO 9000 standards International organization for standardization in Geneve.

Inventory management and operations

Objectives of inventory management
1. To eat (to meet customer demand)
2. To avoid going to the grocery store for each meal (to be less dependent on the
source)
3. To have breakfast supplies for guests to eat (to protect against stock-out)
4. To benefit from price discounts (to gain from sales or quality based cost
reductions)
5. To have in stock before prices go up (to protect against price increases)

Methods of inventory cost control

a. Economic order quantity
b. Statistical inventory control
c. ABC method
d. Just-in-time (JIT)

Methods of inventory record keeping

a. Physical inventory system
b. Cycle counting
c. Perpetual inventory system
d. Two-bin inventory system

Purchasing policies and practices

Importance of purchasing

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1. The quality of a finished product depends on the quality of the raw materials used.
Therefore, the higher the quality of raw materials and component parts the higher
the quality of the product.
2. Purchasing contributes to profitable operations by ensuring that goods are
delivered whenever they are needed. Failure to receive materials on schedule
makes costly delays on production.
3. Effective purchasing secures the best possible price for the entrepreneur. Cost
savings can be made by buying early before prices go up or buying a product on
promotion.

Make or buy decision

These are decisions relating to the choice that companies must make. When they have the
option of making or buying component parts for products they produce.

Reasons for making component parts

1. More complete utilisation of plant capacity permits more economical production
2. Supplys are assured, with fewer delays caused by design changes or difficulties
with suppliers.
3. A secret design may be protected.
4. Expenses are reduced by an amount equivalent to transportation costs and the
outside suppliers selling expense and profit.
5. Closer co-ordination and control of the total production process.
6. Parts produced internally may be of higher quality compared to those from
outside suppliers

Reasons for buying components rather than making

1. An outside supplier may be cheaper because the supplier specialises in the
production of that particular part.
2. Additional space, equipment, personnel skills and working capital are not needed
3. Less diversified managerial experience and skills are required
4. Greater flexibility is provided especially in the manufacture of a seasonal item
5. In-plant operations can concentrate on the firms specialty i.e. finished products
and services
6. The risk of equipment obscolence is transferred to outsiders.

Other forms of making components available

a. Outsourcing contracting a 3rd party to take on and manage one of a firms
functions
b. The Coops and the internet co-operative purchasing organisations (Coops) is
an organisation in which small businesses combine their demand for products or
services in order to negotiate as a group with suppliers
Technology has also opened the door to a world of outsourcing alternatives.
Entrepreneurs can purchase from variety of suppliers in any part of the world.

Measuring supplier performance

A supply chain operations reference (SCORE) model has a list of critical factors useful
for assessing supplier performance. The 5 attributes that stand out are:
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1. Reliability does the supplier provide what you need

2. Responsiveness does the supplier deliver inputs when they are needed
3. Agility responding quickly
4. Costs does the supplier help you control your costs of goods sold
5. Assets does the supplier help you improve efficiencies by inventory holding
time, shortening cash cycle

Building good relationships

The following are purchasing practises that help an entrepreneur to build good relations
with the supplier.
1. Pay bills promptly
2. Give sales representatives a timely and catious hearing
3. Minimise abrupt cancellation of orders merely to gain a temporary advantage
4. Avoid attempts to browbeat a supplier into special consensus or unusual discounts
5. Cooperate with suppliers by making suggestions for product improvements and/or
cost reduction whenever possible
6. Provide catious, reasonable explanations when rejecting bids and make fair
adjustments in the case of disputes

Lean production
An approach that emphasises efficiency through elimination of waste.
In most lean production programs the following are emphasised:
a. Defects are costly because they have to be repaired or scrapped
b. Over production must be stored and may never be sold
c. Transportation can be minimised by locating closer suppliers
d. Wanting can be wastefull because resources are idle
e. Inventory in excess of the minimum required is unproductive and costly
f. Mortion, whether by production, people or machinery can be wasteful
g. Processing itself is wasteful if it is not productive
h.

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CHAPTER 22 : MANAGING THE FIRMS

ASSETS
The Working Capital Cycle
Working capital management the management of current assets and current liabilities

Working capital - the daily flow of resource through a firms working capital accounts

Steps In The Working Capital Cycle.

Step1: purchase or produce inventory for sale, which increases inventories on hand and
increases accounts payable if the inventory is purchased on credit

Step 2: a .Sell the inventory for cash, which increases accounts

c. Sell the inventory on credit which , increases accounts receivables
Step 3: a .Pay the accounts payable, which decrease accounts payables and decreases
cash
d. Pay operating expenses and taxes ,which decreases cash
Step 4: Collect the accounts receivables when due, which decreases accounts receivables
and increases cash
Step 5: Begin the cycle

MANAGING CASH FLOWS

1. managing accounts receivable

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How accounts receivable affect cash-granting credit to customers, although primarily a

marketing decision, directly affects cash accounts .By selling on credit and thus allowing
customers to delay payment, the selling firm delays in flow of cash

The life cycle of accounts receivable credit management policies, practices and
procedures affect the life cycle of receivables and the flow of cash from them. It is
important for small business owners, when establishing goal for every business should be
to minimize the average time the average time it takes customers to pay their bills .By
streaming administrative procedures, a firm can facilitate the task of sending out bills,
thereby generating cash more quickly

The following credit management practices can also have a positive effect on a
firms cash flows
Minimize the time between ,shipping ,invoicing and sending notices on billings
Review previous credit experiences to determine impediments to cash flows such
as continued extension of credit to slow-paying or delinquent customers
Provide incentives for prompt payment by granting cash discounts or charging
interest delinquent accounts
Use the most effective methods for collecting overdue accounts .For ,prompt
phone calls to customers with overdue accounts can improve collections
considerably
Age accounts receivable on a monthly or even a weekly basis to identify quickly
any delinquent accounts
Use a lock box post office box for receiving remittances .If the firms bank
maintains the lock box to which customers send their payments ,it can empty the
box frequently and immediately deposit any check received into the companys
account

2. Managing inventory
Reducing inventory to free cash inventory is bigger problem for some small businesses
than others .The correct minimum level of inventory is the level needed to maintain
desired production schedules and or a certain level of customer service.

3. Managing accounts payables

Negotiation

Timing buy now pay later is the motto of many entrepreneurs .By buying on credit ,a
small business is using creditors funds to supply short term needs .The loner creditors
funds can be borrowed the payment ,therefore should be delayed as long as acceptable
under the agreement

CAPITAL BUDGETING
Capital budgeting analysis an analytical methods that helps manger make decision
about long term investments
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Some capital budgeting decision that might be made by a small firm include the
following
Develop and introduce a new product that shows promise but require additional
study and improvements
Replace a firms delivery trucks with newer methods
Expand sales activity into new territory
Construct a new building
Hire several additional salesperson to intensify in the existing market

CAPITAL BUDGETING TECHNIQUES

a. Accounting return on investment techniques a capital budgeting technique
that evaluates a capital expenditure based on the expected average annual after
tax profits relative to the average book value of an investment
b. Payback period technique a capital budgeting techniques that the amount of
time it will take to recover the cash outlay of an investment
c. Discounted cash flow (DCF) techniques capital budgeting techniques that
compare the present value of future cash flows with the cost of the initial
investment
i. Net present value (NPV) the presents value of expected future cash flows
less the initial investment outlay
ii. Internal rate of return the rate of return a firm expects to earn on a project

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CHAPTER 23: Risk management

What Is Risk Management?

Business risk the possibilities of loses associated with the asset and earnings potential
of a firm

i. Market risk the uncertainty associated with an investment decision

ii. Pure risk uncertainty associated with a situation where only loss or no loss
can occur

Basic types of pure risk

There are two types of property real property and personal property. Real property consist
of land an d anything physically attached to land such as building .Some business owners
purchase land and buildings while others choose to lease necessary real property
.Personal property can be defined simply as any property other than real property
.Personal property includes machinery ,equipment (such as computers ),furniture ,fixtures
,stock and vehicles .While the location of real property is fixed ,personal property can be
moved from one place to place .

PROPERTY CAN BE VALUED IN SEVERAL WAY

a. Replacement value of property the cost of replacing personal property and
rebuilding real property at todays prices.
b. Actual cash value an insurance term that refers to the depreciation valued of a
property
1. Perils is defined as a cause of loss .Some perils are naturally occurring events
,such as windstorms, floods ,earthquakes ,and lightning .The location of property
may increase the likelihood of its loss from certain perils e.g. coastal properties
are more susceptible to wind damage and flooding and properties near fault lines
are more prone to damage from earthquakes
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Losses when you think of property loss, you envision a direct loss in which physical
damage to property reduces its value to the property owner.
Direct loss a loss from inability to carry operations due to a direct loss of property

2. Liability risks is the legal liability that may rise from various business
activities .Legal liability may rise from statutory liability ,contractual liability or
tort liability
a. Statutory liability for example each state has enacted workers compensation
legislation that in most cases requires employers to provide certain benefits to
employees when they are injured in a work related incentives .This means that
fault is not an issue ,an employer is responsible for work related injury without
regard to fault
b. Contractual liability business often enter into contracts with other parties
.These contracts could involve a lease of premise ,a sales contract with customers
an agreement with an outsourcing firm or a contract with construction company.
One common denominator among most of these contracts is the inclusion of some
sort of indemnification clause. Indemnification of the clause is a contractual
clauses that requires one party to assume the final consequences of another partys
legal liabilities.
c. Torts wrongful acts or omissions for which an injured party can take legal
actions against the wrongdoer of the monetary damages
NB: Four elements must be present for someone to be found guilty of a negligence act:
i. Existence of a legal duty between the parties .For example ,a restaurant
owner has a legal duty to provide patrons with food and drink that are fit for
consumption
ii. Failure to provide the appropriate standard of care the care standard
normally used is the reasonable (prudent person )standard ,based on what a
reasonable or prudent person would have done similar circumstances .This
standard of care may be elevated ,however ,if the professional is involved
iii. Presence of injuries or damages negligence may exist .but no injury or
damage is sustained by the claimant, tort liability does not exist.
Two types of damages may be awarded in tort action compensatory and punitive
damages
Compensatory damages are intended to make the claimant whole i.e.to
compensate the claimant for any injuries or damages arising from the negligent
action
Punitive damages are a form of punishment that goes beyond any compensatory
damages .Punitive damages have a dual purpose. First they punish wrongdoers in
instances where there is gross negligence or a callous disregard for the interest of
others. Secondly ,punitive damages are intended to have a deterrent effect
,sending a message to society that such conduct will not be tolerated
iv. Evidence that the negligent act is the proximate cause of the loss there must
be proof that the negligence actually caused the damages sustained .They may
be negligence and there may be damages, but if no link can be established
between the two ,there is no tort liability.
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NB: Tort liability can raise a number of activities .Some of the most significant sources of
tort of liability follow:
Premises liability- people may sustain injuries while on a business promise
.Retailers have significant premises liability exposure because they have many
customers entering stores to purchases goods
Operations liability-people may also sustain injuries as result of a companys
operations that take place away from its premises. Contractors have signification
operations liability exposure because they are performing work at various job
sites and such work could easily result in injuries to another person
Professional liability any business providing professional services to the public
is potentially subject to a professional liability claims
Employers liability as previously mentioned ,employers have temporary
obligations to pay certain benefits to employees injured in the course of
employment .At the same time ,it is possible that an employer may be sued by an
altogether different party as a result if an injury to an employee
Automobile liability a business that uses vehicles for various purpose has
automobile liability exposure >Even a company that does not own or lease
vehicles has potential liabilities if employees use their personal vehicles for
business purposes.
Product liability the product manufactured or sold by a business can be source of
legal liability .E.g. someone who was injured while using product may claim that
the product was defective.
Completed operations liability-the completed operations or completed work of a
business can be a source of legal liability .E.g. a general contractor that has
constructed a new building for another party.
Directors and officers liability an increasing concern among businesses today is
the threat of lawsuit against the directors and officers of a company .The exposure
is greater for publicity owned organizations but it also exists for privately owned
firms and nonprofit organizations ,
3. Personnel risk risks that directly affect individual employees but may have an
indirect impact on a business as well The primary risks in the category include
premature death ,poor health ,and insufficient retirement income
a. Premature death risk is associated with death is not if but when .We all expect to
die, however, there is a risk that we may die early in life .This risk poses a
potential financial problem for both the family of the person and his or her
employer.
b. Poor healthy a more likely occurrence than death of an employee is poor
health .the severity of poor health varies ,ranging from a mild disorder to a more
serious ,disabling malady
c. Insufficient retirement income the final category of personnel risk involves the
possibility of outliving ones wealth .The goal in dealing with the risk is to defer
income and accumulate sufficient wealth to provide a satisfactory level of income
during the non-working years.

Risk management

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Risk management ways of coping with risk that are designed to preserve the assest and
earning power of a firm

The process of risk management

Five steps are required to develop and implement a risk management program
Step 1 : identify and understand risks is essential that a business owner beware of risks
the firm faces .To reduce the chance of overlooking important risks ,a business should
adopt a systematic approach to identifying risks .Useful identification methods
includes insurance policy ,checklists questionnaires, analysis of financial statements and
careful of a firms operations ,customers and firms.
Step 2 : evaluate risks the various risks have been identified ,they must be evaluated in
terms of the potential size of each loss and the probability that it will occur
Risks can be classified in 3 groups:
a. Critical- loss that could result in bankruptcy
b. Extremely important-loss that would require investments of additional capital to
continue operations
c. Moderately important- loss that can be covered with current income or existing
assets
Step 3 : select methods to manage risks two approaches used in dealing with the risk
are risk control and financing ,both of which will be discussed later in this chapter
Step 4 :Implementing the decision .one the decision has been made to use particular
technique or techniques to manage a firms risks ,,this decision must be followed by
action such as purchasing insurance and setting aside dedication funds to cope with any
risk that have been retained .Failure to act or even simple procrastination will /could be
fatal.
Step 5 review and evaluate review and evaluation of the chosen management techniques
are essential because conditions change new risks arise and old ones disappear.
Reviewing earlier decision to use specific methods to identify mistakes made previously

Methods to manage risk

1 risk control is minimizing potential losses by preventing avoiding and reducing
Loss prevention keeping a loss from happening
Loss avoidance avoiding loss by choosing not to engage in hazardous activities
Loss reduction lessening the frequency severity or unpredictable losses
2. Risk financing making funds available to cover losses that could not be eliminated by
risk control
Risk transfer buying insurance or making contractual arrangements with others
in order to transfer risk
Risk retention financing loss intentionally ,through a firms cash flows
Self insurance designing part of a firms earning as a cushion against possible
future losses
Partially self funded program designating part of a firms earnings to fund a
portion of employee medical coverage

Basic principles of a sound program

1. Identify business risks that can be insured a small business must first obtain the
insurance coverage that is either required by law or by contract with another party.
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This generally includes workers compensation insurance and automobile liability

insurance .A reputable insurance agent with expertise in providing business
insurance coverage will be an important resources in identifying business risks
that can be insured while also establishing the premium cost for insuring risks .As
a part of this process, business owners should take the necessary time to
determine the replacement of cost of their building s and personal property.
2. Secure coverage for all major losses must avoid incurring major uninsured losses
that have the capacity to threaten the very existence of the business .E.g.it would
be exceedingly difficult to overcome the total destruction , of a building or faculty
caused by a significant fire or windstorm event .For this reason a business owner
should make certain insurance covers the full replacement value of the firms
building and personal property
3. Consider the feasibility and affordability of insuring smaller potential losses
small potential losses do. Business owner will need to weigh the feasibility and
affordable of absorbing smaller potential losses.

Common types of business insurance

1. Property and Casualty Insurance
a. Property insurance
b. Commercial generalizability insurance
c. Automobile insurance
d. Workerscompansetion insurance
e. Crime insurance
f. Package policies
2. Life and Health Insurance
a. Health insurance
b. Key personal life insurance
c. Disability insurance

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