B

International
Labour
Office

KNOWABOUTBUSINESS
Entrepreneurship Education
in Schools, Technical Vocational Training Institutions and Higher Education

MODULE

5 2018

How do I start a business?

 MODULE 5

How do I start a business?

International Labour Office, Geneva

International Training Centre of the ILO, Turin
Copyright © International Training Centre of the ILO 2018

This publication enjoys copyright under Protocol 2 of the Universal Copyright Convention. Applications for
authorization to reproduce, translate or adapt part or all of its contents should be addressed to the International
Training Centre of the ILO. The Centre welcomes such applications. Nevertheless, short excerpts may be
reproduced without authorization, on condition that the source is indicated.

Know About Business

ISBN 92-9049-396-8

First published 1996

Second edition 2000
Third edition 2002
Fourth edition 2004
Revised edition 2005
Revised edition 2007
Revised edition 2008
Revised edition 2011
Revised edition 2018

The designations employed in the publications of the International Training Centre of the ILO, which are in
conformity with United Nations practice, and the presentation of material therein do not imply the expression of
any opinion whatsoever on the part of the Centre concerning i.a. the legal status of any country, area or territory
or of its authorities, or concerning the delimitation of its frontiers. The responsibility for opinions expressed in
signed articles, studies and other contributions rests solely with their authors, and publication does not constitute
an endorsement by the Centre of the opinions expressed in them.

Publications of the Centre, as well as a catalogue or list of new publications, can be obtained from the following
address:

Publications
International Training Centre of the ILO
Viale Maestri del Lavoro 10
10127 Turin, Italy
Tel: +39 11 693 6693
Fax: +39 11 693 6352
E-mail: publications@itcilo.org
http://www.itcilo.org
 INTRODUCTION

What is Know About Business?

Know About Business (KAB) is an entrepreneurship education programme developed

by the International Labour Organization (ILO) to teach entrepreneurship in technical
and vocational education and training institutions as well as in secondary and higher
education institutions.
The programme seeks to prepare in-school youth – young men and women - for the
transition from school to the world of work by letting them discover and develop
entrepreneurial competencies and basic business management skills through a range
of games and exercises. The ultimate goal is to equip young people with skills and
competencies to start their own venture at some point in their life as well as to work
productively as employees in enterprises as intrapreneurs. KAB helps young people
to explore and develop an entrepreneurial mind-set and attitude that can be applied
in all aspects of life whether a young person choses to become an entrepreneur or an
intrapreneur.
KAB is directed to teachers and educators in technical and vocational education and
training institutions, general secondary education and teachers and lecturers in higher
education such as universities and polytechnics. KAB can be used in any educational
setting and can be adapted for specific technical and general courses where an
educational institution or a teacher wishes to reinforce entrepreneurship learning
outcomes. The typical age group is youth from 15-24 years, but the games and
exercises can be used to teach entrepreneurship to any age or target group.
The complete KAB package consists of a total of 80 hours of games and exercises
and is made up of seven modules, each representing a key area of entrepreneurship.
Each module consists of a Teacher’s Guide with detailed sessions plans and
exercises and a Learner’s Workbook. An Implementation Manual guides educational
institutions through the integration of KAB into existing systems and curricula.
Whereas some countries have adopted the full package in their national curricula,
other countries have adopted part of the KAB package to complement existing
curricula at different institutional levels. The ITC-ILO is available to provide advice and
guidance to any institution that considers implementing the full KAB package or part
of it.
For more information write to the Enterprise, Microfinance and Local Development
Programme (EMLD) of the International Training Centre of the ILO at emld@itcilo.org.

Know About Business 3

 INTRODUCTION

Authors and acknowledgements

The Know About Business programme was initially developed by the International
Labour Organization in Kenya in 1996 as part of an entrepreneurship education
programme in vocational education and training. The team was led by Professor
Robert Nelson of the University of Illinois. Since then a number of revisions were
carried out in 2000, 2002, 2004, 2005, 2007 2008 and 2011.
Over the years many former and current ILO officials have contributed to the
continuous development of the KAB programme including Gulmira Asanbaeva, Rania
Bikhazi, Charles Bodwell, Linda Deelen, Jens Dyring Christensen, Klaus Haftendorn,
Marek Harsdorff, Nelien Haspels, Samih Jaba, George Manu, Barbara Murray, Debra
Perry, Annemarie Reerink, Virginia Rose Losada, Joni Simpson, John Thiongo and
Peter Tomlinson.
The current 2018 version was developed with contributions by Rania Bikhazi, Tong
Cai, Nuno Castro, Linda Deelen, Jens Dyring Christensen, Samih Jaba, Maria José
Mallo and Virginia Rose Losada. The layout and graphics was done by Enzo
Fortarezza. The team wishes to thank the authors of the ILO GET Ahead and Start
Up and Go training materials, that served as inspiration for some of the exercises in
this new KAB package. Very special thanks go out to all those involved in the national
translations and adaptations of Know About Business, whose work was extremely
helpful for the preparation of the present package.

4 Know About Business

 MODULE 5: How do I start a business?

MODULE 5
How Do I Start a Business?

Module objectives:

 To expose learners to the basic aspects of starting a business,

including location selection, business legal forms, and start-up
finance.

Module coverage:

1. Selecting a business location

2. Legal forms of business ownership
3. Money needed to start a business
4. Obtaining money to start a business

Know About Business 5

 MODULE 5: How do I start a business?

Topic 1: Selecting a Business

Location

SUGGESTED TIME 1.5 hours

LEARNING OUTCOMES

 Learners understand the main factors to be considered when selecting a

location for a business.

ACTIVITIES

1. Divide learners into two groups and conduct a debate. One group would
defend and the other groups would reject the following statement:
“Location is not important because people will go out of their way for any good
service or product that they really want.”
2. Let learners talk about their ideas on the importance of the business location.
Ask them which factors an entrepreneur should consider when choosing a
business location. Give them examples of different types of business (retail,
wholesale, service, manufacturing) to let them analyse the factors to be
considered. Write their answers on the board.
3. Invite learners to read HANDOUT 1. Use SLIDE 1 to discuss the factors that
are important in selecting a business location.
4. Divide the class into groups of 3 or 4 learners, and let each group select a
business to start (grocery store, webpage design business, bakery, food
delivery service, handicrafts shop, etc.). Have each group determine the best
location for that business based on their knowledge about their community.
Have groups present their findings to the class. Let each group give both
positive and negative factors regarding the location, and what they could do
to mitigate the impacts of negative factors.
5. Have learners read and discuss HANDOUT 2. Use SLIDE 2 to discuss factors
in selecting a specific location.
6. Have learners read the case study in WORKSHEET 1, and then discuss within
their groups the question: “Which location do you think is best from a business
point of view, Jim’s or Susan’s? Why?” Have a class discussion on their
responses.

6 Know About Business

 TOPIC 1: Selecting a business location

HANDOUT 1

Locating the business

The business location is vitally important to the success or failure of most businesses.
Choosing an adequate location should be a continuous process throughout the life of
the business. Factors such as changes in the population, changes in customer buying
habits and new methods of transportation can affect the suitability of the business
location.
Women and men may have different considerations in selecting a business location.
Many women and men work from home or close to home because of their family
responsibilities and sometimes because of personal security concerns. Disabled
persons or those without independent transport also face constraints.

Importance of business location

Location is more important for some types of businesses than for others. The right
location is very important for retail stores and service businesses. Clothing stores, dry
cleaning establishments and restaurants must be located near their customers to
succeed.
However not all businesses need to be located close to residential areas. Wholesale
businesses, which buy in large quantities and sell in smaller quantities to retail
businesses, can be located further away. Services such as accounting and tax firms
can be located “off the beaten path” and still have high sales. E-commerce has made
it possible for businesses to be located further from their clients, including in foreign
countries.
Manufacturing and construction firms, for instance, do not attract customers because
of the firm’s location. These types of firms find customers through either personal
selling or advertising. The location of these businesses may be selected on the basis
of costs, environmental impact, or supply of raw materials.

What to keep in mind when selecting a business

location?
Who will be the customers?
Entrepreneurs should first identify the groups of people who will be their customers.
For example, if you are interested in opening a store selling sport shoes, it would be
important to know where the greatest population of teenagers and young adults is
located because they buy the most sport shoes. Is the population growing or declining?
Are people shopping in the community itself or elsewhere?

Where will the customers best be served?

Know About Business 7

 MODULE 5: How do I start a business?

Retail and service businesses in particular should identify a good area from where to
service the customers. Is it better to locate the business in a residential area or in an
area where people go for work? Why are other businesses located in certain areas?
Are businesses moving in or out of the area?

Competition
You must study your competitors by gathering information on their strengths and
weaknesses. You should know how many competitors you have and where they are
located. You should also find out how many businesses similar to yours have opened
or closed in the past two years.
There are three favourable conditions for opening a new firm. First, no competitors
are located in the area. Second, competitors’ businesses are poorly managed. Third,
customer demand for your product is growing.

Infrastructure and costs

The costs of operating a business depends on the location. The cost of leasing or
buying premises may vary a lot between one location and the other. Entrepreneurs
also need to study how well the community is connected and whether any
infrastructure plans may change the situation over the coming years. Accessibility by
public transportation and safety and security concerns may be particularly relevant to
female and disabled business owners, employees and clients. The cost and quality of
basic services, such as water and electricity, may also be different from one location
to the other.
In addition to these basic concerns, some specific questions also need to be
answered that depend on whether you plan to open a retail establishment, a
manufacturing firm, a wholesale business or a service business.

Regulations
Most municipalities have zoning laws that restrict the location of certain types of
businesses to certain zones. Some municipalities only allow manufacturing
businesses to operate in industrial zones, for instance. The municipal office will be
able to give information about zoning laws.

Location by types of businesses

Retail firms
Parking facilities and access to major roads are prime problems for many retailers.
Retailers located in shopping malls have less parking problems. Retailers need to
consider the types of businesses that surround a site. For example, studies have
shown that clothing stores should not be located next to service stations. The number
of persons walking by a business location is also important to a retailer. E-commerce
has made it possible for retail shops to be located far from their clients. E-commerce
also provides invisible competition, as your potential customers may be buying
products on-line.

Wholesale firms

8 Know About Business

 TOPIC 1: Selecting a business location

Wholesale firms buy products from manufacturers in large quantities and then sell
their products to retailers in smaller quantities. Two major factors should be
considered in selecting a wholesale site. One major factor is a good transportation
service, including rail and road. Another major factor is proper facilities which include
buildings, fixtures and public utilities. Without these facilities, a wholesaler may not be
able to maintain inventories large enough to handle customer needs.
Service firms
Being close to a large shopping centre is usually considered ideal for service
businesses. However, it is not necessary for a TV repair shop, a dry cleaner’s, a
dentist’s, a shoe repair shop or a child-care facility to be located in high-rent locations.
Customers are willing to seek out and go further away to obtain a good service. These
establishments can be located somewhat “out of the way”. But even among service
firms there are important differences as to which site is better. For example, a dry
cleaner’s located near a grocery store and drugstore is usually a good choice. The
same location may not be suitable for a dentist, who does not require the traffic
movement and convenient drop-off point that makes a dry cleaner’s successful.
Manufacturing firms
Sites that are suitable for manufacturing firms differ from sites that are good for
retailers, wholesalers and services firms. When considering opening a manufacturing
firm, check transportation facilities and distance from raw materials. Proper facilities,
environmental regulations and zoning laws are other important factors. As you study
the general and specific factors of a business location, keep in mind present as well
as future location needs.

Know About Business 9

 MODULE 5: How do I start a business?

SLIDE 1

Importance of business location

 Why is location important to business success?
 Why is location more important for some businesses than for
other businesses?
 Factors to consider when selecting a location:
a. who will be the customers?
b. where will the customers best be served?
c. competition
d. infrastructure and costs
e. regulations

10 Know About Business

 TOPIC 1: Selecting a business location

HANDOUT 2

Procedures for selecting a specific

location
The following procedures are recommended when selecting a business location:
1. Make a list of factors you feel are “necessary” for considering a business location.
Also include a list of factors that would be “desirable” but not necessary.
2. Find all the possible locations that meet your list of factors.
3. Visit the locations to get an idea of their general appearance and eliminate those
locations that are not suitable for your needs. Reduce the number to 2 or 3
locations that appear suitable.
4. Visit the locations again and use a checklist to compare locations against the
factors you have identified. Return to the locations at various times of the day and
evening to get a better understanding of the suitability of each location.
5. Conduct a traffic count at each location. Count the number of cars and
pedestrians that pass each location at various times to calculate the number of
potential customers.
6. Find out whether the selected sites are accessible for everybody at different times
of the day and during the different seasons. Are there any security concerns? Are
the premises accessible to people with disabilities?
7. Talk to your potential clients and ask them about their preferences for the
business location.
8. Make a thorough cost calculation that includes the cost of buying, constructing or
renting the premises, water, electricity, transport and any local taxes you may
have to pay.
9. Visit the municipality and/or the Chamber of Commerce and collect information
about regulations, any changes in zoning plans or transport connections.
10. Ask the opinion of experienced consultants and business people in the area to
help you decide on one location.
11. Analyse all the facts and opinions you have gathered before making a final
decision regarding the location of your business.

Know About Business 11

 MODULE 5: How do I start a business?

SLIDE 2

Selecting a specific location

 List “necessary” and “desirable” location factors
 Identify potential sites that match location factors
 Visit sites and select 2 or 3 best sites
 Compare locations to “necessary” and “desirable” location
factors
 Visit sites at various times of day and evening and conduct
traffic count
 Check accessibility for different kinds of people
 Talk to clients about their preferred location for your business
 Calculate and compare the costs of the different sites
 Check zoning and other local regulations and plans
 Ask experienced business people and consultants to help
 Analyse all facts and opinions
 Make a final decision on the business location

12 Know About Business

 TOPIC 1: Selecting a business location

WORKSHEET 1

Choosing a business location

Jim and Susan were each planning to start a business.
Jim had worked as a carpenter in a large city. He had an accident and a spinal injury
made it impossible to remain a carpenter. Jim decided to start a business in his home
town because he had lived there most of his life. He knew most of the people in the
town and they all liked him. There were already two general stores in his home town,
but Jim still thought he could do good business. Both stores had been in business for
some time, and were quite successful.
Jim’s home town was not very big. Many of the people who lived there were in the
fishing and hunting trade. Some of the people worked part time with the government.
Some had jobs out of town, mainly on construction sites and in the mines. These
people only came back home for a week or two four or five times a year.
Transportation into Jim’s home town was by boat or plane. The general stores had
their supplies transported into the town by barge in the summer. A few supplies were
flown in during the winter, but not too much could be brought in this way.
Jim thought there were enough people in the town to support three stores.
Susan had decided to set up her business in a town some distance away from where
she lived. Susan did not know too many people in the town, but she still thought that
a well-run business would be a success there.
The town where Susan had decided to build her store already had one general store.
It was the only store in town. The people in this town did some trapping and fishing
but they also had some tourist camps. There was a mine situated in a community a
few miles away, and many persons in the town worked and lived at the mine all week
and came home to their families on weekends. There was also some logging in the
area around the town. Many persons worked on the cutting crews. The cut timber was
trucked out to the mill on a road which ran past the town.
Susan was of the opinion that because people had jobs all year round there was a
better chance of making a business succeed in this town. She estimated that there
were enough people to keep two stores busy all year. Susan thought that by offering
the right kind of merchandise, she would achieve success if she established her store
in this town.

Questions for discussion:

Which location do you think is best from a business point of view, Jim’s or Susan’s?
Explain your response.

Know About Business 13

 MODULE 5: How do I start a business?

Topic 2: Forms of Business

Ownership

SUGGESTED TIME 2 hours

LEARNING OUTCOMES

 Learners are aware of the existence of different legal business formats.

 Learners can describe different forms of business ownership, with their
advantages and disadvantages.

ACTIVITIES

1. Explain to the learners that they will learn about different legal formats that
entrepreneurs can use to register their business. Before registering their
business, entrepreneurs need to find out which format is more convenient.
Show SLIDE 1 and explain that during this session, they will learn about the
four most commonly used formats: Sole proprietorship, partnership, limited
liability company and cooperative. Which format is best for a business,
depends on whether the entrepreneur prefers to work alone or with others,
how the entrepreneur wants to raise the necessary capital, and deal with
financial risk, amongst others.
2. Divide the learners into groups, and ask them to complete WORKSHEET 1
based on their understandings. Then show SLIDE 2 and discuss the answers.
3. Use SLIDES 3-6 to explain different forms of business ownership to learners.
Then invite them to read HANDOUT 1 for more information about cooperatives.
Explain them that cooperatives are a great idea for people who want to jointly
invest in an activity, take the decisions as a group, help each other and learn
from each other.
4. Have learners work in groups to analyse the advantages and disadvantages
of the different legal formats on WORKSHEET 2. Then invite one of the groups
to write their answers on the board. Ask the other groups to provide additional
ideas.
5. Show SLIDE 7. Let learners think about the questions and share their ideas.
You may write their answers to question 1 on the board.
6. Let learners read HANDOUT 2 and have a group discussion about how to
choose the right entity.
7. Have learners read and discuss the questions on WORKSHEET 3. Then let
them share their answers.

14 Know About Business

 TOPIC 2: Forms of business ownership

SLIDE 1

Different business legal formats

 Sole proprietorship

 Partnership

 Limited Liability Company

 Cooperative

Know About Business 15

 MODULE 5: How do I start a business?

WORKSHEET 1

Different business legal formats

Choose the legal format that you think fits each description best from the four
options below.
A) Sole proprietorship
B) Partnership
C) Limited liability company (LLC)

Description Legal format

1 There are at least two owners of the business

2 The owner pays taxes in his/her personal capacity

3 The owner can simply start doing business

4 The owner runs the business as he/she sees fit

The business has a different legal personality from

5
the owners

6 Disagreements can slow down decision making

The owner(s) can only lose the money they

7 invested in the business, not their other properties
or savings

16 Know About Business

 TOPIC 2: Forms of business ownership

SLIDE 2

Different business legal formats

Description Legal format

1 There are at least two owners of the business B) Partnership

A) Sole
2 The owner pays taxes in his/her personal capacity
proprietorship

A) Sole
3 The owner can simply start doing business
proprietorship

A) Sole
4 The owner runs the business as he/she sees fit
proprietorship

The business has a different legal personality from C) Limited liability

5
the owners company

6 Disagreements can slow down decision making B) Partnership

The owner(s) can only lose the money they

C) Limited liability
7 invested in the business, not their other properties
company
or savings

Know About Business 17

 MODULE 5: How do I start a business?

SLIDE 3

Sole proprietorship
 There is one single owner.
 The owner makes all the decisions.
 The owner is liable for all obligations and debts.
 The owner takes the profits and decides what to do with it.
 The owner is taxed on personal income with profits earned
from the business.
 Simplest operating structure.
 Usually could be the easiest business to start, with lower
initial costs and less paperwork than other legal forms.

18 Know About Business

 TOPIC 2: Forms of business ownership

SLIDE 4

Partnership
 There are two or more co-owners.
 An agreement/article/contract indicates how the profits,
losses, duties, assets and liabilities are divided among
partners. This document is normally prepared with a
competent attorney.
 The partners take all mayor business decisions together.
 The partnership agreement defines how the profits are
shared.

Know About Business 19

 MODULE 5: How do I start a business?

SLIDE 5

Limited liability company (LLC)

 The owners can only lose the money they have invested in
the business (limited personal liability for the business).
 More complicated to set up and run compared with a sole
proprietorship and partnership.
 The Government imposes financial administration and
reporting standards.

20 Know About Business

 TOPIC 2: Forms of business ownership

SLIDE 6

Cooperatives
 A cooperative is a group of people operating a business
together.
 The members jointly own the cooperative.
 A cooperative agreement is required and should be filed with
the appropriate government authorities.
 The members of the cooperative decide together who will
manage the cooperative.
 The members of the cooperative make all mayor decisions,
based on a one-member-one vote principle.
 Mutual support and mutual learning are important
cooperative principles.
 Depending on government regulations, cooperatives may
pay less taxes than other forms of business.

Know About Business 21

 MODULE 5: How do I start a business?

HANDOUT 1

Advantages of cooperatives
Putting financial resources together: Many types of business activities need a
starting capital that exceeds the savings capacity of individual women and men.
Common input supply: Cooperatives may negotiate better prices and delivery
conditions when buying inputs together and for use by a large number of
entrepreneurs (raw materials, packing materials, etc.).
Joint marketing: Product marketing costs can be reduced when transport facilities
are shared. The members can make agreements with large customers that individual
entrepreneurs would not be able to deal with.
Economies of scale: Entrepreneurs who share the same machinery can lower
production costs or make a larger quantity of goods.
Transfer of knowledge: By working together women and men will learn from each
other, improving their respective technical skills, marketing skills, etc.
Stronger negotiating power: Cooperatives have more negotiating power with
government agencies, communities, families, and business-related entities than
individual entrepreneurs.
Mutual support: Mutual support is one of the most important cooperative principles.
When individual cooperative members are facing certain problems, the cooperative
will support them in overcoming these problems.
Democracy: In cooperatives, decisions are made by all members together, using a
one-member-one-vote principle, even if some members invested more capital than
others.

22 Know About Business

 TOPIC 2: Forms of business ownership

WORKSHEET 2

Advantages and disadvantages of different

legal formats
Fill in the table with your group!

LEGAL FORMAT ADVANTAGES DISADVANTAGES

Sole
Proprietorship

Partnership

Limited Liability
Company

Cooperative

Know About Business 23

 MODULE 5: How do I start a business?

AN EXAMPLE OF THE ADVANTAGES AND DISADVANTAGES OF

DIFFERENT LEGAL FORMATS TABLE

LEGAL FORMAT ADVANTAGES DISADVANTAGES

1. Low costs to start 1. The entrepreneur can lose

2. Simple procedure to all his or her savings and
Sole register the business properties if the business
Proprietorship 3. Direct control of the fails
business 2. Difficulties in raising capital
4. Owner receives all 3. Responsible for all
profits decisions
1. Relatively simple 1. Shared authority
procedure to start the 2. Difficulty in finding suitable
business partners
Partnership 2. Partners jointly invest in 3. Management disputes
the business among partners
3. Shared management
and skills
4. Partners jointly make
decisions
1. The owners will only 1. Closely regulated
lose the capital they 2. More expensive form to
invested in the organize
Limited Liability business when the 3. Extensive record keeping
Company business fails. and reports required
2. Separate legal entity
3. Management can
specialise
4. Easier to raise capital
from banks
1. Members jointly invest 1. Hard to keep qualified
in the cooperative members
2. Mutual support, joint 2. Members contributing to
learning and shared the cooperative unequally
risk-taking 3. Shared authority
Cooperative 3. Democracy, because of 4. Governance challenges
the one member one
vote principle
4. Cooperatives often
benefit from good
discounts for bulk
purchases

24 Know About Business

 TOPIC 2: Forms of business ownership

SLIDE 7

Understanding legal formats

Questions:
1. Can you explain the difference between limited liability and
unlimited liability?

2. Which form of ownership is the most attractive to you? If you

were to start your own business, what legal format would you
use, and why?

Know About Business 25

 MODULE 5: How do I start a business?

EXPLANATION OF “UNDERSTANDING LEGAL FORMATS”

1. Can you explain the difference between limited liability and unlimited liability?

Answer:
 Limited liability means that the owners’ savings and assets are protected if
the business goes bankrupt. The owners will not lose more than what they
have invested in a business.
 Unlimited liability means that the owner’s assets are attached to the business.
The owner or partners can lose everything and even more than what they
have invested in the business.

2. Which form of ownership is the most attractive to you? If you were to start
your own business, what legal format would you use, and why?
Answer: Learners’ answers will differ but learners need to justify why a form of
ownership (partnership, sole proprietorship, limited liability company or cooperative)
appeals to them (easy to set-up, bigger pool of knowledge, limited liability, etc.).

26 Know About Business

 TOPIC 2: Forms of business ownership

HANDOUT 2

Choose the right legal format

A business can be organized in several ways, and the format chosen affects the
company's as well as owners' legal liability and income tax treatment. When preparing
to start your own business, you may ask the question: which legal format is right for
me?
When you make the decision, you may consider the asset and liability protection,
whether it is easy or not to create the business, the tax laws, the opportunities for
obtaining credit and capital, etc. Thus there is not a right or wrong answer, but it is
important to choose the legal format that is most convenient.
Different forms of business ownership have different pros and cons. For example,
sole proprietorship is easier to start with less cost and paperwork. However, it has no
liability and asset protection. Limited liability companies separate personal and
business finance and bring more opportunities to raise capital as a legal entity, but
they are usually more complex to set up and operate.
Keep in mind the different perspectives, and seek competent legal advice by
consulting a lawyer, a financing expert and a tax official before deciding which format
to choose.
In addition, understand that your business will go through several stages of growth as
you build your business over time. Consider a long-term strategy as you carry your
business to new levels of success instead of only focusing on what meets your needs
for today.

Know About Business 27

 MODULE 5: How do I start a business?

WORKSHEET 3

Organizing a business
Ted has lived in a small community for the past ten years. The town, which has a
population of 275 people, is on the edge of a large lake. Hunting and fishing are
excellent in the area. The old road that served the community is narrow and rough.
Spring and summer rains sometimes make the road impassable in some spots. A new
road is being built into the area and should be completed in about four months’ time.
Ted thought about starting a tourist outfitting shop now that the new road is nearing
completion. Tourists will easily be able to drive into the area. They will be eager to
take advantage of the good fishing and hunting.
Ted has considered the advantages and disadvantages of the ways he could legally
organize his business. He considered being a sole proprietor because he likes to be
his own boss. He has saved some money and he could borrow additional money to
start a small business.
A partnership is also appealing. One or two partners could provide the extra money
needed to start a larger business. Another possibility would be to start a limited liability
company. The amount of money thus available would be much greater and he
wouldn’t have a loan to repay. Ted has talked to a number of people in his community
to see if they would be interested in starting a limited liability company. The amount
of money available to start the business would be greater than for a proprietorship or
partnership. Furthermore, in case the business would fail, he would only lose the
money that he would have invested in the business and not his other savings.

Questions:
1. Which form of business ownership would you choose if you were Ted?
2. What additional information does Ted need to make an informed decision
regarding the best form of legal ownership for his business?

28 Know About Business

 TOPIC 3: Money needed to start an enterprise

Topic 3: Money Needed to Start an

Enterprise

SUGGESTED TIME 2 hours

LEARNING OUTCOMES

 Learners will be able to explain the process of estimating the amount of

money needed to start an enterprise.

ACTIVITIES

1. Have learners read HANDOUT 1. Explain to the learners that businesses need
start-up capital for two purposes: The first purpose is to make the initial
investments in buildings, machines and licenses, for instance. The second
purpose is to cover the running costs of the business before the business
starts generating income. Altogether, the money needed is called start-up
capital. Let learners ask any questions, and make sure all learners understand
the basic concepts.
2. Divide learners into small groups, and ask them to complete WORKSHEET 1
within groups. Have learners indicate which payments entrepreneurs need to
make as initial investments, and which payments they need to make when the
business is already operating (working capital), but not yet generating income.
3. Have the learners read WORKSHEET 2, fill in the tables and answer the
questions in groups. Have each group present their findings and correct the
calculations where necessary.

Know About Business 29

 MODULE 5: How do I start a business?

HANDOUT 1

Estimating the start-up capital

Setting up a business requires a certain amount of money that has to be spent before
the business activities start to generate enough income. This money is called start-up
capital. It serves two purposes.

Initial investments
A person starting a business will have to make certain payments even before the
business starts operating. This money is invested in items that the business needs as
long as it is operating.
Buying land, constructing a workshop, purchasing machinery, tools, equipment, office
furniture, etc. are all costs incurred before the business starts its operations, as are
legal fees, utility connections for water, electricity, telephone and Internet, and so on.
Business starters are generally aware that they need money for machines, tools and
equipment for the business. However, sometimes entrepreneurs do not realize that a
number of other payments have to be made before they can really start their business.
For example, the cost for installation of machines and the training of workers to use
them can constitute quite a high cost. Operating licenses are also initial investments
to be made. There may also be costs related to renovations of facilities, for example,
to make them more accessible for customers, including those with disabilities, and to
satisfy safety and health regulations.

Working capital
Once a new business starts to operate, working capital is needed to cover the
immediate expenses until revenues from sales flow back into the business. This time
span depends on the nature of the business. In general, in trading activities this period
can be less than one month, while in manufacturing activities the time span between
the starting date of the production and receipt of money in the bank account or cash
box, can be several months. This money is also invested permanently in the business
and is called working capital. When the business expands, the working capital needs
to be increased.
The need for working capital is also often underestimated. Business starters think
they will be paid immediately. They only take into account the expenditures for
investment items such as premises, machinery, equipment, vehicles, inventory and
so on, without being aware that during the first weeks and months of operations, the
sales revenues do not cover the expenditures for running the business, which can
lead to a problem of liquidity whereby the entrepreneur cannot pay salaries or

30 Know About Business

 TOPIC 3: Money needed to start an enterprise

suppliers. On top of that, sometimes customers ask for credit and payments are not
always made on time.
The start-up capital for a new business is the sum of money needed for the initial
investment and for the working capital. The future entrepreneur needs to have this
amount of money available through using his/her own savings, finding partners and
negotiating loans with banks, etc.

Know About Business 31

 MODULE 5: How do I start a business?

WORKSHEET 1

Start-up capital
Are the payments below made for initial investments in the business or to cover
working capital? Make your choices at the table.
Initial Working
Payments
investments capital

1 Business registration

2 Car insurance 1st year

3 Staff salary 1st month

4 Architect’s fees for workshop planning

5 Purchase of machines

6 Purchase of raw materials

7 Electrical connection of machines

8 Purchase of raw materials

9 Advertising for business opening

10 Acquisition of land in an industrial estate

11 Construction of a workshop

13 Office supplies for the first 2 months

14 Power connection

15 Purchase of a second-hand truck

16 Consultant for investment study

17 Rent of business premises

32 Know About Business

 TOPIC 3: Money needed to start an enterprise

EXPLANATION TO “START-UP CAPITAL”

Initial Working
Payments
investments capital

1 Business registration X

2 Car insurance 1st year X

3 Staff salary 1st month X

4 Architect’s fees for workshop planning X

5 Purchase of machines X

6 Purchase of raw materials X

7 Electrical connection of machines X

8 Purchase of raw materials X

9 Advertising for business opening X

10 Acquisition of land in an industrial estate X

11 Construction of a workshop X

13 Office supplies for the first 2 months X

14 Power connection X

15 Purchase of a second-hand truck X

16 Consultant for investment study X

17 Rent of business premises X

Know About Business 33

 MODULE 5: How do I start a business?

WORKSHEET 2

Starting a pastry shop

Ms. Brownie worked for several years in a pastry shop that produces pastries and
cakes for customers that live and work in the neighbourhood. The shop also delivers
cakes and other delicious sweets and pastries for weddings, birthday celebrations
and other social events.
Ms. Brownie learned everything about making pastries, starting from the raw materials
and ingredients for the different products, the preparation and baking processes as
well as the work in the shop and relations with customers. She had a good salary of
20. Ms. Brownie always wanted to have her own pastry shop, so she put as much
money as she could afford into a savings account.
She made a list of machines and equipment she would need to start her own shop.
She also researched the prices. The most costly item would be an electric oven
(3,500). Then she would need a kneading machine (500), some weighing scales (100),
bowls, dishes, containers, boxes, hand tools (95), furniture for the pastry shop such
as tables and shelves (110) and a big refrigerator (350) that would allow her to store
the finished cakes. She would also need a cash register (250). For herself she has
foreseen a little office, and for the staff a little rest room. Second-hand furniture for
these two rooms would cost around 100. To accommodate more customers,
modifications to the front door would cost 140.

34 Know About Business

 TOPIC 3: Money needed to start an enterprise

After a market assessment she decided to start her own business. It was a very busy
time for Ms. Brownie as she had to finalize her business plan, estimate the investment
and working capital, and get money from a bank. She found a suitable shop for her
business that she could rent for 80 a month.
She registered her business at the cost of 10 and ordered the machines and
equipment. The cost of installation amounted to 20. She paid 15 for water, power,
telephone and Internet connections, registered in her name. Insurance on the shop
was compulsory and she had to pay 10 for the first year.
She selected her staff – two women for the workshop and one young apprentice –
and hired them when the machines had been installed. The monthly salaries for all
the staff summed up to 15. She decided that during the first months, she would pay
herself a salary of 20.
Before opening the shop, Ms. Brownie produced a range of cakes and pastries as
training for the staff under production conditions. The raw materials for the training
costed 25, while she estimated other costs such as water, electricity and telephone at
15. Before starting her business, Ms. Brownie paid 18 for publicity to inform the public
about the opening of the business.
Ms. Brownie also planned to run a catering service. For this purpose she had to buy
a second-hand car for 800 and to hire a driver at a monthly salary of 6. The car
insurance for one year amounted to 25.
Finally, Ms. Brownie’s estimated that she would spend 25 in raw materials, before the
shop would start generating an income from sales.

Know About Business 35

 MODULE 5: How do I start a business?

Questions:
1. Calculate Ms. Brownie’s initial investment costs and working capital needs and fill
in the tables below.

(1) Ms. Brownie’s initial investments:

Investment item Amount

Equipment:
-
-
-
-
-
-
Business registration
Water, electricity, telephone, internet
connection
Furniture:
-
-
Installation of machines
Materials and other costs for staff training
Publicity
Accessibility changes
Car
Total initial investments

36 Know About Business

 TOPIC 3: Money needed to start an enterprise

(2) Ms. Brownie’s working capital needs:

Payment items Amount

Rent of business premises for the first month

Stock for two weeks

Shop Insurance first year
Car insurance first year
Owner’s salary
Staff wages for the first month
Other
Total Working Capital

2. How much money did Ms. Brownie need for initial investments, and how much
working capital did she need?

3. How much start-up capital did Ms. Brownie need in total?

Know About Business 37

 MODULE 5: How do I start a business?

EXPLANATION TO “STARTING A PASTRY SHOP”

(1) Ms. Brownie’s initial investments:

Investment item Amount

Equipment:
- Oven 3,500
- Kneading machine 500
- Scales 100
- Bowls, dishes, containers, boxes, hand tools 95
- Refrigerator 350
- Cash register 250
Business registration 10
Water, electricity, telephone, internet connection 15
Furniture:
- Furniture pastry shop 110
- Office furniture 100
Installation of machines 20
Materials and other costs for staff training 40
Publicity 18
Accessibility changes 140
Car 800
Total initial investments 6,048

38 Know About Business

 TOPIC 3: Money needed to start an enterprise

(2) Ms. Brownie’s working capital needs:

Payment items Amount

Rent of business premises for the first month 80
Stock for two weeks 25
Shop Insurance first year 10
Car insurance first year 25
Owner’s salary 20
Staff wages for the first month 21
Other
Total Working Capital 181

Ms. Brownie’s total start-up capital need is 6,048 + 181 = 6,229.

Know About Business 39

 MODULE 5: How do I start a business?

Topic 4: Obtaining Money to Start a

Business

SUGGESTED TIME 1.5 hours

LEARNING OUTCOMES

 Learners are able to identify different sources of capital to start a business.

 Learners understand how they can increase their chances to access loans.

ACTIVITIES

1. Have learners read HANDOUT 1. Show SLIDE 1 and have the learners
discuss the six questions. Make sure the learners understand the difference
between loans and equity capital.
2. Divide learners into groups and have them complete the case study on
WORKSHEET 1 to determine the capital needed to start a business, then
conduct a discussion with the class.
3. Ask the learners how they would prepare themselves for a visit to the bank.
Write the ideas on the board. Then ask them to invite HANDOUT 2.
4. Ask the learners to list what they themselves would require of a borrower
before they would lend money for a new business venture. Write their answers
on the board for discussion. Then show SLIDE 2 on the 5 Cs of credit and
SLIDE 3 on how to prepare yourself for a visit to the bank.
5. Ask both male and female students whether they think it could be more difficult
for women or men to get a bank loans. Show SLIDE 4 and discuss the reasons
why it is sometimes more difficult for women to access loans. Explain that it is
important for men and women to get equal access to finance and to have equal
rights to decide how to use bank loans.
6. Let learners work in groups to finish WORKSHEET 2 with an analysis of
advantages and disadvantages of equity finance and loan finance. Let groups
show their answers to the class. Explain the main advantages and
disadvantages of equity finance and debt finance using SLIDE 5.
7. (OPTIONAL ACTIVITY 1) Invite a bank loan officer to speak to the class.
Before the visit, have the class formulate questions to ask the loan officer.
These questions may either be sent to the guest speaker ahead of time as a
guideline for his or her presentation, or they may be used as a basis for a
question and answer session at the time of the visit. The major areas for
questioning might include:

40 Know About Business

 TOPIC 4: Obtaining money to start a business

 What are the most important factors that a loan officer looks for in an
application for a business loan?
 How important is it for a loan applicant to have capital or owner equity
to invest in the new business?
 Are some types of businesses more likely than others to receive start-
up loans? If so, is the difference based on the amount required for
starting the business or on the likelihood that the business will succeed?
 What are some ways an individual can obtain owner equity, assuming
that he or she cannot save the money from existing income?
 What are some important considerations for the applicant when
choosing a bank from which to obtain a loan?
8. (OPTIONAL ACTIVITY 2) Search the Internet and find video(s) of start-up
entrepreneurs talking about their financing experience. Play the video(s) to the
class and ask them for their feedback.

Know About Business 41

 MODULE 5: How do I start a business?

HANDOUT 1

Obtaining capital
1. What is equity capital?
Equity capital is the money that the owner and/or other investors invest into the
business. It is the basic funding of the business. Investor will expect a return on their
investment when the business generates profits.
2. What are loans?
Loans are amounts of money obtained from banks or microfinance institutions, on
which the entrepreneur has to pay interest. Loans for the business are also called
credit or debt financing.
3. Can all of the money needed for the business be borrowed?
Almost any lending institution will require an entrepreneur to provide a substantial
portion of the total amount of money needed to start a business. Not many lending
institutions or individuals will risk money on a business if the owners have none of
their own money invested in the firm. The lender must see that the business owner
has a personal commitment and involvement in the business. This personal
commitment includes the time, energy and money the owner is willing to contribute to
the business.
4. Where can equity capital be obtained?
 Personal savings
 Friends and relatives
 Partners. The owner may form a partnership with one or more individuals to
obtain equity capital to start the business.
 Corporation. It is possible to incorporate the business (as a company or a
corporation) and sell stock to raise capital.
5. Where can loans be obtained?
 Banks
 Finance companies
 Governments agencies (with loan schemes)
 Suppliers extending credit terms for equipment, inventory, etc, which allow
the business to begin generating sales before payment is due
 Microfinance institutions
6. What are the five Cs of credit?

42 Know About Business

 TOPIC 4: Obtaining money to start a business

Lending institutions will want to be assured that repayment of the loan will take place
as agreed by the borrower. They will therefore do a thorough loan evaluation. The
loan officer will look at the following points (the five Cs of credit):
 Character: the applicant’s character will be examined, including his or her
past record for meeting financial obligations.
 Capacity: the capacity of the business to generate profits will be examined
to determine the entrepreneurs’ ability to pay back the loan.
 Capital: the applicant’s properties will be examined, including savings and
any other personal or real property (land, buildings, etc.).
 Conditions: the economic conditions of the community, state and region will
have an effect on the availability of a loan.
 Collateral: whether the entrepreneur has assets to secure the loan, such as
real estate (property), receivables, inventory or equipment.

Know About Business 43

 MODULE 5: How do I start a business?

SLIDE 1

Questions on obtaining capital

 What is equity capital?

 What are loans?

 Can all the capital needed for the business be borrowed?

 Where can equity capital be obtained?

 Where can loans be obtained?

 What are the five Cs of credit?

44 Know About Business

 TOPIC 4: Obtaining money to start a business

WORKSHEET 1

Case study - Jenny’s cyber café

Jenny is a recent graduate of a technical institute who is quite skilled in the use and
application of computer technology. She wants to start a cyber café close to the
technical institute where students can meet, socialize and use the five computers she
hopes to purchase for the café. She will probably need to borrow capital to start her
business. If you were Jenny, how would you respond to the following questions
regarding obtaining capital?

Know About Business 45

 MODULE 5: How do I start a business?

Questions:

1. How much will five computers for the cyber café cost?

2. Will she be able to obtain credit from the store where she purchases the
computers?

3. Where can she go to obtain:

(a) equity capital?

(b) debt financing?

4. If she has to go to a bank for a loan, how can she increase her chances of
obtaining a loan?

5. How much capital will she need to finance a cyber café?

46 Know About Business

 TOPIC 4: Obtaining money to start a business

HANDOUT 2

How to prepare for a visit to the bank

1. Prepare yourself
Entrepreneurs should demonstrate to potential lenders that they have a business
strategy or plan of action which will lead to success. The lender also will want to be
sure that the prospective business owner has sufficient experience or knowledge in
the area of the proposed business. A visit to the bank, therefore, needs to be well
prepared.

2. Think about the type of loan needed

Lending institutions offer different types of loans. It is important to discuss with the
loan officer which loan is more convenient for the requirements of the business. You
will need to have a look at the following characteristics:
 Loan term: Short-term (up to one year) or long-term (longer than one year).
 Repayment schedule: Some types of loans are to be paid back in one
amount at the end of the loan term, or will other types of loans need to be paid
back in instalments.
 Collateral: What types of collateral will be required and what value of
collateral?
 Guarantors: Some lenders call for personal guarantees from friends or family.
 Cost: In most countries, banks will change interest on loans. Sometimes,
banks will also ask for a fee on the loan. It is not always easy to calculate the
total costs of the loan.

3. Prepare the business plan and financial projections

Lending institutions will ask for a business plan to decide whether an entrepreneur
deserves a loan. A business plan discloses whether the intended business is viable
or not. The loan officer appraises the business plan presented by the entrepreneur
and comes to his or her own conclusions about the viability of the proposed business.
A very significant aspect of the business plan is the cash flow forecast. Cash flow, as
well as financial projections, indicates whether the business can generate more
money than the costs incurred. These results will indicate to the lender whether the
loan is safe and the borrower can repay according to the agreed terms.

4. Prepare your business pitch

Before you go to the lending institution, you need to have a business pitch ready. You
need to be able to sell your idea to the loan officer besides giving him the business
plan. The business loan officer needs to get a sense that you own the project.

Know About Business 47

 MODULE 5: How do I start a business?

Women entrepreneurs
Women may find it difficult to access loans. Many women do not have assets, such
as land, registered in their names and thus they cannot use these assets as collateral.
Complicated loan application procedures often discourage less educated women from
applying.
Microfinance institutions often specifically target women and disabled entrepreneurs.
Microfinance institutions usually offer small loans for start-up or working capital.
Women and disabled entrepreneurs who need large loans often find it difficult to deal
with formal financial institutions.

48 Know About Business

 TOPIC 4: Obtaining money to start a business

SLIDE 2

The 5 Cs of credit
 Character: the entrepreneur’s character

 Capacity: the capacity of the business to generate profits

 Capital: the entrepreneur’s savings and properties

 Conditions: the economic conditions surrounding the

business

 Collateral: availability of assets to secure the loan

Know About Business 49

 MODULE 5: How do I start a business?

SLIDE 3

Preparing yourself for a bank visit

1. Prepare yourself
2. Understand what type of loan you need
 Loan term
 Repayment schedule
 Costs
 Collateral
 Personal guarantees
3. Prepare your business plan with your cash flow and
financial projections
4. Prepare your business pitch

50 Know About Business

 TOPIC 4: Obtaining money to start a business

SLIDE 4

Why it may be more difficult for women to

access finance
 In some areas, women lack legal rights to (jointly owned)
household assets
 Loan officers may not take women entrepreneurs seriously

 Low educated women often find it difficult to comply with loan

application procedures
 Women lack networking opportunities, and don’t have
contacts with people who can help them in obtaining loans
 Women entrepreneurs do not always have control over the
usage of the loan, as financial decisions are taken by
husbands

Know About Business 51

 MODULE 5: How do I start a business?

WORKSHEET 2

Equity and debt financing

TYPE OF FINANCING ADVANTAGES DISADVANTAGES

EQUITY FINANCING
(Personal savings,
investment from
family, friends, venture
capitals, etc.)

DEBT FINANCING
(All forms of
borrowing)

52 Know About Business

TOPIC 4: Obtaining money to start a business

Know About Business 53

 MODULE 5: How do I start a business?

SLIDE 5

Equity and debt financing

TYPE OF FINANCING ADVANTAGES DISADVANTAGES

 Less pressure of  Investors expect a

debt and loan return on investment
EQUITY FINANCING repayments  Risk of destroying
(Personal savings,  Financial risks personal relations
investment from shared  Financial decision-
family, friends, venture  Larger amount of making shared
capitals, etc.) capital raised  Profits and
 Valuable business ownership shared
assistance  …
 …

 Relatively easy to
 Interest and fees
obtain
need to be paid
DEBT FINANCING  Control and
 Risk that future
(All forms of ownership of the
profits will not cover
borrowing) business
repayment
maintained
 …
 …

Debt or equity financing? It depends on the situation: Your business

plan, your financial situation, potential investors, potential lenders,
costs, etc.

54 Know About Business

 1 What is entrepreneurship?

2 Who are entrepreneurs?

3 Entrepreneurial qualities

4 How do I find a business idea?

5 How do I start a business?

6 How do I run a business?

7 Next steps

8 How do I develop my business plan?

Facilitator’s Guide

Learner’s Workbook

ISBN XX-XXXX-XXX-X
Illustrations: Gianmaria Roccia – Photographs: ............