KENYA METHODIST UNIVERSITY

Distance Learning Material

SCHOOL OF BUSINESS

DEPARTMENT OF BUSINESS ADMINISTRATION

BUSS 221

FUNDERMENTALS OF ENTREPRENEURSHIP

By

DOROTHY KIRIMI

Published by Kenya Methodist University

P.O. Box 267 – 60200, Meru
Tel: 254 – 064 – 30301, 31146

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 TABLE OF CONTENTS

Course Objective ........................................................................................................................... 3

Course Content ............................................................................................................................. 3

Course Outline .............................................................................................................................. 3

Teaching Methodologies ............................................................................................................... 3

Methods of Evaluation .................................................................................................................. 4

Textbooks and Journals for Further Reading ......................................................................... .........4

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COURSE OBJECTIVE

By the end of this unit, the student will be able to:

i. Demonstrate an understanding of the nature and significance of entrepreneurship
ii. Acquire knowledge and skills to identify the critical factors essential for entrepreneurship
iii. Understand the evolutionary and revolutionary nature of entrepreneurship in social and
economic development
iv. Appreciate the challenges and rewards of entrepreneurship.

COURSE CONTENT
1. Nature and meaning of entrepreneurship
2. Characteristic of entrepreneurship/entrepreneurs
3. Creating and starting of entrepreneurship ventures, importance of entrepreneurship
4. Managing enterprises - Formation, record keeping
5. Entrepreneurial motivation/theories
6. Entrepreneurship business development and expansion
7. Business financing
8. Business planning

COURSE OUTLINE
This course seeks to prepare men and women for effective participation in the business world. In
particular, it exposes the student to the nature and meaning of entrepreneurship. The unit further
seeks to impart to the student knowledge and skills in identifying critical factors essential for
entrepreneurship and in creating, starting and managing entrepreneurship venture.

Teaching Methodologies
Class lectures, assignments, discussions, case studies, library and field research and reporting.

Instructional Materials/Equipment
Whiteboard, case studies

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Methods of Evaluation
Class participation is essential for this course. A student who is absent from more than three
classes without reasonable cause will fail the course.

Continuous Assessment Tests 30%

End-of-trimester examination 70%
100%

Textbook for the Course

1. Dollinger, M.J. (1999) Entrepreneurship: Strategies and Resources, 2nd Edition, Prentice Hall.
2. Hisrich, R. D., Peters, M. P., & Shepherd, D. A. (2007). Entrepreneurship. (6th Ed). New Delhi:
Tata, McGraw Hill

Textbooks and Journals for Further Reading

1. Drucker, P.F. (1985) Innovation and Entrepreneurship, Harper & Row.
2. Kibera, F.N. (Ed). (1996) Introduction to Business: A Kenyan Perspective, Kenya Literature
Bureau, Nairobi, Kenya.
3. Kilby, P. (Ed.). (1971) Entrepreneurship and Economic Development, The Free Press.
4. Spring, Anita and Barbara McDade. (1988) African Entrepreneurship, University Press.
5. Saleemi N.A (2009) Entrepreneurship Simplified. Saleemi Publications Ltd, Nairobi. Kenya
6. Peters, H. (1998) Entrepreneurship, 4th Edition, Irwin McGraw-Hill.

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TOPIC 1

Introduction

1.1 Concept of Entrepreneurship

Entrepreneurial development in any nation proves to be a boon for the growth of its economy. In
present day world entrepreneurship is a popular career option. Many people are now planning to
set up their own enterprises that can solve the problems of unemployment, regional disparities and
under utilization of resources.

Entrepreneurship has never been as important as it is today when the world is confronted with big
challenges that extend well beyond the global economy. Entrepreneurship is a tremendous force
that can have a big impact in growth, recovery and societal progress by fueling innovation,
employment generation and social empowerment.

While it as clear that the world is in need of more entrepreneurial societies who can address more
complex, interlinked and fast changing problems, greater awareness is required for the critical role
education has in developing the next wave of leaders, innovators and entrepreneurs who cannot
only create jobs and value for society, but also empower others to dream of a better future.

Therefore, entrepreneurship is the engine that drives the economy and ought to be emphasized in
all areas. It is the practice of starting new organizations or revitalizing mature organizations
particularly new businesses generally in response to identified opportunities. Entrepreneurship is
often a difficult undertaking, as a vast majority of new businesses fail. Entrepreneurial activities
are substantially different depending on the type of organisation that is being started.
Entrepreneurship ranges in scale from solo projects (even involving the entrepreneur only part
time) to major undertakings creating many job opportunities. Many “high-profile” entrepreneurial
ventures seek venture capital or angel funding in order to raise capital to build the business.
Angel investors generally seek returns of 20-30% and more extensive involvement in the business,
(1) many kinds of organizations now exist to support would-be entrepreneurs, including
specialized government agencies, business incubators, science parks and some NGOs.
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1.2 The Entrepreneur

The word entrepreneur is derived from the French word “entreprendre" which means “to
undertake” i.e. individuals who undertake the risk of a new enterprise. The word entrepreneur
therefore, first appeared in the French language in the beginning of the 16th century. The word was
also applied to the leaders of military expedition. But it was Richard Cantillon, an Irishman, living
in France who first used the term entrepreneur to refer to economic activities. According to
Cantillon, “An entrepreneur is a person who buys factor services at certain prices with a view to
selling its product at uncertain prices.” Thus, to Cantillon, an entrepreneur is a bearer of risk which
is non-insurable.

International Labour Organisation (ILO) defines entrepreneurs as those people who have the
ability to see and evaluate business opportunities, together with the necessary resources to take
advantage of them and to initiate appropriate action to ensure success.

Definitions of an Entrepreneur
Entrepreneurs have many of the same character traits as leaders. Similarly, to the early great
man theories of leadership; however, trait-based theories of entrepreneurship are increasingly
questionable. Entrepreneurs are often contrasted with managers and administrators who are said to
be more methodical and less prone to risk-taking. Such person centric models of entrepreneurship
which have been shown to be of questionable validity, not least as many real-life entrepreneurs
operate in teams rather than as single individuals. Still, a vast but now clearly dated literature
studying the entrepreneurial personality found that certain traits seem to be associated with
entrepreneurs:
 David McClelland (1961) described the entrepreneur as primarily motivated by an
overwhelming need for achievement and strong urge to build.
 Collins and Moore (1970) studied 150 entrepreneur and concluded that they are tough,
pragmatic people driven by needs of independence and achievement. They seldom are
willing to submit to authority.
 Bird (1992) sees entrepreneurs as mercurial, that is, prone to insights, brainstorms,

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 deceptions, ingeniousness and resourcefulness; they are cunning, opportunistic, creative
and unsentimental.
 Cooper, Woo, Dunkelberg (1988) argue that entrepreneurs exhibit extreme optimism in
their decision-making processes. In a study of 2994 entrepreneurs, 81% indicate their
personal odds of success as greater than 70% and a remarkable 33% saw the odds of
success of 10 out of 10.
 Busenitz and Barney (1997) claim entrepreneurs are prone to overconfidence and over
generalizations.
 Cole (1959) found there are four types of entrepreneur: the innovator, the calculating
inventor, the over-optimistic promoter, and the organisation builder. These types are not
related to the personality but to the type of opportunity the entrepreneur faces.

Exercise
Explore other definitions by the following proponents of entrepreneurship development : -
 Jean Baptise Say
 Adam Smith
 Frank H. Knight
 David Ricardo
 Joseph A. Schumpeter
 Peter Drucker
 Vasant Desai

An entrepreneur is therefore a central individual in the society for he/she makes things happen for
economic development. In recent years entrepreneurs have been doing so many things that it is
necessary to breach this definition. Although no single definition of entrepreneur exists and no one
profile can represent today’s entrepreneur, research is providing an increasingly sharper focus on
the subject.

Evolution of Entrepreneurship
The word entrepreneur is derived from the French entrepreneur, meaning “to undertake.” The
entrepreneur is one who undertakes to organize, manage and assume the risks of a business. In
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recent years, entrepreneurs have been doing so many things that it is necessary to broaden this
definition. Today, an entrepreneur is an innovator or developer who recognizes and seizes
opportunities; converts those opportunities into workable/marketable ideas; adds value through
time, effort, money, or skills; assumes the risks of the competitive marketplace to implement these
ideas; and realizes the rewards from these efforts.

The entrepreneur is the aggressive catalyst for change in the world of business. He or she is an
independent thinker who dares to be different in a background of common events. The literature
of entrepreneurial research reveals some similarities as well as great many differences, in the
characteristics of entrepreneurs. Chief among these characteristics are personal initiative, the
ability to consolidate resources, management skills, desire for autonomy and risk taking. Other
characteristics include aggressiveness, competitiveness, goal oriented behaviour, confidence,
opportunistic behaviour, intuitiveness, and reality based actions, the ability to learn from mistakes,
and the ability to employ human relation skills.

Although no single definition of entrepreneur exists and no one can represent today’s entrepreneur,
research is providing an increasingly shaper focus on the subject. A brief review of the history of
entrepreneurship illustrates this. America currently is in the midst of a new wave of business and
economic development, and entrepreneurship is its catalyst. Yet the social and economic forces of
entrepreneurial activity existed long before the new millennium. In fact, as noted in Topic 1, the
entrepreneurial spirit has driven many of humanity’s achievements. Humanity’s progress from
caves to campuses has been explained in numerous ways. But central to virtually all of these
theories has been the role of the “agent of change,’ the force that initiates and implements material
progress. Today we recognize that the agent of change in human history has been and most likely
will continue to be the entrepreneur.

The recognition of entrepreneur dates back to the 18th century, when economist Richard Cantillon
associated the “risk-bearing” activity in the economy with the entrepreneur in France. In the
England during the same period, the Industrial Revolution was evolving, with the entrepreneur
playing a visible role in risk taking and the transformation of resources. The association of
entrepreneurship and economics has long been the accepted norm. In fact, until the 1950s the

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majority of definitions and references to entrepreneurship had come from economists. For
example, Cantillon (1725), mentions that Jean Baptiste Say (1808), the renowned French
economist; and Joseph Schumpeter (1934), a 20th Century economic genius, all wrote about
entrepreneurship and its impact on economic development. Over the decades, writers have
continued to try to describe or define what entrepreneurship is all about.

Entrepreneurship, at least in all non-authoritarian societies, constitute a bridge between society as a

whole, especially the social ventures, and the profit-oriented institutions established to take
advantage of its economic endowments and to satisfy, its economic desires. In entrepreneurship,
there is an agreement in the kind of behaviour which what includes:
1. Initiative taking
2. Organizing or reorganizing of social economic mechanisms to turn resources and situations to
practical account
3. Acceptance of risk of failure.

After reviewing the evolution of entrepreneurship and examining its varying definitions, Robert C.
Ronstadt put together a summary description saying:

Entrepreneurship is the dynamic process of creating incremental wealth. This wealth is created by
individuals who assume the major risks in terms of equity, time, and/or career commitment of
providing value for some product or service. The product or service itself may or may not be new
or unique but value must somehow be infused by the entrepreneur by securing and allocating the
necessary skills and resources.

Entrepreneurship as a topic for discussion and analysis was introduced by the economists of the
18th century, and it continued to attract the interest of economists in the 19th century. In the
twentieth century, the word became synonymous or at least closely linked with free enterprise and
capitalism. Moreover, it was generally recognized that entrepreneurs serve as agents of change;
provide creative, innovative ideas for business enterprises; and help businesses grow and become
profitable.

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Whatever the specific activity they engage in, entrepreneurs in the 21st century are considered the
heroes of free enterprise. Many of them have used innovation and creativity to build multimillion-
dollar enterprises from fledgling businesses some in less than a decade! These individuals have
created new products and services and have assumed the risks associated with these ventures.
Many people now regard entrepreneurship as “pioneer ship” on the frontier of business. In
recognizing the importance of the evolution of entrepreneurship into the 21st century, we have
developed an integrated definition that acknowledges the critical factors needed for this
phenomenon:

Entrepreneurship is a dynamic process of vision, change and creation. It requires an application of

energy and passion toward the creation and implementation of new ideas and creative solutions.
Essential ingredients include the willingness to take calculated risks – in terms of time, equity or
career; the ability to formulate an effective venture team; the creative skill to marshal needed
resources; the fundamental skill of building a solid business plan; and, finally, the vision to
recognize opportunity where other see chaos, contradiction, and confusion.

EVOLUTION OF THE CONCEPT OF ENTREPRENEURSHIP

According to Hisrich, Peters and Shephered (2007), the concept of entrepreneurship has evolved
from a risk taker to one who innovates. This has evolved through the following phrases:

a. Earliest Period
 Entrepreneur was defined as a go-between
 Entrepreneur would sign a contract with a money person to sell his goods
 The money person would provide a loan to the merchant-adventurer at a 22.5%, including
insurance
 The entrepreneur would thus bear all the risks trading, including physical and emotional
risks
 At the end of the trip, the two would divide the profits, say, at 75% and 25% for the
entrepreneur and the business person respectively.

b. Middle Ages
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 Entrepreneur was seen as both an actor and a person who managed large production projects
 He did not take risks but rather only managing the production using the resources provided,
usually by the government
 Examples – a cleric - person in-charge of great architectural works, e.g. ,castles and
fortifications, public buildings and cathedrals

c. 17th Century
 Entrepreneur seen as a person who would enter contractual agreement with the government to
perform a service or supply stipulated products
 The contract price was fixed, so entrepreneur would bear any profits/losses
 Richard Cantillon, an economist and author in the 1700s developed one of the earliest theories
of the entrepreneur where he viewed the entrepreneur as a risk taker
 According to Cantillon, merchants, farmers, craftsmen and other sole proprietors bought at a
given price and sold at an uncertain price operate at a risk.

d. 18th Century
 The provider of capital (capitalist) was seen as different from the one who needed it (the
entrepreneur)
 This was the period of rapid industrialization, as reaction to which, many inventions developed
 The inventors (entrepreneurs) often did not have adequate finances to meet the huge
technological needs e.g. Eli Whitney’s cotton gin. He financed the invention using money
expropriate from the government
 Other inventors raised the finances required from private sources.

e. 19th Century
 During this period, entrepreneurs were not distinguished from managers. An entrepreneur was
defined from the economic perspective
 The entrepreneur was seen as the person who organizes and operates an enterprise for personal
gain
 He pays the current prices for the materials used, the use of land, for personal services that he
employs, and for the capital required
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 He contributes his own initiative, skill and ingenuity in planning, organizing and administering
the enterprise
 He assumes the risk
 He retains the net profit.

f. 20th Century
 Entrepreneur is seen as an innovator
 This concept of the entrepreneur as an innovator took centre-stage in the 20th century
 Function of entrepreneur is seen as to reform the production pattern by exploiting an invention
or an untried technological method of producing a new or old productivity in a new way, or
opening a new source of supply of materials or a new outlet for products, by organizing a new
industry e.g., Andrew Carnegie who revolutionalized the steel industry through competitiveness
rather than his inventiveness
 Invention is the act of introducing something new.

NB: The ability to innovate can be seen through history, e.g., Egyptians who designed and built
great pyramids, the laser surgery and wireless communication.

g. Today
 Many principles and terms from business, managerial are applied to refine the concept of
entrepreneur
 Entrepreneurship refers to behaviour that includes initiative taking; organizing and reorganizing
of social and economic mechanisms to turn resources and situations to practical account; and the
acceptance of risk or failure

Economic perspective: an entrepreneur brings resources into combinations that make their value
greater than before- introduces change, innovations, and a new order.

Psychological perspective: an entrepreneur is driven by certain forces e.g., the need for freedom,
the need to obtain something, the need to experiment or to accomplish.

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OTHER CONCEPTS

Technological Innovation
This is the technical, industrial and commercial use of new processes and equipment. This range
from simple investment in manufacturing new equipment or any technical measures to improve
method of production, the sequence of scientific research, market research, invention, development
design first production and marketing of a new product.

Discovery
This is bringing into knowledge something that already exists but better to not known or facts
previously ignored e.g. a graduate finding a booming business in newspaper vending.

Invention
This is the creation or designing of something which did not exist before. It is also the process by
which new ideas are created or developed.
 It’s an act of inventing
 A creation (of a new device or process) resulting from study and experimentation
 Creation of something in the mind
 A novel device, material or technique
 It is the conception of a new idea and useful article, machine, composition or process enough
to produce a significant change in the application of technology.

Example
Inventions – fires, plane, toothpaste, aspirin, gold, telephone, electricity, wheel.
Inventors - Alexander Graham Bell – Telephone, Ford – Ford car, Wright brothers – Airplane

Re-Invention
This is the process by which an innovation is changed in the process of adoption or
implementation. The expression “re-inventing the wheel” suggests the apparent ambiguity with
which a new idea is separately recreated in adopting unit. This implies that re-invention occurs
fairly often in a spontaneous and unplanned fashion and that it represents an intended waste of
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resources through duplication of activities.

Innovation
This involves applying ideas successfully, production, improving, changing and modifying.

Technology Diffusion
This is the means of becoming known to others e.g., the spread of an innovation or invention
through the industry or economy to many users. It is a one too many or many too many process.

Exercise
1. Explain the evolution of the entrepreneurship
2. Which is the appropriate description of an entrepreneur in our society?
3. Explore the following concepts:
 Entrepreneurial mindset
 Entrepreneurial behaviour
 Entrepreneurship education
 Entrepreneurship development
 Enterprise development
 Creativity and innovation.

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TOPIC 2

History of Entrepreneurship

The understanding of entrepreneurship owes much to the work of economist Joseph Schumpeter
and the Australian Economists such as Ludwig von Mises and Von Hayek. In Schumpeter (1950),
an entrepreneur is a person who is willing and able to convert a new idea or invention into a
successful innovation. Entrepreneurship forces “creative destruction” across markets and
industries, simultaneously creating new products and business models. In this way, creative
destruction is largely responsible for the dynamism of industries and long-run economic growth.
Despite Schumpeter’s early 20th century contributions, the traditional microeconomic theory of
economics has had little room for entrepreneurs in its theoretical frameworks (instead assuming
that resources would find each other through a price system).

Notable persons and their works in entrepreneurship history

According to Frank H. Knight (1967) and Peter Drucker (1970) entrepreneurship is about taking
risk. The behaviour of the entrepreneur reflects a person willing to put his/ her career and
financial security on the line and take risks in the name of an idea, spending much time as well as
capital on an uncertain venture. Knight classified three types of uncertainty:
 Risk, which is measurable statistically (such as probability of drawing a red colour ball from
a jar containing ten red and white balls).
 Ambiguity, which is hard to measure statistically (such as the probability of drawing a red
ball from a jar containing five red balls but with an unknown number of white balls).
 True Uncertainty, which is impossible to estimate or predict statistically (such as the
probability of drawing a red ball from a jar whose number of red balls is unknown as well as
the number of other coloured balls).

The acts of entrepreneurship are often associated with true uncertainty, particularly when it
involves bringing something really novel to the world, whose market never exists. Before internet,
nobody knew the market for internet related businesses such as Amazon, Google, YouTube, Yahoo,
etc. Only after the internet emerged, did people begin to see opportunities and market in that
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technology. However, even if a market already exists, let us say the market for cola drinks (which
has been created by Coca Cola), there is no guarantee that a market exists for a particular new
player in the cola category. The question is whether a market exists and if so, does it exist for you.
In broad sense, entrepreneurship is the means of stimulating innovative and creative undertaking
means for better business community and world. It means having one own idea and trying to
implement to create VALUE of the idea.

Value – is anything that materially improves or positively affects the quality of a person, family,
community or nation in general. Entrepreneurship is a term encompassing what entrepreneurs do
including:
 Beginning with identifying of a business opportunity of a particular need/demand that
requires being satisfied.
 Looking at it as a process of creating something, which did not exist before
 Process of constantly searching/harnessing ones’ environment through identifying
resources and implementing activities.
 Development (creating) of a totally new product and using it in as new.

Entrepreneurship is widely regarded as an integral player in the business culture of American life,
and particularly as an engine for job creation and economic growth. Sobel (1974) published “The
Entrepreneurs: Explorations within the American Business Tradition ‘’

THE MYTH OF ENTREPRENEURSHIP

Throughout the years, many myths have arisen about entrepreneurship. These myths are the result
of lack of research on entrepreneurship. As many researchers in the field have noted, the study of
entrepreneurship is still merging, and thus “folklore” will tend to prevail until it is dispelled with
contemporary research findings. The ten most notable myths with an explanation to dispel each
myth include:
1. It takes a lot of money to start a business. This is false because it is all about using the little
resources to make the most out of it.

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2. Entrepreneurs need to do away with is it as venture capitalists are a good place to go for start-
up money. This source is suitable but to some ventures and people need to keep this in mind.
This source is mainly suitable for people who start biotech or computer companies.
3. Those who make it are those with rich backups. This is not the case as people who are not
privileged continue to make it big in this sector even after starting from scratch with no special
favours or advantages.
4. Start-ups cannot be funded with debt. Unlike what many might think, the fact is that debt is
more prevalent than equity. Therefore, for those with solid plans, it does not matter the source
of finance provided the vision, the plan is clear for the future of the business.
5. Some people go about thinking that banks do not lend to those who wish to start up businesses.
This is not true because up to 16% of all financing comes from banks and those starting one,
need to approach banks in the right way. Trade creditors are also known to finance start-ups
and make up a bulk of financing.
6. Those who start businesses, do so in very attractive industries. This might seem to be the case
but is not true at all. Many entrepreneurs have actually been seen to go to the worse industries
there are. Statistics show that many will actually pick the areas they are likely fail in.
7. Many actually believe that the talents and abilities of the entrepreneur have the power to ensure
success unlike what the environment of the business is like. This is false because the general
factors will outweigh the qualifications of an entrepreneur and have to look further than to
talent to survive.
8. All entrepreneurs are rich and have financial success. Even if they make good profits, this does
not make them rich because there is uneven distribution of this wealth which might nullify the
statement.
9. Many entrepreneurs achieve the sales projections and attract investors to their start-ups. This
statement is false. From the hundreds of thousands who start up, only less that 200 meet the
sales projections that may be targeted to a million. In six years, only that number is able to
reach here.
10. Starting a business is easy. This is a myth and it should be known that it is difficult and getting
it running takes a lot. Otherwise, most people give up along the way just because they do not
meet their targets.

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Exercise
1. What are the entrepreneurship myths that exist in our society today?
2.Explain the concept of entrepreneurship

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TOPIC 3

Characteristics of Entrepreneurship

Characteristics of Entrepreneurship
 The entrepreneur has an enthusiastic vision, the driving force of an enterprise.
 The entrepreneur’s vision is usually supported by an interlocked collection of specific ideas not
available to the marketplace.
 The overall blueprint to realize the vision is clear, however details may be incomplete, flexible
and evolving.
 The entrepreneur promotes the vision with enthusiastic passion.
 With persistence and determination, the entrepreneur develops strategies to change the vision
into reality.
 The entrepreneur takes the initial responsibility to cause to become a success
 Entrepreneurs take prudent risks. They assess costs, market/customer needs and persuade
others to join and help.
 An entrepreneur is usually a positive thinker and a decision maker

Characteristics of Entrepreneurs
The word entrepreneurs can be used to describe some of the characteristics of entrepreneurs.
E Energetic Full of energy of the mind and body
N Novelty-oriented Think creativity; continually seek to create improvements in their
performance
T Tolerant Tolerate long hours of hard work – are persevering and enduring
R Result oriented Have high desire for achievement; do not like ending a task
without achieving results
E Enterprising Have the courage and willingness to engage in difficult undertakings
P Profit oriented Money is the main source, do not squander it but rather invest it
R Resourceful Quickly and usefully employ their minds
E Efficiency-Conscious Hate wasting resources; are economical
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N Networking Interact and have connections
E Envisages Have dreams of foresight, plan ahead, set clear attainable goals
U Unstoppable Believe that a slip is not a fall; are optimistic
R Risk-loving Take calculated risks; like challenges
S Self-confident Believer in themselves; see half a glass as half full not half way or
half empty

Coupled with the characteristics, entrepreneurs seem to have a 5D formula for success which
includes:
Desire: The vision, dream that burns in the heart of the entrepreneur. A strong enough dream and
desire will always point towards success and provide the fuel to get there.
Diligence: Making the most of opportunities and options. It implies developing strengths and
overcoming any lack of resources which ever they may be.
Details: Detailing (planning) what is to be done; keeping a diary to avoid mistakes
Discipline: Being self disciplined, financially disciplined
Determination: Being able to endure; staying at it for long

Characteristics vs. traits

Characteristics Traits
Self-confidence Confidence, independence, individuality, optimism
Task-oriented Need for achievement; profit oriented persistence,
Perseverance, determination, hard work, drive, energy, initiative
Risk bearer Risk taking ability, likes challenges
Leadership Leadership behaviours, gets along well with other responsive to
suggestions and criticisms
Originality Innovative, creative, flexible (openness of mind) resourceful,
versatile, knowledge future oriented – foresight perceptive

Personal Characteristics of Potential Entrepreneurs

The following are some of the characteristics of potential entrepreneurs:

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1. Initiative/Risk Taker
Takes actions that go beyond job requirements or the demand of the situation
 Is proactive
 Acts to extend the business into new areas, products or services
 Identifies and acts on opportunities
 Takes action on opportunities
 Seizes unusual opportunities to obtain financing, equipment, land, workspace or assistance.

2. Persistence and Patient

Takes repeated action to overcome obstacles that get in the way of reaching goals.
 Takes action on significant obstacle.

3. Gathering of Information and Opportunity Seeking

Takes action on gathering information so as to achieve business objectives or clarify business
problems.
 Conducts research on how to provide a product or service.
 Consults experts for business or technical advice.
 Seeks information or asks questions to clarify a client’s or a supplier’s needs.
 Personally undertakes market research, analysis or investigation.
 Uses contacts or information to obtain useful information.

4. Concern for High Quality Work

Does things that meet or beat existing standards of excellence.
 States a desire to produce or sell a top or better quality product or service.
 Compares own work or own company’s work favourably to that of others.

5. Commitment to Work Contract

Places the highest priority on getting a job completed.
 Makes a personal sacrifice or expends extraordinary effort to complete a job.
 Accepts full responsibility for problems in completing a job for customers.

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  Pitches in with workers or works in their place to get the job done.
 Expresses concern for satisfying the customer.

6. Efficiency Orientation
Find ways of doing things faster or with fewer resources or at lower cost.
 Uses information or business tools to improve efficiency.
 Express concern about cost vs. benefits of some improvement, change or cause of action.

7. Systematic Planning
Develops and uses logical, step-by-step plans to reach goals.
 Plans by breaking large tasks down into sub-tasks.
 Develops plans that anticipate obstacles.
 Evaluates alternatives.
 Takes a logical and systematic approach to activities.
 Identifies new and potentially unique ideas to reach goals.
 Switches to an alternative strategy to reach a goal.
 Generates new ideas or innovative solutions.

8. Self-Confidence
Has a strong belief in self and own abilities.
 Expresses confidence in own ability to complete a task or meet a challenge.
 Sticks with own judgment in the face of opposition or early lack of success.
 Takes risks
 Confronts problems and issues with others directly.
 Tells others what they have to do.
 Reprimands or disciplines those failing to perform as expected.

9. Persuasion
Successfully persuades others.
 Convinces one to buy a product or service.

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  Convinces one to provide financing.
 Convinces one to do the things he would like them to do.
 Asserts own competence reliability or other personal/company qualities.
 Asserts strong confidence in their own company’s products or services.

10. Uses of Influence Strategy/Networking

 Uses a various strategies to affect others.
 Acts to develop business contacts.
 Uses influential people as agents to accomplish own objectives.
 Selectively limits the information given to others.
 Uses a strategy to influence or persuade others.

Exercise
1. Do a self-assessment and identify your entrepreneurial traits and characteristics.
2. Think of the opportunities you can exploit from the results of your assessment.

23
TOPIC 4

Importance of Entrepreneurship

Entrepreneurship has contributed greatly towards national development. Among the most notable
areas include:
1. Creation of employment
They create jobs for themselves and others by starting their small businesses. The taxes they pay to
the government also contribute greatly in paying the public servants.
2. Provision of goods and services
They produce and distribute goods and services to the community thus boosting the community
welfare.
3. Provides opportunities for on-the-job training
They employ unskilled and semi-skilled employees as well as fresh graduates/school leavers who
do not have the experience and give the opportunity to gain experience through on-the job training.
4. Contribution to the Gross Domestic Production (GDP)
Through production of goods and services they contribute to GDP of the nation. In addition, they
pay taxes.
5. Decentralization of economic activities
By locating their businesses in various areas including the rural areas, they help decentralize
economic activities thus even rural-urban migration.
6. Utilization and conservation of local resources
They creatively seek ways of utilizing the local resources to come up with useful goods e.g., ,
through recycling.
7. Promoting technology development
Through development of appropriate technology, like energy saving jikos, oil press, charcoal
refrigerators etc, they help transfer and development of technology.
8. Earning foreign exchange
Through exporting their products, e.g., curio products, ciondos etc, they earn the country foreign
exchange.
9. Improving society’s standards of living
24
Through their contribution to development of social amenities, infrastructure and provision of
goods and services they help raise the standards of living of the society in general.

10. Act as role models in the society

By portraying successful image in business, they stimulate desire for success within the society.
11. Trickle down effects
This is in terms of forward and backward linkages.

CONTRIBUTIONS OF ENTREPRENEURS
Develop new markets. Under the modern concept of marketing, markets are people who are
willing and able to satisfy their needs. In economics, this is called effective demand. Entrepreneurs
are resourceful and creative as they can create customers or buyers. This makes entrepreneurs
different from ordinary businessmen who only perform traditional functions of management like
planning, organisation and coordination.
Discover new sources of materials. Entrepreneurs are never satisfied with traditional or existing
sources of materials. Due to their innovative nature, they persist on discovering new sources of
materials to improve their enterprises. In business, those who can develop new sources of
materials enjoy a comparative advantage in terms of supply, cost and quality.
Mobilize capital resources. Entrepreneurs are the organizers and coordinators of the major
factors of production, such as land labour and capital. They properly mix the factors of production
to create goods and services. Capital resources, from a layman’s view, refer to money. However,
in economics, capital resources represent machines, buildings, and other physical productive
resources. Entrepreneurs have initiative and self-confidence in accumulating and mobilizing
capital resources for new business or business expansion.
Introduce new technologies, new industries and new products. Apart from being innovators
and reasonable risk-takers, entrepreneurs take advantage of business opportunities, and transform
these into profits. So, they introduce something new or something different. Such entrepreneurial
spirit has greatly contributed to the modernization of economies. Every year, there are new
technologies and new products. All of these are intended to satisfy human needs in more
convenient and pleasant way.
Create employment. The biggest employer is the private business sector; millions of jobs are

25
provided by the factories, service industries, agricultural enterprises, and the numerous small-scale
businesses. Such massive employment has multiplier and accelerator effects in the whole
economy. More jobs mean more incomes which increases demand for goods and services as well
as stimulates production. Again, more production requires more employment.

ADVANTAGES OF ENTREPRENEURSHIP
Every successful entrepreneur brings about benefits not only for himself/herself but for the
municipality, region or country as a whole. The benefits that can be derived from entrepreneurial
activities are as follows: -
1. Enormous personal financial gain
2. Self-employment, offering more job satisfaction and flexibility of the work force
3. Employment for others, often in better jobs
4. Development of more industries, especially in rural areas or regions disadvantaged by
economic changes e.g., due to globalization effects
5. Encourage of the processing of local materials into finished goods for domestic consumption as
well as for export
6. Income generation and increased economic growth
7. Healthy competition thus encouraging higher quality products
8. More goods and services available
9. Development of new markets
10. Promotion of the use of modern technology in small-scale manufacturing to enhance higher
productivity
11. Encouragement of more researches/studies and development of modern machines and
equipment for domestic consumption
12. Development of entrepreneurial qualities and attitudes among potential entrepreneurs to bring
about significant changes in the rural areas
13. Freedom from the dependency on the jobs offered by others
14. The ability to have great accomplishments
15. Reduction of the informal economy
16. Stopping emigration of talent due to better domestic entrepreneurship climate.

26
Entrepreneur vs. Manager Relationship
The terms entrepreneur and manager are many times used interchangeably yet they are different.
The main differences between the two are summed up below:
Figure 1: Differences between Entrepreneur and Manager
Entrepreneur Manager
Involved with the start-up process Involved in the running of a business over
a long period of time
Assumes financial, materials and Does not have to bear risks
psychological risks
Driven by perception of opportunity Driven by the resources he currently
possesses.
Initiates change Follows rules and procedures
Is his own boss Is a hired employee.
Gets uncertain rewards Gets fixed rewards and a salary

Traits of Entrepreneurs
Entrepreneurs have many traits that help make their businesses successful. Some will be strong in
some tracts and weak in others. Some of the traits include:
(a) They are self-starters, who set goals that they can achieve and work for long hours.
(b) Entrepreneurs like people. This helps them get along well with the customers and other
stakeholders.
(c) Entrepreneurs have leadership traits. They coordinate many activities in order to
accomplish a task; communicate well with other people and get other people to believe in
their ideas.
(d) They work hard to achieve their goals thus persistent.
(e) Entrepreneurs like responsibility e.g., making decisions, working for themselves, etc.
(f) They have self-confidence i.e. believe in themselves and their businesses
(g) They are flexible e.g., may need to change plans in order to help the business grow i.e.,
 Look at many solutions to their problems
 Realize that other people may know how to do things better
 May choose the best way to do something.

27
Exercise
1. What are the disadvantages of entrepreneurship?
2. Describe the various types of entrepreneurship
3. What influences entrepreneurial activities in a country?
4. Explain the importance of entrepreneurship to the individual, society and national development

28
TOPIC 5

Types of Entrepreneurship

Broad Categories
1. Craft
Exploits and utilizes personal skills to start a business without thinking of growth or expansion
objectives i.e,
 Craft entrepreneur is not business expansion oriented.
 They provide technical and professional skills.

2. Opportunistic
This is whereby a person starts a business, acts as a manager with view to expand the business to
the maximum. He might not have the professional skills but he has the opportunity to start and
direct others. He sees beyond and he has the abilities to initiate and venture into business that will
expand and grow. Innovative – somebody who is able to delegate activities to others, ready and
able to see, scan the environment. In situations of competitiveness, the craft entrepreneurs have a
very high mortality rate than opportunistic entrepreneurs, so far greater chances of survival in this
competitive world is better to expand and grow becoming opportunistic entrepreneurs.

3. Social entrepreneurship is the work of a social entrepreneur. The Skoll Foundation defines a
social entrepreneur as "society's change agent: a pioneer of innovation that benefits
humanity." A social entrepreneur recognizes a social problem and uses entrepreneurial principles
to organize, create and manage a venture to achieve social change (a social venture). Whereas a
business entrepreneur typically measures performance in profit and return, a social entrepreneur
focuses on creating social capital. Thus, the main aim of social entrepreneurship is to further social
and environmental goals. However, whilst social entrepreneurs are most commonly associated
with the voluntary and not-for-profit sectors, this need not necessarily be incompatible with
making a profit. Social entrepreneurship practiced with a world view or international context is
called international social

29
4. Political entrepreneurship
A political entrepreneur is a business person who utilizes political systems or seeks support from
political bodies in order to promote, expand and profit from their own commercial ventures. A
political entrepreneur refers to a political player who seeks to gain certain political and social
benefits in return for providing the common goods that can be shared by an unorganized general
public. These common goods that political entrepreneurs attempt to provide to the populace
generally include foreign- and domestic-related public policy, while the benefits involve voter
support, public recognition, and personal popularity.

5. Intrapreneurship/corporate entrepreneurship
Intrapreneurship is the equivalent of entrepreneurship practiced within an existing business
structure. Such a business has the financial resources, business skills, marketing and distribution
systems, etc. Yet, the bureaucratic structure, emphasis on short-term profits and highly structured
organization inhibit creativity and prevent new products and businesses from being developed.
This causes intrapreneurial individuals to leave their positions in corporations to create their own
ventures. In recognizing this, large corporations attempt to establish an intrapreneurial spirit in
their organizations. An intrapreneurial individual in a corporation does not raise any funds and
does not fully bear the risk involved in the enterprise.

Specific Types of Entrepreneurs

1. Inventor – have the ability to invent new products, process or service and then create
companies to develop, produce and sell the items.
2. Opportunistic – A person who starts a business acts as a coordinator with a view to expand,
create, innovate and spot opportunities to make the business grow in order to be able to hire
other employees.
3. Pattern multiplier - looks for ideas, products others have come up with, and then creates their
own business based on other people’s model.
4. Speculators - purchase a commodity and resell it for a profit.
5. Acquirers – takes up a business started by another and use their own means to make it
successful.
6. Craft –exploit or utilize personal skills to start a business without thinking of growth and

30
 development (skills could be technical).
7. Economy of scale exploiters - sell large quantities of products by offering discount prices and
have low overhead expenses
8. By and sell artists – these are people who buy a company for the purpose of improving it
before selling it for a profit.

Functions of Entrepreneurs
 Prime mover in the business enterprise
 Bears of uncertainty (risk) – regarded as the primary function
 Idea generation and searching for business opportunities by scanning the environment
 Evaluating business opportunities to assess their viability
 Determination of business objectives
 Product analysis and market research
 Determination of the form of ownership/organization
 Mobilizing resources needed to create and run the business
 Managing the business that is the production, marketing, finances, human resources, etc.

31
TOPIC 6

The Theoretical and Conceptual Base for Entrepreneurship

There are a number of schools of thought which view entrepreneurship from fundamentally
different perspectives. As a result, the definitions can differ depending on the authority’s
perspective. Such perspectives could be psychological, sociological, economical and management.

Psychological Perspective
The central focus of this perspective is that entrepreneurs have unique values, attitudes and need
which drive them. People behave in accordance with their values irrespective of the different
situations they might be in. People’s behaviour results from their attempts to satisfy their unique
needs and values. The psychological school focusing on personality factors believes that
entrepreneurs have unique values and attitudes towards work and life. These, along with certain
dominant needs propel the individual to behave in certain ways. Entrepreneurs are, therefore,
different from non entrepreneurs by personality characteristics. Such propensity and personal
aspects such as positive self image, initiative, independence, future orientation, problem solving,
goal setting, time bound planning and environment searching.

Entrepreneurs acquire their values, attitudes and needs as they grow up from families, schools,
churches, and community as well as in the surrounding culture in general. These values are learned
and internalized and reflect the process of socialization into culture. Since these values and needs
are learned early in life and are well established prior to adulthood, entrepreneurial characteristics
can only be re-enforced in those who portray them or have them in latent form. It would not be
effective to try and develop them in people who do not possess them but to re-enforce them in
those who already have them. The extreme aspect of this perspective further suggests that the
entrepreneur has the ability – a sixth sense – and traits and instincts he/she is born with.
Entrepreneurs portray intuition, vigour, energy, persistence and self esteem. Entrepreneurs
according to this version are born and as they have natural abilities, training, cannot influence them
32
in any way.

The psychological argument perpetuates the myths and stereotypes in society related to superiority
and class systems and are not the healthiest for development. It simply says people are not equal
and that it would be difficult to organize training programmes suitable for all of them. Although
entrepreneurs can be used as role models, those in this category can give negative attitude towards
young people who might not be genius or lucky by not possessing the unique abilities and traits.
People following this school of thought follow such leads questions as:
 What am I?
 What are my achievements?
 What principles do I have?
 What are my values?
 What are my strengths and weaknesses?

Sociological Perspective
The entrepreneur is an individual driven by his/her personal economic interests or otherwise not
necessarily compatible with society in general. The entrepreneur contrasts with more traditional
emphasis on the society, groups and associations. The entrepreneur might be well respected and
accepted or rejected and resented depending on the society they come from and what is valued
there.

According to this theory, the entrepreneur is driven by self-adventurism (way from norms),
desperation due to the societal factors (live or die) and social recognition of making money in
order to take them off his/her back (even taming a stubborn wife or husband). Entrepreneurs can
also emerge as philanthropists by generating money and spending it to improve their
communication and lesser mortals. The assumptions of this theory are that the entrepreneurs are
creations of society and that their activities are just reactions either to protest or better it. Training,
therefore, cannot do much to influence the individual. This theory perpetuates stereotyping of class
systems ad great persons theories which are at times not ideal for developing young nations.

Economic Perspective
33
The etiology of term “entrepreneur “provides insight for the economic perspective which means to
‘’undertake’’ in French. It distinguishes entrepreneurs from managers. Undertaking connotes some
degree of risk, uncertainty and creativity. Innovation, creativity and discovery are the central focus
of this perspective.

Neoclassical economic analysts (Keynesian, Friedmanities, Supply Siders and Marxists)

emphasize optimization of existing resources in order to reach equilibrium (in realm of external
forces). Hence definitions such as “Economic agents who engage in market exchange for profit at
their own risk”, “Shifters of economic resources out of an area of lower into a higher productivity
and greater yield” “Stabilizing force which brings markets closer to equilibrium and forces work
more smoothly”. The entrepreneur is involved in allocating scarce resources in order to produce
tangible/intangible goods with utility. As a forth factor of production, he/she distributes and
organizes scarce resources. The entrepreneur is driven by profit motive (profit maximization and
cost minimization) and gains socially and financially from economic activities. Entrepreneurs can,
therefore be trained on effective utilization and management of scarce resources.

Another school of economics away from neoclassical economics (Led by Joseph Schumpter)
focused on dynamics of economic life, dynamic disequilibrium as opposed to statistic equilibrium.
According to this school, the entrepreneur is central to economic development. He /she is the
mechanism of economic. Dynamic disequilibrium is created by the innovating entrepreneur who
introduces new combinations into the production. Entrepreneurial activity is therefore a
destabilizing force that starts the process of creative destruction, the essence of economic
development. Entrepreneurs are not managers who undertake routine activities on basis of past
experience without the idea of change but one who risks uncertainties and engages in activities that
has not been undertaken before.

The training implication for this is that more time could be spent on enhancing the creativity of
individuals and supporting innovative ideas. People can be trained to sharpen their decision
making abilities and abilities to analyze opportunities creatively. People who follow this school of
thought ask themselves these questions:
 What are the opportunities?

34
  What vision do I have?
 How do I respond to situations?

The Management Perspective

This school emphasizes organisation of resources in a systematic way to attain maximum profit.
Entrepreneurs are therefore organizers of an economic venture: they organize, own, manage and
assume the risks. Entrepreneurship is therefore a series of learned activities which focus on the
central functions of managing a business such as production, planning, marketing, coordinating,
controlling, evaluating and financing.

The management school therefore emphasizes improving a person’s capability through developing
his/her rational, analytic and cause and effect relationships. Specific functions involved are
therefore identified and training structured around them. Another strand of management views
entrepreneur as leaders of people. They have the capacity to adopt their styles in order to get the
maximum out of people. They view other people as their greatest resource and realize that they
cannot accomplish goals without them and their skills. Training is therefore possible by knowing
how to motivate, direct and lead people.

The basic questions that people who follow this school ask themselves include:
 What are my plans?
 What are my capabilities?
 What are my credentials?
 How do I get most from people around me?

Each of the models is based on certain assumptions such as personal qualities or values,
anticipating the future, finding and recognizing opportunities, using management and technical
skills and adapting or changing the direction of a venture. The criteria for each school provide the
foundations for research and training emphasis. All of them provide useful insight in understanding
and explaining entrepreneurship. It is possible that they can complement each other in developing
a rich entrepreneurship programme. Pre starters can benefit a lot from the psychological,
sociological and economics schools while starters and those in the growth stage can gain from
35
management.

Exercise
1. Identify other theories and conceptual frameworks or models that relate to entrepreneurship
2. Explain the macro and micro theories.

36
TOPIC 7

Entrepreneurial Motivation

According to McFarland, motivation refers to the way in which urges, drives, desires, aspirations,
striving or needs direct control or explain the behaviour of human beings.

According to Flippo, “Motivation is the process of attempting to influence others to do your will
through the possibility of gain or reward”.

Nature of Motivation
 It is a personal and internal feeling
 It is a continuous process
 Human needs are interrelated and influence human behaviour in different ways
 Motivation causes goal-directed behaviour

Motivational Process
Motivation is the result of an interaction between human needs and incentives. A person feels
motivated when available incentives leads to the satisfaction of his motives or needs. When the
need is satisfied tension is removed and the person feels motivated.The various steps in the process
of motivation include:
 Awareness needs
 Search for action
 Fulfillment of need
 Discovery of new need

Theories of Motivation
1. Maslow’s Need Hierarchy Theory - The human needs identified are as follows: Physiological,
safety/security, belonging/love, esteem, cognitive, Aesthetic, self-actualization/self-fulfillment
needs.
2. McClelland’s Acquired Needs Theory – This includes the need for achievement, need for
37
 power and need for affiliation.

Factors behind entrepreneurial growth are:

1. Entrepreneurial ambitions - to make money, social prestige, continue family business,
self Employment
2. Compelling reasons - Unemployment, retrenchment, dissatisfaction, makes use of
resources, maintain large family
3. Facilitating factors - Previous association, previous employment, role models, advice,
influence, property inheritance.

Discuss the key internal and external motivation factors that may enhance entrepreneurial
behaviour.

Internal motivation for entrepreneurs include the need for/to

 Self actualization
 Achievement
 Taking up challenges
 Independence
 Success in certain class (social)
 Adventure-to discover the business world and discover ones skill
 Reducing tension
 Acquiring the social status
 Controlling power

External Motivation
 Role model - looking at those already successful in business
 Family background - sets standards also motives
 Training
 Support social systems - access to finances
 Geographical position of the area may entice you into business

38
 Need for income -coming externally as a push from the family
 Government incentives
 Credit facilities
 Low taxation rates
 Economic needs
 Social interaction
 Business experience also motivation
 Education
 Religion
 Market availability
 Infrastructure (comnmnicat1o transport)
 Technological information

Exercise
1. What motivates different people to be entrepreneurs?
2. Visit an entrepreneur and find out what influenced him/her to set up a venture.
3. Explain the achievement motivation.

39
TOPIC 8

Starting your Own Business

Business Idea Generation

All entrepreneurs are business people but not all business people are entrepreneurs. Entrepreneurs
tend to be more innovative than just ordinary business people as they have more than one business
plan.

Means of Generating an Idea

 Identifying a need
 Brainstorming
 Building on your skills, hobbies or interests
 Spotting a market niche
 Listening to what people are saying
 Attribute listening
 Gaining from waste
 Look to see and listen to hear
 Research
 Importing an idea
 Day dreaming
 Spin off from employment

1. Identifying a Need
A need can be an opportunity and indeed a consumer buys to satisfy a need. Abraham Maslow in
his humanistic hierarchy of needs ranges from very basic to the high needs, physical needs to very
high personalized needs. Therefore, identifying an unidentified or underserved need is a sure way
of generating business ideas.

40
Maslow’s Hierarchy of Needs

Self actualization
Esteem/ego

Social

Safety/security

Basic needs

Basic or psychological needs

The first and the most basic needs include thirst, hunger and sleep. In the process of satisfying
these needs, entrepreneurs can generate a lot of business ideas such as cloth store, food kiosks,
building materials etc.

Safety and security needs

Human beings require these and entrepreneurs can generate ideas in the process of satisfying
them, e.g., security firms, watchmen etc.

Social needs
Generally they need to be accepted. An example of goods and services in this category include:
membership for clubs, companies which offer such services, banks for socializing, mainly
members only. Clinics such as for guidance and counseling, golf clubs, deodorants, perfumes
assist one to be accepted in a social group.

41
 Self esteem or ego
This is the need to be recognized. Ideas can be generated by entrepreneurs to suit its need e.g.,
luxury cars – BMW, designer clothes, business cards (perfumed), cellular phones, gold filled
pens.

Self actualization
The need to prove the ability of oneself – self fulfillment, e.g., being a member of a certain
club– research institutes, getting opportunities to do something of your ability, e.g., publishing,
creativity.

2. Brainstorming
This is the process of detaching analysis of ideas from the actual devit of ideas. The idea may or
may not be related to a given product. In the process of brainstorming invaluable ideas generated
may likely lead to high profitability ideas. In brain storming, you are ideally answering questions
such as:
 What can we do with this product?
 How do we improve our performance?

Examples:
Flowers
 Flower gardening – manure Transport services
 Flower export and import Construction

Egg
 Chicken rearing Feeding troughs
 Chicken feed Egg tray

3. Building on Skills, Hobbies or Interests

List as many of the interests and skills you can think of and for each list down or think of any
business ideas. For example:

42
a) Interests and Hobbies e.g., Stitching- Business ideas: Dress making/tailoring, Embroidery
and Training
b) Copy or improving somebody’s ideas (skill) -Many successful businessmen are based on
copying or improving the original.
c) Analyze the weaknesses of the existing business and look for solutions.
d) Combining two existing business ideas in a new way.

Christian Disco Bar

Play, sell gospel music Dance the gospel Sell sodas and
milk

For example:
Conference
Guest house Combine into 1
Training center

Activity - Motivating
Procedure
1. List the business in your locality and group them into two – the successful and the
unsuccessful.
 Go deeper into that successful business and see what it is all about.
2. Identify why the unsuccessful businesses are what they are.
3. Think of what you can do to make these successful businesses more successful and even those
unsuccessful to be successful.

4. Spotting a Market Niche

Entrepreneurs usually look for gaps in growing markets. They try to identify needs for sections of
markets, which are not being utilized for existing business (market segments). However, spotting
a gap in the market may not be easy. One way is to identify trends and translate them into business
ideas by identifying a possible need associated with the trend. Trends may be social, cultural,
technological, economical etc.

43
 Trend Need Business ideas
1. Rural – Urban exodus Housing, employment  Low cost housing
 Employment bureau
2. Change in lifestyle Flashy wedding  Video filming
 Outside catering

5. Listening to What People Say

This is what people tend to say:
 If only I could find a cheaper …
 If only there was a decent bus service to…
 If only one could rely on the…
 Why don’t they have longer business hours?

6. Attribute Listing
This method of generating business ideas is based on changing the way you look at something in
order to find new uses for it. It also attempts to answer the question – what do we do with this
product?
Product: Used types
Attributes: Shape – round Business idea
Color – black - swings
Texture – strong - black
Weight - sandal
Texture – Bruyat - whips

7. Gaining from Waste

If you look closely at what appears to be waste, it may not be waste at all. It could be recycled or
be made to produce a useful product.
‘Waste’ Business idea
Saw dust - Chip boards
44
 - Chicken poultry
- Briquettes

8. Look to See and Listen to Hear

Business ideas can be solicited. You may interview consumers on what they need and don’t have.
Producers may also lack some inputs. Reading newspapers, magazines and reviewing journals or
simply observing business environment can really be a rich source of business ideas. Closely
associated with this method is the idea of importing a business idea.

Putting Your Ideas into Action

Great ideas are worth nothing, unless you do something about them. However, you might have to
do some more for instance, market research and assessing your resources.

SCREENING A BUSINESS IDEA

Guidelines
After generating business ideas, you need to do some evaluation for screening to make a decision
on which idea to pursue. This means you systematically evaluate the most suitable and select the
best. Screening must be done carefully, objectively, soberly and without emotions. Business ideas
screening is required even when there is only one idea to consider. This is because there is a stage
of starting a business that may not be profitable or may be difficult to run due to a variety of
reasons. There are two broad categories of factors that may affect the choice of business to start.
These are:
i) Personal considerations
ii) Business considerations

Personal Considerations
1. Your objectives for the business. A good entrepreneur usually sets personal objectives for
going into business. In addition, they try to answer questions like:
 Does the business idea agree with my business objectives?
One may have only one major objective but it’s possible to have more than one and
prioritize them, e.g., survival may be a major objective until the business breaks.

45
  Even then suitability sets in to judge the compatibility of the idea; with objectivity a tabular
approach may be useful.
2. Your skills. Can you do it? Some businesses require certain specialized skills for starting and
running them. Each idea should be screened in relation to whether it will require you to acquire
specialized skills – Accounting firms, law firms, medical clinics are some of the businesses
which cannot be run by anybody but those with relevant skills. If you have no skills, you may
be advised to obtain through a course or seek employment temporarily to gain experience
firsthand.
3. Your interest. A very important question to ask oneself is, Will I like this business I am
undertaking? There is no point of choosing a business idea that you will not enjoy. Therefore,
each idea you generate try to identify what activities are involved, e.g., waking up early,
closing late, your presence always.
4. Your commitments. Are you committed to your family, friends etc? Will the business
interfere with these commitments? It may be extremely important to have the support of your
family and friends. For example, it may be impossible for them to support you especially your
family, to help your business grow and develop, then, it is advisable to choose a lesser
committing business that does not take much of your time. Support from spouses is very vital
in the business success.
5. Your personal SWOT. This is the analysis of one’s strength, weaknesses, opportunities,
threats.

The SWOT matrix: - Matching the matrix contents of an organization in relation to achieving
desired goals.
S - Relates to an organization’s internal capacity
W - They are subjective
O - Relates an organization’s external environment
T - They are objective.

Importance of the SWOT matrix:

1. Development of organization’s strategic profile.
2. Provision of framework to assess current and future plans.

46
3. Acts as control technique when conducted periodically – weaknesses, strengths.
4. Gives realization to organization’s activities.

SWOT components:
Strengths Positive internal conditions – skills, finances, competence etc
Weaknesses Negative internal conditions
Opportunities Favorable environmental conditions
Threats Unfavorable environmental conditions. Things that might hinder you from
undertaking the idea
Components contents

Internal (Subjective)

Strengths Weaknesses

Distinctive competence Absolute facilities

Adequate finances Lack of key skills
Access to economics of scale Internal operational problems
Technology leader Lack of finances
Good innovation ability Low employee morale
Proven management Poor track record
Cost advantage Weak external image
Poor management

External (Objectives

Opportunities Threats

Potential customers Strong competitors

Potential expansion space Adverse government policies
Favourable legislation policy Adverse demographic changes

47
 Political good will stability Political instability
Healthy economy Decayed economy
Favourable social scene Unfavourable legislation

Schematic comparison of external threats and opportunities with internal strengths and weaknesses
enables the matching of these to produce (generate) a SWOT matrix of strategies.

Procedure
1. List external opportunities
2. List external threats
3. Match strengths with opportunities – record results
4. Match weaknesses with opportunities – record results
5. List internal strengths
6. List internal weaknesses
7. Match strengths with threats – record
8. Match weakness with threats – record

ENTREPRENEURIAL SELF CONCEPT

This is the process of establishing one’s entrepreneurial potential. First, one has to understand
himself, i.e., entrepreneur characteristics to be able to understand strengths and weaknesses
regarding behaviour.
 The idea is to understand ourselves – SWOT analysis assists us in knowing how good or bad
we are in entrepreneurship.
 After this look at solutions towards the weak points.

SWOT – look at background, experience, education, family relationships, life and behavior
patterns e.g., persistence, self reliance, dependence etc.

BUSINESS CONSIDERATIONS
1. Market Availability

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There is no point of starting a business with no assurance of adequate market. Indications of the
availability of the market include:
 The existing demand is not at present adequately served by existing businesses
 Existing demand is presently served by imports only
 Existing demand is presently not served at all
 Supply of the product/service is currently not reliable
 Demand of the product/service is expected to increase significantly in the future
 Your business idea has significant uniqueness or unique selling feature such as more desirable
features, better quality, more durable etc.

2. Availability of Raw Materials

This may be indicated by:
 Availability of in adequate quantity and quality locally.
 There is reliable supply (local or imported).
 Prices are reasonable.
 Future increases in price for raw materials are perceived to be reasonable and predictable.

3. Availability of Technology
This can be evaluated in terms of the following indications:
 Use of proper technology
 Available reasonably priced technology
 Available technologies are appropriate for the level of production investment and product
quality.
 The business will not suffer from technology obsolescence.

4. Availability of Skills
This can be ganged by the following factors:
 Different skills needed by the business are available.
 The supply of the skills is steady.
 The cost of hiring the skills is reasonable.

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5. Government Policy
The following considerations will indicate if the government policy is conducive:
 The area of the business is a government priority.
 Businesses in this area receive government incentives.
 Future government plans stress this area of business.

BUSINESS IDEAS/OPPORTUNITIES

a. Identifying Business Ideas/Opportunity

A business opportunity is an attractive project idea, which an entrepreneur accepts as a basis for an
investment decision. Good business ideas must be capable of being converted into feasible
projects. Thus, the two ingredients of a business opportunity are: -
 Good market scope
 An attractive/acceptable return on investment
There is the need to analyze its viability in areas such as technical, production, commercial and
managerial. Therefore, selection of the right business opportunity requires:
 Understanding one’s own capabilities, strengths, limitations and preferences.
 Exploring all possible opportunities available within existing conditions and environment
 Making a final decision after comparative analysts of opportunities available which are
consistent with entrepreneur’s capabilities.
Ideas about projects may be generated by: -
 Thinking of new products/services not existing in the community.
 Altering the products/services which are already in the market

b. Assessing Business Opportunities

Certain indicators or guidelines may help to identify and assess business opportunities. These
include:
i) Environment
 Basic features of an area and its resources
 Population, its composition, occupational pattern and social-economic background
50
ii) Current business scene
 Present pattern of trading and business activities in the area with references to inter-
regional flow of commodities; local consumption and need for industrial goods as well as
services.
 Emerging trends and patterns of trading and business activities in terms of new demands
for consumption of goods and services in the area.
iii) Technology change
 Anticipating new opportunities because of technology change like computers.

To help in identifying business opportunities, the following idea sources should be considered:
1. Resource based ideas
 Industries based on mineral, agricultural, marine and forest resources.
 Waste-based products such as agro-waste, wood-waste and metal waste.
2. Linkage related ideas
 Industries arising out of various types of linkages such as backward and forward
integration from existing lines of manufacture
3. Export/import related ideas
 Export oriented activity
 Import substitution
4. Market shift or growth related ideas
This is applicable for consumer and industrial products with potential growth as a result of
increased population or changes in composition of population purchasing power in their lifestyle.
5. Service sector ideas
For example, household repairs and maintenance service facilities/workshops/establishments to
cater to industrial and household needs.
6. Government policies, priorities and plans
By knowing the plans, priorities and policies set by the government one may identify a business
opportunity.

c. Assessing Product Demand

The existence of unsatisfied demand for a product or service provides the best opportunity for an
51
entrepreneur to exploit. However, such a situation calls for systematic assessment of the market
situation to establish whether the demand is real or imagined and this can be achieved through
conducting a market survey.

d. Market Survey
This is a systematic tool, which can be used to reduce risk and improve the probability of
entrepreneur’s success. The following steps are sued in conducting a market survey: -
1. Defining objectives of the study and specifying information required.
2. Working out details of the study i.e.
 Identifying the kind of data needed
 Identifying sources of obtaining information
 Time and cost involvement for the study
 Working out methodology and plan of action
3. Selecting samples and deciding what contacts and visits should be made.
4. Preparing questionnaires and plans for surveyors and interviews.
5. Collecting and analyzing data
6. Preparing a report of the findings.

Before committing resources to the business, it is vital to attempt to measure whether there is a
sufficiently large unsatisfied market to exploit. A starting point is to identify what your competitors
are doing in ones proposed area of business and the following questions need to be answered:
1. Is the total market growing at a sufficient rate to allow another new business to develop?
2. Is the market static or declining? In which case to survive one has to capture the business from
your established competitors.
3. What are you going to do which is significantly different from what is already being offered
by your competitors?
4. Have you identified a segment with needs which are not presently being met?

Consumer
This is an important aspect to consider when assessing product demand. There are also attributes
which an entrepreneur should consider to satisfy consumer needs effectively. These include:
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 Who is the consumer?
 What does the consumer require?
 Where is the consumer?
 How does the consumer buy?
 Why does the consumer buy?
 When does the consumer buy?

Competition
 This can alter an entrepreneur’s marketing decisions.
 To market effectively you must know your competitors and the advantages they offer.
 Identifying strategies to take so as to gain a competitive advantage is key.

Exercise
1. What is the importance of an appropriate location to an entrepreneur?
2. Why should an entrepreneur perform a competitor analysis?
3. How does the understanding of the consumer help an entrepreneur while setting up?

SUMMARY OF BUSINESS CONSIDERATIONS

A quick way of screening the business idea vis-à-vis business considerations could be done by
posing the following questions:

Yes – eliminate the idea for further consideration.

1. Are there any restrictions, monopolies, raw materials, and other shortages as well as causes that
may make any factors of production unavailable at reasonable costs?
2. Are capital requirements excessive as/and difficult to obtain?
3. Are environment effects associated with the business contrary to government regulations?
4. Is the business inconsistent with national policies and goals?
5. Is there an effective monopoly that may make entry into the industry?
6. Are there factors that make the marketing of the product difficult?
7. Would exiting from the business if started be difficult?
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8. Are there factors that may hinder effective expansion?
9. Is the technology to be used readily available, proved and easily maintainable locally?
10. Will the business require excessive advertisements and promotions to survive?

The Common Characteristics of a Good Business Idea

 Easy to manage and involves minimum risk.
 Does not require excessive investment capital.
 Offers good returns on investment.
 Has the scope for growth, expansion and diversification.
 Comparative with the owners’ goals and interests.
 It is not against the expectations of the society.
 It has a short gestation period.
 It has readily available market.
 Easy to exit if necessary.
 It does not require frequent and extensive changes in technology.

Responses to the Following Questions will give some Indication as to your Entrepreneurial
Abilities
 Are you usually self motivated to achieve goals?
 Do you work well with other people?
 Within a group of people, do you usually assume a leadership role?
 Are you able to communicate well with others?
 Are you a good listener?
 Do you have self confidence?
 Do you have a positive self-image?
 Are you able to make decision?

Why People go into Business

A growing number of people are becoming dissatisfied with paid employment for a variety of
reasons:

54
 Dislike following orders and unhappy about dependency on employer
 Abilities are not being recognized
 Income is at a set level
 Responsibility is limited
 Find implementation of ideas difficult.

Entrepreneurs go into Business for a Variety of Reasons

 Independence – want to be their own bosses
 Immediate need for a job
 To supplement income
 To make more money
 Opportunity to prove one’s ability.

What Makes Entrepreneurs Successful

An entrepreneur is usually successful when he/she is skilled, excellent in management and
leadership. Technical skills of the owners mean business success.
 Having the ability to manage people – hiring, supervising, training, motivating and organizing
staff employed in the business.
 Managing money – arranging for financing when necessary, keeping records, managing cash,
handling credit and insurance, paying taxes and planning for financial success.
 Directing business apparitions, buying and selling, purchasing equipment and machinery,
making sure that stocks are adequate, meeting customer’s needs and managing everything you
have to make the business effective.
 Making sure that sales and marketing are efficient – meeting customer’s needs, developing
new products or services, setting prices, advertising, dealing with the media and making sales
contacts.
 Dealing with the business environment – licensing and laws, taxation, government
requirements, supplier’s requirements.

Comparison between an Entrepreneur and Employee

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Entrepreneur Employee

1. Confidence 1. Dependable
2. Independent as an individual 2. Give a honest day’s work
3. Optimistic 3. Follows instructions
4. Leadership is dynamic 4. Knows what is expected
5. Originality of thought 5. Understands written information
6. Innovative and creative 6. Manages time effectively
7. Resourceful 7. Knows abilities, strengths and weaknesses
8. Demonstrates initiatives 8. Gets along with most people
9. Is versatile and knowledgeable 9. Is trained for the position
10. Gets along with others 10. Is punctual
11. Flexible 11. Adjusts to various work situations
12. Responsive to suggestion 12. Works without close supervision
13. Achievement oriented 13. Loyal to the organization
14. Profit or results oriented 14. Works as a team member
15. Persistent and determined 15. Works well under no pressure
16. Hard working 16. Uses initiative and imagination
17. Energetic and forceful 17. Makes independent decision
18. Perceptive 18. Neat and clean in appearance
19. Has foresight 19. Follows regulations
20. Has a risk-taking ability 20. Knows how to use resources
21. Accepts challenges 21. Good communication
22. Communicates effectively 22. Prepared to listen
23. Sees the broad picture of business 23. Has some understanding of the business
24. Skilled in decision making 24. Accepts decisions made by others

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TOPIC 9

Legal Forms of a Business

1. Sole proprietorship
2. Partnership
3. Limited and unlimited companies
4. Co-operative societies and public organizations

Exercise
1. Student to read and develop summary notes on this using the format below.
Advantages, limitations, suitability, formation, control management, sources of finances,
scope and future, taxation, dissolution,

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TOPIC 10

Managing Workers in a Business

Human Resource Management is managing employees. This involves planning, directing,

controlling and organizing their activities for efficiency and productivity in the business. In
addition it involves:
 Achieving goals
 Accomplishing daily tasks
 Building the image of the business
 Succeeding in business

The responsibility of the owner/manager in human resource management is:

 Hiring resources and placing new workers
 Training workers to be productive
 Compensating workers for their efforts
 Helping workers maintain and improve their performance
 Evaluating workers’ performance
 Building workers relationship.

Hiring/Recruiting Employees for a Business

This involves:
1. Finding a productive employee which requires studying the job, determining what it consists
of, and concluding what kind of person it takes to successfully carry out the responsibility.
2. Determine the job description – place in the organization structure, principle duties, minimum
education, personality and physical characteristics.
3. Finding and attracting people who have the qualifications for the position.
4. Screening the candidates to identify the most promising and hiring them.

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Sources of Applicants (Determine Advantages and Disadvantages)
1. Business friends and acquaintances
2. Suppliers and customers
3. Employment agencies (reliable ones)
4. Universities and technical institutions
5. Friends and relatives
6. Personal file
7. Self-help clubs, youth groups etc

The Interview Procedure

As the owner/manager determines your interview guide for your business – Crucial areas to be
included are:
 Background information about the candidate
 Technical competence of the candidate
 Interpersonal competence of the candidate

Policies for your Business

Once recruited, make sure the employee understands the following business policies:
 Image of the business
 Working hours
 Pay policies: pay days, overtime pays, salaries etc
 Holidays
 Leaves of absence
 Sick leaves
 Benefits – retirements, insurance etc
 Termination of employment – disciplinary lay off, discharge, resignation.

Employee Motivation
Employee motivation can improve the image of the business, when satisfied employees share their
positive feelings with the customer. Some methods of motivation incude:
 Listening to them for ideas
59
 Involve them in decision making
 Organize a get together/party occasionally
 Take them for a training or in-house training
 Treat them as persons – understand their SWOT
 Appreciate their efforts – small tokens
 Pay them as agreed in the policy
 Pay increases as agreed in the salary policy
 Promotions
 Communicate effectively
 Job security

Delegation of Responsibilities
This involves providing activities to be done by other people in the business, instead of doing it by
oneself.

Importance of delegation
 Reduces backlog of unsolved problems
 Assist in developing business successors
 Gives own/manager time to attend to other matters
 Creates time for making important business decisions
 Avoids overworking a person
 Gives time to think of expansion or diversification

Tasks should be delegated to those:

1. With identified abilities to carry out the responsibilities.
2. That you ‘groom’ as your potential managers.

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TOPIC 11

Record Keeping

Objective:
i. To enable the students understand and use elementary book-keeping techniques in the running
of their businesses with a view of managing them more effectively.

Book-keeping/record keeping – is a method of recording all business transactions (activities)

expressed in (monetary form) in a methodical manner as they occur, to which reference may be
made at a future date. It is the creation, collection, manipulation, classification and storage of
business information.

Many businessmen think that they can easily know how their business is doing by keeping all the
facts about their heads. This is not possible because a business has many transactions involving
money. No business can operate successfully without proper book-keeping records. One of the
main reasons for business failure is the lack of adequate records.

Importance of Maintaining Book-Keeping Records

These helps in the following:
 The businessman to keep in touch with the day-to-day, week-to-week, month-to-month
operations of the business.
 Increase chances of success and reduce the possibility of failure in business.
 Spot the business trend, such as high and low points in sales, operation costs, inventory levels
and credit totals.
 How much money is coming into the business and going out of the business (sales).
 How much is owed by outsiders to the business (debtors).
 How the money has been spent (sales).
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 How much money the business owes the outsiders (creditors).
 How much profit/loss the business is making.
 Decision making.
 Enable solicit for funds from financiers.

Why Some People Do Not Keep Records

The following are some of the reasons traders give for failure to keep records:
 Laziness on the part of traders
 Lack of commitment and appreciation of the value to keep records
 Lack of knowledge and know-how
 Dislike for desk work
 For the sake of keeping business facts a secret
 Fear of paying tax
 Lack of time due to operating many businesses.

Qualities of a Good Record Keeping System

 Easily understood and operated
 Not costly
 Confidential and compact
 Capable of expanding to accommodate new information

Development a Simple System of Record |Keeping

Which records should a business maintain? The type of records needed vary from one business to
another depending on the type and size. However, the records maintained should give the
following important information about the business.
 How much money is coming in and going out of the business?
 Where is the money coming from and going to?
 Whether your business is operating at a profit or loss.
 What your business owes and owns.
Note: An entrepreneur needs to keep records that are helpful to the business

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Example
Hotel business needs to have close control of:
 Sales (Food Sales) – Receipt book
 Purchase of Foodstuffs – Daily purchase analysis sheet
 Expenses – Daily expenses analysis sheet
 Inventory (Stock) – Daily stock analysis sheet
 Cash summary – Cash book.

Recording the sales

 Receipts should be numbered and issued to the customers who later pass it to the counter for
payment purposes.
 The cashier stores the receipts received at the counter.
 At the end of the day, all the receipts are compiled together to get the total sales for the day.
 This total is transferred to the cash book as money coming into the business.

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TOPIC 12

Small Business Management

Definition of a small business

There is no one particular generally accepted definition of a small business. The definition tends
to vary depending on the sector of the business, purpose of the definition and the level of
development where the enterprise is located (country).

The criteria for describing an enterprise as small might be based on one or a combination of the
following factors:
a) Total number of employees in the enterprise:
 Informal sector less than 10 employees
 Formal sector – between 10-50 employees
 Medium size enterprise – 51-150 employees
b) Total investment or capital resources employed – it goes up to Ksh15 million
c) Sales turnover
d) Number of plants or branches operated by one business concern – between 1-5 plants

In most discussions and writings on small businesses, it is concerned that a small enterprise is one
which the administrative and operational management are in the hands of one or two people who
also make important decisions in that enterprise.

Students in entrepreneurship and small enterprise development should be aware of factors which
usually distinguish the small from the larger enterprises. Common among these factors include:
 Small enterprises are primarily financed from personal or family savings with limited resource
to outside finance during the formative stages.
 The manager has close personal contact with the whole workplace.
 The enterprise operates mainly in a limited geographical area.

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Types of Small Business
In Kenya, small scale enterprises include many self-employed artisans and traders in the informal
sector commonly termed as ‘Jua Kali’. The enterprises also cover on the upper limit, the
manufacturing and trading businesses in the formal sector, employing up to 50 people and having
up to Ksh15 million in total investment. The enterprises include many productive activities
consisting of trade, commerce, distribution, transport, construction, agro-business, manufacturing,
and maintenance and repair services.

There are various ways of classifying small businesses. These include:

a) Manufacturing Firms
Since the initial capital investment of manufacturing firms is high due to use of expensive
machines and equipment, and their operating costs and risks are high, few of such firms are small.
However, many small firms provide parts and components to large companies. Few small
manufacturing firms are coming up utilizing the cheap and local machines and equipment, e.g., oil
press machine from Aprotech.

b) Construction Firms
In this sector, few small businesses operate autonomously due to high investment costs. However,
many small firms are sub-contractors providing specialized services like electricians, plumbers,
fixing of doors, painting etc.

c) Wholesalers
There are relatively many small enterprises in this sector. Small firms basically act as middlemen
distributing products of large firms.

d) Retailers
There are many small enterprises in retailing mostly acting as outlets/intermediaries of large firms.

e) Service Business
Service factor is large and small firms perform essential specialized and often technical services to

65
other businesses, institutions and the general public. Such services are mostly for those customers
that are unable to provide technical services like management, consulting, accounting, repairs etc.
Characteristics of Small Business
There are various distinctive characteristics of small enterprises. Among the most common ones
are:
 Small initial capital investment
 Mostly privately owned and organized as sole proprietorship
 Labor intensive – with tendency of utilizing labour more than machinery
 Proprietor and their family members form the biggest share of the work-force.
 Most of the money comes from entrepreneurs’ savings.
 Weak financial discipline – rules and regulations of financial management not strictly adhered
to.
 Organization and management are poor and negligible in many cases.
 Short gestation period – short time between initial investment and generation of returns.
 Flexibility to adapt rapidly to changing demands and conditions.
 Exploitation of human resources – mostly offer poor pay, poor working conditions, few or no
fringe benefits etc.
 Use of cheap and easy technology.
 Short term planning.
 Poor book keeping practices.
 High rates of corruption, cheating etc – especially in financial presentations.
 High incident of infant mortality rate – few survive the teething problems.

Role of Small Business in Economic Development

Small business constitutes the backbone of some economics and has remained the vital link
between various levels of economic activity in some. The small firm has been associated with
economic development for several reasons:
 Contributes significantly to the country’s GDP through production of goods and services,
taxation etc.

66
 Ability to utilize resources that are under utilized by the large businesses due to their ability to
penetrate small market segments.
 Creation of job opportunities through starting firms and employing assistants.
 Contributes to creativity and innovation by coming up with new ways to counter competition.
 Training opportunities for entrepreneurs who start small firms and gradually grow into large
firms.
 Solving the problem of capital scarcity by utilizing the availability of small resources.
 Distributing of economic power to low income class and minority groups.
 Curbing rural-urban migration as they start firms even in the remote rural areas.
 Providing goods and services to big firms through sub-contracting, parts and components etc.

Problems of Small Business

These can either be general or specific. General problems include:
 Government macro-economic policy and resource allocation environment has:
- Highly controlled regulatory system
- Inadequate infrastructure
- Limited markets, i.e., low purchasing power and competition
- Poor access to appropriate technology
 Lack of adequate finances – lack of adequate investment and working capital requirements due
to:
- Stringent collateral requirements
- Scarcity of back able proposals
- Low liquidity ratio of banks
- Lack of security
 Poor non-financial promotion programmes – these include NGOs that promote businesses.
- Lack of adequate information on small scale sector
- No adequate assessment of the target group
- NGO and other promotion programmes have no good coordination thus compete
among them.

Specific problems of small enterprises include:

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 Small enterprise manager operate with inadequate or minimum quantitative data.
 Mostly minimum pay wages have few fringe benefits and offer low job security, therefore not
able to attract good quality personnel.
 Financiers are not willing to finance small firms and the manager is mostly limited in his
ability to raise initial capital.
 Due to limited financial resources, the small firm is vulnerable to economic downturn and
recession.
 Lack of ability to realize full potential of its personnel due to lack of training and development
of personnel.
 High operational costs as its not able to enjoy economies of scale associated with large
purchases.
 It is mostly limited to a single or small product or service range thus concentrating risk.
 Mostly managers are not able to understand and interpret government regulations, actions and
concessions to their best advantage.

Strengths and Weaknesses of Small Business

 Strengths are inherent capabilities of an organization that lead it to have strategic advantage.
 Weaknesses are inherent limitations and constraints of an organization that lead to a strategic
disadvantage to the organization.

Small enterprises possess distinctive strengths/advantages that include:

 Ability to fill limited demands in specialized markets.
 Prosperity for labour intensity and low-medium skilled workers.
 Flexibility to adapt to the rapid changing demands and conditions.

The strengths and weaknesses of small enterprises can be categorized into their functional areas of
operations:

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Strengths
Weaknesses
1. Finance  Little help from government
 Low capital investment  Poor access to funds
 Highly liquid  Inefficient capital budgeting
 Credit worthiness from suppliers  Inadequate returns

2. Marketing  High competition

 Close contact with customers  Low product variety
 Efficient distribution channels  Poor promotion strategy

3. Human Resources
 Motivated managers/workers  Unskilled work
 Team work  High turnover

4. Production
 High technology  Obsolete technology
 Availability of materials  Poor quality products
 Flexibility of products  Lack of enough materials

5. General Management
 Competitive strategy  Poor management
 Commitment of executives  Poor planning and control etc
 Flexibility in decision making

Leadership Roles in Business

Entrepreneurs achieve by being leaders. Leadership can be defined as achieving the objectives of
the business through people. A leader is one who sets goals, knows what he/she wants to achieve,
and achieves these goals by motivating and showing people how to be successful themselves.
They do this by:
1. Building workers’ self-esteem
2. Keeping employees informed of what is happening
3. Delegating work to others and having faith and trust in their performance
4. Marinating contact with employees
5. Analyzing problems when they arise, but not blaming people for those problems
69
6. Being an active listener by knowing what is happening in the business and how things might be
improved.
7. Setting specific objectives and continually reviewing them.
8. Taking corrective action when problems arise.

Leadership means working with people hence maintaining contact with people: Helping people to
improve their position through training or assistance. It is the key to success for those who
establish a new enterprise.

Good Management Tips in Business

1. Have products and services that meet the customers’ need.
2. The business should be located in the right position to satisfy the customers and keep costs to a
minimum.
3. Marketing and advertising should be effective for customers to know about your products and
services and making sure that you meet the needs of those customers.
4. The business organization should provide an effective and efficient unit. Your staff should be
able to make decisions and be responsible for their actions.
5. Overall, you know that management means providing customers with the best and most
efficient service possible.

Why Businesses Fail

Evidence from around the world shows that enterprises that fail do so as a result (largely) of poor
management involving:
 Neglect by the owners – lack of management bad habits, or difficulties within families or from
complacency or laziness.
 Fraud –staff taking money or goods from the business without paying for them.
 Disasters – loss of the business through fire, floods or some other disaster and management
failing to protect the business through insurance or some other method.
 Incompetence – owners who lack personal skills and technical knowledge necessary to run the
business: people who are not capable of managing a small enterprise.

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 A market does not exist - poor service, an indifferent attitude by sales people to customers;
very low or high prices: poor location when compared to competitors.
 Competitive weakness
 Credit policy and cash collection policy that spells disaster – providing credit without
background information on the customers; allowing credit to be extended when cash should be
collected: lack of sound cash collection policies.
 High expenses – little control over spending on travel or entertainment, space, electricity, use
of the telephone.
 Too many assets – too much stock, too many vehicles or too many items of equipment
 Location of the business – a retail store which is not visible by customers: a service business
which never advertises and cannot be located by customers; a factory in the wrong place and
hence having high transport costs; an agricultural business far from the market place.

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TOPIC 13

Business Financing

Introduction
When one has decided to take up a business, be it big or small, the next most important thing to
consider is how the business is to be financed. You can use your own funds or you can turn to
family members or other close associates.

In any case, you will think of securing funds which will be invested or placed at risk on a
permanent basis. Money that is put in a business this way is called EQUITY. If the funds required
are more than can be raised through equity, the usual way to supplement equity funds is to borrow
the additional money required.

The financial needs of an enterprise vary with the individual situation the enterprise faces. A
successful enterprise will pass through the following four major stages:-
1. Pre-start up stage
2. Start-up stage
3. Growth stage
4. Maturity stage

During all these stages, an enterprise will find that money is among the resources which are very
limited in supply. Arguably, the most difficult time to raise funds is at start-up. There are
substantial costs that must be incurred before an entrepreneur can commence operation. The
enterprise will inevitable incur losses before sufficient revenues can be generated to meet even the
current expenses. Until then, the needed money must come from external sources.

Similarly, a growing concern can find that costs and risks associated with growth are beyond the
funds generated by the enterprise’s operation. Funds must then be sourced elsewhere as well as
machinery and equipment. Market changes and new products must be developed. If old partners
are unwilling to or unable to participate, new ones must be convinced of the enterprises profit
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potential and its overall quality. It follows that getting finance is a factor that needs to be managed
as it is a critical factor for business success. It is the entrepreneurs’ responsibility that finances are
available as needed and at terms and conditions conducive for enterprise development.

Getting adequate finances is therefore a critical factor for any business success. Raising money for
a small enterprise can be affected by the following factors:
1. Economic environment: if the economy is in depression or recession. This affects the cost of
borrowing, i.e., interest rates.
2. Political environment: the political situation within the country influences the willingness of
financiers to give loans, e.g., Donde bill.
3. Social environment, e.g., religion: the belief that interest is a sin, culture, lifestyle etc.
4. Stage in lie cycle of the enterprise: the amount and mode of raising finances is determined by
the stage of development of the business.

There are two main sources of finances for a business:

 Equity financing
 Debt financing

The main sources of business financing include:-

1. Equity Financing
Anyone who has tried to raise money to start a new enterprise will agree that it is very difficult to
do so. One can base their project on:
i) Savings: - This has the advantage of speed and stability as there are no claims from other
investors to be considered. But if the enterprise fails, you lose everything. There may be a
limit to the investable funds you have at your disposal. This limits the size of the project
you can undertake on your own.
ii) Friends and associates:- It is not usual to turn to friends and relations to argument your
own investment. There are also sometimes when well-to-do outsiders might be willing to
help. These can be a former employer or other businessmen whose business enterprises
might be furthered by the new undertaking. Friends, relatives and other individual sponsors

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 as sources of business financing are more desirable in that, they do not have formal
investment evaluation criteria. Instead they rely on their assessment of the character of the
businessmen who asks for equity support.
iii) Guarantors: - Business associates may agree to offer securities to guarantee a new
enterprise’s obligation vis-à-vis banks or other institutions. Guarantors however, seem to
have a tendency to need their securities for other purposes at the most inappropriate times.
This leads to protracted haggling and loss of valuable management time. Still, lack of red
tape and the informality of investment to documentation are strong advantages if compared
with other forms of funding.

2. Loans
i) Short-Term Loans
The most widely used form of borrowed funds are:
 Short-term supplier credit
 Bank overdrafts

This applies to all stages of an enterprise’s development. Unfortunately, amongst wholesalers and
bankers, lack of personal acquaintance, hence confidence restricts their willingness to lend to new
enterprises. Bankers also pay attention to the borrowers’ equity and overall financial position.
Thus, with suppliers and bankers, confidence is the most important factor. It affects the amount of
credit that can be made available and its terms and conditions. Consequently, the more mature and
well known an enterprise, the higher the trust its business partner will place into it and the better
the terms they are willing to offer.

Businessmen should learn that most suppliers co-operate if they are honestly informed and if the
clients are known to honor their commitments. Apart from confidence, commercial banks also ask
for securities for overdrafts and other working capital loans. The banking arrangement is a working
relationship with mutual give and take and based on mutual trust. However, do not forget to
review it occasionally to assure that you get the required services at a competitive price.

ii) Long-Term Loans

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Commercial banks and finance companies are unlikely to provide new companies or small
enterprises with long term funds. Generally, applicants find that the appraisal and approval process
requires extensive documentation and tends to be rather lengthy. Long term lenders in the private
sector insist on highly protective terms and conditions. To overcome the shortage of long-term
funds, businessmen can turn to specialized financial institutions (DFIS) which provide funding at
reasonable terms. This includes: KIE Ltd, ICDC, DFB, SEFCO, PTA and IDB. Their funding is
available for periods of up to ten years and borrowers are given a grace period during which only
interest is paid. In addition, the assets acquired with the loan qualify as securities for the loan.

Searching for Funds

Before approaching any funding source:
1. Be clear about the basic facts of your project and about the money. Consider the information a
supplier/banker requires before reaching a financing decision. Be prepared when approaching
your financier.
2. Get ready for the formal request. Most banks have developed forms, which they expect you to
complete with great diligence. Make sure you fully understand what is required and be realistic
about your project.
3. Other institutions may require very comprehensive documentation including possibly an entire
business plan with supporting evidence. Time invested to prepare such a document is normally
well spent. The plan should provide a very useful road map when you start the operation.
4. In sum, during the negotiations, project an image of honesty, purpose and desire for success.
The financing institutions chosen should perceive a knowledgeable and dedicated entrepreneur
assisted by a management team well organized to meet the challenging tasks ahead.

So you have got a killer business idea and want to start a business, how are you going to get the
business start up money you need to take your new business from idea to success? The following
sources can assist one with the start up money required:

1. Your own pockets

This may be daunting at first glance, but it is the most popular source of business start up money.

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Do not have a start up money nest egg. Many people get the business start up money they need by
mortgaging or remortgaging their homes, or selling property or possessions – even those who do
succeed in getting a start up business loan. Lending institutions and investors usually expect the
person starting a business to make a personal financial commitment.

2. Family and friends

This is the second most popular source of business start up money. Family and friends are often
willing to provide a business start up loan or sometimes even an outright gift. After all, they’re
likely to be “pre-sold” on the value of your business idea to some degree, as your family and
friends believe in you.

3. A line of credit
While not recommended as a sole source of business start up money, a line of credit is essential for
the start up phase. No matter how careful and detailed you’ve been in preparing your business
plan, there are always unexpected and underestimated expenses. Before you start a business, you
should already have prepared the way to access this source of business start up money by having
established a relationship with your local bank manager and by ensuring that your credit rating is
in good shape.

4. A start up business loan from a bank

I’m using the term “bank” to refer to a business start up loan from a traditional lending institution
(such as banks and credit unions). It is actually easier than ever to get a business loan, as more
people than ever have been successfully starting small businesses and the big banks are more
interest in small businesses than they used to. That said, you can't just walk in, tell a loans manager
how much business start up money you want, and expect to walk out with it. Applying for any
business loan is a process that you need to prepare for.

5. A start up business loan from a business-related or government sponsored organization

There are many organizations whose purpose is to promote economic development or provide
assistance to help particular types of people succeed in business. Often (but not always) this
assistance includes financial support, such as start up business loans. For instance, one of the ways

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the GOK, supports young entrepreneurs (aged 18 to 35) is by providing start up business loans
through youth fund.

Many women’s organizations also provide financial assistance to women in business, including
start up business loans e.g. KWFT. There are economic development organizations in place in
every province to provide support and services to entrepreneurs, including financial assistance -
CDF, IFC. More examples of organizations that offer business loans, including start up business
loans, KREP, SMEP , KADET, ECLOF.

6. Participating in a government-sponsored business start up program

If you qualify, this is the best way to start a business. Programs such as C-YES, KMAP not only
provide start up money but invaluable assistance, such as mentoring and developing business
plans.

7. Finding investors
Angel investors, venture capitalists, or private lenders all may be excellent sources of business
start up money for your new business. While it’s certainly more difficult in most cases to attract
investors to a start up rather than to an established venture, it’s not impossible if you have the
right business idea at the right time backed by an impressive business plan.

8. Government grant programs

While this is often touted as a great source of business start up money, it’s not, because most start
ups simply do not qualify. While there are government grants available, finding one that can
provide start up money for your new business will be an enterprise in itself (which is probably
why there are so many companies out there providing grant-finding services).Those planning to
start up “the right business” will have a much easier time finding government grant programs
that may provide business start up money. For example, generating efficient, renewable energy is
a priority of the federal government, so businesses involving Cogeneration (using one fuel to
simultaneously produce heat and electricity) or renewable energy technologies will find more
government grant opportunities than others.

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Which of these sources of business start up money is best for you? Probably, like most of the
people who have started businesses before you, you will need a combination of business start up
money sources to get the money you need to develop your business. You may even want to
explore all of these. Whatever you do, however, do not depend on your personal credit cards for
the business start up money. It’s best to wait to start your business until you have the funds you
need in place rather than crippling your new business financially and perhaps ruining your
personal credit rating.

So the key to getting a small business loan is preparation. First, gather together the documents
that will help persuade the lender that a small business loan is necessary and that you are a good
risk. You will need:
A business plan shows the lender not only why you want a small business loan but what you
plan to do with the money.
Cash flow projections - The first question any lender asks is “Will you be able to repay the
loan?” Your business's cash flow projections give lenders concrete financial data that they can
use to assess this risk.
A statement of your personal financial status - A list of your personal assets and debts to give
the lender a fuller financial picture.

To get a small business loan, you may also need the following documents:
Past business tax returns - If your business is established and you have past business tax
returns, it's a good idea to take them with you. They give the lender a better idea of how the
business is doing financially.
A credit rating report - Basically, you establish a credit rating by buying things on credit and
paying back the money you owe. Your loan repayment history plays a big part in establishing
your credit rating, but all your "credit" dealings make up the history that is used to determine
your credit rating. It is not necessary that you include a credit report with your small business
loan application; it is easy enough for potential lenders to check your credit rating. But if you
don't know what your credit rating is or suspect your credit rating is tarnished, you may want to
get one.

Demonstrating your Creditworthiness to a Bank

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When a small business applies for a business loan, a bank or other lender follows a certain
protocol when evaluating the application. One thing the bank uses is the 5 C's of credit analysis
to evaluate the application for the loan. Bankers evaluate the small business in the context of the
5 C's in order to allocate their limited funds. Make sure your loan application addresses the
following:

1. Capacity
In the opinion of the bank, the first "C", capacity, may be the most important. Capacity refers to
the ability of the firm to repay the loan. In your loan application, you must discuss exactly how
and when you intend to repay the loan. Not only do you need to state your revenues and
expenses, but also indicate the amount and timing of your cash flows with regard to repayment.
Capacity also refers to your credit history. Do you have a good credit score? The bank will look
at your past repayment history, both business and personal. Do not forget to indicate every
possible source of repayment at your disposal in your application.

2. Collateral
Collateral is a distinct relationship to capacity. Collateral refers to forms of security you can
provide to your bank or other lender. Collateral may be buildings or equipment owned by the
small business or the person including your home. Collateral may also include a guarantee by
someone else that, in case you cannot repay the loan, the other party will. As money gets tight in
the economy, there is an increased chance that banks will require loan guarantees in addition to
collateral. You may know loan guarantees by the term "co-signer."

3. Capital
Capital is the money invested in your business. This is the money you have at risk if your
business fails. It is also your measure of confidence in your business. The amount of confidence
you have in your business is important to the banker as is the willingness to take risk with your
business. The amount of capital you have invested in the business is also an important measure
of your ability to repay the business loan.

4. Conditions
Conditions are two-fold. Firstly, they refer to the overall economic climate and external

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environment surrounding the bank and the business firm. During a recession or periods of tight
credit, it is obviously more difficult for a small business to repay a loan and more difficult for a
bank to find the funds to loan. It becomes even more important for the small business firm to
present an iron-clad loan application to the bank. The second part of conditions refers to the
intended purpose of the loan. Are you buying new equipment for expansion? Are you
replenishing working capital to prepare for seasonal inventory buildup? Why do you need the
money? Spell it out in detail in your loan application.

5. Character
Character is often a subjective judgment made by the banker about the prospective client. The
lender decides if the client is trustworthy with regard to repaying the loan and generating a return
on the investment. This is where the education and experience of the client comes into the
picture. Your references and background in your industry are considered. Small businesses take
out commercial bank loans for a variety of reasons. Loans can come from other sources as well.
Credit unions make loans to small businesses using accounts receivable or inventory as
collateral. Borrowing money is expensive for a company and raises its risk. In addition to the risk
borrowing money introduces another level of risk to your company. Regardless, debt is one of
the forms of financing small business operations.

Four Reasons to Take Out a Business Loan

1. Purchase Real Estate and Expand Operations
Banks are likely to loan money to existing firms that want to purchase real estate to expand their
operations. If a firm is expanding, then the bank knows the firm is successful and it wants it to
maintain its operation. Expansion generally only happens if the firm is making a profit and a
positive cash flow and has positive forecasting numbers for the future. That is a scenario that
makes a bank likely to approve a loan. Bank loans for real estate are usually in the form of a
mortgage. Long-term bank loans are usually 25-30 year term loans and real estate is normally
used as collateral.

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2. Purchase Equipment
Businesses have a couple of choices with regard to the acquisition of equipment. They can buy it
or they can lease it. There are good reasons to take out a loan to buy your equipment. You can
take a tax write-off the first year you earn the equipment and depreciate the rest of the equipment
over its economic life. You can also use the equipment for its life and sell it for a salvage value.
In order to know whether it is best to buy or lease equipment, you should do a cost-benefit
analysis before you make the decision. When a bank makes a loan for equipment, it is usually
intermediate term loans which are generally 10-15 year term loans.

3. Purchase Inventory
Banks sometimes make loans to small businesses to purchase inventory. Some small businesses
are seasonal in nature, particularly retail businesses. If a business makes most of its sales during
the holiday season, they want to purchase most of their inventory prior to the holiday season.
They may need a bank loan prior to the holiday season to purchase a large amount of inventory
to gear up for that time. Bank loans to purchase inventory are generally short-term in nature and
companies usually pay them off after the season is over with the proceeds of sales from their
seasonal sales.

4. Increase Working Capital

Working capital is the money you use to manage your day-to-day operations. Small businesses
sometimes need loans to meet their daily operations needs until their earning assets are sufficient
to cover their working capital needs. Banks sometimes loan short-term money to small
businesses to enable them to get off the ground and grow. As the business grows and their own
assets enable them to earn money, they can repay the working capital loan to the bank. Working
capital loans may have higher interest rates than, for example, real estate loans, since banks
consider them riskier.

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TOPIC 14

Business Planning

It is the systematic development of actions aimed at reaching business objectives. It involves

analyzing, evaluating and selecting opportunities.

Business Plan
It is a written document that describes the goals of the business and lists the steps that will be
taken to achieve these goals and objectives. It also tells why, how and when a firm will achieve
specific objectives. Other information in a business plan include:
1. Describe material: Where the business plan is written for outsiders (bankers), background
information should be provided, e.g., form of business organization, names of owners, CV of
key personnel etc.
2. Justification material: While the purpose of the business plan may be to plan the business
operations, it should include information that explains the reasons for selecting those
particular operations.

Purpose of a Business Plan

 Analyze an existing business or determine feasibility of starting a new one
 Make plans for the firm’s future
 Source finances from outsiders
 Prepare a detailed marketing and operational plan
 Develop a financial plan.

Elements of a Business Plan

The length and sequence of a business plan depends on the complexity of the business.
However, every plan contains six essential elements with each seeking to respond to a key
question:
Where? Business location determined by its purpose, competitors, management and
opportunities for success.
Why? Business will succeed, determined by identifying market and product advantages.
How? Describe the firms’ resources and its ability to carry out the plan.
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When? The business is successful indicated by measures of profits, sales, units produced,
number of employees etc.
Who? Define each person’s specific duties and responsibilities for accomplishing the
goals of the business.
What? Are costs indicated by the cash flow projections?

How to Prepare for Presentation

Step 1: Analyze the audience. Find out who will be attending your presentation. Get background
on each investor. Determine what other types of businesses they have invested in. Get a sense of
what impresses them.
Step 2: Get organized. Draw up an outline of the key points you want to hit upon. Arrange your
material in the same order as your business plan. Eliminate gaps and inconsistencies in the
outline.
Step 3: Prepare a script. Write your speech on 3-by-5-inch index cards, or type it using a large,
easy-to-read font. If you don't want to write a full speech, point out the main points instead.
Step 4: Keep your tone conversational. Give a quick overview of the business and then go into
the specifics of the business plan.
Step 5: Use visual aids during your presentation. The most effective presentations are
accompanied by 10 to 15 slides, overheads or handouts to punctuate your remarks. You can use
PowerPoint to prepare a computerized presentation as well. You may show a corporate video, but
don't let it run for more than 5 minutes.
Step 6: Review your presentation. Cut out lengthy sentences and check for flow and continuity.
Step 7: Practice. Read your script out loud alone, then present to a group of friends. Ask them to
critique your performance. Be sure to rehearse the audiovisual portion of your presentation as
well.

Business Plan Outline

 Great entrepreneurs have a clear vision of what they want to achieve.
 They can see further down the road than the average manager can see.
 They plot a route to get them where they want to go and then they go for it!

A business plan is a written document that delineates the proposed venture. It must illustrate

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current status, expected needs and project results of the new business.1 A business plan is
written for many reasons. When you are planning to start a business, its most important purpose
is to help you be sure the business is carefully planned and makes financial and operating sense.
The plan may also be used to convince investors, or other sources of financing to invest money
in your business. Therefore, it should be complete, organized and factual. The emphasis of the
business plan should be the implementation and success of the venture. Thus it is important to
translate the plan into action.2

I. Title Page

The title page is the first thing that a potential investor sees. Therefore, it should have
an impact.

Picture or visual of product or service

Company name
Company Logo
Date
Names, telephone numbers, email of key contacts
Statement of confidentiality and propriety.

II. Executive Summary

If the executive summary does not succeed, your business plan will never sell to the
investors. I recommend that you write the summary last so that you can summarize key
points easily. Remember this is the first thing that they will read about your venture. It
is primary function is to capture the investor’s attention. The summary should be no
longer than two pages. The shorter the better.

Description of the business concept and the business

The opportunity and strategy
The target market and projections
The competitive advantage
The economics, profitability and harvest potential
The team
The offering

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III. Mission Statement

A company's mission is its purpose, its reason for being. It is the organizational
equivalent of what an individual might refer to as "a calling" -- one's mission in life --
the grand purpose one is to fulfill. A mission statement is a high-level control device.
Mission statements should answer the following questions:

• What business are you in?

• Why are you in that business?
• Who are your customers?
• What are your products and services?
• What do these do for your customers?
• Who is your competition? Why?

Efforts to write mission statements without first clarifying and gaining consensuses
regarding the organization’s mission are bound to result in empty mission statements.
In trying times, an empty mission statement can also be dysfunctional. The work of
clarifying and developing consensus regarding the organization's mission is a task that
falls to the organization's leaders. However, they can't simply decide on their own and
then announce the mission to the rest of the organization. The mission must be
communicated, understood and accepted by all. Then, the mission can become pivotal in
the defining of organizational culture. That is, the mission statement. can serves as a
current and relevant reminder of who the organization is, what it’s about and where it
wants to go.

Regarding an organization’s vision, it is a 'future mission statement'. You ask the same
questions but with a future tense. The difference between the mission statement and the
vision represents a gap. The gap represents the issues that need to be addressed.
Whether the vision or mission statement is developed first is a matter of preference.
However, if the Mission Statement is not tied directly to the most inspiring aspect of the
Vision, it will lose intensity.

An organization's value or guiding principles serve as reminders of how the organization

chooses to conduct its business. In the broadest sense, it is the organization's code of
conduct. Adherence to such values is most likely to occur when the guiding values and
commitments make sense and are clearly communicated. The espoused values must be
integrated into the organization's culture. Finally, employees must be empowered to
make ethically sound decisions.

Mission statement
Guiding values
Goals and objectives

IV. Company Overview

While no legal form of organization is suited to each and every business, it is important
to identify the “best" form for your venture. Considerations include tax laws, liability
situations, availability of capital and the complexity of the business formation. The
strengths and weaknesses of each corporate form should be careful balanced against
those associated with other structures. Classic forms include sole proprietorships,
partnerships, limited partnerships and corporations. But you can also consider joint
ventures, strategic alliances, business trusts, cooperatives or franchises.

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 Legal Description & Business Form
Operational Structural (Production, function, matrix)

V. The Economics of the Business

It is important to identify the economic factors that will affect your product or service.
Consider things such as country or community growth, industry health, economic
trends, and rising or sinking prices, labor costs. Consider also any legal and
government factors that will affect your market. For example, government regulations
in health care have opened the doors to new ventures that manage these tasks for
organizations. The internet has created a whole new industry of web design and site
management to insure that your perspective is balanced; You should also identify those
factors that you cannot control and determine how they will affect your market.
Finally it is important to accredit your proposal with outside opinions. Expert opinions
provide evidence that your venture is commercially viable.

This section should also include the results of your environmental scan. This includes
an analysis of the business sector strengths and weaknesses as well as the short and
potential long term opportunities and threats of business venturing in this domain.

Economic trends
Legal and regulatory environment
Uncontrollable factors
SWOT analysis (Strengths, weaknesses, opportunities and threats)
Financial characteristics of industry
Commercial viability
Analysis

VI. Competitive Analysis

It is critical that you understand who you are competing against. Thorough market
research will help you identify those companies who offer competitive or related
products. In this section, identify those firms who offer complementary products in the
same or similar industries. Identify their competitive advantages and weaknesses.
Explain how competitive relationships can be turned into joint ventures, strategic
partnerships, buyouts, acquisitions, etc. in the future, if the need arises.

Bench marking results

List of key competitors
Comparison of strengths and weaknesses
Strategy relating to key competitors
Analysis

VII. Product

Here you explain what your product is, how it works or what service(s) you will provide. You
need to emphasize how your product is different from products already in the market. A
vivid description of the product is critical if you are to create value in the minds of investors
depending on the nature of the product, it is useful to provide the potential investors with a
sample, mock up or model of the product (in the appendix).

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 Current product
Development status
Research and development process
Difficulties and risks
Product improvements
Development and production costs
Production and delivery
Proprietary issues
Analysis

VIII Marketing Plan

You may have a great product, but if you do not market it well, it will not sell. Research
indicates that the marketing plan is the most crucial but often worst prepared component of
the business plan. A total of 98% of firms receiving venture capital funding have a clear,
concise market plan.3 Rather than describing a business sector, describe your specific
product market. For example, if you produce widgets, what markets are you competing in?
Clearly define your market strategy and market segment. Describe the nature of that
market. Support your conclusions with primary and secondary data. To accredit your
proposal, include insights from industry experts. Provide a profile of the typical customer
and then explain the marketing channels you will use to reach that customer base.

Describe your pricing strategy. How does the price relate to the cost of production? A useful
approach being used by companies such as Boeing Aerospace Company is called targeted
pricing. Here, the price is determined first and then the production process and costs are
retro-fitted into the pricing structure. Finally, you need to discuss production promotion
and distribution channels (e.g., wholesalers, cataloguers, mass merchant retailers,
consolidators) and why these sources make sense to use. Be sure to compare your proposed
distribution channels to those used by competitors.

Marketing philosophy
Market definition
Customer profile
Market size and trends including size and share
Market strategy (differentiation, cost, quality, mixed)
Pricing
Sales strategy
Distribution channels
Service and warranty policies
Advertising and promotion
Analysis

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VIII. Manufacturing and Operations Plan (If Applicable)

Enumerate and explain capital equipment, material and labor requirements. Are the above
items readily available? Do you have multiple supply sources? List inventory requirements,
quality and technical specifications, hazardous materials

Your choice of a location can make or break your business, so put careful thought and
analysis into your needs. Consider your type of business, traffic, zoning ordinances and
competitors. Do you require heavy traffic (either foot or car)? For some businesses, such as
retail stores, location is critical. For other businesses, you may be able to operate out of your
home but share secretarial services at a shared office facility. This option is particularly
suitable for professional services firms.

Strategy and plan

Advantages of location (zoning, tax laws, wage rates)
Facilities and improvements
Proximity to supplies
Access to transportation
Availability of labour
Total quality issues
Regulatory and legal concerns
Estimated manufacturing costs
Production schedule

X. Management Team

More than half of all new venture proposals are rejected because the management team is
not considered to have demonstrated leadership back and track record relevant to venture.
Therefore, it is important to describe your team accurately and complete. If your team lacks
expertise in a particular area (legal, marketing) describe who or how you fill the gap. You
must also describe the ownership structure and stock. In most cases, a few people will fill a
multitude of positions. A strong board of directors can go a long way to improving your
leadership image.

Organizational chart
Key management personnel (Brief biographical statements and pictures)
Resumes in appendix
Board of directors (Brief biographical statements and pictures)
Management compensation and ownership
Other investors
Other Employee Agreements (stock options, bonus plans)
Shareholders, rights and restrictions
Supportive professional advisors and services
Analysis

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XI. People Resources

Employee compensation costs can account for as high as 80% of a new venture's start up
costs. Given this, it is critical that new ventures hire the best people, compensate them
appropriately and motivate them to excellence. People management includes identifying
people requirements to get the job done, determining how you will recruit and select the
best candidates. It also entails specifying people polices and compensation (base pay and
equity) and benefits.

Staffing requirements
Staffing schedule
Job descriptions
People policies
Compensation and benefits
Training

XII. Critical Risks and Assumptions

Management guru Peter Drucker contends that if you do not have a case against a decision
you don't have a case supporting a decision. Given this, it is important to proactively
identify critical risks associated with the venture and develop a strategic plan of attack to
deal with these critical risk factors should they actually arise.

Delays
Equipment
Management experience
Public acceptance
Competition
Production planning
Alternative courses of action
Analysis

XIII. Capital Requirements

In this section, you describe the additional moneys you need to launch or expand your
business. You need to be specific about the amount of money you want. Be sure to leave
room to negotiate as you seldom get exactly what you request. You also need to indicate the
method by which you want to receive the capital and what you will use the capital to do.

Salesmanship is important here. You need to remind them why this venture is exciting and
why it will succeed. Lastly, you need to indicate what the payoff will be for potential
investors. Remember, a venture capitalist expects at least a 10 times return in 5-10 years. A
bank or government agency wants to see a specific payback schedule. Include a statement
such as:

We can provide an exit for this (loan, investment) within [x] years by [a dividend of excess
profits, recapitalizations, sale of company, or public offering].

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 Moneys needed
Method of funding requested
Why it's needed
Exit value

XIV Financial Plan

The financial plan provides a picture of where your venture stands today and where would it
to be in the future. Financial information is critical to venture funding. Minimally, your
business plan should include a balance sheet which shows the worth of the business. Current
assets include anything that can be converted to cash within a year and fixed assets entail
such things as buildings and equipment. Liabilities are divided into current liabilities (short-
term bills such as inventory, salaries, etc) and long-term debt (such as mortgage, etc). The
difference between the assets and liabilities equals net worth. Statements help you track and
analyze financial information. A second essential element is a profit and loss statement. Any
investor wants to know where the money has gone and where you expect the money to go in
the future. You should also include cash flow projections which inform potential investors
where the money is going. You can develop these items in Excel or purchase business
planning software.

Even when you understand how they work, financial statements and ratios can be complex.
You need to make this information easy to digest. Graphic representations (pie charts,
scatter diagrams, histograms) are extremely viable method of communicating information.

Assumptions
Actual income statement and balance sheets
Pro forma income statement
Pro forma balance sheet
Pro forma cash flow analysis
Break even chart and calculations
Return on investment
Cost control
Cash flow rejections
Capital requirements
Conclusion and highlights

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XV. Proposed Course of Action

When you are planning to start a business, it is very important to be sure the business is
carefully planned and makes financial and operating sense. In order to do so, it is important
to develop a game plan. In this section, you should delineate short and long term goals and
objectives. Additionally you should identify important milestones.

The final components relates to the evaluation of your business venture. Here it is important
to identify the metrics against which you will compare your actual results after the business
has been started. Regularly comparing your planned and actual operations will allow you to
identify problems before they become unmanageable. Regular comparison and corrective
actions will help keep your business on track.

To determine business success, key indictors should be included. Common financial ratios
include:
• Liquidity ratios - These measure the amount of cash available to cover expenses.
• Profitability ratios -These ratios measure profit margin, return on assets, return on
investment and return on sales to help control income.
• Efficiency ratios - These help you keep track of inventory turnover return on assets,
and credit sales. They measure how well you are conducting your business.

While organizations have long focused solely on financial measures, current

conceptualizations of business evaluation contend that a family of measures should be
employed. The attached table delineates some important categorizes of metrics.

Goals
Timetable
Deliverables
Metrics to measure success

XVI. Appendices

Business plans like any other written document can be user friendly or a nightmare for the
reader. Your job is to make it easy for the investor to get a complete snapshot of your
venture. Exhibits give the potential investor a better understanding of your business. By
including data in appendices, the reader can chose to examine or not examine the documents.
If you use a loose leaf to present your materials, you can use pocketed folders to contain the
supplements. These allow the reader to extract the materials easily.

Product description
Sales literature
Business cards
Sales sheets
Cost sheets
Market research reports
Resumes of officers or directors
Advertising campaigns (proposed or past)
Photographs of facilities

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Exercise
What is the importance of a business plan?
Why don’t many business people develop business plans?
What is the role of break-even point in a business plan?
Who is the plan written for?
Briefly discuss the components of a business plan.

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