Entrepreneurship Module 1 - Copy

Entrepreneurship module

ENTREPRENEURSHIP ENTREPRENEURSHIP MODULE (ENT 205)

Frank Wilbert

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Frank Wilbert

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Lecture 1

SMES are considered the economic units and catalyst for industrialisation and rural transformation. It is the major contributor to employment in developing countries and have potential for job creation and poverty povert y alleviation. alle viation. Many programmes have been put in place to support SMEs (direct and indirect) but have not yielded the desired result. Prof. Prince Izedonmi (2004) Alexander Scott= "somewhere, deep in the jungle where a few dare venture, there lives a wild animal called success. It is rare and much sought after, but only a few ever risk tracking it down to capture it. The hunt is long, hard and risky. Success is a clever animal, rarely exposing itself; always quick to flee should it sense danger of being caught, success is so uncommon, so unique and so challenging. Success is for us. Success means winning and is the goal of life. Who does not want to be successful? Who wants to be inferior, poor or wants to be pushed around? Once on its trail, you cannot turn back. Have faith in yourself. Faith can move mountains. Do not engage in wishful thinking because it will remain just that. You have to believe you can succeed and you can get whatever you want- a good job, a good wife/husband you want, the house you cherish, and the God you love. Live it and it becomes real." Milton " the mind is its own place and in itself can make a heaven of hell or a hell of heaven" Emerson: " great men are those whose see that thoughts rule the world." Shakespeare "there is nothing either good or bad except that thinking makes it so . Prophet David "as one thinketh in the heart, so is he." All big businesses of today started small at some stage. Look at you heroes of today- Phillip Chiyangwa, Strive Masiiwa, etc, they all started small and grew their businesses to what they are today. As students to goal in life is to get the best job in company x or b but there other career openings in life. One area that has been seriously under subscribed is entrepreneurship rather than being an employee. Those who are rich today did not get there by being employees but through going into business. Not only are small businesses necessary there actually playing a pivotal role in economic development. Joseph Nebesky put it well when he stated, "small businesses are the backbone of the American economy, and they create two of every three jobs, produce 40% of the Gross National Product Prod uct and invent more than half the nation's technological t echnological innovatio ns. In the last la st ten years small businesses created 63.6 of all new American jobs." Frank Wilbert

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Give the state of our economy and the scarcity of jobs, starting new businesses is interesting challenging and rewarding. The government has also realised the noble objectives of supporting small businesses and ministries and support schemes have been put in place to support small business activities. This module becomes one of the many voices in support of small business development and the nurturing of entrepreneurs. However learning about small businesses is no guarantee that the small businesses will succeed. In fact the majority of success businesses have experienced business failure at one stage or the other. Strive Masiyiwa did not do very well with Retrofit but Econet is doing very well. So fail should not act as a barrier to trying your hand at entrepreneurship but should act as an incentive.

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Bernard Wysocki (Wall Street Journal) " Small businesses fail in prodigious numbers, but the small business owner is clearly a winner... a folk hero, a source of jobs and growth, a role model, a cultural icon." If you think otherwise take solace from the wise words of David Starr Jordan " there is real excellence in all this world which can be separated from right living". You there have to believe yourself and everything will be okay. You can be an entrepreneur and no one can stop you if you believe in yourself. Remember than rich people are in the majority of cases those who start businesses. I am therefore urging to serious consider this option. In John Lafalce's words "Entrepreneurs are economic visionaries whose efforts are consistently helping fuel our nation's economic growth. They are the pied pipers of tomorrow's corporations, the leaders who will pioneer new products and jobs, create exports. These creative men and women need to know that they are crucial to the economic vitality of this economy." To some up this line of thinking it will most appropriate to not Proverbs 13 v 14 " the teachings of the wise are a fountain of life, they will help you escape when your life is in danger." Various people have written about the dynamic role of small to medium sized businesses (SMEs) in the economies of developing countries. These enterprises have been seen as the key to rapid industrial development and other developmental goals of these countries can be realised. Zimbabwe is the same boat with other developing countries and is experiencing severe economic crises arising from both internal and external factors. (Ask students to discuss these and how they affect the economy.) Unemployment is at its highest with estimates ranging from 60% to 80%. The small business sector can be a source of employment and income. The numbers of people running small businesses are not known but some figures being bandied by the Ministry of SMEs is 2 million people being engaged in this sector. Government has realised the role of small businesses and is taking steps to provide for some of the needs of small businesses including setting up of ministries and providing funds and other facilities.

What is a small business?

Andy Bangs Jnr" A small business is where you can bring your dogs to work." There are many problems associated with coming up with a definition of small businesses. Small Frank Wilbert

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business is a term used to describe a certain group of enterprises and how they are run. These businesses have certain characteristics and management style, which differ from those of large organisations. • Small business characteristics differ from industry to indus try and the people who run them.

The sector includes manufacturing businesses, professional managers, and husband and wife teams. It is therefore an easy task to come up with a single definition for small businesses. • People who run small businesses have often been described as being innovative, creative

and risk hungry. Yes small businesses have elements of innovation but are not limited to innovative businesses only but will include all types of business activities pursed by small businesspeople. Most businesses provide the small services or products that are already in existence or are being provided by other businesspeople. Examples will include your vendors, garages, hairdressers, carpenters to mention but a few.

Why define small businesses?

It is necessary to determine when a business can be classified as small. However as previously alluded to, the way a business is measured is subject for debate. It is not possible to provide a universal or national or international definition for small businesses. The need for a definition includes the following: • There is need for quantitative definition when it is necessary to exclude larger businesses

from preferential treatment, which is designed to help small businesses. This preferential treatment can be in the form of assistance through subsidies. It becomes necessary to lay down rules as to which enterprises are eligible for such assistance. • It might be necessary to offer training/consultancy or any other form of assistance and there

is need to define businesses for which such for assistance is designed for. • There is also need to use qualitative measures, which are subjective judgements usually,

related to the management style and methods of operation. For example centralised decisionmaking, labour intensive etc.

There are many methods, which can be used to measure the size of the business, but our study will focus on a few quantitative measures often used and these are: Frank Wilbert

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• Employee numbers- is the most used measure in most industrialised countries and has

found application in developing countries. It is simple to use, which is its major attraction. However this measure has serious problems. The first one is that the actual number of employees is not known for most small businesses. In the majority of cases we depend on family labour, which in the majority of cases is not paid. Usually this labour is not stated in the employee numbers and figures provided tend to be understated for the benefit of the business. In addition it necessary to use seasonal labour and for labour returns these are not included in computing the number of employees at the organisation. There is therefore a tendency to understate the number of employees in the organisation. Most small businesses are created to generate employment opportunities. If measure is used most units generating employee will be excluded yet it is these growing organisations which need the most assistance as their resources will be stretched.

• The value of capital- measure exclude enterprises employing more than a certain amount

of the scarce factor i.e. capital. The more capital employed the greater chances are of disqualification. However there are problems associated with using capital as an evaluation base. In the first instance it is difficult to put value to the way capital is employed in a business. Some figures may be unknown to a business owner and sometimes businesspeople deliberately conceal certain figures or reduce their value. Small businesses are notorious for failure to distinguish between personal and business property. This makes the measurement of capital extremely difficult.

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The businesses use different bases to measure stocks or WIP. Capital equipment also possess problems e.g. machinery might be very o ld or may be home made. Buildings might be used as dwelling places as well as workshops. In most cases valuation tends to be arbitrary.

• Other measures

Sales turnover is also used to define a small business. This refers to the scale of trading of a business. This can be misleading if different businesses are used. What might be small in one business might actually be big in another business. This is made more difficult by seasonal variations.

• Quantitative measures - various measures are used and vary from country to country.

Definitions can include the management style and the methods of operation. Small businesses are those whose management is in the hands of one or two people who are responsible for the major decisions. However in Tanzania a business is considered small when it is within the reach of the people.

Definitions

• According to the Ministry of Industry and International Trade (2000) To qualify as a small

and medium sized business, the employment criteria must be met as well as one of the other two criteria: Small scale enterprise Sector

No. Of People Asset base

Capital Base Employed

Manufacturing < 75 < $6 million < $5 million Other < 50 <$3 million <$2 million

• Bolton Committee (1971) made an attempt to define small businesses and came up with

economic and statistical definitions. The economic definitions are: Frank Wilbert

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• It must have a relative share of their market place. • It is managed by owners in a personalised way, and not through the medium of a formalised

management structure.

• It is independent, in the sense that it is not a part of a large enterprise. This definition seeks

to formulate ways of defining small businesses. The statistical definitions sought to separate small businesses on the following criteria:

• Quantifying the size of the smal l firm and its contribution to GDP, employment, exports etc. • Comparing the extent to which the small firms sector's economic contribution has changed

over time. • Applying the statistical definition in a cross -country comparison of the small firm's

economic contribution.

Eventually it was discovered than it was difficult to establish criteria, which could be applicable in all situations, and the Bolton Committee settled on the following: Sector Definition

Manufacturing 200 employees or less. Construction 25 employees or less. Mining and quarrying 25 employees or less. Retailing Turnover # 50 000 or less. Miscellaneous Turnover #50 000 or less. Services Turnover #50 000 or less. Motor trade Turnover #100 000 or less. Wholesale Turnover #100 000 or less. Road transport 5 vehicles or less.

• World Bank (Grindle et al) " A small business is one with fixed assets excluding land of

US$ 250 000 and less than or equal to 25 permanent employees." • USAID (1990's) A small business has less than 50 employees and at least half the output is

sold. Frank Wilbert

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• UNIDO (Developing countries) Large - firms with 100 + employees Medium - firms with

20-29 workers. Small - firms with 5-19 employees.

According to D. Stokes- Small business management is different in several respects to the management of larger organisations because of social structures and relationships, and because of the resources available. There are no specialist managers to turn to for advice and in a way the small businessperson does everything that needs doing in the business. All small businesses share these experiences. From our discussion so far there seems to be varied interest in the establishment of small businesses to shore up unemployment and economic development. Theories have therefore been put forward to explain the sudden growth in small businesses. There are basically three frames of reference to consider when examining small businesses viz: • The free market model. • The Marxian model. • The Green or Ecological Model.

Small Business and the Free Economy Theory

The free market ideology dominated Government thinking about government thinking especially in Britain when the Thatcher Government drove it. It is noted

for having pushed the agenda for small businesses to prominence. Most government that were opening up their economies have borrowed a lot from this theory. " The theory envisages a society constituted through the act of exchanging goods, services and individual capacities," (D Goss). There is widespread competition between buyers and between sellers in line with the supply and demand - which helps determine prices at which commodities will be exchanged. Goods in demand sell better, sellers will be able to cover their costs and make profit. Sellers whose products do not sell will be forced to reduce prices or go out of business due to lack of sales.

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Small businesses play a crucial role in the economy as follows: • Small businesses represent the bulk of the stock of competing supplies jostling to fulfil

customer demand. They help ensure productive efficiency and maximum utility. • Small businesses are avenues through which individuals with the ability, energy and

ambition can apply their skills in the market place to the benefit of themselves and society.

Samuel Smile in Anthony (1977) states that the free market provides an opportunity for even the humblest member of society, if they are prepared to help themselves, to prosper and, by so doing to serve the greater good. The above discussion forms the origins of the view that that the human spirit responds best to insecurity, uncertainty and pressure of circumstances. Such conditions foster entrepreneurial action and stimulate market activity as individuals attempt, or are driven to overcome them (Coyne and Binks 1983). Government should not be seen to inhibit the growth of small businesses by encouraging those with the ability to pursue business careers.

Small businesses and the Marxian analysis

Marxists considered small businesses as an extension of the capitalist society. Marxists theorists never gave small businesses a chance of survival as they were of the opinion that they will eventually be wiped out by centralisation and concentration of capital. This would result in the swallowing up of small businesses by monopolies. The result will be the polarisation of society into bourgeoisie (very rich people) and the proletariat (impoverished and exploited workers). This meant that small businesses would die a natural death. The continued exploitation of the proletariat will forment class revolution. The theory failed to explain the continued presence of small businesses and their increasing presence in social and political discourse. Therefore the socialists sought a more convincing explanation for the continued existence of small businesses. They contended that small businesses were a subtler form of economic domination by large firms and was thus another form of exploitation of labour. They believe that small businesses depend on large organisations which allow them to thrive when it more profitable to operate in that manner. Large firms subcontract their less profitable activities to smaller businesses in difficult times. These small businesses can operate on a lower cost base because of their lack of unionisation, and poorer terms and Frank Wilbert

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conditions of employment. Big businesses use small businesses as a secondary sector to cushion themselves against market fluctuations. These small businesses survive because they can exploit its unorganised, non unionise labour with lower pay, poorer working conditions and safety records.

The Green Movement

This theory is premised in environmental consciousness. The environment is being depleted at an alarming rate and there is need for redress if the environment is to be saved. Small businesses are seen as the solution to moral and environmental crises within the advanced industrialised societies. Basic assumption is that industrialisation has created a state of mind indifferent and even hostile, to any other goal than short-term material gain. Materialism has resulted in the indiscriminate exploitation of the environment using large-scale techniques to violate the finite resources and the freedom, creativity and spontaneity of individuals and society (Goss). Small businesses are the anti-thesis of such developments. It possesses an essential quality that in it is

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humane, non violent and benign, captured in the slogan " Small is beautiful" representing the feeling that quality of life must come before profits and the materialistic motives of big businesses. They advocate for a return to more order. They have put small businesses to the forefront of their ideology. Small businesses are seen as more democratic and responsive to society than large remote businesses following strategies of high growth, which take little account of their effects either on the world environment or local communities.

Why small businesses?

They are several reasons proffered for the choice of small businesses as the way forward over and above the three theories discussed above. a. Large scale industry failures are behind the move towards small businesses because of the following reasons: • They have not been an engine of growth and provider of employment. In fact there have

been cases of focussing on core businesses and downsizing in order to cope with a hostile environment. • Large businesses are already beneficiaries of enormous support through general trade,

finance, tax policies and other direct subsidies. These have not achieved the desired goals and as a result nothing more can be done to make big businesses grow. Most are already downsizing.

b. Small businesses also offer reasons for pursuing that route and the reasons are as follows: • They mobilise funds which otherwise would have been idle. • Have been re cognised as he seedbed for indigenous entrepreneurship. • Are labour intensive, employing more labour per unit of capital invested than large

enterprises. • Promote indigenous technological know how.

8 • Use mainly local resources, thus have less fore ign currency requirements. • Cater for the needs of the poor. • Adapt easily to the requirements of customer. Frank Wilbert

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c. Public opinion regarding small businesses has shifted. Small businesses had previously been written off as outdated forms of economic activities. In 1980s it was hailed as the new saviour of ailing western economies and with this focus people perceptions to small businesses have changed. This is more so in the volatile economic situation prevailing in any economic set up. People now find it easier to negotiate for prices, models and payment terms. Big businesses only offer you what is available at their terms.

Why governments supported big businesses

There are several factors, which work for big businesses at the detriment of small businesses, and these include the following:

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• Economies of scale help lower costs for manufacturers big enough to use mass production

techniques. • New products were transforming buying habits of society but the research and development

costs for new products are very high and affordable only to large companies with huge profits. • Protectionists trade barriers fell away as market places became increasingly global to the

advantage of big businesses with international marketing and distribution resources. • On the basis of the above reasons policy markers concentrated their attention on the welfare

of big businesses that were considered to be the solution to economic problems and the way forward for national success (economic). This led to a spate of mergers as small businesses were seen as not having a role to play in national development. • Literature, which was produced, also focussed on how to manage and grow big businesses

and so were the teaching institutions of high learning. Small businesses were considered amateurish, with backward technologies and limited financial resource. 1970s and 1980s a shift with literature being produced on how to run small businesses. Politicians in various countries enacted legislation to promote the interest of small businesses.

The first major in road into formulating policy for small businesses was made in the 1970s. 1971 saw the publication of the Bolton Report, which can political perception of small businesses. It sought to establish the importance of small businesses and established eight important roles of small businesses, namely: • A productive outlet for small enterprising and independent individuals (some of whom may

be frustrated under achievers in a larger, more controlled environment).

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The most efficient form of business organisation in some industries or markets where the optimum size of the production unit or sales outlet is small. Specialist suppliers or sub-contractors to larger companies. • Contributors to the variety of products and services made avail able to the customer in

specialised markets, too small for larger companies to consider worthwhile. • Competition to monopolistic tendencies of larger companies. • Innovators of new products, services and processes. • The seedbed from which tomorrow's l arger companies will grow, providing entry point for

entrepreneurial talent development that will become the industrial captains of the future. • The small firms can be extremely efficient, having the advantage of the commitment of

their owner-managers, plus the ability in certain circumstances to better exploit business opportunities than their larger brothers.

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Lecture 2

The fact that small business are born each day it is no guarantee that all will be successful business. Some are still born- they never see the light of day. Others die after one year will the majority die before their 5th anniversary. Very small businesses are most prone to fail than large ones due a number of reasons. Also very young businesses are likely to fail than older ones. Businesses with less than 10 employees are likely to die than those with over than 100 employees. ❖

When to set up

Small businesses are vulnerable in their early years. Best chance to set up a business is when the business environment is most conducive. The following were said to be favourable in the setting up on new businesses: ❖

Unemployment- when there is lack of alternative employment people are pulled into

starting small businesses or into self employment. When unemployment is high often linked with higher rates of unemployment. ❖

Govt policy- govts are introducing measure to encourage the establishment of small

businesses. They offer incentives or amend regulations to suit the small business person best time to start a business. ❖

Profitability more people attracted to small businesses, when the income from self-

employment is higher. ❖ interest

rates- when real interest rates are high new owner managers find it more difficult

to obtain finance and are less willing to borrow. ❖ Personal

savings and assets- personal savings or borrowings guaranteed by most common

form of personal guarantee, are high, favour business start ups. ❖

Consumer expenditure- during times of growing consumer expenditure, more

opportunities for new ventures appear in their sector. ❖ Structural

change in the economy favour the small business such as ESAP, 75% local

content, land reform.

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Factors may induce more new business start ups but do not "represent all positive forces in the business environment which are likely to help the new owner manager. Some are potentially negative factors which can push people into new ventures the wrong reasons: ❖ Potential

negative factors - unemployment and govt initiatives to reduce unemployment,

may encourage many people into employment. But no guarantee of a friendly business environment. High unemployment can result in reduced demand or potential customer expenditure with a new business. ❖ Potential

positive factors- when real interest rates are low and demand is growing, period

likely to be good to start new business, moreso if demand is not too dependent on a healthy economy. Times of structural adjustment are also positive for starting businesses.

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Where to set up

There are areas where a new business can be set with high chances of success in a geographic area ❖ Population

growth- high population growth or high levels of immigration into an area

❖ Unemployment❖ Wealth-

high levels of local unemployment

high income areas with more disposable income to spend esp. on services

❖ Business

size- large numbers of small firms already existing in an area may indicate low

barriers to entry into the predominant business a local small business culture may also encourage more of the workforce into their own ventures by example and familiarity. ❖ Housing

- high levels of owner occupancy and houses prices in a region, give access to

capital. ❖ Local

government expenditure- higher levels of spending by local authorities create more

demand in the region (MSU) ❖ Government

policy- small business incentives and development schemes are target at

regions eg growth points, EPZ (Beitbridge)

Most of these factors are positive save for unemployment. Business likely to benefit from a local environment more than a macro environment. Select a geographical area which exhibits as many as possible of the positive factors listed above. Mny business ignore such advice and locate businesses where they live and not where environmental factors are most favourable.

Which sector to choose

Starting small businesses in some sectors are more difficult than others. Starting a new business entails confronting a series ofissues, or potential problems and these depend on the industry one intends to enter. In every sector there are barriersto entry for small businesses. These help determine the attractiveness of a specific sector to a prospective businessperson. These can be presented diagrammatically as follows: Capital requirements Economies of scale Product Frank Wilbert

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differentiation Switching costs Access to distribution channels Other cost advantages Govt policy

Profitability in some industries is dependent on high levels of output. Helps reduce cost from high levels of output in an industry. Small businesses will find it difficult to compete. Increasing existence of economies of scale in mass markets Economies of scale

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would lead to the decline of smaller businesses becoz large firms enjoying economies of scale can use this cost advantage in a number of ways. Large companies can force competitors to operate on low margins which can make it an unattractive market to new entrants. If prices are kept high, additional profit enjoyed by large suppliers can be invested in marketing or R&D for new products and again reduce the competitiveness of new entrants. Economies of scale put barriers to entry by small businesses. Existence of economies of scale does not mean that there are no opportunities for smaller businesses. Look at the building industries - there are many big companies supplying window frames and door frames. But in tandem there are many small businesses supplying these products at a profit. Alternatively small businesses can provide components to big industries i.e. they can specialise in something/areas where they can become more efficient than the bigger companies and thus will be subcontracted by the bigger businesses. Economies of scale also results in customisation of products i.e. there is little differentiation of products/services. Standardisation of products leave niche markets open to people who dislike uniform treatment e.g. personalised clothing by small tailoring businesses. Etc Economies of scale achieved throu existing technology making them less flexible to change to new technology. Big changes normally initiated by small firms rather than existing businesses. Zimglass still locked in bottle packaging when market has moved to plastic containers which are cheaper.

Product differentiation

Companies build customer loyalty over time (to prove reliability of products or services) throu advertising, packaging or branding. (Nandoos, Geisha,Cascade etc) differentiation takes time to prove reliability of products and services) and money (for advertising, packaging, signage,and branding) this represents a barrier to entry for any new entrant. Direct competition with the big guys can be detrimental and sometimes not feasible with established brands- Royal Crown v coke, Hunters vs National Breweries. However there Once a customer identify with a product it becomes difficult for another to enter that market segment. Small companies not able to compete with large companies with branded products and resources.

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However this should not deter small exploiting opportunities in a particular sector. Actually small businesses can build loyalties, which are difficult to break except via its acquisition. There are always opportunities if small businesspeople look hard enough. Branded products are usually expensively priced small businesses might provide a cheaper substitute. Small firms can build own loyalties, which differentiate them sufficiently to deter new competition. People in Gweru are convinced that for that special meal one has to go to the Dutch Oven. There is so much allegiance to the Dutch Oven by families/lovers etc. also there are many small newspapers that do well against established tittles because they

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cover local news. Others have branched into farming and sport magazine with significant success.

Capital requirement

Cost involved can be a barrier to entry into certain markets. High start up investments block small businesses from involvement esp. those in manufacturing. Use second hand equipment and plant can circumvent the barrier. When buyer switches from one supplier to another, there might be switching costs

Switching costs

Buyers who switch from one company's products to another may incur switching costs e.g. retraining of staff to use new technology. The potential suppliers has to offer more than just marginal benefits to persuade a buyer to change, e.g. giving free machinery to retain customers thereby creating barriers to any competitors. Access to distribution channels

Small businesses need established channels of distribution. This is not an easy task as new products will co mplete with existing products e.g. when a small seeks shelf space from major retailers for its products. Other cost advantages

Learning curve- product improvements come with experience. You reduce wastage, as you get more experienced. Most new business will expect higher production costs per unit than established ones. Location- is a crucial marketing factor. Existing firms often have good locations which will be expensive for new entrants to equal. Such sites can co mmand high rentals. Government policy

Govt control certain industries thereby creating total or partial barriers to entry, e.g. licensing to start a bank, radio station, telephone networks and newspapers. Licensing increases the cost of start or running businesses. Most small businesses complain that most regulations favour larger firms. Services industries have low entry barriers than manufacturing industries. Others are: ❖ Construction Frank Wilbert

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❖ Retail ❖ Distribution ❖ Hotel

and catering

❖ Transport

and communication

Economies of scale

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Lecture 3

The realization has dawned on most people that small businesses have play in economic development and ending unemployment. According to Neck (1977) " for the greater part of the poverty group, the small business is the only activity in which they can usefully hope to be engaged, particularly in the immediate future. Studies have also shown than that the small business sector has played a pivotal role in the development of Japan, Taiwan and Hong Kong, and they continue to play in the development of these economies. According to Young 1987 and Gills et al "It is hoped that small enterprises would generate more employment, permit greater decentralization, promote income equalization and mobilization. Most small businesses face many problems most, which are different from those of big corporations. It is admitted that government has focused to big businesses especially through the establishment of the industrial policy, export promotion, protection from foreign competition, foreign currency allocation. Government actions are seen as a vehicle to help or at least stop hindering the development of successful small businesses. Government has sought ways a leading role in the promotion and assistance towards small businesses. However assistance from government to small businesses has in the majority of cases been ad hoc. Most of these policies have emerged as by products of other policies such as those, which promote industrial efficiency, training, technology etc. There is no specific legislation for small businesses in Zimbabwe. When the country tried to redistribute land it was hamstrung by lack of suitable legislation. However most of the policy has been statements made by government officials through particularly the Ministry of Youth Development, Gender and Employment Creation, the Ministry of Small and Medium Sized Enterprises and the Ministry of Finance. The enactment of the law allowed government to move forward and redistribute land. The support for small businesses and the operating framework should also be legislated if we are serious about making small businesses play a leading role. This calls for us to draw lessons from other nations that are leaders in the development of small businesses. UK

The UK was the leader in realizing the potential of small businesses and sought to create an environment in which small businesses could thrive. To this end they tried to eliminate all forms of discrimination against small businesses. Wherever efforts were made to support big Frank Wilbert

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businesses, the end result was discrimination against small businesses. These had to be reversed. The thinking then was that businesses will flourish unaided hence the following policies: ■ Providing an environment in which small businesses could strive, free from interference of

any kind

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■ Removing discriminatory impact of existing legislation In the 190s the British Government

adopted a more supportive role and sought to encourage the birth of small businesses and to do so directly. Incentives and packages were put in place as an element of the policy. Various assistance packages were put in place to finance the activities of small businesses directly through the setting up of financial aid packages.

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USSR

In 1995 the number of people following the break up of the Soviet Union in the small businesses sector was estimated at 10 million people. peo ple. Small businesses bu sinesses became beca me the answer an swer in the face of failing large businesses. They had vested with a lot potential, high paying, efficient and profitable sector of the economy. However they continued to play a very small role in the overall economy, in a country that was dominated by state companies. Reforms were progressing slowly in the mainstream economy, there was need to boost the operations of small businesses to create efficiencies in the face of collapsing state companies. Government approved a Federal programme of state support for SMEs and then drafted laws on SMEs, which targeted at simplifying taxation and accounting for small firms to encourage the development of SMEs. It also provided tax exemptions for newly established for SMEs. For the 1st 2 years with gradual increases in taxation from 3-5 years. Such assistance was given to SMEs in priority areas (agricultural products, consumer products, medical supplies and construction). Furthermore funding was provided for the establishment of SMEs to develop competition, as well as a fund for the promotion of science and technology. System of recording new SMEs was put in place so that registered SMEs will benefit from the scheme. A track record can be kept of the number of SMEs formed and continuing in operation. Zimbabwe's policy has not been so pronounced in fact no legislation has been put in place to support small businesses. Everything has been so ad hoc and short term in nature. Most of the policy statements stat ements have been made at public gatherings gat herings making them t hem difficult to implement or pursue. This has left many a small businessperson businessperso n confused and government officials not knowing what is expected of them. Consequently people are shuttled from one ministry to another. Presently the Ministry of SMEs is trying to push a policy document through and hopefully policy could be in place before the end of the year. This document has been in circulation for a long time since 2000 and it is frustrating to say the least that we have not developed SMEs as should be the case given the pivotal role them play in an economy. The assistance being given is mainly financial assistance, most of which does not have a clear disbursement procedure in place. In cases such monies have remained idle or have benefited the least deserving cases. (Refer new farmers and seed inputs, which find their way to the street markets.) Can we be wrong if we look at the thinking of some Government Minister Frank Wilbert

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who proclaimed that no economy has flourished on the back of SMEs (Simba Makoni)? In addition funding provided does not go towards boosting specific sectors, which should drive the economy. We have seen that targeted funding in cotton production has resulted in small producers providing close to 80% of total cotton production. If it has worked in cotton production why don't we draw lessons to the benefit of other sectors particularly SMEs.

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Zimbabwe's Policy Document Goal: the main goal of SMEs policy is to generate sustainable jobs, reduce poverty, stimulate

growth and generate foreign currency earnings thereby contributing to the well being of all Zimbabweans. The main aim is to create an enabling environment so as to double the number of small businesses by the year 2005. Objective: The main objective of this policy is to clearly define how the government, private

sector and other stakeholders can encourage and create an enabling environment for SMEs to grow, and to enhance the contribution of this sector to national development. The Policy will:

■ Coordinate the different policies and programmes at national level. ■ Set priorities and the appropriate allocation of limited public resources. ■ Rationalise support programmes ■ Coordinate resource mobilisation strategies.

■ Delegate tasks, responsibilities and accountability. Strategies

1. Create an enabling legal an enabling legal and regulatory environment to include: ■ Simplify complex regs ■ Improve access to info ■ Centralising and streamlining procedures in particular business formation, tax requirements ■ Simplified licensing procedures and reporting requirements.

2. Investment promotion ■ Tax relief ■ Rebates and discounts ■ Export promotion

3. Access to finance ■ Credit finance ■ Establishment of secondary market

4. Market penetration Frank Wilbert

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■ Market intelligence ■ International marketing ■ Marketing and distribution networks ■ Quality assurance

5. Technology &infrastructure support and skills development ■ Technology information ■ Business incubators ■ National productivity centre ■ Electronic communication

6. Entrepreneurial management and skills development ■ Training ■ Mentorship by private sector

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■ Provide guidelines to help SMEs comply regulations in setting up businesses.

Policy Framework

In coming up with policy the thrust should aim at addressing the following crucial issues: ■ How can govt help SMEs by ceasing to hinder them as well as trying to help them? ■ How do urban planning regulations make life difficult for SMEs and are the benefits

outweighed by the costs? ■ Do employees of small businesses benefit from minimum wage regulations and attempts to

improve working conditions? ■ What effects do business licences have on licensees, those who cannot obtain them and the

general public? ■ What impact of regulations affecting small enterprises have on their relationship with the

police? ■ Are financial incentives, which necessarily involve complicated claims procedures, an

effective way of helping small businesses or do they actually injure them? ■ What effect do highly concentrated assistance programmes which reach only a small

minority of small businesses, have on the remainder who do not benefit from them?

The following have been known to hinder the proliferation of small businesses: ■ An incomplete legislative basis for SMEs activity ■ The ill considered, unthought nature of the present system of taxing business people ■ The difficulty and high costs of registering businesses for registering business services. ■ The abundance of supervisory bodies and the parallelism and reduplication of their

functions ■ The actions of local executive bodies, at times hindering the development of businesses.

According to Harper: the obvious fact that the skills and initiative of the individual entrepreneur are by far the most important determinants of success or failure. Some businesses will succeed however difficult the circumstances in which they have to operate, while others will fail in spite of a whole array have heavily subsided and well integrated Frank Wilbert

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programmes of assistance. He concludes that an effective entrepreneur observes his environment and organises his resources to take advantage of it. No amount of specific small business co mpensation can compensate for lack of effective economic management. The key role of the government it has been argued is to create a level playing field for business to thrive. If the economy is well, a lot of opportunities arise for the establishment of businesses and their growth. Regional incentives or other incentives, industrial estates and similar devices can make a contribution but these are effective in directing the location and nature of large businesses. Most small businesses will start and develop ventures outside the framework of government incentives. Govt to create an appropriate economic environment, successful small businesses will make their contributions. This is so because of government restrictions. Small businesses are required to observe a number of regulations, which increase their costs. There is therefore an

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incentive to operate illegally and most businesses use that channel especially to avoid taxation, which is believed to be very high. Taxation also provides for small businesses to remain small as growing a business attracts attention and you will be penalised through taxation for doing well. It is cheaper and more profitable to operate illegally. Any expenditure increases the costs of going business and might render profitable business unprofitable and in case the business being wound up. With regard to incentives Harper observed the following: ■ Government sponsored assistance programmes are often ineffective and can even damage

the interests of the businesses they intend to serve. Young also confirms this position by stating that economic policy biases often constrain small scale and informal sector enterprises and may offset the positive effects of direct credit or technical support to them. Governments often come up with a cocktail of policies including monetary, fiscal, labour, trade, price and regulatory policies. These have both positive and negative effects. They often contradict each other in the absence of coordination. Biases usually favour big businesses and undercut efficient growth. Te benefits to small businesses are often limited since the businesses have to meet set criteria to qualify for assistance. Attempts to channel resources to companies meeting set criteria is often undermined by political influence and inefficient squandering of resources. Homeboys often benefit leaving the more deserving cases. In fact government intervention can be counterproductive than making a positive contribution to the development of SMEs. Based on the needs of small business policy positions can be formulated to address the concerns of small businesses. Small entrepreneurs have identified credit as their primary need. There is need for financial tactics for SMEs. Lending can be character based. There is also need to streamline administrative Based on the needs of small business policy positions can be formulated to address the concerns of small businesses. Small entrepreneurs have identified credit as their primary need. There is need for financial tactics for SMEs. Lending can be character based. There is also need to streamline administrative processing of loans requests. Credit to be extended through banks. ■ There is need to review legislation that constraints small businesses. Once reviewed such

regulation should be implemented if it were to benefit the intended group. ■ Educational systems to help in the development of entrepreneurial skills. Frank Wilbert

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■ There need to look at tax laws to make them an incentive for going into business.

Government, business officials and other stakeholders to collaborate. ■ There is need for communication such as roads and telephones. Small business should

benefit from infrastructure development. ■ The effectiveness of the above will hinge on the appointment of an agency to carry out

services for small businesses. Use must be made of existing skills in government and nongovernmental organisations. ■ There are many players hence the nee for coordination.

Actual policies to be adopted will depend on local circumstances.

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Role of government

■ The government should stop hindering the development of successful small businesses. ■ Government to confirm that skills and initiative of the individual entrepreneur are the most

important determinants of success or failure of a business. It should be noted that businesses would succeed despite difficult circumstances in which they operate while others will fail in spite of an array of heavily subsidised and well-integrated programmes of assistance. An effective entrepreneur will observe the environment and take advantage of it rather than objecting to obstacles that cannot be removed. Harper says for example if there is rapid increases in inflation, recurrent shortages and an apparent system of import restriction and controls, all within an unstable political environment, no amount of training or advice can or bring him or her to save money for investment in the manufacturing industry with a view to long term profits. He/she will opt for short-term gains through speculation and hoarding of essential commodities. ■ Government must have an economic management programme in place if small businesses

are to flourish. ■ Government usually put in place and national investment incentives and industrial estates.

These are more effective at attracting big businesses. Small businesses normally start and develop outside the framework of government incentives. If the economy is okay successful small businesses will make a contribution to economic development. Successful small businesses will make a contribution to the economic development. ■ They should introduce well-planned and efficiently integrated systems of assistance rather

directing them to a particular type of business or particular areas. The view here is that most government sponsored assistance programmes are often ineffective and can militate against the interest of small businesses they are intended to serve. Government often seen as an agency for creating incomprehensible or irrelevant regulations whose enforcement promotes corruption e.g. price controls. Government to examine how its role impinge on the development of SMEs and make the development of SMEs and make the necessary changes in order to remove unintentional discrimination which arise when regulations are conceived for big businesses or transferred from industrialised nations are adopted for SMEs.

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■ There should be coordination between the various service providers that are offered. Many

players involved in giving assistance to small businesses might act ually result in confusion on the part of the small businesses. There should be greater cooperation among the various players involved. TYPES OF ASISTANCE PROGRAMMES- MALCOM HARPER ■ Credit programmes for SMEs

Cash often cite as an important consideration for which small businesses need assistance from government or financial institutions. Remember small businesses are set up from owners' savings and loans from friends and relatives. However additional capital is required for machinery or equipment purchases and also for working capital. Most are unable to access these funds due to lack of collateral or lack of accounting records needed to assess small businesses. Important to have special schemes to provide credit to small businesses. The scheme could include any of the following formats: 1. Set up an institution that specialises in small business financing e.g. SEDCO. Most effective way but the volume of lending may not be sufficient to sustain the numbers of branches to reach every small business enterprise. Institution should also accept deposits from the public to boost the capital base. 2. Establishment of a small business division within a development bank but the institution should be free from institutional rules, regulations that restrict its ability to function effectively. It must be free of maximum amounts of loans regulations, collateral requirement, amortisation schedules, etc. 3. Central bank can set up such a fund and give it to commercial banks for on lending to small businesses. However success will depend on the willingness of commercial banks to give loans to small businesses. Most see it as a burden with little returns.

■ Extension services and training

Individual consultancy normally carried out at the place of business aimed at providing advice of all kinds to owners or operators of small businesses. Lack of experience and education in their fields of endeavour results in ill designed and unprofitable ventures. Extension services goal is to improve managerial, technical and vocational skills to small Frank Wilbert

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businesspeople, and to help them analyse their problems themselves and develop methods of solving them. ■ Training

Extension services might disclose management weaknesses i.e. common areas of deficiency. Classroom training can help improve the technical and vocational skills of some entrepreneurs' e.g. accounting, financial management to complement skills. Training to be combined with incentives if it is going to work otherwise people will retain old attitudes. ■ Appropriate technology

Industrialised countries technology advanced than developing countries. However traditional technology appears to be less efficient because of lower productivity. Government should promote the use of appropriate technology over the long term to bridge the gap between developing and developed countries. Alternatively adopt technology transfer strategies from industrialised. However technology should be carefully selected and where necessary modified to benefit the population. Supporting services ■ Infrastructure development necessary input for the generation of industrial activity on a

reasonable scale in underdeveloped areas this can be basic or supplementary services. Basic s would be transport, power and communications (telephones and mail) supplementary (hospitals, industrial estates/ areas, housing, schools, banks, storage and warehousing facilities. ■ Supply of raw materials - these should be supplied on a regular basis at reasonable prices. It

is necessary to purchase and stock adequate quantities of raw materials. Approach locks up capital in stock. Maybe approach could be the establishment of an agency to undertake procurement and distribution of raw materials so that small businesses can obtain requirements regularly. ■ Establish of information centres -SB runinto difficulties or do not find solutions to

problems partly due to ignorance. May not be aware of assistance and services available to them , e.g. financial management packages, tax regs etc. create a sort of info centre to collect and disseminate info of interest to SB. Info should be presented in a way that is easily

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understood by entrepreneurs. Info to include government policy, rules and regs, training programmes alternative technology, and production process available, domest ic and export markets, supply of raw materials and government documentation requirements.

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■ Incentives and tariffs restrictions- incentives given to local industries to protect them from

competition from foreign firms. Govt to make sure that incentives benefit the small businesses otherwise they might be a disservice. It might be necessary to give special incentives so that they can compete with local large companies incentives. Should help small firms to become self-reliant and independent and should avoid making over dependent on assistance. Incentives should therefore be temporary rather than permanent. Incentives include tax holdings, exemption on import duties, conversion of tax into long term interest free loans and tariffs protection.

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■ Marketing assistance: most small businesses lack of skills in marketing their products. Govt

can assist by actually buying and selling their products or by creating a favourable environment to enable small business to do the selling themselves. Strategy involves providing training, guidance, advice and assistance in promotion and marketing.

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■ Industrial estates- govt set up special industrial estates for small businesses. Physical

facilities to include common workshops, training, technical advice and consultancy or marketing assistance for a group of businesses. Industrial estates to be available to businesses who can benefit from such facilities. Economies of scale

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Lecture 4

One can go into business through various forms namely: ■ Start up i.e. creating a new business from scratch but this is not to mean

that the idea need necessarily new. Some people prefer to start a new business from scratch i.e. they do not intend to buy an existing/established business. Starting from scratch has some advantages and disadvantages. Would be owners prefer to start a business from scratch because it is their creation and they are proud of it or they can be inhibited from buying an existing business due to cash flow problems. They will be required to purchase goodwill, which is an intangible asset and increases value beyond the ability of the would-be new businessperson. Advantages o Lesser funds are required to start a new business than would be the case

with buying an existing business, o One can choose a brand new name and location, o Select and train staff. o Select equipment according to specific needs. o Order and purchase stock based on market research. Not burdened by old

stock from a going concern, o Design and create a unique business climate, o Design the layout. o The newly created business does not carry a negative image. Disadvantages o Many barriers to entry e.g. start up costs, legislation, premises, problems

with suppliers; creditworthiness can be serious barriers to entry, o Difficult to finance the business - banks and other lenders only willing to

give finances to businesses with a proven track record, o Failure rate of small businesses is higher than when one buys an existing

business. Idea can be good but success will only be appare nt when business is operational, o Businessperson does not have reliable information about sales, expenses

and profits. N the majority of cases they just estimates, which can be wide off the mark. Frank Wilbert

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o It can take very long to be established and become popular. No market share or goodwill

exists when a business is established from scratch. The business resources might be exhausted long before significant turnover is achieved. It is easy for a businessperson to start a small business on a part-time basis to overcome the disadvantages discussed above. In the process valuable experience and information is gathered. Like in every business the businessperson should o Conduct a proper market research or analysis. o Should determine what customers need.

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■ Franchise - this method of starting a new business within the framework of existing larger

business entity. entit y. A separate legal enterprise enterpr ise operating operat ing in some way under the umbrella of another organisation. This is a marketing system whereby an individual owner conducts business according to the terms and conditions set by the franchiser. A franchise is the agreement granting the right to do business and specifying the terms and conditions under which the business will be conducted. The franchiser is the company that owns the franchise's name and distinctive elements and grants others the right to sell its products.

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Types of franchising systems

Product and trademark franchising- here the franchisee is granted permission to sell a widely recognised product or brand e.g. service stations, soft drink bottlers. Here the franchiser has little control over the business of the franchisee. Control is however necessary to maintain integrity of products. Business format franchising- franchisee given the right to use marketing system along with ongoing assistance from the franchiser, e.g. Lucky Seven, Spar, Food Chain Group, Sammy, Sheraton Hotel and Mercurri and Holiday Inn. Advantages o Reputation - An established and well-known franchise ensures that

customers buy the product often, o Management assistance - franchising companies provide training in all aspects of

marketing, personnel and financial management, o Profits - entrepreneur can expect reasonable profits. He/she depends on business expertise, o Experience of the franchise owner makes up for the inexperience of

the entrepreneur. o Finance - usually the franchiser provides the franchisee with financial assistance. Less

money needed to start the business, operate business on a day to day basis because of control systems. o The way to operate the business has already been worked out and tested. Starting up should

be easier and faster. faster . o Fewer franchises fail than other business start-ups. Therefore it can be easier to obtain

finance for a franchise. - usually there are nationally agreed terms with suppliers that take account of total franchised businesses.

Disadvantages

else 's idea, franchisee only implementing implement ing and not creating. o Not your own creation, someone else's o Lack of independence- entrepreneur has to follow the principles and methods of the

franchise owner. Rules made by the owner and followed by the franchisee. o Standardisation- all franchise branches are standardised to create a uniform image among

customers- not much scope for own ideas. Frank Wilbert

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o Fees- considerable fees required for the use of the franchising business. Fees might be very

high resulting in poor profits. Furthermore franchisers put in place a profit sharing scheme based on a fixed % of sales rather rat her profits made.

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o The goodwill that a business builds p is never its own, as it is dependent on a continuing

franchise agreement. This could cause a problem when you decide to sell the business. o The franchiser needs to ensure regular disclosure of information by the franchisee to protect

their royalties and the franchise agreement - this can become intrusive into the financial affairs of the franchisee. o Brand image of the franchiser can become a distinct liability if things go wrong. The

franchisee is depended on the stability of the franchiser-national problems with a franchisee who has no control over events. ■ Buy existing business- outright purchase i.e. buying an existing business from somebody

else. There is a new owner but buying an established business. Some people do not necessarily have to start a new business. A person may choose to buy an existing business or may buy into an existing business to become a partner. There are several reasons why people sell business and the would-be buy should critically examine the reasons and these include the following: o Recognition of lack of success of the business and low profitability in the future. o Problems not related to business, which, forces a sale e.g., health problems, marital break-

up, or other personal issues. o To pursue other business opportunities which make a sale desirable. Most people sell to

raise funds for another failing or successful business. o A desire to change out of small businesses,

an,

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o A dispute leading to the breakdown of a business partnership. Alternatively small

businesses might be available for sale from big businesses and the reasons for sale include the following:

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o Failure to meet financial targets set by parent company e.g. ROI is inadequate hence the

decision to sell and invest proceeds into

ventures showing greater potential, Frank Wilbert

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o Company adopts new strategy meaning that the unit no longer fits

hence decision to sell especially when core activities are very varied to those pursue by the business unit,

o When parent company is taken over and unit does not fit into to the

overall scheme of things. Forced sale Liquidation following bankruptcy- in most liquidations people buy assets rather than the business. The creditors will be seeking to recoup some of their monies. Advantages - it may have an established and proven market share, o Locationestablished firms often have the best sites, because the first owner had a wider choice of locations than those available now. o Profits- an established business may generate profit from the start.

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o Personnel- competent staff may be inherited. The already have knowledge

of key customers, sources of raw materials and business operating systems to mention but a few. - it is possible to buy business at a bargain price,

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o Image/goodwill- it takes several years to build a favourable image. Good

image increases chances of the new owner being successful.

Disadvantages o III will- businesses may have a bad reputation and it may take long to

reverse negative perceptions among customers. Mupata wachidembo. o Misrepresentation- sellers may have omitted crucial facts that might affect

the future of the business success, o Changing conditions- seller might even be unaware of the changing circumstances e.g.

population shifts or a major competitor might be entering the market etc. such issues will affect the future of the business. There are many purchase methods available to the new businessperson and these include the following: ■ Buyout - the buying of existing business from within e.g. management buyout. Refers to

the purchase of a business by existing management. Happened with TA when it sold BEC. Management buy out made possible by the availability of finance from merchant banks, banks and venture capital funds. We also have MBO in public companies that are being privatised- more in the provision of services to promote competition e.g. cleaning services, catering and ground maintenance. ■ Buy in- happens when existing owners accept a new partner or shareholder who buys a

small firm which already exists. People might not want to buy the whole business but to be part owners of the business. This is done through being a partner or buying shares in an existing business. This is normally the case when a person joins professional services e.g. layers, accountants, doctors etc. usually in partnership where there is a high turnover when partners leave or retire. Not necessary to dissolve partnership, but gap has to be filled by recruiting another partner into the practice. Expanding small businesses can face serious cash flow problem. It becomes important to ask other people to contribute additional capital needed to keep the business operational. Failure to bring in additional cash might result in the failure of the business. People can also buy in when a large company sells a part of the business to management and if management is handicapped by lack of capital, o Buy in and management buy outFrank Wilbert

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BIMBO- this is a combination of outside and inside management in buying a business.

Aimed t reducing risk of buying into a company from outside existing management has in depth knowledge of company and its markets, while new owners bring in fresh approaches. Can be done via a number of ways including the following: Sale or purchase of assets

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When buying an existing business it is important to know what is up for sale. What is for sale will depend on the wishes of the parties involved and the legal status of the business (i.e. a sole trader, partnership that has no legal distinction from its owners, and limited liability companies where ownership can change through the purchase or sale of shares. The buyer must pay special attention to the assets, which are available for sale. Many assets available might not be on the balance sheet especially for small businesses. The assets for sale will include: o Freehold property- business may own freehold property from which it trades. Mostly the

case when property is the key factor in the success of the business e.g. hotels, restaurants, bars and other leisure facilities that depend on geographic location to attract customers. When location is important it is important to acquire property through purchase or long-term lease agreement. Owing the property is preferable to paying rent due to appreciation in property values over time. When buying property take care and exercise caution. Check on ownership, planning permission, restrictive covenants, mortgages and other charges. Assure yourself of the suitability of the premises to the business. Premises are permanent and take long to remove from the business especially when property market is slow. o Leasehold property- leased property can be a valuable asset to a business. Most retailers

operate from leased premises. Location of such premises commands a premium/ goodwill which can be sold when the business changes hands and must be taken in account however the premium paid can disappear in times of recession. Value of leased premises depends on desirability of premises, state of the premises and the state of the property market at the time. Value likely to fluctuate depending on the above factors. When entering a lease agreement there is need to consider the following factors: • Transferability of lease- most leases are not easily transferable. Landlords want to control

suitability of incoming tenants but some will allow the transfer of leases to third parties but there often restrictions imposed which can devalue a lease. • Terms of lease- Commercial properties are held for shorter periods than residential

property. Normally businesses changing hands will have shorter terms on the lease and the incoming person should look out for this situation as they might be left without premises soon after taking occupation. Most landlords find it difficult to evict a sitting tenant. Landlord may evict tenants on grounds of property redevelopment or intention to use the property. Frank Wilbert

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• Repairs and dilapidations- most commercial properties require tenants to pay for the

upkeep of interior and exterior aspects of the building and surrounding land. Dilapidation clauses require tenants to return the property to the landlord in a specified condition at the end of a lease. Such cost represent considerable burden to tenants especially when premises are old and near the end of the lease. Lease can have negative value as its liabilities outweigh its usefulness. • Rent and provisions for review- where rent due is considered to be below market value /

levels, then this will add to the value of a

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lease. Most leases provide for rent reviews after a certain period. Most leases provide for upward reviews only.

Furniture and fittings- most business purchases include the purchase of furniture and

fittings. When new there is nothing to \Norry about and the tenant will have freedom to choose. However going into existing premises can result in considerable costs in renovations and removal of unwanted fittings (Look at what NMB did when it occupied premises belonging to Zimbank). They have at times had to carry out massive alteration to make the premises suitable for their use. The same would apply for any other venture. It is important to examine the condition of the fixtures and fittings and their appropriateness to the business. The type of business usually determines the nature and type of furniture and fittings when assets are key to the business. Machinery, equipment and vehicles- it is necessary to perform functions of a business and

these assets have to be acquired for the operations of the business. Type of equipment etc will depend of the nature of the business and could include- manufacturing plan, commercial equipment (freezers etc), office equipment and vehicles. Such assets have to be evaluated to determine the purchase price. We can use the following methods to determine the purchase price of these assets: ❖

Written down book value which tends to be arbitrarily determined depending on the

depreciation method used by the business. Depreciation policies often tend to be optimistic or cautious. ❖ Market

value.

❖ Replacement ❖ Original

value.

cost of equipment.

Stock and WIP- small businesses usually sell stock of the business to the new owner. Stock

can be classified as: ❖ Raw

materials, which is converted into products. Valuation of raw materials is the original

cost paid for the stock- however if there are price increases it will be necessary to negotiate a

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higher price based on a replacement value. Buyer might ask for a reduced price if some of the materials are damaged, obsolete, overstocked and perishable. ❖ WIP,

which is unfinished products. It is more complicated to calculate the price of work in

progress, as there are already components of raw materials plus other direct and indirect cost for labour and overheads to be taken into consideration in determining the value of WIP. Calculations have to been made on the state of completeness of the WIP, which is essential in value determination.

Most small business people do not keep such records. ❖ Finished

goods ready for sale products. These are valued at the

selling price at the time of the sale taking into consideration any overstocked position which decreases the value of some lines. Stock should be valued on the day/date of transfer of the business. Should not be a fixed sum during negations. Use can also be made of an independent valuer to determine the selling pr ice.

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Debtors- people and companies will owe the business money. Debtors are a real asset to a

business problem not to negotiate value of debtors since their value is amount owing. Danger is whether they will pay or not and how long they will take. Usually make it a point that the seller retains debtors book and collect their money themselves after the sale or to guarantee the amount in case of failure to collect. Goodwill- accuracy of goodwill depends on circumstances and not reality. It is easier to

identify tangible assets and value these but very difficult to determine goodwill which is a balance sheet item. Usually the practice is to remove the value of tangible assets and the balance remaining from total assets will be the goodwill. Goodwill attempts to value the likelihood of future success and therefore future profitability of the business. Goodwill is the evaluation of future profitability, which is added to any market value of tangible assets. Employees- existing employees can be a key to success i.e. their experience, skills, way of

doing business will impact on customer satisfaction. Employees can truly an intangible asset but will dependent on worker motivation and individual expert ise. Most small businesses often run by the seller who is key to its success- impact of their removal is an important issue particularly in the sale of a small owner managed businesses. Conversely you can take on more than you bargained for with you being lumped with employees recruited on a partisan basis who are a liability to the business. These cannot easily be jettisoned due to labour laws.

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Lecture 5

Once a decision is made to go into business, proper planning becomes essential. The following steps will be taken in starting a business: ♦> Search for and identify a need for a product or service, ♦ Study the market fore the product, using as many sources of information as possible. ♦ Decide whether to start a new business, buy an existing one or buy a franchise.

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♦> Make strategic plans, including setting your mission, strategic objectives and strategies. ♦> Make operational plans, including setting policies, budgets, standards and methods, and

planning the many aspects of producing and marketing the product/service. * Make financial plans including estimates of income and expenditure. ♦ Develop these plans into a business plan.

There are many ways in which a person can go into business including the following: Begin a new business/ Start up - this is new business that is not part of another organisation

though the idea being implemented might not be new. This is often referred to as a green field business - no clearing of brush has been undertaken yet. The ideas are given a chance to be started, grow and develop. Start-up is the only way of exploiting new ideas. Depending on the investment start ups can be in the form of: 1. Sole trader i.e. where the individual makes all the investment on his or her own. 2. It can be shared with others i.e. in the form of a partnership with equal partners or any other such arrangement. 3. It can be a registered company.

Low risk level- typified by someone who begins the business on a part time basis. Risk is minimal as income is generated elsewhere and investment requirements are very small. Motivation may be to turn a hobby or skill into a financial gain- rather like testing the water before making a jump. High-risk level - when a professional etc becomes self-employed. However liabilities are kept low by purchasing minimal equipment or overheads. Investment can be made on an individual basis or at times shared with partners. Adv. ❖

Creation of the owners thereby being free to choose what the business does, how it

operates and what its value are. ♦> Controls of the owners- personal decision count and external influences are minimised. ♦> Satisfaction of the owners - success due to skills and effort of the owners, which gives

them sense of heightened satisfaction when and if one, is successful. ❖ Clean

sheet - the business starts with no backlog of problems. It will create plenty but not

at least inherited from the past.

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❖ New

businesses are candidates for help from various agencies. Government assistance and

help from other agencies is available to encourage start-ups. ♦> Match between the founder and the enterprise- the founder can ensure that their individual

strengths are well used and weaknesses minimised by choosing a business well matched to their own qualities and experience. ❖ Fewer

funds needed - costs are less than buying a similar franchise or existing business.

Disadv. ❖ Unproven

idea- may be creative but will it work? New businesses can only prove itself in

practice.

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❖ High

rate of failure- many new businesses have a high failure rate however other methods

have higher track record. ❖ Hard

and lonely work- entrepreneurs do it themselves and have unsocial working hours.

♦> No market share or goodwill- start up has to start from scratch to establish company name

and build name and to build loyalty. ♦> There are many barriers to market entry- legislation has to be considered, premises found,

accounts opened with suppliers/ creditworthiness proved etc. ❖ Difficulties

to come up with forecasts with no track record, difficult to predict financial

outcomes, sales volumes, overhead costs etc. ❖ Difficulties

to get finances since banks are willing to provide funds to someone with a

proven concept than to new ideas.

Franchising

♦> Product and trademark franchising where the franchisee is granted the right to sell a

widely traded product or brand. Franchisees concentrate on handling one franchiser's product line and identify their business with that firm e.g. petrol stations. The franchiser will exercise very little control over the operations of the franchisee. Control will mostly focus on maintaining the integrity of the product. ❖ Business

format franchising - relationship in which franchisee is granted right to use the

entire marketing system, along with ongoing assistance and guidance from the franchiserincluding restaurants, retailing' hotels etc. ❖ Opportunities

are plenty to go through franchising route however there need to make

intensive studies and evaluations before jumping into a franchising bed. You should look to franchises which are growing fastest so as to get in on growth opportunities. ❖

Examples in Zimbabwe include Spar, Lucky Seven, Wimpy, Muchira FMG and I

understand Town and Country is shaping up another franchising arrangement.

Franchising Frank Wilbert

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Involves a formalised arrangement and a set of relationship that govern the way a business is operated. Members of the system are provided with names, logos, products, operating procedures by the franchiser. Franchising offers the entrepreneur opportunities of reducing the overall risk of starting a business from scratch. Franchises help businesspeople to benefit from the accumulated experience of all members of the system. Franchising is a marketing system whereby an individual owner conducts business according to the terms and conditions set by the franchiser. It is an agreement whereby an independent businessperson is given exclusive rights to sell specified goods or services. The franchisee is a businessperson who agrees to sell the products according to the requirements of the franchiser. ♦> Franchise can be in the form of using a widely recognised product and

trade name. This is called product and trade name franchising e.g. BP,

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Shell, Caltex, Mobil, and Engen etc. ♦ Entrepreneurs might seek to use an entire marketing system and an ongoing process of

assistance and guidance known as business format franchising e.g. Wimpy, Holiday Inn, and Sheraton etc. ♦ Master licensee- firm or individual have a continuing contractual relationship with a

franchiser to sell its franchises. They sometimes give training and warehousing. Adv. ❖ The

business concept is proven.

♦ The way the business is run has already been worked out and tested. Starting the business

should be easier and faster. ❖ Training

and support is given i.e. technical training, business training, site selection and

choice of suppliers. ❖ Fewer

franchises fail than other business start-up forms/methods-consequently it can be

easier to obtain financing for the franchise. However it is difficult to establish failure for the following reasons:

- Franchisers often disguise failure by under reporting. People would not want to join an organization that is not doing well. E.g. when Farm and City broke away from Spar, efforts to establish the reasons for the break up no reasons were given save for a statement that it was through mutual consent of the parties. So did Desai Supermarket. - Franchise outlets are always changing brands hence it will be difficult to know when one has failed and a franchise has taken over.

- Unethical franchises are excluded from the data provided. ❖ National

branding will often be established hence reduce cost of advertising.

♦ Research and development, and competitive analysis will undertake in most cases by the

franchiser to take care of changes in the operating environment. ♦ Economise of scale e.g. when nationally agreed terms are reached with suppliers which take

into account the total franchised business.

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Disadv. ❖ Franchises

are other people's ideas hence the franchisee is only implementing rather than

creating a business. ❖

No independence as franchiser will set the rules that have to be followed by the

franchisee.

♦ Financial costs higher as the person has to pay upfront fees and high

royalties. Set up costs can also be considerable as the entrepreneurs have to follow a prescribed formula e.g. massive renovations to match requirements, and new shop fittings etc. ♦> Lack of match between franchisee and personal location. ♦> Goodwill built is not personal but that of the franchiser. Further it is dependent on a continuing agreement which might cause problems when

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you want to sell the business . ♦ Franchisee should regularly disclose information to the franchiser to protect their royalties and the franchise agreement, might be intrusive into the financial affairs of the franchisee. ❖ Brand

image of the franchiser can be a liability if things do not work out hence the

franchisee is dependent on the stability of the franchiser- a national problem can affect the franchisee who has no control over events. Buying Existing Business

A businessperson can buy an existing business or may opt to join an existing business as a partner. Most people sell their businesses for the following reasons: ♦> Recognition of lack of success- i.e. low probability of success in future. ♦> Other problems not related to the business e.g. health problems, marital break -up or other

personal reasons. ❖ People

can even sell in order to purse other business activities e.g. sell to raise funds to go

into farming etc. ❖ Retirement

of owner especially where there is no family succession plan. ♦> To cash in on

the success of a business. ❖ Dispute

leading to the breakdown of a partnership where one party does not wish to buy

all the business. Large Firm ❖ When ❖

unit fails to meet financial targets set by the parent company continuously.

Changes in strategy by parent company and unit no longer meets/contributes to the

targets/objectives.

♦> To raise money for other business activities due to financial difficulties or other reasons. ❖ When

parent company has been taken over and a new owner feels that the business unit

will not contribute to overall strategy. ♦> Legislation may force business unit to be sold. Forced Sales

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High failure rates of small businesses provide opportunities to but failed companies from the liquidator or administrator. Certain legal procedures have to be followed when closing down a bankrupt company and the sale of assets to pay of debts. There are several ways of buying small businesses including the following: ♦ Outright purchases where the entrepreneur buys the entire business. ❖ Buy

in where the entrepreneur does not buy the entire business but part of the business to

become a partner or shareholder. ❖ Buy

out being the purchase of a business or significant part of the business by existing

management. It is normally the case when large firms are the sellers.

♦ Buy in buy out - which combines outside and inside management in the purchase of the

business. Will benefit from the bringing in o f fresh ideas to the business and other experience while at the same time maintaining continuity.

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Sales

It is necessary to determine assets for sale before making a purchase. The sale will depend on the wishes of parties to the negotiation and the legal status of the business. Assets of the business are the main focus of the buyer. Assets will comprise: ♦> Tangible

assets i.e. property, furniture, fixtures and fittings, machinery, equipment and vehicles, stock and work in progress, and debtors, or ♦ Intangible assets i.e. goodwill, image and reputation, employees, intellectual property and

customers. Liabilities there is need to avoid certain liabilities when buying an existing business and

these include the following: ♦> Trade creditors ♦ Bank and other borrowings. ♦ Tax, Paye, and NSSA contributions,

♦ Lease and hire purchase agreements ♦> Guarantees or mortgages on assets

When buying a limited liability company the purchase of shares entails that the foregoing liabilities are transferred with the business sold. Debt which can be owing for several years can be settled by ♦ Making arrangements for the seller to give personal guarantee and warranties on the

amount of the liability. ♦ Purchasing only the assets of a limited company as if it were a sol trader. A shelf company

with no previous liabilities can purchase asset.

However there are certain liabilities which cannot be avoided and these include: ♦ Obligations to employees when assets/ business is sold as a going concern. Employment

laws regarding terms of employment to be continuous. Terms of employment remain valid. Prior periods of service is added to that of the new owner. ♦ Liabilities attached to specific assets e.g. equipment might be subject to lease or hire

agreements, property to guarantee a loan- such liabilities need to be terminated by the seller before passing title or buyer has to agree to take over the liability with the asset.

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Valuation it critical to determine the worth of the business before a purchase is made so that

a fair value of the asset can be arrived at. Assets can be valued on the following basis: ♦ Market or other valuation of the assets to be acquired. Most tangible assets are valued in

this way i.e. property, fixtures and fittings, equipment, stock and debtors. Always identify these and value separately. ♦ Multiple of annual earnings/ profits- buyer can consider the earning power of the business

now and in future, and use this to value the business. Use profit earning to measure the value of intangible assets on the market. E.g. when selling intangible assets there is need to determine the profit that will be taken into account. Normally expressed as multiple of annual profit. Say a business makes $ 3 000000 profit per year, might be judged to have a goodwill valued at three times the annual profit. The value of the goodwill will be $9 million. Alternatively we can use interest rates or inflation e.g. interest rates may be pegged

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at say 10% will translate to 10 times goodwill (100% /10%) and the selling price will be $30 million.

Adv.

♦ Helps overcome barriers to market entry especially when there are significant barriers to

entry, buying an existing business may be the most realistic alternative. ♦ Buying immediate turnover and income is important when the buyer has no other source of

income. ♦ Buying market share of a small business can be done to build a higher market share

especially when the business controls a significant % of the desired market. It may be advantageous to buy into them than compete with them. ♦ Existing assets- property, equipment and staff requires less time to put these assets in place.

Buyer will only focus attention, resources and energy on the market place. ♦ Goodwill existing with customers base evidence of viability of the business. Removes some

of the risks of small business ownership thereby providing a platform for growth. ♦ Existing track record - ability to look over past performance of business provides comfort

to a potential buyer and financial supporters. A business showing good performance over a number of years easier to fund than one without a history. ♦ Existing knowledge- usually the case when management buys the business.

Disadv.

♦ Buying possible liabilities- even when only assets are being purchased-liabilities can be

attached to them e.g. employee liabilities (you might end up with employee who will not fit into your organisation). The greatest problem is that the liabilities will go unrecognised at the time of purchase only to emerge later. ♦ Uncertainty of records- it is usual for present business owner to reflect the business in the

best light possible to get a buyer or favourable price. Sole traders and partners not required to have audited accounts- some crucial information may be withheld. Onus on the buyer to ask the right questions and not on the seller to provide the right information.

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Historical problems in the business- business can have some dark past or negative goodwill which is not apparent e.g. history of bad relations with suppliers, customers and staff which will outlive the departure of the owner. Not all my own work- buying a business can diminish the sense of achievement and therefore motivation to make it succeed.

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Lecture 6

The key purpose of management is to achieve the organisation's goals and to continuously monitor its objectives" Management Charter Initiative. The problems of small enterprise ♦> Need for analysis- most institutions including government are concerned about self

serving goals than the needs of a sector considered of great benefit to any economy. Must be admitted that small businesses are an extension of the personality of their owners and it is very difficult to generalise them. Owners' perceptions of their problems affected by their inability to analyse their situation and their view of what might or should be provided for them by government. Small businesses believe that: ♦ Their major problem is capital Resulting in inability to invest in a particular asset or for raw

material, equipment, customer credit or finished products. ♦ Shortage of demand. ♦ Shortage of skilled labour and other workers. ♦ Difficulties in obtaining raw material.

The common feature with most businesspeople is their view of their problem and most believes that: ♦> 1st they refer to one single problem. ❖ 2nd

they identify problems whose solution they believe is beyond their control.

People pressurised by the day to day operations of small businesses are more likely to concentrate on whatever appears to be their most pressing problem and ignore the difficulties that will most likely become easily seen if the first problem is solved. They are more prone to blame external

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circumstances for their difficulties than to admit lack of ability. This is usually the case when businesspeople give views it someone else from where help is expected such as money or other resources from outside.

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Major problems ❖ Limited

market share since the small businesses are established in small communities.

♦> Size inhibits them from discussing with government hence they are cut off from

government and cannot influence government policy- lobbying. ♦> Informal sector are people who operate outside existing laws using mobile or temporary

premises, face different problems as small businesses. - Informal businesses face problems imposed by central and local government, which tries to stop activities of informal businesses, which they consider illegal. Remember the running battles, which have often characterised the activities of vendors, the prevalence of backyard garages and illegal kiosks. - Informal sector arise from the need to satisfy a need or in response to opportunities to satisfy urgently felt needs which may be ignored by planners, may not be accepted as legitimate e.g. money lending, prostitution etc. People need these products or services and pay for

them. Governments usually pay lip service in allowing the operations of the informal sector. They do not take positive steps to regulate they but strive to remove them with limited success thereby curtailing the potential of small businesses. The above view should not be construed as the lack problems that confront small businesses. We will examine some of these as follows: ♦ Capital -most financial resources are utilised in unproductive assets by the majority of

small businesspeople. However shortage of capital has a positive side being the ability of small businesses to absorb more employees thereby addressing the problem of unemployment. Important to give small businesses capital but this should be targeted at businesses with highest potential to create more jobs. Generally small businesses find it hard to mobilise funds for investment. According to Malcolm Harper " in most poor countries the shortage of viable investment opportunities is more serious than the shortage of funds to finance them." He further pointed out that Oxfam Trading for instance has a policy of retaining a substantial percentage with them each year from sales of handicraft, for investment in new equipment, stocks of new raw material etc -they asked suppliers of the handicraft how they propose to spend their share of retained money. The majority were Frank Wilbert

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unable to present ideas at all. The scheme is being wound up now but a lot of funds still lay unclaimed. The same applies to the Zimbabwean situation whereby government and other stakeholders have set aside money, which has remained unclaimed due to failure to draft business plans or viable projects. Another problem is that small businesses do not have assets, which can be used to secure a loan. Most financiers demand some form of collateral in order to advance money to small businesses which collateral the small businesses do not have thereby jeopardising potential projects. Even micro finance scheme are demanding their clients to surrender household

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effect to access loans. Consequently even when the risk is loss is the same or even less than that of bigger businesses, small businesses will still be unattractive to lending institutions. Furthermore it will be difficult to sell off shareholding of a small business since an individual or partners often hold it. Only money sharks are prepared to capitalise small businesses and have exploited the non-availability of capital by providing loans at exorbitant rates thereby increasing the cost of the business and in the process jeopardising its chances of success due to tight financial requirements. Governments have also tried to provide funding small businesses through schemes where cheap more is provided to small businesses. This has not translated in the growth or development of successful small businesses. Actual those that have benefited have collapse due to the misapplication of the financial resources. People without training or the right attitudes to run a business will not be successful just because cheap money has been provided. Efforts to convert ordinary workers into entrepreneurs have yielded limited success. Lack of demand and supplies- capital alone cannot change the fortunes of small businesses. It might actually change the fortunes of a small business into a struggling deeply indebted one. After people often cite lack of demand for their products. This problem cannot be solved by providing finance. An understanding of the market problem must be sought before any attempt to solve it is made. Small businesses by their nature are part of the local environment, and tend to employ and serve the local needs of the poorer people in that community. Poverty of the local community suppresses demand for their products hence they will fail to realise critical volumes necessary for success. In addition poor people do not have the capacity to pay cash or in full for the products or services thereby straining the resources of small businesses resulting in serious cash flow problems. A possible solution is for government to critically examine its purchases since it is the largest consumer of services and products. Access to this market is closed due to tendering requirements which tend to eliminate small businesses. The documents to be filled are cumbersome while most small businesses do not have the necessary capacity to satisfy large quantities demanded. Furthermore they cannot compete with big companies, which have the technology, and the volumes necessary for reduce overall costs. There is the added problem of enhanced mobility with the rural urban drift being core in depleting the already small market available. This in turn will result in reduced demand for Frank Wilbert

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the products or services thereby negatively affecting the viability of the business. Added to foregoing in the problem of enhanced transport availability, which makes it cheaper for a person to do his/her shopping in the nearest town. The cities and towns are now within easy access of the community where the people can get bargains, which can result in real savings. Advertising in the mass media replaced personal selling and links. Advertising is economic when costs are spread over large volumes of sales. Advertising is not suitable for small businesses given their limited sales volumes. Small businesses however can capitalise on the changing demands, as it takes long for large companies to change their technologies and products to suit the changing demand. This is usually the case with most services and

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clothing where small businesses can easily adapt to the customers satisfaction. Lack of demand is a more pressing problem than the shortage of capital for the success of small businesses. This is born out of inadequate access to markets, limited capacity, lack of skills and initiative in marketing. Raw Materials- shortage of raw materials is a frequent problem as most small businesses lack the necessary working capital. They cannot negotiate prices with supplies because they do not have the muscle to negotiate for discounts. Consequently they are likely to be tied to higher price, low quality suppliers. They might not have access to important raw materials which is critical for their operational success. ♦:♦ Equipment - demand for products produced by large-scale technology will be out of

bounds to small enterprises. Small businesses cannot access the finances necessary for the purchase of the equipment. This will result in wastages in the production process increasing the cost of production resulting in reduced profits. In addition the quality of goods made by appropriate technology will not compete with that are made from modern machines thereby resulting in reduced demand for products sold by small businesses. In addition spares are also a major problem. Mostly small businesses do not have the forex with which to secure the parts. Most equipment will thus lie idle. Small can improvise foreign currency shortages so that they purchase equipment more suited to the costs and labour in poor countries- e.g. the manufacture of freezit making machines, hand pumps, dough makers etc. ❖ Regulations

and the law- small businesses are disadvantaged when it comes to negotiating

for exemptions from any regulations or laws. Permission to operate from a particular place or any other privilege or right, which is under the control of a large-scale central authority. Most small enterprises find it easier to operate outside the law. Their transgression is less noticeable, and the expenses and administration costs involved in effective control are beyond the resources of government and most of its agencies. Given the problems that most small businesses face the need to plan cannot be overemphasized. Douglass Doneleary stated "most potential bankrupts enter a field where they were once an employee, but do so with no knowledge of selling or bookkeeping. They enter as entrepreneurs feeling that they know the business when all they know is the product."

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People are not aware of the market or the business environment and when it changes they are left behind with an outdated service or product or technology. Rapidly changing environments are the nemesis of small businesses. As an entrepreneur you need the following: ❖ Understanding

what you want from life and in particular understanding your business.

❖ Understanding

its strengths and weaknesses.

❖ Understanding

the whole environment- threats and opportunities on offer.

❖ A

plan of how your business can survive or even grow within this environment.

It is there imperative that every business requires a road map with which to swim into uncharted waters. However most people believe that business

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plans are made to secure funding for a business venture. Those with their own funds do not consider writing a business plan becoz of the following: ❖ A

lack of understanding the process and benefits of business planning.

♦> Pressure on doing, rather than thinking or gathering information in the small business

planning business environment. ♦:♦ The belief that strategic planning is for larger organisations and big business resources

and not necessary for smaller firms who can plan effectively on the back of an envelope. When are plans made?

♦ Start up- there is to plan when a new business idea has been identified and feasibility

studies have to be made. This involves preparing detailed plans for the intended business. ♦ Business purchase- a detailed plan is necessary when buying an existing business plan. Will

enable sensitivity analysis to be carried out so that the purchase is aware of the risk attached to the business and the likely rewards available.

♦> On going business review- necessary to check the progress of the start up or business

purchase. Must note that the business environment is always changing and changes have to be made to ensure t hat the business continues to survive. Will enable business to respond to constantly changing environment. ♦ Major decisions- there is need for a plan when carrying out major changes e.g. when adding

new products, an additional outlet, new equipment or a loan fund for expansion purposes. Why produce a business plan?

Basically writing a business plan is the most important step in establishing or buying a business. It helps the owner/manager to crystallize and focus his/her ideas. I can be used for a variety of purposes including measuring progress against the plan. It is important to prepare a business plan for the following reasons: Managers/owners and lenders/investors will need to investigate the following issues: ♦ Assessing the feasibility and viability of the business or project. Will it work and become

commercially and financially viable? It is better to make mistakes on paper, before trying the real thing. ♦ There is need to set objectives and budgets which will give overall direction and financial

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♦ It helps determine the amount of money required to make the plan work. The assumptions

made should be provided when preparing cash flows etc.

Apart from the foregoing there are other reason why it is necessary to prepare a business plan and these include the following: ❖ To

clarify ideas - helps bring about focus by bringing together generalised and random

thoughts into a clearer perspective of the concepts and how it can be made to work. ❖ Finding

out the unknown - looking for information through research will help to unravel

many hiddens relevant to the business. Useful ideas might be identified which will benefit the business.

Building the team- building a business plan helps promote a feeling of participation among those involved. Everyone involved would want to see he plan succeed. It also helps to identify team

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members with different skills, which will complement each other for the well being of he business. A diversity of ideas will be generated for the benefit of the business, as people with difference skills will bring in different perspectives and views to the same idea. ♦ Preparation of a business plan provides training and management development for the

people involved. The preparation of forecast profits and loss statements, and cash flow are often used at training workshops in the management of small businesses. ❖ Helps

in raising funds but does not guarantee success in raising funds. Most banks cite

inadequate information as a common reason for declining to finance small businesses. Professionally prepared plans help in gaining a hearing from financial institutions. A business plan is also useful to lenders and investors and will thus provide them with additional information especially the following: ❖ To

evaluate the security offered for funds versus the risk involved-many people who

provide loans will seek the security of assets for their loans. This provides them with the comfort of a very high probability of receiving their money back through actual payments or through the sale of the pledge asset. Investors will investigate the assets of the business including debtors and fixed assets to assess their underlying quality and not just the balance sheet value. Financiers will provide funding for viable proposals. ♦ To appraise the quality of management: the majority of failed business are the result of

poor or bad management the quality of management is more important than intangible assets in guaranteeing the security of a loan. The production and presentation of a business plan is an indication of the quality of management. It is not what the business plan says, but how it is put together and communicated, that will count for or against a lending or investing decision. From the foregoing a business plan is very important to the would-be businessperson. This view is supported by Mark Stevens who pointed out" if you are inclined to view the business plan as just another piece of useless paperwork, it's time for an attitude change. When you are starting out, investors will justifiably want to know a lot about you and your qualifications for running a business and will want to know step-by-step plan how you intend to make it a success. If you are already running a business and plan to expand or diversify, investors and lenders want to know a good deal about the company's current status, where it is headed and how you intend to get it there. You must provide them with a plan that makes all of this clear." Frank Wilbert

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Most people are apprehensive about preparing a business plan and as a result tend to overemphasize one particular element especially the financials at the expense of other relevant information. There must be balance in the information presented. This will result in their rejection by investors or lenders. William Sahlman of Harvard Business School pointed out " what's wrong with most business plans? The answer is relatively straightforward. Most waste too much on numbers and devote too little time to information that really matters to intelligent investors. As every seasoned investor knows,

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financial projections for a new company, especially detailed month by month projections that stretch out for more than a year- are and act of imagination." An entrepreneurial venture faces far too many unknowns to predict revenues, let alone profits. Moreover, few if any entrepreneurs correctly anticipate how much capital and time will be required to accomplish their objectives. Typically, they are widely optimistic, padding their projections. Investors know about the padding effect and therefore discount the figures in the business plan. These maneuvers create a vicious circle of inaccuracy that benefits no one. He goes on to state that he should not be misunderstood. Business plans should include some numbers. But those numbers should appear mainly in the form of a business model that shows the entrepreneurial team has thought of failure. ... The model should also address the breakeven issue. At what level of sales does the business begin to make profit? And even more important, when does cash flow turn positive? Without doubt these questions deserve a few pages in any business plan. If the plan is to be considered it should speak the language of investors. You must separate the important issues from the less important ones. It is also important to know how to present your ideas or concepts in a way that is meaningful to them. Failure to do so will result in loss of credibility and a potential financial source. Stanley R. Rich and David Gumpert identified the characteristics of a business plan that will enhance the probability of receiving funding from investors. These include the following: ♦ It must be arranged appropriately, with an executive summary, table of contents, and

chapters in the right order. ♦ It must be the right length and have the right appearance- not too long and not too short, not

too fancy and not too plain. ♦ It must give a sense of what the founders and the company expect to accomplish three to

seven year into the future. ♦ It must explain in quantitative and qualitative terms the benefits to the user of the

company's products and services.

♦> It must justify financially the means chosen to sell the product or services.

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♦ It must justify and explain the level of product development, which has been achieved and

describe in appropriate details the manufacturing processes and associated costs. ♦> It must portray the partners as a team of experienced managers with complementary

business skills. ♦ It must show how investors will cash out in three to seven years with appropriate capital

appreciation. ♦ It must contain believable financial projections with key data explained and documented. ♦ It must be presented to the most potentially receptive financiers possibly to avoid wasting

precious time as the company's funds dwindle.

♦ It must be easily and concisely explainable in a well-orchestrated oral presentation.

Business plans should not exceed 40 pages; investors will generally look at brief reports and avoid those that take too long to read. The

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appearance of the report should be attractive, well organised with numbered pages and a table of contents.

What is a business plan?

It is a written document, which spells out the ideas behind the business and other business considerations. Its objectives included the following: ♦ Identifies the nature and context of the business and why it exists. ♦ To present the approach to be used in exploiting the opportunity. ♦ It identifies the factors likely to determine the success or failure of the venture. ♦ Serves as a tool to raise capital for the business.

According to Longnecker et al "business plans can be viewed as an entrepreneur's game plan which help crystallise the dreams and hopes that motivated the entrepreneur to attempt to start a business. Your plan should layout your basic business idea for the venture, describing where you are now, where you want to go and outline how you propose to get there. Your business plan should explain the key variables for success or failure, thereby helping you prepare for different situations that may occur." The most important step in establishing a business is the construction of a business plan. Oliver Mutukudzi calls it "Vongororo Ruzivo rwerema." Forward analysis of the business will help you avoid throwing away your money in a project that is still born. To prepare a business plan requires people involved to spend time gathering data, interpreting it and presenting it clearly. Ideally the business plan should discuss how the business will be conducted and why it will be successful. Anybody can dream up a successful business essay, but without supporting materials the whole business idea becomes an air bubble. No bank manager will take you seriously unless you can support your ideas. All materials and documents that can support your idea are vital for sound planning. E.g. ♦ You can acquire equipment and other assets prices (proforma invoices) ♦ Or attach catalogues from suppliers indicating products and prices. ♦ A map indicating the location of the business in relation to other competitors if possible. ♦ The target market survey documents ♦ Include official market research figures from various sources about the potential target. Frank Wilbert

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♦ If already running a part time business- financial statements, photographs and testimonials

from customers and suppliers to support the business plan.

When you submit supporting materials it is an indication that you have researched your business idea. The following steps have to be taken in coming up with a business plan:

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♦> Start by writing a description of your business idea- description should not exceed 600

words. Business idea should describe the target market, the product or service, give reasons why the product will be bought, how to market it, projected sales, expenses and profit figures. ♦> Discuss the idea with friends etc to refine it. ♦ Research properly on the business idea. ♦> Write the business plan.

The business plan

The contents of the business plan will be as follows: ♦ Title page -1st page of the business plan and should contain the following:

■ Company name, address, and phone, fax number, web address, etc. ■ Company logo if available. ■ Names, titles, addresses and phone numbers of the owners and key executives. ■ Date on which the business plan was issued. ■ Number of copy. ■ Name of the preparer if other than the executives.

♦ Table of contents- sequential listing of sections of the business plan with page numbers. ♦ Executive Summary- this comes after the table of contents and is crucial for getting

attention of the one-minute investor. It must convey a clear and concise picture of the business proposal and at the same time, create a sense o f excitement regarding its prospects. It must achieve clarity and create interest. It must provide an overview of the whole plan and should be written last and should include the following:

■ Vision and mission Statements- describe the business mission, its intended strategy and

business philosophy for making the vision a reality. ■ It should state briefly how the combined efforts in all areas of the business will move it

towards its goals and must distinguish it from other businesses. ■ A summary of the whole business plan.

♦ Company overview- main body of the business plan beginning with a brief description of

thee business, if business exists include its history. Section tells the reader of the type of Frank Wilbert

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business being proposed, the firm's objectives, where the firm is located, and whether it will serve local or international markets. Also include the legal issues regarding the form of the organisation. Critical questions to ask are: ■ What is the basic nature and activity of the business? ■ When and where the business started/ going to start? ■ What has been achieved? ■ What changes have been made in structure and/ ownership?

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■ In what stage of development is of development is he firm e.g. see stage, maturity etc.

❖

Marketing plan -shows who the firm's customers will be, what type of competition it will

face, its marketing strategy and the firm's competitive edge. Section should address the following: ■ Analysis of the target market. ■ Profile of target customers. ■ Methods of identifying and attracting customer. ■ Selling approaches. ■ Type of sales force. ■ Distribution channels. ■ Types of sales promotions and advertising. ■ Credit policies. ■ Pricing policies.

❖

Products&/ services- describes the products/ services pointing out the unique features.

■ Explain why people will buy the products/ services. ■ Features of the products/ services providing competitive edge/advantage. ■ Available legal protection - patents, copyrights etc.

❖

Management plan- investors look for well managed companies and they consider the

quality of management team. The better the quality the greater your chances of getting support from financiers/investors. Section should show: ■ The proposed organisational structure. ■ Backgrounds of those filling key positions.

The team should be well balanced to include financial, production and marketing expertise. Should show managerial experience. Include brief cvs for managers in the appendix section. Possible questions to ask include the following: ■ Who are members of my management team? Frank Wilbert

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■ What are their skills, education and experience? ■ What active investors or directors are involved and what are their qualifications? ■ What vacant positions remain and what are your plans to fill them? ■ What consultants will be used and what are their qualifications/ ■ What is the compensation package for each employee? ■ How is ownership distributed? ■ How will employees be selected and rewarded? ■ What style of management will be used? ■ How will employees be trained? ■ How will employees be motivated? ■ How will creativity be encouraged?

❖

Operating plan -offers information on how the product will be produced and how

services will be provided ■ Discuss the location of facilities, how much spaces the business will need ■ What type of equipment it will require

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POSSIBLE QUESTIONS

1. How important are your personal reasons for choosing a location 2. What environmental factors will influence your decisions? 3. What resources are most critical to your location decisions? 4. What machinery will be required for operations to start?

♦ FINANCIAL PLAN

Constitutes crucial piece of business plan and comprises proforma statements or projections of the company's financial statement for the next five years. It should include the following: ■ Balance sheets ■ Income statements ■ Statement of cash flows on an annual basis ■ Cash budgets on a monthly basis for year 1, quarterly for years 2&3, annually for year

4&5.

Appendix of supporting documents- contains various supplementary supporting material

and attachments to expand the reader's understanding of a plan e.g. ■ Cvs of key investors/owners/ managers. ■ Photographs of products/facilities and buildings. ■ Professional references. ■ Marketing research studies. ■ Pertinent published research. ■ Signed contracts of sales.

REFERENCES

Kinunda-Rutashoba, L and Olomi, D R (eds) (1996), African Entrepreneurship and Small Business Development, Dares Salaam. Lee, J The Motivation of Women Entrepreneurs in Singapore, Women in Management Review Vol.11 No.2. 19996.pp18-29.

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Matias D G Women and Entrepreneurship in California, Obstacles, Incentives and Reform, Pacific Research Institute for Public Policy, March 2002.

Mattis M C Women Entrepreneurs: Out From Under the Glass Ceiling, Women in Management Review. 2004 Vol.19 Number 3 pp. 154-163. Maysami C, Gogy R and Priscilla V. Female Business Owners in Singapore and Elsewhere: A Review of Studies, Journal of Small Business Management; April 1999, Vol.

37 Issue 2. Elwee, G. and Al-Riyami, R. Women Entrepreneurs in Oman: Some Barriers to Success, Career Development International 8/7 2003 pp.339-346.

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Entrepreneurship Module 1 - Copy

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