LECTURE 9
ESTABLISHING A BUSINESS
Entrepreneur- Person who identifies successful business opportunities, risks time and money to
start and operate a business, bringing resources together with the intention of generating wealth.
Role of an Entrepreneur
An entrepreneur is one who undertakes the risk of investment to create and market a good or
service for financial gains. He is very perceptive and takes advantage of business opportunities
that will generate high profits. Entrepreneurs can be sole traders, partners in a business or a
group of shareholders.
Entrepreneurs are of vital importance to an economy. They are motivated by their own selfinterest to make profits and in so doing provide employment, create goods and services and
generate revenue impacting on the economy’s level of national income and hence potential for
economic growth.
The entrepreneur is a shrewd investor and takes calculated risks i.e. ones that minimize loss
when choosing investment opportunities. The entrepreneur is the conceptualizer of the initial
business idea. He must identify the best resources that suit the business operation and ensure the
efficiency of each resource employed. For example, training workers, using machinery to
increase labour productivity, maximizing the use of factory and shop space and borrowing
money at low interest rates. The entrepreneur must continuously evaluate the performance of his
ventures. Information can be garnered from the balance sheets and Management Information
Systems.
Role of entrepreneur
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6.
7.
Conceptualising
Planning
Accessing funds or financing
Organising the business
Operating the business
Evaluating the performance of the business
Risk bearing
Importance of entrepreneur
1. Provide goods and services
2. Create jobs
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3. Increases the GDP or value of goods produced.
4. Utilize local raw materials
5. Earns foreign exchange
Personal Qualities of an Entrepreneur
Entrepreneurship requires the following characteristics for success:
1. The creativity to innovate new product and ideas.
2. Innovation
3. The drive and determination to be successful.
4. The ability to take calculated risks.
5. The flexibility to adapt to changes in the market and industry.
6. Very goal- oriented to purposely and aggressively accomplish task and meet objectives.
Reasons Persons Establish their own Businesses
1. Financial Independence
Some persons feel restricted financially with the income received from their job. Starting a
business would give them the opportunity to be a successful business person and achieve
financial independence.
2. Being your own boss
You are able to make decisions about the direction and operation of the business.
3. To use your skills and knowledge for yourself
The skills, knowledge and experience that you have acquired can be put to work for you.
4. Self-actualization/fulfilment
Owning and operating a successful business will give a feeling of accomplishment.
5. To create employment for relatives, friends and community members
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Businesses can assist in providing jobs for persons in communities with high levels of
unemployment.
Steps in Establishing a Business
1. Conceptualization
All business ventures begin with the conceptualization of an idea. At this initial stage the product
or service idea is envisioned. Most Entrepreneurs identify a need in the market i.e. a service that
is not being provided or a product that does not exist. If the product or service already exists then
ideas to make improvements may be conceptualized.
2. Research
The entrepreneur is a shrewd investor and takes calculated risks. Before investing money in a
business venture a market research must therefore be done to ascertain the extent of the need for
the product or service. This helps to minimize losses. A market research involves gathering
information about a potential market to help an investor make decisions about entering that
market.
3. Identification of resources
What resources are needed to start the business?
If the market research is favourable the entrepreneur must now identify the necessary resources
to operate business. The resources required are land, labour and capital. Land refers to location
or place used to set up a business. This may be bought, rented or family home. Labour employed
must be qualified and skilled to efficiently carry out their duties. Capital includes money, raw
material and assets such as machinery and equipment.
4. Creation of a business plan
Preparing a business plan is very important before the start of a business. This will help the
business to ascertain whether or not the business will be profitable. A business plan outlines the
goals of a business and the strategies that will be employed to achieve them. Usually financial
institutions require that a business plan be presented when a loan is requested for business
investment.
5. Acquisition of funds
There are several ways of acquiring funds to start a business. There are a myriad of financial
institutions that are willing to assist small businesses once their business plans are deemed
workable. The investor must weigh the advantages and disadvantages of acquiring funds from
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the various financial institutions. The cost of borrowing i.e. the interest rate charged and the
length of the repayment period are factors to consider.
Funds may be borrowed from friends and relatives that may attract a lower or no repayment cost
and a more flexible repayment schedule. Funds can also be acquired from personal savings.
Encouraging partners or selling shares are ways of avoiding high costs of capital.
6. Operation of a business
A business must be efficiently operated to ensure high quality goods and service. This is
important to keep existing customers and for business growth. Many companies employ an
operation manager to design and oversee its operations. This person develops and manages the
various processes used to create goods and services efficiently to ensure customer satisfaction.
Sources of Research in Establishing a Business
Firms embark on research to uncover information about consumer preferences, the level of
competition in the market, responses to advertisement etc.
Sources of Information
Data may be collected from primary or secondary sources.
(a)Primary Data
Primary data is originally collected data. This data will be obtained by interviewing, observing or
distributing questionnaires to the sample population.
(b) Secondary Data
Secondary data is information that has already been collected by someone else originally. This
data will be therefore obtained from books, newspapers, magazines, libraries and publications of
various institutions.
Process between Planning and the Operation of a Business
Managers must continue to plan in order to ensure that its operations meet all long – term,
medium- term and short- term goals.
Long- term plans are made for 3 to 5 year periods. Long-term plans determine the direction of
the company. These plans set out the firm’s overall strategy to move from its present position to
where it intends to be. Long-term plans include expansion plans and plans to create new products
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and services. Long-term plans are made by the directors or persons in senior management
positions of a company.
Medium-term plans range from 1 to 2 years. They are made by department managers or persons
in middle management positions. Medium term plans include increasing the efficiency of a
department in order to increase the quality and quantity of output. This would involve
implementing training programmes for staff and identifying equipment that would increase
efficiency.
Short-term plans are made daily, weekly and monthly by supervisors or persons in lower level
management positions. These plans are centred on meeting daily, weekly and monthly
production targets.
Regulatory Practices Instituted by Governments
A business is not considered a legal entity if it is not registered as business in the country where
it operates. All persons desirous of starting a business must first be registered with the
government agency authorized to carry out registration of business in their country.
A sole trader only needs to register his business by meeting the requirements outlined for sole
traders by the registering office and filling out the required documents.
Partnerships are also registered by the completion of a registration document. The names of all
the partners must be listed on the document. Partners in a business are advised to draft a Deed of
Partnership. This document sets out all the rules that govern the partnership and will thus help to
prevent conflict among partners.
The formation of public and private limited liability companies involves the preparation of a
number of documents.
The Companies Act contains the laws relating to companies. To comply with certain
requirements which were laid down by the Companies Act, the promoters of the company must
present the following documents:
1. The Memorandum of Association – this document governs the company’s relationship with
the outside world. It contains:
(a) The name of the company
(b) The address of the registered office
(c) The objectives of the A statement of limited liability to members
(d) The amount of capital to be raised by the selling of shares and the types of shares to be issued
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(e) The number of shares to be taken by the directors
(f) Statement of intent to form a limited liability
2. Articles of Association – this document contain the internal rules and regulations which
govern the company. It contains:
(a) The rights and obligations of the directors
(b) The procedures for calling an annual general meeting
(c) Procedures for electing directors
(d) The borrowing powers of the company
In order to effect the registration of a company, the Memorandum and Articles of Association
must be prepared by a lawyer or any person named in the articles as a director or company
secretary and sent to the companies registering office.
3. Statutory Declaration – this document states that the promoters of the company have
compiled with the Companies Act. It is a signed statement from each director certifying their
willingness to serve.
4. Certificate of Incorporation
Once all three documents above have been submitted and the Registrar of Companies is satisfied
that all is in order, it will enter the name of the company on the register, and issue a certificate of
incorporation. The certificate of incorporation is proof that all requirements of the Companies
Act have been complied with. The certificate of incorporation establishes the firm as a legal
body.
5. The Incorporated Company
A company always means an incorporated company. If a company is not incorporated, it is really
a large partnership. Every business that has more than twenty shareholders must be registered as
an incorporated company. The advantage of incorporation is that each member’s liability is
limited. At this stage it is only the private limited company that may begin trading.
6. The Prospectus
The public limited liability company must first publish its prospects inviting the public to
subscribe for shares. This may be a publication in the newspaper or in another public media. The
prospectus will contain information on the assets, liabilities and profit levels of the company.
7. Certificate of Trading
Once the public limited liability company has collected the total amount of share capital stated in
the memorandum, the company will then be issued with a Certificate of Trading. This will allow
the company to start trading.
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Sources of Capital in Setting up a Business
Capital is one of the resources required to set up a business establishment.
Capital mainly refers to those assets that are used to start and continuously operate a business.
Fixed capital includes machinery, equipment and vehicles owned by the company. These assets
are so called because they cannot easily be turned into cash.
Circulating capital includes raw materials, finished and semi-finished, goods, bank and cash
balances. These assets can easily be converted into cash.
Sources of Capital
- Personal savings of the owner or owners
- Assistance from friends and family
- Loan from a financial institution
- Selling shares
- Forming Partnerships
- Debentures
- Venture Capitalist
Collateral – is money or property that is pledged as security for repayment of a loan.
Guarantor – someone who gives a legally binding promise to be responsible for the debt of
another person or to carry out some other legal obligation of the other person.
The significance of collateral in accessing capital to establish a business
Collateral is anything of value that is used to secure a loan. It is required by financial institutions
for the approval of loans. If the loan is not repaid then the financial institution has the authority
to seize the borrower’s collateral. Forms of collateral include: bank balances, motor vehicle,
dwelling house, land, machinery and equipment etc.
Evaluation of Different types of collateral
Property- used for large loans for a long time
Stocks- Any size loans
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Bonds- Any size loans
Money- Any size loans
Cash surrender on insurance policies- Any size loans
Motor Vehicles- small and medium loans for a short period
Other assets (Appliances)- small and medium loans for a short period
The value or importance of collateral
Important to an entrepreneur to raise finance for business.
Features of a Business Plan
A business plan is a document outlining the goals of a business and the strategies to achieve
these goals. It is mainly prepared by new businesses or by ones making major changes.
Executive Summary
The Executive Summary is a synopsis of the full business plan. It presents the salient points of
the plan. It contains information on the purpose of the business, its methods of operation and
future expectations.
History of the business
This section gives full details on previous operations of a business. For a new business it will
explain where the idea came from and the reasons for starting the business.
Mission Statement
The Mission Statement gives the overall goal of a business as well as its values. It serves as a
guide to the operation of the business. For example: providing the highest quality goods and
services.
Business goals and objectives
The firms’ short-term, medium-term and long-term goals and the time in which these are to be
achieved is outlined in this section.
Organization
The business must state the ownership structure and give details of the management team.
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SWOT Analysis
Looks at the strength and weaknesses of the business
E.g. Strengths – strategic location, years of experience
Weakness – Loans at affordable interest rates,
Industry Analysis
How has the industry changed in the past few years and who are the other firms in the industry.
Product /Service Description
Describe clearly the product or service that you will be offering.
Market Analysis
Describe your target market and your competitors.
Marketing Strategy
Explain the various promotional, pricing and distribution strategies.
Operations
Explain how the business will function on a day-to-day basis. For example: Procurement of raw
materials, the use of technology and operating methods.
Sales Forecast
What amount of sales the business expects to make on a monthly basis.
Start –up Cost
The total amount needed to start the new business, giving a detailed description of what the
money will be used for.
Operating costs
E.g. fixed Costs (rent, insurance and salary) and variable costs (utilities and wages)
Projected Cash Flow
An estimate of how much you expect to earn periodically once you start operating.
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Acquisition of Funds
Information on how funds will be obtained e.g. personal savings, borrowing from friends and
family, borrowing from financial institutions or by selling shares.
Benefits of a Plan
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Ensures that careful research is conducted into the feasibility of the business.
Anticipates needs and problems which can be planned for in advance.
Provides a written document that can be used when requesting financing.
Purpose of Feasibility Study
This is an analysis of the viability of a business idea, and an examination of the different aspects
of operating a business. It will show whether a business venture is worthwhile.
It will analyse:
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Market demand
Target market
Profitability
Production methods
Operating expenses
Distribution channels
Competition
Promotional requirements
Cash flow
Resources required
Any special legal requirements
Ethical and Legal Issues
Business owners are required to obey all legislation concerning the operations of a business.
These include, paying taxes, business registration, obtaining licenses when required etc. Business
owners should also operate their business based on integrity. This involves:
- Environmental awareness – reducing pollution and harmful effluents in the rivers and seas.
- Avoiding tied selling (marrying of goods)
- Misleading advertising (untruths about goods advertised)
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- Untrue sale price – For example, writing the word sale on items for which the price remains the
same.
- The use of market dominance to squeeze firms out of the industry- For example large firms
may drop the price of their goods so low that small firms are unable to compete with them.
Consequences of Unethical and Illegal Practices
Illegal business practices will result in legal consequence for business. This may include large
fines the loss of the business. Legislation also protects consumers, competitors and society from
unethical practices of a business.
Ethical and
Legal Issues
Ethical and Legal Description
practices
Consequences
Advertising
Misleading
Advertising
Withholding tax
Honest and realistic
advertisements
Mandatory
Cause citizens to
waste a purchase
Tax avoidance
Environmental Issues
Unethical disposal of
waste
Pollution
Money (gained
legally vs illegally)
Money launderinguse of illegal money
in legitimate business
Law mandates
protection of
environment
Illegal business
activity
Taxation
Too much money
circulating.
Distortion of National
Income
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