COMMERCE NOTES F5
Business units
The phrase business unit refers to various ways of owning a business. For
example, you can own a business alone, as a sole proprietor or own it jointly
with another person or partner, as partnership. Another way of owning a
business, especially with many other people is by forming a limited company
of which there are two types namely, private limited companies and public
limited companies.
What is a business: The term business refers to any legal activity carried out
with the view of making profit. This could be singing, farming, buying and
selling, manufacturing, transporting, repairing of cars, or just anything.
The business economy is divided into two sectors Public Sector and Private
Sector
Private Sector includes:
Public Sectors include
-Sole Traders
-Public Corporation
-Partnership
-Parastatals
-Private Limited Company
-Public Limited Company
1. SOLE TRADER
The meaning of sole proprietorship: As the name implies, the ownership of
such business is in the hands of just one person. He/ She perform the day to
day management (of the business) by him or herself, although some delegation
of responsibility may be necessary.
FEATURES OF THE SOLE PROPRIETOR
The main features of sole proprietorship are as follows:
-it is owned by only one person who provides all the capital needed to set up
and run it and takes all the profit as his/ her reward.
-It is the simplest and most common type of enterprise
-The owner uses his or her labour, assisted perhaps by one or two workers or
the family members.
-The business tends to be small in size although it is not always so.
The nature of businesses where sole proprietorship is common
Although sole proprietorship is common in retailing, it is by no means confined
to the retail trade. There are builders, plumbers, hairdressers, motor
mechanics, radio and T V repairers, painters, decorators, and farmers, who
own their businesses alone. In addition, there are also fishing firms, small scale
manufacturing enterprises, hotels, restaurants and bars owned and run by
individuals.
Sources of finance for a sole trader: Selling personal assets e.g. Land, building,
cattle and shares held in other companies, borrowing from friends, family
members, relatives, borrowing from banks, retained profits, trade credit, hiring
equipment etc
Advantages of Sole proprietor
- It is easy to set up, control and manage.
- It requires small amount of capital to set up, although it is not always the
case.
- The owner makes independent and quick decisions on how the business
is to be run.
- The owner has personal contacts with his / her workers and customers.
- The owner takes all the profit made by the business and this gives him or
her encouragement to work hard.
- The owner will be familiar with all aspect of the business
- The business affairs can be kept private.
- Satisfaction and interest is gained by being self employed.
3.Disadvantages of Sole proprietorship
-The owner’s personal assets are at risk because the business has unlimited
liability
-The business cannot do without the owner. In fact it might end when the
owner dies.
-It is more difficult for the owner to borrow money than in other forms of
business so expansion is usually difficult, if not impossible. This is mainly
because many sole traders do not have collateral security to provide when
applying for loans and are therefore considered high risk customers by banks
and other financial institutions.
-Division of labour may be difficult to organise because of the small size of the
business.
-Shortage of capital prevents the sole proprietor modernising and providing
services such as credit, delivery and other amenities to his/ her customers
which means the business is less attractive.
Contribution of sole proprietorship to Botswana’s economy
A large majority of businesses are run as sole proprietorship and they make a
huge contribution to the economy.
-They provide jobs, income and livelihood to many people in Botswana.
-The tax paid by sole proprietors is a source of income to the country
-Export of goods made by sole proprietorship earns the country foreign
exchange.
- Provide goods and services to Batswana
-Sole proprietorship is the foundation of rural economy and contributes to
rural development.
-Some sole proprietorship contributes towards community projects which help
the poor in particular but also improve the well –being of all.
2.PARTNERSHIP
A partnership is a relationship that exist between two or more people who
have come together to do a common business with the view to making profit.
The two or more partners share the risks, costs, and responsibilities of being in
business.
Forming a partnership
A partnership is relatively simple and flexible for two or more people to own
and run a profit making business together. They draw up a legal document
called deed of partnership which gives details of the way they want to organise
and run the partnership.
Deed of partnership: A deed of partnership is a legally binding agreement
between the partners who are in business together. It describes how the
partnership will run. It is not necessary (compulsory) to have a deed of
partnership, but it is a good idea, as it will help to avoid misunderstandings and
disputes between partners in the future
The deed of partnership will usually set out:
-The particulars of the partnership such as its business name, and the name of
partners
-The objectives of the partnership
-whether or not interest is to be paid on capital invested
-the right and duties of the partners themselves.
-The amount of capital that each partner is to contribute to the business.
-The way in which partners will share profits, and whether any of the partners
should be paid a salary
-Working arrangement- eg how much time each partner should contribute to
the business.
-the ways of affecting changes to the partnership, such as how partners can be
appointed and what happens if a partner dies or wishes to leave the
partnership.
THE FEATURES OF PARTNERSHIP
- It is formed by two to twenty people (except for professional
partnership such as that between lawyers, doctors, engineers, and
architects who are allowed to be more than twenty in partnership.
- The capital of partnership is raised by contribution by each partner.
- In a partnership, ownership and control is not separated. It is owned and
controlled by the partners themselves.
- Partners have no separate legal entity. This means the liabilities of the
partners, just like for the sole trader is unlimited.
- Each and every partner is entitled to be involved in the running of the
businesses.
Advantages of partnership
Forming a partnership has several advantages:
-A partnership is easy to set up. It does not involve long, costly and time
consuming procedures.
-More people are involved in the business so more capital can be raised than in
the case of the sole trader who is alone.
-Division of labour is possible as they are many people involved. It is possible to
find that each partner has a different type of skill. This pool of skills can be put
together creating far greater efficiency than the sole proprietor.
-Expenses and management of the business are shared.
-Decision making is consultative. As a result, the quality of decisions tend to be
better than that of a sole proprietor
-A partnership is not required to publish its accounts annually so there is
privacy in the business.
-By coming together there is a range of skills and experience that the partners
can bring to the business
Disadvantages of partnership
Despite the benefits of forming a partnership, there are several disadvantages
as well.
-Decisions may be delayed by disagreement among partners.
-the partners have unlimited liability and are, therefore, personally and fully
liable for the debts of the business. This puts their personal assets at risk.
-if one partner leaves or dies a new partnership agreement is required. This
can be very irritating.
-it is not usually easy to find a suitable partner.
-Membership in a partnership is limited to twenty, (except for professional
partnerships). This is a problem because it restricts the firm’s ability to raise
more capital.
- One or a few partners may be honest and hard working but because profits
are shared by all partners the hard working partners may get discouraged.
-A partnership has no legal existence distinct from the partners themselves.
- If one of the partners resigns dies or goes bankrupt, the partnership must be
dissolved though the business may not need to cease. This can be very
annoying and is not good for the business.
-Converting your business into partnership means giving up sole ownership.
-Sharing profits bring down rewards.
Types of partnership
There are two types of partnership namely limited partnership and general
partnership
General partnership
A general partnership is a partnership in which all the partners have unlimited
liabilities. General partnerships are the most common form of partnership.
Limited partnership
A limited partnership is one where at least one partner has unlimited liability.
Similarities between partnership and sole proprietorship
There are several areas where the two are similar:
-both are easy to set up
-Both have unlimited liability
-Both are managed and controlled directly by their owners
-Both have got no separate entity
-Both are unincorporated forms of business
-Both are not legally required to publish their annual accounts.
-in both there is no differentiation between business and private property.
Differednces between partnership and sole proprietorship.
Sole proprietorship
Partnership
-Owned by only one person
-owned by 2-20
-Capital provided by one person
by partners
-Profit belong to one owner
partners
-Decision making is fast
-Has no assured continuity
-Generally small in size
- capital contributed
- Profit shared by all
-Decision making is slow
-Have greater continuity
- Larger than sole proprietorship
THE CONTRIBUTION OF PARTNERSHIP TO BOTSWANA’S ECONOMY
Partnership firms have made and continue to make and important contribution
to the economy of Botswana
-They provide jobs, income and livelihood to many people in Botswana.
-The tax paid by partnership is a source of income to the country
-Export of goods made by partnership earns the country foreign exchange.
- Provide goods and services to Batswana
-They also contribute to rural development as many are located in rural areas.
-Some sole proprietorship contributes towards community projects which help
the poor in particular but also improve the well –being of all.
LIMITED LIABILITY: If a business runs into a financial difficult the owner losses
only money invested or resources invested in the business. e.g. Private and
public limited companies.
UNLIMITED LIABILITY: If a business runs into financial difficult the owners loses
capital invested and personal properties to cover the debts e.g. sole- traders
and partnership
DIFFERENCES BETWEEN INCORPORATED AND UNINCORPORATED BUSINESS
Unincorporated business have unlimited liability e.g. Sole- traders and
partnership
Incorporated businesses have limited liabilities e.g private limited companies
and public limited companies
LIMITED COMPANIES
A limited company is a company whose liabilities are limited. There are two
types- private limited and public limited companies.
FORMATION OF A LIMITED COMPANY:
The promoters that are people wishing to form a company will:
i)Prepare the memorandum of Association and an Article of Association
ii)Send documents to registrar of c companies
iii) Receive a certificate of incorporation which represents the birth certificate
of a company or a certificate of trading.
MEMORANDUM OF ASSOCIATION:
It is a document that shows the company’s external relationship with the
outside world, it defines the powers and limitations of the company and it
contains the following:
I) the name of the company (must end with limited Ltd or proprietary limited (
‘pty Ltd’)
ii) The location of the business
iii) The objectives of the business
iv) Amount of capital to be raised
V) Statement showing whether it is a private or public limited
ARTICLES OF ASSOCIATION
Is a document that lays down all the rules and regulations for the internal
affairs of the company: it contains the following:
i) rights and powers of directors
ii) Procedures for calling the annual meetings
iii) Procedures for electing members
iv)borrowing powers of the company
PROSPECTUS
-Is a document used to advertise shares so that the public can buy shares in a
company?
-It gives details of shares available, the price of the share, company’s past
financial result.
PRIVATE LIMITED COMPANY: it is a limited liability company which is formed
by 2 to 50 shareholders.
Advantages of private limited companies:
-A private limited company is legally a separate thing, eg buy and sell assets,
makes contracts, sue other companies and individuals and can be sued itself.
-The liability of shareholders is limited so their personal assets are not at risk.
-It can easily raise more capital by selling shares, though not publicly.
-The company has sure continuity unlike a one man business.
-The share holders have direct control over the company’s affairs. Their view is
heard at the annual general meeting.
-The founders can retain control over the company by holding a majority of it
shares.
Disadvantages of private limited companies
_There are too many legal formalities. For example, you must hold an annual
general meeting (every year), you must send details of the company’s financial
affairs to the company registration office every year, the company accounts
must be audited annually, and so on.
-The shares are not freely transferable; transfers of shares to a new investor
must first be approved by existing shareholders. This can limit the
shareholders ability to sell his or her shares.
-the accounts must be audited annually; this means you will have to employ an
auditor in addition to an accountant.
-It is more expensive to set up a company than to start a sole proprietor
business or a partnership
Public limited companies: it is a limited liability company which is formed by
two to no maximum number.
Advantages of public limited companies
-The liability of a public limited company (and that of its shareholders) is
limited and it is a separate legal entity. This encourages the public to invest
money in the company without putting their assets at risk.
-Its shares are freely transferable on the stock exchange. Anyone holding the
shares of a public limited company can take their to the stock exchange and
sell them any time.
-It has assured continuity.
-it can raise more capital by the sale of shares and debentures to the public
especially on the stock exchange.
- It is easier for a public limited company to borrow money from banks and
other financial institutions. They are considered more reliable and safer
borrowers than small businesses, because of their wide assets basis.
-It can afford to employ specialists in such fields as marketing, accounting, and
personnel which make it more efficient.
-its large size allows the company to buy the latest and most modern
equipment and technology which will in turn lead to further savings in labour
and expenses.
- A public limited company is usually large; as a result, it can buy its supplies in
bulk and enjoy large discounts.
Disadvantages of a public limited company
-A public limited company if difficult and expensive to form. The formalities
involved are complex, costly and time consuming.
-Once established, again, it must comply with many regulations (put in place by
the government to protect both the share holders and the general public).
-it may grow and become so big that it is difficult to manage.
-The original owners usually lose control over it as it becomes bigger and
bigger.
- There is little secrecy as account must be published annually
-Decision taking takes a long time because they are many people involved.
CAPITAL STRUCTURE OF LIMITED COMPANIES
TYPES OF SHARE CAPITAL
AUTHORISED- the maximum amount of share capital a company is allowed to
raise through issuing or selling shares.
ISSUED SHARES- That part of the authorised shares that is sold.
PAID UP CAPITAL- Capital raised from shares that have been bought and paid
for.
SHARES: -A Share is a unit of a limited company’s capital.
-When a person buys a share he is given a share certificate
TWO TYPES OF SHARES ARE: PREFERENCE AND ORDINARY SHARES.
THE DIFFERENCE BETWEEN ORDINARY AND PREFERENCE SHARES
ORDINARY SHARES
SHARES
PREFERENCE
-Shares receive variable rates of dividend
a fixed rate of dividend.
-Shares receive
-Usually get dividends after preference shareholders
received dividends before ordinary shareholders.
-Have voting rights
-Usually
-Have no voting rights
DEBENTURES
-This is a loan given to a company
-A fixed rate of interest is paid whether or not the business makes profit
-Types of debentures include; naked, mortgage, redeemable, irredeemable.
DIFFERENCES BETWEEN A SHARE AND DEBENTURE
SHARE
DEBENTURE
Is a unit of capital
Is a loan from the public
Receives dividend only if the company makes profit
interest whether or not the company makes profit.
Shareholders are part owners and may vote
holder is a creditor and cannot vote
Receives
A debenture
MULTINATIONALS
-It is a company that has branches in more than one country e.g. De Beers
-it is usually a public limited company
-its main objectives are to expand into profitable areas
-Decision making is controlled from the head office where the parent company
is located.
-The parent company normally owns 50% or 100% of the subsidiary.
WHY MANY DEVELOLOPING COUNTRIES TRY TO ATTRACT MULTINATIONAL
COMPANIES
Many developing countries do all they can to attract multinational companies
in their countries. The main reasons for the attempts are to:
-bring direct foreign investment and business skills.
-stimulate industrial as well as economic development.
-bring in capital needed to develop natural resources.
THE CONSEQUENCES OF MULTINATIONAL COMPANIES.
Some of them end up exploiting the host countries. For example, they may
insist on importing inputs from abroad instead of using locally available ones.
This will restrict their ability to create jobs. Secondly many of them demand
that the costs of services such as telephone, water and electricity be reduced
or they pull out, this will lead to the fact that companies providing electricity,
water and telephone would fail to make any profit.
ADVANTAGES OF MULTINATIONAL COMPANIES
Multinational companies have many advantages; these include the following:
-Paying taxes which boost the host government income.
-Providing jobs around the world
-They bring business knowledge, skills and technology with them.
-Bringing foreign exchange by selling their goods abroad.
-Providing vital goods and services to private household as well as to other
companies.
-in addition they usually have worldwide contacts which the host country can
use to boost its export sales.
-They can achieve great economies of scale because of their size.
DISADVANTAGES OF MULTINATIONAL COMPANIES
-They dominate most export markets, take over local firms and worse still
force small companies out of business.
-They usually bring their own experts instead of training the locals to
participate in important decision making in multinational companies that
operate in their own country
-They can prevent the transfer of technology to the host country by ensuring
that research facilities remain based in their home countries.
-They are able to pay high salaries and offer better conditions. As a result, they
attract skilled locals at the expense of the local industries.
-These companies take back with them (to their home countries) all the profits
made in the host countries. This drains away the host country’s foreign
exchange reserves.
PRIVATIZATION
-Is a means of selling off government owned corporations to private buyers.
ADVANTAGES OF PRIVATIZATION
-it improves the quality of goods and services. It improves efficiency because
of competition and the drive to maximise profit. High quality products and
effective services are provided.
-it removes political interference in business operations.
-it helps empower citizens where such sales are restricted to citizens
- It reduces government administrative and financial burden with respect to
providing services.
-it increases effectiveness and productivity of public administration.
-improves access to more and better quality services at affordable prices.
-Increased variety.
-More client oriented services. users pay for the services they are embolden to
demand better quality services at reasonable prices.
-It leads to economic stimulation and growth of employment and business
opportunities.
DISADVANTAGES OF PRIVATISATION
-It leads to massive job losses. This is why it is always opposed by trade
unions. As the news owners restructure the company, some jobs are shaded.
-Profits go to private individuals and not to the whole nations.
-Government may lose controls of strategic industries if privatisation is not
carefully planned..
-Privatisation can be abused by corrupt politicians who will sell companies to
themselves and give away prices.
-Privatisation leads to rich individuals getting richer and the poor getting
poorer.
-Some government policies may become difficult to implement.
NATIONALISATION: This refers to the purchase by the state of private sector
business.
Advantages of nationalisation
-The profits realised goes to the state coffers. This helps fund development
project.
- It provide secure employment to the population
-Large public corporations can enjoy economies of scale
- It facilitates the implementation of certain government policies
Disadvantage of nationalisation
-It eliminates competition and causes inefficiency due to monopoly power
-Poor organisation and lack of communication.
-Political aspects e.g. too much interference by parliament makes difficult to
make profit.
-Loss making firms will burden the public purse as they are to be financed by
the tax payers.
-Nationalised industries often become too large and difficult to manage.
-It would be run by politicians who may not have the necessary business
expertise
-Lack of profit motive in their operations lead to wastage of resources
-Centralised control lead to too much bureaucracy.
-Profit drive leads to over exploitation of natural resources.
COMMERCIALISATION
This means the turning of usually a public enterprise into a profit – making
business.
Advantages of commercialisation
-improved efficiency means increased cost effectiveness
-higher profit motive means better utilisation of resources
-Better quality products and services are made as companies face up to
completion.
-Workers become more committed and responsible as their livelihood depend
on the profitability of the enterprise
Disadvantages of commercialisation
-Management find it difficult to reconcile political interest and economic
interests.
-Essential goods and services become too expensive for the poor
-Emphasis on profits will lead to neglect of staff welfare.
-Profit drive leads to over exploitation of natural resources.
Public corporations: Those are enterprises owned by the government eg
Botswana Meat Commission, Water utilities corporations, Botswana
Telecommunications cooperation etc.
Features of public corporative
-They are not after profit but after rendering a service to its citizens
-The policy of the public cooperation is decided by the government.
Advantages of public corporation
-Through state enterprises, the government can control the provision of
essential or strategic goods and services such as electricity, marketing of
minerals, water, railway transport and telecommunications.
-Public cooperation is big and they buy in bulk and are given discount where
they buy.
-They have the interest of the public at heart, and tend to provide cheaper
goods and services.
-They provide secure employment to the large number of the local people.
-They help to implement government polices e.g. on prices of essential goods
and services.
-private firms set up their business only on profitable areas, public cooperation
aims to cover the whole country.
- They are a source of income to the government.
Disadvantages of public corporations
-They are inefficient and wasteful. Most of them are operating below full
capacity.
-Because of monopoly (especially those who have no competitors) they tend to
provide poor quality goods and services.
-Lack of initiative among workers lead to inefficiency. Workers do not identify
with the enterprise. As a result do not use their initiative.
Why the government takes part in the economic activities.
-To provide goods that the private sector is unable to provide eg security,
maintenance of law and order, roads, etc.
-To raise revenue to meet -its expenditure.
-To control the provision of essential or strategic goods and services such as
minerals, water and power.
-To provide comprehensive services throughout the country
-To provide essential goods and services at reasonable rates or prices.
-To create secure employment for the people
-To help implement government policies
-For political reasons. To be seen to be providing goods and services and hence
looking after the well being of the voters.
STOCK EXCHANGE
1. This is a market where stocks and shares are bought and sold
2. A stock/bond is sold by government to raise money for financing
projects.
3. A share is a unit of capital in a company.
4. Dividends are the income received by buying a share in a company.
Structure of Botswana Stock Exchange (BSE)
Stock Exchange Council is divided into Stock Brokers and Stock Makers
(Jobbers)
1. Botswana stock exchange is under the control of a committee elected by
members who are responsible for its administration.
2. Only the following can trade on the stock exchange market:
a) Listed companies
b) Brokers
c) Bank
d) Speculators (bulls, bears, stags.)
Functions of Botswana Stock Exchange
1.
2.
3.
4.
5.
Provides a market where stocks and shares can be bought
Companies who wish to raise capital can sell shares
It sets prices for shares and advertised them
It builds the reputation of a company listed on the stock exchange
It establishes a code of conduct which members must follow- investors
are protected from unfair practices.
Activities of Stock Exchange Members
1. It controls the admission of a new members
2. It disciplines members who are guilty of misconduct
3. It settles disputes between members
4. It provides settlement and information services to members
Causes of Stock Market Turbulences
1.
2.
3.
4.
Political changes- change in elected government
Change in government policies e.g. taxation
Performance of the companies
General national prosperity
Consequences of Market Turbulences
1. Investors withdraw their capital or sell away their shares
2. Fall in the value of shares lead to huge losses to both investor and the
company
3. Decline in the economy- people do not invest, they sell off their shares
4. Improvement in the economy-increase in investment.
ESTABLISHING A COMMERCIAL ACTIVITY
THE PROCESSES OF COMING UP WITH A COMMERCIAL ACTIVITY
To set up in business, you have three possible options
i)
You can start a new business from the scratch,
ii)
You can buy an existing business or
iii)
You can get a franchise
1. Starting a new commercial activity (finding a feasible business idea)
The first step in the processes of coming up with a commercial activity is
conceiving a viable business idea which can be developed into a profitable
business.
Ways of finding commercial ideas
There are many ways of finding a commercial idea but the main ones are
described below:
i)
ii)
iii)
iv)
v)
Noticing a gap in the market: A viable commercial idea may come
from having noticed that something is lacking eg you
may think of things that you, or your friends and family, have always
wanted but which have not been easy to find.
Solving a problem: Many people have made fortunes by trying to
solve a problem. The doctor who would find the cure for Aids, for
example would make a fortune right over the sale of the medicine.
Raising customer’s standard of living: Customers do not need only
food, shelter and clothing. There are a wide range of goods and
services that could be provided to improve their standard of living.
Think of anything a well dressed and fed customer would want to do
during their free time.
Brainstorming: Brainstorming involves team work. You sit down with
a number of people and come up with as many ideas as you can and
discuss them and screen the ideas until you are finally left with the
best possible idea.
Redesigning an existing product: you can think of redesigning an
existing product to make it user friendly or improve its quality.
Techniques of finding commercial ideas
There are many techniques of finding new commercial ideas some of which are
discussed below:
i)
Observation: Look at the changes taking place in the environment
around you; it can be political, economic, social or technological. The
ii)
iii)
iv)
v)
changes have a bearing on people’s lifestyle, their tastes and
preferences. From it you can be able to come up with a business
idea.
Creativity: you can use your imagination to think up a new idea.
Modifying ideas: Look at the product or services people are buying at
the moment, think of a way of improving on them.
Experience: A business idea could be based on your experience e.g.
someone who has worked for a retail shop for a long time can use
their experience to set up their own shop.
Consultation: Intensive consultation with consumers and business
people can also lead to the birth of a viable business idea
Why some Businesses Fail
-Competition from large retail may force small retail out of business- they may
sell goods cheaper.
-Poor customer service e.g. when workers do not treat customers with respect.
- Bad management e.g. owner may withdraw money without proper record
keeping.
-Poor quality products may lead to consumers not returning to your shop.
-Lack of working capital- business unable to pay workers, utility bills.
-Poor advertising- if customers do not know about the business this may lead
to poor sales.
-Poor location- if the business is not easily accessible, it will attract fewer
customers.
Ways in which to increase sales
-By advertising- use different media to inform customers e.g. radio,
newspapers etc
-Do special promotions e.g. give discount to customers, loss leaders etc.
-Changing the layout of the shop is important as it attract customers who will
pass by and look through the widow
-Changing the method of sale- use self – service instead of serving the
customer across the counter as self service lead to impulse buying.
-Offer additional services e.g. delivery.
-Change supplier- get goods at cheaper prices and sell them at cheaper prices
-Join voluntary chain- the retailer will offer lower prices to attract customers as
they buy goods cheaper via the wholesaler.
-Offer wide and variety of goods e.g. groceries and also clothing
-Keeping good financial records e.g. trading profit and loss account, balance
sheet and cash flow statement.
-Open at convenient times- e.g. opening on public holidays or closing very late.
Factors to consider when locating retail shop
-Demand in the area- need to have people around
-Competition- choose a place where there is less competition.
-Available parking space- customers should have enough parking spaces, if that
is not available they move to another shop.
- Accessible location- easy to reach by road by customers
-Preparing rent amount- popular area attracts high rent such in the malls or
town centres’
-Security in the area- employment of security guards or put surveillance
equipment, this ensures the safety of workers, customers and assets of the
business.
-Availability of other amenities e.g. electricity, water
- Potential for trade growth- always expect your business to grow over time.
Effects of Large Business on Small Business
The small retailer may:
-Have less customers leading to loss of sales
-Have reduced profits as large retail sells goods cheaper
-be forced to join voluntary chains in order to get the benefit of bulk buying by
the wholesaler at a factory price.
-be forced to close
-be forced to change the line of the business
-become efficient as they try to cope with competition.
Benefits of large Business to the community
-Possible lower prices
-One stop shopping
-Wider range of goods to choose from
-Loss leaders and other special offers
-Create employment
-May sponsor community activities e.g. sport
-Improve the standard of living of people
-Development of infrastructure e.g. roads.
Disadvantages of large business to the community
-May small shops may close down
-Loss of jobs by people working in small shops
-No personal touch or personal attention given to customers
-People may be forced to shop within certain times as the small shops are no
longer there.
-People may have to travel long distances to the large shops.
-May lead to littering of the area e.g. plastic bags.
-May use up a lot of space.
Effects of a Business on the Environment
-Pollution and environmental damage e.g. litter, deforestation
-Wastage of non- renewable resources
-Boost to the local economy- more business being opened
-Provide jobs which will improve standard of living
-Encourage infrastructures development e.g. building more roads, bridges
Suggestions for Overcoming Negative Effects on the Environment
-Encourage waste recycling
-Strict licensing of land use
-Strengthen anti- pollution, anti- poaching and conservative legislation
Role of Pressure Groups in protecting the environment
-The Kalahari Conservation Society (KCS): to conserve Botswana’s wildlife and
its environment through education and publicity.
-Wildlife clubs: encourage wildlife and environmental activities which are
educational in nature.
-Green peace- to prevent and save the global environment and ensure that
future generation lives in a world free from the risk of polluted water, air, land
and food.
2. PURCHASE OF BUSINESS OR BUYING AN EXISTING BUSINESS
Sometimes an existing business (going concern) may be bought instead of
starting a new one. In this situation the following steps should be taken:
-Find out the value of stock
-Find out the value of fixed assets
-Asses goodwill, a business develops goodwill because of its; good location,
good customer service, loyal customers, excellent past performance and its
ability to do well in the future.
-Find out the real reason why the business is being sold.
-Examine the final accounts of the business for a certain period of time.
Advantages of buying and Existing Business
-You get to use the name of a well established business
-Enjoy goodwill e.g. business that has a good reputation
-Stock may be inherited, owner is able to start trading immediately- not waste
time searching for suppliers
-Premises are already available
Disadvantages of Buying an Existing Business
-Inherit a problem or ill- will of the owner (opposite of goodwill)
-The location may not be suitable- does not attract customers
-Forced to take a business activity that one is not familiar with.
3. Buying a Franchise
-A franchise is an agreement whereby one business (franchiser) gives the right
to another business (franchisee) to use the name of the business and sell a
product or service.
-Examples; KFC,NANDOES etc
Advantages of Franchising- to the Franchisee
-Use a well known and widely advertised name
-Gets assistance from the franchiser e.g. suppliers, advice
-Has better chance of success- product already tested
-Easier to borrow money from the bank
Disadvantages of Franchising
-Franchisee cannot sell the business without franchiser’s agreement
-The franchiser can refuse to renew franchise at any time
-Franchisee is left with little profit- has to pay royalty or a certain amount of
money to the franchisor.
-Franchisee can only buy raw materials from the franchiser
MARKET RESEARCH
Market Research is the gathering of information to find out what customer
want and how you could provide it.
A market is the people to whom goods and services are sold.
Market research reveals the following information:
-Product (strengths and weakness)
-Possible location
-Price consumers will pay
-Promotions used and its effectiveness
-Competition (what price they are charging)
-Potential customers (male, female etc)
-Income level of potential customers
-Market size and consumer tastes and trend
-Source of raw materials.
Types of Market Research
Desk Research and Field Research
1. Desk Research (Secondary research)
-Use of data that already exist
-Data collected by another individual / organization, this information
could be government publications, reports in the mass media, reports
published by trade associations, report in the magazines and books.
Advantages of desk research
-Obtain information very cheaply
-Obtain information quickly- the researcher do not need to design
difficult data collection methods
-Allows comparison of data from different sources
Disadvantages of Desk research
-Data may be out of date
-It may not be suitable
-Data collection method and accuracy may not be known.
2.Field Research (primary research)
-involves collecting original data or information which no one has not yet
collected. This is done through:
i) Observations-looking and recording what people do, and how they respond
to a particular product or service.
ii) Surveys- asking people’s opinion about something using questionnaires
interviews.
iii)Experiments-involves testing a product on a group of consumers to see how
the product would be sold. (Test Marketing)
Advantages of field Research
-Get ideas from people
-Get original information
-Discover customer’s behaviour and buying pattern
-Discover what product is needed
-Discover price to charge, promotions to use.
How to carry out a Market Research
-Determine the need for a market research ( why is it needed)
-Determine the information needed to answer the question
-Determine the method of research to use
-Prepare the material needed e.g. questionnaire
-Analyze the information
-Prepare a report on the finding
Questionnaires (must be simple, clear and precise)
Example
I am conducting a survey to find out whether locating a bakery in Maun would
be a good idea. I would appreciate it if you could help me by filling out this
questionnaire
1. Sex: Male ( )
2. How old are you?
40 ( )
Female ( )
13-19 ( )
40-50 ( )
3.
4.
5.
6.
7.
8.
20-30 ( )
30-
50-60 ( )
above 60
Do you live in Maun?
Yes ( )
No ( )
If no, how often do you come to Maun? Every day ( )
2-3 times
a week ( ) Once a week ( )
Once a month. ( )
Do you work
Yes ( )
No ( )
If no what do you do?
Housewife
()
Student ( )
Other
()
If a bakery was opened in Maun, how often would you visit? Everyday
()
2-3 times a week ( )
Once a week ( ) once a month
()
How much would you be willing to spend each time?
P2 ( ) P5
()
P10 ( )
What type of bread do you like?
Brown ( )
White ( )
At what time of the day would you visit the bakery?
Morning
()
Lunch ( )
Afternoon ( )
Evening ( )
9. Which of the following do you prefer to do?
Watch TV ( )
Read
newspaper ( )
Listen to radio ( ) Go for walk
( )
10.As a customer what makes you happy?
Discount ( ) Loss Leaders ( )
Interviews (involves asking people questions like a questionnaire but it
allows for discussion.
Example- interview sheet
My name is ................................................. i am conducting a research into
customer’s reaction to a product i plan to make and sell. I would appreciate it if
i could ask you a few questions.
1. I plan to make and sell bread. Before i show you a sample, do you like
bread? .................................................
2. What do you like about
bread?..........................................................................................................
.................
3. Here is a sample of my bread. What is your first reaction about
it?......................................................................
4. How much would you be prepared to pay for this
bread?....................................................................................
BUSINESS PLAN
-A business plan is a plan of action that describes all the details of a planned
business.
-It must describe the business idea and the various activities that the business
will undertake
-it must also include details of the intended market and financial estimates for
the next 3 to 5 years.
Importance of the business plan
-it tells the business person about all the important aspect of the business
-it encourages the business person to think ahead
-it summarizes and simplifies the activities of the business.
-it points out what resources will be used.
-support application for finance
-set target for sales and profits
Heading/ Contents of a Business Plan
1.
2.
3.
4.
5.
6.
Business description ( name, type, ownership, staff, location)
Product/service plan (description of the product or service)
Marketing plan (target market, competition, method of selling)
Production plan (materials and machines needed).
Financial plan (income and expenditure statement, cash flow forecast)
Project start-up plan (steps followed to start the business)
SWOT Analysis
-Is a technique used to assess a business idea or an existing business to find
out its Strengths, Weaknesses, Opportunities and Threats.
-It is important as it helps the business to reduce weaknesses and Threats,
improve strengths and take advantages of opportunities.
THE SWOT ANALYSES
Strengths
Capital available
Good location
Business Expertise
Market research done
Workers trained
Weaknesses
Lack of capital
Unsuitable location
Lack of Business skills
No Market research done
Untrained workers
Opportunities
No other c competitor
Infrastructure development e.g. roads
Supportive government policies
Suppliers nearby
Threats
Many competitors
Lack of development e.g. no electricity
Devaluation of currency
Suppliers far away
Profit forecasting
-Is a prediction of expenses and income of a business over a given period.
-It shows what you expect to make and spend.
To calculate use the formulae;
Gross profit= Sales – Cost of Sales
Net Profit=Gross Profit-Operating Expenses
Marketing mix (4Ps)
-In marketing a product, the business should always mention the product
name that is being sold, the price of that product, the place at which the
product is offered, and the promotion message.
Cash Flow Statement
-It is a financial plan, which shows money coming into and going out of the
business over a period.
-It is a statement, which helps to analyze the proposed income and
expenditure over a period of time.
-It is a budgeted statement that looks at expected revenue/ income against
expected expenses over a period.
Importance of Cash Flow Statement
-To determine if the business can meet all their expenses over a certain period
of time
-To help estimate when payments will be made or received.
-To help to estimate if the business needs to borrow money to provide for
working capital
BUSINESS FINANCE
Start-up capital: Is the money and material resources used to start a business
IMPORTANCE OF START-UP CAPITAL
-Used to acquire assets e.g. building, machinery
-Used to purchase stock, pay wages etc
-Used as a reserve to meet unexpected needs
-Used to pay for new projects.
Working Capital
-Is that part of start-up capital used to cover day-to-day expenses of the
business e.g. pay wages
-Working Capital = Current Assets – Current Liabilities
Importance of Working Capital
-Used to buy raw-materials
-Purchase stock of goods
-Pay for advertisements / sales promotion
-Pay wages / salaries
-Pay utility bills e.g. water
Implications of a Lack of Working Capital
-Creditors not paid on time and next time they can refuse to offer you credit
-The business can loss the benefits of cash discount
-Utility bills not paid on time, electricity may be cut, disrupting the smooth
running of the business
-Unable to replace or replenish stock- resulting in loss of customers
-May be unable to pay its workers salaries- they leave, business suffers.
-May be forced to borrow even if interest rate is high
Improving Working Capital
-Obtain a loan or overdraft from the bank using fixed assets as security
-Introduce sales promotion
-Selling of old fixed assets
-Avoid excessive drawings
-By factoring
Business capital
Short term finance (money borrowed for a short time- up to 2 years)
-Loan from Building society
-An overdraft from a commercial bank
-Credit from supplier
Long Term Finance (should be repaid over 2 years)
-Loan from commercial Banks
-Selling Debentures or Shares
-Leasing equipment
-Government grants and loans e.g. CEDA
-Mortgaging –A long term loan which is paid over a long period of time.
Factors to consider when choosing a Method of Finance
-Amount of finance needed
-Interest rates to be paid
-Time allowed for repayment period
-Purpose of the loan
KEEPING THE BOOKS
Importance of Business Records
-
Helps to plan and budget for the future
Shows the profit and of the business
Needed by tax inspectors
Used for borrowing money- Financial institutions need financial records
of the business before granting the business a loan.
- Used if the owner want to sell the business.
- Used to review the past performance of the business.
- For decision making purposes
Business Records
1. Trading and Profit and Loss Account (income statement)
2. Balance Sheet (Statement of financial position)
3. Cash flow statement
Business Income and Expenditure
Income- This is money received by the business e.g. sale of goods, interest
received etc
Expenditure- This is money paid out of the business for various purposes
e.g. rent, wages, telephone , carriage outwards etc
Fa
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