UNIT ONE
Understanding the concept Entrepreneurship
1.0 Introduction
Entrepreneurship and entrepreneurship studies are popular because of its benefits to
individuals, societies and economies. As we begin our studies in entrepreneurship, it is
important to understand what is it and how important it can be for our personal development
as well as the development of our society.
2.0 Objectives
By the end of this unit learners will be able to:
a. define the concept entrepreneurship
b. differentiate between the different forms of entrepreneurship
c. identify successful entrepreneurs/ intrapreneurs and their achievement
d. classify different types of entrepreneurs
e. identify the characteristics of entrepreneurship
f. explain the role of entrepreneurship in economic development.
3.0 Main Content
3 .1 Meaning of entrepreneurship and other related terms
3.1.1 Entrepreneurship
There are many definitions for the word entrepreneurship by different people from different
perspectives. Irrespective, there has been the agreement that entrepreneurship is a dynamic
process of creating incremental value. It is a process that results in creativity, innovation,
growth, taking calculated risk, as well as the ability to plan and manage projects in order to
achieve objectives. It also refers to an individual’s ability to turn ideas into action and is
therefore considered a key competence for all.
For the purpose this course we would stick to the definition by Hisrich and Peters (1998).
Entrepreneurship - It is the process of creating something new with value by devoting the
necessary time and effort; assuming the accompanying financial, psychological, and social
risks; and receiving the resulting rewards of monetary, personal satisfaction and
independence.
It is important to note that the process does not make mention of business. That means the
benefits of entrepreneurship are not limited to setting up of business, innovative ventures or
new jobs alone. It helps individuals to be more creative and self-confident in whatever they
undertake.
This leads us to two main types of entrepreneurship:
i.
business entrepreneurship where the focus on creating wealth
ii.
social entrepreneurship where the focus is on the greater well- being of society
3.1.2 Entrepreneur
Over the years, the process has been differentiated from the person who actually initiates the
process. The person has been known as the entrepreneur. The individual who takes risks and
starts something new to meet the needs of people or society.
Alternatively, the individual who takes the risk to provide a motivation for change,
innovation, and progress in the social and /or economic life.
We can therefore talk about:
i.
Business entrepreneur/ commercial entrepreneur as the person who focus on
creating wealth by satisfying the needs of customers.
ii.
Social entrepreneur as the person whose focus is on the serving the need of
communities and society. The interest is on making a significant difference in society
rather than profit or wealth.
3.1.3 Intrapreneurship
Intrapreneurship refers to entrepreneurship within an existing organization or business
structure. Existing organisations have the structures and the resources, business skills, and
marketing and distribution system to commercialize innovation successfully.
3.1.4 Intrapreneur is the person who focuses on innovation and creativity and who
transforms a dream or an idea into a profitable venture, by operating within the organizational
environment. Thus, Intrapreneurs are inside entrepreneurs who follow the goal of the
organization. They engaged in a special project within a larger firm by drawing on the
resources, capabilities and security of the larger firm.
3.2 Elements of entrepreneur
Entrepreneurship as a dynamic process of creating incremental value involves four aspects;
and for any process to be called entrepreneurship, the four elements must exist:
i.
Entrepreneurship must involve the creation of something new or unique
ii.
It requires the devotion necessary resources (time, money, energy, and effort).
iii.
It involves assuming the necessary risks (psychological, financial, social).
iv.
There must be a form of reward for being an entrepreneur.
3.3 Rewards of entrepreneurship
The reward is the reason why people choose to become entrepreneurs. It is the ‘whatever it
means to a person to be successful at whatever you do. The reward must be such that it does
not discourage. If there is no reward, then the process cannot be termed entrepreneurship.
The following are the forms of have been identified
i.
Profit: Financial gain proportionate to personal achievement. A lot of entrepreneurs
are motivated by the prospects of the profit they will make. Starting one’s own
business is a way to earn money. Indeed, some entrepreneurs earn a lot of money.
ii.
Independence -Power to make own business decisions and be your own boss. Many
people have a strong desire to make their own decisions, take risks, and reap the
rewards.
iii.
Freedom - Escape from an undesirable situation. People sometimes use
entrepreneurship as an escape hatch, to free themselves from an undesirable situation.
Some may wish to leave an unpleasant job situation, while others may seek change
out of necessity.
iv.
Personal Satisfaction- Enjoyment of a satisfying way of life. The reward can be a
pleasurable activity, enjoyable associations, respect in the community, and other
aspect of the business. For many entrepreneurs, the life satisfaction they receive is
much more important than money or independence.
v.
Personal Fulfilment- Some people are drawn to entrepreneurship by their desire to
do good things, to give some positive contribution to their communities. In many
cases, this impulse is merely one element in a mix of motivations. In some
endeavours, however, it is a particularly strong force behind the thinking of becoming
an entrepreneur.
3.4 Entrepreneurship and value creation
Entrepreneurship is all about value creation. Without value created, the process, be it business
or social becomes meaningless. If you create something that has no value for anyone then
your effort will not be appreciated.
Two main types of values are associated with the entrepreneurial process.
Economic value
Social value
i.
Economic value is created when entrepreneurs take resources or set of inputs through
processes that increase the value of those inputs, thereby generating a product or
service that has higher market value.
ii.
Social value is created when entrepreneurs combine resources, inputs, processes or
policies in order to generate improvements in the lives of individuals or society as a
whole.
The table below shows how different stakeholders in society can create value for others.
Stakeholder
Create value for
How value is created
Type of value
created
Established business
Customers,
By offering commercial
employees and
services and products
Financial value
shareholders
Business entrepreneur
Social entrepreneur
Teacher
Customers,
By offering novel
Financial value
employees and
commercial services and
shareholders
products
Society and
By offering novel social
Financial, Social and
individuals in need
services and products
cultural value
Students
By facilitating effective
Social and cultural
learning of students
Family member
Other family
By always being there
Social
members
Student
Future employers,
By preparing for work life; Financial, social and
family / society
by becoming an educated
citizen
cultural
3.5 Types of Entrepreneurs
Entrepreneurs are found in every economy and in every type of economic activity.
However, the nature of entrepreneurs differs according to their functions. Therefore, we
can classify entrepreneurs into different types based on what they do and how they do it.
The following criteria is used in classifying entrepreneurs:
i.
Type of business
ii.
Size of business
iii.
Type of technology used
iv.
On the bases of economic development
v.
Bases of Motivation
vi.
Bases of growth
vii.
Entrepreneurial activity
viii.
Gender
NOTE: If you review the attached material titled Entrepreneurs- Types and functions, you
would understand how entrepreneurs are classified using the criteria above.
3.6 Characteristics of entrepreneurship
There can be as many characteristics associated with entrepreneurship and the list would
differ depending on the perspective of the writer. However, these characteristics are
considered indispensable or necessary in any entrepreneurial venture:
i.
Dynamic Process: Entrepreneurship is a dynamic process that takes into
consideration the environment in which it occurs.
ii.
Creative Activity: Entrepreneurship entails innovations. It deals with product
innovation, production techniques innovation while bearing in mind the environment.
iii.
Purposeful Activity: Entrepreneurship is an activity embarked upon for a specific
purpose. This could be for profit, or for humanitarian purposes or to make a difference
in the society.
iv.
Involves Risk: Entrepreneurship is a very risky venture and without the willingness
of entrepreneurs to assume the risk entrepreneurship would never succeed.
3.3 Role of entrepreneurship in economic development
Normally entrepreneurs do one of the following:
i.
They perform work and keep all the profit for themselves and their families
ii.
They start a business expand it very quickly in order to be able to hire others as
workers
iii.
They design better products, create companies, develop products and sell them for
profit.
iv.
They buy large volume of good from others and sell them while operating at very
low overheads
v.
They take over businesses started by other people and use their own ideas to make
it successful
vi.
They buy companies/ properties from other people improve on them and sell them
for a profit.
vii.
They create new ideas and new ways of doing things and turn struggling
organisations into successful ones
viii.
They create new ideas within existing organisations to be able to change them into
successful ones.
In so doing, entrepreneurs contribute to national development in the following ways:
1. Creation of employment opportunities: They employ themselves, employ others
directly or indirectly.
2.
Increased government revenue: Governments benefit through the taxes that
entrepreneurs pay on their profit. The revenue could be used in many ways: to generate
economic activities which in turn can give rise to employment of more people,
provision of infrastructure such as schools, hospitals, roads, safe water, etc. for the
populace.
3. Conservation of foreign exchange: When entrepreneurs are able to produce goods and
offer services which do not require any or little imported components, the country is
able to conserve foreign exchange for the acquisition of very essential goods and
services.
4. Increased Productivity: The many new ideas that entrepreneurs come up with result
in situations where existing goods and services are improved. Thus, better quality of
goods and services may end up on the market at lower cost of production. In this way
the country benefit in terms of less cost of production, lower prices, use of new and
appropriate technology through innovation.
5. Export promotion: The goods and services produced by local entrepreneurs could be
exported to earn foreign exchange. This money could be used to buy essential goods
and services abroad hence enhancing the state of the nation’s economy.
6. Innovations: Entrepreneurial ventures are often sources of new ideas, materials,
process and services which other firms are unwilling to provide.
7. Flexibility in the economy: Large organizations are often rigid when comes to making
changes due to heavy capital involvement. But small entrepreneurial firms are flexible
as to be able to switch and adapt to changing market conditions in their field of
operations.
8. Keep Monopoly in check. Entrepreneurial firms keep large firms competitive in that
they introduce new products and services and in so doing no firm can maintain monody
of the market.
9. General improvement in the standards of living of the people. The standard of
living of people is measured by the ability of populace to buy goods and services.
When there are employment and people earn, there are able to provide for their needs;
when productivity is high and government revenue is high the social needs of the
people are met. Thus, their standard of living is improved.
10. Encourage investigation and research. Since the main function of the entrepreneurs
is to adopt innovations; it encourages the development of scientific attitude in the
economy and research, investigations and inventions. That way, the interests of the
whole society are promoted.
11. Development and expansion of existing enterprises. Entrepreneurs make regular
efforts increasing the number of products by their existing enterprises, modernising
existing production process, producing new commodities, developing their markets
and increasing the clientele.
12. Change in social framework. Entrepreneurship leads the society towards progress,
by adopting new techniques, producing new of commodities, establishing new
industrial ventures, generating new employment opportunities, and building new and
progressive environment.
4.0 Conclusion
We can therefore conclude that:
1. Entrepreneurship can be relevant in any field. Therefore, skills to be acquired in this
course will not be limited to starting a small-scale business but can be applied to all
areas of your life.
2. Entrepreneurship is considered one of the most important inputs in economic
development and has an important role to play in the development of a country.
3. The number of entrepreneurs a country has, what they do and their level of
competence has the potential to affect the economic growth rate of the country. It is
therefore important for all citizens especially the youth to heighten their
understanding of entrepreneurship in order to play active role in the development of
the nation.
UNIT TWO
FACTORS INFLUENCING ENTREPRENEURSHIP
3.0 Introduction
Entrepreneurship is a complex phenomenon and it is influenced by the interaction of a wide
variety of environmental factors. In areas where these factors are present, entrepreneurial
drive is strong.
Economic
Social
Psychological
Environment
These factors may have both positive and negative influences on the emergence of
entrepreneurship. Positive influences constitute facilitative and conducive conditions for the
emergence of entrepreneurship, whereas negative influences create inhibiting milieu to the
emergence of entrepreneurship.
A. Economic Factors
Economic factors have the most direct and immediate influence on entrepreneurship. The
economic factors that affect entrepreneurial growth are the following:
1. Capital: Capital is one of the most important factors of production for the
establishment of an enterprise. Availability of capital facilitates entrepreneurial
development.
2. Labour: Easy availability of the right type of workers affect entrepreneurship. The
quality rather than quantity of labour influences the emergence and growth of
entrepreneurship.
3. Raw Materials. The necessity of raw materials influences the emergence of
entrepreneurship. In the absence of raw materials, neither any enterprise can be
established nor can an entrepreneur emerge
4. Market: The role and importance of market and marketing is very important for the
growth of entrepreneurship. The size and composition of market both influence
entrepreneurship.
5. Infrastructure: Properly developed communication and transportation facilities
enhances entrepreneurial activities considerably.
B. Social Factors
Social factors can go a long way in encouraging entrepreneurship. The social setting in which
a person grows up shapes their basic beliefs, values and norms. The main components of
social environment are as follows:
1. Family Background: This factor includes size of family, type of family and
economic status of family. Background of a family in manufacturing provided a
source of industrial entrepreneurship. Occupational and social status of the family
influenced mobility. There are certain circumstances where people would have to
be venturesome. For example, in a society where the joint family system is in
vogue, those members of joint family who gain wealth by their hard work are
denied the opportunity to enjoy the fruits of their labour because they have to
share their wealth with the other members of the family.
2. Education: Education enables one to understand the outside world and equips
him with the basic knowledge and skills to deal with day-to-day problems. In any
society, the system of education has a significant role to play in inculcating
entrepreneurial values in people.
3. Attitude of the Society. Certain societies encourage innovations and novelties,
and thus approve entrepreneurs’ actions and rewards like profits. In such societies,
making wealth through business is the right thing to do. Certain others do not
tolerate changes and in such circumstances, entrepreneurship cannot take root and
grow.
4. Cultural Value: In a society where the culture is economically or monetarily
oriented, entrepreneurship is applauded and praised; wealth accumulation as a
way of life is appreciated. In such societies entrepreneurship is popular. In others
where people are not economically motivated and monetary incentives are less
attractive, people seek non-economic opportunities to attain social distinction.
C. Psychological Factors
Several researchers have tried to explain the link psychological roots of entrepreneurship.
These factors have been identified to
1. Need for Achievement: This is social motive to excel that tends to characterise
successful entrepreneurs. It has been found that certain kinds of people, especially
those who became entrepreneurs, have this characteristic which stimulate them to
greater effort. Need for achievement is considered a major determinant of
entrepreneurship.
2. Locus of control: This refers to an individual’s perception about the causes of their
life conditions. External locus of control describes an individual that believes that
most of their life conditions are determined by forces outside of their control, such as
like deities, governments, power structures, institutions, fate or luck. Internal locus of
control describes an individual that believes that they are their own master and can act
to change their own life conditions. Internal locus of control is associated with
intentions to become and entrepreneur, and entrepreneurial drive.
3. Risk-taking propensity: This is defined as a person’s orientation to take risks.
Entrepreneurs are associated with moderate risk. Thus, entrepreneurial behaviour is
associated with calculated or moderate risk rather than no risks at all or extravagant
risks
4. Motives. There are theories of entrepreneurship that stress the motives or goals of the
entrepreneur an influencing factor. Besides wealth, it is believed that entrepreneurs
may have non-monetary goals. (independence, power, authority, prestige, self-esteem,
security and service to society)
D. Other environment factor: Some other factors in the environment that will affect
entrepreneurial drive are technology, political stability, government incentives,
institutions such as trade/ business associations
3.1
EXTERNAL AND INTERNAL FACTORS
The factors that motivates entrepreneurs to starts enterprises could be grouped into external
and internal factors or extrinsic and intrinsic.
Intrinsic Factors: These include characteristics that are personal and the entrepreneur has
controlled over. They include:
1. Need for achievement
2. Risk taking propensity
3. Locus of control
4. Self-efficacy
5. Desire for independence
6. Drive
7. Egoistic passion
Extrinsic factor: These are the environmental factors that drive the entrepreneur with the
hope of success. These include:
a. government policies and relevant assistance (incentives)
b. availability of resources (raw materials and labour)
c. market gap (need for new product or services)
d. availability of information
e. financial assistance
f. political climate
g. legal system.
3.2.
PUSH and PULL FACTORS
Factors influencing people’s entrepreneurial decision could also be categorised into push and
pull factors.
PUSH FACTORS: They are the elements that force people to become entrepreneurs. In such
situations, entrepreneurship is seen as a necessity. These are:
a. job insecurity
b. unemployment
c. disagreement with management
d. inability to fit in with the organisation
e. having no other way of generating an income
f. job dissatisfaction
g. other negative job-related circumstances.
PULL FACORS. They are the elements that entice people into becoming entrepreneurs.
These factors therefore present entrepreneurship as an opportunity. These are:
a. independence
b. achievement
c. recognition
d. personal development
e. personal wealth
f. self-fulfilment
g. entrepreneurial drive and desire
h. financial rewards
Although reasons for venturing into entrepreneurship vary greatly among people, the number
one reason mostly cited is independence. Beyond this, there are theories that suggest that men
and women are motivated by different reasons.
The second order motivators for men are:
a. money
b. job satisfaction
c. achievement
The second order motivators for women are as follows:
a. needs of their children
b. job dissatisfaction
c. achievement
d. money
3.3.
PERSONAL ENTREPRENEURIAL COMPETENCIES
Personal entrepreneurial competencies are the qualities, characteristics, skills, abilities,
knowledge, and behaviour that a person must possess to become a successful entrepreneur.
Although there is no single set of characteristics, there is a package of traits that, in varying
forms, tends to support entrepreneurial initiatives. These are term the 14 Personal
Entrepreneurial Competencies (14 PECs). There can be grouped into three clusters of
competencies. These are:
1. Achievement cluster, made up of competencies such as:
a. opportunity seeking
b. taking initiative
c. being persistent
d. being committed to fulfilling contracts
e. demanding for quality and efficiency
f. taking calculated risk
2. Planning cluster, made up of competencies such as
a. seeking information
b. planning systematically (do not leave to change)
c. goal setting
d. monitoring
3. Power cluster, is made up of competencies such as:
a. self-confidence
b. independence
c. persuasiveness
d. networking
3.4
SKILLS
Skill is the ability to do something. The potential entrepreneur needs 3 different set of skills in
other to be successful. These are:
a. Technical skills
Expertise in technical trade areas such as sewing, baking, cooking, caking decorating,
poultry keeping, electrical wiring, accounting, printing, photography, mushroom
growing, oral communication, machine operating etc.
b. Entrepreneurial skills
This is the know-how or ability to tactfully respond positively to a given situation and
enable you to start and operate an enterprise. It includes being able to scan the
environment and perceive opportunities, identifying the necessary resources to take
advantage of that opportunity and taking action to utilize the opportunity, being a risk
taker, innovative, change oriented, persistent, etc.
c. Managerial or business skills
Those abilities that enable you to run the enterprise. These skills include: managing
money and people, directing business operation and sales operations, marketing,
dealing with difficult people, planning, goal setting, decision making, finance and
accounting, controlling, negotiation etc.
3.5
ROLE MODELS AND SUPPORT SYSTEM
Role models influence entrepreneurs a great deal in their career choice. Role models could be
parents, brothers, sisters’ other relatives or other successful entrepreneur in the community who
normally act as a catalyst to the potential entrepreneurs.
On the other hand, support system is the people around the potential entrepreneur who provide
advice, guidance, financial assistance, information throughout the various phases of the
process.
There are two type of support system:
a. Moral support network
Which could be families and friend and well-wishers. They normally offer
encouragement, understanding and at times assistance.
b. Professional support network
Who could be other business owners, business associate, trade associations, mentors
and professional affiliations.
UNIT TWO
PRACTICE ACTIVITY
Activity One
Answer Yes or No to each of the questions below:
1. Do you understand that owning your own business may entail working 12–16 h a
day, probably 6 days a week, and maybe on holidays?
2. Do you have the physical stamina to handle a business?
3.
Do you have the emotional strength to withstand the strain?
4.
Are you prepared to lower your standard of living for several months or years?
5. Are you prepared to lose your savings?
6. Do you know which skills and areas of expertise are critical to the success of your
project in mind?
7. Do you have these skills?
8. Does your idea effectively utilize your own skills and abilities?
9.
Can you find personnel that have the expertise you lack?
10. Do you know why you are considering this project?
11. Will your project effectively meet your career aspirations?
Activity two
Do you think all students who wants to be self-employed need to be taught Entrepreneurship?
Explain
UNIT THREE
Small Business and Economic Development
1.0 Introduction
The term entrepreneurship is not only limited to small businesses alone. However, the two
terms are often connected because small businesses serve as proxy for entrepreneurial
activities and contribute significantly to economic development. It is therefore important for
potential entrepreneurs to understand the issues and challenges associated with small business
in order to increase their chances of becoming successful entrepreneurs.
2.0 Objectives
By the end of this unit learners will be able to:
a. Define a small business
b. Identify the features of a small business
c. Explain the advantages and disadvantages of small business
d. Identify issues and challenges of operating small business in Ghana.
e. Discuss some measures to be out in place in order to avoid business failures.
3.0 Main Content
3.1. What is a small business?
Small businesses are a key to the economic development of a country and no country can
develop without them. They help to raise the social and the living standard of individuals and
communities. Their importance is emphasised by the quantity and the variety of them that
occur in our environment. They are more than the bigger businesses. They comprise
businesses in retail, commerce, wholesale, construction, manufacturing, production and food
processing.
There is no single definition for small -scale business. However, there are two main
approaches to the definition. These are to use:
a. qualitative measures
b. quantitative measures.
A. The qualitative measures used are:
a. ownership
b. source of finance
c. nature of management and operation
d. geographical location.
Base of the above a business is classified as small if:
i.
It is financed by an individual or a group of individuals.
ii.
It is managed independent by the owner
iii.
Its operation is geographically localised
iv.
It has limited influence compared with the largest competitors in same industry
On this based we can then define small business as a business that is independently owned
and operated and is not dominant in its field of operation.
On the other hand, the quantitative measures usually used are:
a. the number of employees
b. the value of capital equipment
c. total assets
d. yearly sale revenue.
It is important to note that small businesses are not the same everywhere. The size and the
stage of growth of the economy determines what ‘small’ means (quantitatively) in different
economies. For example, in Ghana any business that employ up to 30 people will be
considered a small-scale enterprise while in the UK the cut-off for small- scale enterprises are
249 persons and 500 persons in the USA. Again, in Ghana the value of asset (plants and
machinery) of a small -scale enterprise does not exceed US $100,000. But in the UK small scale business must have a turnover of £50 Million
In Ghana small - scale enterprises are further dis-aggregated into 3 categories:
i.
Micro enterprise
-employs less than 6 people
ii.
Very small enterprise - employs between 6-9 people
iii.
Small enterprise
- employs between 10 and 29 people
3.2 Advantages of small-scale enterprises.
The following hold true for small-scale enterprises in the Ghanaian economy:
1. They serve as a seed-bed for indigenous entrepreneurship
2. They serve as source of employment for many
3. They employ more labour per unit of capital than large enterprises
4. They promote indigenous technological know-how
5. They use mainly local resources; thus, have less foreign exchange requirements
6. They cater for the needs of the poor in the society
7. They adapt easily to customer requirements (flexible)
8. They keep the larger firms competitive
9. They are a source of new ideas and innovations
10. They are a source of freedom for people to try out their ideas. They can enter and
leave at will.
3.3 Disadvantages of small – scale enterprises
1. There is high rate of failure, often causing untold hardship for owners
2. Inadequate or lack of management skills
3. Shortage of working capital due inability to raise funds
4. Government regulatory and policy constraints
5. Neglect by owners.
3.4 Issues and challenges of starting and operation small -scale business in Ghana
The following are identified as some of the factors that constraints small-scale business
operations in Ghana.
1. Bad business idea. Like any idea, a business idea can be flawed, either in the
conception or in the execution.
2. Lack of access to working capital
3. High interest rate
4. High taxes
5. High cost of inputs,
6. Lack of access to non-financial inputs
7. Lack of access to raw materials and equipment due to poor transportation
8. Lack of adequate infrastructure
9. Low domestic demand for local goods and services
10. Failure to plan current as well as future operation
11. Failure to adopt proper inventory control system
12. Poor work attitudes and behaviour of owners.
13. Poor financial control
14. Over investment in fixed asset
15. Lack of technical assistance, business advice and training.
Commented [P1]:
3.5 How to avoid the pitfalls or difficulties of a small business
Starting a business involves a lot of time, money and effort. As such, the last thing that any
business owner would want to happen to their business is for it to fail. It is very important
that business owners make sure that their businesses thrive and grow. To avoid a business
failure, the following factors must be considered.
1. Know the business in depth
2. Have a good relation with stakeholders
3. Create a solid business plan
4. Manage financial resources very well.
5. Understand the financial statement
6. Learn to manage people effectively
7. Be sensitive to your customers
8. Supervise cash flow
9.
Avoid going into debt
10. Maintain good customer service
11. Learn from business competitors
12. Learn how to manage a business.
3.6 Distinguishing between small business and entrepreneurial venture.
There is a popular notion that entrepreneurship is the same as small business ownership.
Therefore, people tend to use the terms interchangeably to describe a business with limited
resources seeking to achieve a certain objective. This may be true to some extent, but in
reality, entrepreneurs and small business owners tend to have different and sometimes
opposite views on their objectives and approach. For small business owners, usually the
principal purpose for setting up a business is to make profit and achieve a personal goal of
meeting family needs and desires. In fact, a small business owner may never want the
business to grow large as he/she usually prefer a more relaxed and less aggressive approaches
to running the business. They would manage the business in a normal way, expecting normal
sales, profit and growth.
On the other hand, the other hand the entrepreneur starts and manages a business with the
principal objectives of profitability and growth. He /she usually seeks rapid growth and
immediate high profit. They therefore employ strategic management practises and innovative
behaviours.
The figure below would summarise the key similarities and differences between small and
medium scale enterprises (SMMEs) and Entrepreneurship.
Source: Okyere (2016). Differences and similarities between SMMEs and entrepreneurship.
The International Journal of Business & Management 5(9), 159 -163.
UNIT 4
THE ENTREPRENEURIAL PROCESS
4.0 Introduction
The decision on whether one will start your own business must be preceded by whether you
will want to own any small business or an entrepreneurial business or venture. In the former,
you require a more relax and less aggressive approach to running the business. However, the
latter is characterized by innovative strategic practices. The owner’s principal objectives are
to have rapid growth, high profit, quick sell-out and possibly large capital gains.
This implies that one needs to assess their abilities and capabilities and also understanding the
entrepreneurial process before you can start the ventures.
The actual entrepreneurial process is made up of four distinct phases.
a. Identification and evaluation of the entrepreneurial opportunity
b. Determination of resources required
i.
Assessing all the resources that will be needed
ii.
Estimate how much it will cost
iii.
Identify sources of funds.
c. Developing the business plan
d. Managing the resulting business.
Sometimes, other writers say the process is divided into three parts.
a. the entrepreneurial job which consist of generation of an idea and
preparation of feasibility report
b. the promotion
c.
the operation.
4.1 Identification and evaluation business Idea
Every entrepreneurial project starts with an idea. An idea is a product or service concept in the
mind of the potential entrepreneur. It can come from many sources. A personal interest can be
developed into a business. It is possible to make hobbies, volunteer experience, and leisure
activities into business. Any specialised knowledge or skill can be turned into a business. It is
possible to write a newspaper column, write recipes, write a book, present workshops, and
conduct seminars in your area of expertise. An understanding of the internet can lead to a
business of designing, creating, monitoring, and updating web sites. This same knowledge can
be used to retrieve information useful to other businesses.
The fact that something is a good idea does not mean it is a good opportunity. It is very critical
to determine whether an idea for a new venture actually represents a good opportunity. A
business opportunity is an attractive project idea, which an entrepreneur accepts as a basis for
an investment decision.
The entrepreneur needs to scan the environment and its resources to determine how it would
be supportive to the idea. An entrepreneur must process a good idea against the realities of the
environment using his/her creativity. The type of venture you end up with must be consistent
with your interest, knowledge, skills acquired from training, work experience family and
friends and hobbies etc. This resulting venture is what is termed an entrepreneurial opportunity.
Factors that can create or guide you to entrepreneurial opportunities are as follows:
1. Market factors: changing needs or lifestyles of consumers, gaps in consumer goods
and services.
2.
Social and demographic factors in terms of population composition (size, age, sex,
distribution) occupational pattern; income levels, and needs of people.
3. Technological changes
4.
Economic factors
5. Political and legal factors
It must be noted that for an entrepreneur to seize an opportunity, the window must
remain open for a sufficient length of time. Even when the concept is good, success
requires an opportunity window that remains open long enough for an entrepreneur to
take advantage of it. If the window closes before the enterprise can get established, it is
unlikely to survive for long.
You are likely to come up with so many potential entrepreneurial ideas. It is then up to you to
select the one that has the potential to yield the amount and the kind of satisfaction that you
require by evaluating all the ideas that have occurred.
4.2 Evaluating a business opportunity
When you make a decision on the ideas you would want to launch, it is very important of
further evaluate your ideas to establish its feasibility. The study is a detailed analysis of the
type of business idea, so as to develop some confidence in the idea.
1. You can assess a business opportunity in terms of how it will affect or impart on
your life. This can be done by considering the satisfaction you expect to gain form the
business, your acceptance of the time you have to allocated to the business and the work
you require to do to ensure the success of the business.
2. Consider the critical factors that may affect the success of the business in terms of
the skills, raw materials, time, money, risk, location and resources (human &
physical).
3.
Assess the market for your products in terms of its size and composition.
4.
Assess your competitors, their strengths and their weaknesses
5. Consider your strength in the opportunity and see if you can make your business
different from those that already exist. This is important because it is the differences
that will help you penetrate the market.
6.
Consider the profitability of your business. Can this business idea bring you
enough to support your life style and help you build a future?
4.3 Determination of required resources
This stage of the entrepreneurial process requires three steps:
a. Assessing all the resources that will be needed
b. Estimate how much it will cost
c. Identify sources of funds.
4.3.1 Assessing resources
All the physical resources (assets) you need to set up and operate an efficient business need to
be assessed. Exactly what you would need and how much of its will be needed will be
dependent on whether you are in retail, wholesale, service, manufacturing, agricultural or
commercial business. However, in most cases these may include;
a. Land building or officer space.
b. Equipment, machinery.
c.
Office furniture and accessories
d. Stock or raw material depending on whether you are in retail or in manufacturing.
e. Special facilities that may be required of particular business.
In identifying the resources, you also need to evaluate them in a way. For instances, the location
or site of the business should be looked at in terms of ease of access availability of partaking
space, accessibility to clientele and the image of the business. Facilities should be considered
in terms of its availability, adequacy, distribution and target. The stock/ raw materials should
be considered in terms of ready access, cost and affordability as well as the consistency of the
supply.
4.3.2 Estimating cost of resources
Costing is a method you use to calculate how much each product, group of products or each
service you offer will costs you to produce to the satisfaction of your customers. As a business
owner, you need to know in details what it cost to make the product you are selling or to provide
a service you have made available to customers for the following reasons:
1. It helps the entrepreneur decides which products or service is the best one to
offer.
2. It helps find out which of your product or services are most costly to produce
and this may help reduce cost
3. It enables the entrepreneur plan for money so that he/ she does not run into
financial difficulties in the course of production.
4. It helps set prices or give estimate of prices to customers and know that you,
profit can be made.
The process of costing involves estimating the quantities of the resources needed, unit cost of
the quantities, their total cost and adding a percentage to cater for inflation.
In any business there are two types of cost: direct cost (variable expenses) and indirect cost
(fixed cost). The type of cost it is will influence how it is treated in the process of accounting.
Direct Cost: It is the cost of items, which become part of the product or service you produce
or offer. Direct cost rises in direct proportion to increases in sales volume and drop as sales
volume drops. It is made of two inputs: direct labour cost and direct materials cost. The
direct labour cost consists of the wages, benefits, meal expenses etc., paid to the workers for
the time they spent making the product or providing the service. The direct materials cost is
made of the raw materials, power/energy used, transport fee for carrying the raw materials,
water, gas as well as consumable parts put into the product.
Indirect Cost: This is the cost of the other items, which you need in running your business.
They cannot be directly attributed to any specific job or product. It does not vary when values
of sales volume rise or fall. It is also sometimes called overhead expense: Examples are:
a. Cost of using a building, machines and equipment (rent)
b. Maintenance, repair and replacement of machinery and equipment
c. Owner’s salary
d. Office cost (stationary, postage, telephones)
e. Financial cost (interest on loans)
f. Insurance
g. Depreciation
h. Power, electricity, air conditioning
i. Professional fees,
4.3.3 Identifying sources of funds
There are many sources of funds for those who wish to start-up a new enterprise. However,
when seeking funding for business, one needs to explore all possible sources and then decide
on the most suitable. In deciding on which of the available sources one must selected out of
the lot, there is the need to consider the following.
a. The cost of borrowing
b. The period for which the money will be needed.
c. How long it will take from require day till you receive the money
d. Purpose for which the money is needed
e. Repayment capacity
f. The pattern of repayment
g. Norms of financial institutions or government
Basically, there are two-types of financing sources available: internal and external.
Internal Sources: These are sources close to or within the operation of the venture. Examples
are:
a. Own savings
b. Sale of assets
c. Credit form suppliers
d. Ploughing back profit earned
e. Transferring profit from existing business
f. Reducing working capital items
g. Delaying payment of bills for few extra days
h. Collecting bills (accounts receivable) more quickly.
External Sources: These are sources of funds external to the venture. Here are some examples:
a. Money from family and friends
b. Commercial Bank loans
c. Pension funds
d. Venture capital firms
e. Equity placement
f. Government special programmes
g. Institutions and insurance companies
h. Debentures
i. Hire purchase
j. Leasing
The three most important factors that need to be considered when evaluating alternative sources
of external financing are:
a. The length of time of funds will be available
b. The cost involved in obtaining the funds
c. The amount of company control that will be lost
These are two forms of external financing for start – up businesses. These are debt financing
and equity financing.
Debt financing. With this type, the payment of the principal and the interest are legally
enforceable and are only indirectly related to the sales and profit of the business. Repayment
is done within and agreed upon time span and does not vary with the success of the business.
It also requires that some asset such as car, house, land, machine etc. is available as collateral.
For this Equity financing: With this type, no collateral is required but the lender is given some
form of ownership position in the business, he or she shares in the profit as well as any
disposition of asset on a pro rata basis and may have a vote as well. It is very important for
potential entrepreneurs to note that no business can be financed entirely with debt finding.
reason, they entail substantial risks for the entrepreneur.
However, many small-scale businesses are debt financing for reason such as:
1. The cost of interest paid on debt is lower than cost of obtaining outside equity.
2. An entrepreneur may be able to raise more total capital form debt financing the
form equity sources.
3. Since debt payment is a fixed cost, any remaining profit belongs to the owner.
As a general rule, small business’ fixed assets should be financed with equity funds or with
debt funds having maturity approximately equal to the productive life of the asset. This means
that long lived asset as such as building, machines and other facilities, should be financed with
long term loans, while short-lived assets, such as inventory or accounts receivable, cash should
be financed with short-term loans.
Again, potential entrepreneurs must know that your ability to attract a loan from a lender will
depend on the lenders’ perception on your character as well as your ability to return the money.
The lender will like to know how long you have lived in a given residence or neighbourhood
and how long you have worked at a particular job. They may want to know your income, how
much you know about the business you are about to enter and whether you will be able to repay
the loan, given your revenue and expenses
4.4
DEVELOPING A BUSINESS PLAN
A business plan is a formal statement of a set of business goals, which are believed to be
attainable, and the plan for reaching those goals. It may also contain background information
about the organisation or team attempting to reach those goals. Business plans may also
target changes in perception and branding by the customer, client, tax-payer, or larger
community. When the existing business is to assume a major change or when planning a new
venture, a 3 to 5-year business plan is required, since investors will look for their annual
return in the 3 to 5-year time. Whatever the length, business plans address three mail area:
1. It describes the what of the business
2. It explains the how of the business
3. It projects the outcomes of the business.
For the entrepreneur starting a new venture, a business plan has these basic objectives:
1. To identify the nature and the context of the business opportunity i.e., why does
such an opportunity exist
2. To present the approach the entrepreneur plans to use to exploit the opportunity
3. To recognise factors that will determine whether the venture will be successful.
4. To serve as a tool to raise capital
5. To provide the basis for comparing actual performance against your projected.
No enterprise can operate in a market economy without a carefully prepared business plan.
The business plan explains in convincing details how the enterprise’s management intends to
manage the business to that it will produce acceptable rate of profitability and returns on
investment. In addition, because the plan requires constant evaluation and refinement to
reflect changing conditions, there must exist a process within the enterprise that involves a
broad mix of management personnel in the ongoing development and revision of the business
plan.
It is worth emphasizing the following points:
1. It should be clear that the business planning itself is in fact a test of the
management’s knowledge and understanding of the overall business environment and
marketplace in which the enterprise operates. By forcing management of consider
specific characters and factors influencing the competitive capabilities of their
enterprise, the business planning process serves to alert management to any
deficiencies in its own capabilities. Thus, the discipline required in development good
business plan contributes to the self-education of management and the creation of
effective management strategies.
2. The work involved in business planning is significant. However, once a plan is
produced, subsequent plans require less upfront data collection since must of the
historical and descriptive data can be received over from one version of the plan to
another.
3. The values of the business plan depend on the quality of the information is
contains and the validity of any assumptions made. It is critical that the plan be
prepared with an objective, open mind and not reflect exaggerated or biased views of
reality. While a well-prepared business plan is also a highly effective marketing tool,
it must strive to prove to be credible and useful. Its credibility over time is directly
indicative of the competence of the enterprise management, which is an issue of prime
importance, is closely scrutinized by investors.
4. The plan demonstrates the viability and potential of the business, as well as
management knowledge and understanding of the variables necessary for successfully
accommodating corporate objects. It also provides the financier with a basis upon
which to evaluate both the potentials for return on the investment and the individuals
who will manage the business. Since the business plan is the first manifestation of
management capabilities that the investors see, it is important that it be carefully
prepared.
The differences in the scope of the business plan may be dependent on whether the business
is a service, manufacturing, consumer good or industrial product. The size of the market,
competition, and potential growth may also affect the scope of the business plan. Whatever it
may be, a business plan addresses three main areas of the business:
a. The What component of the business. This section describes the nature of the
business, its ownership, structure, mission, vision, objectives, the history of the
business, the product or services, the industry and the future development in the
industry.
b. The How component of the business. This section outlines the strategic actions that
will be taken to make the business successful. It includes information on marketing
(strategies for distribution, promotion, pricing, and sales). It also describes the
organisational structure and the workforce that will implement the plan, as well as the
functions of the principal officers of the venture.
c. The projected Outcomes of the business. This outlines the estimated cost, profit
margins, projected income and cash flow, financial needs, financial status, and
projected growth.
4.5 MANAGING THE RESULTANT BUSINESS
This is the last stage of the entrepreneurial process.
i.
A business may be defined as an organisation of people who use their skills and
talents to produce goods or services that are sold to other people at a price that is
usually more than the cost of production.
ii.
A small business is any business that is independently owned and operated and is not
dominant in its field of operation. In Ghana small businesses comprise businesses in
retail services, wholesale, construction, manufacturing and processing. These
enterprises or small-scale businesses are defined differently in different economies.
In Ghana, a small business or enterprise is often thought of as a production and service unit,
which generally employs up to 30 people. Irrespective of location, certain criteria such as the
total assets, the total cash, inventory, land, machinery are used to classify the scale of
business. However, the number of employees is frequently used because it is easy to
understand, count and collect from businesses and it is an indicator that freely allows
comparisons to be made.
The National Board for Small-Scale Industries (NBSSI) of Ghana defines a small-scale
business as one with a labour strength of not more than 29 persons and with plants and
machinery not exceeding US $ 100,000 or its equivalent in Ghana Cedis.
It is posit that in Ghana; almost all the small-scale business activities take place in the
informal sector. They are usually family-owned production and service enterprises usually
dominated by women.
3.5.1 Characteristics of The Informal Sector
a. A large number of small-scale enterprises;
b. A large number of family-owned production and service enterprises;
c. The activities are dominated by women;
d. There is no certification or rules and regulations for new entrants;
e. Ease of entry into informal businesses;
f. There is a high level of reliance on indigenous resources;
g. Low level of technology making production highly labour intensive;
h. Skills of the business owners in the informal sector are acquired mostly
outside the formal school system;
i. The business operation is usually on a small-scale basis;
j. There is normally a very high level of competition;
k. The flexible working hours of many such occupations encourage selfemployment;
l. Perpetuation over-crowding resulting in high level of competition; and
m. Low returns on investment in the sector.
The urban informal sector is more difficult to describe and according to Dixon-Mueller and
Anker (1988), it is not surprising that women’s economic contribution in this sector remains
undefined. It is very difficult to define the extent of the labour force participation of women
and the earnings they generate in the informal sector. They can be categorised into
organised and unorganised.
1.
It is organised when employees are on salaries and the business is in a fixed,
permanent premise. They are often occupational segregation expressed in the extreme forms
of specialization. Yam, fish, cloth and tomatoes sellers’ associations epitomize the
segregation among the organized ones.
2.
The unorganized SSEs are usually run by artisans in temporary premises, such as
open air, mobile kiosks, and homes of the business owners. They often employ few people.
PRACTICE ACTIVITY FOR UNIT 4
General Instruction:
Having finished your reading in this unit spend some time to should reflect on what you
have learnt by completing the activities below. Write down your responses in your note
books to be discussed in class.
1. Write down five business ideas that keeps coming to mind when you think of
starting a business
2. List the resources that will be required to launch and operate each of these
3. Prioritise the ideas and give about 3 reasons for the prioritised order.
UNIT 5
PLANNING A BUSINESS
Before you jump into starting a business, you need to have a plan. Putting together a business
plan will help you create a solid framework around your business idea, and take it from idea to
a real business. Writing out a business plan from scratch can seem daunting, but it’s just about
putting down answers to questions such as:
1. Why is your business uniquely qualified to succeed?
2. Where do you want your business to go?
3. Who are your customers?
4. What about employees?
5. What level of revenues and profits do you foresee?
A business plan therefore is a guide a roadmap for your business that outlines goals and
details how you plan to achieve those goals.
While every business has huge benefits to gain from going through the business planning
process, only a small subset needs the formal business plan document required for seeking
investors or supporting a commercial loan. Most of us need just a Lean Business Plan, for
internal use, with just bullet point lists and important projections. Good businesses always
keep their Lean Plan up to date.
These days, business plans are simpler, shorter, and easier to produce than they have ever
been. Gone are the days of 30- and 40-page business plans—modern business plans are
shorter, easier to write, and—thankfully—easier to read.
What is a business plan?
If you’ve ever jotted down a business idea on a napkin with a few tasks you need to
accomplish, you’ve written a business plan—or at least the very basic components of one.
At its heart, a business plan is just a plan for how your business is going to work, and
how you’re going to make it succeed.
How long should your plan be?
Typically, a business plan is longer than a list on a napkin (although, as you’ll see below, it is
possible—and sometimes ideal—to write your entire business plan on one page). For me in
practice, and for most real businesses, it can be as simple as the Lean Plan that has a few
bullet points to focus strategy, tactics, milestones to track tasks and responsibilities, and
the basic financial projections you need to plan: cash flow, budget, expenses.
How should you present your business plan?
A note on format: business plans should only become printed documents on select occasions,
like when you need to share information with outsiders or team members. Otherwise, they
should be dynamic documents that you maintain on your computer.
The plan goes on forever, meaning that you’re constantly tweaking it, because you’re
regularly evaluating your business health, so the printed version is like a snapshot of what the
plan was on the day that it was printed.
What does a formal plan include?
If you do need a formal business plan document, then that includes elements like:

An executive summary

A company overview

Some information about your products and/or services

Your marketing plan

A list of major company milestones

Some information about each member of the management team and their role in the
company

Details of your company’s financial plan
These are often called the “sections” or “chapters” of the business plan, and I’ll go into much
greater depth about each of them below.
How often should you revise your business plan?
In all cases, the most important element of business planning is the review schedule—set
specific times to review your progress toward your goals. That’s as simple as “the third
Thursday of every month” to cite one obvious example.
Specifically, it’s the time to review your progress on milestones and to compare your actuals
against your financial projections. A real business plan is always wrong—hence the regular
review and revisions—and never done, because the process of review and revising is vital.
Who needs a business plan?
If you’re just planning on picking up some freelance work to supplement your income, you
can skip the business plan. But, if you’re embarking on a more significant endeavour that’s
likely to consume a significant amount of time, money, and resources, then you need a
business plan.
If you’re serious about business, taking planning seriously is critical to your success.
Unfortunately, many people think of business plans only for starting a new business or
applying for business loans. But business plans are also vital for running a business—
strategic planning—whether or not it needs new loans or new investments. Existing
businesses should have business plans that they maintain and update as market conditions
change and as new opportunities arise.
Every business has long-term and short-term goals, sales targets, and expense budgets—a
business plan encompasses all of those things and is as useful to a start-up trying to raise
funds as it is to a 10-year-old business that’s looking to grow.
1. Start-up businesses
The most classic business planning scenario is for a start-up, for which the plan helps the
founders break uncertainty down into meaningful pieces, like the sales projection, expense
budget, milestones, and tasks.
The need becomes obvious as soon as you recognize that you don’t know how much money
you need, and when you need it, without laying out projected sales, costs, expenses, and
timing of payments. And that’s for all startups, whether or not they need to convince
investors, banks, or friends and family to part with their money and fund the new venture.
In this case, the business plan is focused on explaining what the new company is going to do,
how it is going to accomplish its goals, and—most importantly—why the founders are the
right people to do the job. A start-p business plan also details the amount of money needed to
get the business off the ground, and through the initial growth phases that will lead
(hopefully!) to profitability.
2. Existing businesses
Not all business plans are for start-ups that are launching the next big thing. Existing
businesses use business plans to strategically manage and steer the business, not just to
address changes in their markets and to take advantage of new opportunities. They use a plan
to reinforce strategy, establish metrics, manage responsibilities and goals, track results, and
manage and plan resources including critical cash flow. And of course, they use a plan to set
the schedule for regular review and revision.
Business plans can be a critical driver of growth for existing businesses. Did you know that
businesses that write plans and use them to manage their business grow 30 percent faster than
businesses that take a “seat of the pants” approach?
For existing businesses, a robust business planning process can be a competitive advantage
that drives faster growth and greater innovation. Instead of a static document, business plans
in existing businesses become dynamic tools that are used to track growth and spot potential
problems before they derail the business.
Choosing the right kind of business plan for your business
Considering that business plans serve many different purposes, it’s no surprise that they come
in many different forms.
Before you even start writing your business plan, you need to think about who the audience is
and what the goals of your plan are. While there are common components that are found in
almost every business plan, such as sales forecasts and marketing strategy, business plan
formats can be very different depending on the audience and the type of business.
For example, if you’re building a plan for a biotech firm, your plan will go into details about
government approval processes. If you are writing a plan for a restaurant, details about
location and renovations might be critical factors. And, the language you’d use in the biotech
firm’s business plan would be much more technical than the language you’d use in the plan
for the restaurant.
Plans can also differ greatly in length, detail, and presentation. Plans that never leave the
office and are used exclusively for internal strategic planning and management might use
more casual language and might not have much visual polish.
On the other end of the spectrum, a plan that is destined for the desk of a top venture
capitalist will have a high degree of polish and will focus on the high-growth aspects of the
business and the experienced team that is going to deliver stunning results.
Here is a quick overview of three common types of plans:
1. One-page business plan
A one-page business plan is exactly what it sounds like: a quick summary of your business
delivered on a single page. No, this doesn’t mean a very small font size and cramming tons of
information onto a single page—it means that the business is described in very concise
language that is direct and to-the-point.
A one-page business plan can serve two purposes. First, it can be a great tool to introduce the
business to outsiders, such as potential investors. Since investors have very little time to read
detailed business plans, a simple one-page plan is often a better approach to get that first
meeting. Later in the process, a more detailed plan will be needed, but the one-page plan is
great for getting in the door.
This simple plan format is also great for early-stage companies that just want to sketch out
their idea in broad strokes. Think of the one-page business plan as an expanded version of
jotting your idea down on a napkin. Keeping the business idea on one page makes it easy to
see the entire concept at a glance and quickly refine concepts as new ideas come up. Learn
more about how to create a one-page business plan.
2. The Lean Business Plan
A Lean Plan is more detailed than a one-page plan and includes more financial information,
but it’s not as long as a traditional business plan. Lean Plans are more likely to be used
internally as tools for strategic planning and growth.
The Lean Business Plan dispenses with the formalities that are needed when presenting a plan
externally for a loan or investment and focuses almost exclusively on business strategy,
tactics, milestones, metrics, budgets, and forecasts.
These lean business plans skip sections like company history and management team since
everyone in the company almost certainly knows this information. You don’t do an exit
strategy section of your business plan if you’re not writing for investors and therefore you
aren’t concerned with an exit.
The simplest lean business plan uses bullet points to define strategy, tactics, concrete specific
dates and tasks, and essential numbers including projected sales, spending, and cash flow. It’s
just five to 10 pages when printed. And few Lean Plans need printing. Leave them on the
computer. Review and revise them at least once a month. The first Lean Plan takes just a few
hours to do (or less), and a monthly review and revision can take only an hour or two per
month.
Lean business plans are management tools used to guide the growth of both start- ups and
existing businesses. They help business owners think through strategic decisions and measure
progress towards goals.
3. External business plan (a.k.a the standard business plan document)
External business plans, the formal business plan documents, are designed to be read by
outsiders to provide information about a business. The most common use of a full business
plan is to convince investors to fund a business, and the second most common is to support a
loan application. Occasionally this type of business plan is also used to recruit or train or
absorb key employees, but that is much less common.
A formal business plan document is an extension of the internal business plan or the Lean
Plan. It’s mostly a snapshot of the internal plan as it existed at a certain time. But while an
internal plan is short on polish and formality, a formal business plan document should be very
well-presented, with more attention to detail in the language and format. See example
business plans in our sample plan library to give you an idea of what the finished product
might look like.
In addition, an external plan details how potential funds are going to be used. Investors don’t
just hand over cash with no strings attached—they want to understand how their funds will be
used and what the expected return on their investment is.
Finally, external plans put a strong emphasis on the team that is building the company.
Investors invest in people rather than ideas, so it’s critical to include biographies of key team
members and how their background and experience is going to help grow the company.
What to include in your formal business plan
While we just discussed several different types of business plans, there are key elements that
appear in virtually all business plans. These components include the review schedule, strategy
summary, milestones, responsibilities, metrics (numerical goals that can be tracked), and
basic projections. The projections include sales, costs, expenses, and cash flow.
These core elements grow organically as needed by the business for the actual business
purpose.
The order doesn’t matter a whole lot, so don’t sweat having the “right” outline as long as you
have an outline that works. Here’s what they normally include:
Executive summary
Just like the old adage that you never get a second chance to make a first impression,
the executive summary is your business’s calling card. It needs to be succinct and hit the key
highlights of the plan. Many potential investors will never make it beyond the executive
summary, so it needs to be compelling and intriguing.
The executive summary should provide a quick overview of the problem your business
solves, your solution to the problem, the business’s target market, key financial highlights,
and a summary of who does what on the management team.
While it’s difficult to convey everything you might want to convey in the executive
summary, keeping it short is critical. If you hook your reader, they’ll find more detail in the
body of the plan as they continue reading. You could consider using your one-page business
plan as your executive summary. And Live Plan offers an excellent alternative with what it
(as of August 2018) calls the Pitch page, a standard summary.
The opportunity
One often useful section of a formal plan describes the market, including market analysis,
data, projections, descriptions, and competition.
Target market
As critical as it is that your company is solving a real-world problem that people or other
businesses have, it’s equally important to detail who you are selling to. Understanding your
target market is key to building marketing campaigns and sales processes that work. And,
beyond marketing, your target market will define how your company grows.
Market trends
Describe the most important changes happening in your target market right now. Are the
needs, demographics, or preferences of potential customers changing in a notable way?
Ideally, explain how those trends will favour your products or services over those of your
competitors.
For example, if people in your market are increasingly using their smartphones for tasks that
they used to do on a computer, perhaps the mobile app you are developing is well-positioned
to capture a bigger part of the market.
Market growth
Explain how your target market has been growing or shrinking in recent years. Research is
key here, obviously. You can use Internet searches, trade associations, market research firms,
journalists who cover your market, or other credible sources to gauge market growth. A
growing market is encouraging since it suggests a stronger demand for your solution in the
years to come. That said, you can still be successful in a weak or contracting market. It’s just
important to acknowledge that you are swimming against the tide.
Competition
What other options do your customers have to address their needs, and what makes your
solution better for them?
Execution
Products and services
The products and services section of your business plan delves into the core of what you are
trying to achieve. In this section, you will detail the problem you are solving, how you are
solving it, the competitive landscape, and your business’s competitive edge.
Depending on the type of company you are starting, this section may also detail the
technologies you are using, intellectual property that you own, and other key factors about the
products that you are building now and plan on building in the future.
Marketing and sales
The marketing and sales plan details the strategies that you will use to reach your target
market. This portion of your business plan provides an overview of how you will position
your company in the market, how you will price your products and services, how you will
promote your offerings, and any sales processes you need to have in place.
Operations
Depending on the specifics of your business, include plans related to locations and facilities,
technology, and regulatory issues.
Milestones and metrics
Plans are nothing without solid implementation. The milestones and metrics chapter of your
business plan lays out concrete tasks that you plan to accomplish, complete with due dates,
and the names of the people to be held responsible.
This chapter should also detail the key metrics that you plan to use to track the growth of
your business. This could include the number of sales leads generated, the number of page
views to your web site, or any other critical metric that helps determine the health of your
business.
Company overview
For external plans, the company overview is a brief summary of the company’s legal
structure, ownership, history, and location. It’s common to include a mission statement in the
company overview, but that’s certainly not a critical component of all business plans.
The company overview is often omitted from internal plans.
Team
The management team chapter of a business plan is critical for entrepreneurs seeking
investment but can be omitted for virtually any other type of plan.
The management team section should include relevant team bios that explain why your
management personnel is made up of the right people for the roles. After all, good ideas are
not difficult to come by; it’s a talented entrepreneur who can take those ideas and turn them
into thriving businesses.
Business plans should help identify not only the strengths of a business, but areas that need
improvement and gaps that need to be filled. Identifying gaps in the management team shows
knowledge and foresight, not a lack of ability to build the business.
Financial plan
The financial plan is a critical component of nearly all business plans. Running a successful
business means paying close attention to how much money you are bringing in, and how
much money you are spending. A good financial plan goes a long way to help determine
when to hire new employees or buy a new piece of equipment.
If you are a start-up and/or are seeking funding, a solid financial plan helps you figure out
how much capital your business needs to get started or to grow, so you know how much
money to ask for from the bank or from investors.
A typical financial plan includes:

Sales forecast

Personnel plan

Profit and loss statement

Cash flow statement

Balance sheet
Using your business plan to get ahead
I mentioned earlier in this article that businesses that write business plans grow 30 percent
faster than businesses that don’t plan. Taking the simple step forward to do any planning at
all will certainly put your business at a significant advantage over businesses that just drive
forward with no specific plans.
But just writing a business plan does not guarantee your success.
The best way to extract value from your business plan is to use it as an ongoing management
tool. To do this, your business plan must be constantly revisited and revised to reflect current
conditions and the new information that you’ve collected as you run your business.
When you’re running a business, you are learning new things every day: what your customers
like, what they don’t like, which marketing tactics work, which ones don’t. Your business
plan should be a reflection of those learnings to guide your future strategy.
This all sounds like a lot of work, but it doesn’t have to be.
Tips to extract the most value from your plan in the least amount of time
1. Use your one-page business plan to quickly outline your strategy. Use this document
to periodically review your high-level strategy. Are you still solving the same problem
for your customers? Has your target market changed?
2. Use a Lean Plan to document processes that work. Share this document with new
employees to give them a clear picture of your overall strategy.
3. Set milestones for what you plan to accomplish in the next 30 days. Assign these
tasks to team members, set dates, and allocate part of your budget if necessary.
4. Keep your sales forecast and expense budget current. As you learn more about
customer buying patterns, revise your forecast.
5. Compare your planned budgets and forecasts with your actual results at least
monthly. Make adjustments to your plan based on the results.
6. The final, most important aspect of leveraging your business plan as a growth engine is
to schedule a monthly review. The review doesn’t have to take longer than an hour, but
it needs to be a regular recurring meeting on your calendar. In your monthly review, go
over your key numbers compared to your plan, review the milestones you planned to
accomplish, set new milestones, and do a quick review of your overall strategy.
The outline below has been proposed for your use for the purpose of this course
I.
Introductory page. This page should have information on:
a. Name and address of business
b. Name and address of partners /principals
c. Statement of financing needed
d. Statement of confidentiality
II.
III.
Executive summary
Description of the Business and the Industry profile. This section should address the
following:
a. Vision statement and mission
b. The product /service specifics
c. Business strategy
d. Size of business
e. Business’ advantage
f. How the industry has evolved?
g. The future of the industry
IV.
Organisational Plan
a. Type of ownership
b. Identification of partners
c. Authority of principals
d. Background and expertise of management and their responsibilities
V.
Production plan
a. Production process
b. Location and layout
c. Machinery and equipment
d. Source of raw material supply
VI.
Marketing plan
a. Pricing
b. Promotion
c. Distribution
d. Quality control
e. Product Forecast
VII.
Financial plan/ forecasts
a. Costing
b. Break –even
c. Source of funding
d. Pro-forma balance sheet
e. Pro-forma income statement
VIII.
Risk Assessment
a. Evaluation of their weakness
b. Contingency plan.
c. Critical risk, problems and assumptions
d. Who needs a business plan
e. How to choose the right kind of business plan
f. The key components that every business plan should include
UNIT 6
FORMS OF BUSINESS OWNERSHIP
As an entrepreneur thinks through developing a business venture, one issue that has to be
resolved is deciding on the type of ownership. There are several forms of business ownership
that can be considered. All of them have their advantages and disadvantages.
6.1 Sole proprietorship: This is where the business is owned and usually managed by one
person. That is the most common form of small business ownership.
Advantages of Sole Proprietorship
1. Ease of starting and ending the business. All you have to do to start is to acquire the
needed equipment and generate some form of announcement that you are in business. It is
equally easy to stop. There is no one to consult or to disagree with about the decision.
2. Being your own boss. You work for yourself, make you own mistakes and so are the
many small victories each day.
3. Pride of ownership. People who own and manage their own businesses are rightfully
proud of their work.
4. Retention of profit: Other than the joy of being your own boss, there is nothing like the
pressure of knowing that you can make as much as you can and do not have to share that
money with anyone else except the government, in taxes.
5. No Special taxes: All the profit of a sole proprietorship are taxed as the personal income
of the owner and he/she pays the normal income tax on that money.
Disadvantage of Sole Proprietorship
1. Often it is hard to save enough money to start a business and keep it going. The
cost of all that is needed is simply much to cover by one person
2. Unlimited Liability-the risk of losses. When you work alone, any debt or damages
incurred by the business are your debt and you must pay.
3. Limited financial resources: Funds available to the business are limited to the
funds that the one (sole) owner can gather.
4. Difficulty in Management. It is often difficult to find one person qualified to do
everything.
5. Overwhelming time commitment: The owner must spend long hours working.
This may affect other aspects of your life.
6. Few fringe benefits: it you are your won owner you lose the fringe benefits that
come from working for other.
7. Limited growth: If the owner becomes incapacitated, the businesses often come to a
standstill. Expansion is often slow since a sole proprietorship relies on its owner for
most of its creativity, business know-how and funding.
8. Limited life span: if the sole proprietor dies or retires, the business no longer exists
unless it is sold or taken over by the sole proprietor’s heirs.
6.2.
Partnership
It is a legal form of business with two or more owners. There are three key elements in any
general partnership. These are: common ownership shared profits and losses; and the right to
participate in managing the operations of the business. There are two basic types of this form
of ownership.
a. General partnership where all the owners share in operating the business
and in assuming liability for the business’s debt.
b. A limited partnership is where the united partners risk an investment and
agree to enjoy limited liability and can legally help manage the company.
Limited liability means that the partners are not responsible for the
business’s debt beyond the among of their investment.
Advantage of partnership
1. More financial resources; Naturally when two or more people pool their money and
credit together, it I earlier to pay for all bills.
2. Shared management and pooled knowledge; Its simply much easier to manage the
day-to-day activities of a business with carefully chosen partners than to do it alone
3. Longer survival: having a partner to watch over you make people succeed and
become more discipline.
Disadvantages of Partnership
1. Unlimited liability: Each general partner is liable for the debts of the firm, no matter
who was responsible for causing those debts.
2. Division of profits: Sharing the risk means sharing the profit and that can cause
conflict.
3. Disagreement among partners: Potential conflicts are over money, employees’
assets. Because of such problems, all terms of partnership should be spelt out as
writing to protect all parties and to minimize misunderstanding.
4. Difficult to terminate: once you have committed yourself to a partnership it is not
easy to get and of its. There are always questions of who gets what.
6.3.
Corporation
Most people are not willing to risk everything to go into business. Yet for businesses to grow
and prosper and create abundance, many people would have to be willing to invest their
money in businesses. The way to solve this problem is to create a corporation.
Advantages
1. More money for investment. To raise money, a corporation sells ownership (stock)
to anyone who is interested. Through this, they are able to raise large amount of
money. Corporations’ may also find it easier to obtain loans.
2. Limited Liability. A major advantage of corporations is the limited liability of
owners which is the most significant advantage of corporation.
3. Size. Because they have large amount of money to work with, corporations can build
large and modern factories with the latest equipment. They can also hire experts or
specialists in all areas of operations.
4. Perpetual life: Because corporations are separate from the people who own them, the
death of one or more owners does not terminate the cooperation.
5. Ease of ownership change: It is easy to change the owners of a corporation. Simply
sell the stock (shares) to someone else.
6. Ease of drawing talented employees: corporations can attract skilled employees by
offering such benefits as stock options (The right to purchase shares of the
corporation for fixed prices).
7. Separation of ownership from management: corporations can raise money from
many different investors without getting them involved in management.
Disadvantage
1. Initial cost: Incorporation may cost huge amount of money and involve expensive
lawyers and accountants.
2. Paper work: the papers to be filled to start a corporation are many Tax law demands
that a corporation prove all its expenses and deductions are legitimate.
3. Tow tax returns: If an individual incorporates, he she must file both a corporate tax
return and an individual tax. The corporate return can be quite complex.
4. Size: size may be one advantage of corporations but it can be a disadvantage as well.
5. Difficulty of termination: once a corporation is started, it is relatively hard to end.
6. Double taxation: corporate income is taxes twice. First, the cooperation pays tax on
income before it can distribute any to stockholders/ shareholders. Then the
shareholders pay tax on the income (dividends) they receive form the corporation.
6. 4 Franchising
Buying a franchise can be a quick way to set up your own business without starting from
scratch. There are two types of franchise methods - business format franchising and product
and trade name franchising.
6.4.1 Business format franchise: This is the most common form of franchising. A true
business format franchise occurs when the owner of a business (the franchisor) grants a
licence to another person or business (the franchisee) to use their business idea - often in a
specific geographical area.
The franchisee sells the franchisor's product or services, trades under the franchisor's trade
mark or trade name, and benefits from the franchisor's help and support. This help and
support usually takes the form of a turn-key system in order to assist the franchisee with
business issues such as site selection, store layout and design, staff recruitment and training,
marketing and supplier contacts. In return, the franchisee usually pays an initial fee to the
franchisor and then a percentage of the sales revenue. The franchisee owns the outlet they
run. But the franchisor keeps control over how products are marketed and sold and how their
business idea is used.
There are many examples of business format franchising opportunities such as fast food
franchises, retail franchises, coffee shop franchises, gymnasium franchises and environmental
and cleaning franchises.
6.4.2 Product and trade name franchise: This type of franchising involves no
upfront initial fees. The most important thing in product and trade name
franchising is that the franchisor provides their product to a franchisee. The
franchisee is required to purchase the product or range of products
exclusively from the franchisor. The franchisor also provides national
marketing and advertising campaigns, logos and trademarks.
Product and trade name franchising has three distinctive characteristics:
a. the franchisee sells goods which are supplied by the franchisor or person
affiliated with the franchisor
b. the franchisor helps the franchisee to secure accounts
c. within six months of opening the business, the franchisee must pay the
franchisor or a person affiliated with the franchisor.
Advantages franchising
1. The risk of business failure is reduced by franchising. Your business is based on
a proven idea. You can check how successful other franchises are before
committing yourself.
2. Products and services will have already established a market share. Therefore,
there will be no need for market testing.
3. You can use a recognised brand name and trade mark. You benefit from any
advertising or promotion by the owner of the franchise - the 'franchisor'.
4. The franchisor gives you support - usually as a complete package including
training, help setting up the business, a manual telling you how to run the
business and ongoing advice.
5. No prior experience is needed as the training received from the franchisor should
ensure the franchisee establishes the skills required to operate the franchise.
6. A franchise enables a small business to compete with big businesses, more so
than an independent small business, due to the pool of support from the
franchisor and network of other franchisees.
7. You usually have exclusive rights in your territory. The franchisor won't sell any
other franchises in the same territory.
8. Financing the business may be easier. Banks are sometimes more likely to lend
money to buy a franchise with a good reputation.
9. You can benefit from communicating and sharing ideas with, and receiving
support from, other franchisees in the network.
10. Relationships with suppliers have already been established.
Disadvantages of franchising
1. Costs may be higher than you expect. As well as the initial costs of buying the
franchise, you pay continuing management service fees and you may have to
agree to buy products from the franchisor.
2. The franchise agreement usually includes restrictions on how you can run the
business. You might not be able to make changes to suit your local market.
3. You may find that after some time, ongoing franchisor monitoring becomes
intrusive.
4. The franchisor might go out of business.
5. Other franchisees could give the brand a bad reputation, so the recruitment
process needs to be thorough.
6. You may find it difficult to sell your franchise - you can only sell it to
someone approved by the franchisor.
7. All profits (a percentage of sales) are usually shared with the franchisor.
8. The inflexible nature of a franchise may restrict your ability to introduce
changes to the business to respond to the market or make the business
6.5 Business cooperatives
A business cooperative is formed when a group of small businesses opt to pool their
resources to benefit all members. This is not the same as multiple brands operating under a
parent company; it is a group of independent businesses working together to achieve common
goals. If it is a profit making organisation, co-operative members pay an annual membership
fee and share in any profits accrued. Although being part of a business collective can increase
a company’s purchasing power and cut its costs, joining a cooperative can also have
drawbacks.
Advantages of cooperatives
1. One of the greatest advantages of a cooperative company is the equality involved
in its management and how democratic it is overall. This equitable type of
organization makes the cooperative business a lot more stable than a regular
business. Members will come and go without necessarily disrupting the way
things work. In fact, whenever change is necessary, it will take the entire group
of members to decide on it.
2. This equitable type of organization makes the cooperative business a lot more
stable than a regular business. Members will come and go without necessarily
disrupting the way things work. In fact, whenever change is necessary, it will
take the entire group of members to decide on it.
3. A cooperative business confers its own set of economic advantages to its
members. Take consumer cooperatives, for example: The members of such
cooperatives receive dividends for their patronage. Those dividends are
determined by how much members spend on the products of the cooperative.
Members who also happen to be employees of the cooperative are also entitled to
discounts on merchandise.
4. Cooperative businesses are owned and controlled by the members, so they are
more autonomous compared to businesses controlled by their investors. Another
factor that leads to more control within a cooperative is the fact that all the
members of the cooperative need to be active within the cooperative so they can
divide the workload equally among themselves.
5. Cooperative businesses also exempt members from income tax, up to a point.
The members will only be taxed based on the income they receive from the
cooperative and not individually or on the corporate level. Cooperatives that
operate for profit are taxed just like regular businesses. However, they can
reduce their exposure to taxation by paying their members in the form of
patronage dividends in the form of refunds and discounts on products and
services.
6. Cooperatives also receive financial assistance in the form of loans and grants
from the government.
7. Cooperative businesses are based on the philosophy of mutual help. They aren’t
just about uplifting the members economically, but also morally and socially.
Membership instils a spirit of independence, cooperation and tolerance.
Disadvantages of a Cooperative?
1. Cooperative businesses have fewer incentives for large investors when attracting
capital. As a result, they aren’t that appealing to those wealthy investors. They
will mostly attract smaller investors, while the larger ones generally stay away
after knowing that the size of their investment does not determine the size of
their influence.
2. Cooperatives also sometimes experience problems when they try to get debt
capital from banks and other financial institutions. This makes cooperative
businesses an ideal business model for those with low start-up costs.
3. Traditional businesses have centralized power, so they can make decisions
quickly. With cooperative businesses, all of the members need to be involved,
which makes it more time-consuming. When fast decisions are necessary, a
cooperative may run into some issues. Because everyone has equal authority,
deliberations may take a while.
4. Most cooperative businesses do not have professional managers because they are
just too expensive. Co-ops do not attract skilled professionals unless those
professionals also happen to be members. Many do not have the necessary
resources to support the high salaries. For this reason, the co-op can eventually
fail because of poor management and organization.
5. A business to be successful requires long-term effort. For regular businesses, this
isn’t a problem because the profit incentive is there. With a cooperative, the lack
of a profit incentive may lead to lack of interest, which renders the cooperative
inactive after a while.