Under

Ethiopian TVET System

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Basic Account Works Level II

Learning Guide
Unit of Competence: Develop Business Practice
Module Title: Develop Business Practice

Module Code: EIS BAW2 M13 0812

TTLM Code: EIS BAW2 13 0812
LO 1: Identify business opportunity
LO 2: Identify personal business skills
LO 3: Plan for establishment of business operation
LO 4: Implement establishment plan
LO 5: Review implementation process

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LO1 Identify business opportunity

Information Sheet-1 Identify business opportunity

1.1introduction to different types of business firms

Businesses are activities that provide goods and/or services in exchange for money or other goods and services.

A variety of businesses contribute to our local economy.

These include:

 Designing (buildings, gardens, paths, posters, etc.)

 Manufacturing or producing (goods like clothing or furniture, or parts of goods to be used by others
to make complete goods, such as processing paper to make books)
 Supply and distribution (moving goods from producer to client)
 selling (retailing – buying from a producer or another intermediary business and selling to the
consumer, or wholesaling – buying from a business and selling to other retailers or repair businesses)
 installing (fitting or connecting the product to the customer’s home or business)
 repairing (restoring broken or defective goods to working order)
Service industries Follow These Steps to Starting a Business
starting a business involves planning, making key financial decisions and completing a series of legal
activities. These 10 easy steps can help you plan, prepare and manage your business. Click on the links to
learn more. Step 1:
Templates for Writing a Business Plan:-Use these tools and resources to create a business plan. This written
guide will help you map out how you will start and run your business successfully.

Step 2: Get Business Assistance and Training:-Take advantage of free training and counseling services, from
preparing a business plan and securing financing, to expanding or relocating a business.

Step 3: Choose a Business Location:-Get advice on how to select a customer-friendly location and comply
with zoning laws. Step 4:
Finance Your Business:-Find government backed loans, venture capital and research grants to help you get
started. Step 5: Determine the
Legal Structure of Your Business:-Decide which form of ownership is best for you: sole proprietorship,
partnership, Limited Liability Company (LLC), corporation, S corporation, nonprofit or cooperative.
Step 6: Register a Business Name ("Doing Business As"):-Register your business name with your state
government. Step 7:
Get a Tax Identification Number:-Learn which tax identification number you'll need to obtain from the IRS
and your state revenue agency. Step 8: Register for
State and Local Taxes:-Register with your state to obtain a tax identification number, workers' compensation,
unemployment and disability insurance.

Step 9: Obtain Business Licenses and Permits:-Get a list of federal, state and local licenses and permits
required for your business.

Step 10: Understand Employer ResponsibilitiesLearn the legal steps you need to take to hire employees.

1.2 TYPES OF BUSNESS ORGANIZATION

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Meaning

Business organization refers to all necessary arrangements required to conduct a business. It refers to all those
steps that need to be undertaken for establishing relationship between men, material, and machinery to carry on
business efficiently for earning profit.

This may be called the process of organizing. The arrangement which follows this process of organizing is
called a business undertaking or organization. A business undertaking can be better understood by analyzing
its characteristics.

Characteristics

1. Distinct Ownership: The term ownership refers to the right of an individual or a group of individuals to
acquire legal title to assets or properties for the purpose of running the business. A business firm may be
owned by one individual or a group of individuals jointly.

2. Lawful Business: Every business enterprise must undertake such business which is lawful, that is, the
business must not involve activities which are illegal.

3. Separate Status and Management: Every business undertaking is an independent entity. It has its own
assets and liabilities. It has its own way of functioning. The profits earned or losses incurred by one firm
cannot be accounted for by any other firm.

4. Dealing in goods and services: Every business undertaking is engaged in the production and/or distribution
of goods or services in exchange of money.

5. Continuity of business operations: All business enterprise engages in operation on a continuous basis. Any
unit having just one single operation or transaction is not a business unit.

6. Risk involvement: Business undertakings are always exposed to risk and uncertainty. Business is
influenced by future conditions which are unpredictable and uncertain. This makes business decisions risky,
thereby increasing the chances of loss arising out of business.

While establishing a business the most important task is to select a proper form of organization. This is
because the conduct of business, its control, acquisition of capital, extent of risk, distribution of profit, legal
formalities, etc. all depend on the form of organization..

The most important forms of business organization are as follows:

 Sole Proprietorship
 Partnership
 corporation
 Co-operative Society

A) Sole Proprietorship

Meaning

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When the ownership and management of business are in control of one individual, it is known as sole
proprietorship or sole trader ship .It is seen every where in every country, every state, every locality. The
shops or stores which you see in your locality the grocery store, the vegetable store, the sweets shop, the
chemist shop, the stationery store etc. comes under sole proprietorship. It is not that a sole trader ship business
must be a small one. The volume of activities of such a business unit may be quite large. However, since it is
owned and managed by one single individual, often the size of business remains small.

Characteristics:

1. Ownership: The business enterprise is owned by one single individual that is the individual has got legal
title to the assets and properties of the business. The entire profit arising out of business goes to the sole
proprietor. Similarly, he also bears the entire risk or loss of the firm.

2. Management: The owner of the enterprise is generally the manager of the business. He has got absolute
right to plan for the business and execute them without any interference from anywhere. He is the sole decision
maker.

3. Source of Capital: The entire capital of the business is provided by the owner. In addition to his own
capital he may raise more funds from outside through borrowings from close relatives or friends, and through
loans from banks or other financial institutions.

4. Legal Status: The proprietor and the business enterprise are one and the same in the eyes of law. There is
no difference between the business assets and the private assets of the sole proprietor. The business ceases to
exist in the absence of the owner.

5. Liability: The liability of the sole proprietor is unlimited. This means that, in case the sole proprietor fails to
pay for the business obligations and debts arising out of business activities, his personal property can be used
to meet those liabilities.

6. Stability: The stability and continuity of the firm depend upon the capacity, competence and the life span of
the proprietor.

7. Legal Formalities: In the setting up, functioning and dissolution of a sole proprietorship business no legal
formalities are necessary. However, few legal restrictions may be there in setting up a particular type of
business.

For example, to open a restaurant, the sole proprietor needs a license from the local municipality; to open a
chemist shop, the individual must have a license from the government.

Advantages of Sole Proprietorship:

1. Easy Formation: The biggest advantage of a sole trader ship business is its easy formation. Anybody
wishing to start such a business can do so in many cases without any legal formalities.

2. Better Control: The owner has full control over his business. He plans, organizes, co-ordinates the various
activities. Since he has all authority, there is always effective control.

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3. Prompt Decision Making: As the sole trader takes all the decisions himself the decision making becomes
quick, which enables the owner to take care of available opportunities immediately and provide immediate
solutions to problems.

4. Flexibility in Operations: One man ownership and control makes it possible for change in operations to be
brought about as and when necessary.

5. Retention of Business Secrets: Another important advantage of a sole proprietorship business is that the
owner is in a position to maintain absolute secrecy regarding his business activities.

6. Direct Motivation: The owner is directly motivated to put his best efforts as he alone is the beneficiary of
the profits earned.

7. Personal Attention to Consumer Needs: In a sole trader ship business, one generally finds the proprietor
taking personal care of consumer needs as he normally functions within a small geographical area.

8. Creation of Employment: A sole trader ship business facilitates self employment and also employment for
many others. It promotes entrepreneurial skill among the individuals.

9. Social Benefits: A sole proprietor is the master of his own business. He has absolute freedom in taking
decisions, using his skill and capability.

This gives him high self-esteem and dignity in the society and gradually he acquires several social virtues like
self- reliance, self-determination, independent thought and action, initiative, hard work etc,. Thus, he sets an
example for others to follow.

10. Equitable Distribution of Wealth: A sole proprietorship business is generally a small scale business.
Hence there is opportunity for many individuals to own and manage small business units. This enables wide
spread dispersion of economic wealth and diffuses concentration of business in the hands of a few.

Disadvantages of Sole Proprietorship:

1. Unlimited Liability: In sole proprietorship, the liability of business is recovered from the personal assets of
the owner. It restricts the sole trader to take more risk and increases the volume of his business.

2. Limited Financial Resources: The ability to raise and borrow money by one individual is always limited.
The inadequacy of finance is a major handicap for the growth of sole proprietorship.

3. Limited Capacity of Individual: An individual has limited knowledge and skill. Thus his capacity to
undertake responsibilities, his capacity to manage, to take decisions and to bear the risks of business is also
limited.

4. Uncertainty of duration: The existence of a sole trader ship business is linked with the life of the
proprietor. Illness, death or insolvency of the owner brings an end to the business. The continuity of business
operations, therefore, uncertain.

Suitability of Sole Proprietorship:

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Sole proprietorship business is suitable where the market is limited, localized and where customers give
importance to personal attention. This form of organizations suitable where the nature of business is simple
and requires quick decision. For business where capital required is small and risk involvement is not heavy,
this type of firm is suitable. It is also considered suitable for the production of goods which involve manual
skill e.g. handicrafts, filigree works, jewellery, tailoring, haircutting, etc.

B) Partnership

Meaning

A partnership form of organization is one where two or more persons a re associated to run a business with a
view to earn profit. Persons from similar background or persons of different ability and skills may join together
to carryon a business. Each member of such a group is individually known as ‘partner’ and collectively the
members are known as a ‘partnership firm’.

1. Number of Partners: A minimum of two persons are required to start a partnership business. The
maximum membership limit is 10 in case of banking business and 20 in case of all other types of business.

2. Contractual Relationship: The relation between the partners of a partnership firm is created by contract.
The partners enter into partnership through an agreement which may be verbal, written or implied. If the
agreement is in writing it is known as a ‘Partnership Deed’.

3. Competence of Partners: Since individuals have to enter into a contract to become partners, they must be
competent enough to do so. Thus, minors, lunatics and insolvent persons are not eligible to become partners.
However, a minor can be admitted to the benefits of partnership i.e. he can have a share in the profits.

4. Sharing of Profit and Loss: The partners can share profit in any ratio as agreed. In the absence of an
agreement, they share it equally.

5. Unlimited Liability: The partners have unlimited liability. They are liable jointly and severally for the debts
and obligations of the firm. Creditors can lay claim on the personal properties of any individual partner or all
the partners jointly. Even a single partner may be called upon to pay the debts of the firm. Of course, he can
get back the money due from other partners. The liability of a minor is, however, limited to the extent of his
share in the profits, in case of dissolution of a firm.

6. Principal-Agent Relationship: The business in a partnership firm may be carried on by all the partners or
any one of them acting for all. This means that every partner is an agent when he is acting on behalf of others
and he is a principal when others act on his behalf. It is, therefore, essential that there should be mutual trust
and faith among the partners in the interest of the firm.

7. Transfer of Interest: No partner can sell or transfer his interest in the firm to anyone without the consent of
other partners.

8. Legal Status: A partnership firm is just a name for the business as a whole. The firm means partners and
the partners mean the firm. Law does not recognize the firm as a separate entity distinct from the partners.

9. Voluntary Registration: Registration of partnership is not compulsory.

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But since registration entitles the firm to several benefits, it is considered desirable. For example, if it is
registered, any partner can file a case against other partners, or a firm can file a suit against outsiders in case of
disputes, claims, disagreements, etc.

10. Dissolution of Partnership: Dissolution of partnership implies not only a complete closure or termination
of partnership business, but it also includes any change in the existing agreement among the partners due to a
change in the number of partners.

Advantages of Partnership Firm:

1. Easy Formation: A partnership can be formed without many legal formality and expenses. Every
partnership firm need not be registered.

2. Larger Resources: As compared to sole proprietorship, a partnership Firm can pool larger financial
resources. Thus it can enter into bigger operations and can have more credit facilities. It can also have better
managerial talent.

3. Flexibility in operation: There is flexibility of operation in partnership Business due to a limited number of
partners. These partners can change their operations and amend objectives if necessary by mutual consent.

4. Better Management: Partners take more interest in the affairs of business as there is a direct relationship
between ownership, control and profit.

They often meet to discuss the affairs of business and can take prompt decision.

5. Sharing of Risk: In partnership, risk of loss is easier to bear by individual partner as it is shared by all the
partners.

6. Protection of minority interest: Every partner has an equal say indecision making. A partner can prevent a
decision being taken if it adversely affects his interests. In extreme cases a dissenting partner may withdraw
from partnership and can dissolve it.

7. Better Public Relations: In a partnership firm the group managing the affairs of the firm is generally small.
It facilitates cordial relationship with the public.

Disadvantages of partnership Firm:

1. Instability: A partnership firm does not continue to exist indefinitely. The death, insolvency or lunacy of a
partner may bring about an unexpected end to partnership.

2. Unlimited Liability: As the liability of partners is joint and several to an unlimited extent, any one of the
partners can be called upon to pay all the debts even from his personal properties. Further, as every partner has
a right to take part in the management of the firm, any wrong decision by a single partner may lead to heavy
liabilities for others.

3. Lack of Harmony: Since every partner has equal right, there are greater possibilities of friction and quarrel
among the partners. Differences of opinion may lead to mistrust and disharmony which may ultimately result
in disruption and closure of the firm.

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4. Limited Capital: As there is a restriction on the maximum number of partners, the capital which can be
raised is limited.

Suitability of Partnership Firm:

In a partnership firm, persons from different walk of life having ability, managerial talent and skill join
together to carry on a business. This increases the administrative strength of the organization, the financial
resources, the skill and expertise, and reduces risk. Such firms are most suitable for comparatively small
business such as retail and wholesale trade, professional services, medium sized mercantile houses and small
manufacturing units. Generally it is seen that many organizations are initially started as partnership firms and
later, when it is economically viable and financially attractive for the investors, it is converted into a company.

C) Joint Stock Company (corporation)

Meaning:

A Joint Stock Company (corporation) form of business organization is a voluntary association of persons to
carry on business.

Normally, it is given a legal status and is subject to certain legal regulations. It is an association of persons
who generally contribute to certain legal regulations. It is an association of persons who generally contribute
money for some common purpose. The money so contributed is the capital of the company. The persons who
contribute capital are its member’s proportion of capital to which each member is entitled is called his share,
therefore

The members of a joint stock company are known as shareholders and the capital of the company is known
as share capital. The total share capital is divided into a number of units known as ‘shares’.

Characteristics:

1. Artificial Person: A Joint Stock Company is an artificial person in the sense that it is created by law and
does not possess physical attributes of a natural person. However, it has a legal status.

2. Separate Legal Entity: Being an artificial person, a company has an existence independent of its members.
It can own property, enter into contract and conduct any lawful business in its own name. It can sue and can be
sued in the court of law. A shareholder cannot be held responsible for the acts of the company.

3. Common Seal: Every company has a common seal by which it is represented while dealing with outsiders.
Any document with the common seal and duly signed by an officer of the company is binding on the company.

4. Perpetual Existence: A company once formed continues to exist as long as it fulfils the requirements of
law. It is not affected by the death, lunacy, insolvency or retirement of any of its members.

5. Limited Liability: The liability of a member of a Joint Stock Company is limited by guarantee or the shares
he owns. In other words, in case of payment of debts by the company, a shareholder is held liable only to the
extent of his share.

6. Transferability of Shares: The members of a company are free to transfer the shares held by them to
anyone else.

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7. Formation: A company comes into existence only when it has been registered after completing the
formalities prescribed under the law. A company is formed by the initiative of a group of persons known as
promoters.

8. Membership: A company having a minimum membership of two persons and maximum fifty is known as a
Private Limited Company. But in case of a Public Limited Company, the minimum is seven and the
maximum membership is unlimited.

9. Management: Joint Stock Companies have democratic management and control. Even though the
shareholders are the owners of the company, all of them cannot participate in the management process. The
company is managed by the elected representatives of shareholders known as Directors.

10. Capital: A Joint Stock Company generally raises a large amount of capital through issue of shares.

Advantages of Joint Stock Company:

1. Limited Liability: In a Joint Stock Company the liability of its members is limited to the extent of shares
held by them. This attracts a large number of small investors to invest in the company. It helps the company to
raise huge capital. Because of limited liability, a company is also able to take larger risks.

2. Continuity of existence: A company is an artificial person created bylaw and possesses independent legal
status. It is not affected by the death, insolvency etc. of its members. Thus it has a perpetual existence.

3. Benefits of large scale operation: It is only the company form of organization which can provide capital
for large scale operations. It results in large scale production consequently leading to increase in efficiency and
reduction in the cost of operation. It further opens the scope for expansion.

4. Professional Management: Companies, because of complex nature of activities and operations and large
volume of business, require professional managers at every level of organization. And because of their
financial strength they can afford to appoint such managers. This leads to efficiency.

5. Social Benefit: A joint stock company offers employment to a large number of people. It facilitates
promotion of various ancillary industries, trade and auxiliaries to trade. Sometimes it also donates money for
education, health, community service and renders help to charitable and social institutions.

6. Research and Development: A company generally invests a lot of money on research and development for
improved processes of production, designing and innovating new products, improving quality of product, new
ways of training its staff, etc.

Disadvantages of Joint Stock Company:

1. Formation is not easy: The formation of a company involves compliance with a number of legal formalities
under the companies Act and compliance with several other Laws.

2. Control by a Group: Companies are controlled by a group of persons known as the Board of Directors.
This may be due to lack of interest on the part of the shareholders who are widely dispersed; ignorance,
indifference and lack of proper and timely information. Thus, the democratic virtues of a company do not
really exist in practice.

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3. Speculation and Manipulation: The shares of a company are purchased and sold in the stock exchanges.
The value or price of a share is determined in terms of the dividend expected and the reputation of the
company.

These can be manipulated. Besides there is excessive speculation which is regarded as a social evil.

4. Excessive government control: A company is expected to comply with the provisions of several Acts.
Non-compliance of these invites heavy penalty. This affects the smooth functioning of the companies.

5. Delay in Policy Decisions: A company has to fulfill certain procedural formalities before making a policy
decision. These formalities are time consuming and, therefore, policy decisions may be delayed.

6. Social abuses: A joint stock company is a large scale business organization having huge resources. This
provides a lot of power to them. Any miss use of such power creates unhealthy conditions in the society e.g.
having monopoly of a particular business, industry or product; influencing politicians and government in
getting their work done; exploiting workers, consumers and investors

Suitability of Joint Stock Company:

A joint stock company is suitable where the volume of business is quite large, the area of operation is
widespread, the risk involved is heavy and there is a need for huge financial resources and manpower. It is also
preferred when there is need for professional management and flexibility of operations. In certain businesses
like banking and insurance, business can only be undertaken by joint stock companies.

D) Co-operative Society

Meaning

Any ten persons can form a co-operative society. It functions under the Cooperative

A co-operative society is entirely different from all other forms of organization discussed above in terms of its
objective. The co-operatives are formed primarily to render services to its members. Generally it also provides
some service to the society. The main objectives of co-operative society are: (a) rendering service rather than
earning profit, (b) mutual help instead of competition, and (c) self help in place of dependence. On the basis of
objectives, various types of co-operatives are formed:

a. Consumer co-operatives: These are formed to protect the interests of ordinary consumers of society by
making consumer goods available at reasonable prices.

b. Producers co-operatives: These societies are set up to benefit small producers who face problems in
collecting inputs and marketing their products. The Weavers co-operative society, the Handloom owners
cooperative society are examples of such co-operatives.

c. Marketing co-operatives: These are formed by producers and manufactures to eliminate exploitation by the
middlemen while marketing their product.

d. Housing Co-operatives: These are formed to provide housing facilities to its members. They are called co-
operative group housing societies.

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e. Credit Co-operatives: These societies are formed to provide financial help to its members. The rural credit
societies, the credit and thrift societies, the urban co-operative banks etc. come under this category.

f. Farming Co-operatives: These are formed by small farmers to carry on work jointly and thereby share the
benefits of large scale farming. Besides these types, other co-operatives can be formed with the objective of
providing different benefits to its members, like the construction co-operatives, transport co-operatives, co-
operatives to provide education etc.

Characteristics:

1. Voluntary association: Individuals having common interest can come together to form a co-operative
society. Any person can become a member of such an organization and leave the same.

2. Membership: The minimum membership required to form a co-operative society is ten and the maximum
number is unlimited. At times the cooperatives after their formation fix a maximum membership limit.

3. Body corporate: Registration of a society under the Co-operative Societies

Act is a must. Once it is registered, it becomes a body corporate and enjoys certain privileges just like a joint
stock company. Some of the privileges are:

(a) The society enjoys perpetual succession.

(b) It has its own common seal.

(c) It can own property in its name.

(d) It can enter into contract with others.

(e) It can sue others in court of law.

4. Service Motive: The primary objective of any co-operative organization is to render services to its members
in particular and to the society in general.

5. Democratic Set up: Every member has a right to take part in the management of the society. Each member
has one vote. Generally the members elect a committee known as the Executive Committee to look after the
day to day administration and the said committee is responsible to the general body of members.

6. Sources of Finances: A co-operative organization starts with a fund contribute by its members in the form
of units called shares. It can also raise loans and secure grants from the government easily. One fourth of the
profits of the co-operative are transferred to its fund every year.

7. Return on capital: The return on capital subscribed by the members is in the form of a fixed rate of
dividend after deduction from the profit.

Advantages of Co-operative Society:

1. Easy Formation: Formation of a co-operative society is easy as compared to a company. Any 10 persons
can voluntarily form an association and get themselves registered with the Registrar of Co-operative societies.

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2. Limited Liability: The liability of the members is limited to the extent of capital contributed by them.

3. Open Membership: There is no restriction on any individual to be a member of any co-operative.

4. State Assistance: Co-operatives get a lot of patronage in the form of exemptions and concessions in taxes
and financial assistance from the state governments which no other organization gets.

5. Middleman’s Profit Eliminated: Through the co-operative the consumers control their own supplies and
by this means the middleman’s profit is eliminated.

6. Management: A co-operative functions in a democratic manner. Each member has only one vote.

7. Winding up: The dissolution of a co-operative firm is quite difficult. It does not cease to exist in case of
death, or insolvency or resignation of a member. It has thus a fairly stable life.

Disadvantages of Co-operatives:

1. Limited Capital: The amount of capital that a co-operative can generate is limited because of the
membership remaining confined to a locality or region or a particular section of people.

2. Problems in Management: Generally it is seen that co-operative do not function efficiently due to lack of
managerial talent.

3. Lack of Motivation: Co-operatives are formed to render service to its members than to earn profit. This
does not provide enough motivation to manage the co-operatives effectively.

4. Lack of Co-operation: Co-operatives are formed with the very idea of co-operation. But, it is often seen
that there is lot of friction and bickering among the members due to personality differences, ego clash etc.

5. Lack of Secrecy: Maintenance of business secrecy is one of the important factors for the success of
enterprise which the co-operatives always lack.

6. Dependence on Government: The inadequacy of capital and various there limitations make co-operatives
dependant on the government for support and patronage in terms of grants, loans and subject themselves to
interference.

Suitability of Co-operatives:

When the purpose of business is to provide service than to earn profit and to promote common economic
interest, the co-operative society is the only alternative. Co-operatives are also preferred as it is easier to raise
capital through assistance from financial institutions and government. Generally it seems that a co-operative
society is suitable for small and medium size operations.

1.3 Choice of an appropriate form of Business Organization

Selection of a suitable form of business organization on the basis of ownership

And management is one of the important tasks of the entrepreneur. Once a form

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 Of organization is chosen, it is very difficult to switch over to another form because it needs the winding up of
the existing organization which is a waste of time, effort and money. Therefore, the form of organization must
be chosen after thought and consideration.

There are a number of factors to be considered while selecting an appropriate form of business organization.
Let us look into those factors one by one which are inter-related and inter-dependent as well.

1. Nature of Business: The selection of a particular form of organization is dependant upon the nature of
business activity. For service activity it can be ideally done through sole proprietorship or partnership. But if it
is a manufacturing business then a partnership or company is preferable.

2. Volume of Business: If the volume of business or scale of operation is small, a sole proprietorship or
partnership form is ideal. But if the volume of business is on a large scale, company form is the best.

3. Area of Operation: If the business is spread over a wide area, the company form is better suited, but if it is
confined to a particular locality or region, other forms may be suitable.

4. Finance: Where the initial as well as the working capital required to carryon the business is very large, one
has to opt for a company form. In other cases one can go for any other form.

5. Ownership and Control: When direct control over the business is desired, one should go for a sole
proprietorship or partnership instead of company or co-operative form.

6. Liability: A person who can bear the unlimited liability of business can go for sole proprietorship or
partnership form, but if he does not have the capability to shoulder the burden of unlimited liability, he may
opt for either company or co-operative form.

7. Independence: The company or co-operative organizations are subject to strict government regulations. So
if the entrepreneur wants to have a freedom in business with little governmental interference, he has to go for
either sole proprietorship or partnership.

1.4 IDENTIFYING AND ASSESSING NEW BUSINESS OPPORTUNITIES

Many organizations are considering what to do to grow. Some look to internal growth—selling more
of what they already sell to existing customers. Some look to acquisition. And, some look to add new
products or services. The purpose of this missive is the latter.

The decision to offer a new product or service is really a decision to invest in your business. So you
need to begin with a standard ROI calculation. Or to put it another way: If you invest a dollar, how
soon do you want that dollar back? And, how many extra dollars do you want? Over what time
frame?

This approach works whether you are considering any kind of addition—building, equipment,
inventory and even people. So, you might begin with a goal—if I invest $100,000, I want all of that
back in the first 6 months. And, I want to get a return of an additional $100,000 per quarter thereafter.
This is a critical step because if you do not begin with a yardstick, you have nothing to compare what
you find with what you want.

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 After creating your ROI goal, then you get to think a little New products/services
bit about your sales strategy. Existing products/services
Existing customers
New customers

This matrix is the basis for all strategic and sales planning. Begin by answering the question; what do
you want this new product or service to do? Get you more customer share of existing customers or
get you into new customers? This is an important question because of the impact it has on the sales
effort?

Decide What to Sell

The hardest part of this effort is deciding what to sell. Ideally, you will pick something where there is
both need and where you can have a competitive advantage. For example, there may be a lot of
customers in your territory that use certain products and you might not sell them now but if all you
are able to do is to get a “me, too” brand and compete on price…

Unless you have a strong need to get new customers, you might not want to add something that is
way out of your current customer base. For example, if you do a lot of work in pulp and paper and
have never done anything with transportation, you might not want to add something that only has
application in transportation because your sales team will have a lot of difficulty in selling it.

The best thing you can add is something which is used by many of your current customers and will
also help you penetrate closely-aligned businesses. And, you should be very clear on why these folks
might want to begin buying it from you.

Survey Your Customers/Prospects

Before making a decision to add products or services, you need to do a survey of your customer base
with the goal of identifying potential. Potential is the most important part of the sales effort because if
sufficient potential does not exist, you can pretty much be assured you are wasting a lot of sales
resource chasing non-existent business.

My recommendation is to create a specific list of target accounts in each sales territory and give the
sales team a 30-day assignment:

Identify all of the potential for the new product/service in the targeted accounts and also identify who
you think the key decision-makers will be.

You can also give the inside/counter people a similar assignment by implementing a “Question of the
Month” program:

Ask everyone who comes in the following questions:

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 • Do you currently use this product? If so, about how much of it do you use in a month? Year? If
no, have you considered using this product?

• Who are the people in your organization that would probably be involved in a decision to
purchase it?

(You might even have a contest where you hand out steak dinners for two for the individuals that
produce the most information.)

At the end of the month, you ask your sales team to make a formal presentation of what they have
found out. How much potential is out there? If there is enough to make your ROI numbers, proceed to
the next step.

The Next Step…Your Success Ratio

Once you have identified the potential in the target areas, the next step is to look at your historical
success ratios. To do this, look at the total dollars you quoted on everything last year. (You should
know this already.) Then divide it by half. Example, you closed 38% of all dollars quoted last year, so
you would divide it by half and find your expected close ratio for the new product or service would
be 19%. Now multiply .19 times the total potential you found in the exercise above—this is a realistic
sales budget for this year for the new product/service. Is it enough to justify your ROI investment?

You can count on some additional business once you get started because there may be some real
needs in un-surveyed customers and prospects but this is a good starting point.

The Real Deal

Even if you find the potential you need, the real deal is to get out there and sell it. To be effective,
you need to assign a specific number of sales calls at customers with defined potential over the next
30-60-90 days. Then manage it. Finding potential and booking orders is not the same but if your sales
team did the job correctly, you not only have a list of prospective customers but also a list of the
people who should be involved in making the decisions—not a bad way to start a sales effort, right?

Once you start this process, you need to manage it—and that means staying on top of the assignments
because the last thing a salesperson normally wants to do is to talk to new people about new products.

A Word About Compensation

If you want to add a little “zing” to your efforts, why not pay the salespeople a bonus commission on what they
book in the first year? If it’s really important, you can show it by paying a little more for it. And, that might
just help the people to want to do what you want them to do.

1.5 Feasibility Studies

Definition

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A Feasibility Study asks the question ‘can we do this?’ it should be a precursor to finalizing the business Case
which addresses the question ‘should we do this? The purpose of a Feasibility Study is to identify the
likelihood of one or more solutions meeting the stated business requirements. During the Feasibility Study,a
range of potential solutions to a particular business problem or opportunity are assessed and documented. The
outcome of the Feasibility Study is either a problem or opportunity are assessed and documented

The outcome of the Feasibility Study is either a preferred solution for implementation or a statement that the
capability to resolve the problem is beyond the resources or capability of your organization.

Undertaking a Feasibility Study

A Feasibility Study needs to be completed as early in the Project Life Cycle as possible. you need to identify a
range of alternative solutions and determine which option is the most feasible to implement
1.5.1 The steps in a typical Feasibility Study are:

Step 1: Understand the problem

In most cases, the business driver is a problem or opportunity in the organization. You need to have a clear
understanding of what this is (otherwise you can solve the wrong problem)

This is not just a technical question, time, cost, quality, service and reputation issues can be involved.

Step 2: Identify Alternative Solutions

Based on a clear understanding of the business problem, you need to determine the alternative solutions. A
range of solutions will assist in optimizing the outcome from the Feasibility Study.

Step 3: Determine the Feasibility of each option

To identify the feasibility of each solution assessments need to be made for a range of factors:

 Time (likely time and potential range of outcomes)

 Cost (likely cost and potential range of outcomes)
 The risk profile of the solution (opportunities and threats)
 Quality, reliability and performance issues
 Other factors relevant to the solution.

To answer these questions, you need to use a variety of methods to obtain reliable data including online
research, prototyping and modeling

Step 4: Choose a Preferred Solution

The next step is to select a preferred solution. Each parameter should have an acceptable range defined and a
weighting allocated to allow effective comparison

Options that fall outside of an acceptable range are discarded.

The rest are weighted and the optimum solution(s) identified. The selected option is generally the solution that
you have the highest confidence of delivering but cost and/or time considerations may force a higher risk

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option. One key question is what is the likelihood of the alternative solutions actually delivering the benefits
stated in the business Case?

Based on the results of the Feasibility Study and the Benefits and Costs portrayed in the business Case, a
preferred solution is identified.

Step 5: Obtain Buy In

The preferred solution needs to be agreed by all of the key stakeholders. Once agreed the business case can be
firmed up and the project initiated. It is not uncommon for projects to be initiated ahead of the feasibility study.
Ideally, in these circumstances a ‘gateway’ process should be initiated to evaluate the viability of the project
once the most feasible option has been determined. Alternatively, you may be forced to undertake the study
and determine the options within the established parameters of the project.

1.6 MARKET RESEARCH

WHAT IS MARKET RESEARCH?

A continuous process of collecting and analyzing data on products and services, capabilities,and
business practices within the market to satisfy your customer’s needs.

WHEN IS MARKET RESEARCH PERFORMED?

 It starts with a description of need

 Continues throughout the acquisition process
 Until the product is no longer useful or services end
 Level of market research performed will depend on various factors (acquisition value,
urgency, complexity, past experience, and past market research results

HOW CAN I USE MARKET RESEARCH?

 Use it to comply with Federal mandates and acquisition reform principles

(commercial item, performance-based service contracts, environmental requirements,
etc.)
 Use it to locate capable sources (including preferential programs) that can satisfy our
needs.
 Use it to determine the customary practices and terms and conditions (warranties,
financing, and maintenance, and deliveries, etc.).

 Use it to find any laws or regulations unique to our requirements.

 Use it to determine the customary practices of customizing, modifying, or tailoring
requirements to meet customers’ needs and associated costs.
 Use it to help state our requirements in terms that enable and encourage companies to
provide commercial items or non-developmental items.
 Use it to shape and support the development of acquisition requirements such as an
acquisition plan and acquisition strategies.

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  Use it to craft solicitations (product descriptions, statements of work, and evaluation
factors used for source selection) and contracts.
 Use it to facilitate the preparation of acquisition documentation leading to best-value
acquisition decisions.
 Use it to acquire products or services faster, cheaper, and with better capabilities.

1.6.1WHO IS RESPONSIBLE FOR PERFORMING MARKET RESEARCH?

Participation will vary based on the organization and types of supplies or

services needed.
A wide range of people may participate in market research, based on their area
of expertise.
A team approach may be best since many functional areas may need to be
gathered during market research. The team may be composed of: Project
Officers, End Users, Technical Specialists, Logistics Specialists, Scientific
Researchers, Testing Specialists, Cost Analysts, legal Counsel, Contract
Specialists, and Contracting Officers.

Conserve energy and time by making sure the individual responsible for the
operational requirement is on the team.

1.6.2 WHAT ARE SOME OF THE TECHNIQUES OF CONDUCTING MARKET

RESEARCH?

 Reading trade journals.

 Contacting knowledgeable people (Government and industry) in specific markets.
 Contacting contracting officers, contract specialists, and project officers in other federal
agencies and private industry (other users).
 Take advantage of the lessons that these individuals have learned in previous acquisitions.

 Contacting known sources of supplies or services.

 Reviewing market surveys prepared by companies.
 Doing market surveys to obtain information from potential sources.
 Contacting Government research laboratories and centers managing basic research.
 Conducting site visits.
 Attending trade shows, conferences, and symposia.
 Querying Government databases that provide relevant information on acquisitions.
 Using Internet tools and performing Web searches.
 Reviewing the Yellow pages.
 Reviewing results of recent market research on similar or identical requirements.
 Publishing formal requests for information, sources sought synopses, draft statements of
work and solicitations in appropriate technical or scientific journals, business publications,
 Obtaining source lists of similar items from other contracting activities or agencies, trade
associations or other sources.

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  Reviewing catalogs and other product literature, published by manufacturers, distributors, and
dealers.
 Reviewing Federal Supply Schedule contracts, and other Government contracts.
 Conducting interchange meetings or holding pre-solicitation conferences to involve potential
offerors early in the acquisition process.
 Finding established structures within the industry where buyers and sellers find each other.

HOW DO I GET STARTED

 Categorize your requirement (product or service).

 Identify the key characteristics of the requirement (physical aspects, environmental
requirements, etc.).
 Assemble the team, when appropriate, and discuss any known information. By
seeking those who are familiar with the marketplace, efficient use of time should be
realized. Assign tasks, if appropriate.
 Select market research techniques that will help accomplish the market research
objectives (identification of commercial products or services and market practices).
The techniques may change during the market research process.
 Begin investigating the market. Evaluate whether commercial items are available.
(Track and document the results along the way.
 Analyze the data received to determine if the market research objectives have been
met.
 Evaluate all information received and determine if a commercial acquisition is
feasible. Keep in mind that:

Products may meet the requirements in varying degrees. No vendor may meet a particular
requirement, but all may meet some of the requirements. Instead of reducing the product or
service field or eliminating a commercial solution, ask if the requirement can be reevaluated, and
determine if the need can be restated to permit commercial item contracting.

If the user is unwilling to relax or eliminate a particular requirement, ask about the feasibility and
cost of modifying the commercial item to meet the requirement.

 Perform trade-off analyses, which are important in making overall best choices.

It may not be economical to relax the initial requirement (example: a requirement of 300 hours mean
time between failures vs. 250 hours if the equipment is needed frequently).

Trade-offs (such as reliability shortfalls) may be compensated for by other equipment capabilities or
performance (perhaps the equipment has more bells and whistles that can cut the work in half, though
the mean time between failures is 250 hours).

It may be better to accept a trade-off than to impose totally new procedures or requirements that will
drive up the risk and cost. This can happen with product modifications. It is a critical aspect of the
market research process. Documenting market research results in a manner appropriate to the size and

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complexity of the acquisition. It is important to indicate whether the item is or is not a commercial
item or non-developmental item.

Results should be clearly documented so that they can be used in the future. Other market research
teams may use the results when investigating similar products or services.

Documentation provides a historical record of market research efforts, and that market research was
performed. Use information obtained to develop the acquisition plan, solicitation, terms and
condition statement of work, and evaluation criteria for source selection.

1.6.3 FIVE PRINCIPLES THAT YOU NEED TO KEEP IN MIND WHEN ADAPTING
MARKET RESEARCH

 Start early, while the requirement is still flexible.

 Involve users in the process.

 Communicate.
 Use teamwork to accomplish your goals.

 Se market research to first determine the availability of commercial capabilities, practices

items, and services to meet the general requirement. Use market research to obtain specific
and detailed information to make various acquisitions decision.
1.7 E-COMMERCE
INTRODUCTION

In the emerging global economy, e-commerce and e-business have increasingly become a necessary
component of business strategy and a strong catalyst for economic development. The integration of
information and communications technology

(ICT) in business has revolutionized relationships within organizations and those between and among
organizations and individuals. Specifically, the use of ICT in business has enhanced productivity, encouraged
greater customer participation, and enabled mass customization, besides reducing costs.

With developments in the Internet and Web-based technologies, distinctions between traditional markets and
the global electronic marketplace-such as business capital size, among others-are gradually being narrowed
down. The name of the game is strategic positioning, the ability of a company to determine emerging
opportunities and utilize the necessary human capital skills (such as intellectual resources) to make the most of
these opportunities through an e-business strategy that is simple, workable and practicable within the context
of a global information milieu and new economic environment. With its effect of leveling the playing field, e-
commerce coupled with the appropriate strategy and policy approach enables small and medium scale
enterprises to compete with large and capital-rich businesses.

On another plane, developing countries are given increased access to the global marketplace, where they
compete with and complement the more developed economies.

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Most, if not all, developing countries are already participating in e-commerce, either as sellers or buyers.
However, to facilitate e-commerce growth in these countries, the relatively underdeveloped information
infrastructure must be improved.

Among the areas for policy intervention is:

● High Internet access costs, including connection service fees, communication fees, and hosting charges for
websites with sufficient bandwidth;

● Limited availability of credit cards and a nationwide credit card system;

● Underdeveloped transportation infrastructure resulting in slow and uncertain delivery of goods and services;

● Network security problems and insufficient security safeguards;

● Lack of skilled human resources and key technologies (i.e., inadequate professional

IT workforce);

● Content restriction on national security and other public policy grounds, which greatly affect business in the
field of information services, such as the media and entertainment sectors;

● Cross-border issues, such as the recognition of transactions under laws of other

ASEAN member-countries, certification services, improvement of delivery methods and customs facilitation;
and

● The relatively low cost of labor, which implies that a shift to a comparatively capital intensive solution
(including investments on the improvement of the physical and network infrastructure) is not apparent.

It is recognized that in the Information Age, Internet commerce is a powerful tool in the economic growth of
developing countries. While there are indications of eCommerce patronage among large firms in developing
countries, there seems to be little and negligible use of the Internet for commerce among small and medium
sized firms. E-commerce promises better business for SMEs and sustainable economic development for
developing countries. However, this is premised on strong political will and good governance, as well as on a
responsible and supportive private sector within an effective policy framework. This primer seeks to provide
policy guidelines toward this end.

1.7.1 E-business

E-business or e-commerce refers to the process of buying and/or selling by using the Internet to locate the
desired product or service, and to discuss payment. One of the advantages of e-business is that geographical
distance does not present a problem for conducting transactions.

The client may visit the website launched by a certain business and find a product or service that he or she
needs. The client then communicates by e-mail with that business to order the product or service and to
indicate the method of payment. A small business may find it extremely cost-effective to advertise via the
World Wide

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Web, as launching a website is a relatively inexpensive process.

Communicating by e-mail and scanning websites depends very much of course on the quality and efficiency of
the local telephone network and electricity supply.

1.7.2 CONCEPTS AND DEFINITIONS of e- commerce

What is e-commerce?

Electronic commerce or e-commerce refers to a wide range of online business a activities or products and
services. It also pertains to “any form of business transaction in which the parties interact electronically rather
than by physical exchanges or direct physical contact.”

E-commerce is usually associated with buying and selling over the Internet, or conducting any transaction
involving the transfer of ownership or rights to use goods or services through a computer-mediated network.
Though popular, this definition is not comprehensive enough to capture recent developments in this new and
revolutionary business phenomenon. A more complete definition is: E-commerce is the use of electronic
communications and digital information processing technology in business transactions to create, transform,
and redefine relationships for value creation between or among organizations, and between organizations and
individuals.

Three primary processes are enhanced in e-business:

1. Production processes, which include procurement, ordering and replenishment of stocks; processing of
payments; electronic links with suppliers; and production control processes, among others;

2. Customer-focused processes, which include promotional and marketing efforts, selling over the Internet,
processing of customers’ purchase orders and payments, and customer support, among others; and

3. Internal management processes, which include employee services, training, internal information-sharing,
video-conferencing, and recruiting. Electronic applications enhance information flow between production and
sales forces to improve sales force productivity. Workgroup communications and electronic publishing of
internal business information are likewise made more efficient.

Is the Internet economy synonymous with e-commerce and e-business?

The Internet economy is a broader concept than e-commerce and e-business. It includes ecommerce and e-
business.

The Internet economy pertains to all economic activities using electronic networks as a medium for commerce
or those activities involved in both building the networks linked to the Internet and the purchase of application
services7 such as the provision of enabling hardware and software and network equipment for Web-
based/online retail and shopping malls (or “e-malls”). It is made up of three major segments: physical (ICT)
infrastructure, business infrastructure, and commerce.

The CREC (Center for Research and Electronic Commerce) at the University of Texas has developed a
conceptual framework for how the Internet economy works.

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Differences between Electronic Commerce and traditional commerce

- The major difference is the way information is exchanged and processed:

•Traditional commerce:

•face-to-face, telephone lines, or mail systems

•manual processing of traditional business transactions

•individual involved in all stages of business transactions

•E-Commerce:

•using Internet or other network communication technology

•automated processing of business transactions

•individual involved in all stages of transactions

•pulls together all activities of business transactions, marketing and advertising as well as service and
customer support

motioned above Characteristics of

Electronic Commerce

The tools are electronic but the application is commerce.

 Commerce is not accounting or decision support or any other internally focuses

function.
 Commerce is externally focused on those with whom you do business.
 Commerce is doing business, not reporting on it or sending messages about it.

Special characteristics of electronic commerce and Web commerce:

 Information exchanged and processed by a communications network and

computers, as well as e-commerce software.

 Most transactions are processed automatically.

 pulls together a gamut of business support services, such as

 Inter-organizational e-mail, on-line directories

 trading support systems for commodities

 Products, and customized products

 Custom-built goods and services

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  Ordering and logistic support system supports

 Management and statistical reporting systems

1.8 ASSESSING A BUSINESS OPPORTUNITY

Business Opportunity may be defined as a business proposal an entrepreneur would like to pursue considering
risk and the reward involved in the proposal which maybe manufacturing or servicing or trading.

Before investing time and money into a business it is important to have as clear as possible of a picture of
what you're getting into. This brief gives the twenty questions I think are most important to make an
assessment. These questions can be used:

• By an entrepreneur to see if it's worth his time and money to pursue an idea;

• By an entrepreneur to help in making a presentation to a potential investor; or

• By a potential investor to review and compare investment opportunities.

The following model is useful when looking at a business opportunity:

The rest of this paper describes this model and identifies the questions that should be answered in each
category.

Technology and/or Idea

At the core of any business sits a technology and/or idea. If the technology is proprietary, the entire better.

If other companies have the same technology or idea, what makes this company better? Even if you are
running a restaurant, you may have proprietary content that is worth protecting just like Coca-Cola has its
secret formula. To make an assessment, one should answer the following questions:

 What are the technology and/or idea?

 What technologies and/or ideas serve the same market today and will be competitors in
the future?

 Is the technology unique? If so, what are the unique benefits to customers and users?
 Does the company have any way to protect this technology (trade secrets, patents, etc)?

Product or Service

Generally it is products and services, not ideas that are sold to customers. If what you're doing is visionary, it
may be a big step to go from an idea or technology to a product or service. The following are some questions
to be asked:

 Does a sample of the product or service exist?

 If a sample exists, what testing has been done to make sure it works as advertised?

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  If a sample exists, what market testing has been done to see if customers will pay for it?
 Given the current status of the product or service, what investment and time will be
required to put it into production?

Company

Even if you have a clever idea or technology and have implemented this into a product or service that works
and is liked by customers, there must be an organization that will supply this. The key questions are:

 Who in the company has run a business similar to this in the past?
 Who will do the marketing for this product and what experience do they have?
 Who will do the product development and manufacturing of this product or provide the
service and what skills do they have?

 Do the company's financial and development plans look realistic?

Business Model

The business model describes how the company will generate revenues from customers and compete with
competitors. It is important to know:

 What is the pricing for the product or service and how was this pricing determined?
 What data do you have that substantiates that customers will pay this much for the
product or service?
 What is your cost for producing this product or
 What are your marketing costs for selling this product?

Environment

The environment for a business consists of customers, competitors and potential safety, regulatory, product
liability and pollution concerns

Thus, one should understand:

 Who are the competitors and what products/services are they currently offer?
 How big is the market for this product?
 Who are the customers for this product and what are the characteristics of the purchase
decision process?
 What safety, product liability, environmental, or regulatory issues that may affect this
business?

1.8.1 How to identify

BUSINESS OPPORTUNITIES

Business Opportunity may be defined as a business proposal an entrepreneur would like to pursue considering
risk and the reward involved in the proposal which maybe manufacturing or servicing or trading.

How do people generally identify business opportunity?

25
World wide most of the entrepreneurs identify the Business Opportunity based on the following three simple
ways: (traditional way)

1. My father or someone in my family is doing it successfully, so I want to do the same

2. I have related experience; hence I am pursuing this opportunity

3. Someone is doing it successfully whom I know. Hence, I am pursuing this Opportunity

If the line of thinking continues to this then the number of sellers will be more than buyers which has already
led to unhealthy competition. This is the cause for high mortality rate in micro enterprises. In order to rectify
this problem, there is need for a scientific approach to identify business opportunities.

This approach calls for a scientific way of classifying Business Opportunity in to nine broad categories based
on its origin, application, user or source. Based on this, it has been categorized under the following broad nine
categories.

They are:

 Resource based
 Demand based
 Skill based
 Ancillary/ vendor
 Inputs to primary sector
 Inputs to secondary sector
 Inputs to tertiary sector
 Waste based
 Innovative

1. Resource based

Industries which are based on available local resources are called as resource based industries.

2. Demand based

Industries which cater to the local requirement, availability of resources is not a prerequisite, such a category
of industries are placed under this sector. E.g.
Manufacturing series light sets in ABC district for which raw material is not available locally but there is local
demand.

3. Skill based

These are the industries where skills available with the local people are used to manufacture various goods and
services. 4. Ancillary/ vendor

As per the approved definition of Government of India, any Industry supplying raw material or components to
any medium or large industry at least to an extent of one shift load of its installed capacity (per day), such
industries are categorized as Ancillary industry.

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 5. Inputs to primary sector

Mining, agriculture, sericulture, horticulture, cattle rearing, aqua culture etc., comes under primary sector.
Industries which cater to the requirement of these sectors are categorized as input to primary sector.

6. Inputs to secondary sector

Existing industries offer ample opportunities in terms of spares, packing materials etc.

Industries which are manufacturing goods and services as per the requirement of existing industries immaterial
whether it is large, medium or small are categorized under this category. For eg supply of corrugated boxes, PP
caps, washed glass bottles to a Pharmaceutical unit.

7. Inputs to tertiary sector

Existing trade and commerce offers ample scope for supplying goods and services - particularly the service
sector has a pivotal role to play. Eg. A computer accounting system catering to the requirement of existing
trade and commerce – this type of service providers are classified under this category.

8. Waste based

While harvesting the resources lot of waste materials are generated. These unused materials offer ample
opportunity to convert as a value added goods. Industries which are engaged in such activities are categorized
as waste based industries. E.g. Production of paper.

9. Innovative

These are the created goods and services by innovative entrepreneurs. These are the services which are non-
existent till they are launched.

These goods and services includes seeds for sowing purpose, saplings, implements, hand tools, fertilizers,
pesticides, insecticides, baskets, irrigation systems etc.

1.9 Preparing business plan for business operation (show a sample complete B.P. and the soft ware)

What is Business Plan? A

business plan is a document the entrepreneur prepares before going to the implementation stage. It details
every aspect of the business the entrepreneur (cooperative) aspires to establish: description of the business and
the marketing, financial, organizational and operational plans necessary for the foundation of the venture. A
good business plan is important in developing opportunity and also important in determining the resource
required, obtaining those resources and successfully managing the resulting venture. The business plan is a
written document prepared by the entrepreneur (cooperative) that describes all the relevant external and
internal elements involved in starting a new business activity. It is often an integration of functional plans such
as marketing, finance, manufacturing, and human resources. The business plan-or, as it is sometimes referred
to, a road map-answers the questions, where am I now? Where am I going? How will I get there? Potential
investors, suppliers, and even customers will request or require a business plan

27
Business Planning is not just about business plan thinking things through is as important the final document.

It's a tool for understanding how your business is put together. The process will help you learn how to manage
your own company more effectively while you become an expert in your industry and business. It creates a
framework for you to start and grow your business. The Business Plan is dynamic.

1.9.1 Why write business plan

• It helps you think long term - about the big picture, not just about starting a business but staying in business.

• It assists in keeping you motivated.

Feasibility study

• Is your idea viable?

• Is your business going to be profitable?

• Will you require outside financing to start or operate this business?

• What are your barriers to success?

Become a better decision maker

• It will help you anticipate problems.

• Gathering information for your plan will increase your knowledge of the industry thereby there by assisting
you in making more informed decisions.

• Your plan provides an organized way to conduct your investigation.

Reality Check

• Your plan raises questions that will help inspire solutions before a crisis occurs.

• It helps you to know what will be required of you as an entrepreneur.

• By identifying strengths and weaknesses, it reveals where you will need assistance.

Implementation plan

• Use the Business Plan as a guide to keep you focused and making progress during the business start up phase.

Selling tool

• Use the Business Plan to sell your business opportunity to potential investors, employees and suppliers.
Starting a business without a Business Plan is like driving from downtown Ottawa to downtown Toronto
without a map. Chances are you'll make it, but with guidelines the trip will be shorter and much more
pleasant.

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Every time you write a Business Plan you become a better businessperson .

1.9.2 Ten key points to remember when writing your business plan:

 Be honest. Do not be overly optimistic or try to hide limitations or weaknesses.

 Write in easy to understand terms. Avoid jargon and terms that are unfamiliar to people
outside of your industry.
 Represent your company’s image, and convince the reader you understand all aspects of
the business.
 Provide the lender with an understanding of your business and how you will use the loan.
 Evaluate the company’s management team. This is a major focus of the plan.
 Answer the three strategic planning questions:

Where are we now?

Where do we want to be?

How do we get there?

 Quantify your market, sales, production, and cost data. Do not generalize. Be specific. Use
data to help tell the story.
 Begin each major section on a new page with the appropriate title; for example,
Marketing Plan.
 The actual content of the business plan will vary depending on the nature and complexity
of the business, the stage of development and the type of financing needed.
 The business plan may be used as a sales document. The content and quality of the Plan
should be representative of your company

1.9.3 Business Plan Development Procedures

Assessing internal and external environments

Identifying Internal and External Environmental Factors

A business environment in which firms operate comprises of forces /factors outside and inside of the business,
system that may affect their operation/ business environment refers to the various facets within which a firm
has to operate in. The environment determines what business can do and has a shaping and channeling
influencing on their development, decisions and ultimately the internal structure and process of organizations.
Every organization is part of a larger system constantly changing, what managers can do and cannot do. The
idea of an industry is central to understanding what an organization faces in its environment. The importance
of an industry is that external forces affect each industry differently. Figuring out what the important forces are
and how the firm can best position it to take advantage of them is a large part of strategic planning. It is
important to put the new venture in a proper context by first identifying factors that make up the environment
and assessment of external uncontrollable variables that may affect launching the new business. So that the

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organization would be in a better position to develop strategies that could enable it to adjust its operation
successfully to be consistent with what is occurring in the environment. In managing a dynamic environment,
the fundamental task is considering; the entire organization and how it relates to the factors or forces around it.
These environmental factors are divided into two major parts: internal and external environmental factors.

A. Internal Environment

Internal environment consists of factors/forces that originate inside the organization and that are relevant to its
operation. The internal environment consists of environmental forces that directly affect a firm on a regular
basis and that directly influence an organization’s activities. Internal environment include:-

1. Customers, media, labor union, financial institution, competitors, employee, shareholders and suppliers.
SWOT Analysis

Strengths, Weaknesses, Opportunities and Threats:

A SWOT analysis can help the cooperative gaining a better understanding of both internal issues and the
external factors, allowing better decision making. It looks at the organization from four different angles:

 Strengths: internal characteristics such as skills and resources which, if mobilized or used more
effectively, can benefit the organization.
 Weaknesses internal characteristics which limit the potential of the organization such as, for example,
insufficient resources or skills.
 Opportunities external factors which are expected to improve the organization’s competitive position,
and which should be fully exploited.
 Threats external disadvantages which are expected to hinder the organization’s planned progress.

It contributes to the process of transforming visions into plans by giving a summarized picture of the
cooperative’s (any business enterprise) internal and external potential to achieve organizational and/or
programmed, Objectives or operational goals. It also helps to focus on the cooperative’s (enterprise) unique
strengths and opportunities.

A SWOT analysis involves four main steps:

 Identification of strengths and weaknesses

 Identification of opportunities and threats
 Setting priorities
 Formulating strategy statements

1.9.4 Elements of the Business Plan (on a separate word page)

The business plan could take hundreds of hours to prepare, depending on the experience and knowledge of the
entrepreneur as well as the purpose it is intended to serve. It should be comprehensive enough to give any
potential investor a complete picture and understanding of the venture and will help the entrepreneur clarify
his/her thinking about the business.

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Many entrepreneurs incorrectly estimate the length of time that an effective plan will take to prepare. Once the
process has begun, however, the entrepreneur will realize that it is invaluable in sorting out the business
functions of a new venture.

OUTLINE OF A BUSINESS PLAN

I. Introduction page

A. Name and address of the business

B. Name(s) and address of principal
C. Nature of business
D. Statement of financing needed

II. Executive summary

o Three to pages summarizing the complete business plan

III. Company profile:

IV. Business Profile

o Description of the firm’s product

V. Operation Plan

A. Description of company’s operation

B. Flow of orders for goods and/or services.
C. Technology utilization

VI. Marketing plan

A. Pricing
B. Distribution
C. Promotion
D. Product forecasts
E. Controls

VII. Competitors Analysis

VIII. Assessment of risk

A. Evaluate weakness of business

B. New technologies
C. Contingency plan

IX. Financial plan

A. Pro forma income statement

B. Cash flow projection
C. Pro forma balance sheet

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 D. Break-even analysis
E. Sources and applications of funds

X. Appendix (contains backup material)

A. Letters
B. Market research data
C. Leases or contracts
D. Price lists from suppliers

1.9.5 Identify financial availability

Forms of finance

Internal finance

Internal Sources of finance sources that come from the business’s assets or activities.

1. Retained profitif the business made profit, it could use some of that profit to finance future costs.

2. Sales of AssetsThe business can sell of its assets such as property, machinery and such to finance future
costs ordebts. This can be a short term source of finance if the assets sold are like vehicles and machinery, but
canbe a long term source of finance if the assets are valuable like buildings and lands.

3. Reducing stocksby holding too many stocks, the business is actually holding money in the form of goods.
The business can sell these stocks and thus, gain money. This is a short term source of finance.

External finance: - External sources of finance sources that come from outside the business.

Short term finance (under 1 year)

1. Personal savingswhen the business is facing financial constraints, the owner of the business can use his or
her ownmoney to finance the costs or debts. This is considered as external because the money is not raised by
the business’s activity. This source of finance is only applicable for sole traders and partnership, where the
owners are underunlimited liability. This can be a short term or long term source of finance, depending on the
amount of savings investedinto the business.

2. OverdraftsBank overdrafts are given on current accounts and are usually short term sources of finance. It is
different from loans as the payments are only based on how much money the business used fromthe overdraft.
So, lets say the overdraft is $30 000, but the business only used up to $10 000, then the debt is only $10 000
plus interest, which is also based on the amount used. Let’s say the interest rate is 5%, then theinterest is 5% x
10 000 instead of 5% x 30 000.

3. Debt FactoringDebt factoring is selling the business’s invoices to a factoring company.The business
customer does not have to collect the debt anymore as the factoring company will pay for it and will then
collect the debt from the debtors, however, the factoring company will pay less than the actual amount of debt

32
noted in the invoice. So, one advantage is that the business customer will obtain cash quickly and does not
have to wait for the debtors to pay back their debts.However, there will be a loss, as the factoring company will
pay less, for example, only 80% of the debt. That is how these factoring companies make their profits. Another
disadvantage is, it may so happens that the debtors prefer to deal with the business they are trading rather than
a factoring company. Dissatisfaction might happen. Debt factoring is usually a short term source of finance

4. LoansBusinesses can apply for loans from commercial banks, and need to pay interests for it.There are three
types of loans: long term loans, medium term loans and short term loans, dependingon the length of time the
business is given to pay off the debts. Long term loans are due to be paid between 5 to 7 years and medium
term loans

Medium (1-5 years) / Long term (over 5 years) finance

1. Debenturesthis is a form of loan obtained by specialist financial institutions.

It is usually a long term loan.

2. Leasing

Leasing involves a business customer renting equipments that it may use for several years, but the equipments
are not owned. The equipments are rented from a leasing company, and after the contract is finished, the
equipments are to be returned to the leasing company. Since the equipments are not owned, the leasing
company is responsible in financing the maintenance such as repairs for the equipments.Leasing can be either
medium or long term source of finance.

3. Hire purchase Hire purchase is a little bit like leasing as the business does not own the equipments at first
and has topay monthly rents or installation, but different as when all the payments have been made, then
thebusiness becomes the owner of the equipment.

Under the agreement, the business customer usually is responsible for the maintenance of the equipment. Hire
purchasing can be either medium or long term source of finance.

4. Issue sharesif an unlimited company converts to a limited company, then sources of finance can now come
fromthe shareholders.For limited companies, issuing new shares can increase the capital as there are more
shareholders. This is a long term source of finance.

5. Venture capital Venture capitalists are specialist finance providers and the loan business money in return
for a share of business ownership or of any eventual profit.

When the nature of the new business has been decided, it will be necessary to estimate the cost of starting
operations.

These may include the cost of:

 Premises
 Utilities
 Equipment

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  Initial stock
 Insurance

1.9.6 Obtaining funds

The funds for launching the business may be obtained from one or a combination of sources:

 Personal savings
 Family funds
 Community co-operative organizations
 Community financial syndicates
 micro-finance organizations
 Post office
 Savings and loan associations
 Banks, etc.

Banks offer a variety of financial facilities, such as:

 Current or cheque accounts

 Savings accounts
 Loan services.

1.1 Self assessmentquietion(LO1)

1. Discuss steps to starts new business?

2. Identfify the similarity & deference in different form of business organization?

3. Identfy the advantage & disadvantage of different form of business organization?

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4. How to identify new business opportunity?

5. What steps we follow to conduct feasibility study?

6. List down market research techniques?

7. Identfy the content which include in business plan?

8. Identfy source of finance for cooperatives?

9. What we consider when we select an appropriate form of business organization?

I. Which of the following statement are TRUE or FALSE?

1) A sole proprietorship business is started by one person

2) The liability of a sole trader is limited
3) Sole tradership business can be expanded to any limit
4) A sole trader can not maintain business secrecy
5) Sole tradership is suitable for small scale business
6) Registration of sole proprietorship firm is a must
7) There is no risk involved in sole proprietorship business
8) The members of a co-operative get a fixed rate of dividend from profit
9) A co-operative society can not enter into any contract
10) The liability of the members of a co-operative is unlimited
11) A co-operative society needs not be registered
12) The members of a co-operative society have ‘one man - one vote
13) A minor can become a partner
14) The interests of partners are freely transferable
15) A partnership firm has separate legal entity
16) There is a direct relationship between ownership, control and profit in a partnership
business
17) Partners can not admit new members
18) The maximum membership for a public limited company is 50
19) A company is dissolved with the death of its members
20) The members of a company transfer their shares through consent of all members
21) The liability of the members of a Joint Stock Company is unlimited
22) Any document with the signature of the officer of a company is binding on it.

II. Fill in the blanks :

1. A co-operative society has a fairly————life.

2. Membership of a co-operative is——————.
3. A co-operative’s primary motive is——————.
4. The minimum membership to get a co-operative registered is———
5. Dissolution of a co-operative society is ————
6. A company has——— existence.
7. A company enjoys the benefits of ————operation
8. A company is managed by————

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 9. When the area of operation of the business is———a company form is preferred
10. The shares of a Joint Stock Company may be——— in the stock market
11. A partnership firm requires at least———— persons.
12. The partners are liable—————and————for all the debts and obligations of the firm.
13. Registration of a partnership firm is————.
14. There exists a ————— relationship between partners.
15. The persons who own the partnership business are individually called

———— and collectively known as ——————

II Match the following with reference to sole proprietorship business:

AB

1. Liability a. dissolution of business

2. Formation b. minimum

3. Resources c. prompt

4. Death of owner d. limited

5. Decision making e. unlimited

6. Legal formalities f. easy

Instruction Sheet-2 Identify personal business skill

LO2.identfy personal business skills

2.1 Identify financial availability & business skill

People who start their own business have control over what they do in their working life. By managing their
own business, they have the opportunity to shape their work environment and make an impact on their
community. But often there will be resistance, especially if a new business idea is introduced. Therefore, one
needs management skills to make the business successful as well as to convince the community that it can only
help them, or at least can do them no harm.

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A good manager is a planner, a person who has vision, sets goals for achieving that vision and ensures that the
necessary resources, financial and human, are obtained and allocated in time.

Some key qualities good managers have:

 Reliability
 Integrity (financial and ethical)
 Ability to lead
 Ability to set a goal and work towards it in small steps
 Eagerness to meet obligations,

2.1.2 Matching personal skills with business

We all have skills that we use in day-to-day life. We can use some of these skills (or a combination of them) to
launch a viable business.

There are different types of skills:

 Thinking (being creative, solving problems, making decisions, observing my surroundings, basing
actions on needs and opportunities of the immediate context, etc.)
 Conducting myself (believing in myself, managing my life, being responsible, etc.)
 Interacting with people (working with others and accepting others irrespective of their cast, gender,
social status, whether they have a disability or not, etc.)
 What I can do (repairing bicycles, cooking, making crafts, reading, singing, etc.).

The skills that will help us in business are likely to be a combination of our personal (entrepreneurial) qualities
and our technical knowledge and expertise acquired in school. Our skills should not be confined to traditional
stereotypes. For example, girls may make good motor mechanics.

2.2 Risk assessment

Risk assessment is the process by which a firm conducts analysis for events that hold a catastrophic po,ttential
are largely identical to those non-catastrophic event, with three exceptions:

1) Risk manager whose firm are exposed to natural catastrophes devote greater time and effort to exploring
the susceptibility of the firm physical structure to damage.
2) Such corporations commonly rely more heavily on modeling to estimate the probable effects of natural
catastrophes on their business.
3) They find that scenario planning can play a significant role in helping them to broaden and deepen their
thinking about possible adverse events and the environment.

 Risk assessment requires completion of three steps:

1. Event generation and local intensity calculation :the event generation steps determinethe frequency,
severity ,and other characteristics ofpotential catastrophic events by geographic location it require an
analysis of historical data and an understanding of region ,specific feature ,seism tectonic, geological,
topographic that may influence the likelihood of catastrophic event in the future. It also requires use of
parametric or dynamic approach to develop a probability distribution as well as to test goodness- of-fit and
robustness of the physical model.

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2. Involve estimation of local severity. The magnitude of the event, distance from the source of the event
and an array of local conditions affect the intensity at each locality.`
3. Loss calculation: is the last stage in which the model calculates insured losses by applying the specific
insurance policy condition to the total damage estimate. Example of the policy condition may include
coverage limits and sub limit, loss triggers, deductible, coinsurance and endorsements to the policy.

Risk management entails the process by which risk are identified and evaluated, and decision then made and
implemented for the most effective and efficient means of managing the risk. Economists argue that the
pervasive and extensive the use of risk management, the more sustainable will be economic growth and
development. Here we explore why we believe that risk management will be increasingly important in the
future and its role in economic growth.

A more extensive application of risk management principle and process offers benefits to individuals and
business and, thereby to national economies .By reducing long term financial variability, risk management can
render firms more competitive. The most apparent benefit of effective risk management results from loss
control. Effective loss control measure can reduce the frequency and severity of work –related injuries and
illness, work interruption and other causes of economic loss.

Risk management is preventing or reducing business losses .It involves three stages process.

1. To identify the risk to which a company is exposed.

2. To estimate potential losses from those risk.
3. To determine the best way to deal with each risk.

Informal Methods of Risk Analysis

There are three methods of risk analysis found in practice that use discounted cash flow techniques and that do
not require numerical measures of risk. All are based on managerial judgment as to the risk of the project.
They are:

Use of conservative estimate of project cash flow

 Use of judgment as to whether the project is sufficiently profitable to compensate for its risk
 Use of classification system for projects with pre specified minimum acceptable rate of return
(discount rates) for each classification.

All three methods share a common problem; they do not directly considered how investors will value the cash
flow from a project that is under taken. Therefore, they are not very accurate in determini9ng whether
undertaking a project will benefit the owner of the firm .to compensate for this inherent lack of accuracy ,the
methods are relatively ease to apply .under the proper condition, all of them can provide reasonable results.

Conservative Estimates

Perhaps the oldest and still most wildly used method of dealing with risk is to make conservative estimate of
the cash flows. The firm’ cost of capital is used to evaluate the cash flows from all projects regardless of their
risk.

For example, as a financial manager evaluating the proposal to manufacturing a new product, you might take
the sale projections and reduce them by 20 percent. Then you might increase the cost per unit manufactured by

38
10 percent. If the project’s revised cash flows have the positive net present value based on the firm’s cost of
capital, you might then decide the project is worthwhile undertaking.

Judgmental risk evaluation

Under the most common procedure using judgmental risk evaluation, the financial managers computes, or asks
the project originator to compute, the project’s internal rate of return. The financial managers decide whether
the internal rate of return is “high enough” given the perceived risk of the project. This judgment of the
financial manager is based on past experience and current condition in the capital markets. The firm’s cost of
capital may be used as a comparison rate. E.g. suppose the internal rate of return on a project is calculated to
be 16 percent based on the best available estimate of the future cash flows. The firm’s cost of capital is
estimated to be 12 percent.

Project classification

In many large firms with decentralized decision, a more formal procedure, project classification, is used. The
project classification method is based on the assumption that broad groups of project will have similar risk.
Classification schemes in use are typically based on the purpose of the project and on product line of the
division.

The term risk is often used in insurance to mean loss exposure. Loss exposure is a thing or a person subject to
the possibility of losses (e.g. an automobile, a house, or a life).

Insurance professionals often use the term peril interchangeably with risk, although the precise meaning of
peril is the cause of losses. E.g. of peril are fire, wind storm, flood and terrorism.

Historically, a distinction has been drawn between managing hazard risks and managing other risks. A hazard
is a condition that increases the likelihood of loss.

For instance physical hazard refers to the poor physical condition of a property increasing the likelihood of
losses (e.g. poorly lit business premises increases the likelihood of an accident).

Moral hazard refers to a change in human attitude increasing the likelihood of losses.

A hazard risk is sometimes called a pure risk –a risk where the range of outcomes involves only no loss or loss.
On the other hand, speculative risk may result in either gain or loss.

Risks are classified in to three categories:

2.2.1Financial risks

It arises from an individual’s or organization’s ownership or use of financial instruments .Financial risk can
arise from numerous sources, including interest rate change ,foreign currency transaction, extension of credit
,issuance of stock and use of derivatives. Thus, business that extends credit to their customers run the financial
risk that some will default. Individuals incur financial risk when they borrow money to buy a car or a house
and when they make investments. Financial risks are mainly external to the individual and business and,
therefore, less subject to direct control except through careful selection or by not owning or using them
.financial risk can be further categorized as market risk, credit risk and price risk.

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  Marketrisk
It is the potential change in asset value arising from change in the value of underlying financial instrument
.Often firms and individuals are most concerned with losses associated with market risk .such losses can result
from inflation fluctuation in interest rate, or other adverse development in capital market. Market risk includes
asset liquidity risk –the ease with which invested asset can be converted in to cash or cash equivalents .The
term interest rate risk and exchange rate risk refers to the exposure to change in interest rate and foreign
exchange rate ,respectively. Because market risk affects society or the economy as a whole, they are also
called systematic risk. Risk that are unique to a firm or individual and which, therefore, often can controlled by
the firm or individual are called nonsystematic risk.
 Creditrisk
Also known as counterparty risk is the uncertainty surrounding whether a counter party to a transaction will
perform its financial obligations in full and on time. Examples of this risk include the failure of a debtor to
repay a loan, a failure to receive payment for the product or service that a firm has provided, or a failure of a
derivative guarantor to meet its obligations.
 Price risk

It refers to the potential loss in revenue arising from product miss pricing .for example, insurance companies
are vulnerable to price risk because they must establish a price ( premium)before the actual cost of production
(claims and expenses)are known.

2.2.2 Operational Risk

Operational (internal)risks include those risk that arise from the existence and activities of an individual or
from the operation of an organization .for organization ,the risk is associated with human errors, system failure
,and inadequate procedure and control .these risk can be thought of as largely internal to the individual or
organization and as deriving directly from personal ;business ,or other activities or from the physical or mental
condition of individual .As such ,the individual or organization usually can exercise some control over them
.Example of this class would be uncertainty about legal liability arising from faulty product or automobile
accident ,damage to and loss of use of property arising from fire ,loss of health because of cancer ,and
employee work stoppages and strikes .

Hazard risks are an important type of operational risk. Such risk can be classified, according to the generic
nature of the exposure, to the following categories.

 Personal risk: is uncertainty related to loss of health, incapacity, death and outliving ones financial
resources.
 Personnel risk: is uncertainty related to the loss to firm due to death, incapacity, loss of health,
prospect of harm to or unexpected departure of key employees.
 Property risk: is uncertainty related to loss of wealth due to damage or distraction of property.
 Liability risk: is uncertainty related to financial responsibility arising from bodily injury (including
death) or loss of wealth that a person or an entity causes to others.

2.2.3Strategic Risk:

Strategic risk which that stem from macroeconomic and other broad societal influence and trends. These risks
encompass demographic, economic, political and technological factors that can touch every organization and

40
individuals. It includes such matters as the legal and regulatory environment, consumer preference, terrorism
and global warming. This class of risk is external to the organization. While these risks are not directly
controllable, action can be taken to plan for and often to mitigate their adverse effects.

2.3 Risk Management Process

The term risk management process relating to business risk seems to have first appeared in the 1950s.Risk
management is preventing or reducing business loss.

All individuals, business and government must deal with risk. Existing risk management practice, whether
exercised by an individual, a firm, or a government agency, seem to follow rather standardized steps. These
steps are known as the risk management process. IT involves:

 Risk analysis for the identification and evaluation of the possible outcome associated with
events or activities.
 Risk control for the exploration of techniques to control adverse outcomes.
 Risk financing to decide how to finance to finance the cost of adverse outcomes that occur.

2.3.1Methods of Risk Management Process:

1. Risk avoidance

When you locate your business in safe area, you are using a risk avoidance strategy. You are
attempting to avoid crime by shunning environments in which it is more likely to occur. Does your
decision guarantee that you will not be the victim of burglary, robbery or shoplifting? NO but it does
reduce your chance.

2. Risk Reduction

FOR risk that cannot be avoided, business adopts another strategy .they practice risk reduction. Suppose you
own a retail store and are installing a sprinkler system. You are trying to prevent damage to your inventory or
loss of your building .you may not be able to avoid a fire, but you can reduce the damage it does. When you
place electronic tags on expensive merchandise, you are attempting to discourage theft. Business owners
should take these steps to reduce risk:-

1. Design work areas to lower the chances of accident or fire. This includes offices, retail space,
and manufacturing floors.
2. Hold the meeting with the employees to educate them about the safe use of equipment. Make
sure they know how to handle emergency situations.
3. Check and service safety equipment .Test fire extinguishing and smoke detectors regularly. Do
the same for security equipment, such as burglar alarms.
4. Test company products under the most extreme conditions in which they will be used. Inform
the consumer about how to use your product safely .provide instruction for correct use of
product as well as warning about possible hazards.

3. Risk Transfer

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Usually buying insurance to cover any losses, you pay a fee, called a premium, to transfer some of your risk
to an insurance company. A premium is the price of insurance an insured person or business pays for a
specified risk for a specified period of time.

AS a new entrepreneur, you may be overwhelmed by all of your insurance option. Follow these steps to plan
for insurance coverage that will meet your business needs and goals.

 Set insurance goal and make a plan of action.

 Research insurance cost and coverage.
 Make decision and implement your plan.
 Review your result and make adjustment if needed.

 Protection priority

The firmidentifies the business assets and their value that need to be protected. These assets include critical
component (e.g. people, function and facilities), critical information system and data, life safety system and
data and security system.

Protection priority recommends that such asset be classified as following:

 High priority: loss or damage of the asset would bring grave consequence. Examples are loss of
life, severe injuries and loss of primary services.
 Medium priority: loss or damage of the asset would bring moderate to serious consequence .e.g.
injuries and impairment of core function and processes.
 Low priority: loss or damage of the asset would bring minor consequences .e.g. Slight and
temporary impact on core processes and functions.

2.3.2 Insurance classification

Insurance defined from two points of view

First, insurance is the protection against financial loss provided by an insurer. It is an economic devise where
by an individual substitute a small certain cost (the premium) for large uncertain financial loss which would
exist if it were not for the insurance. The primary function of insurance is the creation of the counter part of
risk, which is security. Insurance does not decrease the uncertainty for the individual as to whether or not the
event will occur ,nor does it alter the probability of financial loss connected with the event .

Many people consider an insurance contract to be a waste of money unless a loss occurs and indemnity is
received .some event feel that if they have not had a loss during the policy term , their premium should be
returned.

Second, insurance is a devise by means of which the risk of two or more person or firms are combined through
actual or promised contribution to a fund out of which clients are paid. From the view point of insured
insurance is a transfer devise. From the view point of insurer insurance is a retention and combination devise.
The distinctive future of insurance as a transfer devise is that it involves some pooling of risk; i.e., the insurer
combines the risk of many insured’s. Through this combination the insurer improves its ability to predict its
expected losses.

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Insurance does not prevent losses, nor does it reduce the cost of losses to the economy as a whole .as matter of
fact, it may very well have the opposite effect of causing losses for the purpose of defrauding the insurer, and
in addition people are less careful and may exert less effort to prevent losses then they might if it were not for
the existence of insurance contracts. Also the economy incurs certain additional costs in the operation of the
insurance mechanism not only must the cost of the losses be born, but the expense of distributing the losses on
some equitable basis adds to this cost.

Insurance not gambling or speculation

Gambling-

Speculation

The purchase of insurance is sometimes confused with gambling. Both acts do share one characteristic. Both
the insured and the gambler may collect more dollars than they pay out, the outcome being determined by
some chance event .however, through the purchase of insurance, the insured transfer an existing pure risk. a
gambler create a new risk where none existed before. Insurance is a method of eliminating or greatly reducing
(to one party any way) an already existing risk.

Speculation is transaction under which under which one party ,for a consideration ,agree to assume certain
risks ,usually in connection with a business venture .every business accepts the possibility of losing money
in order to make money.

2.3.3 Requisites of Insurable Risks

Unfortunately, all risks are not insurable. For a practical reason, insurers are not willing to accept all risks that
others may wish to transfer to them .to considered a proper subject for insurance, there are certain
characteristics that should be present.

This requirement should not be considered absolute, as iron rules, but rather as guides. They should be viewed
as ideal slandered, and not necessarily as slandered actually attained in practice. The prerequisite listed below
represent the ‘’ideal’’ slandered of an insurable risk.

1. There must be sufficiently large number homogeneous exposure unit to make the losses reasonably
predictable.

Insurance, as we have seen, is based on the operation of the law large number .unless we are able to calculate
the probability of loss; we cannot have a financially sound program.

2. The loss produced by the risk must be defined and measurable.

The loss must have financial measurement. Another words ,we must be able to tell when a loss has taken
place, and we must able to set some value to it .before the burden of risk can be softly assumed ,the insurer
must set up procedure to determine if loss has actually occurred and, if so, its size.

3. The loss must be fortuitous or accidental.

The loss must be the result of contingency, that is, it must be something that may or may not happen. It must
not be something that is certain to happen. If the insurance company knows that an event in the future is

43
inevitable, it also knows that it must collect a premium equal to the certain loss that it must pay, plus an
additional amount for the expenses of administering the operation. Wear and tear or depreciation which is
certain should not be insured.

4. The loss must not be catastrophic.

Damage which will result from war would be catastrophic in nature. Simultaneously disaster to insured objects
can be illustrated by reference to large fire, floods, and hurricanes that have swept major geographical area in
the past. if an insurer is unlucky enough to have on its books a great deal of property situated in such an area, it
obviously suffers a loss that was not contemplated when the rate were formulated .most insurers reduce this
possibility by ample dispersion of insured objects.

5. Large loss

The risk to be insured against must be capable of producing a large loss which the insured could not pay
without economic distress. The potential loss must be severe enough to cause financial hardship. The large loss
principle state that people should insure potentially serious losses before relatively minor losses. If the loss
involved is so small that it is not worth the time, effort, and expense to enter into an insurance contract to
indemnify the loss.

6. Reasonable cost of transfer.

One of the insured’s requirements is not to insure against a highly probable loss, because the cost of transfer
tends to be excessive. To be insurable the chance of loss must be small. The more probable the loss, the more
certain it is to occur. The more certain it is, the greater the premium will be.

2.3.4 Benefits of insurance

1. Indemnification:-the direct advantage of insurance is indemnification for those who suffer unexpected
losses. This unfortunate business and familiar are restored or at least moved closer to their former
economic position.
2. Reduced reserve requirements:-if there is an insurance protection the amount of accumulated funds
needed to meet possible losses is reduced. One of the chief economic burdens of risk is the necessity for
accumulating funds to meet possible losses.
3. Capital freed for investment:-cash reserve that insurance accumulate are freed for investment purpose.
the insurance mechanism encourage new investment, for example, if an individual knows that his family
will be protected by life insurance in the event of premature death, the insured may be more willing to
invest savings in a long- desired project, such as a business venture, without feeling that the family is
being robbed of its basic income security. In this way a better allocation of economic resources is
achieved. Competition and uses this differentiation to secure competitive advantage.

2.1.Self assessment question (LO2)

1. How to identify personal business skill?

2. Identfy risk assessment steps?

3. Identfy risk classification?

44
 4. List risk management methods?

Instruction Sheet-3 PLAN FOR ESTABLISHMENT OF BUSINESS OPERATION

LO3. Plan for establishment of business operation

3.1 Organizationalstructure

Organization has various structures. These structures are indicating:

 How an organization function & is managed.

 How information flows & is processed with in an organization
 How flexible or responsive the organization is.

A manager need to know need to know what type of organization she or he is working with in order to drive
vital clues about the need or potential for change.

A. Hierarchical structure

Most organization is hierarchies. Such organizations are distinguished by several features.

 Relatively few managers control the organization

 Few units or staffs are under each manager control
 Managers are appointed on merit and expected to be in control of the full range of management
function.
 Management style is likely to be directive
 The organizational structure resembles a pyramid.

BOARD

45
 Executive Directors

Directors of Directors of Directors of Directors of

finance policy programming communication

Policy Regional

Staffs Staff

Finance Fund raising Public relation

staff
Staff Staff
Design staff

FIG.1. HIERARCHIAL ORGANIZATIONAL STRACTURE

B. team structure

Team structure different from hierarchal structure in several ways. A team structure attempts to link the formal
and informal group’s relation ship that influence a worker. These types of organization EMPHASIZE
INTERPERSONAL RELATION SHIP AS A DETERMINANT OF CONDUCT AND PERFORMANCE.
Some of the features this type of organization stracture includes:-

 Manager who serve more as facilitators and groups leaders that final decision makers.
 Managers whose primary responsibility is setting objectives & evaluating performance.
 work style which are more participatory & interactive
 Focus on task, accomplishment of shared objectives, and accountability to the team.
 Use of temporary teams or task force to deal with particular issues or cross-cutting initiatives.

46
 Management
team

Executive COM.
directors Directors.
Fund rising
directors
Program COM. Team
team Fund rising
team

FIG.2.TEAM ORGANIZATIONAL STRACTURE

C.NET WORK STRACTURE

In some instance independents or semi independents organization for loose affiliation in which they share
resources, information, data & responsibility for joint project. the are many variation on network structure
ranging from totally independent groups coming together for a common cause to affiliates of international
organization that share the same principles & approaches to work. Even with these difference net work
structure share common features including:

 Considerable autonomy among its functional & programming unit.

 A small core infrastructure that provide certain service needed by all.
 Highly responsive & fluid approach.
 flexible coordination approaches among components organization as needed
 Decision making accruing with in context of the strategies alliance among the partners.

BOARD

Project B

Project A Core staff,

volunteers or
contract workers

FIG.3. NET-WORK ORGANIZATOINAL STRACTURE.

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3.2 Observing rules and regulations

One of the first things you need to find out when you're starting out is what laws apply to your new business.
You may wish to consult a legal professional to help you with all the legal requirements that you must comply
with, such as licenses and registrations, contracts and leases.

The local delivering institution or organization is expected to familiarize the participants with the documents
referred to in this unit. The aim is to inform the participants of the laws, rules and practices that apply when
starting a business in the community. These may include, for example:

 Requirements for registering a business

 Laws that govern businesses
 The legal classification of a business, e.g. co-operative, public liability company, Limited Liability
Company, etc.
 the tax code for small businesses
 Professional codes of conduct relevant to specific occupations.

The authorities may offer certain facilities and incentives to entrepreneurs starting a new business. These may
take the form of:

 grants to set up a small business

 micro-finance
 Tax relief
 Legal aid
 Recognition in the community, etc.

A businessperson from the local community may be invited to discuss with participants the rules that need to
be observed when a new business is started. He or she could also describe the unforeseen obstacles that are
encountered when starting a business

3.3 Securing financial assistance for business

Sources of raising finance

You are well aware that business cannot be run without capital.

Adequate capital is required to establish a small business. The capitals required for a business
are of two types (a) fixed capital, and (b) Working capital

Fixed capital refers to funds necessary to acquire fixed assets like land, building, machinery
and equipments. Such assets cannot be easily moved from the business site. They provide the
base or foundation of the business.

Factors determining Fixed Capital:

48
As fixed capital is needed to meet the long term requirements of the business, it is necessary
to estimate the amount with utmost care.

Following are the factors that may be kept in view for estimating fixed capital requirements.

(a) Nature of Business:

The business may be a manufacturing concern or a service undertaking or a trading concern.

In a manufacturing firm larger amount of fixed capital is required for building, machine etc.
which require more funds to be invested. In a trading concern fixed capital required is smaller
as the fixed assets like furniture etc. do not involve large investment.

(b) Size of business:

The amount of fixed capital required depends upon the size of business i.e. larger the size
greater will be the need for fixed capital.

(c) Types of goods produced:

If a business manufactures consumer goods like soap, hair oil etc smaller amount of capital is
required but if it manufactures industrial goods like machine tools and equipments, more
fixed capital will be required.

(d) Production Technology:

In a capital intensive production unit the amount of fixed capital required will be more while
it will be less if labor intensive technology is used.

(e) Method of acquisition of fixed assets:

Fixed assets may be purchased or may be acquired on lease or on hire purchase. If the fixed
assets are purchased it will require more fixed capital initially than if the assets are procured
on lease or hire purchase.

Sources of fixed capital

Following are the main sources of fixed capital:

1. Ownership Capital:

The entrepreneur or partners may invest their own savings as capital. This amount of capital
is not returnable. In case of a company, share holders contribute the capital as owners.

49
2. Borrowed Capital:

Long term loans may be arranged from different sources, such as

(i) Commercial banks and (ii) financial institutions. Banks grant term loans for two to ten
years as per the government’s credit policy for small scale industries. The banks extend credit
to such industries as part of priority – sector lending.

Factors that determine working capital needs:

Working Capital is the capital required to meet day to day expenses like wages, rent,
electricity and water charges, and to be invested in the current assets, such as stock of raw
materials, semi finished goods, finished goods etc. Working capital is also called circulating
capital.

This is because investment in current assets are recovered and reinvested repeatedly in course
of business operations. Going by the above meaning of working capital, its requirements may
be met by short term funds. However, since the business is a continuing concern it must at all
times have a certain amount of working capital which would be needed again and again. This
may be regarded as the permanent part of working capital.

Following are the various factors that need to be considered to estimate the amount of
working capital needed.

1. Proportion of cost of raw materials to total cost:

If the raw materials account for a major portion of the total cost of the finished product, more
working capital is required.

2. Cost of labour:

If labor intensive methods of production are used more working capital will be required.

3. Length of operating cycle:

If more time is taken in the completion of the production process and the sale of the products,
higher investment will be required in inventories and wage bills and hence more working
capital will be needed.

4. Terms of purchase and sale:

If raw materials and other services are available on credit and goods produced are sold for
cash, less working capital investment will be involved. On the other hand, if raw material is to

50
be purchased for cash and goods produced are sold on credit, larger working capital will be
necessary.

5. Current Assets turnover:

The current assets turnover is measured by the ratio of sales to current assets. In other words,
more rapid is the use of raw materials in the production process and more rapid the sale of
goods produced lesser will be the amount of working capital needed.

6. Cash requirements:

Needs for cash to meet the operating expenses like wages, rent, freight, taxes etc, also
determine the amount of working capital.

7. Seasonal operations:

Business units engaged in manufacturing seasonal goods are required to have a relatively
larger amount of working capital.

The recovery of working capital through sales of such products is limited to a particular
period, and hence a large amount of working capital is required to meet off–season
requirements.

Sources of short term finance/working capital

Following are the main sources of raising finance to meet working capital requirements:

1. Trade credit:

It is the credit extended by sellers to the buyers. Raw material in case of manufacturing
business and finished goods in case of trading business may be purchased on credit. The
period of credit

2. Bank credit:

Commercial banks are the most important sources of short term finance. The various types of
short term credit facilities that banks provide are: (a) outright loans to be paid back in one
single installment, (b) Cash credit which is a facility of borrowing up to a certain limit, (c)
Overdraft which is a facility given to firms having current accounts to overdraw, (d)
Discounting of bills implying procurement of cash from a bank in exchange for credit
instruments like bills of exchange, promissory notes.

3. Advances from Customers:

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Customers may pay in advance a part of the price of the goods ordered to be supplied later.

3.4 Securing financial assistance for cooperatives

Determining Capital Needs

Capital refers to durable or long lasting inputs such as machines, buildings, equipment, land, vehicles, etc. Capital also
means cash needed by the cooperative for day-today operations.

A co-op's capital needs can be divided into: (1) long-term fixed capital; (2) short-term or operating capital; and
(3) organizational funds.

Long-term Capital is for land, buildings, equipment and vehicles needed by the cooperative. It also includes stock
investments made in other cooperatives or corporations, such as membership in a federated buying or selling cooperative

Short-term Capital is for making crop and/or livestock advances, inventories, supplies, wages and other current
expenditures. If the cooperative plans to extend credit, it should finance accounts receivables. The co-op may also need
large amounts of operating capital if it engages in contracting and vertical integration.

Organizational Funds are for legal and recording fees, business permits, incorporation fees, promotional supplies, and
other expenses incurred in organizing a cooperative.

The exact amount of capital necessary depends on:

(1) The type and size of cooperative to be organized; (2)

the extent of ownership or rental of fixed facilities; (3)
the pledges of business volume; (4) the
availability of borrowed funds and the ability of members to subscribe capital; and
(5) the type and extent of services to be provided.

Sources of Co-op Financing

Cooperatives can get the financing to organize, operate, and expand from two sources: equity capital and borrowed
capital. In a cooperative, equity capital is the portion of assets owned by members. It is also described as the risk capital
because all other obligations must be met incase of liquidation before any equity capital is returned to members.
Borrowed capital is capital borrowed through the member's equity in the cooperative.

Equity Capital Sources

Members most commonly provide equity capital to their cooperative by:
(1) purchasing capital stock or other types of equities; (2)
leaving a portion of the co-op's net savings in the cooperative; and (3)
authorizing the co-op to deduct from proceeds made through sales of member's farm products—usually called per unit
retains.

Equity capital may be divided into two classes: (1)

initial capital investments consisting of common stock, preferred stock and membership fees; and
(2) capital obtained through operations that result in member or patron investments.

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These investments consist of patronage refunds and per unit capital investments made by members in their cooperative,
and stock or other types of equity certificates sold to members and patrons.

Common Stock is an important source of initial equity capital in the cooperative. Generally, common stock is fixed to
voting rights. The cooperative may issue several kinds of common stock (i.e., classes A, B, and C) and designate one class
as voting stock. For example, Class A common stock may be voting stock and may be limited to one share per member.
Class B stock may represent other initial investments of members. In some instances, per unit capital investment and
deferred patronage refunds are identified as common stock C.

Preferred Stock is a second source of initial equity capital.

As the name implies, this stock is preferred over common stock because it has fewer risks and dividends are assured.
Usually preferred stock is non-voting. Preferred stock is more like an investment than other equity capital issued by
cooperatives, and in many instances, it may represent capital raised from the general public or non-patron groups.

Membership Fees are a third source of initial equity capital when cooperatives are organized on a non-stock basis.
Paying the membership fee is thus equivalent to purchasing a share of voting stock. Some cooperatives expect fees to be
paid yearly in proportion to the business the member does or will do with the cooperative.

Membership Certificates are issued by non-stock cooperatives to members when membership fees are paid.

These funds pay all or a part of the costs associated with operating the cooperative.

Capital Certificates, also issued by non-stock cooperatives, are similar to preferred stock certificates in that they may
bear interest, have due dates, usually have no voting rights, and can be issued to both members and nonmembers.
Deferred Patronage Refunds. Cooperatives can retain 80 percent of net margins and pay member-patrons the remaining
20 percent in cash. The 80 percent of net margins, which could be paid to members as patronage refunds, are accumulated
by the cooperative until sufficient capital is accumulated to finance needed facilities and operations. They may then be
redeemed under a revolving capital plan.

Retention of Unallocated Reserves. Some capital reserves are retained by the cooperative on an unallocated basis.
These reserves are generally designed to absorb possible operating losses and are sometimes established to comply with
state laws.

Per-unit Capital Retains, used primarily by marketing cooperatives, are invested in cooperatives through deductions
from sales proceeds on a physical unit basis. Cooperative bylaws may place such retains in a revolving capital fund,
providing that when the cooperative has adequate finances, the fund will be revolved.

Revolving Fund Financing allows cooperatives to constantly renew their capital structures, to provide an unending
source of member capital, and, at the same time, assure that the oldest equities would be paid back first.

Under this financing method, members' revolving equities are allocated to them on the cooperatives' books, and these
equities are used to conduct the business.

Sources of Borrowed Funds

Cooperatives may often find equity capital sources are not adequate either to begin or to maintain a sound ands table
financial structure. As a result, many co-ops must find permanent external sources. Some cooperatives raise external
funds from non-member investors and creditors.

Raising funds this way gives the cooperative greater leverage; that is, it can borrow additional capital on a smaller percent
of net worth. The member thus has a lower investment and the creditors share a greater portion of the risk.

53
Sources of borrowed funds for cooperatives include:

 Cooperative Bank -Regional cooperatives

 Rural financial institution -Municipal bonds

 Government agencies -Foundations and private grants

 Individuals
 Commercial banks and insurance companies

of business legal and regulatory (Ethiopian commerce and

3.5 Requirement

industry bureau )
 Obtain a notice of pre-approval of the company name
The applicant picks up the application for company name pre approval from the local Administration
of Industry and Commerce (AIC), or otherwise, downloads the form from AIC’s Web site. The
applicant can be the representative designated by all the shareholders or the agent entrusted by all the
shareholders. The completed application form shall be signed by all shareholders of the company. The
application form together with the business licenses or other registration certificates (if the
shareholders are companies or other eligible entities) and the photocopy of the identity card of the
individual shareholders shall be filed with the AIC. Effective July 1, 2004, enterprise name registration
must follow the amended State Administration of Industry and Commerce (SAIC) rules (that is, the
new Enterprise Name Registration Administration Implementing Measures. According to the new
registration rules, if the applicant goes directly to the AIC, a proposed company name is approved or
rejected on the spot. This is newly regulated by Article 24 of the aforementioned measures and is
implemented in practice. However if the application is made through mail, fax, email, etc, the
proposed company name will be approved or rejected within 15 days.
 Open a preliminary bank account; deposit fund in the account and obtain the certificate of
deposit
The Company Law was modified on October 27, 2005, and became effective on January 1, 2006.
- Article 26 lowers the minimum capital requirement to CNY 30,000. According to this article, the
shareholders, after paying the required initial capital contribution, may pay off their remaining capital
contributions, if any, within 2 years after establishing the company. Note that the required initial
capital contribution is at least 20% of the proposed company’s registered capital and shall not be lower
than the legal requirement for the registered capital for particular industries.
- Article 27 provides the form of the capital contribution. According to this article, if the initial capital
contribution is in cash, the shareholders must (a) open a preliminary bank account after obtaining pre
approval of the company name; and (b) deposit the initial capital contribution into the bank account. If
the initial capital contribution is in no monetary assets, the shareholder must transfer the property title
of the assets to the company and the value of such assets must be appraised. The initial capital
contribution must be verified by legally established verification institutes. The revised Company Law
enables shareholders to contribute up to 70% of the registered capital of a limited liability corporation
in “no monetary assets that can be monetarily valued and legally transferred.”
 Obtain capital verification report from an auditing firm
An auditing firm has to prepare a report that verifies the company capital as past of the documents
necessary for registration
 Obtain registration certification "business license of enterprise legal person" with SAIC or local
equivalent: To obtain registration certification, the company must file a completed application form

54
 along with the following documents:
- Notice of approval of company name.
- Lease or other proof of company office.
- Capital verification certificate or appraisal report.
- Articles of association, executed by each shareholder.
- Representation authorization.
- Identity cards of shareholders and identification documents of officers.
- Appointment documents and identification documents (certifying name and address) of the directors,
supervisors, and officers.
- Appointment documents and identification documents of the company’s legal representative
- If the initial contribution is in no monetary assets, the document certifying transfer of the property
title of such assets.
- Other documents as required by the authorities.
Within 15 working days from receipt of all documents, the AIC should decide to approve or not
approve the company registration. After the company registers, it can proceed to have its seal carved,
to open formal bank accounts, and to apply for taxation registration.
According to the new administrative rules, application forms may be downloaded from the local
government authorities’ Web sites. Statutory time limits were introduced for acceptance of application
documents and for registration decision making, which differs according to the form of application. In
practice, the decision will usually be made within 15 days of receipt of the application. Documentation
requirements for company registration were standardized. The Registry is now required to publicly
display them.
- According to Article 52, if an application is filed (by letter, telegraph, telex, fax, email, or electronic
data exchange), the Company Registry must, within 5 days of receiving the relevant application
documents and materials, decide whether to accept the application. If the application documents and
materials are incomplete or do not meet the statutory requirements, the Registry must inform the
applicant, within 5 days, of all contents subject to supplementation and correction.
- According to Article 54, if the organ in charge of company registration must verify the application
documents and materials, it shall decide whether to approve the registration within 15 days of
acceptance. In other cases, the organ must decide whether to approve the registration on the spot or
within 15 days of acceptance.
- According to Article 55, if the organ decides to approve a company registration, it shall issue a
“notice on approval for establishment registration” and inform the applicant to collect its business
license within 10 days.
 Obtain the approval to make a company seal from the police department
If all the shareholders are individual investors, the registration file will include the duplicate of the
business license (the original and one copy) and the legal representative’s identification card. If
registration is approved, a notice to make the company seal will be issued to the company.
 Make a company seal
To make the company seal, the company shall designate a company possessing a Shanghai Special
Industry Permit (company seal carving) this process costs CNY 70–300, depending on the design

quality.

 Obtain the organization code certificate issued by the Quality and Technology Supervision
Bureau

55
 The company must apply for the organization code certificate within 30 days of obtaining the business
license, by filing a completed application form with the Shanghai Organization Code Management
Center (a branch of the Quality and Technology Supervision Bureau) along with the following
documents:
- Business license (original and one copy)
- Identity card of the legal representative (one copy).
 Register with the local statistics bureau

Within 30 days of obtaining the business license, the company must apply for statistics registration by
submitting to the local statistics bureau a completed statistics registration form along with the
following documents:
- Business license (one copy)
- Organization code certificate (one copy).
 Register for both state and local tax with the tax bureau

The tax registration procedures have been simplified since 2004 with the implementation of the
Administration Measures of Tax Registration, issued by the State Taxation Bureau. Two separate
taxation authorities still exist (the state taxation bureau and local taxation bureau). However, company
founders are required to file tax registration only once, to either of these two authorities. The statutory
time limit is 30 days from the date of receiving the registration application.

The company must file the tax registration form and the initial tax reporting forms. Together with
those forms, the company submits for review the following documents:
- Business license duplicate (original and one copy).
- Organization code certificate (original and one copy).
- Identification card of the legal representative (original and one copy).
- Identification card of the taxation personnel (original and one copy).
- Company seal and financial seal.
- Office lease agreement and receipt(s) for rent paid.
- Articles of association (original and one copy) and bank-issued account-opening certificate (original
and one copy).
- Capital verification report
-Photocopy of property ownership certificate
- land use right certificate
- commitment letter regarding the authenticity of the documents submitted.
 Open a formal bank account of the company and transfer the registered capital to the account

The procedures and required documents for opening a company bank account and transferring the
registered capital to it may vary depending on each bank’s practice.
 apply for the authorization to print or purchase financial invoices/receipts
After registering for state or local taxes and obtaining the tax registration certificate, the company must
apply separately to the relevant authorities (that is, the state and local taxation offices) for approval to
purchase and issue financial invoices/receipts. The taxation authority will issue the invoice purchasing
book, if it agrees to grant the company such qualification, upon reviewing the following submitted
documents:
- Tax registration certificate (one copy).
- Identity card of taxation personnel (one copy).

56
 - Application forms.
- Models of invoice seal.
 Purchase uniform invoices
The Company must obtain and submit an application form to purchase uniform invoices. The form and
the authorization book (from Procedure 10) must be submitted to the Tax Office.
The VAT and ordinary invoices are published by the tax authority for anti forgery reasons (with few
exceptions). Taxpayers buy VAT and ordinary invoices from the tax authority.
 File for recruitment registration with local career service center
Within 30 days of recruiting employees, a new company must register with the local career service
center, sponsored by the local government. Relevant application forms which can be electronically
downloaded or obtained from the local career service center shall be filled and submitted.
 Register with SocialWelfareInsuranceCenter
Within 30 days of establishment, the company must register for the payment of employee social
insurance with the local social insurance office by submitting a completed social insurance registration
form and the following documents:

- Company seal.
- Duplicate of business license (original and one copy).
- Organization code certificate (original and one copy).

After all these documents have been verified, the authorities will issue a notice to open a social insurance
account for the company. The company must then apply to open a special account at the designated bank.
The local social insurance office will issue the social insurance registration card to the company on
receiving bank notification of account opening.

3.6 Determining human and physical resources

The entrepreneur may launch the business by him or herself, and consider obtaining assistance as it expands
and the workload increases. She or he may also launch the business as a sub-contractor for another business,
and consider getting help when the circumstances of the business permit.

Mobilizing people to help with the business will involve compensating those people with a fair wage that
corresponds to their suitability (qualifications) for the job and the number of hours, days, weeks or months they
will work.

Hiring

Before hiring workers, the business needs to identify clearly the nature of the work that is to be done and the
professional qualifications and skills of the person who should be hired to do this work. Staff may need to
receive training when they start work and then again periodically during their working life with the business.
Relevant training may contribute to motivating staff and making them more productive.

Productivity is the amount of work a person does in a fixed period of time.

The entrepreneur should keep in mind that the wage is not the only cost associated with hiring people to help
with the business. There may be dues to be paid to the national government and/or the local authority in the
form of social security, health benefit payments and training.

Workers may be hired to carry out the following functions in the business:

57
  Production
 Quality control
 􀁘 Administration
 􀁘 Transport
 Customer relations, etc.

3.6.1 Development of Human Resource Plan

Introduction

A “human resource category” (for example, consultant, programmer, etc.) is a way of classifying skills that is
useful in matching resource requirements to particular people when developing the human resource plan for a
project. The Human resource plan contains for each human resource category, information such as:

 The number of staff required.

 Costing information and assumptions.
 When the staff are needed and for how long.
 Any special skills required over and above those that people in the category would normally be
expected to have, as well as the required level of proficiency and the relative importance of these
skills.
 Training requirements needed specifically for the project, for example in a new technology.
 Office and materiel requirements
 Plans for team-building activities.(Motivation management)

The following column shows a sample portion of the Human resource plan for a project.

 Human resource category

 Number of staff
 Cost assumptions
 When needed
 Till what date the staff is needed
 Special skills, if any
 Special needs, if any
 Training needs, if any

The Human resource plan supports staff planning, staff acquisition, allocating resources to staff, and
supervising project specific training activities. A summary Human resource plan is created for the entire
project and managed by the project manager.

3.6.2 Creation of human resource plan

Introduction

This process may be used at several levels in the project organization.

Each project organizational unit that has a responsibility for staffing, controlling and allocating staff related
resources may create a Human resource plan.

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Steps

 Review the Project definition, the Organizational breakdown structure (OBS), and the Technical
environment plan to understand the situation for which the Human resource plan will be created
 Review the project documentation describing procedures for recruiting and staffing to determine the
human resource categories to be used and expected utilization factor for the project.
 For each human resource category in the Project management schedule, validate the number of
resources needed.
 Identify training requirements and add the training effort to the effort defined in the Project
management schedule for each human resource category.
 Validate the number of available resources used in the Project management schedule and adjusts as
necessary.

Physical resources:-it includes

 Premises

 Location
 Storage facilities
 Buy or rent
 Plant, machineries and equipment

 When to purchase
 Buy or lease
 Materials and stocks

Starting and running a business requires materials. The materials a business needs will depend on the nature of
its activity (the product or service it is providing), and of course its size (how many people it employs, how
many clients it has and the amount of goods or services it provides).

The entrepreneur must determine very carefully what items or types of materials she or he needs to best run the
business, and in what quantities.

A business needs two categories of items:

1) Items that enable the business to produce its goods or offer its services

2) Items to manage the administration of the business, such as pens, paper and a calculator (and eventually
perhaps a computer!).

How many or how much of each item is needed will depend on the size of the business and how many goods
or services it aims to make available to customers.

Some items will need to be obtained only once every few years, while others will need to be constantly
renewed. For example, after initially acquiring several sets of drinking mugs, a restaurant will need to obtain

59
new mugs only occasionally, as they break or their condition deteriorates. On the other hand, it will need to
buy fresh food very regularly, or the customers will go hungry!

Once the entrepreneur has decided on the necessary materials and their quantity, he or she must determine
whether or not they are easily available.

Materials can beobtained from a combination of sources:

 Community members such as agricultural workers

 other businesses
 Council or local government, etc.

Materials can be expensive, particularly if they have been transported long distances. Wherever possible, they
should be obtained from the local community and its surrounding areas.

3.7 RECRUITMENT STRATEGIES

The search for new employees is a familiar task for most employers. Employees retire, move, quit, are
transferred, or are fired.

Businesses restructure, grow, or take a new direction. Regardless of the situation, the end result is the same –
you have a job opening to fill.

A number of steps must be taken in order to fill a job. First of all, the employer must determine what the job
entails. What tasks will this person perform? What skills and education are necessary? Next, you must decide
which recruitment strategy would be most effective to find qualified candidates. Posting a newspaper ad?
Using the Internet? Recruiting at schools? It is important to look for potential employees in a number of
different places and from a variety of sources.

This module will guide you through the recruitment process, from start to finish. It will cover the following
topics: how to write job descriptions, how to access the workforce, and how to diversify your workforce. Use
the forms attached at the back of the module to help you during your own recruitment strategy.

3.7.1 Laying the Groundwork

Before moving forward, you can put the job under a magnifying glass to gather all the information you need
about the position. What activities will this employee are involved in? What skills are necessary to do the job
successfully? What level of education and/or training will be needed? This investigation will help you develop
a more precise idea of what you’re looking for in a new employee.

You may find that you are quite familiar with the position being offered and are able to simply re-use the same
job description as you have used in the past. However, it is often a good idea to take the time to make sure you

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fully understand what the job involves. The following Work Description Form may help you determine the
exact duties, responsibilities, and performance standards required for the position.

After jotting down the daily “nuts and bolts” of the position, you must decide what sort of education,
experience, and personality traits the job applicants must have. Be realistic. Don’t make your personal
preferences into job requirements. This will limit the number of candidates you have available to you. Take the
time to make sure you really know what the job involves.

A Physical Demand:

This section should include a description of working conditions which might affect some individuals’ ability to
do the work. Skills:

List the knowledge, personal management and teamwork skills needed.

Education and Experience:

Identify the education and experience needed. Where possible, include different combinations of education and
experience to widen your selection of applicants.

AAAAAA3.7.2 Writing the Job Description

Once you have defined the job requirements, you are ready to write an effective job description. Don’t
underestimate the importance of this task. By taking the time to write a clear and detailed job description, you
enable job seekers to determine whether or not they are interested in and qualified for the job. This, in turn,
means that you’ll have less “résumé weeding” to do later.

”Job Description” defined - a profile of a particular job, its essential functions, reporting relationships, hours,
and required credentials. It identifies what the job seeker agrees to do in return for pay and benefits. 3

Prior to preparing a written advertisement for the employment position, consider what you will need from the
employee. You may or
may not want to include some of the expectations in your job description.
This next section outlines the three crucial areas of the job description:

 Duties and responsibilities

 Performance expectations
 Competencies

Duties and Responsibilities of the Job

1. Name the essential responsibilities of the position.

2. Spell out areas of responsibility clearly in order to avoid clashes over authority in the future.

3. Spell out any special physical requirements of the position, such as lifting heavy objects or prolonged use of
computers.

Performance Expectations

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1. Identify the level of output expected

2. Spell out targets for productivity improvement (Ex. increasing sales by a stated percentage per month).

3. Tie performance to quantifiable goals according to a timetable for review (Ex. quarterly or annually).

Technical Competencies

1. Write out the specific technical skills and knowledge required (expertise with a particular computer
application; skill with a particular tool; level of previous work experience in the specific industry or market).

2. Highlight particular qualifications required (a degree in a specific discipline, such as electrical engineering;
completion of an apprenticeship; professional designation, such as chartered accountant; a heavy goods vehicle
license).

3. Specify any particular work experience you consider essential (e.g. shift work).

General Competencies

1. Write down competencies that are important to this position (skills in customer relations, in working with
others, and in written and oral communications).

2. Distinguish between the competencies expected of a person new to the position and of someone who has
been in the job long enough to be expected to perform at a fully satisfactory level. This range of expectations
will help with training as well as with salary and wage adjustment.

Personal Competencies

Energy, initiative, integrity, discipline, reliability, adaptability, and willingness to take on new challenges are
all personal competencies. Personal competencies are vital when seeking a person who will fit in with the
culture of the company. If the company is dynamic and fast-paced, you will want to recruit a person who is
creative, energetic, and enthusiastic. If the business places heavy emphasis on dealing with customers, then
you are looking for reliability and good people skills.

The sample Job Profile below can be used as a guide when writing job descriptions. OB PROFILE

Position Title: Administrative Assistant

Required Experience/Skills: 1-2 years of office experience;

Education: Post-high school business or secretarial training required;

Essential Functions: Duties include:

 Typing, proofreading correspondence, memoranda, and reports

 Organizing and maintaining company files
 Entering data into spreadsheet files
 Answering telephone, arranging appointments for sales personnel

SalaryRange: $25,000-$30,000

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3.7.3 Candidate Sources

Now that you know what you’re looking for in an employee, you must determine where to find the potential
job seekers. There are a number of ways you can get the word out. The next section will guide you through a
variety of options.

We have included a discussion of recruitment strategies used by small and medium-size companies across
Canada – and the benefits and drawbacks of each.

Some of the top sources of candidates for small and medium-size businesses are:

 Referrals by Friends, Business Colleagues, & Employees

 Personal Contacts
 Drop-ins
 Newspaper Ads
 Advanced Education, Employment and Labor Internet posting (SaskJobs.ca)
 Human Resources and Social Development Canada
 School Campus Recruiting
 Creative Advertising
 Websites
 Industry, Trade & Professional Associations & Recruiting
 Internal Job Postings

1. Referrals by Friends, Business Colleagues, and Employees

Referrals by friends, business colleagues, and employees’ are among the most highly used forms of
recruitment for any firm. They are particularly beneficial to small and medium-size businesses. 6

_ It is inexpensive.

_ People who know your culture are likely to refer candidates who will fit in well.

_ The reputation of people doing the referring will be enhanced if they recommend good qualify people.
Therefore, they typically recommend people with good potential.

_ It is a relatively fast method of finding candidates.

_ It may take up unnecessary time since you may feel obligated to interview all the candidates who are referred
to you, even if they are not suitable for the position or are not a match for the work culture.

_ Relationships may be destroyed if people continue to refrain appropriate candidates.

3.7.4 Evaluating Recruitment Strategies

As an employer, you are looking for a recruitment strategy that is both effective and cost-efficient. By keeping
track of what has worked and what hasn’t worked in the past, you’ll be able to make better use of your
valuable time and your advertising dollars in the future. You might want to start by filling out a table similar to
the one below. Keep this as a long-term record for use on future hires.

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When recruiting new employees, it is often the tendency to chooseemployees from backgrounds, cultures, and
experiences that aresimilar to our own. However, if we allow ourselves to think aboutrecruiting potential
employees from non-traditional sources, a wholenew, larger group of candidates becomes available. This can
beparticularly valuable to businesses in smaller communities where thenumber of potential employees is
reduced. Consideration can begiven to the following groups in order to increase the potential poolof
laborers/employees:

 Persons with disabilities

 Aboriginal people
 Older workers
 Foreign/Immigrant Workers
 Youth

4.1 Recruiting Persons with Disabilities

When recruiting persons with disabilities, you must determine where and how to post the job to attract the best
candidates. If you are interested in incorporating persons with disabilities into your workforce, you may want
to do the following: Clearly state that you are an equal opportunity employer and encourage individuals with
disabilities to apply.

Practice outreach recruitment. This could involve contacting specific search firms, government agencies or
community agencies that specialize in supporting diversity recruitment and/or contacting agencies or websites
that specialize in working with and placing individuals with disabilities.

3.Self assessment questions(LO3)

Following statements relate either to Fixed Capital or Working Capital.

Classify them:

1. Capital required to buy fixed assets like machinery, building, etc.

2. Manufacturing seasonal goods require more capital

3. A higher ratio of the cost of raw material to the total cost is an important
determinant.

4. Bank credit is an important source of raising finance.

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 5. A manufacturing concern requires more of this capital than a trading concern.

6. Borrowing from financial institutions such as Small Industries

Discus it

1. Identfy deferent types of organizational structures?

2. What rule & regulation we consider before starting new business?

3. Identfy source of capital for your business?

4. What is a physical resource? Give example.

5. Identfy recruitment strategies?

6. Identfy sources of candidates?

Instruction Sheet-4 IMPLEMENT ESTABLISHMENT PLAN

LO4. implement establishment plan.

4.1 Undertaking marketing operation

Ongoing battles between marketing and operations provide fodder for every one from humorists to
organizational behavior specialists. Cartoon its smock the narrow-minded views of each discipline, while
organization experts propose new compensation schemes to drive alignment.

The stark truth is that marketing and operations do have fundamentally different perspectives and for very
good reason. Marketing focuses on top-line revenue and, accordingly, seeks product variety (available on short
notice) from well-stocked inventory pools. Operations worries about cost, looking for efficiencies in
manufacturing and the supply chain. Seldom does either function seriously examine value as perceived by the
customer.

This being the case, conflict is inherent, and organizational incentives alone cannot solve the problem (though
a good cartoon can sometimes reduce the tension).

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Rather than debating binary options from functional points of view, companies must seek to balance the trade-
offs between costs of different service options and their value to customers. We refer to the decisions resulting
from these explicit trade-offs as Differentiated Service Policies. Although they are a powerful tool, few
companies fully understand them, and even fewer apply them appropriately. More often they fall back on “the
way we do things” that reflects long-forgotten compromises.

4.2 Implementing an Organizational Unit Structure

This chapter discusses how to create and manage organizational units, delegate common administrative tasks, and
plan the implementation of an organizational unit structure.

After completing this module, you will be able to:

 Create and manage organizational units.

 Delegate control of an organizational unit.

 Plan an organizational unit strategy.

Delegating Administrative Control of

Organizational Units
This lesson explains the purpose of delegating administrative privileges, the administrative tasks that you may
delegate, how to delegate these tasks, and how to verify that you have delegated the required privileges to perform
these tasks.

After completing this lesson, students will be able to:

 Describe the conditions under which administrative control to an organizational unit can be delegated.
 Describe common organizational unit administrative tasks.
 Delegate administrative control of an organizational unit by using the Delegation of Control Wizard.
 Customize delegated administrative control by creating a custom task to be delegated.
 Verify the administrative privileges that have been delegated.

What Is Delegation of Administrative Privileges?

The primary reason to create organizational units is to distribute administrative tasks across the organization by
delegating administrative control to other administrators. Delegation is especially important when you develop a
decentralized administrative model.

Delegation of administration is the process of decentralizing the responsibility for managing organizational units
from a central administrator to other administrators. The ability to establish access to individual organizational units
is an important security feature in Active Directory. You can control access to the lowest level of an organization
without the necessity of creating many Active Directory domains.

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Authority delegated at the site level will likely span domains or, conversely, may not include targets in the domain.
Authority delegated at the domain level will affect all objects in the domain. Authority delegated at the
organizational unit level can affect that object and all of its child objects, or just the object itself.

You delegate administrative control to provide administrative autonomy of services and data to organizations or to
isolate services or data in an organization. You can eliminate the need for multiple administrative accounts that have
broad authority, such as for an entire domain. Yet still use the predefined Domain Admins group to manage the
entire domain.

Autonomyis the ability of administrators in an organization to independently manage:

! All or part of service management (called service autonomy).

! All or part of the data in the Active Directory database or on member computers that are joined to the directory
(called data autonomy).

Administrative autonomy:

 Minimizes the number of administrators who must have high levels of access.
 Limits the impact of an administrative mistake to a smaller area of administration.

Isolation is the ability of the administrators of an organization to prevent other administrators from:

 Controlling or interfering with service management (called service isolation).

 Controlling or viewing a subset of data in the directory or on member computers that are
joined to the directory (called data isolation).

Windows Server 2003 contains specific permissions and user rights that you can use to delegate administrative
control. By using a combination of organizational units, groups, and permissions, you can designate administrative
rights to a particular user so that the user has an appropriate level of administration over an entire domain, all
organizational units in a domain, or a single organizational unit.

The Organizational Unit Planning Process

The structure of organizational units in Active Directory is based on the administrative structure of the organization.
The first step in planning an organizational unit structure is to document the structure of the organization.

To plan the organizational unit strategy for you organization, perform the following tasks:

 Document the existing structure of the organization. When documenting the existing structure of the
organization, one strategy is to divide the administrative tasks into categories and then document the
administrators who are responsible for each category.
 Identify areas for improvement. Work with the planning team to identify areas for improvement. For
example, it may be more cost-effective to combine several IT teams from different divisions. You may
identify non-IT employees who can assist in the administrative process and reduce the IT staff workload.
This way, administrators can focus on the areas where their expertise is required.

Implementing an Organizational Unit Structure

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Next, use the following as guidelines for your delegation plan:

Determine the level of administration.Decide what each group will control and at which level you will delegate
administration in the administrative hierarchy. When you create the plan, identify which groups will be:

• Granted full control over objects of a particular class. These groups can create and delete objects in a specified
class and modify any attribute on objects in the specified class.

• Allowed to create objects of a particular class.By default, users have full control over objects that they create.

• Allowed to only modify specific attributes of existing objects of a particular class.

! Identify each administrator and user account in your organization and the resources that they administer. This
information will help you determine theownership and the permissions assigned to the organizational units
youcreate to support the delegation plan.

4.2.1Organizational Factors that Affect an Organizational Unit

Structure

The factors that affect an organizational unit structure are the type and structure of the IT administrative model.
Understanding these factors will help you create an organizational unit structure that best suits your organization’s
requirements.

The most common IT organizations are:

Centralized IT. In this model, the IT organization reports to one individual and is usually
the group responsible for all network and information services, although some routine
tasks may be delegated to certain groups or departments.
Centralized IT with decentralized management. In this model, a centrally located core IT
team is responsible for the core infrastructure services, but it delegates most day-to-day
operations to IT groups in branch offices, which provide local administrative support to
their users.

Decentralized IT.This type of organization allows various business units to select an appropriate IT model
to serve their requirements. Such an organization may have multiple IT groups with varying requirements
and goals. Whenever there are organization-wide technology initiatives, such as an upgrade to a messaging
application, the IT groups must work together to implement changes.
Outsourced IT. Some organizations hire a third party to manage all or part of their IT organization. When
only parts of the IT organization are outsourced, it becomes imperative to implement a proper delegation
model.

That way, the internal IT group maintains control of the organization without compromising the service level
agreements that the third party has committed to provide.

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Implementing an Organizational Unit Structure

The administrative model structure reflects how an organization manages its IT resources, such as users, computers,
groups, printers, and shared files.

Different ways that administrative models are structured include:

 Administration based on geographic location. The IT organization is centralized, such as at headquarters,

but network administration is geographically distributed. For example, each branch has its own
administrative group that manages resources at its location.
 Administration based on the organization. In this structure, the IT organization is divided into departments
or business units, each of which has its own IT group.
 Administration based on business function.A decentralized IT organization often bases its administrative
model on business functions in the organization.
 Hybrid administration. This structure combines strengths from several models to meet the administrative
needs of the organization. your partner to plan an organizational unit

4.3 Monitoring and Evaluation

OVERVIEW

Brief description

This toolkit deals with the “nuts and bolts” (the basics) of setting up and using a monitoring and evaluation system
for a project or an organization. It clarifies what monitoring and evaluation are, how you plan to do them, how you
design a system that helps you monitor and an evaluation process that brings it all together usefully. It looks at how
you collect the information you need and then how you save yourself from drowning in data by analyzing the
information in a relatively straightforward way. Finally it raises, and attempts to address, some of the issues to do
with taking action on the basis of what you have learned.

Why have detailed toolkits on monitoring and evaluation?

If you don’t care about how well you are doing or about what impact you are having, why bother to do it at all?
Monitoring and evaluation enable you to assess the quality and impact of your work, against your action plans and
your strategic plan. In order for monitoring and evaluation to be really valuable, you do need to have planned well.
Planning is dealt with in detail in other toolkits on this website.

Who should use this toolkit?

This toolkit should be useful to anyone working in an organization or project who is concerned about the efficiency,
effectiveness and impact of the work of the project or organization.

When will this toolkit be useful?

This toolkit will be useful when:

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  You are setting up systems for data collection during the planning phases of a projector organization;
 You want to analyses data collected through the monitoring process;
 You are concerned about how efficiently and how effectively you are working;
 You reach a stage in your project, or in the life of your organization, when you think it would be useful
to evaluate what impact the work is having;
 Donors ask for an external evaluation of your organization and or work.

Although there is a tendency in civil society organizations to see an evaluation as something that happens when a
donor insists on it, in fact, monitoring and evaluation are invaluable indicators, you may go on using resources to no
useful end, without changing the situation assessment.

4.3 Monitoring and Evaluation

BASIC PRINCIPLES

What is monitoring and evaluation?

Although the term “monitoring and evaluation” tends to get run together as if it is only one thing, monitoring and
evaluation are, in fact, two distinct sets of organizational activities, related but not identical.

Monitoring is the systematic collection and analysis of information as a project progresses.

It is aimed at improving the efficiency and effectiveness of a project or organization. It is based on targets set and
activities planned during the planning phases of work. It helps to keep the work on track, and can let management
know when things are going wrong. If done properly, it is an invaluable tool for good management, and it provides a
useful base for evaluation. It enables you to determine whether the resources you have available are sufficient and
are being well used, whether the capacity you have is sufficient and appropriate, and whether you are doing what
you planned to do

Evaluation is the comparison of actual project impacts against the agreed strategic plans. It looks at what you set
out to do, at what you have accomplished, and how you accomplished it. It can be formative (taking place during
the life of a project or organization, with the intention of improving the strategy or way of functioning of the project
or organization). It can also be summative (drawing learning’s from a completed project or an organization that is
no longer functioning). Someone once described this as the difference between a check-up and an autopsy!

What monitoring and evaluation have in common is that they are geared towards learning from what you are doing
and how you are doing it, by focusing on:

 Efficiency
 Effectiveness
 Impact

Efficiency tells you that the input into the work is appropriate in terms of the output. This could be input in terms of
money, time, staff, equipment and so on. When you run a project and are concerned about its explicability or about
going to scale (see Glossary of Terms), then it is very important to get the efficiency element right.

Effectiveness is a measure of the extent to which a development programmes or project achieves the specific
objectives it set. If, for example, we set out to improve the qualifications of all the high school teachers in a
particular area, did we succeed?

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Impact tells you whether or not what you did made a difference to the problem situation you were trying to address.
In other words, was your strategy useful? Did ensuring that teachers were better qualified improve the pass rate in
the final year of school? Before you decide to get bigger, or to replicate the project elsewhere, you need to be sure
that what you are doing makes sense in terms of the impact you want to achieve.

From this it should be clear that monitoring and evaluation are best done when there has been proper planning
against which to assess progress and achievements. There are three

WHY DO MONITORING AND EVALUATION?

Through monitoring and evaluation, you can:

 Review progress;
 Identify problems in planning and/or implementation;
 Make adjustments so that you are more likely to “make a difference”.

In many organizations, “monitoring and evaluation” is something that that is seen as a donor requirement rather than
a management tool. Donors are certainly entitled to know whether their money is being properly spent, and whether
it is being well spent. But the primary(most important) use of monitoring and evaluation should be for the
organization or project itself to see how it is doing against objectives, whether it is having an impact, whether it is
working efficiently, and to learn how to do it better.

Plans are essential but they are not set in concrete (totally fixed). If they are not working, or if the circumstances
change and then plans need to change too. Monitoring and evaluation are both tools which help a project or
organization know when plans are not working, and when circumstances have changed. They give management the
information it needs to make decisions about the project or organization, about changes that are necessary in
strategy or plans. Through this, the constants remain the pillars of the strategic framework: the problem analysis, the
vision, and the values of the project or organization. Everything else is negotiable. (See also the toolkit on strategic
planning) Getting something wrong is not a crime. The effect of monitoring and evaluation can be seen in the
following cycle. Note that you will monitor and adjust several times before you are ready to evaluate and re plan.

It is important to recognize that monitoring and evaluation are not magic wands that can be waved to make
problems disappear, or to cure them, or to miraculously make changes without a lot of hard work being put in by the
project or organization. In themselves, they are not a solution, but they are valuable tools. Monitoring and
evaluation can:

 Help you identify problems and their causes;

 Suggest possible solutions to problems;
 Raise questions about assumptions and strategy;
 Push you to reflect on where you are going and how you are getting there;
 Provide you with information and insight;
 Encourage you to act on the information and insight;
 Increase the likelihood that you will make a positive development difference.

Monitoring involves:

 Establishing indicators (See Glossary of Terms) of efficiency, effectiveness and impact;

 Setting up systems to collect information relating to these indicators;
 Collecting and recording the information;
 Analyzing the information;

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  Using the information to inform day-to-day management.

Monitoring is an internal function in any project or organization.

Evaluation involves:

Looking at what the project or organization intended to achieve – what difference didit want to make?
What impact did it want to make?
Assessing its progress towards what it wanted to achieve, its impact targets.
Looking at the strategy of the project or organization. Did it have a strategy? Was it effective in following
its strategy? Did the strategy work? If not, why not?

Looking at how it worked. Was there an efficient use of resources? What were the opportunity costs (see
Glossary of Terms) of the way it chose to work? How sustainable is the way in which the project or
organization works? What are the implications for the various stakeholders in the way the organization
works?

In an evaluation, we look at efficiency, effectiveness and impact (see Glossary of Terms).

There are many different ways of doing an evaluation. Some of the more common terms you may have come across
are:

 Self-evaluation: This involves an organization or project holding up a mirror to itself and assessing how it
is doing, as a way of learning and improving practice.

It takes a very self-reflective and honest organization to do this effectively, but it can be an important learning
experience.

 Participatory evaluation: This is a form of internal evaluation. The intention is to involve as many people
with a direct stake in the work as possible. This may mean project staff and beneficiaries working together
on the evaluation. If an outsider is called in, it is to act as a facilitator of the process, not an evaluator.
 Rapid Participatory Appraisal: Originally used in rural areas, the same methodology can, in fact, be
applied in most communities. This is a qualitative (see Glossary of Terms) way of doing evaluations. It is
semi-structured and carried out by an interdisciplinary team over a short time. It is used as a starting point
for understanding a local situation and is quick, cheap, useful way together information. It involves the use
of secondary (see Glossary of Terms) data review, direct observation, semi-structured interviews, key
informants, group interviews, games, diagrams, maps and calendars. In an evaluation context, it allows one
to get valuable input from those who are supposed to be benefiting from the development work. It is
flexible and interactive.

 External evaluation: This is an evaluation done by a carefully chosen outsider or outsider team.
 Interactive evaluation: This involves a very active interaction between an outside evaluator or evaluation
team and the organization or project being evaluated. Sometimes an insider may be included in the
evaluation team.

4.3.1 Planning for monitoring and evaluation

Monitoring and evaluation should be part of your planning process. It is very difficult to go back and set up
monitoring and evaluation systems once things have begun to happen. You need to begin gathering information
about performance and in relation to targets from the word go. The first information gathering should, in fact, take

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place when you do your needs assessment (see the toolkit on overview of planning, the section on doing the ground
work).

This will give you the information you need against which to assess improvements over time.

When you do your planning process, you will set indicators (see Glossary of Terms). These indicators provide the
framework for your monitoring and evaluation system. They tell you what you want to know and the kinds of
information it will be useful to collect. In this section we look at:

 What do we want to know? This includes looking at indicators for both internal issues and external issues.
(Also look at the examples of indicators later in this toolkit.)
 Different kinds of information.
 How will we get information?
 Who should be involved?

There is not one set way of planning for monitoring and evaluation. The ideas included in the toolkits on overview
of planning, strategic planning and action planning will help you to develop a useful framework for your monitoring
and evaluation system. If you are familiar with logical framework analysis and already use it in your planning, this
approach lends itself well to planning a monitoring and evaluation system.

Designing a monitoring and/or evaluation process

As there are differences between the design of a monitoring system and that of an evaluation process, we deal with
them separately here.

Under monitoring we look at the process an organization could go through to design a monitoring system.

Under evaluation we look at:

 Purpose
 Key evaluation questions
 Methodology.

MONITORING

When you design a monitoring system, you are taking a formative view point and establishing a system that will
provide useful information on an ongoing basis so that you can improve what you do and how you do it.

On the next page, you will find a suggested process for designing a monitoring system.

For a case study of how an organization went about designing a monitoring system, go to the section with examples,
and the example given of designing a monitoring system.

4.3.2 DESIGNING A MONITORING SYSTEM

Below is a step-by-step process you could use in order to design a monitoring system for your organization or
project.

Step 1: At a workshop with appropriate staff and/or volunteers, and run by you or a consultant:

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  Introduce the concepts of efficiency, effectiveness and impact
 Explain that a monitoring system needs to cover all three.
 Generate a list of indicators for each of the three aspects.
 Clarify what variables (see Glossary of Terms) need to be linked. So, for example, do you want to be able
to link the age of a teacher with his/her qualifications in order to answer the question: Are older teachers
more or less likely to have higher qualifications?

 Clarify what information the project or organization is already collecting.

Step 2: Turn the input from the workshop into a brief for the questions your monitoring system must be able
toanswer. Depending on how complex your requirements are, and what your capacity is, you may decide to go for
computerized data base or a manual one. If you want to be able to link many variables across many cases (e.g.
participants, schools, parent involvement, resources, urban/rural etc), you may need to go the computer route. If you
have a few variables, you can probably do it manually. The important thing is to begin by knowing what variables
you are interested in and to keep data on these variables. Linking and analysis can take place later. (These concepts
are complicated. It will help you to read the case study in the examples the indicators of efficiency, effectiveness
and impact that have been prioritized. You will then choose the variables that will help you answer the questions
you think are important.

So, for example, you might have an indicator of impact which is that “safer sex options are chosen” as an indicator
that “young people are now making informed and mature lifestyle choices”. The variables that might affect the
indicator include:

 Age
 Gender
 Religion
 Urban/rural
 Economic category
 Family environment
 Length of exposure to your project’s initiative
 Number of workshops attended.

By keeping the right information you will be able to answer questions such as:

 Does economic category i.e. do young people in richer areas respond better or worse to the
message or does it make no difference?
 Does the number of workshops attended make a difference to the impact?

Answers to these kinds of questions enable a project or organization to make decisions about what they do and how
they do it, to make informed changes to programmes, and to measure their impact and effectiveness. Answers to
questions such as:

 Do more people attend sessions that are organized well in advance?

 Do more schools participate when there is no charge?
 Do more young people attend when sessions are over weekends or in the evenings?
 Does it cost less to run a workshop in the community, or to bring people to our training centre to run the
workshop? Enable the project or organization to measure and improve their efficiency.

Step 3: Decide how you will collect the information you need and where it will be kept.

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Step 4: Decide how often you will analyze the information – this means putting it together and trying to answer the
questions you think are important.

Step 5: Collect, analyze, report.

EVALUATION

Designing an evaluation process means being able to develop Terms of Reference for such a process (if you are the
project or organization) or being able to draw up a sensible proposal to meet the needs of the project or organization
(if you are a consultant).

The main sections in Terms of Reference for an evaluation process usually include:

 Background: This is background to the project or organization, something about the problem identified,
what you do, how long you have existed, why you have decided to do an evaluation.
 Purpose: Here you would say what it is the organization or project wants the evaluation to achieve.
 Key evaluation questions: What the central questions are that the evaluation must address.
 Specific objectives: What specific areas, internal and/or external, you want the evaluation to address.
So, for example, you might want the evaluations to include are view of finances, or to include certain
specific programme sites.
 Methodology: here you might give broad parameters of the kind of approach you favor in evaluation.
You might also suggest the kinds of techniques you would like the evaluation team to use.
 Logistical issues: These would include timing, costing, and requirements of team composition and so
on.

Purpose

The purpose of an evaluation is the reason why you are doing it. It goes beyond what you want to know to why you
want to know it. It is usually a sentence or, at most, a paragraph.

It has two parts:

 What you want evaluated;

 To what end you want it done.

Examples of an evaluation purpose could be:

 To provide the organization with information needed to make decisions about the future of the
project.
 To assess whether the organization/project is having the planned impact in order to decide
whether or not to replicate the model elsewhere.
 To assess the programme in terms of effectiveness, impact on the target group, efficiency and
sustainability in order to improve it’s functioning.

4.4 Collecting Information

Here we look in detail at:

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  Baselines and damage control;
 Methods.

By damage control we mean what you need to do if you failed to get baseline information when you started out.

BASELINES AND DAMAGE CONTROL

Ideally, if you have done your planning well and collected information about the situation at the beginning of your
intervention, you will have baseline data.

Baseline data is the information you have about the situation before you do anything. It isthe information on which
your problem analysis is based. It is very difficult to measure th impact of your initiative if you do not know what
the situation was when you began it. You need baseline data that is relevant to the indicators you have decided will
help you measure the impact of your work.

There are different levels of baseline data:

 General information about the situation, often available in official statistics e.g. infant mortality rates,
school enrolment by gender, unemployment rates, literacy rates and so on. If you are working in a particular
geographical area, then you need information for that area. If it is not available in official statistics, you
may need to do some information gathering yourselves. This might involve house-to-house surveying,
either comprehensively or using sampling (see the section after this on methods), or visiting schools,
hospitals etc. Focus on your indicators of impact when you collect this information.
 If you have decided to measure impact through a sample of people or families with whom you are working,
you will need specific information about those people or families. So, for example, for families (or business
enterprises or schools or whatever units you are working with) you may want specific information about
income, history, number of people employed, and number of children per classroom and so on. You will
probably get this information from a combination of interviewing and filling in of basic questionnaires.
Again, remember to focus on the indicators which you have decided are important for your work.
 If you are working with individuals, then you need “intake” information – documented information about
their situation at the time you began working with them. For example, you might want to know, in addition
to age, gender, name and so on, current income, employment status, and current levels of education, amount
of money so on, for each individual participant. Again, you will probably get the information from a
combination of interviewing and filling in of basic questionnaires, and you should focus on the indicators
which you think are important.

It is very difficult to go back and get this kind of baseline information after you have begun work and the situation
has changed. But what if you didn’t collect this information at the beginning of the process? There are ways of
doing damage control. You can get anecdotal information (see Glossary of Terms) from those who were involved
at the beginning and you can ask participants if they remember what the situation was when the project began. You
may not even have decided what your important indicators are when you began your work. You will have to work it
out “backwards”, and then try to get information about the situation related to those indicators when you started out.
You can speak to people, look at records and other written sources such as minutes, reports and soon.

One useful way of making meaningful comparisons where you do not have baseline information is through using
control groups. Control groups are groups of people, businesses, families or whatever unit you are focusing on, that
have not had input from you project or organization but are, in most other ways, very similar to those you are
working with.

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For example: You have been working with groups of school children around the country in order to build their self-
esteem and knowledge as a way of combating the spread of HIV/AIDS and preventing teenage pregnancies. After a
few years, you want to measure what impact you have had on these children. You are going to run a series of focus
groups with the children at the schools where you have worked. But you did not do any baseline study with them.

METHODS

In this section we are going to give you a “shopping list” of the different kinds of methods that can be used to
collect information for monitoring and evaluation purposes. You need to select methods that suit your purposes and
your resources. Do not plan to do a comprehensive survey of 100 000 households if you have two weeks and very
little money!

Use sampling in this case.

Sampling is another important concept when using various tools for a monitoring or evaluation process. Sampling
is not really a tool in itself, but used with other tools it is very useful. Sampling answers the question: Who do we
survey, interview, include in a focus group etc? It is a way of narrowing down the number of possible respondents to
make it manageable and affordable. Sometimes it is necessary to be comprehensive. This means getting to every
possible household, or school or teacher or clinic etc. In an evaluation, you might well use all the information
collected in every case during the monitoring process in an overall analysis. Usually, however, unless numbers are
very small, for in-depth exploration you will use a sample. Sampling techniques include:

 Random sampling (In theory random sampling means doing the sampling on a sort of lottery basis where,
for example all the names go into a container, are tumbled around and then the required number are drawn
out. This sort of random sampling is very difficult to use in the kind of work we are talking about. For
practical purposes you are more likely to, for example, select every seventh household or every third person
on the list. The idea is that there is no bias in the selection.);
 Stratified sampling (e.g. every seventh household in the upper income bracket, every third household in the
lower income bracket);

 Cluster sampling (e.g. only those people who have been on the project for at least two years).

It is also usually best to use triangulation. This is a fancy word that means that one set of data or information is
confirmed by another. You usually look for confirmation from a number of sources saying the same thing.

INTERVIEWING SKILLS

Some do’s and don’ts for interviewing:

 DO test the interview schedule beforehand for clarity, and to make sure questions cannot be misunderstood.
 DO state clearly what the purpose of the interview is.
 DO assure the interviewee that what is said will be treated in confidence.
 DO ask if the interviewee minds if you take notes or tape record the interview.
 DO record the exact words of the interviewee as far as possible.
 DO keep talking as you write.
 DO keep the interview to the point.

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  DO cover the full schedule of questions.
 DO watch for answers that are vague and probe for more information.
 DO be flexible and note down everything interesting that is said, even if it isn’t on the schedule.
 DON’T offend the interviewee in any way.
 DON’T say things that are judgmental.
 DON’T interrupt in mid-sentence.
 DON’T put words into the interviewees’ mouth.
 DON’T show what you are thinking through changed tone of voice.

Taking action

Monitoring and evaluation have little value if the organization or project does not act on the information that comes
out of the analysis of data collected. Once you have the findings, conclusions and recommendations from your
monitoring and evaluation process, you need to:

 Report to your stakeholders;

 Learn from the overall process;
 Make effective decisions about how to move forward; and, if necessary,
 Deal with resistance to the necessary changes within the organization or project, or even among other
stakeholders.

REPORTING

Whether you are monitoring or evaluating, at some point, or points, there will be a reporting process. This reporting
process follows the stage of analyzing information. You will report to different stakeholders in different ways,
sometimes in written form, sometimes verbally and, increasingly, making use of tools such as Power point
presentations, slides and videos.

Below is a table, suggesting different reporting mechanisms that might be appropriate for different stakeholders and
at different times in project cycles. For writing tips, go to the toolkit on effective writing for organizations.

4.5 Establishing & documenting legal contract

Definition

A contract is a written or oral legally-binding agreement between the parties identified in the
agreement to fulfill the terms and conditions outlined in the agreement. A prerequisite requirement
for the enforcement of a contract, amongst other things, is the condition that the parties to the contract
accept the terms of the claimed contract. Historically, this was most commonly achieved through
signature or performance, but in many jurisdictions - especially with the advance of electronic
commerce - the forms of acceptance have expanded to include various forms of electronic signature.

Contracts can be of many types, e.g. sales contracts (including leases), purchasing contracts,
partnership agreements, trade agreements, and intellectual property agreements.

 A sales contract is a contract between a company (the seller) and a customer that where the company
agrees to sell products and/or services. The customer in return is obligated to pay for the
product/services bought.

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  A purchasing contract is a contract between a company (the buyer) and a supplier who is promising to
sell products and/or services within agreed terms and conditions. The company (buyer) in return is
obligated to acknowledge the goods / or service and pay for liability created.
 A partnership agreement may be a contract which formally establishes the terms of a partnership
between two legal entities such that they regard each other as 'partners' in a commercial arrangement.
However, such expressions may also be merely a means to reflect the desire of the contracting parties
to act 'as if' both are in a partnership with common goals. Therefore, it might not be the common law
arrangement of a partnership which by definition creates fiduciary duties and which also has 'joint and
several' liabilities.

4.5.1 Essential Elements of a Valid Contract

1. Proper offer and proper acceptance. There must be an agreement based on a lawful offer made by
person to another and lawful acceptance of that offer made by the latter.

2. Lawful consideration: An agreement to form a valid contract should be supported by consideration.

Consideration means “something in return” (quid pro quo). It can be cash, kind, an act or abstinence.
It can be past, present or future. However, consideration should be real and lawful.

3. Competent to contract or capacity: In order to make a valid contract the parties to it must be
competent to be contracted. a person is considered to be competent to contract if he satisfies the
following criterion:

 The person has reached the age of maturity.

 The person is of sound mind.
 The person is not disqualified from contracting by any law.

4. Free Consent: To constitute a valid contract there must be free and genuine consent of the parties to
the contract. It should not be obtained by misrepresentation, fraud, coercion, undue influence or
mistake.

5. Lawful Object and Agreement: The object of the agreement must not be illegal or unlawful.

6. Agreement not declared void or illegal: Agreements which have been expressly declared void or
illegal by law are not enforceable at law; hence does not constitute a valid contract.

7. Intention to Create Legal Relationships

8. Certainty, Possibility of Performance

9. Legal Formalities

Types of Contracts

On the basis of Validity:

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1. Valid contract: An agreement which has all the essential elements of a contract is called a valid
contract. A valid contract can be enforced by law.

2. Void contract: A void contract is a contract which ceases to be enforceable by law. A contract
when originally entered into may be valid and binding on the parties. It may subsequently become
void. -- There are many judgments which have stated that where any crime has been converted into a
"Source of Profit" or if any act to be done under any contract is opposed to "Public Policy" under any
contract -- than that contract itself cannot be enforced under the law-

3. Voidable contract :-An agreement which is enforceable by law at the option of one or more of the
parties thereto, but not at the option of other or others, is a voidable contract. If the essential element
of free consent is missing in a contract, the law confers right on the aggrieved party either to reject
the contract or to accept it. However, the contract continues to be good and enforceable unless it is
repudiated by the aggrieved party.

4. Illegal contract: A contract is illegal if it is forbidden by law; or is of such nature that, if permitted,
would defeat the provisions of any law or is fraudulent; or involves or implies injury to a person or
property of another, or court regards it as immoral or opposed to public policy. These agreements are
punishable by law. These are void-ab-initio.

“All illegal agreements are void agreements but all void agreements are not illegal.”

5. Unenforceable contract: Where a contract is good in substance but because of some technical
defect cannot be enforced by law is called unenforceable contract. These contracts are neither void
nor voidable.

On the basis of Formation:

1. Express contract: Where the terms of the contract are expressly agreed upon in words (written or
spoken) at the time of formation, the contract is said to be express contract.

2. Implied contract: An implied contract is one which is inferred from the acts or conduct of the
parties or from the circumstances of the cases. Where a proposal or acceptance is made otherwise
than in words, promise is said to be implied.

3. Tacit contract-Tacit contracts are IMPlIED contract in itself. e.g.-Taking ticket in the bus,during
journey..

4. Quasi contract: A quasi contract is created by law. Thus, quasi contracts are strictly not contracts
as there is no intention of parties to enter into a contract. It is legal obligation which is imposed on a
party who is required to perform it. A quasi contract is based on the principle that a person shall not
be allowed to enrich himself at the expense of another.

On the basis of Performance:

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1. Executed contract: An executed contract is one in which both the parties have performed their
respective obligation.

2. Executory contract: An executory contract is one where one or both the parties to the contract have
still to perform their obligations in future. Thus, a contract which is partially performed or wholly
unperformed is termed as executory contract.

3. Unilateral contract: A unilateral contract is one in which only one party has to perform his
obligation at the time of the formation of the contract, the other party having fulfilled his obligation at
the time of the contract or before the contract comes into existence.

4. Bilateral contract: A bilateral contract is one in which the obligation on both the parties to the
contract is outstanding at the time of the formation of the contract. Bilateral contracts are also known
as contracts with executory consideration.

Offer

"when one person signifies to another his willingness to do or to abstain from doing anything with a
view to obtain the assent of that other to such act or abstinence, he is said to make a proposal/offer".
Thus, for a valid offer,the party making it must express his willingness to do or not to do something.
But mere expression of willingness does not constitute an offer. An offer should be made to obtainthe
assent of the other. The offer should be communicated to the offeree and it should not contain a
termthenon compliance of which would amount to acceptance.

4.5.2 Classification of Offer

 General Offer: This is made to public in general.

 Special Offer: This is made to a definite person.
 Cross Offer: Exchange of identical offer in ignorance of each other
 Counter Offer: Modification and Variation of Original offer
 Standing, Open or Continuing Offer:-Which is open for a specific period of time. The offer
must be distinguished from an invitation to offer. Invitation to offerAn invitation to offer is
only a circulation of an offer; it is an attempt to induce offers and precedes a definite offer.
Acceptance of an invitation to an offer does not result contract and only an offer emerges in
the process of negotiation. A statement made by a person who does not intend to bound by it
but, intends to further act, is an invitation to offer.

Acceptance

When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be
accepted.

Rules:

1. Acceptance must be absolute and unqualified.

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2. Communicated to offeror.

3. Acceptance must be in the mode prescribed.

4. Acceptance must be given within a reasonable time before the offer lapses.

5. Acceptance by the way of conduct.

6. Mere silence is no acceptance

7. offree and offerer must be consent

Lawful Consideration

Consideration is defined as: "When at the desire of the promisor, the promisee has done or abstained
from doing, or does or abstains from doing, or promises to do or abstain something, such an act or
abstinence or promise is called consideration for the promise."

In short, Consideration means quid pro quo i.e. something in return.

An agreement must be supported by a lawful consideration on both sides.

The consideration or object of an agreement is lawful, unless and until it is-

1.forbidden by law, or
2.is of such nature that ,if permitted ,it would defeat the provisions of any law ,or
3.is fraudulent ,or involves or implies injury to the person or property of another ,or
4.the court regards it as immoral ,or opposed to public policy.
5.Consideration may take in any form-money, goods, services, a promise to marry, a promise to
forbear etc.

Competent To Contract

Section 11 of The Indian Contract Act specifies that every person is competent to contract provided:

1. He should not be a minor i.e. an individual who has not attained the age of majority i.e. 18 years.

2. He should be of sound mind while making a contract. A person with unsound mind cannot make a
contract.

3. He is not a person who has been personally disqualified by law.

Free Consent

" two or more persons are said to be consented when they agree upon the same thing in the same
sense (Consensus-ad-idem).

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A consent is said to be free when it not caused by coercion or undue influence or fraud or
misrepresentation or mistake.

Elements Vitiating free Consent

1. Coercion :- "Coercion" is the committing, or threatening to commit, any act forbidden by the law
or the unlawful detaining, or threatening to detain, any property, to the prejudice of any person
whatever, with the intention of causing any person to enter into an agreement.

2. Undue influence:-Where a person who is in a position to dominate the will of another enters into a
contract with him and the transaction appears on the face of it, or on the evidence, to be
unconscionable, the burden of proving that such contract was not induced by undue influence shall lie
upon the person in the position to dominate the will of the other."

3. Fraud : "Fraud" means and includes any of the following acts committed by a party to a contract, or
with his connivance, or by his agent, with intent to deceive another party thereto of his agent, or to
induce him to enter into the contract.

4. Misrepresentation (Section 18): “causing, however innocently, a party to an agreement to make a

mistake as to the substance of the thing which is the subject of the agreement".

5. Mistake of fact : "Where both the parties to an agreement are under a mistake as to a matter of fact
essential to the agreement, the agreement is void".

Revocation of Offer

A proposal may be revoked at any time before the communication of its acceptance is complete as
against the proposer, but not afterwards. An acceptance may be revoked at any time before the
communication of the acceptance is complete as against the acceptor, but not afterwards.

A proposal is revoked -

(1) By the communication of notice of revocation by the proposer to the other party;

(2) By the lapse of the time prescribed in such proposal for its acceptance, or, if no time is so
prescribed, by the lapse of a reasonable time, without communication of the acceptance;

(3) By the failure of the acceptor to fulfill a condition precedent to acceptance; or

(4) By the death or insanity of the proposer, if the fact of the death or insanity comes to the
knowledge of the acceptor before acceptance.

Agency

In law,the relationship that exists when one person or party (the principal) engages another (the agent)
to act for him, e.g. to do his work, to sell his goods, to manage his business. The law of agency thus
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governs the legal relationship in which the agent deals with a third party on behalf of the principal.
The competent agent is legally capable of acting for this principal vis-à-vis the third party. Hence, the
process of concluding a contract through an agent involves a twofold relationship. On the one hand,
the law of agency is concerned with the external business relations of an economic unit and with the
powers of the various representatives to affect the legal position of the principal. On the other hand, it
rules the internal relationship between principal and agent as well, thereby imposing certain duties on
the representative. An agency may come to an end in a variety of ways:

(i) By the principal revoking the agency – However, principal cannot revoke an agency coupled with
interest to the prejudice of such interest. Such Agency is coupled with interest. An agency is coupled
with interest when the agent himself has an interest in the subject-matter of the agency, e.g., where the
goods are consigned by an upcountry constituent to a commission agent for sale, with poor to recoup
himself from the sale proceeds, the advances made by him to the principal against the security of the
goods; in such a case, the principal cannot revoke the agent’s authority till the goods are actually sold,
nor is the agency terminated by death or insanity.

(ii) By the agent renouncing the business of agency;

(iii) By the business of agency being completed;

(iv)By the principal being adjudicated insolvent

The principal also cannot revoke the agent’s authority after it has been partly exercised, so as to bind
the principal though he can always do so, before such authority has been so exercised. If the agency is
for a fixed period, the principal cannot terminate the agency before the time expired, except for
sufficient cause. If he does, he is liable to compensate the agent for the loss caused to him thereby.
The same rules apply where the agent, renounces an agency for a fixed period. Notice in this
connection that want of skill continuous disobedience of lawful orders, and rude or insulting behavior
has been held to be sufficient cause for dismissal of an agent. Further, reasonable notice has to be
given by one party to the other; otherwise, damage resulting from want of such notice, will have to be
paid. The revocation or renunciation of an agency may be made expressly or impliedly by conduct.
The termination does not take effect as regards the agent, till it becomes known to him and as regards
third party, till the termination is known to them.When an agent’s authority is terminated, it operates
as a termination of subagent also.

4.5.3 Mutuality of Obligation

This element is also known as the “meeting of the minds”. Mutuality of obligation refers to the parties’ mutual
understanding and assent to the expression of their agreement. The parties must agree to the same thing, in the
same sense, at the same time. The determination of a meeting of their minds, and thus offer and acceptance, is
based on the objective standard of what the parties said and did and not their subjective state of
mind.Unexpressed subjective intent is irrelevant. In determining whether mutual assent is present, the court
looks to the communications between the parties and to the acts and circumstances surrounding this
communications.The offer must be clear and definite just as there must be a clear and definite acceptance of all
terms contained in the offer.Where a meeting of the minds is contested, the determination of the existence of a
contract is a question of fact. If the fact finder determines that one party reasonably drew the inference of a
promise from the other party’s conduct, that promise will be given effect in law.

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To be enforceable, the parties must have agreed on the essential terms of the contract.However, parties may
agree upon some contractual terms, understanding them to be an agreement and leave other contract terms to
be made later.Full agreement on all contractual terms is the best practice and should be the norm. It is only
when an essential term is left open for future negotiation that there is nothing more than an unenforceable
agreement to agree.

Such an agreement is void as a contract.

Any contract or mutual understanding between parties that differs materially from the original offer is open to
legal challenge. Should any component of a negotiation tend toward a final result where a contract or
agreement differs? Materially from the offer, that component of the negotiation should cease. If the
component in question is critical to the provision of a service or goods, the issuance of another offer that
incorporates that component should be considered.

Certainty of Subject Matter

In general, a contract is legally binding only if its terms are sufficiently defined to enable a court to understand
the parties’ obligations. The rules regarding indefiniteness of material terms of a contract are based on the
concept that a party cannot accept an offer so as to form a contract unless the terms of that contract are
reasonably certain.Thus, the material terms of a contract must be agreed upon before a court can enforce the
contract.Each contract should be considered separately to determine its material terms.

As a general rule, an agreement simply to enter into negotiations for a contract later also does not create an
enforceable contract. Parties may agree on some of the terms of a contract and understand them to be an
agreement, and yet leave other portions of the agreement to be made later.

Sometimes terms are omitted from contracts and assuming the omitted term is not an essential term, the courts
have implied terms to preserve the enforceability of the contract should a legal challenge arise. A court may
uphold an agreement by supplying missing terms.Historically, Texas courts prefer to validate transactions
rather than void them, but courts may not create a contract where none exists and they generally may not insert
or eliminate essential terms. Whether or not a court will imply or supply missing contract terms will depend on
the specific facts of the transaction. An example of terms that have been implied or supplied are time and place
of performance.

Consideration

Consideration is an essential element of any valid contract.Consideration consists of either a benefit to the
promissory or a detriment to the promisee. It is a present exchange bargained for in return for a promise. It
may consist of some right, interest, profit, or benefit that accrues to one party, or alternatively, of some
forbearance, loss or responsibility that is undertaken or incurred by the other party. It is not necessary for a
contract to be supported by a monetary consideration.

4.6 Identifying & completing business premises

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Finding the right premises for your business is crucial. A key decision is whether to buy or rent
property. Renting premises ties up less capital than buying which means you can invest it in the
business instead. It can also give you flexibility to relocate easily should you need to. The type of
premises you rent and the location will be partly dictated by the type of business you are running. The
amount you can afford - taking into account extra costs such as business and utility rates, and
building insurance - will also be a deciding factor.

Finding the Right Premises

What is the order of priorities in deciding on premises?

Think the process through logically. The best sequence may be:

 Decide on location. If you get this wrong there is no way of correcting your mistake except by moving
again!

If your business is in manufacturing, ease of access to sources of raw materials and to your markets
may be essential.

If you are running a shop, it should clearly be in a location where the public will notice it and find it
easy to visit. For cost reasons you may have to accept some compromise.

 You need to consider your business strategy, the number of people you will be employing, the
processes used in the business and the plant/machinery required.

The type and location of property required for a manufacturing business with heavy plant will be
different from that required for a software or distribution business.

Consider also your ongoing plans. Should you ensure at the outset that there is space for expansion or
will you rely on a move to larger premises at a later date as the business expands?

Think about the quality of the workspace environment and how this may impact on the staff and their
productivity.

All of these considerations need to be thought through before you make a final choice about your
premises. 

 Next, prepare a specification of the premises you want.

Sketch out a plan on graph paper, detailing your requirements. From this you can calculate the floor
area you need.

Do not forget car parking and loading and unloading facilities.

And remember your utilities requirements - what power supplies will your processes require, what
telecommunications facilities, for example?

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  The other key decision you have to make at the outset is whether you will be purchasing or leasing
the premises (see sections Buy or lease? and Taking a lease and Taking a license)
 Calculate how much you can afford to pay in outgoings on the premises, whether you buy or
lease.

In addition to rent or mortgage repayments you will need to allow for general rates, water rates,
service charge for maintenance and cleaning of common areas, and insurance of the building.

Armed with this information, you will be able to give a chartered surveyor a succinct summary of
what you are looking for.

A chartered surveyor whom you retain to advise you will provide independent and professional
advice on the size, type, form of tenure and location of premises that best suit your needs.

Your requirements

Drawing up a list of what you need from your premises is a good way to start your search. This list
might include the following points:

 size and layout of the premises

 structure and appearance, both internally and externally
 any special structural requirements, such as high ceilings
 facilities and comfort for employees and visitors - including lighting, toilets and kitchen facilities
 utilities, such as power and drainage, and any special requirements - for example, three-phase
electricity
 permission, including planning permission, to use the premises for your type of business
 access and parking space - for deliveries or customers, including disabled customers
 whether you need the flexibility to alter or expand the premises
 your long-term business plans

After drawing up your list of requirements, you may decide that working from home could suit you.
However, there are important legal and practical issues you need to take into account - Your choice of
premises will also depend on your budget. Whether you rent or buy, costs can include:

 initial purchase costs, including legal costs such as solicitor's fees and professional fees for surveyors
 initial alterations, fitting out and decoration
 any alterations required to meet building, health and safety and fire regulations
 ongoing rent, service and utility charges, including water, electricity and gas
 business rates
 continuing maintenance and repairs
 building and contents insurance

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4.6.1 Renting business premises

The advantages of renting premises

Buying business premises is a big commitment and it's important to consider carefully whether
renting is a better option. Renting can provide more flexibility for your business as it grows. You are
not locked into property ownership and you can usually agree with your landlord the length of the
lease that you require, or have a break clause included in the lease. This will let you end the lease
(usually on a specific date) if, for instance, you want to relocate.

Financially, renting can make good business sense. It ties up less capital than buying, freeing up cash
that could be used elsewhere in the business.

You are not exposed to interest rate rises, although your rent may rise periodically as a result of rent
reviews.

There is also less potential for unexpected financial shocks - unless you wish to sell the remaining
term on your lease to someone else, falls in property value will not affect you. Also, you will have no
concerns about capital gains tax unless you decide to sell your lease for a premium.

You may have less responsibility for the building if you rent rather than buy, although this will
depend on the terms of your lease. You may have to look after repairs and maintenance inside the
building but external maintenance is more likely to be the responsibility of the landlord, particularly
in multi-occupancy premises, though you may have to pay a service charge..

Renting can also give you space for negotiation. You or your agent can negotiate any aspect of the
lease, either at the start or if you want to renew it after the lease ends. Always check to see how rent is
reviewed before you sign the lease.

4.6.2 Choose the right premises for your business

Choose the right location for your business premises

Choosing the right location can be something of a balancing act. Ideally, the location should be
convenient for your customers, employees and suppliers - without being too expensive.

For shops and other retail businesses, location is of critical importance. Your location must attract
customers.

If you rely on passing trade, you want to be in an area where enough people who want your product
or service can see you. For example, newsagents are often located in or around train stations. You
could also benefit from customers who are attracted by other shops in a shopping centre.

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For employees, the best location will be easy to travel to. Good public transport links and local
parking facilities or spaces make it easier for employees who don't live within walking distance.
Employees also tend to prefer working somewhere with good local facilities.

You may want to be near suppliers for a quick, flexible service. Deliveries may be easier if there are
good road and transport links.

You may not want to be too near your competitors, though clusters of similar businesses sometimes
attract more customers. Your neighbors and your location also affect your image. Location has a
major impact on cost. If you need premises in a prime location the extra costs may be justified.

Leasing generally involves the following stage

 Inspection & research of premises

 Obtaining preliminary documentation
 Obtaining of advice
 Negotiating the lease
 Preparation of final documentation
 Fit-out of the premises

Legal considerations when choosing business premises

If you own or occupy business premises, you need to understand the legal obligations and restrictions
that affect you. For example:

 The premises must have planning permission that allows them to be used for your type of business.
You must comply with building, fire, and health and safety regulations.
 Stamp duty is payable on commercial leases and you are likely to be liable for business rates, though
in rented premises these may be paid by the landlord. You are responsible for the health and safety of
employees and visitors.
 You also need to provide a suitable working environment.
 If you provide goods or services to the public, you must take reasonable steps to make your premises
accessible..
 You need to comply with the terms of any lease or license agreement.
 For some businesses, you may require a license to operate or to sell certain products.
 There may be restrictions on times when deliveries are allowed, noise and pollution levels, and how
you or your customers dispose of waste.

In licensed or leased premises, responsibilities are shared between the landlord and the tenant.
Whatever premises you choose, you need to ensure that you are properly insured. If you are in any
doubt about your legal obligations, you should take advice from your business adviser or solicitor.

4.Self assessment questions(LO4)

1. Identfy organization unit planning process?

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 2. Discuss organizational factors that affect organizational unit structure?

3. What is the difference between monitoring & evaluation?

4. Duscuss steps of monitoring?

5. What is a contract?

6. Dicuss essential elements of valid contract?

7. Dicuss business premises?

8. How to find right business premises?

Instruction Sheet- 5 REVIEW IMPLIMENTATION PROCESS

LO5.review implementation process

5.1 Identifying & managing improvement in the business operation

Business Process Improvement (BPI) is a systematic approach to help an organization optimize its
underlying processes to achieve more efficient results.

A business process improvement (BPI) typically involves six steps:

1. Selection of process teams and leader

Process teams, comprising 2-4 employees from various departments that are involved in the particular
process, is set up. Each team selects a process team leader, typically the person who is responsible for
running the respective process.

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2. Process analysis training:-The selected process team members are trained in process analysis and
documentation techniques.

3. Process analysis interview:-The members of the process teams conduct several interviews with
people working along the processes. During the interview, they gather information about process
structure, as well as process performance data.

4. Process documentation:-The interview results are used to draw a first process map. Previously
existing process descriptions are reviewed and integrated, wherever possible. Possible process
improvements, discussed during the interview, are integrated into the process maps.

5. Review cycle:-The draft documentation is then reviewed by the employees working in the process.
Additional review cycles may be necessary in order to achieve a common view (mental image) of the
process with all concerned employees. This stage is an iterative process.

6. Problem analysis:-A thorough analysis of process problems can then be conducted, based on the
process map, and information gathered about the process. At this time of the project, process goal
information from the strategy audit is available as well, and is used to derive measures for process
improvement.

10 Ways to Improve Your Business Operations

Every new day gives you a chance to move forward from your present situation. Learn ten ways you
can improve your business today.

by George Rodriguez
Staff Writer 

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Every new day gives you a chance to move forward from your present situation. You can improve your
business on a number of fronts: by increasing profits, reducing losses, getting more customers,
expanding the markets, becoming more visible in the community, going public or a number of other
items deemed desirable.

You must have a vision of what you want to achieve, where you want to go, and what you want the
business to become. Learn ten ways you can improve your business: 

1. Start the year in high gear. Take a notebook (or a laptop or PDA) and jot down your thoughts
and plans for the year. It's the time to get excited to the prospects of this New Year! List down ideas on
new product lines, or new projects that you want to take on. Write down your ideas on how to expand
and energize your business. Only through innovation and continuing adoption of relevant new products
and ideas can your business improve its competitiveness and profitability. Start the ball rolling with
financers, lenders and bankers if you need to take on additional capital.

2. Dust off your business plans. Review, review and review your business plan. See how far (or
little) your business has taken shape from your original idea. Many entrepreneurs write a business plan at
the start, only to forget about it. Some stray away from their plans - and fail. Go find your business plans
and update it. Since your business' inception, a number of factors must have changed - from the overall
business climate to your product line. Take all those changes into consideration, factor in your and your
family's goals, and get a clear assessment of the direction of your business. Get in touch with your
business advisers, if any.

3. Rekindle your relationship with your customers. The start of the year is the perfect time
to tap your customer database and get in touch with your existing customers. Whether by phone, email or
letter, contact your customers to greet them "Happy New Year!" and remind them that your business is
ready to serve them this year. You need to constantly look for ways to encourage repeat business.
Although marketing and advertising are important to get more customers, quality, service and customer
satisfaction are what keep a business successful in the long run.

4. Evaluate your pricing. Think about raising your rates. Now is the appropriate time to inform
clients that your rates are going up. Just be sure to check out what the competition's doing and make sure
your prices or rates aren't too low. You don't want to overprice yourself out of the market, yet you should
not bear the burden of a cash flow shortage. Give your customers a month or two advance notice should
you decide to increase your rates.

5. Find ways to cut your costs. Even if you have secured funding from investors, you need to
constantly look for ways to reduce your costs. From making double-sided paper copies to ordering
shipping supplies in bulk, you can reduce wasted material, effort, and time in making, selling, and
delivering your product. The result is an improvement in your company's bottom line and an increased
competitive advantage.

6. Resolve to improve your weak spots. Take stock of all aspects of your business operation
and list down the areas that you want to improve. If your list of delinquent receivables is longer than
Santa's list, find out how you can improve your billing and collection process. Perhaps you need to
improve your record keeping to help flag you on delinquent accounts.

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7. Institute measures to assess the performance of your business. Setting clear
standards for your business allows you to determine the effectiveness and efficiency of
your strategies. If you haven't done so in the past year, start determining how much you
are making per hour of work, how effective your advertising is, and some other
measurements of where your business has been. Set some benchmarks and periodically
assess how your business is doing. You need to know what you consider an
improvement before you can start to improve on it.

8. Keep employees involved. Good employees are hard to find; yet they are an important element
in your business. Check to see if they are getting what they need and make them part of the team. Help
them understand the importance of their role in your business and how their job impacts the business as a
whole. Review your relationship with your employees and find ways to keep your relationship happy and
avoid costly attrition.

9. Explore new markets or improve marketing. Start the year by exploring new markets for
your business. Whether you are looking at targeting a new demographic or getting your business up on
the web, take time to plan how you can expand your existing market. Look for ways to improve your
marketing, whether by winning easy publicity, arranging an open house or preparing direct mails.

10. Find out how you can live a more balanced life. Work and business are not the be-all
and end-all of your life. Learn to have fun! Spend more time with your family. Take a vacation once in a
while. Engage in activities that will rejuvenate your spirit and your life. Take care of yourself, and your
health. Your productivity and focus will improve if you are stress-free and healthy.

Continuous quality improvement is a methodology used to implement incremental adjustments in business

processes with the long term goal of improving key business metrics. Managers must commit to continuous
quality improvement in order for it to be successful. Here are some steps for successfully managing the
implementation and usage of this methodology.

Make it a priority. Employees must understand that other responsibilities must be set aside in
order to use continuous quality improvement. All levels of management from the top down need
to buy into this goal.

Set goals. Determine what type of quality you want your company to improve. You can improve,
for example, the number of defects per million or the amount of time it takes human resources to
respond to a request.

Involve employees at all levels in quality improvements. The employees who use a process every
day are experts. They can use their expertise to identify problem areas and suggest solutions.

Document your processes. An efficient organization runs its processes according to a standardized
procedure unique to that process. You can create documentation in phases or as you attempt to
improve processes.

Measure the effectiveness of your processes. Once you have collected enough data for a baseline, you can
evaluate the success of your improvement efforts. Analyze your
business and encourage your employees to do the same. Think of creative ways to improve.

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 Review your efforts and their progress. Make sure that the results are coming into line with the efforts and
costs. Although it requires time to achieve these goals, you may need to provide guidance or make
structural changes to achieve them.

5.2 Recording, organizing & completing necessary documents

How to Organize Important Documents

Instructions

 Organize your tax returns. The Internal Revenue Service (irs.gov) has up to six
years from the date you file to audit you or challenge your returns. Keep copies
of tax returns and supporting documents such as receipts for charitable
contributions and miscellaneous deductions. There is no statute of limitations
on investigations of taxpayers who fail to file or who file fraudulent returns.
 Organize your investment records. If your mutual-fund Company or
stockbroker provides a year-end summary statement of your transactions, shred
the monthly reports. Keep a record of all trades, particularly the original price
of your stocks and fund shares when you sell. Also, save records of all
contributions to non-deductible individual retirement accounts, as proof of
already having paid taxes on the money. Keep trade confirmations for a couple
of years after sales in case the IRS has questions.
 Organize your credit-card bills. Review your statements for potential duplicate
charges, then shred them when the next bill comes in, unless you are self-
employed, in which case file and keep them for tax purposes.
 File bank statements along with canceled checks and pay stubs for three years
before shredding.
 Track your charitable deductions by keeping receipts and records of donations
for tax purposes.
 To organize your medical records, save receipts and insurance payments for
dentists, doctors, hospitals and prescriptions.
 Save all real-estate records and transactions, as well as the title and deed to
your house. Other records to keep include contracts and receipts for home
improvement and repairs, property tax paperwork and warranties.
 Save all vital statistics--passports, birth certificates, and marriage and divorce
papers--permanently.

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5.2.1 How to File Organizers

 Classify your documents by arranging them in single sets as this will help in
coordinating your categories or classes. Decide what documents should be
placed in which category. Create sections in each category as it will help you in
managing and organizing your files.

 Create sub-categories for each category. You may find it hard to arrange a file
system in categories and their sub-categories; it will be convenient after the file
system is organized. Such file systems can be helpful and you may further
simplify your file system by dividing subcategory sections in different sub-
heads such as place, date and name.
 Categorize your folder system by using coded colors to make every file
significant and separated from each other. Significant colors will help you find
any particular file within moments and you will not have to check each folder
when you need to locate the right file.
 Use three to five colors; more colors may create complexity in your filing
system. Use a particular color for each folder category like a blue color can be
used for household files, red color for medical files, green for financial files
and orange for personal files. Utilizing colors can separate each folder
categories.
 Use colored tabs for the hanging folders and white labels for labeling because
it can be easily read in white color. Place each label on the tab position of the
folder in accordance with the categories you created in alphabetical or
numerical order.

5.2.2 THE DOCUMENT LOCATOR SYSTEM

Most people have no idea where to start searching for their important records. They usually keep
them scattered in various locations—tax records in a file cabinet, savings bonds in a home safe, wills
at an attorney’s office, some contracts or deeds in a bank safe deposit box.

There’s a reason many people do not have an organized record-keeping system: It’s because getting
records organized is a stressful, confusing chore.

The Document Locator System is effective because it takes away that stress and confusion. This
simple recordkeeping system provides an easy way to keep track of your important personal (not
business) records, keeping them organized and available. You will not miss out on a tax deduction
because you did not keep the necessary receipt. More importantly, the document locator system will
help a spouse or executors locate documents in case of your death or disability.

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5.2.3 WHERE TO FILE WHAT

OTHER
DOCUMENT WHERE TO FILE LOCATION/NOT
ES
Accident reports Insurance  
Adoption records Important Personal and/or  
Children
Accountant Professionals  
Address book Important Personal  
Alimony records Tax Records  
Apartment—records for Residences  
Annuity Investments  
Antiques Major Assets  
Appliances—receipts, warranties and Major Assets  
contracts for
Appraisals of assets Major Assets  
Assets—list of Major Assets  
Attorney Professionals and/or Estate  
Planning
Auto insurance Vehicles and/or Insurance  
Auto loans Credit and Loans  
Auto mileage logs Tax Records  
Automobile title Vehicles  
Bank account statements Banking  
Bills of sale Major Assets  
Birth certificates Important Personal and/or  
Children
Boat insurance Insurance  
Boat records Vehicles  

Recording data

5.2.4 Recording Requirements

We have certain requirements that apply to almost any document(s) you want to record. Please make
sure to take these requirements into consideration as you prepare your document(s) for recording in
order to facilitate timely recording of your document(s) and to avoid unnecessary penalties at
recording time. There are some kinds of documents that cannot be recorded; please see our section on
non-recordable documents below for a list of these.

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To ensure same day recording of your documents,
please be sure we have them by 4:00 p.m.!

General Recording Requirements

Documents Transferring Title

Documents transferring title must contain the Assessor's Parcel Number (APN) and must be
accompanied by a Preliminary Change of Ownership Report.

Legibility

Documents must be clearly readable and capable of producing a legible microfilm record.

Names under Signatures

Names must be printed or typed under all signatures and business names.

Notary Acknowledgement

Documents affecting title to real property must be properly acknowledged.

Title

Documents should be identified as to type.

Parties

Names of parties to be indexed must be contained in the document.

Return Address

A name and address where the document should be sent after recording must be shown in the upper
left hand corner of each document.

Address for delivery

Your document accompanied by the proper fees can be delivered to:

Depending on the type of document, additional requirements may apply.

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Non-Recordable Documents

The following types of documents cannot be recorded:

Negotiable Instruments

 Stocks
 Bonds
 Money

Vital Records

 Birth Certificates
 Death Certificates
 Passports
 Citizenship Papers
 Copyrights
 Wills
 Trademarks

5. Self assessment questions(LO5)

1. List business process improvement steps?

2. Discuss ways of improving your business operations?
3. How to organize important documents?
4. Discuss general recording requirements?

Reference

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