KNOW ABOUT

BUSINESS

Entrepreneurship Education
in Schools and Technical Vocational Training Institutions
and Higher Education

MODULE 6
How Do I Organize an Enterprise?

Authors:

George Manu
Robert Nelson
John Thiongo
Klaus Haftendorn

Editors:

Peter Tomlinson and Klaus Haftendorn

International Labour Office, Geneva

International Training Centre of the ILO, Turin
Copyright © International Training Centre of the ILO 2008

This publication enjoys copyright under Protocol 2 of the Universal Copyright Convention. Applications for
authorization to reproduce, translate or adapt part or all of its contents should be addressed to the
International Training Centre of the ILO. The Centre welcomes such applications. Nevertheless, short
excerpts may be reproduced without authorization, on condition that the source is indicated.

Know About Business

ISBN 92-9049-396-8

First published 1996

Second edition 2000
Third edition 2002
Fourth edition 2004
Revised edition 2005
Revised edition 2007
Revised edition 2008

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Know About Business Module 6: How Do I Organize an Enterprise?

MODULE 6

How Do I Organize an
Enterprise?
Module objective:
Ä To enable learners to appreciate the procedures required
for organizing an enterprise.

Module coverage:
Page
1. Selecting a Suitable Market ....................................... 4
2. Selecting a Business Location .................................. 24
3. Legal Forms of Business Ownership .......................... 33
4. Money Needed to Start an Enterprise........................ 41
5. Obtaining Money to Start an Enterprise ..................... 51
6. Ways of Getting into Business.................................. 66

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Know About Business Module 6: How Do I Organize an Enterprise?

I TOPIC 1: Selecting a Suitable Market

II SUGGESTED DURATION:
• 4 hours/sessions

III OBJECTIVE:
• To enable learners to understand the procedures for identifying a suitable
market for a business.

IV RATIONALE:
• A business is more likely to succeed if it is based on a product or service
that enough customers will buy to generate a profit. For a business to be
successful and profitable there must be an adequate market for its products
or services.
• Many small business failures can be traced to this problem of determining a
suitable product and market. The enthusiasm of the prospective
entrepreneur can often cause him or her to overlook this most basic
business concept: “The basic purpose of a business is to satisfy customer
needs and wants”. Before starting a business, it is essential to determine
whether a market exists for a specific product or service.
• The purpose of this topic is to discuss the elements of a market and identify
characteristics that should be known about the customers and the
competitors within the market. Market research will give the answer to
what market share potential entrepreneurs can expect for the products or
services they want to sell. This is particularly important when they plan to
start a business because all decisions concerning the amount of space
needed for the business, equipment, materials or finished goods to buy, the
staff to hire all depend on a realistic estimate of the potential market the
business intends to serve.

V ACTIVITIES:
1. Have the learners read HANDOUT 1 as homework. Conduct a class
discussion regarding the 11 questions in TRANSPARENCY 1. As a final
question, ask: “Why should entrepreneurs have a complete understanding
of customers needs before starting their business?”

2. Show TRANSPARENCY 2 and discuss responses to each of the five

questions. Divide the learners into groups and have them identify the “Five
Ws” of a market for businesses such as auto repair, bakery, clothing,
store, bookstore, handicraft shop. Have each group of learners report their
findings to the rest of the class.

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Know About Business Module 6: How Do I Organize an Enterprise?

3. Create one group of learners for each of the five Ws and have learners
discuss what factors are related to each W and what sources of
information are needed for each factor. Each group presents their finding
on the board. Show TRANSPARENCY 3 and compare the group findings.

4. Have the learners read HANDOUT 2 and after discussion use the case
study in WORKSHEET 1 as an example of a person starting a business
without doing market research. Have the learners discuss the following
questions:
a. Why did the White’s Hardware business fail?
b. What should Mr White have done before he started the business?
5. Based on the case study of Mr White, highlight the importance of
conducting a market survey when starting a business. Have the learners
read HANDOUT 3 as a basis for the discussion.

6. Discuss HANDOUT 4 with the learners and explain why sales plans are
important.

7. Distribute WORKSHEET 2 and organize learners in groups of 3 to 5. Let

them develop a sales plan based on the findings of the market survey
described in the worksheet. Let the learners present their sales plan and
discuss the findings. Explain to the learners that:

• sales are only predictable to some extent, even with good calculations;
• accuracy of calculation depends on the quality of data used;
• information that is provided by market research is not always precise,
therefore several different scenarios should be taken into account for
planning;
• behaviour of other players and the entries of new players into the market
remain a main risk for any business. Such influences are difficult to
calculate/research, but are crucial for the success of a business;
• with good calculations/market research an entrepreneur is able to
decrease the risk of starting an enterprise. However, starting an
enterprise always remains a risk because not all influences are
predictable.

Sales of uniforms
During the four-year period the annual turnover of Tom and Emily’s uniform
business is likely to increase strongly, because the number of pupils in the
school will rise each year. By comparison, the annual turnover of the uniform
business in the fourth year can be expected to be four times higher than in the
first year.

The demand for alterations will most likely remain on the same level, but
migration to and from the suburb might change the level of demand. From
the figures given different scenarios can be calculated. Two possible solutions
are presented below.

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Know About Business Module 6: How Do I Organize an Enterprise?

Sales plan assuming a market share of 70% of uniform business

and one uniform package sold per child
Annual turnover: 10,500 (-10% failure rate: 9,450, +10% failure rate: 11,550)

Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec Sum
Percentage 2% 5% 9% 2% 2% 3% 13% 40% 10% 2% 2% 10% 100%

Expected
210 525 945 210 210 315 1,365.00 4,200.00 1,050.00 210 210 1,050.00 10,500.00
turnover

-10% failure
189 472.5 850.5 189 189 283.5 1,228.50 3,780.00 945 189 189 945 9,450.00
rate

+10% failure
231 577.5 1,039.50 231 231 346.5 1,501.50 4,620.00 1,155.00 231 231 1,155.00 11,550.00
rate

Sales plan assuming a market share of 90% and 1.5 uniforms

sold per child
A very optimistic scenario would foresee that all 20% of parents who have not thought
about buying a school uniform yet, would decide to buy at Tom and Emily’s shop.
Furthermore, according to the “optimistic shop owners” a sale of 1.5 uniforms could
be assumed. Then the following sales would be possible.

Annual turnover: 20,250 CU (-10% failure rate: 18,225 CU, +10% failure rate:
22,275 CU)

Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec Sum
Percentage 2% 5% 9% 2% 2% 3% 13% 40% 10% 2% 2% 10% 100%

Expected
405 1,012.50 1,822.50 405 405 607.5 2,632.50 8,100.00 2,025.00 405 405 2,025 20,250.00
turnover

-10% failure
364.5 911.25 1,640.25 364.5 364.5 546.75 2,369.25 7,290.00 1,822.50 364.5 364.5 1,822.50 18,225.00
rate

+10% failure
445.5 1,113.75 2,004.75 445.5 445.5 668.25 2,895.75 8,910.00 2,227.50 445.5 445.5 2,227.50 22,275.00
rate

Alteration services
Annual turnover: 5,120 CU (-10% failure rate: 4,608 CU, +10% failure rate: 5,632 CU)

Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec Sum
Percentage 9% 8% 9% 8% 9% 8% 8% 6% 8% 8% 9% 10% 100%

Expected
460.8 409.6 460.8 409.6 460.8 409.6 409.6 307.2 409.6 409.6 460.8 512 5,120.00
turnover

-10% failure
414.72 368.64 414.72 368.64 414.72 368.64 368.64 276.48 368.64 368.64 414.72 460.8 4,608.00
rate

+10% failure
506.88 450.56 506.88 450.56 506.88 450.56 450.56 337.92 450.56 450.56 506.88 563.2 5,632.00
rate

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Know About Business Module 6: How Do I Organize an Enterprise?

MODULE 6: Topic 1

HANDOUT 1

Market Information
1) What is a market?
The market for a business is all the people within a specific geographical area
who need a specific product or service and are willing and able to buy it. Every
business sells some type of product or service to people. Potential customers
can be described as:

1. People who need or want the product or service.

2. People who are able to buy the product or service.
3. People who are willing to buy the product or service.

Competition must be considered. If competitors are serving the same market,

it must be decided if the market is large enough to support another business.
It should also be determined how the product or service is unique and
different from that of the competitors.

2) What should entrepreneurs know about potential

customers?
a. Know the customers: The market can be segmented either by dividing it
into meaningful buyer groups or dividing it according to characteristics
such as age, sex, marital and family status, employment, income and
trends regarding any of these characteristics.
b. Know what different customer groups wants: By segmenting the
marketing into groups, it is easier for entrepreneurs to determine what
products or services each group wants or needs.
c. Know where the customer buys: Entrepreneurs need to find out where
the customers in their market are presently buying, and determine what
factors will cause them to switch and buy from their new businesses.
d. Know when the customer buys: By knowing when customers buy
(daily, weekly, monthly, yearly, seasonally), entrepreneurs will be able to
determine such things as possible hours of operation, when to advertise
and quantity of merchandise to have on hand at specific times of the year.
e. Know how the customer buys: Knowing how the customer pays for
products and services can help the entrepreneur to determine a credit
policy as well as a pricing policy for the business.

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Know About Business Module 6: How Do I Organize an Enterprise?

3) Where can customer information be located?

Customer information can be obtained from trade associations (publications),
chambers of commerce, government agencies (including local government),
newspapers and magazines, and individual research by conducting a market
survey in the community.

4) What is the marketing concept?

One of the greatest needs of the owners of small businesses is to understand
and develop marketing programs for their products and services. Modern
marketing programs are built around the “marketing concept” and
performance, which directs the owners to focus their efforts on identifying,
satisfying and following up the customer’s needs, but at a cost that will bring a
profit. Marketing is based on the fact that: (a) business policies and activities
should be focused on satisfying customer needs, and (b) profitable sales
volume is a primary goal.

When applying the marketing concept, a small business should:

a. Determine the needs of their customers (market research);

b. Analyse their competitive advantages (marketing strategy);
c. Select specific markets to serve (target marketing); and
d. Determine how to best satisfy those needs (marketing mix).

5) What is market research?

A small market research program, based on a questionnaire given to present
customers and/or prospective customers, can disclose problems and areas of
dissatisfaction that can be easily remedied, or new products or services that
could be offered successfully.

Market research should also identify trends that may affect sales and
profitability levels. Population shifts, legal developments and the local
economic situation should be monitored to enable early identification of
problems and opportunities. Competitor activity also should be monitored;
competitors may be entering or leaving the market. For example, it is very
useful to know what your competitors’ strategies are (i.e. how do they
compete?).

6) What is a marketing strategy?

Marketing strategy includes identifying customer groups (target markets) which
a small business can serve better than its large competitors, and tailoring its
product offers, prices, distribution, promotional efforts and services towards
that particular market segment (managing the marketing mix). Ideally the
strategy should address customer needs which are not currently being met in
the market and which represent adequate potential size and profitability. A
small business cannot be all things to all people, so it must analyse its market
and its own capabilities so as to focus on a specific target market.

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Know About Business Module 6: How Do I Organize an Enterprise?

7) What is target marketing?

Owners of small businesses have limited resources to spend on marketing
activities. Concentrating their marketing efforts on one or two key market
segments is the basis for their target marketing. The major ways for a
business to segment its market are:

a. Geographical segmentation: serving the needs of customers in a

particular geographical area (for example, a neighbourhood shop may
send advertisements only to people living within one and a half miles of
the shop).
b. Customer segmentation: identifying groups of people who are most
likely to buy the product. Remember, it is easier and less costly to keep
current customers than it is to attract new customers.

8) What is the marketing mix?

The marketing mix is used to describe how entrepreneurs can combine the
following four areas into an overall marketing program.

a. Products and services: effective product strategies for a small business

may include concentrating on a narrow product line, developing a highly
specialized product or service, or providing a product/service package
containing an unusually high amount of service.
b. Promotion: this marketing decision area includes advertising,
salesmanship and other promotional activities. In general, high quality
salesmanship is a must for small businesses because of their limited ability
to advertise heavily.
c. Place/distribution: manufacturers and wholesalers must decide how to
distribute their products. Working through established distributors or
manufacturer’s agents is generally more feasible for small manufacturers.
Small retailers should consider cost and traffic flow as two major factors in
location site selection. In other words, low-cost, low-traffic location means
spending more on advertising to build traffic.
d. Price: determining price levels and/or pricing policies (including credit
policy) is the major factor affecting total revenue. Generally, higher prices
mean lower volume and vice-versa; however, small businesses can often
command higher prices because of the personalized service they can offer.

The nature of the product/service is also important in locational decisions. If

purchases are made largely on impulse (e.g., soda or candy), then high traffic
and visibility are critical. On the other hand, location is less important for
products/services that customers are willing to go out of their way to find
(e.g., hotel supplies).

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9) How can marketing performance be evaluated?

After key marketing program decisions are made, entrepreneurs need to
evaluate their decisions. Standards of performance need to be established so
results can be evaluated against them. Sound data on industry norms and
past performance provide a basis for comparing present performance. Owners
should evaluate their business performance at least quarterly.

The key questions are:

a. Is the business doing all it can to be customer-oriented?
b. Do employees make sure customers’ needs are satisfied and leave
customers with the feeling that they would enjoy coming back?
c. Can customers find what they want and at a competitive price?

10) How can the consumer acceptance of a product or service

be analysed?
Consumers buy products or services for their own use, but do not buy
products for the purpose of making a profit from them. Consumers buy to
satisfy their own or their family’s wants and needs. When they buy any
product or service, they do so because of what they expect the product or
service to do for them. People are motivated to buy for two basic reasons:

• Emotional reasons: pride in personal appearance, social achievement,

ambition, cleanliness, pleasure, increased leisure time.
• Rational needs: durability, economy in use, economy in purchase,
handiness, efficiency in operation, dependability in use.
Psychologists have determined that consumer buying behavior is primarily
directed toward satisfying certain basic needs. These very basic needs include
food, shelter and clothing. An individual attempting to fulfill the most basic
needs is led by rational motives. Persons with few resources need the best
products and services for their money in terms of quantity, quality and
dependability.

Many consumers won’t admit they purchase goods and services to satisfy
emotional needs. However, most psychologists believe that pride in personal
appearance is an emotional buying motive. Certain motives generally seem to
be more rational than others. Because people think of themselves as rational
individuals, they tend to express their reasons for buying in very logical ways.
To market a product or service successfully, entrepreneurs need to be aware
of what motivates consumers to buy a specific product/service.

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11) What factors affect the consumer market?

The consumer market is constantly changing. Many of the following factors
have contributed to consumer changes in the last few years.

• Population changes, such as shift in age, distribution of income, including

increases in total purchasing power and the amount spent for “luxuries”.
• Changes in life-style and attitudes.
• A greater percentage of women in the workforce.
• More leisure time.
• More credit purchases.
• An increase in the number of white-collar and skilled workers.
• Higher overall educational level of the population.
• High rate of inflation.
• Changes in technology (mobile phones).
Entrepreneurs need to monitor and be ready for changes in consumer
behavior. Entrepreneurs may need to modify or refine their marketing policies
and procedures. Predicting changes in the market is an important but difficult
task. Market information must be collected and analyzed continually.

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MODULE 6: Topic 1

TRANSPARENCY 1

Questions Regarding Market Information

1. What is a market?
2. What should entrepreneurs know about
potential customers?
3. Where can customer information be
obtained?
4. What is the marketing concept?
5. What is market research?
6. What is a marketing strategy?
7. What is target marketing?
8. What is the marketing mix?
9. How can marketing performance be
evaluated?
10. How can the feasibility of a product or
service be analysed?
11. What factors affect the consumer
market?

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MODULE 6: Topic 1

TRANSPARENCY2

The Five Ws of the Market

The “Five Ws” are a framework around

which entrepreneurs can gather data
about a potential market to better
understand and predict buyer behaviour.
Notice that there are five questions
(who, what, when, where and why)
with factors and elements
particular to each.

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MODULE 6: Topic 1

TRANSPARENCY 3

Question Factors Sources of Information

1. Who are Education • Numbers, growth, decline,
my movements (in and out), age
customers? (average, trends), marital
Population status (numbers, trends)
• Number of schools (all levels),
education levels (average,
Family trends)
structure
• Numbers, composition,
Economic trends
• Individual income levels,
ownership (land, homes,
autos, capital);
Housing • Age, ownership patterns,
rental units numbers, trends
2. What do Product or
service • Market surveys (formal)
they
• Informal observations
want?
3. When do Timing • Daily
they buy? • At pay day
• Special events
4. Where Location • Open markets
do they • Commercial centers
buy? • How to go there;
transportation
• Suitable site (personal factors)
• Community interest
5. Why do • Purchasing power of
Effective
demand population
they buy?
• Purchasing habits and trends
• To replace used goods
• To get latest technology or
mode

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Know About Business Module 6: How Do I Organize an Enterprise?

MODULE 6: Topic 1

HANDOUT 2

Know Your Competitors

Analyzing Competition
Competition must be expected when initiating a business, but having too much
competition is an unnecessary risk. It would be better to select a different type of
business if there is too much competition. You must know your competitors as well as
you know your customers. Business rewards come from being better than your
competition. The best way to do that is to know who your competitors are and how
they operate. Unfortunately, many entrepreneurs never bother to find out much about
their competition until it is too late. The following steps should be taken by
entrepreneurs to get to know their competitors.

Step 1: Identify your competitors

A. Direct Competitors: list each by name, address and type of business.
B. Indirect Competitors: list the name, address and type of business of each firm
that provides products and/or services that, while not the same as yours, can be a
substitute for yours.

Step 2: Analyse businesses that have recently been set up and

recently failed
A. List competitive businesses that have started within the past two years.
B. List competitive businesses that have gone out of business within the past two
years.
C. Analyze the possible reasons for the businesses that have failed in the last two
years. What factor or combination of factors explains the optimism of the new
businesses that have succeeded? What factor or combination of factors were
present in the businesses that failed?

Step 3: Analyse existing businesses

A. Estimate the sales and turnover of each of your primary competitors.
B. Rate your competitors in terms of price, quality of product or services, facilities,
advertising, promotion and sales.
• What prices do they charge? What is the quality of their merchandise? How
much do they advertise
• What extra services do they offer?
• Are their sales terms liberal?
• Is their location expensive, moderate or cheap?
• Are their production processes and equipment modern? Are their employees
well-trained? Are their employees well paid?

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C. Determine if there is a correlation between the firms that have high sales and
their methods of operation. That is, do these firms have similar pricing, selling
and/or production methods? A thorough analysis of the methods of operation
based on the firm’s sales should yield valuable information.

Step 4: Compare your proposed business operations against the

competition
A. Indicate the advantages your products and/or services will have in terms of price,
performance, quality, durability and visibility over the competition.
B. Be able to explain why your method of operating your business will be more
successful than that of your competitors.
C. If you plan to operate in a manner similar to other businesses, you should be able
to explain why:
1. Either the market is large enough to profitably support you and the other
firms, or
2. The market cannot support all competitors but your business will be more
efficient and/or more effective.
D. If you plan to operate in a manner completely different from the competition, you
should be able to explain why no one else is operating that way. Are other
businesses not aware of the opportunity? Or, do they know something that you
don’t?

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Know About Business Module 6: How Do I Organize an Enterprise?

MODULE 6: Topic 1

WORKSHEET 1

White’s Hardware Store

Mr. White was a young school teacher in a small town. After moving to the
community, Mr. White made many friends, was apparently well-liked and took part in
many community activities. Mr. White wanted to make more money so he thought he
would start a business. He was encouraged by his wife to try a way of life that would
bring more income than teaching.

Mr. White heard through a friend that a stock of hardware was for sale in a town. The
owner of the store had died. For 2,000 cash, Mr. White could buy an inventory of
hardware items. Investigating the possibilities in his town, he could rent a vacant store
between two retail businesses. One of these businesses was a feed store, and the other
was a long established hardware store owned by a smart middle-aged businessman.
Although a local banker told Mr. White not to leave his job as a school teacher, he quit
his teaching job, took his savings of 5,000 and entered the hardware business.

Other businessmen in the town didn’t think the new hardware dealer’s chances of
success were very good. One of the local retailers said there wasn’t room in the town
for two hardware stores.

Upon opening his store, Mr. White placed a sign in the window stating: “Open for
business – Hours are six a.m. to ten p.m. The owner will also do business outside of
regular business hours.” Mr. White thought that in this way he could compete with the
established hardware store next door.

During weekdays, Mr. White’s hardware store was the only place of business in town
to stay open after six p.m. During the long hours the hardware store was kept open,
Mr White didn’t make too many sales.

The only customers Mr. White attracted were a few poor credit risks, who purchased
small items from the new hardware store on credit rather than paying cash in the
other hardware store. Mr. White soon discovered that his stock was down, that he had
no cash with which to purchase new stock, and he couldn’t borrow more money to
keep the business going.

With competition from the established hardware next door, Mr. White’s business lasted
only eighteen months. There had never really been much of a chance for success. The
market for hardware items in the town was too small to support two hardware stores.
Even the best manager could not have made a success of White’s Hardware. Mr. White
wished he had checked things more carefully before he started the business. Mr. White
thought that “maybe the pay for teaching wasn’t so bad after all.”

Questions for discussion:

1. Why did White’s Hardware fail?
2. What should Mr. White have done before he started the business?

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MODULE 6: Topic 1

HANDOUT 3

Conducting a Market Survey

You may have an excellent product or service to offer to the public. One key to
success or failure in business is determining whether there are enough customers
willing to buy your product or service on a regular basis. The price of the product or
service must give you an adequate profit margin to allow you to survive, make a profit
and further develop the business.

Before committing your resources to the business, you should measure whether there
is a sufficiently large unsatisfied market. The following questions need to be answered
to determine what your competitors are doing in your proposed area of business.
• Is the market growing at a rate that allows another new business to enter?
• In a declining market, how will you capture business from your competitors?
• How do your products or services differ from those of your competitors?
• Have you identified a market segment that needs servicing?

Steps in Conducting a Market Survey

The process of conducting a market survey involves the following steps.

1. Define market survey objectives and specify what information is required.

2. Work out details of the market survey, such as:
• sources for obtaining information,
• time and cost of conducting the study,
• methodology to be used in gathering information,
• development of a plan of action.
3. Select sample samples and decide what contacts and visits should be made.
4. Prepare questionnaires and plan for survey interviews.
5. Collect and analyse data.
6. Prepare a report of findings.

For new entrepreneurs, a major problem in conducting market surveys is not knowing
specific sources and contacts for obtaining information.

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Information Sources
The information sources can be divided into:
1. Primary Data Sources: information which originates as a result of contacts with
those who are directly involved in the relevant activity. For a furniture survey, for
example, information obtained from furniture manufacturers or wholesalers would
be primary data sources.
2. Secondary Data Sources: data which already exists and may be used in the
investigation. This information may not have been collected for a specific purpose.
It may be obtained from trade/manufacturer’s associations or published data.

Tips for Conducting a Market Survey

The following tips can help entrepreneurs to conduct a market survey effectively and
systematically.
• Personal bias can be a negative factor in collecting information from various types
of people.
• Be patient and persistent in gathering information during the survey.
• Keep information confidential. Do not pass information on to others.
• Write down the information immediately after you visit someone. Avoid writing or
referring to your papers when interviewing someone.
• Sequencing of questions, as well as involvement and commitment to get
information, are the key factors in conducting a successful market survey.
• The best way to gain information from your competitors is to go as a potential
client. You might show interest in selling their products.
When the survey is completed, a detailed report on your findings should be prepared
in written form. The market survey report will help you to assess the feasibility of
marketing your product. It may also be an important document to convince financial
institutions about your understanding of the market and your competition.

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MODULE 6: Topic 1

HANDOUT 4

Developing a Sales Plan

An important element of the market survey report is the sales plan. An entrepreneur
must have a realistic idea as to how many products or services her/his business can
sell in the near future. For this purpose, and based on the findings of the market
survey, a monthly sales needs to be prepared for the next twelve months. If the
business offers several products or services with different prices, the forecast should
be made for each product or service individually. However, a wholesaler or a retailer
with a large number of products will make the sales plan for the main groups of
products with an average price.

A sales plan contains three elements: the quantity of products to be sold, the price of
the product and turnover. The turnover is the amount of money that a business
receives from its sales during a month (monthly turnover) or during a year (yearly
turnover).

Sales Plan for Company XYZ Year ________

Month Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec
Product 1
Price/unit
Turnover

The sales plan will also reflect seasonal variations of the business, e.g. a restaurant on
the beach will have more customers in summer than in winter, or a tailor shop that
sells school uniforms will have high sales when the school year starts.

From the sales plan an entrepreneur will know when he needs to buy raw materials or
goods and how much income to expect every month. An entrepreneur who has been
in business for a long time will know from the past how the business will function
during a year. However, a market survey should be done on a regular basis, in
particular when the planned sales are not reached or the entrepreneur wants to
expand the business and offer new products.

Someone who wants to start a new business must pay a great deal of attention to the
market survey because she or he must be quite sure that the products or services can
be sold in the number and for the prices that were set in the development of a
realistic sales plan.
Remember, the whole business depends on the income from sales.

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Know About Business Module 6: How Do I Organize an Enterprise?

MODULE 6: Topic 1

WORKSHEET 2

Developing a Sales Plan

Tom has recently graduated from a technical training institution, where he has been
trained as a tailor. His friend Emily is working as a sales person in a boutique.
Because of Emily’s selling abilities, her business experience and Tom’s technical skills,
they are of the opinion that they would make a good team for a tailor’s shop. Both of
them are considering self-employment as a career option, not only because they have
taken an entrepreneurship training class during their training, but also because they
see an exciting opportunity: a new school is going to be opened in a fast-growing
suburb of a medium-sized town, which is located at a distance of 70 km/40 miles from
the capital. As both of them were living in the town before their training, they know
the local businesses and circumstances quite well and have realized that there are
currently no shops for school uniforms in the area. School uniforms are obligatory in
all schools in the country.

Because of this opportunity, they are extremely interested in checking whether there
is a suitable market for the opening of a new tailoring shop.

Their business idea is to buy uniforms that are mass produced by a factory in the
capital, to adapt these uniforms to the requirements of the school and to sell them in
their own shop. They want to sell these uniforms as a package containing everything
that is needed: a jacket, trousers/skirts, shirts/blouses, socks, shoes, ties, etc. Taking
the prices of their competitors into account, they have calculated that the price of one
uniform package should be 60 (for both boys and girls).

In addition, all items of the uniform package and other clothes will be available singly.
As Tom is a qualified tailor, they are planning to offer additional services to their
customers, such as alterations, or repair of clothes. They expect that their main
business will be the sale of school uniform packages and alterations.

The school has recently published its requirements for uniforms. Emily and Tom have
already tried to produce them according to these requirements and have shown their
products to the school official responsible for the uniforms. The official was quite
satisfied with their results and promised to include Emily and Tom’s business in a list
of recommended shops the school provides to the parents.

Although these circumstances seem to be promising, Emily and Tom decided to carry
out a market study with the help of a business consultant to see whether there is
suitable market to start up a business. Their research has provided them with the
following information.

There are three other shops in the town that offer school uniforms and could be
included in the school’s list of suitable shops.

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Know About Business Module 6: How Do I Organize an Enterprise?

In comparison to these other shops, Emily and Tom see the following competitive
advantages for their business:
• Location: They expect that their main advantage is location. No other shop is
located within the immediate area and a 3 km (2 mile) radius from the school.
• One stop-shop: No other shop offers the required uniforms and shoes for the
new school as a complete package. However, when Tom and Emily’s shop and the
new school open, the other shops will probably quickly adapt to the new situation.
• Prices and competition: Emily and Tom think that they would be able to
undersell their competitors with the price of 60. But they have to consider that
their competitors might be able to decrease prices due to the increased
competition. Hence, Tom and Emily researched where and at what prices their
competitors buy their raw materials. Competition in the school uniform/alteration
business is not very intense because customers seem to prefer shops located close
to the school or their homes. Tom and Emily assume that the other shop owners
in town are quite satisfied with their market shares, because they are doing little
marketing and advertisement. All the shops have been in business several years,
offer similar prices, and serve different schools. However, as their research
showed, one competitor might be able to offer lower prices because he buys his
raw materials cheaper than Tom and Emily, but he is located quite far from the
school, a distance of 7 km (4 miles) and uses low quality cloth. So far, no other
business seems to have realized the opportunity.

The new primary school in the town will start with 250 pupils. The official estimates of
the government predict that during the first four years of its existence the school will
gradually increase the number of pupils to 1,000 and then will remain on this level.
Each pupil entering the school will have to buy a new school uniform.

Through a questionnaire based survey, Emily and Tom were able to gather some more
information about their potential customers. They conducted a survey among the
parents of the 250 children in the town who are going to start in the new school. The
results showed that 70% of the parents of these children liked the idea of a uniform
package at a competitive price of 60 in a shop close by and would consider buying it.
20% stated that they had not thought about buying a school uniform yet. About 10%
answered that they would look for the cheapest price and would even travel long
distances in order to save money.

Furthermore, through interviews with shop owners in other towns selling uniform
packages and using statistical data, Tom and Emily were able to calculate when and
how many school uniforms are usually bought. At least one new uniform package per
year is needed as children of this age quickly grow out of them. Approximately half
the shop owners interviewed said that they calculate one uniform per child per year,
whereas the other half were more optimistic and stated that they usually calculate an
average of 1.5 uniform packages per primary school child. Through statistical data
Tom and Emily were able to estimate the distribution of uniform package sales during
the year (see table 1).

In addition, they received interesting figures from the tailor’s association of the
country, which have been recently published. The association estimates that for each
100 inhabitants there is an annual average demand of 8 alterations to clothes. The
average alteration price the association uses is 8.

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Know About Business Module 6: How Do I Organize an Enterprise?

The population for which Tom and Emily’s shop would be the nearest tailor’s is
approximately 8,000 inhabitants. The association also provided figures on the average
distribution of sales of alteration services during a year. These are included in Table 1.
NOTE: As the survey was conducted from a representative sample and statistical data
does not reflect all possible variations, an overall failure rate of 10% for all figures
provided should be presumed.

Table 1: Average sales of uniforms/alterations to clothes services

during the year
Month Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec
Uniforms 2% 5% 9% 2% 2% 3% 13% 40% 10% 2% 2% 10%
Alteration 9% 8% 9% 8% 9% 8% 8% 6% 8% 8% 9% 10%
business

Develop a sales forecast for the business of Emily and Tom (sales of uniform packages
and alterations to clothes) with the given figures.

Are you able to develop an optimistic and a more pessimistic sales plan for the first
year of business?

Think also about the following questions: What is a main difficulty for their line of
business?

What other circumstances might influence their sales, cannot be calculated and
remain a risk?

How is the turnover expected to develop during their initial four years of business?

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Know About Business Module 6: How Do I Organize an Enterprise?

I TOPIC 2: Selecting a Business Location

II SUGGESTED TIME:
• 2 hours/sessions

III OBJECTIVE:
• To enable learners to understand the major factors to be considered when
selecting a location for a business.

IV RATIONALE:
• Selecting the business location is one of several factors which is vitally
important to the success or failure of a small business and is one of the
primary initial concerns of the entrepreneur. In many instances, the
entrepreneur looks no further than the nearest vacancy sign for the location
of the business. Learners should be aware of the required information and
necessary skills to make sound decisions regarding the selection of a
location for a business. It should be emphasized that although a good
location may allow a marginal business to survive, a bad location may spell
doom for even the best planned business. There are two basic factors in
selecting a location for a business
(1) deciding on the particular community and
(2) selecting a particular site within that community.

V ACTIVITIES:
1. Have the learners read HANDOUT 1. Use TRANSPARENCY 1 to discuss
general factors which are important in selecting a business location.

2. Divide learners into two groups and conduct a debate. One group would
defend and the other groups would reject the following statement:
LOCATION IS NOT IMPORTANT BECAUSE PEOPLE WILL GO OUT OF THEIR
WAY FOR ANY GOOD SERVICE OR PRODUCT THAT THEY REALLY WANT.

3. Have the learners read and discuss HANDOUT 2. Use TRANSPARENCY 2 to

discuss factors in selecting a specific location.

4. Have the learners read the case study in WORKSHEET 1. Divide the
learners into small groups to discuss the question: “Which location do you
think is best from a business point of view, Jim’s or Susan’s? Why?” Have
a class discussion on their responses.

5. Divide the learners into groups. Each group would select a business to start
(welding shop, grocery store, auto repair shop, beauty salon, etc.). Have
each group conduct research in their town to determine the best location for
that business. Have each group present their findings to the class. The
group should give both positive and negative factors regarding this location.

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Know About Business Module 6: How Do I Organize an Enterprise?

MODULE 6: Topic 2

HANDOUT 1

Locating the Business

Selecting the business location is one of several factors which is vitally important to
the success or failure of a small business. In many instances, the small business
owner looks no further than the nearest vacancy sign for locating the business. To
increase the chances of success, it is important that considerable thought and
research be given to selecting a location. It should be emphasized that although a
good location may allow a mediocre business to survive, a bad location may spell
failure for even the best planned business.

Analysis of the location should be a continuous process throughout the life of the
business. Such factors as changing population, changes in customer buying habits,
new methods of transportation and the direction of community growth can adversely
affect the suitability of the business location. Two basic aspects of selecting a location
for a business are:

(1) deciding on a particular community, and

(2) selecting a particular site within that community.

Importance of Business Location

Location is more important for some types of businesses than for others. The right
location is very important for retail stores and service businesses. Clothing stores, dry
cleaning establishments and service stations all depend on a great deal of customer
traffic to survive. These types of businesses must locate near their customers to
succeed.

For other types of retail and service businesses and most wholesale businesses,
location is not as important in attracting customers. Retail stores that sell high-cost
items such as furniture and appliances draw customers to them. Services such as
accounting and tax firms and wholesale businesses can be located “off the beaten
path” and still have high sales. Customers will spend time searching for the product or
service offered by these businesses.

Manufacturing, construction and some of the other services are not interested in
attracting customers on the basis of the firm’s location. These types of firms find
customers through either personal selling or advertising. The location of these
businesses may be selected on the basis of costs, environmental impact, or supply of
raw materials.

Economics, population and competition are important factors to consider when

selecting a business location. These factors will also help in selecting a promising city
or town in which to locate the business.

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Know About Business Module 6: How Do I Organize an Enterprise?

General Factors in Selecting a Business Location

ECONOMICS
A major concern in choosing a community in which to initiate a small business is the
economic base of the community. Why do people live in the area? What is their
standard of living? Why are other businesses located in the area? A study should be
made of the industries in the area. Do 80 per cent of the people work in one industry
or very few businesses, or does the community contain a variety of businesses? Is the
industry healthy in the area? Is the business activity in the community seasonal? Are
businesses moving in or moving out of the community? You will need to study the
effect the responses to these questions will have on your business.

How much people in an area earn determines the demand for goods and services.
Entrepreneurs should therefore gather information about income in the area they
have selected. Specific questions include: What is the average family income? What
are the income levels (low, medium, high) in the area? What are the
employment/unemployment trends? Other important economic factors might include
good highways and access to railroads.

POPULATION
Entrepreneurs should identify the groups of people who will be their customers. For
example, if you are interested in opening a music store, it would be important to know
where the greatest population of teenagers and young adults is located because they
buy the most music CDs. Other population factors include: How stable is the area? Do
people move in and out regularly? Is the population growing or declining? If the area
is rapidly growing, there will probably be a large number of young families. All these
factors need to be considered when locating a business.

COMPETITION
You must study your competitors by gathering information on their strengths and
weaknesses. You should know how many competitors you have and where they are
located. You should also find out how many businesses similar to yours have opened
or closed in the past two years. Indirect competition that provides similar kinds of
goods and services should also be studied.

There are three favourable conditions for opening a new firm. First, no competitors
are located in the area. Second, competitors’ businesses are poorly managed. Third,
customer demand for your product is growing.

Basic site factors to be reviewed for every type of business include: lease-purchase
terms, competition, parking and costs of operating at the location. In addition to these
basic concerns, some specific questions also need to be answered that depend on
whether you plan to open a retail establishment, a manufacturing firm, a wholesale
business or a service business.

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Location by Types of Businesses

RETAIL FIRMS
Parking facilities and access to major roads have become a prime problem for many
retailers. Retailers located in shopping malls have less parking problems. Retailers
need to consider the types of businesses that surround a site. For example, studies
have shown that clothing stores should not be located next to service stations.

The number of persons walking by a business location is also important to a retailer.

For example, the retailer should ask “are the pedestrians who pass this site on their
way to public transportation or to the local theatre?” Those going to the theatre are
not likely to stop and make purchases.

WHOLESALE FIRMS
Wholesale firms buy products from manufacturers in large quantities and then sell
their products to retailers in smaller quantities. Two major factors should be
considered in selecting a wholesale site. One major factor is a good transportation
service, including rail and road. Another major factor is proper facilities which include
buildings, fixtures and public utilities. Without these facilities, a wholesaler may not be
able to maintain inventories large enough to handle customer needs. Most cities have
zoning laws that restrict the location of wholesale firms. These laws need to be
known. Wholesale firms should also be located as close as possible to their customers.

SERVICE FIRMS
Being close to a large shopping centre is usually considered ideal for service
businesses. However, it is not necessary for a TV repair shop, a dry cleaner’s, a
dentist’s, a shoe repair shop or a child-care facility to be located in high-rent
locations. Customers are willing to seek out and go further away to obtain a good
service. These establishments can be located somewhat “out of the way”. But even
among service firms there are important differences as to which site is better. For
example, a dry cleaner’s located near a grocery store and drugstore is usually a good
choice. The same location may not be suitable for a dentist, who does not require the
traffic movement and convenient drop-off point that makes a dry cleaner’s successful.

MANUFACTURING FIRMS
Sites that are suitable for manufacturing firms differ from sites that are good for
retailers, wholesalers and services firms. When considering opening a manufacturing
firm, check transportation facilities and distance from raw materials. Nearness to
customers, proper facilities and zoning laws are other important factors. As you study
the general and specific factors of a business location, keep in mind future as well as
present location needs.

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Know About Business Module 6: How Do I Organize an Enterprise?

MODULE 6: Topic 2

TRANSPARENCY 1

Importance of Business Location

1. Why is location important to business

success?
2. Two basic aspects of selecting a location:
a. deciding on a particular community
b. deciding on a particular site within
that community
3. Why is location more important for some
businesses than for other businesses?
4. Factors to consider when selecting a
location:
a. economics (local economy)
b. population
c. competition
5. Location factors based on type of
business
a. retail firms
b. wholesale firms
c. service firms
d. manufacturing firms

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Know About Business Module 6: How Do I Organize an Enterprise?

MODULE 6: Topic 2

HANDOUT 2

Procedures for Selecting a Specific

Location
The following procedures are recommended when selecting a business location:
1. Make a list of factors you feel are “necessary” for considering a business location.
Also include a list of factors that would be “desirable” but are not necessary.
2. Find all the possible locations in a community that meet your list of factors.
3. Visit the locations to get an idea of their general appearance and eliminate those
locations that are not suitable for your needs. Reduce the number to 2 or 3
locations that appear suitable.
4. Visit the locations again and use a checklist to compare locations against the
factors you have identified. Consider the factors that are critical to the success of
your business.
5. Return to the locations at various times of the day and evening to get a better
understanding of the suitability of each location.
6. Conduct a traffic count at each location. Count the number of cars and pedestrians
that pass each location at various times to calculate the number of potential
customers.
7. Ask the opinion of experienced consultants and business people in the area to help
you decide on one location.
8. Analyse all the facts and opinions you have gathered before making a final
decision regarding the location of your business.

Specific Location Factors

Traffic (potential customers) and accessibility are more important to some businesses
than others. Think about how you will sell your products and services to your
customers; what kind of business do they expect you to run? What is really important
to them? You will need to balance the advantages and disadvantages of the specific
sites for your business.

Suppose you have identified the best neighborhoods or shopping areas for your
business. Now, you are ready to begin looking at specific locations within these areas.
Your first concern will be for traffic patterns and accessibility of customers to your
business. You must have a good customer base in the areas you’ve targeted; the task
will then be to find the best location within each area.

In central and suburban business districts, small retail stores depend upon traffic
generated by large stores. Large stores and small stores alike must attract business
from the existing flow of traffic. The same is true for restaurants and other businesses
that depend on buyers who decide impulsively on the basis of convenience. If you
operate one of these kinds of businesses, the more money you spend on getting a
good location, the less money you will have to spend on advertising. Study the flow

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Know About Business Module 6: How Do I Organize an Enterprise?

of traffic, especially around shopping centres and large stores. Note one-way streets,
street widths and parking lots. Look for the best traffic situation for your needs.

When you have narrowed down your site alternatives to a few, determine how
important traffic will be to your business success. Depending upon how important you
rank traffic, consider the following factors. Public transportation may be important for
both customers and employees. Pay attention to locations in or near public
transportation terminals.

Parking availability will be important to drive-by traffic. Cost and access to a parking
lot are the most important considerations. Remember, it should be easy for the
customer to stop and buy. Locating your business on a busy street will not help if your
customers can’t park their car. Distance from residential areas or other business
areas will be important for some types of businesses. Traffic congestion can cause
some people to actually avoid an intersection or shopping centre. If there is too much
traffic around the business, it will hurt sales.

The side of the street the business is located on may be important. Research done for
petrol service station locations applies to many other businesses that would sell to the
customer driving by. People want to buy certain things on their way to or from their
homes. For example, newspapers and petrol are bought on the way to work, while
food is purchased and dry cleaning collected on the way home. If you sell better
during the afternoon, cater to the afternoon rush-hour on the side of the street that
carries the outbound traffic going home.

The width of the street may be important. Street width indicates how well-travelled
the road is or will be. Generally, the wider the road, the better the location. A main
thoroughfare is a better location than a “feeder” street because more potential
customers per day travel on it. A wider road is easier for customers, too. Remember
to think like a prospective customer in a hurry: Will there be traffic jams because of
double-parked cars?

The part of the block in which you locate your business may be important. A corner is
more visible than a mid-block location because it can more easily be noticed from the
crossroads. However, rental rates are usually higher for corner locations.

Neighbors can be your greatest help if you choose your location well. Neighboring
stores may do a lot of advertising to increase sales. Some business owners may pool
a portion of their promotion money to fund merchant’s associations that promote a
distinct shopping district.

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MODULE 6: Topic 2

TRANSPARENCY 2

Selecting a Specific Location

ƒ List “necessary” and “desirable” location factors

ƒ Identify potential sites that match location factors
ƒ Visit sites and select 2 or 3 best sites
ƒ Compare locations to “necessary” and “desirable”
location factors
ƒ Visit sites at various times of day and evening
and conduct traffic count
ƒ Ask experienced business people and consultants
to help
ƒ Analyse all facts and opinions
ƒ Make final decision on business location

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Know About Business Module 6: How Do I Organize an Enterprise?

MODULE 6: Topic 2

WORKSHEET 1

Choosing a Business Location

Jim and Susan were each planning to go into business for themselves. They were
talking about how they had made their decisions to become self-employed.

Jim had decided to start his business in his home town because he had lived there all
his life, knew most of the people, and they all liked him. There was a Co-op store and
a Hudson’s Bay store there already, but Jim still thought he could do good business.
Both the Co-op and the Bay stores had been in business for some time. They both did
a lot of business.

Jim’s home town wasn’t very big. Many of the people who lived there were in the
fishing and hunting trade. Some of the people worked part time with the government.
Some had jobs out of town, mainly on construction sites and in the mines. These
people only came back home for a week or two four or five times a year.

Transportation into Jim’s home town was by boat or plane. The Bay and the Co-op
stores had their supplies transported into the town by barge in the summer. A few
supplies were flown in during the winter, but not too much could be brought in this
way.

Jim thought there were enough people in the town to support three stores.

Susan had decided to set up her business in a town some distance away from where
she lived. Susan didn’t know too many people in the town, but she still thought that a
well-run business would be a success there.

The town where Susan had decided to build her store already had one general store.
It was the only store in town. The people in this town did some trapping and fishing
but they also had some tourist camps. There was a mine situated in a community a
few miles away, and many persons in the town worked and lived at the mine all week
and came home to their families on weekends. There was also some logging in the
area around the town. Many persons worked on the cutting crews. The cut timber was
trucked out to the mill on a road which ran past the town. Susan was of the opinion
that because people had jobs all year round there was a better chance of making a
business succeed in this town. She estimated that there were enough people to keep
two stores busy all year. Susan thought that by offering the right kind of merchandise,
she would achieve success if she established her store in this town.

Question for Discussion

Which location do you think is best from a business point of view, Jim’s or Susan’s?
Why?

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Know About Business Module 6: How Do I Organize an Enterprise?

I TOPIC 3: Legal Forms of Business Ownership

II SUGGESTED TIME:
• 3 hours/sessions

III OBJECTIVE:
• To enable learners to understand the four basic types of business ownership
and the advantages and disadvantages of each type.

IV RATIONALE:
A. One of the first decisions a small business owner must make is to
determine the legal form of ownership of the enterprise. However, this
initial decision may not be final. Not only may the business grow and alter
its operations over time, but financial and tax situations may affect the
advantages and disadvantages of the various legal forms of ownership.

B. The vast majority of all legal business enterprises are organized in one of
the following four legal forms: sole proprietorships, partnerships, limited
companies or cooperatives. Learners should have a basic knowledge of all
the legal forms of ownership available and be aware of the relative
advantages and disadvantages of each form of ownership. Competent legal
advice should be sought when deciding which legal form to adopt.

C. This topic will identify the advantages and disadvantages of each of the
four basic forms of legal ownership with regard to six areas of concern to a
business:

1. legal costs and procedures necessary for starting the business,

2. liability of the owner(s),

3. continuity of the business,

4. management of the business,

5. acquiring additional capital, and

6. taxation.

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V ACTIVITIES:
1. Have the learners read HANDOUT 1. Discuss with the students each of the
8 major questions regarding business ownership show on TRANSPARENCY
1 and have the learners discuss the advantages and disadvantages of each
legal form of business ownership and compare their answers with those of
TRANSPARENCY 2.

2. Have the learners read the information on WORKSHEET 1. Ask the learners
to answer the following questions on the bottom of the worksheet.

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Know About Business Module 6: How Do I Organize an Enterprise?

MODULE 6: Topic 3

HANDOUT 1

Questions Concerning Business

Ownership
1. How many owners are there in a sole proprietorship, a
partnership, a limited company and a cooperative?
A. The sole proprietorship has only one owner.
B. A partnership has two or more co-owners.
C. A limited company is an association of stockholders or owners chartered
by the government. It has the authority to transact business in same
manner as one person.
D. A cooperative is a group of people operating a business through a jointly
owned and democratically run organization.

2. What are the legal costs and procedures for starting all
four types of business ownership?
A. Sole proprietorship. The only requirements are to determine (a) if a
licence is required for the particular business, (b) if a tax or licence fee
must be paid. Because of the limited restrictions, the sole proprietorship is
the easiest business to start and the initial costs are usually low.
B. Partnership. The cost of organizing a partnership is usually low. In
addition to any necessary licences, it is recommended that a partnership
agreement, called the Articles of Partnership, be prepared in writing by a
competent attorney. The Articles of Partnership should contain at least the
following provisions:
• division of profit or loss
• compensation to each partner
• distribution of assets in the event of dissolution
• duration of the partnership
• duties of each partner
C. Limited company. It is more difficult to form a limited company than the
other two types of business given above, and it is usually more costly. This
kind of business is usually in the best position to obtain additional capital.
In addition to pledging corporate assets as collateral, a limited company
may sell additional stock in the company to raise funds.
D. Cooperative. The cost of registering a cooperative is low. A written
cooperative agreement is required and must be filed with the appropriate
government authorities.

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Know About Business Module 6: How Do I Organize an Enterprise?

3. Why consult a lawyer when starting a new business?

All forms of legal ownership should be discussed with a competent attorney
before any decision regarding the form to select is made. The attorney will
need to know as much about the business and its owner(s) as possible,
including the personal financial position(s) of the owner(s), so that sound
recommendation can be made.

4. What liability is involved in the four types of business

ownership?
A. Sole proprietorship. A sole proprietor is personally liable for all the debts
of the business. If necessary, this liability includes all of the proprietor’s
personal property and assets.
B. Partnership. Each member of a general partnership is fully liable for all
the debts owed by the business regardless of their personal investment in
the business, and this liability includes all personal property and assets.
Each partner is also responsible and liable for the acts of the other
partners with regard to business obligations.
C. Limited company. The stockholders, or owners, of a corporation are
liable only for the amount corresponding to their investment. While
stockholders may lose the money they have invested in the business, they
cannot be forced to pay off company debts with additional money from
their personal funds.
D. Cooperative. Each member of the cooperative is fully liable for the debts
of the cooperative.

5. How does the legal ownership affect the continuity of the

business?
A. Sole proprietorship. The business is terminated upon the death or
incapacity of the owner.
B. Partnership. The partnership is terminated upon the death, incapacity or
withdrawal of any one of the partners, unless the remaining business
partners buy the deceased, incapacitated or withdrawn partner’s interest.
C. Limited company. This kind of company has a separate and continuous
life of its own, and does not dissolve if a stockholder dies or the stock is
sold to another person.
D. Cooperative. The cooperative has a life of its own.

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6. How does the legal structure affect management of the

business?
A. Sole proprietorship. The sole proprietor may operate the business in any
way he or she likes, as long as the law is not broken. When all
management decisions are made by one person, it can be a disadvantage.
B. Partnership. In a general partnership, each partner typically has an equal
role in management with the various duties divided among them. Their
combined abilities and knowledge may give the partnership an advantage
over the sole proprietorship regarding management. The division of
management duties may, however, lead to disagreements.
C. Limited company. Legal procedures must be followed strictly according
to company law. The officials of the limited company must file a special
document, called the Articles of Incorporation, with the government, pay
initial taxes and filing fees, and hold official meetings to deal with specific
details of operation and organization.
D. Cooperative. The management of a cooperative is elected by the
members of the cooperative.

7. How will the legal structure affect taxes?

A. Sole proprietorship. Personal income tax must be paid on all business
profits.
B. Partnership. Personal income tax must be paid by all partners on their
individual share of the business profits.
C. Limited company. It is taxed twice. First there is tax on the amount of
the business profits. Then the owners are also taxed on any dividends they
may receive.

D. Cooperative. Depending on government regulations, taxes may be paid

by the cooperative.

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Know About Business Module 6: How Do I Organize an Enterprise?

MODULE 6: Topic 3

TRANSPARENCY 1

Questions Concerning Business

Ownership

1. How many owners are there in a sole

proprietorship, a partnership, a limited
company and a cooperative?
2. What are the legal costs and procedures
for starting all four types of business
ownership?
3. Why should a lawyer be consulted when
starting a new business?
4. What liability is involved in the four types
of business ownership?
5. How does the legal ownership affect the
continuity of the business?
6. How does the legal structure affect
management of the business?
7. How will the legal structure affect taxes?
8. How will the legal structure affect
conditions of employment?

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Know About Business Module 6: How Do I Organize an Enterprise?

MODULE 6: Topic 3

TRANSPARENCY 2

Advantages and Disadvantages

of Different Forms of Ownership
OWNERSHIP ADVANTAGES DISADVANTAGES
FORM
1. Low costs to start
Sole 1. Unlimited liability
2. Minimum regulations
Proprietorship 2. Lack of continuity
3. Direct control of
3. Difficulty in raising
business
capital
4. Low working capital
4. Responsible for all
requirements
decisions
5. Tax advantages
6. Owner receives all
profits
Partnership 1. Easy to form 1. Unlimited liability
2. Low costs to start 2. Lack of continuity
3. Added capital sources 3. Shared authority
4. Shared management 4. Difficulty in raising
5. Possible tax advantages additional capital
5. Difficulty in finding
suitable partners
1. Limited liability 1. Closely regulated
Limited Company
2. Management can 2. Most expensive form to
specialize organize
3. Transferable ownership 3. Charter restrictions
4. Continuous existence 4. Extensive record
5. Legal entity keeping required
6. Potential tax advantages 5. Double taxation
7. Easier to raise capital (company and
stockholders)
1. Means to empower poor
Cooperative 1. Hard to keep qualified
2. Joint self-help
members
3. Organizational structure
2. Members contributing to
helps all members
cooperative unequal
4. Shared risk-taking
3. Shared authority
5. Easier to raise capital
4. Gender issues
6. Combines individual
skills

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Know About Business Module 6: How Do I Organize an Enterprise?

MODULE 6: Topic 3

WORKSHEET 1

Organizing a Business
Ted has lived in a small community for the past ten years. The town, which has a
population of 275 people, is on the edge of a large lake. Hunting and fishing are
excellent in the area. The old road that served the community is narrow and rough.
Spring and summer rains sometimes make the road impassable in some spots. A new
road is being built into the area and should be completed in about four months time.

Ted thought about starting a tourist outfitting shop now that the new road is nearing
completion. Tourists will easily be able to drive into the area. They will be eager to
take advantage of the good fishing and hunting.

Ted has considered the advantages and disadvantages of the ways he could legally
organize his business. He considered being a sole proprietor because he likes to be his
own boss. He has saved 4,200 and he could borrow additional money to start a small
business.

A partnership is also appealing. One or two partners could provide the extra money
needed to start a larger business. Another possibility would be start a limited
company and sell shares. The amount of money available would be much greater and
he wouldn’t have a loan to repay. He would also have money to advertise. Ted has
talked to a number of people in the community to see if they would be interested in
starting a limited company. The amount of money available to start the business
would be greater than for a proprietorship or partnership. Furthermore, a much
greater number of people in the community would benefit.

Questions
1. Which form of business ownership would you choose if you were Ted?
2. What additional information does Ted need to make an informed decision
regarding the best form of legal ownership for his business?

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Know About Business Module 6: How Do I Organize an Enterprise?

I TOPIC 4: Money Needed to Start an

Enterprise

II SUGGESTED TIME:
• 3 hours/sessions

III OBJECTIVE:
• To enable learners to make the distinction between pre-operation payments
and initial operation payments and to estimate the amount of money
needed to start an enterprise.

IV RATIONALE:
• Setting up a business requires a certain amount of money that has to be
spent before the business activities can start to generate income though
sales. Often potential entrepreneurs underestimate the amount needed
because they only take into account the expenditures for investment items
such as machines and equipments, cars, and so on. They are not aware that
during the first weeks or months of operations (trading, manufacturing or
providing services) the sales revenues do not cover the expenditures for
running the business. This can lead to a problem of liquidity whereby the
entrepreneur cannot pay salaries or suppliers.
• The amount needed as start-up capital is generally much higher than the
money the future businesswoman or businessman has at her/his disposal.
As the difference has to be found from other resources, it is important to
know exactly how much money is needed.

V ACTIVITIES:
1. Have learners read HANDOUT 1 as homework. Explain the difference
between pre-operation payments and initial operation payments and
factors that determine the duration of the initial operation period.

2. Divide learners into small groups and ask them to indicate whether the
payment is either pre-operation payments, initial operation payments or
other types of payments and fill complete WORKSHEET 1. After they
finished, discuss each payment with the learners.

3. Have the learners read WORKSHEET 2. Divide them into groups of 4 or 5

to answer the questions. Explain what a timeline and milestones are. Make
sure that the learners understand when the pre-operation period ends and
the initial payment period begins. Have each group present their findings.
Show TRANSPARENCIES 1 and 2 and let the learners fill the tables of pre-
operation payments and initial operation payments.

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Know About Business Module 6: How Do I Organize an Enterprise?

MODULE 6: Topic 4

SUPPLEMENTARY NOTES
FOR THE FACILITATOR
Business starters, in particular young people, are generally aware that they need
money for machines, tools or equipment for a shop. However, very often they do not
realize that a number of other payments have to be made before they can really start
their business. For example, the cost for installation of machines and the training of
workers to use them can constitute quite a high percentage of the total cost of the
machines. Fees for licences and insurance are also often forgotten in the calculation of
the investment capital.

The need for working capital is also often underestimated. People think they will be
paid immediately. This is often the case in trading activities; however, the shop owner
has to have a stock of goods because she/he cannot replace every article sold
immediately. Sometimes customers who place bigger orders ask for credit and timely
payment is not always made.

In manufacturing activities working capital has to cover a longer period and that can
last several months.

If the working capital is underestimated it can happen that a

businesswoman/businessman has a flourishing business but she/he runs out of money
to pay salaries, for example, or renew stock or (in the worst cases) make bank
repayments.

It is therefore recommended to include in the investment capital a certain percentage

for unforeseen items and working capital for a longer period as opposed to the strict
minimum.

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Know About Business Module 6: How Do I Organize an Enterprise?

MODULE 6: Topic 4

HANDOUT 1

Estimating the Start-Up Capital

If someone wants to start a business he/she must be aware that a certain amount of
money is needed during the start-up process of a business for payments before the
business begins to earn its own income. This money is called start-up capital. It
serves two purposes.
• Pre-operation payments or investment capital

This means money that a person starting a business will have to pay before his
business starts operating. The money needed for these payments is invested in
the business as long as the business is operating.

Buying land, constructing a workshop, purchasing machinery, tools, equipment

office furniture, etc. are all pre-operation payments, as are legal fees, connections
for water, electricity and telephone, publicity and advertisement before opening,
and so on.

Business starters, are generally aware that they need money for machines, tools
or equipment for a shop. However, in particular young people, very often do not
realize that a number of other payments have to be made before they can really
start their business. For example, the cost for installation of machines and the
training of workers to use them can constitute quite a high percentage of the total
cost of the machines. Fees for licenses and insurance are also part of investment
capital.
• Initial operation payments or working capital

Initial operation payments will occur when a new business starts to operate, to
cover immediate expenses until revenues from sales flow back into the business.
This time span depends on the nature of the business. In general, in trading
activities this period can be less than one month while in manufacturing activities
the time span between the starting date of the production (processing time of the
product, the time it remains in the distribution system, e.g. store of finished goods
in the factory, delivery to wholesalers or retailers or to the customer) and receipt
of money in the bank account or cash box can be several months. This money is
also invested permanently in the business and is working capital. When the
business expands the working capital needs to be increased

The need for working capital is also often underestimated. Business starters think
they will be paid immediately. This is often the case in trading activities; however,
the shop owner has to have a stock of goods because she/he cannot replace every
article sold immediately. Sometimes customers who place bigger orders ask for
credit and payments are not always made on time.

In manufacturing activities, working capital has to cover a longer period that can
last several months. If the working capital is underestimated, an entrepreneur

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Know About Business Module 6: How Do I Organize an Enterprise?

may have a flourishing business, but may run out of money to pay salaries, buy
additional merchandise for sale, or is not able to make bank repayments. It is
recommended that a certain percentage is included in the investment capital for
unforeseen items. Working capital should also include additional funds for
unforeseen expenses.
The distinction between these two categories of payments depends on the moment
when the payments are made: either before the business starts to operate
(investment capital) or after it has started (working capital). The start-up capital for a
new business is the sum of the expenditures for the investment items and the working
capital. The future entrepreneur needs to have this amount of money by: using
his/her own savings, finding partners and negotiating loans with banks. As a general
rule, 30% of the start-up capital should be from the entrepreneur’s own resources.

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Know About Business Module 6: How Do I Organize an Enterprise?

MODULE 6: Topic 4

WORKSHEET 1

Payments to be Covered by Start-Up Capital

Pre- Initial Other

Payments
operation operation payments

Business registration

Staff salary 1st month

Architect’s fees for

workshop planning

Purchase of machines

Purchase of raw materials

Electrical connection of
machines

Purchase of finished goods

Advertising for business

opening
Acquisition of land in an
industrial estate

Construction of a villa

Owner’s salary 1st month

Office supplies for

2 months

Power connection

Purchase of a second-hand
truck
Consultant for investment
study

Rent of business premises

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Know About Business Module 6: How Do I Organize an Enterprise?

MODULE 6: Topic 4

WORKSHEET 1 (cont.)

Payments to be Covered by Start-Up Capital

Pre- Initial Other
Payments
operation operation payments

Purchase of stock

Insurance against fire

Health insurance for staff

Private car for the owner’s

spouse

Sales promotion

Computer equipment

Construction material for

workshop
School fees for staff’s
children

Telephone installation

1st telephone bill

Replacement of stock of
goods
Travel to supplier of
machines

Car insurance 1st year

Maintenance cost for a

truck

Interests for credit

Repayment of money
borrowed from friends

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Know About Business Module 6: How Do I Organize an Enterprise?

MODULE 6: Topic 4

WORKSHEET 2

Starting a Pastry Shop

Ms Brownie has been working for several years in a pastry shop that produces its own
pastries and cakes for clients that live and work in the neighborhood. The shop also
delivers cakes and other delicious sweets and pastries for weddings, birthday
celebrations and other social events to the customer at home.

Ms Brownie has already learned everything about making pastries starting from the
raw materials and ingredients for the different products, the preparation and baking
processes as well as the work in the shop and relations with customers. She had a
good salary of 10. Ms Brownie has always wanted to have her own pastry shop, so
she puts as much money as she could afford into a savings account.

She had also made a list of machines and equipment she would need to start her own
shop. She had also researched the prices. The most costly item would be an electric
oven (3,500); then she would need a kneading machine (500), some weighing scales
(100), bowls, dishes, containers, boxes, hand tools (95), furniture for the pastry shop
such as tables and shelves (110) and a big refrigerator (350) that would allow her to
store the finished cakes of three day’s production. She would also need to equip the
sales room with a display case, various shelves and a cash register (250). For herself
she has foreseen a little office and for the staff a little rest room. Second-hand
furniture for these two rooms would cost around 100.

After a market assessment she has decided to start her own business. It was a very
busy time for Ms Brownie as she had to finalize her business plan, estimate the
investment and working capital, and get money from her bank. She finished the
business plan in one month: The plan showed that the business is feasible and that
she could cover 30% of the total investment. At that time she had the possibility to
rent a shop suitable for her business in an area of the town with middle-income
families that constitutes a good client base. The shop became vacant in 2 months time
and the rent for the shop amounted to 80 a month. It took her one-month to
negotiate her business plan with some banks and to get a loan.

Then she had to register her business (10) and order the machines and equipment
that could be delivered within three months. Water, power and telephone connections
have had to be registered in her name and she had to pay 15 for them. Also,
insurance on the shop was compulsory and she had to pay 10 for one year. Ms
Brownie had given up her job when the machines and equipment had been delivered.
She had planned to open her shop one month after the delivery of the machines; its
installation had been taken two weeks. The cost of installation amounted to 20.

She had selected her staff – two women for the workshop and one young apprentice –
and had hired them when the machines had been installed.

The monthly salaries for all the staff summed up to 15. She trained the staff during
the period before the opening of the shop.

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Know About Business Module 6: How Do I Organize an Enterprise?

The opening of the shop took place two weeks after all the equipment has been
installed. During these two weeks Ms Brownie produced a range of cakes and pastries
as training for the staff under production conditions. The raw materials for one week’s
production are calculated at 25, while other costs such as water, electricity,
telephone, petrol for the car, etc. are estimated at 15. To be on the safe side Ms
Brownie will start with a stock for two weeks production.

Before starting her business Ms Brownie planned to use some publicity and
advertisements, and she could manage to get a proposal for the whole publicity
operation from an agency for 18.

Ms Brownie planned also to run a catering service. For this purpose she had to buy a
second-hand car for 800 and to hire a driver at a monthly salary of 6. The car
insurance for one year amounted to 25.

Ms Brownie’s sales plan estimated that 60% of sales would be at the shop and that
40% of the sales would be through the catering service. These customers would pay
within two weeks. She estimates that the catering service will begin one month after
the shop’s opening.

Questions:
Draw up a timeline (with a monthly scale) starting with Ms. Brownie’s decision to go in
business and the milestones for the different events during the start-up phase to find
out the duration of the pre-operation phase and the initial operation phase.

Draw up a table for the pre-operation phase and a table for the initial operation phase
by using Worksheets 3 and 4 as model and calculate the investment capital and the
working capital.

How much investment capital did Ms. Brownie need to cover her pre-operation
payments and how much working capital did she need to cover her initial operating
payments?

What was Ms Brownie’s own start-up capital and how much was provided by the
bank?

Did Ms. Brownie have to increase the working capital in the second month? If yes,
why and how much?

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Know About Business Module 6: How Do I Organize an Enterprise?

MODULE 6: Topic 4

TRANSPARENCY 1

Pre-operation Payments for

Investment Items

Investment item Specification Amount

Land
Building
Consultancy fees
Power connection kVA
Water connection Pipe diameter
Phone connection lines
(technical
Machinery/Equipment
specifications)
„
„
„
„

Installation of (technical
machines specifications)
Vehicles
Office furniture
„ Office equipment
Licences/permits
Staff training
Owner’s salary
Advertisement
Other

Total Investment

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Know About Business Module 6: How Do I Organize an Enterprise?

MODULE 6: Topic 4

TRANSPARENCY 2

Initial Operating Payments

Amount
Payment Weekly/monthly
initial
items amount
operations
Rent of business
premises
Initial stock of
„ Raw materials
„ Semi-finished
products
„ Goods
„ Office supplies
Insurance
Car fuel
Electricity/water
Communications
Promotion
Owner’s salary
Staff wages
Bank charges
Other

Total Working
Capital

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Know About Business Module 6: How Do I Organize an Enterprise?

I TOPIC 5: Obtaining Money to Start an

Enterprise

II SUGGESTED TIME:
• 5 hours/sessions

III OBJECTIVE:
• To enable learners to identify the advantages and disadvantages of using
various sources of capital to start an enterprise.

IV RATIONALE:
• Many prospective small business owners have good business ideas and
plans. However, they may discover that the capital necessary to initiate
their business is not readily available. As a result, many prospective small
enterprises never become operational. Learners should be aware of the
types of funds available to prospective business owners. It should be
emphasized that sound preparation and planning will increase the
probability of obtaining the necessary capital.
• Entrepreneurs will almost certainly have to invest their personal money in
the business. However, some of the capital needed to begin business
operations can be obtained through credit. This topic will identify potential
sources of initial capital, and offer suggestions regarding how to prepare for
obtaining debt or credit financing.

V ACTIVITIES:
1. Have the learners read WORKSHEET 1 to determine the capital needed to
start a business. Show TRANSPARENCY 1 and have the learners discuss
each of the six questions. Ask the learners to list what they themselves
would require of a borrower before they would lend money for a new
business venture. This list can be written on the chalkboard and discussed
by the class. Divide the learners into groups and have them complete the
case study at the end of WORKSHEET 1.

2. Have the learners read HANDOUT 1 as background information. Using

TRANSPARENCY 2, lead a class discussion on sources of financing for
starting a small enterprise and procedures for applying for a business loan.

3. Use TRANSPARENCY 3 to discuss criteria for evaluating sources of business

loans.

4. Use TRANSPARENCY 4 to discuss the loan application from the loan

officer’s perspective.

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Know About Business Module 6: How Do I Organize an Enterprise?

5. As a review of equity and debt financing, show TRANSPARENCY 5 and

discuss the advantages and disadvantages of the various forms of
financing.

6. Invite a bank loan officer to speak to the class. Before the visit, have the
class formulate questions to ask the loan officer. These questions may
either be sent to the guest speaker ahead of time as a guideline for his or
her presentation, or they may be used as a basis for a question and
answer session at the time of the visit. The major areas for questioning
might include:

A. What are the most important factors that a loan officer looks for in an
application for a small business loan?

B. How important is it for a loan applicant to have capital or owner equity

to invest in the new business?

C. Are some types of businesses more likely than others to receive start-
up loans? If so, is the difference based on the amount required for
starting the business or on the likelihood that the business will
succeed?

D. What are some ways an individual can obtain owner equity, assuming
that he or she cannot save the money from existing income?

E. What are some important considerations for the applicant when

choosing a bank from which to obtain a loan?

F. How much does the applicant’s personal credit rating affect a loan
officer’s decision to give him or her a small business loan?

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Know About Business Module 6: How Do I Organize an Enterprise?

MODULE 6: Topic 5

WORKSHEET 1

Questions on Obtaining Capital

1. Can all of the capital needed be borrowed?
A. Almost any lending institution will require an entrepreneur to provide a
substantial amount of the total amount of money needed to initiate a
business. This depends to a great extent on market and economic
conditions. Few lending institutions or individuals will risk money on a
venture if the owners have none of their own money invested in the firm.
B. Money that the owner puts into the business is called equity capital. It is
the owner’s investment in the business. Borrowing needed capital for the
business is called credit or debt financing.
C. The lender must sense that the business owner has a personal
commitment and involvement in the business. This personal commitment
includes the time, energy and money the owner is willing to contribute to
the business.

2. Where can equity capital be obtained?

A. Personal savings
B. Friends and relatives
C. Partners. The owner may form a partnership with one or more individuals
to obtain equity capital to initiate the business
D. Corporation. It is possible to incorporate the business (as a company or a
corporation) and sell stock to raise equity capital

3. Where can credit or debt financing be obtained?

A. Banks
B. Finance companies
C. Governments agencies (with loan schemes)
D. Trade credit. Suppliers extending credit terms for equipment, inventory,
etc. allow the business to begin generating sales before payment is due
E. Microfinance institutions

4. How can the chances of obtaining a loan be increased,

especially for female entrepreneurs, who may face
gender-based barriers when accessing credit?
A. Entrepreneurs cannot be sure of obtaining a loan, but if they are well
prepared when going to a lending institution, their chances of obtaining a
loan are much greater.

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Know About Business Module 6: How Do I Organize an Enterprise?

5. What are the four C’s of credit?

A. A banker or loan officer will take into consideration the four C’s of credit
when evaluating a loan applicant:
• Character: the applicant’s attitude toward credit will be examined,
including his or her past record for meeting financial obligations.
• Capacity: the applicant’s income will be examined to determine his or
her ability to pay back the loan.
• Capital: the applicant’s personal worth will be examined, including
savings and any other personal or real property (land, buildings, etc.).
• Conditions: the economic conditions of the community, state and region
will have an effect on the availability of a loan.
B. Prospective business owners should demonstrate to potential lenders that
they have a business strategy or plan of action which will lead to success.
C. The lender will want to be sure that the prospective business owner has
sufficient experience or knowledge in the area of the proposed business.
D. Whether attempting to raise equity capital or obtain credit financing, a
well-researched and realistic business plan is essential.
E. Women entrepreneurs should be provided with necessary information,
contacts and tools to facilitate their access to credit.

6. How will the capital be used?

In financing a new business, first determine your specific needs for money. To
help determine your money needs, three groups of costs and expenses are
examined: start-up costs, operating expenses and personal expenses.

A. Start-up costs: expenses that occur once only when starting the
business. Once your business is started, you may never have these
expenses again. Some examples of start-up costs include:
• fixtures and equipment
• initial inventory
• deposits for rent and utilities
• business licences and permits
• certain legal fees and
• advertising for the grand opening
For example, when opening a restaurant you would have many start-up
costs such as tables and chairs; ovens and fryers; all the ingredients to
make the items on the menu; dishes, cutlery, etc. You would also have to
buy or rent a building, pay for a business licence and a restaurant permit,
and print your menu.
B. Operating expenses: until there is enough profit to keep the business
running, money will be needed for operating expenses. Examples of
operating expenses include inventory, supplies, advertising, payroll, taxes,
wages, repairs and equipment, insurance, monthly rent and utilities.

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Know About Business Module 6: How Do I Organize an Enterprise?

Once your restaurant is open you will have regular operating expenses.
You will continually have to buy food, pay cooks and waiters/waitresses,
pay sales tax, make monthly rental payments and much more. It is
important to determine how much money is needed each month to
operate the business.
C. Personal expenses: these include costs that are necessary for you to live.
You need money for personal expenses such as rent or mortgage
payments, food, transportation, insurance, clothing, utilities, medical bills
and entertainment.
Many new businesses will not immediately be profitable; it may take from
one to three years for a business to become stable and profitable. You
must plan for all your expenses. People may start a new business while
working at another job, or they may have a spouse who earns money from
paid employment. This helps to limit the money needed to finance the
business.

Case Study
A recent graduate of a technical institute is quite skilled in the use and application of
computer technology. She wants to start a cyber café close to the institute where
students can meet, socialize and use the five computers she hopes to purchase for the
café. She will probably need to borrow capital to start her business. If you were her,
how would you respond to the following questions regarding obtaining capital:
1. How much will five computers for the cyber café cost?
2. Will she be able to obtain credit from the store where she purchases the
computers?
3. Where can she go to borrow:
(a) equity capital?
(b) debt financing?
4. If she has to go to a bank for a loan, how can she increase her chances of
obtaining a loan?
5. How much capital will she need to finance a cyber café?

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Know About Business Module 6: How Do I Organize an Enterprise?

MODULE 6: Topic 5

TRANSPARENCY 1

Questions on Obtaining Capital

1. Can all the capital needed be borrowed?

2. Where can equity capital be borrowed?
3. Where can credit or debt financing be
obtained?
4. How can the chances of obtaining a loan
be increased?
5. What are the four C's of credit?
6. How will the capital be used?
• Start-up costs
• Operating costs
• Personal expenses

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Know About Business Module 6: How Do I Organize an Enterprise?

MODULE 6: Topic 5

HANDOUT 1

Sources of Business Financing

Many prospective entrepreneurs have promising business ideas and plans. However,
the capital necessary to initiate their plans may not be readily available. As a result,
many prospective small enterprises never become operational. The small business
owner will have to invest a certain amount of personal money to start a business.
However, with sound preparation and planning, financing can be obtained from other
sources. The two primary sources of financing to establish a business may be (a) the
owner’s equity or (b) borrowing from lending institutions.

1. Equity financing
The main source of equity financing for most entrepreneurs is their personal savings.
Financial experts say that one-half of the money needed to start a small business
should come from the owner. This means future owners must work and save to have
enough money to start a business.

Another popular source of equity financing is money from other sources such as
family, friends, venture capitalists, or another business that is generating surpluses.
However, there are a few points to consider. For example, will such investors want to
get involved with operating the business? What will happen if the business doesn’t
succeed? Will it ruin your relationship, especially with family and friends?

Equity financing can also be obtained by selling part of the business to one or more
partners. With partners putting in money, it is usually easier to raise the total amount
needed. However, partners must be able to get along and sometimes this is not easy.
Since many people starting their own business want to make their own decisions, the
partnership alternative may not be a good idea.

2. Borrow from lending institutions

When equity sources are not enough, the entrepreneur has the option of borrowing
from other sources. Lenders will usually lend money for starting a business to people
they know and trust. Lenders are careful not to lend money if the risk is too great.
Lenders do not want to lose money if the business fails. Most lenders will, therefore,
review the business plan very carefully. This plan should describe how the business
will be operated, how much money will be needed and how it will be used, and at
what point the business will be profitable.

Most people think of banks when borrowing money. However, it is not always easy for
small enterprises to borrow from banks. Banks only lend money when the risk of
losing it is very low. Frequently, they will only lend to customers whom they have
known for a long time. If someone is thinking of borrowing money at some time in the
future, it might be a good idea to develop a good personal relationship with a local
banker as soon as possible.

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Know About Business Module 6: How Do I Organize an Enterprise?

3. Considerations in applying for a business loan

Different lending institutions have different procedures which have to be followed by
the loan applicant. While lending institutions want to help potential borrowers, these
institutions have to be assured that repayment of the loan will take place as agreed by
the borrower. It is necessary to understand the following factors that are taken into
consideration when a banker is appraising a loan application.
• Type of loan: short-term (up to one year) or long-term (longer than one year).
• Purpose of the loan: it is essential to determine that the applicant will not invest
the money in a business venture which is illegal, not favoured by government
policy, or is viewed unfavourably by the local community.
• Credit worthiness and integrity of the borrower. Can the borrower be
trusted?
• Capability: the business profile of the applicant becomes an indicator of the
entrepreneur’s capability to operate the project with professional expertise and
effectiveness. Capability helps the lender to understand whether the borrower will
be able to utilize the loan for the intended purpose.
• Repayment period: this is a very important requirement for both the borrower
and the lender. The lender needs to know whether the offer of the borrower to
repay is realistic. The lender can ascertain this through statistical and financial
projections and advise the applicant regarding a realistic repayment period as well
as other details such as the amount of monthly instalments.
• Security: security or collateral for the loan must be acceptable to the lender.
Even if all other conditions are fulfilled, the lender may not grant the loan if
security conditions and terms required by the bank are not satisfied. This is
especially true when applying for a business loan for the first time.
• Guarantors: some lenders call for security both in the form of property and
tangible assets and guarantees from friends.
• Business plan: this is the major instrument used by any lending institution to
decide whether a loan applicant deserves a loan. A business plan discloses
whether the intended business is viable or not. A loan applicant may have his own
expert prepare a business plan to prove that the loan he is applying for deserves
due consideration by the lending organization. The lender always appraises the
business plan presented by the applicant and comes to his own conclusions, or
prepares his own feasibility study to assess and appraise the viability of the
proposed business. A very significant aspect of the business plan is the cost
involved and the cash flow. Cash flow, as well as financial and statistical
projections, indicates whether the project can generate more money than the
costs incurred. These results will indicate to the lender whether the loan is safe
and the borrower can repay according to the agreed terms.
• Current customers of a lending institution have an easier position when
applying for a business loan if the loan is to be used as working capital. The bank
will study the customer’s past financial records and these financial records will
help the banker to decide what action to take. If the customer intends to start a
new business, then the procedures will almost be similar to that of a new
applicant. By keeping written financial records, the entrepreneurs will have written
proof of the past history of the business.

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There are several sources of money available to entrepreneurs. Frequently, the key
decision is to determine which source of money is most appropriate for their current
needs. Selection of the right source of financing for their needs can have a
pronounced effect on the future of their business.

Receiving a short-term bank loan when a longer-term loan is required can soon create
a crisis. Selling a part of the business to raise capital that could have been borrowed
may be extremely costly. Over-extended credit to customers can be costly and restrict
operations.

There are many opportunities for mistakes in the choice of capital source. However,
the right choice of financing the business can provide the capital needed while freeing
entrepreneurs from unnecessary costs, risks, or the possibility of losing control of
their own business.

4. Criteria for evaluating loan sources

To determine the best source for raising capital needed in a particular situation, the
following five questions should be considered.
• What are the benefits of a loan in relation to its costs? (cost)
• Which loan source exposes the business to the lowest degree of risk? (risk)
• Will conditions imposed by a loan source reduce flexibility in seeking additional
capital, or in using capital generated through operations according to the owner’s
best judgement? (flexibility)
• Could the owner’s control of the business be adversely affected? Could the loss of
control prevent the entrepreneur from making operating decisions that are in the
best interests of the business? (control)
• Which financial sources are available to the business? (availability)

Cost. The cost of a loan is usually measured by its impact on the earnings of the
present owners, not simply the increased expenses incurred by that business.
Consider a company that is deciding between a 20,000 loan at 10% interest or selling
25% of the shares in the business to raise 20,000. The business expects to pay
interest of 2,000 on the loan per year, which would reduce its net income by 2,000
before taxes. If the business expects to earn 30,000, interest expenses would reduce
earnings to 28,000.

In the equity alternative, the net income would be 30,000, since there would be no
interest expenses. However, only 22,500 would be applicable to the present owners
since 7,500 (30,000 x 25%) would represent the participation of new shareholders.
Therefore, the income of the business under the equity alternative would be higher,
but the benefit of the (main)owner would be less.

Each capital source has its own cost. Internal sources, such as the sale or liquidation
of assets, could lead to a loss of revenue following inventory disposal or added
operating costs if machinery was sold to generate cash. In reaching a decision, it is
important to consider all relevant costs for each source of finance.

Risk. There are several types of risk involved in raising capital. Use of trade credit
could lead to supplier dissatisfaction and possible damage to your credit standing.

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Since borrowed money must be repaid with interest, debt capital imposes obligations
upon the cash flow of the business that must be met to avoid default. A default could
cause a number of actions, such as forfeiture of collateral or forced bankruptcy. The
only money source that involves no risk to the business is equity capital, since the
equity investor, and not the business, is assuming the risk.

Flexibility. Total reliance on profits to meet capital needs could cause a business to
be overly cautious in extending credit or purchasing inventory. These restrictions
might lead to lost sales. Use of trade credit from suppliers as a major capital source
can make a business overly dependent upon a few suppliers, and unable to take
advantage of better prices from other suppliers.

Control. The use of internal financing and trade credit is unlikely to have any impact
upon the control of the business by the present owners. Equity investors are normally
entitled to some degree of control in the company’s operations. Lenders do not
ordinarily participate in the affairs of the business, nor are they legally entitled to a
vote in limited company matters, as are shareholders.

Availability. Frequently, a business may be restricted in its ability to raise capital by

the lack of availability of preferred sources of capital. Regardless of the source
considered most feasible, the business only has access to financial resources that are
available.

Weighing Evaluation Factors. Every capital source being considered should be

evaluated in terms of cost, risk. flexibility, control and availability. Which of these
sources are most important? Which are least important? The answers will depend
upon the particular situation. In many cases, availability may be all-important. In
other situations, cost may be the deciding factor. A decision can only be made by the
prudent judgement of the owner after assembling and analysing all relevant facts.

5. Lending officer’s concerns

Often a bank lending officer refuses or “declines” a loan request. Foremost in the
lender’s mind is the question: “Can the firm pay back this loan?” The lender may
refuse the loan because the owner hastily and haphazardly prepared the loan
application under pressure. As a result, the lending officer detects an air of instability
and lack of planning in the owner’s description of his or her business affairs. When an
entrepreneur’s request for a loan is turned down, the loan applicant should accept the
refusal gracefully, and eliminate weaknesses before applying for a loan in the future.

Questions Concerning Borrowing

The lender needs answers to several pertinent questions to determine whether or not
the borrower can repay the loan. One of these questions is: “How does the borrower
intend to use the money?”

What kind of loan? When consider borrowing, determine what kind of loan is needed.
A business uses four basic types of money in its operations. The purpose for
borrowing will determine the type.
• Trade credit. This type of money is not borrowed. It is money you owe your
suppliers who permit you to receive inventory on a credit account. A good past

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credit experience is evidence of your ability to repay borrowed funds.

• Short-term credit. Banks and other lenders provide this type of money to make
purchases of inventory for special reasons, such as buying inventory for the next
selling season. Such loans are self liquidating because they generate money from
sales. Short-term credit is repaid in less than one year.
• Long-term credit. Loans for more than a year might be used for the expansion
or modernization of a business. These loans are repaid out of accumulated profits.
Usually, a loan of this type is a mortgage or a promissory note.
• Equity Funds. This type of money is never repaid. An investor gives cash to the
business in return for a share of ownership (shareholder) in the business.

Some entrepreneurs fail to recognize the difference between the four types of money.
Keep in mind that money borrowed for a temporary purpose should be used in the
profit producing areas of the business and will be repaid out of those operations.
Equity funds are those which remain in the business and increase the total net worth
of the owner.

Are sales adequate? Is a loan being requested to: increase sales volume, buy
additional stocks of high volume merchandise which may have even greater potential,
or create a new image through an overall advertising campaign?

What is the receivables position of the business? Receivables are the accounts
receivable that are going uncollected and getting old. In effect, does the business
need money to make up for old accounts that have not repaid?

Is the profit margin adequate? Is there a lot of business activity but results show a
lack of profit? This may indicate that the business expenses are not properly
controlled. Is the market insufficient? What is the plan for repayment of the loan? Is
the forecast for cash income and expenditures realistic?

The lender will carefully review the cash flow of the business to determine whether or
not the owner is providing sufficient cash to meet the firm’s obligations. The lender
also has to make sure that cash needed for working capital is not being absorbed by
the business into other areas of investment, and thereby reducing the available cash.

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Know About Business Module 6: How Do I Organize an Enterprise?

MODULE 6: Topic 5

TRANSPARENCY 2

Sources of Business Financing

Equity Financing
• Personal savings
• Loans from family and friends
• Having one or more partners
Borrowing from Lending Institutions
Considerations in applying for a
business loan
• Type of loan
• Purpose of loan
• Credit worthiness and integrity
• Capability
• Repayment period
• Security
• Guarantors
• Flexibility of project
• Customer status with banks

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MODULE 6: Topic 5

TRANSPARENCY 3

Criteria for Evaluating Loan Sources

„ Cost

„ Risk

„ Flexibility

„ Control

„ Availability

„ Weighing Evaluation Criteria

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MODULE 6: Topic 5

TRANSPARENCY 4

Lending Officer’s Concerns

1. Can the firm repay the loan?

2. How will the loan be repaid?
3. How does the borrower intend to use the
loan money?
4. What kind of money is needed?
• trade credit
• short-term credit
• long-term credit
• equity financing
5. Are the planned firm’s sales adequate to
make profits to repay the loan?

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Know About Business Module 6: How Do I Organize an Enterprise?

MODULE 6: Topic 5

TRANSPARENCY 5

Equity and Debt Financing

TYPE OF FINANCING ADVANTAGES DISADVANTAGES
EQUITY FINANCING
A. Using personal 1. All of the profit kept. 1. Chance of loss.
savings 2. Reduces amount of debt. 2. May force personal
3. Risk of loss provides sacrifices.
motivation to succeed. 3. Loss of return from use of
4. Shows good faith to any savings in other
potential lenders. investments.
B. Involving 1. Brings in more cash. 1. Part of profits given up.
friends and 2. May be possible to borrow 2. Part of the ownership given
family more. up.
3. Financial risks shared.
C. Forming a 1. Easy source of cash. 1. Risk of destroying personal
partnership 2. Less pressure and relations
restrictions. 2. May encourage unwanted
3. Informal arrangements. involvement in business.
D. Forming a 1. Larger amount of cash 1. Part of profits given up.
limited company raised. 2. Share of control and
2. Financial risks shared. ownership given up.
3. Legal liability reduced.
4. Tax savings.
E. Forming a 1. Poor people are able to 1. Profits shared.
cooperative combine financial 2. Financial decision-making
resources. shared.
2. Financial risks shared.
F. Working with 1. Set up to help small 1. Favours expanding
financial businesses. businesses.
institutions 2. Provides loans.
DEBT FINANCING
All forms of 1. Relatively easy to obtain. 1. High interest costs.
borrowing 2. Control and ownership of 2. Risk that future profits will
the business maintained. not cover repayment.
3. Can be repaid at more 3. Easy to abuse and
advantageous time. overuse.
4. May save money. 4. Financial and confidential
5. Costs may be tax information must be
deductible. 5. Lender may impose
6. Inflation allows repayment limitations or restrictions
with cheaper money. on borrower.

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Know About Business Module 6: How Do I Organize an Enterprise?

I TOPIC 6: Ways of Getting into Business

II SUGGESTED TIME:
• 2 hours/sessions

III OBJECTIVE:
• To enable learners to identify the advantages and disadvantages of buying
an existing business, starting a new business or operating a franchising
business.

IV RATIONALE:
• Entrepreneurs may have the option of starting a new business, buying an
existing business or becoming a franchisee. Learners should know the
advantages and disadvantages of these three alternative means of
becoming an entrepreneur.

V ACTIVITIES:
1. Have the learners read and discuss HANDOUT 1. Use TRANSPARENCY 1 to
discuss the advantages and disadvantages of buying an existing business.

2. Use TRANSPARENCY 2 to discuss the advantages and disadvantages of

starting a new business.

3. Use TRANSPARENCY 3 to discuss the advantages and disadvantages of

becoming a franchisee.

4. Divide the learners into six groups. Have them discuss:

a. the advantages of starting a new restaurant

b. the disadvantages of starting a new restaurant

c. the advantages of buying an existing restaurant

d. the disadvantages of buying an existing restaurant

e. the advantages of opening a new restaurant as franchisee

f. the disadvantages of opening a new restaurant as franchisee

Have each group present the advantages or disadvantages of either starting a

new restaurant or buying an existing restaurant to the rest of the class.

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Know About Business Module 6: How Do I Organize an Enterprise?

MODULE 6: Topic 6

HANDOUT 1

Buying an Existing Business versus

Starting a New Business
1. Buying an existing business
If someone has never owned a business, buying and operating an existing business
offers many advantages such as established customers and business procedures,
trained employees, inventory and premises which are in place and a business which
already has a name in the market.

There are many questions which the potential entrepreneur needs to ask about any
business which is for sale:
• Why do I want to buy this business?
• Why does the owner want to sell?
• Does the business have a future where it is and the way it is operating?
• Will I be happy operating this business?
• Do I have the skills?

The question of price is a difficult one. Consider what you are getting for the price you
are paying.
• Are you getting land and buildings?
• Are you buying the stock, furniture and appliances?
• Are you buying the name of the business and the rights to use that name forever?
• Are you paying for the present owner of the business not to set up another
business nearby?

There are several ways of putting a price on a business. By comparing several similar
businesses you will get a “feel” for a reasonable price. However, no matter how much
you pay, that amount is your investment in the new business.

2. Starting a new business

Most people who want to be entrepreneurs think that the best approach is to start
their own new business and not to buy one that already exists. This approach gives
the potential owner a great deal of satisfaction. It also means taking a relatively high
risk compared to buying an established business.

Starting a new business means allocating a great deal of time to planning and
investigating the potential market for the products or services to be sold by the new
business.

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3. Becoming a franchisee
Franchising is a system where a franchiser has developed and implemented a business
that he offers for replication to a franchisee. The franchisee opens a business by
using the business idea of the franchiser against a fee. In return, the franchisee gets
training, the marketing concept, the brand name and the product or service. He also
has the guarantee that no other franchisee from the same franchiser will have the
right to do business in the same area.

All these elements are fixed in a franchising contact that is binding for both parties.
Franchising lowers the risk as the product is usually well known in the market. On the
other hand it limits entrepreneurial decision-making and shrinks the profit margin as a
fee or a percentage of the turnover has to be paid to the franchiser.

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Know About Business Module 6: How Do I Organize an Enterprise?

MODULE 6: Topic 6

TRANSPARENCY 1

Advantages and Disadvantages of

Buying an Existing Business
Advantages Disadvantages

ƒ Less risk ƒ Product or service may be

in a declining market

ƒ Significant personal ƒ Limited growth potential

freedom

ƒ Cash flow already being ƒ Debts or stock may be too

generated high

ƒ Relationships have been ƒ Merchandise may be

established with suppliers obsolete
and banks

ƒ An established service or ƒ Seller may have hidden

product, with customers, a reasons for selling: the
method of operation, staff business may have been
and a name declining for years

ƒ Location may be excellent ƒ The business may have a

bad reputation in the
neighbourhood

ƒ Location may be poor

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Know About Business Module 6: How Do I Organize an Enterprise?

MODULE 6: Topic 6

TRANSPARENCY 2

Advantages and Disadvantages of

Starting a New Business
Advantages Disadvantages

ƒ Potentially lower expenses ƒ High risk in establishing a

and start-up costs new business

ƒ Greater personal freedom ƒ Requires significant

personal and business
planning

ƒ Ability to enter a new ƒ Customers may have to be

market or introduce a new found and customer
product relations developed

ƒ Ability to change business ƒ Competition from

practice or change established businesses
direction of the business may be strong
quickly

ƒ New business operations ƒ May be difficult to find

can be introduced from the financing for a long start-
beginning up period

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Know About Business Module 6: How Do I Organize an Enterprise?

MODULE 6: Topic 6

TRANSPARENCY 3

Advantages and Disadvantages of

Becoming a Franchisee
Advantages Disadvantages

ƒ Lower risk for the start-up ƒ Less entrepreneurial

decision-making power

ƒ Start-up investment cost ƒ Franchising fees would

well known decrease profits

ƒ Good market introduction ƒ No possibility of

of the product or service introducing a new product
from other suppliers

ƒ Proven marketing concept ƒ Strong dependency on the

franchiser

ƒ Training assured by the ƒ If the franchiser’s business

franchiser loses the market, your
business loses the market

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