KWAME NKRUMAH UNIVERSITY OF SCIENCE AND

TECHNOLOGY, KUMASI

INSTITUTE OF DISTANCE LEARNING

CTM 457: ENTERPRENEURSHIP MANAGEMENT

[Credits: 3]

BADU, E. AND OWUSU-MANU, D

Publisher Information
IDL, 2011
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storage and retrieval system, without the permission from the copyright holders.
For any information contact:
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Kumasi, Ghana

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The Course Authors

PROF. EDWARD BADU is an Associate Professor at the Department of Building
Technology, Kwame Nkrumah University of Science and Technology (KNUST), and Provost
of the College of Architecture and Planning, KNUST. He holds a BSc. in Building
Technology from KNUST and a MSc. in Construction Management from Loughborough
University in the United Kingdom and a PhD (Eng) from NIT, Japan. Prof. Badu has a
Certificate in Staff & Curriculum Development from Nottingham University. He is a Member
of the Ghana Institute of Construction, Fellow of the Chartered Institution of Building,
United Kingdom, Fellow of the Ghana Institution of Surveyors and Member, Federation of
International Surveyors. Prof. Badus teaching and research interests are in Construction
Management, Construction Economics, Project Management, Quantity Surveying, Staff and
Curriculum Development, Distance Education, and Distance Learning Materials
Development.

DR. DE-GRAFT OWUSU-MANU is currently a Lecturer at the Department of Building

Technology of the Kwame Nkrumah University of Science and Technology. After obtaining
his bachelors degree in Building Technology, where he attained First Class honours, he
moved straight to pursue his PhD degree where he specialized in capital asset investments
and financial management of construction corporations. De-Graft has acted as a consultant,
teacher and researcher in a wide range of construction and management fields, with strong
interests in all phases of capital investments, corporate strategy, construction management,
project management, financial management, curriculum development, entrepreneurship and
portfolio management.

Course Introduction
Entrepreneurship is one of the most important forces that shapes the changes in the economic
landscape of any country, and has a direct relationship with national growth. Enquiries into
the economic functioning of many countries have indicated successful entrepreneurship as a
major component of a healthy market economy and important source of job creation.
Entrepreneurial activity varies significantly across countries; both in terms of the level and
the type of entrepreneurship, but countries with similar levels of per capita Gross Domestic
Product (GDP) tend to exhibit broadly similar patterns, although higher growth rates of GDP
per capita in middle-income countries are mirrored in the higher innovativeness and growth
potential of entrepreneurial activity in these countries. There is a strong variation worldwide,
both in the frequency and the quality of entrepreneurial activity. In middle-income countries,
there are higher percentages of individuals starting a business than in high-income countries.
Also, the chances of the individual entrepreneur surviving in the market for longer years vary
significantly across countries.
The potential benefits of entrepreneurship for developing countries are enormous and to this
end, most of the countries in sub-Saharan Africa champion the development of small and
medium-sized enterprises (SMEs). Entrepreneurship activities in Ghana have been
categorized under three broad sectors namely, Agriculture, Industry and Services, of which
the construction industry falls within the Industry category. Though the GDP contribution of
the Construction Industry is relatively small compared with other economic sectors, it can
boast of employing most of the labour force. In order to reverse the persistent decline in the
national economy, Ghana embarked upon structural adjustment in April, 1983 with the aim of
removing the distortions which prevented the market from allocating resources efficiently to
help boost entrepreneurship. This course is designed to provide students with an introduction
to the theories and principles of entrepreneurship, the processes of new venture business
development and management, and entrepreneurship in the Ghanaian context, with special
reference to the construction industry.

Course Outline
The course has 4 units. Each unit deals with specific topics, which form the basis of the
whole course in Entrepreneurship Management. At the beginning of each unit you are
provided with a basic working knowledge of the topics. A group of the techniques described
in the units should help in achieving the skills required in Entrepreneurship Development and
Management. The units of the course are as follows:
Unit 1: Entrepreneurial: Concept and Entrepreneurial Process;
Unit 2: Business Organizations and SMEs Development;
Unit 3: Business Planning and Proposal Development; and
Unit 4: Financing and Funding of a New Business Venture.
Each unit has its objectives and is geared towards the achievement of these objectives.
4

Test your understanding

Within each session and at the end of each unit are questions or exercises labeled selfassessment. These are meant to help you assess your understanding of the unit or course. It
is vital that you take time to complete or find solutions to these exercises as they occur in the
study material. Make sure you write full answers. We recommend you have a notebook or
exercise book specifically for this purpose and keep it with your study materials as record of
your work.

References for Further Reading

Baron, R. A. (2005), Entrepreneurship: a process perspective: Mason, OH Thomson/SouthWestern.

Barringer, B.R. (2006), Entrepreneurship: successfully launching new ventures: Upper Saddle
River, N.J Pearson Prentice Hall

Hisrich, R.D. & Peters, M. P. (1998), Entrepreneurship. 4th Edition. Irwin McGraw-Hill:
Boston
Hisrich, R.D (2008), Entrepreneurship, Boston, McGraw-Hill/Irwin,

Hough, J. and Scheepers, R. (2008), Creating corporate entrepreneurship Through strategic

leadership. Journal of Global Strategic Management, Vol.3 pp 17-25.
Kurtzman, J. (2005), Startups that work: the 10 critical factors that will make or break a new
company: New York: Portfolio
Morocco, T. (2000), Towards an Innovative and Entrepreneurial Economy for Africa. Paper
for African Training and Research Centre in Administration for Development- CAFRAD.
Parker, S.C. (2004), The economics of self-employment and entrepreneurship: New York:
Cambridge
Roberts, M. J. (2007), New business ventures and the entrepreneur: Boston, MA McGrawHill
Schumpeter, J.A. (1934), The theory of economic development. Harvard University Press:
Cambridge, MA.
Silver, D. (2007), Smart start-ups: how entrepreneurs and corporations can profit by starting
online communities:. Hoboken, N.J: John Wiley
Wyk, R.V. & Boshoff, A.B. (2004), Entrepreneurial attitudes: A distinction between two
professional groups. South Africa Journal of Business Management Vol. 35 No. 2 pp 33-38.

Table of Contents
Publisher Information................................................................................................................2
The Course Authors...................................................................................................................3
Course Introduction...................................................................................................................4
List of Figures..........................................................................................................................11
List of Tables............................................................................................................................11
UNIT 1
12
ENTREPRENEURSHIP: CONCEPT AND ENTREPRENEURIAL PROCESS...........12
INTRODUCTION..................................................................................................................12
UNIT OBJECTIVES..............................................................................................................12
SESSION 1-1 FOUNDATIONS OF ENTREPRENEURSHIP..........................................13
1-1.1 What is Entrepreneurship.............................................................................................13
1-1.2 Evolution of Stages of Evolution of Entrepreneurship................................................14
1-1.3 Stages of Evolution of Entrepreneurship Hunting Stage..............................................15
1-1.3.1 Hunting Stage...................................................................................................15
1-1.3.2 Pastoral Stage...................................................................................................15
1-1.3.3 Agricultural Stage.............................................................................................15
1-1.3.4 Handicraft Stage...............................................................................................15
1-1.3.5 Present Industrial Stage...................................................................................15
1-1.4 Conceptual Approaches to Entrepreneurship...............................................................16
1-1.5 Benefits of Entrepreneurship........................................................................................16
1-1.6 Potential Drawbacks of Entrepreneurship....................................................................17
1-1.7 Driving Force of the Entrepreneurship Boom..............................................................17
1-1.8 Who is an Entrepreneur?..............................................................................................17
1-1.9 Qualities of Entrepreneurs............................................................................................18
1-1.10 Types of Entrepreneurs ...............................................................................................19
1-1.10.1 Type of business...............................................................................................19
1-1.10.2 Use of Technology...........................................................................................19
1-1.10.3 Motivation........................................................................................................19
1-1.10.4 Growth..............................................................................................................19
1-1.10.5 Stages in Development.....................................................................................20
1-1.10.6 Other Forms Entrepreneurs..............................................................................20
1-1.11 Cultural Diversity of Entrepreneurs.............................................................................20
1-1.12 Entrepreneurial Activity...............................................................................................20
1-1.13 Entrepreneurial Process................................................................................................21
1-1.14 Critical Factors for Starting a New Enterprise.............................................................22
1-1.14.1 Personal Attributes...........................................................................................22
1-1.14.2 Environmental Factors.....................................................................................24
1-1.14.3 Other Sociological Factors...............................................................................24
1-1.15 Entrepreneurship Failure (Mistakes Entrepreneurs Make)..........................................25
1-1.16 How to Avoid the Entrepreneurship Failure (Pitfalls).................................................25
SESSION 2-1 ENTREPRENEURIAL INNOVATIONS....................................................26
2-1.1 What is Entrepreneurial innovation?............................................................................26
2-1.2 Stages of Development and Innovation........................................................................26
2-1.3 Sources of Entrepreneurial Ideas and Innovation.........................................................27
2-1.4 What is Creative Thinking?..........................................................................................28
6

2-1.5 Benefits of Creative Thinking?....................................................................................28

2-1.6 What Skills help in Creative Thinking?.......................................................................29
2-1.7 Creative Thinking Techniques.....................................................................................29
2-1.7.1 Step 1: Analysis................................................................................................29
2-1.7.2 Step 2: Brainstorming.......................................................................................30
2-1.7.3 Step 3: Break It Down......................................................................................30
2-1.7.4 Step 4: Review..................................................................................................30
UNIT 2
32
BUSINESS ORGANISATIONS AND SMES DEVELOPMENT......................................32
INTRODUCTION..................................................................................................................32
UNIT OBJECTIVES..............................................................................................................32
SESSION 1-2 BUSINESS ORGANISATION IN CONTEXT...........................................33
1-2.1 What is Business Organisation?...................................................................................33
1-2.2 Characteristics of Business Organisation.....................................................................33
1-2.3 Legal Structure (Forms) of Business Organisation......................................................34
1-2.4 Sole Proprietorship.......................................................................................................34
1-2.4.1 Characteristics..................................................................................................34
1-2.4.2 Advantages of Sole Proprietorship:..................................................................35
1-2.4.3 Disadvantages of Sole Proprietorship..............................................................36
1-2.4.4 Suitability of Sole Proprietorship.....................................................................37
1-2.5 Partnership....................................................................................................................37
1-2.5.1 Types of Partnership.........................................................................................37
1-2.5.2 Characteristics of Partnership...........................................................................38
1-2.5.3 Advantages of Partnership Firm.......................................................................39
1-2.5.4 Disadvantages of partnership Firm...................................................................39
1-2.5.5 Suitability of Partnership Firm:........................................................................40
1-2.6 Joint Stock Company (Incorporated Company ).........................................................40
1-2.6.1 Types of Joint Stock Company (JSC)..............................................................41
1-2.6.2 Characteristics..................................................................................................41
1-2.6.3 Advantages of Joint Stock Company...............................................................42
1-2.6.4 Disadvantages of Joint Stock Company...........................................................43
1-2.6.5 Suitability of Joint Stock Company..................................................................43
1-2.7 Co-operative Society....................................................................................................44
1-2.7.1 Types of co-operatives.....................................................................................44
1-2.7.2 Characteristics:.................................................................................................44
1-2.7.3 Advantages of Co-operative Society: ..............................................................45
1-2.7.4 Disadvantages of Co-operatives.......................................................................46
1-2.7.5 Suitability of Co-operatives..............................................................................46
1-2.8 Factors to Consider when selecting a Business Organisation......................................47
SESSION 2-2 SMALL -MEDIUM ENTERPRISES DEVELOPMENT..........................48
2-2.1 Definition Of Small Medium Enterprises (SMEs).......................................................48
2-2.2 The European Concept of SMEs..................................................................................48
2-2.3 Other Concepts of SMEs by Selected Countries and Organizations............................49
2-2.4 The Ghanaian Concept of SMEs..................................................................................50
2-2.5 Classification of SMEs by Industry.............................................................................51
2-2.6 Impact of SMEs in a Global Economic Context..........................................................52
2-2.7 Impact of SMEs in the Ghanaian Economic Context..................................................53
7

2-2.8 Government Policies for Promoting SMEs in Ghana..................................................53

2-2.9 Challenges of SMEs.....................................................................................................54
2-2.9.1 Financial Constraints........................................................................................55
2-2.9.2 Labour Market Constraints...............................................................................55
2-2.9.3 Equipment & Technology Constraints.............................................................55
2-2.9.4 Domestic Demand Constraints.........................................................................55
2-2.9.5 International Markets Constraints....................................................................56
2-2.9.6 Legal Constraints..............................................................................................56
2-2.9.7 Managerial Constraints.....................................................................................56
UNIT 3
58
BUSINESS PLAANING AND PROPOSAL DEVELOPMENT.......................................58
INTRODUCTION..................................................................................................................58
UNIT OBJECTIVES..............................................................................................................58
SESSION 1-3 BUSINESS PLANNING................................................................................59
1-3.1 What is a Business Plan or Business Planning?...........................................................59
1-3.2 Types of Business Plans...............................................................................................59
1-3.3 Stages of Business Planning.........................................................................................60
1-3.3.1 Phase One: Initial Goals and Feasibility Study................................................61
1-3.3.2 Phase Two: Business Plan and Concept Test...................................................61
1-3.3.3 Phase Three: Full-Scale Operation...................................................................61
1-3.4 Components/Elements of Business Plan......................................................................61
1-3.4.1 Front Matter and Executive Summary.............................................................61
1-3.4.2 Business Definition and Concept.....................................................................62
1-3.4.3 Goals & Objectives..........................................................................................62
1-3.4.4 Management Ownership..................................................................................62
1-3.4.5 Product and Services........................................................................................62
1-3.4.6 Market Research...............................................................................................63
1-3.4.7 Market Strategies..............................................................................................63
1-3.4.8 Operations and Implementation.......................................................................65
1-3.4.9 Human Resources.............................................................................................65
1-3.4.10 Financial Plan...................................................................................................66
1-3.4.11 Appendices.......................................................................................................66
SESSION 2-3 BUSINESS PROPOSAL DEVELOPMENT...............................................67
2-3.1 What is a Business Proposal?.......................................................................................67
2-3.2 Types of Proposals.......................................................................................................67
2-3.2.1 Internal Business Proposals..............................................................................67
2-3.2.2 Solicited Proposals...........................................................................................68
2-3.2.3 Unsolicited Proposals.......................................................................................68
2-3.2.4 Sole-Source Contracts......................................................................................68
2-3.3 Request for Information and Request for Quote..........................................................70
2-3.3.1 Request for Information (RFI).........................................................................70
2-3.3.2 Request for Quotation (RFQ)...........................................................................70
2-3.4 Four Key Questions to proposal Development............................................................70
2-3.5 Summary of the Planning Process................................................................................70
2-3.6 Bid-Decision Criteria...................................................................................................71
2-3.7 When Not to Write a Proposal.....................................................................................72
2-3.8 Characteristics of a Winning Proposal.........................................................................72
8

2-3.9 Step Proposal Preparation and Writing Process...........................................................73

2-3.9.1 Step 1: Bid/No-Bid Analysis and Decision......................................................73
2-3.9.2 Step 2: The Proposal Team..............................................................................74
2-3.9.3 Step 3: RFP Analysis........................................................................................74
2-3.9.4 Step 4: Preparation Schedule............................................................................74
2-3.9.5 Step 5: Assignment of Tasks............................................................................74
2-3.9.6 Step 6: Development of Program Design.........................................................74
2-3.9.7 Step 7: Development of Front Matter and Executive Summary......................74
2-3.9.8 Step 8: Producing the proposal.........................................................................75
2-3.9.9 Step 9: Client Presentation...............................................................................75
UNIT 4
77
FINANCING AND FUNDING A NEW BUSINESS VENTURE......................................77
INTRODUCTION..................................................................................................................77
UNIT OBJECTIVES..............................................................................................................77
SESSION 1-4 SMES FUNDING AND FINANCING SOURCES.....................................78
1-4.1 Introduction to Raising Finance...................................................................................78
1-4.2 Why do SMEs find financing a problem?...................................................................78
1-4.3 Sources of Finance for SMEs......................................................................................78
SESSION 2-4 EQUITY FINANCING ALTERNATIVES FOR SMES............................79
2-4.1 What is Equity Finance?...............................................................................................79
2-4.1.1 Ordinary (equity) shares...................................................................................79
2-4.1.2 Preference shares..............................................................................................80
2-4.2 Equity Financing Flow Framework for SMEs.............................................................80
2-4.3 SMEs Stages of Growth and Financing Flow..............................................................81
2-4.3.1 Stage 1: Seed....................................................................................................81
2-4.3.2 Stage 2: Start-up...............................................................................................82
2-4.3.3 Stage 3: First Expansion..................................................................................82
2-4.3.4 Stage 4: Second Expansion.............................................................................83
2-4.3.5 Stage 5: Initial Public Offering.......................................................................83
2-4.4 Equity Financing Agents..............................................................................................83
2-4.4.1 Private Investors..............................................................................................83
2-4.4.2 Angels...............................................................................................................84
2-4.4.3 Venture Capital.................................................................................................85
2-4.4.4 Banks................................................................................................................85
2-4.4.5 Corporate Investors..........................................................................................85
2-4.4.6 Institutional Investors.......................................................................................86
2-4.4.7 The Public.........................................................................................................86
SESSION 3-4 DEBT FINANCING ALTERNATIVES FOR SMES.................................86
3-4.1 Sources of Finance for SMEs.......................................................................................86
3-4.1.1 Loan Financing.................................................................................................87
3-4.1.2 Bank Overdraft Financing................................................................................87
3-4.1.3 Overdraft Financing.........................................................................................87
3-4.1.4 Invoice Discounting.........................................................................................88
3-4.1.5 Senior debt........................................................................................................88
3-4.1.6 Mezzanine Debt................................................................................................88

SESSION 4-4 OTHER FORMS OF FINANCING FOR SMES........................................89

4-4.1 Hire purchase and Leasing...........................................................................................89
4-4.2 Donor Agencies, NGOs and Governmental Funding...................................................89
4-4.3 Grants and Soft Loans..................................................................................................89
4-4.4 Trade Credit Financing.................................................................................................89
4-4.5 Factoring Financing......................................................................................................90
SESSION 5-4 WORKING CAPITAL..................................................................................90
5-4.1 Definition of working capital.......................................................................................90
5-4.2 Working capital cycle...................................................................................................91
5-4.3 Working capital needs of a business............................................................................92
5-4.4 Working capital needs also fluctuate during the year..................................................92

10

List of Figures
Figure 1: Stages in Evolution of Entrepreneurship..................................................................15
Figure 2: Entrepreneurial Process Model.................................................................................21
Figure 3: Entrepreneurial Cycle...............................................................................................22
Figure 4: Impact of SMEs in Global Economy52
Figure 5: Various Categories of Business Plans......................................................................59
Figure 6: Stages of Business Planning.....................................................................................60
Figure 7: The Flow of Equity Financing for SMEs................................................................81
Figure 8: Working Capital Cycle.............................................................................................91
Figure 9: A Graph of Total Assets against Time......................................................................93

List of Tables
Table 1: 10Ds of Entrepreneurial Character...23
Table 2: European Commission Definition of SMEs.49
Table 3: UNIDOs definition of SMEs..49
Table 4: South Africas Definition of SMEs.....50
Table 5: General definition of SMEs in Ghana.......51
Table 6: The Bolton Committee Definitions of a small firm by industry...51
Table 7: Advantages and disadvantages of types of Proposals...............................................68

11

UNIT

ENTREPRENEURSHIP: CONCEPT AND

ENTERPRENEURIAL PROCESS
INTRODUCTION
Entrepreneurship is a complex phenomenon and can be found in a variety of settings and
situations. Entrepreneurship is the key to economic performance, playing an important and
dynamic role in all economies. Encouraging entrepreneurship is vital in creating jobs,
improving competitiveness, boosting exports, fostering economic growth, and reducing
poverty. Sustainable development and economic growth are results of macroeconomic,
political, legal, and social circumstances; yet the importance of an entrepreneurial culture
within an economy cannot be undermined. Facilitating the building of an entrepreneurial
society is a priority shared by many governments, and hence fostering entrepreneurial
attitudes and values is high on governmental agenda the world over.

UNIT OBJECTIVES
This unit provides an introductory to entrepreneurship development with emphasis on
entrepreneurial evolution and process. The unit further discusses the fundamental factors that
affect entrepreneurship development. After completing this unit you should be able to:

Define entrepreneurship and explain who an entrepreneur is.

The nature and importance of entrepreneurship.
Identify and explain entrepreneurial traits, attitudes and attributes.
Trace the evolution of entrepreneurship.
Define and explain the entrepreneurial process.
Identify and discuss the factors for starting a new business.
Identify and discuss creative thinking processes.
Define and explain entrepreneurial innovations.
Define the role of the entrepreneur in business.
Describe the benefits and drawbacks of entrepreneurship.
Explain the forces that drive the growth in entrepreneurship.
Describe factors of entrepreneurship failure and success.

12

SESSION 1-1 FOUNDATIONS OF ENTREPRENEURSHIP

1-1.1 What is Entrepreneurship
Many definitions of entrepreneurship abound. Entrepreneurship can be described as the search
for new products, new production methods, new markets and new forms of an organization.
Entrepreneurship is a microeconomic act of undertaking an innovation with the aim of
combining the innovation with finance and business to produce goods or services. The
discipline of entrepreneurship generally studies the why, when and how of opportunity
creation, recognition and utilization for providing goods and services through the creation of
new firms (start-ups) and within existing firms for both profit and non-profit purposes.
Another definition of entrepreneurship that is often used is a process through which
individuals identify opportunities, allocate resources, and create value. This creation of value
is often through the identification of unmet needs or through the identification of opportunities
for change.
Entrepreneurship can also be described as the act of being an entrepreneur, which can be
defined as "one who undertakes innovations, finance and business acumen in an effort to
transform innovations into economic goods". Entrepreneurship is the process of searching out
opportunities in the market place and arranging resources required to exploit these
opportunities for long term gains. Thus, entrepreneurship = identifying an opportunity;
pursuing that opportunity beyond your current resources; and believing that the opportunity
can be achieved. This may result in new organizations or may be part of revitalizing mature
organizations in response to a perceived opportunity. Different views of entrepreneurship are
expressed as follows:

Entrepreneurship is about creativity - entrepreneurs use innovation and hard work

to overcome obstacles to their success.

Entrepreneurship is about fun - nothing feels better than focused effort and
accomplishment.

Entrepreneurship is about freedom - few things in life are as empowering as being

able to determine what work you will do, when, where and with whom you will do it.

Entrepreneurship is about responsibility - entrepreneurs may not report directly to

bosses, but do have lenders, investors, family and the ever-present laws of
profitability.

Entrepreneurship is about hard work and dedication -thus being true to our
visions and our passions. Entrepreneurs design the business we love and work hard to
provide our customers, employees and community with the best we have to offer.

Entrepreneurship is about diversity -anyone can become an entrepreneur if they

have a keen curiosity to learn and a desire to overcome the challenges inherent in
learning new and exciting things.
13

1-1.2 Evolution of Entrepreneurship

During the 1940s and 1950s business historians pioneered the study of Entrepreneurship.
However, the study of entrepreneurship ran into formidable methodological roadblocks, and
attention shifted to the corporation, leaving the study of entrepreneurship fragmented and
marginal. Nevertheless, business historians have made significant contributions to the study
of entrepreneurship through their diverse coverage of countries, regions and industries, and
in contrast to much management research over the past two decades - through exploring how
the economic, social, organizational, and institutional context matter to evaluating
entrepreneurship. After the Second World War entrepreneurs received new meaning for
attaining economic development within the shortest possible time. But in the process they
were seriously handicapped by the rigid institutional setup, political instability, marketing
imperfection and traditional value system.
Since the 1980s, entrepreneurship has emerged as a topic of growing interest among
management scholars and social scientists. The subject has grown in legitimacy, particularly
in business schools. Motivated by the goal of understanding these developments,
management scholars and social scientists interested in entrepreneurship have tended to focus
their attention on studying new business formation, which provides a homogeneous and
easily delimited basis for quantitative empirical work.
Historical research on entrepreneurship started much earlier, and traces its roots to different
motivations and theoretical concerns. The historical study of entrepreneurship has been
particularly concerned with understanding the process of structural change and development
within economies
The early history of entrepreneurship in Ghana reflects from the culture, customs and
tradition of the Ghanaian people. The process of entrepreneurship therefore passed through
the potential roots of the society and all those who accepted entrepreneurial role had the
cultural heritage of trade and business. As society grew, the value work tended towards
change and the various occupational roles interchanged with non-role group and sub-groups.
People from different regions and status also entered into the entrepreneurial role. The
emergence of entrepreneurship in the Ghana got localized and spread effect, took its own
time. The concept of growth theory seems to be closely related in explaining the theory of
entrepreneurship development as well.

14

1-1.3 Stages of Evolution of Entrepreneurship

Stages in evolution of entrepreneurship is shown in Fig 1
Hunting
stage

Pastoral stage

Agricultural
stage

Handicraft
stage

Present Industrial
stage

Figure 1: stages of Entrepreneurship. Sources: Authors Construction

1-1.3.1 Hunting Stage

The primary stage of the evolution of the economic life of man was hunting stage. Wants
were limited and very few in numbers. The family members themselves satisfied problems of
food, clothing and shelter. Producers were the consumers also. Robinson Crusoe, living in the
deserted island, satisfying his own requirements had no knowledge of business. People in
some parts of Africa still lead this type of life. In this stage problems of production and
distribution were not complex since wants were simple and limited.
1-1.3.2 Pastoral Stage
With the progress of mankind gradually mental understanding developed and people started
realizing that instead of killing animals, they should breed and rear them. Thus cattle
breeding encouraged the use of milk, and they had to think in terms of grazing areas for their
cattle. The surplus milk, meat and other related products were spared of exchange. This stage
can be termed as the first stage of economic development and the beginning of commerce.
1-1.3.3 Agricultural Stage
In search of grazing areas, they further realized that they should grow plants as food for
animals. They started testing some grain products and slowly developed a taste in plants and
the land was used for cultivation. Groups of persons started living together on their
agricultural fields, which were subsequently converted into small villages with their farms.
Free exchange of goods was started and the activities were also divided to the extent of
division of labour at the village level to complement the needs of each other. Initially each
village was self-sufficient, but later they began small trading activities on barter basis.
1-1.3.4 Handicraft Stage
In the agricultural stage, people started learning the use of cloth made of cotton products, and
they developed the segments of the workers for different activities. Cottage scale setup was
developed at the village level to nearby villages, and in exchange they brought requirements
either to consume themselves or for their village friends. Since the demand for gold coins,
silver coins, skin and hide etc increased the activities of cobblers, gold smiths, and
blacksmiths, labourers also rapidly increased, and caste system was also formed on the basis
of activities they did. Everybody selected their job according to their own choice and taste.

15

1-1.3.5 Present Industrial Stage:

The use of mechanical devices and the commonly acceptable form of monetary system
accelerated the growth of entrepreneurship activities. The progress of science and the
increase in the means of transportation and communication enabled to travelling widely and
the markets were developed in the country and abroad.

1-1.4 Conceptual Approaches to Entrepreneurship

Three main conceptual approaches to entrepreneurship are described by commentators of
entrepreneurship, namely: functional approach; the firm as a key economic indicator; and
owner-operated enterprises.
The first is Functional approach: this is concerned with the dynamic actors that
make key decisions on investment, production, innovation, location, research and
development. From this perspective, entrepreneurship is a psychological trait referring
to dynamism, creativity and originality. This approach also includes managers of
multi-national firms, state enterprises or non-profit organizations, and a variety of
dynamic entrepreneurs within organizations.
The second approach focuses on the firm as the key economic actor. The firms
included here are owner-operated firms, incorporated joint stock companies, stateowned firms, joint ventures and subsidiaries of multinationals. These firms are the
units that make the key decisions on investment, on branching into new activities or
sectors, or relocating to other countries. There exists a large literature on firm-level
behavior in developing countries which examine firm characteristics, including their
economic performance, innovative performance, capabilities and business strategies.
The third conceptual approach focuses on owner-operated enterprises. Within this
approach, the entrepreneur is the person who is both owner and is actively involved in
running the business. This relates to mainly small and medium-sized enterprises
(SMEs), start-ups and self-employment.

1-1.5 Benefits of Entrepreneurship

Entrepreneurship has assumed importance for accelerating economic growth both in
developed and developing countries. Advantages of entrepreneurship include but not limited
to the following;
It is an engine for job creation and economic growth and reduces unemployment. An
entrepreneur sets up a new business and in doing so, provides employment
opportunities. The government or local authorities carry out taxation and this goes
towards increasing a countrys revenue.
Entrepreneurship brings out leadership qualities in an entrepreneur. Such an
entrepreneur can be offered training opportunities to sharpen his/her skills. The
trained entrepreneur can then benefit other organizations or a community.
Entrepreneurship affords the entrepreneur the freedom to manage his/her enterprise as
he/she wishes.
Entrepreneurship allows potential entrepreneurs with capital to start and see their
innovations take root.
16

Entrepreneurship encourages competition as each potential entrepreneur tries to come

up with the best innovation. This also translates in quality goods or services.
It also promotes capital formation and creates wealth in country.
Entrepreneurship improves backwardness of the people and eradicates regional
imbalances.
It stimulates proper utilization of human potential.

1-1.6 Potential Drawbacks of Entrepreneurship

With these potential rewards, Entrepreneurship also presents risk and uncertainty. Entrepreneurs
may experience:

Uncertainty of income The entrepreneur is the last one to be paid;

Risk of losing their entire investment;
Long hours and hard work;
Lower quality of life until the business gets established;
High levels of stress;
Complete responsibility ; and
Discouragement.

1-1.7 Driving Force of the Entrepreneurship Boom

The rapid increase in entrepreneurs in the 21st century has been a result of:

Considering entrepreneurs as heroes;

Entrepreneurial education;

Demographic and economic factors;

Shift to a service economy;

Technological advancements;

Independent lifestyles;

Commerce and the Internet; and

Additional international opportunities

1-1.8 Who is an Entrepreneur?

The word Entrepreneur is actually a French word that means undertake. The English
understanding of this term is someone who wants to start a business or enterprise. Different
definitions of entrepreneur abound but a convergent definition of an entrepreneur is one who
creates a new business in the face of risk and uncertainty for achieving profit and growth
opportunities and assembles the necessary resources to capitalize on those opportunities.
Webster dictionary denes Entrepreneur as someone who organizes operates and assumes the
risk in a business venture in expectation of gaining the prot.
17

Thus, entrepreneurs may be responsible for founding many different types of organizations:
For-prot: A for-prot or commercial venture is created and remains viable due
to the desire to sell something for a prot.

Non-prot: A non-prot venture is created and remains viable as a result of a desire

to improve the quality of life for a group. A person founding a non-prot may be
considered a social entrepreneur, since he or she is motivated by the desire to have an
impact on society instead of earning money. Non-prots often dedicate themselves to
social issues such as environmental concerns, animal rights, unemployment, health
care, and advocacy for underserved groups

1-1.9 Qualities of Entrepreneurs

The most important quality of an entrepreneur is the ability to see an opportunity. An
opportunity is defined as a desired future that is different from the present. It is a belief that
achieving this goal or that objective is possible. Opportunity depends on the person, the
environment, access to resources and timing. Common traits characterized with entrepreneurs
are as follows:
Desire for responsibility;
Preference for moderate risk (risk eliminators);
Confidence in their ability to succeed;
Desire for immediate feedback;
High level of energy;
Future orientation (serial entrepreneurs);
Skill in organization;
Value of achievement over money;
High degree of commitment;
Willingness to accept risk, work hard and take action;
Need for achievement;
Innovative peruses deviant pursuits;
Reflects strong urge to be independent;
Persistently tries to do something better;
Dissatisfied with routine activities;
Prepared to withstand the hard life;
Determined but patient;
Exhibits sense of leadership;
Exhibits sense of competitiveness;
Tends to persist in the face to adversity; and
Convert a situation into opportunity.

18

1-1.10 Types of Entrepreneurs

Classification of entrepreneurs is usually based on: type of business, use of technology,
motivation, growth, stages in development and other factors.
1-1.10.1 Type of business

Business entrepreneur: Convert ideas into reality; deal with both manufacturing and
trading aspect of business (Small trading and manufacturing business)
Trading entrepreneur: Undertakes trading activities; concerned with marketing
(Domestic and international level)
Industrial entrepreneur: Undertakes manufacturing activities only; new product
development etc (textile, electronics, etc)
Corporate entrepreneur: Interested in management part of organisation; exceptional
organising, coordinating skills to manage a corporate undertaking
Agricultural entrepreneur: Production and marketing of agricultural inputs and
outputs (Dairy, horticulture, forestry)

1-1.10.2 Use of Technology

Technical entrepreneur: Production oriented, possesses innovative skills in

manufacturing, quality control etc.
Non technical entrepreneur: Develops marketing, distribution facilities and strategies
Professional entrepreneur: Uses the proceeds from sale of one
business to start another one.

1-1.10.3 Motivation

Pure entrepreneur: Psychological and economic rewards motivate him

Induced entrepreneur: Incentives, concessions, benefits offered by government for
entrepreneurs motivates him
Motivated entrepreneur: Sense of achievement and fulfillment motivate him
Spontaneous entrepreneur: Born entrepreneurs with inborn traits of confidence, vision
and initiative

1-1.10.4 Growth

Growth entrepreneur: One who enters a sector with a high growth rate; is a positive
thinker
Super growth entrepreneur: One who enters a business and shows a quick, steep and
upward growth curve

19

1-1.10.5 Stages in Development

First generation entrepreneur: Innovator, risk taker, among the first in family to enter
business
Modern entrepreneur: Who considers feasibility of business, which can adapt to
change and dynamic market
Classical entrepreneur: One who gives more importance to consistent returns than to
growth; concerned about customer and marketing needs

1-1.10.6 Other Forms Entrepreneurs

Other criteria to determine forms of entrepreneurs include:
Area of operation (i.e. rural and urban entrepreneur);
Gender (i.e. men and women entrepreneur);
Age (i.e. generation X and Y entrepreneur, etc); and
Scale of production (small, medium and large scale entrepreneur)

1-1.11 Cultural Diversity of Entrepreneurs

Entrepreneurs are found in virtually every walk of life including:

Young Entrepreneurs;

Women Entrepreneurs;

Minority Enterprises;

Immigrant Entrepreneurs;

Part-time Entrepreneurs;

Home-Based Businesses;

Family Businesses;

Copreneurs;

Corporate Castoffs; and

Corporate Dropout.

1-1.12 Entrepreneurial Activity

The most obvious form of entrepreneurship is that of starting new businesses (referred as
Startup Company). However, in recent years, the term has been extended to include social and
political forms of entrepreneurial activity. When entrepreneurship is describing activities
within a firm or large organization it is referred to as intra-preneurship ((i.e. corporate
entrepreneurship) and may include corporate venturing, when large entities spin-off
organizations. Productive entrepreneurial activity consists of the creation, recognition and
utilization of positive opportunities in such a way that involves innovationor the
provision of new combinationsof products and/or processes. Entrepreneurial activities are
substantially different depending on the type of organization and creativity involved.
Entrepreneurship activity ranges in scale from solo projects (even involving the entrepreneur
only part-time) to major undertakings creating many job opportunities. Examples of
entrepreneurial activities are:
20

Large scale and small scale. Entrepreneurial activity may take place within a large
company or within the home, school, church or local community organization.
Service production and goods production. Entrepreneurs can be at work providing
a service such as delivering food, mowing lawns, developing a technology or they can
be at work producing and selling a product such as hockey sticks, software, tires, or
advertising brochures.
Local/national/international. Activity can take place at home, in school, within the
country, or internationally.

1-1.13

Entrepreneurial Process

The entrepreneurial process involves all the functions, activities, and actions associated with
perceiving opportunities and creating organizations to pursue them. Other commentators of
entrepreneurship also describe entrepreneurial process as the personal, sociological, and
environmental factors that give birth to a new enterprise. Whether or not the person decides
to pursue that idea depends on factors such as his alternative career prospects, family, friends,
role models, the state of the economy, and the availability of resources. Figure 2 below
presents a model of entrepreneurial process as developed by Carol Moore in 1986.

Organizational

Personal

Personal

Sociological

Personal

Achievement
Locus of control
Ambiguity tolerance
Risk taking
Personal values
Education
Experience

Risk taking
Job dissatisfaction
Job loss
Education
Age
Commitment

Networks
Teams
Parents
Family
Role models
Friends

Entrepreneur
Leader
Manager
Commitment
Vision

Innovation

Triggering Event

Environment

Environment

Opportunities
Role models
Creativity

Competition
Resources
Incubator
Government policy

21

Implementation

Team
Strategy
Structure
Culture
Products

Growth

Environment
Competitors
Customers
Suppliers
Investors
Bankers
Lawyers
Resources
Government policy

Figure 2: Entrepreneurial Process Model. Source: Carol Moore (1986)

1. Develop skills that may
contribute to entrepreneurial
behaviour
6. Plan and prepare the
venture thoroughly

2. Examine opportunities to
fulfil need or wants and to
solve problems

5. Use all available sources

and resource to evaluate
the opportunities and
ideas

3. Generate ideas to satisfy the

opportunities

4. Assess the opportunities

and ideas
Figure 3: Entrepreneurial Cycle. Source Modified from Carol Moore (1986)

1-1.14

Critical Factors for Starting a New Enterprise

What are the factors that influence someone to embark on an entrepreneurial career? As with
most human behavior, entrepreneurial traits are shaped by personal attributes and
environment factors.

1-1.14.1

Personal Attributes

It does appear that entrepreneurs have a higher locus of control than non-entrepreneurs,
which means that they have a higher desire to be in control of their own fate. This has been
confirmed by many studies which have found that entrepreneurs say that independence is
their main reason for starting their businesses.
By and large, we no longer use psychological terms when talking about entrepreneurs.
Instead we use everyday words to describe the characteristics found in most entrepreneurs.
Table 1 presents the ten (10) Ds that represent entrepreneurial character:

22

Table 1: 10Ds of Entrepreneurial Character

Attribute

Definition

1 Dream

Entrepreneurs have a vision of what the future could be like for

them and their businesses. And, more important, they have the
ability to implement their dreams.

2 Decisiveness

They dont procrastinate. They make decisions swiftly. Their

swiftness is a key factor in their success
Once they decide on a course of action, they implement it as
quickly as possible
They implement their ventures with total commitment. They
seldom give up, even when confronted by obstacles that seem
insurmountable
They are totally dedicated to their business, sometimes at
considerable cost to their relationships with their friends and
families. They work tirelessly. Twelve-hour days, and sevenday work weeks are not uncommon when an entrepreneur is
striving to get a business off the ground.

3 Doers
4 Determination

5 Dedication

6 Devotion

7 Details

Entrepreneurs love what they do. It is that love that sustains them
when the going gets tough. And it is love of their product or
service that makes them so effective at selling it.
It is said that the devil resides in the details. That is never more
true than in starting and growing a business. The entrepreneur
must be on top of the critical details

8 Destiny

They want to be in charge of their own destiny rather than

dependent on an employer.

9 Dollars

Getting rich is not the prime motivator of entrepreneurs. Money

is more a measure of their success. They assume that if they are
successful they will be rewarded.

10 Distribute

Entrepreneurs distribute the ownership of their businesses

with key employees who are critical to the success of the
business.

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1-1.14.2

Environmental Factors

Perhaps as important as personal attributes are the external influences on a would-be

entrepreneur. It is no accident that some parts of the world are more entrepreneurial than
others. The most famous region of high-tech entrepreneurship is USA and Japan. Because
everyone in these countries knows someone who has made it big as an entrepreneur, role
models abound. To facilitate the process, there are venture capitalists who understand how to
select and nurture high-tech entrepreneurs, bankers who specialize in lending to them,
lawyers who understand the importance of intellectual property and how to protect it,
landlords who are experienced in renting real estate to fledgling companies, suppliers who are
willing to sell goods on credit to companies with no credit history, and even politicians who
are supportive. Role models are very important because knowing successful entrepreneurs
make the act of becoming one yourself seem much more credible.
Would-be entrepreneurs come into contact with role models primarily in the home and at
work. If you have a close relative who is an entrepreneur, it is more likely that you will have
a desire to become an entrepreneur yourself, especially if that relative is your mother or
father. Studies have shown that, more than half of the undergraduates studying
entrepreneurship come from families that own businesses. But you dont have to be from a
business-owning family to become an entrepreneur. Bill Gates, for example, was following
the family tradition of becoming a lawyer when he dropped out of Harvard and founded
Microsoft. He was in the fledgling microcomputer industry, which was being built by
entrepreneurs, so he had plenty of role models among his friends and acquaintances.

1-1.14.3

Other Sociological Factors

Besides role models, entrepreneurs are influenced by other sociological factors. Family
responsibilities play an important role in the decision whether to start a company. It is,
relatively speaking, an easy career decision to start a business when a person is 25 years old,
single, and without many personal assets and dependents.
It is a much harder decision when a person is 45 and married, has teenage children preparing
to go to college, a hefty mortgage, car payments, and a secure, well-paying job. A 1992
survey of European high-potential entrepreneurs, for instance, found that on average they had
50% of their net worth tied up in their businesses. And at 45 plus, if you fail as an entrepreneur, it is not easy to rebuild a career working for another company. But despite the
risks, plenty of 45-year-olds are taking the plunge.
Another factor that determines the age at which entrepreneurs start businesses is the trade-off
between the experience that comes with age and the optimism and energy of youth. As you
grow older, you gain experience, but sometimes when you have been in an industry a long
time, you know so many pitfalls that you are pessimistic about the chance of succeeding if
you decide to go out on your own. Someone who has just enough experience to feel confident
as a manager is more likely to feel optimistic about an entrepreneurial career. Perhaps the
ideal combination is a beginners mind with the experience of an industry veteran.
24

A beginners mind looks at situations from a new perspective, with a can-do spirit. When
starting a business, entrepreneurs need a host of contacts, including customers, suppliers,
investors, bankers, accountants, and lawyers. So it is important to understand where to find
help before embarking on a new venture. A network of friends and business associates can be
of immeasurable help in building the contacts an entrepreneur will need. They can also
provide human contact because opening a business can be a lonely experience for anyone
who has worked in an organization with many fellow employees.

1-1.15

Entrepreneurship Failure (Mistakes Entrepreneurs Make)

Studies have indicated that there are common reasons for new business ventures to fail. These
causes of small business failure may include:
Management mistakes;
Lack of experience;
Poor financial control;
Weak marketing efforts;
Failure to develop a strategic plan;
Uncontrolled growth;
Poor location;
Improper inventory control;
Incorrect pricing ; and
Inability to make the entrepreneurial transition.

1-1.16

How to Avoid the Entrepreneurship Failure (Pitfalls)

Studies have indicated that entrepreneurs can increase their chances for success if they:

Know their business in depth;

Develop a solid business plan in writing;
Manage financial resources;
Understand financial statements;
Learn to manage people effectively; and
Keep in tune with who they are.

25

SESSION 2-1 ENTREPRENEURIAL INNOVATIONS

2-1.1 What is Entrepreneurial innovation?
As described by many authors, the concept of innovation refers to the putting into practice of
inventions. A narrow, strictly-technological approach focuses specifically on product and
process innovations, or technological innovation, which is often said to be the result of
technology entrepreneurship. A broader approach refers to innovation as not only the
development of new products, new processes and new sources of supply, but also to the
exploitation of new markets and the development of new ways to organize business.
Essentially, entrepreneurial innovation has resultant effect on marketing and organizational
innovations (MOI).
While organisational innovation is the implementation of a new organisational method in the
firms business practices, workplace organisation or external relations, marketing innovation
is the implementation of a new marketing method involving significant changes in product
design or packaging, product placement, product promotion or pricing. Innovative
performance has been measured in a variety of ways: using patents, trademarks, R&D inputs
and other secondary indicators such as publications or citations.

2-1.2 Stages of Development and Innovation

Different types and degrees of innovation may take place across different stages of
development. There are three stages of development in innovation, namely; factor-driven,
efficiency- driven and innovation-driven stages of development.
In the factor-driven stage of innovation, high rates of unemployment results in a large
informal sector and a high rate of small business start-ups; at this stage low-cost and
resource based production dominates. Innovation may account for only five per cent
of economic activity in factor-based economies.

In the efficiency stage, the rate of start-ups will start to decline as capital and other
production factors are used more efficiently, raising their rate of return. As a result,
firms become larger and start to exploit economies of scale. In this case, innovation
becomes more important and potentially contributes to around 10 per cent of
economic activity.
Finally, in the innovation stage, knowledge becomes the driver of growth as countries
already on the production possibility curve try to shift this out. In this scenario,
innovation can contribute to more than 30 per cent of economic activity. Though these
distinctions are useful, they understate the importance of innovation by
entrepreneurial innovation in the early stages of development. One reason is that
differences between incremental innovations and more radical innovations need to be
distinguished.
26

2-1.3 Sources of Entrepreneurial Ideas and Innovation

There is almost always a triggering event that gives birth to a new organization. The question
is: where do would-be entrepreneurs get their ideas from? A person gets an idea for a new
business either through a deliberate search or a chance encounter. Most cited sources of
entrepreneurial ideas described by most entrepreneurship commentators are explained below:

Perhaps the entrepreneur has no better career prospects. For example, Stephen Gyan
was a high school dropout who, after a number of minor jobs, had run out of career
options. He decided that making traditional medicines in his own tiny business was
better than earning low wages working for someone else. Within a few years, he had
built a manufacturing factory of traditional medicine in Kumasi and a chain of
traditional medicine retail stores throughout Ghana.

For other people, entrepreneurship is a deliberate career choice. For instance, Nancy
Adom was a student at the Kwame Nkrumah University of Science and Technology
when she decided to start a business and work at home. She started a social enterprise
and now growing big.

More often than not it is through their present line of employment or experience. A
study on fastest growing companies in the world found that 57% of the founders got
the idea for their new venture in the industry they worked in and a further 23% in an
industry related to the one in which they were employed. Hence, 80% of all new highpotential businesses are founded in industries that are the same as, or closely related
to, the one in which the entrepreneur has previous experience.

Some habitual entrepreneurs do it over and over again in the same industry or related
industry. For example, Dickson Owusu became a partner in Yoghurt and Ice Cream
when he was in his early twenties. He eventually took over Steves Ice Cream, and
created both a national franchise of some 26 units and a new food niche, Sweet Life
Ice Creams.

Sometimes the person has been passed over for a promotion, or even laid off or fired.
For instance, Francis Mensah had been laid off three times as a result of financial
meltdown, bankruptcy, mergers and consolidations of companies he had worked for
in the construction industry, so he decided to start a publishing firm by create a
newsletter. After two years, he had grown the tiny newsletter business into a big
magazine publishing firm.

Traditionally, new ideas result from creative thinking and innovation. Creative
thinking is the ability to let your mind create thoughts that are often different and
unusual. Creative thinking revolves and evolves around the idea of thinking beyond
the scope of the norm. It is all about being able to think outside the box and be
original in your thought process.
27

2-1.4 What is Creative Thinking?

Have you ever had an amazing idea that just seems to be the ideal solution to a problem?
Has anyone ever told you that you are amazing when you have shared an idea? Have you
ever solved a problem that nobody else could solve? If you answered yes to any of these
questions, then chances are you already know what creative thinking is.
Creative thinking is all about being able to come up with ideas and thoughts that are not
something the average person would come up with. Creative thinking can be defined as
thinking outside the box, which means thinking beyond the normal scope. A good example
of creative thinking is coming up for different ideas of how to use a common product. The
common product already has an identifiable use or uses. However, there are also probably
other ways the product can be used. Creative thinking would help a person to define other
ways to get use form the common product.
Creative thinking can involve many techniques. It takes some certain skills to be a creative
thinker, too. Creative thinking is usually something people have to work to gain it because it
is not usually a second nature. When a person develops their creative thinking abilities, they
will find they can come up with ideas quickly. They will likely find that they think differently
than others and come up with ideas that are not at all like others. They will likely begin with
the not-so-obvious answers to questions instead of jumping right in with the obvious
solutions. A creative thinker is someone great to have around because they will be able to
give multiple ideas at a time.

2-1.5 Benefits of Creative Thinking?

Creative thinking has numerous benefits. It is a great skill that can really boost your value in
entrepreneurship. Being able to think creatively can also be a huge benefit to almost any
industry or business. Creative thinking allows a person to come up with multiple ideas rather
quickly. Once a person is a skilled creative thinker, they will be able to just come up with
ideas in the blink of the eye.

Creative thinking can make a person a perfect problem solver. Being able to think
creatively allows a person to come up with solutions to problems that others may
never even think about. A person is able to come up with good ideas that may not
be so obvious. These ideas can then be translated into a viable enterprise.

Creative thinking can give a person a completely new outlook. They will be able to
use it in their professional and personal life. They will start to implement creative
thinking techniques no matter what they are doing because it will come naturally.

Creative thinking can change a person whole attitude. It will make them more
confident and allow them to live up to their full potential because they will not
doubt their abilities.
28

Above all, creative thinking can be a ticket to success and great accomplishment. A
creative thinker is hard to hold back. They are always thinking and they are always
on top of their game. It is hard to deny a creative thinker anything because they are
good at what they do. They are able to bring their creative thinking to the table to
help improve their life and accomplish their goals.

2-1.6 What Skills help in Creative Thinking?

In fact, all you need is to bring the skills you have to the table and build upon them to make
yourself a creative thinker. While creative thinking is a skill itself, it does take other skills to
be a good creative thinker. Here are some skills you likely have already that can be used to
develop creative thinking:

Organizational Skills -Being organized may seem the opposite of being creative.
When people think of creativity they often thin unstructured thought and
unorganized behaviors, but actually creative thought can be quite organized. When
you are organized, you are able to better sift through your thoughts and get to the
heart of the good idea.

Reasoning Skills -Being able to reason is very helpful in creative thinking.

Reasoning skills come in handy when you are analyzing a situation. You are able to
decide right away what will work and what will not work.

Objectivity -Being able to be objective allows you to consider many possibilities

and not just be stuck on the obvious. This is key to creative thinking.

2-1.7 Creative Thinking Techniques

The way a person goes about creative thinking is a very individual process. There really are
no hard-set rules, but creative thinking, as any way of thinking, usually follows a general
process. Understanding the general process can help you to be a better creative thinker and
make it easier for you to be a creative thinker. The creative thinking process involves four
steps.
2-1.7.1 Step 1: Analysis
You begin by looking over the situation. You should take in everything you can about the
situation. Get details and ask questions. You must really get to know the situation at this
point. Analysis involves finding out the: who, what, where, when and how of the situation.
Once analysis is complete, you should be able to completely explain the situation including
any obvious problems or issues.

29

2-1.7.2

Step 2: Brainstorming

This is the true area of creative thinking. Once you know about the situation, you can begin to
start thinking. You can brainstorm in any manner that works for you. You may just shout out
ideas or may write them down. Whatever works for you is best to do. Brainstorming can take
on many forms. You can write things down, talk things out or even conduct experiments.
Brainstorming should be free flowing and recorded so no good ideas are lost.
2-1.7.3

Step 3: Break It Down

Now that you have a nice collection of ideas, you can start going through them and weeding
out ones that will not work. You may find that if you change an idea just a little that it will
work much better. This step is all about tweaking your ideas. You will go over all of your
ideas and weed out those that are not going to work. You should end up wit h the ideas that
seem to be the best solutions.
2-1.7.4

Step 4: Review

The final step involves getting your final idea. This will help you to come up with one or two
ideas that seem to stand out and be the best ideas. You will go over the ideas you have left
and narrow them down even more to one or two plausible ideas. You should then be able to
go into detail of how each idea will work and how it will be implemented. Being a creative
thinker involves being able to think without a lot of structure, but these four steps are the
basics of any thinking process. They may help you to be a better creative thinker.

SELF ASSESSMENT TEST

1. What forces have led to the boom in entrepreneurship in Ghana and across the globe?
2. What is an entrepreneur? Give a brief description of the entrepreneurial profile.
3. Entrepreneurship is more mundane than it is sometimes portrayed. In fact, you do not
need to be a person of mythical proportions to be successful in building a company.
Do you agree? Explain.
4. What are the major benefits of business ownership?
5. Which of the potential drawbacks to business ownership are most crucial
6. Briefly describe the role of the following groups in entrepreneurship: women,
minorities, immigrants, part-timers, home-based business owners, family business
owners, copreneurs, corporate castoffs and corporate dropouts
7. Outline and explain the causes of entrepreneurship failure.
8. How does the typical entrepreneur view the possibility of business failure
9. How can the entrepreneur avoid the common pitfalls that lead to business failure
10. Explain the typical entrepreneurs attitude toward risk
11. Are you interested in launching a small business? If so, when? What kind of business?
Describe it. What can you do to ensure its success?
30

DISCUSSION QUESTIONS
1. Entrepreneurs are not cut from the same mold, and no one set of characteristics can
predict entrepreneurial tendencies or success. Share your observations about
entrepreneurial characteristics.
2. What is your perception of entrepreneurs in our community and in our society? Why do
you believe entrepreneurs have that reputation?
3. If you were to begin a business immediately after your academic career concluded, what
challenges would you face? Would you consider that an ideal time in your life to launch
your first venture? If not, at what point in your life might be a better time and why? What
experiences might you find beneficial before you started your own business.
4. Discuss your knowledge about businesses that have failed. Were there failures due to one
or more of these causes or were other factors involved?

COURSEWORK
Students shall be put into teams and will be required to conduct case studies on the following
under- listed cases.

Success Stories of three women who made it in the construction industry.

Success stories of three men who made it in the construction industry.
Success stories of three local construction companies in Ghana.
Success stories of three local consultancy firms in Ghana.
Success stories of three foreign construction companies operating in Ghana.

31

UNIT

BUSINESS ORGANISATIONS AND SMES

DEVELOPMENT
INTRODUCTION
In the previous unit, you have learnt an about the principles of entrepreneurship emphasizing
on entrepreneurial process and evolution. This current unit will introduce you to the concept
and principles of business organisations, incorporation procedures and SMEs. Students shall be
exposed to SMEs and shall also learn issues concerning business undertakings, enterprises,
concerns or firms. The unit shall look into the formation, of such organisations in order to
understand how to organise a business because the right form of business organisation is largely
responsible for the success of an enterprise.

UNIT OBJECTIVES
This unit builds on the previous unit to explain concepts business organisation and expounds
on incorporation procedures of businesses in Ghana. After completing this unit students
should be able to:
Explain the meaning of the term business organisation
Identify the different forms of business organisation
Explain the meaning and characteristics of Sole Proprietorship, Partnership,
Incorporated Companies, Joint Stock Company and Co-operative Societies
Enumerate the relative advantages and disadvantages of different forms of business
organisations
Identify the factors influencing the choice of an appropriate form of business
organisation.
Define and explain Small Medium Enterprises (SMEs).
Identify and discuss the contributions of SMEs to economic growth.
Identify and explain the stages of growth of SMEs

32

SESSION 1-2 BUSINESS ORGANISATION IN CONTEXT

1-2.1 What is Business Organisation?
Business organisation refers to all necessary arrangements required to conduct a business. It
refers to all those steps that need to be undertaken for establishing relationship between men,
material, and machinery to carry on business efficiently for earning profits. This may be called
the process of organising. The arrangement which follows this process of organising is called a
business undertaking or organisation. A business undertaking can be better understood by
analysing its characteristics.

1-2.2 Characteristics of Business Organisation

The following under-listed typify characteristics of a business organisation or undertaking:
Distinct Ownership: The term ownership refers to the right of an individual or a group of
individuals to acquire legal title to assets or properties for the purpose of running the
business. A business firm may be owned by one individual or a group of individuals
jointly.
Lawful Business: Every business enterprise must undertake such business which is lawful,
that is, the business must not involve activities which are illegal.
Separate Status and Management: Every business undertaking is an independent entity.
It has its own assets and liabilities. It has its own way of functioning. The profits earned or
losses incurred by one firm cannot be accounted for by any other firm.
Dealing in goods and services: Every business undertaking is engaged in the production
and/or distribution of goods or services in exchange of money.
Continuity of business operations: All business enterprises engage in operation on a
continuous basis. Any unit having just one single operation or transaction is not a business
unit.
Risk involvement: Business undertakings are always exposed to risk and uncertainty.
Business is influenced by future conditions which are unpredictable and uncertain. This
makes business decisions risky, thereby increasing the chances of loss arising out of
business.

33

1-2.3 Legal Structure (Forms) of Business Organisation

While establishing a business the most important task is to select a proper form of
organisation. The legal structure a business chooses is fundamental to the way it operates.
This legal framework determines the control of the business, acquisition of capital, extent of
risk, the distribution of profits and losses, legal formalities, taxation payment, and where
legal liabilities rests. It also determines the nature of a business relationships with business
associates, investors, creditors and employees. The most important forms of business
organisation are as follows:

Sole Proprietorship;
Partnership;
Joint Stock Company (Incorporated Company); and
Co-operative Society.

1-2.4 Sole Proprietorship

When the ownership and management of business are in control of one individual, it is known as
sole proprietorship or sole tradership. Thus, when an individual runs an unincorporated
business on his or her own. This is also known as sole practitioner in the case of
professional services (such as freelance consultant, etc). It is seen everywhere, in every country
and every locality. The shops or stores which you see in your locality - the grocery store, the
vegetable store, the sweets shop, the chemist shop, the stationery store, etc. come under sole
proprietorship. It is not that a sole tradership business must be a small one.
The volume of activities of such a business unit may be quite large. However, since it is owned
and managed by one single individual, often the size of business remains small. The individual
is taxed under the Internal Revenues Self-Assessment system, with income tax calculated
after deduction for legitimate business expenses and personal allowances.

1-2.4.1

Characteristics

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

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

34

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

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

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

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

Legal Formalities: In the setting up, functioning and dissolution of a sole proprietorship
business no legal formalities are necessary. However, a few legal restrictions may be
there in setting up a particular type of business. For example, to open a restaurant, the
sole proprietor needs a license from the local municipality; to open a chemist shop, the
individual must have a license from the government.

1-2.4.2

Advantages of Sole Proprietorship:

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

Better Control: The owner has full control over his business. He plans, organises, coordinates the various activities. Since he has all authority, there is always effective
control.

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

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

Retention of Business Secrets: Another important advantage of a sole proprietorship

business is that the owner is in a position to maintain absolute secrecy regarding his
business activities.

35

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

Personal Attention to Consumer Needs: In a sole tradership business, one generally

finds the proprietor taking personal care of consumer needs as he normally functions
within a small geographical area.

Creation of Employment: A sole tradership business facilitates self-employment and

also employment for many others. It promotes entrepreneurial skill among the
individuals.

Social Benefits: A sole proprietor is the master of his own business. He has absolute
freedom in taking decisions, using his skill and capability. This gives him high selfesteem and dignity in the society and gradually he acquires several social virtues like selfreliance, self-determination, independent thought and action, initiative, hard work etc,.
Thus, he sets an example for others to follow.

Equitable Distribution of Wealth: A sole proprietorship business is generally a small

scale business. Hence there is opportunity for many individuals to own and manage small
business units. This enables widespread dispersion of economic wealth and diffuses
concentration of business in the hands of a few.

1-2.4.3

Disadvantages of Sole Proprietorship

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

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

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

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

36

1-2.4.4

Suitability of Sole Proprietorship

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

1-2.5 Partnership
A partnership form of organisation is one where two or more persons are associated to run a
business with a view to earn profit. Persons from similar background or persons of different
ability and skills, may join together to carry on a business. Each member of such a group is
individually known as partner and collectively the members are known as a partnership
firm. Unlike an incorporated company, a partnership does not have a legal personality of
its own. Therefore the Partners are liable for any debts of the business. In every country,
Partnerships are governed by the Partnership Act and the operation of a partnership is usually
governed by a Partnership Agreement.
The specific terms of this agreement are determined by the partners themselves, covering
issues such as:
Profit-sharing normally, partners share equally in the profits;
Entitlement to receive salaries and other benefits in kind (e.g. cars, health insurance);
Interest on capital (the amount invested in the partnership);
Arrangements for the introduction of new partners;
Arrangements for retiring partners; and
What happens when the partnership is dissolved?

1-2.5.1 Types of Partnership

Partnership liability can take three principal forms, namely; General Partners, Limited
Partners and Nominal Partners. While, General Partners (the usual situation) are fully liable
for business debts, Limited Partners are limited to the amount of investment they have made
in the Partnership. Nominal Partners people who allow their names to be used for the benefit
of the partnership, usually for remuneration, but they do not get a share of the partnership
profits.

37

1-2.5.2

Characteristics of Partnership

Number of Partners: A minimum of two persons are required to start a partnership

business. The maximum membership limit is 10 in case of banking business and 20 in
case of all other types of business.

Contractual Relationship: The relation between the partners of a partnership firm is

created by contract. The partners enter into partnership through an agreement which
may be verbal, written or implied. If the agreement is in writing it is known as a
Partnership Deed.

Competence of Partners: Since individuals have to enter into a contract to become

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

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

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

Principal-Agent Relationship: The business in a partnership firm may be carried on

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

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

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

Voluntary Registration: Registration of partnership is not compulsory. But since

registration entitles the firm to several benefits, it is considered desirable. For
example, if it is registered, any partner can file a case against other partners, or a firm
can file a suit against outsiders in case of disputes, claims, disagreements, etc.
38

1-2.5.3

Dissolution of Partnership: Dissolution of partnership implies not only a complete

closure or termination of partnership business, but it also includes any change in the
existing agreement among the partners due to a change in the number of partners.

Advantages of Partnership Firm

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

Larger Resources: As compared to sole proprietorship, a partnership firm can pool

larger financial resources. Thus it can enter into bigger operations and can have more
credit facilities. It can also have better managerial talent.

Flexibility in operation: There is flexibility of operation in partnership business due

to a limited number of partners. These partners can change their operations and amend
objectives if necessary by mutual consent.

Better Management: Partners take more interest in the affairs of business as there is
a direct relationship between ownership, control and profit. They often meet to
discuss the affairs of business and can take prompt decision.

Sharing of Risk: In partnership, risk of loss is easier to bear by individual partners as

it is shared by all the partners.

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

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

1-2.5.4

Disadvantages of partnership Firm

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

Unlimited Liability: As the liability of partners is joint and several to an unlimited

extent, any one of the partners can be called upon to pay all the debts even from his
personal properties. Further, as every partner has a right to take part in the
management of the firm, any wrong decision by a single partner may lead to heavy
liabilities for others.
39

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

Limited Capital: As there is a restriction on the maximum number of partners, the

capital which can be raised is limited.

1-2.5.5 Suitability of Partnership Firm:

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

1-2.6 Joint Stock Company (Incorporated Company )

A Joint Stock Company (JSC) form of business organisation is a voluntary association of
persons to carry on business. Normally, it is given a legal status and is subject to certain legal
regulations. It is an association of persons who generally contribute money for some common
purpose.
The money so contributed is the capital of the company. The persons who contribute capital
are its members. The proportion of capital to which each member is entitled is called his
share, therefore members of a joint stock company are known as shareholders and the capital
of the company is known as share capital.
The total share capital is divided into a number of units known as shares. Incorporating
business activities into a company confers life on the business as a separate legal person.
Profits and losses are the companys and it has its own debts and obligations. The company
continues despite the resignation, death or bankruptcy of management or shareholders. A
company also offers the best vehicle for expansion and the provision of outside investors.
The Joint Stock Companies are governed by the Ghana Companies Act, 1963. The Act defines a
company as an artificial person created by law, having separate entity, with perpetual succession
and a common seal.

40

1-2.6.1

Types of Joint Stock Company (JSC)

There are four main types of company:

1. Private company limited by shares members liability is limited to the amount
unpaid on shares they hold.
2. Private company limited by guarantee - members liability is limited to the
amount they have agreed to contribute to the companys assets if it is wound up.
3. Private unlimited company there is no limit to the members liability.
4. Public limited company (PLC) the companys shares may be offered for sale to
the general public and members liability is limited to the amount unpaid on shares
held by them.

1-2.6.2

Characteristics

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

Separate Legal Entity: Being an artificial person, a company has an existence

independent of its members. It can own property, enter into contract and conduct any
lawful business in its own name. It can sue and can be sued in the court of law. A
shareholder cannot be held responsible for the acts of the company.

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

Perpetual Existence: A company once formed continues to exist as long as it fulfils

the requirements of law. It is not affected by the death, lunacy, insolvency or
retirement of any of its members.

Limited Liability: The liability of a member of a Joint Stock Company is limited by

guarantee or the shares he owns. In other words, in case of payment of debts by the
company, a shareholder is held liable only to the extent of his share.

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

41

Formation: A company comes into existence only when it has been registered after
completing the formalities prescribed under the Indian Companies Act 1956. A
company is formed by the initiative of a group of persons known as promoters.

Membership: A company having a minimum membership of two persons and

maximum fifty is known as a Private Limited Company. But in case of a Public
Limited Company, the minimum is seven and the maximum membership is
unlimited.

Management: Joint Stock Companies have democratic management and control.

Even though the shareholders are the owners of the company, all of the them cannot
participate in the management process. The company is managed by the elected
representatives of shareholders known as Directors.

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

1-2.6.3

Advantages of Joint Stock Company

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

Continuity of existence: A company is an artificial person created by law and

possesses independent legal status. It is not affected by the death, insolvency etc. of
its members. Thus it has a perpetual existence.

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

Professional Management: Companies, because of complex nature of activities and

operations and large volume of business, require professional managers at every level
of organisation. And because of their financial strength they can afford to appoint such
managers. This leads to efficiency.

Social Benefit: A joint stock company offers employment to a large number of

people. It facilitates promotion of various ancillary industries, trade and auxiliaries to
trade. Sometimes it also donates money for education, health, community service and
renders help to charitable and social institutions.
42

1-2.6.4

Research and Development: A company generally invests a lot of money on

research and development for improved processes of production, designing and
innovating new products, improving quality of product, new ways of training its staff.

Disadvantages of Joint Stock Company:

Formation is not easy: The formation of a company involves compliance with a

number of legal formalities under the companies Act and compliance with several
other Laws.

Control by a Group: Companies are controlled by a group of persons known as the

Board of Directors. This may be due to lack of interest on the part of the
shareholders who are widely dispersed; ignorance, indifference and lack of proper and
timely information. Thus, the democratic virtues of a company do not really exist in
practice.

Speculation and Manipulation: The shares of a company are purchased and sold in
the stock exchanges. The value or price of a share is determined in terms of the
dividend expected and the reputation of the company. These can be manipulated.
Besides there is excessive speculation which is regarded as a social evil.

Excessive government control: A company is expected to comply with the

provisions of several Acts. Non-compliance of these invites heavy penalty. This
affects the smooth functioning of the companies.

Delay in Policy Decisions: A company has to fulfill certain procedural formalities

before making a policy decision. These formalities are time consuming and, therefore,
policy decisions may be delayed.

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

1-2.6.5 Suitability of Joint Stock Company:

A joint stock company is suitable where the volume of business is quite large, the area of
operation is widespread, the risk involved is heavy and there is a need for huge financial
resources and manpower. It is also preferred when there is need for professional management
and flexibility of operations. In certain businesses like banking and insurance, business can
only be undertaken by joint stock companies.
43

1-2.7 Co-operative Society

Any ten persons can form a co-operative society. It functions under the Cooperative Societies Act
and other State Co-operative Societies Acts. A co-operative society is entirely different from all
other forms of organisation discussed above in terms of its objective. The co-operatives are
formed primarily to render services to its members. Generally it also provides some service to the
society. The main objectives of co-operative society are: (a) rendering service rather than earning
profit, (b) mutual help instead of competition, and (c) self help in place of dependence.

1-2.7.1

Types of co-operatives

a. Consumer co-operatives: These are formed to protect the interests of ordinary

consumers of society by making consumer goods available at reasonable prices.
b. Producers co-operatives: These societies are set up to benefit small producers who
face problems in collecting inputs and marketing their products.
c. Marketing co-operatives: These are formed by producers and manufactures to
eliminate exploitation by the middlemen while marketing their product. .
d. Housing Co-operatives: These are formed to provide housing facilities to its
members. They are called co-operative group housing societies.
e. Credit Co-operatives: These societies are formed to provide financial help to its
members. The rural credit societies, the credit and thrift societies, the urban cooperative banks etc. come under this category.
f. Forming Co-operatives: These are formed by small farmers to carry on work jointly
and thereby share the benefits of large scale farming.
Besides these types, other co-operatives can be formed with the objective of providing
different benefits to its members, like the construction co-operatives, transport co-operatives,
co-operatives to provide education etc.

1-2.7.2

Characteristics:

Voluntary association: Individuals having common interest can come together to

form a co-operative society. Any person can become a member of such an
organisation and leave the same.

Membership: The minimum membership required to form a co-operative society is

ten and the maximum number is unlimited. At times the cooperatives after their
formation fix a maximum membership limit.

44

Body corporate: Registration of a society under the Co-operative Societies Act is a

must. Once it is registered, it becomes a body corporate and enjoys certain privileges
just like a joint stock company. Some of the privileges are: the society enjoys
perpetual succession; it has its own common seal; it can own property in its name; it
can enter into contract with others; and it can sue others in court of law.

Service Motive: The primary objective of any co-operative organisation is to render

services to its members in particular and to the society in general.

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

Sources of Finances: A co-operative organisation starts with a fund contribute by its

members in the form of units called shares. It can also raise loans and secure grants
from the government easily. One fourth of the profits of the co-operative are
transferred to its fund every year.

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

1-2.7.3

Advantages of Co-operative Society:

Easy Formation: Formation of a co-operative society is easy as compared to a

company. Any 10 persons can voluntarily form an association and get themselves
registered with the Registrar of Co-operative societies.

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

Open Membership: There is no restriction on any individual to be a member of any

co-operative.

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

Middlemans Profit Eliminated: Through the co-operative the consumers control

their own supplies and by this means the middlemans profit is eliminated.

45

Management: A co-operative functions in a democratic manner. Each member has

only one vote.

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

1-2.7.4

Disadvantages of Co-operatives

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

Problems in Management: Generally it is seen that co-operative do not function

efficiently due to lack of managerial talent.

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

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

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

Dependence on Government: The inadequacy of capital and various other

limitations make co-operatives dependant on the government for support and
patronage in terms of grants, loans and subject themselves to interference.

1-2.7.5 Suitability of Co-operatives

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

46

1-2.8 Factors to Consider when selecting a Business Organisation

Selection of a suitable form of business organisation on the basis of ownership and
management is one of the important tasks of the entrepreneur. Once a form of organisation is
chosen, it is very difficult to switch over to another form because it needs the winding up of
the existing organisation which is a waste of time, effort and money. Therefore, the form of
organisation must be chosen after careful thought and consideration. There are a number of
factors to be considered while selecting an appropriate form of business organisation. Let us
look into those factors one by one which are inter-related and inter-dependent as well.

Nature of Business: The selection of a particular form of organisation is dependant

upon the nature of business activity. For service activity it can be ideally done through
sole proprietorship or partnership. But if it is a manufacturing business then a
partnership or company is preferable.

Volume of Business: If the volume of business or scale of operation is small, a sole

proprietorship or partnership form is ideal. But if the volume of business is on a large
scale, company form is the best.

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

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

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

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

Independence: The company or co-operative organisations are subject to strict

government regulations. So if the entrepreneur wants to have a freedom in business
with little governmental interference, he has to go for either sole proprietorship or
partnership.

47

SESSION 2-2 SMALL -MEDIUM ENTERPRISES DEVELOPMENT

2-2.1 Definition Of Small Medium Enterprises (SMEs)
To create an enabling platform for industrial development, businesses have been divided into
deferent classes. One of the major groupings is by the size of the industry. Industries are
grouped by size as Large, Medium, Small and Micro Enterprises. One of the reasons for such
classification is to enable policies to be formulated to help the very small firms grow.
Companies that meet the criteria for small company are able to take advantage of exemptions
such as less onerous accounting requirements and in some cases tax reliefs.
Within the extant literature, it has been established that there is no distinct definition of Small
and Medium Enterprises (SMEs). This is so because the classification of businesses into
Large-Scale or Small-Scale is subjective and coupled with qualitative judgment. Globally
different countries have different methods of identifying their Enterprises as Large, Medium,
Small or Micro. This lack of uniformity in the global perception of SMEs is partly due to
variant form of industries and partly due to economics and development levels of countries
globally.
Firms differ in their levels of capitalisation, sales and employment. Hence, definitions which
employ measures of size (number of employees, turnover, profitability and net worth) when
applied to one sector could lead to all firms being classified as small, while the same size
definition when applied to a different sector could lead to a different result.
As an attempt to overcome this difficulty in firm classification, a committee known as the
Bolton Committee (1971) was formed to formulated an economic and a statistical
definition of Small Firms. The committee concluded that a firm should be regarded as Small
if it meets the following three criteria:

It has a relatively small share of their market place;

It is managed by owners or part owners in a personalised way, and not through the
medium of a formalised management structure; and
It is independent, in the sense of not forming part of a large enterprise.

2-2.2 The European Concept of SMEs

In Europe, the SME sector is divided into three main components namely micro, small and
medium enterprises. The European Commission (EC) defines a Medium-Size company as
one of fewer than 250 employees, and turnover and balance sheet less than 50 million, a
Small one as fewer than 50 employees and turnover and balance sheet less than 10 million,
(European Commission, 2005).

48

This definition was realized to have a problem of the number of employees, the ceiling for
turnover and the balance sheet not exactly correspond, and as a result the number of
employees tends to be used as the primary determinant of size (European Commission,
2008). The table below gives a summary of the ECs definition of SMEs.
Table 2: European Commission Definition of SMEs
Criterion
Micro firm
Maximum number of employees
Maximum annual turnover
Maximum annual balance sheet total

9
2m
2m

Small firm
49
10m
10m

Medium firm
249
50m
50m

Source: (Dalitso and Peter 2000)

2-2.3 Other Concepts of SMEs by Selected Countries and Organizations

Malawi established an official definition of enterprise sizes since 1992. The Malawian
definition is based on three criteria, namely the level of capital investment, number of
employees and turnover. An enterprise qualifies as Small scale in Malawi if it satisfies any
two of the following three criteria:

It has a capital investment of US$2,000 - US$55,000,

Employs 5 - 20 people
It has an annual turnover of up to US$110,000 (using1992 official exchange rate).

The United Nations Industrial Development Organization (UNIDO) established two distinct
definitions of SMEs for Developing and Developed Countries. The table below shows
UNIDOs definition.
Table 3: UNIDOs definition of SMEs
Firm Size
Developing Countries

Developed Countries

Large
Medium
Small
Micro

firms with 500+ workers

firms with 100 - 499 workers
firm with less than 99 workers
-

firms with 100+ workers

firms with 20 - 99 workers
firms with 5 - 19 workers
firms with less than 5 workers

Source: (Dalitso and Peter 2000)

49

South Africa just like other nations also has its national definition of Small and Medium
Enterprises. The South African definition for SMEs is shown in the table below.
Table 4: South Africas Definition of SMEs
Enterprise
Number of Employees Annual Turnover (in
Size
South African Rand)
7.27Rand = $1

Gross Assets, Excluding

Fixed Property

Medium

Fewer than 100 to

200, depending on
industry

Less than R4 million to

R50 million, depending
upon industry

Less than R2 million to

R18 million, depending
on industry

Small

Fewer than 50

Less than R2 million to

R25 million, depending
on industry

Less than R2 million to

R4.5 million, depending
on industry

Very Small

Fewer than 10 to 20,

depending on industry

Less than R200 000 to

R500,000, depending
on industry

Less than R150 000 to

R500,000, depending on
Industry

Micro

Fewer than 5

Less than R150,000

Less than R100,000

Source: (Abor and Quartey, 2010)

2-2.4 The Ghanaian Concept of SMEs

In Ghana, Small and Medium Scale enterprises have also been variously defined, but the
most commonly used criterion is the number of employees of the enterprise. The Ghana
Statistical Service (GSS) establish a definition for all sizes of Businesses in the Country. By
the GSS definition, firms with less than 10 employees are Small Scale Enterprises and their
counterparts with more than 10 employees are considered as Medium and Large-Sized
Enterprises.
Another body that has come with a definition for Small Enterprises is the National Board of
Small Scale Industries (NBSSI). Their definition considers both the `fixed asset and number
of employees in the Business. It defines a Small Scale Enterprise as one with not more than
9 workers, has plant and machinery (excluding land, buildings and vehicles) not exceeding 10
million Cedis (NBSSI, 1994). The Ghana Enterprise Development Commission (GEDC)
definition for SMEs on the other hand uses a 10 million Cedis upper limit for plant and
machinery. The main problem associated with the use of fixed asset is the continuous
depreciation in the exchange rate of the Ghanaian Cedi which often makes such definitions
out-dated (Steel and Webster, 1990).

50

Osei et al. (1993) in defining Small Scale Enterprises in Ghana used an employment cut off
point of 30 employees to indicate Small Scale Enterprises. Osei et al, however, broke small
scale enterprises into 3 categories namely:
(i) Micro -employing less than 6 people;
(ii) Very small, those employing 6-9 people;
(iii) Small -between 10 and 29 employees.
Generally, the Ghanaian definition of SMEs is as shown in the table below.
Table 5: General definition of SMEs in Ghana
Size
Number of Employees

Fixed Asset (Cedi Equivalent)

Micro Enterprise
Small Enterprise
Medium Enterprise

Not exceeding $10,000.00

$10,000-$100,000
$100,000-$1 million

Up to 5
6 and 29
30 and 99

Source: (Dalitso and Joshua, 2010)

2-2.5 Classification of SMEs by Industry

As indicated earlier, the definition of small and medium enterprises varies extensively both
across in within countries. Whilst some countries establish their definition based on the
general size of businesses, others establish theirs from the size as well as the industry. The
concept of defining SMEs by industry came as a result of the differences that exist in the
requirements of the number of employees and capital for the start up of different industries.
Another reason had to do with the fact that some industries are high-tech whilst others are
low-tech and as a result a business considered to be small in one industry could be rated as
medium or large in another industry. It was against this background that the Bolton
Committee came out with their definition based on industries. The table below shows the
Bolton Committee definitions of the small firm to different sectors.
Table 6: The Bolton Committee Definitions of a small firm by industry
Sector
Definition
Manufacturing
Construction
Mining & Quarrying
Retailing
Miscellaneous
Services
Motor Trades
Wholesale Trades
Road Transport
Catering

200 employees or less

25 employees or less
25 employees or less
Turnover of 50,000 pounds or less
Turnover of 50,000 pounds or less
Turnover of 50,000 pounds or less
Turnover of 100,000 pounds or less
Turnover of 200,000 pounds or less
Five Vehicles or less
Five Vehicles or less

Source: Dalitso and Peter (2000). [The Bolton Committee (1971)]

51

In South Africa, the definition for small and medium scale enterprises is also by industry. The
upper limit for Small Scale Enterprises is 20 employees for the Service Industry and 50
employees for Mining, Electricity, Manufacturing and Construction Sectors. The figures for
Medium Scale Enterprises are 100 for the Service Sector and 200 for Mining, Electricity,
Manufacturing and Construction Sectors Dalitso and Joshua (2010).

2-2.6 Impact of SMEs in a Global Economic Context

Small and Medium Enterprises (SMEs) all over the World play a major role in the global
economy, both in terms of employment, economic development and growth. SMEs employ
the highest number of workers in the developed industrial economies than the multinational
companies. According to the International Finance Corporation (IFC) there is a positive
relationship between a countrys overall level of income and the number of SMEs in that
country (WBCSD, 2004). The dynamic role of Small and Medium Scale Enterprises (SMEs)
in both developed and developing countries have been highly emphasised. These enterprises
have been identified as the means through which the rapid industrialisation and other
developmental goals of these countries can be realized.
Another important achievement of SMEs is that they have improved the efficiency of
domestic markets and made productive use of scarce resources, thus, facilitating long term
economic growth. Thus, it has been argued by economist and development experts that
promoting the SME sector in developing countries will create more employment
opportunities bring about equitable distribution of income whilst ensuring a better
productivity within an economy. When the Gross Domestic Product (GDP) of the worlds
developed Economies are ranked, the contribution of U.S. SMEs alone is ranked just after
Japans GDP as shown in Figure 4 below. This analogy implies that the contribution of SMEs
in U.S. exceed the GDP of most Economies.

Figure 4: Impact of SMEs in Global Economy

52

2-2.7 Impact of SMEs in the Ghanaian Economic Context

Small and Medium Enterprises constitute about 90% of all Enterprises in Ghana and generate
about 60% of the employment in the Ghanaian labour force ranging from agriculture, light
manufacturing, art and craft, construction, financial services, textile production. The sector
has been observed to have experienced higher employment growth than Micro and Large
Scale Enterprises in Ghana.
In Ghana, SMEs output as a percentage of GDP accounted for 60% of GDP in 1998 (Dalitso
and Peter, 2000). In the manufacturing sector of Ghana, SMEs have been noted to provide
about 85% of employment. Research in Ghana and many other Countries have shown that
capital productivity is often higher in SMEs than is the case with Large Scale Enterprises; the
reason being that SMEs are labour intensive with very small amount of capital invested.
From the Data available the Social Security & National Insurance Trust (SSNIT) reflects that
90% of companies in Ghana are SMEs employing both skilled and unskilled labour.

2-2.8 Government Policies for Promoting SMEs in Ghana

Since 1970s there have been pragmatic Concepts for the development of SMEs in Ghana.
Some institutions were set up to assist SMEs and prominent among them were the Office of
Business Promotion; currently referred to as Ghana Enterprise Development Commission
(GEDC).
The commission was setup to provide a package for strengthening Small Scale Industries
both technically and financially. It was also to assist Ghanaian entrepreneurs to enter into
industries which were mainly operated by foreigners but which became open to Ghanaians
after the `Alliance Compliance Order6 in 1970. The PNDC Government, in 1992 undertook
a number of measures aimed at strengthening the private sector to the economic reforms at
the time. A number of price control laws were repealed when the Private Sector Advisory
Group was formed and the Manufacturing Industries Act, 1971 (Act 356) was abolished. To
strengthen the sector, the Investment Code of 1985 (PNDC Law 116) was passed to promote
joint ventures between foreign and local investors in the Country.
The Rural Finance Project was also established to providing long term credit to SMEs. An
Export Development and Investment Fund (EDIF) was also set up in 1997 which became
operational under the Exim-Guarantee Company Scheme of the Bank of Ghana for the
support of industrial and export services within the first quarter of 1998.
The National Board for Small Scale Industries (NBSSI) was established in 1985 by an Act of
the Parliament (Act 434) of the Third Republic of Ghana to promote Small Businesses,
address the high unemployment rate and the growth of the economy of Ghana. The NBSSI
established an Entrepreneurial Development Programme, intended to train and assist persons
with entrepreneurial abilities into self employment.
53

In 1987, the industrial sector also witnessed the coming into operation of the Ghana
Appropriate Technology Industrial Service (GRATIS). The focus of GRATIS was to upgrade
Small Scale Industries by way of transferring appropriate technology to Small Scale and
informal Industries at the grass root level. This move by the government was meant to reduce
the dominance of foreign businesses in the country. The Intermediate Technology Transfer
Units (ITTUs) was also established in the country to develop engineering abilities of small
scale manufacturing and service industries engaged in vehicle repairs and other related trades.
The Fund for Small and Medium Enterprises Development (FUSMED) was formed to
address the challenges Small Businesses face in securing credit. It was against this
background that the Bank of Ghana obtained a US$ 28 million credit from the International
Development Association (IDA) of the World Bank to support SMEs in Ghana. When the
Programme of Action to Mitigate the Social Cost of Adjustment (PAMSCAD) was
established, a revolving fund of US$ 2 million at the time was set aside to assist SMEs.
Other financial support interventions included the establishment of:
Business Assistance Fund: The fund was in operational in the 1990s to provide
direct government lending to the SME sector.
Ghana Investment Fund: A Fund set up by an Act parliament (Act 616) to create
credit facilities to companies by selected financial institutions in Ghana. However,
the scheme was never implemented.
Export Development and Investment Fund (EDIF): Under this scheme, export
oriented companies were targeted and they could borrow up to a cedi equivalent of
$500,000 over a five-year period at a subsidized interest rate of 15%.

2-2.9 Challenges of SMEs

In spite of the numerous achievements of SMEs in socio economic developments and the
wide range of reforms instituted by nations, they are still saddled with a lot of challenges. The
reasons for these constraints are due to the difficulty of absorbing large fixed costs, the
absence of economies of scale and scope in key factors of production, and the higher unit
costs of providing services to smaller firms.
Small businesses have always had a lot of difficulties in recruiting qualified managerial and
technical workers due to inadequate finance thus affecting their ability to innovate. Another
area of difficulty facing SMEs has to do with bureaucracy and corruption associated with the
public sector especially in many African countries. Some of the constraints identified with the
sector are as stated below.

54

2-2.9.1 Financial Constraints

Another dominant constraint to Small and Medium Scale Enterprises in Ghana is how get
access to finance. About 52% of respondents to a survey conducted by Parker, et al. (1995)
cited Credit constraints pertaining to working capital and raw materials as a major problem
confronting their businesses. This stems from the fact that SMEs have limited access to
capital markets, locally and internationally, partly because of the perception of higher risk,
informational barriers, and the higher costs of intermediation for smaller firms that makes it
difficult for SMEs to obtain long-term finance in the form of Loan and equity.

2-2.9.2 2. Labour Market Constraints

Labour for SMEs can be grouped into two distinct categories namely skilled and unskilled
labour. Low-tech SMEs might not have serious problems with labour acquisition due to the
fact that they deal mostly with a high proportion of unskilled labour. As a result labour may
seems a less important constraint considering the widespread unemployment or
underemployment in most countries.
Aryeetey et al. (1994) found that 7% of the respondents in their research indicated that they
had problems finding skilled labour, and 2% had similar problems with unskilled labour.
Again this could be partly due to the low level of high-tech SMEs and the high
unemployment rate in Ghana. However, in high-tech SMEs, skilled workers are required
which can pose serious labour problems especially in developing countries. An insufficient
supply of skilled workers can limit the specialisation opportunities, raise costs, and reduce
flexibility in managing operations of businesses.

2-2.9.3 Equipment & Technology Constraints

Technology and modern equipment controls industrial development in modern times. SMEs
by virtue of their size and financial standings have difficulties in gaining access to
appropriate technologies and information on available techniques thus limits their ability to
innovate and compete.

2-2.9.4 Domestic Demand Constraints

One serious problem that SMEs face domestically is limited access to public contracts and
subcontracts, arising from cumbersome bidding procedures and/or lack of information. In
addition to this is the few distribution channels are often taken over by Larger Firms, thereby
creating serious limitations to market access for SMEs. As noted in the case of Ghana, a
demand constraint is one of the factors that has limited the growth of SMEs.

55

2-2.9.5 International Markets Constraints

Previously SMEs were not opened to international competition; however, the case is different
now as many are now faced with greater external competition in job acquisition and the
market share. However, this problem was mostly identified in medium-sized enterprises in
Ghana with very little in the construction industry.
2-2.9.6 Legal Constraints
High start-up costs for firms, including licensing and registration requirements, can impose
excessive and unnecessary burdens on SMEs. The high cost of settling legal claims and
excessive delays in court proceedings adversely affect SME operations. In the case of Ghana,
the cumbersome procedure for registering and commencing business were key issues often
cited.
2-2.9.7 Managerial Constraints
Lack of managerial know-how places significant constraints on SME development. Even
though SMEs tend to attract motivated managers, they can hardly compete with larger firms.
The lack of support services coupled with their relatively higher unit cost makes it difficult
for SME to improve their management capabilities. Despite the numerous institutions set up
by Governments and other organizations to providing training and advisory services, there is
still a skills gap among the SME sector as a whole.

SELF ASSESSMENT TEST

1. What are the limitations of sole tradership?

2. Discuss the social desirability of a sole tradership business.
3. Give six advantages of a sole trading business?
4. State the advantages of a partnership business.
5. Give five advantages of a joint stock company.
6. Name any five type of co-operatives.
7. What are the disadvantages of co-operative societies?
8. What are the characteristics of a business organisation?
9. What is a sole trading firm? What are its features? Discuss in details.
10. Can sole trading firm survive in the present day economy? If so why?
11. Discuss the characteristics of a partnership firm. How is it different than sole
proprietorship?
12. What is a joint stock company? What are its features?
13. Discuss the disadvantages of a Joint Stock Company.
14. Differentiate between a company and a co-operative society?
15. A co-operative society is the best form f business organisation. Do you agree?

56

DISCUSSION QUESTIONS
1. Joint Stock Companies (i.e. Incorporated Companies) are perceived to be the best form of
businesses. Do you agree with this assertion? Express your views to support or reject the
assertion
5. Joe Mensah is an undergraduate student of a third year class pursuing a course in
mathematical science. He has passion for entrepreneurship and has started some business
in the construction industry as a cement vendor. His business is three months old and
considering employing 10 permanent workers. What is typical with Joe? Discuss the
remits of his business and indicate with advice whether you agree with Joes decision at
this stage of his business.
6. Christiana and Genevieve have both completed the University with 2nd Class Honours
degrees. They happened to do their National Service (NS) in a typical social enterprise
firm where they attended to children. Few months to completion of their NS, they decided
to set up their own Social Enterprise to build recreational centres for children and the
youth. Six months into their new world, they decided to quit the business. Discuss what
might have triggered their decision.
7. Imagine, you are a Management Consultant whose main service includes business
diagnosis and autopsy. Three friends came to your office to enquire the best business
model (legal structure) to adopt for their new venture they are planning to start. Provide
them with profession advice.
8. If you are a Business Consultant in the construction industry and you are tasked to assist
some young entrepreneurs about starting a business in the construction industry, what
advice would you provide to these young entrepreneurs? Discuss the incorporation
processes (legal and non-legal requirements) of starting typical contractor-based and
consultant-based organisations in the construction industry.

57

UNIT

BUSINESS PLANNING AND PROPOSAL

DEVELOPMENT

INTRODUCTION
Today, a record number of people are going into business for themselves, either on their own
or with others. To survive, they must quickly learn how to attract and win clients. Corporate
leaders and managers need to prepare business plans and proposals to attract funding and
financing and win clients. If you have launched your own business or managing an existing
company, you will need to learn the art of writing good business plans and winning
proposals. In the previous unit, you have been introduced to the types of business
organisations and small to medium size enterprises. This current unit will introduce you to
the business planning and proposal development, which are fundamental requirements and
crucial part of the business development process. Students shall be exposed to business
planning, providing the prospective business owner with valuable insight into the feasibility
of a business idea. At the same time, students will discover how to find bids, how to evaluate
which bids you should pursue, and how to develop winning proposals, including personal
client presentations.

UNIT OBJECTIVES
This unit provides a brief overview of the business planning and proposal development processes. After

completing this unit students should be able to:

Explain the meaning of business plan and business proposal.
Discuss the functions and the use of business plan and business proposal.
Distinguish between a business plan and a business proposal.
Identify and discuss the various forms of business plans and business proposals.
Enumerate the relative advantages and disadvantages of business plan and a business
proposal
Identify and explain the components of a business plan and a business proposal.
Develop workable business plan and a wining business proposal.
58

SESSION 1-3 BUSINESS PLANNING

1-3.1 What is a Business Plan or Business Planning?
Planning is a crucial part of the business development process, providing the prospective
business owner with valuable insight into the feasibility of a business idea. Business plans are
used to demonstrate the feasibility of a business idea, to provide a blueprint for operating that
business, and to provide documentation needed to secure funding and financing. The primary
purpose of developing a business plan is to gather the information necessary to make an
informed decision about a prospective business.

1-3.2 Types of Business Plans

There are two ways to look at the business plan: by stage of development, and by target
reader. Under the stage of development, there are generally two ways to divide the planning
style: start-up plans and plans for ongoing businesses. Under the target reader there are also
two ways to look at the plan: an inside reader and an outside reader. There are many
variations on the general categories of business plans, namely:

Loan Proposal Business Plan;

Loan Investment Business Plan;
Operational Start-Up Business Plan; and
Strategic Business Plan.

Although there are dierent plans and dierent readers, there are similarities in each of the
four plans including the nancial forecast, which is common to all business plans. For
example, a rapidly growing business requires a slightly dierent emphasis for both its
strategic and loan/investment plan. Figure 5 below graphically demonstrates the variations in
the various forms of business plans.

Existing
Business

Loan/Investment Plan

Strategic Plan

Loan Proposal Plan

Operational Start-Up Plan

Stage of Development
Start-Up
Business

External

Internal
Target Reader

Figure 5: Various Categories of Business Plans

59

A business plan geared to an external reader is written with a specic objective in mind
usually a loan or an investment. Before writing the external plan, you as the business owner
must believe in your business. After all, how can you convince a bank or nancial institution
to lend, or an investor to invest, unless you are personally convinced of the validity and
viability of the business?
A business plan geared to the internal reader serves two purposes. It is a road map for taking
the business in a particular direction. It is also a litmus test for the business. Setting goals and
objectives is one thing, but determining the steps needed to accomplish these goals is quite
another. The planning process allows the entrepreneur to determine what might or might not
work. For example, a business owner may research the idea of opening a chain of stores only
to discover that franchising is a more eective way to expand the business. Likewise, in a
start-up situation, an entrepreneur may discover during his market research that his
hometown is not large enough to provide a sustainable market for his chosen endeavour. He
can then consider a dierent type of business, or start his business in a dierent location.

1-3.3 Stages of Business Planning

Three broad stages of planning encompass the process of developing a cold storage facility,
from initial goals to full-scale operations. Figure 6 shows the planning process. The following
three subsections discuss what takes place during each phase, from the perspective of the
prospective entrepreneur.
Initial Goals

Feasibility Study

Not Feasible:
What can we change?

Feasible
Develop Business Plan

Concept Testing
Seek funding
Feasible
Full-Scale Operation
Figure 6: Stages of Business Planning
60

Not Feasible:
What can we change?

1-3.1.1 Phase One: Initial Goals and Feasibility Study

In this phase, the entrepreneur or business owner works to determine his initial goals and the
reasons for developing the business. Once those goals have been determined, the entrepreneur
proceeds with feasibility study to determine if the idea is feasible. If it is not, the study should
address what could be done to make the facility feasible. The outcome of this phase is a
market analysis, feasibility study, and other information that will be needed to prepare a
business plan.
1-3.1.2 Phase Two: Business Plan and Concept Test
In this phase, the entrepreneur uses results from the previous phase to develop a business plan
and proceed with a concept test. If the test shows that the concept is viable, the entrepreneur
can seek funding and proceed with a full-scale facility. If the test shows the concept to be
infeasible, more work should be done on the business plan and concept to determine what
would make the business feasible. One way to accomplish a concept test might be to pilot the
business on a very small-scale. This would test the demand for one service without a lot of
financial risk. The outcome of this phase is greater knowledge about the feasibility of the
business. Once the concept works, the owner may proceed to the final stage.
1-3.1.3 Phase Three: Full-Scale Operation
In this phase, the owner acquires funding and financing, and proceeds with full scale
operation. This process relies heavily upon information gathered from the previous two
phases, as well as anything learned from the concept test. The outcome of this phase is a fullscale business that has begun operations to serve the market identified in the business plan.

1-3.4 Components/Elements of Business Plan

1-3.4.1 Front Matter and Executive Summary

Front matter for the proposal includes the cover (or transmittal) letter, nal table of contents,
list of any graphics and tables, and the executive summary. The purpose of the executive
summary is to get the readers attention by summarizing the key elements of the business plan.
It must be short, to the point and very well written. This is arguably the most important part
of the business plan. The Introduction must make your reader want to keep reading. It is a
good idea to write as much of the Introduction as you can at the outset of the planning
process. This initial writing will help you to focus your attention on the goals of the plan.
You should then rewrite the Introduction after you have completed the rest of the business
plan. This way the specics of the plan, and the changes made during the planning process
are accounted for. You are addressing the issues of what you do, where you are going in the
short term and what you want from the reader of the plan. This section of the plan should be
two to three pages long.
61

1-3.4.2 Business Definition and Concept

The business definition section asks two important questions. First, it asks why an owner
wants to be in business. Second, it asks what business the owner is in. The following should
be provided at this section of the business plan where applicable:
Describe what your business does in general terms.
Include your mission or vision statement.
Describe what differentiates your business from others. This is important to the
reader, as they want to know how your business will be able to create new
customers. What do you offer that will take customers away from competitors?
Briefly describe your business history if applicable.
Provide any other information that will excite the reader about your business.

1-3.4.3 Goals & Objectives

Tell the reader what you want (e.g. a business loan for a specific amount).
State your sales, production and profit goals. Be specific in amount and time line.
If this is for a bank loan, comment on goals such as anticipated time to achieve a
positive cash flow and the ability to service debt. (Note you cannot complete this
section until the rest of the plan is complete.)
1-3.4.4 Management Ownership
Briefly describe the technical qualifications of each principal in this enterprise.
Briefly describe the business qualifications of each principal in this enterprise.
Tell the reader your business structure (i.e. proprietorship, partnership, and
incorporation).
Provide a fact sheet with contact information such as name, address, telephone
numbers, email addresses, etc

1-3.4.5 Product and Services

The purpose of the product/service section is to detail exactly what your business does for the
customer and what makes these offerings desirable.
Product Oriented Businesses
Describe each product you sell. The combination of products is your product mix. If you
cannot list each product, break the business down into logical categories. Describe the key
product features, and how your products are different from those of your competitors.
(Functionality, durability, ease of use, etc). Describe product protection such as patents,
copyrights and trademarks.

62

Service Businesses
Describe each type of service you offer (be specific). Describe the service features in terms
important to the customer. Describe any service protection such as copyrights or trademarks.
Product Risks
If there are any risks associated with your product or service such as product liability,
professional liability, or ease of duplication by competition, state them and describe how you
will mitigate these risks.

1-3.4.6 Market Research

The purpose of the Industry and Market Research section is to prove that the market is large
enough in your area to support the survival and growth of your business.
Industry Research
Describe your industry. If you are in a new industry, or an industry not well known to a
reader, this will be a fairly comprehensive section. A better known industry requires less
explanation. Describe the state of the industry. Document industry trends on a local, national
or world scale. Sales, number of customers, number of units sold, trends in related industries
are all good industry indicators. Describe the key customers for your specific industry.
Provide other national/international economic indicators that encourage the health of your
industry. Examine risks to the industry caused by legislation, technological change or any
threat to the industry as a whole.
Competitor Analysis
Provide the results of any customer survey work you have done and the sources of
information. List the direct competitors in your local market. These are firms who offer
exactly what you offer. List the current number and the number in existence for the past
three-year period. List the indirect competitors in your local market. These are firms who
offer substitute products. Analyze any competitors who have gone out of business in the past
and if possible describe why their business failed. Explain how your firm will compete with
these competitors to prove how you can survive in their markets. Examine risks that could
occur when you enter the market. For example, what if your key competitor cuts their price
when you open your business? Position your product. Show how your products/services or
company is different from your competition.

1-3.4.7 Market Strategies

The purpose of the Marketing section is to demonstrate how you plan to tap your market.
This includes pricing, distribution, sales and promotional strategies. Marketing is one of the
most misunderstood aspects of business. To many, marketing is sales and promotion. Sales
and promotion are important elements of marketing, but marketing is a broader concept.

63

It envelops the design and packaging of a product the price and discounting strategies for
the business and the intimate knowledge of the current and future needs and wants of the
target market. To create a balanced approach you should research all elements of marketing
not just advertising, sales and promotion. Here are some of the key elements of marketing
you want to address in your business plan.
Price Strategy
What are your prices for different products and services? How did you arrive at those prices?
(i.e., Charge going rate, industry standard mark-up, etc.) Do you have any price packages?
What is your price image? (i.e., bargain, middle of the road, high end) Is this consistent with
your target market? How do your prices compare with your competition? Have you
accounted for markdowns and off price promotions?
Physical Distribution
Describe which of the following distribution systems you plan to use in your business:

Direct Distribution selling directly from producer/provider to the customer.

Wholesale Distribution selling to a retailer who sells to the customer.

Brokers or Agents using a third party to sell the product usually on a commission
basis. This can be done for goods (Manufacturers Agents).

Hybrid Distribution Using more than one of the above.

Internet Sales See Internet Strategies Section.

Advertising & Promotion

Your promotional strategy is made up of three main areas. Not all businesses use all three, so
only include the parts relevant to your situation.

Advertising Plan (Paid Advertising): Provide a list of the media you plan to use.
You may include newspapers, magazines, radio, television, direct mail or Internet
advertising. Develop a monthly advertising schedule with planned budget amounts. If
you have written any ads or brochures, include them as appendices.

Public Relations Plan: Include media sources you plan to use to promote your
business. Include press releases in the appendices to the business plan. If you are
using a Public Relations firm indicate the name of the firm in this section.

Personal Selling Plan: Describe how you will prospect and find new customers.
Describe how you will provide new customers with information. If you have letters of
agreement, contracts or other sales tools, it is sometimes advisable to include them as
appendices to the business plan.

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1-3.4.8 Operations and Implementation

The purpose of the Operations section is to indicate how you plan to operate the business.
This means how you will produce the services or provide the products. The operations or
implementation section discusses common issues that arise when implementing a business
idea, and focuses thinking on ways to overcome those challenges. Issues such as production
plan, production flow, procurement, inventory control, quality control, and breaking even
should be addressed at this section. This section of the business plan deserves a great deal of
thought, because the issues raised in this section are important in keeping a cold storage
facility running. Many of these issues are managerial issues, and need to be decided by the
entrepreneur, and his management team assisting with the implementation.
Production Plan (Manufacturing Businesses)
The production plan demonstrates your ability to produce products. This section may not
apply to service businesses.
Production Flow Chart (Manufacturing businesses)
Provide a flow chart/process diagram showing the entire production process from start to
finish. List and budge production equipment required for the business.
Procurement (Businesses that manufacture or sell products)
Sources of supply and order lead time. Terms and conditions of sale. Alternate sources of
supply (this addresses procurement risk). Inventory control systems. Physical space
requirements (unless covered in location sections).
Sub Contractors (both goods and services)
Provide a list of sub-contractors. Show exactly what these sub-contractors do and where they
fit into the production of the business. Show alternative sub-contractors (this addresses subcontract risk).
1-3.4.9 Human Resources
The Human Resources section demonstrates how you will determine your HR needs, fulll
them, manage your staff and pay them.

Staffing:
Organizational chart (show reporting structure).
Job descriptions (show what people do).
Job specifications (show the skills and knowledge required to do each job).
Recruiting (Where will you find good people?).
Management (How will you treat those good people?).
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Compensation How much will you pay your people? (This includes base wages,
commissions, bonuses and other incentives.
Human resources risks. (Look at contingent plans for loss of key personnel, labour
shortages or strikes).

Professionals & Mentors:

Accountant, Lawyer, Bank Services, Business Advisors and Mentors (it can be
helpful to provide single-paragraph, biographies on key business advisors.)
Legal & Administrative
Legal form and capitalization and shares and (proprietorship, partnership, JSC)
Directors & Officers (Corporation Only)
List of key legal agreements such as contracts, leases, agreements, franchise
agreements, personal loan guarantees etc. The actual documentation is often put into
the appendix of the business plan.
Insurance/Risk management

1-3.4.10

Financial Plan

The nancial plan is critical to the success of your business plan especially if it is for the
purpose of getting a bank loan. The purpose of the financial plan is to show the nancial
requirements to start the business or inject into the business, and to keep the business
protable and liquid. There are three sections in a nancial plan, namely:
Starting Balance Sheet
Pro-Forma (Forecast) Income Statement
Cash Flow Forecast
Profit and Loss Statement
Notes to the Financial Plan
Statement of Personal Net Worth (for lending purposes)
The Cash Flow Forecast is arguably the most important part of the plan, but each of the other
documents is important from a planning perspective.

1-3.4.11

Appendices

The purpose of the appendices is to provide supporting documents for claims made in the
business plan. They may not necessarily be read, but are there for reference purposes.

Resum(s) of principals.
Letters of agreement / intent (potential orders, customer commitments, letters of
support). This adds a great deal of credibility to the outside reader, including the bank
or financial institution.
Sample ads and brochures.
Collation of market surveys.
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Price lists.
Personal net worth statement (including personal property values, investments, cash,
bank loans, charge accounts, mortgages, other liabilities. This will substantiate the
value of your personal guarantee if required for security.
List of inventory (including type, age, value).
List of leasehold improvements (including description, when made).
List of fixed assets (including description, age, current market value of any
equipment; legal description of any lands; description of any encumbrances on assets
to be pledged for business purposes).
Description of insurance coverage (e.g. insurance policies, amount of coverage).
Aged accounts receivable summary.
Aged accounts payable summary.
Copies of legal agreements (e.g. contracts, lease, franchise agreement, mortgage,
debentures).
Appraisals (include recent appraisals of assets such as buildings, property, and
equipment or provide a market evaluation of the business and an asset list outlining
the asset, the year purchased and amount paid).
Financial statements for associated companies (where appropriate).
Name of present lending institution (including branch, type of accounts).
Lawyers name (includes address and phone/fax number).
Accountants name (includes address and phone/fax number).

SESSION 2-3 BUSINESS PROPOSAL DEVELOPMENT

2-3.1 What is a Business Proposal?
A business proposal is primarily a sophisticated sales and marketing piece you develop to
dene a clients problem and/or opportunities and to sell the client your ability to provide
solutions and strategies to their satisfaction.

2-3.2 Types of Proposals

Proposals generally fall into four categories: internal, solicited, unsolicited, and sole-source.

2-3.2.1 Internal Business Proposals

Internal proposals are written within a company by a particular division, department, group,
or individual to persuade top management to support an idea or project. For example, the
product line manager may write a proposal to automate a particular assembly process. Even
though these proposals are for internal consumption only, they follow the same principles as
proposals written for outside companies or agencies.
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2-3.2.2 Solicited Proposals

Sometimes, a company is formally invited to submit a proposal. They receive a request for
proposal (RFP), expression of interest (EOI), request for quotation (RFQ), or bid invitation.
The client has a particular project or problem and is looking for outside help to get the job
done. The RFP has two components, thus technical proposal and financial proposal. The RFP
or bid invitation outlines the requirements and criteria for the job. The client selects a supplier
on the basis of a rms recommended programme, qualications, and projected costs.
2-3.2.3 Unsolicited Proposals
Unsolicited proposals are the most risky to write. They may require considerable time and
effort to develop with no guarantee that a client will be interested in the product or service
offered. For example, a rm may develop a new program or concept, such as a new
accounting method, and then must persuade clients to contract for the service. Because the
client has not requested the proposal, the rm must compete with a clients internal
operations and other businesses for the clients attention and acceptance. On the other hand,
these proposals are a way to generate new business for a company. As a rule, however,
companies do not write unsolicited proposals unless they have solid reasons to believe they
can win the clients business.

2-3.2.4 Sole-Source Contracts

In some instances, a government agency, private rm, or association will contract with only
one company to supply a product or service. This practice is known as a sole-source contract
and is generally established when a company has an outstanding record of reliability and
performance. Such a company might submit a proposal for a sole-source contract not to
compete for a job but simply to comply with regulations. The format is often standardized
and requires detailed information about the product, delivery schedules, and pricing. Table 7
summarizes these four types of proposals and their characteristics.

Table 7: Advantages and disadvantages of types of Proposals

Type of Proposal

Description

Internal Proposal

Proposal written within a company by a particular division,

department, group, or individual in the rm; it may be solicited or
unsolicited.
Advantages: those preparing the proposal know the rms needs
and the management structure; communication may be easier and
decisions made more quickly than with outside clients.
Disadvantages: the proposal must compete for scarce resources
with other company business; if the proposal loses its management
champion, the project may be cancelled.
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Solicited Proposal

Proposal written in response to an RFP from a potential client.

Advantages: client is requesting a proposal, and the rm can select
which RFPs to answer based on resources, expertise, previous
experience, and time/cost calculations.

Unsolicited Proposal

Disadvantages: if the rms bid/no-bid decision-making process is

awed, the rm may expend valuable resources researching,
writing, and presenting the proposal with little chance of winning
the job
Proposal that a company initiates without an RFP and sends to
potential clients in an effort to obtain new business.
Advantages: the rm can introduce itself to a wide range of
companies; the same proposal can be sent to many rms, thus
conserving company resources.

Sole-Source Contracts

Disadvantages: proposals are not tailored to individual companies;

the rm may get more business than it can successfully handle.
Primarily government projects that are tied to a specic rm; the
RFP is sent not to request a competitive bid but to elicit detailed
information on the product or services to be supplied in order to
satisfy government regulations.
Advantages: the rm contracted to do the work knows when the
work will be coming in and the specifications; no resources are
required to win the contract.
Disadvantages: an outside rm responding to the RFP has little or
no chance of winning the contract away from the company
currently doing the work. If the contract is awarded to the bidding
rm, they may have to use the specications and parameters of the
prior contractor.

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2-3.3 Request for Information and Request for Quote

There are a couple of variations of a formal RFP that you might want to consider answering.
At times a client may send out a request for information (RFI) or a request for quote (RFQ).
2-3-3.1 Request for Information (RFI)
A client may start the RFP process with a request for information. Basically, the client wants
to nd out: whether the requirements for a job they need to have done are reasonable;
whether the appropriate technology for the job exists; whether solutions the client is
considering are realistic; and whether you and other rms can meet the requirements of the
job. The client may ask you to point out potential problems, evaluate the available
technology, and critique the clients project goals, schedules, and cost estimates. Because an
RFI often leads to an RFP, you should consider responding to the clients inquiry. In many
cases, the document you develop for the RFI can serve as your core materials for the RFP.

2-3-3.2 Request for Quotation (RFQ)

In a request for quote, the client provides more detailed requirements than those found in an
RFP and may even specify how those requirements are to be met. You would be asked to
supply specic quotes for each part of the workincluding stafng, benchmarks, and a
detailed breakdown of projected hours and costs. Like an RFP, a written RFQ is considered
binding on your rm, unless the clients requirements change.

2-3.4 Four Key Questions to proposal Development

When it comes to developing winning proposals, it doesnt matter whether your company is
in the Ghana Club 100 or the newest venture; four questions have to be answered, thus,
How do you set up your planning process?
How do you elicit requests for proposals (RFPs) or locate job opportunities?
How do you choose which jobs your rm should target?
How do you write a winning proposal?

2-3.5 Summary of the Planning Process

In summary, a mission statement, business plan, and marketing plan enable you to:
Identify what kind of rm you want to have, the type of business you are in, and what your
overall goals and objectives are.
Dene your companys main product lines.
Identify the companys strengths and weaknesses.
Identify market niches in which your rm has an advantage over the competition.
Identify potential clients within those niches and how you can help solve those
clients problems.
Develop contingency plans to anticipate and adapt to a rapidly changing marketplace.

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2-3.6 Bid-Decision Criteria

At the bid-decision meeting, assess each RFP or new opportunity in light of the following
criteria:
1. First and most important, does the proposal support your business and marketing
plans? The bids you decide to pursue should be in line with your mission statement
and primary marketing goals. For example, if the goal of your rm is to increase business in city trafc planning contracts, an RFP from a health-care rm will pull you off
your main objective. Make sure that the jobs you pursue support your business plan
and marketing strategy.
2. Does this project fall into your organizations area of expertise? For example, if the
RFP deals with upgrading cable relays and you are only beginning to venture into this
area, do you have sufcient skills and resources to handle the job? Nothing kills a
companys reputation faster than failure to perform the required work. Make sure you
have the capability to follow through on the job. Otherwise, its best to decline an
RFP rather than risk compromising your rms reputation.
3. Does your background research on the project point out where your rm has a
competitive edge over other companies? Do you have more experience in this area? Is
your staff better trained or educated? Can you come up with more innovative
solutions to the clients problems? You need to identify your major strengths and
weaknesses as they apply to this contract, not your overall strengths and weaknesses.
If you cant identify a clear competitive advantage for your rm, it may be better to
decline the RFP and wait for the next opportunity.
4. Have you worked for the client before or had signicant contact with the client on
other jobs? If so, you often have a unique vantage point regarding their operations and
problems. This fact can help give you a competitive edge over other rms.
5. Can you assemble a proposal team and provide them with enough support and
dedicated time to get the job done? If your team does not have enough time or
management support to write the best proposal, you decrease your chances of winning
the contract.
6. Finally, taking all other criteria into consideration, is there a realistic chance that your
rm will receive the contract? If your research shows that you have anything less than
a 50 to 60 percent chance of winning a job, it is generally not worth your time to
pursue it. Some experts say that a rm should not pursue any job unless they have an
80 percent or better chance of winning the contract. Also, see if you can determine
whether another rm has been un-ofcially selected, or wired, to get the contract or
job. Your personal network contacts should be able to give you this information.

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2-3.7 When Not to Write a Proposal

Your experience in your eld and your knowledge of the competition should give you a good
gut feeling about the chances of winning a contract. But its always good to have a checklist
for making a no-bid decision. If any one or more of the following criteria hold true, you
should seriously consider declining the RFP or job opportunity. Chances are that the
solicitation has been made simply to satisfy regulations.
The time frame for preparing and submitting a proposal is completely unrealistic for
you to do a good job.
The RFP states that the current project is follow-up work for a multiple-stage project.
You would be competing against the rm that completed the rst part of the project.
(However, it may be possible to subcontract with the original rm to do a portion of
the work.)
The technical or other specications of the project do not match your systems but do
match those of your competitors.
The contract does not support your marketing plan or is out of your eld of expertise.
You have no real competitive edge over other rms.
You do not have the staff or resources to prepare the best proposal your company can
present.
Your chances of winning the proposal are less than 50 percent or, as some experts
advocate, less than 80 percent.
Sometimes your best decision can be to turn down an RFP. However, always maintain good
relations with the client company. Write a letter thanking them for the opportunity to bid on
the RFP, and then explain that you are declining the bid and why. Ask the company to
include you on their list for future RFPs

2-3.8 Characteristics of a Winning Proposal

If the RFP or new opportunity meets the bid-decision criteria, your task now shifts from
deciding, Should we do this proposal? to, How do we write a winning proposal? Whether
you are responding to an RFP or initiating the proposal, remember that your overriding
purpose is to convince the client that your rm is uniquely qualied to do the job. From the
clients perspective, proposals make it possible to evaluate the skills and capabilities of a
select range of companies and to choose the best rm for the job. No matter who the
prospective client may be and what problems must be solved, a winning proposal will always
include at least the following elements:
1. Evidence that you clearly understand the clients problem and situation. It is astonishing
how many proposals show that the submitting rm has not taken the time to research the
clients problem and to state it clearly. Do background research to nd out what the client
truly needs. You may discover that the real problem is not what the client has stated in the
RFP. This element is so important that it should be rst on the proposal teams list and be
featured prominently in the proposal document.
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2. A strategy and program plan or design that the client feels will solve the problem and
produce the desired results. The strategy and program plan is the heart of your proposal.
The plan describes how you are going to solve clients problems and meet their needs.
You should clearly state what benets clients will gain by accepting your solutions. The
proposal must tell clients enough without telling them everything. Otherwise, they may
use your proposal to do the job themselves!
3. Clear documentation of your rms qualications and capabilities for carrying out the
program plan. The client must be convinced that your rm has the required expertise and
staff to accomplish the work better than anyone else. This documentation can take the
form of a list of previous client work and rsums of staff members.
4. Evidence that your rm is reliable and dependable. You can include references or client
contacts who will vouch for your rm. The new client must have condence that you will
deliver on your promises and will complete the job within the time and cost estimates you
have developed.
5. A convincing reason why the client should choose your rm over all the other rms
competing for the job. Do you have a better program plan, more expertise in the eld,
better staff, or some other competitive edge? Highlight this advantage; clients should feel
they cant afford to do without you.
6. Finally, your proposal should look like a winner. Whether you submit a hard copy or an
electronic version of your proposal, the cover, title page, format, and graphics should
convey the spirit and professionalism of your company. Take the time to proofread your
copydo not rely on spell-check programs

2-3.9 Step Proposal Preparation and Writing Process

Whether you prepare an unsolicited proposal or respond to an RFP, the proposal preparation
and writing process is fundamentally the same. It can be broken down into nine steps.

2-3.9.1 Step 1: Bid/No-Bid Analysis and Decision

The most important management decision a company makes regarding any given project is
whether to bid for the contract. A proposal represents a signicant investment of company
resources and should be undertaken only if there is a reasonable chance of winning the
contract. Or you may decide to accept a loss on the job if you wish to establish your company
with a client, particularly if the prestige of the client will encourage other clients to hire your
company. There are two parts to this step: an analysis of the RFP and an economic analysis to
determine whether the potential return outweighs the cost of preparing the proposal and
completing the work.
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2-3.9.2 Step 2: The Proposal Team

The proposal team may be composed of only one person or several dozen people, depending
on the size of your rm and the importance of the project. Make sure to build and maintain a
good proposal team and outline the responsibilities of each team member from manager to
consultants to support staff. Attach the professional summaries and a-two page summary of
the CVs as appendices to the proposal.

2-3.9.3 Step 3: RFP Analysis

One of the most important tasks in the proposal preparation process is to analyze the RFP to
determine what the client may really need in addition to what is stated in the document. This
will help you develop your unique selling point that can make your rm stand out from the
competition. The work done in this step enables you to construct the proposal preparation
schedule in Step 4.

2-3.9.4 Step 4: Preparation Schedule

One of the proposal managers most important jobs is making sure that the proposal team
meets their deadlines. The manager must plan the effort just like any other company project.

2-3.9.5 Step 5: Assignment of Tasks

The preparation schedule allows the project manager to assign tasks and keep track of the
individual (or group and coordinator) responsible for completing the task, key dates that work
is due, and actual dates when the work is received. A more sophisticated method of assigning
and tracking tasks is through the use of PERT/CPM (Program Evaluation and Review
Technique with Critical Path Method) charts. These charts outline the critical steps in the proposal process, which are supported by less critical tasks, and assign a time frame to each step
and task.
.
2-3.9.6 Step 6: Development of Program Design
In Step 6, the proposal manager coordinates all information to develop the nal program
design. In this step, your rm pinpoints exactly what you will do for the client, how you will
do it, and how much time and money it will take to nish the project. This step includes
developing time and cost estimates.
2-3.9.7 Step 7: Development of Front Matter and Executive Summary
Once the rst draft of the proposal is complete, top management will review it and usually
suggest changes. When managers approve the nal content, the proposal team will develop
the front matter and the executive summary.
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Like business plan, front matter for the proposal includes the cover (or transmittal) letter,
nal table of contents, list of any graphics and tables, and the executive summary. The
executive summary is a key part of the proposal because it briey describes the major issues
and your rms recommended actions. The executive summary serves as a potent sales and
marketing piece for your company

2-3.9.8 Step 8: Producing the proposal

In Step 8, the manager gathers all proposal sections into one complete document, along with
any graphics required. The proposal usually follows a set format, generally developed by
each company. For example, many proposals have a format such as:
1. Title page Cover letter or letter of transmittal Table of contents List of graphics and
tables Executive summary (summarizes main points and recommendations).
2. Statement of the clients problem (an analysis of the clients situation)
Program design (your proposed solution)
Technical section (technical aspects of the program design)
Management section (description of how the project will be managed and who
will make up the management team)
Time/cost section (estimates of time and cost necessary to complete the project,
including follow-up).
3. Bidders experience and qualications (why your rm should be hired to do the work;
this section can include an analysis of your competitors).
4. Methodology- describing how the project will be executed detailing unique strategies.
5. Conclusions (your nal opportunity to sell your proposal to the client, including a
restatement of your solution and unique selling point, and how both will benet the
client).
6. Appendixes (staff rsums, recommendations from former clients, studies, surveys,
contracts, other additional information not included in the text).

2-3.9.9 Step 9: Client Presentation

After all the hard work you have put into your proposal, you do not want to lose out on the
nal leg by failing to do a quality presentation. Your proposal deserves the best chance for
success. In some cases, you will simply deliver your nished proposal to the client and then
spend a few nerve-wracking days, weeks, or even months waiting for an answer. In other
cases, however, writing the proposal is only half the battle.

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You must also do a client presentation. Here is where your background research on client
management and your face-to-face contacts with the client will prove invaluable. You need to
know not only how to do a quality presentation but also how to anticipate who is likely to
give you trouble and how to disarm their objections and soothe their fears. Make no mistake
about itfor many managers and workers in the client company, you represent the often
unwelcome prospect of change. This is particularly the case if people believe that their jobs
may be in jeopardy or that they will be required to learn new procedures.

SELF ASSESSMENT TEST

1.
2.
3.
4.
5.
6.
7.

Business proposal is different from business plan. Discuss

Discuss the four types of proposals with examples.
What is the difference between request for information and request for proposal?
Identify and discuss the stages involved in proposal development
Discuss the various types of business plan.
List and explain the components of a business plan.
List and explain the components of a business proposal.

Case Study Assignment

1. Ghana Marketing Platform (GMP) is providing funding for young entrepreneurs in
Ghana and within the West Africa subs-region to facilitate the entrepreneurship
expansion project which is endorsed by the Ghana Government. Funding will be
provided on competitive basis based on winning proposals. GMP is requesting
entrepreneurs and potential entrepreneurs to submit proposals on innovative project to
solve a major problem affecting society. Three winning groups shall be provided with a
seed capital of $50,000 to start a business. Assuming your group has been selected as
one of the winners; develop a workable business plan for this new venture.
Note:
Students shall be put in groups of 5, and each group will submit one set of
proposal and one set of business plan.
Students shall make power point presentations to a panel of assessors.

Assignment duration shall be four weeks.

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UNIT

FINANCING AND FUNDING A NEW

BUSINESS VENTURE
INTRODUCTION
Funding and financing are essential business imperatives for starting a new business. Also,
when an existing venture is growing, for example, when contemplating investment in capital
equipment or an acquisition or expansion, it would require additional finance when its current
financial resources is inadequate. However, lack of access to finance remains a major
constraint to many start-up businesses and existing businesses who are considering
expansion. Many studies have also conceded that high interest rates and the cumbersome
processes have often been mentioned as the main impediments to SMEs access to bank loans
in Ghana. Some prominent researchers have noted that, about 90% of small firms are refused
loans when applied for from the formal financial intermediaries, due to inability to fulfil
stringent collateral conditions. In the previous unit, you have learnt about business planning
and business proposal development which are roadmaps to securing financing and funding.
This unit provides a basic overview of financing and funding opportunities for SMEs and
provides indicators on some of the agencies and programmes that may provide funding and
financing for SMEs.

UNIT OBJECTIVES
This unit builds on the previous unit to provide indicators on various sources of funding and
financing for SMEs in Ghana. After completing this unit students should be able to:
Identify and explain the two main sources of financing (debt and equity).
Discuss the various forms of debt financing alternatives to SMEs.
Discuss the various forms of equity financing alternatives to SMEs.
Identify and explain the various growth stages of SMEs and their financing needs.
Enumerate the relative advantages and debt and equity.
Identify and explain equity financing agents.
Explain start-up capital and working capital of SMEs.

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SESSION 1-4 SMES FUNDING AND FINANCING SOURCES

1-4.1 Introduction to Raising Finance

Raising finance is often a complex process. Business management needs to assess several
alternatives and then negotiate terms which are acceptable to the finance provider. The main
negotiating points are often as follows:

Whether equity investors take a seat on the board;

Votes ascribed to equity investors;
Level of warranties and indemnities provided by the directors;
Financiers fees and costs; and
Who bears costs of due diligence.

During the finance-raising process, accountants are often called to review the financial
aspects of the plan. Their report may be formal or informal, an overview or an extensive
review of the companys management information system, forecasting methods and their
accuracy, review of latest management accounts including working capital, pension funding
and employee contracts etc. This due diligence process is used to highlight a fundamental
problem that may exit.

1-4.2 Why do SMEs find financing a problem?

The main problem faced by SMEs when trying to obtain funding is that of uncertainty:
SMEs rarely have a long history or successful track record that potential investors can
rely on in making an investment;
Banks are particularly nervous of smaller businesses due to a perception that they
represent a greater credit risk; and
A common problem is often that the banks will be unwilling to increase loan funding
without an increase in the security given (which the SME owners may be unable or
unwilling to provide). A particular problem of uncertainty relates to businesses with a
low asset base. These are companies without substantial tangible assets which can be
use to provide security for lenders.

1-4.3 Sources of Finance for SMEs

There are a number of potential sources of finance to meet the needs of small and growing
businesses. The two main sources (forms) of finance to finance a new venture include:
Equity Financing Sources (i.e. existing shareholders and directors funds, retained
profit, right issues, new issues of shares to the public, families and friends, etc); and
Debt Financing Sources (i.e. loan finance, overdraft financing, etc).
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The main differences between borrowed money (debt) and equity are that bankers request
interest payments and capital repayments, and the borrowed money is usually secured on
business assets or the personal assets of shareholders and/or directors. A bank also has the
power to place a business into administration or bankruptcy if it defaults on debt interest or
repayments or its prospects decline.
In contrast, equity investors take the risk of failure like other shareholders, whilst they will
benefit through participation in increasing levels of profits and on the eventual sale of their
stake. However in most circumstances venture capitalists will also require more complex
investments (such as preference shares or loan stock) in addition to their equity stake.
The overall objective in raising finance for a company is to avoid exposing the business to
excessive high borrowings, but without unnecessarily diluting the share capital. A key
consideration in choosing the source of new business finance is to strike a balance between
equity and debt to ensure the funding structure suits the business. This will ensure that the
financial risk of the company is kept at an optimal level.
Other sources of financing that can be explored by SMEs to finance a new venture may
include but not limited to the following:
Trade Credit Finance;
Factoring and Invoice Discounting;
Business Angels Financing;
Family and Friends;
Venture Capital Funding; and
Leasing and Hire Purchase.
Since debt financing is difficult to access by SMEs, many entrepreneurs result principally to
Equity Finance and other innovative forms and sources of finance. There are three main
methods of raising equity finance, thus:

SESSION 2-4 EQUITY FINANCING ALTERNATIVES FOR SMES

2-4.1 What is Equity Finance?

Equity is the term commonly used to describe the ordinary share capital of a business.
Ordinary shares in the equity capital of a business entitle the holders to all distributed profits
after the holders of debentures and preference shares have been paid.
2-4.1.1 Ordinary (equity) shares
Ordinary shares are issued to the owners of a company. The ordinary shares typically have a
nominal or face value (usually something like GHC1). However, it is important to
understand that the market value of a companys shares has little (if any) relationship to their
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nominal or face value. The market value of a companys shares is determined by the price
another investor is prepared to pay for them. In the case of publicly-quoted companies, this is
reflected in the market value of the ordinary shares traded on the stock exchange (the share
price). In the case of privately-owned companies, where there is unlikely to be much trading
in shares, market value is often determined when the business is sold or when a minority
shareholding is valued for taxation purposes. Another form of ordinary shares is Deferred
ordinary shares, which are entitled to a dividend only after a certain date or only if profits rise
above certain amount. Voting rights might differ from those attached to other ordinary shares.
Why might a company issue ordinary shares?
A new issue of shares might be made for several reasons:
The company might want to raise more cash.
The company might want to issue new shares partly to raise cash but more
importantly to float its shares on a stock market.
The company might issue new shares to the shareholders of another company, in
order to take it over.
2-4.1.2 Preference shares
A preference share is basically a priority share. It is entitled to a dividend before ordinary
shareholders and in the event of winding up, the preference shareholders would be paid
before the ordinary shareholders. Dividends on preference shares are usually of a fixed
nature. Preference shareholders do not usually have voting rights. Venture capital houses tend
to invest a significant portion of their funding in the form of preference shares. This enables
the management team to qualify for a larger share of economic ownership than would be the
case if all the funds were provided by ordinary shares.

2-4.2 Equity Financing Flow Framework for SMEs

SMEs in different industries progress along different financing paths. For example, a
biotechnology firm may progress along a grant funding path, while a construction start-up
may progress along debt financing path. In both cases, financing options become more
readily available in the latter stages when products or services are closer to becoming a
commercial reality and/or when positive earnings are evident. The following generic
Framework represents the most usual circumstances for a SME seeking equity financing, has
been created to provide a structure of reference for the report. It will allow for the
classification of the different forms of equity financing (Finance Agents) as well as the
different facilitators, programmes, regulations, and policies that affect investment decisions at
different stages in SMEs growth cycle.

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Private

Flow
Incentives

Seed

VCs

Angels

Flow
Incentives

Corporate

Institutional

Banks

Flow
Incentives

Flow
Incentives

Start
up

First
Expansion

Primary

Secondary

Second
Expansion

Public

Flow
Incentives

Initial
Public
Offering

Agent

Figure 7: The Flow of Equity Financing for SMEs.

2-4.3 SMEs Stages of Growth and Financing Flow

2-4.3.1 Stage 1: Seed
All businesses start with an idea. The germination of these ideas into a comprehensive vision
of a viable company is called the seed stage of a business. During this stage prototypes are
built, market opportunities are assessed, ideas are exchanged between trusted friends and
family, and the entrepreneur makes a final decision as to whether or not he will dedicate most
of his time towards developing the new venture.
Seed stage equity financing primarily comes from the entrepreneur, family, and friends type
I private investors. This type of financing is often called love money, as it is seldom
invested based of the idea itself but due to the relationship the investor has with the
entrepreneur. During the seed stage the majority of expenses will be incurred developing
prototypes and conducting market research. However, there are many situations in which
seed stage financing requirements are well beyond the means of an entrepreneur and his local
network. In these situations the most likely option for equity investment comes from angels
and type II private investors, which include past business acquaintances, friends of friends,
and others. While both type II private investors and angels will likely be wealthy individuals
or business owners with the means to invest in the new venture, angels are different in that
they actively seek equity investment opportunities.

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In fact, with the widespread use of information technology angels are becoming more like
Venture Capital firms. The advent of online screening functions, angel networks and the
proactive search for high quality investments are three key factors that separate angels from
type II private investors.
Regardless of the type of investor targeted, at this point the entrepreneur will need to have
some form of a business plan prepared along with financial projections for the business.
Investors outside of the immediate circle of family and friends will require information
regarding market size, trends, details of the technology, identification of customers, etc. Most
angels will require a comprehensive business plan and executive summary. In addition to a
written plan, the entrepreneur will have to possess excellent verbal skills in order to
communicate his vision to potential investors.

2-4.3.2 Stage 2: Start-up

Once the initial research, idea formulation, and prototypes have been completed then it is
time to start the business. During this stage the entrepreneurs vision will become a
functioning organization. The entrepreneur will have to find a home for the business, hire
employees (and possibly additional management), order inventories, secure suppliers,
commence marketing efforts and so on.
For most entrepreneurs, securing equity financing during this stage is still quite difficult. The
company does not yet have a base of customers and has not yet earned profit. It is a very
risky time for a new venture. Similar to the seed stage of growth, angels and private investors
will be targets for investment funds. However, another group of investors, venture capitalists,
can now be considered. It will now be more important than ever to have a well developed
business plan. In addition, the entrepreneur will likely need the services of an experienced
lawyer and an accountant, especially when attempting to value the company in order to
acquire equity financing.

2-4.3.3 Stage 3: First Expansion

In this model the first expansion occurs due to the companys rapid growth. The entrepreneur
needs additional working capital and/or capital investment to address growing sales of the
company. Additional employees are hired, the production process is enlarged and new
markets beyond the local setting are targeted. In a global context, particularly in the USA, an
average investments range from $3 to $5 million. If the entrepreneur can prove positive
earnings and an established customer base, the chances for private, angel and venture capital
equity investment will be increased dramatically.

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2-4.3.4 Stage 4: Second Expansion

Second expansion usually involves a company growing at an extremely rapid pace with a
robust technology and a rapidly growing potential market. Although not always the case, the
entrepreneur may envision transforming the business from a small concern to a large
corporation. Additional funds are required to develop new products and/or enter new
international markets. Again, production facilities, marketing budgets and other areas of the
business may need to be enlarged in order to address the firms high growth potential. In the
USA and other parts of the world, second expansion investments range from $5 to $20
million. With a successful history and high potential for the future, equity financing options
will begin to increase. Banks and corporate investors will also become targets for additional
funds.

2-4.3.5 Stage 5: Initial Public Offering

A successful SME (although it may no longer be an SME) can finance its growth by
acquiring funds from the public through an IPO. However, many companies never reach this
stage of growth by choice. The numerous regulations and procedures that must be followed
are not appealing to many entrepreneurs. Although business owners will have an opportunity
to cash out some of their equity in the secondary markets, they must also be ready to give up
some control of the business. Periodic reports of business activities have to be supplied to
shareholders, which may affect any perceived competitive advantage associated with the
companys private information. Also, other activities such as sales of stock by executives
must be reported to a securities exchange commission. The size of the investment may range
from 5 million to well over 100 million. In the United States there are alternatives to going
IPO in regards to attracting equity investments from the public. Small businesses can access
public capital by selling state-registered securities to the general public. This process is called
a Direct Public Offering (DPO).

2-4.4 Equity Financing Agents

2-4.4.1 Private Investors
Type I
The first type of private investment comes from friends and family and is often referred to as
love money. The decision to invest does not usually consider the technology or business
idea itself, but the investors prior relationship with the entrepreneur. It must be assumed that
in order to provide funding, type I investor must first have sufficient financial means to do so.
Also, the primary reasons for investing usually do not include such considerations as tax
incentives. In many cases the investor simply wants the entrepreneur to succeed while the
possibility of high returns is a secondary concern.
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Type II
There are two key differences between type I and type II private investors. First, type II
investors do not usually do not have a close personal relationship with the entrepreneur. The
entrepreneur is usually introduced to these individuals through business transactions and
networking, or the private investor may have an interest in the SME industry. Second, type II
investors are more stringent in their investigation of the opportunity and will have much
higher expectations of returns. In most cases formal documentation and periodic reporting
will be required. Type II private investors are also often confused with angel investors.
While there are indeed some similarities both are wealthy individuals the primary
difference is that type II investors do not proactively seek to invest in small businesses;
however, they are targeted by entrepreneurs due to their financial capabilities and/or
credibility in the industry. In addition, angels have differentiated themselves further from
type II investors through their increased usage of information technology. With the use of
online screening and matching services found in most angel networks, angels are now
functioning more like venture capital firms. They now have a larger pool of opportunities to
select from and have formalized much of the selection process by requiring entrepreneurs to
submit online applications and business plans.

2-4.4.2 Angels
Angels are individuals or small groups of professionals or business people with an active
interest in investing in and assisting new ventures. Most often they focus on local companies.
These investors are more formal than the type I private investor, and provide more value than
the type II private investor. Angels often provide guidance and contacts for the entrepreneur
with such groups as banks, suppliers, industry associations and others. The credibility that a
reputable angel can provide to a small struggling business often allows the SME to possess a
competitive edge during the vulnerable start-up stage of development. Angels will often look
for high returns and an exit strategy for their investments.
Similar to formal venture capital, they often tie investments to the achievement of milestones
and objectives. The key to garnering angel equity investments will be a well developed
business plan, exceptional management, a high growth business idea, and an exit strategy for
the angels investment.
All of these types of private investors (type I, type II, and angels) are more readily found in
the United States due to a business culture that rewards entrepreneurial activity and various
government sponsored incentive programs. Also, small angel networks have begun to form in
some parts of the country increasing the prominence of angels in this country. It should be
noted that a critical mass of angel networks has not yet been established in this country and
entrepreneurs often find it difficult to locate angel investors.

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2-4.4.3 Venture Capital

Venture capital firms (VCs) allocate funds from private and institutional investors in order to
invest in companies that possess high growth potential. VCs typically invest for short terms
of three to seven years and expect pre-tax returns from 20 to 40 percent per annum. Unlike
angels, VCs primarily invest in existing companies with the expectation of moving the
company towards IPO or acquisition the exit strategies of choice. However, some VCs will
invest in start-ups in special circumstances, such as a business with patented technology and a
high growth market, or a very experienced management team that is breaking out on its own.
VCs rarely provide investment during the seed stage of a company. During the past few
years, venture capital funds have been flowing primarily towards high technology companies.
In the second quarter of 1999 sixty percent of all venture capital firms in the West,
particularly the USA went to two high technology sectors: communication and software, with
the majority flowing to Internet related companies.
Due to the high expenses of venture capital firms, they usually have a minimum investment
in order to justify their due diligence costs. Due to the formal structure of the venture capital
operation and the more stringent evaluation process, complete business plans and
presentations are compulsory. Also, an existing customer base and a minimum number of
years with positive earnings will also be closely considered.
The cost of financing through venture capital firms is usually quite high. Often 30 to 50
percent ownership of the company is the price paid for venture capital funds. Although the
VC will not typically get involved in the daily management of the company, it will usually
occupy a seat on the board of directors once a deal has been closed. The investment itself can
take on many different forms. Primarily it is a straight equity investment; however, it can also
involve convertible debt or debt with warranties. Similar to the angel investor, a properly
chosen VC firm will also provide additional value in the form of consulting and networking.

2-4.4.4 Banks
Banks in the United States offer a variety of equity financing options; however, straight
equity investments in seed or start-up companies are very rare. At this stage of growth banks
primarily provide fee for service consulting to locate potential equity investors. Once a
company has experienced successful growth and is deemed ready to move towards the IPO
stage, then banks become more involved in equity financing activities.
2-4.4.5 Corporate Investors
Corporate investors include large existing businesses with proven track records. Corporate
investors will often finance a successful partner, customer or supplier if the risk return
ratios match corporate policies. For more risky ventures, such as start-ups, many corporations
have developed incubation facilities. New innovations within the company, often called
intraprenership, are often spun-off into new businesses through such programs.
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2-4.4.6 Institutional Investors

Institutional investors, such as mutual and pension funds, primarily invest in SMEs by
providing funds to venture capital firms. Start-ups and seed companies will rarely receive
funds directly from the institutional investor; however, some have set up large funds with the
purpose of investing in small businesses. In most cases these funds are set up similar to
venture capital firms.
2-4.4.7 The Public
The public is the largest potential pool of capital for small business. Due to securities
exchange regulations, the public most often can only invest in publicly traded companies
registered with the Securities Exchange Commission (SEC). The investment is realized
during the public offering. However, the public also indirectly invest in SMEs through
mutual and pension funds. In many parts of the world, there are exemptions to the Securities
Act that allow small companies to solicit equity investments from the public without fully
registering with the SEC. There are restrictions on the amount of the total investments and in
some cases the type of investor that is eligible.

SESSION 3-4 DEBT FINANCING ALTERNATIVES FOR SMES

3-4.1 Sources of Finance for SMEs

Debt finance exists in various forms and the tenure can be arranged in three principal terms,
thus, short term, medium term and long-term debt.
Short Term Finance: These credit facilities normally last for less than three years and may
include; overdraft, stocks, short-term loans, appropriation, bonds and securities.
Medium Term Finance: The most difficult financing problem are concerned with obtaining
finance for periods ranging from about three to eight years thus medium term finance. These
loans are required to finance major expansions, machinery, plant and equipment. The major
expansion is neither sufficiently large nor sound to justify the issue of equities on debenture,
nor small enough to be covered by short term funding.
Long Term Finance: This is habitually between 5-10 years or even longer for major
constructional and developmental projects. It may be useful in starting or expanding a
business and would be used for the purchase of building or equivalent. The risks to the lender
can be higher because of the time scale involved. Long term loans may be a combination of
the following: mortgage, merchant bank loan, industrial and community finance corporation
shares, debenture, government grant loan, sales and lease back.

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3-4.1.1 Loan Financing

Medium term loans (up to seven years) and long term loans (including commercial
mortgages) are provided for specific purposes such as acquiring an asset, business or shares.
The loan is normally secured on the asset or assets and the interest rate may be variable or
fixed. The Small Firms Loan Guarantee Scheme can provide up to 250,000 of borrowing
supported by a government guarantee where all other sources of finance have been exhausted.
3-4.1.2 Bank Overdraft Financing
An overdraft is an agreed sum by which a customer can overdraw their current account. It is
normally secured on current assets, repayable on demand and used for short term working
capital fluctuations. The interest cost is normally variable and linked to bank base rate.
3-4.1.3 Overdraft Financing
Overdraft financing is provided when businesses make payments from their business current
account exceeding the available cash balance. An overdraft facility enables businesses to
obtain short-term funding although in theory the amount loaned is repayable on demand by
the bank. There are several important factors to consider when assessing the appropriateness
of an overdraft as a source of funding for SMEs:
The amount borrowed should not exceed the agreed limit (facility). The amount of
the facility made available is a matter for negotiation with the bank;
Interest is charged on the amount overdrawn at a rate that is above the Bank Base
Rate. The bank may also charge an overdraft facility fee;
Overdrafts are generally meant to cover short-term financing requirements they are
not generally meant to provide a permanent source of finance.
Depending on the size of the overdraft facility, the bank may require the SME to
provide some security for example by securing the overdraft against tangible fixed
assets, or against personal guarantees provided by the directors.

The amount of an overdraft at any one time will depend on the cash flows of the business, the
timing of receipts and payments, seasonal trends in the sales and so on. This can be illustrated
using the data below. In the example cash flow statement given below, the SME generates a
positive overall cash flow in a full year. However, due to the timing of sales receipts
compared with supplier payments, the business needs to fund a temporary overdraft during
the year:
Advantages of an overdraft over a loan
Customer only pays interest when overdrawn
Bank has flexibility to review and adjust the level of the overdraft facility, perhaps on a shortterm basis. Overdraft can be effectively be used as a medium-term loan the facility is
simply renewed each time the bank comes to review it. Being part of short-term debt, the
overdraft balance is not normally included in calculations of the business financial gearing.

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Advantages of a loan over an overdraft

Business and bank know precisely what the repayments of the loan will be and how much
interest is payable and when. This makes cash flow planning more predictable. The loan is
committed the business does not have to worry about the loan being withdrawn whilst it
complies with the terms of the loan.
3-4.1.4 Invoice Discounting
Finance can be raised against debts due from customers via invoice discounting or invoice
factoring, thus improving cash flow. Debtors are used as the prime security for the lender and
the borrower may obtain up about 80 per cent of approved debts. In addition, a number of
these sources of finance will now lend against stock and other assets and may be suitable than
bank lending. Invoice discounting is normally confidential (the customer is not aware that
their payments are essentially insured).
3-4.1.5 Senior debt
This is the term given to the bank loans and other lines of credit such as overdrafts for
working capital, and is so named in recognition of the banks place in the financial pecking
order; that is to say, the bank has first call on cash-flow to service the debt due to it and
normally first call on any security. Typically senior debt takes the form of a medium-term
loan, repayable over a period of up to seven years, plus a working capital overdraft.
3-4.1.6 Mezzanine Debt
This is loan finance where there is little or no security left after the senior debt has been
secured. Mezzanine debt tends to be a loan secured on the assets of the business behind the
banks senior debt, and usually has the benefit of an equity kicker. The equity kicker
usually takes the form of a warrant that entitles the mezzanine lender to buy a small
percentage of the business (typically 5%) for a nominal price.
To reflect the higher risk of mezzanine funds, the lender will charge a rate of interest of
perhaps four to eight per cent over bank base rate may take an option to acquire some equity
and may require repayment over a shorter term. Interest on the mezzanine debt is often set at
one or two percent higher than the senior debt rate.

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SESSION 4-4 OTHER FORMS OF FINANCING FOR SMES

4-4.1 Hire purchase and Leasing

Hire purchase agreements and leasing provide finance for the acquisition of specific assets
such as cars, equipment and machinery involving a deposit and repayments over, typically,
three to ten years. Technically, ownership of the asset remains with the lessor whereas title to
the goods is eventually transferred to the hirer in a hire purchase agreement.

4-4.2 Donor Agencies, NGOs and Governmental Funding

External donors, with the government, central bank and commercial banks acting as mere
intermediaries, can fund most of the lending in this category. A typical special program will
identify the specific business enterprise category to benefit, provide guarantors to the bank to
minimize credit risk exposure, provide funds to cover administrative costs and subsidize
funds for further lending to the target SMEs. Usually banks are asked to contribute part of the
fund to be lent out. The banks that have been involved in this type of lending are the Ghana
Commercial Bank (GCB) and the Social Security Bank (SSB).

4-4.3 Grants and Soft Loans

Government, local authorities, local development agencies and the European Union are the
major sources of grants and soft loans. Grants are normally made to facilitate the purchase of
assets and either the generation of jobs or the training of employees. Soft loans are normally
subsidized by a third party so that the terms of interest and security levels are less than the
market rate. There are over 350 initiatives from the Department of Trade and Industry alone
so it is a matter of identifying which sources will be appropriate in each case.

4-4.4 Trade Credit Financing

In todays business transactions, it is more common to see that retailers are allowed a fixed
time period before they settle their account to the supplier. This period is termed as trade
credit period. Before the end of the trade credit period, the retailer can sell the goods and
accumulate revenue and earn interest. A higher interest is charged if the payment is not
settled at the end of the trade credit period.
In the real world, the supplier would allow a specified credit period (say, 30 days) to the
retailer for payment without penalty to stimulate the demand of consumable products. This
credit term in financial management is denoted as net 30. The trade credit financing
produces two benefits to the supplier: (1) it usually attract new customers who consider it to
be a type of price reduction; and (2) it causes a reduction in sales outstanding, since some
established customers will pay more promptly in order to take advantage of trade credit more
frequently.
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4-4.5 Factoring Financing

Factoring is described as a type of supplier financing in which firms sell their credit-worthy
accounts receivable at a discount (generally equal to interest plus service fees) and receive
immediate cash. In addition, factoring is often done without recourse: the factor that
purchases the receivables assumes the credit risk for the buyers ability to pay. In this case,
factoring is not a loan and there are no additional liabilities on the firms balance sheet,
although it provides working capital financing.
Hence, factoring is a comprehensive financial service that includes credit protection, accounts
receivable bookkeeping, collection services and financing. Factoring differs from a bank
loan in three main ways. First, the emphasis is on the value of the receivables (essentially a
financial asset), not the firms credit worthiness. Secondly, factoring is not a loan it is the
purchase of a financial asset (the receivable). Finally, a bank loan involves two parties
whereas factoring involves three.
Factoring can be a powerful tool in providing financing to high-risk small and medium
contractors. Factorings key virtue is that underwriting is based on the risk of the receivables
(i.e. the buyer) rather than the risk of the seller. Therefore, factoring may be particularly well
suited for financing receivables from small and medium, large or foreign firms when those
receivables are obligations of buyers who are more creditworthy than the sellers themselves.

SESSION 5-4 WORKING CAPITAL

5-4.1 Definition of working capital

The net working capital of a business is its current assets less its current liabilities.
Current Assets include: Stocks of raw materials; work-in-progress; finished goods; trade
debtors; prepayments; cash balances;
Current Liabilities include: Trade creditors, accruals; taxation payable; dividends payable;
and short term loans.
Every business needs adequate liquid resources in order to maintain day-to-day cash flow. It
needs enough cash to pay wages and salaries as they fall due and to pay creditors if it is to
keep its workforce and ensure its supplies. Maintaining adequate working capital is not just
important in the short-term. Sufficient liquidity must be maintained in order to ensure the
survival of the business in the long-term as well. Even a profitable business may fail if it does
not have adequate cash flow to meet its liabilities as they fall due. Therefore, when
businesses make investment decisions they must not only consider the financial outlay
involved with acquiring the new machine or the new building, etc, but must also take account
of the additional current assets that are usually involved with any expansion of activity.

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Increased production trends to engender a need to hold additional stocks of raw materials and
work in progress. Increased sales usually mean that the level of debtors will increase.

5-4.2 Working capital cycle

The working capital cycle can be defined as: The period of time which elapses between the
point at which cash begins to be expended on the production of a product and the collection
of cash from a customer. The diagram below illustrates the working capital cycle for a
manufacturing firm
Work-in progress

Raw materials
stock

Finished goods
stock

Wages & overheads

Sale

Selling expenses
Trade creditors

Trade debtors

Cash

Taxation
Shareholders

Fixed assets
Loan creditors

Lease payments

Figure 8: Working Capital Cycle

The upper portion of the diagram above shows in a simplified form the chain of events in a
manufacturing firm. Each of the boxes in the upper part of the diagram can be seen as a tank
through which funds flow. These banks, which are concerned with day-to-day activities, have
funds constantly flowing into and out of them.

The chain starts with the firm buying raw materials on credit
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In due course this stock will be used in production, work will be carried out on the
stock, and it will become part of the firms work in progress (WIP)
Work will continue on the WIP until it eventually emerges as the finished product
As production progresses, labour costs and overheads will need to be met
Of course at some stage, trade creditors will need to be paid
When the finished goods are sold on credit, debtors are increased
They will eventually pay, so that cash will be injected into the firm

Unlike movements in the working capital items, most of these non-working capital cash
transactions are not every day events. Some of them are annual events (e.g. tax payments,
lease payments, dividends, interest and, possibly, fixed asset purchases and sales). Others
(e.g. new equity and loan finance and redemption of old equity and loan finance) would
typically be rarer events.

5-4.3 Working capital needs of a business

Different industries have different optimum working capital profiles, reflecting their methods
of doing business and what they are selling.
Businesses with a lot of cash sales and few credit sales should have minimal trade
debtors. Supermarkets are good examples of such businesses;

Businesses that exist to trade in completed products will only have finished goods in
stock. Compare this with manufacturers who will also have to maintain stocks of raw
materials and work-in-progress;

Some finished goods, notably foodstuffs, have to be sold within a limited period because
of their perishable nature.

Larger companies may be able to use their bargaining strength as customers to obtain
more favourable, extended credit terms from suppliers. By contrast, smaller companies,
particularly those that have recently started trading (and do not have a track record of
credit worthiness) may be required to pay their suppliers immediately.

Some businesses will receive their monies at certain times of the year, although they may
incur expenses throughout the year at a fairly consistent level. This is often known as
seasonality of cash flow. For example, travel agents have peak sales in the weeks
immediately following Christmas.

5-4.4 Working capital needs also fluctuate during the year

The amount of funds tied up in working capital would not typically be a constant figure
throughout the year. Only in the most unusual of businesses would there be a constant need
for working capital funding. For most businesses there would be weekly fluctuations. Many
businesses operate in industries that have seasonal changes in demand. This means that sales,
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stocks, debtors, etc. would be at higher levels at some predictable times of the year than at
others.
In principle, the working capital need can be separated into two parts:
A fixed part, and

A fluctuating part

The fixed part is probably defined in amount as the minimum working capital requirement for
the year. It is widely advocated that the firm should be funded in the way shown in the
diagram below:

Short term finance

Total
Assets

Long term finance

Fixed element of working capital

Fixed Assets

Time
Figure 9: A Graph of Total Assets against Time

The more permanent needs (fixed assets and the fixed element of working capital) should be
financed from fairly permanent sources (e.g. equity and loan stocks); the fluctuating element
should be financed from a short-term source (e.g. a bank overdraft), which can be drawn on
and repaid easily and at short notice.

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SELF ASSESSMENT TEST

1. SMEs are often challenged with accessing bank finance. Identify and explain the
reasons why formal financial institutions rarely provide competitive finance to SMEs.
2. Identify and discuss the two main sources of finance, highlighting their relative
advantages and disadvantages.
3. Explain equity financing with illustrative examples.
4. SMEs in different industries progress along different financing paths. Use the
generic framework of Equity Financing flow to illustrate this assertion.
5. Growing business from the scratch is a difficult task, sometimes you win and
sometimes you lose. Discuss this statement from the perspective of the five stages of
SMEs growth.
6. Identify and explain the principal equity financing agents.
7. What is the difference between loan and overdraft financing?
8. Identify and explain the principal debt financing alternatives.

DISCUSSION QUESTIONS
9. Entrepreneurs are not cut from the same mold, and no one set of characteristics can
predict entrepreneurial tendencies or success. Share your observations about
entrepreneurial characteristics.
10. What is your perception of entrepreneurs in our community and in our society? Why do
you believe entrepreneurs have that reputation?
11. If you were to begin a business immediately after your academic career concluded, what
challenges would you face? Would you consider that an ideal time in your life to launch
your first venture? If not, at what point in your life might be a better time and why? What
experiences might you find beneficial before you started your own business.
12. Discuss your knowledge about businesses that have failed. Were there failures due to one
or more of these causes or were other factors involved?

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