Debre-Markos University

College of Technology
Mechanical Engineering Department

lecture note on Entrepreneurship for Engineers

Contents
Part
Part
Part
Part
Part
Part

1
2
3
4
5
6

Introduction to

Entrepreneurship
Choosing The Legal Form Of an

Ownership
Setting a Business enterprise
Marketing in Business enterprises
Financing and accounting in
business
Risk and insurance of Business
enterprises

Chapter one
Entrepreneurship

Entrepreneur
Entrepreneurship

Meaning of the terms Entrepreneur,

Entrepreneurship, Owner-Manager
What is Entrepreneur?
Entrepreneurs are action-oriented, highly
motivated individuals who take risks to
achieve goals.
Entrepreneurs are people who have the
ability
to see and evaluate business opportunities,
to gather the necessary resources to take

advantage of them; and

to initiate appropriate action to ensure success.

Economists may view entrepreneurs as those

who bring resources together in unusual

combinations to generate profits.
Psychologists tend to view entrepreneurs in
behavioral terms as those achievementoriented individuals driven to seek challenges
and new accomplishments.
Peter Drucker states, as Entrepreneur is
someone who always searches for change
responds to it, and exploits it as an opportunity.
Example: It is the entrepreneur who only knows
Opening of new university near the society
Opening of Hotels near tourists attraction-center

What is Entrepreneurship?

Entrepreneurship is the dynamic process of creating

incremental wealth. This wealth is created by individuals
who assume the major risks in terms of equity, time and
/or career commitments of providing value for some
product or service. The product or service itself may or
may not be new or unique but value must somehow be
infused by the entrepreneur by securing and allocating
the necessary skills and resources Robert Ronstadt
Entrepreneurship is very rarely a get rich-quick
proposition; rather, it is one of building long-term value
and durable cash flow streams.

What Is An Entrepreneur
& Entrepreneurship ?
ENTREPRENEUR

A vision-driven individual who assumes

significant personal and financial risk to
start or expand a business.

ENTREPRENEURSHIP
The pursuit of opportunity through
innovation, creativity and hard work
without regard for
the resources currently controlled.

The Entrepreneurial Process

It is opportunity/market driven
It is driven by a lead entrepreneur

and an entrepreneurial team

It is resource parsimonious and creative
It depends on the fit and balance among
these
It is integrated and holistic

The entrepreneur versus the owner

manager (similarities and differences)
Entrepreneur
a.Entrepreneurial function is the organization of
production:
Entrepreneurship is an economic concept. Economics

describes four factors of production, namely, land, labor,

capital and entrepreneurial ability (organizational
skill).

b. Decision-making and calculated risk bearing:

c. An entrepreneur has an all-round personality:
d. High levels of achievement motivation
e. Innovative, creative, imaginative soul
f. The entrepreneur is the owner of the business
who enjoys the position of an employer.

Owner Manager
They may or may not be entrepreneurs.
They own and manage a small enterprise, in a way,

which fits with their personal motivations.

They are more intent on survival than seeking
innovative change and growth.
1. Limited scope for innovativeness, creativity and

imagination
2. Managerial jobs are transferable

-As a manager in the business organization,

his job is transferable from office to office, from one
unit and location to another location
3. Managers do not bear-risk

-Risk bearing capacity is an entrepreneurial

quality

Characteristics of Entrepreneurs
1. Need for Achievement:- vision

2. Willingness to take risks:-financial, careers, family ,

3. Self-Confidence:- internal and external locus of
control
4. Innovation:-. The entrepreneurial manger is constantly looking
for innovations, not by waiting for a flash of inspirations, but
through an organized and continuous search for new ideas
5. Total Commitment

6. All-rounders
7. A need to seek refuge:- escape from environmental
factor
a. The Foreign Refugee
b. Corporate Refugee.
c. Other Refugees

Other types of refugees mentioned are the following:

1.The parental (paternal) refugee
Who leaves a family business to show the parent that I can do it
alone.
2.The feminist refugee
Who experiences discrimination and elects to start a firm in
which she can operate independently male chauvinist.
3.The housewife refugee
Who starts her own business after her family is grown or at
some other point when she can free herself from household
responsibilities.
4.The educational refugee
Who tires of an academic program and decide to go into
business.

Motivation for starting a

business?

Motivation for starting a business

The reason for small firm formation can be divided between
pull and push influences.

I.Pull Influence
Some individuals are attracted towards small

business ownership by positive motive such as a

specific idea which they are convinced will work.
Pull motives include:

a. Desire for independence

b. Desire to exploit an opportunity
c. Turning a hobby or previous work experience in to a
business
d. Financial Incentive
The promise of long-term financial independence can

clearly be a motive in starting new firm, although it is

usually not quoted as frequently as other factors.

Push Independence
Many people are pushed into founding a new

enterprise by variety of factors including:

1.Redundancy==>Being without a job (idleness)
2.Unemployment (or threat of)
3.Disagreement with previous
employer==>Uncomfortable relation at work has
also pushed new entrants into small business.
The dividing line between those pulled and

those pushed is often blurred.

Outcomes of Entrepreneurship
Economic growth
New industry formation
Job creation

Success factors for entrepreneurs

Most new ventures succeed because their founders are capable individuals.

1.The entrepreneurial team

2.Incremental growth of product or services
3.Marketing and timing: Market potential is critically
influenced by
timing of new products or
services.

Weakness of entrepreneurship
a. Limited resource:- entrepreneurship mostly
starts from small investment or contribution of
owners are more than one individual
b. Lack of experience:- most of entrepreneurs have
no experience and this may lead to in efficiency
c. Disagreement between member: if the owner of
entrepreneur is more than one person,
disagreement between them can be created. This
disagreement can limit the operation of the
business.
d. Uncertainty of income:- opening and running a
business provide no guarantee that an
entrepreneur will earn enough money to survive

e. Risk:- starting or buying a new business involves risk

and the higher rewards the greater the risk
entrepreneurs usually face. This is why entrepreneurs
tend to have evaluate risk very carefully
f. Lower quality of life until the business gets
established:- the long hour and hard work needed to
launch a business can take their tall in the rest of the
entrepreneurs life
g. Complete responsibility:- it is great to be the boss but
many entrepreneurs find they must make decision on
issues about which they are not knowledgeable. When
there is no one to ask the pressure can build quickly the
realization that, the decisions they make are the cause
of success or failure.

Elements involved in
Entrepreneur
1.RISK:- Simply stated risk is a
condition in which there is a
possibility of an adverse deviation
from a desired outcome that is
expected or hoped from applied to a
business risk translates in to the
possibility of losses associated with
the assets and the earning potential
of the firm.

Business risks can be classified in to two

broad category market risk and pure risk.
Entrepreneurs face a number of different
types of risk. These can be grouped in to
basic areas.
a. Political risk:b. Business risk:c. Economic risk:d. property risk
e. Personal risk

2.Information
Information gives the following importance to the
businessmens
To know the position of their competitors that is
their strength and weaknesses, business strategy
they use and their long term plan.
To know threats and opportunity in doing business
Helps to design long term objectives and goals
indicate capital requirement (labor, capital and
machinery)
Helps to know market position locally and
internationally.

Sources of information
Information are obtained from two main
methods of data collection. That is primary data
collection and secondary data collection
1.Collection of primary data:
Observation method
Interview method
Through questioner
Other methods which includes warranty

cards, consumer panels, etc

2. Collection of secondary data:-Secondary

data are available in
Various publication of the central state and

local government
Various publications of foreign government
or international bodies and their subsidiary
organization.
Technical and trade journals
Books, magazines and newspapers
Reports
Public records and statistics, historical
documents.

By way of caution, the entrepreneur before using

secondary data must see that the process
following characteristics
1.Reliability of data
a. Who collected the data?
b. What were the sources of data?
c. Were they collected by using proper methods?
d. At what time they collected. Etc.

2.Suitability of data:- the data that are suitable for

one enquiry may not be suitable for another
enquiry, then the researcher has to check the
suitability of the data properly.
3.Adequacy of data

Kinds of Entrepreneurship
1.Women Entrepreneurs.
2.Founders and other Entrepreneurs.
a. Founding Entrepreneurs /Founders/
b.General mangers and
c.Franchisees

3.High-Growth and low-Growth Firms

a.Marginal Firms
b.Attractive Small Companies and
c.High potential ventures.
Assignment One: What is franchise & franchisee
in business? [max 1page]

Starting Technology based

new venture

Introduction
The innovative capacity of an entrepreneur and more
accurately, of companies operating in that field, is a
key determinant of its capability to enhance the
economic development and to upgrade the standard
of living of a country. It is widely accepted that one
of the indicators of this innovative capacity is the
rate of creation of New Technology-Based firms
(NTBF).
The nurturing of small firm formation and growth has
become increasingly important to the health of
developed economies in general, and to the creation
of new innovative industrial sectors in particular.

Contd
Technology incubators, which play a role in
accelerating the commercialization of R&D
outputs and the transfer of technology, have
contributed to startups of high technology-based
enterprises in the newly industrializing
economies of developing and developed
economies of the world.
Strengthening and promoting technology based
ventures through incubation programmes for new
technology based enterprises is necessary for
them to survive in a competitive society.

Government policies:
Credit programmes with State-subsidized rates
Share programmes by Government venture-capital companies
Grants by the Government, especially for creating jobs and for research
Security programmes by the Government for taking over part of the risk of

the credit institutions for enterprises

Advisory services.

Other
support
activities
fordevelop
enterprises
with both public
and
How
to form
and
Technology
based

private
sector involvement, include:
ventures?
* Business consulting services: Assistance with

business development, developing business plans, tax advice,

and so forth;

Contd

Technical consulting services: More specialized

services are provided such as networking assistance

between enterprises and science and technology
organizations, technology transfer, the exchange of
similar experiences and the identification of potential for
cooperation
Financing support activities: Offer optimal conditions
to enterprises, especially SMEs, in terms of rent and
costs of spaces, infrastructure and services. Offer also
assistance with accessing and using financial sources
such as corporate financing, business angels, venture
capital, and so forth;
Intellectual property assistance: Assistance with
developing and patenting new and improved technology,
including bringing it to the market for profit;
International assistance: Assistance with the global
networking of incubation and innovation centres for
information exchange and technology transfer

Factors contributing to the Success of High

Technology based Enterprises
The main catalytic factors for the success of high
technology-based enterprises are :
national policies,
research and development institutions
technological entrepreneur development
innovative finance support systems &
protecting intellectual property
science and technology parks
promoting and developing strategic business
alliances and networking
standardization, quality control and marketing.

Technology transfer for business

development
Technology
transfer is the process by which
existing knowledge, facilities or capabilities are utilized
and marketed to fulfill public and private needs.
It is the process by which basic science research and
fundamental discoveries are developed into practical
and commercially relevant applications and products.
Technology transfer processes constitutes technology
transfer, technology promotion, technology
deployment, technology innovation, technology
development, technology research, technology
assessment, technology information and
communication, technology investment, technology
collaboration and technology commercialization

Cost: Technology can cut costs in many ways: reducing material,

labor or distribution costs. Example: material costs can be
reduced by replacing lower cost material or by reducing the
material required to make a product.

Drive for acquiring new

Speed
technology
of delivery: The key competitive priority may be the

speed of delivery, as measured by lead time required to deliver a

product. Example, Automated guidance vehicle(AGV), Electronic
Data Interchange(EDI)

Quality: Technologies help to improve the quality and reduce the

production costs.

Flexibility and customization: The global market place of 1990s

is characterized by short product lifecycles, increased product veriety, and
extensive customization. To retain and increase market share in such
competitive environment, firms have to be more flexible in their operations.
* Increased production volume

*Higher living standards

The Entrepreneurship Process

Entrepreneurship and Technological

Change

New Industry Formation &

New
industries are born when technological change
technology

produces a new opportunity that an enterprising

entrepreneur seizes.
Disruptive or metamorphic technologies that destroy
previous technologies and create new industries display
a different pattern of behavior.
The pattern of growth, shakeout, stabilization, and
decline of industry can be interrupted at any time by the
entry of another disruptive technology.
Reading assignment
*Steps in Technology Transfer
* Promotion and Commercialization of technology-based innovation
Reference: Entrepreneurship for Engineers, Handout

In The Beginning..
The World was round..

And Now.?

Companies worldwide are finding they must either convincingly justify their
prices or differentiate themselves with some kind of perceived recognizable
value.

Technology is always evolving, and

companies, not just search companies,
cant be afraid to take advantage of
change.-Eric Schimdt

The use of technology as an integral

and key element in the transformation
of goods or services. Randall Stross

Definition
Technopreneurshipis the Result of uniting

Technology with Entrepreneurship

This is not just the effect of technology on

businesses but rather the process where

progression in the lives of the people happens.
It is the process of using the developments
brought about by specialized knowledge to come
up with innovations in all the aspects of human
life with the aid of a creative and skillful mind.
Birth of this field provides every entrepreneur a
challenge of exploring an untraveled path
towards greater success.

Technopreneurshipcan be
defined
as..

Integration of Technology, Innovation and

Entrepreneurship
Act of turning something into a resource
of high value by converting good ideas into
business ventures that relies heavily on the
application of human knowledge for
practical purposes.
Entrepreneurship in the field of technology.
Firms in which technology plays a critical
role in their operations.
Process of engineering the future of an
individual, an organization or a nation.

Definition Continues.
Application of the newest inventions

and advancements in coming out with

new and innovative products through
the process of dissemination.
Manufacturing of hi-tech products or
making use of hi technology to deliver
product to consumers.
Exhaustive use of and Exploitation of
technology in making profit.

Some Thoughts from Definition- The Meruvian

Roadmap

Who Has Been?

Steve Jobs

Bill Gates

Who has Been..?

Mark Zuckerberg

Sergey Brin and

Larry Page

Key Ideas

Discovering Gaps

Seeking and Creating

Opportunities
What do you See?
Problem or a

Challenge?

Always Distinguish

Between Risk and

Uncertainty
Uncertainty is an

opportunity for
Innovation

Opportunities Abound,

See or Create them

Knowing and Leveraging your

Strengths
Areas of Expertize
What comes to you

Naturally
Areas you can
Leverage in a
Synergy
Skills, Knowledge,
Proven Abilities

Defining and Assembling Your

Audience
Define your Market
Segment your

Audience
Assemble the
Audience and
Target the Share of
Mind
Create Top of
Mind Awareness

Developing a Viable Business

Model

Monetizing your Creation

Revenue

Models
Subscription
Advertising
Outright Sales
Sales and

Service

Various Possible Funding

Models

Final Thoughts

If you really want it, youll find a way If

you dont, youll find an excuse!
- Jim Rohn
If I had asked people what they
wanted, they would have said faster
horses.
-Henry Ford

Part two: Choosing The Legal

Form
Of
an
Ownership
2.1 Forms of Ownership and legal
requirement
2.2 Advantage and disadvantage for
each types of ownership

Forms of ownership and legal

requirements
Those

forms have been modified over the

course of time to keep pace with business
needs and the custom of society.

Ownership of business is represented by the

right of individual or a group of individuals to

acquire legal title to property (assets) for the
purpose of controlling them and to enjoy the
gains of profits from such possession and use.

The most common forms currently in wide

use by small business are:

Sole proprietorship
Partnership
Corporations and
Cooperatives
Each form of ownership has a characteristic
internal structure, legal status, size and
field to which it is best suited.

1) Sole proprietorship

It is an individual or single ownership

The sole proprietorship is a form of business organization

in which
o An individual introduces his capital,

o Use of his own skill and intelligence in the management

of its affairs and
o It is solely responsible for the results of its operation.
This form is known also as individual or single

proprietorship, sole ownership or individual

enterprise.
Example: Photo studio, bookshop, bakeries, small town

restaurants, retail stores, radio and watch repair shops,

and other elementary forms of business where personal
service is important.

Advantages of Sole
proprietorships
a.
Ease and low cost of formation and dissolution:there are no restrictions on either starting or
terminating small business operations.
b. Direct motivation and personal care
c. Freedom and promptness of action
The sole proprietor can take his own decision and there is
none to question his authority. the sole proprietor can
take prompt/quick decisions especially when an
emergency arises.
d. Business confidentiality
e. Single Tax:-The proprietorship does not pay tax as a
business; the profits from the business are the
personal income of the owner and are declare on his
individual income tax return.

Disadvantages of sole
proprietorship

a. Limited resources and size:-the capacity and skill are

very limited. Lending institutions and suppliers may not be

willing to cooperate because it is neither safe nor dependable
which results in making the business to remain limited in size.

b. Limited Managerial Skill:- in complex and difficult condition

which requires different expertise knowledge
c. Unlimited liability:-The sole proprietor will be legally liable
for all debts of the business , a source of courage and real
devotion, limit his activities only in specified areas
d. Uncertain future/Death of the owner terminates the
business/
e.

Difficulty in hiring and keeping high achievement

employees

2. Partnership**
The association of two or more persons to

carry as co-owners of a business where the

relationship is based on agreement is
called partnership.
This form of a business requires the existence

of two or more persons entering into a

contractual relationship.
This contract, which is an agreement between

the parties, is known as a memorandum of

association or article of partners deed.

Kinds of Partners
1.A general partner
Assumes unlimited liability and is usually active in managing the business.

Most partners are general partners.

2.A limited or special partner

Assumes limited liability, risking only his /her investment in the
business. Limited partners may not be active in management, and
their names are not used in the name of the business.
3.A secret partner
Takes an active role in managing a partnership but whose identities are

unknown to the public. i.e the general public does not know of this persons
partnership status.

4.A silent partner

As

opposed to a secret partner, a silent partner, his identities and

involvement, is known to the general public, but is inactive in managing the
partnership business

5.Senior partners
Assume major roles in management because of the
long tenure (possession), amount of investment in the
partnership, or age. They normally receive large shares
of the partnerships profits.
6.Junior partners
Are generally younger partners in tenure, have only
small investment in the firm, and are not expected to
make major decision. They assume limited role in the
partnerships management and receive a smaller share
of the partnerships profits.
See others

Advantages of partnership

1. Ease of starting
2. Increased source of capital:-Partnership can offer creditors less
risk than a sole proprietorship; it is often an attractive investment.
3. Combined managerial skill
4. Definite legal status
Todays partner can be assured that a competent lawyer can answer
virtually
any questions he/she might have about this form of
ownership. i.e lawyers can provide a sound legal advice about
partnership issues.
6. Motivation of important employees
7. Reduced risk

Disadvantages of partnership
1.Unlimited liability
2. Risk of implied authority
The fault and miss judgment made by a single
partner binds the firm and the remaining partners.
Thus, they are liable for the debts made by the
partner.
3. Lack of harmonyagrmnt or synchronizatn
4. Lack of continuity/instability/
If any one of the general partners dies, withdraws
because of mentally or physically incapable (injured),
the partnership ends.
5. Investment withdrawals difficulty /frozeninvestment/

3. Corporation***
A corporation is an artificial person authorized and recognized

by law, with distinctive name, a common seal, comprising of

transferable shares of fixed values, carrying limited liability and
having a perpetual or continued or uninterrupted succession

life.

Characteristics of Corporation
1. Separate legal entity
It can sue or be sued.
It has the right to manage its own affairs.
Shareholders cannot be liable for the acts of the corporation
2. Limited liability
Since the corporation has separate legal entity its debts are its
own. The assets and liabilities, rights and obligations incidental to
the companys activities are assets and liabilities, rights and
obligations respectively of the company and not of its members.
3.Transferiablity of shares
It is easy to transfer ownership in a corporation. A stockholder may
sell stock to another person and transfer the membership and
membership interest freely without consulting other stockholders .

4.Perpitual existence
Death, insanity, retirement and withdrawal of shareholders will not
affect the company.
5.Common seal
A corporation has a common seal with the name of the company
engraved on it, which is used as a substitute for its signature through
it acts through its agents.
6.Separation of ownership from management
7.Supervision
8.Written Constitution
On the creation of a company, the promoters must file certain
documents with the Registrar of Companies. These include the Article
of Association and the Memorandum of Association*.

Advantages of a
corporation
1. Financial
strength
2. Limited liability
3.Scope of expansion
Corporations

have greater
proprietorship or partnerships

potential

than

sole

4. Managerial efficiency
Corporations

enjoy
the
advantage
of
efficient
management by hiring specialists skilled persons to
become members of the board of directors to mange the
corporation

5. Ease in transferring ownership

6. Legal entity status
A corporation can purchase property, make
contracts, sue and be sued in the corporate name.

Disadvantages of a corporation
1. Difficulty of formation
It
is time consuming and cumbersome/not
managable to establish corporations unlike the
other forms of businesses.
2. Lack of owners/managers personal interest
These forms of organizations are managed by
directors, hired officials, and employees who may
not be expected to have such an interest in the
success of the business as the individual owner or
partner would have in his own business.
3. Delay in decision-making it needs official meeting of managers
or board

4.Lack of secrecy.opennesslack of privacy

5.Double taxation

4.Corporatives(*)
It is an organization owned by members/customers

who pay an annual membership fee and share in

any profits (if it is profit making organization).
It has to adopt the following principles:
Members have an equal vote in decisions
Membership is open to every one who fulfills
specified conditions (e.g. Number of hour worked)
Assets controlled and usually owned jointly by
members
Profit shared equally between members with limited
interest payment on loans made by members;
Members benefit from participation, not investment

5.Other forms of business

Franchises
A franchise is a business in which the owner of the
name or method of doing business (called the
franchisor) allows a local operator (called the
franchisee) to set up a business under that name.
Management buy-outs and buy-ins
In
recent years the traditional separation of
shareholders and management has been eroded by the
growing popularity of management buy-outs. This is
where a group of members pool their resources to buy
the business they have been running, usually from as
larger, parent company. A management buy-in is
where a group of managers buys into an existing firm,
usually replacing those who have been running it.

Part Three: Setting a Business

enterprise
3.1
Small Business as Basic
components of Economy
3.2 What is basic business idea
3.3 Steps in business setting
3.4 Developing a Business Plan

What is small business?

There are two approaches to define small
Business. They are:
1. By some measure of size
2. using an economic /control definitions.
what r msr of size?
wt r economic criteria?

1. Sizeof Criteria
Examples
criteria used to measure size are:
1. Number of employees
2. Sales
volume
3. Asset size
4. Insurance
enforce
5. Volume of deposits
Although

the first criteria located above,

employee, is the most widely used yardstick;
the best criteria in any given case depends
upon the users purpose.

To provide a clear image of the small firms, the

following general criteria for defining a small
business are suggested:
A). Financing of the business is supplied by one
individual or a small group.
b) Except for its marketing function, the firms
operations are geographically localized.
c) Compared to the biggest firms in the industry is
small
d) The number of employees in the business is
usually fewer than 100

Economic /Control Criteria

The economic /control definition cover:
a)Market share:- The characteristics of a small firms

share of the market is that it is not large enough to

enable it to influence the prices of national quantities of
goods sold to any significant extent.
b)Independence:- Means that the owner has control of the

business himself.
c)Personalized management:- Is the most characteristics

factor of all. It implies that the owner activity participates

in all aspects of the managements of the business, and in
all major decisions-making processes. There is no
delegation of authority.

All three of these characteristics must be satisfied if the

business is to rank as a small business.

Types of small business

1. Family Enterprises
Family owned business varies widely and can

include retail stores, contracting businesses, small

manufacturing firms, and restaurants among
others. In the absence of a successor, the life of a
venture is limited to the working life of its founder.
Succession is a serious problem.
2. Personal service Firms(PSF)
3. Franchise:-The franchisee may receiver Francis
help, training, a protected market, and technical
assistance with matters such as site selections,
purchasing, accounting, and operations
management.

Why are small business important

to economy?
They make exceptional contributions as they
provide
a. New jobs as populations and economy grow, small
business provide new job opportunity.
b.Introducing innovations-many scientific
breakthrough originated with small organization.
Photocopies, etc
c. Stimulating Economic competitions.

Reasons for the more rapid growth of small firms in

most developed countries.
1.New technologies, such as numerically controlled

machine tools, may permit efficient production

on a smaller scale
2.Greater flexibility is required as a result of
increased global competitions
3.Consumers may be coming to prefer personalized
products over mass produced goods.

Causes for small business failure

Incompetence- The owners simply do not know how to run the

enterprise.
Unbalanced experience- do not have rounded experience in
the major activities of business production.
Lack of managerial experience. Do not know how to
manage production.
Lack of experience in the line- the owner has entered a
business field in which he or she has very little knowledge.
Neglect- the owner does not pay sufficient attention to the
enterprise.
Fraud- involves intentional misrepresentations or deception
(purchasing materials or goods for him/her self with the
companys money)
Disaster- refers to some unforeseen happening or act of God
(eg. Robberies and extended strikes.)

The following are specific managerial causes of

small business failure
Inadequate records- unable to establish an
adequate record keeping system.
Expansion beyond resources
Lack of information about customer
Failure to diversify market
Lack of marketing research.
Legal problems
Nepotism- favoritism toward family members
One person management
Lack of technical competence
Absentee management the owner stayed away for
long period

Strength and weakness of small

business

Strength

1. Independence
Most small business owners enjoy being their own
boss, they like the freedom to do things than way.
2. Financial opportunities
Many small business owners make more money
running their own company than they would be
working for someone else.
3. Community services
if the person has reason to believe the public will
pay for such output, he/she will start a company to
provide it.

4. Job security
when one owns a business, job security is
ensured.
5. Family employment (benefits)
create the employment in the family
higher moral and trust occur in family-run
business
is times of server economic downturn
6. Challenge.
They want to win or lose on their own abilities the
challenge gives them psychological satisfaction

Weaknesses
1. Sales fluctuations
in some months sales are very high, while in other they
drop off dramatically. The individual must balance cash
inflows with cash outflows.
2. Competition- Owning a business is the risk of
competition (eg. Restaurants)
3. Increased responsibilities- owner is often a
bookkeeper, accountant sales person, personnel manager.
4. Financial loses- when the owner makes all major
decisions
6. Risk of failure- the ultimate risk the small business
owner manger faces is failure.

What is basic business idea?

It is logical to think of a goal for the unit in long

run rather than to look for the immediate

tomorrow. This long-term thinking is called basic
business idea

Businessmen/businesswomen

should think of
long-term goal and the profit when they start a
business.

The basic business idea, which is at the top of the

hierarchy, is to meet the broadest needs of the

customers, and has the long life perhaps from 550 years.
The

basic business idea facilitates choice of

product under an overall plan.

Thus, entrepreneur may think of being in the

entertainment film, in automobiles, in medicines,

in services, in industries, etc.

In a dynamic business scheme, one has to

carefully watch is one of the basic idea
degenerating as regards
Its

ability to generate quick returns.

Its ability to permit quick changes in the
products.

What project an entrepreneur

should have?

A project is a complex of economic activities in which the

key players commit scarce/limited resources in the

expectation that the benefits gained will exceed these
resources.
Also,

a project, broadly defined, in a way of using

resources: a decision between undertaking and not
undertaking a project is a choice between attentive ways
of using resources.

The project should have to consider the SWOT and

should be designed accordingly.

The SWOT approach compels individuals to think or

reason out systematically and analytically the important

factors strengths, weakness, opportunities, and threats.

Strength: is an inherent capacity, which an

organization can use to gain strategic

advantage over its competitors.
Weakness: is an inherent limitation or
constraint, which creates a strategic
disadvantage
Opportunity: refers to any factor that offer
promise or potential for moving closer or more
quickly towards the firms goal
Threat: is any factor that may limit or impede
the business in the pursuit of its goals

To be a successful entrepreneur, one major

determinant factor is the choice of a good
business idea. To select the best business idea,
the following steps needs to be pursued.
a. Identify your problem
b.Define your objectives
c. Identify, develop and analyze the possible

alternative
d.Select the best alternative in light of the specific
criteria set to the better fulfillment of the
objective.

Steps in business setting

1. The first key to success in any

manufacturing activity is to select the right
product. These must be examined with a
view to assess:
a.The marketing aspects
b.Technical aspects
c. Financial aspects

2. Having selected a product, a detailed

project report to be prepared. This will
cover the following aspects.
a. A detailed estimate of demand is to be made.
b. Technical specifications of the process should

be carefully studied.
c. The equipment required and their sources are
to be specified
d. Requirement of space.
e. The total cost of the project to be worked out,
the means for financing it identified
f. The economics of the entire scheme at
projected operating level is to be assessed.

3. Implementation of the detailed project report. Includes:

a. Deciding on form of ownership and registration
b. Obtaining finance ,Obtaining license
c. Establishing necessary infrastructures
4. Once all the required authorizations and sanctions have
been obtained, simultaneous action is to be taken for the
following. Pre-commissioning requirement
a. Ordering machinery from suppliers
b. Obtaining utilities like power and water connections
after constructions of shed, if necessary.
c. Recruitment of staff,
d. Arranging supplies of materials
e. Arranging for distribution of the products

5. Once these are complete, the plant is ready for

commissioning
trial
run
may
be
made.
Commissioning of plant, Includes:
a. Trial run of machineries
b.Promotional activity for the product
c. Introduce the product to the market and obtain

feedback
6. The unit is then ready for commercial production.
a. Commercial production

This is all about the feasibility study +pre&after

implementation

DEVELOPING A BUSINESS PLAN

WHAT IS A BUSINESS PLAN?

A business plan is a comprehensive set of

guidelines for a new venture.

A business plan is also called a feasibility plan that

encompasses the full range of business planning

activities, but it seldom requires the depth of
research or detail expected for an establishment
enterprise.
A business plan would present your basic business

idea and all related operating, marketing, financial

and managerial considerations.

What ever the name, it should lay out your

idea, describe where you are, point out where

you want to go, and how you propose to go
there.
The business plan may present a proposal for

launching an entirely new business. More

commonly, perhaps; it may present a plan for a
major explanation of a firm that has already
started operation

THE PURPOSE OF BUSINESS

PLAN
1.It can help the owner/manager crystallize and focus

his/her idea.
2.Although planning is a mental process, it must go

beyond the realm of thought. Thinking about a

proposed business becomes more rigorous as rough
ideas must be crystallized and quantified on paper.
3.It can help the owner/manager set objectives and

give him a yardstick against which to monitor

performance.
4.It can also use as a vehicle to attract any external

finance needed by the business. Eg. To get fund

5.It can convince investors that the

owner/manager has identified high growth
opportunities.
6. It entails taking a long-term view of the
business and its environment.
7. It emphasizes the strengths and recognizes
the weaknesses of the proposed venture.
8. The plan can uncover weakness or alert
the entrepreneur to sources of possible
danger

WHEN THE BUSINESS PLANS ARE

PRODUCED?
At the start up of a new

business:
Business purchase:
On going:
Major decisions:

WHO PRODUCED THE BUSINESS PLAN?

o Managers:, Owners:, Lenders:
WHY THE BUSINESS PLANS ARE
PRODUCED?
Assessing the feasibility and viability of the business/project:

it is in every ones interests to make mistakes on paper,

hypothetically testing for feasibility, before trying the real
thing.
Setting objectives and budgets: having a clear financial vision

with believable budgets is a basic requirement of everyone

involved in a plan.
Calculating how much money is needed: a detailed cash flow

with assumptions is vital ingredient to precisely quantify

earlier the likely funds required.

THE FORMAT OF A BUSINESS PLAN

1. Where are we now?
An analysis of the current situations of the market
place, the competitions, the business concept and the
people involved. It will include any historical background
relevant to the positions to date.
2. Where do we intend going?
Qualitative expression of the objectives, quantifiable
targets will clarify and measure progress towards the
intended goals.
3. How do we get there?
Implementing of accepted aims is what all the parties to
a plan are interested in as a final result.

I.Analysis
of OF
the
current
situation
(where
COMPONENTS
BUSINESS
PLAN
(OUT LINE
OF A
1. Identification
the business
we now?)
BUSINESS
PLAN)ofare

a. Introduction
- relevant history and background
- Proposed date for commencement of trading /beginning of a plan
b. Names
-name of the business and trading name
- name of the managers/owners
c. Legal identity
-company/partnership/sole-trade/cooperative
- details of share or capital structure
d. Location
-address-registered and operational
- brief details of premises.
e. Professional advisers, -Accountants, solicitors, bank

2. The key people

a. Existing management- Outline of
background experience
, skills and knowledge.
-Names of the management
team
b. Future requirement -gaps in skills and
experience and how they will be filled ,- future
recruitment intentions

3.The nature of the business

a. Product(s)or service(s)-Description and

applications

-Key suppliers
-Planned developments of product or service
b. Market and customers
Definition of target market, classification of
customers

- Trend in market place

c. Competition- description of competitors; strength
and weakness of the major competitors.

II. FUTURE DIRECTION (where do we intend

going?)

1. Management of resources
a) Operation:-premises, materials, equipment,
insurance, management information system.
b) People/Human resource/- employment practices,
recruitment, team management, training etc

III. IMPLEMENTATION OF AIM (how do we get

2. Marketing plan
there?)
a)Competitive edge- unique selling point of business
(Critical products or service characteristics or
uniqueness in relation to competitors)
b) Marketing objectives - specific aims for product or
service in the market place
c) Marketing methods- product, pricing, promotion,
distributions=4ps

3. Money: financial analysis

a. Funding requirement- start up capital, working
capital, asset capital, timing of funds required,
security offered.
b. Profit and loss:-- 3 years forecast, sales
variable costs, profit, overheads, net profit
c. Cash flow:-- 3 years forecast, receipts,
payments, monthly and cumulative cash flow
d. Balance sheet
- use of funds, source funds

Assignment 2: write the difference b/n feasibility

study and business plan (brief with 2pages)

Part four: Marketing in Business

enterprises
4.1 The Marketing Perspective
4.2 Marketing Mix-product, price, place,
and promotion,
4.3 Marketing segmentation and market
research,
4.4 Factors affecting the Business
Environment

THE MARKETING
PERSPECTIVE
Definition of Market:
Market is a group of potential customers
having needs to satisfy, ability to buy &
willingness to pay in order to satisfy these
needs.
OR

A social & managerial process by which

individuals & groups obtain what they need &

want through creating & exchanging products &
value with others.

The main concepts of marketing

Marketing activities are integrated
Organizations are market oriented
Marketing focuses on selected markets
Customer satisfaction is the core of marketing
Marketing starts early before production &

continues after sellingT/Fdiscuss?

THE MARKETING MIX

A marketing organization has to concentrate on

four important aspects known as the 4Ps of

marketing.
The marketing manager has to combine these

4 Ps (PRODUCT, PRICE, PROMOTION and

PLACE.) in such a way that the combination
provides satisfaction to the customer and profit
to the manufacturer.
When these elements (4 Ps) are combined

together they are called as The Marketing

Mix.

1.The product mix: Includes:

Product planning and development
Branding
Packaging Labeling

2.The price mix: Includes

Price polices
Skimming pricing (Pricing above
the market)
Penetration pricing (Pricing below
the market)
Premium pricing (Pricing with the
market)
Discounts
Quantity discount Seasonal
discount
Trade discount
Cash discount
Credits

3. Place mix
(Physical
distribution mix):
Channels of
distribution
Transportation
Warehousing
4. Promotion mix:
Includes
Advertising
Personal selling
Sales promotion
Publicity

I. THE PRODUCT MIX

Product: Is any commodity that satisfies the needs & wants of

customer.
It is a bundle of tangible & intangible attributes, which satisfy the

needs, & wants of customers.

In today market, a product can be

o A person (soccer players),

Organization (privatized
firms),
o Places (leased land),
Objects (items),
o Idea (business plans or project proposal),
o Services (medication or barber), or mixes of these elements.
So, a product can be defined as anything, which comprises of

benefits in forms of physical, service, and symbolic attributes to

maximize buyers want satisfaction.

1.Product planning and development

Product planning includes three major types of
decisions:
Development and introduction of new
products
Modifications of existing products in keeping
with the changing tastes and preferences of
the target customers and
Elimination of unprofitable or obsolete
products

2. Branding
Brand name: the part of a brand, which consists of word,

letters and/or numbers, which can be vocalized. Eg. OMO,

Coke
Brand mark: the part of a brand that can be recognized but

is not utter able. It can appear in the form of symbol, design,

distinctive coloring or lettering.
Trademark: a brand or part of a brand that has been given

legal protection so that the owner has exclusive rights to its

use. After companies identify their trademark, they entail a
term or
Trade Name: Trade name is the name of the business

organization. A trade name may also be used as a brand

name. In such a case it performs a dual function. It gives
identification to the product as well as the manufacturer

Importance of a brand
The brand makes it easier for the seller to process orders and track

down problems.
The sellers brand name and trademark provide legal protection of

unique product features.

Branding gives the seller the opportunity to attract a loyal profitable set

of customers and helps to increase the control and share of the market.
Branding helps the seller to segment markets and expand the product

mix.
Good brand help to build the corporate image because it advertises the

quality and size of the company.

Brands make it easy for customers to identify products or services.

Requirements of a good brand

Be easy to pronounce, recognize and remember
Be distinctive.
Suggest something about the products benefits or

characteristics
Suggest about the product qualities such as action or

use.
Be large enough to be applicable to new products

that may be added to the product line.

Have a possibility of registration and legal protection.

3.Packaging
Packaging is a marketing process concerned with
the design and production of the container or
wrapper for a product.
The container or wrapper or covering is called the
package.
Importance of packaging
1.Packaging serves several safety and utilitarian

purposes
2.Packaging
may
implement
a
companys
marketing program.
3.Well-packaged products may increase profit
possibilities in that it stimulates customers to pay
more just to get the special package.

4.Labeling
1.Brand label: simply the brand alone applied to

the product or to the package.

2. Grade label: a label, which identifies the
quality with, a letter, number or word.
3. Descriptive label: it gives objective
information about the use, construction, care,
performance or other features of the product.
Sometimes it is called informative label.
Eg. medicines

II. THE PRICE MIX

WHAT IS PRICE?
Is the amount of money consumers have to pay

to obtain the product.

Price has operated as the major determinant of

user choice traditionally.

Although non-price factors have become more

important in recent decades price still remains

one of the most important element determining
market share and profitability.
Different companies set the price haphazardly

as based on cost.

METHODS OF PRICING
1.Cost plus pricing/ Mark Up pricing/
2. Skimming pricing
The following conditions should be satisfied
1.A sufficient number of buyers have a high
current demand.
2.The high initial prices do not attract more
competition to the market.
3.The high price communicates the image of a
superior product.
3.Penetration pricing: below market price
4. Premium pricing: with market

The major objectives of pricing are:

Achievement of target return
Maximization of profit
Increase of sales volume
Maintenance or increase of market share
Stabilization of prices &
Meeting competition

Direct channel
1.Door-to-door selling
2.Manufacturers sales branches
3.Direct mail

Indirect channel
1.Merchant Middlemen: Whole seller:- Eg. Petram PLC and East Africa Trading are

wholesalers of consumer products.

Retailer:- Eg. Hadiya supermarket, and several Kiosks are
found closer to sell the items to residential houses.
2. Agent Middlemen
Commission agent, Brokers, Selling agents,
Eg. -Sony Glorious, is an agent to Sony Electronics products,
-Equatorial business is agent to Samsung.

Channel levels
Zero-level
Manufact
urer

One-level
Manufact
urer

Two-level
Manufact
urer

Threelevel
Manufact
urer
Agent

Wholesa
ler

Consum
er

Wholesa
ler

Retaile
r

Retaile
r

Retaile
r

Consum
er

Consum
er

Consum
er

IV. PROMOTION MIX

Is sometimes known as marketing

communication.
Means activities that communicate the

merits of the product & persuade target

customers to buy it.
Promotional objectives:
Informing the product
Increasing sales
Stabilizing sales / profit
Positioning the product

The promotional mix consists of four major

tools
Advertising: such as informative Ad, Persuasive

Ad and Reminder Ad
Personal selling Oral presentation in

conversation with one / more consumers for the

purpose of making sale
Sales promotion Includes: gifts, games,

sampling, coupons, and window displays.

Publicity Any information about the

organization, its personnel or its products that

appears in any medium on a non - paid basis.

MARKET SEGMENTATION
Market segment is a group of individuals or organizations within

a market that share one or more common characteristics.

The process of dividing a market in to segments is called market

segmentation.
Bases for market segmentation
1.Geographic segmentation:- Region Urban, Suburban, Rural,
Market density, Climate, Terrain (land, topography), City size, Country
size, State size
2.Demographic segmentation:- Age, Gender, Race, Ethnicity,
Income, Education, Occupation, Family size, Family life cycle,
Religion, Social class
3.Psycho graphic segmentation:- Personality, Attributes, Motives,
Lifestyles
4.Behavioral segmentation:- Volume usage, End use, Benefit,
Expectations,
Brand loyalty, Price sensitivity

MARKET RESEARCH
1.Marketing research is the systematic
recording and analysis of data about
problems relating to marketing.
AmericanMarketing Association
2.Marketing research is the application of
scientific method to the solution of
marketing problems.
Luck, Wales, Taylor
It is important for any business to conduct it before
established ,ongoing business and futurity.

Part five: Financing and

accounting in business
5.1 Financial requirement
5.2 Sources of finance,
5.3 control of financial resource
5.4 financial analysis and accounting
(reading ass..)

DEVELOPING FINANCIAL PLAN

Project implementation requires bringing

together the inputs of land, labor,

machinery, staff etc.
Finance is required to assemble these

inputs.
Proper financing of business is essential for

success in both small and large enterprises.

Financial

planning is the process of formulating

policies and strategies relating to the procurement,
investment and administration of funds for an enterprise.

While formulating a financial plan, the entrepreneur has

to answer the following questions:

How much money is needed?

Where the money comes from?
When should the money be available?

These three questions are concerned respectively with

the estimation of financial needs, sources of finance, and

the time of raising funds.
.Discuss about source of finance and how get from
them?

SOURCE OF FINANCE

A. Internal sources (Equity capital)

Owners capital or owners equity represent the

personal investment of the owner or owners in

a business, and it is sometimes called risk
capital because these investors assume the
primary risk of losing their funds if the business
fails.
It requires no repayment in the form of debt

and much safer for new ventures than debt

financing.
It

also requires sharing the ownership and

profits with the funding sources.

Source of equity capital:

1. Personal savings

The first place entrepreneurs should take for start

up money is in their own pockets or on their
poolofpersonalsavings.

It is the least expensive source of funds available.

As a general rules, entrepreneurs should expect to

provide at least half of the start up funds in the
form of equity capital.

If the entrepreneur is not willing to risk his own

money potential investors re not likely to risk their
money in the business either.

2. Friends and relatives:

Because of their relationships with the founder,

these people are most likely to invest. But having

them invest can lead to controversy if their
participation is not clear to everyone.
To avoid such problems, and entrepreneur must

honestly present the investment opportunity and

the nature of risks involved to avoid alienating
friends and family members if the business fails.

3. Angels
These private investors (or angels) are wealthy

individuals, often entrepreneurs themselves, who

invest in business start ups in exchange for equity
stakes inthecompanies.
Due to the inherent risks in start up companies, may

venture capitalists have shifted their investment

portfolios away form startups toward more established
firms.
Angles will often finance the deals that no venture

capitalists will consider most angles have substantial

business and financial experience and prefer to invest
in companies at the start up or infant growth stage

4.Partners:
Whenever an entrepreneur gives up equity in

his/her
business
(through
what
ever
mechanisms), he/she runs the risk of losing
control over it.
As

the founders ownership is a company

becomes increasingly diluted, the probability of
losing control of its future directional and the
entire decision making process increases.

5. Venture capital companies

venture capital companies are private, for profit organizations

that purchases equity positions in young businesses they

believe have high growth and high profit potential.

They provide start up (seed money) capital to new ventures,

Development funds to businesses in their early growth stage,

and

Expansion funds to rapidly growing ventures that have the

potential to go public or that need capital for acquisitions.

Two factors make a deal attractive to venture capitalists:

high returns and a convenient (and profitable) exit strategy.

6. Public stock sale (going public)

This is an effective method of raising large

amounts of capital, but it can be an

expensive
and
timeconsumingprocessfilledwithregulatoryni
ghtmares

B. External source (Debt capital)

Borrowed capital or debt capital is the external

financing that a small business owner has borrowed

and must repay with interest.
Small enterprises have few choices than large firm

for obtaining debt financing.

Although borrowed capital allows entrepreneurs to

maintain complete ownership of their business, it

must be carried as a liability on the balance sheet as
well as be repaid with interest at some point in the
future or with in the time stipulated in the contract

1.Commercial banks
In most cases commercial banks give
Short-term loan (repayable with in one year or

less) and
Medium term loan (maturing in above one year

but less than five years) as a working capital.

Long term loans (maturing in more than five

years) for the purchase of property or equipment

or as a project loan, with the purchased asset or
the project itself serving as collaterals.

unsecured and secured loans

An unsecured loan is a loan in which collateral

is not requested.
That is the loan is granted against personal

guarantee or corporate customers of the bank.

Unsecured loans will have high interest

charges but this may not be necessarily

applicable by all banks

To secure a bank loan, an entrepreneur typically

will have to answer a number of question,

together with descriptive commentaries
What do you plan to do with the money

(credit facility)?
How much do you need?
When do they need it?.
How long will you need it?
How will you repay the loan?

2.Trade credit
It is credit given by suppliers who sell goods on

account.
This credit is reflected on the entrepreneurs

balance sheet as account payable and in most

cases it must be paid in 30 to 90 or more days
interest free because of its ready availability
Getting suppliers to extend credit in the form of

delayed payments usually is much easier for a

small business than obtaining bank financing.

3.Equipment suppliers
Most equipment vendors encourage business

owners to purchase their equipment

offering to finance the purchase

by

In some cases, the vendors will repurchase

equipment for salvage value at he end of its

useful life and offer the business owner
another credit agreement on new equipment.

5. Accounts receivable financing

Short term financing that involves either

the pledge of receivables as collateral for a

loan or the sale of receivables (factoring).
Account receivable bank loans are made on

a discounted value of the receivables

pledged.

6. Credit Unions:
7. Insurance Companies:
8. Bonds
9. Treasury bill
How to prepare financial statement n

accounting .read
If time c sm pts abt accounting.

Part six:- Risk and insurance of Business

enterprises
6.1 Definition of Risk,
6.2 The process of Risk
management,
6.3 Classifying risks by Type of
Asset,
6.4 Insurance of the Small
Business

DEFINITION OF RISK
Risk

exists whenever the future is

unknown. Because the adverse effects of risk
have plagued mankind since the beginning of
time, individuals, groups and societies have
developed various methods for managing risk.
Since no one knows the future exactly,
everyone is a risk manager for himself. I.e.,
not by choice, but by sheer necessity.
o Example: In buying a tire, we may have a
choice. There is no sheer necessity

The term risk used in different ways. The

following definitions given by different scholars

and practitioners in the field:
Risk

is the channel of loss

Risk is the possibility of loss
Risk is uncertainly
Risk is the dispersion of actual from expected
result
Risk is the probability of any outcome different
from the one expected
Generally, it has bad/negative connotation

Business risks can be classified into two broad

categories:
1.Market risk is the uncertainty associated with an
investment decision. An entrepreneur who invests in
a new business hopes for a gain but realizes that the
eventual outcome may be a loss.

2.Pure risk is used to describe a situation where only

loss or no loss can occur-there is no potential gain.
A pure risk exists when there is a chance of loss but
no chance of gain/profit. Example: Owner of an
automobile faces the risk of a collusion loss. If
collusion occurs, he will suffer a financial loss. If there
is no collusion, the owner will not gain

RISK MANAGEMENT
The complexity of the business environment calls for

or demand for a special attention to a risk:

The special task to
Identify
Analyze
Combat and the operating risks are referred to as risk

management.
below
Some of the factors, which increase the complexity of

environment, are:
Inflation
Growth of internal operation
More complex technology
Increasing government regulation

What

is
risk
management?
Risk
management is a systematic way of protecting
business resources and income against losses
so that the organizations aims are reached
without interruption, creating stability and
contributing to profit.

Risk management is broader than insurance

management in that it deals with both

insurable and uninsurable risks.
Insurance
management for most part it is restricted to
the area of those risks that are considered to be
insurable.
The emphasis in the risk management concept

is on reducing the cost of safeguarding against

risk by whatever means.

2.To estimate the frequency and size of

loss, i.e., to estimate the probability of loss
from various sources. It is also called as risk
measurement.
Risk measurement means
i. Determination of the chance of an occurrence

or relative frequency.
ii. Determination of the impact of losses upon
financial affairs.
iii.The ability to predict the losses that will
actually occur during the budget year.

3.To decide the best and most economical

method of handling the risk if loss.
i.e. Selection of the proper tool for
handling risk
4. Implementing the decision
5.Revaluating the decision

Tools of Risk Management

1. Avoidance
One way to handle a particular pure risk is to avoid
the property, person or activity with which the risk is
associated.
Two approaches of risk avoidance:
i. Refusing
e.g. For instance, a firm can avoid a flood loss by not
building a plant in a place where flood is frequently
affecting. In case of refusing, we are discontinuing
the activity
ii. Abandonment
e.g. A firm that produces a highly toxic product may
stop manufacturing that product.

2. Retention
Bearing all the risk by that person/organization.
Types of retention
i. Planned/conscious/ active risk retention
It is characterized by the recognition that the risk
exists, and tacit agreement to assume the losses
involved.
The decision to retain a risk actively is made
because there are no alternatives more attractive.
Self-insurance is a special case of active retention.
Self-insurance is not insurance, because there is no
transfer of the risk to an outsider.
o E.g. A firm may keep some money to retain the
risk.

ii.
Unplanned/Unconscious/
Retention

Passive

Passive risk retention takes place when the

individual exposed to
recognize its existence.

the

risk

does

not

In this case, the person so exposed retains the

financial consequence of the possible loss

without realizing that he does so.

4. Separation /Diversification
Separation of the firms exposures to loss instead of

concentrating them at one location where they

might all be involved in the same loss.
Separation==>Dispersion/Scattering the exposure
in different places.
Dont put all your eggs in one basket
Example: Instead of placing its entire inventory in

one warehouse, the firm may elect to separate this

exposure by placing equal parts of the inventory in
ten widely separated warehouses.

5. Transfer
It is also called as shifting method.
When a business organization cannot afford to

cover the loss by itself, it may look for/transfer

institutions.
Insurance is a means of shifting or transferring
risk.

CLASSIFYING RISK BY TYPE OF ASSET

1.Property risks
Property-oriented risks involve tangible and highly
visible assets. Many property-oriented risks are
insurable; they include:
Fire , Natural disasters, Burglary, Business
swindles (or fraudulent transactions) and,
Shoplifting.
2.Personnel risks
Personnel-oriented losses occur through the actions
of employees. The three primary types of Personneloriented risks are:
Employee dishonesty, Competition from former
employees, Loss of key executives

3.Customer risks
Customers are the source of profit for small business, but

they are also the source of an ever-increasing amount of

business risk. Much of these risks are: On-premises injuries
and Product liability
On-premises injuries:
Customers may initiate legal claims as a result of on-

premises injuries.
When a customer breaks an arm by slipping on icy steps
while entering or leaving a store;
Inadequate security, which may result in robbery, assault, or
other violent crimes; Customers who are victims often look to
the business to recover their losses.
Product liability:
A product liability suit may be

filed when a customer

becomes ill or sustains physical or property damage from
using a product made or sold by a firm.

INSURANCE FOR THE SMALL BUSINESS

1. Basic principles for a sound insurance program
Basic principles in evaluating an insurance program include:
Identifying insurable business risks
Limiting coverage to major potential losses and
Relating premium costs to probability of loss

2.Requierments for obtaining insurance

1. There must be a sufficiently large number of homogenous
exposure units to make the losses reasonably
predictable.
o
o
o

Insurance is based on the operation of the law of large

numbers.
There must be a large number of exposures and those
exposures must be homogenous.
Unless we are able to calculate the probability of loss, we
cannot have a financially sound program.

2. The loss produced by the risk must be definite and

measurable.
The loss must have financial measurement or financial
implication.
The risk must be calculated
Example: For instance a person may purchase disability
insurance. How do we know that the person is unable to
do? Thus, the risk must be definite and measurable.

3. The loss must be fortuitous or accidental.

i.e. the loss must be the result of a contingency, i.e., it

must be something that may or may not happen. It must

not be something that is certain to happen.
Wear and tear or depreciation, which is a certainty,
should not be insured. No protection is given by
insurance.
We should not be certain as to the occurrence of a loss

4. The loss must not be catastrophic

All or most of the objects in the group should not

suffer loss at the same time because the insurance

principle is based on a notion of sharing losses.
Example: Damage which results from war, flood,

windstorm and so on would be catastrophic in

nature and hence do not have insurance.

5. The loss must be large loss.

The risk to be insured against must be capable of

producing a large loss, which the insured could not pay

without economic distress.
Incase the loss occurs, it must be severe that must be

transferred to the insurer. Those recurring and minor

types of losses are not transferred to the insurance
company.

6. Reasonable cost of transfer

i.e: the probability of loss must not be too high

because the cost of transfer tends to be excessive.

To be insurable, the chance of loss must be small.

The more probable the loss, the more certain it is to

occur.
The more certain it is, the greater the premium will

be. But to make insurance attractive, the premium

has to be for less than the face of the policy. For
instance, a life insurance company to issue a birr
1000 policy on a man aged 99. The net premium
would be about birr 980.

The end

 Risk management is the identification, measurement

and treatment of liability, property and personal pure

risks that the business organization is facing.
It is the science that deals with the techniques of

forecasting future losses so as to plan, organize, direct

and control the adverse effect of risk.
i.e., Risk management is defined on the base of
managerial functions.
It is the reduction and prevention of the unfavorable

effects of risk at minimum cost through its identification,

measurement and control.
It is a discipline / a profession that systematically

identifies and analyzes the various loss exposures faced

by a firm or an organization and employees and the
best method of treating the loss exposures consistence
with the goals an objective of the organization.

5. Combination
Risks

are pooled when the number of

independent exposure units under observation is
increased.

Unlike

separation, which spreads a specified

number of exposure units, combination increases
the number of exposure units under the control of
the firm.

In the case of firms, combination results in the

pooling of resources of two or more firms. The

new firm has more building, more automobiles,
and more employees than either of the original
companies. This leads to financial strength,
thereby minimizing the adverse effect of the
potential loss.

6. Neutralization
Neutralization, which is very closely related to

transfer.
It is the process of balancing a chance of loss
against a chance of gain.
Eg. An excellent example is the process of making
commitments on both sides of transaction in such
a way the risks compensate each other.
The following matrix can determine which risk

management be used.

ACCOUNTING FOR SMALL BUSINESS

Proper financial and accounting records make it

possible for the owner to exercise effective

control of funds and overall performance of
his/her business.
Such records also make it possible to know

whether the firm is earning profits or loss.

Accounts

also help to know the financial

position of the business at any time and at the
end of the fiscal year.

BUSINESSTRANSACTIONANDACCOUNTI
NG EQUATION
A business transaction is the occurrence of an

event or of a condition that must be recorded.

The

payment of a monthly telephone bill,

The purchase of merchandise on credit and
The acquisition of land and a building are
examples of business transactions
A particular business transaction may lead to an event

or a condition that result in another transaction.

For example, the purchase of merchandise on
credit will be followed by payment to the
creditor, which is another transaction

The accounting equation

Assets are the properties owned by a business enterprise

or any thing of value owned by a business enterprise.

The rights or claims to the properties are referred to as

equities.
The sum of assets is equal to that of the sum of equities.
Equities may be subdivided into two principal types:
o the rights of creditors and
o the rights of owners.
Rights of creditors represent debts of the business and

are called creditors equities or liabilities.

The rights of owner or owners are called owners equity

or owners capital

Expansion of the equation to give recognition to the

two basic types of equities yields the following, which

is known as the accounting equation:
o Assets = equities
o Assets = creditors equities + owners equity
o Assets = liabilities +capital
It is customary to place liabilities before owners

equity in the accounting equation because creditors

have preferential rights to the assets.

Assets
Assets: any physical thing (tangible) or right (intangible)

that has a monetary value is an asset. Assets are

customarily divided into two:
Current assets: are cash and other assets that may

reasonably be expected to be realized incase or sold or

used up usually within one year or less, through the
normal operations of the business.
Example:cash,accountsreceivable,notesreceivable,suppli

es,prepaid expenses, stock (inventory), etc

Plant assets: are tangible assets used in the businesses

that are of a permanent or relatively fixed nature. It is

also known as fixed assets.
Example: equipment, machinery, building, vehicles and land

Liabilities:
Liabilities: are debts owned to outsiders (creditors) .

Liabilities are frequently described on the balance sheet

by titles that include the word Payable.
1.Current liabilities: are liabilities that will be due within a
short time (usually one year or less) and that are to be
paid out of current assets.
Example: notes payable, accounts payable, salaries
payable, interest payable, taxes payable.
2.Long-term liabilities: are liabilities that will be due for a
comparatively long time (usually more than one year) it is
also known as fixed liabilities.
As they come within the one-year range and are to be
paid, such liabilities become current.
Example: Mortgage payable

Owner equity
Owner equity: is the residual claim against the assets

of the business after the total liabilities are deducted.

For a corporation, owners equity is frequently called
stockholders
equity,
shareholders
equity
or
stockholders investment.
Capital: is the owners equity in a sole proprietorship (and

partnership)
Capital stock: represents the investment of the

stockholders.
Retained earnings: represents the net income retained in

the business.
Drawings: represents the amount of withdrawals made by

the owner of a sole proprietorship (and partnership)

Dividends:

represents
earnings to stockholders.

the

distribution

of

Revenue: is the amount charged to customers

for goods or services sold to them It is an increase

in capital that resulted from the normal operation
of the business. Example: Professional fees,
commissions revenue, fares earned, interest
income, etc
Expense: costs that have been consumed in the

process of producing revenue are expired costs or

expenses. It resulted in a decrease in capital.
Example: Wages expense, rent expense, supplies
expense, utilities expense, etc

Preparation of financial
transactions
statements
has been determined, the essential information is

Financial statements: After the effect of the individual

communicated to users. The account statements that

communicate this information are called financial statements.

The principal financial statements are the income statements

the statement of owners equity, the balance sheet and the

statement of cash flow.
The financial statements prepared for sole proprietorship,
partnership and corporation are almost the same.
The major difference is in the capital section of the balance

sheet.
The capital section of these enterprises indicates the name of

the owner, the name of the partners and the capital stock
(common stock) and/or the preferred stock in their respective
order.

Income statement: a summary of the revenue and

the expenses of a business entity for a specific period

of time, such as a month or a year.
ABC trading
Income statement
For month ended December 31, 2004
Sales
10,000
Operating expenses:
Wages expense
3,000
Rent expense
2,000
Suppliers expense
2,000
Utilities expense
750
Miscellaneous expense 250
Total operating expense
(8,000)
Net income
2,000

Statement of owners equity is a summary of the changes

in the owners equity of a business entity that have occurred

during a specific period of time such as a month or a year.
ABC trading
Statement of owners equity
For month ended December 31, 2004
Investment during the month
15,000
Net income for the month
2,000
Less withdrawals
500
Increase in owner equity
1,500
Mr. X, Capital, December 31,2004
16,500

 Balance sheet: is a list of the assets, liabilities and owners

equity of a business entity as of a specific date, usually at

the close of the last day of a month or year .
ABC trading
Balance sheet
December 31, 2004
Assets

Cash
10,000
Supplies
Land
Total asset

1,000
8,000

19,000
Liabilities

Accounts payable

2,500
Owners equity

Mr. X, capital
Total liabilities and capital

16,000
19,000

Statement of cash flows

It is a summary of the cash receipts and cash

payments of a business entity for a specific

period of time, such as a month or a year.
It is customary to report cash flows (cash

receipts and cash payments) in three sections:

1. Operating activities
2. Investing activities, and
3. Financing activities

ABC trading
Statement of cash flows
For month ended December 31,2004

Cash flows from operating activities:

Cash received from customers
10,000
Less cash payments for expense and payments to creditors (7,300)
Net cash flow from operating activities
Cash flows from investing activities:
Cash payments for acquisition of land
Cash flows from financing activities:
Cash received as owners investment
Less cash withdrawal by owner
Net cash flow from financing activities
Net cash flow and December 31,2004 cash balance

2,700
(8,000)

15,000
(500)
14,500
9,200

January Projections
1. ABC projects a beginning cash balance of $20,000.
2. Cash receipts. Product manufacturing will not be completed
until February, so there will be no sales. However, service
income of $4,000 is projected.
3. Interest on the $20,000 will amount to about $100 at current
rate.
4. There are no long-term assets to sell. Enter a zero.
5. Adding 1, 2, 3, and 4 the Total Cash Available will be $24,100.
6. Cash payments. Product will be available from manufacturer in
February and payment will not be due until pickup. However,
there will be prototype costs of $5,000.
7. Variable (selling) expenses. Estimated at $1,140.
8. Fixed (administrative) expenses. Estimated at $1,215.
9. Interest expense. No outstanding debts or loans. Enter zero.
10. Taxes. No profit previous quarter. No estimated taxes would
be due.

11. Payments on long-term assets. ABC plans to purchase office

equipment to be paid in full at the time of purchase $1,139.
12. Loan repayments. No loans have been received. Enter zero.
13. Owner draws. Owner will need $2,000 for living expenses.
14. Total cash paid out. Add 6 through 13. Total $10,494.
15. Cash balance. Subtract Cash Paid Out from Total Cash
Available ($13,606).
16. Loans to be received. Being aware of the $30,000 to be paid
to the manufacturer in February, a loan of $40,000 is
anticipated to increase Cash Available. (This requires advance
planning.)
17. Equity deposit. Owner plans to add $5,000 from personal CD.
18. Ending cash balance. Adding 15, 16, and 17, the result is
$58,606.

February Projections
1. February Beginning Cash Balance. January
Ending Cash Balance ($58,606).
2. Cash receipts. Still no sales, but service income
is $2,000.
3. Interest income. Projected at about $120.
4. Sale of long-term assets. None. Enter zero.
5. Total cash available. Add 1, 2, 3, and 4. The
result is $60,726.
6. Cash payments. $30,000 due to manufacturer,
$400 due on packaging design.
7. Continue as in January. Dont forget to include
payments on your loan.

Common Accounting Transactions

Lets suppose that Lykun and Gelila have opened a local feed
and pet supply store. During their first month of business
several
accounting
transactions
take
place.
Owner
Investments Lykun and Gelila file articles of incorporation
and receive their charter and business license and begin their
business as LGM, Inc. They have $75,000 of cash to invest in
their new business. The first balance sheet of LGM, Inc. would
show the asset Cash and the Equity of the owners

As of right now, LGM has no liabilities and assets equal equity.

The labels Cash and Net Worth are called accounts. Accounts
are used to classify similar transactions.

Purchase of Assets with Cash LGM decides to

purchase a small land for $10,000 and building for

$40,000. This transaction doesnt change LGMs
total assets, liabilities, or equity, but it does
change the composition of the assets. A key point
to remember is that the purchase of an asset
doesnt affect owners equity. The transaction
decreases Cash and increases two new accounts
called Land and Buildings:

 Purchase of Assets by Incurring a Liability Assets

may be purchased with credit instead of with cash.

However, by using credit the business agrees to
pay the liability at a later date. Lets suppose that
LGM buys pet supplies for $1,000 on credit. The
transaction increases the assets (Pet Supplies) and
increases the liabilities of LGM, Inc. Assets
purchased on credit are still recorded for the full
amount at the time of purchase. It should be
pointed out that this type of transaction increases
both sides of the accounting equation to $76,000.
The liability creates a new account called Accounts
Payable:

Payment

of a Liability Shortly after

purchasing the pet supplies, LGM decides to
pay $500 of the $1,000 owed for the supplies.
As a result, both assets (Cash) and liabilities
(Accounts Payable) decrease, but Pet Supplies
is unaffected. Payment of a liability doesnt
affect equity or the asset purchased with
credit. Both sides of the equation are still equal
although they now have a new value of
$75,500:

 Revenue Revenues equal the price charged for

the sale of goods or services. LGM, Inc. earns

money (Revenue) by selling feed and pet supplies.
Sometimes these supplies are paid to LGM
immediately in the form of cash and sometimes a
customer asks for a credit account and agrees to
pay within 30 days. In either case, the sale is
recorded when it is earned. Suppose LGM sells
horse feed to a customer for $2,000 and is paid in
cash. This transaction increases both assets (Cash)
and owners equity (Net Worth):

 Now suppose that LGM sells $1,000 of steer ration

to a 4-H member and agrees to wait for the

payment until after the local youth show and sale.
Because the money has been earned now, a bill or
invoice is sent to the youth and the transaction is
recorded now. Revenues are recorded when they
are earned, not necessarily when payment is
received. This revenue increases both assets and
owners equity as before but a new asset account
(Accounts Receivable) is also created:

Collection of Accounts Receivable Lets say

that immediately after the youth show and

sale the 4-H member comes in and pays $500
of the $1,000 that he/she owes. The asset Cash
increases and the asset Accounts Receivable
decreases. The transaction doesnt affect
owners equity because the revenue was
already recorded in transaction 6 above. It
should be noted that the balance for Accounts
Receivable is $500 indicating that another
$500 is still to be paid to LGM:

 Expenses Expenses are recorded when they are

accrued just as revenue is recorded when earned.

Expenses may be paid in cash immediately or later
on. If an expense is going to be paid later on, a
liability (Accounts Payable or Wages Payable) is
created. In either case, owners equity decreases.
Suppose that LGM, Inc. pays $1000 to rent some
equipment for their office and $400 in wages to a
part-time worker. Each of these transactions reduce
assets (Cash) and equity (Net Worth):

Lets also assume that LGM has not paid a $400

bill for utility expenses incurred the previous

month. In this transaction, the effect on owners
equity is the same as when the expense is paid in
cash, but instead of a decrease in assets there is
an increase in liabilities (Accounts Payable):

Break even analysis

One of the most common tools used in evaluating the

economic feasibility of a new enterprise or product is

the break-even analysis.

The break-even point is the point at which revenue is

exactly equal to costs. At this point, no profit is made

and no losses are incurred.

The break-even point can be expressed in terms of unit

sales or dollar sales. That is, the break-even units

indicate the level of sales that are required to cover
costs.

Sales above that number result in profit and sales

below that number result in a loss. The break-even

sales indicates the dollars of gross sales required to
break-even.

Break-even analysis is based on two types of

costs: fixed costs and variable costs.

Fixed costs are overhead-type expenses that are
constant and do not change as the level of
output changes.
Variable cost are not constant and do change
with the level of output. Because of this, variable
expenses are often stated on a per unit basis.
Once the break-even point is met, assuming no

change in selling price, fixed and variable cost, a

profit in the amount of the difference in the
selling price and the variable costs will be
recognized.

 One important aspect of break-even analysis is

that it is normally not this simple. In many

instances, the selling price, fixed costs or variable
costs will not remain constant resulting in a
change in the break-even.

And these changes will change the break-even.

So, a break-even cannot be calculated only once.

It should be calculated on a regular basis to reflect
changes in costs and prices and in order to
maintain profitability or make adjustments in the
product line.

There are three basic pieces of information

needed to evaluate a break-even point:

Average Per Unit Sales Price
Average Per Unit Variable Cost
Average Annual Fixed Costs

Profit = revenue-cost
Profit=(revenue)-(fixed cost (Cf) + variable cost)
Revenue =(selling price (P))* quantity sold (Q))
Variable cost = (quantity sold * variable cost per unit (Cv))
In break even point the profit is assumed to be zero
0= (P*Q)-(Cf + (Q*Cv))
(P*Q)-(Q*Cv)=Cf
Q(P-Cv)=Cf
Q=Cf/P-Cv
The basic equation for determining the break-even units
is=
Average Annual Fixed Cost
(Average Per Unit Sales Price - Average Per Unit Variable
Cost)

Example: A local livestock producer utilizes

compost waste to develop an organic fertilizer
product. The fertilizer is prepared for retail sale
in 50 pound bags. The retail sales price is $5.00
per bag. The average variable cost per bag is
$2.80 and average annual fixed costs are
$60,000. These three pieces of information are:
Average Per Unit Sales Price = $5.00 per bag
Average Per Unit Variable Cost = $2.80 per bag
Average Annual Fixed Costs = $60,000.00

The above assumption can be utilized to

calculate the number of bags that must be

sold in order to break-even as well as the total
dollar of sales needed to break-even. Using
the formulas explained earlier, the following
calculations can be made:
Break-Even Units: $60,000.00 ($5.00 $2.80) = 27,273 bags
Break-Even Sales: $60,000.00 1 - ($2.80
$5.00) = $136,365
Therefore, no profits are made from the sale
of this product until more than 27,273 bags
are sold or more than $136,365 in gross sales
is generated.

ILLUSTRATION 4: Jacks Grocery is manufacturing

a store brand item that has a variable cost of
Rs. 0.75 per unit and a selling price of Rs. 1.25
per unit. Fixed costs are Rs. 12,000. Current
volume is 50,000 units. The Grocery can
substantially improve the product quality by
adding a new piece of equipment at an additional
fixed cost of Rs. 5,000. Variable cost would
increase to Rs. 1.00, but their volume should
increase to 70,000 units due to the higher quality
product. Should the company buy the new
equipment? What are the break-even points (Rs.
and units) for the two processes? Develop a
break-even chart.
218

SOLUTION
Profit = TR TC
Option A: Current Equipment
BEP Sales in value (Rs.)
BEP Sales in Quantity (Units)
Option B: Adding New Equipment
BEP Sales in value (Rs.)
BEP Sales in Quantity (Units)
Profit = 50000 * (1.25 0.75) 12000 = Rs.13000.
Option B: Add equipment:
Profit = 70000 * (1.25 1.00) 17000 = Rs.500.

Therefore, the company should continue as is with

the present equipment as this returns a higher
profit.
219

220

221

FACTORS AFFECTING THE BUSINESS ENVIRONMENT

1.The macro environment (far environment)
i. Economic forces
A. Rising income
B. Inflation
C. Recession:-A recession is a period of economic
activity when income, production, and employment tend to
fall-all of which reduce demand. Thus businesses are
expected to design different strategies that enable them
overcome the problems of inflation and recession.

ii. Legal and political factors

A. Federal and state laws
B. The development of regional markets
C. The creation and expansion of the global market

iii. Social forces

A. Demographic forces
i. Population growth
ii Age distribution
B. Cultural forces
C. The consumer movement:-Is a connection of
individuals, organizations and groups whose
objective is to protect the rights of consumers
iv. Technological forces

2.The microenvironment (The near environment)

The microenvironment refers the competitive

situation of an industry.
The competitive environment refers to the
number of competitors a firm must face, the
relative size of the competitors, and the degree of
interdependence within the industry.
Competition in an industry arises from
i. The power of buyers
ii. The power of suppliers
iii. The threat of new entrants
iv. The threat of substitutes
v. The intensity of rivalry

Porter claims that five forces determine

competitiveness. These are shown in figure

below:

Economies of scale (i.e. the average size

of business varies from industry to

industry .For example, the average size of
chemical firms is very large, where as the
average size of retail firms is relatively
small. The most fundamental reason for
these differences in the extent of
economies of scale in an industry. i.e how
the total cost per unit produced
changes as more units are produced.)

Decision Making Process

Where to invest to get profit,
What to do about an employee who is always late,
What subject will have top priority in meeting, etc.

Decision-making is not a separate, isolated function

of management but it is an integral component of
every managerial function (i.e. in planning,
organizing, staffing, directing, & controlling ).

Decision-making:-It is the process of

selecting or choosing, based on some
criteria, the best alternative among
alternatives

Types of Decision
Programmed decisions :-Are the decisions

that managers make in response to

repetitive & routine problems.
These decisions are Programmable

because they are based on organizational

established policies, procedures & rules

Examples: i. In Collage Enrolment,

ii. In Payroll processing

Non-programmed decisions: Are those made by managers

in a naval, complex, or/and extremely important problem

situation.
They are called non-programmed because established
policies, rules & procedures cant be employed & it is decision
makers insights, judgment & creativity, which have
paramount importance.
They

are going to deal with unusual types of problems

or /exceptional or special types of problems/.
They are time consuming in defining, identifying,
evaluating & selecting one alternative.
They are broad, long-range & made by higher-level
personnel.
The conditions for non-programmed decisions are
uncertain.
Strategic decisions, general are non-programmed
decisions, requiring subjective judgments.

Steps in the process of rational

decision-making:
Identify & Define the problem

Problem is anything that hampers the achievement of goals.

Problem is a necessary condition for a decision, i.e., there

would be no need for decisions if problems did not exist.

Establish decision criteria

Identifying those characteristics that are important in making

the decision.

Develop Alternatives
Develop & list as many possible alternatives solutions to the
problem as you can.
Formulate
Goals

Evaluate &
Follow up

Evaluate
Decision
Situations

Implement
Decision

Analyze
Alternatives

Select
Alternatives

Analyze the alternatives

What are the advantages & disadvantages of

each alternative?

Select the best alternative

Select the best alternative that suits to solve our

decision problem. In selecting the best

alternative, factors such as risk, timing &
limiting factors should be considered adequately.

Implement the solution

Putting the decision into action.

Establishing a control & Evaluation System

Ongoing actions need to be monitored.
Following up decisions

Decision Making Under Different

Conditions
a. Decision under certainty

Example: If you decide to invest your money in saving

account in the Commercial Bank of Ethiopia, You are certain
that you will earn ten percent.

b. Decision under uncertainty

Example: A corporation that decides to expand its
operation in a strong country may know little about its
culture, laws, economic environment, or politics. The
political situation may be so volatile that even experts
cannot predict a possible change in government .

c. Decision under risk

Example: If we gamble by tossing a fair coin, the
probability that a tail will turn up is 50%.