entrepreneurship module 1 - copy

Entrepreneurship module

Frank Wilbert 1

ENTREPRENEURSHIP MODULE (ENT 205)


Frank Wilbert 2


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Lecture 1

SMES are considered the economic units and catalyst for industrialisation and rural

transformation. It is the major contributor to employment in developing countries and have

potential for job creation and poverty alleviation. Many programmes have been put in place

to support SMEs (direct and indirect) but have not yielded the desired result. Prof. Prince

Izedonmi (2004) Alexander Scott= "somewhere, deep in the jungle where a few dare venture,

there lives a wild animal called success. It is rare and much sought after, but only a few ever

risk tracking it down to capture it. The hunt is long, hard and risky. Success is a clever

animal, rarely exposing itself; always quick to flee should it sense danger of being caught,

success is so uncommon, so unique and so challenging. Success is for us. Success means

winning and is the goal of life. Who does not want to be successful? Who wants to be

inferior, poor or wants to be pushed around?

Once on its trail, you cannot turn back. Have faith in yourself. Faith can move mountains. Do

not engage in wishful thinking because it will remain just that. You have to believe you can

succeed and you can get whatever you want- a good job, a good wife/husband you want, the

house you cherish, and the God you love. Live it and it becomes real."

Milton " the mind is its own place and in itself can make a heaven of hell or a hell of heaven"

Emerson: " great men are those whose see that thoughts rule the world." Shakespeare "there

is nothing either good or bad except that thinking makes it so .

Prophet David "as one thinketh in the heart, so is he."

All big businesses of today started small at some stage. Look at you heroes of today- Phillip

Chiyangwa, Strive Masiiwa, etc, they all started small and grew their businesses to what they

are today. As students to goal in life is to get the best job in company x or b but there other

career openings in life. One area that has been seriously under subscribed is entrepreneurship

rather than being an employee. Those who are rich today did not get there by being

employees but through going into business. Not only are small businesses necessary there

actually playing a pivotal role in economic development.

Joseph Nebesky put it well when he stated, "small businesses are the backbone of the

American economy, and they create two of every three jobs, produce 40% of the Gross

National Product and invent more than half the nation's technological innovations. In the last

ten years small businesses created 63.6 of all new American jobs."


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Give the state of our economy and the scarcity of jobs, starting new businesses is interesting

challenging and rewarding. The government has also realised the noble objectives of

supporting small businesses and ministries and support schemes have been put in place to

support small business activities. This module becomes one of the many voices in support of

small business development and the nurturing of entrepreneurs.

However learning about small businesses is no guarantee that the small businesses will

succeed. In fact the majority of success businesses have experienced business failure at one

stage or the other. Strive Masiyiwa did not do very well with Retrofit but Econet is doing

very well. So fail should not act as a barrier to trying your hand at entrepreneurship but

should act as an incentive.


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Bernard Wysocki (Wall Street Journal) " Small businesses fail in prodigious numbers, but the

small business owner is clearly a winner... a folk hero, a source of jobs and growth, a role

model, a cultural icon."

If you think otherwise take solace from the wise words of David Starr Jordan " there is real

excellence in all this world which can be separated from right living". You there have to

believe yourself and everything will be okay. You can be an entrepreneur and no one can stop

you if you believe in yourself. Remember than rich people are in the majority of cases those

who start businesses. I am therefore urging to serious consider this option. In John Lafalce's

words "Entrepreneurs are economic visionaries whose efforts are consistently helping fuel

our nation's economic growth. They are the pied pipers of tomorrow's corporations, the

leaders who will pioneer new products and jobs, create exports. These creative men and

women need to know that they are crucial to the economic vitality of this economy."

To some up this line of thinking it will most appropriate to not Proverbs 13 v 14 " the

teachings of the wise are a fountain of life, they will help you escape when your life is in

danger."

Various people have written about the dynamic role of small to medium sized businesses

(SMEs) in the economies of developing countries. These enterprises have been seen as the

key to rapid industrial development and other developmental goals of these countries can be

realised. Zimbabwe is the same boat with other developing countries and is experiencing

severe economic crises arising from both internal and external factors. (Ask students to

discuss these and how they affect the economy.)

Unemployment is at its highest with estimates ranging from 60% to 80%. The small business

sector can be a source of employment and income. The numbers of people running small

businesses are not known but some figures being bandied by the Ministry of SMEs is 2

million people being engaged in this sector. Government has realised the role of small

businesses and is taking steps to provide for some of the needs of small businesses including

setting up of ministries and providing funds and other facilities.

What is a small business?

Andy Bangs Jnr" A small business is where you can bring your dogs to work." There are

many problems associated with coming up with a definition of small businesses. Small


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business is a term used to describe a certain group of enterprises and how they are run. These

businesses have certain characteristics and management style, which differ from those of

large organisations.

Small business characteristics differ from industry to industry and the people who run them.

The sector includes manufacturing businesses, professional managers, and husband and wife

teams. It is therefore an easy task to come up with a single definition for small businesses.

People who run small businesses have often been described as being innovative, creative

and risk hungry. Yes small businesses have elements of innovation but are not limited to

innovative businesses only but will include all types of business activities pursed by small

businesspeople. Most businesses provide the small services or products that are already in

existence or are being provided by other businesspeople. Examples will include your vendors,

garages, hairdressers, carpenters to mention but a few.

Why define small businesses?

It is necessary to determine when a business can be classified as small. However as

previously alluded to, the way a business is measured is subject for debate. It is not possible

to provide a universal or national or international definition for small businesses. The need

for a definition includes the following:

There is need for quantitative definition when it is necessary to exclude larger businesses

from preferential treatment, which is designed to help small businesses. This preferential

treatment can be in the form of assistance through subsidies. It becomes necessary to lay

down rules as to which enterprises are eligible for such assistance.

It might be necessary to offer training/consultancy or any other form of assistance and there

is need to define businesses for which such for assistance is designed for.

There is also need to use qualitative measures, which are subjective judgements usually,

related to the management style and methods of operation. For example centralised decision-

making, labour intensive etc.

There are many methods, which can be used to measure the size of the business, but our

study will focus on a few quantitative measures often used and these are:


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Employee numbers- is the most used measure in most industrialised countries and has

found application in developing countries. It is simple to use, which is its major attraction.

However this measure has serious problems. The first one is that the actual number of

employees is not known for most small businesses. In the majority of cases we depend on

family labour, which in the majority of cases is not paid. Usually this labour is not stated in

the employee numbers and figures provided tend to be understated for the benefit of the

business. In addition it necessary to use seasonal labour and for labour returns these are not

included in computing the number of employees at the organisation. There is therefore a

tendency to understate the number of employees in the organisation. Most small businesses

are created to generate employment opportunities. If measure is used most units generating

employee will be excluded yet it is these growing organisations which need the most

assistance as their resources will be stretched.

The value of capital- measure exclude enterprises employing more than a certain amount

of the scarce factor i.e. capital. The more capital employed the greater chances are of

disqualification.

However there are problems associated with using capital as an evaluation base. In the first

instance it is difficult to put value to the way capital is employed in a business. Some figures

may be unknown to a business owner and sometimes businesspeople deliberately conceal

certain figures or reduce their value.

Small businesses are notorious for failure to distinguish between personal and business

property. This makes the measurement of capital extremely difficult.


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The businesses use different bases to measure stocks or WIP. Capital equipment also possess

problems e.g. machinery might be very old or may be home made. Buildings might be used

as dwelling places as well as workshops. In most cases valuation tends to be arbitrary.

Other measures

Sales turnover is also used to define a small business. This refers to the scale of trading of a

business. This can be misleading if different businesses are used. What might be small in one

business might actually be big in another business. This is made more difficult by seasonal

variations.

Quantitative measures- various measures are used and vary from country to country.

Definitions can include the management style and the methods of operation. Small businesses

are those whose management is in the hands of one or two people who are responsible for the

major decisions.

However in Tanzania a business is considered small when it is within the reach of the people.

Definitions

According to the Ministry of Industry and International Trade (2000) To qualify as a small

and medium sized business, the employment criteria must be met as well as one of the other

two criteria:

Small scale enterprise

Sector No. Of People Asset base

Capital Base

Employed

Manufacturing < 75 < $6 million < $5 million

Other < 50


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It must have a relative share of their market place.

It is managed by owners in a personalised way, and not through the medium of a formalised

management structure.

It is independent, in the sense that it is not a part of a large enterprise. This definition seeks

to formulate ways of defining small businesses. The statistical definitions sought to separate

small businesses on the following criteria:

Quantifying the size of the small firm and its contribution to GDP, employment, exports etc.

Comparing the extent to which the small firms sector's economic contribution has changed

over time.

Applying the statistical definition in a cross-country comparison of the small firm's

economic contribution.

Eventually it was discovered than it was difficult to establish criteria, which could be

applicable in all situations, and the Bolton Committee settled on the following: Sector

Definition

Manufacturing 200 employees or less.

Construction 25 employees or less.

Mining and quarrying 25 employees or less.

Retailing Turnover # 50 000 or less.

Miscellaneous Turnover #50 000 or less.

Services Turnover #50 000 or less.

Motor trade Turnover #100 000 or less.

Wholesale Turnover #100 000 or less.

Road transport 5 vehicles or less.

World Bank (Grindle et al) " A small business is one with fixed assets excluding land of

US$ 250 000 and less than or equal to 25 permanent employees."

USAID (1990's) A small business has less than 50 employees and at least half the output is

sold.


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UNIDO (Developing countries) Large - firms with 100 + employees Medium - firms with

20-29 workers. Small - firms with 5-19 employees.

According to D. Stokes- Small business management is different in several respects to the

management of larger organisations because of social structures and relationships, and

because of the resources available. There are no specialist managers to turn to for advice and

in a way the small businessperson does everything that needs doing in the business. All small

businesses share these experiences.

From our discussion so far there seems to be varied interest in the establishment of small

businesses to shore up unemployment and economic development. Theories have therefore

been put forward to explain the sudden growth in small businesses. There are basically three

frames of reference to consider when examining small businesses viz:

The free market model.

The Marxian model.

The Green or Ecological Model.

Small Business and the Free Economy Theory

The free market ideology dominated Government thinking about government thinking

especially in Britain when the Thatcher Government drove it. It is noted

for having pushed the agenda for small businesses to prominence. Most government that were

opening up their economies have borrowed a lot from this theory. " The theory envisages a

society constituted through the act of exchanging goods, services and individual capacities,"

(D Goss). There is widespread competition between buyers and between sellers in line with

the supply and demand - which helps determine prices at which commodities will be

exchanged. Goods in demand sell better, sellers will be able to cover their costs and make

profit. Sellers whose products do not sell will be forced to reduce prices or go out of business

due to lack of sales.


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Small businesses play a crucial role in the economy as follows:

Small businesses represent the bulk of the stock of competing supplies jostling to fulfil

customer demand. They help ensure productive efficiency and maximum utility.

Small businesses are avenues through which individuals with the ability, energy and

ambition can apply their skills in the market place to the benefit of themselves and society.

Samuel Smile in Anthony (1977) states that the free market provides an opportunity for even

the humblest member of society, if they are prepared to help themselves, to prosper and, by

so doing to serve the greater good. The above discussion forms the origins of the view that

that the human spirit responds best to insecurity, uncertainty and pressure of circumstances.

Such conditions foster entrepreneurial action and stimulate market activity as individuals

attempt, or are driven to overcome them (Coyne and Binks 1983). Government should not be

seen to inhibit the growth of small businesses by encouraging those with the ability to pursue

business careers.

Small businesses and the Marxian analysis

Marxists considered small businesses as an extension of the capitalist society. Marxists

theorists never gave small businesses a chance of survival as they were of the opinion that

they will eventually be wiped out by centralisation and concentration of capital. This would

result in the swallowing up of small businesses by monopolies. The result will be the

polarisation of society into bourgeoisie (very rich people) and the proletariat (impoverished

and exploited workers). This meant that small businesses would die a natural death. The

continued exploitation of the proletariat will forment class revolution. The theory failed to

explain the continued presence of small businesses and their increasing presence in social and

political discourse. Therefore the socialists sought a more convincing explanation for the

continued existence of small businesses. They contended that small businesses were a subtler

form of economic domination by large firms and was thus another form of exploitation of

labour. They believe that small businesses depend on large organisations which allow them to

thrive when it more profitable to operate in that manner. Large firms subcontract their less

profitable activities to smaller businesses in difficult times. These small businesses can

operate on a lower cost base because of their lack of unionisation, and poorer terms and


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conditions of employment. Big businesses use small businesses as a secondary sector to

cushion themselves against market fluctuations. These small businesses survive because they

can exploit its unorganised, non unionise labour with lower pay, poorer working conditions

and safety records.

The Green Movement

This theory is premised in environmental consciousness. The environment is being depleted

at an alarming rate and there is need for redress if the environment is to be saved. Small

businesses are seen as the solution to moral and environmental crises within the advanced

industrialised societies. Basic assumption is that industrialisation has created a state of mind

indifferent and even hostile, to any other goal than short-term material gain. Materialism has

resulted in the indiscriminate exploitation of the environment using large-scale techniques to

violate the finite resources and the freedom, creativity and spontaneity of individuals and

society (Goss). Small businesses are the anti-thesis of such developments. It possesses an

essential quality that in it is


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humane, non violent and benign, captured in the slogan " Small is beautiful" representing the

feeling that quality of life must come before profits and the materialistic motives of big

businesses. They advocate for a return to more order. They have put small businesses to the

forefront of their ideology. Small businesses are seen as more democratic and responsive to

society than large remote businesses following strategies of high growth, which take little

account of their effects either on the world environment or local communities.

Why small businesses?

They are several reasons proffered for the choice of small businesses as the way forward over

and above the three theories discussed above.

a. Large scale industry failures are behind the move towards small businesses because of the

following reasons:

They have not been an engine of growth and provider of employment. In fact there have

been cases of focussing on core businesses and downsizing in order to cope with a hostile

environment.

Large businesses are already beneficiaries of enormous support through general trade,

finance, tax policies and other direct subsidies. These have not achieved the desired goals and

as a result nothing more can be done to make big businesses grow. Most are already

downsizing.

b. Small businesses also offer reasons for pursuing that route and the reasons are as follows:

They mobilise funds which otherwise would have been idle.

Have been recognised as he seedbed for indigenous entrepreneurship.

Are labour intensive, employing more labour per unit of capital invested than large

enterprises.

Promote indigenous technological know how.

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Use mainly local resources, thus have less foreign currency requirements.

Cater for the needs of the poor.

Adapt easily to the requirements of customer.


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c. Public opinion regarding small businesses has shifted. Small businesses had previously

been written off as outdated forms of economic activities. In 1980s it was hailed as the new

saviour of ailing western economies and with this focus people perceptions to small

businesses have changed. This is more so in the volatile economic situation prevailing in any

economic set up. People now find it easier to negotiate for prices, models and payment terms.

Big businesses only offer you what is available at their terms.

Why governments supported big businesses

There are several factors, which work for big businesses at the detriment of small businesses,

and these include the following:


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Economies of scale help lower costs for manufacturers big enough to use mass production

techniques.

New products were transforming buying habits of society but the research and development

costs for new products are very high and affordable only to large companies with huge

profits.

Protectionists trade barriers fell away as market places became increasingly global to the

advantage of big businesses with international marketing and distribution resources.

On the basis of the above reasons policy markers concentrated their attention on the welfare

of big businesses that were considered to be the solution to economic problems and the way

forward for national success (economic). This led to a spate of mergers as small businesses

were seen as not having a role to play in national development.

Literature, which was produced, also focussed on how to manage and grow big businesses

and so were the teaching institutions of high learning. Small businesses were considered

amateurish, with backward technologies and limited financial resource. 1970s and 1980s a

shift with literature being produced on how to run small businesses. Politicians in various

countries enacted legislation to promote the interest of small businesses.

The first major in road into formulating policy for small businesses was made in the 1970s.

1971 saw the publication of the Bolton Report, which can political perception of small

businesses. It sought to establish the importance of small businesses and established eight

important roles of small businesses, namely:

A productive outlet for small enterprising and independent individuals (some of whom may

be frustrated under achievers in a larger, more controlled environment).


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The most efficient form of business organisation in some industries or markets where the

optimum size of the production unit or sales outlet is small.

Specialist suppliers or sub-contractors to larger companies.

Contributors to the variety of products and services made available to the customer in

specialised markets, too small for larger companies to consider worthwhile.

Competition to monopolistic tendencies of larger companies.

Innovators of new products, services and processes.

The seedbed from which tomorrow's larger companies will grow, providing entry point for

entrepreneurial talent development that will become the industrial captains of the future.

The small firms can be extremely efficient, having the advantage of the commitment of

their owner-managers, plus the ability in certain circumstances to better exploit business

opportunities than their larger brothers.


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Lecture 2

The fact that small business are born each day it is no guarantee that all will be successful

business. Some are still born- they never see the light of day. Others die after one year will

the majority die before their 5th anniversary.

Very small businesses are most prone to fail than large ones due a number of reasons. Also

very young businesses are likely to fail than older ones. Businesses with less than 10

employees are likely to die than those with over than 100 employees.

When to set up

Small businesses are vulnerable in their early years. Best chance to set up a business is when

the business environment is most conducive. The following were said to be favourable in the

setting up on new businesses:

Unemployment- when there is lack of alternative employment people are pulled into

starting small businesses or into self employment. When unemployment is high often linked

with higher rates of unemployment.

Govt policy- govts are introducing measure to encourage the establishment of small

businesses. They offer incentives or amend regulations to suit the small business person best

time to start a business.

Profitability more people attracted to small businesses, when the income from self-

employment is higher.

interest rates- when real interest rates are high new owner managers find it more difficult

to obtain finance and are less willing to borrow.

Personal savings and assets- personal savings or borrowings guaranteed by most common

form of personal guarantee, are high, favour business start ups.

Consumer expenditure- during times of growing consumer expenditure, more

opportunities for new ventures appear in their sector.

Structural change in the economy favour the small business such as ESAP, 75% local

content, land reform.


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Factors may induce more new business start ups but do not "represent all positive forces in

the business environment which are likely to help the new owner manager. Some are

potentially negative factors which can push people into new ventures the wrong reasons:

Potential negative factors - unemployment and govt initiatives to reduce unemployment,

may encourage many people into employment. But no guarantee of a friendly business

environment. High unemployment can result in reduced demand or potential customer

expenditure with a new business.

Potential positive factors- when real interest rates are low and demand is growing, period

likely to be good to start new business, moreso if demand is not too dependent on a healthy

economy. Times of structural adjustment are also positive for starting businesses.


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Where to set up

There are areas where a new business can be set with high chances of success in a geographic

area

Population growth- high population growth or high levels of immigration into an area

Unemployment- high levels of local unemployment

Wealth- high income areas with more disposable income to spend esp. on services

Business size- large numbers of small firms already existing in an area may indicate low

barriers to entry into the predominant business a local small business culture may also

encourage more of the workforce into their own ventures by example and familiarity.

Housing - high levels of owner occupancy and houses prices in a region, give access to

capital.

Local government expenditure- higher levels of spending by local authorities create more

demand in the region (MSU)

Government policy- small business incentives and development schemes are target at

regions eg growth points, EPZ (Beitbridge)

Most of these factors are positive save for unemployment. Business likely to benefit from a

local environment more than a macro environment. Select a geographical area which exhibits

as many as possible of the positive factors listed above. Mny business ignore such advice and

locate businesses where they live and not where environmental factors are most favourable.

Which sector to choose

Starting small businesses in some sectors are more difficult than others. Starting a new

business entails confronting a series ofissues, or potential problems and these depend on the

industry one intends to enter. In every sector there are barriersto entry for small businesses.

These help determine the attractiveness of a specific sector to a prospective businessperson.

These can be presented diagrammatically as follows:

Capital requirements

Economies of scale

Product


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differentiation

Switching costs

Access to distribution

channels

Other cost

advantages

Govt policy

Profitability in some industries is dependent on high levels of output. Helps reduce cost from

high levels of output in an industry. Small businesses will find it difficult to compete.

Increasing existence of economies of scale in mass markets Economies of scale


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would lead to the decline of smaller businesses becoz large firms enjoying economies of scale

can use this cost advantage in a number of ways. Large companies can force competitors to

operate on low margins which can make it an unattractive market to new entrants. If prices

are kept high, additional profit enjoyed by large suppliers can be invested in marketing or

R&D for new products and again reduce the competitiveness of new entrants. Economies of

scale put barriers to entry by small businesses.

Existence of economies of scale does not mean that there are no opportunities for smaller

businesses. Look at the building industries - there are many big companies supplying window

frames and door frames. But in tandem there are many small businesses supplying these

products at a profit. Alternatively small businesses can provide components to big industries

i.e. they can specialise in something/areas where they can become more efficient than the

bigger companies and thus will be subcontracted by the bigger businesses.

Economies of scale also results in customisation of products i.e. there is little differentiation

of products/services. Standardisation of products leave niche markets open to people who

dislike uniform treatment e.g. personalised clothing by small tailoring businesses. Etc

Economies of scale achieved throu existing technology making them less flexible to change

to new technology. Big changes normally initiated by small firms rather than existing

businesses. Zimglass still locked in bottle packaging when market has moved to plastic

containers which are cheaper.

Product differentiation

Companies build customer loyalty over time (to prove reliability of products or services)

throu advertising, packaging or branding. (Nandoos, Geisha,Cascade etc) differentiation takes

time to prove reliability of products and services) and money (for advertising, packaging,

signage,and branding) this represents a barrier to entry for any new entrant. Direct

competition with the big guys can be detrimental and sometimes not feasible with established

brands- Royal Crown v coke, Hunters vs National Breweries. However there Once a

customer identify with a product it becomes difficult for another to enter that market

segment. Small companies not able to compete with large companies with branded products

and resources.


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However this should not deter small exploiting opportunities in a particular sector. Actually

small businesses can build loyalties, which are difficult to break except via its acquisition.

There are always opportunities if small businesspeople look hard enough. Branded products

are usually expensively priced small businesses might provide a cheaper substitute.

Small firms can build own loyalties, which differentiate them sufficiently to deter new

competition. People in Gweru are convinced that for that special meal one has to go to the

Dutch Oven. There is so much allegiance to the Dutch Oven by families/lovers etc. also there

are many small newspapers that do well against established tittles because they


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cover local news. Others have branched into farming and sport magazine with significant

success.

Capital requirement

Cost involved can be a barrier to entry into certain markets. High start up investments block

small businesses from involvement esp. those in manufacturing. Use second hand equipment

and plant can circumvent the barrier. When buyer switches from one supplier to another,

there might be switching costs

Switching costs

Buyers who switch from one company's products to another may incur switching costs e.g.

retraining of staff to use new technology. The potential suppliers has to offer more than just

marginal benefits to persuade a buyer to change, e.g. giving free machinery to retain

customers thereby creating barriers to any competitors.

Access to distribution channels

Small businesses need established channels of distribution. This is not an easy task as new

products will complete with existing products e.g. when a small seeks shelf space from major

retailers for its products.

Other cost advantages

Learning curve- product improvements come with experience. You reduce wastage, as you

get more experienced. Most new business will expect higher production costs per unit than

established ones.

Location- is a crucial marketing factor. Existing firms often have good locations which will

be expensive for new entrants to equal. Such sites can command high rentals.

Government policy

Govt control certain industries thereby creating total or partial barriers to entry, e.g. licensing

to start a bank, radio station, telephone networks and newspapers. Licensing increases the

cost of start or running businesses. Most small businesses complain that most regulations

favour larger firms. Services industries have low entry barriers than manufacturing industries.

Others are:

Construction


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Retail

Distribution

Hotel and catering

Transport and communication

Economies of scale


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Lecture 3

The realization has dawned on most people that small businesses have play in economic

development and ending unemployment. According to Neck (1977) " for the greater part of

the poverty group, the small business is the only activity in which they can usefully hope to

be engaged, particularly in the immediate future. Studies have also shown than that the small

business sector has played a pivotal role in the development of Japan, Taiwan and Hong

Kong, and they continue to play in the development of these economies. According to Young

1987 and Gills et al "It is hoped that small enterprises would generate more employment,

permit greater decentralization, promote income equalization and mobilization.

Most small businesses face many problems most, which are different from those of big

corporations. It is admitted that government has focused to big businesses especially through

the establishment of the industrial policy, export promotion, protection from foreign

competition, foreign currency allocation. Government actions are seen as a vehicle to help or

at least stop hindering the development of successful small businesses. Government has

sought ways a leading role in the promotion and assistance towards small businesses.

However assistance from government to small businesses has in the majority of cases been ad

hoc. Most of these policies have emerged as by products of other policies such as those,

which promote industrial efficiency, training, technology etc.

There is no specific legislation for small businesses in Zimbabwe. When the country tried to

redistribute land it was hamstrung by lack of suitable legislation. However most of the policy

has been statements made by government officials through particularly the Ministry of Youth

Development, Gender and Employment Creation, the Ministry of Small and Medium Sized

Enterprises and the Ministry of Finance.

The enactment of the law allowed government to move forward and redistribute land. The

support for small businesses and the operating framework should also be legislated if we are

serious about making small businesses play a leading role. This calls for us to draw lessons

from other nations that are leaders in the development of small businesses.

UK

The UK was the leader in realizing the potential of small businesses and sought to create an

environment in which small businesses could thrive. To this end they tried to eliminate all

forms of discrimination against small businesses. Wherever efforts were made to support big


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businesses, the end result was discrimination against small businesses. These had to be

reversed. The thinking then was that businesses will flourish unaided hence the following

policies:

Providing an environment in which small businesses could strive, free from interference of

any kind


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Removing discriminatory impact of existing legislation In the 190s the British Government

adopted a more supportive role and sought to encourage the birth of small businesses and to

do so directly. Incentives and packages were put in place as an element of the policy. Various

assistance packages were put in place to finance the activities of small businesses directly

through the setting up of financial aid packages.


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USSR

In 1995 the number of people following the break up of the Soviet Union in the small

businesses sector was estimated at 10 million people. Small businesses became the answer in

the face of failing large businesses. They had vested with a lot potential, high paying,

efficient and profitable sector of the economy. However they continued to play a very small

role in the overall economy, in a country that was dominated by state companies. Reforms

were progressing slowly in the mainstream economy, there was need to boost the operations

of small businesses to create efficiencies in the face of collapsing state companies.

Government approved a Federal programme of state support for SMEs and then drafted laws

on SMEs, which targeted at simplifying taxation and accounting for small firms to encourage

the development of SMEs. It also provided tax exemptions for newly established for SMEs.

For the 1st 2 years with gradual increases in taxation from 3-5 years. Such assistance was

given to SMEs in priority areas (agricultural products, consumer products, medical supplies

and construction). Furthermore funding was provided for the establishment of SMEs to

develop competition, as well as a fund for the promotion of science and technology. System

of recording new SMEs was put in place so that registered SMEs will benefit from the

scheme. A track record can be kept of the number of SMEs formed and continuing in

operation.

Zimbabwe's policy has not been so pronounced in fact no legislation has been put in place to

support small businesses. Everything has been so ad hoc and short term in nature. Most of the

policy statements have been made at public gatherings making them difficult to implement or

pursue. This has left many a small businessperson confused and government officials not

knowing what is expected of them. Consequently people are shuttled from one ministry to

another. Presently the Ministry of SMEs is trying to push a policy document through and

hopefully policy could be in place before the end of the year. This document has been in

circulation for a long time since 2000 and it is frustrating to say the least that we have not

developed SMEs as should be the case given the pivotal role them play in an economy. The

assistance being given is mainly financial assistance, most of which does not have a clear

disbursement procedure in place. In cases such monies have remained idle or have benefited

the least deserving cases. (Refer new farmers and seed inputs, which find their way to the

street markets.) Can we be wrong if we look at the thinking of some Government Minister


Frank Wilbert 29

who proclaimed that no economy has flourished on the back of SMEs (Simba Makoni)? In

addition funding provided does not go towards boosting specific sectors, which should drive

the economy. We have seen that targeted funding in cotton production has resulted in small

producers providing close to 80% of total cotton production. If it has worked in cotton

production why don't we draw lessons to the benefit of other sectors particularly SMEs.


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Zimbabwe's Policy Document

Goal: the main goal of SMEs policy is to generate sustainable jobs, reduce poverty, stimulate

growth and generate foreign currency earnings thereby contributing to the well being of all

Zimbabweans. The main aim is to create an enabling environment so as to double the number

of small businesses by the year 2005.

Objective: The main objective of this policy is to clearly define how the government, private

sector and other stakeholders can encourage and create an enabling environment for SMEs to

grow, and to enhance the contribution of this sector to national development. The Policy

will:

Coordinate the different policies and programmes at national level.

Set priorities and the appropriate allocation of limited public resources.

Rationalise support programmes

Coordinate resource mobilisation strategies.

Delegate tasks, responsibilities and accountability. Strategies

1. Create an enabling legal an enabling legal and regulatory environment to include:

Simplify complex regs

Improve access to info

Centralising and streamlining procedures in particular business formation, tax requirements

Simplified licensing procedures and reporting requirements.

2. Investment promotion

Tax relief

Rebates and discounts

Export promotion

3. Access to finance

Credit finance

Establishment of secondary market

4. Market penetration


Frank Wilbert 31

Market intelligence

International marketing

Marketing and distribution networks

Quality assurance

5. Technology &infrastructure support and skills development

Technology information

Business incubators

National productivity centre

Electronic communication

6. Entrepreneurial management and skills development

Training

Mentorship by private sector


Frank Wilbert 32

Provide guidelines to help SMEs comply regulations in setting up businesses.

Policy Framework

In coming up with policy the thrust should aim at addressing the following crucial issues:

How can govt help SMEs by ceasing to hinder them as well as trying to help them?

How do urban planning regulations make life difficult for SMEs and are the benefits

outweighed by the costs?

Do employees of small businesses benefit from minimum wage regulations and attempts to

improve working conditions?

What effects do business licences have on licensees, those who cannot obtain them and the

general public?

What impact of regulations affecting small enterprises have on their relationship with the

police?

Are financial incentives, which necessarily involve complicated claims procedures, an

effective way of helping small businesses or do they actually injure them?

What effect do highly concentrated assistance programmes which reach only a small

minority of small businesses, have on the remainder who do not benefit from them?

The following have been known to hinder the proliferation of small businesses:

An incomplete legislative basis for SMEs activity

The ill considered, unthought nature of the present system of taxing business people

The difficulty and high costs of registering businesses for registering business services.

The abundance of supervisory bodies and the parallelism and reduplication of their

functions

The actions of local executive bodies, at times hindering the development of businesses.

According to Harper: the obvious fact that the skills and initiative of the individual

entrepreneur are by far the most important determinants of success or failure. Some

businesses will succeed however difficult the circumstances in which they have to operate,

while others will fail in spite of a whole array have heavily subsided and well integrated


Frank Wilbert 33

programmes of assistance. He concludes that an effective entrepreneur observes his

environment and organises his resources to take advantage of it. No amount of specific small

business compensation can compensate for lack of effective economic management. The key

role of the government it has been argued is to create a level playing field for business to

thrive. If the economy is well, a lot of opportunities arise for the establishment of businesses

and their growth.

Regional incentives or other incentives, industrial estates and similar devices can make a

contribution but these are effective in directing the location and nature of large businesses.

Most small businesses will start and develop ventures outside the framework of government

incentives. Govt to create an appropriate economic environment, successful small businesses

will make their contributions. This is so because of government restrictions. Small businesses

are required to observe a number of regulations, which increase their costs. There is therefore

an


Frank Wilbert 34

incentive to operate illegally and most businesses use that channel especially to avoid

taxation, which is believed to be very high. Taxation also provides for small businesses to

remain small as growing a business attracts attention and you will be penalised through

taxation for doing well. It is cheaper and more profitable to operate illegally. Any expenditure

increases the costs of going business and might render profitable business unprofitable and in

case the business being wound up.

With regard to incentives Harper observed the following:

Government sponsored assistance programmes are often ineffective and can even damage

the interests of the businesses they intend to serve. Young also confirms this position by

stating that economic policy biases often constrain small scale and informal sector enterprises

and may offset the positive effects of direct credit or technical support to them. Governments

often come up with a cocktail of policies including monetary, fiscal, labour, trade, price and

regulatory policies. These have both positive and negative effects. They often contradict each

other in the absence of coordination. Biases usually favour big businesses and undercut

efficient growth. Te benefits to small businesses are often limited since the businesses have to

meet set criteria to qualify for assistance. Attempts to channel resources to companies

meeting set criteria is often undermined by political influence and inefficient squandering of

resources. Homeboys often benefit leaving the more deserving cases. In fact government

intervention can be counterproductive than making a positive contribution to the development

of SMEs.

Based on the needs of small business policy positions can be formulated to address the

concerns of small businesses. Small entrepreneurs have identified credit as their primary

need. There is need for financial tactics for SMEs. Lending can be character based. There is

also need to streamline administrative Based on the needs of small business policy positions

can be formulated to address the concerns of small businesses. Small entrepreneurs have

identified credit as their primary need. There is need for financial tactics for SMEs. Lending

can be character based. There is also need to streamline administrative processing of loans

requests. Credit to be extended through banks.

There is need to review legislation that constraints small businesses. Once reviewed such

regulation should be implemented if it were to benefit the intended group.

Educational systems to help in the development of entrepreneurial skills.


Frank Wilbert 35

There need to look at tax laws to make them an incentive for going into business.

Government, business officials and other stakeholders to collaborate.

There is need for communication such as roads and telephones. Small business should

benefit from infrastructure development.

The effectiveness of the above will hinge on the appointment of an agency to carry out

services for small businesses. Use must be made of existing skills in government and non-

governmental organisations.

There are many players hence the nee for coordination.

Actual policies to be adopted will depend on local circumstances.


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Role of government

The government should stop hindering the development of successful small businesses.

Government to confirm that skills and initiative of the individual entrepreneur are the most

important determinants of success or failure of a business. It should be noted that businesses

would succeed despite difficult circumstances in which they operate while others will fail in

spite of an array of heavily subsidised and well-integrated programmes of assistance. An

effective entrepreneur will observe the environment and take advantage of it rather than

objecting to obstacles that cannot be removed. Harper says for example if there is rapid

increases in inflation, recurrent shortages and an apparent system of import restriction and

controls, all within an unstable political environment, no amount of training or advice can or

bring him or her to save money for investment in the manufacturing industry with a view to

long term profits. He/she will opt for short-term gains through speculation and hoarding of

essential commodities.

Government must have an economic management programme in place if small businesses

are to flourish.

Government usually put in place and national investment incentives and industrial estates.

These are more effective at attracting big businesses. Small businesses normally start and

develop outside the framework of government incentives. If the economy is okay successful

small businesses will make a contribution to economic development. Successful small

businesses will make a contribution to the economic development.

They should introduce well-planned and efficiently integrated systems of assistance rather

directing them to a particular type of business or particular areas. The view here is that most

government sponsored assistance programmes are often ineffective and can militate against

the interest of small businesses they are intended to serve. Government often seen as an

agency for creating incomprehensible or irrelevant regulations whose enforcement promotes

corruption e.g. price controls. Government to examine how its role impinge on the

development of SMEs and make the development of SMEs and make the necessary changes

in order to remove unintentional discrimination which arise when regulations are conceived

for big businesses or transferred from industrialised nations are adopted for SMEs.


Frank Wilbert 37

There should be coordination between the various service providers that are offered. Many

players involved in giving assistance to small businesses might actually result in confusion on

the part of the small businesses. There should be greater cooperation among the various

players involved.

TYPES OF ASISTANCE PROGRAMMES- MALCOM HARPER

Credit programmes for SMEs

Cash often cite as an important consideration for which small businesses need assistance

from government or financial institutions. Remember small businesses are set up from

owners' savings and loans from friends and relatives. However additional capital is required

for machinery or equipment purchases and also for working capital. Most are unable to

access these funds due to lack of collateral or lack of accounting records needed to assess

small businesses. Important to have special schemes to provide credit to small businesses.

The scheme could include any of the following formats:

1. Set up an institution that specialises in small business financing e.g. SEDCO. Most

effective way but the volume of lending may not be sufficient to sustain the numbers of

branches to reach every small business enterprise. Institution should also accept deposits

from the public to boost the capital base.

2. Establishment of a small business division within a development bank but the institution

should be free from institutional rules, regulations that restrict its ability to function

effectively. It must be free of maximum amounts of loans regulations, collateral requirement,

amortisation schedules, etc.

3. Central bank can set up such a fund and give it to commercial banks for on lending to

small businesses. However success will depend on the willingness of commercial banks to

give loans to small businesses. Most see it as a burden with little returns.

Extension services and training

Individual consultancy normally carried out at the place of business aimed at providing

advice of all kinds to owners or operators of small businesses. Lack of experience and

education in their fields of endeavour results in ill designed and unprofitable ventures.

Extension services goal is to improve managerial, technical and vocational skills to small


Frank Wilbert 38

businesspeople, and to help them analyse their problems themselves and develop methods of

solving them.

Training

Extension services might disclose management weaknesses i.e. common areas of deficiency.

Classroom training can help improve the technical and vocational skills of some

entrepreneurs' e.g. accounting, financial management to complement skills. Training to be

combined with incentives if it is going to work otherwise people will retain old attitudes.

Appropriate technology

Industrialised countries technology advanced than developing countries. However traditional

technology appears to be less efficient because of lower productivity. Government should

promote the use of appropriate technology over the long term to bridge the gap between

developing and developed countries. Alternatively adopt technology transfer strategies from

industrialised. However technology should be carefully selected and where necessary

modified to benefit the population. Supporting services

Infrastructure development necessary input for the generation of industrial activity on a

reasonable scale in underdeveloped areas this can be basic or supplementary services. Basic s

would be transport, power and communications (telephones and mail) supplementary

(hospitals, industrial estates/ areas, housing, schools, banks, storage and warehousing

facilities.

Supply of raw materials - these should be supplied on a regular basis at reasonable prices. It

is necessary to purchase and stock adequate quantities of raw materials. Approach locks up

capital in stock. Maybe approach could be the establishment of an agency to undertake

procurement and distribution of raw materials so that small businesses can obtain

requirements regularly.

Establish of information centres -SB runinto difficulties or do not find solutions to

problems partly due to ignorance. May not be aware of assistance and services available to

them , e.g. financial management packages, tax regs etc. create a sort of info centre to collect

and disseminate info of interest to SB. Info should be presented in a way that is easily


Frank Wilbert 39

understood by entrepreneurs. Info to include government policy, rules and regs, training

programmes alternative technology, and production process available, domestic and export

markets, supply of raw materials and government documentation requirements.


Frank Wilbert 40

Incentives and tariffs restrictions- incentives given to local industries to protect them from

competition from foreign firms. Govt to make sure that incentives benefit the small

businesses otherwise they might be a disservice. It might be necessary to give special

incentives so that they can compete with local large companies incentives. Should help small

firms to become self-reliant and independent and should avoid making over dependent on

assistance. Incentives should therefore be temporary rather than permanent. Incentives

include tax holdings, exemption on import duties, conversion of tax into long term interest

free loans and tariffs protection.


Frank Wilbert 41

Marketing assistance: most small businesses lack of skills in marketing their products. Govt

can assist by actually buying and selling their products or by creating a favourable

environment to enable small business to do the selling themselves. Strategy involves

providing training, guidance, advice and assistance in promotion and marketing.


Frank Wilbert 42

Industrial estates- govt set up special industrial estates for small businesses. Physical

facilities to include common workshops, training, technical advice and consultancy or

marketing assistance for a group of businesses. Industrial estates to be available to businesses

who can benefit from such facilities.

Economies of scale


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Lecture 4

One can go into business through various forms namely:

Start up i.e. creating a new business from scratch but this is not to mean

that the idea need necessarily new. Some people prefer to start a new business from scratch

i.e. they do not intend to buy an existing/established business. Starting from scratch has some

advantages and disadvantages. Would be owners prefer to start a business from scratch

because it is their creation and they are proud of it or they can be inhibited from buying an

existing business due to cash flow problems. They will be required to purchase goodwill,

which is an intangible asset and increases value beyond the ability of the would-be new

businessperson.

Advantages -

o Lesser funds are required to start a new business than would be the case

with buying an existing business, o One can choose a brand new name and location, o Select

and train staff.

o Select equipment according to specific needs.

o Order and purchase stock based on market research. Not burdened by old

stock from a going concern,

o Design and create a unique business climate,

o Design the layout.

o The newly created business does not carry a negative image.

Disadvantages

o Many barriers to entry e.g. start up costs, legislation, premises, problems

with suppliers; creditworthiness can be serious barriers to entry,

o Difficult to finance the business - banks and other lenders only willing to

give finances to businesses with a proven track record,

o Failure rate of small businesses is higher than when one buys an existing

business. Idea can be good but success will only be apparent when

business is operational,

o Businessperson does not have reliable information about sales, expenses

and profits. N the majority of cases they just estimates, which can be wide

off the mark.


Frank Wilbert 44

o It can take very long to be established and become popular. No market share or goodwill

exists when a business is established from scratch. The business resources might be

exhausted long before significant turnover is achieved.

It is easy for a businessperson to start a small business on a part-time basis to overcome the

disadvantages discussed above. In the process valuable experience and information is

gathered. Like in every business the businessperson should

o Conduct a proper market research or analysis.

o Should determine what customers need.


Frank Wilbert 45

Franchise - this method of starting a new business within the framework of existing larger

business entity. A separate legal enterprise operating in some way under the umbrella of

another organisation. This is a marketing system whereby an individual owner conducts

business according to the terms and conditions set by the franchiser. A franchise is the

agreement granting the right to do business and specifying the terms and conditions under

which the business will be conducted. The franchiser is the company that owns the franchise's

name and distinctive elements and grants others the right to sell its products.


Frank Wilbert 46

Types of franchising systems

Product and trademark franchising- here the franchisee is granted permission to sell a widely

recognised product or brand e.g. service stations, soft drink bottlers. Here the franchiser has

little control over the business of the franchisee. Control is however necessary to maintain

integrity of products. Business format franchising- franchisee given the right to use marketing

system along with ongoing assistance from the franchiser, e.g. Lucky Seven, Spar, Food

Chain Group, Sammy, Sheraton Hotel and Mercurri and Holiday Inn.

Advantages

o Reputation - An established and well-known franchise ensures that

customers buy the product often,

o Management assistance - franchising companies provide training in all aspects of

marketing, personnel and financial management,

o Profits - entrepreneur can expect reasonable profits. He/she depends on business expertise,

o Experience of the franchise owner makes up for the inexperience of

the entrepreneur.

o Finance - usually the franchiser provides the franchisee with financial assistance. Less

money needed to start the business, operate business on a day to day basis because of control

systems.

o The way to operate the business has already been worked out and tested. Starting up should

be easier and faster.

o Fewer franchises fail than other business start-ups. Therefore it can be easier to obtain

finance for a franchise.

- usually there are nationally agreed terms with suppliers that take

account of total franchised businesses.

Disadvantages

o Not your own creation, someone else's idea, franchisee only implementing and not creating.

o Lack of independence- entrepreneur has to follow the principles and methods of the

franchise owner. Rules made by the owner and followed by the franchisee.

o Standardisation- all franchise branches are standardised to create a uniform image among

customers- not much scope for own ideas.


Frank Wilbert 47

o Fees- considerable fees required for the use of the franchising business. Fees might be very

high resulting in poor profits. Furthermore franchisers put in place a profit sharing scheme

based on a fixed % of sales rather profits made.


Frank Wilbert 48

o The goodwill that a business builds p is never its own, as it is dependent on a continuing

franchise agreement. This could cause a problem when you decide to sell the business.

o The franchiser needs to ensure regular disclosure of information by the franchisee to protect

their royalties and the franchise agreement - this can become intrusive into the financial

affairs of the franchisee.

o Brand image of the franchiser can become a distinct liability if things go wrong. The

franchisee is depended on the stability of the franchiser-national problems with a franchisee

who has no control over events.

Buy existing business- outright purchase i.e. buying an existing business from somebody

else. There is a new owner but buying an established business. Some people do not

necessarily have to start a new business. A person may choose to buy an existing business or

may buy into an existing business to become a partner. There are several reasons why people

sell business and the would-be buy should critically examine the reasons and these include

the following:

o Recognition of lack of success of the business and low profitability in the future.

o Problems not related to business, which, forces a sale e.g., health problems, marital break-

up, or other personal issues.

o To pursue other business opportunities which make a sale desirable. Most people sell to

raise funds for another failing or successful business.

o A desire to change out of small businesses,

an,


Frank Wilbert 49

o A dispute leading to the breakdown of a business partnership. Alternatively small

businesses might be available for sale from big businesses and the reasons for sale include the

following:


Frank Wilbert 50

o Failure to meet financial targets set by parent company e.g. ROI is inadequate hence the

decision to sell and invest proceeds into

ventures showing greater potential,


Frank Wilbert 51

o Company adopts new strategy meaning that the unit no longer fits

hence decision to sell especially when core activities are very varied to

those pursue by the business unit,

o When parent company is taken over and unit does not fit into to the

overall scheme of things. Forced sale

Liquidation following bankruptcy- in most liquidations people buy assets rather than the

business. The creditors will be seeking to recoup some of their monies. Advantages

- it may have an established and proven market share, o Location-

established firms often have the best sites, because the first owner had a wider choice of

locations than those available now.

o Profits- an established business may generate profit from the start.


Frank Wilbert 52

o Personnel- competent staff may be inherited. The already have knowledge

of key customers, sources of raw materials and business operating

systems to mention but a few.

- it is possible to buy business at a bargain price,


Frank Wilbert 53

o Image/goodwill- it takes several years to build a favourable image. Good

image increases chances of the new owner being successful.

Disadvantages

o III will- businesses may have a bad reputation and it may take long to

reverse negative perceptions among customers. Mupata wachidembo.

o Misrepresentation- sellers may have omitted crucial facts that might affect

the future of the business success,

o Changing conditions- seller might even be unaware of the changing circumstances e.g.

population shifts or a major competitor might be entering the market etc. such issues will

affect the future of the business. There are many purchase methods available to the new

businessperson and these include the following:

Buyout - the buying of existing business from within e.g. management buyout. Refers to

the purchase of a business by existing management. Happened with TA when it sold BEC.

Management buy out made possible by the availability of finance from merchant banks,

banks and venture capital funds.

We also have MBO in public companies that are being privatised- more in the provision of

services to promote competition e.g. cleaning services, catering and ground maintenance.

Buy in- happens when existing owners accept a new partner or shareholder who buys a

small firm which already exists. People might not want to buy the whole business but to be

part owners of the business. This is done through being a partner or buying shares in an

existing business.

This is normally the case when a person joins professional services e.g. layers, accountants,

doctors etc. usually in partnership where there is a high turnover when partners leave or

retire. Not necessary to dissolve partnership, but gap has to be filled by recruiting another

partner into the practice.

Expanding small businesses can face serious cash flow problem. It becomes important to ask

other people to contribute additional capital needed to keep the business operational. Failure

to bring in additional cash might result in the failure of the business.

People can also buy in when a large company sells a part of the business to management and

if management is handicapped by lack of capital, o Buy in and management buy out-


Frank Wilbert 54

BIMBO- this is a combination of outside and inside management in buying a business.

Aimed t reducing risk of buying into a company from outside existing management has in

depth knowledge of company and its markets, while new owners bring in fresh approaches.

Can be done via a number of ways including the following:

Sale or purchase of assets


Frank Wilbert 55

When buying an existing business it is important to know what is up for sale. What is for sale

will depend on the wishes of the parties involved and the legal status of the business (i.e. a

sole trader, partnership that has no legal distinction from its owners, and limited liability

companies where ownership can change through the purchase or sale of shares.

The buyer must pay special attention to the assets, which are available for sale. Many assets

available might not be on the balance sheet especially for small businesses. The assets for

sale will include:

o Freehold property- business may own freehold property from which it trades. Mostly the

case when property is the key factor in the success of the business e.g. hotels, restaurants,

bars and other leisure facilities that depend on geographic location to attract customers. When

location is important it is important to acquire property through purchase or long-term lease

agreement. Owing the property is preferable to paying rent due to appreciation in property

values over time. When buying property take care and exercise caution. Check on ownership,

planning permission, restrictive covenants, mortgages and other charges. Assure yourself of

the suitability of the premises to the business. Premises are permanent and take long to

remove from the business especially when property market is slow.

o Leasehold property- leased property can be a valuable asset to a business. Most retailers

operate from leased premises. Location of such premises commands a premium/ goodwill

which can be sold when the business changes hands and must be taken in account however

the premium paid can disappear in times of recession. Value of leased premises depends on

desirability of premises, state of the premises and the state of the property market at the time.

Value likely to fluctuate depending on the above factors. When entering a lease agreement

there is need to consider the following factors:

Transferability of lease- most leases are not easily transferable. Landlords want to control

suitability of incoming tenants but some will allow the transfer of leases to third parties but

there often restrictions imposed which can devalue a lease.

Terms of lease- Commercial properties are held for shorter periods than residential

property. Normally businesses changing hands will have shorter terms on the lease and the

incoming person should look out for this situation as they might be left without premises

soon after taking occupation. Most landlords find it difficult to evict a sitting tenant. Landlord

may evict tenants on grounds of property redevelopment or intention to use the property.


Frank Wilbert 56

Repairs and dilapidations- most commercial properties require tenants to pay for the

upkeep of interior and exterior aspects of the building and surrounding land. Dilapidation

clauses require tenants to return the property to the landlord in a specified condition at the

end of a lease. Such cost represent considerable burden to tenants especially when premises

are old and near the end of the lease. Lease can have negative value as its liabilities outweigh

its usefulness.

Rent and provisions for review- where rent due is considered to be below market value /

levels, then this will add to the value of a


Frank Wilbert 57

lease. Most leases provide for rent reviews after a certain period. Most leases provide for

upward reviews only.

Furniture and fittings- most business purchases include the purchase of furniture and

fittings. When new there is nothing to \Norry about and the tenant will have freedom to

choose. However going into existing premises can result in considerable costs in renovations

and removal of unwanted fittings (Look at what NMB did when it occupied premises

belonging to Zimbank). They have at times had to carry out massive alteration to make the

premises suitable for their use. The same would apply for any other venture. It is important to

examine the condition of the fixtures and fittings and their appropriateness to the business.

The type of business usually determines the nature and type of furniture and fittings when

assets are key to the business.

Machinery, equipment and vehicles- it is necessary to perform functions of a business and

these assets have to be acquired for the operations of the business. Type of equipment etc will

depend of the nature of the business and could include- manufacturing plan, commercial

equipment (freezers etc), office equipment and vehicles. Such assets have to be evaluated to

determine the purchase price. We can use the following methods to determine the purchase

price of these assets:

Written down book value which tends to be arbitrarily determined depending on the

depreciation method used by the business. Depreciation policies often tend to be optimistic or

cautious.

Market value.

Replacement value.

Original cost of equipment.

Stock and WIP- small businesses usually sell stock of the business to the new owner. Stock

can be classified as:

Raw materials, which is converted into products. Valuation of raw materials is the original

cost paid for the stock- however if there are price increases it will be necessary to negotiate a


Frank Wilbert 58

higher price based on a replacement value. Buyer might ask for a reduced price if some of the

materials are damaged, obsolete, overstocked and perishable.

WIP, which is unfinished products. It is more complicated to calculate the price of work in

progress, as there are already components of raw materials plus other direct and indirect cost

for labour and overheads to be taken into consideration in determining the value of WIP.

Calculations have to been made on the state of completeness of the WIP, which is essential in

value determination.

Most small business people do not keep such records.

Finished goods ready for sale products. These are valued at the

selling price at the time of the sale taking into consideration any

overstocked position which decreases the value of some lines. Stock should be valued on the

day/date of transfer of the business. Should not be a fixed sum during negations. Use can also

be made of an independent valuer to determine the selling price.


Frank Wilbert 59

Debtors- people and companies will owe the business money. Debtors are a real asset to a

business problem not to negotiate value of debtors since their value is amount owing. Danger

is whether they will pay or not and how long they will take. Usually make it a point that the

seller retains debtors book and collect their money themselves after the sale or to guarantee

the amount in case of failure to collect.

Goodwill- accuracy of goodwill depends on circumstances and not reality. It is easier to

identify tangible assets and value these but very difficult to determine goodwill which is a

balance sheet item. Usually the practice is to remove the value of tangible assets and the

balance remaining from total assets will be the goodwill. Goodwill attempts to value the

likelihood of future success and therefore future profitability of the business. Goodwill is the

evaluation of future profitability, which is added to any market value of tangible assets.

Employees- existing employees can be a key to success i.e. their experience, skills, way of

doing business will impact on customer satisfaction. Employees can truly an intangible asset

but will dependent on worker motivation and individual expertise. Most small businesses

often run by the seller who is key to its success- impact of their removal is an important issue

particularly in the sale of a small owner managed businesses. Conversely you can take on

more than you bargained for with you being lumped with employees recruited on a partisan

basis who are a liability to the business. These cannot easily be jettisoned due to labour laws.


Frank Wilbert 60

Lecture 5

Once a decision is made to go into business, proper planning becomes essential. The

following steps will be taken in starting a business:

> Search for and identify a need for a product or service,

Study the market fore the product, using as many sources of information as possible.

Decide whether to start a new business, buy an existing one or buy a franchise.


Frank Wilbert 61

> Make strategic plans, including setting your mission, strategic objectives and strategies.

> Make operational plans, including setting policies, budgets, standards and methods, and

planning the many aspects of producing and marketing the product/service.

* Make financial plans including estimates of income and expenditure.

Develop these plans into a business plan.

There are many ways in which a person can go into business including the following:

Begin a new business/ Start up - this is new business that is not part of another organisation

though the idea being implemented might not be new. This is often referred to as a green field

business - no clearing of brush has been undertaken yet. The ideas are given a chance to be

started, grow and develop. Start-up is the only way of exploiting new ideas. Depending on the

investment start ups can be in the form of:

1. Sole trader i.e. where the individual makes all the investment on his or her own.

2. It can be shared with others i.e. in the form of a partnership with equal partners or any

other such arrangement.

3. It can be a registered company.

Low risk level- typified by someone who begins the business on a part time basis. Risk is

minimal as income is generated elsewhere and investment requirements are very small.

Motivation may be to turn a hobby or skill into a financial gain- rather like testing the water

before making a jump. High-risk level - when a professional etc becomes self-employed.

However liabilities are kept low by purchasing minimal equipment or overheads. Investment

can be made on an individual basis or at times shared with partners. Adv.

Creation of the owners thereby being free to choose what the business does, how it

operates and what its value are.

> Controls of the owners- personal decision count and external influences are minimised.

> Satisfaction of the owners - success due to skills and effort of the owners, which gives

them sense of heightened satisfaction when and if one, is successful.

Clean sheet - the business starts with no backlog of problems. It will create plenty but not

at least inherited from the past.


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New businesses are candidates for help from various agencies. Government assistance and

help from other agencies is available to encourage start-ups.

> Match between the founder and the enterprise- the founder can ensure that their individual

strengths are well used and weaknesses minimised by choosing a business well matched to

their own qualities and experience.

Fewer funds needed - costs are less than buying a similar franchise or existing business.

Disadv.

Unproven idea- may be creative but will it work? New businesses can only prove itself in

practice.


Frank Wilbert 63

High rate of failure- many new businesses have a high failure rate however other methods

have higher track record.

Hard and lonely work- entrepreneurs do it themselves and have unsocial working hours.

> No market share or goodwill- start up has to start from scratch to establish company name

and build name and to build loyalty.

> There are many barriers to market entry- legislation has to be considered, premises found,

accounts opened with suppliers/ creditworthiness proved etc.

Difficulties to come up with forecasts with no track record, difficult to predict financial

outcomes, sales volumes, overhead costs etc.

Difficulties to get finances since banks are willing to provide funds to someone with a

proven concept than to new ideas.

Franchising

> Product and trademark franchising where the franchisee is granted the right to sell a

widely traded product or brand. Franchisees concentrate on handling one franchiser's product

line and identify their business with that firm e.g. petrol stations. The franchiser will exercise

very little control over the operations of the franchisee. Control will mostly focus on

maintaining the integrity of the product.

Business format franchising - relationship in which franchisee is granted right to use the

entire marketing system, along with ongoing assistance and guidance from the franchiser-

including restaurants, retailing' hotels etc.

Opportunities are plenty to go through franchising route however there need to make

intensive studies and evaluations before jumping into a franchising bed. You should look to

franchises which are