Learner Guide for Entrepreneurship (ENT001) 2011imm-gsm.s3.amazonaws.com/.../ENT_Entrepreneurship_LG2011.pdfEntrepreneurship also provides students with the essential skills used in

Learner Guide

for

Entrepreneurship (ENT001) Entrepreneurship (ENT)

2011

The IMM GSM holds the copyright of all IMM Graduate School of Marketing material. No

publications may be reproduced without written prior permission from the IMM GSM.

Revised: October 2010

IMM GSM© Page 2 of 109 ENT001/ENT

Table of Contents

SECTION A

1. Word of welcome .................................................................................. 6

2. How to use this guide ............................................................................ 7

3. Purpose and overall learning outcomes ................................................ 8

4. NQF (National Qualifications Framework) specifications .................... 10

5. Pre-knowlege ...................................................................................... 10

6. Relationship to other modules ............................................................. 10

7. Prescribed booklist and additional reading .......................................... 11

8. Curriculum ........................................................................................... 13

9. Specific learning outcomes ................................................................. 14

10. Critical cross-field outcomes .............................................................. 17

11. Assessment ......................................................................................... 18

SECTION B

MODULE ONE – ENTREPRENEURIAL OPPORTUNITIES ...................... 20

Study unit 1: The entrepreneurial life ..................................................... 20

1. Specific learning outcomes .................................................................. 20

2. Reading reference ............................................................................... 21

3. Overview of this study unit ................................................................... 21

4. Key concepts and terms ...................................................................... 26

5. Self-assessment exercises .................................................................. 26

Study unit 2: Entrepreneurial Integrity and Ethics ................................ 27


2. Reading references ............................................................................. 28




Study unit 3: Starting the business ........................................................ 33



3. Overview of this study unit .................................................................. 34




Study unit 4: Franchises and buy-outs .................................................. 39






Study unit 5: The family business .......................................................... 44






MODULE TWO – THE NEW VENTURE BUSINESS PLAN ...................... 50

Study unit 6: Creating business plans ................................................... 50




4. Key concepts and terms ..................................................................... 53

5. Self-assessment exercises ................................................................. 54

Study unit 7: The marketing plan ............................................................ 55






Study unit 8: The organisation of the business ..................................... 60

(The organisation plan) .............................................................................. 60






Study unit 9: The location plan ............................................................... 65





4 Key concepts and terms ...................................................................... 68

5 Self-assessment exercises .................................................................. 69

Study unit 10: The financial plan ............................................................ 70

(The financial plan) ..................................................................................... 70





5 Self-assessment exercises .................................................................. 79

Study unit 11: The harvest plan .............................................................. 82



3. Overview of this study unit .................................................................... 83

4. Key concepts and terms ....................................................................... 84

5. Self-assessment exercises ................................................................... 84

MODULE THREE – MANAGING GROWTH IN THE SMALL BUSINESS 85

Study unit 12: Professional management and leadership .................... 85

1. Specific learning outcomes ................................................................... 85

2. Reading references .............................................................................. 86




Study unit 13: Human resource management ....................................... 91






Study unit 14: Operations management ................................................. 96





4. Key concepts and terms .................................................................... 100

5. Self-assessment exercises ................................................................ 100

Study unit 15: Risk management .......................................................... 101

1. Specific learning outcomes ................................................................ 101

2. Reading references ........................................................................... 101

3. Overview of this study unit ................................................................. 102



Study unit 16: Managing assets ............................................................ 105

1. Specific learning outcomes ................................................................ 105

2. Reading references ........................................................................... 106

3. Overview of this study unit ................................................................. 106




SECTION A

1. Word of welcome

Welcome to the world of the entrepreneur, the exciting and dynamic world of

business, where internationally-recognised entrepreneurs, such as Bill Gates

Sol Kerzner or Richard Branson, have become business icons. Their huge

success and entrepreneurial spirit captivate the business world.

Entrepreneurs are the driving force behind innovation, change and job

creation and these traits are increasingly being recognised as critical to

business sustainability. An entrepreneurial qualification is a tremendous

advantage for graduates, who can then implement these skills in establishing

a successful career.

This entrepreneurship module, in conjuction with small business

management, focuses on the basic skills, knowledge and tasks that

individuals must have, develop and apply in order to manage their enterprise

successfully within the marketing industry and beyond.

The objective is to enable the student to make a difference by discovering

market needs and launching new or improved products to meet those needs,

thus creating jobs and adding value. Owning and managing a small business

has allowed many people to make their dreams come true. It is the aim of this

module to guide the learner closer to his/her reality.

Students must develop the ability to see their field of specialisation in the

context of entrepreneurial activity within a small business enterprise. The

prescribed textbook therefore focuses on a variety of aspects relating to

entrepreneurship and the starting and managing of a small business.


2. How to use this guide

Distance learning requires discipline and planning. This learner guide has

therefore been developed to guide you through the concepts and theory of

entrepreneurship and assist you in successfully completing the module. It is

not intended to replace the prescribed textbook, but the learner guide rather

leads you through each unit of study allowing you to gain a full understanding

of the essentials in making a success in the world of business.

This learner guide is divided into two sections:

Section A provides all the information required about the Entrepreneurship

module and also explains the module within the context of the South African

National Qualifications Framework (NQF).

Section B guides you through the 16 units of study that make up the module.

You will need to study each unit systematically. The detailed outcomes

indicate what you should learn and understand; the guidelines assist you in

showing how best to achieve the outcomes; and the self-assessment

exercises then enable you to measure how well you have achieved what you

set out to learn. Ensure that you understand and are able to complete all the

exercises. This will prepare you well for the examination.

The learner guide should be studied in conjunction with the textbook and does

not replace the textbook.

At the end of each study unit you will find some typical examples of

examination questions which should be used for self-evaluation.

The following icons appear in all of the learning guides of the IMM Graduate

School of Marketing:


indicates learning outcomes

indicates the sections in the prescribed textbook that you

need to study.

indicates key concepts

indicates the self-evaluation questions.

3. Purpose and overall learning outcomes

The objective of this module is to introduce the student to entrepreneurship in

the context of small business management. By working through the learner

guide, a student will develop a sound understanding of the underlying

fundamentals and concepts deemed necessary for a successful business.

Absorbing the instruction and guidance of the textbook contents is also critical

for successful completion of the module.

After completing this module, students will be aware of all relevant

terminology and definitions within the context of application of the concepts to

real life situations. It is important to learn the language and terminology used

in the business world, in order to liaise and communicate effectively within

different spheres of business.

Successful application of the skills obtained in this module should show a

significant return on the effort you invest.


On completion of this subject, you should be able to

• understand the concept of entrepreneurship and its relationship to small

business management (entrepreneurship is not only about the

management of a small business). Understand alternative entrepreneurial

opportunities in the small business sector within the southern African

context, considering globalisation of business, together with differences in

legislation, classifications and financial controls.

• understand the content and process in compiling a business plan.

• understand the aspects relating to managing operational activities within a

small business. These include social and ethical issues, managing growth,

human resources and quality aspects.

• understand the basic considerations and factors of financial management

in an entrepreneurial organization.

• understand the various risks facing an entrepreneurial enterprise, with

consideration of exit strategies as a final alternative.

• understand the following important terms and concepts:

Entrepreneurship

Small business management

Franchising

Family business

Start-up vs. buy-out opportunity

Competitive advantage

The business plan

The location decision

Home-based business

Financial forecasting

Debt vs. equity

Social responsibility vs. ethics vs. consumerism

Globalisation and e-commerce

Human resources management

Quality management

Financial performance

Asset management


Risk management

Exit strategies.

4. National Qualifications Framework specifications

This module forms an elective module for the Diploma in Marketing

Management and the BBA in Marketing Management.

In terms of the new National Qualifications Framework (NQF) it is designed as

a 20-credit module offered on NQF level 7.

The IMM Graduate School of Marketing regards Entrepreneurship as an

elective module in year 2 or 3.

5. Pre-knowledge

Entrepreneurship is a very broad study field. In the context of this module, it is

limited to entrepreneurship and small business management. This module

should allow the student to generate a big picture view, in terms of the

marketing discipline within new venture enterprises. Students need previous

exposure to learning in the fields of business management on undergraduate

level. Exposure to marketing management will furthermore assist the student

with industry specific entrepreneurial practice.

Entrepreneurship allows the student to develop further skills and knowledge,

whilst also applying the specialised marketing knowledge gained from prior

learning.

6. Relationship to other modules

Upon looking closer at the connection between entrepreneurship and other

modules, it is important to understand that the entrepreneurship syllabus

encompasses the whole spectrum of business functions, including marketing

and sales, human resources marketing, strategic marketing, financial planning


and financial decision making, financial accounting, corporate governance and

compliance. The entrepreneur will be exposed to and involved in all of these

diverse disciplines in the world of business.

The terminology and concepts explained and used in the module also

integrate with other IMM GSM modules, which is useful to the student in

identifying and recognising current and prior learning.

The student is guided in starting-up, buying or managing a small business

enterprise or independent division, which can be applied in any industry, but

with a focus on marketing and marketing-related businesses.

Entrepreneurship also provides students with the essential skills used in the

global entrepreneurial and small business management environment so that

they will, on completion of the module, be able to easily apply what they have

learnt.

7. Prescribed textbook and additional reading

Prescribed textbook:

Moore, C.W., Petty, J.W., Palich, L.E., and Longenecker, J.G. 2010.

Managing Small Business: An Entrepreneurial Emphasis. International

Student Edition. 15th edn. South-Western Cengage Learning.

Some features of the prescribed textbook include the following:

• Thorough coverage of small business management, with a specific

emphasis on entrepreneurship, entrepreneurial behaviour within the

business environment, start-up and managing a small business.

• The use of the Internet, which is particularly helpful in understanding and

analysing practical examples relating to entrepreneurship and small

business management.

• Each chapter includes a ‘real-life’ example of organisational experiences

related to the chapter topic, providing a practical application and

explanation.


• At the end of each chapter, a variety of questions with answers, key terms,

including page references, case studies and exercises with practical

application and Internet-based exploration are provided.

Two basic definitions are listed below to assist you in understanding the

terminology used both in the textbook, as well as throughout the course.

Term Definition

Entrepreneurship The process where an individual is willing to take calculated

risk in order to create or utilise a viable business opportunity,

no matter the initial limitations and limited resources

available.

Small business In a South African context: In comparison to first-world

countries, small businesses will include small- and medium-

sized South African organisations.

Additional reading

The IMM GSM recommends supplementary texts for each of the modules

offered. The purpose of these additional texts is to supplement the material in

the prescribed textbook. The following supplementary reading is

recommended for the Entrepreneurship module:

� Ashton, R. 2007. The Entrepreneur’s Book of Checklists – 1000 Tips to

help you start and grow your business. 2nd edn. Pearson.

� Burke, R. 2006. The Entrepreneurs Toolkit. Burke publishing.

� Bygrave, W.D. 2010. The Portable MBA in Entrepreneurship. 4th edn. New

York: John Wiley & Sons.

� Niemann, G., and Nieuwenhuizen, C. (ed). 2009. Entrepreneurship: A

South African Perspective. 2 nd edn. Van Schaik.

Resources

It is very important that, while reading the material, you always have a

dictionary or thesaurus handy. As you come across a term or word that you


are not familiar with, you should look it up and jot down the meaning, as these

words are sure to reappear in your study themes. There may also be

technical terms that do not appear in your dictionary. For these, you will need

to refer to either the prescribed textbook or another entrepreneurship textbook

in the library. At the back of some textbooks, you will find a glossary of terms,

whilst at the end this learner guide you will find a glossary of terms most

frequently used throughout this module.

Most libraries do have a periodical section in which you can find useful

magazines, such as The Entrepreneur, Succeed, Acumen, Leadership

amongst others. These will help you understand the South African and global

entrepreneurial environment outside of the theory that is covered in your

prescribed textbook.

Make sure that you use the Internet to enhance your appreciation of

entrepreneurship. It is strongly recommended that you use a well-known

search engine, such as EBSCOHost.

8. Curriculum

The syllabus is structured into study units. For each study unit, a specific

theme has been identified. The following section of the learner guide gives

you an overview of the study units that make up the Entrepreneurship module.

You are advised to supplement your learning by broadly reading on each

theme, beyond the prescribed textbook. Your understanding of the subject

can only be enriched if you consider the different views that exist within the

discipline of entrepreneurship. Additonal thinking and reflection on the specific

themes will enable you to better apply the models, principles and concepts

contained in this course.

The entrepreneurship syllabus is divided into three sections, as follows:


Module Study Unit

Description

Chapter

1 Entrepreneurial opportunities

1 The entrepreneurial life 1

2 Entrepreneurial integrity and ethics 2

3 Starting the business 3

4 Franchises and buy-outs 4

5 The family business 5

2 The new venture business plan

6 Creating business plans 6

7 The marketing plan 7

8 The organisation of the business 8

9 The location plan 9

10 The financial plan:

• Financial statements

• Projecting financial requirements

• Sources of financing

10, 11,

12

11 The harvest plan 13

3 Managing growth in the small business

12 Professional management and leadership 19

13 Human resources management 20

14 Operations management 21

15 Risk management 23

16 Managing assets 22

9. Specific learning outcomes

Entrepreneurship has been structured into the following exit level outcomes,

specific outcomes and assessment criteria:


Module Description Learning outcomes

1 Entrepreneurial

opportunities

Define entrepreneurship and analyse the

definition and different types.

Reason the value of entrepreneurship and its

success.

Describe the various types of entrepreneurs.

Describe and classify small business in the

South African context.

Define a family business and discuss it as an

entrepreneurial opportunity.

Define franchising and discuss it as an

entrepreneurial opportunity.

Define start-up and buy-out business

opportunities and discuss each as

entrepreneurial opportunities.

Describe and assess the various strategies to

establish competitive advantage.

Describe and evaluate social and ethical

issues reflecting on managing a small

business.

2 Developing new

venture business

opportunities

Identify and explain the components of a

business plan and construct and assemble a

business plan for an organisation in the

marketing industry.

Identify, discuss and reason the various plans

that form the components of a business plan.

Identify, describe and analyse the relevant

aspects that must be included and considered

in the various sub-plans of the business plan

including marketing plan, financial plan,

operations plan, people and management

plan and other associated elements.

Name and discuss the elements of the


business plan.

Apply the business plan in relation to a

marketing business.

Investigate the various sub-plans within a

formal business plan.

3 Managing growth

in a small

business

organisation

Name and discuss the factors and

management tasks to be considered when

managing and leading a fast-growing

organisation.

Discuss and create the processes and

considerations in managing human resources

in a small business.

Identify and discuss operations management

and its related processes and activities, such

as inventory management and purchasing,

required in an entrepreneurial venture.

Discuss and assess total quality management

and risk in small business operational

processes.

Discuss and assess risk management in small

businesses and entrepreneurial ventures.

Explain, calculate and interpret the financial

fundamentals in terms of asset management,

risk and insurance and the related strategies.


10. Critical cross-field outcomes

The critical cross-field outcomes, also known as transferable skills as

identified by the South African Qualifications Authority (SAQA), are essential

for your development as a student within the education and training system,

regardless of the specific area of learning. It is these outcomes that are

deemed critical for your development in the capacity of life-long learning.

The critical cross-field outcomes adopted by SAQA are as follows:

(1) Identify and solve problems in which responses display that

responsible decisions using critical and creative thinking have been

made.

(2) Work effectively with others as a member of a team, group,

organisation and community.

(3) Organise and manage oneself and one’s activities responsibly and

effectively.

(4) Collect, analyse, organise and critically evaluate information.

(5) Communicate effectively using visual, mathematical and/or language

skills in the modes of oral and/or written presentation.

(6) Use science and technology effectively and critically, showing

responsibility towards the environment and health of others.

(7) Demonstrate an understanding of the world as a set of related systems

by realising that problem-solving contexts do not exist in isolation.

(8) Reflecting on and exploring a variety of strategies to learn more

effectively.

(9) Participating as responsible citizens in the life of local, national and

global communities.

(10) Being culturally and aesthetically sensitive across a range of social

contexts.

(11) Exploring education and career opportunities.

(12) Developing entrepreneurial opportunities.


The transferable skills identified in this module are as follows:

Taught Practised Assessed

Problem solving X X X

Working in teams X X

Self-management X X

Information gathering/research

skills

X X X

Communication skills X X X

Analytical skills X X X

Learning strategies X X X

Responsible citizenship X X

Cultural sensitivity X X

Career development X

Entrepreneurship X X X

11. Assessment details

There are two assessments involved in terms of the Entrepreneurship module:

• Assignment: The assignment contributes 20% to the overall mark for

the module. Assignments will focus on selected chapters, and need to

be typed. Please ensure that you adhere to the general rules of the

IMM Graduate School of Marketing pertaining to the style and format of

assignments. You will be issued with a separate brief in this regard.

• Examination: The exam incorporates all content covered in the learner

guide and constitutes 80% of the final mark for the Entrepreneurship

module. The duration of the examination is three hours and the paper

will count 100 marks. The examination paper will consist mainly of

paragraph and essay type answers. Examination results are usually

released within six weeks of sitting the examination.


The final mark, consisting of an assignment mark and an examination mark, is

released in the form of a final percentage (mark out of 100). The grading

system is as follows:

Percentage Scale Description

75% or more Pass with Distinction

50% - 74% Pass

0% - 49% Fail

A timetable of the assessment programme for the semester, including dates

for the assignment to be submitted during the course of the year, is available

in the Calendar of Events for that year. Please refer to the current issue of the

IMM GSM Prospectus. This document and the Student Yearbook provide

details of the IMM GSM assessment policy.


SECTION B: STUDY UNITS

MODULE 1 – ENTREPRENEURIAL OPPORTUNITIES

Study Unit 1: The entrepreneurial life

Overview of textbook content

Study Unit 1 looks at entrepreneurship as a discipline. It

covers definitions and classifications of entrepreneurs in relation to

practising entrepreneurship in the small business environment. In this

section, the specific learning outcomes you need to master are listed

below. This assists you once you start reading the material in Moore et

al. (2010), as you will be able to indentify what is important to

understand and what to do after you have completed the study unit.

The material provided is informative as well as easy to read.

Topics:

Rewards and pay-offs of entrepreneurship

Classification of types of entrepreneurs

Advantages of small entrepreneurial organisations

What makes entrepreneurs successful?

Getting started in entrepreneurship

Differentiate between entrepreneurship and a small business


After studying this chapter, students should be able to:

• Discuss entrepreneurial opportunities and

give examples of highly successful

businesses started by entrepreneurs.


2. Reading reference

Study Moore et al. (2010) Chapter 1.

3. Overview of this study unit

3.1 Introduction: entrepreneurial opportunities

Entrepreneurial opportunities exist for those who can

produce products or services desired by customers. The fields of

entrepreneurial opportunities are huge. Due to the many profound

changes that have occurred to the world in which we live,

technological development has dramatically reduced the world of

commerce to a click of a button. This has played an enormous role in

changing the traditional landscape of the entrepreneur. Whilst vast,

potential, profitable business opportunities exist in our environment,

there are also many risks and challenges. Studying this module will

show where the main potential lies as well as indicating these

challenges.

• Identify the pay-offs (rewards) of

entrepreneurial careers.

• Describe and analyse the various types of

entrepreneurs, entrepreneurial management

styles and entrepreneurial ventures.

• Identify and discuss aspects that provide a

potential competitive edge for small

entrepreneurial organisations.

• Discuss and compare several factors that

indicate a readiness for entrepreneurship.


3.2 Entrepreneurship and small business

The importance of defining entrepreneurship and how this

relates to small business is important for the student to understand.

Entrepreneurs can be defined as those individuals who discover

market needs and launch businesses to meet those needs. The term

‘entrepreneur’ is also applied not only to first or second generation

operators of businesses, but also to franchisees and owner-managers.

Small businesses are an important part of the greater economy. Small

businesses can be small one-man operators, but a business with 100

employees can also be classified as a small business. Thus, small

businesses include one or two-person businesses – the kind you may

decide to start on your own or with a partner, or a company with

anything up to 100 employees. Various ways of classifying a small

business exist and also differ from country to country. Whatever the

size, the most important thing to recognise is that they are very

different structurally and operationally to the large companies and

corporate organisations.

3.3 The rewards of entrepreneurship

There are many reasons why people become

entrepreneurs; in a recent study, researchers identified 38 different

reasons for self-employment. Obviously, entrepreneurship must

deliver according to one’s financial needs so, primarily,

entrepreneurship is about achieving an adequate financial return to

compensate the entrepreneur for the time and money he/she invests

and, at the same time, provide adequate reward for the risks and

initiative taken in operating his/her own business.

The freedom to operate independently is another reward for

entrepreneurship. The importance of being your own boss and having


operational independence is evidenced in various surveys conducted

on this aspect. Whilst the going may not be easy, entrepreneurs can

do things their own way and thus reap the benefits accordingly.

Remember, though, the real boss of the entrepreneur is, of course, the

customer.

Exhibit 1.2 in Chapter 1 clarifies the main entrepreneurial incentives.

Reluctant entrepreneurs are those who try to establish a sense of

freedom from a negative situation, or even as a result of a possible

layoff. Examples could be a professor getting bored with academia or

an executive who lost a top position because of take-over or

acquisition. Most entrepreneurs reveal a sense of satisfaction in

running their own businesses. The desire to contribute to the

community and society is also one of the many motives that may drive

the entrepreneurial spirit and for many entrepreneurs, happiness and

self-fulfilment is much more important than money or the

independence.

3.4 The many varieties of entrepreneurship

Entrepreneurship is diverse and as a potential

entrepreneur, you are not restricted to a narrow stereotype. Founders,

franchisees, micro-business managers, entrepreneurial teams,

artisans and more and more women make up the various types of

entrepreneurs.

Attractive small businesses offer substantial financial rewards for their

owners; income from these businesses can vary quite dramatically,

depending on how and where these businesses are positioned.

An entrepreneurial team is defined as two or more people with diverse

skills working together as entrepreneurs on one project/enterprise.


Moore et al. (2010), focuses directly on the diversity issues of these

different entrepreneurial profiles in Chapter 1. These include the

founder, business owner, franchisee, women, artisan and opportunistic

entrepreneur as well as the different types of ventures such as

gazelles, attractive small businesses and micro-businesses.

3.5 The competitive edge of entrepreneurship

The customer is and will always be the ultimate focus of any

organisation, and often small businesses have the opportunity to be

more able to deliver real service more directly and effectively than their

corporate counterparts. Customer satisfaction is to be earned. Many

small businesses do not manage to achieve quality customer service,

but many do realise their potential in this area. Being a small firm and

having a smaller number of customers with which to build a good

relationship, means that customer service is a powerful tool for

entrepreneurial businesses. See Chapter 14 for a further discussion

on this subject.

The quality of operations is also a very important aspect of focus for

small business. Many small businesses are able to excel in producing

superior quality work as their operations are smaller and

entrepreneurs are generally more ‘hands-on’ than managers in larger

organisations.

Technology has seen that innovation in terms of products and

competitiveness is now well within the reach of the small business

entrepreneur, who can be flexible and respond to changing needs and

opportunities faster than larger companies.

Ethics: In a recent study at Harvard Business School more than 72

percent of respondents stated that high ethical standards are a vital

prerequisite for long-term success in business. In Chapter 2 we will


discuss the critical importance of integrity and responsibility and its

role in entrepreneurship.

A special niche is also a consideration in establishing a competitive

advantage. Finding a special niche may empower a small business to

be very competitive in that particular area of business.

3.6 Getting started

A question that is often asked concerns the right age to

become an entrepreneur. It is a difficult question to answer as there

are a myriad of factors – as discussed earlier – as to why people

become entrepreneurs. However the best time-window seems to be

between late 20s and early 40s, as this is the time when there appears

to be a balance between experience on the one hand and family

obligations on the other. However, 50 and 60-year olds will often walk

away from big careers in order to pursue the exciting prospects of

entrepreneurship.

The inherent characteristics of successful entrepreneurs cannot be

well-defined as no specific profile exists. It should, however, be noted

that one of the primary traits entrepreneurs display is their ability to

take risks. As they invest their own money, they assume the financial

risk of the business. They can generally be considered as moderate

risk-takers, as they do have some control over the risk. You should

familiarise yourself with the six categories of suggested

entreprenuerial characteristics, as outlined to the end of Chapter 1.

In whichever manner an entrepreneur begins to look at starting his/her

own business, there is a point in time when he/she will have to find the

courage and take the plunge. Mentors are those people who give

guidance to entrepreneurs based on their experiences and knowledge

acquired. Success in business will contribute to success in life,

allowing the entrepreneur to craft a worthy legacy.


4. Key concepts and terms

5. Self-assessment exercise

Make sure that you understand and are able to apply

the ‘Key Terms’ to be found at the end of Chapter 1

in Moore et al. (2010).

1. Define and explain the concept: Entrepreneurship.

2. The outstanding success stories at the beginning of the chapter are

exceptions to the rule. What, then, is their significance in illustrating

entrepreneurial opportunity? Are these stories misleading?

3. Consider an entrepreneur you know personally. What were the most

significant reasons for him/her to decide on following an independent

business career?

4. The rewards of profit, independence and a satisfying way of life may

attract individuals to entrepreneurial careers. What problems might be

anticipated if an entrepreneur were to become obsessed with one of

these rewards – that is, he/she has an excessive desire for profit,

independence or a particular lifestyle?

5. Explain how women in the role of entrepreneurs is significant for

entrepreneurship.

6. Distinguish between an artisan entrepreneur and an opportunistic

entrepreneur.

7. What is the difference between a founder and an administrative

entrepreneur?

8. Explain how customer focus and innovation can be special strengths

to a small business.

9. Why is the period from the mid-20s to the early 40s considered to be

the best age for becoming an entrepreneur?

10. What are the most common characteristics found in successful

entrepreneurs? Give some examples.


Study Unit 2: Entrepreneurial integrity and ethics


The focus of Study Unit 2 is to define and discuss the

concept of integrity and understand the importance of honesty,

integrity and ethics in small businesses.

Topics

Integrity and entrepreneurship

Integrity and stakeholders

Ethics and social responsibility

Challenges and benefits of ethical behaviour

Developing and building integrity

Social entrepreneurship.


After studying this chapter, students should be

able to:

• Define integrity and understand its importance to small business.

• Explain how integrity applies to various stakeholder groups such

as owners, customers, employees and the community.

• Identify challenges that arise in small business and explain the

benefits of ethical behaviour and social responsibility.

• Describe practical approaches for building a business with

integrity.

• Discuss social entrepreneurship and the costs and opportunities of

environmentalism.





3.1 Introduction

This chapter introduces you to entrepreneurial integrity. The

heart of integrity is the ability of small businesses to engage in ethical

behaviour and not to compromise the business integrity for the sake of

business or personal advantage. There is no doubt that to run a

socially responsible business demands high integrity and ethical

business practices.

3.2 Integrity and entrepreneurship

The hallmark of business integrity includes such values as

honesty, reliability and fairness. Money is important too but it cannot

be the overriding factor and customers should never be deceived for

the simple reasons of financial gain. Excessive focus on money will

quickly lead to distortions in business behaviour and can be regarded

as a root cause of many business failings: Enron, WorldCom and

South Africa’s own LeisureNet immediately come to mind. See Exhibit

2.1 in Chapter 2 for typical ethical issues facing small businesses.

Doing the right thing is the basis of integrity, which in turn is based on

ethical issues. To be able to act with integrity is simply to consider the

welfare of others.


3.3 Integrity and stakeholders

Although the survey discussed in Exhibit 2.2 found that the

ethical issues most mentioned were related to customers and

competitors, the second most common category concerned the way in

which a company treats its employees, including decisions about

retrenchments, discrimination, fairness in staff promotions and also

how stakeholders are treated by the organisation. The third category

related to the obligations of employees to their employers focuses on

employee actions that may not have the best interests of the company

at heart.

Results of the survey revealed that entrepreneurs must consider the

interests of a number of groups when making decisions: owners,

customers, employees and the community. The management of the

concerns of stakeholder groups are critical to the well-being of the

business. If one group is neglected, that group can use its influence to

negatively affect the performance of the company as a whole.

In many small businesses, some people may have ownership of part

of the business but are not really involved in the operations. This is

difficult to manage, as sometimes questions concerning proper

conduct arise – for example, when reporting on financial information.

In the United States, special legislation had to be passed through the

Senate in July 2002 to implement the Sarbanes-Oxley Act, which

primarily concerns internal controls over financial reporting. This was

due to the fraudulent conduct of corporations such as Enron,

WorldCom, Tyco and many others. A special clause on whistle-

blowing is also part of the Sarbanes-Oxley Act, specifically to allow the

exposure of unscrupulous and unethical behaviour by employees.

King 1, 2, and 3 provide guidelines to be considered for ethical and

sustainable conduct in the South and southern African business

environment.


Ethical business practices must not be limited to customers and

employees within the business operation, but must extend to the

business also acting as a good citizen within the community. These

broader obligations of citizenship are called social responsibilities.

3.4 The challenges and benefits of acting ethically and with

integrity

Small businesses face unique challenges of integrity; but

the benefits for businesses that practice integrity can offer very real

advantages to small businesses. As they strive to earn profits, there is

often a great deal of temptation for entrepreneurs to compromise their

ethical standards. In a study conducted for entrepreneurs and as

discussed in Chapter 2, most participants took the moral high ground

when it came to ethical issues. However, the study revealed that in

the occasional instance, entrepreneurs did succumb, but largely

entrepreneurs could be regarded as people who exercise integrity.

The greatest benefit of integrity is that it generates trust. Consumer

trust results when the stated values of a company and its behaviour in

the market-place match.

3.5 Developing integrity

Building a business with integrity requires the entrepreneur

to show that his/her business operates honourably and honestly in all

areas. Achieving this means that management has to build the

business through the display of leadership and by developing a culture

that supports appropriate behaviour.

Entrepreneurs who are committed to the underlying values of integrity

operate their businesses in ways that reflect their own true personal

interpretation of these values. Normally, values that serve as a

foundation for integrity are based on the personal values of the


entrepreneur and his/her views of humankind and the universe. For a

business to operate on a high level of integrity, there needs to be a

supportive organisational culture. Kenneth Blanchard and Norman

Vincent Peale discuss this issue in Chapter 2 and suggest a policy be

developed on five basic underlying principles. More specifically, a

‘code of ethics’ should be formulated. See the ethical code example in

Exhibit 2.3 in Chapter 2.

The Ethics Resource Center in Washington DC, USA, provides us with

a six-step process to assist with ethics while making decisions. The

aim of this process is to improve decision making when dealing with

challenging situations and problems without jeopardising ethics.

3.6 Social entrepreneurship: a fast emerging trend

Environmentalism is the ‘effort to protect and preserve the

environment and directly affects most businesses today. Contrary to

popular belief, the interests of small business owners and

environmentalists are not necessarily at odds with one another.

Many small businesses have taken the aspect of environmentalism to

heart and structured their businesses accordingly – for example,

aiming at a reduction in pollution of air and water, while many also play

an active role in the preservation of the environment. Unfortunately,

some small businesses have had to close their doors because of

costly environmental regulations and controls.

Environmentalism can actually provide many opportunities for small

businesses; in fact many small businesses exist primarily due to

environmental concerns. An ultimate goal is to be aware of the

dangers that our environment faces and aim to save our planet and, in

the process, for entrepreneurs to contribute effectively. Consult

Chapter 2 for more details.




Ensure that you understand and are able to

apply the ‘Key Terms’ to be found at the end of

Chapter 2 of Moore et al. (2010).

1. Think of an example of an unethical business practice that you

have personally encountered. Why do you believe is it unethical?

2. Select a small business that you are aware of. How do you rate its

ethical performance? What evidence or clues have you based your

opinion on?

3. How can an organisation act in a socially responsible manner? List

some examples.

4. What is skimming? In what manner may small business owners

attempt to rationalise such a practice?

5. Explain and assess the advantages of conducting business with

integrity.

6. Is it acceptable to focus more on profit in a small business and

less on goals requiring social responsibility?

7. Define the concepts of integrity, ethics and social responsibility.

8. Explain the meaning of social entrepreneurship.

9. Discuss and apply the ethical decision-making process.

10. Identify and give examples of the five fundamental principles on

which an ethics policy should be based.


Study Unit 3: Starting the business


Study Unit 3 focuses on the relevant aspects of starting-up

your own business and gives consideration to the discussion of

various ideas and the broad strategies to contemplate.

Topics:

Identifying and evaluating opportunities

Starting a new business enterprise

Start-up business ideas

Selecting appropriate strategies.



• Identify factors that help to evaluate an idea for a new

venture as a potential good investment opportunity.

• Give the advantages for starting a new business from

scratch, rather than buying an existing firm or

acquiring a franchise.

• Distinguish between the different types and sources of

start-up ideas.

• Describe and apply internal and external analyses

that can help shape new venture opportunities.

• Explain broad-based strategy options and

focus strategies.





3.1 Introduction

When Bill Gates started Microsoft in the basement of his

parent’s home, he soon dazzled the world with his brilliance and has

built up one of the biggest and most profitable companies in the world.

Everyday around the world, entrepreneurs start up incredible

businesses. Google is another example, where two academics, Sergei

Brin and Larry Page forfeited their doctoral studies at Stanford

University because Google became so successful so quickly.

3.2 Creating a new business from scratch

This chapter introduces you to several good reasons for

starting a new business from scratch, rather than buying a franchise or

an existing business; some examples may be found in Chapter 3. One

important aspect to always consider is understanding the importance

of creating a competitive advantage. (A competitive advantage exists

when a firm has a product that is viewed by its target market as

superior to those of its competitors.)

3.3 Start-up ideas

Start-up ideas fall into three categories, Type A, Type B and

Type C (see Exhibit 3.1 in Chapter 3). Many entrepreneurs begin with

Type A, ‘new market’ ideas, which centre on providing customers with

an existing product not currently accessible to them. Type B ‘new

technology’ ideas revolve around new or relatively new technology to


the market and Type C ‘new benefit’ ideas are those based on offering

customers new benefits through product performance improvements.

These Type C ideas account for a vast number of small business start-

ups.

Often the primary source of a start-up idea is personal experience,

either at work or at home or through hobbies, even through the

accidental discovery of a great idea. Start-up ideas may also emanate

from a deliberate search by an entrepreneur for a new idea.

Other useful idea leads can be found in Exhibit 3.2 and change

sources in Exhibit 3.3 in Chapter 3. Furthermore Drucker proposed

innovation as a key source to new ideas. Consider the 10 suggestions

provided in Chapter 3 to help search for that one great business idea,

using innovative thinking.

3.4 Using internal and external analysis to evaluate an

opportunity

In his book, Making Sense of Strategy, Tony Manning refers

to the fact that there are usually two approaches to evaluate business

opportunities: inside out and outside in. This means that entrepreneurs

evaluate their own personal capabilities and then search for possible

new products they can offer in line with their stated capabilities (inside-

out), or they can carefully evaluate customer needs present in the

market-place and relate those needs to their capabilities (outside-in).

The dynamics of the ‘general’ environment (or external macro-

environment) have a huge impact on any start-up business, with

influential factors ranging from political, economic, socio-cultural,

technological and legal issues (PEST+L); these situations can have a

massive impact on the entrepreneur and are essentially outside

his/her sphere of influence and control. Note that addressing the


technology factor is probably the most important to the small business

as, in today’s changing world, this can make or break an organisation.

Analysing the external ‘industry’ environment is primarily concerned

with attaining and maintaining a competitive edge within the business

and is more directly involved with the operational aspect of the

business, although understanding the general environment is also very

important. In his book, Competitive Advantage, Michael Porter lists five

factors that are of critical importance in understanding industry

dynamics. Porter’s model is known as Porter’s Five Forces model

(See Exhibit 3.5 in Chapter 3).

An inside-out analysis will focus on your business’s resources, your

capabilities as well as core competencies. Consider a SWOT analysis

to assess how internal and external factors impact on your business’s

strategic situation. An example of such a SWOT analysis is presented

in Exhibit 3.6 in Chapter 3.

3.5 Selecting strategies that capture opportunities

A strategy is a plan of action that coordinates the resources

and commitments of a business to achieve performance. In order to

make the correct strategic decisions, an entrepreneur has to be aware

of all the strategies that are available.

Understanding broad-based strategy, cost-based strategy,

differentiation based strategy, and focus strategy is very important and

learning how to apply these strategies can make the difference

between failure and success for an entrepreneur (See Chapter 3).

Note that the importance of knowing the advantages and

disadvantages of ‘focus’ strategies should not be underestimated.


Understanding the various strategies leads the entrepreneur to make a

decision for the business, formulating the primary direction the

business will take in relation to its customers and competitors.

All these strategies could be of no value if you have not answered one

fundamental question: “Is my start-up idea feasible?” Consider a

feasibility analysis (see Exhibit 3.9) and remember to seek a possible

fatal flaw.



Ensure that you understand and use the ‘Key Terms’

found at the end of Chapter 3 of Moore et al. (2010).

1. For what reasons would an entrepreneur prefer to launch an

entirely new venture, rather than buy an existing firm?

2. Suggest a product not currently available that might lead to a

new small business. Do you think it would it be a good idea to

launch a new business solely dependent on that new product?

Give reasons for your answer.

3. Using the types of ideas given in Exhibit 3.1, identify and classify

South African marketing related businesses that fall into each

category.

4. What are the primary factors that shape competition dynamics in a

specific industry, according to Porter’s Five Forces model?

5. List and explain the five different areas of the model of the general

environment? How would each segment influence a small

business?

6. How are capabilities related to tangible and intangible resources?


7. Analyse the concept of a SWOT analysis. How can a SWOT

analysis be used to match opportunities reflected in analysis

of the macro/external environment?

8. What are the basic strategic options for creating a competitive

advantage? Give reasons for your answer.

9. Define a ‘focus’ strategy and give advantages and

disadvantages thereof.

10. Analyse the various sources of start-up ideas and indicate

the values of each.

11. Identify the advantages and disadvantages of

environmentalism and give reasons.

12. Describe practical approaches to building a business with

integrity. Give examples to illustrate your answer.

13. Compile a detailed review illustrating the potential

impact of the Internet and globalisation on the integrity

of a small business.


Study Unit 4: Franchises and buy-outs


Study Unit 4 analyses the concept of franchising. It focuses

on the franchise as a business opportunity, examining the advantages

and disadvantages, as well as the unique aspects of this type of small

business opportunity. The unit also examines buy-outs as a small

business opportunity.

Topics:

The franchising concept

Advantages and disadvantages of franchising

Evaluating a franchising opportunity

The franchisee/franchisor relationship

Starting a small business via a buy-out of an existing organisation.



• Explain the franchising concept and discuss different

types of franchising businesses.

• Identify the major advantages and limitations of

franchising.

• Discuss the process for evaluating a franchise

opportunity.

• Evaluate franchising from a franchisor’s perspective.





3.1 Introduction: Franchising

This chapter introduces you to franchises and buy-outs.

Franchising as legal and marketing concept is not a new idea –

unfortunately it is a concept that remains misunderstood by many

people. Franchising should not be defined as an industry; rather, it is a

method of marketing products that almost knows no boundaries

across business categories. Many entrepreneurs begin by buying a

franchise and then often think and anticipate it as an automatic road to

business success.

History shows, however, that many entrepreneurs have realised that

this is not the case and have large amounts of money. Franchisors

and franchisees are the main parties that exist in the franchising

industry. The franchisor is a manufacturer or another channel member,

who owns an attractive business concept worthy of duplication.

3.2 Pros and cons of franchising

Buying a franchise does have some definite advantages as well as

some risky disadvantages. It is important for you to understand the

pros and cons of purchasing a franchise. One great advantage is the

high probability of success, compared to starting your own business

from scratch. Financial assistance, training and operating benefits are

further benefits associated with franchising.


At the beginning of Chapter 4, these advantages are discussed in

detail, along with the ‘limitations of franchising’. Take careful note of

these factors when considering an entrepreneurial enterprise – they

will assist in your decision as to which route to follow.

3.3 Evaluating franchise opportunities

Over the past few years there has been phenomenal growth

in the world of franchising. Much information is available in this regard

and references are easy to come by. This helps the potential

franchisee to make a diligent and well-researched decision.

Remember that franchising is both capital and cash-flow intensive,

especially in the start-up phase.

Information gathered from the franchisor and previous franchisees will

also assist in deciding whether to go this route, or whether to purchase

an existing business. See Entrepreneur’s 20 fastest growing

franchisees for 2009 to be found in Exhibit 4.8 of Chapter 4.

Potential franchisees also need to consider the legal issues relating to

franchising such as the franchise contract and other disclosure documents.

Furthermore global franchising creates numerous opportunities for franchisors

and franchisees alike.

3.4 Buying an existing business

Buying an existing business, rather than entering into a

franchise agreement, also has certain benefits. Bear in mind that

certain issues, including start-up, capital expenditure, possible royalty

payments, etc., are all factors that need to be considered when

pursuing a business opportunity.

In the second half of Chapter 4 various reasons to think about when

investigating the acquisition of an existing business are presented. It


also indicates which processes are important to follow when pursuing

this road.

In this area, once again one of the most important aspects for an

entrepreneur to consider is the diligent investigation and careful

research of all the potential opportunities and risks pertaining to

acquiring either a franchise or an existing business.

See Exhibit 4.9 on documents required for due diligence. A potential

entrepreneur needs to investigate and evaluate why an existing

business is for sale. Quantative factors as well as non-quantative

factors need to be considered.

3.5 Additional reading on franchising

Love, J.F. 1995. McDonalds: Behind the Arches. New York:

Bantam Books.

www.smetoolkit.org or www.fasa.co.za


Ensure that you understand and are able to apply the ‘Key

Terms’ of this section that can be found at the end of

Chapter 4 of Moore et al. (2010).



1. Detail what you feel makes franchising different from other forms of

business. Be specific in your answer.

2. What are the differences between ‘product’ and ‘trade name’ franchising

and ‘business formal’ franchising? Which one currently accounts for the

majority of franchising activity?

3. Give a comprehensive definition of franchising.

4. Discuss the advantages and limitations of franchising from the viewpoint

of both a potential franchisee and a potential franchisor.

5. Should the franchise information provided by a franchisor to a potential

franchisee be discounted? Give reasons for your answer. Evaluate ‘loss

of control’ as a possible disadvantage of franchising. Answer from a

franchisor’s perspective.

6. What types of restrictions on franchisee independence may be included

in a typical franchise contract?

7. Detail certain problems which may arise in consulting and discussing

with former franchisees when evaluating a franchise.

8. What types of franchise information could you expect to obtain from

specialised business periodicals that you may not be able to secure from

the franchisor?

9. Explain the role of the Franchising Association of Southern Africa

(FASA).

10. List some of the common reasons that businesses are for sale.

Discuss four positive reasons for buying an existing business.

11. What factors does one need to consider when evaluating an

existing business that is up for sale? Consider and detail the

various aspects in valuing the business.


Study Unit 5: The family business


Study Unit 5 focuses on the family business as another

opportunity to be explored for prospective entrepreneurs. It includes

an examination of the characteristics, development of the business,

and the roles, relationships and other unique features of a family-

owned business.

Topics:

The family business

The culture of a family business

Family roles and relationships

Special features of family business management

Family business succession



• Discuss the factors that make a family business unique.

• Explain the cultural context of a family business.

• Outline the complex roles and relationships involved in a

family business.

• Identify certain management practices that may enable a

family business to function effectively.

• Describe the process of managerial succession in a family

business.




3.1 Introduction: Family business

Family businesses differ from other forms of business in a

number of ways. If the opportunity of ‘joining’ a family business is open

to you, it is often regarded as a ‘no brainer’, but this depends from

which angle you choose to view the opportunity.

The common definition of a family business is a company in which

more than two members of the same family are involved, on an

ownership basis. As the definition suggests, a family business usually

passes from one family generation to another.

Over the years, much has been written about the trials and tribulations

of family businesses. One question to bear in mind is the potential for

competition to exist between the family and business. Consider the

advantages of a family business as presented in Exhibit 5.2 in Chapter

5 in order to understand the advantages of such an entrepreneurial

venture.

3.2 Family business momentum

The founder of a family business certainly provides an

imprint of the unique attributes of such a business venture.

Commitment from the other family members is of the essence. A

variety of reasons are presented in Chapter 5 indicating why family

members might be committed to the family business (see Exhibit 5.3 in

Chapter 5).



3.3 Family roles and relationships

Owing to the overlapping of two vitally important institutions

– the family and the business, the management of family-owned

businesses often becomes increasingly difficult. Parental concerns

regarding the family business are varied but a good indication of these

is presented in Chapter 5. Possible questions involving husband and

wife team dynamics, as well as those of sons and daughters, are

discussed in detail. Read the case study Living the Dream in Chapter

5 where problems are discussed. The case reveals a wide range of

possible reactions to the prospect of joining the family business. These

include disinterest, self-doubt, commitment concerns, and even the

perception of possible discriminatory practices. All issues require a

collaborative effort in order to make both the business and marriages

viable.

3.4 Professional management of the family business

First rate management is critical for any business, and the

family business is no exception. Often, a family business deviates from

the basic principles necessary to make it successful. Chapter 5

highlights the plights often encountered by the family business.

It is often apparent that non-family members get the opportunity to rise

to the top of the company, although the appointment of Sean

Summers and Nick Badminton as CEOs to Pick n Pay contradicts this.

Raymond Ackerman, as the founder of the most powerful family

businesses in South Africa, recognised that Sean was key to the good

management of the Ackerman’s family business.

Family retreats, family councils and family business constitutions are

discussed in detail in Chapter 5. Ensure that you understand the

fundamental guidelines applicable to the running of a family business.


3.5 The process of leadership succession

The tasks of preparing family members for careers within

the business and, ultimately, business leadership, can be difficult and

frustrating. Thus, career development and leadership succession are

two of the most important aspects that need to be addressed when

planning succession and sustainability of a family business.

Note that there are five different stages in the process of succession:

the pre-business stage, education and personal development stage,

proof of competence stage, formal start in the business stage and the

declaration of succession stage. A possible model of succession can

be found in Exhibit 5.4 in Chapter 5, detailing the process from the

entry of successor through to transfer of leadership.

One of the most difficult phases in traditional succession in a family

business is the transfer of ownership. Inheritance by certain members

and the involvement of other family members play important and often

complex roles in the succession arrangement. It is important for the

owner(s) to have assessed talent and capabilities in choosing his/her

successor in the family business.


It is important to understand and be able to apply the ‘Key

Terms’ detailed at the end of Chapter 5 of Moore et al. (2010).



1. Explain the similarities and differences between family businesses

and other types of small businesses. Detail the factors that make a

business a family business.

2. Supposing that, as the founder of a business, you have a vacant sales

manager position. Realising that if you promote your son to that

position, sales may suffer but you really wish to see your son make

some progress and earn a higher salary, what considerations would

you give to making this decision? Would you promote your son? Give

reasons for your answer.

3. What benefits often result from family involvement in a

business?

4. Why does a first-generation family business tend to have a

paternalistic business pattern as well as a patriarchal family

pattern?

5. As a recent graduate in marketing management, you are

heading for a job in the family business. Your education has

made you aware of certain outdated business practices in the

family business. Despite these, the business continues to

show a good return on investment. Would you rock the boat?

If so, how would you proceed in correcting what you perceive

to be absolute traditions? Give detail to your answer.

6. Describe either a founder-son or founder-daughter relationship

within a family business with which you are familiar. What

strengths or weaknesses are evident in that relationship?

7. Should a son or daughter feel obliged to carry on a family

business? What could be the source of such a feeling, one

way or the other?


8. Assume that you are an ambitious but non-family manager in a

family business and that one of your colleagues is the founder’s

son or daughter. What, if anything, would keep you interested in

pursuing a career with this organisation?

9. Clearly identify and describe the stages outlined in the model of

succession. Give examples of each stage and illustrate this process

graphically.

10. When making decisions about transferring ownership of a family

business from one generation to the next, how much emphasis

should be placed on tax laws and other issues that go beyond the

family? Why?


MODULE 2 – THE NEW VENTURE BUSINESS PLAN

Study Unit 6: Creating business plans


Study Unit 6 focuses on the introductory aspects of a

business plan. This unit identifies the broad structure of the ideal

business plan and highlights the factors to consider before setting out

the business plan.

Topics:

The business plan

Need for a business plan

Compiling, structuring and presenting a business plan

Business plan resources.



• Explain what a business plan entails, when it is

necessary, and the format it should take.

• Explain the need for a business plan from the

perspective of both the entrepreneur and the investor.

• Describe the planning and preparation requirements of

an entrepreneur and the management team.

• List practical suggestions for compiling and writing a

business plan and outline the key sections of a business

plan.

• Identify possible available sources that may assist in

preparing a business plan.




This chapter introduces you to the business plan.

3.1 Introduction: Business plan overview

It is widely accepted that no company can operate or

survive without a business plan. A business plan is a document that

outlines the basic underlying idea of the business and describes any

and all related start-up considerations. In essence, the business plan

is the game plan of the entrepreneur – it shows how to make things

happen and it is really the single most important document which

encourages and pushes the entrepreneur into business.

Basically, the business plan has three main objectives:

� To identify the nature and context of the business opportunity

� To present the proposed approach the entrepreneur can take to

exploit the opportunity

� To recognise the factors necessary for the venture to be

successful.

It is important for the entrepreneur to be totally convinced about the

positiveness of the opportunity presented. It needs to be a good

investment opportunity, in terms of both economics and personal

goals.

A business plan is essential in order to raise funds – banks will not

accommodate suggestions without a detailed business plan. The

same applies to outside investors (see Exhibit 6.1). Whenever there is

a need for finance, the first question is always, ‘Where is your



business plan?’ It needs to include an executive summary and a fully

comprehensive plan with all the elements as presented in Chapter 6.

3.2 Preparing and presenting a business plan

Chapter 6 illustrates how to prepare a business plan and

shows what content should be included. It is very important that you

understand this section, as a well prepared business plan is of

fundamental importance to an entrepreneur. The standard format of

the business plan can be found in Chapter 6.

Note that the executive summary is especially important. Although it

appears at the beginning of the business plan, it is actually written only

after the entire plan is completed. The executive summary gives a

broad overview of the content of the total business plan. Boardroom

executives tend to read this summary first to glean an immediate and

concise indication of the core ideas covered in the plan (sometimes

they only read this section). It is natural that a potential investor may

not bother to continue reading if his/her attention has not been

stimulated up front. Consider how to compile an effective written

business plan.

Many a great business opportunity has been lost because

entrepreneurs neglected to grasp the critical importance of a good

executive summary. Also remember that how you present your

business plan to investors is a critical factor to consider the potential

success thereof.

The writing of a well thought out and clearly defined business plan is

obviously very important in the process of raising of finances and for

detailing the operations and internal workings of the business, but

unfortunately, it does not guarantee success. The careful planning of

the business activities, the implementation thereof, and the

involvement of the entrepreneur and his/her team are the most


important ingredients in ensuring business success. Consider the

recommendations presented in Chapter 6 in order to minimise

common mistakes.

3.3 Resources for the business plan

When writing a business plan it is important to know what

investors want to know and what they don’t want to know, as well as

what works and what doesn’t. Books, websites and computer software

packages are easily accessible to help guide the entrepreneur step-

by-step in the preparation of a business plan.

If a business entrepreneur is unable to answer certain of the tough

questions about the business, he/she may need to approach a

business plan advisor. This is someone who is well versed in the

workings of small companies. This will not, however, relieve the

entrepreneur of his/her responsibilities as the primary driver of the

business plan process.


Ensure sure that you understand and can to apply the

‘Key Terms’ found at the end of Chapter 6 of Moore et al.

(2010).



1. What benefits can be associated with preparing a written business

plan for a new venture? What is a business plan? Who would be the

main people to make use of such a plan?

2. Why is it that entrepreneurs often tend to neglect the initial planning

stages of a business? What are the two main types of business

plans?

3. In what way might the business plan assist in the recruitment of key

management personnel?

4. How might an entrepreneur’s perspective differ from a potential

investor’s with regard to the contents of a business plan?

5. Is it possible that an intelligent investor would make a decision based

on a one-minute review of a business plan? Discuss.

6. Investors are often said to be more market-oriented than product-

oriented. What does this mean and what would the logic behind this

be?

7. Why is a more condensed business plan usually better than a lengthy

one, especially since a longer plan would probably include more

supporting data?

8. What are the essential components of a business plan? Create a

business plan for your own business idea.

9. In a business plan, the income statement of a financial plan should

show that the business will be profitable or become profitable over

time. Why then, is there a need for a statement of cash flows?

10. Review an existing business plan and then compile your own

business plan. Using a fictitious marketing organisation as an

example, compare the outcomes of the two business plans.


Study Unit 7: The marketing plan


Chapter 7 discusses one of the major components of a

business plan. It focuses on the marketing plan, the components

thereof and the considerations required when compiling it.

Topics:

The marketing of small businesses

Marketing research for a new venture

The market and potential target markets

The marketing plan as part of the business plan.


2. Reading references

After studying this chapter, students should be able

to:

• Describe small business marketing.

• Discuss the nature of the marketing research

process.

• Explain the term ‘market’ and discuss the

methods for forecasting sales.

• Identify the components of a formal marketing

plan.




This chapter introduces you to the marketing plan as a

critical component of the business plan.

3.1 Introduction

Marketing is defined in different ways by different people –

generally, though, in small businesses, “marketing consists of those

business activities that direct the creation, development and delivery of

a bundle of satisfaction from the creator to the targeted user that

satisfies that user (end-user)”. All marketing efforts should begin and

end with the consumer; this is better known as a consumer orientation.

3.2 The formal marketing plan

All marketing plans should cover, at the very least, market

analysis, details regarding the competition, and a full marketing

strategy – see Exhibit 7.2. In terms of the market analysis, the

entrepreneur will need to address the importance of the specified

target market, clearly identify how the target market is segmented, be

clear as to whether the market is a consumer or business market, and

have a clear vision of the customer profile.

Direct and indirect competition and their targeted markets should be

considered in great detail. The Internet can be seen as a good place

to start. The entrepreneur can see what the competition is doing. Be

sure to monitor the competition regularly (at least on a monthly basis)

to notice any changes that may have occurred on their websites. This

is often an indication of changes in marketing strategy.


The formulation and detailing of the marketing strategy is a very

important part of the formal marketing plan. Different marketing

strategies can be adopted as presented in Chapter 7.

3.3 Marketing research for the new venture

“Marketing research may be defined as the gathering,

processing, reporting, and interpreting of marketing information”

(Chapter 7). It is about gathering information and finding out what you

want to know. For the entrepreneur, the costs of marketing research

are important to consider when comparing the cost versus the

expected benefits.

The steps in the marketing research process are (1) identifying the

informational need, (2) searching for secondary data, (3) collecting

primary data, and (4) interpreting the data gathered. This process is

detailed and discussed in Chapter 7.

3.4 Understanding potential target markets

A market can be defined as “a group of customers or

potential customers that exhibit unsatisfied needs and who also have

the appropriate purchasing power to satisfy these needs”. These then,

are the three essential ingredients in the definition of a market: 1)

customers, 2) unsatisfied needs, and 3) purchasing power.

Market segmentation is a process that involves dividing the larger

market into smaller groups of individuals who have similar

characteristics and needs. Segmentation variables to consider include:

demographic, benefits, geographic, etc. Once a market is segmented

and a target market is selected, an entrepreneur puts together a

marketing strategy that best fits the profile of the target market and the

operations of the business, thus developing a unique marketing mix for

each segment.


There are several types of strategies that can be selected, depending

on the segmentation strategy utilised. These are the unsegmented

strategy (also known as mass marketing); the multi-segment strategy

(where it is recognised that two or more market segments have the

potential to be profitable), and the single-segment strategy (where a

firm recognises that, whilst several distinct market segments may

exist, they choose to concentrate on reaching only one segment).

Exhibits 7.4, 7.5 and 7.6 in Chapter 7 illustrate the various market

strategies.

3.5. Estimating market potential

John Fenton said “Nothing happens until a sale is made.”

Without sales, a business cannot exist and therefore the importance of

sales and the proper planning thereof cannot be overemphasised.

Sales forecasting is an essential component of the business plan

because it is the part that most clearly assesses the potential viability

of the new venture. Chapter 7 fully explains the process of forecasting

necessary to predict future sales over certain given periods, varying

from quarterly to bi-annually or annually. The entrepreneur should be

careful not to overlook the importance of sales. Sales turnover, cost of

sales, the sales force and all other aspects that may impact the

revenue stream of the firm must be well researched and documented

to ensure top-line results. Exhibit 7.7 clearly illustrates the challenges

and difficulty the entrepreneur faces in the forecasting process.


Ensure that you understand and can apply the ‘Key

Terms’ at the end of Chapter 7 of Moore et al. (2010).



1. What is the scope of small business marketing? Explain the different

marketing philosophies.

2. Why is a consumer orientation the ‘right choice’? Define ‘the marketing

concept’.

3. What are the obstacles to adopting a consumer orientation in a small

organisation?

4. Detail the steps in the marketing research process for a small

business.

5. What are the major considerations in designing a research

questionnaire?

6. Explain the three components of the definition of a market.

7. How would you go about establishing market potential?

8. Explain why the sales forecasting process is used more widely by

large businesses than by small ones.

9. Describe and explain the components of a formal marketing plan. Use

an example to illustrate.


Study Unit 8: The organisation of the business

(The organisation plan)


Study Unit 8 discusses another major component of a

business plan. This study unit focuses on human resources, but more

specifically, on the management team, forms of an organisation, and

related legal considerations.

Topics:

The management team

Legal forms of an organisation (South Africa)

The board of directors

Business tax (South African tax laws)

The management team within the business plan.


After studying this chapter, students should be able

to:

• Describe the characteristics and value of a strong

management team.

• Identify the common legal forms of organisation

used by small businesses and describe the

characteristics of each within a South African

context.

• Discuss factors to consider in choosing from

among the primary legal forms of organisation in

South Africa.




This chapter introduces you to understanding the human

resource plan and building an effective organisation with a strong

management team.

3.1 Introduction

A new business rarely has the financial resources to recruit

all the desired human resources. For this reason, strategic alliances

are becoming increasingly important for small businesses.

3.2 Building the management team

Assembling the right management team is important to the

success of any organisation. A management team brings far more

strength to a venture than a sole individual. A team presents a

diversity of talent to meet various managerial needs (see the Iiving the

dream case study entitled ‘friends in fashion’ in Chapter 8).

The leader of a management team needs to complement the team’s

varied skills for optimum functionality in the organisation. The right

• Describe how to use boards of directors and

advisory councils effectively.

• Explain briefly how different forms of

organisations are taxed by SARS.



combination of education and experience will greatly enhance the

quality of decision making.

3.3 Choosing a legal form of organisation

A new business must choose a form of legal organisation;

this will set out the actual owners of the business. Options include a

company, a close corporation, a partnership or a sole proprietor.

Chapter 8 provides a comprehensive explanation of the different forms

of ownership, as well as the common legal forms of organisations

used by small businesses (see Exhibit 8.1). Although more exist, the

most popular business formats considered by entrepreneurs in South

Africa include: sole proprietorships, partnerships, close corporations,

and private and public companies. A sole proprietorship is a typical

business format where an individual trades in his or her own name.

Another common business relationship is ‘the partnership’. See Exhibit

8.3 for the advantages and disadvantages of this type of business.

The close corporation is another legal format currently in South Africa.

The proposed new company act will have certain implications for profit

vs. non-profit organisations. For example the establishment of close

corporations in the future within South Africa will also be impacted by

the change in company legislation. The other most used legal formats

in South Africa are that of a private company and a public company.

Consult the following sources for more information on the different

legal business formats in South Africa:

� Nieuwenhuizen, C., and Oosthuizen, T.F.J. 2010. Business

Management: A Focused Introduction. FVBC. Chapter 2.

� Du Toit, G.S., Erasmus, B.J., and Strydom, J.W. 2007.

Introduction to Business Management. 7th edn. Oxford. Chapter

3.

� Nieman, G., and Bennett, A. 2006. Business Management: A

Value Chain Approach. 2nd edn. Van Schaik. Chapter 4.


3.4 Choosing an organisational form

Exhibit 8.4 summarises the main considerations when selecting one of

the legal business format options. Every entrepreneur needs to make

an informed decision before finalising the relevant legal business

format. PLEASE NOTE: The section in Chapter 8 is not applicable to

you as it is American-based.

3.5 The board of directors

The ideal size of a board of directors in a small firm is up to

five. A mistake often made by entrepreneurs is to elect friends and

relatives to the board. It is important to select an active board that will

take a constructive approach and provide independent and informed

opinions about issues concerning the company. A well-selected board

of directors will also bring supplementary knowledge and broader

experience to the management team and, frequently, by virtue of their

diverse backgrounds, they fill vital gaps that may exist in the business.

Read the latter part of Chapter 8 for clearer knowledge of the

contribution, selection and compensation of directors. Also refer to the

King 3 Report on boards of directors, fiduciary duties and corporate

governance.



Terms’ found at the end of Chapter 8 of Moore et al.

(2010).



1. Why would investors tend to favour a new business led

by a full management team over a business led by a

sole entrepreneur? Is this preference justified?

2. Discuss the merits and demerits of: a sole

proprietorship, close corporation, partnership, a private

company and a public company. Analyse the

differences between them.

3. Does the concept of limited liability apply to a sole

proprietorship? For what reasons? Give the main

considerations when selecting a legal format for a small

business.

4. Suppose a partnership is set up and operated without

formal articles of partnership. Explain the various

problems that may arise.

5. Evaluate the legal forms of organisation in terms of

both the management control by the owner and the

sharing of the business’s profits.

6. How might a board of directors be of value to the

management team of a small company? What

qualifications are considered essential for a director?

7. How do advisory councils differ from boards of

directors? Which would you recommend to a small

business owner and why?

8. Consider the advantages and disadvantages of the

various legal formats.


Study Unit 9: The location plan


Study Unit 9 examines the activities related to the selection

of the most appropriate location for a new business enterprise, taking

into consideration aspects relating to the setting-up of the actual

facilities. It also examines home-based businesses.

Topics:

The location decision

Home-based business

Physical facilities and layout of the organisation

Location and the business plan

E-commerce.



• Identify the factors affecting the choice of a business

location.

• Describe the challenges and attractions of a home-

based business.

• Explain how operational efficiency can be optimised

in the layout of a physical facility, considering design

and equipment.

• Understand the potential benefits of an Internet-

based location (e-commerce).




This chapter introduces you to the location plan.

3.1 Introduction

The choice of location is usually a once-off decision.

However, it can be a very time-consuming exercise. Location guidance

is often provided when an entrepreneur buys a franchise or an existing

business but, regardless of how this decision is made, it should always

be included in the business plan.

3.2 Factors affecting the choice of a business location

If the site chosen is inferior, even adequate financing and

superior systems may not prevent the business from being

unsuccessful. Location choice is more vital to some types of

businesses than to others. For example, a retail clothing outlet will

place a far higher premium on site location than a building contractor.

For retail outlets and service businesses, choosing the site location is

very important as customers’ accessibility is often the key to sales.

Another example is convenience goods which need to be located in

close proximity to the customer. If they are not, the customer may

substitute competitive but more accessible brands. The key factors

determining a good business location are presented in Exhibit 9.2 and

discussed in Chapter 9. Apart from accessibility, environmental

conditions, personal preference and resource availability, the site

availability and site costs need to be investigated. The physical design



and equipping of the facilities should convey an image of a stable,

professional company.

3.3 Designing and equipping the physical facilities

Various challenges need to be addressed when designing

and equipping the physical facilities. Key equipment to consider

includes manufacturing and office equipment.

3.4. Locating the start-up in the entrepreneur’s home

The home-based business has become increasingly

attractive in recent years (this is particularly evident in South Africa).

Whilst this is an apparently attractive option, the entrepreneur needs to

understand the challenges of creating a home-based start-up. Some of

the biggest businesses in the world today, for example, Hewlett-

Packard (HP) and Microsoft, started from home-based locations. See

Exhibit 9.4 in Chapter 9 for more reasons that entrepreneurs may have

for operating a home-based business.

3.4.1 The challenge of home-based businesses

Two of the most important aspects to consider when

deciding to operate from a home-based environment are the legal

implications and the business image. Take into consideration the

image that may be portrayed if a salesperson or customer visits your

home/business and your children are at home. See Exhibit 9.4 for

reasons for starting-up a home-based business. Legally, there are also

clear guidelines with regard to claiming tax concessions and certain

insurance implications.


3.5 Locating the start-up on the Internet

The tremendous growth of the Internet has dramatically

changed the way we do business today. The digital economy fuelled

the creation of small businesses all over the world. E-commerce

started to impact our lives in the nineties and has huge benefits to

offer the entrepreneur, including enabling small businesses to build on

one of their greatest strengths – customer relationships. Customer

Relationship Marketing (CRM) is a data-based computer system that

helps build and enhance customer relationships.

3.5.1 E-commerce business models

The term business model is defined as a “group of shared

characteristics, behaviours and goals that a business follows in a

particular business situation”. There are three major categories of e-

commerce business models: business-to-business (B2B), business-to-

consumer (B2C), and auction sites – see Exhibit 9.6.

A comprehensive analysis of these models can be found towards the

end of Chapter 9. Auction sites have also been a new trend for online

presence. Consider the nature of online presence as discussed in

Chapter 9 as it varies depending on your objective to be present on

the Internet or to actually do transactions on the Internet.


Ensure that you understand and can apply the ‘Key Terms’

at the end of Chapter 9 of Moore et al. (2010).



1. What are the key attributes of a good business location? Which

of these would probably be most important for the location of a

retail business? Why?

2. Which resource factors might be most vital to consider for a new

manufacturing venture that produces residential home furniture?

Give reasons.

3. Is the business owner’s hometown likely to be a good location for

his/her business? It is logical for an owner to allow personal

preferences to influence a decision about business location?

Explain your answers.

4. Under what conditions would it is most appropriate for a new

business to buy a building rather than pay rent?

5. Detail the factors an entrepreneur should assess when

considering a home-based business.

6. In a home-based business, there is typically some competition, if

not conflict, between the interests of the home and those of the

business. What factors determine whether the risk is greater for

the home or the business?

7. What legal issues should one consider before starting a home-

based business?

8. Discuss the different ways of categorising e-commerce business

models.

9. Explain the differences between B2B and B2C businesses.

Identify some of the reasons consumers give for not using online

shopping.


Study Unit 10: Projecting financial requirements

(The financial plan)


Study Unit 10 discusses one of the major components of a

business plan, focusing on the financial plan, the components thereof,

and the required considerations when compiling it.

Topics:

Income statement

Balance sheet

Cash flow

Types of financing

Financial forecasting

Finances and the business plan

Assessing financial performance

Ratio analyses

Debt or equity financing

Sources of financing/funding.


After studying these chapters, students should be able to:

• Describe the purpose and content of financial

statements.

• Explain how to forecast a new venture’s profitability.

• Determine asset requirements, as well as

funding and cash flow requirements.

• Forecast the financial requirements for a

business.




Chapter 10 introduces you to the three key financial

statements namely the income statement, balance sheet and cash

flow statement. These tools are considered crucial to any financial

plan. Thereafter Chapter 11 considers financial needs and how to

project your financial requirements. Chapter 12 concludes the financial

discussion and focuses on the different sources of financing in order to

address your financial needs.

Study Moore et al. (2010) Chapters 10, 11 and 12.

• Evaluate a business’s liquidity and profitability.

• Measure an organisation’s use of debt or equity

financing.

• Evaluate the rate of return earned on the owners'

investment.

• Evaluate the choice between debt financing and equity

financing.

• Describe various sources of financing/funding available

to small organisations.

• Describe how the nature of the company affects its

financing sources.

• Discuss the most important factors in the process of

obtaining start-up funding.

• Discuss the different routes/alternatives for acquiring

start-up funding.


3.1 Introduction

An entrepreneur needs to have a good understanding of

financial statements as he/she needs to make future financial

projections for the intended venture and establish its financial viability.

Adventure is only attractive if there are good financial gains (profits) to

be made relative to the required investment. Cash flows and the roles

of the income statement and balance sheet are thus critical for the

entrepreneur to understand. Obviously, the intention is not to make an

accountant out of an entrepreneur, but rather to ensure an

understanding of financials and how they impact the organisation as a

whole.

3.2 The income statement

An income statement or profit and loss statement indicates

the amount of profits generated by a firm over a given period of time,

usually monthly or annually. In its most basic form, the income

statement may be represented by the following equation:

sales (revenue) – expenses = profits

The financial viability begins with the top line, or sales (revenue).

An overview of the income statement, operating activities and

financing activities can be found in Chapter 10. (See Exhibit 10.1 for a

clear overview of the income statement.)

3.3 The balance sheet

Whilst the income statement reports the financial results of

business operations over a period of time, the balance sheet provides

a snapshot of a business’s financial position at a very specific point in

time.


The balance sheet captures the cumulative effect of all earlier financial

decisions. In its simplest form, a balance sheet follows this formula:

total assets = debt + ownership equity

Each of the three main parts of the balance sheet, viz. 1) current

assets, 2) fixed assets and, 3) other assets, is discussed in detail in

Chapter 10. Also take note of Exhibit 10.3 for an overview of the

balance sheet.

3.4 The cash flow statement

‘CASH IS KING’ is the watchword of an entrepreneur. Cash

flow concerns are frequently the most important issue for small

business owners, and poor cash flow is the single most important

factor leading to companies closing their doors. Even some profitable

companies have had to close down because they were unable to raise

the necessary cash to finance their operating activities.

Another important aspect to understand is that the income statement

is not a measure of cash flows. The income statement is calculated on

an accrual basis rather than on a cash basis. This is very important as,

in accrual-basis accounting, income is recorded when it is earned –

whether or not the income has been received in cash, and expenses

are recorded when they are incurred – even if money has not actually

been paid out.

In cash-basis accounting, income is reported when cash is received,

and expenses are recorded when they are paid. Exhibit 10.6 in

Chapter 10 presents a practical example of a cash flow statement, as

well as details regarding its importance and the workings of cash flow

from operations.


3.5 Evaluating the business’s financial performance

Owners of small businesses need to understand the

financial impact, whether positive or negative, that management

decisions have on the firm. The financial statements reflect the results

of all operating decisions. Utilising of the financial statements will vary,

depending on what areas the interpreter is focusing. For example, a

banker and an entrepreneur examine the data from different

perspectives but, essentially, the important issues are the same. The

best way of extracting the relevant and appropriate information from

the available financial data is by conducting financial ratios.

3.6 Financial ratios

Analysing financial ratios correctly gives the entrepreneur

an understanding of the financial condition and performance of the

firm. This information may not be readily apparent from the traditional

forms of financial reporting.

It is important to note that a single ratio in itself may not be a

particularly meaningful piece of information but, when financial ratios

are detailed on a spreadsheet over a period of time, a study of the

composite change will quickly indicate whether there has been an

improvement or deterioration in the financial condition of the business.

This is usually called a ‘time series analysis’ and is used very

successfully in forecasting the future of the business.

Liquidity ratios, debt ratios, coverage ratios, profitability ratios, turnover

ratios and earning power ratios can all be applied to the balance

sheet, cash flow statement and profit and loss statement (income

statement) of the business. Exhibit 10.7 in Chapter 10 shows these

ratios which are discussed in detail.


3.7 Financial forecasting

Usually one of the biggest challenges for the entrepreneur

when starting a small business is financial forecasting. The

entrepreneur must ensure that he/she understands the fundamentals

of the business which will drive profits as well as be very clear on how

sales and operating expenses will impact on the bottom line.

Issues such as forecasting asset and financing requirements, and

cash flows for the new venture, normally have a direct effect on the

amount of capital required for the business and in assessing to what

extent financing will be necessary. This includes the following areas of

forecasting as discussed in Chapter 11:

• Forecasting profitability (using the income statement as

reference)

• Forecasting asset requirements

• Forecasting financing requirements

• Forecasting cash flow.

3.7.1 Using financial ratios for forecasting

Any ratio calculation is based on historical information

which may or may not have any relationship to the future results of a

business. For example, the profitability ratio for a Christmas

ornaments company may be extremely poor for the first quarters,

leading one to falsely assume a continuing pattern of losses. However,

a late season (Christmas) surge in sales volume completely overturns

these assumptions. You may ask the question: ‘because of their

historical foundation, can ratios really be effective in predicting the

future?’ The answer is ‘certainly’, but the results they reveal must be

tempered with knowledge of the business and they should also be

compared and used with a variety of other performance measures. For

example, if the current ratio suddenly drops from 2:1 to 1:1, this could

signify that the company is rapidly using up its available resources to


pay its liabilities, which could be a preliminary signal of bankruptcy and

would require a deeper analysis of the financials as a whole.

But, the ratio on its own could also be misleading as a company may

simply have chosen to use a large portion of its current assets to pay

off a long-term debt in advance of its scheduled payment date. In this

case, if the drop in current ratio had been seen in conjunction with the

debt-to-equity ratio, it would have been clear that the drop in the

current ratio was offset by the improvement in the debt-to-equity ratio.

So, it is important to remember that ratio analysis must be

supplemented by other information before it can be used as a

predictive tool in the business.

It is important for an entrepreneur to understand the relationship of this

study unit to previous theory and you are encouraged to return to the

diagrams in Chapter 11 and revisit the effects on an owner’s return on

equity (net income/common equity) of: 1) a firm’s return on assets

(operating income/total assets) and, 2) a firm’s debt ratio (total

debt/total assets).

Financials and the business plan are inextricably linked. Consider the

practical suggestions provided towards the end of Chapter 11 to

ensure good judgment for good forecasting.

3.8 Sources of financing for your business

One of the most difficult challenges that an entrepreneur

faces in starting a new business is acquiring financing for the venture

as discussed in Chapter 12. There are basically four things to consider

when determining how a company is financed: (1) the firm’s economic

potential, (2) the size and maturity of the company, (3) the nature of its

assets and, (4) the personal preference of the owner with respect to

the trade-offs between debt and equity.


Often, smaller businesses rely on personal loans and credit cards for

financing. Normally, banks and other financing houses will only

consider financing once the business has an established track record;

this accounts for the fact that most businesses acquire funding only in

the later stages of their business cycle.

3.8.1 Debt or equity financing

It is very important to be clear about the differences

between equity financing and debt, and the choice should be made

early in the life cycle of the business as this influences the long-term

performance of the business. Potential profitability, financial risk, and

voting control are all trade-offs between debt and equity and should be

very carefully considered. See Exhibit 12.1 in Chapter 12 and ensure

you understand these trade-offs.

Debt is high risk – if the business fails to earn profits, its creditors will

still insist on payment. Regardless of performance, the shareholders

will always demand their ‘pound of flesh’. If the business does not

honour its financial obligations with regard to its debt, creditors can

drive the company into bankruptcy.

In terms of voting control, many small business owners may regret

having made the decision to sacrifice this in the early stages of their

business as it may lead to potentially hostile shareholders with the

ability to vote on the future direction of the company.

Raising new capital by means of equity financing leads to the owner

giving up part of the company’s ownership. For this reason, many

small business owners prefer to finance with debt rather equity, thus

preventing giving up control of a portion of their shares.


3.9 Different sources of financing

Usually, when the personal finances and savings of the

entrepreneur have been exhausted, the entrepreneur needs to turn to

other sources of financing. Exhibit 12.3 in Chapter 12 shows a

comprehensive overview of the various possible sources of funds.

3.9.1 Sources close to home

A study conducted in the USA amongst Inc. 500 businesses

shows that the primary source of financing for small businesses is the

personal assets of the entrepreneur and, whilst loans from friends and

family are a distant second, together they make up 80% percent of

start-up capital for small businesses (see Exhibit 12.4 in Chapter 12).

Remember though, that borrowing money from family and friends does

pose the risk of damaging personal relationships if things do not go as

expected.

3.9.2 Bank financing

Commercial banks are the primary source of lending capital

to small businesses. Unfortunately, banks tend to look at established

companies with a proven track record when lending capital. Banks

also usually require collateral in the form of hard assets. For these

reasons, it is prudent to cultivate a good relationship with your bank in

the early stages of the business, as the need for financing does arise

sooner or later.

Banks mainly lend in one of three ways, viz. (1) lines of credit, (2) term

loans and, (3) mortgages.

Review Chapter 12 to understand the importance of bank financing,

the banker’s perspective, advice on how to select a banker, issues


around negotiating the loan, and the fundamentals necessary for

financing a small business.

3.9.3 Other sources of financing

Apart from private sources and bank financing, a variety of sources

are discussed in Chapter 12. These include for example business

suppliers and asset-based lenders, private equity investors,

government and other generally less important sources. Each of these

sources is discussed in more detail in Chapter 12. Remember that

criteria and legislation will differ from country to country.



1. What is the relationship between an income statement and a

balance sheet? Compile a draft income statement and a draft

balance sheet for a small business.

2. Explain the purposes of the income statement and balance sheet.

3. Distinguish between (a) gross profit, (b) operating income (earnings

before interest and taxes) and, (c) net income available to owners.

4. Why aren’t a business’s cash flows equal to its profit?

5. What determines an enterprise’s profitability?

6. Describe the process for estimating the amount of assets required

for a new venture.

7. Distinguish between ownership equity and debt.

8. How are a start-up’s financial requirements estimated?

Ensure you understand the ‘Key Terms’ at the end of

Chapters 10, 11 and 12 of Moore et al. (2010).


9. Provide eight suggestions to ensure good judgement for effective

projections and forecasting.

10. Draw-up and apply a real case for an income statement and balance

sheet.

11. Explain the accounting concept that income is only realised when

earned, whether it has been received in cash or not.

12. What are the primary types of records required in an accounting

system?

13. What is liquidity? Differentiate between the two approaches given in

this chapter to measure liquidity.

14. Briefly explain the following ratios and show the formulae:

a. Liquidity

b. Profitability

15. What is the relationship between the following ratios: operating

income, return on investment, operating profit margin, and

total asset turnover?

16. What is the difference between using operating profit and using net

income in calculating a company’s return on investment?

17. What is financial leverage? When should it be used, and when

should it be avoided? Why?

18. What determines a small business’s return on equity? Explain.

19. Explain the three trade-offs between debt financing and equity

financing.

20. Assume that you are starting a business for the first time. What are

the greatest personal obstacles to obtaining funds for the new

venture? Why?

21. If you were starting a new business, where would you begin to seek

the required capital? Should your answer depend on the nature of

your new business? Explain.

22. Explain how trade credit and equipment loans can provide initial

capital funding.


23. Describe the different types of loans obtainable from a commercial

bank in South Africa. Detail how would you go about applying for a

bank loan.

24. What information does a banker need to have in order to decide

whether or not to make the loan?

25. What are the usual forms of venture capital investments?

26. Why is venture capital an inappropriate type of financing for most

small businesses?

27. How is the Internet being used to raise capital?

28. What information would you require to the ratios: return on equity and

return on assets?


Study Unit 11: The harvest plan


Study Unit 11 examines the strategies an entrepreneur

should consider if he/she decides to sell the business. It also

considers a variety of options for exiting the market, partially or fully.

Topics:

Methods of exiting a business

The valuation of an organisation

Harvesting strategies.




• Explain the importance of having an exit strategy.

• Describe the options available for exiting a business.

• Explain how market comparables based on earnings

are used to value a business during harvesting.

• Provide advice on developing an effective exiting

strategy.




This chapter introduces you to the harvest plan.

3.1 Introduction

There are currently unprecedented opportunities for

entrepreneurs to sell their businesses and, whilst the issue of

‘harvesting’ is not usually uppermost in the mind of the entrepreneur, it

is an important strategy to consider and plan for. Harvesting, or

exiting, is a method entrepreneurs (or investors) use to get out of the

business, obviously while reaping the maximum value. The harvest

plan is much more than just selling and leaving the business. It

involves capturing maximum value, reducing risks and, perhaps, in the

process, creating future options.

3.2 Methods of harvesting a business

There are four basic ways to harvest an investment in a

privately owned company: (1) selling, (2) releasing the cash flows to its

owners, (3) offering shares to the public through an initial public

offering (IPO) and, (4) issuing a private placement of the shares.

There are many reasons why an entrepreneur may want to sell the

business but, basically, there are three types of sale transactions: 1)

selling to a strategic buyer, 2) selling to a financial buyer and, 3)

selling to employees of the business.

Ways to harvest the business are shown in Exhibit 13.1 in Chapter 13.

Read the relevant discussion in the chapter to gain insight into these

strategies.


3.3 Developing an effective harvest plan

As said, it is important for the entrepreneur to craft an

effective exit strategy for the business, but few people think of long-

term value over short-term returns. Compared to investors, who are

always thinking about exiting, entrepreneurs are often caught

unawares and should be conscious of the perils of staying in the

business too long. They may miss out on value if the windows of

opportunity are missed.



1. Explain the term ‘harvesting’ and detail what is involved in harvesting an

investment in a privately held firm.

2. Contrast a strategic acquisition with a financial acquisition.

3. Explain the term leveraged buyout. In what way is this different to a

management buyout?

4. For what reasons might an entrepreneur find ‘going public’ a frustrating

process?

5. What advice would you give an entrepreneur who is planning to harvest

his/her business?

6. What emotions might an entrepreneur experience after harvesting a

business that had been an integral part of his/her life?

7. Distinguish between bust-up LBOs and build-up LBOs.

8. Give a practical example of a management buy-out.


Terms’ found at the end of Chapter 13 of Moore et al. (2010)


MODULE 3 – MANAGING GROWTH IN THE SMALL BUSINESS

Study Unit 12: Professional management and leadership


Study Unit 12 aims at identifying and discussing all aspects

that must be considered by a professional management team in order

to cope with a growing enterprise. It also suggests further methods to

manage a small business under these growth conditions.

Topics:

Characteristics of small business management

Entrepreneurial leadership

The nature of managerial work and related management tasks

Time management.



• Discuss the distinctive features of small business

management.

• Identify the various types of, and approaches to,

planning.

• Discuss the entrepreneur’s leadership role.

• Describe the nature and types of small

business organisational structures.


• Discuss the ways in which control is exercised in a

small business.

• Describe the problem of time pressure and suggest

possible solutions.

• Explain the various types of outside management

assistance.



This chapter introduces you to managing growth in the

small business.

3.1 Introduction

Leadership roles are major determinants in the success of a

small business. Consequently, a myriad books and articles have been

written on leadership. Leadership roles differ greatly, depending on

both the size of the business and the strategic direction the business

has taken. Leadership is more concerned with pointing the way and

the destination than the details of getting there.

3.2 Entrepreneurial leadership

In most small businesses, leadership of the business is

personalised. The owner-manager is highly visible and therefore

usually plays a very active role in the running of the business. It stands

to reason that, if a strong feeling of loyalty exists towards the



employer, a close relationship will develop between him/her and the

employee.

Leadership styles are important to identify and understand. Chapter 19

provides a summary of different leadership styles. An entrepreneur

should be able to utilise different leadership styles in order to get the

best out of his/her employees.

3.3 Distinctive characteristics of small business management

Small organisations will experience many challenges and

resultant transformations in their leadership and management

processes as the firm progresses from start-up to growth. It is

therefore essential to ensure the right level of professional

management – people who are skilled in systematic and analytical

methods – to deal with problems and issues. Managerial weakness in

small companies is fairly common and many small businesses fail as a

result. As the company grows, so will the structure and behaviour of

its management. This relationship between small business growth and

its managerial capabilities should not be neglected.

3.4 Managerial tasks of entrepreneurs

In a typical small business, entrepreneurs do not assign a

great deal of time to planning. They are often too busy with operational

issues and the degree of planning is quite inadequate. There appears

to be a high correlation between length of time invested in planning

and profitability.

Strategic plans which are more long-term orientated are important for

the implementation of short-term operational plans. Strategic plans are

somewhat different to the business plan – business plans are more

focused in terms of obtaining finance or funding, usually from a bank.


Note that these short-term plans are also critical as they are primarily

related to the revenue and budget.

No business can function without a clear structure and an

organisational plan. Exhibit 19.2 in Chapter 19 is an example of a clear

line-and-staff organisational structure. Various elements of organising

such as span of control authority, structure and chain of command, to

mention a few, are discussed in Chapter 19.

Another management task is that of controlling. The entrepreneurial

manager needs to ensure performance measurement by means of

operational controls (see Exhibit 19.3 in Chapter 19).

Healthy businesses need effective communication channels that

enable managers and employees to talk to each other and openly

share ideas and discuss problems. Communication and the sharing of

information is the lifeblood of the organisation and the days of

autocratic ‘top down’ communication are a thing of the past. A key

aspect of good communication is for managers to remember that

employees are also human beings and need to know what is going on

in the business. Negotiation is also required as it is based on two-way

communication in order to resolve differences.

3.5 Personal time management

Many new entrepreneurs work more than 60 to 80 hours

per week in order to ensure success in the start-up period. This often

leads to a problem with meeting with key people who can provide

essential information regarding the market, competitors, etc.

Frequently, the new small business owner does too much and

neglects to delegate. A successful entrepreneur needs to train his/her

staff well and then delegate tasks; this allows more free time for

him/herself. Effective time management requires a huge amount of

self-discipline. It is necessary for the small business owner to


understand this and to not fall into the trap of procrastinating on

important issues due to time limitations.

3.6 Outside management assistance

A great variety of sources for management assistance exist. Exhibit

19.5 presents a summary of services provided by business incubators to new

entrepreneurial firms. Read more about these sources at the end of Chapter

19.


5 Self-assessment exercise

Ensure that you understand and can apply the ‘Key ‘Terms’

found at the end of Chapter 19 in Moore et al. (2010).

1. Is the quality of management likely to be relatively uniform in all types

of small businesses? If not, what might account for differences?

2. What are the four stages of small business growth outlined in this

chapter? How do management requirements change as the

business moves through these stages?

3. Do you think that most employees of small businesses welcome or

resist a leadership approach that sought their ideas and involved

them in meetings? For what reasons might some employees resist

such an approach?

4. There is a saying that “What you do speaks so loudly I can’t hear

what you say.” Explain this and how it might apply to communication

in small businesses.


5. What type of small business might effectively use a line

organisation? When might it become necessary to change the

company’s structure and which type of structure might be more

appropriate? Why? Explain the relationship between planning and

control in a small business. Give an example.

7. What practices can a small business manager use to conserve

time?

8. Identify the different types of leadership styles and explain the

characteristics of an effective leader.

9. Analyse the management tasks required by the management team


10. What are the typical services provided by a business incubator?

Are these services of help to a small business management team?

Explain your answer.


Study Unit 13: Human resource management


Study Unit 13 focuses exclusively on the broader issues

relating to managing human resources in a small business. It explains

the processes relating to identifying, selecting and implementing

human resources.

Topics:

Recruiting personnel

Evaluating and selecting employees

Training and developing employees

Compensation

Relationships.


After studying this chapter, students will be able to:

• Explain the importance of employee recruitment and

identify sources that can be useful in finding suitable

applicants.

• Identify steps required in evaluating job applicants.

• Describe the role of training for both managerial and

non-managerial employees in a small business.

• Explain various types of compensation plans as well

as the differences between day work and incentives.

• Discuss various human resource issues, labour

unions, and formalisation of employer-employee

relationships.




This chapter introduces you to managing human resources


3.1 Introduction

Successful businesses are dependent on honest,

competent and hard-working employees and, for this reason, it is

important for entrepreneurs to manage their employees well. The

management of human resources is primarily future-orientated as

opposed to financials which are normally historically-orientated. The

aim would be to create an optimal fit among employee, job,

organisation, and environment. This will allow employees to reach

their desired levels of satisfaction and performance while the

organisation achieves its goals.

There are four important components to the management of human

resources: 1) the external environment, 2) the organisation, 3) the

work itself and, 4) the individual or employee.

Additional recommended reading: Nel, P.S., van Dyk, P.S.,

Haasbroek, G.D., Schultz, H.B., Sono, T., and Werner A. 2004.

Human Resources Management. 6th edn, Cape Town: Oxford

University Press.

AND



Oosthuizen, T.F.J., Coetzee, J.E., Kruger, J.M., and Meyer, D. 2008.

Human Resource Management: A South African Perspective. 2nd edn.

FVBC.

3.2 Recruiting personnel

There is a huge need for quality employees and the goal is

obviously to attract a pool of applicants large enough to contain many

talented prospects. The right people in the right positions provide a

strong foundation for any business. The employees impact businesses

in two main ways: 1) the profitability of the business in the sense that

the salespeople can directly affect sales revenue and, 2) the payroll of

the business which is normally the single biggest item in the operating

expense of the profit and loss statement. Chapter 20 presents various

sources to consider when looking for the appropriate employee. It also

considers the important aspect of diversity.

3.4 Evaluating prospects and selecting employees

There is a series of specific steps involved when

interviewing a prospective candidate. Employers should follow these

steps to ensure proper evaluation of candidates. These steps include:

1) using application forms, 2) interviewing the applicant, 3) checking

references, 4) testing the applicant and, 5) requiring physical

examinations. Review these steps as discussed in Chapter 20.

3.5 Training and developing employees

Employee training follows the recruitment and acceptance

process. Of course, training to improve skills and knowledge should

not be limited to new employees but should form part of the business

strategy. This ensures that employees have the necessary tools and

skills to cope with changing demands.


The first few days are often difficult for the new employee and, to

alleviate any insecurity, employers should embark on a thorough

orientation programme. It is obviously important to eliminate

uneasiness as much as possible. Chapter 20 explains detailed

processes and procedures to follow. Also consider job instruction

training as presented in Exhibit 20.1.

3.6 Employee compensation and incentives

Read and understand the sections of employee

compensation and incentives in Chapter 20. Bearing in mind that

these can differ greatly from business to business, practical

discussions in class or with your fellow students will stimulate debate

on salaries and wages which are important but controversial issues in

businesses.

3.7 Special human resource management issues

Read and understand the special issues presented in

Chapter 20. Bearing in mind that these can differ greatly from business

to business as well as country to country, you need to understand the

meaning and value of employee leasing, legal protection of

employees, labour unions, employer and employee relationships as

well as the need for a human resource manager in an entrepreneurial

venture.



Terms’ found at the end of Chapter 20 in Moore et al. (2010).



1. As a customer of many small businesses, you can appreciate the

importance of the employees’ role in their success. Describe one

experience you have had in which the employee’s contribution to his/her

employer’s success was positive, and one that was negative.

2. What factor(s) may make you cautious about working for a small business?

Could you overcome these reasons for hesitation and, if so, how?

3. In what ways is the workforce becoming more diverse, and how do these

changes affect recruitment by small businesses?

4. Based on your own experience with an interviewee for a position,

what do you think is the most serious weakness of the interviewing

process? How could it be remedied?

5. What steps and topics would you recommend for inclusion in an orientation

program for a marketing organisation that employs approximately 30

employees?

6. Select a small business with which you are well acquainted and determine

whether adequate provisions have been made for replacement of key

management personnel if and when it becomes necessary. Is the business

using any form of executive development?

7. What problems are involved in using incentive plans in a small business?

How might the nature of the work affect management’s decision concerning

the use of such plans?

8. Is the use of a profit-sharing plan desirable in a small business? Give

reasons for your answer. What might lessen such a plan’s effectiveness in

motivating employees?

9. Discuss the process of evaluating and selecting the appropriate candidate.

10. Identify and give practical examples of sources of prospective employees


Study Unit 14: Operations management


Study Unit 14 explains how the operations process is used

for creating goods and services. It also looks at the purchasing of

supplies and how quality is a key factor in a successful operations

process.

Topics:

Total quality management/quality as a competitive tool

The operations process

Productivity and re-engineering

Purchasing and inventory management.



• Explain the key elements as well as tools and

techniques of total quality management (TQM)

programmes.

• Discuss the nature of the operations process for

both products and services.

• Explain how re-engineering and other methods of

work-improvement can increase productivity and

thus make a firm more competitive.

• Discuss the importance of purchasing and the

nature of key purchasing policies.

• Describe ways to control inventory levels and

minimise inventory costs.




This chapter introduces you to operations management and the key

considerations for an entrepreneurial venture.

3.1 Introduction

The operations process in a business can be viewed as the

process that involves all activities in creating value for customers. By

doing this, the business generates income and revenue. Operations

are at the heart of any business model and are indeed the very reason

why small businesses are sustainable.

3.2 The operations process

The operations process is that part of the business that gets

the job done. Operations management involves the planning and

control of a conversion process and includes acquiring inputs and

overseeing their transformation into products or services. Primarily, all

operations processes are similar in that they change inputs into

outputs. Inputs can be defined as cash, raw materials, labour,

equipments, etc., whereas outputs are the products or services

provided to the customer.

Exhibit 21.1 in Chapter 21 shows a visual representation of the

operations process. There are different types of manufacturing

processes. Chapter 21 presents the differences between job shops,

repetitive and batch manufacturing. For a service business, the critical



importance of its relationship with its customers carries operational

implications for managing the employees. Those hiring employees in a

service business should consider the employee’s role in relating to the

customer and should select individuals capable of relating well and

delivering a quality interaction.

3.3 Inventory management and operations

Poor inventory management was the ‘death knell’ for many

automotive businesses in Detroit, USA until Toyota implemented their

famous JIT (Just-In-Time) system of inventory management. Since

this time, many companies have undertaken dramatic restructuring in

terms of their inventory management and operations. In manufacturing

enterprises, ‘continuous’ operations are particularly important as

delays, often caused by a lack of materials or parts, can be extremely

costly.

Optimising inventory levels is also important in reducing costs and

utilising a plan of economic order quantity (EOQ) can assist here. The

ABC inventory analysis and JIT inventory system discussed in Chapter

21 show how such processes can improve the operations process

and, in turn, support the success of the business.

3.4 Total quality management and operations

Quality has many definitions and there is an ongoing debate

as to what quality actually is. Generally, quality may be defined as the

characteristics of a product or service that determine its ability to

satisfy stated and implied needs. Many quality improvement methods

have been introduced over the years; one of the best known

approaches is Total Quality Management (TQM). TQM is an all-

encompassing, quality-focused management approach to providing

products and services that satisfy customer requirements.


All customers have certain expectations in terms of how a product will

satisfy their needs. For example, a customer’s primary concern will be

for service quality when servicing his/her car. The concern for

customer satisfaction is a powerful force and should be the catalyst to

energise the management effort in a business. Consider the various

TQM tools and techniques presented in Chapter 21.

3.5 Purchasing policies and practices

Purchasing the right raw materials and resources is an

important part of operations management. Failure to receive materials,

parts or equipment according to the desired schedule may cause

costly interruptions which may then lead to the loss of loyal customers

on the basis of the business’s inability to deliver. The section ‘Making

or-buying” in Chapter 21 shows why the decision to make rather than

buy might sometimes be advantageous to the business. Also consider

outsourcing, Internet buying as well as the importance of developing

and maintaining good relationships with suppliers.

3.6 Lean production and synchronous management

Lean production focuses on minimising waste. Thereby it

enables a business to improve its efficiency. Consider the lean

production mind-set presented in Chapter 21.

Another aspect to consider is synchronous management. This

recognises the interdependence of a variety of elements in operations

which in the end impacts on the overall business performance. Dealing

with bottlenecks and other constraints could enhance the level of

synchronisation.




1. Explain why is understanding the customer’s focus on quality

management so important to a small business?

2. Explain the meaning of total quality management TQM). Detail and

evaluate possible tools and techniques that can be utilised to improve

quality.

3. Discuss how the operations process differs in a manufacturing business

and a service business. Use examples to illustrate your answer.

4. The demand for services is generally not uniform during a day, a week

or any other period. Discuss the strategies that can be used by service

companies to better match their capacity to supply services to meet the

customer’s demand.

5. Explain the purpose and nature of re-engineering.

6. Doing something rapidly and doing it well are sometimes not

compatible. How can quality improvements possibly contribute to

productivity improvement?

7. Why is ‘purchasing’ a particularly vital function in a small business? Do

you think an owner-manager of a small business can safely delegate the

purchasing authority to a subordinate? Explain your answer.

8. Under what conditions should a small manufacturer either make

component parts or buy them from suppliers?

9. Explain the basic concept underlying the calculation of an economic

order quality (EOQ).


found at the end of Chapter 21 of Moore et al. (2010).


Study Unit 15: Risk management


Study Unit 15 defines risk in a small business and offers

options of how to prepare for risk and how to manage it. This study

unit also looks at insurance as a means of reducing risk.

Topics:

Risk management

Classifying risks

Insurance for small businesses.




• Define risk and explain the nature of risk.

• Explain the risk management process and how this

can be used in dealing with risk in small businesses.

• Describe the risks associated with different types of

business assets, both physical and human.

• Explain the basic principles to be used in evaluating

an insurance programme, including types of

insurance and the fundamental requirements for

obtaining insurance.




This chapter introduces you to risk and risk management in small

businesses.

3.1 Introduction

Risk means different things to different people but,

essentially, it can be defined as the ‘possibility of suffering harm or

loss’ (Chapter 23). Certain individuals are natural risk-takers, whereas

others are risk-averse. In a new business, risk is often the most talked

about aspect. As it grows, risk remains an integral part of the

business, even if it is hugely successful.

3.2 Risk management

What is risk? One definition of risk is a condition in which

there is a possibility of an adverse deviation from a desired outcome.

Business risks can be classified into two broad categories, viz. market

risk and pure risk. Market risk is the uncertainty associated with an

investment decision. In this case, the success or failure of the

enterprise will only be evident over time. Pure risk is where there is

only loss or no loss, i.e. there is no potential gain. It is possible to

insure against this risk. The steps needed to implement a risk

management programme (and its aim of preserving an asset) are: 1)

identify possible risks, 2) evaluate the risks, 3) select methods to

manage the risk, 4) implement the decision and, 5) evaluate and

review the programme.

Regardless of the nature of the business, risk management is a

serious and important issue. Exhibit 23.3 in Chapter 23 identifies the

risks on the road to success and Exhibit 23.4 in Chapter 23 highlights

the tools for managing risk. Also consider the five-step process

involved for risk management.


3.3 Classifying business risks

Risks can be classified into the following categories:

property risks, liability risks, and personnel risks. These are discussed

in detail in Chapter 23. It is very important for the potential

entrepreneur to be aware of these risks and the available options for

dealing with them.

Property risks involve perils and losses. Liability risks involve statutory

liability, contractual liability and tort liability.

Tort liability is civil wrongdoing that includes breach of contract, a

common occurrence in business today. “Torts are wrongful acts or

omissions for which an injured party can take civil action against the

wrongdoer for monetary damages”. Torts are often an act of

negligence. Some of the more important tort liabilities in business

include premise liability, professional liability, employee liability,

vehicular liability, product liability and director’s liability.

Personnel risks involve premature death, poor health and insufficient

retirement income.

3.4 Insurance for small business

In certain instances it becomes necessary to successfully

transfer the risks of a business and, although increasingly costly,

insurance programmes should be implemented in this regard. Chapter

23 details the different types of business insurances usually available

to small businesses.

Regardless of size or structure, the management of risk is critical to

small businesses.



.



Terms’ found at the end of Chapter 23 Moore et al.

(2010).

1. Define and explain the nature of risk.

2. What are the basic ways of dealing with risk in a small business?

3. Which of the classifications of business risks is the most difficult for a

small organisation to control? Why? Which is the least difficult to

control? Why?

4. Can a small business safely assume that business risks will never

turn into losses sufficiently large enough to bankrupt it? Give reasons

for your answer.

5. When it is logical for a small business to utilise self-insurance?

Explain.

6. List several approaches that can be used in combating the potential

danger of theft or fraud by employees and/or outsiders.

7. Discuss whether life insurance is an acceptable solution for dealing

with the owner’s risk.

8. Briefly mention the most common types of business insurance.

9. Are any kinds of business risks basically ‘human risks’? If so, who are

the people involved?

10. Explain the basic approaches that should be used in evaluating an

insurance programme.


Study Unit 16: Managing assets


Study Unit 16 addresses the necessity for an entrepreneur

to manage his/her fixed and variable assets in order to maintain a

healthy cash flow and thus ensure maximum profitability.

Topics:

Working capital cycle

Managing cash flows

Managing accounts receivable, inventory and accounts payable

Capital budgeting practices.



• Describe the working-capital cycle of a small

business.

• Identify the important issues in managing a

company’s cash flow.

• Explain key issues in managing accounts

receivable, inventory, and accounts payable.

• Discuss the techniques commonly used in making

capital budgeting decisions.

• Describe the capital budgeting practices of small

businesses.




This study unit introduces you to managing the assets of a small

business.

3.1 Introduction

Frequently, a small business will grow incredibly fast and

the owner(s) will be excited and highly motivated because of this

unexpected, rapid growth. However, in turn, this may create cash flow

problems as the company grows out of its capital base and becomes

unable to produce more products. This occurs because of the lack of

working capital owing to the unexpected and uncontrolled growth.

Working capital refers to the company’s investment in current assets

such as cash, inventory, marketable securities and accounts

receivable. These are the assets that are used by management in the

day-to-day operations of the business; thus, the definition ‘working

assets/capital’. Essentially, the business’s current assets form the

working capital and it is extremely important to manage these properly.

3.2 The working-capital cycle

Valuable business opportunities can be irreparably

damaged by not managing the company’s short-term assets and

liabilities correctly.

Net operating working capital is calculated by taking three current

assets, viz. cash, accounts receivable and inventories, less two

sources of short-term debt, viz. accounts payable and accruals. A



firm’s working-capital cycle is the flow of resources through these

accounts as part of the day-to-day operations. Exhibit 22.1 in Chapter

22 provides a good visual example of the steps of the working-capital

cycle as discussed earlier in the chapter. It is also important to

understand the working-capital time lines found presented Exhibit

22.2.

3.3 Managing cash flows

Unfortunately, many successful and profitable companies

have had to close their doors because of inadequate cash flow. There

are four sources of cash inflow in a business: 1) new investment, 2)

new debt, 3) sale of fixed assets and, 4) operating revenues (including

the collection of accounts receivable). A business grows most

efficiently when it experiences continued profitable operations

accompanied by a positive cash inflow. Exhibit 22.4 in Chapter 22 of

the textbook shows the ‘Flow of cash through the business’. Consider

the relevant steps in calculating cash flow.

3.4 Managing accounts receivable

The receivable cycle begins with a credit sale and, in most

instances an invoice is raised and sent to the customer for payment.

Credit management policies, practices and procedures affect the life

cycle of receivables and therefore the flow of cash from them.

Needless to say, when a small business experiences cash flow

problems, it may well have something to do with the poor management

of cash receivables.

3.5 Managing inventories

One of the biggest issues surrounding a company’s

inventory is that it ties up funds that are not actively profitable. The


optimal inventory level is the level needed to maintain desired

production schedules and customer demand.

There is a tendency for small business owners to ‘overbuy’ inventory.

The reasons for this are varied but include overly optimistic forecasts,

a supplier pressurising the business owner to pre-buy against a price

increase, and an attempt by the manager to satisfy his/her customers

on every stock item.

Stockpiling can be the single biggest drain on a small business and

entrepreneurs must therefore exercise caution in this area.

3.6 Managing accounts payable

Accounts payable hinges on timing and negotiation. In terms

of timing the aim is to buy now but pay later, thereby negotiating

payable obligations.

3.7 Capital budgeting

Capital budgeting allows a manager to make decisions

about long-term investments. Techniques used for capital budgeting

are presented at the end of Chapter 22.



found at the end of Chapter 22 in Moore et al. (2010)



1. List the events found in the working-capital cycle that directly affect

cash and those events that do not.

2. What determines the length of a business’s cash conversion period?

3. What are some examples of cash receipts that do not constitute

sales revenue? Explain how expenses and cash disbursements

during a month may be different.

4. How may a seller speed up the collection of accounts receivable?

Give examples that may apply to various stages in the life cycle of

receivables.

5. Differentiate between net cash flow and net profit.

6. Detail and compare the different techniques that can be used in

capital budgeting analysis.

7. Define the internal rate of return (IRR).

8. Define cost of capital (CoC). Why is it important?

9. What guidelines can be followed in order to manage inventory and

accounts payable?

Documents

Learner Guide for Entrepreneurship (ENT001) 2011imm-gsm.s3.amazonaws.com/.../ENT_Entrepreneurship_LG2011.pdfEntrepreneurship also provides students with the essential skills used in