Manual for General Entrepreneuship Studies12_2

MANUAL FOR GENERAL ENTREPRENEUSHIP STUDIES

CHAPTER 1: INTRODUCTION TO ENTREPRENEURSHIP AND PROBLEM SOLVING B EHAVIOUR

The World of the Entrepreneur

Welcome to the world of the entrepreneur! Across the globe, growing numbers of people are realizing their dreams of owning and operating their own businesses.

Interest in entrepreneurship has never been higher than it has been at the beginning of the twentyfirst century

Capitalist societies depend on entrepreneurs to provide the drive and risk taking necessary for the system to supply people with the goods and services they need.

Entrepreneurship plays a significant role in the business world by:

i. Introducing innovative products

ii. Pushing back technological frontiers

iii. Creating new jobs

iv. Opening foreign markets

What is an Entrepreneur

An entrepreneur is one who

creates a business in the face of risk and uncertainty

for the purpose of achieving profit and growth

by identifying significant opportunities

and assembling the necessary resources to capitalize on them.

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Characteristics of Entrepreneur (Entrepreneurial profile)

i. Desire for responsibility

ii. Preference for moderate risk (Minimize risk by building a solid business plan)

iii. Confidence in their ability to succeed

iv. Desire for immediate feedback

v. High level of energy

vi. Future orientation (A focus on future opportunities, rather than focus on past events)

vii. Skill at organizing

viii. Value of achievement over money

ix. High degree of commitment

x. Tolerance for ambiguity (willingness to take risks)

xi. Flexibility (adapt their businesses to meet changing tastes and trends)

xii. Tenacity (Try, try and try again)

The Benefits of Entrepreneurshipi. Opportunity to create your own destiny

ii. Opportunity to make a difference (combining concern for social issues and a desire to earn a good living).

iii. Opportunity to reach your full potentialiv. Opportunity to reap impressive profitsv. Opportunity to contribute to society and be recognized for your efforts

vi. Opportunity to do what you enjoy and have fun at it

The Potential Drawbacks of entrepreneurshipi) Uncertainty of incomeii) Risk of losing your entire investment

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iii) Long hours and hard workiv) Lower quality of life until the business gets establishedv) Complete responsibility (have to make all decisions)vi) Discouragement (Face many obstacles along the way).

The Cultural Diversity of Entrepreneurship Anyone has the potential to become an entrepreneur. Indeed, diversity is a hallmark of entrepreneurship, and the following represent the

diverse mix of people who make up the rich fabric of entrepreneurship:a) Young Entrepreneursb) Women Entrepreneursc) Minority Enterprisesd) Immigrant Entrepreneurse) PartTime Entrepreneursf) HomeBased Businessg) Familyowned businessh) Copreneurs (entrepreneurial couples who work together as coowners of their

business)i) Corporate Castoffs (People who lose their company jobs and start their own

businesses)j) Corporate dropouts

The Power of “Small” Business A small business is one that employs fewer than 100 people. “Gazelles” refer to very successful small businesses that are growing at 20% or more per

year with at least $100,000 in annual sales; they create 70% of net new jobs in the economy.

The small business sector’s contributions are many:a. They make up 99% of all businessesb. They employ 51% of the private sector workforcec. They create twothirds to threefourths of the net new jobs in the economyd. They produce 51% of the country’s private gross domestic product (GDP)e. They account for 47% of all business sales.

The 10 Deadly Mistakes of Entrepreneurship

1. Management Mistakes (primary cause of business failure)2. Lack of Experience

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3. Poor Financial Control4. Weak Marketing Efforts5. Failure to Develop a Strategic Plan (Failure to plan is planning to fail)6. Uncontrolled Growth (As the business increases in size and complexity, problems

increase in magnitude, and the entrepreneur must learn to deal with them)7. Poor Location8. Improper Inventory Control9. Incorrect Pricing (Small businesses usually underprice their products and services. The

first step in establishing accurate prices is too know what a product or service costs to make or provide)

10. Inability to Make the “Entrepreneurial Transition” (Once a business is started and starts to grow, it usually requires a radically different style of management, one that entrepreneurs are not necessary good at)

Putting Failure into Perspective Because they are building businesses in an environment filled with uncertainty and

shaped by rapid change, entrepreneurs recognize that failure is likely to be part of their lives, but they are not paralyzed by that fear.

Failure is a natural part of the creative process. The only people who never fail are those who never do anything or never attempt anything new.

One hallmark of successful entrepreneurs is the ability to fail intelligently, learning why they failed so that they can avoid making the same mistake again.

Entrepreneurial success requires both persistence and resilience, the ability to bounce back from failure.

How to Avoid the Pitfalls1. Know Your Business in Depth2. Develop a Solid Business Plan3. Manage Financial Resources4. Understand Financial Statements (To truly understand what is going on in the business,

an owner must have at least a basic understanding of accounting and finance)5. Learn to Manage People Effectively (No matter what kind of business you launch, you

must learn to mange people. Every business depends on a foundation of welltrained, motivated employees. No business owner can do everything alone.)

6. Keep in Tune with Yourself (Monitor your health, manage your time, and have passion for what you do).

CHAPTER 2: INSIDE THE ENTREPRENEURIAL MIND: FROM IDEAS TO REALITY

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Creativity, Innovation, and Entrepreneurship

What is the entrepreneurial “secret” for creating value in the marketplace? In reality, the “secret” is no secret at all: It is applying creativity and innovation to solve problems and to exploit opportunities to enhance or to enrich people’s lives.

Creativity is the ability to develop new ideas and to discover new ways of looking at problems and opportunities.

Innovation is the ability to apply creative solutions to problems and opportunities to enhance or to enrich people’s lives.

Successful entrepreneurs come up with ideas and then find ways to make them work to solve a problem or to fill a need.

Entrepreneurship is thus the result of a disciplined, systematic process of applying creativity and innovation to needs and opportunities in the marketplace.

Creativity – A Necessity for Survival

In this fiercely competitive, fastfaced, global economy, creativity is not only and important source for building a competitive advantage, but it also is a necessity for survival.

A paradigm is a preconceived idea of what the world is, what it should be like, and how it should operate.

Entrepreneurs must always be on guard against existing paradigms because they are obstacles to creativity. Successful entrepreneurs often go beyond conventional wisdom as they ask “why not…?”

Success – even survival – in this fiercely competitive, global environment requires entrepreneurs to tap their creativity and that of their employees constantly.

Barriers to Creativity

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The number of potential barriers to creativity is limitless, but entrepreneurs commonly face 10 “mental locks” on creativity:

i. Searching for the one “right” answer

Deeply ingrained in most educational systems is the assumption that there is one “right” answer to a problem.

In reality, however, depending on the question one asks, there may be (and usually are) several “right” answers.

ii. Focusing on “being logical”

Focusing too much on being logical discourages the use of one of the mind’s most powerful creations: intuition.

Intuition is a crucial part of the creative process because using it often requires one to think about things in new and different ways.

iii. Blindly following the rules

Sometimes creativity depends on our ability to break the existing rules so that we can see new ways of doing things.

iv. Constantly being practical

Suspending practicality for a while frees the mind to consider creative solutions that otherwise might never arise. (Consider the invention of the airplane).

v. Viewing play as frivolous (not important)

A playful attitude is fundamental to creative thinking

Children learn when they play, and so can entrepreneurs

Watch children playing and you will see them invent new games, create new ways of looking at old things, and learn what works and what doesn’t in their games.

vi. Becoming overly specialized

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Creative thinkers do not limit their search for ideas in areas in which they have expertise. They search for ideas outside their areas of specialty.

vii. Avoiding ambiguity (uncertainty)

Avoiding uncertain situations often stifles creativity

Ambiguity can be a powerful creative stimulus; it encourages us to “think something different”.

viii. Fearing looking foolish

People tend toward the status quo because they don’t want to look foolish.

Entrepreneurs perform a vital function – “creative destruction” – in which they look at old ways of doing things and ask, “Is there a better way?” By destroying the old, they create the new.

ix. Fearing mistakes and failure

Creative people realize that trying something new often leads to failure; however they do not see failure as an end. It represents a learning experience on the way to success.

x. Believing that “ I’m not creative”

Some people limit themselves because they believe creativity belongs only to a select few.

Everyone has within themselves the potential to be creative.

How to enhance creativity

Entrepreneurs can stimulate creativity in their companies by:

i. Embracing diversity (Hire a diverse workforce)

ii. Expecting creativity

iii. Expecting and tolerating failure

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iv. Encouraging creativity

v. Viewing problems as challenges

vi. Providing creativity training

vii. Providing support (Employees should be given the tools and the resources they need to be creative).

viii. Rewarding creativity

ix. Modeling creativity (Entrepreneurs must set an example to employees by being creative themselves.

Entrepreneurs can enhance their own creativity by:

i. Allowing themselves to be creative

ii. Giving their minds fresh input everyday

iii. Keeping a journal handy to record their thoughts and ideas

iv. Reading books on stimulating creativity

v. Taking some time off to relax

The Creative Process

Although creative ideas may appear to strike as suddenly as a bolt of lightning, they are actually the result of the creative process, which involves seven steps

i. Preparation:

involves getting the mind ready for creative thinking

Preparation might include a formal education, onthejob training, work experience, and taking advantage of other learning opportunities

ii. Investigation:8

Requires the individual to develop a solid understanding of the problem or decision

iii. Transformation:

Involves viewing the similarities (convergent thinking) and the differences in the information collected

iv. Incubation:

Allows the subconscious to reflect on the information collected

v. Illumination:

Occurs at some point during the incubation period when a spontaneous breakthrough causes “the light bulb to go on”

vi. Verification:

Involves validating the idea as accurate and useful

For entrepreneurs, this may include conducting experiments, running simulations, test marketing a product or service, etc, to verify that the new idea will work and is practical to implement.

vii. Implementation:

Involves transforming the idea into a business reality

Techniques for Improving the Creative Process

Three techniques are especially useful for improving the creative process:

i. Brainstorming

A process in which a small group of people interact with very little structure with the goal of producing a large quantity of novel and imaginative ideas

As group members interact, each idea sparks the thinking of others, and the spawning of ideas becomes contagious.

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ii. Mindmapping

A graphical technique that encourages thinking on both sides of the brain, visually displays the various relationships among ideas, and improves the ability to view a problem from many sides

iii. Rapid Prototyping

Based on the premise that transforming an idea into an actual model will point out flaws in the original idea and will lead to improvements in its designs

Developing a model of an idea enables the entrepreneur to determine what works and what does not.

Protecting Your Ideas

Once entrepreneurs come up with an innovative idea for a product or service that ahas market potential, their immediate concern should be to protect it from unauthorized use.

This is where patents, trademarks and copyrights become very useful.

Patents: A patent is a grant from the federal government that gives an inventor exclusive rights to an invention for 20 years.

Trademark: A trademark is any distinctive word, symbol, or trade dress that a company uses to identify its product and to distinguish it from other goods. It serves as the company’s “signature” in the market place.

Copyright: A copyright protects original works of authorship. It covers only the form in which an idea is expressed, not the idea itself, and lasts for 70 years beyond the creator’s death.

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CHAPTER 3: STRATEGIC MANAGEMENT AND THE ENTREPRENEUR

Introduction

Too often, entrepreneurs brimming with optimism and enthusiasm launch businesses destined for failure because their founders never stop to define a workable strategy that sets them apart from their competitors.

Perhaps the biggest change business owners’ face is the shift in the world’s economy from a base of financial to intellectual capital.

Intellectual capital is a key source of a company’s competitive advantage that is comprised of:

1. Human Capital (talents, skills and abilities of a company’s workforce)

2. Structural Capital (accumulated knowledge and experience that a company possesses)

3. Customer Capital (the established customer base, positive reputation and goodwill a company builds over time with its customers)

Increasingly, entrepreneurs are recognizing that the capital stored in these three areas forms the foundation of their ability to compete effectively and that they must manage this capital base carefully.

The process of strategic management provides entrepreneurs a powerful weapon to successfully manage their intellectual capital and be successful.

Strategic management is the process of developing a gameplan to guide a company as it strives to accomplish its vision, mission, goals, and objectives and to keep it from straying off course.

Building a Competitive Advantage

Te goal of developing a strategic plan is to create for the small company a competitive advantage.

Competitive advantage is the aggregation of factors that sets a small business apart from its competitors and gives it a unique position in the market superior to its competition.

Building a competitive advantage alone is not enough; the key to success is building a sustainable competitive advantage.

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In the long run, a company gains a sustainable competitive advantage through its ability to develop a set of core competencies that enables it to serve its target customer better than its rivals.

Core competences are a unique set of lasting capabilities that a company develops in key operational areas, such as quality, service, innovation, team building, flexibility, responsiveness and others, which allow it to vault past competitors.

They are what the company does best, and the focal point of the strategy. This step must identify target market segments and determine how to position the company in those markets.

The bottom line is that entrepreneurs must identify some way to differentiate their companies from competitors.

The Strategic Management Process

Strategic planning is a continuous process that consists of nine steps:

Step 1: Develop a clear vision and translate it into a meaningful mission statement

A vision is the result of an entrepreneur’s dream of something that does not exist yet and the ability to paint a compelling picture of that dream for everyone to see.

A clearly defined vision helps a company in three ways:

i. Vision provides direction

ii. Vision determines decisions

iii. Vision motivates people

The best way to put a vision into action is to create a written mission statement that communicates those values to everyone the company touches.

A mission statement is an enduring declaration of a company’s purpose that addresses the first question of any business venture: What business are we in?

The mission statement sets the tone for the entire company and focuses its attention on the right direction

Some the key issues that a company’s mission statement should address (elements of a mission statement) include:

i. What are the basic beliefs and values of the organization? What do we stand for?12

ii. Who are the company’s target customers?

iii. What are our basic products and services? What customer needs and wants do they satisfy?

iv. Why should customers do business with us rather than the competitor?

v. What constitutes value to our customers? How can we offer them better value?

vi. What is our competitive advantage? What is its source?

vii. In which markets will we choose to compete?

viii. Who are the key stakeholders in our company and what effect do they have on it?

Step 2: Assess the Company’s Strengths and Weaknesses

Building a successful competitive strategy requires a business to magnify its strengths and overcome or compensate for its weaknesses.

Strengths are positive internal factors that a company can use to accomplish its mission, goals, and objectives (e.g. special skills or knowledge, positive public image and experienced sales force).

Weaknesses are negative internal factors that inhibit a company’s ability to accomplish it mission, goals and objectives. (e.g. lack of capital, shortage of skilled workers, and an inferior location)

Step 3: Scan the Environment for Significant Opportunities and Threats facing the business

Opportunities are positive external options that a firm can exploit to accomplish its mission, goals and objectives.

Opportunities almost always arise as a result of factors that are beyond entrepreneurs’ control. Constantly scanning for those opportunities that best match their companies’ core competencies and strengths and then pouncing on them ahead of competitors is the key to success.

Threats are negative external factors that inhibit a company’s ability to achieve its mission, goals and objectives.

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Threats to the business can take a variety of forms, such as competitors entering the local market, a government mandate regulating a business activity, an economic recession, rising interest rates, technological advances making the company’s product obsolete, etc.

Step 4: Identify the Key Factors for Success in the Business

Key success factors are the factors that determine a company’s ability to compete successfully in an industry

Many of these sources of competitive advantage are based on cost factors such as manufacturing cost per unit and distribution cost per unit. Some are less tangible but just as important, such as superior product quality, solid relationships with dependable suppliers, number of services offered, prime store location, etc.

Entrepreneurs must identify these key success factors and determine how well their businesses meet these criteria for successfully competing in the market.

Step 5: Analyze the Competition

Business owners should know their competitors almost as well as they know their own business.

Direct competitors are those that offer the same products and services

Strategic competitors offer some of the same products and services.

Indirect competitors offer the same or similar products or services, but their target customers seldom overlook yours.

A competition profile matrix is a helpful tool for analyzing competitors’ strengths and weaknesses.

It allows business owners to evaluate their company against major competitors on the key success factors for that market.

Step 6: Create Company Goals and Objectives

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Before entrepreneurs can build a comprehensive set of strategies, they must first establish business goals and objectives, which give them targets to aim for and provide a basis for evaluating their companies’ performance.

Goals are the broad, longrange attributes that a business seeks to accomplish; they tend to be general and even abstract.

Objectives are more specific targets of performance, commonly addressing areas such as profitability, productivity, growth and other key aspects of a business.

Wellwritten objectives have the following characteristics: i) specific, ii) measurable, iii) assignable, iv) realistic, yet challenging, v) timely and vi) written down.

The strategic planning process works best when managers and employees are actively and jointly involved in setting objectives.

Step 7: Formulate Strategic Options and Select the Appropriate Strategies

A strategy is a road map of the actions an entrepreneur draws up to fulfill a company’s mission, goals and objectives.

In other words, the mission goals and objectives spell out what the entrepreneur hopes to achieve, while the strategy defines the means for reaching them.

A successful strategy is comprehensive and wellintegrated, focusing on establishing the key success factors that the entrepreneur identified in Step 4.

Three basic strategic options can be utilized:

i. Cost leadership strategy: a strategy in which a company strives to be the lowcost producer relative to its competitor in the industry.

ii. Differentiation strategy: a strategy in which a company seeks to build customer loyalty by positioning its goods or services in a unique or different fashion.

iii. Focus strategy: a strategy in which a company selects one or more market segments, identifies customers’ special needs, wants and interests, and approaches them with a good or service designed to excel in meeting those needs, wants, and interests (Focus on a narrow market segment and be the best in that area, either through being the lowestcost provider or by differentiating the product or service in a unique fashion).

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Step 8: Translate Strategic Plans into Action Plans

No strategic plan is plan is complete until it is put into action.

To make the plan workable, the business owner should divide the plan into projects, carefully defining each one by the following:

i. Purpose: What is the project designed to accomplish?

ii. Scope: Which areas of the company will be involved in the project?

iii. Contribution: How does the project relate to other projects and to the overall strategic plan?

iv. Resource requirements: What human and financial resources are needed to complete the project successfully?

v. Timing: Which schedules and deadlines will ensure project completion?

Step 9: Establish Accurate Controls

A company’s actual performance rarely ever matches stated objectives. Entrepreneurs quickly realize the need to control actual results that deviate from plans.

To judge the effectiveness of their strategies, many companies are developing balanced scorecards, a set of measurements unique to a company that includes both financial and operational measures and gives managers a quick yet comprehensive picture of the company’s overall performance.

A balanced scorecard looks at a business from four important perspectives:

i. Customer perspective: How do customers see us?

ii. Internal business perspective: At what must we excel?

iii. Innovation and Leaning Perspective: Can we continue to improve and create value?

iv. Financial Perspective: How do we look to shareholders?

The strategic planning process does not end with the nine steps outlined here; it is an ongoing procedure that entrepreneurs must repeat.

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CHAPTER 4: FORMS OF BUSINESS OWNERSHIP AND FRANCHISING

a) Three major forms of business ownership (advantages and disadvantages)

I) The Sole Proprietorship a business owned and managed by one individualAdvantages of a proprietorship

i. Simple to createii. Least costly form of ownership to beginiii. Profit incentive (owner keeps all profits)iv. Total decisionmaking authorityv. No special legal restriction (has very few rules for establishing and running, unlike

corporation)vi. Easy to discontinue.

Disadvantages of a proprietorshipi. Unlimited personal liability (owner responsible for all debts of the business)ii. Limited skills and capabilities (owner may not possess all the skills necessary for

successfully running the business).iii. Feelings of isolation (no one to turn for help in solving problems or getting feedback

on a new idea).iv. Limited access to capital (difficulty in raising additional money to grow and expand

business).v. Lack of continuity for the business (if the proprietor dies, retires or becomes

incapacitated, the business usually automatically terminates).

II) The Partnership An association of two or more people who coown a business for the purpose of making a

profit. A good partnership requires a partnership agreement, which is a document that states in

writing all of the terms of operating the partnership and protects the interest of each partern

Advantages of the Partnershipi. Easy to establish

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ii. Complementary skills (In successful partnerships, the parties’ skills and abilities usually complement one another, strengthening the company’s managerial foundations).

iii. Division of profits (no restrictions on how profits should be shared as long as all partners agree).

iv. Larger pool of capitalv. Ability to attract limited partners General partners: partners who share in owning, operating and managing a business and

who have unlimited personal liability for the partnership’s debts Limited partners: partners who do not take an active role in managing a business and

whose liability for the partnership’s debts is limited to the amount they have invested. A limited partnership can attract investors by offering them limited liability and the

potential to realize a substantial return on their investments if the business is successful.vi. Little government regulationvii. Flexibility

viii. Taxation (not subject to federal taxation; like the proprietorship, avoids the “double taxation” disadvantage associated with the corporate form of ownership)

Disadvantages of the Partnershipi. Unlimited liability of at least one partner (at least one member of every partnership

must be a general partner, and every general partner has unlimited personal liability).ii. Capital accumulation ( not as effective as corporate form of ownership which can raise

capital by selling shares).iii. Difficulty in disposing of partnership interest without dissolving the partnership (when

a partner withdraws from the partnership, it ceases to exist unless there are specific provisions in the partnership agreement)

iv. Lack of continuity (if a partner dies, partnership interest is often nontransferable through inheritance because the remaining partners may not want to be in a partnership with the person who inherits the deceased partner’s interest).

v. Potential for personality and authority conflicts (No matter how compatible partners are, friction among them is inevitable. The demise of many partnerships can often be traced to interpersonal conflicts and the lack of a procedure to resolve those conflicts).

Other forms of partner ships i. Limited partnership – a partnership composed of at least one general partner and at

least one limited partner.ii. Limited liability partnership (LLP) – a special type of limited partnership in which all

partners, who in many states must be professionals (e.g. attorneys, physicians, dentists and accountants), are limited partners.

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iii. Master limited partnership (MLP) – a partnership whose shares are traded on stock exchanges, just like a corporation’s; behave much like a corporation, and in 1987 U.S. legislation provided that any MLPs not involved in natural resources or real estate be taxed as corporations).

III) CorporationsMost complex of the three major forms of business ownership A Corporation is a separate legal entity apart from its own owners that receives the right to exist from the state in which it is incorporated. A domestic corporation is one doing business in the state in which it is incorporated. A foreign corporation is one doing business in a state other than the one in which it is incorporated An alien corporation is one formed in one country and doing business in another country.

How to Incorporate Every state requires a certificate of incorporation or charter to be filed with the secretary

of state, The following information is generally required to be included in the certificate of

incorporation:i) The corporation’s nameii) The corporation’s statement of purposeiii) The corporation’s time horizon (mostly formed with no specific termination date)iv) Names and addresses of the incorporatorsv) Place of businessvi) Capital stock authorization (The articles of incorporation must include the amount and

type of capital stock the corporation wants to be authorized to issue; a corporation can issue any number of issues up to the amount authorized).

vii) Capital required at the time of incorporation (some states require a newly formed corporation to deposit in a bank a specific percentage of the stock’s par value prior to incorporating)

viii) Restrictions on transferring shares Many closelyheld corporations (those owned by a few shareholders, often family

members) require shareholders interested in selling their stock to offer it first to the corporations.

Treasury stock: the shares of its own stock that a corporation owns Right to first refusal: a provision requiring shareholders who want to sell their stock to

offer it first to the corporation.ix) Names and addresses of the officers and directors of the corporationx) Rules under which the corporation will operate (Bylaws)

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The Advantages of the Corporationi. Limited liability of stockholders( because it is a separate legal entity, a corporation

allows investors to limit their liability to the total amount of their investment in the business

ii. Ability to attract capitaliii. Ability to continue indefinitelyiv. Transferable ownership

The Disadvantages of Corporationsi. Cost and time involved in the incorporation processii. Double taxation (corporation’s profits are taxed twice: at the corporate rate and at the

individual rate [on the portion of profits distributed as dividends]). iii. Potential for diminished managerial incentives Professional managers the entrepreneur brings in to help run the business as it grows do

not always have the same degree of interest in or loyalty to the company. As a result, the business may suffer without the founder’s energy, care, and devotion.

One way to minimize this potential problem is to link managers’ compensation to the company’s financial performance through a profitsharing or bonus plan.

iv. Legal requirements and regulatory red tapev. Potential loss of control by the founder When entrepreneurs sell shares of ownership in their companies, they relinquish some

control. When large amount of capital is needed, entrepreneurs may have to give up significant

amounts of control, so much, in fact, that the founders become minority shareholders.

Other forms of ownership

i. The S Corporation A corporation that retains the legal characteristics of a regular(C) corporation but has the

advantage of being taxed as a partnership if it meets certain criteria. It must meet the following criteria:

a) It must be a domestic corporationb) It cannot have a nonresident alien as a shareholderc) It can issue only one class of common stock, which means that all shares must carry

the same rights.d) It must limit its shareholders to individuals, estates and certain trustse) It cannot have more than 75 shareholders

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f) Less than 25% of the corporation’s gross revenues during three successive tax years must be from passive sources.

ii. The Limited Liability Company (LLC) a relatively new form of ownership that, like an S corporation, is a cross between a

partnership and a corporation; it is not subject to many of the restrictions imposed on S corporations.

For example, S corporations cannot have more than 75 shareholders, none of whom can be foreigners or corporations. S corporations are also limited to only one class of stock. LLCs eliminate those restrictions.

Creating an LLC is much like creating a corporation. Two documents are filed with the secretary of state: the articles of organizations and the operating agreement.

Articles of organization are similar to a regular corporation’s article of incorporation, while operating agreements are similar to corporations’ bylaws.

iii. The Professional Corporation Designed to offer professionals – lawyers, doctors, dentists, accountants, and others the

advantages of the corporate form of ownership. They are ideally suited for professionals who must always be concerned about

malpractice law suits because they offer limited liability. For example, if three doctors formed a professional corporation, none of them would be

liable for the others’ malpractice.

iv. The Joint venture A joint venture is very much like a partnership, except that it is formed for a specific,

limited purpose. For instance, suppose you own a piece of land normally used for agriculture. You have a

friend who wants to host a twoweek program for FUT students. You and your friend form a joint venture for the specific purpose of hosting the program. Your contribution is the exclusive use of your land for two weeks. When the program is over, you and your friend split the profits 2080, and the joint venture terminates.

Franchising Franchising is a system of distribution in which semindependent business owners

(franchisees) pay fees and royalties to a parent company (franchiser) in return for the right to become identified with its trademark, to sell its products or services, and often to use its business format and system.

Franchisees do not establish their own autonomous businesses; instead they buy a “success package” from the franchiser, who shows them how to use it.

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Franchisees, unlike independent business owners, don’t have the freedom to change the way they run their businesses, but they do have a formula for success that the franchiser has worked out.

Types of Franchisingi. Tradename franchising: a system of franchising in which a faranchisee purchases the

right to use the franchiser’s trademark without distributing particular products under the franchiser’s name.

ii. Product distribution franchising: A system of franchising in which a franchiser licenses a franchisee to sell its products

under the franchiser’s brand name and trademark through a selective, limited distribution network.

This system is commonly used to market automobiles (Toyota, Peugeot), gasoline products ( Mobil, Texaco), soft drinks, etc.

iii. Pure franchising: A system of franchising in which a franchiser sells a franchisee a complete business

format and system, Franchiser provides the franchisee with a complete business format, including a license

for a trade name, the products or services to be sold, the physical plant, the methods of operation, a marketing strategy plan, a quality control process, a twoway communications system, and the necessary business services.

Most common among fastfood restaurants, hotels, and many others.

Benefits of Buying a Franchisei. Management training and support (Franchisers often offer managerial training

programs to franchisees prior to opening a new outlet).ii. Brandname Appeal (Franchisees have the advantage of identifying their businesses

with a widely recognized trademark, which usually provides a great deal of drawing power.

iii. Standardized Quality of Goods and Services (In order to maintain reputation, franchisers demands franchisees to comply with uniform standards of quality and services throughout the entire chain.

iv. National Advertising Programs (Franchisers usually require franchisees to contribute a percentage of their gross revenues for a national advertising campaign. These funds are pooled together and used for a cooperative advertising program, which has more impact than if the franchisees spent the same amount of money separately.)

v. Proven Products and Business Formats (What a franchisee essentially purchases is a franchiser’s experience, expertise and products. A franchise owner does not have to build the business from scratch.

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vi. Centralized Buying Power (A significant advantage a franchisee has over an independent small business owner is participation in the franchiser’s centralized and largevolume buying power)

vii. Site Selection and Territorial Protection A proper location is critical to the success of any small business. Many franchisers will

make an extensive location analysis for each new outlet. Some franchisers offer franchisees territorial protection, which gives existing franchisees

the right to exclusive distribution of brand name goods or services within a particular geographic area.

viii. Greater Chance for Success (Available statistics suggest that franchising is less risky than building a business from the ground up.)

The Drawbacks of Buying a Franchisei. Franchise fees and profit sharingii. Strict adherence to standardized operationsiii. Restrictions on purchasing (in the interest of maintaining quality standards,

franchisees may be required to purchase products, special equipment or other times from the franchiser of from an “approved” supplier).

iv. Limited product linev. Less freedom

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CHAPTER 5: BUYING AN EXISTING BUSINESS

Buying an Existing Business

Advantages

1. A successful existing business may continue to be successful: purchasing a thriving business at an acceptable price increases the likelihood of success.

2. An existing business may already have the best location: When the location of the business is critical to its success, it may be wise to purchase a business that is already in the right place.

3. Employees and suppliers are established: An existing business already has experienced employees, so there are fewer problems associated with the transition phase.

4. Equipment is installed and productive capacity is known: Avoid the tremendous cost of buying new equipment as is the case when starting business from scratch.

5. Inventory is in place and trade credit is established.

6. The new business owner hits the ground running

7. The new owner can use the experience of the previous owner

8. Easier financing

9. It’s a Bargain: In some cases, the current owners may need to sell on short notice, which may lead them to selling the business at a low price.

Disadvantages

1. It’s a Loser: A business may be for sale because it has never been profitable.

2. The previous owner may have created ill will: Customers, suppliers, creditors or employees may have extremely negative feelings about the behavior of the previous owner.

3. Employees inherited with the business may not be suitable

4. The Business location may have become unsatisfactory

5. Equipment and facilities may be obsolete or inefficient

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6. Change and innovation are difficult to implement: Methods previously used in a business may have established precedents that are hard to modify.

7. Inventory may be outdated or obsolete

8. The business may be overpriced

The Steps in Acquiring a Business

Buying a business can be a treacherous experience unless the buyer is well prepared.

The right way to buy a business is to:

1. Analyze your skills, abilities and interests to determine what kinds of businesses you should consider.

2. Prepare a list of potential candidates

Do not limit yourself to only those companies that are advertised as being “for sale”.

Consider the “hidden market”: low profile companies that might be for sale but not advertised as such.

One can tap into such a hidden market through sources like business brokers, bankers, accountants, and even by knocking on doors of businesses you would like to buy (even if they are not advertised as being for sale)

3. Investigate those candidates and evaluate the best one(s)

4. Explore financing options (how to raise the money to buy the business)

5. Ensure a smooth transition

Concentrate on communicating with employees

Be honest with employees

Listen to employees

Consider asking the seller to serve as a consultant until the transition is complete.

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Evaluating an Existing Business – The Due Diligence Process

Rushing into a deal can be the biggest mistake a business buyer can make

Before closing a deal, every business buyer should investigate 5 critical areas:

1. Why does the owner wish to sell? Look for the real reason.

2. Determine the physical condition of the business. Consider both the building and its location.

3. Conduct a thorough analysis of the market for your products or services. Who are the present and potential customers? Conduct and equally thorough analysis of competitors, both indirect and direct. How do they operate and why do customers prefer them?

4. Consider all of the legal aspects that might constrain the expansion and growth of the business.

5. Analyze the financial condition of the business, looking at financial statements, income tax returns, and especially cash flow.

Methods for determining the Value of a Business

Placing a value on a business is partly an art and partly a science.

There is no single best method for determining the value of a business.

The following techniques are useful:

1. Basic Balance Sheet Methods: Net Worth = Assets – Liabilitis

a. Balance Sheet Technique:

a method of valuing a business based on the value of the company’s net worth (net worth = total assets – total liabilities)

b. Adjusted Balance Sheet Technique

A more realistic method for determining a company’s value is to adjust the book value of net worth to reflect actual market value.

The adjusted balance sheet technique is thus a method of valuing a business based on the market value of the company’s net worth

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2. Earnings Approach

A method of valuing a business that recognizes that a buyer is purchasing the future income (earnings) potential of a business

Example is the capitalized earnings approach

Under this approach, Value = Net earnings (after deducting owners salary)/ Rate of return

3. Market Approach

A method of valuing a business that uses the price/earnings ratio of similar publicly held companies to determine value.

Value = Average P/E ratio * Estimated Net Earnings.

Negotiating the Deal

The first rule of negotiating is never to confuse price with value

In a business sale, the party who is the better negotiator usually comes out on top.

Before beginning negotiations, a buyer should identify the factors that are affecting the negotiations and then develop a negotiating strategy.

The best deals are the result of a cooperative relationship between the parties based on trust.

The 5 Ps of Negotiating

1. Preparation: Examine the needs of both parties and all of the relevant external factors affecting the negotiation before you sit down to talk

2. Poise: Remain calm during the negotiation.

3. Patience: Don’t be in such a hurry to close the deal you end up giving up much of what you hoped to get.

4. Persuasiveness: Know what your most important positions are, articulate them, and offer support for your position.

5. Persistence: Don’t give in at the first sign of resistance to your position, especially in issues you consider very important.

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CHAPTER 6: DEVELOPING MARKETING STRATEGIES

Building a Guerrilla Marketing Plan

Marketing is the process of creating and delivering desired goods and services to customers, and involves all of the activities associated with winning and retaining loyal customers.

The secret to successful marketing is to understand what your target customers’ needs, demands, and wants are before your competitors can; offer them the products and services that will satisfy those needs, demands and wants; and provide customers service, convenience and value.

Guerrilla marketing strategies are unconventional, lowcost, creative marketing strategies designed to give small companies an edge over their larger, richer, more powerful rivals.

A guerilla marketing plan should accomplish four objectives:

1. It should pinpoint the specific target markets the small company will serve.

2. It should determine customer needs and wants through market research.

3. It should analyze the firm’s competitive advantages and build a guerrilla marketing strategy around them.

4. It should help create a marketing mix that meets customer needs and wants.

Pinpointing the Target Market

Target market is the specific group of customers at whom a company aims its goods or services.

To be customer driven, an effective marketing program must be based on a clear, concise definition of a company’s target customers.

A sound market research helps the owner pinpoint his target market.

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The most successful businesses have well defined portraits of the customers they are seeking to attract.

Determining Customer Needs and Wants Through Market Research

Market research is the vehichle for gathering the information that serves as the foundation for the marketing plan.

It involves systematically collecting, analyzing, and interpreting data pertaining to a company’s market, customers and competitors.

The objective of market research is to learn how to improve the level of satisfaction for existing customers and to find ways to attract new customers.

Market research does not have to be time consuming, complex or expensive to be useful. By applying the same type of creativity that they display when creating their businesses, entrepreneurs can perform effective market research at reasonable costs.

The steps in conducting market research include:

1. Defining the objective

The first and most crucial step.

It answers the question, “What do we want to know?”

2. Collect the data

The marketing approach that dominates today is individualized (onetoone) marketing, a system based on gathering data on individual customers and developing a marketing program designed to appeal specifically to their needs and wants.

How can entrepreneurs collect such valuable market and customer information? Two basic methods are available: conducting primary research (data you collect and analyze yourself) and gathering secondary research (data that have already been compiled and are available, often at a very reasonable cost.

3. Analyze and Interpret the Data

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Entrepreneurs must use judgment and common sense to determine what the results of their research mean.

4. Draw Conclusions and Act

The market research process is not complete until the business owner acts on the information collected.

Plotting a Guerilla Marketing Strategy: How to Build a Competitive Edge

When plotting a marketing strategy, owners must strive to achieve a competitive edge some way to make their companies different from, and better than the competition.

Successful entrepreneurs rely on the following effective guerilla marketing strategies to develop a competitive edge:

1. Find a Niche and Fill it

A niche strategy allows a small company to maximize the advantages of its size and to compete effectively even in industries dominated by giants.

Focusing on niches that are too small to be attractive to large companies is a common recipe for success among thriving small companies.

2. Don’t Just Sell – Entertain

Winning customers today requires more than low prices and wide merchandise selection; increasingly, businesses are adopting strategies based on entertailing.

Entertailing is a marketing concept designed to draw customers into a store by creating a kaleidoscope of sights, sounds, smells and activities, all designed to entertain and of course sell.

3. Strive to be Unique

Entrepreneurs can achieve a unique place in the market in a variety of ways, including through the products and services they offer, the marketing and promotional campaigns they use, the store layouts they design, and the business strategies they employ.

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4. Create an Identity for your business

Some of the most powerful marketers are those companies that have a clear sense of who they are, what they stand for, and why they exist.

5. Connect with Customers on an Emotional Level

Companies that establish a deeper relationship with their customers than one based merely on making a sale have the capacity to be exceptional guerrilla marketers.

They connect with their customers emotionally by supporting causes that are important to their customer base, taking exceptional care of their customers, surpassing customers’ expectations in quality and service, or making it fun and enjoyable to do business with them.

6. Focus on the Customer

Businesses must realize that everything in the business – even the business itself – depends on creating a satisfied customer.

7. Devotion to Quality

Worldclass companies treat quality as a strategic objective – an integral part of a company’s strategy and culture.

This philosophy is called total quality management (TQM) – quality not just in the product or service itself but in every aspect of the business and its relationship with the customer and continuous improvement in the quality delivered to customers.

8. Attention to Convenience

Successful companies go out of their way to make sure that it is easy for customers to do business with them.

9. Concentration on Innovation

Innovation is the key to success.

Markets change too quickly and competitors move too fast for a small company to stand still and remain competitive.

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Because y cannot outspend their larger rivals, small companies often turn to superior innovation as the way to gain a competitive edge.

10. Dedication to Service and Customer Satisfaction

Success businesses recognize that superior customer service is only an intermediate step towards the goal of customer satisfaction.

These companies seek to go beyond customer satisfaction, striving for customer astonishement.

Certainly the least expensive – and the most effective way to achieve customer satisfaction is through friendly, personal service.

11. Emphasis on Speed

Worldclass companies recognize that reducing the time it takes to develop, design, manufacture, and deliver a product reduces costs, increases quality, improves customer satisfaction, and boosts market share.

Marketing on the World Wide Web

The Web offers small business owners tremendous marketing potential on a par with their larger rivals.

Establishing a presence on the Web is important for companies targeting educated, wealthy, young customers.

Successful Web sites are attractive, inviting, easy to navigate, interactive, and offer users something of value.

The Marketing Mix

The major elements of a marketing strategy are the four Ps of marketing – product, place, price and promotion.

1. Product33

A product is any item or service that satisfies the need of a customer.

Products can have form and shape, or they can be services with no physical form.

The product life cycle describes the stages of development, growth, and decline in a product’s life.

Stage 1: introductory stage – the stage in which a product or service must break into the market and overcome customer inertia.

Stage 2: growth and acceptance stage – the stage in which sales and profits materialize

Stage 3: maturity and competition stage – the stage in which sales rise, but profits peak and then fall as competitors enter the market.

Stage 4: market saturation stage – stage in which sales peak, indicating the time to introduce the next generation product.

Stage 5: product decline stage – the stage in which sales continue to fall and profit margins decline drastically.

2. Place

Refers to method of distribution of products

The focus here is on choosing the appropriate channel of distribution and using it most efficiently.

3. Price

Almost everyone agrees that the price of the product or service is a key factor in the decision to buy.

Price affects both sales volume and profits, and without the right price, both sales and profits will suffer.

The right price for a product or service depends on three factors: (1) a small company’s cost structure, (2) an assessment of what the market will bear, and (3) the desired image the company wants to create in the customer’s mind.

4. Promotion34

Involves both advertising and personal selling

The goal is to inform and persuade customers

Advertising communicates to potential customers through some mass medium the benefits of a good or service.

Personal selling involves the art of persuasive sales on a onetoone basis.

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CHAPTER 6: BUILDING A POWERFUL MARKET PLAN














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6. Collect the data




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The Marketing Mix


5. Product40









6. Place



7. Price




8. Promotion41





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CHAPTER 7: INTEGRATED MARKETING COMMUNICATIONS AND PRICING STRATEGIES

The Basics of a Marketing Communications Plan

Every small business needs a plan to assure that the money invested in its marketing communications is not wasted.

The first step is to define the purpose of the company’s marketing communications program. In other words, the owner must decide, “What do I want to accomplish with my messages?”

The next step in developing a communications plan is to analyze the firm and its target audience.

Once business owners have defined their target audience, they can design marketing messages and choose the media for transmitting the. At this stage, the owners decide what to say and how to say it.

Entrepreneurs should build their advertisements around a unique selling proposition (USP).

USP is a key customer benefit of a product or service that sets it apart from its competition; it answers the customer’s question: “What’s in it for me?”

The best way to identify a meaningful USP is to describe the primary benefit your product or service offer customers, and then to list other secondary benefits it provides.

The Operational Elements of a Marketing Communications Plan

The marketing communications plan is made operational by ensuring that all elements of the plan (advertising, publicity, and personal selling) achieve a consistent message that is based on the firm’s USP.

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1. Advertising

Advertising is any sales presentation that is nonpersonal in nature and is paid for by an identified sponsor.

There are five fundamentals of a successful advertisement:

i. It should communicate the company’s USP

ii. It should prove the USP and benefits to the customer with facts, statistics, or testimonials.

iii. It should emphasize a key benefit of the product or service to the customer.

iv. It should attract attention

v. It should motivate customers to take action immediately.

2. Publicity

Any commercial news covered by the media that boosts sales but for which a small company does not pay

The following tactics can help any small business owner stimulate publicity for his or her firm:

i. Sponsor a community project or support a nonprofit organization or charity

ii. Promote a good cause

iii. Offer or sponsor a seminar

3. Personal Selling

The personal contact between salespeople and potential customers resulting from sales efforts.

Not everyone can be effective at personal selling. It requires training about the product or service, and certain qualities such as patience, motivation to succeed and empathy for customers.

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Selecting Advertising Media

One of the most important decisions an entrepreneur must make is which media to use in disseminating the advertising message.

The medium used to transmit the message influences the consumer’s perception and reception of it. By choosing the proper advertising media, a business owner can reach his target audience effectively at minimum cost.

Traditional Media options are as follows:

1. WordofMouth Advertising and Endorsements

Advertising in which satisfied customers recommend a business to friends, family members, and acquaintances.

The ultimate in wordofmouth advertising is what experts call “buzz”. Buzz occurs when a product is hot and everyone is talking about it.

2. Newspapers

3. Radio

4. Television

5. Magazines

6. Direct Mail

7. Internet

Preparing an Advertising Budget

Establishing an advertising budget presents a real challenge to the small business owner.

There are four basic methods:

1. Whatisaffordable method

Management spends what it can afford on advertising.

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This method fails to relate the advertising budget to the advertising objective.

2. Matching competitor method

This method assumes that a firm’s advertising needs and strategies are the same as those of the competitor, so the firm spends the same amount as its competitors do.

Relying on this technique can lead to blind imitation instead of a budget suited to the small firm’s circumstances.

3. Percentageofsales approach

Most commonly used method of establishing an advertising budget.

This method relates advertising expenditures to actual sales results.

Relying on this method can be dangerous as it may not be representative of a small company’s advertising needs.

4. Objectiveandtask method

Most difficult and least used technique

It is also the method most often recommended by advertising experts

With this method, an owner links advertising expenditures to specific objectives.

Advertise Big on a Small Budget

Despite their limited advertising budgets, small businesses do not have to take a secondclass approach to advertising.

Three techniques that can stretch a small company’s advertising dollars are:

1. Cooperative Advertising

An arrangement in which a manufacturing company shares the cost of advertising with a small retailer if the retailer features its products in those ads.

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Both the manufacturer and the retailer get more advertising per dollar by sharing expenses

2. Shared Advertising

An arrangement in which a group of similar businesses forms a syndicate to produce generic ads that allow the individual businesses to dub in local information.

Technique is especially useful for firms that sell relatively standardized products or services such as legal assistance, autos, and furniture.

3. Publicity

Pricing Strategies and Tactics

A. Introducing a new product

Pricing a new product is often difficult for the small business manager, but it should accomplish three objectives:

i. Getting the product accepted: No matter how unusual a product is, its price must be acceptable to the firm’s potential customers.

ii. Maintaining market share as competition grows: If a new product is successful, competitors will enter the market, and the small company must work to expand or at least maintain its market share. Continuously reappraising the product’s price in conjunction with special advertising and promotion techniques helps to retain a satisfactory market share.

iii. Earning a profit: Obviously, a small firm must establish a price for the new product higher than its cost. Entrepreneurs should not introduce a new product at a price below cost because it is much easier to lower a price than to increase it once the product in on the market.

Small business strategies have three basic strategies to choose from when establishing a new product’s price:

1. Market penetration 47

If a small business introduces a product into a highly competitive market in which a large number of similar products are competing for acceptance, the product must penetrate the market to be successful.

To gain quick acceptance and extensive distribution in the mass market, the firm should introduce the product with a low price (just above the total unit cost).

2. Skimming

A skimming pricing strategy often is used when a company introduces a new product into a market with little or no competition.

Here a firm uses a higherthannormal price in an effort to quickly recover the initial developmental and promotional costs of the market.

Successful skimming strategies require a company to differentiate its products or services from those of the competition, justifying the aboveaverage price.

3. Sliding down the demand curve

It is a variation of the skimming pricing strategy.

Using this tactic, a small firm introduces a product at a high price. Then technological advancements enable the firm to lower its costs quickly and to reduce the product’s price before the competition can.

By beating other businesses in a price decline, the small company discourages competitors and gradually, over time, becomes a high volume producer.

Computers are a prime example of a product introduced at a high price that quickly cascaded downward as companies made important technological advances.

Pricing Established Goods and Services

1. Odd pricing

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A pricing technique where managers prefer to establish prices that end in odd numbers (5, 7, and 9) because they believe for example that merchandise selling at N1295 appears to be much cheaper than the same item priced at N1300.

Effectiveness of this approach remains to be proven.

2. Price Lining

A technique that greatly simplifies the pricing function.

Managers set the same price for products that have similar features and appear within the same line.

For example, most movie stores use price lines for their DVDs and CDs.

3. Leader Pricing

A technique that involves marking down the normal price of a popular item in an attempt to attract more customers who make incidental purchases of other items at regular prices

4. Geographical pricing

a. Zone pricing: a technique that involves setting different prices for customers located in different territories because of different transportation costs. (e.g parcel post charges at post office, UPS or DHL)

b. Delivered pricing: a technique in which a company charges all customers the same price regardless of their locations.

c. FOBFactory: a pricing method in which a company sells merchandise to customers on the condition that they pay all shipping costs.

5. Opportunistic pricing

A pricing method that involves charging customers unreasonably high prices when goods or services are in short supply.

Opportunistic pricing may backfire, however, because customers know that a company is exploiting them.

6. Discounts (markdowns)49

Discounts are reductions from normal prices.

Many small business managers use discounts to move stale, outdated, damaged or slowmoving merchandise.

Multiple unit pricing is a promotional technique that offers customers discounts if they purchase in quantity.

7. Suggested Retail Prices

Many manufacturers print suggested retail prices on their products or include them on invoices or in wholesale catalogues.

Many small businesses follow these suggested retail prices because it eliminates the need to make a pricing decision.

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CHAPTER 8: MANAGING CASH FLOW

Cash Management

A survey by the National Federation of Independent Businesses found that 67% of small business owners say they have at least occasional problems managing cash flow; 19% report cash flow as a continuing problem.

The only way to avoid this potentially businesscrushing predicament is by using the principles of cash management.

Cash management is the process of forecasting, collecting, disbursing, investing and planning for the cash a company needs to operate smoothly.

Cash management is a vital task because cash is the most important yet least productive asset that a small business owns.

A business must have enough cash to meet its obligations or it will be declared bankrupt.

The first step in managing cash flow more effectively is to understand the company’s cash flow cycle.

Cash flow cycle is the time lag between paying suppliers for merchandise or materials and receiving payment from customers; the longer this cash flow cycle, the more likely the business owner is to encounter a cash crisis

The next step in effective cash management is to analyze the cash flow cycle, looking for ways to reduce its length.

5 Cash Management Roles of the Entrepreneur

1. Cash Finder:

This is the entrepreneur’s first and foremost responsibility.

You must make sure there is enough capital to pay all present and future bills.

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This is not a onetime task, it is an ongoing job.

2. Cash Planner:

As cash planner, an entrepreneur makes sure the company’s cash is used properly and efficiently.

You must keep track of its cash, make sure it is available to pay bills, and plan for its future use.

3. Cash Distributor:

This role requires you to control the cash needed to pay the company’s bills and the priority and the timing of those payments.

Forecasting cash disbursements accurately and making sure the cash is available when payments come due are essential to keeping the business solvent.

4. Cash Collector:

As cash collector, your job is to make sure your customers pay their bills on time.

Too often, entrepreneurs focus on pumping up sales, while neglecting to collect the cash from those sales.

Having someone n your company responsible for collective accounts receivable is essential.

Uncollected accounts drain a small company’s pool of cash very quickly.

5. Cash Conserver

This role requires you to make sure your company gets maximum value for the dollars it spends.

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Whether you are buying inventory to resell or computers to keep track of what you sell, it is important to get the most for your money.

Avoiding unnecessary expenditures is an important part of this task.

The goal is to spend cash so it will produce a return for the company.

Cash and Profits are not the same

When analyzing cash flow, entrepreneurs must understand that cash and profits are not the same.

Profit (or net income) is the difference between a company’s total revenue and its total expenses. It measures how efficiently a business is operating.

Cash is the money that is free and readily available to use in a business.

Cash follow measures a company’s liquidity and its ability to pay its bills and other financial obligations on time by tracking the flow of cash into and out of the businesses over a period of time.

Profitability does not guarantee liquidity, as profits can be tied up in many forms such as accounts receivable, inventory, computers or machinery.

Decreases in cash occur when the business purchases on credit or for cash, goods for inventory or materials for use in production.

When a company takes in cash or collects payments on accounts receivable, its cash balance increases.

The Cash Budget

The need for a cash budget arises because in every business the cash flowing in is rarely “in sync” with the cash flowing out of the business.

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This uneven flow of cash creates periodic cash surpluses and shortages, making it necessary for entrepreneurs to track the flow of cash through their businesses so they can project realistically the cash available throughout the year.

The cash budget is a “cash map” showing the amount and the timing of cash receipts and cash disbursements on a daily, weekly or monthly basis.

Preparing a Cash Budget

There are five basic steps in completing a cash budget:

1. Determining an adequate minimum cash balance

The most reliable method of deciding cash balance is based on past experience.

Past operating records should indicate the proper cash cushion needed to cover any unexpected expenses after all normal cash outlines are deducted from the month’s cash receipts.

2. Forecasting sales

The heart of the cash budget is the sales forecast.

It is the central factor in creating an accurate picture of the firm’s cash position because sales ultimately are transformed into cash receipts and cash disbursements.

For an established business, a sales forecast is based on past sales, but owners must be careful not to be excessively optimistic in projecting sales.

The task of forecasting sales for the new firm is more difficult but not impossible. For example, the new owner might conduct research on similar firms and their sales patterns in the first year of operation to come up with a forecast.

No matter what techniques entrepreneurs use, they must recognize that even the best sales estimates will be wrong.

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Many financial analysts suggest that the owner create three sales estimates – an optimistic, a pessimistic, and a most likely sales estimate – and then make a separate cash budget for each forecast.

3. Forecasting Cash Receipts

When a firm sells goods and services on credit, the cash budget must account for the delay between the sale and the actual collection of the proceeds.

Collecting accounts receivable promptly poses problems for many small companies, and is often cited by small business owners as the primary cause of cash flow problems.

4. Forecasting Cash Disbursements

The key factor in forecasting disbursements for a cash budget is to record them in the month in which they will be paid, not when the obligation is incurred.

Usually an owner’s tendency is to underestimate cash disbursements, which can result in a cash crisis. To prevent this, wise entrepreneurs cushion their cash disbursement accounts, assuming they will be higher than expected.

5. Estimating the EndofMonth Cash Balance

Begin by determining the cash balance at the beginning of the month ( cash in hand, and cash in savings or checking account)

Add forecasted cash receipts and decrease forecasted cash disbursements to estimate endofmonth cash balance.

The “Big Three” of Cash Management

The big three of cash management are accounts receivable, accounts payable and inventory.

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A good cash management “recipe” involves collecting your company’s cash as quickly as possible, economizing to keep costs low, and paying out your company’s cash as slowly as possible.

Business owners must also monitor inventory carefully to avoid tying up valuable cash in an excessive stock of inventory.

1. Accounts Receivable:

Controlling accounts receivable requires business owners to establish clear, firm credit and collection policies and to screen customers before granting them credit.

Sending invoices promptly and acting on pastdue accounts quickly also improve cash flow.

The goal is to collect cash from receivables as quickly as possible.

2. Accounts Payable:

When managing accounts payable, a manager’s goal is to stretch out payables as long as possible without damaging the company’s credit rating.

Other techniques include verifying invoices before paying them, taking advantage of cash discounts, and negotiating the best possible credit terms.

3. Inventory:

Inventory frequently causes cash headaches for small business managers.

Excess inventory earns a zero return of return and ties up a company’s cash unnecessarily.

Owners must watch for stale merchandise.

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Avoiding the Cash Crunch

By utilizing the following techniques, entrepreneurs can get maximum benefit from their companies’ pool of available cash:

1. Barter

Bartering is the exchange of goods and services for other goods and services rather than for cash

2. Trim Overhead costs

Simple costcutting measures can save big money.

Examples include: i) periodically evaluating expenses, ii). Leasing instead of buying when practical, iii) Avoiding nonessential outlays and iv) hiring parttime and freelance specialists whenever possible.

3. Be on the lookout for employee theft

4. Keep your business plan current

5. Invest surplus cash

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CHAPTER 9: CREATING A SUCCESSFUL FINANCIAL PLAN

Fashioning a welldesigned, logical financial plan as part of a comprehensive business plan is one of the most important steps to launching a new business venture.

Entrepreneurs who fail to develop workable strategies for earning a profit within a reasonable time eventually will suffer the ultimate business penalty: failure.

Financial management is a process that provides entrepreneurs with relevant financial information in an easytoread format on a timely basis; it allows entrepreneurs to know not only how their businesses are doing financially but also why they are performing that way.

Basic Financial Statements

Entrepreneurs rely on three basic financial statements to understand the financial conditions of their companies:

1. The balance sheet:

Built on the accounting equation, Assets = Liabilities + Owner’s equity (Capital)

It provides an estimate of the company’s value on a particular date.

The first section of the balance sheet lists the firm’s assets and show the total value of everything the business owns; Current assets consist of cash and items to be converted to cash with one year or within the company’s normal operating cycle. Fixed assets are assets acquired for longterm use in a business.

The second section shows the business’s liabilities (the creditors’ claims against the company’s assets). Current liabilities are those debts that must be made within one year or within the normal operating cycle of a company. Longterm liabilities are those that come due after one year.

This section also shows the owner’s equity, the value of the owner’s investment in the business. It is the balancing factor on the balance sheet.

2. Income Statement

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This statement compares the firm’s revenues against its expenses to determine its net profit (or loss).

It provides information about the company’s bottom line.

To calculate the net profit or loss, an entrepreneur records sales revenues for the year, which include all income that flows into the business from sales of goods and services. Income from other sources also must be included in the revenue section.

To determine net sales, owners subtract the value of returned items and refunds from gross revenue.

Cost of goods sold represent the total cost, including shipping, of the merchandise sold during the accounting period

Net sales minus costs of goods sold results in a company’s gross profit. Dividing fross profit by net sales revenue produces the gross profit margin.

Operating expenses include those costs that contribute directly to the manufacture and distribution of goods. General expenses are indirect costs incurred in operating the business.

Total revenue minus total expenses gives the net income (or loss) for the accounting period.

3. Statement of cash flows:

This statement shows the change in the company’s working capital over the accounting period by listing the sources and the uses of funds.

Creating Projected(pro forma) Financial Statements

Projected financial statements are a basic component of a sound financial plan.

They help the manager plot the company’s financial future by setting operating objectives and by analyzing the reasons for variations from targeted results.

Also, the small business in search of startup funds will need these pro forma statements to present to prospective lenders and investors.

They also assist in determining the amount of cash, inventory, fixtures and other assets the business will need to begin operations.

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Ratio Analysis

Once an entrepreneur has the business “up and running” with the help of a solid financial plan, the next step is to keep the company moving in the right direction with the help of proper financial controls.

Establishing these controls and using them consistently is one of the keys to keeping a business vibrant and healthy.

Ratio analysis is a method of expressing the relationship between any two accounting elements that allow business owners to analyze their companies’ financial performances.

There are 12 key ratios which are divided into four major categories: liquidity ratios, leverage ratios, operating ratios, and profitability ratios.

A. Liquidity Ratios

They tell whether a small business will be able to meet its shortterm obligations as they come due.

1. Current ratio

Measures a small firm’s solvency by indicating its ability to pay current liabilities out of current assets.

Current ratio = Current assets/Current liabilities

Also called working capital ratio

Typically, financial analysts suggest that a small business maintain a current tatio of at least 2:1 (2 dollars of current assets for every 1 dollar of current liabilities) to maintain a comfortable cushion of working capital.

Generally, the higher a company’s current ratio, the stronger its financial position.

2. Quick ratio

A conservative measure of a firm’s liquidity, measuring the extent to which its most liquid assets cover its current liabilities.

Quick assets include all current assets except inventory

Quick ratio = Quick assets/Current liabilities

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Also called acid test ratio

It is a more rigorous test of a firm’s liquidity.

Generally a quick ratio of 1:1 is considered satisfactory.

B. Leverage Ratios

Measure the financing supplied by a firm’s owners against that supplied by its creditors; they are a gauge of the depth of a company’s debt.

1. Debt Ratio

Measures the percentage of total assets financed by a company’s creditors compared to its owners

Debt Ratio = Total debt (or liabilities)/Total assets

A high debt ratio means that most of the firm’s financing comes from creditors, and thus they bear most of the financial risk.

2. Debt to Net Worth Ratio

Expresses the relationship between the capital contribution from creditors and those from owners and measures how highly leveraged a company is.

This ratio shows a company’s capital structure by comparing what the business “owes” to “what it is worth”.

Debt to Net Worth Ratio = Total debt (or liabilities)/ Tangible net worth

Tangible net worth represents the owners’ investment in the business.

The higher this ratio, the more leverage the firm is using, and the lower the degree of protection afforded creditors if the business should fail.

A higher debt to net worth ratio means that the firm has less capacity to borrow, as creditors view it as risky.

3. Times Interest Earned Ratio

Measures a small firm’s ability to make the interest payments on its debt.

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It tells how many times a company’s earnings cover the interest payments on the debt it is carrying

Times Interest Earned = Earnings before interest and taxes (EBIT)/Total Interest Expense

A high ratio suggests that the company would have little difficulty meeting the interest payments on its loans, and creditors see this a s a sign of safety for future loans.

C. Operating Ratios

Help an entrepreneur evaluate a small company’s overall performance and indicate how effectively the business employs its resources.

1. Average Inventory Turnover

Measures the number of times its average inventory is sold out, or turned over, during an accounting period.

This ratio tells the owner whether or not he or she is managing inventory properly.

It tells the owner whether inventory is understocked, overstocked or obsolete.

Average Inventory Turnover = Cost of goods sold/Average Inventory

Average Inventory = Beginning Inventory + Ending Inventory/2

Financial analysts suggest that a favorable turnover ratio depends on the type of business, its size, profitability, its method of inventory valuation, and other relevant factors.

2. Average Collection Period Ratio

Measures the number of days it takes to collect accounts receivable

To compute the average collection period, you must first calculate the firm’s receivable turnover ratio = Credit sales/Accounts receivable.

The receivable turnover ratio measures the number of times the firm’s accounts receivable turn over during the accounting period.

Average collection period = Days in accounting period / Receivable turnover ratio

The lower a company’s average collection period, the fast it is collecting its receivables.

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One of the most useful applications of the collection period ratio is to compare it to the industry average.

3. Average Payable Period Ratio

Measures the number of days it takes a company to pay its accounts payable

To compute, first calculate the payables turnover = purchases/accounts payable.

Average payable period = Days in accounting period/ payables turnover ratio

One of the most meaningful comparisons for this ratio is against the credit terms suppliers offer.

If the average payable ratio slips beyond the supplier’s credit terms, it is an indication that the company is suffering from a sloppy accounts payable procedure or from cash shortages, and its credit rating is in danger.

4. Net Sales to Total Assets Ratio

Measures a company’s ability to generate sales in relation to its asset base.

It describes how productively the firm employs its assets to produce sales revenue

Also called Total Asset Turnover

Total Asset Turnover = Net Sales/ Net Total Assets

Net Total Assets = Total Assets – Depreciation

Ratio is only meaningful when compared with that of similar firms in the same industry category.

A total assets turnover ratio below the industry indicates that a small firm is not generating an adequate sales volume for its asset size.

5. Net Sales to Working Capital Ratio

Measures how many dollars in sales a business generates for every dollar of working capital.

Working capital = Current Assets – Current liabilities

Net sales to working capital ratio = Net Sales/ (Current assets – Current liabilities)

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D. Profitability Ratios

Indicate how efficiently a small company is being managed

They describe how successfully a firm is using its available resources to generate a profit.

1. Net Profit on Sales Ratio

Measures a company’s profit per dollar of sales

Net profit on sales ratio = Net profit/Net sales

To evaluate this ratio properly, the owner must consider a firm’s asset value, its inventory and receivables turnover ratios, and its total capitalization.

If the firm’s profit margin on sales is below the industry average, it may be a sign that its prices are too low, that its costs are excessively high , or both.

2. Net Profit to Equity Ratio

Measures the owners’ rate of return on investment.

Because it reports the percentage of the owners’ investment in the business that is being returned through profits annually, it is one of the most important indicators of a firm’s profitability or management’s efficiency

Net Profit to Equity Ratio = Net Profit/Owners’ equity (or net worth)

Interpreting Business Ratios

To benefit from ratio analysis, the small company should compare its ratios to those of other companies in the same line of business and look for trends over time.

When business owners detect deviations in their companies’ ratios from industry standards, they should determine the cause of the deviations.

In some cases, such deviations are the result of sound business decisions; in other instances, they might be indicators of what could become serious problems for the company.

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CHAPTER 10: BUSINESS PLANNING














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10. Collect the data




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The Marketing Mix


9. Product69









10. Place



11. Price




12. Promotion70





CHAPTER 10b: CRATFTING A WINNING BUSINESS PLAN

Why Develop a Business Plan

A business plan is a written summary of an entrepreneur’s proposed business venture, its operational and financial details, its marketing opportunities and strategy, and its managers’ skills and abilities.

A well assembled business plan serves three essential functions:

1. Most importantly, it guides the company’s operations by charting its future course and devising a strategy for success.

2. It attracts lenders and investors

3. It forces potential entrepreneurs to look at their business ideas in the harsh light of reality by making them assess their ventures’ chances of success more objectively.

To get external financing, an entrepreneur’s plan must pass three tests with potential lenders and investors:

i. Reality Test

The external component of the reality test revolves around proving that a market for the product or service really does exist. It focuses on industry attractiveness, market niches, potential customers, market size, degree of competition, and similar factors.

The internal component of the reality test focuses on the product or service itself. Can the company really build or provide it for the cost estimates of the business plan. Does it offer customers something of value?

ii. Competitive Test

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The external part of the competitive test evaluates the company’s relative position to its key competitors. Ho w do the company’s strength and weaknesses match up with those of the competition?

The internal competitive test focuses on management’s ability to create a company that will gain an edge over existing rivals. To pass this part of the test, a plan must prove the quality, skill and experience of the venture’s management team.

iii. Value Test

To convince lenders and investors to put their money into the venture, a business plan must prove to them that it offers a high probability of repayment or an attractive rate of return.

The Elements of a Business Plan

Although a business plan should be unique and tailormade to suit the particular needs of a small company, it should cover these basic elements:

1. The Executive Summary

A concise ( maximum of 2 pages) summary of all the relevant points of the business venture.

It should explain the basic business model and briefly describe the owners and key employees, target market, and financial highlights.

Although it is the first part of the business plan, it should be the last section written.

2. Mission Statement

The broadest expression of a company’s purpose and defines the direction in which it will move.

3. Company History

Brief history of the operation, highlighting the significant financial and operational events in the company’s life.

4. Business and Industry Profile

To acquaint lenders with the industry in which a company competes, an entrepreneur should describe it in the business plan.

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This section should begin with a statement of the company’s general business goals and a narrower definition of its immediate objectives.

5. Business Strategy

This segment of the business plan outlines the methods the company can use to meets its goals and objectives.

6. Description of Firm’s Product/Service

An entrepreneur should describe the company’s overall product line, giving an overview of how customers use its goods or services.

The emphasis of this section should be on defining the benefits customers get by purchasing the company’s product or services rather than just a description of the features of those products and services.

Manufacturers should describe their production process, strategic raw materials required, sources of supply they will use, and their costs.

7. Marketing Strategy

Defining the target market and its potential is one of the most important and most challenging parts of building a business plan.

Prospective lenders and investors want to know whether or not there is a real market for the proposed good or service.

Questions this part of the business plan should address include: Who are the most promising customers or prospects? What are their characteristics? Where do they live? What do they buy? Why do they buy? When do they buy? What expectations do they have about the product or service? Will the business focus on a niche? How does the company seek to position itself in its market.

This portion of the plan also should describe the channels of distribution that the business will use.

8. Competitor Analysis

This section of the plan should include an analysis of each significant competitor.

Entrepreneurs who believe that they have no competition are only fooling themselves.

This section of the plan should also focus on demonstrating that the entrepreneur’s company has an advantage over its competitors.

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9. Description of the Management Team

The most important factor in the success of a business venture is the quality of its management, and most financial officers and investors weigh heavily the ability and experience of the firm’s managers in their financing decisions.

A plan should thus describe the qualifications of business officers, key directors and any person with at least 20 percent ownership in the company.

Resumes in a plan should summarize an individual’s education, work history and relevant business experience.

10. Plan of Operation

To complete the description of the business, the owner should construct an organizational chart identifying the business’s key positions and the personnel occupying them.

Also, a description of the form of ownership and of any leases, contracts, and other relevant agreements pertaining to the business is helpful.

11. Forecasted or Pro Forma Financial Statements

One of the most important sections of the business plan is an outline of the proposed company’s financial statements.

Whether assembling a plan for an existing business or for a startup, an entrepreneur should carefully prepare monthly projected financial statements for the operation for the next year using past operating data, published statistics, and judgments to derive three sets of forecasts of the income statement, balance sheet, cash budge and schedule of planned capital expenditures.

12. The Loan or Investment Proposal

The loan or investment proposal section of the business plan should state the purpose of the financing, the amount requested, and the plans for repayment or, in the case of investors, an attractive exit strategy.

Making the Business Plan Presentation

Lenders and investors are favorably impressed by entrepreneurs who are informed and prepared when requesting a loan or investment.

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Some helpful tips for making a business plan presentation to potential lenders and investors include:

1. Demonstrate enthusiasm about the venture, but don’t be overly emotional.

2. Know your audience thoroughly and work to establish rapport with them.

3. “Hook” investors quickly with an upfront explanation of the new venture, its opportunities, and the anticipated benefits to them.

4. Use visual aids.

5. Hit the highlights of your venture

6. Don’t get caught up in too much detail in early meetings with lenders and investors.

7. Avoid the use of technological terms that will likely be above most of the audience.

8. Rehearse your presentation before giving it.

9. Close by reinforcing the nature of the opportunity.

10. Be prepared for questions.

11. Follow up with every investor to whom you make a presentation. Don’t sit back and wait; be proactive. They have what you need – investment capital.

What Lenders and Investors look for in a Business Plan

Small business owners need to be aware of the criteria bankers use in evaluating the creditworthiness of loan applications. These criteria are referred to as the “five Cs of credit”.

1. Capital

Banks expect a small company to have an equity base of investment by the owner(s) that will help support the venture during times of financial strain, which are common during the startup and growth phases of a business.

Lenders and Investors see capital as a risksharing strategy with entrepreneurs.

2. Capacity

Another name for capacity is cash flow.

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The bank must be convinced of the firm’s ability to meet its regular financial obligations and to repay the bank loan, and that takes cash.

Lenders expect small businesses to pass the test of liquidity, especially for shortterm loans.

3. Collateral

Collateral includes any assets the owner pledges to the bank as security for repayment of the loan.

Bankers view the entrepreneurs’ willingness to pledge collateral as an indication of their dedication to making the venture a success.

4. Character

Before extending a loan to or making an investment in a small business, lenders and investors must be satisfied with an entrepreneur’s character.

The evaluation of character is frequently based on intangible factors such as honesty, integrity and competence, and it plays a critical role in the decision to put money into a business or not.

5. Conditions

Lenders and investors consider factors relating to a business’s operation such as potential growth in the market, competition, location, strengths, weaknesses, opportunities and threats. The best way to provide this relevant information is in a business plan.

Another important condition influencing the banker’s decision is the shape of the overall economy, including interest rate levels, inflation rate, and demand for money. Although these factors are beyond an entrepreneur’s control, they still are an important component in a banker’s decision.

CHAPTER 11: SOURCES OF FINANCING: DEBT AND EQUITY

Introduction

Raising the money to launch a new business has always been a challenge for entrepreneurs.

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Rather than rely primarily on a single source of funds as they have in the past, entrepreneurs must piece together capital from multiple sources, a method known as layered financing.

This chapter will guide you through the many financing options available to entrepreneurs, focusing on both sources of equity (ownership) and debt ( borrowed) financing.

Planning For Capital Needs

Becoming a successful entrepreneur requires one to become a skilled fundraiser, a job that requires more time and energy than most business founders think.

Capital is any form of wealth employed to produce more health.

Entrepreneurs need three different types of capital:

1. Fixed Capital:

Capital needed to purchase a company’s permanent or fixed assets such as buildings, land, computers and equipment.

Money invested in these fixed assets are usually large, and frozen because they cannot be used for any other purpose.

2. Working Capital:

Capital needed to support a business’s shortterm operations.

It represents a company’s temporary funds

Working capital is normally used to buy inventory, pay bills, finance credit sales, pay wages and salaries, and take care of any unexpected emergencies.

3. Growth Capital:

Capital needed to finance a company’s growth or its expansion in a new direction.

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Equity Capital Versus Debt Capital

Equity Capital

Equity Capital represents the personal investment of the owner (or owners) in a business, and is sometimes called risk capital because these investors assume the primary risk of losing funds if the business fails.

If a venture succeeds, however, founders and investors share in the benefits, which can be quite substantial.

The primary advantage of equity capital it that it does not have to be repaid like a loan does.

The primary disadvantage is that the entrepreneur must give up some – perhaps most – of the ownership in the business to outsiders.

Debt Capital

The financing that a small business owner has borrowed and must repay with interest

The primary advantage is that it does not require entrepreneurs to give up ownership of the business.

The primary disadvantage is that it must be carried as a liability on the balance sheet as well as be repaid with interest at some point in the future.

Source of Equity Financing

1. Personal Savings: The first place entrepreneurs should look for startup money is their own pockets.

2. Friends and Family Members

3. Angels: wealthy individuals, often entrepreneurs themselves, who invest in business startups in exchange for equity stakes in the companies.

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4. Partners

5. Corporate Venture Capital: When large corporations finance small companies.

6. Venture Capital Companies: private, forprofit organizations that purchase equity positions in young businesses they believe have highgrowth and highprofit potential.

7. Public Stock Sale (“Going Public”): In some cases, entrepreneurs can raise capital by selling shares of its stock to the general public for the first time. This is known as an initial public offering (IPO).

Sources of Debt Financing

1. Commercial Banks:

Offer the greatest variety of loans, although they are conservative lenders.

Typical shortterm loans include commercial loans, lines of credit, discounting accounts receivable, inventory financing, and floor planning (a form of financing used by bigticket item retailers like cars, boats).

2. Trade Credit:

Used extensively by small businesses as a source of financing.

Vendors and suppliers commonly finance sales to businesses for 30, 60, or even 90 days.

3. Equipment suppliers: offer small businesses financing similar to trade credit but with slightly different terms.

4. Commercial Finance Companies:

Offer many of same time of loans that banks do, but are more risk oriented in their lending practices.

They emphasize accounts receivable financing and inventory loans.

5. Savings and Loan Associations: specialize in loans to purchase real property – commercial and industrial mortgages for up to 30 years.

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6. Brokerage houses: offer loans to prospective entrepreneurs at lower interest rates than banks because they have high quality, liquid collateral – stocks and bonds in the borrower’s portfolio.

7. Insurance Companies:

Provide financing through policy loans and mortgage loans.

Policy loans are loans extended on the basis of the amount of money a customer has paid into a policy in the form of premiums.

Mortgage loans are made for large amounts and are based on the value of the land being purchased

8. Credit Unions: a nonprofit financial cooperative that promotes savings and provides loans to its members.

9. Federally Sponsored Programs

A. NEEDS

The National Economic Empowerment and Development Strategy (NEEDS) is the response to the development challenges of Nigeria established in 2003 by the Obasanjo administration.

NEEDS focuses on four key strategies:

i. Poverty eradication

ii. Wealth creation

iii. Employment generation

iv. Value orientation.

The major target of NEEDS is poverty eradication, which perceives entrepreneurship as a major vehicle for economic growth.

B. SMEDAN

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Small and Medium Development Agency of Nigeria (SMEDAN) was established in 2003.

Its aim was not to provide direct finance to small and medium enterprises, but to facilitate their access to finance and other resources.

It has four major roles: i) provision of information and awareness creation through business sensitization activities, ii) Business Development Service (BDS) with its tripartite role of training, counseling and mentoring, iii) Promotion of enterprise networking or cluster formation to stimulate international competitiveness, and iv) advocacy and improvement in operating environment usually in partnership with others.

Internal Methods of Financing

Small business owners may also look inside their firms for capital.

This type of financing is called bootstrap financing, and includes:

1. Factoring Accounts Receivable:

Instead of carrying credit sales on its own books, a small business can sell outright its accounts receivable to a factor.

A factor is a financial institution that buys a business’s accounts receivable at a discount.

2. Leasing:

By leasing expensive assets, the small business owner is able to use them without locking in valuable capital for an extended period of time.

3. Credit cards:

Unable to find financing elsewhere, many entrepreneurs launch their companies using the fastest and most convenient source of debt capital available: credit cards.

Putting business startup costs on credit cards is expensive and risky, but some entrepreneurs have no choice.

CHAPTER 12: CHOOSING THE RIGHT LOCATION AND LAYOUT

Location: A Source of Competitive Advantage81

Much like choosing a form of ownership and selecting particular sources of financing, the location decision has farreaching and often longlasting effects on a small company’s future.

The location decision process resembles a pyramid. The first level of the decision is the broadest, requiring an entrepreneur to select a particular region of the country. From there, an entrepreneur must choose the right state, then the right city, and finally, the right site within the city.

The “secret” to selecting the ideal location lies in knowing which factors are most important to a company’s success and then finding a location that satisfies as many of them as possible, particularly those that are most critical

1. Choosing the Region

Which region of the country has the characteristics necessary for a new business to succeed?

Above all, the entrepreneur must always place the customer first in his or her mind when deciding on a location.

One of the first stops entrepreneurs should make when conducting a regional evaluation is the Census Bureau which is an excellent source for basic demographic and population data.

2. Choosing the State

Some of the key issues to explore include the laws, regulations and taxes that govern businesses and any incentives or investment credits the state may offer to businesses locating there.

Other factors include proximity to markets, proximity to raw materials, wage rates, quantity and quality of the labor supply, general business climate, tax rates, and internet access.

3. Choosing the City

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A company’s location should match the market for its products or services, and assembling a demographic profile will tell an entrepreneur how well a particular city suits the company.

Studying the size of the market for a product or service and the number of existing competitors will help an entrepreneur determine whether he or she can capture a sufficiently large market share to earn a profit. Again census data can be valuable.

Some cities have characteristics that attract certain industries, and as a result, companies tend to cluster there.

Business owners must investigate the quality of local transportation systems

Does the community in which you plan to locate offer adequate police and fire protection?

A final consideration when selecting a cit is the quality of life it offers. Cities that offer comfortable weather, cultural events, museums, outdoor activities, concerts, etc are very attractive to entrepreneurs.

4. Choosing the Site

Each type of business has different evaluation criteria for what makes an ideal location.

The site location decision draws on the most precise information available on the makeup of the area.

Location Criteria For Retail and Service Businesses

For retailers, the location decision is especially crucial.

Retailers must consider:

1. The size of the trade area (trading area is the region from which a business can expect to draw customers over a reasonable time span).

2. The volume of customer traffic

3. Number of parking spots83

4. Availability of room for expansion

5. Visibility of a site

Location Options for Retail and Service Businesses

There are six basic areas where retail and service business owners can locate:

1. Central Business District (CBD): CBD is the traditional center of town.

2. Neighborhood Locations: Locations near residential areas.

3. Shopping Centers and Malls

4. Near Competitors: Locating near competitors might be a key factor for success in those businesses selling goods that customers shop for and compare on the basis of price, quality, color, and other factors.

5. Outlying Areas: Generally, it is not advisable for a small business to locate in a remote area because accessibility and traffic flow are vital to retail and service success.

6. HomeBased Business

The Location Decision for Manufacturers

A manufacturer’s location decision is strongly influenced by local zoning ordinances.

Some offer industrial parks designed specifically to attract manufacturers (e.g. Agbara Industrial Estate in Ogun State).

Two crucial factors for most manufacturers are:

1. The reliability and the cost of transporting raw materials

2. The quality and quantity of available labor.

Layout and Design Considerations84

Once the entrepreneur chooses the best location for his or her business, the next question deals with designing the proper layout for the building to maximize sales or productivity.

Layout is the logical arrangement of the physical facilities in a business that contributes to efficient operations, increased productivity, and higher sales.

The following factors have a significant impact on a building’s layout and design:

1. Size: Is it large enough to accommodate the business with some room for growth?

2. Construction and External Appearance: Is the building structurally sound and does it create the right impression for the business?

3. Entrances: Are they inviting?

4. Legal Issues: Does the building comply with the zoning and planning laws? If not, how much will it cost to bring it up to standard?

5. Signs: Are they legible, well located, and easy to see?

6. Interior: Does the interior design contribute to our ability to make sales, and is it ergonomically designed? [Ergonomics is the science of adapting work and the work environment to complement employees’ strengths and to suit customers’ needs)

7. Lights and Fixtures: Is the lightning adequate for the tasks workers will be performing, and what is the estimated cost of lightning?

Layout: Maximizing Revenues, Increasing Efficiency and Reducing Cost

The ideal layout for a building depends on the type of business it houses and on the entrepreneur’s strategy for gaining a competitive advantage.

Retailers design their layouts with the goal of maximizing sales revenue.

Manufacturers see layout as an opportunity to increase efficiency and productivity and to lower costs.

A. Layout for Retailers

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Retailers have three basic layout patterns to choose from:

1. The Grid Layout:

A formal arrangement of displays arranged in a rectangular fashion so that aisles are parallel.

Supermarkets and discounts stores use the grid layout because it is well suited to selfservice stores.

This layout uses the available space most efficiently, creates a neat, organized environment, and facilitates shopping by standardizing the location of items.

2. Freeform Layout:

An informal arrangement of displays of various shapes and sizes.

Its primary advantage is a relaxed, friendly shopping atmosphere it creates, which encourages customers to shop for longer, and increases the number of impulse purchases they make.

It is not as efficient as the grid layout, and can cause security problems if not properly planned.

3. Boutique Layout:

An arrangement that divides a store into a series of individual shopping areas, each with its own theme.

B. Layout for Manufacturers

Three basic options exist:

1. Product (line) layout:

An arrangement of workers and equipment according to the sequence of operations performed on a product.

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Automobile assembly plants, paper mills, and oil refineries are examples of product layouts.

2. Process Layout:

An arrangement of workers and equipment according to the general function they perform, without regard to any particular product or customer.

3. FixedPosition Layout:

An arrangement in which materials do not move down a production line but rather, because of their weight, size or bulk are assembled in one spot.

Aircraft assembly parts and shipyards typify this kind of layout.

Build, Buy or Lease

Once an entrepreneur has a good idea of the specific criteria to be met for a building to serve the needs of the business, the issue turns to what she can afford to spend.

The ability to obtain the best possible facilities in relation to available cash may depend largely on whether an entrepreneur decides to build, buy, or lease a building.

Building a new building gives an entrepreneur the opportunity to design exactly what he wants in a brandnew facility; however, not very small business owner can afford to tie up significant amounts of cash in fixed assets.

Buying an existing building gives a business owner the freedom to renovate as needed, but this can be an expensive alternative.

Leasing a location is a common choice because it is economical, but the business owner faces the uncertainty of lease renewals, rising rents, and renovation problems.

CHAPTER 13: GLOBAL ASPECTS OF ENTREPRENEURSHIP

Why Go Global?

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Failure to cultivate global markets can be a lethal mistakes for modern businesses,

whatever their size.

Increasingly, small businesses will be under pressure to expand into international markets

and to consider themselves businesses without borders.

Going global can put tremendous strain on a small company, but entrepreneurs who take

the plunge into global business can reap the following benefits:

1. Offset sales declines in the domestic markets:

Markets in foreign countries may be booming when those in Nigeria are sagging.

In this way, global business acts as a countercyclical balance.

2. Increase sales and profits:

3. Extend their products’ life cycle

Some companies have been able to take products that had reached the maturity stage in

their home country and sell them successfully in foreign markets.

4. Lower manufacturing costs:

In industries characterized by high level of fixed costs, businesses that expand into global

markets can lower their manufacturing costs by spreading those fixed costs over a larger

number of units.

5. Improve competitive position and enhance reputation

6. Raise quality levels:

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Businesses that compete in global markets learn very quickly how to boost their quality

levels to worldclass standards.

7. Become more customer oriented:

Delving into global markets teaches business owners about the unique tastes, customs,

preferences, and habits of customers in many different cultures.

Responding to these differences imbues businesses with a degree of sensitivity toward

their customers, both domestic and foreign.

Strategies For Going Global

Entrepreneurs have eight strategic options to choose from when going global:

1. Creating a World Wide Web

Perhaps the simplest and least expensive way for a small business to begin conducting

business globally is to establish a site on the World Wide Web.

Companies wanting to sell goods on the Web should establish a secure ordering and

payment system for online customers.

2. Trade Intermediaries

Trade intermediaries are domestic agencies that serve as distributors in foreign countries

for domestic companies of all sizes.

These trade intermediaries such as export management companies and export trading

companies serve as a small company’s “export department”.

3. Joint Ventures89

In a domestic joint venture, 2 or more small Nigerian companies form an alliance for the

purpose of exporting their goods and services abroad.

In a foreign joint venture, a domestic business small business forms an alliance with a

company in the target area.

4. Foreign Licensing

Rather than sell their products or services directly to customers overseas, some small

companies enter foreign markets by licensing businesses in other nations to use their

patents, trademarks, copyrights, technology, processes, or products.

In return for licensing these assets, the small company collects royalties from the sales of

its foreign licenses.

5. International Franchising

6. Countertrading and Bartering

Some countries lack a hard currency that is convertible into other currencies, so

companies doing business there must rely on countertrading or bartering.

Countertrade is a transaction in which a business selling goods in a foreign country

agrees to promote investment and trade in that country.

Bartering involves trading goods and services for other goods and services.

7. Exporting

8. Establishing international locations

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Exporting

Building a successful export program takes patience and research. Steps include:

1. Realizing that even the tiniest companies and least experienced entrepreneurs have the

potential to export.

2. Analyze your product or service

3. Analyze your commitment

4. Research markets and pick your target.

5. Develop a distribution strategy

6. Find your customer

7. Find financing

8. Ship your goods

9. Collect your money

Barriers to International Trade

A. Domestic Barriers

1. The attitude that “we are too small to export”.

2. Lack of information on how to get started in global trade.

3. A lack of available financing

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B. International Barriers

1. Tariff Barriers: A tariff is a tax, or duty, that a government imposes on goods and

services imported into that country.

2. Non Tariff Barriers:

i. Quotas: a limit on the amount of product imported into a country.

ii. Embargoes: a total ban on imports of certain products.

iii. Dumping: the practice of selling large quantities of products in foreign countries

below cost in an attempt to gain market share.

C. Political Barriers

Companies doing business in politically risky lands face the very real dangers of:

i. Government takeovers of private property

ii. Attempts at coups to overthrow ruling parties

iii. Kidnapping, bombings, and other violent acts against businesses and their

employees, etc.

D. Business Barriers

Companies doing business internationally quickly learn that business practices and

regulations in foreign lands can be quite different from those in Nigeria.

E. Cultural Barriers

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The culture of a nation includes the beliefs, values, view, and mores that its inhabitants

share

Differences in cultures among nations create another barrier to international trade.

The diversity of languages, business philosophies, practices, and traditions make

international trade more complex than selling to the business down the street.

International Trade Agreements

1. General Agreement on Tariffs and Trade (GATT)

The first global tariff agreement created in 1947.

It was designed to reduce tariffs among member nations and to facilitate trade across the

globe.

2. World Trade Organization (WTO)

Established in 1995 to implement the GATT tariff agreements

The WTO has over 140 members and represents over 97% of all global trade.

The WTO is the governing body that resolves trade disputes among members.

3. The North American Free Trade Agreement (NAFTA)

It created a free trade area among Canada, Mexico, and the United States.

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The agreement created an association that knocked down trade barriers; both tariff and

nontariff, among these partner nations.

CHAPTER 14: LEADING THE GROWING COMPANY

Leadership in the New Economy

To be successful, an entrepreneur must assume a wide range of roles, tasks, an

responsibilities, but none is more important than the role of leader.

Leadership is the process of influencing and inspiring others to work to achieve a

common goal and then giving them the power and freedom to achieve it

Management and leadership are not the same; yet both are essential to a company’s

success.

Leadership without management is unbridled; management without leadership is

uninspired.

In other words, leasers are the architects of small businesses; management are the

builders.

Tips for Becoming a Successful Leader in the New Economy

1. Leaders are both confident and modest

Being a leader is not about making yourself more powerful; it’s about making the people

around you more powerful.

2. Leaders are authentic

No one believes in a leader who fails to “walk the talk”.

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Leadership requires integrity and sincerity. These characteristics are the building blocks

of trust.

3. Leaders are good listeners

Successful leaders know that some of the best ideas come from the people who actually

do a job every day, and these leaders are willing to listen to employees.

4. Leaders are good at giving encouragement, and they are never satisified

Leaders constantly test their own stamina and courage and those of the people in their

organizations by raising the standards of performance.

They praise those who succeed and are supportive when people fail

5. Leaders make unexpected connections

Leaders arrange for interaction among people who otherwise might not get together.

Then they listen for innovative ideas that result from those interactions and act on them.

6. Leaders provide direction

Modern leaders know how to ask probing, revealing questions of others that provide

insight into the best course of action. They realize that they do not have all the answers.

7. Leaders protect their people from danger and expose them to reality

The surest way leaders can protect their organizations from danger is to keep everyone

focused on the vision.

Exposing people to reality means forcing the organization to face up to the need for

change.

8. Leaders create change and stand for values that don’t change95

Although change is essential to an organization’s survival, a leader must protect those

values and principles that are central to the company’s core.

9. Leaders lead by example

Leaders recognize that they are always under the microscope and that workers are always

interpreting leaders’ actions.

That is why leaders must live by the principles that they espouse.

10. Leaders don’t blame; they learn

Leaders know that creativity and innovation carry with them the risk of failure.

Their attitude is: Try, fail, learn, and try again.

11. Leaders look for and network with other leaders

Successful leaders are not Lone Rangers

They look for allies and the opportunity to network with others so they can learn to

become more effective leaders.

12. The job of the leader is to make more leaders

In the past, the assumption was that an organization needed just one strong leader.

Today, the organization with the most leaders usually wins! Your ultimate challenge is

not just to become an effective leader but also to create more leaders in your company.

Hiring the Right Employees

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The decision to hire a new employee is an important one for every business, but its

impact is magnified many times in a small company.

Every “new hire” a business owner makes determines the heights to which the company

can climb – or the depths to which it will plunge.

To avoid making hiring mistakes, entrepreneurs should:

1. Develop meaningful job descriptions and job specifications

2. Plan and conduct an effective interview

3. Check references before hiring any employee.

Building the Right Organizational Culture and Structure

Company culture is the distinctive, unwritten code of conduct that governs the behavior,

attitudes, relationships, and style of an organization.

Culture arises from an entrepreneur’s consistent and relentless pursuit of a set of core

values that everyone in the company can believe in.

Small companies’ flexible structures can be a major competitive weapon.

Entrepreneurs rely on six different management styles to guide their companies as they

grow.

The first three involve running a company without any management assistance and are

best suited for small companies in the early stages of growth; the last three rely on a team

approach to run the company as its growth rate heats up.

1. The Craftsman97

These entrepreneurs run a oneman show.

They do everything themselves because their primary concern is the quality of the

products or services they produce.

Woodworkers, cabinetmakers, glassblower, and other craftsmen rely on this style of

management.

2. The Classic

The classic entrepreneur brings in other people but does not delegate any significant

authority to them, choosing instead to watch over everything himself.

An inherent danger with this style is the entrepreneur’s tendency to “micromanage” every

aspect of the business rather than spend her time focusing on those tasks that are most

important and most productive for the company.

3. The Coordinator

The coordinator style of management gives an entrepreneur the ability to create a fairly

large company with very few employees.

In this type of business, the entrepreneur farms out a large portion of the work to other

companies and then coordinates all of the activities.

Although this style sounds like an easy way to build a business, it can be very

challenging to implement as the business’s success is highly dependent on its suppliers.

4. The EntrepreneurplusEmployee Team

This style gives an entrepreneur the power to grow the business beyond the scope of the

manageronly styles.

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The entrepreneur delegates authority to key employees, but retains the final decision

making authority in the company.

Sometimes employees given authority might make mistakes, but delegation allows a

manager to get the maximum benefit from each employee while freeing himself or

herself up to focus on the most important tasks in the business

5. The Small Partnership

In this style, entrepreneurs choose to share managerial responsibilities with one or more

partners.

The biggest advantage of this style is the ability to share responsibility for the company

with those who have a real stake in the company and are willing to work hard to make it a

success.

The downside is the necessity of giving up total control over the business, and the

potential for personality conflicts and disputes over the company’s direction.

6. The BigTeam Venture

This is the broadest management style which typically emerges over time as a company

grows.

Once a company reaches a certain point in its growth, managers must expand the breadth

of the management team’s experience to handle the increasing level of responsibility that

results from the sheer size of the company.

The Challenge of Motivating Workers

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Motivation is the degree of effort an employee exerts to accomplish a task; it shows up as

excitement about work.

Four important tools of motivation include:

1. Empowerment:

Empowerment is the process of giving workers at every level of the organization the

power, the freedom, and the responsibility to control their own work, to make decisions,

and to take action to meet the company’s objectives.

Empowerment challenges workers to make the most of their creativity, imagination,

knowledge, and skills.

This method of management encourages them to take the initiative to identify and solve

problems on their own and as part of a team.

2. Job design:

Over the years, managers have learned that the job itself, and the way it is designed can

be a source of motivation or demotivation for workers.

Job design techniques for enhancing employee motivation include:

i. Job enlargement: It adds more tasks to a job to broaden its scope. The idea is to make

the job more varied and to allow employees to perform a more complete unit of work.

ii. Job rotation: it involves crosstraining employees so they can move from one job in

the company to others, giving them a greater number and variety of tasks to perform.

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iii. Job enrichment: It involves building motivators into a job by increasing the planning,

decisionmaking, organizing, and controlling functions workers perform. The idea is

to make every employee a manager – at least a manager of his own job.

iv. Flex time: an arrangement under which employees work a number of hours but have

flexibility about when they start and stop work. For instance, one worker might

choose to come in at 7am and leave at 3pm to attend her son’s football game, whereas

another may work from 11am to 7pm.

v. Job sharing: a work arrangement in which two or more people share a single fulltime

job. For instance two university students might share the same 40houraweek job,

one working mornings and the other working afternoons.

vi. Flexplace: a work arrangement in which employees work at a place other than the

traditional office, such as a satellite branch closer to their homes or at home.

Flexplace is an easy job design strategy because of telecommuting, which is an

arrangement under which employees working from their homes use modern

communications equipment to hook up electronically to their workplaces.

3. Reward and Compensation

Money is an important motivator for many workers, but it is not the only one.

The key to using rewards such as recognition and praise to motivate workers involves

tailoring them to the needs and characteristics of the workers.

4. Feedback

Giving employees timely, relevant feedback about their job performances through a

performance appraisal system can be a powerful motivator.

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CHAPTER 9: RISK MANAGEMENT AND ACCEPTANCE OF ENTREPRENEURIAL RESPONSIBILITY

Introduction

Entrepreneurship is a configuration of risks. No matter the dynamism of a business

environment, risk taking is a part of business, as decisions must be made without

complete information and contingencies of life.

A risk situation involves potential loss or failure or potential gain or success. A risk

situation entails two types of cost – 1) cost of potential loss that turns into actual loss and

2) cost of reducing or eliminating the risk and potential loss.

Risks can be categorized into two: Speculative risk and pure risk.

Speculative risk is where there is a probability of loss or gain. Example is stock exchange

market, shares and stocks.

Pure risks are circumstances where losses and injuries occur from certain eventualities

like fire, burglary, motor or industrial accident, natural disasters, etc.

Risk Management

Risk management is concerned with the conservation of a firm’s assets and earning

power against risk of accidental loss.

Risk management techniques can be categorized into three:

1. Risk avoidance, which implies keeping off those activities that have very high potential

loss.

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2. Risk reduction, which involves the reduction of the risk in developing a new product

through careful planning, strategizing and market testing. Taking of appropriate

precautionary measures and procedures like fire and smoke alarms, burglar alarms and

security guards, etc.

3. Risk shifting, which is the shifting or transferring of risks that cannot be avoided or

reduced to insurance companies who then assume the risk. The burdens of loss resulting

from pure risk are passed to insurance companies in exchange for a premium.

An entrepreneur must not be generally averse to taking risk, as investment will be low in

spite of promising returns. Risk should be taken in a systematic way.

Insurance and Insurance Management

Insurance is a fund to which all who face pure risk make periodic financial contributions

called premiums to a common fund out of which compensation is made in the event of a

loss.

Insurance is a contract between two parties – the insurance company (insurer) and the

person(s) contributing (insured).

Insurance contract is a legal relationship; therefore certain conditions must be met to

make it binding and enforceable by the parties. The conditions are stated below:

i. There must be an insurable risk, i.e. something to insure.

ii. Potential accidental loss, e.g. traffic accident

iii. Predeterminable and measurable loss or injury

iv. Not catastrophic in nature, e.g. loss through war

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v. Availability of large number of similar risk to be insured in order to pool risk.

vi. Proven monetary losses to b suffered if the risk materializes

vii. The property must possess value

viii. A premium must be paid.

Insurance management is a part of the risk management functions that concerns itself on

a technically trained and professional level. It is the liaison function between buyers of

insurance for business needs and the seller which is the insurance industry.

The entrepreneur must understand and negotiate an almost limitless number of forms of

insurance that are beneficial to the venture. Some examples are:

1. Fire Insurance

2. Motor Vehicle Insurance

3. Advertisers Liability Insurance: protects a firm against liability arising from libel,

slander, assassination of character, infringement of copyright through advertising.

4. Comprehensive General Liability Insurance: a very broad covering for all liabilities

including contractual liability, product liability, premises and operations, but excludes

automobiles.

5. Accident Insurance

6. Credit Insurance: protection against the insolvency of customers. Does not extend to

retailers.

7. Employers liability Insurance: provides protection for the firm against liability arising

from injury to employees.

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8. Workmen Compensation Insurance: Legislation compelling employers to compensate

employees for accident occurring in places of work.

GOVERNMENTAL INTERVENTION IN BUSINESS OWNERSHIP

Indigenization

Indigenization simply means policy initiatives designed to accelerate the greater

participation of Nigerians in the ownership and management of business enterprises in

Nigeria.

It was discovered that most expatriates are not really committed to the economic

development of Nigeria, but concerned with making as much profit as possible, and then

taking these profits back to their countries.

In view of these, it was felt that the authoritative heights in the private sector should

cease being controlled by foreigners and that indigenes should be afforded the

opportunity of developing their economy.

Reasons for Indigenization

1. Indigenization brings about a greater sense of patriotism on the part of the indigenes in

the pursuance of their private economic objectives.

2. The need to encourage entrepreneurial spirit on the part of indigenes, improved attitude

towards risk, uncertainties and investment which will definitely stimulate

entrepreneurship development.

3. For the purpose of preservation of national identity and economic independence, a

country would have to indigenize its economy.105

4. The need to encourage and stimulate the use of local materials and further exploitation of

local resources while the expatriates are much more interested in their home economy as

they bring virtually all resources from their economy, even labor.

5. Indigenization is supposed to lead to development of the capital market, as company

shares continue to change hands and the capital market will record remarkable pressure

of transactions which will provide good experience for the future growth.

Types of Indigenization

1. Indigenization of ownership: This aims at giving the indigenes of a country ownership

stake in the economic establishment of the country.

2. Indigenization of control: This enables the indigenes of a country to exercise control

through the board of Directors on the policies of the enterprises.

3. Indigenization of manpower: This is otherwise known as Africanization. It was the first

form of indigenization policy applied in the civil services.

4. Indigenization of Technology: Involves two phases

a. Acquisition of technology from highly industrialized countries so as to enable developing

countries to skip many stages of development.

b. Adaptive technology: This is the process of selection and adaptation in order to match

imported techniques to African conditions.

The Degree of Indigenization

The first attempt to ensure that Nigerians control and run the business enterprises of their

country was made with the promulgation of the Nigerian Enterprises Promotion Decree

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1972. The economic activities were structured into two schedules based on the varying

degrees of complexities of the enterprises.

The 1972 decree was confronted with a lot of difficulties, especially by foreigners who

attempted to circumvent the promulgation. This led to another decree in 1977.

The Nigerian Enterprises Promotion Decree of 1977 increased the number of businesses

that were 100% owned by Nigerians adding departmental stores and supermarkets with

an annual turnover of less than N2 million.

In 1997, as a way of having foreign investment and to pursue a policy of economic

liberalization, the Nigerian Enterprises Promotion Decree was abolished.

There is a feeling, however, that Nigerians have already come of age in entrepreneurship

and can now compete effectively with expatriates in any sector of the Nigerian economy.

Privatization and Commercialization of Public Enterprises

Public enterprises refer to those owned by the government, whether federal, state or local.

Commercialization of public enterprises is a method whereby government retains the

ownership and control, but subvention will cease and the institution will be required and

motivated to profit orientation

Privatization means the adoption of an economic methodology which enhances the role

of the private sector in the economy to include public sector enterprises, the nature of

which requires that they be managed on commercial basis.

Privatization means a radical shift in ownership of manufacturing enterprises in the

country by the public sector to the private sector.

The objectives of privatization are:

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1. Integrate our economy into the mainstream of the world economic order.

2. Send a clear message to the local and international community that a new transparent

Nigeria is now open for business.

3. Change the orientation of all public enterprises engaged in economic activities towards a

new horizon of performance, improvement, viability and overall efficiency.

4. Raise funds for financing sociallyoriented programs such as poverty eradication, health,

education and infrastructure.

5. Improve economic efficiency and foster economic equity.

6. Reduce government interference in the economy

7. Expose public enterprise to market discipline

8. Generate new investment

9. Provide opportunity for competition

10. Improve technical and operational efficiency of public enterprises.

In order to concretize the privatization program and realize the set objectives,

Government set up a National Council on Privatization (NCP). The NCP exercises the

function of privatization through the Bureau for Public Enterprise (BPE).

PublicPrivate Participation (PPP)

Following the introduction of the Structural Adjustment Program in 1986, government

has been downplaying its leading role as a major investor in the manufacturing sector.

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The objective of rapidly transforming the country into a major industrialized economy

now hinges on the private sector playing the leading role in investment management and

development.

Government is now keen to provide an enabling environment for the private sector to

play a pivotal role by adopting the following strategies:

1. Deregulation: Government intends to achieve increased private sector participation by

repealing all enactments that created public sector monopoly in certain sectors of the

economy.

2. Privatization/Commercialization

3. Public/Private Interface: a situation whereby the government is in constant and

continuous contact and consultations with the private sector on issues of concern to

industry through quarterly dialogue.

4. Identification of Strategic Industrial Sub sectors: Government produced the Industrial

Master plan (IMP). Under the IMP, certain strategic subsectors were identified as the

main focus that could enhance the industrial development of Nigeria if vigorously

pursued. These subsectors are as follows: Engineering, Chemical/Petrochemical, Agro

Allied, Construction and Information and Communications Technologies.

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