Establishing a Business
Topic Three

Previous - Organization and Management

Establishing a Business

A business is an organization or entity engaged in commercial, industrial or professional activities. A business transacts its activities through the production of a good, offering of a service or retailing of already manufactured products.

The Entrepreneur

An entrepreneur is one who undertakes the risk of investment to create and market a good or service for financial gains. He/she is very perceptive and takes advantage of business opportunities that will generate high profits.  Entrepreneurs can be sole traders, partners in a business or a group of shareholders. 

The Role of the Entrepreneur

Entrepreneurship is important for the following reasons:

Conceptualization – the entrepreneur is the person who comes up with the business idea.  The idea could have stemmed from his observation of a need for a product which he believes could satisfy customers.   

Development of managerial capabilities - the most important benefit of entrepreneurship is that it helps in identifying and developing managerial capabilities of entrepreneurs.

Creation of organisation – When entrepreneurs embarks on setting up their businesses, they will in turn be creating organizations which are important for the economic development of the country. 

Improving standards of living – when organizations are created by entrepreneurs, they are giving citizens an opportunity to be employed and earn income.  This allows these individuals to afford their requirements of life.  This results in the increasing of the standards of individuals.

Economic development – when organizations and businesses are created by entrepreneurs, they create employment which translates into higher standards of living and more employment with less unemployment.  This will in turn lead to economic growth and development. 

Risks - the entrepreneur takes the risks of the business

Create Jobs - by establishing their business, entrepreneurs will need workers to assist them in producing the products and services to be offered to customers in the market. So they create jobs.

Community Development – The presence of entrepreneurs and their businesses can assist communities by donating and contributing to social projects and programs.

Characteristics of an Entrepreneur

Entrepreneurship is characterized by the following features:

  • Vision – As founder and head of a business establishment, vision is needed for success.
  • Innovativeness - entrepreneurship involves a continuous search for new ideas. Therefore, entrepreneurs are critical thinkers and innovators.
  • Economic dynamism - Entrepreneur is a very dynamic person who is also energetic who is highly motivated in going after his business ideas.
  • Profit driver and potential - profit is the ultimate motive of the entrepreneur.   
  • Risk bearing - the foundation of entrepreneurship is the willingness to take on risk arising out of the creation and implementation of new ideas.

Setting in up a Business

There are standard steps involved in starting up of a business. These steps are as follows:

Conceptualization - All business ventures begin with the conceptualization of an idea. This is where the vision of the product or service is envisioned.  Entrepreneurs will identify the need for a particular goods or service by observation. 

Market Research - Before starting a business venture, the prospective business owner must undertake a market research to determine the required needs in order to establish the business.  The purpose of market research is to examine the market associated with a particular good or service to determine how the market will receive it. 

Identification of resources - After the market research has been conducted and there is scope for the product, the entrepreneur must now identify the necessary resources to operate business

Creation of a Business Plan - A business plan helps the business determine whether or not the business will be a success.  The business plan will outline vision, mission, objectives and the strategies that will be employed to achieve the intended goals and objectives. 

Operation of the Business - Efficiency of the business is very important in order to be successful.  This will mean that the business should have policies and procedures to ensure that the business is operated according to best practice and in accordance with the highest possible standards and according to national laws. 

Reasons for a Business Plan

The following are some reasons business will need a business plan.

To map the future - A business plan is not just required to secure funding at the start-up phase, but is a vital aid to help in the effective management of the business.

To support growth and secure funding - Most businesses face investment decisions during the course of their lifetime. Many times, these opportunities cannot be funded by free cash flows alone and so the business must seek external funding. In order to secure funding, financial institutions and other such lenders will require access to the company’s recent Income financial statements plus a recent business plan.

Elements of Business Plan

The following are some the components of a business plan:

Executive Summary - The first section should be a concise overview of your business plan. It should be short, and must be well written. Your goal is to draw readers in so they want to learn more about your company.  The executive summary for a business plan should include your business name and location, products and/or services offered, mission and vision statements and the specific purpose of the plan.

Company Description - This high-level view of your business should explain who you are, how you operate and what your goals are. The company description should feature:

  • The legal structure of your business (corporation, sole proprietorship, etc.)
  • A brief history, the nature of your business, and the needs or demands you plan to supply and,
  • An overview of your products/services, customers, and suppliers

Products and Services - Clearly products and services to be offered should be stated.

Market analysis - Show your industry knowledge, and present conclusions based on thorough market research.

Audit of the Environment - Business will need to conduct an audit of the environment in which it operates.  This audit will be on the internal and external aspects of the business.  One of the most popular auditing tools is that of a SWOT analysis showing the business’s strengths, weaknesses, opportunities and threats.

Strategy and Implementation - Summarize the strategies that his business will be using to explore its strengths and opportunities and to avoid threats and weaknesses.

Organization and Management Team - Outline your company's organizational structure. Identify the owners, management team and board of directors.

Financial plan and projections - Some of the important financial statements that should be part of your plan should be stated here.

Factors affecting Industry Location

The following are some factors that influence business location:

The proximity to market or customers – it is important that there be easy access to customers by the business.  Many companies choose to operate in areas that are highly populated such as in the cities or in shopping malls.

The proximity to raw materials – it is far more cost effective and beneficial for businesses to be  located as close to its source of raw materials.  This will indeed result in lower transportation and total cost.

Availability to suitable labour supply – it can also be stated as a fact that businesses that are located close to a readily abundant supply of labour will tend to be much more successful than businesses that are located far away from quality human resources. 

Adequate Infrastructure – businesses will tend to benefit more when they are located in areas where is an adequate system of infrastructure such as shopping malls, transportation network, ports, airports, water, roads and communication facilities. 

Collateral

When members of the public borrow money from banks, the banks often requests security in the event that borrowers cannot repay the loan.  This security is called collateral.  Some banks may choose to offer loans without collateral but will charge a higher rate of interest for the exposure.  When collateral is offered the rate of interest on such loans are lower because such loans are secured. 

Most financial institutions look for three sources of repayment. First is the borrower’s ability to repay.  In terms of lending money to businesses, the ability to repay such loans is through cash flow. Cash flow in this case means operating profits or the conversion and sale of current assets (usually inventory) – operating cycle cash flow.   In the event that the business does not generate sufficient cash flows, financial institutions usually look at a second source of repayment – which stems from the value of the collateral. The third source of repayment is usually in the form of personal or business guarantees for repayment.

Next - Business and the Law