NATURE OF SMALL-SCLAE ENTREPRENEURSHIP
LAGOS CITY POLYTECHNIC E-LEARNING
SCHOOL OF MANAGEMENT AND BUSINESS STUDIES
DEPARTMENT OF BUSINESS ADMINISTRATION
PROGRAMME: Higher National Diploma in Business Administration and Management
COURSE TITLE: Small Business Management
COURSE CODE: BAM 418
CREDIT HOURS: 3 HOURS A WEEK
LECTURER: OBADIPE A.J.
PROGRAMME GOAL: To provide the student with the basic knowledge on the various tools used in the management of small-scale businesses.
OBJECTIVES:
At the end of this course, the students should be able to:
• Understand the nature of small-scale enterprises.
• Understand the legal framework for small-scale enterprises in Nigeria.
• Understand the role of government in small-scale enterprises in Nigeria.
• Understand business plan for a small-scale business enterprise.
• Understand marketing management in a small business enterprise.
• Understand the general concept of production management.
• Know human capital needs for an enterprise.
• Understand the financing of small business enterprise.
• Understand financial management in a small business enterprise.
• Understand credit control in small business enterprises.
COURSE OUTLINES
Chapter 1: NATURE OF SMALL-SCALE ENTREPRENEURSHIP
1.1 Introduction
1.2 Identifying a Small Business
1.3 Importance of Small Business
1.4 Types of Small Business
1.5 Problems associated with small Scale Businesses
1.6 Advantages of Self-Employment
1.7 Disadvantages of Self-Employment
1.8 Ten Causes of Business Failure You Must Watch out For
1.9 Assignments
1.10 Quizzes
Chapter 2: LEGAL FRAMEWORK FOR SMALL SCALE BUSINESS
2.1 Introduction
2.2 The Sole Proprietorship
2.3 Partnerships
2.4 Incorporated Companies(Corporations)
2.5 Constitution and Regulation of Companies.
2.6 Regulations to watch out for
2.7 There are a range of legal structures associated with different forms of business.
2.8 Environmental factors affecting a business.
2.9 Business Related Laws
2.10 Roles of Entrepreneurship in Development of the economy
2.11 Assignments
2.12 Quizzes
Chapter 3: ROLE OF GOVERNMENTS IN SMALL SCALE ENTERPRISES IN NIGERIA
3.1 Various Support Agencies and their functions in Small and Medium Scale Industrial Development
3.2 Industrial Association
3.3 Other Support Agencies
3.4 Entrepreneurship Supportive Agencies in Nigeria
3.5 Assignments
3.6 Quizzes
Chapter 4: BUSINESS PLAN FOR SMALL SCALE BUSINESS ENTERPRISES
4.1 Business Plan
4.2 Nature of the Business Plan
4.3 Purpose of the Business Plan
4.4 Components of Business Plan
4.5 Assignments
4.6 Quizzes
Chapter 5: MARKETING MANAGEMENT IN A SMALL SCALE ENTERPRISE
5.1 The Marketing Concept
5.2 Marketing Research Process
5.3 Target Market
5.4 Channels of Distribution
5.5 Appropriate Pricing Strategies
5.6 Assignments
5.7 Quizzes
Chapter 6: GENERAL CONCEPT OF PRODUCTION
MANAGEMENT
6.1 Production Management Overview and Key Concepts
6.2 Production Quality Control
6.3 Labor Force Management
6.4 Expense Control
6.5 Inventory Control
6.6 Production Planning
6.7 Production Evaluation
6.8 Sources of Raw Materials
6.9 Assignments
6.10 Quizzes
Chapter 7: HUMAN CAPITAL NEEDS FOR ENTERPRISES
7.1 Human Capital needs in an enterprise.
7.2 How to motivate and compensate employees
7.3 Assignments
7.4 Quizzes
Chapter 8: FINANCING OF SMALL-SCALE ENTERPRISES
8.1 Definition of Short Term Business Financing
8.2 Types of Short Term Business Financing
8.3 Definition of Medium Term Sources
8.4 Definition of Long Term Business Financing
8.5 Preference Stock
8.6 Factors to Be Considered When Setting a Factory
8.7 Assignments
8.8 Quizzes
Chapter 9: CREDIT CONTROL IN SMALL BUSINESS
9.1 What is Credit Control?
9.2 Steps in extending credit to customers
9.3 Sources of Information on Credit
9.4 Consumer Credits
9.5 Credit Cards
9.6 Reasons for Credit to Small Business Enterprises in Nigeria
9.7 Cost of Credit
9.8 Assignments
9.9 Quizzes
Review Questions
CHAPTER ONE
NATURE OF SMALL-SCALE ENTREPRENEURSHIP
1.1 Introduction
Small businesses are normally privately owned corporations, partnerships, or sole proprietorships. The legal definition of “small” varies by country and by industry, ranging from fewer than 15 employees under the Australian Fair Work Act 2009, 50 employees in the European Union and fewer than 500 employees to qualify for many U.S. Small Business Administration Programme. Small businesses can also be classified according to other methods such as sales, assets, or net profits.
In the case of Nigeria, hardly do you see a clear-cut definition that distinguishes between small and medium scale enterprises. However, the Central Bank of Nigeria in its monetary policies circular No. 22 of 1988 view small scale industry as those enterprises which has annual turnover not exceeding 500,000 naira. (CBN; 1988) Similarly in 1990 the Federal Government of Nigeria defined small scale enterprises for the purpose of commercial bank loans as those enterprises whose annual turnover does not exceed 500,000 thousand naira and for merchant bank loan those enterprises with capital investment not exceeding 2 million naira (excluding the cost of land) or a minimum of 5 million naira.
In a more general and comprehensive term Ogechukwu (2005) chronicles a general criterion for defining small and medium scale enterprises in different countries. These includes number of employees, annual turnover, local operations, sales volumes, financial strength, managers and owners’ autonomy, relatively small markets compared to their industries and capital usually supplied by individual or shareholders etc. There are so many small scale business units in Nigeria which qualifies within this context, most of them are in the commercial sector.
In the case of Nigeria, small and medium scale enterprises have performed at very abysmal level. This low performance has further exacerbated poverty, hunger unemployment and low standard of living of people in a country whose economics is ailing. The current problems of hunger, poverty and unemployment have undermined the capacity of the economy and small and medium scale enterprises are seen as mechanism for intervention to addressing these long term problem of the economy. While the importance of small and medium scale enterprises has not been in doubt, unfortunately classifying businesses into large and medium scale is subjective and premised on different value judgement. Such classification has followed different criteria such as employment, sales or investment for defining small and medium scale enterprises.
Small businesses are privately owned corporations, partnerships, or sole proprietorships that have fewer employees and/or less annual revenue than a regular-sized business or corporation.
In the Nigerian situation, the definition of small business varies between the various industries and also between different organizations. The Manufacturers Association of Nigeria may see small business from a perception that is different from a chamber of commerce. The Central Bank of Nigeria may also define a small business from a different outlook altogether. Because of the problems of harmonizing all the definitions of small business, we shall present a simple and functional definition of small business.
We shall define a small business as one that is independently owned and operated and is not dominant in its field of operation.
It is important for us to reflect on this simple definition of small business. The definition seeks to focus on the ownership, operations and their scope of influence in
the operating environment. Basically therefore, small businesses are not dominant in
their field of operation.
Small businesses in many countries include service or retail operations such as convenience stores, small grocery stores, bakeries or delicatessens, hairdressers or tradespeople (e.g., carpenters, electricians), restaurants, guest houses, photographers, very small-scale manufacturing, and Internet-related businesses such as web design and computer programming. Some professionals operate as small businesses, such as lawyers, accountants, dentists and medical doctors (although these professionals can also work for large organizations or companies). Small businesses vary a great deal in terms of size, revenues and regulatory authorization, both within a country and from country to country. Some small businesses, such as a home accounting business, may only require a business license. On the other hand, other small businesses, such as day cares, retirement homes and restaurants serving liquor are more heavily regulated, and may require inspection and certification from various government authorities.
1.2 Identifying a Small Business
We need to have certain criteria which distinguishes the small business from the bigger businesses. Some of the criteria are as follows:
1. Initial Capital outlay (start-up capital)
Initial capital outlay or start-up capital ordinarily refers to the financial resources that are
needed to start a business. If the initial capital outlay needed to start a business is small
then that may lead us to conclude that the business is a small one.
For example, with as low as N10,000 (ten thousand naira only) the following businesses
can be setup:
- a newspaper vending business
- a recharge card business
- a pure water distribution business
- a street hawking business
Although any business that requires a small initial layout to start can be called a small business, there is no specific amount of capital that acts as a dividing line between small and big businesses. For example, a transporter who owns a luxury bus costing N25, 000,000 (twenty-five million naira only) may not be said to be in big business because with one bus, he cannot be said to be dominant in an industry where such operators like G.U.O. own fleets of luxury buses.
2. Number of employees
A second criteria that can be used to distinguished between a small business and a big one is the number of employees that the business has. For example, a business that has 5 (five) employees is obviously a small one. But another business that has about 10,000 (ten thousand) employees cannot be said to be a small business. In the past the dividing line between a small business and a big business was 50 (fifty) employees. If a business had less than 50 employees, it was classified as a small business. But if a business had employees of 50 and above, it was then classified as a big business. That dividing line of 50 is no longer applicable or acceptable.
3. Ownership Structure
Another criteria which can be used to distinguish between a small business and a big one is the ownership structure. A business owned by an individual obviously is a small one. So also is a partnership operated by two lawyers. But if you look at the private limited liability company with many shareholders, you will quickly realize that it is likely to lead to a big business. Therefore, ownership structure is very important in distinguishing between a small business from a big one.
4. Types of Technology Employed.
Another visible criterion used to distinguish a small business from a big business is the type of technology employed. Because of the small size and relatively low capital base, the small business employs relatively simple technology in operations. This is because the small businesses due to their low capital base cannot afford to acquire complex technology that comes expensive.
Consider for example a small cottage palm oil mill located in a rural area in Nigeria. The oil mill will obviously consist of a small drum used as a boiler. It will also have a manually operated screw press that extracts the oil from the oil palm. With this type of mill, production will be slow and tedious. However, if you compare this rural mill with the palm oil mill of Ada Palm in Imo State, you can spot the differences. The Ada Palm oil mill is automated and employs modern technology in extracting palm oil.
1.3 Importance of Small Business
l They enhance capacity building as they serve as entrepreneurial training avenue.
l They create more employment opportunities per unit of investment because of their labour intensive operations.
l They achieve a much more relative high value added operations because they are propelled by basic economic activities that depend mostly on locally sourced raw materials.
l They provide feeder industry services as they serve as major suppliers of intermediate goods and components to large-scale industries as well as major agents for the distribution of final products of such industries.
l They provide opportunities for the development of local skills and technology acquisition through adaptation.
l Contribution to the economy in terms of output of goods and services.
l Provide a vehicle for reducing income disparities; develop a pool of skilled and semi-skilled workers as a basis for the future industrial expansion.
l Improve forward and backward linkages between economically, socially and geographically diverse sectors of the economy.
l Provide opportunities for developing and adapting appropriate technological approaches and so on.
1.4 Types of Small Business
By business types we mean the various functional groupings in the economy. This
grouping is based on the activities of the business concerned. The type of businesses are trading and commerce enterprises, service enterprises and small manufacturing enterprises.
1. Trading and Commerce Enterprises
Obviously trading is one of the commonest business activities in Nigeria. A trader is one who buys goods from A and sells the same goods to B at a much higher price. The difference between the selling price and the purchase price is the profit of the trader.
Perhaps when you look around you, you will notice a lot of small businesses selling such items as:
- sachet water
- bread and biscuits
- recharge cards
These trading and commerce enterprises possibly constitute about over 80% of the total number of small business.
2. Service Enterprises
Service enterprises are not engaged in buying and selling. Rather, they are engaged in providing services to people and organizations.
Examples of service enterprises are:
- barber shop
- hair dressing salons
- shoe repair shops
- a dentist shop
- a dance theatre
- a photographer shop.
3. Small Manufacturing Enterprises
Small manufacturing enterprises are another major group of businesses in the
Nigerian economy. They engage in basic manufacturing activities that do not involve
complex processes or technology. Also they may not involve huge capital outlays.
The examples include:
- soap making enterprises
- sachet water making enterprises
- exercise book making enterprises
- bread making enterprises
The following businesses could also be run on small scale:
• Catering
• Child Care
• Cleaning Service
• Convenience stores, other small shops (such as a bakery)
• Hairdressers
• Tradesmen
• Lawyers
• Accountants
• Restaurants
• Guest houses
• Photographers
1.5 Problems associated with small Scale Businesses
A small-scale business is a business that is privately owned and operated, with a small number of employees and relatively low volume of sales. In addition to number of employees, other methods used to classify small companies include annual sales (turnover), value of assets and net profit (balance sheet), alone or in a mixed definition.
Small-scale businesses are in an enviable position because they have ability to be agile and fluid in their procedures and practices, compared to larger businesses that have many layers of bureaucracy. However, small-scale businesses face many challenges due to their size, and owners and need to address these problems and come up with unique solutions for their small business to survive and prosper.
1. Difficult to Attract Customers
Small-scale businesses typically have a more difficult time attracting customers than larger companies. They have smaller marketing and advertising budgets. Also, some potential customers are reluctant to do business with small businesses, especially new businesses without a loyal following, since they believe that these businesses may not be around for a long time or that they will not be able to provide the appropriate level of service. A challenge for small-scale businesses is to make sure that they provide excellent customer service and instill confidence in their customers.
2. Hard to Attract Employees
Small-scale businesses also face challenges when hiring employees. It is difficult for many small businesses to compete with the salaries and benefits that larger corporation provide. Many potential employees are also hesitant to work for a small-scale business because they feel that there is not the opportunity for advancement. If you can't provide full benefit for full time- employees, you can opt on hiring part-timers or contractual.
3. Difficult to Grow
Due to their size, many small-scale businesses find it difficult to grow. They have limited budgets to use for expansion and marketing campaigns. They also have limited resources to work on growing the company. Small business owners must find creative ways to use their limited resources to grow the business while running the day-to-day operations of the company.
4. Must Compete Against Bigger Companies
Possibly one of the biggest problems facing small-scale businesses is that they have to compete with much larger companies. Larger companies have bigger budgets and can usually provide products and services at much lower costs. A small business must be able to either match the prices charged by larger businesses or provide extra benefits to the customer such as better customer service.
5. Difficult to Finance Expansion
Small-scale businesses face challenges obtaining money for expansions. Larger corporation have many more resources available to them to obtain capital to expand, and banks and lenders are much more willing to lend money to a large company with tangible assets that can be used for collateral. Larger companies also have the option of selling shares of stock to the public to raise funds. However, there are already several financing programs offered by the government, NGOs, and banks that cater especially to SMES.
1.6 Advantages of Self-Employment
1. You are your own boss. You can have some flexibility in when you work. No one is going to fire you. You have job security. This will provide you an opportunity to put down roots and provide a sense of stability for your family. You can belong to a community.
2. You will have the chance to put your ideas into the business. Hopefully your business is in a field or area that you enjoy. Your business can be adaptable to what you see that needs to be done. This flexibility makes small businesses able to change virtually overnight to meet a perceived need.
3. You work hard and enjoy the rewards of your hard work. You'll never work harder for someone else as you will for yourself. I have always said, â??When you are your own boss, you know when you are loafing or when something more needs to be done! You will participate in every aspect of running the business. But if you want to schedule a day away from your work, you can do that.
4. You get to feel the enormous sense of pride and personal satisfaction when your business is successful, when your business has a good reputation, and when the business grows.
5. You will have the opportunity to lead others. When you need additional employees, you get to choose who you employ and then lead their growth and development.
6. You will get to work closely with your customers. You can develop strong meaningful relationships with your customers or clients.
7. You will develop a breadth of talents. In the course of running your business you will learn and acquire significant skills of marketing, accounting, negotiating and selling which are sought after skills in the workforce.
8. A successful business can provide financial reward. Hopefully, your business will prosper and reward you for your sacrifices. You may have a chance to make a lot more money that if you worked for someone. You will also have a chance to build real retirement value, if you can build your business and then sell it when you retire.
1.7 Disadvantages of Self-Employment
1. Risk of failure. Most new businesses fail in their first years. When you are self-employed, it is your own money or money that you have borrowed at risk. Having your own business, increases the problems associated with failure.
2. Your decisions can be wrong. There will be no one to bail you out from your mistakes. And as a general rule, you cannot move forward without some mistakes. The big question is, can you learn from your errors and be adaptable?
3. Owning your own business can require a sacrifice of your personal life, you may need to work long, long hours, you may need to work on weekends, and you may not have a vacation for several years.
4. Your income stream may fluctuate throughout the year. You may have very little to live on during the early times.
5. Your health insurance and pension costs are not included automatically. When comparing self-employment income to a job, you need to remember the employee benefits that are associated with employment such as health insurance or perhaps a pension contribution to a 401(k) are not automatically included. You will have to meet these needs from your income.
6. Strict record keeping and attention to detail are very important. You will have the ultimate responsibility for such things as the required licenses, sales tax returns, employment and unemployment taxes returns, payroll information, and income tax returns. The details that are recorded on these documents will need to come from your record keeping system.
7. Some tasks may be unpleasant. You may find yourself doing things that you do not enjoy, but no one else is there to do them. This may include firing employees, or saying â “no” to a family member looking for work.
8. You may have a hard time hiring qualified employees.
9. There is always a risk of being sued. Creditors and customers may possess the ability to seek your personal assets if you default on your business obligations. If a customer or vendor believes you acted in error, he may file a lawsuit against you. To protect your assets, you can seek liability insurance for your business, but some new business owners may find it difficult to afford insurance premiums.
1.8 Ten Causes of Business Failure You Must Watch out For
If you visit a construction site or a chemical plant, you might see some warning signs. These signs are called red flags and they alert you of impending danger. Just as there are red flags in life, so are they also in business. In business, red flags are there to save us but most of the time we ignore it.
“Failure is an opportunity to begin again more intelligently” – Henry Ford
Businesses fail for various reasons but if entrepreneurs watch out for these signs, there is a great opportunity to succeed where others have failed. Below is ten Causes of Business Failures You Must Watch Out For
1. High Debt Ratio
The first cause of business failures you must watch out for is high debt ratio, if your business is being owed much, may be by giving too much credit to customers, then your business is at risk. Also, if your business is heavily indebted, then it's at folding up. An antidote to this is for you as an entrepreneur to always carry out an acid test ratio and keep a keen eye on the debt to equity ratio.
“There is one paradoxical characteristic every entrepreneur must possess to succeed. An entrepreneur must be able to persuade his debtors to pay their debts promptly and at the same, must tactically delay payments to his creditors” – Ajaero Tony Martins
2. High Level of Mismanagement
The second cause of business failures is high level of mismanagement. If your key staff lacks professionalism, then your business is in trouble. Since your staff are in charge of running the day to day affairs of your business, their professionalism should not be compromised for anything.
“There will be times when you will have to be abrasive, even brutal to members of your staff. Don't worry that your people will say bad things about you because of this. They already have. But in general, try to be pleasant and accommodating. Try to please the greatest number who work for you that you can; antagonize the fewest. Blow smoke”. – The Mafia Manager
3 Unexpected Resignation of Staff
The third to watch out for is the unexpected resignation of staff from sensitive offices. This can really pose a threat to your business so you must be prepared for it. In business, poaching is really a factor to deal with. Big companies are always poaching good staffs away from other companies by enticing them with improved salaries and incentives.
“The competition to hire the best will increase in the years ahead. Companies that give extra flexibility to their employees will have the edge in this area”. – Bill Gates.
4. Inadequate Inventory
Another factor that leads to business failures is inadequate stock or inventory. I don't need to explain much on this. If you have inadequate stock either for production or for your customers, you are still bound to fail because you are tying down business capital.
“Inventories can be managed but people must be led” – Henry Ross Perot.
5. Selling Products below cost price
The fifth cause of business failures is the sales of goods and services below cost price. Sometimes in business, cash crunch, fierce competition or economic factor make businesses sell their goods below cost price and this can ruin your business.
6. Dwindling working Capital
Dwindling working capital also cause of business failures and you must watch out for. Depreciating capital may be as a result of unnecessary expenditure, too much inventory and weak cash flow management on the part of the entrepreneur.
7 Consistent Negative Cash flow
The seventh factor that could lead to business failure is consistent negative cash flow. Cash flow is to business what blood is to human. A solution to negative cash flow is to hire a professional accountant to keep a keen eye on the cash flow.
“The most important word in the world of money is cash flow. The second most important word is leverage”. – Rich Dad.
8. Declining Profit
Declining Profit, if not handled properly can cause business failure. If there is a down turn in profit margins due to competition of deflation, your business could be negatively affected. A solution to declining profit is to increase your sales volume so you can make more profit on volume or better still; diversify.
9. Loss of Market Share
Loss of market share is the ninth cause of business failure. If you observe you are losing your market share due to either competition, new technology, innovation or trend, then this is a sign that your business is on the verge of been liquidated.
“Your greatest and most powerful business survival strategy is going to be the speed at which you handle the speed of change. That speed of change is trend”. –Ajaero Tony Martins.
The only prevention to loss of market share is to keep your ears to the ground for any new industrial trend, technology or innovation. You must also keep an eye on your competitors and be quick to act and adapt to any positive or negative industrial change or once again; you can diversify.
10. Inability to Secure Optional Capital
Lastly, your ability to secure funds from financial institutions could lead to business failure. I really don't know what to say this one but it is often said that “where there is a will, there is a way”. If financial institutions refuse to assist you financially, you have to turn to other sources of funds.
In conclusion, the overall cause of business failure is lack of control on the part of the entrepreneur. Never leave total control of your business to your employees even if they are professionals. Remember, professionals are only there to advise you on what to do. The final decision lies in your hand as the entrepreneur and business owner.
“Before making an important decision, get as much as you can of the best information available and review it carefully, analyze it and draw up worse case scenarios. Add up the plus or minus factors, discuss it with your team and do what your guts tell you to do”
1.9 Assignments
i) Define Small Business Enterprise and Explain how you can identify a small business in Nigeria.
ii) Identify the various types of Small Businesses in Nigeria.
iii) What are the problems associated with small businesses in Nigeria?
1.10 Quizzes
i) Explain your Understanding of Small Business Enterprises.
ii) List 10 Businesses in Nigeria that you can start with an Initial Capital of N10,000
CHAPTER 2
LEGAL FRAMEWORK FOR SMALL SCALE BUSINESS
2.1 Introduction
When organizing a new business, one of the most important decisions to be made is choosing the structure of a business. This decision will have long-term implications, so consult with an accountant and attorney to help you select the form of ownership that is right for you. Your choice will be based on:
• Your vision regarding the size and nature of your business.
• The level of control you wish to have.
• The level of “structure” you are willing to deal with.
• The business's vulnerability to lawsuits.
• Tax implications of the different ownership structures.
• Expected profit (or loss) of the business.
• Whether or not you need to re-invest earnings into the business.
• Your need for access to cash out of the business for yourself.
• The risks of your personal assets from business liabilities
• Are their partners and/or investors that will be part of the business?
There are various forms in which a business can be operated. Understanding the legal form of the business is important as it enables us to understand what a business can do legally and what it cannot do. The various forms in which a business can be operated include:
2.2 The Sole Proprietorship
In the Nigerian setting, the simplest form of business organization is the sole proprietorship. Under the sole proprietorship, a man or woman undertakes to establish a business and run the business as the sole proprietor. The sole proprietor is responsible for the strategic direction of the business. He reaps all the profits and also bears all the losses if the company fails to make a profit.
Sole Proprietors are unincorporated businesses. They are also called independent contractors, consultants, or freelancers. There are no forms you need to fill out to start this type of business.
The vast majority of small businesses start as sole proprietorships but this is very dangerous. These firms are owned by one person, usually the individual who has day-to-day responsibility for running the business. Sole proprietors own all the assets of the business and the profits generated by it. They also assume “complete personal” responsibility for all of its liabilities or debts. In the eyes of the law, you are one in the same with the business.
2.2.1 Advantages of a Sole Proprietorship
l Easiest and least expensive form of ownership to organize.
l Sole proprietors are in complete control, within the law, to make all decisions.
l Sole proprietors receive all income generated by the business to keep or reinvest.
l Profits from the business flow-through directly to the owner's personal tax return.
l The business is easy to dissolve, if desired.
l Low start-up capital seems to be one of the major advantages of a proprietorship.
l Lack of operational restrictions is another major advantage of a proprietorship. The proprietor has unlimited freedom to take any business decision. He / she does not need to report to any board of directors or any shareholder. The proprietor can close the business at will and does not need to consult anybody in doing so.
l Secrecy is another major advantage of the proprietorship. In a proprietorship, most strategies are kept secret and only known to the proprietor and may be members of the immediate family. For example, a proprietor engaged in the business of baking bread may keep secret the recipe so that competitors will not gain access to it.
2.2.2 Disadvantages of a Sole Proprietorship
l Have almost hard time attracting high-caliber employees, or those that are motivated by the opportunity to own a part of the business.
l Employees benefits such as owner's medical insurance premiums are not directly deductible from business income (partially deductible as an adjustment to income).
l A major disadvantages of the proprietorship is unlimited liability. The proprietor is responsible for all debts incurred while doing the business. Creditors who have a claim to the debts can sue the proprietor and force him / her into liquidation. In some cases, the personal property of the proprietor may be seized and sold on the orders of the court of law. This unlimited liability is a major drawback for proprietorship as their business and personal assets are 100% at risk.
l Another major disadvantage of a proprietorship is lack of finance. Because of its ownership structure, the proprietorship is usually unable to attract bank financing to inject in the business. Lack of finance can also make the proprietorship to shy away from otherwise profitable business opportunities.
l Again a major disadvantage of a proprietorship is that of limited size. Because the business is owned by one person, there is a limit to the size to which the business can grow.
2.2.3 Business Names
A lot of men and women go about their businesses in their own personal names. In their shops or business locations, they may not have sign boards indicating where they are. But the proper thing to do while engaged in small business is to register the name of the business. In line with the Registration of Business Names Act of 1963, any person wishing to do business in any name other than the person’s name is required to register the name as a business name. Examples of business name are:
• Leo Okoro trading as Leotraco Industries
• Peter Umoh trading as Umoh agencies.
Usually when a business is registered as a business name, a certificate of registration is issued by the registrar of business names. The certificate of registration is different from the certificate of incorporation.
2.3 Partnerships
Another form of small business organization is partnership. Partnership is defined as the relation which subsists between persons carrying on a business in common with a view of profit. Apparently two or more persons can combine to form a partnership. A partner has limited liability for what is done on behalf of the firm by his other partners unless the articles of partnership otherwise provide. Another important thing to note is that no formality is required to bring a partnership into existence. Thus creation of partnership can be either orally, by conduct or in writing.
Every partnership should ideally state:
- How profits or losses will be shared
- How assets will be divided when the partnership is dissolved
- The duties of every partner
2.3.1 Types of Partners
Active partner: Here the partners actively participate in the business of the partnership. If there are three partners, the three of them participate actively in running the partnership.
Dormant partner: In this situation, the partner although his name does not feature in the actual business of the partnership, shares in the profits of the business.
Nominal partner: Here the person (partner) lends his / her name to a business without having any real interest in it.
2.3.2 Creation of Partnership
A partnership is usually created by a contract entered into by parties (e.g. Mr. Abu and Mr. Nwoke). The creation of partnership is governed by the ordinary laws of contract. Ordinarily no formalities are required to create a partnership since a partnership may be created orally. However, a standard partnership should be created by a written agreement or a deed which will contain the articles of partnership. It is also important to note that each partner must have the capacity to contract. A contract entered into by a minor cannot be enforced by a court of law. When a partnership has been created, any alteration that will be made to the Articles of partnership must have the consent of all the partners. Usually we expect that the articles of partnership will provide for the period of the duration of the partnership.
Otherwise the partnership will be a continuous one. In the Nigerian context, the
commonest partnerships are found in the professions such as law, medicine and
accounting. Examples of partnership are
- Akintola Williams & Co – (Chartered accountants)
- Odu & Esha (Legal practitioners)
- Epega, Olu and Shittu (Estate Valuers)
2.3.3 The Business Name
A partnership business is an unincorporated body of two or more people who have entered into partnership with a view to profit. In such a situation, the firm trades under the name of a firm. A proprietor of a business is entitled to trade in his/ her name.
Also the partners can trade in the name of the partners. In Nigeria, it is not compulsory to register individuals or firms. However, the Registration of Business Names Act makes registration compulsory for a firm or individual having a place of business in Nigeria and carrying on business under a business name which does not consist of the true surnames of all partners (or his true surname).
Examples of business names are:
- Leonard Okeke Trading as Leotraco Nigeria Company.
- Obum Dauda Trading as Obumso Agencies.
2.3.4 The Advantages of the Partnership
1. It makes room for increased capital. You will recall that a proprietor operates a business with his / her own funds, which may be limited. This obviously is a major disadvantage. But a partnership may be created by two or more persons who invariably pool their resources together. Obviously, a partnership is expected to have more financial resources than a proprietorship because of the larger number of people involved.
2. The second advantage of a partnership is improved managerial decision making. When two or more people come together, they pool their managerial resources together in the partnership. As they say, two heads are better than one. For example, a medical partnership consisting of a Surgeon and a Gynecologist will obviously do much better than a medical practice owned by a single doctor. The key advantage of a partnership is the pooling of managerial resources.
3. Another advantage of a partnership is that there are chances of expansion of the business of the partnership. This is due to the availability of more resources and managerial skills.
4. The partners can also be able to attract bank financial assistance. All these can lead to increased expansion and growth of the partnership business.
2.3.5 The Disadvantages of the Partnership
1. The first major disadvantages of a partnership is unlimited liability. The partners are liable for the obligations of the partnership. In most cases, the liability knows no bounds and is therefore unlimited. This is a major setback because the partners may have to lose their personal assets and properties just to meet the obligations of the partnership.
2. The second disadvantage of a partnership is that of succession/ continuity. If one partner in a partnership dies or becomes insane (mad), the partnership is terminated. The remaining partners may not be able to buy out the dead or insane partner’s shares.
3. The third disadvantage of a partnership is the size limitation imposed on it by its nature. We have seen that the partnership is larger than a proprietorship but it is still not the biggest form of business organization since it is smaller in size than a limited liability company. There is a limit to which a partnership can grow.
2.4 Incorporated Companies(Corporations)
A corporation, chartered by the state in which it is headquartered, is considered by law to be a unique “entity”, separate and apart from those who own it. A corporation can be taxed; it can be sued; it can enter into contractual agreements. The owners of a corporation are its shareholders. The shareholders elect a board of directors to oversee the major policies and decisions. The corporation has a life of its own and does not dissolve when ownership changes.
Note: Corporations are incorporated businesses, it’s considered a separate entity, and this often provides a measure of legal and financial protection for the shareholders. The shareholders of corporations have limited liability protection, and corporations have full discretion over the amount of profits they can distribute ore retain. Corporations are presumed to be for-profit entities, and as such they can have an unlimited number of years with losses. Corporations must have at least one shareholder.
In Nigeria today, many businesses are run as incorporated companies. The most important feature of an incorporated company is the principle of its corporate existence. Following this principle, an incorporated company is regarded as a separate legal entity, distinct from, though composed of, the individuals who make up the corporate body. The rule about the concept of legal entity of an incorporated company was laid down in Salomon Vs Salomon which stated that “the company is a different person from the subscribers. Although the company has no physical existence nevertheless, it is regarded in law as a separate person like any natural person. Thus a company can sue or be sued in its own name.
The history of Company law in Nigeria dates back to 1912 when the first companies’ ordinance was introduced into Southern Nigeria. This was later amended in 1917 by the companies (Amendment and Extension) ordinance which extended its provision to the rest of Nigeria.
The companies’ ordinance of 1917 was replaced by a new company’s ordinance of 1922 later known as the Companies Act, 1922. The Companies Act was replaced by the Companies decree 1968. The companies decree of 1968 was replaced by the Companies and Allied Matters Decree 1990 (CAMD) which is the current source of Nigerian Company Law.
2.4.1 Nature of an Incorporated Company
In the literature, company is used to describe different types of associations entered into by persons for the purpose of carrying on business and to make profit.
However, the most important feature of an incorporated company is the principle of its corporate existence. An incorporated company is regarded as a separate legal entity, distinct from, though composed of the individuals who make up the corporate body. The implication is that the incorporated company in law is a separate person. It can sue and be sued in its own name. It can own property and do business in its name.
Another major feature of many incorporated companies under the Companies and Allied Matters Decree 1990 (CAMD) is the principle of limited liability. It will be important for us to understand the principle of limited liability as used in company law. In a limited liability company, a shareholder says with 100,000 shares of N1 each cannot be called upon in the event of the company being wound up, to contribute to the assets of the company beyond the amount unpaid-up on his/her shares. So from the onset, a shareholder contributing to the formation of a company knows exactly the highest amount of money he/she is willing to invest in a company. This principle of limited liability protects the personal assets of the shareholders in the event of company’s failure.
2.4.2 Advantages of a Corporation
l Shareholders have limited liability for the corporation's debts or judgements against the corporations. Generally, shareholders can only be held accountable for their investment in stock of the company. (Note however, that officers can be held personally liable for their actions, such as the failure to withhold and pay employment taxes).
l Ownership transfers: it is not difficult for a shareholder to sell shares in a corporation, though this is more difficult when the entity is privately-held.
l Corporations can raise additional funds through the sale of stock.
• A corporation may deduct the cost of benefits it provides to officers and employees.
l Perpetual life: There is no limit to the life of a corporation, since ownership can pass through many generations of investors.
l Corporations are considered to be more credible. Lenders, suppliers and even customers are more comfortable doing business with a corporation rather than a small business.
2.4.3 Disadvantages of a Corporation
l The process of incorporation requires more time and money than other forms of organization. The fees and legal costs required to form a corporation may be substantial, especially if the business is just being started and the corporation is low on financial resources.
l Corporations are monitored by federal, state and some local agencies, and as a result may have more paperwork to comply with regulations. Paperwork for a corporation is intense. Annual reports and corporate tax returns are required for the government. Other paperwork required are accounting records, shareholder meeting minutes, board of director minutes and licenses.
l Incorporating may result in higher overall taxes. Dividends paid to shareholders are not deductible from business income, thus this income can be taxed twice.
l Another disadvantage of corporations is that, as Adam Smith pointed out in the Wealth of Nations, when ownership is separated from, the latter will inevitably begin to neglect the interests of the former, creating dysfunction within the company.
2.5 Constitution and Regulation of Companies.
Technically, the memorandum of association and articles of association together form the constitution of a company.
2.5.1 The Memorandum of Association
The memorandum of Association is the company’s charter and it defines the limits to the company’s powers. The memorandum of Association must contain the following information.
l The Nature of the Company. The name of the company must be stated fully and must end with the word limited. The name of a company must not be similar to the name of another existing company.
l The Objects of the Company. This is known as the objects clause. The objects clause defines the powers of the company i.e. what it can do. For example, a company’s objects clause may state that it is engaged in the business of agriculture. The objects clause serves two purposes. Firstly, it informs a prospective shareholder of a company on the purposes of which their money will be put. Secondly outside persons wishing to do business with the company are informed well in advance of the limits of the business – what it can do and what it cannot do.
l The Capital Clause. Every company must disclose its capital. The amount of capital which the company is authorized to issue is called the Nominal or
Authorized capital. For example, 1,000,000 ordinary shares of N1 each may
constitute the Nominal capital of a company. The capital clause will also show the various classes of shares e.g. ordinary shares, preference shares etc.
l Registered Office Clause. Every company must have a registered office where it does business. Usually it is at this office that legal writs may be served upon the company.
2.5.2 The Articles of Association
The Articles of Association are the regulations governing the internal management of a company. Items to be found in the articles of association are such matters as transfer of shares, meetings, voting rights etc.
In the Incorporation of a company, all the necessary documents including list of directors are lodged with the Corporate Affairs Commission. If the application is successful, then a Certificate of Incorporation is issued. At this point in time, we must point out that in the Nigerian context, there are two main types of companies – private and public companies.
The articles of association must include provisions regarding the following:
1) Company name
The company name of a private limited liability company must include the words “limited liability company” or the abbreviation “limited / Ltd”.
2) The company’s place of business
3) The company's field of activity: The term "field of activity" refers to the fields in which the company carries on its business activity. Any activity, which may be pursued legally in the form of a limited liability company, can constitute the company’s field of activity. A company can have several fields of activity, but they must all be registered. Although legislation is silent about how precise the definition of the field of activity needs to be, inexact and unnecessarily extensive definitions should be avoided. The definition of the field of activity has legal significance when assessing the competence of the company’s organs to take care of company matters. Moreover, the field of activity is of importance when evaluating the use of company assets. The field of activity may also consist of a general field of activity. Definitions of the field of activity, which are too narrow, can cause extra costs and inconvenience, as the expansion of the company’s activity requires for the articles of association to be amended correspondingly and for the changes to be registered with the Trade Register.
In addition, the following provisions may be included in the articles of association:
4) Share capital
5) Nominal value and number of shares
If the nominal value is defined in the articles of association, all shares must have the same nominal value.
6) Number of members of the board of directors and auditors as well as the possible deputy members, or the minimum and maximum number thereof. The number of the members of the board of directors and auditors, as well as the possible deputy members and their term of office may be stated in the articles of association. The number of the members may also be stated as a minimum or maximum amount.
7) Notice of a general meeting of shareholders
The articles of association may stipulate the manner in which and when the notice to the annual general meeting of shareholders must be given.
8) The agenda of the annual general meeting: The articles of association may state the agenda of the annual general meeting. Matters, which according to mandatory law provisions must be considered at the annual general meeting, shall also be included on the agenda.
9) Accounting period of the company: According to the Auditing Act, the accounting period of the company may be a calendar year or any other period of twelve (12) months. The accounting period may be shorter or longer than this period when the company's activity is being set up or closed down or when the time for the financial statements is being changed.
10) Other provisions
In addition to mandatory provisions, the shareholders may also quite freely include other provisions in the articles of association. The other provisions may not, however, contradict the mandatory principles provided by the Law. These voluntary provisions may concern the following matters:
•appointment of a Managing Director
•the manner of calling the general meeting;
•nomination of the chairman of the general meeting or election of a director of the board;
•minimum attendance at the general meeting;
•expansion of the scope of the tasks of the general meeting to cover e.g. decisions on transfers of or mortgage on fixed assets, or on floating charges;
•determination of the majority required for resolutions adopted by the general meeting above the ordinary;
•withdrawal of the decision power of the chairman in the event of equal votes so that the outcome may be determined e.g. by the drawing of lots;
•an arbitration clause, which binds the company, the shareholders, the board, the supervisory board, a member of the board and a member of the supervisory board, the managing director and the auditor with the same effect as an arbitration agreement.
2.6 Regulations to watch out for
It may be inconceivable to you that your home-based consulting service or hand knit sweater business would have to comply with any of the numerous local, state and federal regulations, but in all likelihood it will. Avoid the temptation to ignore regulatory details. Doing so may avert some red tape in the short term, but could be an obstacle as your business grows. Taking the time to research the applicable regulations is as important as knowing your market.
Below is a checklist of the most common requirements that affects small businesses, but it is by no means exhaustive. Bear in mind that regulations vary by industry. If you're in the food service business, for example, you will have to deal with the health department. If you use chemical solvents, you will have environmental compliance to meet. Carefully investigate the regulations that affect your industry. Being out of compliance could leave you unprotected legally, lead to expensive penalties, and jeopardize your business.
Business Licenses
There are many types of licenses. You need one to operate legally almost everywhere. If the business is located within an incorporated city limits, a license must be obtained from the city; if outside the city limits, then from the country.
Certificate of Occupancy - C of O
If you are planning on occupying a new or used building for a new business, you may have to apply for a Certificate of Occupancy from the relevant department.
Fictitious Business Name
Businesses that use a name other than the owner's must register the fictitious name with the country as required by the Trade Name Registration Act. This does not apply to corporations doing business under their corporation name or to those practicing any profession under a partnership name.
Protecting Your Ideas
It's not easy to think about ideas as property, but for some businesses it's vital. Most of us have had an idea for a new product or service only to dismiss, postpone, or neglect it. Sometimes we later find that others had the same idea, but took it to market before we did. By that time, it is too late for us to take advantage of the idea.
Ideas are relatively easy to come by, but inventions are more difficult. It takes knowledge, time, money, and effort to refine an idea into a workable invention, even on paper. Turning an invention into an innovation a new product accepted by the market place takes a lot of efforts and a little luck. There are substantial barriers in the path of those who pursue innovation. Overcoming them requires careful planning and plenty of input from others.
Hundreds of thousands of inventors and innovators file each year for protection under patent, trademark and copyright laws. However, it can be hard to decide which of the three vehicles is most appropriate for the protection of a particular invention. Although a single product or service may require a patent, a trademark, and a copyright, each category protects a distinct aspect of a creative work or expression.
Patents, copyrights and trademarks, as well as know-how or trade secrets, are often collectively referred to as intellectual property. Many firms have such property without even being aware of it or of the need to take measures to protect it, People who may not be interested in protecting their own rights must still take precautions to avoid infringing on the rights of others. This calls for more than the avoidance of copying. Some copying is unavoidable; but one can easily infringe on the rights of others without deliberately imitating specific features of goods or services.
Trade Secrets – A trade secret is any piece of info resource owned by a business that isn't known to the general public, including formulas, business plans, designs and procedures. State and federal laws protect trade secrets when other areas of intellectual property law don’t offer adequate protection. An example is the formula for Coca-Cola, which remains a secret despite being over 100 years old. This formula cannot be patented because it is considered a recipe, but it can be protected under trade secret laws.
Trade secret law does not provide absolute protection. While the law prohibits competitors from stealing business secrets, they may be figured out by using reverse engineering. Secrets discovered via reverse engineering and then made public lose their protection.
2.7 There are a range of legal structures associated with different forms of business.
1. Sole trader businesses are the easiest to set up because there is no complex paperwork. The business and the owner are the same person in law. The sole trader does not have limited liability which means they are responsible for all the debts of the business. The sole traders have to produce an annual accounting return debts of the business. The sole trader has to produce an annual accounting return for the Inland Revenue.
2. Partnerships are set up by a Deed of Partnership which is a document made out by the partners and witnessed by a solicitor. This deed sets out the legal relationship between partners e.g. how profits will be shared out, responsibilities of partners etc. In traditional partnerships the partners had unlimited liability i.e. they were jointly responsible for the debts of their partnership. In 2001 this has been altered so that some large partnerships e.g. accountancy firms can have limited liability.
3. Companies are separate in law from the individual owners (shareholders) of the business. This means that should the business run up debts the shareholders are only liable for these debts up to the sum of they have contributed to the company. A number of Companies Acts have been passed setting out ways in which companies should conduct their affairs.
To register as a company various documents must be registered at the Corporate Affairs Commission setting out internal relationships within the company, and external relationship with third parties. A public company can only start trading and sell shares on the Stock Exchange once it has carried out all the required paperwork.
2.8 Environmental factors affecting a business.
Environmental Factors
Technology
Demographics Government
Socio-Culture Economics
Environmental factors can have an impact on project management even in environments that are relatively stable. From access to capital, to access to technology, to access to people, projects will succeed or fail based on the project leader ability to make maximum use of available resources. In addition, unanticipated changes in the environment can cause even the most well-managed and smoothly proceeding project to lose momentum.
Access to Capital
There are few projects that don't require the access to capital – money to purchase the tools, equipment and raw materials necessary to move the project forward and ensure a successful completion. Access to capital can be an environmental factor that can impact project management. Initially, if the project is not well scoped so that all of the capital requirements are identified and bids attained, unpleasant surprises could occur at a later stage. During a project changes may occur in the environment in terms of access to – or pricing of-the materials needed to complete the project.
Access to People
All projects require people, but people are not always readily available to contribute to or complete projects. Sometimes the issue is related to capacity, as there are simply not enough people to get a job done. Other times, the issue is related to ability, which can be not enough of the right people to complete a project. Environmental factors can affect access to people to complete projects as well. Certain types of skilled workers or specialists may be in short supply, for instance. Or they may not be available in the geographic area where the project is being managed.
Access to Technology
In many cases technology can streamline the process of project management. However, access to technology may be limited or the necessary technology may be expensive or not compatible with existing technology or equipment. In addition, even technology is available, training may become an issue and can create delays and added expense for projects.
Unanticipated Environmental Changes
Regardless of how effective a project manager is or how carefully a project is planned, unanticipated environmental changes (disasters or economic shifts) can affect the project at any stage of its implementation. To the extent that they can, project leaders need to be alert to the potential for unexpected environmental impacts and have contingency plans in place to ensure the least possible negative impact to the project's success.
The different environmental factors that affect the business can be broadly categorized as internal and external factors.
• INTERNAL FACTORS: Internal factors are those factors which exists within the premises of an organization and directly affect the different operations carried out in a business. These internal factors are:
A. VALUE SYSTEM: It implies the culture and norms of the business. In other words, it means the regulatory framework of a business and every member of the organization has to act within the limits of this framework.
B. MISSIONS AND OBJECTIVES: Different priorities, policies and philosophies of a business are guided by the mission and objectives of a business.
C. FINANCIAL FACTORS: Financial factors such as: financial policies, financial position and capital structure also affects a business performance and it strategies.
D. INTERNAL RELATIONSHIP: Factors like the amount of support the top management enjoys from its shareholders, employees and the board of directors also affects the smooth functioning of a business.
• The EXTERNAL FACTORS include all those factors which exist outside the firm and are often regarded as uncontrollable. These external forces can further be categorized as MICRO ENVIRONMENT and MACRO ENVIRONMENT.
MICRO ENVIRONEMNT includes the following factors:
1. SUPPLIERS: Suppliers are those people who are responsible for supplying necessary inputs to the organization and ensure the smooth flow of production.
2. COMPETITORS: Competitors can be called the close rivals and in order to survive the competition one has to keep a close watch in the market and formulate its policies and strategies as such to face the competition.
3. MARKETING INTERMEDIARIES: Marketing intermediaries aid the company in promoting, selling and distribution of the goods and services to its final users. Therefore, marketing intermediaries are vital link between the business and the consumers.
MACRO ENVIRONMENT includes the following factors:
1. ECONOMIC FACTORS: Economic factors include economic conditions and economic policies that together constitute the economic environment. These include growth rate, inflation, and restrictive trade practice, etc. which have a considerable impact on the business.)
2. SOCIAL FACTORS: Social factors includes the society as a whole alongside its preferences and priorities like the buying and consumption pattern, beliefs of people their purchasing power, educational background etc.
3. POLITICAL FACTORS: The political factors are related to the management of public affairs and their impact on the business. It is important to have a political stability to maintain stability in the trade.
4. TECHNOLOGICAL FACTORS: Latest technologies help in improving the marketability of the product and it makes it more consumers friendly. Therefore, it is important for a business to keep a pace with the changing technologies in order to survive in the long run.
What Are Political and Legal Factors That Affect a Business?
How will it affect the company's marketing strategy?
There are many hundreds of political and legal factors which will directly or indirectly affect businesses. In fact, most laws will have some relevance if you look deep enough.
2.9 Business Related Laws
There are however some main business related laws which are primarily there to serve the business world. These include:
Equal pay act (1970) This means that all employees who are doing the same job should be paid the same wage.
Sex discrimination act (1975) – Employers must not discriminate between their employees because of their sex.
Sales of goods act (1979) – A consumer can sue a business if it sells them a product that is of poor quality, or is not as described and does not fit the purpose for which it is being sold. This is a law which affects businesses but supports the customer.
Health and Safety at work act (1974) – This law ensures that employers provide healthy and safe working conditions and employees must act in a safe and responsible way.
Race relations act (1976) – Similar to the sex discrimination law; this law means that employers must not discriminate due to the race of their employers or interviewees.
Contract of Employment – This is an agreement between the employer and the employee. It includes conditions such as rates of pay, hours of work, holidays, pension contributions and the amount of notice that must be given if the worker wants to leave or the employer wants to make the worker redundant. Employees taken on for a month or more must be given a written statement of the conditions within two months of the date of the job starts.
2.10 Roles of Entrepreneurship in Development of the economy
The role of entrepreneurship and an entrepreneurial culture in economic and social development has often been underestimated. Over the years, it has become increasingly apparent that entrepreneurship does indeed contribute to economic development.
Transforming ideas into economic opportunities is the crux of entrepreneurship. History shows that economic progress has been significantly advanced by pragmatic people who are entrepreneurial and innovative, able to exploit opportunity and willing to take risks.
Entrepreneurs produces solutions that fly in the face of established knowledge, and they always challenge the status quo. They are risk-takers who pursue opportunities that others may fail to recognize or may even view as problems or threats. Whatever the definition of entrepreneurship, it is closely associated with change, creativity, knowledge, innovation and flexibility-factors that are increasingly important sources of competitiveness is an increasingly globalized world economy. Thus, fostering entrepreneurship means promoting the competitiveness of business.
For many developing countries, private sector development has been a powerful engine of economic growth and wealth creation, and crucial for improving the quality, number and variety of employment opportunities for the poor.
Economically, entrepreneurship invigorates markets. The formation of new business leads to job creation and has a multiplying effect on the economy. Socially, entrepreneurship empowers citizens, generates innovation and changes mindsets. These changes have the potentials to integrate developing countries into the global economy.
Note: The entrepreneur who is a business leader looks for ideas and puts them into effect in fostering economic growth and development. Entrepreneurship is one of the most important input in the economic development of a country. The entrepreneur acts as a trigger head to give spark to economic activities by his entrepreneurial decisions. He plays a pivotal role not only in the development of industrial sector of a country but also in the development of farm and service sector. The major role played by an entrepreneur in the economic development of an economy is discussed in a systematic and orderly manner as follows:
(1) Promotes Capital Formation:
Entrepreneurs promote capital formation by mobilizing the idle savings of public. They employ their own as well as borrowed resources for setting up their enterprises. Such types of entrepreneurial activities lead to value addition and creation of wealth, which is very essential for the industrial and economic development of the country.
(2) Creates Large-Scale Employment Opportunities
Entrepreneurs provides immediate large-scale employment to the unemployed which is a chronic problem of underdeveloped nations. With the setting up of more and more units by entrepreneurs, both on small and large-scale numerous job opportunities are created for others. As time passes, these enterprises grow, providing direct and indirect employment opportunities to many more. In this way, entrepreneurs play an effective role in reducing the problem of unemployment in the country which in turn clears the paths towards economic development of the nation.
(3) Promotes Balanced Regional Development:
Entrepreneurs helps to remove regional disparities through setting up of industries in less developed and backward areas. The growth of industries and business in these areas lead to a large number of public benefits like road transport, health, education, entertainment etc. Setting up of more industries leads to more development of backward regions and thereby promotes balanced regional development.
(4) Reduces Concentration of Economic Power
Economic power is the natural outcome of industrial and business activity. Industrial development normally leads to concentration of economic power in the hands of a few individuals which results in the growth of monopolies. In order to redress this problem a large number of entrepreneurs need to be developed, which will help reduce concentration of economic power amongst the population.
(5) Wealth Creation and Distribution:
It stimulates equitable redistribution of wealth and income in the interest of the country to more people and geographic areas, thus giving benefit to larger sections of the society. Entrepreneurial activities also generate more activities and give a multiplier effect in the economy.
(6) Increasing Gross National Product and Per Capital Income:
Entrepreneurs are always on the lookout for opportunities. They explore and exploit opportunities, encourage effective resource mobilization of capital and skill, bring in new products and services and develops markets for growth of the economy. In this way, they help increasing gross national product as well as per capital income of the people in a country. Increase in gross national product and per capital income of the people in a country, is a sign of economic growth.
(7) Improvement in the Standard of Living:
Increase in the standard of living of the people is a characteristic feature of economic development of the country. Entrepreneurs play a key role in increasing the standard of living of the people by adopting latest innovations in the introduction of wide variety of goods and services in large scale that are at a lower cost. This enables the people to avail better quality goods at lower prices which results in the improvement of their standard of living.
(8) Promotes Country's Export Trade:
Entrepreneurs help in promoting a country's export-trade, which is an important ingredient of economic development. They produce goods and services in large scale for the purpose of earning huge amount of foreign exchange from export in order to combat the import dues requirement. Hence import substitution and export promotion ensure economic independence and development.
(9) Induces Backward and Forward Linkages:
Entrepreneurs like to work in an environment of change and try to maximize profits by innovation. When an enterprise is established in accordance with the changing technology, it induces backward and forward linkages which stimulate the process of economic development in the country.
(10) Facilities Overall Development
Entrepreneurs act as catalytic agent for change which results in chain reaction. Once an enterprise is established, the process of industrialization is set in motion. This unit will generate demand for various types of units required by it and there will be so many other units which require the output of this unit. This leads to overall development of an area due to increase in demand and setting up of more and more units. In this way, the entrepreneurs multiply their entrepreneurial activities, thus creating an environment of enthusiasm and conveying an impetus for overall development of the area.
In essence:
• Entrepreneurs are innovators
• They observe an opportunity
• They create new goods and services
• They improve existing products
• Entrepreneurs provide choice
• They add goods and services to the marketplace.
• They offer variety
• They design different approaches to familiar problems
• Entrepreneurs provide jobs
• They hire workers for their businesses.
• They consume resources, thus providing job in the industries that supply those resources.
• Entrepreneurs help the economy to grow.
• They create social benefits
• They contribute to a more equitable distribution of income
• They utilize and mobilizes resources for greater productivity
• They help in dispersing industrial activities to the countryside
• They generate foreign exchange
• They nurture entrepreneurial talents
• They establish industrial linkages
• They encourage healthy competition
• They promote the use of modern technology
• They encourage more researches/studies and inventions of machines and equipment.
2.10 Assignments
i) Explain the differences between a Partnership and a Sole-proprietorship. What are the advantages and disadvantages of each of type?
ii) What are the different environmental factors that affect a business?
iii) Explain the role of entrepreneurship in the development of the Economy
2.11 Quizzes
i) List the various information contained in the Articles of Partnership.
ii) Highlight the checklists of the most common requirements that affect small businesses.
iii) What are the various internal factors that affect a business?
CHAPTER THREE
ROLE OF GOVERNMENTS IN SMALL SCALE ENTERPRISES IN NIGERIA
3.1 Various Support Agencies and their functions in Small and Medium Scale Industrial Development
What are the functions of support agencies in small and medium scale industrial development in Nigeria?
Some supportive agencies are established by the government at all levels to facilitates the promotion of entrepreneurship in Nigeria. These agencies are established to cope with the dynamics of the economy at a particular time.
Their basic functions can be discussed under these roles.
• Participatory
• Regulatory
• Facilitating
1) Participatory Agencies
The agencies in this category aid in providing goods and services which are best produced by the government. They provide goods and services that are highly subsidized or goods produced below the average cost. The services provided by these agencies are essentially to encourage entrepreneurship. Example are Federal Road Maintenance agency(FERMA), Public Corporation such as PHCN, NEMA, FAAN etc.
2) Regulatory Agencies
These are agencies established for regulating business. They are involved in inspection of facilities, laboratory test of products, approval of facilities and product etc. They include the following:
• Standards Organization of Nigeria (SON)
• National Agency for Food and Drugs Administration and Control (NAFDAC)
• National Drug Law Enforcement Agency (NDLEA)
• Federal Environmental Protection Agency (FEPA)
• State Environmental Protection Agency (SEPA)
3) Facilitating Agencies
These are agencies set up to facilitate the establishment and successful existence of small scale industries. They are saddled with the responsibility of ensuring conducive environment for SMEs. Their function may include specialized fund for SMEs or otherwise. In this category we have such institutions as:
• The Industrial Training Fund (ITF)
• Federal Institution of Industrial Research Oshodi (FIIRO)
• Bank of Industry (BOI)
• The Industrial Development Centre (IDC)
• Universities and Polytechnics
• Nigerian Export Promotion Council (NEPC)
• The National Directorate of Employment (NDE)
• National Poverty Eradication Programme (NAPEP)
• Small and Medium Enterprises Development Agency of Nigeria (SMEDAN)
3.2 Industrial Association
Government has also established some industrial association to foster industrial harmony. These associations were created by law or decree at different times.
They include:
• The Manufacturers Association of Nigeria (MAN)
• The National Association of Small Scale Industrialists (NASSI)
• The Nigerian Employers Consultative Association (NECA)
• The Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture (NACCIMA).
3.3 Other Support Agencies
Federal Government especially, is in collaboration with some international bodies to promote small and medium scale industries, just as they do in other sectors, their functions cover funding, research and development etc., these bodies include:
• The World Bank
• United Nations Children's Fund (UNICEF)
• United Nations Industrial Organization (UNIDO)
• African Development Bank (ADB)
3.4 Entrepreneurship Supportive Agencies in Nigeria
3.4.1 Manufacturers Association of Nigeria (MAN)
MAN was formed as a company limited by guarantee to perform important roles on behalf of its members. It was established as a national industrial association in 1971. The activities of MAN are focused on sectoral group interactions.
The list of sectoral groups includes:
• Food, Beverages and Tobacco
• Chemicals and Pharmaceutical
• Domestic and industrial plastic, rubber and foam
• Basic metal, iron and steel, and fabricated metal products
• Pulp, paper and paper products, printing and publishing.
• Electrical and electronics
• Textile, weaving, apparel, carpet, leather and leather footwear.
• Wood and wood products including furniture
• Non-metallic mineral products
• Motor vehicle and miscellaneous Assembly
• MAN export group.
Functions of Manufacturer Association of Nigeria (MAN)
This industrial association performs the following functions among many;
l It encourages the patronage of Nigerian made products by Nigerians and foreigners.
l It encourages high standard of quality for members' products through the collation and the provision of advice.
l It provides for manufacturers avenue for formulating and influencing general policy, in regard to industrial matters.
3.4.2 National Association of Small and Medium Enterprises (NASME)
It is a private sector organization in Nigeria. Its membership is drawn from small and medium scale enterprises. It is devoted to networking capacity building, policy advocacy and promotion of the performance of its member’s firms and operators. NASME works to improve the welfare of its members and make input in industrial policy.
Analysis and publications from NASME on business environment, competitive enlightenment and policy making are useful to Nigerian entrepreneurs. Members firms of NASME face the daily challenge of unsupported macroeconomic environment.
3.4.3 Small and Medium Enterprises Development Agency of Nigeria (SMEDAN)
This body was established to promote the development of micro, small and medium Enterprises (MSME). Its mission is to facilitate the access of micro, small and medium entrepreneurs/investors to all resources required for their development. Its vision is to establish a structured and efficient micro, small and medium enterprises sector that will enhance sustainable development of Nigeria.
If SMEDAN functions optimally it will be one of the most veritable channels to combat poverty.
Like any other agency of its kind, harsh economic condition couple with weak government institutions does not help its performance.
3.4.4 National Poverty Eradication Programme (NAPEP).
This programme aimed at poverty era lot of intervention schemes in Nigeria's current poverty eradication programme. One is YouWin, Npower it is targeted at youths. Youwin is a youth development programme, established by the regime of Goodluck Jonathan to empower Nigeria Youths. The programme is a Public - Private initiative with the aim of financing outstanding business plan for aspiring entrepreneur Nigerian Youth. It is primarily aimed at the economic empowerment of Nigerian youths. While N-Power was designed by the present administration - President Muhammad Buhari to drastically reduce Youth unemployment. The focus is to provide our young graduates with the skills, tools and livelihood to enable them advance from unemployment to employment, entrepreneurship and innovation. Its impact is still below expectation.
3.4.5 Small and Medium Industries Equity Investment Scheme (SMIEIS)
The Scheme requires all banks in Nigeria to set aside ten (10) percent of their Profit After Tax (PAT) for equity investment and promotion of small and medium enterprises. The 10% of the profit After Tax (PAT) to be set aside annually shall be invested in small and medium enterprises as the banking industry's contribution to the federal governments' efforts towards stimulating economic growth, developing local technology and generating employment. Activities covered by the scheme include all legal business activity with the exception of trading/merchandising and financial services. Beneficiaries are expected to comply with guidelines of the schemes and ensure prudent utilization of fund. Like its other counterparts its performance is still below expectation.
3.4.6 Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture (NACCIMA)
NACCIMA was founded in 1960 as a voluntary association of manufacturers, merchants, mines, farmers, financiers, industrialist, trade groups who network together for the principal
objectives of promoting, protecting and improving business environment for micro and macro benefits. The body performs many functions:
l To provide a network of national and international business contacts and opportunities.
l To promote, protect and develop all matters affecting commerce, industry, mines and agriculture and other form of private economic activities by all lawful means.
• To promote, support and oppose legislative and other measures affecting commerce, industry, mines and agriculture in Nigeria.
l They contribute to the overall economic stability of the community.
l They encourage an orderly expansion and development of all segments of community.
l They contribute to the social, political and economic development of Nigeria.
3.4.7 Nigerian Association of Small Scale Industrialists (NASSI)
This association was established in 1978 to cater for the needs of the Small Scale business industrialist through the provision of Socio-political economic support for the members.
It has numerous functions as follows
l The body organizes workshops, conferences, exhibitions, trade-fairs, study tours and also provide advisory services to the members.
l It was to provide information on sources of raw materials, market situations, plants and equipments and the required manufacturing standard.
l The body grants micro credit facilities to members and sometimes stands as sureties for bonafide small and medium enterprise (SME) in their relationship with development finance institutions.
l The association links up its members with various opportunities and development assistance both at home and abroad.
l The body serves as the mouthpiece of members in advocacy capacity against unfavorable public policies.
3.4.8 National Economic Reconstruction Fund (NERFUND)
As part of the economic reconstruction under the Structural Adjustment Programme, the NERFUND was established by Decree No. 25 of 1988. The primary aim of this fund is to provide soft, medium and long-term finance to small and medium scale enterprises that are 100 per cent owned by Nigerians.
As a financial intermediary, NERFUND sources its funds through the Federal Government, the Central Bank of Nigeria and Foreign Government, The Central Bank of Nigeria and Foreign Government and International Development Finance Institutions like the African Development Bank.
The fund so mobilized both from local and foreign sources are made available to small
and medium scale industries provided they are 100% Nigerian owned.
3.4.9 National Directorate of Employment (NDE) Charter
In conformity with its mandate of job creation and in effect tackling the problems of unemployment in Nigeria, the National Directorate of Employment (NDE) trains unemployed youths and retired persons for Vocational Skills Acquisition, Entrepreneurship or Business Development, Labour Based Works, Rural Employment Promotion and Job placement guidance and counseling.
3.4.10 Industrial Development Centres (IDC)
Industrial Development Centres (IDCs) were established by the Federal Government of Nigeria across the country with the aim of promoting small and medium enterprises. The Industrial Development Centers (IDCs) are established to provide extension service to SMEs in such areas as project appraisal for loan application, training of entrepreneurs, managerial assistance, product development as well as other extension services. The Industrial Development Centre in pursuance of its mandate of coordinating and monitoring all investment activities facilitate investments by maintenance of liaison between investors and Ministries, Government departments and agencies, institutional lenders and other authorities concerned with investments; provision and dissemination of up-to-date information on incentives available to investors; and assisting incoming and existing investors by providing support services including assistance to procure,
authorities and permits required for the establishment and operation of enterprises.
3.4.11 Raw Materials Research and Development Council
The Service Charter of RMRDC is tailored towards assisting in the exploitation and
utilization of raw materials, development and survival of Nigerian’s industries and
consequently, improves the standard of living of its citizens. The Council was established
in 1987 through the recommendations of a workshop on Industrial Matters organized by
the Manufacturers Association of Nigerian (MAN) and the Nigerian Institute of Social
and Economic Research (NISER) held in 1983. RMRDC was envisioned by the
organizers of the workshop to be Nigeria’s focal point for the development and utilization
of the nation’s vast industrial raw materials that facilitate the establishment of the new
resource-based industries thus providing new job opportunities and contributes to the
nation’s gross domestic product (GDP).
The clarion call of these quick thinking Nigerians informed the development of a
corporate vision and mission for the council as well as its service charter.
3.4.12 Nigerian Employers Consultative Association (NECA)
It is the umbrella organization for employers’ association of Nigeria and was founded in
1959 with its memberships drawn from the private and public sector employers
associations. It performs many roles in Nigeria. These roles include:
l it promotes and encourages any technical or other forms of education for the
development of employees.
l it assists in the maintenance and promotion of good relations between members and their employees.
l it encourages the payment of equitable rates of wages and salaries to the employees.
l it promotes, influences, modifies or seeks the repeal of legislative and other resources affecting or likely to affect the employers.
3.5 Assignments
i) What are the functions of support agencies in small and medium scale industrial development in Nigeria?
ii) Write fully on 3 entrepreneurship supportive agencies in Nigeria, highlighting their functions.
3.6 Quizzes
i) List out the various supportive agencies under the following heading;
• Participatory
• Regulatory
• Facilitative
ii) List out the various sectorial groups under Manufacturers Association of Nigeria (MAN)
CHAPTER FOUR
BUSINESS PLAN FOR SMALL SCALE BUSINESS ENTERPRISES
4.1 Business Plan
Lambing and Kuehl (2007), a business plan is a comprehensive document that helps an entrepreneur analyze the market and plan a business strategy. According to them, a business plan is often prepared by an existing company to ensure that future growth is properly managed. Ndebbio (2007) stated that a business plan is a document showing where a business is going, how to get there, through what means and what you will get when you get there.
Bature (2009) described a business plan as the road map on the journey to an entrepreneur’s success. According to him, it is the key to the successful take-off and execution of the business.
However, if the plan is prepared for a start-up, it helps the entrepreneurs to avoid pitfalls or costly mistakes which could affect the business prospect. In addition to being useful as a planning document, the business plan often is necessary for obtaining financing. Banks, venture capitalists and investors usually require a business plan in order to help them make their investment decisions. To that extent, a well-written business plan provides evidence of the entrepreneur’s ability to plan and manage the enterprise.
4.2 Nature of the Business Plan
The nature of a business plan is that, as a mental process, it decides the direction that a business organization intend to follow, in order to achieve its stated objectives. It starts with questions about who carries which task, when, where and how is the task carried. In doing this, it requires minimizing incremental costs and maximizing output ratios.
A business plan as a document shows work-in progress. In this case, you are reminded that even successful investors are expected to maintain current business plans. In order to persuade a potential or prospective buyer to buy your product or service, it is necessary for an entrepreneur to have a good knowledge of it.
As a matter of fact, the entrepreneur acts as one of the salespersons and as such the product should be his business. Because the potential inventors, suppliers, and buyers are regarded as your customers, there is need for an entrepreneur to convince them about his knowledge of the business.
4.3 Purpose of the Business Plan
Clarify Direction
The primary purpose of a business plan is to define what the business is or what it intends to be over time. Clarifying the purpose and direction of your business allows you to understand what needs to be done for forward movement. Clarifying can consist of a simple description of your business and its products or services, or it can specify the exact product lines and services you'll offer, as well as a detailed description of your ideal customer.
Future Vision
Although clarifying direction in the business plan lets you know where you're starting, future vision allows you to have goals to reach for. Businesses evolve and adapt over time, and factoring future growth and direction into the business plan can be an effective way to plan for changes in the market, growing or slowing trends, and new innovations or directions to take as the company grows.
Attract Financing
The development of a comprehensive business plan shows whether or not a business has the potential to make a profit." By putting statistics, facts, figures and detailed plans in writing, a new business has a better chance of attracting investors to provide the capital needed for getting started.
Attract Team Members
Business plans can be designed as a sale tool to attract partners, secure supplier accounts and attract executive level employees into the new venture. Business plans can be shared with the executive candidates or desired partners to help convince them of the potential for the business, and persuade them to join the team.
Manage Company
A business plan conveys the organizational structure of your business, including titles of directors or officers and their individual duties. It also acts as a management tool that can be referred to regularly to ensure the business is on course with meeting goals, sales targets or operational milestones.
4.4 Components of Business Plan
A business plan includes the following major topic headings:
λ Executive Summary
λ Mission Statement
λ Business Environment
λ Marketing Plan
λ Management Team
λ Financial Data
λ Legal Considerations
λ Insurance Requirements
λ Suppliers
λ Risks
λ Assumptions/Conclusions
4.4.1 Executive Summary
The executive summary provides the reader with an overview of all of the most important facts contained in the plan. Although the executive summary is placed in the front of the business plan, it is actually easier to write it after an entrepreneur must have written the entire business plan. Then portions of each section can be used to write a paragraph or two about each of the major topics. Table below shows an Executive Summary Checklist which will help an entrepreneur to write his business executive
summary.
CHECKLIST: EXECUTIVE SUMMARY
λ Briefly describe the proposed business and product or service it will provide.
λ Describe the most important trends in the industry.
λ Describe the type of advertising and promotion that will be implemented.
λ Give the sales and profits for the past three years (if it is an existing company).
λ Give projected sales and profits for the next three years (for both existing businesses and start-ups).
λ Describe the education and relevant work experience of the owners and key management personnel.
λ Include any important legal considerations such as exclusive agreements, consumer contracts, and patents.
λ Include any other information that you believe the reader should know in order to understand the business operation.
4.4.2 Mission Statement
The mission statement is a concise, well-defined explanation of the purpose of the business and the management’s philosophy. Although mission statements vary, common elements include a description of the products or services offered and the management philosophy of the company’s owner. The mission statement provides direction for the company and prevents the company owners from diversifying into areas that do not serve the original company purpose. For this reason, the mission statement should be written as the first step in developing the business plan. The Mission Statement Checklist will help you write your mission statement.
CHECKLIST: MISSION STATEMENT
λ What is the purpose of your business?
λ What products and services will be offered?
λ What is your management philosophy?
4.4.3 Business Environment
Successful entrepreneurs constantly analyze the business environment and its impact on the company. This analysis is an important first step in determining whether a business can survive and grow. The business environment is composed of three factors – national trends, industry
trends and local trends.
λ What national trends will affect your business?
λ What industry trends will affect your business?
λ What local trends will affect your business?
CHECKLIST: BUSINESS ENVIRONMENT
National Trends
λ Demographic changes
λ Legislative actions
λ Technological changes
λ Healthcare reform
λ The economy and interest rates
Industry Information
λ Is this industry dominated by large or small firms?
λ What is the failure rate in this industry?
λ Is this a new industry or one that is well established?
λ What is the typical profitability in this industry?
λ What are the trends in this industry?
Community Information
• Is the population in the community increasing or decreasing?
• What is the attitude of the community toward your business? Is it positive, negative, or neutral?
• Will the community help provide any financing for your business or help in getting it started?
• Is the local economy strong or in a recession?
4.4.4 Marketing Plan
The business plan covering marketing activities show detailed description of how a company will compete in the marketplace, its products and services and competitor analysis as well as a developed competitive advantage for the enterprise.
Components of Marketing Plan
The marketing section of the business plan provides a detailed description of how the company will compete in the marketplace as it sells those products and services. The marketing section includes the following:
Description of Product or Service
If you plan to sell a product the description should include the size, weight, shape, packaging, and quality. If you plan to sell a service, describe all of the services you will offer and explain the typical procedures you will follow.
An analysis of the competition
An analysis of the competition can be completed by determining their strengths and
weaknesses and examining specific aspects of their operation. Do they have a large product line? Do they have poor service? Are they strong or weak financially? Do they have a stable workforce or is there a high turnover? It is important to consider both direct and indirect competition, since many entrepreneurs underestimate their competition.
Pricing
λ What is your Pricing Objective?
λ What are your Pricing Policies?
λ How will you determine your Prices?
Many factors must be considered before prices are established. Some of the considerations are as follows:
λ Costs
λ Competitors’ prices
λ Effect on demand
λ Image
λ Channels of distribution
λ Industry Markups
λ Wholesale
Credit Terms to Customers
In many industries, it is common to extend credit to customers, allowing them a specified time to pay for the goods and services they have received. The main purpose in extending credit is to increase sales; therefore, it is often an important part of a company’s marketing strategy. There are two general categories of credit – consumer credit and trade credit. Consumer credit is extended from retail stores to the final consumer. Trade credit is extended from one business to another. Typical terms of trade credit are Net 30, 2/10 net 30, 2/10 net 30 EOM etc.
Competitive Advantage
Every business must have a competitive advantage, something that differentiates it from similar businesses. The competitive advantage must be carefully developed because it is the reason why customers will buy from you instead of buying from your competitors. Typical competitive advantage may include the following:
Quality – if you can provide a better product or service than that which is currently offered, customers will often buy it even if it costs more. Many small businesses have become successful by following this strategy.
Price – if you can offer a product or service at a lower price, your business will appeal to bargain hunters who want to keep their costs low.
Location – many small businesses are successful because they are more conveniently located than their competitors.
Selection – a wide selection is often successful in attracting customers. A wide product selection may allow you to serve several groups of customers.
Service – Small businesses can often provide more personalized service than large businesses. Particularly when a business is small, the owner can work directly with the customers and ensure customer satisfaction.
You should also consider combining several competitive advantages. Many entrepreneurs build their businesses on only one competitive advantage and are successful. However, if you can combine them (for example, excellent quality and large selection), you will have an even better chance of beaten the competition.
Market Segmentation
No business can serve everyone, and small businesses with limited resources usually concentrate on a specific customer base. You can identify your target markets by separating the customers into groups with similar needs. This is known as market segmentation or niche marketing. Your target market(s) can be segmented in several ways: some of the more common ways are listed below:
λ Geographic: Often customers can be described in terms of their residence or place of work.
λ Demographic: Often customers are described by demographic characteristics such as age, income or gender.
λ Benefit: Entrepreneurs will often find that different groups of customers buy their product or service for different reasons. Grouping customers according to their reasons for purchasing the product or service is known as benefit segmentation.
λ Usage rate: In many industries, a small group of customers buys the largest amount of a product or service. Grouping customers by how often they use a product or service known as usage-rate segmentation.
λ Psychographic: Psychographic segmentation is a method of grouping customers based on values and/or lifestyle.
Entrepreneurs should carefully define their target market because this will ensure that marketing efforts are targeted to potential customers and will not be wasted. It also helps the business owner focus all of his or her efforts in the proper direction.
Promotion and Sales
A business with the best products and services will still fail if the customers are not informed and persuaded. For this reason, a promotional plan is crucial to the success of the business.
Promotion may take many forms, including the following:
Direct marketing which includes direct mail; mail-order catalogues; direct selling; telemarketing; direct-response advertisements through mail, broadcast and print media, and the Internet.
Sales promotion consists of marketing activities that provide extra value or incentives to the salesforce, distributors, or the ultimate consumer. Sales promotions are developed to increase sales.
Publicity is company information released as news on radio, on television, or in newspapers. Publicity is designed to create awareness of the company and its products.
Public relations
Consist of community activities of a company designed to create a favorable impression with the public.
Advertising consists of non-personal messages directed at a large number of people. Advertising is carried out through media such radio, television and newspapers.
The combination of direct marketing, advertising, sales promotion, publicity and public relations is called the promotional mix.
4.4.5 Management and Personnel
Even the best business idea is useless if the entrepreneur and employees do not have the skills necessary to implement a plan of action.
The management and personnel section of the business plan details the human resources that will be needed to operate the business.
Need for an Organizational Chart
An organizational chart is a graphic representation of the lines of authority in the company. If the company consists only of the entrepreneur, there is certainly no need for an organizational chart.
However, if there are employees, an organizational chart is advisable. When there are only a few employees, the organizational chart is a simple structure – for example, when all of the employees report directly to the owner. As the company grows, the owner cannot supervise all the staff, and an additional manager or supervisor is necessary. This results in an organizational chart with at least three levels – the entrepreneur, the managers, and all other employees. When a company becomes even larger and has several managers, the company may be organized along departmental lines (Lambing and Kuehi, 2007).
4.4.6 Start-up Costs and Financing
If the business plan is going to be used to obtain financing, the financial section is one of the most important. Mistakes in this section may prevent an entrepreneur from obtaining funds even if all other parts of the business plan are excellent. The financial section includes the following topics (Lambing and Kuehi, 2007):
λ Start-up costs.
λ Business financing.
λ The projected income statement
- Opening-day balance sheet
- Projected income statements
- Projected cash flow statements
λ The breakeven point
The start-up costs which are necessary to open the business are inventory, furniture and fixtures, machinery and equipment, prepaid expenses, training costs for employees, deposits, etc. Most of these costs will be incurred before the company opens for business. Start-up costs for businesses vary by industry, but those common are the ones already listed earlier on.
How will the Business Be Financed?
The financing section of the business plan should identify the type of financing that will be used because this may have a financial impact on you and the company (Lambing and Kuehi, 2007).
For example, if a large amount of money is borrowed, the company will have substantial loan payments every month, which could be a burden for a new company. If you use personal assets as collateral for a loan, you could lose them if the business does not succeed. Money that is borrowed, known as debt financing must be repaid with interest. The interest rate for business loans is generally determined by prime rate, a benchmark rate that fluctuates depending on the economic conditions in the country. A brief explanation of financing alternatives follows
(Lambing and Kuehi, 2007):
1. Debt financing – they include bank loans, federal government financing programs and
state and local government financing programs. Access to credit is vital for small business survival, and a key supplier to small firms is the commercial banking system. However, not all banks actively seek small business customers and entrepreneurs may find their business plan rejected at one bank while being enthusiastically accepted at another.
2. Equity financing – This include personal funds, private investors, partners, venture
capital firms, and stock sales.
Personal funds include any money invested from savings accounts and checking accounts. Many financial institutions and investors expect the entrepreneur to invest some
personal funds if he or she is also seeking financing from others.
Private investors may include friends and family members, wealthy individuals, and
partners. Friends and family members are often willing to provide funds, but family
relations may be strained or ruined if the business does not succeed or if there are
disagreement about how it should be operated. Some wealthy individuals invest in small
businesses, hoping to earn a high rate of return when the company becomes successful.
These individuals’ area often referred to as angels because of the financial assistance they
provide. Because entrepreneurs often do not know how to find investors, and the
investors do not know how to find entrepreneurs; many matching services have been
started. Many states or municipalities have established databases for that purpose.
Venture capital firms are companies that invest money in small businesses that have a potential to achieve extremely rapid growth and generate large profits. These firms generally prefer to invest in companies that can generate a rate of return of 25 to 40 percent compounded annually and go public within five to seven years after the investment by the venture capital firm. They also look for companies that have an excellent management team. Venture capital firms often specialize in a specific industry such as biotechnology, data communications, and healthcare; therefore, entrepreneurs seeking venture capital should research the firms to determine which invest in their industry.
3. Cost of financing – The business plan must also state how debt financing will be repaid and what will be given in exchange for equity funds. For loans, the plan should state the number of years over which the loan will be repaid and the interest rate. For equity, the percentage ownership must be stated along with other payments. It is common to reward investors with dividends, which are periodic payments based on the company’s net profit. The business plan should therefore state both percentage of ownership for investors and dividends that will be paid.
Projected Financial Statements
The projected financial statements that are included in the business plan are the opening-day balance sheet, the projected income statements, and the projected cash flow statements. Before describing these, a discussion of accounting methods is necessary because several different methods are used to develop financial statements (Lambing and Kuehi, 2007).
Accounting Methods
Accounting methods take the form of cash basis, accrual basis and completed-contract method basis. These are explained below.
Cash Basis – the cash basis is the simplest method and easiest to use. The cash basis records a sale when payment is received from the customer and records an expense when the bill is paid. For some businesses, especially service businesses they do not extend credit, this method works well and can be used for management purposes and for tax purposes. However, the cash basis does not always provide an accurate picture of the financial status of the company.
Also, for companies that extent credit to their customers, the cash basis does not work well because the cash received from customers is not necessarily an accurate reflection of sales. Collections from customers may lag behind sales, making sales appear lower than they actually are.
•
Accrual Basis – the accrual basis records sales when they are made and records expenses
when they are incurred. This method is not as simple as the cash method but gives an
accurate picture of the financial health of the company. For companies that carry inventory and/or those that extend credit, the accrual basis is the best method to use.
Completed-Contract Method – some firms, such as construction companies, work on
projects that extend over many months. In these instances, it would give an inaccurate
portrayal of the company if no expenses or income were recorded until the project was
completed. For this reason, a method known as the completed-contract method is used. The customer is often billed as the project progresses (for example at increments of 25, 50, and 75 percent completion), and corresponding amounts of expenses for materials and labour are recorded at the same time. This presents a more accurate picture of the income and expenses than if the cash or accrual method were used.
Balance Sheet
The balance sheet compares the possessions of a company and the debts it owes on a specific day. Therefore, while the income statement records profit or loss over a period of time, the balance sheet shows the financial situation on a certain day. The components of a balance sheet are assets and liabilities (Lambing and Kuehi, 2007).
Assets – a company’s possessions, called assets, may be tangible items such as machinery
and equipment, or they may be intangible assets such as a patent or goodwill. On the balance sheet, assets are divided into several categories – current, fixed, and other.
o Current assets are those that are easily converted into cash and include the following:
Cash – all cash on hand in the business and in the business checking and savings
accounts are recorded.
Accounts receivable – if a company extends credit and customers owe for purchases,
this is a company asset because it is money that will be received in the future.
Inventory – all items available for resale are current assets. In a manufacturing firm,
the inventory may be separated into two categories – raw materials and finished
goods.
Supplies – all supplies such as shop supplies, office supplies, and bags and boxes for
customers’ packages would be included.
o Fixed assets are items that are more permanent in nature and are used in the running of business. These include the following: Machinery, equipment, furniture, fixtures – all items listed in your start-up costs in these categories would be fixed assets.
Land and buildings – if you purchase land ad a building or if you construct a building,
this would be shown in the amount of the price paid or the construction costs.
Vehicles – this includes all company cars, trucks and so on.
A company may have assets that do not fall into these categories. For example, if you are
required to pay deposits for leases or utilities, the money is often held for several years
before it is returned. For this reason, it is not considered a current asset and is therefore
placed in a category called other assets. Similarly, a company may have intangible assets
such as goodwill or patents; these are included as other assets.
Liabilities – the liabilities section of the balance sheet includes all debts the company owes. As with the assets, the liabilities are categorized. Liabilities are classified as current (those that must be paid within 12 months) and long-term (those that are due more than one year after the date of the balance sheet).
o Current liabilities – are as follows:
Accounts payable – all bills due for inventory and supplies are included in accounts
payable.
Accrued expenses - - bills due for utilities and other miscellaneous expenses are
considered accrued expenses. Also, if employees are paid every two weeks and wages
are owed to them when the balance sheet is prepared, these would be included.
Notes payable – any short-term loans that are due within 12 months from the date of
the balance sheet is considered a current liability. Loan payments include both
principal (loan repayment) and interest. Only the principal is recorded on the balance
sheet.
o Long-term liabilities – are debts or portions of debts that are due more than 12
months from the date of the balance. The current portion of the debt is subtracted from the total. •
Equity – Another category on the balance sheet is called the equity, net worth, or capital
account. The equity includes all the money the entrepreneur has invested from personal funds as well as retained earnings. Retained earnings is an accumulation of all profits and losses of the company from the day it began until the day the balance sheet is prepared. This account represents the difference between the assets and liabilities. Total assets minus total liabilities must equal net worth or equity.
Projected Income Statements
The income statement is completed on a periodic basis and records sales, cost of goods sold, expenses, and profit or loss. These are explained below.
Sales – on the income statement, the sales of a company may be listed as “sales”, “income”, or “revenue”, depending on the type of company. If the statements are completed on an accrual basis, this represents the sales that have been generated, not necessarily those for which payment has been received.
Cost of goods sold – includes any costs for products, materials, or labour that are directly
related to the sale. In a retail firm, cost of goods sold is the cost paid to suppliers for
inventory. In service firms such as housecleaning or maid service businesses, the product
cost is small, but labour is a major part of the cost of goods sold. In construction firms, both labour and materials costs are often included for different firms.
4.4.7 Legal Section
All entrepreneurs will encounter legal issues throughout the time they operate the
business. When planning a business, the entrepreneur must select a form of organization;
determine whether copyrights, patents, or trademarks will be needed; have contracts
written and/or reviewed by a lawyer; and identify the type of taxes that will be due
(Lambing and Kuehi, 2007).
The legal section of the business plan should also contain any information about contracts
or legal arrangements with suppliers, customers, or employees. If the company has an
agreement to service a specific geographic territory, or if there are contracts for jobs to be
completed, this information should be included.
4.4.8 Insurance
Starting and operating a business involve risks of many kinds. Some risks are insurable
while others are not. For example, a restaurant may be damaged by a fire; another one
may be burglarized; still another may have a van damaged in an auto accident. These
risks can be insured and are therefore considered controllable by purchasing
insurance. This section lists the most common types of insurance a small business may
need. The insurance checklist shown below summarizes important insurance
considerations.
CHECKLIST: INSURANCE
Research the laws covering workers’ compensation in your state to determine if the insurance will be required by law.
Identify the greatest insurable risks that your business will face.
Identify other risks that you would like to insure.
Determine how much you can afford to spend on insurance.
Have you checked with an agent to determine the cost?
Is the local economy strong or in a recession?
Although a business may purchase many types of insurance, workers’ compensation is
required by law and entrepreneurs must make sure that the company is adequately
covered.
4.4.9 Suppliers
It is important to identify the suppliers of the business to obtain information concerning
the products and services you will need. Suppliers generally can be categorized as follows
(Baumback, 1988):
• Producers – they include manufacturers, miners, farmers, and processors of natural
products. Many producers sell only large quantities to wholesalers and do
not transact business with small firms.
• Wholesalers or merchants’ intermediaries – Wholesalers buy from producers and
take title to the goods. Wholesalers are a major source of supplies for small
businesses. An excellent working relationship with the wholesaler is often essential
for the small business to operate properly.
• Functional (agent) intermediaries – Some intermediaries operate as wholesalers but
do not take title to the goods. They represent the manufacturer, take orders, and
provide service to the customers. This group of suppliers includes manufacturers’
representatives, who sell products for many manufacturers within a geographic area.
They usually have an ongoing relationship with the producers.
• Merchandise brokers – They are another type of agent intermediary and represent
manufacturers by bringing buyer and seller together. They are usually located in large
manufacturing areas.
• Resident buying officers – They are the third type of agent intermediary. They
represent a group of retailers and offer a variety of services, including buying
merchandise for those stores and furnishing market information and forecasts.
Resident buying offices are paid by the retailers.
CHECKLIST: SUPPLIERS
Identify your most important suppliers.
What are their credit terms?
How often do they deliver?
What are the minimum order quantities?
Are inventory shortages a problem in this industry?
Are there many suppliers for your business, or do you have to?
choose from only a few?
Risks, Assumptions, and Conclusion
This section will be discussed under the following sub-sections.
4.4.10 Risks
Every business faces two types of risks – controllable and uncontrollable. Controllable
risks cannot necessarily be prevented, but the financial loss can be minimized by
purchasing insurance. Therefore, the risks of fire, vandalism, damage from storms, and so
forth are considered controllable because insurance is available to pay for the financial
loss.
Uncontrollable risks, however, are those that would have a detrimental financial impact
but cannot be covered by insurance. Uncontrollable risks that are common to many
businesses include the following:
1. A new competitor locating nearby.
2. A recessionary economy.
3. New technology.
4. Changes in consumer tastes.
5. A price war by competitors.
Each business faces risks that are unique to that business. You should consider these
carefully and briefly describe what steps would be taken if the uncontrollable risk
actually develops. For example, if an entrepreneur believes that competitors would
engage in a price war, the new entrepreneur may plan to differentiate the new business by
offering products and services that the competition does not offer. If the risk of a
recession would severely affect the company, the entrepreneur may consider what
products or services could be offered that would not be as sensitive to a recessionary
economy.
4.4.11 Assumptions and Conclusion
The final section of the business plan will vary depending on whether the plan is for a
new business or for an existing business.
If the plan was prepared to determine the viability of a proposed business, the conclusion
answers the questions, “Is this business feasible?” Bear in mind that the conclusion was
reached only by making assumptions throughout the report. The following assumptions
are common:
(1) A specific site
(2) A certain amount of money for start-up costs
(3) The ability to obtain financing
(4) No new competitors opening.
Just as each business has unique risks, however, each depends on assumptions that are
unique to that particular business. Therefore, you should identify the most important
Uncontrollable Risks
What uncontrollable risks will affect your business?
The economy
The weather
New technology
Price wars
Changes in consumer tastes
New competitors
For each risk you have identified, explain what you will do to minimize the financial impact if the risk materializes.
5. Assignments
i) Explain fully, the purpose of a business plan.
ii) What are the components of a business plan?
iii) How can a business be financed?
4.6 Quizzes
i) Highlight the checklists of Executive summary as a component of a business plan
ii) Write short notes on the following accounting methods:
• Cash basis
• Accrual basis
• Completed Contract method
iii) List out the various categories of suppliers to small businesses
CHAPTER FIVE
MARKETING MANAGEMENT IN A SMALL SCALE ENTERPRISE
5.1 The Marketing Concept
At World War II, there was a variety of products available in the market and customers having discretionary income could make choices and purchase what really fulfill their needs. In that situation, firms were forced to think about what their customers need, when they need it and how to keep them satisfied which is the Marketing Concept.
The main focus of all the firms turned from hard selling towards identification of customer needs, making decision to fulfill those need and maintaining long-term relation with customers by satisfying their changing needs. The Marketing concept resulted in a separate marketing department in organization and today we can see many organizations have structured themselves as marketing organization where every employee is contributing towards customer satisfaction whether or not he's a marketing person.
So, the marketing concept totally relies upon marketing research that helps in identification of segments, their sizes, needs, target market and then by using the right ‘Marketing Mix', marketing teams makes such decisions that results in customers’ satisfaction.
American Marketing Association defines marketing as:
Marketing is the activity, set of institutions, and processes for creating, communicating, delivering, and exchanging offerings that have value for customers, clients, partners, and society at large.
The Chartered Institute of Marketing (CIM) says:
It is the management process responsible for identifying, anticipating and satisfying customer requirements profitability;
Philip Kotler defines marketing as:
Marketing is the social process by which individuals and groups obtain what they need and want through creating and exchanging products and value with others.
After going through the marketing definitions and concepts the core ideas contained are as follows:
• The main focal point in marketing is customer needs.
• In order to maintain long-term relations with customers, future needs have to be identified and predicted.
• Marketing is not the duty of marketing department only but the duty of everyone in the organization.
5.2 Marketing Research Process
The marketing research process includes the systematic identification, collection, analysis and distribution of information for the purpose of knowledge development and decision making.
The reasons and times at which your company or organization might consider performing marketing research varies, but the general purpose of gaining intelligence for decision making remains constant throughout. Whether you are conducting ad-hoc marketing research projects, creating a new marketing research program or revising an existing one is a set of six steps which defines the tasks to be accomplished in conducting a marketing research study. While there are dozens of little steps along the way, each of those steps fits into one of the six major steps of the marketing research process.
The Six Steps in Conducting Quantitative Marketing Research
• Identifying and defining your problem
• Developing your approach
• Establishing research design and strategy.
• Performing data analysis
• Reporting and presentation
• Report preparation and presentation.
Step 1: Problem Definition
The first step in any marketing research project is to define the problems. In defining the problem, the researcher should take into account the purpose of the study, the relevant background information, what information is needed, and how it will be used in decision making. Problem definition involves discussion with the decision makers, interviews with industry experts, analysis of secondary data, and perhaps, some qualitative research, such as focus groups. Once the problem has been precisely defined, the research can be designed and conducted properly.
Step 2: Development of an Approach to the Problem
Development of an approach to the problems includes formulating an objective or theoretical framework, analytical models, research, questions, hypotheses, and identifying characteristics or factors that can influence the research design. This process is guided by discussion with management and industry experts, case studies and simulations, analysis of secondary data, qualitative research and pragmatic considerations.
Step 3: Research Design Formulation
A research design is a framework or blueprint for conducting the marketing research project. It details the procedure necessary for obtaining the required information, and its purpose is to design a study that will test the hypotheses of interest, determine possible answers to the research questions, and provide the information needed for decision making. Conducting exploratory research, precisely defining the variables, and designing appropriate scales to measure them are also a part of the research design. The issue of how the data should be obtained from the respondents (for example, by conducting a survey or an experiment) must be addressed. It is also necessary to design a questionnaire and a sampling plan to select respondents for the study.
More formally, formulating the research design involves the following:
• Secondary data analysis
• Qualitative research
• Methods of collecting quantitative data
• Definition of the Information needed
• Measurement and scaling procedures
• Questionnaire design
• Sampling process and sample sizes
• Plan of data analysis
Step 4: Field Work or Data Collection
Data collection involves a field forces or staff that operates either in the field, as in the case of personal interviewing (in-home, mail intercept, or computer-assisted personal interviewing), from an office by telephone interviewing), or through mail (traditional mail and mail panel survey with pre recruited household. Proper selection, training supervisor and evaluation of the field force help minimize data collection errors.
Step 5: Data Preparation and Analysis
Data preparation includes the editing, coding transcription, and verification of data. Each questionnaire of observation form is inspected, or edited, and, if necessary, corrected. Number of letter codes are assigned to represent each response to each question in the questionnaire. The data from the questionnaires are transcribed or key-punched on to magnetic tape, or disks or input directly into the computer. Verification ensues that the data from the original questionnaires have been accurately transcribed, while data analysis, gives meaning to the data that have been collected. Simple techniques are need for analyzing data when there is a single measurement of each element or unit in the sample. On the other hand, multivariate techniques are used for analyzing data when there are two or more measurements on each element and the variables are analyzed simultaneously.
Step 6: Report Preparation and Presentation
The entire project should be documented in a written report which addresses the specific research questions identified, describes the approach, the research design, data collection, and data analysis procedures adopted, and present the results and the major findings. The findings should be presented in a comprehensible format so that they can be readily used in the decision making process. In addition, an oral presentation should be made to management using tables, figures, and graphs to enhance clarity and impact.
For these reasons, interviews with exports are more useful in conducting marketing research for industrial firms and for products of a technical nature, where it is relatively easy to identify and approach the experts. This method is also helpful in situations where little information is available from other sources, as in the case of radically new products.
5.3 Target Market
A target market is basically the type of person that will want or need your product or services. By targeting a specific market, you will be able to save money by spending less or marketing and increasing marketing. The process of identifying a target market is called market segmentation. Using market segmentation, a business can use a top-down approach to identifying a target group or niche. After you have identified a niche using target segmentation, you will be able to concentrate your efforts on targeted marketing to attract a specific consumer group.
Consumer market research is the process of using various techniques to collect, analyze, and report data about potential consumer groups. Formal market segmentation requires comprehensive market research. The market research will help you to identify quantitative and qualitative patterns in consumer groups. Quantitative consumer data relies on numbers such as age, income, and family size while qualitative data relies on characteristics such as education, occupation, and personality. There are several ways you can go about segmenting a population to target a market. Some are more relevant to your business than others.
The following describes different aspects of market segmentation used for marketing research that will help you in identifying a niche and maximizing your business market dollars.
Demographics:
• Age: Teenagers or kids can be targeted by a company.
• Income: A person earning N200,000 is more likely to purchase a Car than a person earning N10,000.
• Family size: Wholesale distributors that keep prices low by selling in bulk would target larger families.
• Education: A calculator company may target high school math students.
• Occupation: A shoe company might sell a shoe targeted for construction workers.
• Gender: A handbag company will target women.
• Nationality/Race: A small business selling foodstuffs from Africa would target the immigrant African community.
Geography:
• Region of the world: The shoe company, Puma, most aggressively targets consumers in Latin America and Europe for their soccer shoes.
• Climate: A snow plow manufacturer will target areas where its snows.
Behaviours:
• Brand loyalty: Apple targets a niche of consumers loyal to its product.
• Value of quality: Higher-end watch companies like Seiko target consumers thus value high-quality time pieces.
Psychographic:
• Personality: A person who likes to show off is more likely to buy a Toyota Prado than reserved person.
• Lifestyle: A shoe company like Vans, that sells skateboarding shoes would target skateboarders within their advertising.
• Interests: Stories that sell arts and crafts materials target hobbyist and students alike.
5.4 Channels of Distribution
Distribution is one of the classic “4” Ps” of marketing (product, promotion, price, placement a.k.a “distribution”). It's a key element in your entire marketing strategy – it helps you expand your reach and grow revenue. Means used to transfer merchandise from the manufacturer to the end user. An intermediary in the channel is called a middleman. Channel normally range from two-level channels without intermediaries. For example, a caterer who prepares food and sells it directly to the customer is in a two-level channel. A food manufacturer who sells to a restaurant supplier, who sells to individual restaurants, who then serve the customer, is in a four-level channel. Intermediaries in the channel of distribution are used to facilitate the delivery of the merchandise. For example, a manufacturer may rely upon the workforce about the merchandise. For example, a manufacturer may rely upon the workforce employed by a distributor to sell the product, make deliveries, and collect payments. The channels used by a marketer are an integral part of the marketing plan and play a role in all strategic marketing decisions.
Types of Marketing Channels
Marketing channels can be described by the number of channel levels involved. Each layer of middlemen that perform some work in bringing the product and its ownership closer to the final buyer is a channel level. Because the producer and the final consumer both perform some work, they are part of every channel. We use the number of intermediary levels to indicate the length of a channel. All of the institutions in the channel are connected by several types of flows. These include the physical flow of products, the flow of ownership, the payment flow, the information flow, and the promotion flow.
We shall now take a look at two types of marketing channels – channels for consumer goods and channels for industrial goods.
Channels for Consumer goods
Producer - Consumer(direct)
Producer - Retailer - Consumer
Producer - Wholesaler - Retailer - Consumer.
Producer - Wholesaler - Jobber - Retailer - Consumer.
(1) Producer to the Consumers: When there are no intermediaries between the producer and the consumer, the channel is direct. This type of channel is most commonly used with organizational products, especially where the product is new. This is aimed at creating awareness and to gain access to target consumers.
(2) Producer to Retailer to the Consumer: The channel from producer to retailer to the consumer is common when the retail establishments involved are relatively large.
(3) Producer to Wholesaler to Retailer to the Consumer: The most common channel for consumer goods. It employs a wholesaler to take care of the shipping and transportation needs. Wholesalers offer the accumulating and allocating functions that allow small producers to interact with large retailers, and vice versa.
(4) Producer to Wholesaler to Jobber to Retailer to the Consumer: the producer chooses to use agents (Jobbers) to assist the wholesalers in marketing goods. The use of Jobbers could be attributed to their specialized experiences.
Channels for Industrial goods
Manufacturers - Industrial Customer(direct)
Manufacturer - Industrial distributor - Industrial Customer.
Manufacturer - Manufacturer’s representative - Industrial Customer.
Manufacturer - Manufacturer’s representative - Industrial distributor -Industrial Customer.
(1) Manufacturer to Industrial Customer (Buyer): From the diagram above, manufacturers use direct marketing to distribute their products to the industrial users. This is mostly associated with complex products that require a good deal of pre-sale and post-sale support. It should be noted that post-sale support is often best handled through a direct channel, because the manufacturer might be the only entity with sufficient expertise to help the customer because these large accounts generate enough business to support the sales effort involved, and because large customers have a habit of going through their economic weight to demand for personalized service.
(2) Manufacturer to Industrial Distributor to Industrial Customer: This is the most used channel for industrial products. Distributors take title to the goods and specialize in different lines of goods. Some of the disadvantages associated with this channel are that:
(a) Distributors will want access to large accounts that the manufacturer may try to keep for itself
(b) Distributors try to keep their product selections wide, which frequently means carrying competing lines.
(c) Sometimes distributors do not always respond to manufacturers’ advice regarding promotions, pricing and operational policies.
(3) Manufacturer to Manufacturer’s representative to Industrial Customer: This channel of distribution for industrial goods is mostly adopted by manufacturers who wish to maintain control over their products. It also applies to those goods that are sold across countries. Other factors include cultural factors, and government policies, etc.
(4) Manufacturer to Manufacturer’s representative to Industrial distributor to Industrial Customer: The fourth channel of distribution is adopted by manufacturers who wish to have control of marketing activities of their products. However, some titles to the goods are given to industrial distributors, who sell to the industrial customers when needed and at the quantity needed.
5.5 Appropriate Pricing Strategies
Merely raising prices is not always the solution to poor patronage, especially in a poor economy. Too many businesses have been lost because they priced themselves out of the marketplace. One strategy does not fit all, so adopting a pricing strategies a learning curve when studying the needs and behaviors of customers and clients.
The pricing strategy tends to be one of the more critical components of the marketing mix and is focused on operating awareness and ultimately profit for the company is the pursuit of identifying the option price for a department.
Cost-plus pricing
Cost-plus pricing is the simplest pricing method. The firm calculates the cost of producing the product and adds on a percentage (profit) to that price to give the selling price. This method although simple has two flaws: it takes no account of demand and there is no way of determining if potential customers will purchase the product at the calculated price.
This appears in two forms, full cost pricing which takes into consideration both variable and fixed costs and adds a % markup. The other is Direct cost pricing which is variable costs plus a % markup, the latter is only used in periods of high competition as this method usually leads to loss in the long run.
Creaming or skimming
In market skimming, goods are sold at higher prices so that fewer sales are needed to break even. Selling a product at a high price, sacrificing high sales to gain a high profit is therefore “skimming” the market. Skimming is usually employed to reimburse the cost of investment of the original research into the product: commonly used in electronic markets when a new range, such as DVD players, are firstly dispatched into the market at a high price. This strategy is often used to target “early adopters” of a product or service. These early adopters are relatively less price-sensitive because either their need for the product is more than the need to economize, they understand the value of the product better than others or simply because they are too rich to be affected by the high prices.
This strategy is employed only for a limited duration to recover most of investment made to build the product. To gain further market share, a seller must use other pricing tactics such as economy or penetration. This method can have some setbacks it could leave the product at a high price against the competition.
Limit pricing
A limit price is the price set by a monopolist to discourage economic entry into a market, and is illegal in many countries. The limit price is the price that the entrant would face upon entering as long as the incumbent firm did not decrease output. The limit price is often lower than the average cost of production or just low enough to make entering not profitable. The quantity produced by the incumbent firm to act as a deterrent to entry is usually larger than would be optimal for a monopolist, but might still produce higher economic profits than would be earned under perfect competition.
The problem with limit pricing as a strategy is that once the entrant has entered the market, the quantity used as a threat to deter entry is no longer the incumbent firm's best response. This means that for limit pricing to be an effective deterrent to entry, the threat must in some way be made credible. A way to achieve this is for the incumbent firm to constrain itself to produce a certain quantity whether entry occurs or not. An example of this would be if the firm signed a union contract to employ a certain (high) level of labour for a long period of time.
Market-oriented pricing
Setting a price based upon analysis and research compiled from the target market. This means that marketers will set prices depending on the results from the research. For instance, if the competitors are pricing their products at a lower price, then it's up to them to either price their goods at an above price or below, depending on what the company wants to achieve.
Penetration pricing
Setting the price low in order to attract customers and gain market share. The price will be raised later once this market share is gained.
Price discrimination
Setting a different price for the same product in different segments to the market. For example, this can be for different ages, such as classes, or for different opening times.
Premium pricing
Premium pricing is the practice of keeping the price of a product or service artificially high in order to encourage favorable perceptions among buyers, based solely on the price. The practice is intended to exploit the (not necessarily justifiable) tendency for buyers to assume that expensive items enjoy an exceptional reputation, are more reliable or desirable, or represent exceptional quality and distinction.
Psychological pricing
Pricing designed to have a positive psychological impact. For example, selling a product at N3.95 or N3.99, rather than N4.00.
Dynamic pricing
Flexible pricing mechanism made possible by advances in information technology, and employed mostly by Internet based companies. By responding to market fluctuations or large amounts of data gathered from customers – ranging from where they live to what they buy to how much they have spent on past purchases – dynamic pricing allows online companies to adjust the prices of identical goods to correspond to a customer's willingness to pay. The airline industry is often cited as a dynamic pricing success story. In fact, it employs the technique so artfully that most of the passengers on any given airplane have paid different ticket prices for the same flight.
Price leadership
An observation made of oligopolistic business behavior in which one company, usually the dominant competitor among several, leads the way in determining prices, the others soon following. The context is a state of limited competition, in which a market is shared by a small number of producers or sellers.
Target pricing
Pricing method whereby the selling price of a product is calculated to produce a particular rate of return on investment for a specific volume of production. The target pricing method is used most often by public utilities, like electric and gas companies, and companies whose capital investment is high, like automobile manufacturers.
Target pricing is not useful for companies whose capital investment is low because, according to this formula, the selling price will be understated. Also the target pricing method is not keyed to the demand for the product, and if the entire volume is not sold, a company might sustain an overall budgetary loss on the product.
Marginal-cost pricing
In business, the practice of setting the price of a product to equal to extra cost of producing an extra unit of output. By this policy, a producer charges, for each product unit sold, only the addition to total cost resulting from materials and direct labour. Business often set prices close to marginal cost during periods of poor sales. If, for example, an item has a marginal cost of N1.00 and a normal selling price is N2.00, the firm selling the item might wish to lower the price to N1.10 if demand has waned. The business would choose this approach because the incremental profit of 10 kobo from the transaction is better than no sale at all.
5. Assignments
i) Explain in full, the Marketing Research process
ii) Explain in full, the various marketing channels for consumer and industrial goods
iii) Explain in full, the appropriate pricing strategies available to a business
6. Quizzes
i) Write short notes on the following types of pricing strategies:
• Penetration Pricing
• Dynamic Pricing
• Premium Pricing
• Marginal Cost Pricing
ii) Explain the marketing concept
iii) List the various elements in formulating the research design when conducting quantitative marketing research
CHAPTER SIX
GENERAL CONCEPT OF PRODUCTION MANAGEMENT
6.1 Production Management Overview and Key Concepts
Production management is often referred to as Operations management or manufacturing management. It can be defined as the administration of all processes, materials and personnel involved in the creation of manufactured goods. Production management techniques are used in the assembly and distribution of items from clothing to automobile. Production management consists of several processes, including quality assurance, budgeting and expense control. It may also take into account inventory control, production planning and product conceptualization. The techniques include:
6.2 Production Quality Control
Quality control generally refers to the process by which manufactured goods meet acceptable company standards for distribution. Quality assurance tests and inspections are conducted on machinery and products to ensure these standards are being met.
6.3 Labor Force Management
Labour force management process ensures that employees work productively in a cost-effective, timely manner. Personnel management also entails the general supervision of employees to make sure that they effectively adapt to changing work environment.
6.4 Expense Control
An element of production management is budgeting. Costs of tools, materials, labor, equipment maintenance and distribution must be effectively managed.
6.5 Inventory Control
Production management is the ability to account for all production and distribution components, from packing supplies to finished goods. Batch traceability is a term often associated with inventory control measures.
6.6 Production Planning
Production planning takes into account market trends, buyer demand, production capabilities and stock. Upon reviewing supply and demand, production managers decide on the quantity of manufactured goods to produce.
6.7 Production Evaluation
Product performance evaluation takes into account the study of unsuccessful goods and the examination of inefficiency causes. Concept associated with product performance standards encompass time or motion studies, failure modes and effect analysis.
6.8 Sources of Raw Materials
A raw material or feedstock is the basic material from which a product is manufactured or made, frequently used with an extended meaning. For example, the term is used to denote material that came from nature and is in an unprocessed or minimally processed state.
Some examples of raw materials.
Cotton
An example of a raw material is cotton, which is harvested from plants. Cotton can be processed into thread (also considered a raw material), which can then be woven into cloth, a semi-finished material. Cutting and sewing the fabric turns it into a garment, which is a finished product.
Steel
Steelmaking is another example – raw materials in the form of ore are mined, refined and processed into steel, a semi-finished material. Steel is then used as an input in many other industries to make finished products.
6.9 Assignments
i) Give an overview of what production management is
ii) Explain the following production management key concepts:
• Production quality control
• Labour force management
• Expense control
• Inventory control
• Production planning
6.10 Quizzes
i) What is Production Evaluation?
ii) What is raw materials in a manufacturing concern? Give 2 Examples.
CHAPTER SEVEN
HUMAN CAPITAL NEEDS FOR ENTERPRISES
7.1 Human Capital needs in an enterprise.
Human Capital is the stock of competencies, knowledge and personality attributes possessed by an individual and the ability to perform labor so as to produce economic value. It is the set of skills which an employee acquires on the job, through training and experience, and which increase that employee's value in the marketplace.
7.2 How to motivate and compensate employees
It is a costly mistake to get lost in the false theory that more money equals happy employees.
Believing this is costing your valuable time, revenue, employees….and even threatening your own job. Cash will always be a major factor in motivating people and a solid compensation plan is critical to attracting and keeping key personnel. But the key is that additional cash is not always the only answer and in many cases not even the best answer. Here are some of the ways to motivate an employee:
1. Recognition/Attention. When your employees accomplish some task, they have achieved something. Your recognition is appreciation for achievement. Most managers don't give every recognition because they don't get enough. Therefore, isn’t really natural to do it.
2. Applause: A form of recognition yes, but a very specific form. Physically applaud your people by giving them a round of applause for specific achievements. Where? When? The answer is wherever and whenever. At meetings or company-sponsored social gatherings, a luncheon, or in the office. At the end of a shift, before a shift, and whenever possible in the middle of a shift.
3. One-on-One Coaching: Coaching is employee development. Your only cost is time. Time means you care. And remember your people don't care how much you know…until they know how much you care.
4. Training: Is training ever finished? You Cannot possibly over train? For whatever reasons, too many people feel “My people have already been trained” or “I've got good people… they only need a little training.
5. Career Path: Your employees need to know what is potentially ahead of them, what opportunities there are for growth. This issue is sometimes forgotten ingredient as to the important it plays in the overall motivation of people. Set career paths within your organization.
6. Job Titles: When you talk about job titles you are tapping the self-esteem of people. How someone feels about the way they are perceived in the workforce is a critical component to overall attitude and morale. Picture a social gathering that includes some of your staff. The subject of work inevitably comes up. Will your people be proud, or embarrassed, to share their title and workplace? The importance of feeling proud of who you are and what you do is monumental.
7. Good Work Environment: A recent industry study shows just how inaccurate your results can be. Employers were asked to rank what they thought motivated their people and then employees were asked to rank what really did motivate them.
8. On-the-Spot Praise: This too is associated with recognition but the key here is timing. When there is a reason for praising someone don't put it off for any reason! Promptness equals effectiveness. Praise people when the achievement is fresh on everyone's mind.
9. Leadership Roles. Give your leadership roles to reward their performance and also to help you identify future promotable people. Most people are stimulated by leadership roles even in spot appearance. For example, when visitors come to your workplace use this opportunity to allow an employee to take the role of visitor’s guide.
10. Team Spirit: Have a picture taken on your entire staff (including you!), have it enlarged and hang it in a visible spot. Most people like to physically see themselves as part of a group of team.
11. Executive Recognition: This is the secret weapon. And like any secret weapon, timing is most critical. If this is used too often the value is diminished. And if it is used only for special occasions and rare achievements the value is escalated. We talked earlier about general recognition and the positive impact that has on your people. That will go up a few notches when it comes from an executive. Some of the same vehicles can be used here such as memos and voice mail. To add yet another level of stimulation, have an executive either personally call to congratulate someone (or a group) or even show up in person to shake hands and express his or her appreciation.
12. Social Gatherings: Scheduled offsite events enhance bonding when in turn helps team spirit, which ultimately impacts your positive work environment. Halloween costume parties, picnics on July 4th, Memorial Day or Labour Day, and Christmas parties are only some of the ideas that successfully bring people together for an enjoyable time.
13. Casual Dress Day: This will apply more to the Business-to-Business world based on the difference in normal dress codes from the Business-to-Consumer arena. For those required to “dress business” every day a casual day becomes a popular desire. Use holidays to create theme color casual days such as red and green before Christmas or red, white and blue before July 4th, or black and orange prior to Halloween.
14. Time Off: Implement contests that earn time off. People will compete for 15 minutes or ½ hour off just as hard as they will for a cash award. And in many cases, I have had people pick time off over cash when given the choice. Put goals in place (padded of course) and when these goals are reached by individuals, teams or the entire staff, reward them with time off. Allow early dismissals, late arrivals, and extended lunch period or additional breaks.
15. Outside Seminars: Outside seminars are a stimulating break. Because outside seminars are not always cost efficient for most people, consider on-site seminars or workshops for your staff. Use outside seminars as a contest prize for one or two people. Then set up a structured plan for those seminar attendees to briefly recreate the seminar to the rest of your people when they return. Now everyone gets educated for the price of one.
16. Additional Responsibility: There are definitely employees in your organization who are beginning for and can handle additional responsibility. Our job as managers is to identify who they are and if possible match responsibilities to their strengths and desires.
17. Stress Management: There are many articles and books available on the subject. Make this reference material available to your people. Make sure they know it is available and encourage them to use it.
7.3 Assignments
i) Explain in full, how you can motivate and compensate your employees.
7.4 Quizzes
i) What is Human Capital?
CHAPTER EIGHT
FINANCING OF SMALL-SCALE ENTERPRISES
EXPLAIN SOURCES OF FINANCE - LONG AND SHORT TERM.
On the basis of On the basis of On the basis of
Period ownership source of generation
Long-term Short-term Owner’s Borrowed funds Internal External
Equity shares Trade credit Funds Debentures Sources Sources
Retained earnings Factoring Equity Loans from Equity Financial
Preference shares Banks shares banks shares institutions
Debentures Commercial Retained Loans from capital Loan from
Loan from financial paper earnings financial Retained banks
Institutions institutions earnings Preference
Loan from banks Public deposits shares
Lease financing Public deposits
Medium-term Commercial Debenture
Loan from banks papers Lease
Public deposits financing
Loan from financial Commercial
institutions papers
Lease financing Trade credit
Factoring
8.1 Definition of Short Term Business Financing
Short term financing has to do with using funds with maturity/repayment period of between One (1) day and twelve (12) calendar months. Short term methods of finance are suitable for funding projects of short term nature and can also be attributed to shortages in working capital. They should not as a matter of policy be used to finance long term investments to avoid a mismatch (Akintoye 2008). It is prudent to have some current assets financed by long term capital on a roll-over basis to create assets; otherwise the company will have a negative working capital.
8.2 Types of Short Term Business Financing
The main sources of short term financing are the following:
λ Bank credit/bank overdraft.
λ Commercial papers.
λ Trade credits.
λ Debit factoring.
λ Invoice discounting.
λ Bill discounting.
λ Accruals.
λ Acceptance credits/bankers acceptances.
λ Accommodation finance
Bank Credit/Bank Overdraft
Commercial Banks sometimes allow their customers to overdraw their accounts up to certain limits; overdraft interest is charged on the day-to-day overdrawn position. The bigger customers may be charged “Prime Rates” (a little above the bank’s base rate) while smaller customers may be required to pay a premium over and above the prime rate. Bank overdrafts are usually available for up to 12 calendar months (1 year), but can be rolled over on a mutual agreement. The main cost of bank overdraft is the interest charge.
Commercial Paper
This is an instrument used by big companies to raise short term funds from the money market. It is usually issued on behalf of the company by a bank as the issuing house. The issuing house does not guarantee the notes but assist in finding investors to buy them. The investors are therefore effectively lending to the company issuing the notes not the issuing house. The issuing house charges a commission for the intermediate service. Commercial papers usually carry a stated coupon rate, and the maturity date of between 30 and 270 days. The costs of commercial papers are made up of the following two components:
i. The coupon rate (the annual interest paid on a security) e.g. 12% per annum 17
ii. An issuing house commission e.g. 0.5% flat on the amount raised. Costs of various alternative funds are always considered before a choice is made.
Trade Credits
Buying today and paying tomorrow is a credit. The credit from suppliers is a major source of business finance, especially to small companies. This source of finance could be very expensive where cash discount is offered and such an offer is not taken.
The effective cost of not taking a discount can be calculated as follows:
Cost = % Age discount X 365
100 - % Age discount Maximum payment period less Maximum discount period.
It can be rolled over and therefore will become a continuous source of finance. The other intrinsic of costs associated with trade credits are:
i. Pressure from suppliers
ii. Reduction in credit rating and loss of goodwill if payment is delayed beyond maturity date.
Factoring
Factoring means the act of selling the company’s debt for cash.
Factoring involves raising funds on the security of the company’s debt so that the cash is received earlier than if the company waited for the debtors to pay. This is only easy for a company that is well known and debtors who are well known to be of high integrity.
Types of Factoring
There are two main types of factoring.
• Service Factoring
Service factoring has to do with the factor buying from the company’s debt. In effect, the company passes to the factor all the work of the company’s debt collection and debtors’ account. Payment to the company by the factor for the debt is made on an average settlement date based on the maturity date of the debt. The charge for this services is usually based on debt turnover.
Disadvantages of Service Factoring
1. The debtor is always aware of the existence of the factor since all invoices and statements will be sent out by the factor and payments made to the factor.
2. Payment is made by the factor to the company on the average date of which the debt falls due for settlement.
• Finance Factoring
The type of factoring involves not only the provision of accounting facilities but also of immediate finance, since the factor buying the debt makes an immediate payment to the company of up to 90% of the face value of the debt in addition to paying the service charge, the company must also pay the finance charge to the factor.
Invoice Discounting
In spite of the fact by accepting a company, a factor will thoroughly investigate the company’s affairs in order to satisfy himself that the business is properly managed. There is still fears that the use of factor indicates financial instability. Consequently, many potential users of debt factoring have refrained from using the facilities available, this reluctance has given rise to a method of confidential invoice factoring which has become known as invoice discounting. Under this method, debts are sold to the factor who makes an immediate payment of an agreed percentage of the face value of the debt sold. No accounting (sales) service is supplied by the factor, rather only finance is supplied for which interest is charged. In effect, a factor buys the debt and appoints the company as agent to collect those debts.
Bills Discounting
A bill of exchange is normally prepared by the supplier of goods (creditor) for endorsement acceptance by the customer (debtor). This is common with export sales. The supplier (seller) can obtain immediate cash after the goods have been dispatched by discounting the bill with the bank/discount house.
Accruals
Deferment of tax payments and wages is the common example in this method. Tax laws provide that tax liabilities should be due for payment after one year. Also employees would work for a period of one month before receiving their pay. These form interest-free sources of short term finance. The cost of postponing tax payment is normally a penalty or fine, while the cost of postponing wage payment will be to dampen employee’s morale. Employees may respond with absenteeism, reduced efficiency or seek employment elsewhere. A firm must use this source of finance carefully and only as a last resort.
Acceptance Credit / Bankers Acceptance
This source of finance is similar to bills of exchange. The only difference is that it is a bank which undertakes to liquidate the debt of maturity in case of a default. Such bill becomes readily discountable in the money market because it has been accepted by a bank. The evaluation carried out by the provider of the fund (discount house) will normally cover the credit worthiness and reputation of the bank providing the guaranteed acceptance. Bankers acceptance (Acceptance Credits) are issued for period varying between 2 months and 12 months.
Accommodation Finance
In this method, two bills of exchange are drawn. The first is on the principal debtor and fully accepted by him. The second is on the bank (based on the strength of the first bill) and fully accepted by the bank. The first bill has an early maturity. The client company takes the second bill and discounts it in the money market.
On maturity, the bank (in possession of the first bill) collects the debt book, thus providing enough funds to settle the other finance house with whom the second bill was discounted. Obviously the client company incurs two costs. In this regard, a bank that participates effectively in the discounting market can derive double income as it charges commissions for its acceptance and also receives discount for the discounting service.
Franchising
Franchising is a method of expanding a business on less capital than otherwise needed. For suitable business, it is an alternative to raising extra capital for growth. Under a franchising arrangement, a franchisee pays a franchisor for the right to operate a local business under the franchisor’s trade name. The franchisor must bear certain costs (possibly for architect’s work, establishment costs, legal costs and the cost of other support services) and will charge the franchise an initial franchise fee to cover set-up costs relying on the subsequent regular payments by the franchise for operating profit. These regular payments will be a percentage of the franchisee’s turnover.
The advantages of franchise to the franchisor are as follows.
i. The capital outlay needed to expand the business is reducing substantially.
ii. The image of the business is improved because the franchise will be motivated to achieve good results and will have the authority to take whatever action they deemed fit to improve results.
The advantage of a franchisor to the franchise is that he obtains ownership of a business for an agreed number of years (including stock and premises, although premises might be lent from the franchisor) together with the backing of a large organization’s marketing effort and experience.
8.3 DEFINITION OF MEDIUM TERM SOURCES
These are sources for funding larger and credit worthy companies. These funds are repayable within 1-5 years or sometimes 1-10 years. They include;
Bank Term Loans
This is similar to bank overdraft except that it is available for a longer period. Also, it carries a higher interest charge because of the longer period covered. The collateral security required for bank term loan is often higher than the bank overdraft, and banks would also carry out a more stringent evaluation of the company and the project for which the fund is required. In short, the degree of control over bank term loan is higher than bank overdraft.
Venture Capital
Venture Capital represents funds invested in a new enterprise. There are several stages. Seed money is needed to develop a product or service – and a business plan. Although, usually these needs are small (several hundred thousand naira or less) and funded by the entrepreneur, or his/her family, or friends. On rare occasions, venture capitals can provide such financing. The next stage is start-up or first-round financing. This financing is used to fund further research and development and to formulate initial marketing and production plans. Typically, second round financing, it often falls in the second round. Third-round and perhaps subsequent round financings are used when a company is producing and selling products or services but where cash flow breakeven is yet to occur.
Hire Purchase
This is an arrangement under which the hirer, in return for the use of an asset, undertakes to make periodic payments to the owner of the asset. He is expected to assume ownership of the asset after the payment of the last installment.
Mortgage
An alternative to sale and lease-back is mortgaging. It may be possible for a company to arrange to borrow money by means of a mortgage on freehold property. The most likely institutions that are prepared to lend on the platform mentioned are insurance companies, investment companies, and pension funds. Building societies are reluctant to lend to companies and there are limitations on the amount they can lend in any year to corporate borrowers. They may be more willing to grant mortgages to the proprietors of small incorporated businesses. Repayments of principal plus interest may be spread over a long period of time. The rate charged is somewhat in excess of base interest rate.
8.4 DEFINITION OF LONG TERM BUSINESS FINANCING
Long term business financing involves funding larger and functional companies. The company can either be private or public and it is usually available for a period of 10 years or longer.
Long Term Sources
The main sources of long term funds are:
Equity capital
Debenture stock capital
Preference share capital.
Equity Capital/Ordinary Share Capital
The traditional form of capital is equity capital. The holders of this capital are the owners of the business. They therefore have a general primitive right to anything of value that the company may wish to distribute as well as the ultimate control of the company’s affairs. They bear a huge portion of the entire risks associated with company; hence they expect a higher rate of return than most other providers of finance. Other features are that they expect and are entitled to a share of the profit of the company in the form of dividends, subject to the recommendation of the directors and after all prior claims have been met. The ordinary shareholders have voting power of right attached to their investments. They cannot redeem or reclaim their investment except by selling their shares or in the event of liquidation. Ordinary shares could take the form of preferred, defer
Debenture stock: Debenture represents the document which acknowledges the indebtedness to the company. These are loans of a long term nature. These could be secured or unsecured. In practice, the term “debentures” may be restricted to secured loans. The main Features are the followings.
λ They are not entitled to voting rights.
λ They are fixed interest securities entitled to annual interest payments.
λ The interest elements are tax deductible.
λ They could be redeemable, irredeemable or convertible.
The principal amounts are usually secured on the assets of the company and could have:
i. Floating charge
ii. Fixed charge
iii. A combination of (i) and (ii).
A floating charge covers all the assets as they exist from time to time excluding assets subjected to fixed charge. A floating charge does not prevent the company from buying and selling assets in the normal course of its business. A fixed charge is one or more specific assets if the company fails to pay interest, or the principal, or attempts to dispose of an asset charged, then a receiver may be appointed to take possession of the asset and sell it for the benefits of the debenture holders.
Debentures could be redeemable or irredeemable. The date for redemption is usually written in form of a range (e.g. 2001-2010). The date will be agreed upon at the time of negotiating the loan. Some debentures are irredeemable. In this case, no date is set for redemption but the borrower can redeem the debt whenever he wishes and force the debenture holders to settle.
A borrower may redeem a debenture earlier than the due date because of any of the following reasons:
1. To take advantage of failing interest rates.
2. To make use of surplus fund.
3. To release assets covered by fixed charge for usage as a collateral.
Debenture stocks could also be convertible. In this case, the holder has an option to convert the debenture within a given time period into equity stock at a specific price. If this option is not exercised, then the debenture will continue its normal to redemption.
8.5 Preference Stock
This is because debentures are less risky and usually have tax shield (benefits). Other features of preference shares are that they are not entitled to any voting rights normally, and their interest in the company is represented by dividend payment and principal repayment. Preference shares could be preferred or deferred, cumulative, participating or redeemable. Cumulative preference shares would have their dividend income accumulated and paid at future dates if the company has liquidity problems.
Participating preference shareholders are entitled to a fixed dividend income per year (this may be cumulative) plus a further share of many other profits. In some cases, this further share could be after the ordinary shareholders have been paid a certain dividend. Preferred and deferred preference stock have characteristics similar to preferred ordinary shares.
Advantages and Disadvantages of Convertible Loan Stock
(α) From the point of view of a borrower, convertible loan stock has the following advantages:
ι. Provided the company has good prospects, it will be possible to offer convertible loan stock at a lower interest rate than debentures.
ιι. If the company is just starting up or is developing a new product, so that returns will initially be small, convertible loan stock provides cheap fixed interest funding and the conversion date can be planned to coincide with the growing availability of profit sufficient to pay acceptable dividends.
ιιι. When money is in short supply, the incentive of a future share in profits may encourage lenders who would not otherwise invest in the company.
(β) From the point of view of the lender, by taking convertible loan stock, he ensures a fixed income in the early years while he wants to see whether the business is successful. If it prospers and the price of the ordinary shares rises, then he can take advantage of both favorable conversion terms and also the opportunity of participating in the available profits. If the business is not successful, then he will accept redemption of his loan stock, or will be able to sell it at a price which at least reflects its fixed interest earning power.
8.6 FACTORS TO BE CONSIDERED WHEN SETTING A FACTORY
The important considerations for selecting a suitable location are given as follows:
a) Natural or climate conditions.
b) Availability and nearness to the sources of raw material.
c) Transport costs-in obtaining raw materials and also distribution or marketing finished products to the ultimate users.
d) Access to market: Small business in retail or wholesale or services should be located within the vicinity of densely populated areas.
e) Availability of infrastructural facilities such as developed industrial sheds or sites, link roads, nearness to railway stations, airports or seaports, availability of electricity, water, public utilizes,
f) Availability of skilled and non-skilled labour and technically qualified and trained managers.
g) Banking and financial institutions should be located nearby.
h) Locations with links: to develop industrial areas or business centers result in savings and cost reductions in transport overheads, miscellaneous expenses.
i) Strategic considerations of safety and security should be given due importance.
j) Government influences: Both positive and negative incentives to motivate an entrepreneur to choose a particular location are made available. Positive includes cheap overhead facilities like electricity, banking transport, tax relief, subsidies liberalization. Negative incentives are in form of restrictions for setting up industries in urban areas for reasons of pollution control and decentralization of industries.
k) Residence of small business entrepreneurs want to set up nearby their homelands.
8.7 Assignments
i) What are the various types of short-term business Financing available to a small business?
ii) What are the various sources of medium-term financing available to a small-scale business?
iii) What are the various types of long-term financing available to a small-scale business
8.8 Quizzes
i) What is Short-term business financing? Give 3 examples.
ii) Define Medium-term business financing. Give 3 Examples.
iii) Explain what you understand by Long-term business financing. Give 3 Examples.
CHAPTER NINE
CREDIT CONTROL IN SMALL BUSINESS
9.1 What is Credit Control?
Credit is a system where you pay for goods and services several weeks or months after they have been received. For a small business, this could be either from suppliers or to consumers.
Control refers to the continuing process by which the company credits or exposures are monitored, maintained and policed. It is necessary to screen the credit worthiness of customers before extending credits to them, since most of these facilities are largely unsecured. It is also necessary that the entrepreneur is aware of the business risks behind such exposures. Analyzing such risks, helps to identify the risks in the lending situation, draw conclusion as to the likelihood of repayment and recommend a structure that will minimize risks, while providing the company with a profit margin.
Business risk analysis covers supply, demand, production, collection, management and industry. Business risk is the uncertainty that the management will be able to recover the cost invested in the asset conversion site. Proactive risk management and control positions an entity to exploit opportunities and protect itself against undesirable events while risk avoidance limits any capacity. There is a chance that a debtor may not be able to meet the obligations under the terms specified in the credit agreement. The repayment may also be delayed which can cause cash flow problem for the company. This is a major cause of distress in companies
9.2 Steps in extending credit to customers
In analyzing credits of any sort, it is usually helpful to adopt a framework/ structure that makes it easy for understanding. Over time, the following framework in particular has become popular.
• The 5 c’s approach.
This approach looks at the following elements of the borrower character, capacity, capital, collateral and condition. Questions asked under character includes who is the customer? Is he an existing customer? Is he a referred customer? Is he a sought after prospect? Is he a working customer? The identity of the customer poses a major challenge in view of the poor information and credit database in Nigeria. It is very important to have enough information about the personal details. Character credit history and other subjective character consideration like first impression, purpose of the request, attitude to credit, proposed tenure, etc. Capacity essentially measures the depth service capacity of the applicant. Critical consideration here includes; source of income, stability of income, disposable income, etc. Collateral; since most credits by small businesses are secured by the asset, there is the need to ensure that the credit is based on cash flow and capacity to pay back. Conditions are the terms under which the credit is extended. It is usual to require that the customer make a part payment of the cost of the asset to strengthen the cash flow of the small business. Repayment period should be clearly stated and a markup should compensate for the period of extension of the facility.
• Documentation
The company should ensure proper post disbursement documentation. Keep proper record of customers invoices, repayments amount, and monitor the payment period to ensure that the customer complies with the terms and conditions of the credit. Check to ensure that cheques are properly executed, ensure safekeeping of postdated cheques, ensure cheques are paid in on due dates, maintain regular contact with customers
9.3 Sources of Information on Credit
Many great financial problems are caused by going along with the crowd and trying to keep along with the joneses (Robert Kiyosaki).
The following are sources of information on credit
• Banks
• Trade sources
• National economic data
• Competition
• Financial statements.
Hardly any meaningful decision can be made solely on the basis of any one of the listed sources. The sources complement one another and it is necessary to interpret the findings from all sources combined together
9.4 Consumer Credits
Consumer credit is about extension of credits to reliable individuals and corporates (Partnerships, Sole-proprietorship, etc.) with dependable cash flow. Consumer credits are mass oriented and driven by 3 main factors:
i. People (Having the right quality and quantity of manpower)
ii. Resources (Having the right working tools)
iii. Visibility (Advertising and promotion of services)
Consumer lending is an entrenched culture in developed countries and it is just becoming popular in Nigeria due to difficulty of individuals to acquire assets on cash and carry basis.
9.5 Credit Cards
A credit card is a payment card issued to users (cardholders) to enable the cardholder to pay a merchant for goods and services based on the cardholder’s promise to the card issuer to pay them for the amounts plus the other agreed charges. Credit cards allows customers to build a continuing balance of debt, subject to interest being charged.
Types of Credit Cards operational in Nigeria:
i. MasterCard: This is an internationally recognized card issued by independent banks in Nigeria.
ii. Visa card: Much like the MasterCard and can be used worldwide. Also issued by Nigerian Banks
iii. Verve card: Unlike MasterCard and Visa Card, this is a Nigerian credit card and cannot be used outside the National Boundary.
9.6 Reasons for Credit to Small Business Enterprises in Nigeria
A 2015 report put the number of small and medium scale enterprises (SME) in Nigeria at 37 million. Over the years, the numbers have increased significantly.
A lot of SMEs have also died within the same period and the ones alive struggle to keep their head above the difficult Nigerian waters.
In its own report, the Word Bank highlighted the lack of access to credit facilities as a reason most of these businesses struggle, hence Nigeria’s consistent poor ranking on the ease of doing business index.
These are genuinely worrying numbers for a country that hopes to achieve economic stability on the success of SMEs.
9.7 Cost of Credit
Life is full of surprises, and sometimes you’re faced with an expense that you’re just not prepared for. In such cases, many people will rely on a personal loan. But credit comes at a cost, and many people have no idea how much a loan will cost them. These are the different factors affecting the cost of a loan:
• Interest: Interest rates can vary quite widely and depend on a number of factors such as credit type, repayment term, and credit score of the borrower. Also while it may be tempting to go for a flexible rate, this can be very costly if interest rates go up. It is much safer to go for a fixed interest rate.
• Initiation Fee: This fee is paid when you first take out the loan and is paid only once. Depending on the amount, type of loan and creditor provider, this fee can easily exceed thousands of Naira. An initiation fee can be added to the total loan amount (and paid in monthly installments) or paid upfront. It is better to pay it upfront.
• Service fee: With almost all loans, there is a monthly fee form administration costs. Of course if you have multiple loans, these can add up. For this reason, some people who have several loans might bundle their debt into a single debt consolidation loan, thus reducing servicing fees to one.
9.8 Assignments
i) Explain the various steps in extending credits to customers
ii) Explain the difference between consumer credit and credit cards
9.9 Quizzes
i) What is Credit Control in Small Business Enterprises(SME)?
ii) What are the costs of credit to a customer?
Review Questions
1) The legal definition of “small” varies by country and by industry, However, in the case of Nigeria, hardly do you see a clear-cut definition that distinguishes between small and medium scale enterprises. Substantiate this argument.
2) There is the need to have certain criteria which distinguishes small businesses from other forms of businesses. What are these criteria?
3) Small-scale businesses face many challenges due to their size, and owners and there is the need to address these problems and come up with unique solutions for their small business to survive and prosper. Suggest Possible solutions to these problems.
4) Just as there are red flags in life, so are they also in business. In business, red flags are there to save us but most of the time we ignore it. Explain in full what these red flags are.
5) When organizing a new business, one of the most important decisions to be made is choosing the structure of a business. What are the considerations for the choice of structure of a business?
6) Technically, the memorandum of association and articles of association together form the constitution of a company. Explain the elements of these two documents.
7) Environmental factors can have an impact on project management even in environments that are relatively stable. From access to capital, to access to technology, to access to people, projects will succeed or fail based on the project leader ability to make maximum use of available resources. In addition, unanticipated changes in the environment can cause even the most well-managed and smoothly proceeding project to lose momentum. Explain.
8) Some supportive agencies are established by the government at all levels to facilitates the promotion of entrepreneurship in Nigeria. These agencies are established to cope with the dynamics of the economy at a particular time. Explain the functions of these supportive agencies under three headings.
9) Federal Government especially, is in collaboration with some international bodies to promote small and medium scale industries, just as they do in other key sectors, their functions cover funding, research and development. What are these bodies?
10) The nature of a business plan is that, as a mental process, it decides the direction that a business organization intend to follow, in order to achieve its stated objectives. Explain this with particular reference to the main objectives of a business plan.
11) The executive summary provides the reader with an overview of all of the most important facts contained in the plan. What are the main components of the executive summary?
12) No business can serve everyone, and small businesses with limited resources usually concentrate on a specific customer base. How can a business segments its market?
13) The channels used by a marketer are an integral part of the marketing plan and play a role in all strategic marketing decisions. Discuss with particular reference to the different types of channels available.
14) The pricing strategy tends to be one of the more critical components of the marketing mix and is focused on operating awareness and ultimately profit for the company is the pursuit of identifying the option price for a department. What are the pricing strategies available to a small business?
15) It is a costly mistake to get lost in the false theory that more money equals happy employees. What are the other compensation/motivation options available to a manager?
16) Medium-term financing are sources for funding larger and credit worthy companies. These funds are repayable within 1-5 years or sometimes 1-10 years. What are these sources of medium-term finance?
17) Explain the important considerations for selecting a suitable location for setting up a factory.
18) In analyzing credits of any sort, it is usually helpful to adopt a framework/ structure that makes it easy for understanding. Explain in detail, these frameworks/structure.
19) Explain the difference between consumer credit and credit cards, and highlight the various types of each.
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Source of Funds
Classification
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