ETHIO-LENS COLLEGE

Course Name : Entrepreneurship

Teaching Material

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 Table of Contents
.................................................................................................................................Page No.

CHAPTER ONE..................................................................................................................3
ENTREPRENEURSHIP - Introduction..............................................................................3
1.1 Nature and development of the Concept Entrepreneurship.................................3
1.2 Terminologies related with Entrepreneurs...........................................................9
1.3 Types of start-ups..............................................................................................10
1.4. Entrepreneurial trait and characteristics.................................................................13
1.5. Role of entrepreneurs in an Economy....................................................................18
1.6. The Entrepreneurial Decision Process....................................................................19
1.7. Male versus Female Entrepreneurs....................................................................23
1.8. The Entrepreneurial Process..................................................................................25
ROLE OF SMALL BUSINESS IN AN ECONOMY...................................................30
2.1. Definition of Small/Micro Business.......................................................................31
2.2. Role of small Enterprises is an Economy...............................................................35
2.3 Factors contributing for the success of Micro and small business..........................39
Chapter III..........................................................................................................................41
Small Business Ownership Opportunities.........................................................................41
3.1. Business acquisition or buying a new business......................................................42
3.2. Franchising.............................................................................................................44
3.4. Developing Business idea and establishing a Business from a scratch..................49
CHAPTER IV....................................................................................................................57
DEVELOPING A BUSSINESS PLAN.............................................................................57
4.1. What is a business plan?.........................................................................................58
4.1.1. Why writing a business plan?....................................................................60
4.1.2. Advantages of writing a business plan............................................................61
4.2. Elements of a Business Plan...................................................................................64
4.2.1. Introductory Page.............................................................................................64
4.2.2. Table of Contents.............................................................................................65
4.2.3. Executive Summery.........................................................................................65
4.2.4. Environment and Industry Analysis................................................................66
4.2.5. Description of venture.....................................................................................67
4.2.6. Production/Operation/ Plan.......................................................................69
4.2.7. Marketing Plan.................................................................................................69
4.2.8. Financial Plan............................................................................................74
4.2.9. The Organization Plan.....................................................................................79
4.2.10. Assessment of Risk......................................................................................100
4.2.11. Appendix......................................................................................................101
Summery..........................................................................................................................101
CHAPTER V...................................................................................................................103
SOURCE OF FINANCE FOR SMALL BUSINESS......................................................103
Learning Objectives.........................................................................................................103

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 5.1. Equity or Debt Financing......................................................................................103
5.1.1. Advantages and disadvantages of equity Financing.....................................104
5.1.2. Advantages and Disadvantages of Debt........................................................105
5.1.3. Short Term Loan Financing..........................................................................105
5.1.4. Long Term Debt Financing...........................................................................107
5.2. Internal or External Financing..............................................................................108
Summery..........................................................................................................................111
Chapter VI.......................................................................................................................113
Managing and Ending Business.......................................................................................113
Chapter overview.............................................................................................................113
6.1. Managing Growing Business...........................................................................114
6.2. Problems and causes of failure of small business enterprises..............................125
6.3. Small Business Environment in Ethiopia.............................................................131
Assignment......................................................................................................................146

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 CHAPTER ONE

ENTREPRENEURSHIP - Introduction

1.1 Nature and development of the Concept Entrepreneurship

Like in many other terminologies that are coined by social scientists, we do not have an
indisputable definition for entrepreneurship and entrepreneur. The concept and definition
differs from time to time, country to country, from economic system to economic system
and among disciplines. The development of the theory of entrepreneurship parallels, a
great extent, to the development of the term itself.

The term entrepreneur is a French word and, literally translated, means ''between takers''
or ''go-between''. This concept goes with its definition of early period, which means an
agent who sells products by signing a contract to pay the money and a fixed percentage
of profit to the money person who lends him/her. The money person is a passive risk
bearer while the entrepreneur is an active role player in trading those items with both
physical and emotional risk in return for a certain proportion of gain. Here, an
entrepreneur basically is a trader who explores trade rout and sells products by taking
money from money owners.

In the MIDDLE AGES (13th and 14th century), the term entrepreneur was used to describe
both an actor and a person who managed large production projects (like big public
building, castles etc.) using the resource provided by governments without taking any
risks. Typical entrepreneurs at this time were architectures and contractors.

The reemergence of connection of risk with entrepreneurship developed in the 17th

century when entrepreneur is defined as a person who entered into a contractual
arrangement with the government to perform a service or to supply stipulated products.

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The entrepreneur agrees to provide the product with fixed price despite the price
fluctuation on inputs and its subsequent impact on the cost of providing the output. Here
the entrepreneur took risk.

Following the industrial revolution of the 18 th century, the person with capital was
separated from the other who needs (uses) capital. Those individuals who have the idea to
do something (entrepreneurs) need to contact those having capitals (venture capitalists or
capital owners) to put their idea into practice.

Until mid 20th century (i.e. in late 19th and early 20th century), entrepreneurs were
frequently not distinguished from managers and were viewed mostly from an economic
perspective. Entrepreneurs were considered as those individuals who combing means of
production with his/her own initiative, skill and ingenuity in undertaking the managerial
functions (planning, organizing and administrating the enterprise). S/he also assumes the
chance of loss and gain consequent to unforeseen and uncontrollable circumstances.
Here, the profit is the rewards of the entrepreneurial contribution of the manager.

The concept of entrepreneurship was attached with the concept of innovation in the mid
of the 20th century. At this time the function of the entrepreneur was to reform or
revolutionize the pattern of production by exploiting an invention or, more generally, an
untried technology, method of producing a new commodity or producing an old one in a
new way, opening a new source of supply of materials or a new outlet for products by
organizing a new industry.

An entrepreneur is also defined differently in developed and developing countries. In

developed country - an entrepreneur is the one who is involved in innovation process.
Innovation can be
 Producing new product that is not known by the customers.
 Introducing new method of doing things (Technology) that is not tried or used in an
industry before and that improve the performance of the firm in one way or
another.
 Finding new sources of inputs that were not used before.

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  Opening new market, which can be introducing the product in a market where the
product didn’t exist before.
A combination of one or more of the above options.

In developing countries, however, a person who is able to imitate is also considered as

entrepreneur. Here an entrepreneur is the one who start a business (old or new), undertake
risk, bear uncertainty, and perform the managerial function of decision-making and
coordination. Unlike developed countries, emphasis is not put only on innovation in this
case.
Activity 1
A) Define entrepreneurship and entrepreneur?
B) Distinguish entrepreneurship and intrapreneurship.
C) What are the reasons for not having one definition for entrepreneurship in the
world

Entrepreneurs play a significant role in a certain economic system by innovation, creation

and translation of various things in various fields of industry and commerce. Economic
system in turn affects the nature, scope and environment of entrepreneurship. The role,
function, importance and form of existence of entrepreneurs vary in the three kinds of
economic systems (i.e. socialism-communism, mixed economy and capitalism).

In capitalist economic system, it is free enterprise system where individuals have the
freedom to save and invest and the system encourages their involvement growth and
expansion. Entrepreneurs are free to invest and they are assumed to be catalysts for
economic growth. With this attitude towards entrepreneurs, necessary assistances of
financial or non-financial are provided to potential entrepreneurs to play a role in the
economy.

In the mixed economy, as well, entrepreneurs are considered as important for economic
development and they are involved in production, distribution of goods and services in an
economy. But unlike the case in the capitalist economy, the government's role passes
beyond stabilizing the economy using policies. It is also involved in the production of

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capital goods and distribution of basic social services. At different degree attempts are
also made towards strengthening entrepreneurs.

In contrast, in socialist or communist economic system, entrepreneurs or private investors

are considered as parasites of the economy that exploit the efforts and contribution of the
work force. So they are discouraged not to evolve in an economy. The entrepreneurs, if
they are to be so in this economic system, are those who are working in the central
planning and financial institutions who are allowed to strategize the resource allocation,
with the intension of maximizing returns without ignoring sense of equity.

Entrepreneurs are considered differently in different disciplines. For an economist, an

entrepreneur is one who brings resources, labor, materials and other assets into
combination that make their value greater than before, and the one who introduces,
changes, innovations and a new order. For sociologist an entrepreneur is a person who is
molded by various practical, and social enforcements and in a way that are sensitive to
business and social environment who is capable of seeing and exploiting opportunities
that wouldn't have been seen by others. For a psychologist, an entrepreneur is typically a
person driven by certain forces needed to obtain or attain something, to experiment, to
accomplish, or perhaps to escape authority of others. For a businessperson, an
entrepreneur is an aggressive competitor or a supplier of inputs or a customer of his/her
products.
Activity 2 What is the entrepreneurial decision process? Discuss the two conditions that
must be satisfied for this decision process.

The concept of entrepreneurship is further refined when principles and terms from a
business, managerial and personal perspective are considered. Whatever the definition of
entrepreneurship may be, in almost all of the definitions there is agreement that we are
talking about a kind of behavior that includes:
i) Initiative taking
ii) Organizing and reorganizing of social and economic mechanisms to turn
resources and situations to practical account, and
iii) Acceptance of risk or failure.

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Although each of he definitions views entrepreneurs form a slightly different perspective,
they all contain similar notions, such as newness, organizing, creating, wealth and risk
taking, Yet each definition is some what restrictive since entrepreneurs are found in all
professions - education, medicine, research, law, architecture, engendering, social work
and distribution. So as to include all types of entrepreneurial behavior, the following
definition of entrepreneurship will be the foundation of this material:

Entrepreneurship is the process of creating something new with value by devoting the
necessary time and effort, assuming the accompanying financial, psychic and social risks
and receiving the resulting rewards of monetary and personal satisfaction and
independence.

This definition stresses four basic aspects of being an entrepreneur regardless of the field.
First, entrepreneurship involves the creation process of something new of value. The
creation has to have value to the entrepreneur and to the audience for which it is
developed. This audience can be:
 The market of buyers in the case of a business innovation.
 Prospective students in the case of a new course.
 The constituency for a new service provided by non-profit agency.

Second, entrepreneurship requires the devotion of the necessary time and effort. Only
those going through the entrepreneurial processes appreciate the significant amount of
time and effort it takes to create something new and make it operational.
Third, entrepreneurship requires assuming the necessary risks. These risks take a variety
of forms, depending on the field of effort of the entrepreneur, but usually center around
financial, psychological ad social risks.
Fourth, entrepreneurship involves expecting rewards for the undertaking. The most
important of these rewards is independence, followed by personal satisfaction. For profit
entrepreneurs, the monetary reward also comes into play. For some of these
entrepreneurs, money becomes the indicator of the degree of success.
Therefore, these and some additional concepts can make us describe an ideal
entrepreneur as the one who:

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 Is involved in an endless creation process. An entrepreneur is not the one who
creates or innovates once and stop, rather they keep on innovating. Once they are
sure that their idea is working and their enterprise is functioning smoothly then
they move on to another creation process.
Is diligent, hard working, and persistent to his/her job. Because entrepreneurs are
bringing something new into an economy, they work more than the average
working time.
Is visionary. which means that individual who posses this quality has the passion
for operational excellence, innovative technology, response to the market need,
social betterment.
Possesses high quality of leadership and organizing skill. Entrepreneurs can put
their idea into practice when they have the ability to communicate, convince and
persuade people: and organize, coordinate and direct the efforts of those who are
working for materializing the goal of the enterprise.
Since we are people of developing country the term entrepreneurs used differently than
the term we have used in the above comprehensive definition. In the context of our
country, those people who start a business (new or old), take the risk of operating it,
strive to be successful and profitable, bear uncertainty, and practice the managerial
function of organizing and coordination are entrepreneurs.

Please note that entrepreneurship, entrepreneurs and enterprise are interconnected

concepts. Entrepreneurship is the process of undertaking the activity of entrepreneurs
stated in the definition. Entrepreneurs are those who undertake entrepreneurship and
enterprise is the institution within which the entrepreneurial activities are undertaken.

Enterprise

Process
Person
Institution

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1.2 Terminologies related with Entrepreneurs

Activity
In your belief, what is the basic difference between entrepreneur and professional
manager?
What is inventor, Innovator, Intrapreneur and what is the similarity and difference of
these terms in relation to entrepreneurs

There are various terminologies that are not clearly differentiated from entrepreneurs;
some of them are entrepreneur, inventors and professional managers.

An intrapreneur is the one who is active and capable of building new idea for product or
process and work to bring his/her idea to fruition within the framework of the
organization. S/he is an entrepreneur within an existing business structure. Intrapreneurs
are employees of one organization who are valuable assets of the organization. The
process of establishing entrepreneurship with in an existing organization -
Entrepreneurship - requires the commitment of particularly the top management. The
organization must carefully choose entrepreneurial leader, develop general guideline for
venture and delineate expectation before entrepreneurial program begins.

An inventor is an individual who creates something for the first time. But this people are
not clever enough in materializing their novel ideas and they are good thinkers but are
poor doers. An inventor, in addition to being highly creative, tend to be well educated,
with collage or most often post graduate degree, has family, education and occupational
experiences that contribute to creative development and free thinking; is problem solver
able to reduce complex problem to simple ones; have a very high level of self confidence;
is willing to take risks; and has the ability to tolerate ambiguity and uncertainty. A typical
inventor places a high premium on being an achiever and measures achievement by the
number of inventions developed and the number of patents granted than the number of
business established.

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The entrepreneur is a person who is motivated to satisfy a high need for achievement in
innovative and creative activities. This endless creative and innovative spirit is termed as
entrepreneurship. Building the process is not enough for the entrepreneur, but equally
important task for him/her is to manage the business, i.e. perform entrepreneurial and
managerial functions.

The entrepreneur differs from professional manager in that s/he undertakes a venture for
his personal gratification. As such s/he doesn’t love working within the framework of
occupational behavior set by others. S/he may engage herself/himself as professional
manager to perform some of the functions such as setting objectives, policies, procedures,
rules, strategies and formal communication network. However, the entrepreneurial
function of innovation, assumption of business risk and commitment to her/his vision
cannot be delegated to the professional manager. Failure to the professional executive
may mean a little more than locating a new job perhaps even at a higher salary, where as
failure of an entrepreneur in his/her efforts would mean a devastating loss to her/his
career. The professional manager has to work with in the framework of policy guidelines
laid down by the entrepreneur.

1.3 Types of start-ups

The entrepreneurial decision process may lead to some type of starting a new business.
But what types of start-ups is the main question? Generally, the entrepreneurial decision
process may result in three different types of start-ups. These are:

i) Life style firms: is privately held and usually achieve only modest growth due
to the nature of the business, the objectives of the entrepreneur, and the
limited money devoted to research and development. This type of firm may
grow after several years to 30 or 40 employees and have annual revenues of
about $2 million. A life style firm is a small venture that exists primarily to
support the owners and usually ahs little opportunity for significant growth
and expansion.
ii) Foundation Company - is a type of company formed from research and
development and lays the foundation for a new business area. This firm can

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 grow in 5 to 10 years from 40 to 400 employees and from $10 million to $20
million in yearly revenues. Since this type of start-up rarely goes public, it
usually draws the interest of private investors only, not the venture - capital
community.
iii) High potential venture - is a venture that has high growth potential and
therefore receives great investor interest. It is the one that receives the greatest
investment interest and publicity. While the company may start out like a
foundation company, its growth is far more rapid. After 5 to 10 years, the
company could employ around 500 employees, with $20 million to $30
million in avenue. These firms are also called gazelles and are integral to the
economic development of an area.

Given that the results of the decision. Making process need to be perceived a desirable
and possible for an individual to change from a present lifestyle to a radically new one, it
is not surprising that the type and number of new business formation vary greatly thought
the world.
The distinction between entrepreneur and the professional (traditional) manager is
presented in Table 1.1 below:
TABLE 1.1
DISTINCTIVE FEATURES OF TRADITIONAL MANAGERS AND THE
ENTREPRENEUR
Managers Entrepreneur
Primary motives Want promotion and traditional corporate Wants freedom, goal-oriented, self-
rewards, Power-motivated reliant, and self-motivated
Time Orientation Respond to quotas and Budgets, weekly, End goals of 5-10 year growth of
monthly, quarterly, annual planning horizons, business in view as guides. Takes
the next promotion or transfer. action now to move the next step along
way.
Action Delegate action. Supervising and reporting take Gets hands dirty. May upset employees
most of the energy. by suddenly doing their work.
Skills Professional training. Often business school Knows business intimately. More
trained. business skill than managerial or
political skill. Often technically
trained if in technical business.
Courage and Sees others in change or his or her density. Can Self-confident, optimistic, courageous.
Destiny be forceful and ambitious, but may be fearful of
others' ability in case of optimism.
Attention Primarily on events inside corporation Primarily on technology and market
place.
Risk Careful Like moderate risk. Invest heavily but

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 expects to succeed.
Status Cares about status symbols Happy sitting on an orange crate if job
is getting done.
Failure and Mistakes Strives to avoid mistakes and surprises. Deals with mistakes and failures as
learning experiences.
Decisions Agrees with those in power, Follows private vision. Decisive and
action-oriented.
Attitude Toward the Sees system as nurturing and protective, seeks May rapidly advance in a system,
system position within it. when frustrated; reject the system and
form his or her own.
Problem-solving Works out problems within the system Escapes problems in large and formula
style structures by leaving and starting over
his own.
Family History Family members worked for large Entrepreneurial small-business,
organizations. professional, or agricultural
background.
Educational Level Highly educated. Less well educated in earlier studies,
some graduate work but not PhD in
later once
Relationship with Hierarchy as basic relationship. Transactions and deal making as basic
others relationship
Source: Desai (2000) pp 112-113

1.4. Entrepreneurial trait and characteristics

Activity 3
Do you think that entrepreneurs have different type of trait and characteristics from the
society?
If you feel so just observe some of them in your surrounding and list out those
characteristics and traits

Entrepreneurs have some qualities that distinguish them from the general population and
even from hired professional managers. Several researchers, investors, and aspiring
entrepreneurs possess certain characteristics of entrepreneurs that they have practically
studied form a variety of perspectives and by a variety of methods. Now let us discuss
some of the characteristics that can be easily perceived.
a) High need for achievement

Psychologists recognize that people differ in their need for achievement Individuals with
a low need for achievements are those who seem to be contend with their present status.

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On the other hand, individuals with the high need for achievement like to compete with
some standard of excellence and prefer to be personally responsible to their own
assigned tasks. This drive for achievement is reflected in the ambitious individuals who
start new business (i.e. entrepreneur) and then guide than in their growth.

Because achievement is a major source of satisfaction for entrepreneur, they are more
concerned with achieving success than with avoiding failure. Entrepreneurs carefully
analyze the probabilities of different alternatives for their success. In an entrepreneurial
situation, entrepreneurs have:
 Strong personal initiative- entrepreneurs show greater initiative they act
independently and initiate action without any stimulation or support form other.
They do not require a superior or coercers to initiate things or support them that
could detract from their sense of personal accomplishment and work. They are
self starters, and they want to be able to say "I did it myself"
 Strong personal commitment to their organization- entrepreneurs is fiercely
committal to their organization. They beehive strongly in its goals and values,
they are willing to work harder for the organization, and they want to belong to
the organization for a long time. It is common for entrepreneurs to speak of
their venture as if it were a baby to which they had given birth. They will do
anything to keep the venture alive and well, and to nurture in into success.

 Believe that one person can make a difference - Entrepreneurs believe that they
control their lives, rather than being controlled by another person or by
something else beyond their influence. They have an internal locus of control.
They plan actions and work hard to achieve goals because trying hard is likely
to pay off, because what one does personally can make a difference.

 Believe that work should be guided by personal goals, not those of others-
Entrepreneurs are individualistic; in an ideal world, they would prefer to work
free from superiors who tell them what to do, professional organizations that
set ideal standards for-their performance, and peer groups that constrain their
actions. Many entrepreneurs find freedom in their ventures. They believe a

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 really good job is one where people can realize their own goals, strive to
accomplish these goals as they see fit, and live or die by their ability to plan
and achieve results.


b) Willingness to take risks

Entrepreneurs are calculated risk takers. They enjoy the excitement of a challenge, but
they do not gamble. Entrepreneurs avoid high-risk situations because they want to
succeed. They like achievable challenges. In other words, entrepreneurs feel or get
greater satisfaction in accomplishing difficult but realistic tasks by applying their own
skills. Business growth and development requires that you are not afraid to make
decisions and are willing to assume certain risks. Most people are afraid to take risks
because they want to be safe and avoid failure. However, all phases of your work
involves risk taking, which is an essential part of being an entrepreneur. You have to
work under the pressure and conditions of risk taking and should understand that the
possibility of failure is always present.

c) A need to Exercise leadership

The total performance of a business is mainly determined by the attitudes and actions of
the entrepreneur. Your effectiveness as a leader is determined by the results of your
achievement. Successful entrepreneurs are successful leaders, whether they lead a few
employees or few hundred employees. By the very nature of their work, entrepreneurs are
leaders they:

 Seek opportunities;
 Initiate business enterprise;
 Gather the physical, financial and human resources to carry out their enterprises.
 Set goals for themselves and for others; and
 Direct and guide others to accomplish goals

Entrepreneurs are individuals who have developed their own style of leadership.

d) Self Confidence

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Individuals who possess self-confidence feel that they can face the challenges that
confront them. Studies show that successful entrepreneurs tend to be self-reliant
individuals who see the problems in launching a new venture but believe in their own
ability to overcome these problems.
On the basis of research to date, it appears that entrepreneurs have a high internal locus of
control than that of the population in general. Most of the time, therefore, successful
entrepreneurs are self-confident. They believe that they are capable of controlling their
own destiny and that of their enterprise. They don’t feel that outside forces control them
and their fate.

e) An ability of decision-making
To be an entrepreneur, you must be creative, especially when it comes to decision-
making. You must strongly believe in yourself and your ability to make good decision. It
is this decision-making ability that is the distinguishing mark of an entrepreneur. You, as
an entrepreneur, will have to be more creative, because you will have to make decisions
partly without the assistance of others. You may have to look at a problem from different
angles and seek an innovative ways of solving it.
Success as an entrepreneur depends on your ability to make decisions that improve the
future profitability of your business. Intuitive decision making ability, a most valuable
entrepreneurial resource, comes from years of experiences of being exposed to making
necessary decisions in increasingly complex situations.

f) Ability to solve problems

Successful entrepreneurs seek out problems that may affect their success and
methodologically go about overcoming them. The scientific approach of problem solving
indicates that there are specific procedures to follow in order to solve a problem and
make a decision. These usually involves:
 Identify major problems,
 Search for possible causes to the problem,
 Consider potential solutions to the problem,
 Select the most feasible solution,
 Implement the solution, and

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  Verify that the solution is correct.

As an entrepreneur, you must be influential in your actions. Your business should have
definite purposes and clearly identified goals to achieve. Most entrepreneurs have little
fear of decision making because they do not expect to fail. They set their own standards
for success.
Dealing with ambiguity and uncertainty are important characteristic of entrepreneurs.
You should have a positive attitude towards decision-making. The positive attitude will
help you to use decision making as a positive force in attaining the goals and aspiration of
your business.

g) A high need for feedback

'How are we doing?' This question is ever present in the entrepreneur’s mind.
Entrepreneurs aggressively pursue feedback that will enable them to gauge their progress
and effectiveness. They instinctively nurture relationship with people to learn any effect
on expanding their network of useful contacts and influences.

h) Creativity and innovativeness

The ability to create new ideas, new concepts, and new ways of viewing problems is at
the heart of successful entrepreneurs. The ability to see an opportunity instead of a
problem and a solution instead of a dilemma is a functional skill associated with
entrepreneurs.

i) An ability of effective business planning

Effective planning helps the entrepreneur to establish business goals. As your business
grows, there exists a greater need for planning. In most businesses there are two kinds of
planning activities;
 First, there are entrepreneurial activities, including such tasks of making
contacts with bankers, accountants and lawyers, other who help with
financial and legal matters of your business. Obtaining marketing surveys,
conducting product research and designing budgets are all entrepreneurial
aspects of business planning.

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  Second, there are those aspects of business that may be considered routine.
These include preparing monthly financial reports, monitoring and revising
budgets, managing the flow of production and marketing products and
services.

You can hire some personalities to do the routine activities; but you must be deeply
involved with the entrepreneurial aspects of your business. It is difficult to delegate
responsibility for entrepreneurial activities; and if you do, you may lose effective control
of your business. The more you delegate your routine activities to others, the more time
you will be able to devote to the entrepreneurial planning aspects of the business.
Effective entrepreneurial planning, therefore, assumes that no important decision will be
made without your knowledge and approval. An important purpose of business planning
is to enable you to have the right information at the right time in order to make the right
decisions.

j) Ability to use time effectively

Time is something that you cannot save; you simply lose more and more of it as the day
progresses: By the end of the day there is none left to use? All entrepreneurs need to
manage time effectively, and the key to using time effectively is through better
management. By budgeting time you will achieve better results. Specific way to make
better use of your time includes:
 Establishing goals
 Determining deadlines, and
 Allocating time for each important activity.

Entrepreneurs should spend most of their time on those objectives and problems that
affect the business as a whole. To use time effectively, you must identity the major
problems facing your organization and attack them in priority order, giving preference to
short-term rather than long-term problems.

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1.5. Role of entrepreneurs in an Economy

The role of entrepreneurship in an economy in far more than increasing the gross
domestic product or gross national product of a country. It helps the country in
distributing wealth to many people who are capable of benefiting from it either as an
owner or as an employee; it stimulates other investment as a supplier or as a consumer. In
addition the improvement that follows the application of new technology (converting
business ideas into business), resource utilization capacity is further maximized. The
very important role played by entrepreneurs is filling the gap between the technology and
the unsatisfied social need and function accordingly. Even though many entrepreneurs
have difficulty of bridging the gap between the technology and the market place and
create new venture due to technical, managerial, financial, and networking with
stakeholders' problems, they are playing a significant role towards this end.

1.6. The Entrepreneurial Decision Process

Activity
If you are interested to start a new business, what is the specific entrepreneurial
process you have to follow for achieving success?

Many individuals have difficulty of bringing their ideas to the market and creating a new
venture. However, entrepreneurship and the actual entrepreneurial decisions have
resulted in establishment of several million new businesses. Indeed, millions of ventures
are formed despite recursion, inflation, high interest rates, lack of infrastructure,
economic uncertainty, and high probability of failure. Like all processes, the
entrepreneurial decision process entails a movement from one thing to another - a
movement from a present life style to forming a new enterprise.
The decision to leave a career or lifestyle is not an easy one. It takes a great deal of
energy and courage to change and do something new and different.

Perhaps an even stronger incentive to overcome the inertia and leave a present lifestyle to
create something new comes from a negative force – disruption or a positive force –

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opportunity. Those individuals who were working, for example in an organization, may
be obliged to leave their job for different reasons such as retirement, transfer of one of the
dual career family, graduation or dropouts from a university, lied off or fired out. But
these individuals who are disrupted because of one or more of the above reasons may not
directly start a new business. So what are the probable reasons that make individuals start
their own business? Here are some of the reasons:

I. Perceived Desirability of Starting a new Business

In similar external environment, some people have ability to recognize that there is a
need to establish a way for self-employment when there is disruption. The perception that
starting a new business is desirable results from an individual's background, culture,
subculture and influence from others. The background of entrepreneurs includes
childhood and family environment, education, personal values, age and work history.
Culture and sub culture: A person grew up in a culture that values an individual who
successfully creates a new business will have a better potential to establish a venture than
the one who grew in a culture that doesn’t value self employment. If an individual grew
in a culture that support and even promote forming new business as one of the best
occupation, then those people will start a new business in response to any change resulted
from disruption.

Background:
Childhood family environment: There are also variations within subculture caused by
family traits and their lifestyle. That is, individuals born from family that value
independence show a tendency of being entrepreneurs. That is the independency enjoyed
by entrepreneur in any profession permits their entire family’s life by giving
encouragement and value to their children's business formation activity.

It is believed that variables such as order of birth, parents' occupation, social status and
parents' relationship with children have an impact for children to be potential

20
entrepreneur. Although consensus is not yet reached, being the first born in the family
particularly for females is believed to have an impact on receiving special attention and
develop self-confidence. That in turn led the first-born individuals to be entrepreneurs.
With respect to parents’ occupation, there is strong evidence that entrepreneurs tend to
have half-employed or entrepreneurial father. The independence and flexibility enjoyed
by the parents (entrepreneurial parents) sparks light in the early child mind to follow
them as a role model.

Moreover, the overall parental relationship with children regardless of whether they are
entrepreneurs or not could also has a strong contribution in the development of
entrepreneurial child. If parents are supportive and encourage independence, achievement
and responsibility of children they would have good chance of rearing potential
entrepreneurs.

Educational background: Even though formal education is not necessary to start a

new business, it gives a potential entrepreneur the skills needed to form and manage a
new enterprise. Entrepreneurs have cited the relevance of education in areas of finance,
strategic planning, marketing and management for establishment and management of a
successful enterprise.

Age: - the relationship of age to the entrepreneurial career process has been studied.
Most entrepreneurs start their entrepreneurial career between 22-45 years of age. This is
the period at which people become independent, hard worker and contribute much in
their lives. But this doesn’t mean that people out of this age are not capable of being an
entrepreneur, there are in fact many successful businesses that are established after
retirement.

Personal values: although these various variables can also be used to identify successful
individuals and managers, they are very important to identify entrepreneurs. These
personal values are successful leadership, aggression, benevolence, hardworking,
creativity and resource seeking and attitude towards entrepreneurship as a means of
living.

21
Working history: Plays a critical role in new venture success. Individuals will tend to be
more successful in forming businesses in fields in which they have worked because they
will get experience in the areas of:
 Financing
 Product development
 Preparation of marketing plan and management
 Manufacturing
 Development of distribution channels

Encouragement to form a new business is further stimulated (influenced) by

Teachers can significantly influence individuals to regard entrepreneurship as a desirable

and viable career path. The inclusion of courses that are related to innovation also
provide clue for students to consider entrepreneurship as viable career path.

Peer groups do also influence the decision of their member in carrier. If majority
members in the peer are successful entrepreneurs they could also influence other
members to join similar career.

Role Model: This is one of the most powerful influences in making business formation
possible. Where some one else whom you know as an ordinary person becomes
successful in front of your eyes, it will be easier to picture your self-engaged in similar
activities. An entrepreneur needs strong support and advisory system in the early phase of
the new venture. This supportive system is perhaps more crucial during the start up
phase, as it provides information, advice and guidance on such matter as organizational
structure, obtaining needed financial resource, marketing and market segmentation. Role
models will provide such support an entrepreneur needs during and after the launch of the
new venture.

II. Opportunities (Vivid Possibilities)

22
Although the desire derived from the individual's culture, subculture, family, teachers and
peers needs to exist before any action is taken, the second feature that promotes
entrepreneurial decision is existence of opportunities. Several factors - government,
marketing, and finances - contribute to the creation of a new venture.

Financial Resource: Although most of the start up money for any new company comes
from personal savings, credits, friends and relatives, there is often a need for additional
seed capital. When individuals have money at their disposal and when they do not get any
return out of it, they may decide to start their own business by investing the money on it.

Marketing: it also plays critical role in forming a new business. Presence of sufficient
market size and marketing know how to put together the marketing mixes needed for
successful product launching will initiate disrupted people to start their own new
business.

Government: The government policies towards small enterprises influence the decision
of owning a business. If the government provides incentives, various supportive rules and
regulations such as low tax rate, low interest rate to loan, provision of training, expanding
access to credit, developing infrastructure, stability, etc it encourages entrepreneurs and
discourages otherwise.
As presented above, many potential entrepreneurs never take the fateful step of launching
their own business ventures. Some of those who actually make the move are stimulated
by precipitating events (disruption). In more positive vein, however, prospective
entrepreneurs may unexpectedly stumble across business opportunities like leaving their
presented salaried job and running family business or other profitable firm.

1.7. Male versus Female Entrepreneurs

23
 Activity
Do you think that females can be entrepreneurs? What is the major
difference you will perceive between male and female entrepreneurs?

There has been a significant growth in female self-employment, with women now
starting new ventures at three times the rate of men. By forming over 70 percent of all
new businesses, women now own over 8.5 million small businesses employing over 17
million people, an increase of over 45 percent since 1990, in America. Much is known
about the characteristics of entrepreneurs, their motivations, backgrounds, families,
educational background, occupational experiences, and the problems of both female and
makes entrepreneurs.

Although the characteristics of both male and female entrepreneurs are generally very
similar, female entrepreneurs differ in terms of motivation, business skills, and
occupational backgrounds. Factors in the start-up process of a business for male and
female entrepreneurs are also differences between male and female entrepreneurs are
summarized Table 1.3 As indicated, men are often motivated by the drive to control their
own destinies, to make things happen. This drive often stems from disagreements with
their bosses or a felling that they can run things better. In contrast, women tend to be
more motivated by the need for achievement arising from job frustration in not being
allowed to perform and grow in their previous situation despite their high performance
record in their jobs.

Departure points and reasons for starting the business are similar for both men and
women. Both generally have a strong interest and experience in the area of their venture.
However, for men, the transition from a past occupation to the new venture is often
facilitated when the new venture is an outgrowth of a present job, sideline, or hobby.
Women, on the other hand, often leave a previous occupation with a high level of job
frustration as well as enthusiasm for the new venture rather than practical ex prince,
thereby making the transition somewhat more difficult.

24
 Table 1.3. Differences and similarities between male and female
entrepreneurs
Characteristics Male Entrepreneurs
Motivation Achievement-strive to make things
happen persona l in dependence-self-
image as it relates to status through their
role in the corporation is unimportant
Job satisfaction arising from the desire to
be in control
Departure point Dissatisfaction with present job Sideline
in college, sideline to present job, or
outgrowth of present job Discharge of
layoff Opportunity for acquisition
Sources of funds Personal assets and savings Bank
financing Investors Loans from friends
and family
Occupational Experiences in line of work Recognized
background specialist or one who has gained a high
level of achievement on the field
competent in a variety of business
functions
Personality Opinionated ad persuasive Goal oriented
characteristics Innovative and idealistic High level of
self-confidence Enthusiastic and energetic
Must be own boss
Background Age when starting venture; 25 - 35 Father
was self-employed College educated-
degree in business or technical area
(usually engineering) Firstborn child
Support groups Friends, professional acquaintances
(lawyers, accountants) Business
associates Suppose
Type of business Manufacturing or construction
stated
Source: Hisrich R.D. and Peters M.P. (2002) pp 76
Female Entrepreneurs
Achievement-accomplishment of goal
Independence-to do it alone
Job frustration Interest in and
recognition of opportunity in the area
change in personal circumstances
Personal assets and savings Personal
loans
Experience in area of business Middle-
management or administrative-level
experience in the field Service-related
occupational background
Flexible and tolerant Goal oriented
Creative and realistic Medium level of
self-confidence Enthusiastic and
energetic Ability to deal with the social
and economic environment.
Age when starting venture: 35 - 45,
Father was self-employed College
educated-degree in liberal arts,
Firstborn child.
Close friends Suppose Family Women's
professional groups Trade associations
Service related-educational services,
consulting, or public relations.

1.8. The Entrepreneurial Process

The process of starting a new venture is embodied in the entrepreneurial process, which
involves more than just problem solving in a typical management position. An
entrepreneur must find, evaluate, and develop opportunities by overcoming the forces
that resist the creation of something new. The process has four distinct phases
i. Identification and evaluation of the opportunity
ii. Development of the businessman.

25
 iii. Determination of the required resource and
iv. Managing the resulting enterprise.

Although these phases proceed progressively, none is dealt with in isolation or is totally
completed before facts are being dealt with in a sequential phase. For example, to
successfully identify and evaluate and opportunity (phase 1) and entrepreneur must have
in mind the type of business desired (phase 4).

i. Identify and evaluate the opportunity

Opportunity identification and evaluation is the process by which one entrepreneur comes
up with the opportunity for a new venture, but it is a very difficult task. Most good
business opportunities do not suddenly appear, but rather results from an entrepreneur's
alertness to possibilities or in some cases, the establishment of mechanisms that identify
potential entrepreneurs.

Although most entrepreneurs do not have formal mechanisms for identifying business
opportunities, some sources are very fruitful
 Consumer and business associates
 Numbers of the distribution system and
 Technical people.

Often, consumer such as business associates purchasing product to fit a certain lifestyle,
are the best source of ideas for a new venture

Due to their close contact with end users, channel of the distribution system all see
product needs. Many other entrepreneurs have identified business opportunities through a
discussion with a retailer, Wholesaler or manufacture's representative.
Finally, technically oriented individuals often conceptualize business opportunities when
working on other projects.

Weather the opportunity is identified by -using input form consumer, business associates
channel members, or technical people, and each opportunity must be carefully screened

26
and evaluated. The evaluation of the opportunity is perhaps the most critical element of
the entrepreneurial process. As it allows the entrepreneur to assess whether the specific
product or service has the returns needed for the required. This evaluation process
involves.

 Looking the length of time needed for creation process

 Its real and perceived value
 Its risks and returns
 Its fit with the personal skills and goals of the entrepreneur, and
 Its differential advantage in its competitive environment

It is important for the entrepreneur to understand the cause of the opportunity. Is it

technological change and market shift, government regulation, or assumption? There
factor and the resulting opportunity have a different market size and time dimension.

ii. Develop a business plan

In order to explicit the defined opportunity, a good business plan must be developed. This
is perhaps the most difficult phase of the entrepreneurial Process. An entrepreneur
usually has not prepared a business plan before and does not have the resources available
to do a good job. A good business plan is not only important in developing the
opportunity but also essential in determining the resources required, obtaining those
resources, and successfully managing the resulting venture. The preparation of the
business plan is the focus of chapter 3.

iii. Determine the resource required

The resources needed for the opportunity must also be determined. This process starts
with appraisal of the entrepreneur percent recourses. Any resources that are critical must
then be distinguishing from those that are just helpful care must be taken not to
underestimate the amount and variety of recourse needed. The downside risks associated
with insufficient or inappropriate resources should also be assessed.

27
Acquiring the needed resources in a timely manner gives up as little control as possible is
the next help in the entrepreneurial process. An entrepreneur should strive to maintain as
large an ownership position as possible, particularly in the start-up stale. By
understanding resources supplier needs the entrepreneur can structure a deal that enables
the resources to be acquired at the lowest possible cost and the least control.

iv. Manage the enterprise

After resources are acquired, the entrepreneur must employ them through the
implementation of the business plan. The operational problems of the growing enterprise
must also be examined. This involves implementing a management style and structure, as
well as determining the key variables for success. A control system must be identified so
that any problem areas can be carefully monitored. Some entrepreneurs have difficulty
managing and growing the venture they created.

28
 CHAPTER TWO
ROLE OF SMALL BUSINESS IN AN ECONOMY
Learning Objectives:
At the end-of-this chapter students are expected to: -
 Define Micro/Small enterprise
 State the benefits of small business enterprises for the development of the
economy
 Identify the problem of small enterprises and try to suggest solutions for the
problem.
Activity
What is small Business?
What are the criteria used to classify business as beg or small

2.1. Definition of Small/Micro Business

Across the world as in our country, there are small and large business organizations
operating for profit. Thus, how can we identify that a given business organization is small
or large? A business may be described as 'small' when compared to large firms, but 'large'
when compared to smaller ones. In general, the following questions can be raised in
relation to business organization classification:
 What varieties are applied to determine business size?
 Is independent ownership a critical factor?
 Is sales volume or number of employees a logical guide in describing
smallness?
 Can a business be described accurately as small in both manufacturing and
retailing sector, etc?

There are no lower limits to the size of small enterprise which include the formal and
informal sector represented by self employment, family undertakings, sole owners,
partnerships, companies and cooperatives. However, a problem arises when attempting to
establish an acceptable upper limit of the definition:

29
  Financiers often talk interns of upper levels of fixed assets, net work, or
value added
 Labor officers may refer to the total number of persons employed
 Traders might use a ceiling limit in sales value
 Service personnel may use the total number of customers,
 Manufacturers may prefer to use maximum levels of energy required for
production; or different criteria may be combined in attempting to set the
limit at which the enterprise leases to be small.
Even the criteria used to measure the size of business vary; some criteria are applicable to
all industrial areas, while others are relevant only to certain types of businesses. The most
common criteria used to measure are:
 Number of employees
 Sales volume
 Size of asset
 Personalized management
 Insurance in force
 Volume of deposit
 Market share
 Independence
Small and micro business are available in both developed and developing economy, in
any kind of industry be it service or manufacturing, rules and urban areas. Because of
their contribution to the national economy, the importance and emphasis on steps has
receiving a good attention in the minds of policy markets and planners.
To give you an insight on the parameter (criteria) used to classify small and large
business organizations in Ethiopia and other countries, let us see some so the definitions
provided by different institutions.
In our country, Ministry of Trade and Industry and the central statistics Authority (CSA)
have defined Micro and small enterprises separately. According to the official definition
of Ministry of Trade and Industry. Micro and small enterprises and defined as follows:

30
  Micro enterprises are business found in all sectors of Ethiopian economy with
a paid-up capital (fixed assets) of not more than Birr 20,000, but excluding
high-tech consultancy firms and other high-tech establishments.
 Small enterprises are business enterprises with a paid-up capitol of more than
Birr 20,000 ($2500) but not more than Birr 500,000 ($62500) but excluding
high-tech consultancy firms and high-tech establishments. Note that, (1 us $
equals about 9 Birr)
The central statistic Authority (CSA) for the purposes of its survey on ''urban Informal
sector Activity operator and small scale manufacturing Industries'' has attached various
definitions to enterprises based on capital, level of technical and technological capacities.
Accordingly, it as defined micro and small enterprises as follows:-
 Micro and small enterprises are establishments stated with 10 persons using
power driven machinery''
When we see the experience of other countries, for example the units states of America,
the small business act issued in 1953 stated that.
''A small business organization is one which is independently owned and operated and
not dominant in its field of operation."
The act also further stated that, number of employees and sales volume as guideline in
defining small business.
Small Business Administration Authority of the United State of America in 1972 has
established the following annual sales volume upper limit to fall under small business
enterprises.
1. Retailing and service = 2 to 7.5 million dollar depending on the industry
2. Wholesaling = 95 to 22 million dollar depending on the
industry
3. Manufacturing = 250 or fewer employees
On the top of the above-discussed quantitative standards, there are also qualitative
standards. In the United States of America, a Committee for Economic Development
(CED) has explained that small business is characterized by at least two of the following
key features: -
 Management is independent; usually the managers are also the owners.
 Capital is supplied and individuals or small group holds ownership

31
  The area of separation is mainly ideal. Workers and owners are in one home
community
 The business is small when compared to the biggest units in its field. The size of
the top bracket varies greatly, so that what might be seen large in one field would
be definitely small in another.
The number of employees on a firm's payroll is perhaps the most widely used yardstick.
Usually a business with 100 employees or more is considered to be a large business. The
other usual parameter is the annual roles volume.
As you can understand from the above definitions, there is no accepted standard
definition of Micro and small business enterprises. Different scholars define Micro and
small business enterprises differently based on the level of development of the country
under review. As shown above, it is also usual to see that different institutes define micro
and small enterprises differently using their own parameters.
To provide a clear image of the small enterprise discussed in this material, let us suggest
the following general criteria for defining the small business:
 Financing of the business is supplied by one individual or a small group
 Except for its marketing functions, the firm's operations are geographically
localized. Typically it operates in only one city or community.
 Compared to the biggest firms in the industry, the business is small
 The member of employees on the business is usually fewer than 100.
Broadly speaking, then, small business enterprises basically include family businesses
engaging three or four family member and cottage industries or independent workers in
the non-structured or informal sector of the economy. Additionally, it may include small
building constructors, maintenance and repaired services, trade and transport. Generally,
in our lessons here we are going to focus on enterprises where the operational and
administrative management lies in the hands of one or few people who usually make the
major decision.

32
2.2. Role of small Enterprises is an Economy

Activity
You just see what small businesses are doing in your surrounding and list out the
advantages that you as an individual, the local people and the businesses
benefit from it.

The role of entrepreneurship in economic development involves more than increasing per
capita income. It involves initiating and constituting change in the structure of a business
and society. This change is accompanied by growth and increased out put, which allows
more wealth to be divided to more participants. Innovation is a key for economic
development not only in terms of development of new products but also in terms of
stimulating investment in the new venture being created. Innovation can take place and
be sponsored by the government, entrepreneurs or entrepreneurs. Many entrepreneurs
have a difficult time to innovate and put it is practice mainly because of lack of
managerial skill, marketing capacity or finical resources. Due to this their inventions are
often unrealistic; require significant modification to be marketable. In addition even
when they want to inters into new market by adopting products produced, for instance
some where abroad they frequency don't know how to interface with all the necessary
entities, such as banks, suppliers, venture capitalists, distributors and advertising
agencies.

In spite of all these differences, entrepreneurship is presently the most effective method
of creating new enterprise, and bringing new products to the market. These
entrepreneurial activities significantly affect the economy of an area by building the
economic base and providing jobs.
Given its impact on born the overall economy and the employment of an area, it is
supporting that entrepreneurship has not become even more of a local policy in economic
development.
What concrete benefits does small business contribute is an economy
1. Use of local impute and save foreign exchange.

33
 Most, if not all, small enterprises uses local inputs and don't use imported raw
material or other input. As a result it creates a new market (demand) to locally
produced inputs. The introduction of new demand stimulates the increase from
the supply side in one hand and increases the demand for other products. In
addition when the product-produced substitute imported produces it saves foreign
exchange.
2. Promote Linkage
When the business uses inputs from local products and produces an output that
can be used as an input for other industry in the country then it encourages both
forward and backward linkage.
For instance if a farmer entrepreneur prepares compost and distribute to the
farmers then the entrepreneur creates demand to the farmers to sell cow dung and
crop residues in one hand and the entrepreneur is helping farmers to boost their
production at lower cost. In so ding it is promoting the backward and forward
linkage in one hand and saving foreign currency that otherwise was used for
buying inorganic fertilizers.
3. Efficiently
It is natural that human beings perform best when they work for themselves than
others. When people work as an employee and boss for them selves and are
exposed to take risk is case of failure and be rewarded incase of success they will
perform their maximum by using all their resources efficiently (time, profession,
money etc). This opportunity is exploited when people start their own venture.
Moreover, small businesses by nature are not viable to unnecessary bureaucracy
as number of employees is small. This gives more chance for efficient operation
and reduction of wastage than in big institutions where employees are paid based
on their more presences not of performance.
4. Creates employment opportunity
The more number of small business are established, there will be more job
opportunities available for job seekers. Researches also found out that the
number of employees working in small business is by far very large as compared
to the large institution when observed on total investment to employment
opportunities created.

34
5. Introduce innovation
New products that originate is the research laboratory of big business make
available contribution to our standard of living. There is a question, however, as
to the relative importance of big business in achieving the freely significant
innovations. Some source indicates that many scientific breaks through originate
with independent invertors and small organizations. Students of innovation have
shown the greater effectiveness of small firms in research and development.
Innovation contributes to productivity by providing better products and better
methods of production. The large number of small firms that provide the center
of initiative and source of innovation are thus in a position to help improve the
country’s productivity.
6. Stimulate Economic competition
When there are many small businesses then there are many of them involved in
the same industrial activity. This engagement of many ventures activity induces a
competitive environment that makes each business to complete in a society
desirable manner. They will perform at a maximum efficiency and provide it in a
reasonable price. The introduction of the value of competition (Competitive
market system) in an economy adds value to the effective operation system where
all involved in the process interact in a win-win strategy is a way that promote the
growth of an economy
7. Promotes Economy resilience
When an economy is made of small number of large business organizations only
risk can be spread among them. When the economy of the country basis it self on
very large number of small enterprises, large number of medium enterprises and a
good number of big enterprises in a pyramidal structure then the economy will be
resilient to recover when disturbances are encountered. That is even when some
enterprises fail, others will be successful and the economy as a whole can grow
rapidly. When inefficient businesses are challenged they will improve their
competitive position or disappear. Such failures need not be excessively costly
because the expansion of existing and new successful businesses expands the
economy and create jobs, widen income-earning opportunities for the society. If

35
 only limited number of huge organizations is left to operate in an economy they
will not be efficient, create oligopoly market and exploit consumers’ welfare. At
the same time failure of some of such grant institutions will affect the economy of
the country. Therefore, the expansion of small enterprises plays a significant role
for economic resilience.
8. Supporting large and Giant Enterprises
The interdependence of small, micro, medium and large enterprises in our country
and across the world is one of the basic realities in the economy. The fact that, some
functions are more expertly performed by small business enables the small enterprises
to contribute to the success of the large one. If small businesses suddenly go out of
operation, the fate of the big enterprise will be in danger.
The major contribution of micro and small enterprises in supporting large and giant
enterprise can be classified into distribution and supply function.
I. Distribution Function
To distribute and sell their products, large enterprises should have wholesale and retail
outlets. The vital role of small business in distributing the products of both large and
small manufactures is evidenced by its dominance of let ailing scene. Students let us take
the case of Japans Sony Companies. The company produces daily large amount of
electronic products such as Televisions, Tape Recorders, and Photo Camera etc. These,
products are distributed all over all worlds through small Business. As you may know in
Ethiopia, Glorious PVT. LTD. CO. is in charge of the distribution activities.

II. Supply Function

Small businesses also act as suppliers and subcontractors for large firms. Specially, in
developed world, the final products of small enterprises serve as raw material of the big
enterprises. For instance, General Motor purchases goods and services of small
enterprises to produce Motor vehicles. You can take also the relation ship between cotton
producers' small enterprises and Garment Factors of out county for instance, cotton,
which is the final output of small enterprise, is the row material of Akaki Garment
factory, Bahir Dar Textile Factory or Combolcha Textile factory.

36
On the other hand, small industries also purchase row materials equipment and supplies
from large firms. From these functions, you should understand that, there is strong
mutual relationship between small and large enterprises.

2.3 Factors contributing for the success of Micro and small business

Inspire of the aforementioned problems, small businesses has competitive strength over
bigger ones that emanates from their smallness. Factors that have contribution for the
successes of small business are knowledge of customers, product and geographic
specialization and flexibility in management.

A). Knowledge of customers and markets

As you know, by their very nature, small businesses are nearer to the customers.
Managers of small businesses can easily get information about their customers. On the
other hand, in big businesses their bureaucratic structure tends to isolate its management
from customers and the market. Thus, special effort is required to keep decision makers
of big business enterprises well informed. A through research should be undertaken and
the result be presented to them.

However, it doesn't mean that, research is not applicable for small enterprises. The fact is
that small business managers can acquire almost automatically some information unlike
big business enterprise manage who can get information only with a great like market
supply.

The small businesses managers close acquaintance with customers and markets is a good
potential strength. In short both sensitive awareness of customer's needs and careful
observation of market trends are necessary to make this potential strength a reality.

B) Product and Geographic specialization

As stated above, small business enterprises are nearer to their customers. Thus, there is a
possibility that, small businesses can be an expert of a given product with in a certain
geographic location. This is because small businesses can improve the quality of their

37
goods and services according to the comment of customers in that specific geographical
location. In brief, if a sufficiently narrow market segment is selected, the possibility of
becoming a true specialist comes closer to reality.

C) Flexibility in Management
Rapid environmental change has become a way of life, product life cycles become shorter
and innovative appears with grater frequency. Customers' wants grow increasingly and
competitors move more quickly. As a result, change is a way of life for all business
enterprises of all size. However, a difference exists in the small enterprises a
adaptability. Nearness to their customers and low-level structure puts small enterprises in
a better position to made decisions quickly. In contrast more levels of management must
be consulted before making a change in large enterprises.

38
 Chapter III
Small Business Ownership Opportunities

Overview of the Chapter

This chapter presents the major form of business ownership options and the advantages
and disadvantages associated with it. If a person wants to own a business and work upon
it as a life career, the first thing s/he expected to do is to assess the possible ownership
opportunities. This assessment will enable the potential entrepreneur to select the optimal
choice that can be successful based upon the condition, merit and demerits of each with
the person’s potential, preference and qualification. There are generally four forms of
business ownership opportunities. These are acquiring an existing business organization,
franchising, taking over family business, and establishing a business from a scratch.

After studying this chapter students are expected to know

 The types of business ownership opportunities
 What business acquisition is and what are the advantage and disadvantage of
business acquisition
 What franchising is, the advantage and disadvantages of franchising
 What taking over family business is and the problems associated with it
 What establishing a business from a scratch means
 Sources of business ideas
 Mechanisms of generating a business idea
 Steps in product planning and development

SMALL BUSINESS OWNERSHIP OPPORTUNITIES

An entrepreneur should not always start business from the scratch. They have many
opportunities of having a venture. They can own news business through business
acquisition or buying a business, franchising, taking over family business or establishing
from the organization. Here are some of the opportunities of owning the business.

39
 Activity
If you want to own a business what are the alternatives of owning
it?

3.1. Business acquisition or buying a new business

Acquisition by definition is a complete absorption or buying of an organization. The

already bought organization then is no more independent organization. As acquisition
can take many forms, depending on the goals and positions of the parties involved in
transaction, the amount money involved and type of company.
Although one of the key issues in buying a business is agreeing on price, successful
acquisition of companies usually involves more than this. The primarily concern of
entrepreneurs is maintaining the focus of new feature as a whole. Whether the acquisition
will become the core of the new business or rather represents the needed capability in
terms of distribution outlets, sales force, or production facility the entrepreneur must
ensure that it fits into over all direction of the strategic plan of the present venture.
Acquisition as a form of owning a business has advantages and disadvantages.

Advantages of acquisition

1. Established business
The most significant advantage in acquiring existing business is that the acquired
business has an established image. If the business is profitable and is successfully
running, then what is expected from the new buyer is to maintain the position of the
business.

2. Location
Since the business is established one, there is no problem associated with where to locate
the business. By the time the entrepreneur decides to buy the business, the location of the
business, its accessibility to different infrastructure, to suppliers, to customers and so on
is considered. So there is no problem that the location of the business is going to be new
to the customers or those who need to have a frequent interaction with the business as
they are familiar to the place.

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3. Established market structure
One of the most important factors that affect the value of an acquired firm is its existing
channel and sales structure. Businesses, which are successfully functioning, will have a
well-established channel of distribution, suppliers, consumers which are important assets
for the success of the business.
4. Cost

The actual cost of acquiring a business can be lower than the cost of establishing from a
scratch or any other method of owning a business. This, then, will increase the return on
investment of the entrepreneur.

5. Existing Employees

The employees of an existing business can be important assets to the new entrepreneur.
Particularly those who are key to the organization will remain the business to be
successful if the entrepreneur is able to maintain them. The entrepreneur is new to the
business and market structure members so the existence of employees will enable the
entrepreneur to know the organization culture, its relationship with members in the
market structure, and the industry. It also ensures the continuity of the business in
working with the channel members and others.

6. More opportunity for creation

Since entrepreneurs don’t have to be concerned with finding suppliers, channel members,
hiring new employees, or creating customers awareness, more time can be spent on
assessing opportunities to expand or strengthened the existing business.

Although business acquisition can have the above and other more advantages, it is not
without disadvantage. Here are some of the disadvantages:
1. Marginal success record

Most businesses that are for sale have severe problems that make the business owner to
decide to sale than to resolve the problems. Some of the problems of ventures for sale are

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erratic profit making ability, highly indebted, poor record system, entered into legal
complications to be closed, have out dated machineries and equipments etc. So it is
important to review the records and meet with important constituents to assess the
marginal records in terms of future potential.

2. Over confidence in ability

Some entrepreneurs may assume that s/he can succeed where other have failed. This is
why self-evaluation is so important before entering into any purchasing agreement. Even
though the entrepreneur comes up with new idea and management qualities, the venture
may never be successful for reasons that are not possible to correct.

3. Loss of key employees

Often when another acquires business, key employees leave the organization. Loss of key
employees can be devastating for an entrepreneur who is acquiring a business since the
value of the business is often the reflection of efforts of these employees. This is
particularly evident in service business where it is difficult to separate actual service from
the one who provides it. In the acquisition negotiation, it is helpful for the entrepreneur
to speak to all or at least key employees individually to get some assurance of their
intension as well as to inform how important they will be to the future of the business.

4. Over valued
It is possible that the actual purchase price is inflated due to the established image,
customer base, channel members, or suppliers. If the entrepreneur acquires a business
with a price higher than the business actually worth, the return on investment will be
unacceptable.

3.2. Franchising
Franchising also represents an opportunity for an entrepreneur to expand the business. In
the context of franchising, the entrepreneur will be trained and supported in the marketing
by the franchisers and will be using the name, process, product and so on. Franchising is
the process that allows another party to use a product or service under the owners’ name.

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In the context of franchising, the entrepreneur will be trained and supported in marketing
by the franchiser and will be using a name that has an established image. It is a means by
which entrepreneurs can expand their business by having other pay for use of the name
process or product. Franchising is defined as an arrangement where by the manufacturer
or wholesaler of a trademarked product gives an exclusive right of local distribution to
independent retailer in return for the payment of royalty and conformance to standardized
procedure. The person offering the franchise is known as the franchisor. The person who
purchases the franchise is the franchisee.

Advantages of franchising to the franchisee

One of the most important advantages of buying the franchise is that the entrepreneur
doesn’t have to incur all the risks associated with creating a new venture. Through
franchising entrepreneurs can reduce problems such as product acceptance, management
expertise, meeting capital requirement, knowledge of market, operating and structural
control.

1. Product acceptance
The franchisee usually enters into a business that has an accepted product or trade mark.
S/he shouldn’t spend resource in trying to establish the credibility of the business. The
credibility already exists since the years the franchise has existed.

2. Management expertise
Another important advantage of franchising is the managerial assistance provided by the
franchiser. Each new franchisee is often required to take a training program in all aspects
of operating the franchise. This training can include off-job training about business
concepts such as accounting, personnel management, marketing, and production or on-
job training where the franchisee is required to work in an existing franchise owner
business at the company owned store. Once the franchise has been started the franchisers
will offer managerial assistance on the basis of need.

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The training and education program is actually one of the most important criteria that
entrepreneurs should consider in evaluating any franchisee opportunity. If the assistance
during start up is not good, an entrepreneur may probably look for other opportunities in
case s/he has not outlaid a large amount of money.

3. Capital requirement
The franchise offers an opportunity to start new venture with support that could save the
entrepreneur significant time and possible capital. Some franchisers conduct location
analysis and market research of the area that might include an assessment of
demographic, business condition and competition. In some cases the, franchiser finance
the franchisee to start operation. Savings in startups are also reflected in the pooling of
money by individual franchisees for advertising and sales promotion.

4. Knowledge of the market

Any franchise business offers the entrepreneurs’ years of experience in business and
knowledge of the market. This knowledge can be reflected ob plans offered by the
franchiser that deals the profile of the target customer and the strategies that should be
implemented ones the operation has begun. Most franchisers will consistently evaluate
changes in test and preference of the target market, change in the market size of the
business and so on to design the best strategy the makes the business to successfully
operate in the industry.

5. Operating and structural control

Two problems that many entrepreneurs face in starting a new venture are quality control.
Support in standardization in the supply, product and service provided by the franchiser
reduces the problem of quality deterioration of the product or service rendered.

Advantage to the franchiser

The advantages to the franchiser are related to expansion of risk, capital requirement and
cost advantage.

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1. Expansion of risk
The advantage of franchising for the franchiser is that the venture can expand quickly
using little capital. This advantage is significant when we reflect on the problems and
issues that an entrepreneur faces in trying to manage growing new venture. Moreover risk
of failure of that particular business will be shared by both parties and in fact could be
more for the franchisee.

2. Cost advantage
Many franchise businesses produce parts, accessories and packages and raw material in
large quantities then sell them to franchisees. This can be part of the franchising
agreement; this, hence, will help the franchiser to get the advantage of economies of scale
and there by reduce cost.
Another advantage is that each franchisee is responsible to contribute for advertisement
that would be too costly had it been covered by the franchiser. This pool of resource
allows the franchiser to conduct advertising in different media across nations.

Disadvantage of franchising
This approach may not be the best approach for owning a business at all the time.
Problems between the franchiser and franchisee are the most common problems. The
disadvantage relies highly on the failure of the franchiser to provide services, advertising,
location and other promises stated at the outset of entering into the agreement.

3.3. Family Business ownership Opportunity

A person whose parents have had a business can get an opportunity of having a business
by taking over his/her parents business when parents retire (get older). When succession
occurs, some researchers suggest the transfer to follow a planned change in management,
strategy, and control method that can be shaped by family relationship. It is a four-stage
model that can be repeated, done for longer time/shorter time depending on the
complexity of the business as the new generation joins the firm.

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1. Owner manager Business
This is a stage of business operation where the founder is in control but a son or a
daughter is introduced into a business on a permanent basis. Here, the entire decision is
under full control of the owner and the potential successor is allowed to assist and
experience what is going on in the business world and in particular in the parents
business.

2. Training and Development of the New Generation

This is the stage where decisions are made, although not always formally, about passing
the business to the successor and a process of training and development is provided to the
successor. This is an informal kind of usually on-job training where the potential
successor is allowed to perform different tasks in a business and be acquainted with the
entire business operation. Here the owner about his/ her experience, challenges faced and
methods used to cope them up, the relationship of the business with different suppliers,
customers, bankers etc provides the successor with information.

3. Partnership
This is the stage when the son/ daughter shows sufficient business skill and expertise that
the founder starts to loosen the reins of control, delegates authority and starts to share
responsibilities. Here the successor performs the main job and the founder assists the
successor to perform in a better way. They work together; the successor gets the chance
to pass decision with responsibility of the out come.

4. Power transfer
This is the phase when strategic planning, management control and operational
responsibility shifts from one generation to another. The succession process accelerates
as the founder begins to retire and reduce his/her active participation in the business.
Succession cannot be always be systematic and trouble free. That is transfer of ownership
also has a chance for creation of conflict between the founder and successor. Even though
females can also take over the business the potential conflict is high when transfer is

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made between the father and the son. Although they have strong relationship between
them and they can work successfully, psychologists argue that this kind of relationship
has a unique potential for conflict. Founders have very close link with their business. The
father tends to see the business as an extension of himself, a symbol of achievement, and
extension of his masculinity. He also tends to have a strong control over the business and
passing to the son can make him feel like threatening his masculinity.

Different researches revealed that the business functions better while managed by the
business founder. Most transferred business tends to fail after passing two or three
generations. This could be because the one who took over the business may not be
interested in doing the business, may not have the skill and dedication for making the
business successful, or the business type may mot be the one which has the tendency to
grow and prosper.

3.4. Developing Business idea and establishing a Business from a scratch

Entrepreneurs can also start their business from a scratch. For this they must have a new
idea that is to be converted into fruition. Although there could be a lot of opportunities
that allows potential entrepreneurs to come up with new idea, some of the more
frequently used sources of idea are customers, channel of distribution members, existing
companies, and research and development.

A. Customers
Potential entrepreneurs should pay attention to the final focal point of the idea for a new
product – customers. This attention can take the form of informally monitoring potential
ideas and needs or formally arranging customers to have an opportunity to express their
opinions. Care need to be taken to insure that the idea or need represents the large share
of customers that permit the establishment of new businesses.

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 B. Existing Companies
Potential entrepreneurs should also establish a formal method for monitoring and
evaluation competitive products on the market. Such kind of analysis reveals ways of
improving the products that may result in a new product that has most market appeal.
For instance, if a product currently available in a market is too costly and uses metal as an
input you may think of introducing a new product that uses plastic as an input with cheap
price.
C. Distribution Channel
Members of the distribution channels are also excellent sources of new idea because they
are familiar with the needs of the market, the common complaints of customers,
weakness of the current product etc… Channel members are frequently used not only as
source of information but also help in marketing the entrepreneurs’ new product.

D. Research and Development

The largest source of the new idea is the entrepreneurs “own research and development”
Entrepreneurs can have access to formal research and development unit of a big business
enterprise or a separate research and development institution. Those ideas which are very
much convincing may not all the time be sponsored and launched in the market;
therefore, research ideas which are not put into practice can also be used as sources of a
new idea for establishing a new business.
In addition to such sources there could also be government patent offices that contain
numerous new product possibilities which can serve as an alternative to select the
marketable product with or without modification.

3.4.1. Methods of generating new Idea

Business ideas from these or other sources can be generated, developed and roughly
screened by using different methods. Some of them are focus group discussion, brain
storming and inventory analysis. In addition to these techniques other techniques of
creative problem solving techniques such as Gordon method, free association, synectics,
reverse brainstorming, brainstorming, check list method and so forth is also used to
generate ideas. The first three idea generation methods are presented below.

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 a. Focus group discussion
Focus group discussion has been used for a variety of purposes of which idea generation
method is the one. In such kind of discussion, a moderator leads a group of people
through open and in-depth discussion rather than asking structured questions to get a
predetermined response. Members of the focus group discussion are free to raise ideas
that are related to the original idea taken from different sources for further development.
However, when ideas go far from the original point, the moderator should be able to
direct the entire discussion to move around the idea stated at the out set. Here criticizing
the idea of the other is possible and those ideas on which the group member reach at
consensus is taken as final point. Moreover, the moderator is also responsible to make all
the group discussants to participate equally through promoting the dormant ones and
making the dominant speakers to leave gap for the dormants to foreword their reaction.

In addition to generating new ideas, focus group discussion is excellent method for
initially screening ideas and concepts. The size of the focus group ranges from 8-14 and
12 is the ideal group size.

b. Brainstorming
It is the most widely used technique both for idea generation and for creative problem
solving activities. Brainstorming method for generating new idea is based on the fact that
people can be stimulated to greater creativity by meeting with others and participating in
organized group experiences. Although most of the ideas generated from the group has
no basis for further development, leaving the people free often leads to emerging of new
ideas. Brainstorming is unstructured process of generating all possible ideas by a
spontaneous contribution of participants. The size of each brainstorming group ranges
from 6-12 to ensure the participation of wide range of knowledge. To avoid inhibiting
responses and reservation of participants from raising ideas that they feel, no group
member is recognized as expert in the field under discussion. All ideas no matter how
illogical must be recorded. When we use this method the following things must be keep
in mind.
 No criticism is allowed by any one in the group on the idea of the other

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 Freewheeling is encouraged in a sense that the wilder the idea the better the
progressive outcome will be; therefore, each member has the right to think
differently with no limitation of the boundary of thinking from external party.
 Quantity of ideas is encouraged. That is the greater the number of ideas the greater
will be the likely hood of emergence of useful idea
 Combination and improvement of ideas are encouraged. The brainstorming
discussion should be a fun with no dominance or prohibition of the discussion.

c. Problem Inventory Analysis

Problem inventory analysis uses individual in a manner that is similar to focus group
discussion to generate new product ideas. However, instead of generating new ideas
themselves, customers are provided with a list of problems in a general product category.
Then there are asked to identify and discuss products in this category that have a
particular problem. This method is effective since it is easier to relate known products to
suggested problems than to generate an entirely new product idea by itself. Problem
inventory analysis can also be used to test a new product idea.

3.4.2. Product Planning and Development Process

Ones ideas emerge from idea source or creative problem solving technique, they need to
be developed and refined to new product to be offered. This refinement process is called
product planning and development. It is divided into five major stages: Idea stage,
concept stage, product development stage, test marketing stage, and commercialization
stage. The commercialization stage involves the product life cycle (introduction, growth,
maturity and decline).

At each stage of the product planning and development process, criteria for evaluation
need to be broad, yet quantitative enough to screen the product carefully in the particular
stage of development. Criteria should be developed to evaluate the new product in terms
of market opportunity, competition, market system, financial factors and production
factors.
The new product should have enough demand both in market size and further expanding
opportunity. Currently competing producers, price, and marketing policies should be

50
assessed in order to forecast the possible impact of the existing product on the market of
the new product and to enable the new product possess product features that can remain
competent in the market.

1. Idea stage
Promising new products should be identified and impractical ones should be eliminated
in the idea stage. The idea can be evaluated by using systematic evaluation technique by
presenting the new product with its chief values and benefits to the potential customers
and know the response. Moreover, the need of that product to the enterprise, the financial
parameters such as cash inflow and out flow, contribution to profit and return on
investment must be forecasted. In order to accurately determine the need for a new
product, it is helpful to determine the potential needs of the market in terms of timing,
satisfaction, alternatives, benefits and risks, future expectations, pricing versus product
performance features, market structure and size, and economic conditions. The need
determination should focus on the type pf needs, its timing, the users involved with trying
the product, the importance of controllable marketing variables, the over all market
structure, and the characteristics of the market. Each of these factors should be evaluated
in terms of the characteristics of new idea being considered and the aspects and
capabilities of present methods for satisfying the particular need. This analysis will
indicate the extent of the opportunity available.

2. Concept Stage
After a new product idea has been identified in the idea stage the refined product idea is
further developed and refined through interaction with customers. At this stage, potential
acceptance of the product by customers is done without incurring the cost of
manufacturing the physical product. This can be done by inviting customers to respond to
and be able to know their attitude to the product by describing the characteristics and
attributes of new product idea.
Their comment allows knowing the potential modifications to be made on conceived
product. Analyzing consumers' response can discover favorable and unfavorable product
features and additional favorable attributes can be incorporated in the new product.

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3. Product development stage
In this stage, consumers’ reaction to the physical product is determined. One method used
at this stage is the consumer panel in which a group of potential customers are given with
sample products of the new product and competitive product and take their response
again fro possible modification.

4. Test Market stage

Although the result of product development stage provides the basis of the final response
and modification, this test step is the evaluation process; the test market stage provides
actual sales result that indicates the acceptance level of consumers. Positive test results
indicate the degree of probability for success of the product launch and company
formation. When we find positive indication and decide to go to the next stage then it
follows the commercialization stage where by products are formally introduced into the
market.

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 CHAPTER IV
DEVELOPING A BUSSINESS PLAN
Objectives
 Know what business plan is

 What is the advantage of the business plan?

 What are the main components of a business plan?

 What are the main issues that need to be addressed in each component of the business
plan?
 Able to develop a business plan
For a person who has the knowledge about business courses, it is normal and natural to
know about planning, how to plan, challenges to planning and the relevance of planning.
Planning is anticipating the future courses of actions that are needed to be taken to
achieve a certain objective. Plans are of many types, depending on the parameters used
for classifying them. Planning is a dynamic and ever ending process, challenging in a
dynamic environment and yet pertinent for organizations be if small or large, business or
public organizations.

Planning is important in early stages of any new venture when entrepreneurs need to
think of establishing a new business. Business plan, although often criticized for being
‘reams of glory’ is probably the most important document to an entrepreneur at a start up
stage. Business plans tend to be treated as an academic exercise by many writers and
consultants. They talk about such things as ‘the planning process’, ‘driving strategy’, the
‘organizational strategy’, and ‘modeling approach’; however, planning shouldn’t be
viewed as an academic exercise. Entrepreneurs can enhance their chance of success by
taking time or write a business plan. The process of thinking about your business venture
and then articulate it on a paper will assist you in thinking through how you are going to
accomplish your goal. There are many successful entrepreneurs who are not the only
business people who tell you that their business plan was instrumental in keeping them
focused on their objectives. Entrepreneurs are not the only people who write and use
business plans. Many large businesses are engaged in planning. The anatomy of their
plans resembles in many aspects the basic plan.

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Activity
What is a business plan and what makes it to be different from other types of plans?

4.1. What is a business plan?

As basic as a question may seem, it is the most appropriate place to begin the planning
process. Having the right view of the business plan will help you develop the kind of plan
that will allow you/ your business to be successful. All kinds of definitions are given by
different authors but with similar key concepts.
1. A business plan is a document that convincingly demonstrates that your business
can sell enough of its product or service to make a satisfactory benefit and be
attractive to potential partners.
2. A business plan is a written summery of entrepreneurs proposed business venture,
its operational, financial details, marketing opportunities and strategies and the
managers skill and ability.
3. A business plan is a selling document. It should sell your business and its
executives to potential bankers of your business, from bankers to investors to
partners to employees.
4. A business pan (road map) is a written document prepared by the entrepreneur or
her close assistants that describes external and internal factors that are pertinent to
address issues such as where I am?, Where I want to go?, and How can I get
there? This plan thus is composed of mission, goal and objective and the strategy
of materializing the objectives. It often involves the integration of functional plans
such as marketing, manufacturing, human resource and financial plans.

A business plan thus describes the direction the company is following what its goals are,
and where it wants to go and how it is going to get there. Be aware that a business plan is
not a simple assignment that can be completed in an over night. It is a result of many
weeks and months of research and evaluation. A business running without a plan is
reactive rather then being proactive. It today’s dynamic world, a business must plan in
order to successfully. Without a plan it is not possible event o forecast short term sales,
human resources requirement, material requirement and financial demands let alone the

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impact of the external environment to the business. In short the business plan is
entrepreneurs insurance against launching a business destined to fail or mismanage a
potentially successful company.

Many entrepreneurs agonize about writing a business plan because they find it so difficult
to get started. When the entrepreneur decides to develop a business plan she must be
quite sure of having knowledge about planning, forecasting, accountancy, marketing,
research, sales, human resource management, legal issues in establishing a business, and
product development. If knowledge is lacking in either one or more of them, the
entrepreneur can seek assistance from experts in the area who later on are going to be
partners in the organization. The business allows the entrepreneur to exploit the
opportunities that arise in the life of a business. A written business plan becomes
entrepreneurs’ business representative during sales and conference presentations and
meetings.

Activity
Have you ever seen a written business plan?
What do you think is the advantages of writing a business plan?

4.1.1. Why writing a business plan?

Every entrepreneur has a business plan. The problem is that more often that not it is
within her mind and is not written down. The problem is, a plan in the entrepreneur’s
head is very much different from the one that is written down. The written one is precise,
more fluid; whereas the former it is unknown to others working with the entrepreneur.
The difference between unwritten plan and written plan is explained by the challenge
faced by the entrepreneur during transferring the plan in mind to the paper. If you talk to
an entrepreneur who passed through writing a business plan you will learn that it is one of
the most difficult tasks they ever accomplished.

A plan is a reflection of the creator. It should demonstrate that the entrepreneur has
thought seriously about the venture and what will make it succeed. Preparing a solid plan

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demonstrates that the entrepreneur has taken the time to commit the idea to prepare.
Building the plan forces the entrepreneur to consider both the positive and negative
aspects of the business. A detailed and thoughtfully developed business plan makes a
positive first impression on those who read it. In most cases potential lenders and
investors read a business plan before they meet the entrepreneur. Sophisticated investors
will not take time to meet with the entrepreneur whose business plan tends to reflect a
series investment of time and energy. They know that an entrepreneur who lacks the
discipline to develop a business plan likely lacks the discipline to run a business.

An entrepreneur cannot allow others to prepare the business plan for her because
outsiders cannot understand the business nor envisioned the proposed company as well.
The entrepreneur is the driving force behind the business idea and is the one who can best
convey the mission and the enthusiasm she has for transforming the idea in to successful
business. Also because the entrepreneur will make the presentation to potential lenders
and investors she must understand every details of the business plan.

4.1.2. Advantages of writing a business plan

1. Obtaining Bank Finance
For most banks it is usually enough that an applicant provides past and current financial
statement to get a formal hearing of loan if the business is not new but in today’s world,
just getting hearing is not enough. Because more businesses are seeking bank financing
than can be financed by the bank, it is only those businesses that present the best case that
are financed. Therefore, the business plan helps you to present the business in convincing
and feasible manner and be financed. Since bankers are risk averse, a written business
plan carries an important message even before it is read. It is an indication that the
company’s executives are serious enough to do formal planning and the project to be
financed is a well thought over and articulated business idea that can serve as an
assurance for being financed.

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2. Seeking investment fund
Venture capitalist and others require a business plan from any company that want to be
taken seriously for financing. Business plan is the most important one in this condition
just like the curriculum vitae for job application. Venture capitalists use business plans to
screen out those businesses to be financed. From among the potential applicants for
finance those, which are more convincing, well articulated, feasible in terms of
profitability and continuity will be selected. So a well-written business plan expands the
chance of being financed.

3. Arranging strategic alliance

Strategic alliances are arrangements between large and small companies to carry out joint
research, marketing and other activities. For small business arranging strategic alliance
with a large company can mean gaining access to important financial, distribution and
other resources. But before a large company will even consider a strategic alliance, its
executive will want to examine a smaller company‘s business plan.

4. Obtaining large contract

Smaller companies seek to obtain a large chunk of business from different corporation
but obtaining large contract is a common obstacle for small business. It comes when the
corporation representatives says something like ‘everyone knows who we are and we
will be around long enough to fill all the obligations, but very few people know the small
and new business. At this point, producing a business plan can go a long way towards
reassuring a corporation that we will be around and will discharge our responsibility that
arises from the contract. The business plan demonstrates that you have thought well for
longer period for several years and have plans for what you have accomplished.

5. Attracting key employees

When a new or early stage company goes to hire top-level managers, it faces difficulty
unlike large companies. A prospective manager your company wants to hire may be
considering leaving a secure job with a larger business and wandering how long your
company is going to be around. If he/she feels to unsecured you cannot convince that

57
person to join your company. Therefore, availability of a business plan can serve as an
indication of long-sighted nature of your business.

6. Completing merger and acquisition

Whether you want to acquire a new business or want to sell you business can also be
indicated in your business plan and the action of doing this will not be reactive as things
are available to you but it will be proactive and actions will move together with your
plan.

7. Motivating your management Team

One of the major problem confronting growing companies is communicating companies
strategy and business approach within the company so that every one will work towards
the same goal. When individuals in a business have different visions about the company
strategy, customers will be confused about what the company is trying to accomplish. A
written business plan that is based on inputs from all members of the companies
management team and distributed to all managers ensure that every one understands what
where the company is headed. In the process, the plan serves as a motivational tool by
laying out the companies financial, marketing and production goals. Other benefits are
derived from a business plan fro both the entrepreneur and the financial sources that read
it and evaluate the venture. Writing a business plan particularly for entrepreneurs have
the following merits.

 The time, effort, research and fund spent to formulate the business plan forces
entrepreneurs to view the venture critically and objectively.
 The competitive, economic and financial analysis included in business plan
exposes the entrepreneur to closely scrutinize his/her assumptions about the
ventures success
Since all aspects of the business venture must be addresses in the plan the entrepreneur
developments and examine operating strategies and expected results from outside
evaluators

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  The business plan tries to quantify objectives, provide measurable benchmarks
with comparative forecasts with actual results.
 The completed business plan provides the entrepreneur with a communication
tool for outside financial sources as well as a operational tool for guiding the
venture towards success.

Whereas for potential financers the business plan provides the following information
 Provides information about the detail potential market for the product, and plans
for alternative sources of securing the fund
 Through prospective financial statement, the financial statements in the business
plan illustrates the business’s ability to pay back debt and distribute adequate
equity to shareholders
 The plan identifies and indicates possible risks and crucial events with
presentation of contingent plan that can be an outlet for success of the business
 Indicates the managerial and planning ability and commitment of the entrepreneur
 The information gained from business plan also makes potential financing
institutions to reasonably decide on financing the business

4.2. Elements of a Business Plan

There are no substitutes for a business plan and there is no short cut to produce a business
plan. Each of it is unique in terms the nature and the special contribution of the business
to the economy. The elements of a business plan may be started but how entrepreneurs
tell their story should be unique and reflect their personal excitements about the new
venture. Although building a business plan doesn’t guarantee success, it does raise an
entrepreneur’s chance of succeeding in a business.
A business plan typically ranges from 25-55 pages length. Shorter plans typically are too
sketchy to be of any value and those much longer ones are too long to be grasped very
easily. The following are part of a business plan.
1. Introductory Page
2. Executive Summery

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3. Industrial analysis
4. Description of venture
5. Production/ Operation/ plan
6. Marketing plan
7. Organizational plan
8. Assessment of risk
9. Financial plan
10. Appendix

4.2.1. Introductory Page

This is the title or the cover page that provides a brief summery of the business plan’s
content. It contains:
 The name and address of the company
 The name of the entrepreneur and addresses (Tele, fax, website, etc)
 A paragraph describing the company and the nature of the business
 The amount of financing needed and probably the combination of sources (stock,
debt, and their one investment)
 A statement of confidentiality of the report so that the idea will not be taken by
some body without the consent of the author.
 This page summarizes basic information that could take to much time and effort
to extract form the body of the report.

4.2.2. Table of Contents

This includes the logical listing of all the business plans section together with section
titles and page numbers. Be sure to list the major section as well as for important sub-
sections. This section enables potential reviewers or reader of th business plan to quickly
go and read the particular section of the business plan in which they are interested among
other parts of the business plan.

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4.2.3. Executive Summery

This part of the plan is prepared after the total plan is written. This part should stimulate
the reader to go further and read the entire business plan. This is important section that
shouldn’t be written without proper care because investors and other potential sources of
finance decide whether reading the entire plan or not by reading this part of the plan. It on
average is written on two to three pages. An executive summery among other things
should contain at least the following.
 Brief discussion of the business concept
 The facts that support the relevance or opportunities of establishing the
business should be mentioned. This is the change in the economy, industrial
expansion, information technology expansion etc that are supported by facts
should be presented
 The strategy that is designed to exploit this opportunity by establishing this
business should be briefly discussed. The kind of marketing strategy,
management system, the technique employed to pursue that opportunity and
what makes this strategy to be different from other which are being practiced
in other organizations
 The potential benefits that can be accumulated by pursuing that strategy and
the financial feasibility of operating it should be presented
 In addition to this other information which is believed to have positive impact
on investors can be included in this part of the business plan.

4.2.4. Environment and Industry Analysis

It is important to put a new venture in proper context by conducting environmental

analysis to identify trends and changes that is occurring in a national and international
level that may affect the new venture. The environmental analysis include the following

Economy: The entrepreneur should consider trends in the gross national product,
unemployment by geographic area, disposable income of residents, the saving habit of
people and so on.

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Culture: An evaluation of cultural change may consider shifts in population, value
system towards for instance fashion, work, saving, safety, health and nutrition etc.

Technology: Although advances in technology are difficult to predict, the entrepreneur

should consider some potential changes in technology by considering resources allocated
for technological advancement by different organization. Being in a market that is rapidly
changing due to technological development will require the entrepreneurs to make careful
short term decisions as well as to be prepared with contingency given any new
technological development that may affect the product.

Legal Concerns: There are many important legal issues in starting a new venture. The
entrepreneur should be prepared for any future legislation that may affect the product or
service, channel of distribution, price or promotion strategy. The deregulation of price
restriction on media advertisement, safety regulation affecting the product or packaging
should be assessed.

Such external variables are generally uncontrollable yet have impact on the business
operation. Ones an assessment of the environment is complete, the entrepreneur should
make industrial analysis that will focus on specific industrial trends. Two of them are the
industrial demand and completion.

o Industrial Demand
It is often available from published sources. Knowledge about whether the market is
growing or declining, the number of new competitors, and the possible changes in
consumers’ needs are important issues in trying to ascertain the potential benefit that
might be achieved by the new venture. The demand for entrepreneur’s product requires
marketing research that is going to be discussed I the marketing plan component of the
business plan.

o Competition

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Most entrepreneurs generally face threats from larger corporations. The entrepreneurs
must be prepared for these threats and must keep him/her informed about who the
competitors are and what their strengths and weaknesses are so that effective marketing
strategy is put into effect. The industrial analysis should finally need to have a briefing of
the potential customers and their profile; their location and trends occurring in the market
area, and the market segment where by the venture will serve and compete with.

4.2.5. Description of venture

This section begins by mission statement of the enterprise. This statement describes the
nature of business and what the entrepreneur hopes to achieve with the business. This
mission statement is also called the definition of business that guides the firm through
long term decision-making. After a mission statement important information that
provides clear description and understanding of the business venture is discussed. Some
of the vital areas described here are the following.

 Product
The business owner should describe the company’s over all product line, giving an over
view of how customers use goods and services. Drawing, diagrams and illustration may
be required if the product is complicated. It is best to write product description so that
any one can understand it. The entrepreneur should include a summery of any patent,
copyright or trademark protecting the product from infringement by competitors. Finally
the owner should honestly compare its product with that of competitors citing specific
advantages that makes the business’s product different fro others.
 Location
The location of the business is vital for success of the business particularly if the business
is retail or involves service delivery. Thus the emphasis of location in the business plan is
a function of the type of business. In assessing the building or space that the business is
going to occupy, the entrepreneur is going to evaluate such factors as parking, access
from road way to facility, and access to customers, suppliers, distributors, delivery rates,
town regulations, or zoning laws. Too many entrepreneurs never look for location beyond
their own home cities or towns. When entrepreneurs try to stay in this ‘comfort zone’,

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they often fail to discover location that would be far superior and contribute significantly
to the success of their own venture. Consider these questions while addressing this
section of the business plan:
 What does the location needs?
 What kind of space will you need?
 What are the things desirable (building, new, old)
 Is that leased, rented, owned?
 Is it easily accessible?
 What are the facilities available (light, water, transportation, telephone
access e.t.c.)

4.2.6. Production/Operation/ Plan

Activity 4.5.
1. What is production plan?
2. What is the difference between production and operation plan?

If the venture is a manufacturing company, there is s need to have a production plan.

This plan should describe the complete manufacturing process. If some or all of the
manufacturing process is to be sub-contracted or outsourced then the production plan
should describe the location of the contractors, why they are selected, cost of contract and
if possible terms of contract, for how long the contract is signed etc. Whereas if part or all
of the manufacturing is being done by the new enterprise, then the entrepreneur should
describe the physical layout, the machinery and equipment needed, the form of acquiring
those equipment that is purchasing or leasing. In addition the availability of raw material,
the possible sources or potential suppliers name, address, cost of the raw materials, cost
of manufacturing and other additional physical capital required need to be maintained.
Moreover, the detail operational plan also indicates the amount of production produced in
months, or years. This can be derived from the forecast of the market and expected
demand of the product.

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If the enterprise, however, is non-manufacturing one like merchandising and service
delivery organization, this part of the plan is named as operational plan. It indicates the
steps or processes in procuring the products, storing and selling them. The inventory
control techniques employed to avoid wastage, spoilage of resources and ensuring the
continuous availability of products to customers.

4.2.7. Marketing Plan

Activity 4.6.
1. Define Marketing Plan?
2. Discuss the steps in preparing marketing plan?
3. What kind of information is need to preparing marketing plan?

The marketing plan is the major component of a business plan which indicates how the
entrepreneur has planned to be effective in competing and implementing in the market
place and be able to achieve goals for which the business is initially established. Every
entrepreneur must, therefore, describe the company’s target market and its characteristics.
Defining the target market and its potential is the most important and difficult part of
developing a business plan. Building a successful business depends on the entrepreneurial
ability to attract those customers that are willing and able to spend money to buy the
product of the enterprise. Perhaps the worst error an entrepreneur commits is failing to
define his target market. This is one of the major task that is accomplished in preparing
the marketing plan part of the business plan. As part of a business plan the marketing
plan should focus on the strategies for the first few years. Each year the entrepreneur
should prepare annual marketing plan before any decision is made regarding production,
personnel and financial plans. Then the annual plan becomes a basis for planning other
aspects of the business mentioned previously.

Information for development of marketing plan may require undertaking of research in

order to know the potential customers, the size of the potential market, the price of the
product and its affordability for potential customers, the effective form of promotional
strategy and appropriate distribution channel. Since conducting marketing research is
costly, the entrepreneur needs to assess available sources and information needed to

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determine the marketing mixes and potential customers. Research techniques that are not
costly and sources of information that are free or cheap will be preferred by
entrepreneurs.

Before conducting a research, entrepreneurs should be clear with the objective of

conducting it. The main objective of entrepreneurs is to know the target market (potential
customers) and demographic data about them. Moreover, the study could be conducted to
define different kinds of marketing mixes (about pricing, promotion, distribution, and
kind of product and test of customers to the product). Information for the research can be
collected from secondary sources such as government offices, research findings in
universities, libraries etc. and/or primary data can also be collected through observation,
focus group discussion, interviews and so on. Analysis of these data collected through
different techniques and sources will enable entrepreneurs to know about the kind of
customers, size of the market, the test and preference of customers and the kind of
strategies used in utilizing the marketing mixes. Sometimes, this research may reveal that
there is enough market to exploit or there is no enough market and the business is not
feasible. So it is a valuable part of the business plan.

A marketing plan answers three basic questions of a business. First, it enables us to know
the current condition of the enterprise. It tells us the background of the company, its
strengths and weakness, some background on the competition, strength and weakness of
the company and the possible opportunities that can be exploited or threats that may
challenge the performance of the business.
Second, it also tells us where we want to go in the marketing aspect of the business at
least in the short run. Third, it also tries to address the specific marketing strategy that
will be implemented, when the strategy is going to be used and who is responsible to do
so.

Steps in preparing marketing Plan

1. Defining the Business situation

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This is like assessment of the business environment, which could be done in industrial
and environmental analysis part of the business plan. So here we need to revise what we
have done in the first part of the business plan.

2. Define the target market

From the marketing research, the entrepreneur should have a good idea of who the
customers or target market will be. Knowledge of the target market provides a basis for
determining the appropriate marketing action and strategy that will efficiently meet its
needs. The defined target market will usually represent one or more segments of the
entire market.

3. Considering Strengths and Weaknesses

The entrepreneur should genuinely present the weakness and strength of the business.
Strengths of a new business could be the experience of the entrepreneur in working on
businesses that are related the newly established business and the skill, knowledge and
working experience of the management team. The weakness can also be the limited
financial, technological and channel of distribution of the business etc..

4. Establishing a goal or objective

Here the goal of the enterprise will be presented. The goal answers ‘the where we want to
question’ This part tries to specify such things as the market share of the business in the
industry, profit, market penetration, number of distributor, pricing policy, sales
promotion and advertisement support.
5. Defining the market strategy and Action Program

This strategy and action plans respond to the strategy of the organization and on
marketing mixes. Some of the decisions to be taken on marketing mixes and customers
can be the following

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Product
This element of the marketing mix indicates a description of the product to be marketed
in the enterprise. Product description involves the package, the brand name, price,
warranty, image, service, delivery time feature and style and so on.

Pricing

Determining the price of the product is the more difficult part of the decision. A product
with quality and expensive component will require a high price to maintain the proper
image. The entrepreneur must also consider many other factors such as cost discount,
freight, and markups. The problem in estimating price is often associated the difficult
task of estimating cost. Marketing research can also indicate the reasonable price the
customers are willing to pay for the product.

Distribution

This factor provides place utility for customers by providing the product on the right
place available when it is needed. There are many options for entrepreneurs to be
considered in distributing the product. Issues such as type of channel of distribution,
member of intermediaries, and location of channel members should be described in this
section of the marketing plan.

Promotion

It is necessary for entrepreneurs to inform potential consumer about the products

availability. This informing, persuading and instructing of potential customers can be
done using various media such as television, radio, prints etc. Promoting products can be
done with or with out payment. Those paid promotional methods are advertisement and
personal selling where as the unpaid promotional method is publicity. Particularly unique
and creative marketing ideas are often special interest to the media. Local news papers
radios and magazines can publicize the marketing idea. Depending on the outreach and

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market size of the product the entrepreneur needs to select the best channel of promotion
that is cost effective and can reach potential customers.

All these marketing mixes need to be specified in the marketing plan of the business plan.
Equally or more importantly there is a need to develop a strategy on meeting the needs of
customers better than competitors are doing. For these different activities should be
performed of which following are worth mentioning.
 Develop a statement of customers’ service principles that are known and be
followed by the employees.
 Provide training particularly to those employees who have direct contact with
customers on hw to serve customers, how to persuade customers, how to maintain
customers and so on and reward those employee who are high quality customers’
service.
 Make regular contact with consumers using different methods so as to know their
suggestions, complaints and inform new progresses in the services or goods of
the business.
In so doing the business should be able to meet customers’ expectation more than
competitors are doing. Satisfying customers are another technique of advertisement
because they can also good mouth and attract potential customers without any
promotional expense.

4.2.8. Financial Plan

Activity 4.7.
1. What is financial plan?
2. What are the types of financial statements prepared in Pro forma financial
statement preparation in Business plan?
3. What are the advantages of preparing Pro forma financial statements?

Developing Capital and Operational Budget

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 Business plan can be complete when the marketing plan is accompanied by budget for
operation and procurement of capital for the business. The capital budget states the
budget required to provide a basis for evaluating expenditure that will impact the
business for more than one year. The capital budget projects the financial requirement to
acquire new equipment, vehicle, building etc.

It may also consider evaluating the cost of making or buying decision in manufacturing,
moreover, the capital budget also consider possible investment options that can be
considered and evaluated using different techniques such as the pay back criterion, the
Internal rate of return, and net present values of the investment. Such kinds of capital
budget are experienced when the business wants to expand by being involved in different
projects. But fro a small business which is looking for a fund for the first time the
business it self is a project and more attention will be on operational budget that covers
the cost of running the business. But capital budget component of such businesses include
costs of fixed capital that must be acquired to run the business.

The initial data required for budgeting and development of Pro forma income statement
, cash flow and balance sheet that can be present for potential investors is the sales
forecast. Based on the sales forecast the entrepreneur will then develop the cost of sales.
In manufacturing venture the entrepreneur can compare the cost of producing the
products internally or through subcontracting them to another manufacturer. This
determination of cost of sales includes the cost of the ending inventory that should be
available in case of possible market fluctuation.

Sample manufacturing budget derived from sales forecast in terms of

(0000 Birr) for five subsequent months
Sep Oct Nov Dec
Forecasted Cost of sales 200 250 300 300
Ending Inventory required 20 20 20 20
Total available for sale 220 270 320 320
Less Beginning inventory 0 20 20 20
Total production (purchase required) 220 250 300 300

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 After determining the sales budget, the entrepreneur focuses on operating costs. From the
total operating costs some are fixed and some are variable. Fixed costs include salary,
depreciation, utility and other overhead costs.

Pro forma Income statement

Using the forecasted sales volume and the operation costs that are derived from the sales
forecast income statement is developed. Sales can be forecasted using survey of buyers’
intension, composition of sales forecast, expert opinion or time series analysis. The Pro
forma income statement also provides projection of operation expenses and for each of
the months that leads to the determination of net profit. Each of the expenses should be
properly projected and exhaustively mentioned so that any probable change, modification
or addition of other operating expense that may not be present in the previous months.
Example of Pro forma income statement below in (000 Birr).

Months Sep. Oct. Nov. Dec. Jan. Feb

Sales 30 40 45 43 50 51
Less cost of goods sold 15 20 23 22 27 26
Gross profit 15 20 22 21 23 25
Less Operating Expense
Selling expense 5 5 5 4 5 5
Wage and salary expense 6 6 6 6.5 6.5 6.5
office supplies 1 1 1 2 2 2
Interest expense 0.5 0.6 0.6 0.5 .5 0.4
Depreciation .5 .5 .5 .5 .6 .6
Advertisement 4 4 3 3.5 3.5 3.5
miscellaneous .5 .5 .5 .4 .5 .5
Total Operating Expense 17.5 17.6 16.6 17.4 18.6 18
Profit(Loss) before tax (2.5) 2.6 5.4 3.6 4.4 7
Income tax (10%) 0 .26 .54 .36 .44 .7
Net income after tax (2.5) 2.36 4.86 3.24 3.96 6.3

The items presented in the operating expense section of the Pro forma income statement
should reflect the potential and planned changes with regards to different activities in the
business. For instance advertisement expense could be high in the first few months

71
because there is a need to promote our product to our potential customers. Moreover
there may be an increase in wage and salary expense as time passes because the
enterprise may need to employee additional staff as the business keep on growing and
expanding. Moreover, it is expected usually the new businesses will not profitable at the
beginning of their establishment because the produce is new to the customers and there
are fixed costs that should be covered by the time the business is established. So
observing losses on income statement for some months or even years is not a surprise
even for investors. Pro forma income statement is also prepared for the coming two,
three years at least in gross terms so that potential investors can assess the profitability of
the business.

Pro forma Cash Flow

Cash flow statement indicates the difference between actual cash received and cash
actually dispersed. Cash flows only when actual payments are received or made. So sales
made on account and purchases made on account don’t show any cash inflow or cash out
flow. In addition cash payments to reduce principal on loan don’t constitute a business
expense but reduces the cash on hand. Receiving of cash in return for accounts receivable
does also have an effect on amount of cash at hand but doesn’t have impact in increasing
net income or profit. It is important for the entrepreneur to make monthly projection of
the cash flow. The numbers in the cash flow statements are modification of those in the
income statement. Modification made on the numbers of the income statement is on those
accounts for the expected timing of the changes in cash on some current asset or liability
is made.

An analysis of cash flow is useful for short run planning. A firm needs sufficient cash to
pay debts maturing in the new future, to pay interest and other expenses and to pay
dividends to stockholders. The firm can make projection of cash inflows and outflows for
the near future to determine the availability of cash. This cash balance can be matched for
the enterprise’s need for cash during the period and arrangements can be made to meet
deficit or invest the surplus temporarily. A historical analysis of cash flows provides
insight to prepare reliable cash flow projects for the immediate future. The Pro forma
cash flow statement helps to answer the following questions.

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  The liquidity position of the firm
 The causes fro changes in the enterprises working capital or cash position
 What fixed assets are acquired by the firm
 Whether the enterprise pay dividend to the stockholders
 Whether the firm used external sources of finance to meet its need for fund
 Did the enterprise sell any of its non-current asset

Example of Pro forma Cash flow statement

Net income XXXXX

Adjustment to net income

Non-cash non-operating items

Depreciation and amortization
Cash provided by changes in current asset or liabilities
Increase (-) or decrease (+) in accounts receivable XX
Increase (-) or decease (+) in inventory XX
Increase (-) or decrease (+) in prepaid expense XXX
Increase (+) or decrease (-) in accounts payable XXX
Net cash provided by operating expense XXXX

Cash flow from other activities

Capital expenditure (-) [XX]
Payment of debt (-) [XX]
Dividend paid (-) [XXX]
Sales of stock (+) XXX
Purchase of plants(-) XXX
Net cash provided by other activities
Increase [decrease] XXX

Pro forma Balance Sheet

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This statement shows the condition of the business at the end of the first year. The
balance sheet will require the use of Pro forma income and cash flow statements to help
justifying some of the figures. It reflects the position of the business at the end of the first
year. It summarizes assets, liabilities and capital of the business at a certain point in time.
The balance sheet also reflects the fixed asset and current asset of the business and at the
sometime the liability of the business.

Asset
Current Asset
Cash xxx
Accounts receivable xxx
Merchandise inventory xxx
Total current asset xxxx
Fixed Asset
Equipment xxxx
Building xxxx
Total fixed asset xxxx
Total Asset xxxxx
Liability and owners equity
Current liability
Accounts payable xxx
Current portion of long-term debt xxx
Total current liability xxxx
Long term liability
Note payable xxx
Total liability xxx
Owners’ equity
Mrs X’s capital xxx

Total liability and owners’ equity xxxx

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 4.2.9. The Organization Plan

The three major issues presented in this part of the business plan are the legal ownership
forms, the organization structure and design, and the management team.

4.2.9.1. Management Team

The management team of the organization is committed to the goals of the new venture.
The management team should be able to work together effectively towards this end.
Investors will demand that the management team must attempt to operate full time in that
organization, they should not work as a par-time, while they are working for another
organization. It is also not necessary for entrepreneurs to take large amount of money
from a newly established business as a salary because it could be perceived by investors
that the owner is not committed to ensure the continuity of the business by reducing the
amount of expenditure of this kind. Side by side with this the legal form of the business
should also be determined.

4.2.9.2. Organization Structure

Generally, the design of initial organization will be simple. In fact, the entrepreneur may
find that s/he perform all the functions of the organization alone. This is common
problem and significant reason for many failures. The entrepreneur sometimes thinks that
s/he can do all the jobs and is unwilling to give up the responsibility to others or even
including other management team. In most cases when this occurs, the entrepreneur will
have difficulty making the transition from a start-up to a growing, well-managed business
that maintains its success over along period of time. Regardless of the number of
individuals involved in the start up of the business, there will be a need to increase the
number of employees when the business starts to expand and workload increases. In
response to this need, the organization structure will also expand and change to

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accommodate the expansions accordingly. The organizing process primarily addresses
the following critical issues.

1. It determines what work activities have to be done to accomplish organizational

objectives.
2. If classifies the types of work needed and groups the work in to manageable work
units
3. It assigns the work to individuals and delegates the appropriate authority.
4. It designs a hierarchy decision-making relationship among the grouped job
position.
These activities resulted in the drawing of the organization structure. The organization
structure or design is the entrepreneur’s explicit and formal indication to the members of
the organization as to what is expected of them and the possible changes that are planned
to be accommodated accordingly. Typically, these expectations can be grouped into the
following areas.

 Organization structure: This defines the members’ jobs and

communication and relationship these jobs have with each other. These
relationships are depicted in the organization chart. The chat shows the
following.
 Who reports to whom
 How many subordinates work for each manager
 Channel of official communication through the solid lines that connect
each job
 How the company is structured (basis of departmentalization which we
will see later)
 The hierarchy of decision making
 When the existing structure is formulated (if the date is available on the
chart)
 Type of authority and relation ship. Solid line connects line authority and
dotted lines should start and functional authority.

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By the time jobs that need to be performed are identified are determined, the entrepreneur
will need to prepare job description and job analysis. The job analysis will serve as a
guide in determining hiring procedures, training, and performance appraisal,
compensation programs, and job description and job specifications. The job description
begins based on the list of necessary tasks that need to be accomplished. Once the list is
completed, the entrepreneur should determine how many positions are necessary to
accomplish these needs and what type of person (in terms of skill and qualification) is
ideal. Decision where to advertise for employees, how they will be trained, how they will
be evaluated, and how they will be compensated are important in the early organization
plan for the new venture. Searching for more senior talent for new venture requires a
different strategy than for other positions. Usually networking with the external advisors,
family, friends, and business associations provide the best source of candidates. Perhaps,
the most important part in business plan is job description and specifications. Many other
decisions such as hiring procedures, training performance appraisal, benefit and others
can be summarized in a certain kind of manual that doesn’t need to be part of the
business plan.

Job description: The entrepreneur should clarify roles of employees by preparing job
description. Job description specifies the details of the work that is needed to be
performed and special conditions or skills involved in undertaking the job. The degree of
detail ness is debatable particularly for newly established businesses that may require the
assuming of double responsibilities. Regardless of it, the job description should include
the job summery, skill and experience required a summery of responsibilities of duties,
the authority of individuals and standard of performance. Job description communicates
to candidates what will be expected of them.

Job Specifications: This presents the skill and ability expected from employees. This
includes the experience and education requirements. Outlining the job specifications for
trained employee is usually much easier than untrained people who will be trained on the
job. Because in the previous case the specification emphasis more on the educational
qualification which can be objectively mentioned whereas in the later case the
specifications will be more on personal traits, attitudes which are subjective. When ever

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possible entrepreneurs will prefer to employee those who are already trained and
educated to take over the responsibility of performing that particular task than those who
are going to train take the responsibility.

4.2.9.2. Types of legal business ownership

Dear distance learners in choosing a particular form of organization, an entrepreneur will

try to find out how far his requirements will be met by a particular form of organization.
He/she will generally consider the following factors while making this type of
assessment.

1. Ease of formation- an ideal form of organization is one, which can be brought into
existence with the least difficulty. A good form of organization, as judged from the
point of view of ease of formation, is one that involves the least expense in formation
and minimum legal formalities.

2. Ease of raising capital- where a large amount of capital is needed, it is desirable to

ensure that investors in the business concerned are assured of safety of investment,
fair return on investment and the transferability of investment.
3. Limited liability- from the point of view of risk, the entrepreneur will naturally prefer
limited liability. This means that in case of insolvency or winding up, the owner or
owners' will be held responsible only up to the amount of capital they have agreed to
be contributed by them.

4. Direct relationship between ownership control and management- the right of an

individual or a group of individuals represents ownership or a business. As a rule, the
control should lie where the ownership lies. This will ensure that the management
will take active interest in the efficient running of the enterprise. If the responsibility
for management or the control of management is not with the owners' the
management may not have a direct personal interest in maximizing profits through
increased efficiency.

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5. Flexibility of operations- a good form of organizations offers the maximum flexibility
and adaptability to situations. This means that the organization should lend itself to
change and adjustment with out much difficulty as the need be.

6. Continuity or stability- an ideal form of organization enjoys an uninterrupted

existence over a long period of time. Form the point of view of entrepreneur; it is
important that he should be able to formulate plans for the future and to make
investments paying for considerable periods of time. From the social point of view
also, it is desirable that there should be an agency that meets its economic needs
continuously and provides continuous employment to a section of a society.
7. Retention of business secrets- The entrepreneur will also have to be careful to ensure
that the form of organization chosen by him will allow the vital business secrets to be
retained with out being leaked out to the competitors.

8. Freedom from state regulation- various forms of organization are exposed to varying
degrees of control and regulations by state. Where the extent of regulation by
government is considerable the enterprise may have to spend considerable amount of
time, money and energy in complying with legal formalities and instructions.
9. Law tax burden- various forms of organizations are assessed to income tax on
different bases. Obviously other things being equal, the ideal form of organization
will be that which attracts the minimum amount of tax liability.

It would be naive to expect all the above features in any one form of business
organization. No single form can suit a particular business for all time to come. The best
form of ownership, therefore, is dependent on various factors such as nature of business,
scale of operation and requirement of capital etc., which must be weighted in conjunction
with the characteristics narrated above to arrive at a suitable form of business
organizations.

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Dear distance learners, basically there are three major types of business ownership
systems legally known in this world. Each ownership style has its own nature and
characteristics, as it will be discussed below.

Sole proprietorship

It is a form of business organization in which an individual introduces his own capital,

uses his own skill and intelligence in the management of its affairs and is solely
responsible for the result of its operations. This forms is also known as an individual or
single proprietorship, sole ownership or individual enterprise. The basic features of this
form of business organization are as follows:

Characteristics of sole proprietorship

i. Single ownership- it is the business owned by a single individual who

finances, controls, and manages the business and consequently enjoys the
profit and/or suffers losses solely and exclusively.
ii. Owner manager- Ownership and management of the business concerns rests
in the hands of the sole proprietor who enjoys full control over the business.
iii. No-separate legal entity- the sole proprietorship firms has no separate legal
identity of its own as distinct from its owner. Both are treated as one and the
same in the eyes of the law.
iv. Undivided risk- The question of sharing the profit or losses of business by
another person other than the sole owner does not arise and the proprietor
bears the risks all by himself/herself.
v. Unlimited liability - In case of losses the liability of the sole owner is
unlimited and his personal property may also be attached, it need be, to
discharge the debts incurred in running the business.
vi. Freedom from government control- Except for the permission required to
be obtained from the local authorities; this form of business has virtually no
government control and is free from government regulations.

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 Advantages of sole proprietorship
1. Ease and low cost of formation and dissolution - It is easy to form a sole
proprietorship, the legal formalities or other complicated procedures required
are loss.

If all debts of the business are paid and the businessman is not willing to carry
or change it to another form, it is easy to dissolve the sole proprietorship, as it
was to form it.

2. Direct motivation and personal care: In this form of organization all the
profits of the business belong to one person and he faces every loss. This gives
greater incentive to the owner to take personal interest in his business and
manage it most efficiently.
3. Freedom and promptness in action- In matters of business dealing the sole
proprietor can take his own decision and there is no question to his authority.
This type of freedom of action promotes initiative and self-reliance. As there is
no need to consult other persons, the sole proprietorship can take prompt
decisions.
4. Business secrecy- In this type of business, it is easy to maintain the secrecy of
business. Since confidential information is a key to success for a competitive
business, it is unlikely that the owner will lake the information. Thus, any
change he wants to make regarding business methods or policies can be done
with out the knowledge of others.
5. Social desirability- From the social point of view, the sole proprietorship is
desirable as it ensures that too much wealth does not concentrate in the hands of
few.
6. Absolute control- the sole owner has a direct and absolute control of his
business affairs and he is free to act or manage the business in his own chosen
way. His control on all business operations is complete and absolute and outside
interference or influence cannot alter or minimize it.

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 7. Flexibility in operations- since the sole proprietor does not need to consult any
one or is not obligated to discuss with any body in regard to his business
operations there is greater scope for flexibility.
8. Minimum government control - This form of business ownership is not
regulated by any central or state law except the general law of contract and sales
of goods. Consequently, there is little interference or control by government in
day-to-day business affairs. The sole trader is not required to submit any annual
profit and loss account to the government.

9. Personal touch- customer satisfaction and worker's motivation are two most
important factors that contribute to the success of business. By paying personal
attention to the customers and by maintaining an intimate personal touch with
the workers, the sole trader will boost the business prospects as well as his own
personal image that helps to make flourish beyond his own expectations.

Disadvantages of Sole proprietorship

1. Limited resource and size - In the type of concern, the resources (capital and
skill) are very limited. As only one person is responsible for the business,
capital is limited to his capacity. Lending institutions many hesitate lend large
some of money, and suppliers may be unwilling to make sales in large
quantities of item on credit to such business because it is neither sate nor
dependable which results in making the business to remain limited in size.
2. Unlimited liability- the sole proprietor will be legally liable for all debts of the
business. At times of loss and bankruptcy, if the business asset is not sufficient
to satisfy the obligations or debts of creditors, his personal and real property
may be required to pay off.
3. Limited managerial skills- Due to limited financial capacity, the owner cannot
afford to employ trained and professional managers for running a business many
complex and difficult problems. Thus the company's managerial skill is limited
to owner's profession.
4. Uncertain future - This kind of business suffers from uncertain future that
means there is instability or lack of continuity. This business may come to an

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 end if the owner cannot continue to run the business due to death, insanity,
imprisonment or bankruptcy.

Partnership
This form of organization represents the second stage in the evolution of the form of
business organization. It grew essentially to meet the requirements of expanding
business, which calls for more capital, increased risk, and more managerial ability that
were considered as limitation of the individual proprietorship. Since it will be difficult to
find a single person possessing adequate capital, technical skill, knowledge, experience of
managing, there arises a need for a formation of business where two or more persons join
together, contribute their capital and skill. This form of association of two or more
persons to carry on a business as co-owners for profit where the relation bases ship on
agreement is known as partnership.

In Ethiopia as per the commercial code of 1960, Article 211 read as, " A partnership
agreement is defined as a contract where by two or more persons who intend to join
together, make contribution for the purpose of carrying out activities of an economic
nature and of participating in the profit and loses arising out there of it any.

Characteristics of partnership
From the above definition of partnership, which is almost similar in all countries
regulations, the following general characteristics can be indicated.
a. Plurality of persons: This form of business requires the existence of two or
more persons entering in to a contract, which is an agreement between parties
known as memorandum of association or Article of partnership deed.
b. Contractual relation ships- Partnerships comes into existence by mutual
agreement, which stipulates the contractual relation ships between the partners.
The memorandum lays down the terms and conditions of partnership and the
rights, duties and obligations of partners. According to 1960 commercial code
of Ethiopia, Article 234, the memorandum of association contains the following
particulars:
1. The name, address and nationality of each partner

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 2. The firm name
3. The head office and branches, if any
4. The business purpose of the firm.
5. The contributions of each partner, their value and their method of valuation
(Market price, cost, etc).
6. The services required from persons contributing, etc.
7. The share of each partner in the profit and in the losses and the agreed
procedures for allocation
8. The managers and agents of the firm
9. The period of time for which the partnership has been established.

As part of the formation procedure, this type of business is required to be made known to
the outside parties or to the public through the process of publicity in the official
newspapers such as Addis Zemen.
c. Capital contribution- in this form of organization, every partner shall make a
contribution, which may be in money, debts, other property or skill. The
contribution that is to be made for the business shall be equal unless otherwise
agreed.
d. Management- Every partner has the right to take an active part in the
management of the firm's affair. But the partnership agreement may provide the
pattern of managing by indicating how the management activities shared among
the different partners according to their experience and knowledge.

e. Duration- The partnership firms legally come to an end if any of the partners
withdraw or dies or is no longer able under the law to be a partner or declared
bankrupt. However, if the remaining partners agree to work together under the
original firm name and style, the firm will not be dissolved and will continue its
business after setting the claims of the out going partner.

f. Unlimited liability- The liability of each partner of the firm is unlimited in

respect of the firm's debts. The liability of partners is joint, several in a sense

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 that the creditors can recover their dues from the property of any or all partners
incase the firm's assets are insufficient.

g. Agency relationship- the partner will be liable for the faults and wrongful acts
of a co-partner in the course of the firm's business while acting for the business.
The relationship b/n partners are one of agency so that every partner binds the
other partner by an act in the name of the partnership firm and in the ordinary
course of its business.

h. Utmost trust and good faith- There must be the highest standard of honesty
among partners. Partnership agreement is based on mutual confidence and trust
of the partners. The partners must, therefore, be just and honest to other
partners.

i. No-separate legal entity- the partnership firm has no independent legal

existence apart from the persons who constituent. In the eyes of the law, like
that of sole proprietorship, there is no distinction between the partners and the
firm.

j. Restriction on transfer of interest - A partner cannot transfer his share or give

his ownership to outsiders without the consent of other partners. In other wards,
no partner is entitled to bring in another person as partner without the
permission of the existing partners.
k. Unanimity of consent- No change may be made in the nature of business and
no partner can act out of the specified way or partner cannot make major and
special decision without the consent or agreement of all the partners.

Type of partnership
Dear distance learners, there are two types of partnerships namely general partnership
and special partnership and the basic difference between the two is that while the former

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bestows unlimited liability on its partners, the latter type (special partnership) allows for a
limited liability to its partners.

Kinds of partners
Partner of a firm may be classified into the following categories
i. Active partner- A person who takes an active part in the conduct of business and
managers its affairs is called an active partner or working partner. He is the full-
fledged genera partner whose liability is unlimited.
ii. Sleeping partner or dormant Partner- He who does not take any art or active
interest in the conduct of business is called " Sleeping" or dormant partner, he only
contributes a limited capital and his liability is also limited to that extent . Although
he is equally liable to third parties as other partners are, he can not deal with the
third parties or commit the firm to any liability on his own.
iii. Normal or Ostensible partner. A normal partner is one who does not invest any
money nor takes any share in the profits but he only lends his name to the firm. He
does not also take any active part in the business. Such men of repute will help
attract fresh capital or increase the business prospects on the strength of their good
will. Such partners, though nominal, are equally liable to third parties as the other
partners are.

Advantages of partnership

1. Ease of organization- except some formality, partnership like that of proprietorship

is quite easily formed. All that is required is an agreement among partners. The
initial expenses are less and the legal formalities are simple.

2. Large financial and Managerial Capabilities- In this form of organization

compared to sole proprietorship, the capital to be raised, will be more because the
financial resources of two or more persons will be available and this will make the
business to enjoy high credit standing and get more credit. Because the talents,
managements of two or more persons are combined, this facilitates better
organization of business and balanced judgment leading the firm to be best
managed that the previous form does not have.

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3. Personal supervision- Partners look after the business personally and guard against
wastage and other inefficiencies because they are initially interested in the success
of the business and also know if there is a failure on their pat, they may put even
their private property in jeopardy.

4. Reduced risk- the losses incurred by the firm will be shared by all partners and
hence the share of loss of each partner will be less than in case of sole
proprietorship.

5. Flexibility- the partnership firm is not subject to government interference or

regulation in the day-to-day functioning Hence, partners are free to change the line
of business or the place of business at their will. There is thus a lot of scope for
flexibility in business operations in a partnership firm.

6. Democratic functioning- in a partnership firm every partner has a right to

participate in the decision-making process or management of the firm irrespective
of his status based on capital contribution.
7. Better public relations- the reputation of a sole proprietorship rests on just one
person-the sole owner-where as all the partners of a partnership firm can pool up
their resourcefulness and good will to boost up the image and business prospects of
the firm.

8. Tax liability- A partnership firm is not subjected to double taxation. Either it is

assessed for tax as in individual or its income is taxable in the hands of the partners.
In either case, the firm enjoys certain tax advantages at moderate levels of income.

Disadvantages of partnership

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1. Unlimited liability- although this point will make the partners not to be careless, it
might make partners not to be careless, it might make partners to play safe and
make them fear of taking advantages of sudden business opportunities. Related to
this point, if the assets of the partnership are not sufficient to meet the
organizations, the creditors may choose to sue any of all to satisfy the debts. Hence,
this possesses a serious handicap for the individual partner with large personal
assets as he may be obliged to repay the entire debts of the partnership from his
personal assets and claim latter.

2. Risk of implied authority- A dishonest or incompetent partner may make, by his

acts, misjudgment or fault, the form in difficulties because his acts would bind the
firm and the remaining partners. Here, the partners will not be only liable for debts
incurred by joint decisions, they are also liable for any debts made by the partners)
when acting for the firm.

3. Lack of harmony- as every partner has equal voice in the management, every
one would try to assert his positions, tries to promote his personal interest and this
may lead to internal frictions and misunderstanding. Thus, important decision will
take longer time to be reached affecting the business not to take new opportunities.
Even worst, if serious disagreements occur, the only solution might be only to
dissolve the partnership.

4. Lack of continuity - As mentioned before, though in some cases, it can be

continued with the remaining partner's mutual agreement, there is instability in the
life of partnership. The business can come to an end due to death, retirement or
withdrawal of a partner for any reasons like dissatisfaction, bankruptcy or any
serious disagreements among partner or by court decree.

5. Non-transferability of interest: "yet another disadvantages in a partnership firm

is that no partner can transfer his interest or get back his investment in business by

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 selling off to outsiders when ever he wants with out the consent of all other partners
and depend on their mercy or seek premature termination of partnership agreement
by any means open to him. These two options are hard to make and so investment
in a partnership is somewhat risky in that way.

6. Lack of public confidence - A partnership firm is not legally bound to disclose

its affairs and statement of accounts to general public. Since even registration is not
compulsory the firm is virtually free from government control or regulation. In the
absence of public secreting or its affairs or auditing of its accounts, public can have
little confidence in the soundness of the firm and hence hesitate of to deal with the
firm in any way lack of public confidence may affect the business interests in the
long run.

However, one may find it suitable in medium- sized business ventures where
pooling up of capital and other natural resources or talents is required. Even
professionals like chartered accounts, lawyers and doctors also find the partnership
more suitable and extension of sole proprietorship when business gets established
and grows at a faster pace. However, in large scale capital intensive industrial
ventures where productivity and technological progress vie with one another steel
plants, computers or chemicals manufacturing etc..., a partnership firm is not
advisable.

Joint stock company (corporation)

A joint stock company is essentially a group of persons coming together voluntarily to

carry on certain business by organizing themselves into a single legal entity with a view
to function as an artificial person in the eyes of the law. A few definitions buy eminent
authors and legal luminaries are worth studying.

Chief justice marshal (1819) defined the corporation as " an artificial being, invisible,
intangible and existing only in contemplation of law- being the mere creature of law, it

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possesses only those properties which the charter /certificate of incorporation of its
creation confers upon it"

According to William A. wood, a corporation is " our association of natural persons or of

other legally constituted persons (other corporations) authorized by law, separate and
distinct from its stockholders and, in a certain sense, is a citizen. Action at law may be
maintained against it in the same way as again a natural person.

Justice landler has described the company as " an association of many persons who
contribute money or money's worth to a common stock and employ it for a common
purpose. The common stock so contributed is denoted in money and is the capital of the
company. The persons who contribute it or to whom it belongs are members. The
proportion of capital to which each member is entitled is his share".

The most widely quoted definition for joint stock company or corporation is given as an
artificial person (being an association of natural persons) recognized by law, with
distinctive name, a common seal comprising of transferable shares of fixed values,
carrying limited liabilities, and having a perpetual or continuous or uninterrupted
secession.

The above definitions help us understand the essential characteristics of a joint stock
company which are discussed below:

Features of corporation

a. Separate legal entity - The rights and privileges are given to it by its charter, which
is granted by the state in which it is incorporated, gives privileges to it . Thus, the
corporation becomes a legal entity and is granted the right to manage its own affairs
the right to sue and be sued, and the right to own and dispose property.

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b. Limited Liability - Since the company has a separate legal entity, its debts are its
own share holders or owners of the corporation can not be held liable or can not be
called upon to pay more than the face value of the share standing in his name or the
contribution made. In other words, personal assets will not be required to cover
debts and other obligations in case the business fails to settle.

c. Transferability of shares- The share holder of the business can transfer his share
to others without consulting other shareholders. The owners can sell their share or
give freely as they wish for any one without the consent of other shareholders.
d. Perpetual existence - The corporation can be dissolved in only three ways;
I. By court order
II. By the approval of the majority of the stock holder or
III. By the expiration of the corporate charter (charter is an instrument
granted the corporation the right to operate and defining the
restrictions and procedures under which it may do so)
- Corporation is not affected or interrupted by the death, insolvency or
retirement of any shareholder or director.

e. Common seal - A company, not being a natural person, cannot sign documents for
itself. The common seal with the name of the company engraved on it is, therefore;
used as a substitute for its signature.

f. Separation of ownership from management - Here all owners, large in number,

do not have the opportunity or managing the day- to day working of the company.
The shareholders who own the capital are kind of absentee owners who are engaged
in their respective locations or activities whole holding shares of the company. In
other words, the ownership is delineated from management in the company form
while in the non-corporate form of business organization both ownership and
management rest in the same hands.

Advantages of corporation

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1. Financial strength - the company can raise a large amount of capital by issuing
shares. It can also attract capital from thousands of individuals of varying incomes.
It can also expand as long as investors are willing to purchase additional shares of
stock. Corporation find it easier to borrow large sums of money because the amount
needed gives interests to those appropriate agencies that market securities.

2. Limited liability: The share holders liability is limited to the extent of the face
value of the shares held by him and his personal properties are not affected. Thus,
the organization can attract more investors who do not want to take more risk. The
creditors cannot look beyond the assets of the corporation to settle their debts
because the corporation is a separate legal entity and the firm, rather than its
owners, owes the debt.

3. Scope of expansion: As large capital is invested, it would be possible to use up-

to-date equipment and expensive machinery and carry out operations at large scale.
This will lead the corporation to produce goods at the least cost of production
resulting in a higher profit and creating the possibility to have big reserve that can
be used for the expansion of the company.

4. Stability: The company enjoys perpetual succession, which means that

bankruptcy, insanity or death of a shareholders, change in management or owners;
dispute over the ownership cannot affect the continuity of a company. Thus,
companies are well suited for businesses, which require a long period to establish
and consolidate.

5. Efficient and bolder management- there is availability of managerial talent

because the most efficient persons may be chosen as directors and it found
unsatisfactory they can be found unsatisfactory they can be fired. Since the persons
who manage the company have relatively smaller financial stake, they will have an

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 adventurous spirit and can undertake big risks, which are needed in staring and
bringing success to business.

6. Diffused risk: The risk is spread over several members of the company and is
reduced for each member, which helps the business in attracting more investors and
to venture on new opportunities.

7. Public confidence: No company can keep its affairs or accounts secret because its
existence, activities even dissolutions are all governed by statutory laws. In fact a
company takes pride in advertising its secret of success because it helps in winning
the public confidence. And the chances of winning the public confidences are for
greater in the company form than other forms b/c of its huge financial resources,
professional management, improved and sophisticated technologies a finest end
product etc. The more a company enjoys public confidence or trust, the more its
stands to gain by way of increased sales or in terms of raising additional financial
resources.

Disadvantages of corporation
In spite of the above-mentioned advantages, there are many disadvantages from
which these forms of organization suffer from:

1. Difficulty of formation: Before a company can start functioning, though vary

from country to country. There are numerous requirements or law to be
complied with. This form organization requires also huge sum of money, and
thus a large number of people have to be approached for raising the required
capital. Thus, the points mentioned will make formation of a company a
difficult task.

2. Lack of owner's personal interest: Directors manage these forms of

organization and paid officials and employees who may not be expected to have
such an intense interest in the success of the business. Besides, the owners who

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 usually own a very small part of the business will not put forth their maximum
effort on the total success of the business like the previous forms of
organizations.

3. Delay in decision-making: A company organization does not enjoy the same

amount of flexibility and promptness of decisions. Decisions, specially, on key
issues requiring general meetings, difficulty of getting the required number of
members to pass decision or the requisite quorum and the presence of divers
interests which may lead to disagreements.

4. Oligarchy fraudulent management: Though in theory, it is said democratic

principles are followed in the management of companies, in practice the
concentration or managing power is in the few hands of the managing directors
thus leading to oligarchy of managing or rule by few. Money times dishonest
persons at the top succeed in cleverly misleading an cheating the share holders
and as a result leading the companies to be managed by cheating and fraudulent
hands.

5. Taxation: On the average, not less that 35% of the profit is taxed as federal
income tax personal income tax on dividends and corporate profit tax by states
are common taxes imposed on corporations.

6. Lack of secrecy: The publication of the financial reports of a corporation

becomes a matter of public record. Therefore, the large corporation is unable to
keep confidential certain areas that they do not wish to reveal ( profits or losses,
sales, salaries to individual or dividends returned to stock holders) allowing
competitors to alter their plans based on the corporation's open books.

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 7. Expensive administration: A company is a huge corporate body that has to
necessarily employ a team of competent and professional managers to organize
and manage its affairs. Their remuneration and perks cost the company clearly
but is unavoidable expenditures even when the company runs in loss. The
overheads on administration of a company are definitely much more than in a
partnership or a sole proprietorship but that cannot be helped because of the size
of a company.

8. Malpractice: there is a greater scope for resorting to malpractices in a company

form because the management is virtually divorced from ownership and some
unscrupulous directors and managers could collude to manipulate the accounts
and defraud the company. The upper echelons of managers may misuse the
properties of the company. Besides, as they know many business secrets and
vital information there is the possibility of manipulating the share prices in the
stock markets. Genuine investors fall a prey to such misleading information
spread by vested interests and even put the company in financial difficulties.

As a conclusion, on the whole, the company form of organization has a better case for its
retention rather than extinction. Its advantages far out weight its disadvantages. A
corporation has its own importance not only for the entrepreneur but also for large
segment of society like the shareholders and consumers, etc. It is the barometer of a
nation's economic strength and prosperity. It must, however, be conceded that the
company form is suitable mostly to capital intensive industries, large scale manufacturing
units and foreign trade activities. Etc.

Table 2.1 Comparison of sole proprietorship, partnership and

corporation
Characters Most advantageous Least advantageous
Form Form
1. Availability of capital Corporation Proprietorship
2. Cost of organization Proprietorship Corporation
3. Ease of organization Proprietorship Corporation
4. Ease of expansion Corporation Proprietorship

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5. Ease of dissolution Proprietorship Corporation
6. Ease of transferring ownership Corporation Partnership
7. Ease of withdrawing from ownership Corporation Partnership
8. Efficiency of management Corporation Proprietorship
9. Governmental controls Proprietorship Corporation
10. Length of life Corporation Proprietorship
11. Liability of owners Corporation Proprietorship
12. Secrecy of operation Proprietorship Corporation
13. Tax position of owners Proprietorship Corporation
14. Flexibility of operations Proprietorship Corporation

4.2.10. Assessment of Risk

Every new enterprise may face potential hazards given the particular industry and
competitive environment. The entrepreneur should be able to indicate the potential risks
to the new venture. Moreover, the entrepreneur should discuss what will going to happen
if that expected risk happens and present the strategy that will be employed to either
prevent, minimize, or respond to the risks that could occur.

4.2.11. Appendix
This is the last part of the business plan that comprises of documents that are cited in the
body of the business plan and which are thought to be sought by potential readers of the
plan in detail. It may include for example the marketing research, the resume of the
management team and the owner etc.

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 CHAPTER V
SOURCE OF FINANCE FOR SMALL BUSINESS

Financing a Business
One of the most difficult problems in the new venture creation process is obtaining
finance. For an entrepreneur, available financing needs to be considered from the
perspective of debt Vs equity finance and external Vs internal financing. Financing a
business can be seen in terms of short term and long term financing as well.

Learning Objectives
The main objective of this chapter is to describe the sources of finance for entrepreneurs
and to indicate the merits and demerits of each source
At the end of this unit students will be able to:
 Differentiate between equity and debt financing
 Identify short term source of finance
 Identify long term source of finance
 Identify the advantages and disadvantages of equity finance
 Identify the advantages and disadvantages of debt finance
5.1. Equity or Debt Financing
The debt financing is the methods of financing a business involving interest bearing
instrument usually a lone, the payment of which is only indirectly related to the sales and
profit of the venture. Such kind of financing usually requires a certain kind of asset as
collateral to the lender as a security in case of failure of the borrower to pay back the
money. Such kind of financing also requires the payment of the principal and an interest
as return for using the money for specified period of time. Debt financing could be short
term (the one which should be paid within a year) or could be long term (the one that
requires more than a year to be paid). The short term debt financing is usually used for
financing working capital such as purchase of inventory, accounts receivable and other
operation of the business. Whereas the long term debt financing is used for purchasing
fixed asset such as machineries and equipment while interest rate is low debt financing
will be preferred over equity financing because it enables the entrepreneur to retain a
large ownership portion of the business.

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Equity financing doesn't collateral but finance is gained in exchange of sharing
ownership. The investor shares the profit of the venture as well as disposition of the asset
proportionally. The preference of the entrepreneur to finance her business using equity or
debt financing depends on the availability of the sources, the interest rate, nature of the
business, the interest of the owner to share ownership and so on.

5.1.1. Advantages and disadvantages of equity Financing

The major advantages of equity financing are:

A. No interest charges must be paid
B. Particular advantage in an economic slum. Their solvency is less likely to be
threatened by an inability to meet obligation to lenders.
C. Profits produced by a business financed by owners belong to owners and are not
reduced by loan payment.
The major disadvantages of equity financing
A. Capital needs of business vary over time. If requirement decreases,
B. Invested money may remain idle.
C. Greater total investment by owners is required to a given scope operation when
little or no borrowed money is used
D. Equity financing has the major drawback of diluting ownership. In effect, the
original owners sacrifice a portion of their control & profits
5.1.2. Advantages and Disadvantages of Debt
Advantages of Debt financing
A. Interest paid to the use of borrowed money is not taxed. This effectively reduces
the cost of using the money.
B. Borrowing is convenient for short-term needs. It makes it unnecessary to keep
large amount of cash for peak needs.
C. Borrowed money provides additional capital without giving up an ownership or
control of the business.

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 D. Owners who are able to borrow money make profits without increasing their
investment.
Disadvantages of Debt Financing
A. Borrowed money is sometimes unavailable or can only be obtained at a high
interest rate. Businesses that rests on debt financing may encounter many
difficulties
B. Businesses that use borrowed money must meet interest payments regularly. This
can be a burden when revenues are down or the company is facing other financial
difficulties.
C. During liquidation, borrowers have an upper hand to get their money first over
equity financers'. In trust receipts the bank advances a large percentage of the
invoice price of the goods and is paid on a prorate basis as the inventory sold.
Hence it threatens owners right in case of insolvency or bankruptcy.

5.1.3. Short Term Loan Financing

Accounts receivable loans:
When the customers who buy on credit basis from the organization are credit worthy, a
bank my factor it. Particularly when the customer is the government the entrepreneur can
develop a factoring arrangement where by the factor (the bank) actually buys the
accounts receivable at the value below the face value of sales. The cost of factoring
includes the interest charge on the amount of money advanced until the time the accounts
receivable are collected, the commission of collecting the cash from the customer, and
protection fee against possible uncollectable accounts. If the customer fails to pay the
money to the bank the bank will incur the loss of uncollectable. Moreover, entrepreneurs
can also discount accounts receivable in advance before maturity date. Here the risk of
uncollectible is for the entrepreneur.

Trade Credit
Trade credit is an arrangement whereby products or supplies are purchases on credit basis
to be paid in a short period. The degree of formality may be oral promise or written
agreement. That is when products or supplies are purchased on accounts payable or notes

99
payable respectively. The accounts payable is an open book credit where by the buyer
and seller obtain products or raw materials before paying for them. Under this type of
arrangement, customers pay in a short period of time usually in 30 days. However, many
businesses try to pay before 30 days to benefit from the discount usually offered by the
supplier to encourage early payment. Invoices usually state 2/10, n/30 kind of
arrangement for encouraging customers to pay within 10 days to get a 2% discount.

When credit transactions are accompanied by a written agreement it becomes more

formal. Some businesses prefer to have a promissory note on credit sales to be somehow
secured. One kind of such formal agreement is a promissory note which is an
unconditional written agreement drawn by the borrower who promises to pay a fixed
sum of money on a specified date to the creditor. The person who promises to pay
specified in the note is the maker. The person for whom money is paid is the payee
whenever the payee wants to get money earlier than the stated date then s/he can endorse
it to the bank to get paid with a discount net of service fee.

Activity
Dear students, is there any banking? Financial institution, or individuals
those provide short-term loans? Identify the difference between the cost
of loan of banks and financial institution vs. the cost of loan from
individuals. Which source is better? Why

5.1.4. Long Term Debt Financing

Large companies require a big amount of money than small businesses. It is also
impossible for them to repay the money with in a short period of time. Two sources of
these funds are loan and bonds. Only big organizations and government can usually issue
bonds.

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When there is a need for long time use, long-term loans are used. These loans can make
funds available for up to 10 years. The debt is usually repaid according to a fixed interest
and principal, although the principal can sometimes started to be repaid in the third or
second year of the loan, with interest being paid the first year.

The most common long-term loan is mortgage. This loan is secured by some kind of
valuable property. Tangible property such as building, land, and other equipments may be
used as collateral.
Long-Term Equity Financing
Equity financing is gained by selling a financial instrument called stock.

Corporate Stock
The two main sources of stockholders equity are
1. Investment contributed by the stock holders called paid in capital or contributed
capital, and
2. Net income retained in the business, called retained earning.

Individuals and or generations that own corporate stock actually own shares of the assets
of the corporation. This distinguishes stockholders from bondholders who have lent
money to the company. Bondholders do not participate in ownerships of assets of the
organization to whom they lend money.

Dividends
Having a share in profit is the main reason that individuals or organizations acquire
ownership. Based on the amount of shares of stocks, corporations distribute surplus
profits among stockholders. Rules about the distribution of profit make an important
distinction between the two major types of stock: preferred and common.

Common stock versus preferred stock

The kind of stock stockholders acquire, has a clear impact on the rights & privileges in
the distribution of profit and participation in the decision making process. If a corporation
issues only common stock, each share generally has equal right. A corporation may

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provide one or more classes of stocks with various preferential rights. The preference
usually relates the right to share in the distribution of earning such stock is generally
called preferred stock.

A corporation with both preferred and common stock may declare dividends on the
common only after it meets the requirements of the stated dividend on the preferred.

5.2. Internal or External Financing

Financing is also possible using internal sources or external sources of fund. The type of
fund more frequently employed is internal fund. Internally generated fund can come from
several sources within the company such as profit, sales of asset, extended payment
terms, and accounting receivable. In every new venture the startup years involve the
deployment of the profit to the business. Moreover, rather than purchasing plant assets it
is preferable to acquire them in lease, rent etc. so that the cash can be ploughed back to
the business. Sometimes the equity is entirely retained without some remuneration to the
owners. In addition by collecting receivables as early as possible and paying payables as
late as possible businesses can be financed internally. But doing so should be in a way
that doesn’t irritate the suppliers or customers.

External source of fund include personal fund, fund from family and friends, commercial
banks, government grants etc). The external sources of fund should be evaluated based on
the following criteria
 Length of time the fund is available
 The cost of acquiring it (interest or sharing of ownership)
 Discount offered for prompt payment. Let’s see some of the external sources of
Fund

Personal Saving
This is the most frequently used and the most reliable source of financing a business. It is
the least expensive fund in terms of cost and control; moreover, it enables the

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entrepreneur to attract other sources of finance. Outsiders who provide capital feel that
the entrepreneur is sufficiently committed to the business and make them to be motivated
to provide additional fund to the business.

Family and Friends

Family and friends are the next common source of fund for a business preceded by
personal fund. They are willing to invest because of their relationship with the
entrepreneur. Sometimes contributions from these sources may suffices to start a new
business without formally looking for fund but doing so could have disadvantages in a
sense that failure of the organization and disability to payback the money could coarse
the entrepreneurs relationship with friends and it may severely affect the life the family
in general because of loss of income and wealth. In addition these people may start
intervening in the operation of the business knowingly or unknowingly and hinders
smooth operation of the business.

Commercial Bank
Commercial banks are a source of short-term funds most frequently used by the
entrepreneur when collateral is available. The fund provided is in the form of short term
debt financing and as such requires a tangible guaranty. The collator can be in terms of
business asset (land equipment, or the building of the venture) or personal assets (the
entrepreneurs own property including house, car) or assets of the consigner of the note. In
Ethiopia, there are many private banks like Abyssinia, Dashen, Awash, and the
government owned Commercial Bank of Ethiopia that provides short-term loans for a
business. In addition Construction Bank of Ethiopia and Development Bank of Ethiopia
also provide a long term debt financing for entrepreneurs.

The Bankers Perspective towards extending loan

Banks are in business to make as much money as possible with the least risk. Above all
they want to avoid bad debt. Bank managers are employees and they work in a highly
regulated environment and they have limited discretion. Lending decisions are highly
influenced by lending policies and procedures that can also reflect the general economic

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condition and the balance and history of banks lending portfolio. Making a judgment
about the managerial capacity and feasibility of the business is a central concept in
lending. Bankers are primarily interested in minimizing risks and are very much
interested to see good financial control and utilization in place. For this, a well-
formulated business plan can serve a lot in judging the nature, management capacity and
success of the business. One acronym often used by bankers as framework to decide upon
financing or not financing the business is CAMPARI.

Character: This part of the framework addresses the characteristic of the potential
borrower with regards to his/ her or their credit history, honesty and integrity.

Ability: This is about the managerial, planning and implementation capacity of the owner
or management team. This can partly be revealed through assessing business plans and
communicating it with the borrowers. In addition their financial and personal
intelligence, sharpness, good judgmental ability is assessed.

Management: This is about the adequacy of the management team in managing the
business. This can be assessed though the qualification, number, proven experience of the
management team.

Purpose: This is tracing the purpose of the loan as to whether it is within the banking
policy and area of interest, legality of financing it and whether the required fund is within
the best interest of the business.

Amount: Is the amount requested correct and reasonable for the activities business
intended to perform or is that more than the actual requirement of running the business.

Repayment: This is an assessment as to whether the business is capable of producing

profit and paying back the loan or is that predicted to be loss-making business and make
the bank inn risk of not being paid.

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Insurance: Banks assesses the security of funding the business and may require collateral
to offer the fund to the borrower. Good entrepreneurs are able to keep good relationship
with bankers. And their relationship will be based on trust, respect and integrity. This
norm between the bankers and the entrepreneur can allow both parties to discharge their
responsibilities smoothly.

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 Chapter VI
Managing and Ending Business

Chapter objective
Dear distance students after studying this chapter you are expected to know the following
 Skills required to manage growing business
 The major problems of small business in general
 Problems of small business in Ethiopia

6.1. Managing Growing Business

During the growth stage, there are certain critical skills and strategies that the
entrepreneur will need to recognize.
There are different areas of expertise required of an entrepreneur to put the business plan
into practice. Some of these are record keeping, Financial Analysis and control, sales and
marketing analysis and marketing skill, advertising, leadership and time management,
and negotiation and human resource management. There are different means of
expanding business. These are joint venture, acquisition, merger, leveraged buyouts and
franchising. Joint ventures are separate entities formed by two or more partners. That is
when our business wants to expand; it can make an agreement to work with other
institution by creating another business while working on the initial business. Leverage
buyout occurs when an entrepreneur uses borrowed funds to purchase an existing venture
for cash. Most leverage buyouts occur because the entrepreneur purchasing the venture
believes that s/he can run the current owner. The current owner is frequently an owner
who wants to retire, or a branch of a corporate firm that is to be divested.

1. Record Keeping
Maintaining good records and financial control over such activities such as cash flow,
inventory, receivables, customers’ data, sales and costs should be a priority of every
growing business. All other analysis such as finance, marketing, etc is possible only when
we are able to keep sensible records. Keeping such records may require knowledge of
accounting. Small business owners may not be able to pay an accountant’s full salary but
the record can be maintained through par-time work.

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2. Financial Analysis
In this regard the entrepreneur is expected to manage cash, asset, debt and profit. Cash
flows, income statements, and balance sheets are the most important financial records
that are used to control and manage the enterprise. The projections we made in preparing
the business plan can be used as a benchmark to evaluate the progresses of the business.
In managing the cash flow using the cash flow statement, it may happen for instance that
cash out flow may exceed cash inflow. This can be investigated by comparing the Pro
forma or budgeted cash with the actual result. This could be because
I. Actual sales is less than forecasted sales volume
II. Most of the sales are made on credit
III. Most of the payments were made in cash and the out flow was more
than the planned one.
IV. Purchasing price is greater than the anticipated

If for example the reason is because of failure of some customers to pay cash for credit
sales then we have to make a follow up and make them pay before it becomes bad debt.
Comparing of budgeted cash flow with actual cash flow enables the entrepreneur with an
important assessment of potential immediate cash needs and indicate possible problems
in the management of assets. This early warnings facilitate smooth operation of the
business that would have been turned into failure.

The financial statements also pinpoint some information about the level of inventory
stocked, the receivables and payables etc. With regards of inventory, the entrepreneur
should be able to properly determine the economic order quantity or its approximation
in order to avoid the cost of overstocking (tie up of cash) and under stocking. The owner
needs to determine the costing methods (the decision to use FIFO, LIFO or weighted
average). The costing system has an impact on the preparation of the financial statements
and its results.

Comparing the actual and expected costs and profits is also important to detect the
operating expense or other cost that strongly affects the business's entire cost of

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operation. When the business is producing or selling different products, maintaining
costs across products will help to know which product is becoming costly and affects the
profitability of the business and which one is less costly.

Ratio analysis is a powerful tool of finical analysis. A ratio is the quotient of two
mathematical expressions as a relationship between two or more things. In financial
analysis, a ratio is used as a benchmark for evaluating the financial position and
performance of a business. The relationship between two accounting figures expressed
mathematically is known as a financial ratio or simply ratio. Ratio helps to summarize
large quantity of financial data and to make qualitative judgment about the businesses
financial performance.

Types of ratio
Activity 4.8.
1. What is financial analysis?
2. What is its relevance for entrepreneurs who running their business?
3. What is the most known type of financial analysis method?
4. What is the advantage of ratio analysis?
5. What are the types of ration analysis?

Financial analysis is the process of identifying the financial strength and weakness of the
firm by properly establishing relationship between the item of the balance sheet and the
profit and loss account. Financial analysis can be undertaken by management of the
enterprise or by parties outside the organization, viz. on owners, creditors, investors and
others. The nature of analysis will differ depending on the purpose of the analyst.

 Trade creditors are interested in the business’s ability to meet their claims over a
very short period of time. There analysis will, therefore, confine to the evaluation
of the business’s liquidity position.

 Suppliers of long term debt, on the other hand, are concerned with the
business’s long-term solvency and survival. They analyze the business’s

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 profitability over time, its ability to generate cash to be able to pay interest and
repay principal and the relationship between various sources of funds. Long term
creditors do analyze the historical, financial statements but they place more
emphasis on the business’s projected, or Pro forma , financial statements to make
analysis about its future solvency and profitability.

 Investors who have invested their money in the business are most concerned
about the business’s earning. They restore more confidences in those businesses
that show steady growth in earnings. As such, they concentrate on the analysis of
the business present and future profitability.
They are also interested in the business’s financial structure to the extent it influences
the business earnings ability and risk.

 Management of the business would be interested in every aspect of the financial

analysis. It is their overall responsibility to see that resource of the business is
used most effectively and efficiently, and that the business’s financial condition is
sound.

Several ratios, calculated from accounting data, can be grouped into various classes
according to financial activity or function to be evaluated. As stated earlier the parties
interested in the financial analysis are long and short-term creditors, owners and
management. Short-term creditors’ main interest is in the liquidity position or the short-
term solvency of the business. Long-term creditors, on the other hand, are more interested
in the long-term solvency and profitability of the business. Similarly, owners concentrate
on the business’s profitability and financial condition. Management is interested in
evaluating every aspect of the business’s performance. They have to protect the interest
of all parties and see that the business grows profitably. We may classify types of ratios
in the following four important categories.
 Liquidity ratios
 Leverage ratios
 Activity ratios

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  Profitability ratios

Liquidity Ratios

These ratios measure the business’s ability to meet current obligation. Liquidity ratio
measures the ability of the business to meet its current obligations. If fact analysis of
liquidity needs the preparation of cash budgets and cash and fund flow statements. But
liquidity ratio, by establishing a relationship between cash and other current asset to
current obligations, provide a quick measure of liquidity. A business could insure that it
doesn’t suffer from lack of liquidity and that it doesn’t have excess liquidity. The failure
of a business to meet its obligation due to lack of sufficient liquidity, will result in a poor
credit worthiness, loss of creditors, confidence or even in legal tangles resulting in the
closure of the company.

A very high degree of liquidity is also bad; idle assets earn nothing. The business’s fund
will be unnecessarily tied up in a current assets therefore it is necessary to strike a proper
balance between a high liquidity and lack of liquidity. The most common ratios which
indicate the extent of liquidity or lack of it, is the following.
1. Current ratio
This is calculated by dividing current asset by current liability.

Current ratio = Current Asset

Current liability

As a conventional rule, a current ratio of for instance 2:1 or more is considered

satisfactory. The current ratio represents a margin of safety for creditors. The higher the
current ratio, the greater will be the margin of safety. The larger the amount of current
asset in relation to current liability, the more the business’s ability to meet its current
obligations; however, an arbitrary standard of 2:1 should not be blindly followed.

2. Quick ratio

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It establishes a relationship between quick, liquid asset and current liability. An asset is
liquid if it can be converted into cash immediately or reasonably done without loss of
value.
3. Quick ratio is calculated by dividing quick asset by current liability
Quick ratio= Current asset-inventory
Current liability

Cash ratio
Since cash is the most liquid asset, financial analysts may examine cash ratio to
liabilities. Trade investment or marketable securities are equivalent to cash.
Cash ratio= cash + marketable securities
Current liability

Leverage ratios

The short-term creditors like bankers and suppliers of raw material are more interested
with the firm’s current debt paying ability. On the other hand, long-term creditors are
more concerned with the firm’s long-term financial position. To judge the long-term
financial position of the firm, financial leverage or capital structure ratios are calculated.
The manner in which asset is financed has a number of implication.
1. Between debt and equity, debt is more risky from the firms point of view
2. Use of debt is advantageous for shareholders as they can retain control of the
business with limited stake and it can also magnify their earnings when the return
on investment of the debtors fund is higher than the interest paid.
3. A high debt burden firm will find difficulty to raise fund from creditors and
owners in the future. Creditors treat the owners' equity as a margin of safety. Thus
the leverage ratio is calculated to measure the financial risk of the firm. Some of
the leverage ratios are
1. Debt ratio
The owners may be interested to know the proportion of interest bearing debt in the
capital structure. It is calculated by dividing total debt by net asset.

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Debt ratio= Total debt
Total debt + net worth

Where net worth= Net fixed asset + net current Asset (total current asset-current
liability excluding interest bearing current liability)

2. Debt-equity ratio
From the total debt ratio, debt equity ratio describes the lenders contribution for each
birr of owners contribution.
Debt-equity ratio=Total debt
Net worth
4. Coverage ratio
Converge ratio is used to test the business’s debt servicing capacity. This is computed
by dividing earning before interest and taxes by interest change.
Interest coverage= Earning before interest and tax
Interest

Activity Ratio

Funds of creditors and owners are invested in various assets to generate sales and profit.
The better the management of assets, the larger will be the amount of sales. Activity
ratios are employed to evaluate the efficiency with which the firm manages and utilize its
asset. These ratios are also called turnover ratios because they indicate the speed with
which assets are being converted into sales. Some of the activity ratios are
1. Inventory turnover

This ratio indicates the efficiency of the firm in producing and selling its products. It is
calculated by dividing the cost of goods sold by average inventory.
Inventory turnover= Cost of goods sold
Average inventory
Where average inventory is the average of the opening and closing balance.

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This ratio indicates how rapidly inventory is turning into cash or accounts receivable
through sales. Generally a high turn over indicates a good inventory management; a low
inventory turnover on the other hand, indicates excessive inventory level than warranted
by production and sales activities. This also ties fund unnecessarily.

5. Asset turn over ratio

Assets are used to generate sales. Therefore, a firm should manage its asset efficiently
to maximize sales. Asset turnovers can be calculated on net asset, total asset, fixed
asset, and current asset.

Example Net asset turnover= Sales

Net asset
Where net asset is the sum of fixed asset plus current asset- current liability
Total asset turn over= sales
Total asset
Fixed asset turnover= sales
Net fixed asset

Current asset turnover= Sales

Current asset

Profitability ratio

This ratio is calculated to measure the operating efficiency of the business. Besides
management of the company, creditor and owners are also interested in the profitability
of the firm. Generally two types of profitability ratios can be calculated
 Profitability in terms of sales
 Profitability in terms of investment
1. Profitability in terms of sales
A) Profit margin= Earning before interest and tax

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 Sales
A low gross of profit margin may reflect high cost of goods sold.
B). Operating expense ratio= operating expense
Sales

A higher operating expense ratio is unfavorable since it will leave a small amount of
operating income to meet the interest dividend and other obligations of the business.

2. Profitability in terms of investment

Profitability of business is also assessed by using total investment. One of the
profitability ratio analyses is use of return on investment (ROI). ROI is calculated by
dividing profit after tax (PAT) by investment.
ROI= PAT
Total asset

Utility of ratio Analysis

Ratio analysis helps determining
 The ability of the fund to cover the current obligation
 The extent to which the firm has used long term solvency by borrowing funds
 The efficiency with which the enterprise is utilizing its asset and generate sales
revenue
 Over all operating efficiency and performance of the business.
Ratio analysis serves the following for organizations or interested parties
 Performance analysis: Any interested party can know the current financial
position or long term solvency of the business
 Credit analysis: Depending on the interest of the party, ratio analysis shows the
liquidity or debt paying ability of the firm
 Security analysis: The major focus of security analysis is on the long-term
profitability. Profitability ratios, the leverage and others to know the future
profitability potential of the.

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3. Marketing and Sales Control
This control usually focuses on key variables that reflect performance results
established in the annual marketing plan. Some of these key variables include market
share, distribution, promotion, pricing and customer satisfaction.
The entrepreneur is expected to know the market share of the business as compared
with total sales of the industry. These kinds of data may not be easily available in
developing countries like Ethiopia.

With regards to promotion and distribution, the entrepreneur should follow and know
which item customers frequently demand and ensure its availability at any branch of
the business if any. Moreover, effort should be made to know the effectiveness of the
promotion strategy used by the business. This will make the business to be cost
conscious and target oriented in spending for promotion. The promotion should also
be made about the whereabouts of the business and its nature using local media.

Marketing skill is critical to ventures continued success. A growing business is

expected to expand by increasing its market share, identifying new customer,
introducing new product or introducing new source of input that can strengthen its
effort. These in turn need marketing skills of identifying the gap to be filled and the
way of addressing the gap.

4. Time Management
One of the biggest problems in growing the venture is time management. Time is the
entrepreneur’s most precious yet limited resources. It cannot be borrowed, saved,
rented, saved, bought or hired. Few entrepreneurs use time effectively, and none of
them ever reaches perfection. Entrepreneur can make better use of their time, and the
more they strive to do so the more it will enrich to their venture as well as their
personal lives. Time management has ample advantage in increasing productivity, job
satisfaction, improved interpersonal relation, reducing time anxiety and tension, and
better health. To get these payoffs from time management an entrepreneur should
have the following.

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 1. Desire to effectively use time even when there is excess time or when the
entrepreneur is under pressure.
2. Maximizing Effectiveness over improving minor efficiency: This requires
the need to completing a particular job in time than to spend more on it for
minor extra efficiency.
3. Prioritizing planning: Each day an entrepreneur needs to list the daily
tasks to be accomplished and prioritized them accordingly.
4. The entrepreneur should periodically review the objectives and the degree
to which these have been achieved.
5. This will give insight to the entrepreneur to further improve time
management and maximizing the payoff.

5. Negotiation
Negotiation is the process by which parties attempt to resolve conflicts by agreement.
Negotiation can be classified into two as distributive bargaining or integrative
bargaining.

Cooperative negotiation (integrative bargaining) involves cooperative negotiation

between the negotiating parties. In this situation, the entrepreneur is willing to let the
other side achieve its desired outcome while maintaining a commitment to his/her
goals.
Distributive or competitive negotiation does not allow the other party to achieve his
or her goals. In this case, there is a fixed benefit to be shared between the parties and
the agreement to give more of the share to one party is possible at the expense of the
other. In this kind of negotiation, there is no trust between the parties, a solution can
be reached only through a series of modified position of compromise and concession.
This is the most common type of bargaining entrepreneurs face in their day to day
activity. Having a strong skill on this regard will make them more successful.

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 6. Leadership and human resource management
An entrepreneur is expected to be a role model to all employees working in the
venture. A good work ethic, being organized, being prepared for meetings, being on
time, giving praise to employees and good communication within the venture is very
important. S/he is also expected to have a skill to inspire employees, and influence
them to strive to attain organizational goals and objectives.
Recording and hiring new employees may occur at both the entry and top
management level. Recruiting competent employees and maintaining their motivation
in the venture is another task of owners. Owners may reach these kinds of employees
through networks, associations, personal acquaintance or other sources. Recruiting
them using formal sources and opening a separate human resource management unit
in a newly established organization may be luxuries hence the informal source is
frequently used.

6.2. Problems and causes of failure of small business enterprises

It is a clear fact that small business enterprises all over the word are not operating
smoothly without any problem. They are experiencing various problems in the day-to-
day functions. When these problems are detected early and remedial action is taken, then
the business will survive and grow. However, if these problems (sicknesses are not
identified early, and remedial action is delayed or not taken at all, business starts to
decay.

Activity
Dear students search for small business in your area and identify what kind of in problem
they face internally. Write them in the space provided.
………………………………………………………………………………………………

A) Lack of Managerial skills

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It is evident that most small business enterprises management teams do not possess
managerial skills that the work deserves. This is because, the owner of the business is at
the same time the manager. S/he is responsible to pass major decisions alone and to
accomplish daily routine activities that require a diversity of talents. It is that the owner
has no superior ability in all areas of management and small business mangers also fail to
exercise the highest quality of managements as they are bound by tradition.

B. Financing
The major problems of many small businesses are lack of capital and credit. Long-term
capital is a particular need of many small firms. Borrowing money from banks, friends
or relatives is a source of long-term capital. However, fulfilling the requirements of
banks to get the loan and the corresponding high interest relates is heart breaking to small
businesses.

C. Tax
Like any business organization, small enterprises are also supposed to pay different taxes
by law. Payment of tax for their profit is a problem when the assignment is done arbitrary
or when the rate is too high.

D. Market Research
Conducting research on products, processes and methods, is vital to keep the business
enterprise alive in the market and profitable. In most cases, small business does not have
the required fund to undertake the research; hence, managers tend to rely on requests and
complaints of customers and sometimes on trade survey conducted by other
organizations. Hence, they seldom are well informed as to the extent and the sales
potential of their market. Entrepreneurs should estimate demand by carefully studying of
the market. Lack of knowledge about the market whether it is growing or declining, the
possibility of new competitors to enter, possible changes in consumer needs lead them to
over-estimation of demand. Thus, additional marketing research about the demand for the
business's product and serine will be required.

E. Problem of selecting qualified personnel

Small business enterprises managers have a problem of selecting the right applicant for
the right position. This is because the manger themselves lack the skill or have little

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knowledge to select competent employees small business managers owner typically lack
a well-developed personnel program and have little knowledge of its significant.

F. Marketing and Marketing Skill

Small businesses are facing marketing problems to sell products/services. Difficulties in
managing the firms advertising program initiate the nature of the marketing problem.
Small enterprise do not have clearly defined policy when to advertise, which media to
use, how much to spend on advertising program and finally to evaluate the effectiveness
of the program. Lack of skill and knowledge about channels of distribution, product
differentiation, marketing strategy and other issues like wise constitute significant
problem for a small firm.

G) Choice of Idea

Identification and evaluation of business idea is a most difficult task. Most good business
idea do not appear suddenly rather the entrepreneur should be alert to identify potential
opportunities. Most small businesses starters do not have the formal mechanism of
identifying business opportunities. Business ideas can be a raised from consumers,
business associates, members of distribution system. Often, consumers who purchase
products are the best source of ideas for new business. Due to their close interaction with
the end-user, channel members of the distribution system also see new product needs.

Whether the opportunity is identified with the input from consumers, business associates,
channel members, or technical people, each opportunity must be carefully screened and
evaluated. The evaluation of the opportunity is perhaps the most critical element. But
entrepreneurs often fail to evaluate opportunities due to their limited skill and this results
poor assessment of the specific products more profitable.

They also fail to determine risk involved with each opportunity and rewards that can be
exploited. Determining opportunity requires assessment of the market size, level of
competition, technology, and the amount of capital involved.

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Opportunity analysis, or what is frequently called an opportunity assessment plan, is not a
business plan. Compared to a business plan, it should be shorter; focus on opportunity not
the entire ventured, this provide the basis to make the decision of whether to act on
opportunity.
The most difficult and critical aspect of opportunity analysis is the assessment of the
opportunity. This requires the following questions to be answered:
 What market need does it fill?
 What personal observation have you experienced or recorded with regard to
the market need?
 What social condition underlies this market need?
 What market research data can be gathered to discuses this market need?
 What competition exists in this market? How would you describe the
behavior of this competition

H. Faulty Plan

Planning plays an important role for successful attainment of small business. It is

extremely important in the early stages of many new small businesses. Failure in
preparation of good plan obviously leads to negative consequences to the new business.
Factors that lead to poor planning can be categorized as technical feasibility, and
economic viability. Technical feasibility factors include Inadequate technical know-how,
vocational disadvantage, and outdated production process.

There are different techniques and types of planning that help entrepreneurs develop a
promising plans. But most of them are not aware of the techniques and procedures those
result good plan. Goals and objectives must be specific and feasible. Entrepreneurs
should not be ambitious. Goals and objectives that are too general and not feasible make
the business plan difficult to control and implement. Entrepreneurs require time and
energy to prepare a plan, without studying the feasibility and any barriers to success
feasibility study require useful information about marketing, finance, and production. But
Entrepreneurs rarely gather n formation above the three aspects of the business
mentioned about. And the main reason is skill how to collect the information how to

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interpret and manipulate the information in a meaningful manner. Identification of
possible sources of this information is also another problem.

Poor selection of operation locations plays its own role for poor planning. Poor site
location creates another problem to the business in many ways, for example, selecting
site far from customers or resource area increase distribution & transportation costs. This
in turn creates financial problems and reduction in profit.

Most small businesses undertake their operation using out dated or archaic production
equipment. It is obvious that production technology has a clear impact on the quality of
the product thereby the competitiveness of the business. Due to outdated production tools
small businesses becomes unable to compete with these with advanced production
technologies. Thus, small business operators have to make sure that their production
facilities are capable of producing the planned quantity and quality of products and/or
services.

Economic feasibility factors such as high cost of input, too high break even point,
uneconomic size of business, under-estimation of financial requirements, and over
estimation of demand causes planning failure.

I. Cost of input
High cost of input is on reason to the failure of small businesses. They buy input with a
high price and this may force them to spend substantial amount of their capital on
material inputs. This can be due to poor purchasing activities. They may lack the skill to
identify possible alternative supplier through fathering information and carefully
evaluating each supplier based on clearly stated criteria's or areas of performance.

J. Uneconomic size of project

Poor determination of the size of the firm is also observed from small business starters.
The size of the firm should be with the size that can be implemented with the available
financial and human resource of the firm. Entrepreneurs also fail to correctly estimate the

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financial requirement of the size of the project. They under-estimate the money
requirement of the project which leads to problems in the implementation stage. They
may run out of money and interruption may occur if there is no immediate source of
finance.

K. Implementation

A plan, which is prepared without undertaking careful analysis about the future, will
create problem in the phase of implementation. On reason is that the plan we develop to
day may not work for tomorrow because the environment in which businesses operate is
extremely dynamic. Problems that may our in the implementation phase includes:
 Cost overruns resulting from delays in getting license and mater

L. Poor Resource control

Assets such as cash, marketable securities, receivables, and inventory need close and
recorded control as they are vulnerable for abuse and theft.
Inventory is an important cost control and customer service activities that need to be
carefully monitored too much inventory to meet customer needs can tie up cash. On the
other hand, too little inventory can also increase cost. Sales may be lost, customers may
become unhappy and choose another firm. Most small business makes mistakes in
controlling inventory. In other words, they face problems in making trade-off between
too much and too little inventory. They make them unable to determine the optimum
level of inventory.

M. Poor marketing skill

Marketing skills are essential to small Businesses continual success. As the company
grows, it will need to develop new products and services to maintain its competitiveness.
They should be an angering process based on information regarding changing customer

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needs and competitors strategies. For small businesses it is difficult to be engaged in
some of these kinds of formal procedures for developing new products because of lack of
skilled manpower and financial resources.

N. Poor time management

Time management involves investing time to determine what the entrepreneur wants out
of the firm. Few entrepreneurs use time effectively, and none of them reaches perfection.

Activity
You just go to the nearby town and ask one or more of the merchants about their
problems in running the business and know their problems and compare the problems
mentioned by the merchants and the common problems of Ethiopian entrepreneurs as
presented here in this module
.
6.3. Small Business Environment in Ethiopia

Ethiopian micro and small enterprises are confronted by many problems. According to
the CSA Report (1994-1995), the major obstacles experienced by small-scale
manufacturing industries were the irregular and erratic supply of raw materials and a
shortage of suitable working premises, lack of working premises, access to capital and
inefficient utilization of it. The problems of raw material shortages, lack of working
capital and effective marketing practices faced by small manufacturing industries result
in the failure of these businesses. The same set of problems, when experienced by
informal sector operators, has the effect of preventing their expansion almost from the
beginning of their operations. Results of the 1997 CSA Survey showed that for about 50
per cent of informal sector operators, the first major difficulty when starting their
operation was the lack of sufficient initial capital. Until 1997, there were no organized

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policy and support systems catering to the development of the small and micro
enterprises sector, so structural, institutional, and policy barriers were not being
addressed. Premises, markets, finance, supply arrangements, regulatory barriers, and
legitimization of entrepreneurial activity are among the most urgent problem of small
business.
Here are the commonly cited problems of micro and small enterprises in Ethiopia.

1. Inefficient Civil Service

Service delivery basically refers to the systematic arrangement of activities in service
giving institutions with the aim of fulfilling the needs and expectations of service users
and other stakeholders with the optimum use of resources. In short, improvement of
service delivery means increasing the cost effectiveness, coverage and impact of services.
As stated in the FDRE service delivery policy in the civil service although the Ethiopian
Civil service has a long tradition and experience of serving various governments, it has so
far given little attention to service delivery efficiency. As a result of which private sectors
are suffering from this inefficiency from the very beginning of licensing to their day-to-
day functions that relate them with governmental institutions.

2. Unfavorable legal and regulatory environment

The private sector in Ethiopia was suppressed under the command economy of the past.
Moreover, private enterprise was not allowed to engage in several types of activities.
Now, nearly all business activities are open to domestic private enterprise either on its
own or in partnership with government, except for a few areas kept as government
monopoly. Procedures for registration and licensing have been greatly improved in
comparative terms. Generally, the removal of legal restrictions is near complete, but
regulatory impediments though reduced still persist. Business, like society in general,
needs to operate under the rule of law. No strong private sector can exist in the absence of
an adequate legal framework to resolve disputes, facilitate efficient transactions, and to
protect property rights.

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It is therefore essential that a comprehensive legal system be put in place so that all
economic activities are undertaken within the framework of the law. The mere existence
of a legal package would not be sufficient. The services given by the courts should also
be efficient and up-to-date. Even though market economy system is fraught with the
making of contracts at all levels, there is a tendency that making contracts at the courts
of law is undesirable. Settlement of contractual disputes is often a long and time-
consuming process.

Various studies and discussions indicate that the following are some of regulatory issues
affecting private investment and private sector development. /Report on private sector
investment in Ethiopia constraints and opportunities workshop, organized by the British
Embassy and British council in collaboration with the Ethiopian Chamber of Commerce,
15-16 may 2001/

 There are no shared objectives of government and the private sector. The private
sector and the government must have a common interest in creating an operating
environment that encourages fair competition and market efficiency.

 Governance responsibilities of the government and the private sector are not
clearly put. There are governance weaknesses on the part of both government and
the private sector.
 Market regulation is not mostly ensuring fair competition and market efficiency.
 Dialogue between the private sector and government has not been strengthened so
that it could minimize the regulatory and governance weaknesses.
 Bureaucratic delays and administrative inefficiencies

3. Weak public private partnership (PPP)

A crucial requirement for an effective private sector policy framework is to ensure that it
is actually developed in close consultation with the private sector. Partnerships between
the private and public sectors are becoming commonplace as a means of ensuring that
government policies reflect the views of the private sector, and as a means of joining

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forces where joint activities are appropriate. It is, therefore, useful to have regular forum
at which the private sector and public sector agencies can exchange views on important
policy and related issues on continuous bases.

In Ethiopia, in spite of the high attempt to create a conducive macro economic

environment by the government, consultation between the government and the private
sector during policy and strategy formulation is rare.

It is commendable to take into account concerns of the private sector particularly small
and micro enterprises in policy formulation, in the process of enacting laws, regulations
and guidelines, and in following up their implementation.

4. Lack of raw material

Small and micro enterprises viability is determined by the source and proximity to raw
materials. Hence small and micro enterprises should be located in the areas where their
resources originate or where good infrastructure assures their availability. However,
studies indicated that in Ethiopia shortage of raw materials has been a continuous
problem for small-scale enterprises. The domestic supply as well as the import of raw
materials from abroad has been inadequate. In addition, poor distribution and marketing
system, fluctuation in their price and lack of standardization, scarcity of foreign exchange
by small and micro enterprises to import from international market, confinement of small
and micro enterprises in urban areas, among others, are contributing for unavailability of
raw materials in the domestic market.

5. Lack of information & information system

Information refers more specifically to data which are of a particular nature and in a
particular form which makes them useful for what ever decision making purpose.

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Hence for the success of small and micro enterprises the presence of strong institution
that can provide reliable and timely information through efficient information system is
vital. Generally small and micro enterprises require information related to market, raw
materials, utilities, technology, business opportunities and partners, governance, policies,
rules, regulations, infrastructure, etc. However, in most cases, Ethiopian entrepreneurs
have not access to any reliable source of information on the line of activities with
potential to growth. Consequently, the major criterion entrepreneur's resort to choosing
their lines of investment appears to be the imitation of others who have started
presumably profitable activities in the same locality.

Moreover, the formulation of an effective policy framework for private sector

development depends critically on the ability of policy-makers to draw on appropriate
quantitative and qualitative data and information, such as industrial and enterprise
statistics, broader information on the conditions prevailing in the private sector and the
requirements of private entrepreneurs.

However, in Ethiopia access to such data and information is often limited as it is

cumbersome and expensive to collect, assemble, process and disseminate. This can lead
to the drafting of inappropriate or mutually contradictory policies, whose effects may be
counter-productive.

Central Statistics Authority’s survey on Small Scale Manufacturing Industries in Ethiopia

Conducted in 2002 has indicated that, of the total establishments covered by the survey
3.16 percent of them have problems in obtaining information. The survey further
indicated that, lack of information to identify type of activity, to know about appropriate
machinery and where to buy it, where to get appropriate training and license, and lack of
sufficient market information, among others, are the major problems (CSA, 2003).
. Tesfaye Hailselassie et al.(2004)

Unavailability and inconsistency of information, failure to clearly identify the type and
nature of information required by small and micro enterprises sector, absence of efficient

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information system at all levels, failure to establish a responsible institutions or
organizations, shortage of skilled manpower and modern facilities, lack of awareness
about the benefits of information on the part of small and micro enterprise operators,
among others, are the root causes to the lack of information.

6. Market and marketing problem

The final goal of any business enterprise is reaching the consumers through marketing.
Without market demand business is nothing rather than being futile.

Effective marketing linkage is critical to the success of small and micro enterprises. Often
this is not available and is the main cause of business failures. Innovative means of
linking products to market is badly needed. Moreover, market research on product,
potential market, and socioeconomic conditions of customers, their preference and test,
information on business opportunities is vital to the success of small and micro
enterprises. However, most small and micro enterprises in Ethiopia are not in a position
to have access to efficient market and marketing system as has already been proved by
different studies.

Lack of market information as well as lack of markets has been the major impediments to
the development of small-scale industries in Ethiopia. Owing to lack of market research
and information many of the small-scale industries often concentrate in the production of
similar commodities, which puts them in fierce competition with one another. This is
because of lack of resources to undertake market research and acquire market
information.

7. Product quality and standardization problem

It is usual that quality and sales are positively correlated. Since quality cannot be added to
the product after it is produced, the quality scheme has to be planned a head. Planning at
enterprise level is, therefore, important because quality is the result of skilled manpower,

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quality materials, appropriate equipment and facility, and corporate-wide commitment to
excellence. Generally when there is deeper understanding of quality, appreciation of its
meaning, knowledge of its measurements and identification of its sources, enterprise
operators can easily prevent quality deficiencies. However, most small and micro
enterprises in Ethiopia lack this basic knowledge of quality and hence operate
traditionally.

In the era of globalization, the contemporary world market is highly sensitive and
dependent on the products' import rules and regulations mainly on their quality and
marketing standards set by the importing countries. These products' quality and
marketing standards include cleanliness specifications, chemical residues, microbial
contamination, quarantine inspection, packaging and presentation, relevant information,
etc.. Hence to provide support services to the private sector especially in the areas of
quality management, standardization, certification, establishing new or upgrading the
existing institutions is vital. However, critical capacities are lacking in many African
countries. The absence of such services can have serious consequences for business,
especially those oriented towards export markets.

The root causes for product quality problem in small and micro enterprises sector could
be summarized as follows:
 Lack of understanding of the meaning, concepts and measurements of quality by
most small and micro enterprises operators.
 Failure to make continuous market research.
 Lack of commitment and negligence of small and micro enterprises operators
and staff on quality standardization.
 Absence of national quality standards for most indigenous goods and
unfamiliarity with international standards of exports items.
 Shortage and limited spatial distribution of institutions rendering services such
as quality management, standardization and certification.
 Absence of efficient system to introduce national as well as international
standards to both producers and consumers.

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  Shortage of skilled manpower in the field. .
 Absence of consumers' associations.

8. Shortage of capital & lack of credit access

Any business shall have to use own savings or seek external funds where savings are
insufficient as seed capital for start-up business and development capital for expansion of
an established company. Whatever the sources may be, finance will be required at start-
up and expansion stage of any business. Access to financial Services gives people the
ability to expand their options, and thereby to increase the productivity of their resources.
Savings services allow clients to store current income as assets for future use, while
credit services allow clients to invest or consume now. Hence financial services should
include not only credit but also saving services

However, it is common to see that the private sector irrespective of its type, suffer from
shortage of capital and access to credit. A survey on urban informal sector activities
(CSA, 1997) reveled that out of 119,953 business operators in the Amhara region, 50.6%
of their first major difficulty when they start their business was lack of sufficient initial
capital.

Moreover, review of 2002 CSA manufacturing survey report, disclosed that from the total
31,863 establishments asked on the extent of financial problem they faced while starting
their business 23% reported that they face lack of sufficient initial capital when
commencing operation.

Source: Tesfaye Hailselassie et al.(2004)

The financial sectors are still modest, and do not perform well in developing innovative
financing arrangements for new investments. Banks need collateral particularly fixed
assets to provide loan. Banks perceive lending to micro enterprises to entail high
transaction cost and risk associated with screaming problems loose contract enforcement
and regulations that in turn prompt them to require large collateral. Hence both sides
retreat from entering a mutually beneficial transaction.

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Physical remoteness from financial institution, absence and/or inefficient hire or lease
industry, and credit anxiety and cultural influences on credit services are also the most
suppressing unit for the sectors financial access. Whereas, micro finance institutions are
supposed to follow group based lending system where each group members is jointly
liable for defaulted loans of their group members. Group lending tends to preclude
entrepreneurs who are and need to be self-centered in decision-making and innovation.
This displays that the business sector especially small and micro Enterprises are supposed
to benefit little from the existing financial market.

Absence of short-term financial arrangements in times of critical needs by Banks such as

overdrafts, which are important for a business to fill cash flow gaps absence of efficient
record of clientele financial needs and absence of stock exchange market are problems
that limit small and micro enterprises financial access. Low recognition and support for
the establishment of venture capital industry and inability to mobilize savings and to
transfer from excess to shortage are still gaps in the financial market.

9. Lack of premises and land

The private sector by virtue of its character in demanding customer-oriented location

needs land administration services that recognize and realize the existing potential of the
sector. It is obvious that accessibility to market and labor forces is the foremost
determinates of enterprise location.

The center of an urban area is the most desirable location because it offers the greatest
accessibility to the entire urban market. The enterprises’ need to minimize expenses of
moving commodities as well as to grasp the niche market tends to aggregate in urban
centers. However, due to varieties of reasons, the progressively incubating enterprises
employ traditionally acquired land & buildings for their activities. It is common to see
most enterprises in the region taking the advantages of their residents as premises.

For small and micro enterprises in general, lack of premises is unquestionably a major
problem. They can rarely acquire suitable locations where they can get easy access to

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markets. The question, however, goes beyond that interestingly. Even for the newly
emerging entrepreneurs the transaction cost of securing premises is almost prohibitive.
Supporting these events, a survey report of CSA (2002) for the small scale manufacturing
has also justified the problem of obtaining working premises to be 32.01% computed
from reports of 2,812 business establishments.

10. In adequate consultancy & advisory service

In competitive and constantly changing business environment, the production & supply
of quality goods & services at a minimum cost depends highly, on the availability and
fusion of business upgrading services and technical know-how. Entrepreneurs, to cope up
with constantly changing business environment, need to be assisted on how they could
measure their pace in line with the prevailing changes and associated impacts.

Consultancy Services as a tool to enable entrepreneurs to diagnose their business and to

undertake informed decisions is one of the key element from a range of services.
Businesses go into trouble for one or more of the reasons.

Inability to get insight of their own business problem, to undertake business opportunity
identification and feasibility study, to prepare business plan, to identify sources &
procedures for finance, to build business linkage both local to local and local to
international, to undertake business, and cash flow management, to make records and
other accounting activities, to make business registration, to perceive tax related issues,
and handle customers.

The impact of shortage on consultancy services is also a common phenomenon in areas

of income and expense accounting. As can be seen on the surface, enterprises lack to
keep general records and to differentiate between personal & business income and
expense. Many of enterprise owners do no distinguish their business income and
expenditure from their personal income and expenditure. Many of them lack modern
business accounting system and are staffed by family members alone. If these business
organizations were to account land and building, which they had acquired before the

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business venture and their family work as opportunity cost to the business many of them
would come to realize that they are operating at a loss.

11. Lack of appropriate technology

It has long been recognized that technology plays a pivotal roll in socio-economic as well
as environmental development. The term technology is used to denote a given
combination of machinery, raw materials, and labor as well as organization of
production, aspects of supervision, the necessary information, etc.

In other words, it involves entire systems of knowledge, skills, techniques, management,

organization and all hardware used in the system. Technology is multidimensional in
nature. It has social, economical, political, cultural and environmental dimensions. When
a certain technology is planned to be employed, due consideration should be paid to go in
line with the above dimensions.

Hence, more emphasis should be given for those technologies, which are appropriate or
consistent with local resources and conditions. All these refer to the concept of
appropriate technology. The concept of appropriate technology has taken root in many
parts of the world.

Appropriate Technology is now recognized as the generic name for a wide range of
technologies characterized by any one or several of the following features: low
investment per workplace, low capital investment per unit of out put, organizational
simplicity, high adaptability to a particular social or cultural environment, sparing use of
natural resources, low cost of final product or high potential for employment.

The definition mainly signifies the conditions of the developing economies like ours,
where there is severe capital scarcity and abundant workforce. Therefore, the use of
appropriate technologies should be seen as a core issue in our socio-economic agenda.

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Appropriate technology encompasses a very wide range of technological solutions,
modes of technology transfer and adaptation, and criteria for technology assessment and
development. But, efforts made so far to develop appropriate technology by undertaking
any of the above tasks are very minimal. As a result of this, most of the existing
technologies are either obsolete or not compatible with the objective conditions of the
country. In addition to that, technologies are not readily available which enable to exploit
indigenous resources.

All these happened due to the fact that there was no due attention given for appropriate
technology- development. There has not been also sufficient manpower with related
knowledge and skill, and information regarding to appropriate technology is not readily
available and appropriate technology- funding is at its minimal stage.

Furthermore, the tradition to use and upgrade traditional technologies is not satisfactorily
developed; consequently, there is high dependency syndrome on foreign technologies.
The link to foreign dealers or sources of technologies is also too weak.

12. Lack of entrepreneurial, managerial & other skills

Many new businesses recently established in the private sector are weak in business
skills. Numerous problems and constraints confront the small enterprises in Africa. Small
and micro enterprises are retarded by limited access to capital and raw materials,
conservative distribution system, inadequate technical, legal and institutional assistance
and poorly trained labor force. Lack of managerial talent accounts for the failure of many
small enterprises and in general constitutes a serious handicap to development.

As the following data by Tim Rudkins et al, 1994 also indicates, most micro enterprise
owners in Ethiopia (more than 88% of them) acquire their skills outside of the formal
school and hence lack of modern business management, entrepreneurial and other skills
resulted.

 Formal school 12%

 Apprentice 6%
 Family 18%
 Other means of acquiring skill 65%

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CSA report of 2002 on small scale manufacturing industries in Ethiopia states that
absence of adequate skills accounts for 5.33% of the major problems facing small and
micro enterprises operators. This problem holds 5.84% of its share among the many
problems of the cottage /handicrafts manufacturing industries. This truth can have its
impact on small and micro enterprises operators in denial of access to credit.
Source: Tesfaye Hailselassie et al.(2004)

Existing institutions providing entrepreneurial development training have inadequate

capacity, physical facilities and equipment, limited funding low enrolment and limitations
in staffing. The institutions are unable to offer training in a wide range of traders.
There are no appropriate training institutions, which train manpower for small enterprises
management. Therefore, the sector suffers from lack of skilled labor.
The small and micro enterprises operators do not conduct market research. And as a
result of this they face the problem of production of similar products. One major reason
for the absence of market research might be lack of managerial capability and technical
skill of the small and micro enterprises operator.

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