BCom SCM Year 2 Entrepreneurship and Small Businesses January 2020

ENTREPRENEURSHIP
AND SMALL BUSINESSES
Module Guide
Copyright© 2020
MANAGEMENT COLLEGE OF SOUTHERN AFRICA
All rights reserved, no part of this book may be reproduced in any form or by any means, including photocopying machines,
without the written permission of the publisher. Please report all errors and omissions to the following email address:
modulefeedback@mancosa.co.za
This Module Guide,
Entrepreneurship and Small Businesses (NQF level 6),
will be used across the following programmes:
Bachelor of Business Administration

Bachelor of Commerce in Financial Management
Bachelor of Commerce in Marketing Management
Bachelor of Commerce in Supply Chain Management
Bachelor of Commerce in Human Resource Management (New Structure)
Bachelor of Commerce in Human Resource Management (Old Structure)
ENTREPRENEURSHIP AND SMALL BUSINESSES
List of Contents ....................................................................................................................................................... 1
Preface.................................................................................................................................................................... 2
Unit 1: Entrepreneurship and Intrapreneurship ....................................................................................................... 8
Unit 2: The Business World................................................................................................................................... 20
Unit 3: Generating and Evaluating Business Ideas ............................................................................................... 27
Unit 4: Assessing the Viability of Business Ideas .................................................................................................. 35
Unit 5: Business Plans for SMME’s ....................................................................................................................... 42
Unit 6: Establishment of Small Business ............................................................................................................... 56
Unit 7: Small Business Management .................................................................................................................... 65
Unit 8: Franchising ................................................................................................................................................ 80
Bibliography .......................................................................................................................................................... 88
i
Entrepreneurship and Small Businesses
List of Contents
List of Figures and Illustrations
Figure 2.1: Examining eyes at a private clinic - an example of labour .............................................................. 23
Figure 3.1: Yellow pages - a potential source of generating business ideas .................................................... 32
Figure 6.1: People in a partnership ................................................................................................................... 60
Figure 7.1: Example of organisational structure ............................................................................................... 71
Figure 7.3: A poor location can destroy the business ....................................................................................... 77
1 MANCOSA
Preface
A. Welcome
Dear Student
It is a great pleasure to welcome you to Entrepreneurship and Small Businesses (ESB6) to make sure that you
share our passion about this area of study, we encourage you to read this overview thoroughly. Refer to it as often
as you need to, since it will certainly make studying this module a lot easier. The intention of this module is to
develop both your confidence and proficiency in this module.
The field of Entrepreneurship is extremely dynamic and challenging. The learning content, activities and self-
study questions contained in this guide will therefore provide you with opportunities to explore the latest
developments in this field and help you to discover the field of Entrepreneurship as it is practiced today.
This is a distance-learning module. Since you do not have a tutor standing next to you while you study, you need
to apply self-discipline. You will have the opportunity to collaborate with each other via social media tools. Your
study skills will include self-direction and responsibility. However, you will gain a lot from the experience! These
study skills will contribute to your life skills, which will help you to succeed in all areas of life.
We hope you enjoy the module.
B. Module Overview
The module is a 15 credit module at NQF level 6
Unit 1: Entrepreneurship and Intrapeneurship

1.1 Introduction
1.2 What is entrepreneurship?
1.3 Entrepreneurs
1.4 Importance of entrepreneurs
1.5 Personal qualities of entrepreneurs
1.6 Intrapreneurship
1.7 The objectives of an entrepreneur
1.8 Summary
MANCOSA 2
Unit 2: The Business World

2.1 Introduction
2.2 What is a business?
2.3 Factors of production
2.4 The location of an enterprise
2.5 Informal and Informal enterprises
2.6 The Business Environment
2.7 Summary
Unit 3: Generating and Evaluating Business Ideas

3.1 Introduction
3.2 What are business ideas and opportunity?
3.3 Creativity Methods
3.4 Generating small business ideas
3.5 Evaluating small business ideas
3.6 Summary
Unit 4: Assessing The Viability of Business Ideas

4.1 Introduction
4.2 Consumers needs
4.3 Mission statement and objectives
4.4 Basic business calculations
4.5 Summary
Unit 5: Business Plan and SMMEs

5.1 Introduction
5.2 What is a business plan?
5.3 Elements of a SMME business plan
5.4 Example of a business plan
5.5 The Business Plan Presentation
5.6 Summary
Unit 6: Establishment of A Business

6.1 Introduction
6.2 What are the factors affecting the choice of business enterprise?
6.3 Forms of business ownership
6.4 The procedure and legal requirements of business forms
6.5 Summary
3 MANCOSA
Unit 7: Small Business Management

7.1 Introduction
7.2 Entrepreneurship and small business management
7.3 The Role of SMMEs in an economy
7.4 The general management function
7.5 The functions of an enterprise
7.6 Why do SMMEs fail?
7.7 Summary
Unit 8: Franchising
8.1 Introduction
8.2 The concept of franchising
8.3 Types of franchising
8.4 Advantages and disadvantages of franchising
8.5 The Law of Contract
8.6 Summary
C. Learning Outcomes and Associated Assessment Criteria of the Module
LEARNING OUTCOMES OF THE MODULE ASSOCIATED ASSESSMENT CRITERIA OF THE

MODULE
Explain the importance of entrepreneurship in the Think points

economy.
Activities
Discuss the qualities and characteristics of Reading activities
entrepreneurs.
Self-check questions
Discuss the typical business environment of an
Case study
SMME.
Assignment
Explain how business ideas are generated and
evaluated. Exams
Assess the viability of a business idea.
Draw up a business plan for a SMME.
Discuss the various forms of business ownership.
Evaluate franchising as a means of

entrepreneurial development.
MANCOSA 4
D. Learning Outcomes and the Associated Assessment Criteria of the Units

You will find the Unit Learning Outcomes and the Associated Assessment Criteria on the introductory pages of
each Unit in the Module Guide. The Unit Learning Outcomes and Associated Assessment Criteria lists an overview
of the areas you must demonstrate knowledge in and the practical skills you must be able to achieve at the end of
each Unit lesson in the Module Guide.
E. How to Use this Module

This Module Guide was compiled to help you work through your units and textbook for this module, by breaking
your studies into manageable parts. The Module Guide gives you extra theory and explanations where necessary,
and so enables you to get the most from your module.
The purpose of the Module Guide is to allow you the opportunity to integrate the theoretical concepts from the
prescribed textbook and recommended readings. We suggest that you briefly skim read through the entire guide
to get an overview of its contents. At the beginning of each Unit, you will find a list of Learning Outcomes and
Associated Assessment Criteria. This outlines the main points that you should understand when you have
completed the Unit/s. Do not attempt to read and study everything at once. Each study session should be 90
minutes without a break
This module should be studied using the prescribed and recommended textbooks/readings and the relevant
sections of this Module Guide. You must read about the topic that you intend to study in the appropriate section
before you start reading the textbook in detail. Ensure that you make your own notes as you work through both the
textbook and this module. In the event that you do not have the prescribed and recommended textbooks/readings,
you must make use of any other source that deals with the sections in this module. If you want to do further reading,
and want to obtain publications that were used as source documents when we wrote this guide, you should look
at the reference list and the bibliography at the end of the Module Guide. In addition, at the end of each Unit there
may be link to the PowerPoint presentation and other useful reading.
F. Study Material
The study material for this module includes tutorial letters, programme handbook, this Module Guide, a list of
prescribed and recommended textbooks/readings which may be supplemented by additional readings.
G. Prescribed and Recommended Textbook/Readings

There is at least one prescribed and recommended textbooks/readings allocated for the module.
The prescribed and recommended readings/textbooks presents a tremendous amount of material in a simple,
easy-to-learn format. You should read ahead during your course. Make a point of it to re-read the learning content
in your module textbook. This will increase your retention of important concepts and skills. You may wish to read
more widely than just the Module Guide and the prescribed and recommended textbooks/readings, the
Bibliography and Reference list provides you with additional reading.
5 MANCOSA
The prescribed and recommended textbooks/readings for this module is:

Strydom, J. and Nieuwenhuizen, C. (2015) Entrepreneurship and How to Establish Your Own Business. 5th
Edition. Juta and Company (Pty) Ltd
In addition to the prescribed textbook, the following should be considered for recommended books/readings:
Venter, R., Urban, B. and Rwigema, H (2015) Entrepreneurship – Theory in Practice. 3rd Edition. Oxford
University Press.
Spinelli, S. and Adams, R (2016) New Venture Creation – Entrepreneurship for the 21st Century. 10th Edition.
McGraw-Hill Education.
Kroon, J. (2000). Entrepreneurship, Start your own Business. Kagiso Education: Cape Town
H. Special Features
In the Module Guide, you will find the following icons together with a description. These are designed to help you
study. It is imperative that you work through them as they also provide guidelines for examination purposes.
Special Feature Icon Explanation
LEARNING The Learning Outcomes indicate what aspects of the particular

OUTCOMES Unit you have to master and demonstrate that you have
mastered them.
ASSOCIATED The Associated Assessment Criteria is the evaluation of student

ASSESSMENT understanding with respect to agreed-upon outcomes. The
CRITERIA Criteria set the standard for the successful demonstration of the
understanding of a concept or skill.
THINK POINT A think point asks you to stop and think about an issue.
Sometimes you are asked to apply a concept to your own
experience or to think of an example.
ACTIVITY You may come across activities that ask you to carry out specific
tasks. In most cases, there are no right or wrong answers to
these activities. The aim of the activities is to give you an
opportunity to apply what you have learned.
READINGS At this point, you should read the reference supplied. If you are
unable to acquire the suggested readings, then you are welcome
to consult any current source that deals with the subject. This
constitutes research.
MANCOSA 6
PRACTICAL Real examples or cases will be discussed to enhance

APPLICATION understanding of this Module Guide.
OR EXAMPLES
SELF-TEST You may come across self-test questions at the end of each Unit
QUESTIONS that will test your knowledge. You should refer to the module for
the answers or your textbook(s).
REVISION You may come across self-assessment questions that test your
QUESTIONS understanding of what you have learned so far. These may be
attempted with the aid of your textbooks, journal articles and
Module Guide.
CASE STUDY Case studies are included in different sections in this module
guide. This activity provides students with the opportunity to
apply theory to practice.
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Unit
1: Entrepreneurship
and Intrapreneurship
MANCOSA 8
Unit Learning Outcomes and Associated Assessment Criteria
LEARNING OUTCOMES OF THIS UNIT: ASSOCIATED ASSESSMENT CRITERIA OF THIS UNIT:
Explain the concept of entrepreneurship. Complete the relevant reading, activities, think points
and case study provided to understand the scope of
Define the term entrepreneur.
entrepreneurship.
Distinguish between entrepreneurship and
Complete the relevant reading, activities, think points
Intrapreneurship.
and case study provided.
Describe the importance of entrepreneurs
to an economy.
and case study provided to gain an understanding of the
Expound on the importance of importance of entrepreneurs.
entrepreneurs to an economy
Describe the personal qualities of an and case study provided to understand the concept of
entrepreneur. intrapreneurship.
Define the term intrapreneur. Complete the relevant reading, activities, think points
Explain the objectives of an entrepreneur. and case study provided to gain an understanding of the
objectives of entrepreneurs.
9 MANCOSA
1.1 Introduction
1.3 Entrepreneurs
1.8 Summary
Prescribed / Recommended Readings
Below is the prescribed reading specific to this unit;

Nieuwenhuizen, C., Strydom, J (2012) Entrepreneurship and How to
Establish Your Own Business. 4th Edition. Juta and Company. Unit 1
Kroon, J. (2000). Entrepreneurship, Start your own Business. Kagiso

Education: Cape Town. Units 1 and 2
Venter, R., Urban, B. and Rwigema, H (2010) Entrepreneurship –

Theory in Practice. 2nd Edition. Oxford University Press. Unit 1
Spinelli, S. and Adams, R (2012) New Venture Creation –

Entrepreneurship for the 21st Century. 9th Edition. McGraw-Hill
Companies Inc. Unit 1
MANCOSA 10
1.1 Introduction
Entrepreneurship is a subject of great importance and relevance to any economy, because it involves the formation
of companies, which supply people with goods and services they need and results in the creation of jobs. The
purpose of this module is to encourage and stir the entrepreneurial spirit in the students, so that they can go into
their communities and form new companies, develop existing businesses and create the much needed jobs for
their countries.
In this unit we will learn the meaning of the word entrepreneurship and distinguish it from intrapreneurship. We will
focus on entrepreneurs – their objectives, personal qualities, importance to the economy and their personal
qualities. We conclude the unit by posing the question, but who can be an entrepreneur? Anyone who is willing to
be an entrepreneur and make the necessary sacrifices can be an entrepreneur. The reader can also be an
entrepreneur.

There are many definitions of the word entrepreneurship. The more comprehensive definition is by Timmons,
Smollen and Dingee (1990:5-6) and is given below:
‘Entrepreneurship is creating and building something of value from practically nothing. That is, entrepreneurship is
the process of creating or seizing an opportunity and pursuing it regardless of the resources currently controlled.
Entrepreneurship involves the definition, creation and distribution of value and benefits to individuals, groups,
organisations and society. Entrepreneurship is very rarely a get-rich-quick proposition; rather it is one of building
long-term value and durable cash flow streams.’
Note the key words in the definition, which are in italics for emphasis. Entrepreneurship involves creating and
building something of value e.g. a business enterprise or company. Note also that the quantity of resources held
has little bearing on entrepreneurship. Whilst resources are important, their absence does not necessarily stop
entrepreneurship. Entrepreneurship benefits individuals, groups, organisations and society through the provision
of goods and services.
It is important to note that entrepreneurship is about building long-term value and durable cash flow streams. It
should also be noted that entrepreneurship can be developed. People can be stimulated and activated to be
venturesome, creative and dynamic. This is why we are talking about entrepreneurship, so that the entrepreneurial
spirit can be developed in the reader.
And finally, entrepreneurship has benefits for the economy, society and the entrepreneur. Benefits to the economy
and society and entrepreneur include:
The establishment and management of small businesses.
The sale of products and services and the creation of employment.
Benefits to the entrepreneur from self-fulfilment by doing what they enjoy, reaping profits, contribution to
society to recognition for his/her efforts.
11 MANCOSA
1.3 Entrepreneurs
We have established the concept of entrepreneurship, the next question we have to tackle is, but who are
entrepreneurs?
In 1947, a researcher called Schumpeter categorically launched the field of entrepreneurship, not only by
associating entrepreneurs with innovation, but also demonstrating the importance of entrepreneurs in creative
destruction (radical improvements and changes that made old processes and technologies obsolete), and hence,
economic development.
His concept of economic development had five phases which were, the introduction of new goods, the introduction
of new production methods, opening of new markets, the conquest of a new source of supply of raw materials and
the carrying out of the new organisation of an industry. (Venter et al.,2010)
Entrepreneurs are skilled in the identification of new products, new methods of production and marketing. Having
identified these opportunities, they set up operations to exploit these opportunities. This skill can be in-born or
developed by reading books, magazines and learning from others.
Today, entrepreneurs are conventionally viewed as the movers and shakers – people who challenge convention
in pursuit of new venture creation. Through innovation they guide the way people live, work, learn, play and lead.
Through innovation entrepreneurs present profitable products and ventures that did not exist before. In this sense,
they add value. They generate innovations, fill market gaps and increase competition, consequently promoting
economic efficiency. Dynamic growth is accompanied by inventively combining human, material, financial and
physical resources. (Venter et al.,2010)
An entrepreneur can therefore be described as someone who:

Starts his/her own enterprise
Manages his own enterprise
Buys an existing enterprise
Identifies new products or opportunities
Is creative and/or innovative
Organises and controls resources (like capital, labour, materials) to ensure a profit
Has the ability and insight to market, produce and finance a service or product;
Is willing to take calculated risks
The common view is that a person who starts and establishes any enterprise, not necessarily an enterprise that
shows high levels of innovation, is an entrepreneur. We pose the question, who can be an entrepreneur? The
answer is anyone- regardless of age, race, gender, colour, national origin or any other characteristic can be an
entrepreneur. They need the drive, the energy and other characteristics that are valuable to an entrepreneur for
success. We will look at these characteristics in the sections that follow.
MANCOSA 12
Case Study
Ten years ago, Kobus Oosthuizen started a bakery franchise called Butterfield Bakery.
Kobus’s franchise operation now has more than 120 franchises. What is different about
Butterfield Bakery outlets is that they have a defined market and are situated close to their
target markets (mines and other areas inadequately serviced by traditional and in-house
bakeries). The combined turnover of these franchises is more than R300 million per annum.
More familiar to the public is Nandos. This franchise was started in the south of
Johannesburg 18 years ago by Robert Brozin and Fernando Duarte as a fast-food shop
selling spicy, grilled chicken meals. In 2001 there were 343 Nandos worldwide. Of these,
184 are in South Africa, 70 are owned by Nandos, and 159 are international, situated mainly
in Britain, Australia and the Middle East.
(Source: Nieuwenhuizen et al., 2007:8)
Discussion Questions
Using the definitions of an entrepreneur that we learnt, identify the entrepreneur/s in the
case study above. What business did this person/s start, who has benefited from the
business and in what way?

Entrepreneurs occupy a central position in an economy. It is the entrepreneurs who serve as the spark plug in the
economy's engine, activating and stimulating different economic activities. Most nations worldwide can trace their
economic success to efforts at encouraging and rewarding the entrepreneurial spirit.
A society is prosperous only to the degree to which it rewards and encourages entrepreneurial activity because it
is the entrepreneurs and their activities that are the critical determinant of the level of success, prosperity, growth
and opportunity in any economy. The most dynamic societies in the world are the ones that have the most
entrepreneurs, plus the economic and legal structure to encourage and motivate entrepreneurs to greater activities
(Tracy, 2005).
The South African economy is experiencing a high unemployment problem. In such an economy entrepreneurship
is critical both in creating the much needed job opportunities for its citizens and producing products and services.
The trend around the world is that small businesses especially the informal sector creates more jobs than large
companies.
13 MANCOSA
Think Point
Conduct some research and find out at least five products/services that have introduced in
your country by SMMEs. Do you think the products/services are innovative? Explain your
answer.

Entrepreneurs have some common features that set them apart from people who are not intent on starting their
own enterprises. This is not to say that all entrepreneurs have the same characteristics. Each entrepreneur has
the unique combination of factors at his/her disposal for achieving success.
We will discuss the skills, expertise and aptitudes of entrepreneurs and their interpersonal qualities.
These factors are:
Skill
Expertise and
Aptitude
Skills refer to the ability to do an activity or job well, especially because you have practised it. For example, you
can learn to become an electrician, dentist, carpenter or a beautician. Expertise on the hand is knowledge that you
acquire by either studying or through experience. You can be an expert in computer programming, air conditioning
systems or manpower recruitment.
Successful entrepreneurs have particular skills, expertise and aptitudes that can be applied profitably in any
enterprise. It is always advisable to start or run an enterprise in something you feel comfortable with and know a
lot (expertise) and in which you are skilled.
Each person is born with aptitudes and talents. An aptitude is an ability we are born with. Some are artistic, some
have a talent for communicating and others have a flair for figures.
Think Point
Evaluate yourself and list the following attributes that you possess:
a) Skills……………………………………………………………………….
b) Expertise………………………………………………………………….
What business do you think you would be good at? How would these attributes help you in
your business?
MANCOSA 14
The personal characteristics of entrepreneurs

It is not enough to have expertise, skills and aptitude. To enhance chances of success in business, business
characteristics and management skills are also needed.
The following are personal characteristics of entrepreneurs deserve our attention:
1. Persistence
Entrepreneurs have a lot of confidence both in themselves and their enterprises. They press on despite setbacks
and difficult situations and problems that may arise. They are not easily discouraged when they make mistakes or
fail. They exercise patience until the task at hand has been completed and the goal has been reached.
2. Commitment to the enterprise

Entrepreneurs dedicate their time, skills, expertise and resources to establish and build the enterprise. They prove
their commitment through the following actions:
using their own money in the enterprise;
borrowing and securing the loan against their house;
putting in long hours to ensure the success of the enterprise;
accepting a lower standard of living; usually at the beginning;
earning little or no income from the enterprise until it stabilises.
3. Involvement in the enterprise

Entrepreneurs are actively involved in all aspects of the enterprise and are aware of what is happening in the
enterprise. They communicate with staff, suppliers and clients to ensure the success of the business.
Willingness to take risks

Entrepreneurs take risks, it must be noted that this is calculated risk. The risk must not be excessive, or the chances
of success will be out of the entrepreneur’s hands. On the other hand, the level of risks should not be too small as
lower risk is not usually challenging and profitable. Entrepreneurs do not take gambles.
4. Sound relationships
Entrepreneurs make an effort to cultivate good relationships with people. This is part of networking. They develop
good working relations with their staff, clients, suppliers and other entrepreneurs. Success is difficult to achieve in
isolation. Networking is critical to the success of the business venture.
5. Creativity
Creativity refers to the entrepreneur’s imagination, his ability to think originally or differently. Examples include the
recently designed sports shoe, washing and drying machine. This machine can wash sports shoes and dry them
in ten minutes’. This is a good example of creativity.
15 MANCOSA
6. Positive attitude
Entrepreneurs remain positive despite setbacks and failure. Yes, sometimes they get discouraged when
situations are not favourable, but overall they accept their situation and remain positive.
Whilst anyone can become an entrepreneur, because of the difficulties that are usually encountered, not
everyone should become an entrepreneur. Whilst the rewards do come eventually, there may be periods of
stress and difficulty.
Think Point
What do you understand by the term networking in business? As a potential entrepreneur,
what kind of people would you want to network with? Explain your answer.
What is intrapreneurship?
Intrapreneurship is the same as entrepreneurship except that it is practiced in an existing organisation.
Intrapreneurship involves the definition, creation and distribution of value and benefits to individuals, groups,
organisations and society by one or more people working within an existing organisation. It is a process in which
organisations encourage entrepreneurial characteristics in their own managers. The intrapreneur is a revolutionary
within an organisation – challenging the status quo and fighting to change the system from inside the organisation.
Most organisations however require that the intrapreneur should seek for permission before attempting to change
anything in the organisation. One advantage of intrapreneurship over entrepreneurship is that there are more
resources available to the intrapreneur, which can be applied to the opportunity identified.
Importance of intrapreneurship
Changes in organisations are taking place faster than ever before. Organisations are finding it increasingly difficult
to compete. They are looking to intrapreneurs to take on their competitors by creating new businesses in new
markets. As competition intensifies, so does the need for creative thinking. Creativity is needed both at the strategic
and operational levels to effect the changes that competition demands.
What factors discourage intrapreneurship?

The costs of failure are too high
There must be some element of tolerance to failure. This is not to say organisations should simply condone failure
but rather that organisations must measure and attribute failure to either the intrapreneurs fault or circumstances
beyond the intrapreneur’s control. Afterwards appropriate action can then be taken.
MANCOSA 16
The rewards for success are too low

The rewards for success are usually not enough because very few organisations provide adequate rewards for
success. In most cases the rewards are less than those available to entrepreneurs. The incentive systems need
to be reviewed upwards.
Unwillingness to change
Most organisations have a culture of resistance to change- afraid of the unknown. This attitude of unwillingness to
change or entertain new ideas frustrates intrapreneurs trying to challenge the status quo.
Intrapreneurial employees are advised to be:

Courageous
Modest risk takers
Flexible
Creative
Humble, asking for permission to use company resources.
Think Point
What appeals to you more – to be an entrepreneur or to be an intrapreneur?

Provide reasons for your answer.

What drives entrepreneurs to work so hard with no guarantee for success? What forces drive them to risk so much
and to make so many sacrifices in an attempt to achieve the ideal? Why do entrepreneurs start their own business?
The objectives of an entrepreneur vary depending on the entrepreneur and his circumstances. We discuss them
below:
1. To gain control over one’s destiny
Owning a business gives the entrepreneur the independence and opportunity to achieve what they have always
desired. They can get satisfaction in knowing that they are in control of their destiny and determining the direction
of their businesses. In addition, to be your own boss is better for most of us.
2. To reach full potential

Entrepreneurship stretches the entrepreneurs to reach their full potential by exploiting a business opportunity that
they have identified. Additionally, the demands and challenges of the business, stimulates new levels of
determination and creativity. This might be especially appealing as an escape from a boring job.
17 MANCOSA
3. To contribute to society and be recognised for their efforts

Entrepreneurs enjoy the recognition they receive from customers for their service. The knowledge that their work
has a bearing on the economy brings them satisfaction. They are generally held in high esteem in society for their
achievements, which is gratifying.
4. To start a new career

The aim of an entrepreneur might be to start a new career after being retrenched or unemployed. After the
frustration of retrenchment or losing a job, some people feel they would rather start something of their own and
avoid another painful experience of being retrenched or losing their job.
5. To make a profit
Entrepreneurs might go into business because they want to make a profit and so supplement their income. The
issue of profit is critical to the sustainability of the business. Profit is the money left after expenses incurred by the
business have been deducted i.e. Income - Expenses = Profit.
Profit is important because it enables owners to invest in the continued operations of the business. It should
therefore be the objective of any entrepreneur to make a profit from the business and in the long term grow this
profit. Profit is the reward for taking the risk and running a business.
Example of profit calculation

Sandile bought a water meter for R4000. He travelled to fit the water meter at a customer’s premises. His transport
and labour charge came to R500. If he charged the customer R5500, what was his profit?
Income – Expenses = Profit
R5500- R4500 (R4000 + R500) = R1000
His profit was R1000.
Think Point
If you decide to form a business, what would be your fears? Provide
reasons for your answer.
MANCOSA 18
1.8 Summary
Entrepreneurship involves creating and building something of value e.g. a business enterprise or company. Note
also that the quantity of resources held has little bearing on entrepreneurship. Entrepreneurship benefits
individuals, groups, organisations and society. Entrepreneurship is about building long-term value and durable
cash flow streams. It is not about making a quick buck.
Entrepreneurs are people with the ability to create an enterprise where none existed before. They are important to
any economy, producing a combination of ideas, skills, money, equipment and markets that form a successful
enterprise. The emphasis on this definition is the creation of an enterprise. Intrapreneurs are people who practice
entrepreneurship in an established organisation.
Entrepreneurs have certain skills, expertise and aptitude. In addition, they have certain personal qualities that are
useful for succeeding in business. These qualities are persistence, commitment to the enterprise, involvement in
the enterprise, willingness to take risks, sound human relationships, creativity and a positive attitude to life.
Successful entrepreneurs realise that effective management is necessary for the success of an enterprise.
Therefore, they can manage their enterprises themselves or appoint small business managers to ensure
permanence and growth.
Activity 1.1
This exercise is designed to help you assess the qualities of people you are familiar with
that started their own businesses.
1. State the name of your favourite businessman.
2. Explain the nature of business he is running.
3. Find out why the businessman started his own business.
4. What are the strong qualities that you think made him/her successful?
5. Analyse the weak qualities that you think could hamper the success of the business.
6. Explain why the businessman inspires you.
19 MANCOSA
Unit
2: The Business World
MANCOSA 20
Describe what a business is. Complete the relevant reading, activity and think points
provided to understand what a business is.
State the factors of production.
Complete the relevant reading, activity and think points
Explain the importance of the location of an
provided and be knowledgeable about the factors of
enterprise.
production.
Distinguish between formal and informal
enterprises.
To appreciate the importance of the

business environment.
2.1 Introduction
2.5 Formal and Informal enterprises
2.7 Summary

Nieuwenhuizen, C., Strydom, J (2012) Entrepreneurship and How to Establish
Your Own Business. 4th Edition. Juta and Company. Unit 2
Education: Cape Town.
Venter, R., Urban, B. and Rwigema, H (2010) Entrepreneurship – Theory in
Practice. 2nd Edition. Oxford University Press. Unit 4
21 MANCOSA
2.1 Introduction
In this unit we will familiarise ourselves with the language and vocabulary of the business world. The entrepreneur
does not exist in isolation; he interacts with suppliers, customers, bank managers, branches of local or central
government, investors and other stakeholders. It is important that the entrepreneur understands the business
language so that he/she can communicate easily with other people.
We will look at the factors of production and their relevance to the entrepreneur and the enterprise. The choice of
location is important to the enterprise and deserves our utmost attention. Answers to the questions will be provided.
“What are the objectives of an entrepreneur when he/she starts an enterprise?” We will then distinguish between
informal and informal enterprises before concluding the unit with a discussion on the business environment.

All of us interact with one form of business or another every day of our lives. We buy food from a business, use
transport that is either run by some business or bought from a business. We use phones provided by a business,
wear clothes bought from a business and even work for a business ourselves.
But what is a business? A business is any individual or group of individuals that satisfy the needs of people, Smit
(2004). A business focuses on producing, goods or services to its customers. A business will combine capital,
labour and technology in providing goods or services to its customers. There are different types of businesses. A
business could be in the manufacturing, information technology, services sector etc.
Customer needs are the desires or cravings for certain items or services that people require in day-to-day living.
People need food to eat, drinks to refresh themselves, shelter to live in, electricity. These are called natural needs.
Businesses produce goods and services to meet these needs. Customer needs can also be classified as essential
needs for example medicine, luxury needs, e.g. furniture; cultural needs, e.g. education; and protection needs, e.g.
law and order.
Think Point
Can you think of your own two examples of luxury needs and essential
needs?
MANCOSA 22

Resources are required to produce goods and services. Resources are scarce relative to the needs and wants of
people and businesses operating in an economy. It is important that these resources are used efficiently in order
to maximise the output that can be produced from them. Production factors can be looked at as resources when
starting an enterprise.
Certain factors are needed to start an enterprise. These are called the factors of production:
Land
Labour
Capital
Entrepreneurship
1. Land
Land refers to the natural resources available for production. Some countries are endowed with natural resources
and exploit this by specialising in the extraction and production of these resources - for example – Saudi Arabia
has oil in abundance. Other examples of natural resources include water, minerals, wood, leather and iron ore.
2. Labour
Your desire to start an enterprise of your own is only the first step in establishing a business. You need people who
can assist you with the business. Labour is the human input into the production process. These employees or
labourers are paid a wage or salary. Not all labour is of the same quality. Some workers are more productive than
others because of the education, training and experience they have received. The technical knowledge and skills
of people who work in an enterprise, is called human capital.
1Figure 2.1: Examining eyes at a private clinic - an example of labour
23 MANCOSA
3. Capital
The word capital has several meanings. It means the finance raised to operate a business (financial capital). Capital
also refers to machinery, plant and equipment, new technology, factories and buildings - all goods designed to
increase the productive potential of the economy. This is called physical capital. Human capital refers to the
technical knowledge and ingenuity of people who work in an enterprise.
4. Entrepreneurship
Entrepreneurs are people who organise productive resources to make goods and services. The skill in combining
the other three production factors in order to generate a product is known as entrepreneurial ability. The success
and/or failure of a business often depend on the quality of entrepreneurship.
Think Point
What resources go into making a plastic chair?

The enterprise is a body that is established by an entrepreneur to provide goods and services that meet the needs
of consumers. The location or premises where an enterprise operates is called an establishment. In the example
of a manufacturing business, this would be a factory. The factory is where the company’s production equipment is
located and where raw materials are converted to outputs.
Every business must have some location or establishment to operate from. The choice of where to locate the
premises is not an easy one neither should it be taken lightly. The choice depends on a host of factors including
your preference, availability, costs and concentration of customers. A proper study must be done before settling
on a location. The key criteria are concentration of customers and least cost. A wrong choice can spell trouble for
the enterprise.
Enterprises and their establishments are classified according to their activities into primary, secondary and tertiary
sectors. Let us see what these words mean.
The Primary Sector

The primary sector involves the exploitation of natural resources in their unprocessed form. An example is a citrus
plantation.
MANCOSA 24
The Secondary Sector

In the secondary sector, natural resources are processed to their final product. For example, this would be
preserving oranges.
The Tertiary Sector

Here the final product is transported from the manufacturer or producer to the consumer. Supermarkets such as
Checkers, Spar and Woolworth’s belong to the tertiary sector.
Think Point
Let’s take the example of a door that is on sale at city hardware. Can you determine the
primary, secondary and tertiary sectors involved in making the door?
2.5 Formal and Informal enterprises

Let us see what these interesting terms mean. An informal enterprise is an enterprise that does not have officially
recognised business premises. It is not officially recognised and does not keep official records. Examples are
people selling oranges and apples at a street corner.
Clearly there are advantages with this form of business. It is easy to start, as it does not need to be registered or
recorded for tax purposes. But there are disadvantages as well. The owner of an informal enterprise cannot rent
premises on behalf of his/her enterprise. Obtaining finance will be equally difficult as financial institutions view
informal enterprises with suspicion. In addition, they usually have little or no security to offer.
A formal enterprise is an enterprise that has a registered form of enterprise and is registered for tax purposes.
Examples of formal enterprises are private companies and close corporations.

A management system describes the organisation and the set of significant interacting institutions and forces in
the organisation's complex and rapidly changing environment that affect its ability to serve its customers. The firm
must continuously monitor and adapt to the environment if it is to survive and prosper. Disturbances in the
environment may spell profound threats or new opportunities for the firm. The successful firm will identify, appraise,
and respond to the various opportunities and threats in its environment.
The business environment is made up of all the factors that can affect the business enterprise in any way. The
business enterprise is affected by both the internal and the external environment. Unfortunately, we have no control
over some of these factors. An entrepreneur or his manager should be skilled in knowing how to analyse and
improve the ability of an organisation to survive and grow in a complex and changing world.
25 MANCOSA
The Internal Environment

The management system can be conceptualised on two levels. The first level involves the organisation's internal
environment. Internally, an organisation can be viewed as a resource conversion machine that takes inputs (labour,
money, materials and equipment) from the external environment (i.e., the outside world), converts them into useful
products, goods, and services, and makes them available to customers as outputs. The internal environment is
called the micro environment.
The External Environment

The second level of the management system involves the organisation's external environment. The external
environment is part of the business environment outside the environment. It consists of all the outside institutions
and forces that have an actual or potential interest or impact the organisation's ability to achieve its objectives.
These include competitors, suppliers, economic conditions, technological changes, political and legal variables,
social and cultural forces, physical variables and international forces. Environmental forces create challenges and
opportunities for the organisation.
Think Point
Describe how competitors affect your business.
2.7 Summary
The factors of production are land, labour, capital and entrepreneurship. The primary sector involves the
exploitation of natural resources in their unprocessed form. The secondary sector involves the processing of natural
resources into their final product. In the tertiary sector the finished goods are transported to the consumer. Although
the objectives of entrepreneurs vary, the profit motive deserves special attention because profit sustains the
business. Enterprises can be formal or informal. The business environment is made up of all the factors that can
affect the business enterprise in any way.
Activity 1.2
1. Describe the factors of production.

2. Which factor of production do you think is the most important to the business you
want to start?
3. Give examples of the primary sector in the production of toilet paper.
4. Describe any four objectives that you have to start your own business.
MANCOSA 26
Unit
3: Generating and Evaluating
Business Ideas
27 MANCOSA
Identify business ideas. Complete the relevant reading, self-check questions,

activity and think points provided to be able to identify
Distinguish between business ideas and
business ideas.
opportunity.
Complete the talking points, activities and self-reflection
Use the methods of cultivating a creative
questions to be able to cultivate a creative attitude.
attitude.
Generate business ideas that can be
questions provided to be able to generate small business
used in the formation of a real business.
ideas.
Perform a feasibility study on business
ideas.
questions provided to be able to perform a feasibility
study on business ideas.
3.1 Introduction
3.6 Summary

Education: Cape Town. Units 7-10
Venter, R., Urban, B. and Rwigema, H (2010) Entrepreneurship – Theory
in Practice. 2nd Edition. Oxford University Press. Unit 5
MANCOSA 28
3.1 Introduction
The setting up of a business or the entrepreneurial process can be divided into three phases - the idea stage, the
planning stage and the implementation stage. This unit is part of the idea stage. Many people would like to take
the plunge and start a business of their own, but lack the idea of what to produce and sell. How can one know
whether he/she has stumbled on an idea that can give rise to a new business? In this section, we will try to answer
this question.
We will look at the methods that can help us to be creative so that the generation of business ideas becomes easy.
Distinguishing between business ideas and opportunity follows before we focus on testing these business ideas.
Evaluating or testing the business ideas is important so that we do not spend a lot of time with ideas that do not
work. We will conclude the unit by focusing on how we can protect the valuable business ideas that we have
generated.

Throughout history, we see that entrepreneurs’ ideas have changed the world. They have invented new products
and services, developed new technology, discovered new knowledge, improved existing products or services,
found different ways of providing more goods and services with fewer resources.
Creativity is the ability to develop new ideas and to discover new ways of looking at problems and opportunities.
Ideas can be generated through everyday activities by identifying needs from other sources and then applying
creativity. Creativity is useful in helping us think in a particular way so that we can generate business ideas.
Entrepreneurs are constantly listening and looking around for business ideas to satisfy consumers by improving
existing products and services or producing new inventions. Business ideas are thoughts or intentions with a
potential to be turned into a business. Please note that all ideas cannot be successfully converted into a business.
All opportunities are based on an idea, but all ideas do not represent genuine opportunities. Opportunities are
ideas that work, ideas that can be transformed into a successful business.
Self-Test Questions
Using examples, distinguish between a business idea and an opportunity.
29 MANCOSA

To generate ideas requires creativity. Creativity is a way of thinking. It is an attitude of always trying to improve
existing products and services. By talking and listening to consumers and business owners, an entrepreneur
becomes aware of what customers need. Creative thinking requires constantly asking the question, “Can I do it
better?”
This eventually yields business ideas.
The art of creative thinking can be improved.
The following methods are useful in improving your creativity:

In brainstorming the following steps are useful:
Define the problem.
Let several people try to solve the problem.
Choose one person to write down the ideas generated.
Suggest ideas (possible solutions to the problem) and record them.
Discuss the ideas and eliminate those that have the least chance of succeeding.
Remain with the most workable ideas.
Manipulating existing products or services.
In manipulating existing products or services, the following procedure will be useful:

Draw up a list of existing products or services.
Suggest a number of ways in which these things can be modified.
Apply the possible modifications to the list of products or services.
Possible modifications can be change of colour, shape or design. Alternatively, the changes could be to
package differently, to make lighter, heavier, bigger or more durable depending on the type of product or
service.
Breaking your routine, your normal way of thinking and doing things is a good way of creating creativity. How
do you wash dishes? Can you do it differently? Can you use lemon juice for instance to wash dishes? Does
it make any difference?
Attribute analysis.
Draw a list of products or services.
Generate a list of attributes for each item. For example, a ball-pen is cylindrical, made of plastic, has a
separate cap, plastic cartridge and contains ink.
Can the shape of the pen be changed? Can the pen be made from a different material- steel, wood or glass?
Can the pen be designed with no cap or with a lighter cap?
MANCOSA 30
These series of actions will eventually yield an attractive idea.
Think Point
Take a clean piece of writing paper and apply the creativity techniques to generate
ideas successfully. Can you come up with business ideas?

There are various methods by which small business ideas can be identified. Ideas can be generated from the
entrepreneur’s skills, expertise and aptitudes, from everyday activities, from common needs, from existing
problems and other possible sources.
Thus ideas can be generated from:

a) The entrepreneur’s skills, expertise and aptitudes
Whilst formal training does not necessarily guarantee success in a small business enterprise, you can however
obtain certain knowledge from those studies which can lead to the generation of small business ideas. For
example, a person with an engineering background can design a sports shoe washing machine.
Skills can be gained from working experience. A person with a marketing experience for example might want to
start a marketing agency. This person will be comfortable forming a company in a field in which he/she has
experience and knowledge.
b) From other sources

Business ideas can also be generated from consulting other reference sources. These include the Telkom yellow
pages, business publications like the financial mail, looking at overseas products, visiting trade shows, examining
advertisements and other sources that are not listed here but are capable of generating business ideas.
c) From common needs

All of us need something. Because we are different, our needs are also different. Examining what different people
or organisations need with a view to satisfying these needs can trigger small business ideas. For example, you
can think of products which mothers with babies need.
d) From existing problems

Another dimension is to think of solving existing problems. You can think of things that irritate you or other people.
The strategy is to come up with ways of removing these irritations or solving these problems. You can find out
from family or friends what things irritate them and come up with a solution.
31 MANCOSA
e) From everyday activities

It is possible to identify small business ideas by focusing on the activities that we perform daily. For example, we
can think of the products that are advertised on television, in magazines and newspapers and see how these could
be improved. Talking to other people, at work or at home is a useful method of generating business ideas. Going
shopping and observing what customers buy, how they behave in the shops observe the most popular groceries
that they buy can generate business ideas.
2Figure 3.1: Yellow pages - a potential source of generating business ideas
Think Point
List four activities that you perform daily. What are the possible small
business ideas that you can think of from each activity?

The use of creativity methods results in the generation of business ideas. However, the reality is that most of these
ideas will not work. In other words, they are not opportunities. Two methods are used to evaluate or test whether
our ideas have a chance of working- a feasibility study and a viability study. Let’s see what these words mean.
A feasibility study is a general examination of the potential of a business idea to be converted into a business
enterprise. A viability study on the other hand is an in-depth investigation of the profitability of the idea to be
converted into a small business enterprise. Key words are in italics to emphasise the difference between these
two studies. In this section we will focus on testing the feasibility of our business ideas. We will return to the viability
studies in unit four.
MANCOSA 32
To determine the feasibility of our business ideas we will ask ourselves the following key questions:
1. Do you want to do what the idea suggests?

Here you check whether you have the health, the energy and time to pursue the idea, whether your family
understands and supports the idea of getting into business and whether this is the best idea amongst the ideas
that you have selected.
2. Is there a market for the idea?

It is important at this stage to know who the consumers will be, and whether they are sufficient in number to sustain
demand. How the consumers will pay for the product or services must be established as well as what it is that you
are offering which will attract consumers to you rather than our competitors.
3. Can you meet the needs of the consumers?

Here the entrepreneur must check his capacity to meet the needs of the consumer in terms of his skills, quantity
of and quality of products, financial capital and the human resources required. The source of funds needs to be
determined as how long those funds are expected to last.
4. Can you communicate the idea to the consumers?

In this section, the focus is on getting the message across to the consumers. Some knowledge is required of the
behaviour of the consumers. Knowledge is required of how your target consumers perceive your products or
services and whether they read special magazines or newspapers and the best method to convey a message
about the product or service to these consumers.
If we can answer yes, to these questions then we are ready to do a viability test.
Think Point
Suppose you want to start a business of selling popcorn in a busy street in Durban.
Determine the feasibility of this business idea, using the steps that you have just learnt.
3.6 Summary
In this unit we have discussed key issues that are important in generating business ideas. These are cultivating a
creative attitude, generating business ideas from different sources such as everyday activities, yellow pages,
existing problems, the entrepreneur’s skills, expertise and aptitude and from common needs. We distinguished
between ideas and opportunities. An opportunity is a business idea that works. How do we know that our ideas will
work?
33 MANCOSA
We do a feasibility study and a viability study. We have already covered the feasibility study by asking a series of
questions to test our resolve to proceed with the business idea. If we are happy with the business idea this far then
we will do the final check- the viability study in the next unit. Before, proceeding to the next unit please attempt the
activity below.
Activity 3.1
1. Describe the methods that you can use to improve your creative abilities.
2. List the techniques that can be used in the generation of small business
ideas.
3. Are these techniques relevant to your situation?
4. Explain the difference between a feasibility study and viability study.
MANCOSA 34
Unit
4: Assessing the Viability of
Business Ideas
35 MANCOSA
Identify the needs of consumers as they Complete the reading, think points, self-check questions
relate to the enterprise. and activity provided to be able to identify the needs of
consumers in relation to the enterprise and to have an
Explain the importance of testing business
understanding of the importance of testing business
ideas.
ideas.
State the mission and objectives of an
Complete the reading, think points, self-check question
enterprise.
and activities provided to be able to develop mission
Perform calculations such as expected statements and objectives for an enterprise.
market share, income of the business,
profit and loss
and activity provided to understand how to perform
calculations such as expected market share, income of
the business and profit and loss.
4.1 Introduction
4.2 Consumers needs
4.5 Summary

Education: Cape Town. Units 7-10
Companies Inc. Units 3 - 6
MANCOSA 36
4.1 Introduction
In the previous unit we looked at the process of generating and evaluating business ideas to see if the ideas could
be implemented (feasible). In this unit we will take a step further and focus on viability. In a viability study, we
assess whether a business idea is viable i.e. whether the idea can be marketed and the business can be managed
at a sustainable profit level. If you cannot manage a business over time at a sustainable profit, the idea is non-
viable. It is advisable to drop the idea at this stage.
We will perform a viability study in this unit. In a viability study, it is important to establish if the business can make
a profit. But to establish if we can make a profit requires that we know the income to the business, the source of
this income as well as expenses incurred by the business. We cannot know the income to the business unless we
know who our customers are, where they are and what they require. So we begin by assessing the needs of our
potential consumers.
It is not adequate to know if there is a need for our products or services. We must know who is going to buy our
products or services. This is called the customer profile or characteristics of your customers.
4.2 Consumers needs

The entrepreneur must research his business idea to clarify the direction the enterprise will go. In assessing the
viability of a business, the first step is to find out who your customers are and their needs. You must be able to sell
what your customers need and not necessarily what you think they need. As we have explained before, people
buy to satisfy a need. Consumers’ needs are the foundation of any business. Let us do a needs analysis.
To determine if there is a need for a product or service the following method is useful:
a) List the features of the product or service e.g. smooth peanut butter packaged in glass bottles.
b) Find out what each feature can mean to the client e.g. consumers may want 375ml bottles rather 750ml bottles.
c) Investigate who occupies the market, who are the industry leaders, suppliers and other experts on this product
e.g. market leader may be Pick n’ Pay No Name brand.
We will now discuss how to do a customer profile.

d) Establish possible consumers and organise them into segments or groups say according to their age e.g.
mothers with small babies, school children and athletes.
To do a customer profile, we need to answer questions on where our consumers live, their age groups, their income
levels, their level of training, their lifestyle and their perceptions on the quality of the product and how likely changes
in the price will affect them. This information can be obtained through surveys (postal, telephone or personal),
which will produce a profile or characteristics of the consumers.
In the process of determining the market for the enterprise, it is a good idea to divide the market into segments
with similar needs. This is called market segmentation.
37 MANCOSA
There are four broad types of market segmentation:

Geographic segmentation, the size or number of customers is divided according to an area or town to be
served.
Demographic segmentation, the size or number of customers is divided according to their sex, income,
occupation, education, age, family size or lifestyle.
Benefit segmentation, the size or number of customers is divided according to the benefit they will receive
from buying your product.
Psychographic segmentation, the size or number of customers is divided according to their specific lifestyles,
user or consumer status and their loyalty status.
Think Point
Suppose that you want to start a business that sells colour television sets.
Conduct a needs analysis for your customers.

With the information obtained from the needs analysis and customer profile, it is now possible to define the mission
and objectives of the enterprise. For example: The mission statement can be stated as: To sell smooth peanut
butter made from high quality groundnuts and packaged in decorative glass bottles in order to satisfy consumer
needs.
From the mission of the enterprise flow the objectives of the enterprise. Objectives must be measurable and be
achievable. There is no point in setting objectives that cannot be achieved. Equally, setting too easy a target is
not challenging. We must aim for a balance between the two.
The characteristics of an objective should be SMART i.e.:

1) S- Specific
2) M- Measurable
3) A- Attainable
4) R- Realistic
5) T- Time-specific
For example, the objective of an enterprise can be stated as: To capture 15% of the peanut butter market in South
Africa within the first three years of operation.
Clearly, this objective is SMART.
MANCOSA 38
Think Point
Can you provide your own example of the mission statement and objectives of an
enterprise that you are familiar with?

If it is clear what exactly the enterprise will do, then it is now time to calculate the market share of the enterprise.
Now that we know exactly what our enterprise will do, let’s calculate our market share. Every business must be
concerned with its market. The word market is defined in terms of consumers, their money and desire to exchange
it for goods and services.
1. The Target Market

The entrepreneur must start by identifying the market for his/her goods i.e. customers who are interested in buying
his/her goods and services. Thus, the target market is that portion of the market that you can reach with your goods
and services. To determine the target market, you must find out the total market that is served by your competitors
and estimate the total market potential. The difference is your target market i.e.
Total Market Potential – Market Share of competitors = Target Market
After analysis of your competitors, a strategy of how to compete with them must be decided. This can be done by
using a SWOT analysis. Here you analyse your strengths and weaknesses. Then you look at the opportunities that
are available to your business and the threats that face you as a newcomer in the market.
Opportunities are positive external options that the business can employ to meets its objectives, for example a
segment of the market that has the potential to grow the business. Strengths are positive factors internal to the
business for example, specific skills of the firm, unique knowledge and special resources of the firm.
Threats are negative external factors that that slows down a business’s ability to meet its objectives, for example
interest rates, economic recession etc. Weaknesses are negative internal factors that inhibit the accomplishment
of objectives for example, lack of skills, lack of knowledge about the business or its customers and lack of resources
e.g. cash.
To determine profitability, the entrepreneur must determine the size of the potential market.
2. Expected Market Share

The entrepreneur needs a market that is profitable. A business operates under uncertain conditions. So it is not
possible to know exactly what your market share will be.
39 MANCOSA
However, you should calculate the expected market share under three different scenarios: -
a) a prosperous scenario
b) a most probable scenario
c) a weak scenario
The following procedure is used:
Calculate the total market potential

Say there are 800 000 people who like peanut butter. This is the total market potential. This number can be obtained
from marketing companies or chamber of commerce bodies. Research indicates that the business can sell 200
000 bottles per month.
200 000 is the potential market.
Calculate the target market

Let us suppose there are four companies that supply peanut butter in the market and that these companies supply
700 000 bottles per month. The target for the new company is therefore 800 000 – 700 000 = 100 000 bottles per
month. Thus the target market for the business is 100 000 bottles per month.
Calculate the expected market share

Because of financial and production constraints the new company can only sell 3 500 bottles per month when the
situation is favourable, 2500 on average and 1500 when the situation is unfavourable.
Calculate the Income

To calculate the income, we need to know the total cost per unit and the percentage of the mark up.
Example: Say the cost of production is R20 per bottle. The business will include a mark-up of 25%. What is the
selling price?
The selling price = 125/100 = 1.25 x 20

= R25
NB: Once the item is bought, the selling price becomes the income.
Profit = Total Income – Total Expenses
= R 25 – R 20 = R5 per bottle.
If the business sold 3 500 bottles in a prosperous scenario, then the profit is:
3 500* 5
= R17 500
MANCOSA 40
If the business sold 1 500 in an unfavourable scenario, then the profit would be:
R 1 500* 5
= R 7 500
Self-Test Questions
The total market potential for selling cow’s milk is 500 000 litres per month in
Pretoria. Three companies selling cow’s milk produce 350 000 litres per month.
Calculate the target market for a new entrant in the market.
4.5 Summary
After you have done market research, you must define the mission and objectives of the enterprise. To convert a
business idea into an enterprise requires that you perform a viability test first. This gives you an idea that the
business will be profitable. If the idea cannot result in profit then it must be discarded. To establish if you can make
a profit requires that you know the needs of the consumers and their profile, the market potential and target market.
The incomes to the business, the source of this income as well as expenses incurred by the business are important
in helping you calculate the loss or profit of the business.
Activity 4.1
1. A well-defined objective(s) must satisfy five criteria. Write down the five criteria.
2. What does the term market segmentation mean? Explain four types of market
segmentation.
3. A shirt costs R30 and the entrepreneur intends to put a mark-up of 25% as his profit.
Calculate the profit.
41 MANCOSA
Unit
5: Business Plans
for SMME’s
MANCOSA 42
Explain the purpose of a business plan. Complete the reading, think points, self-check question
and activity provided to fully understand what a
Describe the elements of a business plan.
business plan is and its purpose.
Analyse a business plan.
Complete the reading, think points, self-check
Write a business plan. questions and activity provided to be able to describe
Present a business plan with confidence. the elements of a business plan, analyse a business
plan and to be able to plan and presents a business
plan with confidence.
5.1 Introduction
5.4 Example of a Business Plan
5.6 Summary

Education: Cape Town. Unit 17
Venter, R., Urban, B. and Rwigema, H (2010) Entrepreneurship – Theory
in Practice. 2nd Edition. Oxford University Press. Unit 6
43 MANCOSA
5.1 Introduction
In this module we will focus on a business plan for Small, Medium and Micro Enterprises (SMMEs), answering the
question, what is a business plan? We will go a little deeper and find out the importance of a business plan to
entrepreneurs. There are variations on what actually constitutes a small, medium and micro enterprise. According
to Barrow (2004), a micro enterprise employs less than 10 employees, a small enterprise, 10 to 40 employees,
and a medium sized enterprise, 50 to 500 employees. Therefore, an SMME is any company that employs
anywhere between 1 and 500 employees.
A description of the various elements that make a business plan will then follow. It is important to point out at this
stage that there are good as well as bad business plans. Whether a plan is good or bad depends on how well the
business plan has been written. We hope to obtain some skills required in writing a business plan as we go through
this module. We will take a look at an example of a business plan and conclude the module by focusing on useful
techniques on business plan presentation.

A business plan is a written summary of an entrepreneur's proposed business venture, its operational and financial
details, its marketing opportunities and strategy and its managers’ skills and abilities. It acts as a roadmap of the
business and an insurance against launching a business destined to fail or mismanaging a potentially successful
company. The aim of the business plan is to communicate to the stakeholders of the business (a stakeholder is
someone with an interest in the business). It communicates to investors, employees, suppliers, financiers and
other groups with an interest in the business.
But why communicate through a business plan? This is necessary in order to sell the idea that the business venture
will succeed and to persuade people to invest in the enterprise. The business plan aims to convince readers that
a sustainable demand for a product/service exists, that the risk has been identified but are manageable, that the
enterprise is profitable and that the entrepreneurial team is experienced.
Broadly, a business plan serves two essential functions:

1. It guides the company's operations by explaining its future direction and crafting a strategy for success.
2. It attracts lenders and investors.
Depending on their circumstances, the entrepreneurial team may be required to bring on board investors or borrow
some money for the business. A good business plan can help attract lenders and investors.
Self-Test Questions
In your own words, explain the purpose of a business plan.
MANCOSA 44

There are no fixed rules on making a business plan. However, it requires sound knowledge of such aspects as
taxation, financial management, the product to be sold or service to be offered, marketing, etc. It is advisable to
bring in experts on any of these aspects which you may not be familiar with. This may help in making the business
plan look more professional and convincing.
To be attractive, the business plan should be well written, attractive in appearance, concise yet comprehensive,
logical, simple and easy to read and based on facts and evidence as far as possible. It must be informative and
interesting to the reader. The better the business plan, the better its ability to articulate the issues effectively and
the better the chances of securing financial support. It must factor in the effect of the external environment and the
risk reward tradeoffs.
Generally, a business plan will contain the following key elements:

Description of the enterprise
Name of the enterprise
Address and telephone number of the business
Details of bankers, Attorneys and Auditors
Type of enterprise, primary activities
Logo and emblem
Mission statement
Goals and objectives
The business opportunity must be clearly explained. Include the primary activities of the business and its history,
if the business is already operational.
Type of ownership e.g. private company
Organisational structure
Staffing
ii. Indicate the present need for staff (whether full-time or part-time) and the staffing requirements for the next three
years. Clearly specify the skills required and the staff costs.
iii. Strategies – specific targets and the means to reach them
a) The Marketing Plan

A description of your specific target market. Who are your customers?
The percentage of the market you intend capturing e.g. 10% in the first year.
Sales forecasts for the first year of business
A description of key customers e.g. Banking institutions
A description of your key competitors, their marketing strategies and potential effects on your business
A description of your marketing mix- Promotion, Pricing, Place and Products.
45 MANCOSA
b) The Financial Plan

Start-up cost.
Calculation of your breakeven point.
A cash-flow statement that captures the cash position on a monthly basis.
Detailed income statement for the first year showing projected income and expenditure on a monthly basis.
External financing required and any securities that you have.
iv. The Entrepreneurial Team

The business plan must have comprehensive Curriculum Vitaes (CVs) for the entrepreneurial team. The skills and
the experiences of the management team together represent a major risk factor. It is important to describe the
skills of the entrepreneurial or management team, paying special attention to each member’s knowledge of the
product or service.
v. Manufacturing Plan
If your business is in manufacturing, you need to include a manufacturing plan as follows:
Description of manufacturing facilities
Capital investment in the manufacturing process and how much will be needed in the next 3 years.
The source of raw materials and their prices. How much will they cost and where will they be stored?
A list of your suppliers and the level of dependence on each.
Think Point
Do you think all the five elements of the business plan are relevant to all SMMEs? Which
element do you think may not apply? Give reasons for your answer.
5.4 Example of a Business Plan

Business Plan for Glorious Car Wash
Details of Enterprise
Type of Enterprise:
Providing customers with exterior and interior car washing.
Address of Enterprise
17 Piennar Street, Hatfield, Pretoria 2000.
Tel: (012) 318 4220
Fax: (012) 318 4005
MANCOSA 46
Owner:
Chris Naidoo
17 Piennar Street, Hatfield, Pretoria 2000.
Tel: (012) 318 4220
Bank:
ABSA BANK
Address: Hatfield Branch, Pretoria 2000.
Tel: (012) 320 4008
Fax: (012) 320 4110
Attorneys:
SHEPSTONE AND WYLIE
Address: Pretoriuos Street, Hatfield, Pretoria 2000.
Tel: (012) 350 4333
Fax: (012) 320 4999
Auditors: Deloitte and Touche

Address: Paul Kruger Street, Pretoria 2000.
Tel: (012) 360 4221
Fax: (012) 360 4443
Date: 5 APRIL 2006.

PURPOSE OF ENTERPRISE
The purpose of the enterprise is to provide the following services to its customers:
Car washing (exterior)
Car cleaning (interior)
Executive Summary
The name of the company is Glorious Car Wash. The business will be located in Hatfield, Pretoria. It will be a close
corporation. Chris Naidoo solely owns the company. Glorious Car Wash will be funded by an initial investment of
R 250 000. Chris Naidoo will manage the business. For more information on the owners, refer to Addendum A.
Mission
The mission of Glorious Car Wash is to provide top quality washing service for luxury car owners in Hatfield,
Pretoria. Chris Naidoo Wash will work to keep employees satisfied in order to maintain impeccable customer
service.
47 MANCOSA
Objectives
The objectives for Glorious Car Wash:
1. To be viewed as a premium car wash service in Hatfield, Pretoria.
2. To make a turnover of R500 000 in the second year of operations.
3. To achieve a net profit margin of 20-25%.
The business requires total capital of R205 405. All of the capital will be financed by means of borrowed funds
using personal insurance policies as collateral.
The loan will be used to:

a. pay staff for three months.
b. pay initial deposit and rental for three months.
c. acquires assets (truck, washing equipment and cleaning chemicals).
d. pay for initial advertising costs.
Business Information
Chris Naidoo Wash will be providing customers with two services: exterior and interior car washing. It is a close
corporation. It is envisaged to start operations on the 1st of November 2006.
Business description
The office hours will be from 7:00 to 17:30. The business will be busiest Friday afternoons and the weekends and
also just before major public holidays when motorists wash their cars before travelling. Pricing will be set at a mark-
up of 50% on cost.
Personnel and Organisation

In addition to the manager, there will be six people working for the enterprise:
Driver/messenger
Cashier
3 Cleaners
Bookkeeper
Driver with code 10 license and at a least two years’ experience.
Bookkeeper will be responsible for accounting purpose and will come in thrice a week.
Cashier will handle all cash and issue receipts. She will also answer all telephones.
The cleaners are responsible for cleaning the various cars. One will wash the exterior; the other will vacuum
the interior whilst the third will polish the vehicle.
MANCOSA 48
Marketing Information
The surrounding area is quite affluent, 50% of the residents earn over R150, 000 a year. There are three different
car dealerships within a four-kilometre radius which will require car washing services for the various fleets.
Market Analysis
Glorious Car Wash will target three main groups of customers: individual car owner and leasers, car dealerships,
and local businesses.
The car wash will be based in Hatfield, Pretoria. This area has a number of benefits in terms of the market that it
will provide for the business. Many people in the neighbourhood own and/or lease new cars and place great value
on their cars and how they look.
Market Research
Glorious Car Wash is positioning itself as the premier car wash serving the Hatfield area. Chris has forecasted a
20% market share.
Competitors
Glorious Car Wash has no true competitors that are trying to offer a high quality service for a reasonable rate. Most
are trying to compete on price alone. Glorious Car Wash’s ability to provide a high quality service, both in regards
to the actual washing as well as customer service is all based on their ability to find the best employees.
Competitors’ strengths
Financially sound
Good reputation
Competitors’ weaknesses
Long queues
Lower end of the market
My enterprise’s business strengths

Providing high quality services.
Aggressive advertising strategy
Advanced washing technology
My enterprise’s business strengths

Inexperience
Cannot attend to a few cars at any given time.
49 MANCOSA
Advantages of location
Spacious with plenty of shops so people can be shopping whilst their cars are being washed.
Market
Glorious Car Wash will target three main groups of customers: individual car owner and leasers, car dealerships
and local businesses.
Self-Test Questions
Explain how you can turn the weaknesses of a competitor to your advantage.
Market Segmentation
Glorious Car Wash segments its customers by type of car ownership. The strategy behind Glorious Car Wash
target segmentation is to attract customers who will be repeat users and will frequent the business in the typically
quiet times for a car wash business. We believe that the type of car that a person owns says volumes about their
driving, and, therefore their car washing requirements.
New car owners: Owners of newer cars are most likely to use a handcar washing service. These owners take
great pride in their cars and will bring them often to the wash and detail service. The aim is to inform these
customers that Glorious Car Wash will keep their car looking as good as it did the first day they drove it.
Older luxury car owners: These people have either owned their high-end luxury cars for several years or are
unable to afford the expense of a new luxury car but want the feel of relaxed driving. Both of these groups want to
keep their cars in the best shape possible. These owners will bring their cars in for regular washes and occasional
details.
Sports car owners: These people are often younger or middle-aged men and will regard the look of their car as
important. They will also pride themselves on the look of their car and will have their car hand washed (at least)
weekly.
Lifetime owners: Many of these people have owned their cars for more than four or five years and are more likely
to be women. They like their cars to look presentable, and want to keep it in good shape but are not tied up in the
look of their car.
Dealerships: There are five new and used car dealerships within three kilometres of the proposed location of
Glorious Car Wash. These dealerships often use outside car wash services to clean their vehicles before they are
put up for sale.
MANCOSA 50
Local businesses: Some local businesses have fleets of cars and small vans that must be kept clean to maintain
their company image. These businesses will be looking for a cost effective, efficient car washing service to perform
this service, and will prefer to use a car wash service during the week rather than during weekends, like the general
public.
Financial Information
Estimated Start-Up Capital
R
Salaries and wages 6 000
Rent 1 000
Advertising 3 000
Telephone 500
Insurance 800
Maintenance 300
Miscellaneous 160
Interest 1 875
Sub total 14 635 [43 905 for 3 months]
Once-Off Costs
R
Motor vehicle 120 000
Furniture 4 000
Computerised washing equipment 27 500
Installation charges 5 000
Deposits with public utilities 5 000
Sub-total 161 500
Total estimate for start-up 205 405
51 MANCOSA
Budget for The First Year of Operation

R R
Revenues R258 750
Revenue from operations R258 750
Expenses R 187 620

Employee salaries R 72 000
Rent R 12 000
Advertising R 3 000
Telephone R 6 000
Insurance R 9 600
Maintenance R 3 600
Miscellaneous R 1 920
Other expenses R 4 000
Depreciation R 27 500
Interest R 48 000
Net Operating Income (Before tax) R71 130
Income tax @35% R24 896
Excess Income over expenses R46 234
Return on investment 23%
Addendum A
Entrepreneurial Team
Chris Naidoo
Surname: Naidoo
First names: Chris
Title: Mr
Residential Address: 17 King George Street
Cresthaven
Pretoria
2000
MANCOSA 52
Chris has been involved in the family's car repair business for the last ten years. He has worked his way through
the organisation and has been the manager for the last five years overseeing operations of R1.2 million annually.
He left to pursue private interests. Chris received his MBA from Pretoria University and his BSc in Business
Management from the same university.
Think Point
As the only member of your company’s entrepreneurial team, can you repeat the
information in Addendum A as it applies to yourself.

If you require external funding for your business, you may be required to make a presentation to potential investors
and lenders. Lenders and investors are impressed by entrepreneurs who are informed and prepared when
requesting a loan or investment. An entrepreneur's time for presenting a business opportunity will usually be quite
limited.
Some helpful tips for making a business plan presentation to potential lenders and investors include:
Demonstrate enthusiasm about the venture.
Know your audience and work to convince them.
Emphasise the opportunities and the anticipated benefits of the new venture.
Focus on the highlights; specific questions will bring out the details later.
Keep your presentation simple by limiting it to two or three major points.
Avoid the use of technological terms that will likely be above most of the audience.
Use visual aids.
Close by reinforcing the nature of the opportunity.
Be prepared for questions.
Follow up with every investor to whom you make a presentation.
What Lenders and Investors Look for in a Business Plan

Once established, banks become a regular source of financing. It is important to know the criteria lenders and
investors use when evaluating the creditworthiness of entrepreneurs seeking financing.
53 MANCOSA
Lenders and investors refer to these criteria as the five Cs of credit: capital, capacity, collateral, character, and
conditions.
1. Capital.
A small business must have a stable capital base before any lender is willing to grant a loan. The most common
reasons that banks give for rejecting small business loan applications are under-capitalisation or too much debt.
Lenders and investors see capital as a risk-sharing strategy with entrepreneurs.
2. Capacity
A synonym for capacity is cash flow. Lenders and investors must be convinced of the firm's ability to meet its
regular financial obligations and to repay loans, and that takes cash. Lenders expect small businesses to pass the
test of liquidity, especially for short-term loans.
3. Collateral
Collateral includes any assets an entrepreneur pledges to a lender as security for repayment of a loan. If the
company defaults on the loan, the lender has the right to sell the collateral and use the proceeds to satisfy the
loan.
4. Character
Lenders and investors must be satisfied with an entrepreneur's character. The evaluation of character frequently
is based on intangible factors such as honesty, integrity, competence, polish, determination, intelligence, and
ability. Although the qualities judged are abstract, this evaluation plays a critical role in the decision to put money
into a business or not.
5. Conditions
The conditions surrounding a funding request also affect an entrepreneur's chances of receiving financing. Lenders
and investors consider factors relating to a business's operation such as potential growth in the market,
competition, location, strengths, weaknesses, opportunities, and threats.
Think Point
Provide two examples of assets that an entrepreneur can pledge to the bank as
security for a loan.
MANCOSA 54
5.6 Summary
A business plan serves two important purposes, to guide the direction that the company will go and to persuade
investors and lenders to support the business. The business plan contains key information on the business which
are also called elements of the business; the name of the business, its activities, the purpose of its existence, the
marketing plan, the production and financial plan. The business plan must be well written to be taken seriously.
We have obtained some skills required in writing a business plan in this unit.
Activity 5.1
Study the business plan for Glorious Car Wash. What would you say are the
strong points of the business plan? What are its weak points?
55 MANCOSA
Unit
6: Establishment
of Small Business
MANCOSA 56
Make an informed choice on the form of Complete the reading, think points, self-check question
business that suits a situation. and activity provided to be able to make an informed
choice on forms of business.
Describe the factors that should be
considered in choosing the form of Complete the reading, think points, self-check question
business. and activity provided to be able to distinguish between
the various forms of business ownership.
Distinguish between the various forms of
business ownership. Complete the reading, think points, self-check question
and activity provided to fully understand the legal
State the legal requirements of the form of
requirements of a business and the procedure that
business.
should be followed in setting it up.
Explain the procedure that should be
followed in setting up a specific form of
business.
Make an informed choice on the form of

business that suits a situation.
6.1 Introduction
6.5 Summary

Nieuwenhuizen, C., Strydom, J (2012) Entrepreneurship and How to Establish Your
Own Business. 4th Edition. Juta and Company. Units 6
Kroon, J. (2000). Entrepreneurship, Start your own Business. Kagiso Education:

Cape Town. Units 5 and 6
Venter, R., Urban, B. and Rwigema, H (2010) Entrepreneurship – Theory in

Practice. 2nd Edition. Oxford University Press. Unit 7 and 8
57 MANCOSA
6.1 Introduction
The idea of starting our own business and consequently being our own boss is a very exciting one for most of us.
This conjures up images of fancy titles like managing director, chief executive officer etc. Whilst this may happen
somewhere along the line, and it is good to dream big, at the beginning things are usually a lot different and harder.
In this section, we are going to learn about the forms of business that are available, the process of setting up these
business forms and then make an informed choice of which form of business best suits our situation. The question
each prospective entrepreneur must grapple with is what form of business is suitable for my situation? What are
the requirements of this business form?
A business is an individual or group of individuals that satisfies the needs of people or consumers. The business
focuses on the production, selling or provision of a service to a customer. There are several important factors to
take into consideration when choosing the right business form. In this section the key factors will be considered.
These are not the only factors but they are key:
The nature of business that is required.
The legal liability of the owners.
The specific legal requirements.
The business form.
The nature of business that is required

The business form that is suitable to you depends on the aim of the business and the nature of the product or
service to be offered. If for instance you want to open a butchery, then a sole proprietorship may be suitable. If,
however, you want to form an insurance company, then you may require a more sophisticated business form like
a private company.
The legal liability of the owners

The company and the close corporation are recognised as separate legal personality from the founders as opposed
to the sole proprietor and the partnership which do not possess their own legal personality. The person in the sole
proprietorship and the members of the partnership are responsible for the tax and debt obligation of the business.
The specific legal requirements

The various business forms have different legal requirements. For example, a company must be registered with
the registrar of Companies and produce financial statements. It is important to find out what exact legal
requirements of the business form that you are interested in. It must be noted that these legal requirements have
financial implications.
MANCOSA 58
The business form

What is the business form that best suits my situation? The form of business to choose from depends on your
situation and may be dictated upon by capital requirements, the size of the business and the number of people
that will be involved in the business. Some of the business forms are quite complicated and require advice from
specialists such as an accountant or attorney.
There are different types of businesses to choose from. We will discuss the main type’s viz. Sole Proprietorship,
Partnerships, Private Company and Public Companies.
Think Point
Can you think of other factors that could affect the choice of a business enterprise?

1) Sole Proprietor
The sole proprietor (also called the sole trader) is without question, the simplest and most popular form of
ownership. This form of business is also called the sole trader. The sole proprietorship, as its name implies, is a
business owned and managed by one individual and in most cases where the owner also manages the business.
Examples include flea-market stalls, laundries, butcheries and hairdressers.
A sole proprietor can conduct business under his/her name or under a trade name. For example, let’s say that
Vuyo Sandile is a plumber. He can conduct his business under his name, Vuyo Sandile Plumbers. Alternatively,
he can conduct the business under a trade name such as Efficient Plumbers.
Advantages
It is the least regulated form of business ownership and therefore the easiest to start, operate and
terminate.
It is the least expensive form of ownership to establish. There is no need to create and file legal documents
that are recommended for partnerships and required for corporations.
The main advantage of this type of business is that the owner gets all the profits (less taxes, of course) should
the business prosper, so this is an incentive to work hard.
The owner is in total control of operations, so he/she can respond quickly to changes, which is an asset in a
rapidly changing environment.
59 MANCOSA
The disadvantages to the sole proprietorship include:

The sole proprietor has to take responsibility for the running of the business including losing everything should
the business fail and being personally liable for all the businesses debts.
A sole proprietor may not have the wide range of skills required in running a successful business.
The business could lack sufficient capital because the owner has to rely on his or her own savings or take a
loan.
If the proprietor dies, retires, or becomes incapacitated, the business may terminate, unless a family member
or employee can take over, the business could be in trouble.
Think Point
Give your own example of a sole proprietor? What business is the sole proprietor in?
2) Partnership
When two or more people agree (whether verbally or in writing) to become co-owners of a business, the
organisation is called a partnership. The contract can be between a minimum of two and a maximum of twenty
persons, who contribute capital, goods or expertise to the lawful business with the purpose of making a profit. A
partnership is not a legal person and therefore all partners are jointly liable for the debts and obligations of the
business.
3Figure 6.1: People in a partnership
MANCOSA 60
The advantages of choosing the partnership as a form of ownership include:

Like the sole proprietorship, the partnership is easy and inexpensive to form because it is less regulated.
The parties’ skills and abilities usually complement one another, strengthening the company's managerial
foundation.
There are no restrictions on how partners distribute the company's profits as long as the method is consistent
with the partnership agreement and does not violate the rights of any partner.
The partnership can significantly broaden the pool of capital available to a business.
The disadvantages of a partnership

Partners have unlimited liability for the partnership’s debts and usually take an active role in managing the
business.
The partnership is dissolved if there is a change in its membership composition. The duration of a partnership
is therefore uncertain.
It is not easy to find suitable partners.
Partners are jointly liable for the debts incurred by other partners.
Self-Test Questions
How can you overcome the disadvantages of a partnership?
3) Private Company
The private company has a minimum of one and a maximum of fifty shareholders. The transfer of shares is
restricted which means that shares cannot be sold to the public. Shareholders have limited liability for the debts of
the business. The name of the company must end in ‘Proprietary Limited’ or the letters ‘(Pty) Ltd’, for example
Arda Bank (Pvt) Ltd. This means that the number of shareholders is limited. A private company’s shares cannot
be sold to the public to raise capital. Therefore, the shares cannot be listed on the stock exchange (the JSE, for
example).
Advantages
Private companies form a separate legal entity with limited liability to the shareholders.
Business continuity is assured since shares can be passed without affecting the company.
Private companies are suitable as family businesses.
The company and its members are taxed separately.
61 MANCOSA
Disadvantages
It is a complex process to establish and manage a private company.
A private company must meet such costs as incorporation costs, annual subscriptions and the cost of issuing
shares.
As a result of the compulsory publication of its statement, everyone including its competitors knows the
company’s information.
Self-Test Questions
Compare and contrast the CC and the private company.
4) Public Company
A public company is the form of business that has seven or more shareholders and where the shares are sold to
the public. Such large, publicly owned companies might have thousands of shareholders. Absa, listed on the
Johannesburg Stock Exchange (JSE) is an example of a public company.
A public company can raise a large amount of capital from the general public. Investors with small amounts of
money are also able to invest in this type of ownership. However, the costs of becoming a public company are high
and the procedure of establishing the business is complicated.
5) Close Corporation
Until the 1st May 2011, another form of business called a Close Corporation was possible to be formed. According
to the New Companies Act that came into effect on the 1st May 2011, whilst existing Close Corporations will be
recognised, no new Close Corporations will be registered or allowed to be formed. The New Companies Act allows
for existing Close Corporations to convert into a private company should the members choose to do so. From the
effective date of the Act, companies will also not be able to convert into a Close Corporation.
The Close Corporation as a business entity consists of between one to ten individuals who are referred to as
members. Unlike Partnerships and Sole Proprietors, the assets and debts of a CC are not legally bounded to the
members of the business. The registration of a Close Corporation could be done with a lawyer or accountant and
the business was then given a registration number.
Self-Test Questions
State the maximum number of members for the private, sole proprietor, partnership and the
private company. Do you agree with these limits? Explain why you agree or disagree with
these limits.
MANCOSA 62

Sole Proprietorship
Few legal requirements govern the setting up of a sole proprietorship. All businesses must register with the local
authority, except flea markets, which do not need to register. Most one –person businesses’ do not require licenses
unless you plan a food-related business. It is however; best to contact your local authority to confirm this position.
VAT registration is compulsory if your turnover is more than R150 000 per annum.
No other legal requirements are needed to start a one-person business. Flea markets are not allowed to operate
their stalls on private property without the prior consent of the owner. Manufacturing businesses should move into
an industrial area once they employ more than four people.
Partnerships
The standard partnership agreement will likely include the following:
1. Name of the partnership.
2. Purpose of the business. What is the reason the business was brought into being?
3. Address of the business. Where will the principal business be located?
4. Duration of the partnership. How long will the partnership last?
5. Names of the partners and their addresses.
6. Contributions of each partner to the business, at the creation of the partnership and later. This would include
each partner's investment in the business. In some situations, a partner may contribute assets that are not
likely to appear on a balance sheet. Experience, sales contacts, or a good reputation in the community may
be reasons for asking a person to join in a partnership.
7. Agreement on how the profits or losses will be distributed.
8. Agreement on salaries or drawing rights against profits for each partner.
9. Procedure for expansion through the addition of new partners.
10. Sale of partnership interest. The Memorandum of Incorporation of the partnership should include terms
defining how a partner can sell his or her interest in the business.
11. Salaries, draws, and expense accounts for the partners. How much money will each partner draw from the
business? Under what circumstances? How often?
12. Absence or disability of one of the partners. If a partner is absent or disabled for an extended period of time,
should the partnership continue? Will the absent or disabled partner receive the same share of profits as she
did prior to her absence or disability? Should the absent or disabled partner be held responsible for debts
incurred while unable to participate?
63 MANCOSA
Private Company
The company must be registered with the Registrar of Companies. The following information is required for a
company to be registered:
1. The company’s name
2. The company’s type of economic activity.
3. Names and addresses of the shareholders of the companies.
4. Place of business
5. Memorandum of Association and Incorporation must be drawn up.
6. Capital required at the time of incorporation.
7. The company must register with the South African Receiver (SARS) and tax must be paid as an employer, as
a tax payer and as an added value (VAT).
The Memorandum of incorporation indicates that the company has received a legal personality.
Think Point
Identify a partnership of your choice. Find out the key elements of the
partnership agreement. Is the agreement the same as the
requirements of forming a partnership that we have just learnt? What
are the similarities or differences?
6.5 Summary
Let us refresh our memories and see what we have learnt in this module. We have learnt that the choice of a
business enterprise is affected by the nature of the business that you require, the liability of the owner, the business
form and its legal requirements. Furthermore, we have learnt about the sole proprietor, the partnership, the close
corporation, the private and public companies including the advantages and disadvantages of each. We concluded
the unit by a brief description of the procedure and legal requirements of each business form. We are now ready
for the next unit, after attempting the activity.
Activity 6.1
1. State the names of a partnership and a private company and publicly quoted
company that you know.
2. Outline the advantages and disadvantages of the sole proprietor and
partnerships.
3. How would you overcome the disadvantages of the sole proprietorship?
4. Describe the factors that affect the choice of a business enterprise.
MANCOSA 64
Unit
7: Small Business
Management
65 MANCOSA
Distinguish between entrepreneurship Complete the reading, think points, self-check questions
and small business management. and activity provided to fully understand
entrepreneurship and small business management.
Explain the importance of small
businesses to an economy. Complete the reading, think points, self-check questions
and activity provided to be able to explain the
Demonstrate knowledge of the general
importance of small businesses to an economy.
management function.
Complete the reading, think points, self-check questions
Describe the functions of an enterprise.
and activity provided to grasp an in-depth knowledge of
Discuss the common causes of business the general management functions.
failure.
Distinguish between entrepreneurship and activity provided to be able to describe the functions
and small business management. of an enterprise.
Explain the importance of small Complete the reading, think points, self-check question
businesses to an economy.
and activity provided to fully understand why SMME’s
tend to fail.
MANCOSA 66
7.1 Introduction
7.7 Summary

Online resources
www.small-business-hub.co.za
www.entrepreneur.co.za
www.gemconsortium.org
www.Seda.org.za
67 MANCOSA
7.1 Introduction
In this unit, we will take a closer look at small business management. We will begin by distinguishing
entrepreneurship from small business management. Business management explains the principles that
businesses can use to stay competitive in the market and grow into an established business. We highlight the role
of SMMEs first to the South African economy and to world economies in general.
The description of the general management function is given- planning, organising, leading and controlling. We
then discuss the enterprise functions, which are purchasing, production, marketing, financing function, personnel,
the administrative the public relations function. We conclude the unit with a discussion on the most common cause
of SMME business failure.

Once the enterprise is established, the person is no longer an entrepreneur, but is in fact a manager of the
enterprise, or rather a small business manager. Entrepreneurs are also small business managers, as they manage
their enterprises themselves to ensure their continued stay in business. However, entrepreneurs are not
necessarily small business managers, and small business managers are not all entrepreneurs.
Successful entrepreneurs realise that effective management is necessary for the success of an enterprise. To this
end, they can either manage their enterprises themselves or appoint competent small business managers to
ensure continuous growth of the business.
The role of the small business manager in the enterprise is just as important as the role of the entrepreneur. An
enterprise must be well managed in order to ensure that it makes a profit and to guarantee its survival. Without
proper management, entrepreneurship is meaningless, as even the best product or service in the world cannot
ensure success.
Think Point
What do you think are the differences in the characteristics of a small business
manager and entrepreneur?
MANCOSA 68

It is widely recognised that small, medium and micro enterprises (SMMEs) can serve as crucial engines of
economic development and job creation. In particular, small businesses are seen as the principal creators of new
jobs. The realities that SMMEs can adapt more easily to market conditions, typically employ more labour-intensive
production processes, and have lower capital costs associated with job creation in comparison to larger firms are
seen as the primary reasons for their strength as creators of new, productive employment opportunities. Moreover,
the development of the SMME sector can make an important contribution to accelerating the achievement of wider
socio-economic goals, including those related to rural and urban development and the alleviation of poverty
(SEDA, 2012).
SMMEs already have a significant presence in the South African economy, accounting for close to 91% of all
formal business entities in the country, making an estimated contribution of between 51% and 57% to national
Gross Domestic Product (GDP), and providing approximately 60% of employment in South Africa. However, there
is empirical evidence to suggest that, given the right support and conditions, SMMEs could make an even greater
contribution to employment in the country. Specifically, it has been shown that SMMEs and informal enterprises
can contribute as much as 70% to GDP and 95% of total employment in middle income countries; and empirical
studies have shown that SMMEs contribute more than 65% of total employment in some of these countries (SEDA,
2012).
The role of SMMEs extends beyond employment creation in an economy. They also act as subcontractors for
large organisations and are responsible for innovations in an economy. Innovation involves the creation of new
products and processes. The Nandos case study that we looked at in unit one is a good example of an innovative
idea – a new method of cooking chicken. SMMEs are in many instances the entry point into the business world
thus playing an important socio-economic role.
In the United States, for example the small business sector makes up 99% of all businesses and employs 51% of
the nation’s private sector work force, even though they possess less than a quarter of the total business assets.
This sector produces 51% of the country's private Gross Domestic Product (GDP) and accounts for 47% of
business sales (Zimmerer & Scarborough). Small businesses thus contribute to wealth creation in a country.
It is evident from these two examples that small businesses are important to an economy.
69 MANCOSA
Think Point
Can you think of any other contribution that SMMEs make to a country’s
economy?

An entrepreneur must exercise general management of the business. He must make decisions, plan, organise the
activities of the business, control and lead the business towards its vision. The management function is the
foundation upon which a business can be built. Planning is the starting point of the management function.
Planning
Planning helps you determine in advance what you want to achieve with your business and more importantly, how
you want to achieve your plan. When you plan, you draw up objectives of the business and how you intend to
achieve those objectives. Even the best plans are useless if they cannot be implemented.
You need information to be able to plan effectively. This information is obtained from the past. The information is
obtained from the business environment. The business environment is made up of the internal and external
environments. The internal environment is made up of the micro-environment. The micro-environment refers to the
enterprises’ objectives, rules, regulations, policy, budget, decisions, and organisation structure. The external
environment is made up of the market environment and the macro-environment. The market environment refers to
the interaction between the business and the consumers, suppliers, creditors, staff and competitors in the market.
The macro-environment on the other hand refers to the economic, political, social and technological factors in the
environment.
Planning involves three steps:

Long-term planning (or strategic planning)
Medium –term planning (or functional planning)
Short-term planning (or operational planning)
Self-Test Questions
Distinguish between the micro-environment, the market environment and the
macro-environment.
MANCOSA 70
Organising
Organising means ensuring that employees work together as a team, and that resources owned by the business,
are put to the best use. Organising as a management function involves three tasks- dividing activities into groups
and sections, the creation of posts within those sections and a decision on duties, authority and responsibilities.
As an example, let us suppose that a small business employs ten people and is in the business of manufacturing
picks and shovels. The business could have two sections- manufacturing and sales, each led by a supervisor and
both supervisors reporting to a manager. The specific duties, authority and responsibilities of each position are
then spelt out. Such decisions will give the business an organisational structure. This is an example of organising.
Manager
Eng Supervisor Sales Supervisor
Fitters and Turners Salesman
4Figure 7.1: Example of organisational structure
Self-Test Questions
Illustrate the structure of your current business or alternatively of your proposed business.
Leadership
Leadership is an important management function because it ensures that work will be started and completed. It
indicates the relationship between the leader and the members of his working group. Ideally this relationship must
ensure that work gets done. Significant responsibilities are placed on the shoulders of a leader. The success or
failure of a business is dependent on the leadership of an organisation. This explains somewhat why business
leaders are well remunerated.
There are several leadership styles that leaders can adopt for their organisations. These are the autocratic, the
democratic, the “laissez faire”, the compromise and the Good Samaritan types. These leadership styles are
captured in Figure 7.2 below. However, it must be emphasised that no leadership style will be suitable for all
71 MANCOSA
situations. The leader needs to vary his style depending on each situation. A leadership style, which is task-
oriented, places more emphasis on the completion of tasks rather than on the needs of employees. An employee-
oriented leadership on the other hand places the needs of the workers first.
APPROACH TYPE OF LEADER LEADERSHIP STYLE
Little concern for employees or production Laissez faire type Poor leadership style
Little concern for production, but concerned Good Samaritan type Employee-oriented style
about employees
Little concern for employees, Autocrat Task-oriented style
but concerned about production
Reasonable interest in employees as well Compromise type Maintains existing style of

as in production leadership
Greatest degree of concern for employees Democratic type Team leadership style
as well as or production.
Self-Test Questions
Which leadership style appeals to you most? Justify your answer.
Controlling
Controlling ensures that plans are implemented properly. In the management cycle - planning, organising, directing
and controlling - planning moves forward into all the other functions whilst controlling reaches back. It is the final
link in the functional chain of management activities and brings the functions of management cycle full circle. It is
the process through which standards for performance of people and processes are set, communicated, and
applied.
Effective control systems use mechanisms to monitor activities and where necessary take corrective action. The
manager observes what happens and compares that with what was supposed to happen. He or she must correct
unsatisfactory conditions and bring results up to the required expectations. Control systems provide managers with
knowledge of how well implementation is going. They facilitate the delegation of activities to employees.
MANCOSA 72
The Control Process

The control process is a continuous flow between measuring, comparing and action. There are four steps in the
control process: establishing performance standards, measuring actual performance, comparing measured
performance against established standards, and taking corrective action. These steps are briefly explained:
Step 1: Establish Performance Standards

A standard is any guideline established as the basis for measurement. Standards are created when objectives are
set during the planning process. It is a precise, explicit statement of expected results from a product, service,
machine, individual, or organisational unit.
Step 2: Measure Actual Performance

Managers collect data to measure actual performance to determine variation from the standard. Written data might
include time cards, inspection reports or sales tickets. Personal observation, statistical reports, oral reports and
written reports can be used to measure performance. Observation of employees working provides unfiltered
information, extensive coverage, and the ability to read between the lines. While providing insight, this method
might be misinterpreted by employees as mistrust.
Step 3: Compare Measured Performance against Established Standards.

Comparing results with standards determines variation. It is normal to expect some variation in all activities. It is
the range of variation, which is important. The key question in all situations is: What is the acceptable variance?
Deviations or differences that exceed this range would alert the supervisor to a problem.
Step 4: Take Corrective Action.

The manager must establish the cause of deviation from standard. Afterwards, he or she takes action to remove
or minimise the cause. If for example, the source of variation in work performance is from a deficit in activity, then
the manager can take immediate corrective action and get performance back on track. Equally, the manager can
opt to take basic corrective action, which would determine how and why performance has deviated and correct the
source of the deviation.
Self-Test Questions
List the steps for the control process.
73 MANCOSA

The main purpose of any business is to make a profit. The entrepreneur must focus on all aspects of the business
to ensure that he makes a profit. The functions of a business enterprise are briefly discussed below:
The Administration Function

The enterprise needs to keep records in order to comply with the legal requirements specified in the relevant
legislation. The administration function is concerned with record keeping- bookkeeping, drawing up financial
statements, formulating and maintaining office procedures, storing and filing business records and completion of
work within appropriate deadlines.
The Income Tax Act, for example, requires registration as an employer, deductions from salaries of employees
(PAYE/SITE) financial records need to be kept. The Value Added Tax requires collection of taxes, submissions of
VAT to the Receiver of Revenue. The Workmen’s Compensation Act requires wage statements, reporting injuries
sustained during execution of duties.
Think Point
Explain some of the mistakes that SMMEs make in terms of the administrative
function?
2. he Financing Function.
Capital is the lifeblood of any business. Capital may be fixed capital or floating capital. Fixed capital consists of
machinery, equipment, buildings etc. Floating capital is used for the purchase of goods required by the business
and also to pay running for expenses. The business needs sufficient funds in order to operate efficiently.
The financial function is responsible for obtaining sufficient funds at favourable conditions for the business. These
funds may include business loans, overdrafts, etc from financial institutions. Funds collected for the business may
also form the sale of the company’s goods and services. The business must make appropriate plans on how to
spend the money obtained for the business. Control to expenditure is necessary in order to maintain a sound
financial position for the business.
Self-Test Questions
Conduct some research and find out what an overdraft is. Discuss the advantages
and disadvantages of an overdraft.
MANCOSA 74
3. The Marketing Function.

This entails collecting adequate information on your customers, advertising your goods and services to meet
customer needs in order to grow the market share of the business. The key consideration in the marketing function
is the customer or consumer.
The following questions need to be asked:

Who are our customers?
Where are they?
What are their needs?
How can these needs be satisfied?
How much money do they earn?
How can we reach them – by television, newspapers or radio?
How do we get the goods to them?
The answers given to these questions constitute the marketing function.
4. The Personnel Function.

The personnel function is concerned with the recruitment and selection of suitable people to the company, job
descriptions, training of personnel, motivating staff to produce their best results, creating a favourable working
environment for them and treating them fairly, with dignity and respect.
It is important to have a written agreement between the enterprise and the employees. This is called a contract of
employment. The contract of employment must contain a job description, working conditions and place of work.
More importantly, it must contain information on the Unemployment Insurance Fund (UIF), annual leave, sick leave,
termination of employment and disciplinary and grievance procedures.
Self-Test Questions
What symptoms suggest that the personnel function is not effective in an
organisation? Justify your answer.
5. The Production Function.

The production function is concerned with the manufacturing of products. Production is normally carried out in a
factory or workshop. The key issues in production are the design and attributes of the product to be manufactured,
the plan for the production process, the type of equipment and machinery that will be used for the products, layout
of the factory, safety measures for the factory and quality control of the stock. The products need to be the right
quality and quantity. There is no use manufacturing fancy products that have no demand.
75 MANCOSA
6. The Purchasing Function.

The success of a business is dependent on the sale of its products and services. Sales in turn depend on the
demand for products. The purchasing function is central to the acquisition of products. The right products, in the
right quantity and quality must be bought.
The purchasing function is concerned with ordering goods that are required by the business, receiving the stock
and ensuring that the quality and quantity of goods conforms to what has been ordered. In addition, the purchasing
function keeps in touch with suppliers or scouts for new suppliers to ensure that the business obtains quality goods
at competitive prices.
7. Public Relations Function.

The public relations function is important in building up a favourable image of the company with customers,
suppliers, shareholders and the community. It focuses on positive communication between the business and the
community.
Think Point
Explain why it is important for the entrepreneur to perform the public
relations function.

Small businesses are vulnerable to a high failure rate because of their limited resources, inexperienced
management and lack of financial stability. Their failure rate is actually higher than that of larger, established
businesses. In this section, we will look at the ten common mistakes made by small businesses which ultimately
contribute to their failure.
These are:
1. Management mistakes
In most small businesses, poor management is the primary cause of business failure. Sometimes the manager of
a small business does not have the business knowledge to operate it successfully.
2. Lack of expertise
Small business managers need to have experience and knowledge in the field they want to enter. This enables
them to understand the operations of that particular field.
MANCOSA 76
3. Poor financial control

Proper financial control is key to the success of a small business. Small business managers must realise that any
successful business venture requires proper financial control. It is also equally important for the business to have
a sufficient amount of capital on hand at start-up. Ideally, the financial affairs of the business must be kept separate
from that of the owner for purposes of transparency and proper control.
4. Weak marketing efforts

A sustained marketing effort is required in order to build a growing base of customers. To keep customers coming
back requires providing them with value, quality, convenience and efficient service.
5. Failure to develop a strategic plan

The small business must have a clear vision and strategy. Where does the business want to go and how does it
intend to get there? Failure to plan can result in failure of survival.
6. Uncontrolled growth
Growth is a natural and desirable part of any business enterprise. However, it must be planned and controlled.
Rapid expansion usually requires major changes in organisational structure, personnel assignments, inventory
and financial control procedures. Uncontrolled growth on a small business can exert considerable strain on the
business which may lead to poor performance and ultimately its demise.
7. Poor choice of business location

The process of choosing the right business location is not easy. Small businesses choose their locations without
proper study, investigation or planning. A poor business location can destroy a business.
5Figure 7.3: A poor location can destroy the business
77 MANCOSA
8. Improper inventory control

The largest investment a small business owner makes is in inventory. However, research shows that inventory
control is one of the most neglected managerial responsibility. Insufficient inventory levels result in shortages and
stock-outs, causing customers to become disillusioned and leave. A more common situation is that the manager
has not only too much inventory but also too much of the wrong type of inventory. Inventory must be properly
managed.
9. Incorrect pricing
Setting prices that will generate the necessary profits entails that business owners must understand how much it
costs to make, market and deliver their products and services. Usually, entrepreneurs simply charge what their
competitors are charging or base their prices on some vague idea of “selling the best product at the lowest price,”
both of which are dangerous. For survival, proper pricing of products must be done.
10. Transition
Making the transition from an entrepreneur to a small business manager is not easy. After the business, growth
usually requires a different style of management. Unfortunately, most entrepreneurs are not necessarily good at
this different style. Where entrepreneurs cannot make this transition, it is recommended that they appoint a
manager to run their business.
Think Point
List two small businesses belonging to friends or relatives that did not survive.
By talking to them about the failed businesses, what was the reasons for their failure?
Avoid the Pitfalls

The suggestions for success follow naturally from the causes of business failure:
Know your business in depth
Get the best education in your business area before you set out on your own. Become a serious student of your
industry. Read everything you can – trade journals, business periodicals, books, research reports – relating to your
industry and learn what it takes to succeed in it.
Develop a solid business plan

For any entrepreneur, a well-written business plan is a crucial ingredient in preparing for business success. Without
a sound business plan, a firm merely drifts along without any real direction. We covered business plans in the
previous unit.
MANCOSA 78
Manage financial resources

The best defense against financial problems is developing a practical information system and then using this
information to make business decisions. No entrepreneur can maintain control over a business unless he/she is
able to assess its financial health.
Understand financial statements

Business owners must depend on records and financial statements to know the condition of their businesses. It
does not help the situation if the entrepreneur cannot understand financial statements.
Learn to manage people effectively
The people an entrepreneur hires ultimately determine the heights to which the company can climb – or the depths
to which it can plunge. The entrepreneur must respect the value of human capital to the enterprise.
Keep in tune with yourself

Your business’s success will depend on your constant presence and attention, so it is critical to monitor your health
closely. Stress is a primary problem, especially if it is not kept in check.
7.7 Summary
Small businesses are important to an economy because they generate employment, wealth and produce goods
and services for society. The key functions of an enterprise are purchasing function, production function, marketing
function, financing function, administration function, personnel function, public relations function and general
management function. Franchising is an arrangement in which semi-independent business owners pay fees and
royalties to a parent company for the rights to use the business name and to sell a product or service. A contract
is a lawful agreement made by two or more persons within the limits of their contractual capacity.
Activity 7.1
1. There are several functions of an enterprise. Identify any three such

functions.
2. Why do you think such functions are important to the enterprise?
3. What is a contract? What are the essential elements of a contract?
4. Describe two disadvantages of a franchise.
79 MANCOSA
Unit
8: Franchising
MANCOSA 80
Describe the concept of franchising. Complete the reading, think points, and activity
provided to gain an understanding of franchising.
Explain the two types of franchising.
Complete the reading, think points, and activity
Discuss the advantages and
provided to be able to describe the concept of
disadvantages of franchising.
franchising.
Demonstrate knowledge on the Law of
Contract.
provided to understand the advantages and
disadvantages of franchising.

provided to be able to understand and demonstrate
knowledge of franchising.
81 MANCOSA
8.1 Introduction
8.6 Summary

Establish Your Own Business. 4th Edition. Juta and Company. Unit 1 (pg.
6 – 8)
Education: Cape Town. Units 20
Online resources: www.frain.org.za
MANCOSA 82
8.1 Introduction
In this unit, we focus on franchising, an important entrepreneurial development strategy. Franchising is a relatively
new business concept and is fairly easy and quick way to get into business. We start by defining what franchising
is and then discuss the main types of franchising and then give examples of these types.
We then discuss the advantages and disadvantages of franchising. We look at the basics of the law of contract. It
is important that entrepreneurs understand the law of contract because their position requires that they sign
contracts with suppliers, customers, employees etc. Signing contracts without understanding their contents can
have serious implications for both the business and the entrepreneur in the long term.

Franchising is an arrangement in which semi-independent business owners (franchisees) pay fees and royalties
to a parent company (franchiser) for the rights to use the business name and to sell a product or service, and often
to use its business format and system in a given territory. The franchiser provides critical services such as market
research, a proven business system, name recognition and many other forms of assistance. The franchiser’s close
ongoing involvement enhances the franchisee’s chances of success considerably.
In return, the franchisee (person who buys the franchise) pays an initial franchise fee as well as an on-going
percentage of his sales to the franchiser as royalties and agrees to operate his outlet in accordance with the
franchiser's system. He/she will receive initial on-going training and strict adherence to the business philosophy
will be compulsory, so much so that the franchiser will carry out regular inspections to ensure that all facets of
product and service delivery conform to prescribed standards. Most food franchises are conducted in this way to
ensure high standards.
The popularity of franchising comes from its ability to offer those who lack business experience the chance to own
and operate a business with a high probability of success. It is important for a good working relationship to exist
between a franchiser and a franchisee in order to ensure the smooth operation of the business.

In practice, there are two specific ways of conducting a franchise business namely:
Distributorship: This involves a franchiser licensing a franchisee to sell specific products under the
franchiser's brand name and trademark through a selective, limited distribution network.
Business format franchising: The franchisee purchases the right to use all the elements of a fully integrated
business operation. Most franchisees are business format franchises. Examples include selling television sets
in South Africa, manufactured by the Japanese company JVC.
83 MANCOSA
The following sectors are witnessing an increase in business format franchising, are:
Fast food franchises
Car repair
Financial counselling services
Legal services centres
Insurance
Restaurants, retail stores and hotels are the most popular businesses for franchising. Some well-known examples
of franchises are KFC, Holiday Inn and McDonalds.

The benefits of a franchise include:
The franchisee gets the opportunity to own a small business relatively quickly, and because of the
identification with an established product and brand name, a franchise often reaches the break-even point
faster than an independent business would.
Franchisees also benefit from the franchiser's business experience.
Management training and support is provided.
Standardised quality of goods and services.
Access to national advertising programs.
Financial assistance.
Centralised buying power.
The drawbacks of franchising include:

Most franchisers impose some type of fees and demand a share of the franchisee's sales revenues in return
for the use of the franchiser's name, products or services, and business system. If the business is profitable
these can be large sums of money.
Strict adherence to standardised operations is expected, even when it is clear these are no longer relevant.
Franchises have a limited product line. This creates problems if the product line is no longer popular with
consumers.
Possible market saturation may occur as many franchises may be licensed in one area.
There is less freedom and autonomy.
Think Point
Can you identify two franchises operating in your country?
What type of franchise are they?
MANCOSA 84

A contract is a lawful agreement made by two or more persons within the limits of their contractual capacity. The
law respects the right of people to agree on almost anything and will enforce these contracts provided that the
contracts are not illegal, immoral or impossible to perform. As an entrepreneur, you may have to enter into various
contracts in the process of forming or running your business. It is important to know the basics of the law of contract
both to protect yourself and your business.
Formalities
Generally, no formalities are required to enter into a contract. Valid contracts can be made orally, in written form
or even by conduct. If the intention of the parties is communicated clearly then an oral contract is as valid as a
written one. However, written contracts are easier to prove in court than oral contracts.
Essential Elements of a Contract

There are several essential elements for a contract to be valid and enforceable.
These are:
1. The agreement must be lawful. An agreement must not violate statute or common law, otherwise it becomes
void.
2. The contracting parties must have the capacity to contract. The person entering the contract must be able to
do so. In other words, you cannot enter into a contract with a child or with someone who is mentally ill.
3. The contract must be based on reasonableness, seriousness and intention for it to be binding. For example,
a verbal agreement to go to lunch does not constitute a contract.
4. Communication must take place between the contracting parties by spoken or written words, even by conduct.
The communication must consist of an offer and an acceptance.
5. The contract must not be so vague that the court is unable to interpret what it means. The contract must be
clear.
6. It is possible that a contract may not represent a true meeting of the minds and so may be void or rendered
void. This means it does not have the reality of consent. This may mean the accepting party was unaware of
the full facts or there was misrepresentation.
7. A contract must be physically and legally capable of being performed. A contract is void if it is impossible to
perform at the time it was entered into. For example, the contract must not be immoral.
This brief introduction to the Law of Contract is useful in helping the entrepreneur as he/she gets into various
contracts for the enterprise.
85 MANCOSA
8.6 Summary
In this unit, we focused on franchising, an important entrepreneurial development strategy. We saw that franchising
is a relatively new business concept and that is fairly easy and quick way to get into business although it might not
be very cheap. We defined what franchising is and then discussed the main types of franchising as well as
examples for each. We discussed the advantages and disadvantages of franchising so that an entrepreneur getting
into a franchise arrangement has full understanding of what he/she is doing. We looked at the basics of the law
of contract. We observed that it is important that entrepreneurs understand the law of contract because their
position requires that they sign contracts with suppliers, customers, employees etc. Signing contracts without
understanding their contents can have serious consequences for both the business and the entrepreneur in the
long term.
Activity 8.1
Read more about franchises from www.frain.org.za and answer the question: What
procedure would you follow in order to establish say a McDonald’s franchise?
ANSWERS
1. Pat bought electricity meters for R6000. He travelled to fit them at customers’ premises. His transport and
labour charge came to R1500. If he charged the customers R9500, what was his profit? p13.
Income – Expenses = Profit
R9500- R7500 (R6000 + R1500) = R2000
His profit was R2000.
2. What resources go into making a plastic chair? See p24.
Labour: Workers employed directly in the car industry; engineers, designers, paint sprayers, management,
staff, transport and distribution workers etc.
Land: Natural resources used by a manufacturer, land for plant and equipment.
Capital: Fixed capital: machinery, technology, buildings and working capital: i.e. stocks of raw materials and
components.
Entrepreneurship: management, risk taking.
3. Let’s take the example of a door that is on sale at city hardware. Can you determine the primary, secondary
and tertiary sectors involved in making the door? See p25.
The primary sector is the trees that are planted and cared for.
In the secondary sector, the trees are processed first into wood and then made into doors.
In the tertiary sector, the door is transported from the manufacturer or producer to the consumer. The
hardware belongs to the tertiary sector.
MANCOSA 86
4. The total market potential for selling cow’s milk is 500 000 litres per month in Pretoria. Three companies selling
cow’s milk produce 350 000 litres per month. Calculate the target market for a new entrant in the market. See
p34.
The market share is 500 000 litres – 350 000 = 150 000 litres.
5. Do you think all the five elements of the business plan are relevant to all SMMEs? Which element do you think
may not apply? Give reasons for your answer.
No, all the elements may not be useful for all SMMEs. The production planning for instance is only relevant to
an SMME, which is involved in production. A vegetable street vendor for example, may not need a detailed
marketing plan.
6. Provide two examples of assets that an entrepreneur can pledge to the bank as security for a loan.
An entrepreneur may lodge his/her house, car etc as security for a loan.
7. Can you identify two franchises operating in your country?

What type of franchise is each? See p95.
Two franchises operating in South Africa are KFC and Steers. Both franchises are business format
franchising.
87 MANCOSA
Bibliography
Kroon, J. (2000). Entrepreneurship, Start your own Business. Kagiso Education: Cape Town (There is no
recent edition of this book)
Strydom, J. and Nieuwenhuizen, C. (2015) Entrepreneurship and How to Establish Your Own Business.
5th Edition. Juta and Company (Pty) Ltd
Spinelli, S. and Adams, R (2016) New Venture Creation – Entrepreneurship for the 21st Century. 10th
Edition. McGraw-Hill Education.
Venter, R., Urban, B. and Rwigema, H (2015) Entrepreneurship – Theory in Practice. 3rd Edition. Oxford
University Press.
MANCOSA 88
89 MANCOSA

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ENTREPRENEURSHIP

AND SMALL BUSINESSES

Bachelor of Business Administration

List of Contents ....................................................................................................................................................... 1

Unit 1: Entrepreneurship and Intrapreneurship ....................................................................................................... 8

Unit 2: The Business World................................................................................................................................... 20

Unit 3: Generating and Evaluating Business Ideas ............................................................................................... 27

Unit 4: Assessing the Viability of Business Ideas .................................................................................................. 35

Unit 5: Business Plans for SMME’s ....................................................................................................................... 42

Unit 6: Establishment of Small Business ............................................................................................................... 56

Unit 7: Small Business Management .................................................................................................................... 65

Unit 8: Franchising ................................................................................................................................................ 80

List of Figures and Illustrations

Figure 2.1: Examining eyes at a private clinic - an example of labour .............................................................. 23

Figure 6.1: People in a partnership ................................................................................................................... 60

Figure 7.1: Example of organisational structure ............................................................................................... 71

Figure 7.3: A poor location can destroy the business ....................................................................................... 77

We hope you enjoy the module.

The module is a 15 credit module at NQF level 6

Unit 1: Entrepreneurship and Intrapeneurship

Unit 2: The Business World

Unit 3: Generating and Evaluating Business Ideas

Unit 4: Assessing The Viability of Business Ideas

Unit 5: Business Plan and SMMEs

Unit 6: Establishment of A Business

Unit 7: Small Business Management

C. Learning Outcomes and Associated Assessment Criteria of the Module

LEARNING OUTCOMES OF THE MODULE ASSOCIATED ASSESSMENT CRITERIA OF THE

Explain the importance of entrepreneurship in the Think points

Assess the viability of a business idea.

Draw up a business plan for a SMME.

Discuss the various forms of business ownership.

Evaluate franchising as a means of

D. Learning Outcomes and the Associated Assessment Criteria of the Units

E. How to Use this Module

G. Prescribed and Recommended Textbook/Readings

The prescribed and recommended textbooks/readings for this module is:

Special Feature Icon Explanation

LEARNING The Learning Outcomes indicate what aspects of the particular

ASSOCIATED The Associated Assessment Criteria is the evaluation of student

PRACTICAL Real examples or cases will be discussed to enhance

Unit Learning Outcomes and Associated Assessment Criteria

LEARNING OUTCOMES OF THIS UNIT: ASSOCIATED ASSESSMENT CRITERIA OF THIS UNIT:

Prescribed / Recommended Readings

Below is the prescribed reading specific to this unit;

Kroon, J. (2000). Entrepreneurship, Start your own Business. Kagiso

Venter, R., Urban, B. and Rwigema, H (2010) Entrepreneurship –

Spinelli, S. and Adams, R (2012) New Venture Creation –

1.2 What is entrepreneurship?

An entrepreneur can therefore be described as someone who:

(Source: Nieuwenhuizen et al., 2007:8)

1.4 Importance of entrepreneurs

1.5 Personal qualities of entrepreneurs

The personal characteristics of entrepreneurs

The following are personal characteristics of entrepreneurs deserve our attention:

2. Commitment to the enterprise

3. Involvement in the enterprise

Willingness to take risks

What factors discourage intrapreneurship?

The rewards for success are too low

Intrapreneurial employees are advised to be:

What appeals to you more – to be an entrepreneur or to be an intrapreneur?

1.7 The objectives of an entrepreneur

2. To reach full potential