Professional Documents
Culture Documents
International
Labour
Office
KNOWABOUTBUSINESS
Entrepreneurship Education
in Schools, Technical Vocational Training Institutions and Higher Education
MODULE
5 2018
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authorization to reproduce, translate or adapt part or all of its contents should be addressed to the International
Training Centre of the ILO. The Centre welcomes such applications. Nevertheless, short excerpts may be
reproduced without authorization, on condition that the source is indicated.
ISBN 92-9049-396-8
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INTRODUCTION
The Know About Business programme was initially developed by the International
Labour Organization in Kenya in 1996 as part of an entrepreneurship education
programme in vocational education and training. The team was led by Professor
Robert Nelson of the University of Illinois. Since then a number of revisions were
carried out in 2000, 2002, 2004, 2005, 2007 2008 and 2011.
Over the years many former and current ILO officials have contributed to the
continuous development of the KAB programme including Gulmira Asanbaeva, Rania
Bikhazi, Charles Bodwell, Linda Deelen, Jens Dyring Christensen, Klaus Haftendorn,
Marek Harsdorff, Nelien Haspels, Samih Jaba, George Manu, Barbara Murray, Debra
Perry, Annemarie Reerink, Virginia Rose Losada, Joni Simpson, John Thiongo and
Peter Tomlinson.
The current 2018 version was developed with contributions by Rania Bikhazi, Tong
Cai, Nuno Castro, Linda Deelen, Jens Dyring Christensen, Samih Jaba, Maria José
Mallo and Virginia Rose Losada. The layout and graphics was done by Enzo
Fortarezza. The team wishes to thank the authors of the ILO GET Ahead and Start
Up and Go training materials, that served as inspiration for some of the exercises in
this new KAB package. Very special thanks go out to all those involved in the national
translations and adaptations of Know About Business, whose work was extremely
helpful for the preparation of the present package.
MODULE 5
How Do I Start a Business?
Module objectives:
Module coverage:
LEARNING OUTCOMES
ACTIVITIES
1. Divide learners into two groups and conduct a debate. One group would
defend and the other groups would reject the following statement:
“Location is not important because people will go out of their way for any good
service or product that they really want.”
2. Let learners talk about their ideas on the importance of the business location.
Ask them which factors an entrepreneur should consider when choosing a
business location. Give them examples of different types of business (retail,
wholesale, service, manufacturing) to let them analyse the factors to be
considered. Write their answers on the board.
3. Invite learners to read HANDOUT 1. Use SLIDE 1 to discuss the factors that
are important in selecting a business location.
4. Divide the class into groups of 3 or 4 learners, and let each group select a
business to start (grocery store, webpage design business, bakery, food
delivery service, handicrafts shop, etc.). Have each group determine the best
location for that business based on their knowledge about their community.
Have groups present their findings to the class. Let each group give both
positive and negative factors regarding the location, and what they could do
to mitigate the impacts of negative factors.
5. Have learners read and discuss HANDOUT 2. Use SLIDE 2 to discuss factors
in selecting a specific location.
6. Have learners read the case study in WORKSHEET 1, and then discuss within
their groups the question: “Which location do you think is best from a business
point of view, Jim’s or Susan’s? Why?” Have a class discussion on their
responses.
HANDOUT 1
Retail and service businesses in particular should identify a good area from where to
service the customers. Is it better to locate the business in a residential area or in an
area where people go for work? Why are other businesses located in certain areas?
Are businesses moving in or out of the area?
Competition
You must study your competitors by gathering information on their strengths and
weaknesses. You should know how many competitors you have and where they are
located. You should also find out how many businesses similar to yours have opened
or closed in the past two years.
There are three favourable conditions for opening a new firm. First, no competitors
are located in the area. Second, competitors’ businesses are poorly managed. Third,
customer demand for your product is growing.
Regulations
Most municipalities have zoning laws that restrict the location of certain types of
businesses to certain zones. Some municipalities only allow manufacturing
businesses to operate in industrial zones, for instance. The municipal office will be
able to give information about zoning laws.
Wholesale firms
Wholesale firms buy products from manufacturers in large quantities and then sell
their products to retailers in smaller quantities. Two major factors should be
considered in selecting a wholesale site. One major factor is a good transportation
service, including rail and road. Another major factor is proper facilities which include
buildings, fixtures and public utilities. Without these facilities, a wholesaler may not be
able to maintain inventories large enough to handle customer needs.
Service firms
Being close to a large shopping centre is usually considered ideal for service
businesses. However, it is not necessary for a TV repair shop, a dry cleaner’s, a
dentist’s, a shoe repair shop or a child-care facility to be located in high-rent locations.
Customers are willing to seek out and go further away to obtain a good service. These
establishments can be located somewhat “out of the way”. But even among service
firms there are important differences as to which site is better. For example, a dry
cleaner’s located near a grocery store and drugstore is usually a good choice. The
same location may not be suitable for a dentist, who does not require the traffic
movement and convenient drop-off point that makes a dry cleaner’s successful.
Manufacturing firms
Sites that are suitable for manufacturing firms differ from sites that are good for
retailers, wholesalers and services firms. When considering opening a manufacturing
firm, check transportation facilities and distance from raw materials. Proper facilities,
environmental regulations and zoning laws are other important factors. As you study
the general and specific factors of a business location, keep in mind present as well
as future location needs.
SLIDE 1
HANDOUT 2
SLIDE 2
WORKSHEET 1
LEARNING OUTCOMES
ACTIVITIES
1. Explain to the learners that they will learn about different legal formats that
entrepreneurs can use to register their business. Before registering their
business, entrepreneurs need to find out which format is more convenient.
Show SLIDE 1 and explain that during this session, they will learn about the
four most commonly used formats: Sole proprietorship, partnership, limited
liability company and cooperative. Which format is best for a business,
depends on whether the entrepreneur prefers to work alone or with others,
how the entrepreneur wants to raise the necessary capital, and deal with
financial risk, amongst others.
2. Divide the learners into groups, and ask them to complete WORKSHEET 1
based on their understandings. Then show SLIDE 2 and discuss the answers.
3. Use SLIDES 3-6 to explain different forms of business ownership to learners.
Then invite them to read HANDOUT 1 for more information about cooperatives.
Explain them that cooperatives are a great idea for people who want to jointly
invest in an activity, take the decisions as a group, help each other and learn
from each other.
4. Have learners work in groups to analyse the advantages and disadvantages
of the different legal formats on WORKSHEET 2. Then invite one of the groups
to write their answers on the board. Ask the other groups to provide additional
ideas.
5. Show SLIDE 7. Let learners think about the questions and share their ideas.
You may write their answers to question 1 on the board.
6. Let learners read HANDOUT 2 and have a group discussion about how to
choose the right entity.
7. Have learners read and discuss the questions on WORKSHEET 3. Then let
them share their answers.
SLIDE 1
Partnership
Cooperative
WORKSHEET 1
SLIDE 2
A) Sole
2 The owner pays taxes in his/her personal capacity
proprietorship
A) Sole
3 The owner can simply start doing business
proprietorship
A) Sole
4 The owner runs the business as he/she sees fit
proprietorship
SLIDE 3
Sole proprietorship
There is one single owner.
The owner makes all the decisions.
The owner is liable for all obligations and debts.
The owner takes the profits and decides what to do with it.
The owner is taxed on personal income with profits earned
from the business.
Simplest operating structure.
Usually could be the easiest business to start, with lower
initial costs and less paperwork than other legal forms.
SLIDE 4
Partnership
There are two or more co-owners.
An agreement/article/contract indicates how the profits,
losses, duties, assets and liabilities are divided among
partners. This document is normally prepared with a
competent attorney.
The partners take all mayor business decisions together.
The partnership agreement defines how the profits are
shared.
SLIDE 5
SLIDE 6
Cooperatives
A cooperative is a group of people operating a business
together.
The members jointly own the cooperative.
A cooperative agreement is required and should be filed with
the appropriate government authorities.
The members of the cooperative decide together who will
manage the cooperative.
The members of the cooperative make all mayor decisions,
based on a one-member-one vote principle.
Mutual support and mutual learning are important
cooperative principles.
Depending on government regulations, cooperatives may
pay less taxes than other forms of business.
HANDOUT 1
Advantages of cooperatives
Putting financial resources together: Many types of business activities need a
starting capital that exceeds the savings capacity of individual women and men.
Common input supply: Cooperatives may negotiate better prices and delivery
conditions when buying inputs together and for use by a large number of
entrepreneurs (raw materials, packing materials, etc.).
Joint marketing: Product marketing costs can be reduced when transport facilities
are shared. The members can make agreements with large customers that individual
entrepreneurs would not be able to deal with.
Economies of scale: Entrepreneurs who share the same machinery can lower
production costs or make a larger quantity of goods.
Transfer of knowledge: By working together women and men will learn from each
other, improving their respective technical skills, marketing skills, etc.
Stronger negotiating power: Cooperatives have more negotiating power with
government agencies, communities, families, and business-related entities than
individual entrepreneurs.
Mutual support: Mutual support is one of the most important cooperative principles.
When individual cooperative members are facing certain problems, the cooperative
will support them in overcoming these problems.
Democracy: In cooperatives, decisions are made by all members together, using a
one-member-one-vote principle, even if some members invested more capital than
others.
WORKSHEET 2
Sole
Proprietorship
Partnership
Limited Liability
Company
Cooperative
SLIDE 7
1. Can you explain the difference between limited liability and unlimited liability?
Answer:
Limited liability means that the owners’ savings and assets are protected if
the business goes bankrupt. The owners will not lose more than what they
have invested in a business.
Unlimited liability means that the owner’s assets are attached to the business.
The owner or partners can lose everything and even more than what they
have invested in the business.
2. Which form of ownership is the most attractive to you? If you were to start
your own business, what legal format would you use, and why?
Answer: Learners’ answers will differ but learners need to justify why a form of
ownership (partnership, sole proprietorship, limited liability company or cooperative)
appeals to them (easy to set-up, bigger pool of knowledge, limited liability, etc.).
HANDOUT 2
WORKSHEET 3
Organizing a business
Ted has lived in a small community for the past ten years. The town, which has a
population of 275 people, is on the edge of a large lake. Hunting and fishing are
excellent in the area. The old road that served the community is narrow and rough.
Spring and summer rains sometimes make the road impassable in some spots. A new
road is being built into the area and should be completed in about four months’ time.
Ted thought about starting a tourist outfitting shop now that the new road is nearing
completion. Tourists will easily be able to drive into the area. They will be eager to
take advantage of the good fishing and hunting.
Ted has considered the advantages and disadvantages of the ways he could legally
organize his business. He considered being a sole proprietor because he likes to be
his own boss. He has saved some money and he could borrow additional money to
start a small business.
A partnership is also appealing. One or two partners could provide the extra money
needed to start a larger business. Another possibility would be to start a limited liability
company. The amount of money thus available would be much greater and he
wouldn’t have a loan to repay. Ted has talked to a number of people in his community
to see if they would be interested in starting a limited liability company. The amount
of money available to start the business would be greater than for a proprietorship or
partnership. Furthermore, in case the business would fail, he would only lose the
money that he would have invested in the business and not his other savings.
Questions:
1. Which form of business ownership would you choose if you were Ted?
2. What additional information does Ted need to make an informed decision
regarding the best form of legal ownership for his business?
LEARNING OUTCOMES
ACTIVITIES
1. Have learners read HANDOUT 1. Explain to the learners that businesses need
start-up capital for two purposes: The first purpose is to make the initial
investments in buildings, machines and licenses, for instance. The second
purpose is to cover the running costs of the business before the business
starts generating income. Altogether, the money needed is called start-up
capital. Let learners ask any questions, and make sure all learners understand
the basic concepts.
2. Divide learners into small groups, and ask them to complete WORKSHEET 1
within groups. Have learners indicate which payments entrepreneurs need to
make as initial investments, and which payments they need to make when the
business is already operating (working capital), but not yet generating income.
3. Have the learners read WORKSHEET 2, fill in the tables and answer the
questions in groups. Have each group present their findings and correct the
calculations where necessary.
HANDOUT 1
Initial investments
A person starting a business will have to make certain payments even before the
business starts operating. This money is invested in items that the business needs as
long as it is operating.
Buying land, constructing a workshop, purchasing machinery, tools, equipment, office
furniture, etc. are all costs incurred before the business starts its operations, as are
legal fees, utility connections for water, electricity, telephone and Internet, and so on.
Business starters are generally aware that they need money for machines, tools and
equipment for the business. However, sometimes entrepreneurs do not realize that a
number of other payments have to be made before they can really start their business.
For example, the cost for installation of machines and the training of workers to use
them can constitute quite a high cost. Operating licenses are also initial investments
to be made. There may also be costs related to renovations of facilities, for example,
to make them more accessible for customers, including those with disabilities, and to
satisfy safety and health regulations.
Working capital
Once a new business starts to operate, working capital is needed to cover the
immediate expenses until revenues from sales flow back into the business. This time
span depends on the nature of the business. In general, in trading activities this period
can be less than one month, while in manufacturing activities the time span between
the starting date of the production and receipt of money in the bank account or cash
box, can be several months. This money is also invested permanently in the business
and is called working capital. When the business expands, the working capital needs
to be increased.
The need for working capital is also often underestimated. Business starters think
they will be paid immediately. They only take into account the expenditures for
investment items such as premises, machinery, equipment, vehicles, inventory and
so on, without being aware that during the first weeks and months of operations, the
sales revenues do not cover the expenditures for running the business, which can
lead to a problem of liquidity whereby the entrepreneur cannot pay salaries or
suppliers. On top of that, sometimes customers ask for credit and payments are not
always made on time.
The start-up capital for a new business is the sum of money needed for the initial
investment and for the working capital. The future entrepreneur needs to have this
amount of money available through using his/her own savings, finding partners and
negotiating loans with banks, etc.
WORKSHEET 1
Start-up capital
Are the payments below made for initial investments in the business or to cover
working capital? Make your choices at the table.
Initial Working
Payments
investments capital
1 Business registration
5 Purchase of machines
11 Construction of a workshop
14 Power connection
Initial Working
Payments
investments capital
1 Business registration X
5 Purchase of machines X
11 Construction of a workshop X
14 Power connection X
WORKSHEET 2
Ms. Brownie worked for several years in a pastry shop that produces pastries and
cakes for customers that live and work in the neighbourhood. The shop also delivers
cakes and other delicious sweets and pastries for weddings, birthday celebrations
and other social events.
Ms. Brownie learned everything about making pastries, starting from the raw materials
and ingredients for the different products, the preparation and baking processes as
well as the work in the shop and relations with customers. She had a good salary of
20. Ms. Brownie always wanted to have her own pastry shop, so she put as much
money as she could afford into a savings account.
She made a list of machines and equipment she would need to start her own shop.
She also researched the prices. The most costly item would be an electric oven
(3,500). Then she would need a kneading machine (500), some weighing scales (100),
bowls, dishes, containers, boxes, hand tools (95), furniture for the pastry shop such
as tables and shelves (110) and a big refrigerator (350) that would allow her to store
the finished cakes. She would also need a cash register (250). For herself she has
foreseen a little office, and for the staff a little rest room. Second-hand furniture for
these two rooms would cost around 100. To accommodate more customers,
modifications to the front door would cost 140.
After a market assessment she decided to start her own business. It was a very busy
time for Ms. Brownie as she had to finalize her business plan, estimate the investment
and working capital, and get money from a bank. She found a suitable shop for her
business that she could rent for 80 a month.
She registered her business at the cost of 10 and ordered the machines and
equipment. The cost of installation amounted to 20. She paid 15 for water, power,
telephone and Internet connections, registered in her name. Insurance on the shop
was compulsory and she had to pay 10 for the first year.
She selected her staff – two women for the workshop and one young apprentice –
and hired them when the machines had been installed. The monthly salaries for all
the staff summed up to 15. She decided that during the first months, she would pay
herself a salary of 20.
Before opening the shop, Ms. Brownie produced a range of cakes and pastries as
training for the staff under production conditions. The raw materials for the training
costed 25, while she estimated other costs such as water, electricity and telephone at
15. Before starting her business, Ms. Brownie paid 18 for publicity to inform the public
about the opening of the business.
Ms. Brownie also planned to run a catering service. For this purpose she had to buy
a second-hand car for 800 and to hire a driver at a monthly salary of 6. The car
insurance for one year amounted to 25.
Finally, Ms. Brownie’s estimated that she would spend 25 in raw materials, before the
shop would start generating an income from sales.
Questions:
1. Calculate Ms. Brownie’s initial investment costs and working capital needs and fill
in the tables below.
2. How much money did Ms. Brownie need for initial investments, and how much
working capital did she need?
LEARNING OUTCOMES
ACTIVITIES
1. Have learners read HANDOUT 1. Show SLIDE 1 and have the learners
discuss the six questions. Make sure the learners understand the difference
between loans and equity capital.
2. Divide learners into groups and have them complete the case study on
WORKSHEET 1 to determine the capital needed to start a business, then
conduct a discussion with the class.
3. Ask the learners how they would prepare themselves for a visit to the bank.
Write the ideas on the board. Then ask them to invite HANDOUT 2.
4. Ask the learners to list what they themselves would require of a borrower
before they would lend money for a new business venture. Write their answers
on the board for discussion. Then show SLIDE 2 on the 5 Cs of credit and
SLIDE 3 on how to prepare yourself for a visit to the bank.
5. Ask both male and female students whether they think it could be more difficult
for women or men to get a bank loans. Show SLIDE 4 and discuss the reasons
why it is sometimes more difficult for women to access loans. Explain that it is
important for men and women to get equal access to finance and to have equal
rights to decide how to use bank loans.
6. Let learners work in groups to finish WORKSHEET 2 with an analysis of
advantages and disadvantages of equity finance and loan finance. Let groups
show their answers to the class. Explain the main advantages and
disadvantages of equity finance and debt finance using SLIDE 5.
7. (OPTIONAL ACTIVITY 1) Invite a bank loan officer to speak to the class.
Before the visit, have the class formulate questions to ask the loan officer.
These questions may either be sent to the guest speaker ahead of time as a
guideline for his or her presentation, or they may be used as a basis for a
question and answer session at the time of the visit. The major areas for
questioning might include:
What are the most important factors that a loan officer looks for in an
application for a business loan?
How important is it for a loan applicant to have capital or owner equity
to invest in the new business?
Are some types of businesses more likely than others to receive start-
up loans? If so, is the difference based on the amount required for
starting the business or on the likelihood that the business will succeed?
What are some ways an individual can obtain owner equity, assuming
that he or she cannot save the money from existing income?
What are some important considerations for the applicant when
choosing a bank from which to obtain a loan?
8. (OPTIONAL ACTIVITY 2) Search the Internet and find video(s) of start-up
entrepreneurs talking about their financing experience. Play the video(s) to the
class and ask them for their feedback.
HANDOUT 1
Obtaining capital
1. What is equity capital?
Equity capital is the money that the owner and/or other investors invest into the
business. It is the basic funding of the business. Investor will expect a return on their
investment when the business generates profits.
2. What are loans?
Loans are amounts of money obtained from banks or microfinance institutions, on
which the entrepreneur has to pay interest. Loans for the business are also called
credit or debt financing.
3. Can all of the money needed for the business be borrowed?
Almost any lending institution will require an entrepreneur to provide a substantial
portion of the total amount of money needed to start a business. Not many lending
institutions or individuals will risk money on a business if the owners have none of
their own money invested in the firm. The lender must see that the business owner
has a personal commitment and involvement in the business. This personal
commitment includes the time, energy and money the owner is willing to contribute to
the business.
4. Where can equity capital be obtained?
Personal savings
Friends and relatives
Partners. The owner may form a partnership with one or more individuals to
obtain equity capital to start the business.
Corporation. It is possible to incorporate the business (as a company or a
corporation) and sell stock to raise capital.
5. Where can loans be obtained?
Banks
Finance companies
Governments agencies (with loan schemes)
Suppliers extending credit terms for equipment, inventory, etc, which allow
the business to begin generating sales before payment is due
Microfinance institutions
6. What are the five Cs of credit?
Lending institutions will want to be assured that repayment of the loan will take place
as agreed by the borrower. They will therefore do a thorough loan evaluation. The
loan officer will look at the following points (the five Cs of credit):
Character: the applicant’s character will be examined, including his or her
past record for meeting financial obligations.
Capacity: the capacity of the business to generate profits will be examined
to determine the entrepreneurs’ ability to pay back the loan.
Capital: the applicant’s properties will be examined, including savings and
any other personal or real property (land, buildings, etc.).
Conditions: the economic conditions of the community, state and region will
have an effect on the availability of a loan.
Collateral: whether the entrepreneur has assets to secure the loan, such as
real estate (property), receivables, inventory or equipment.
SLIDE 1
WORKSHEET 1
Jenny is a recent graduate of a technical institute who is quite skilled in the use and
application of computer technology. She wants to start a cyber café close to the
technical institute where students can meet, socialize and use the five computers she
hopes to purchase for the café. She will probably need to borrow capital to start her
business. If you were Jenny, how would you respond to the following questions
regarding obtaining capital?
Questions:
1. How much will five computers for the cyber café cost?
2. Will she be able to obtain credit from the store where she purchases the
computers?
4. If she has to go to a bank for a loan, how can she increase her chances of
obtaining a loan?
HANDOUT 2
1. Prepare yourself
Entrepreneurs should demonstrate to potential lenders that they have a business
strategy or plan of action which will lead to success. The lender also will want to be
sure that the prospective business owner has sufficient experience or knowledge in
the area of the proposed business. A visit to the bank, therefore, needs to be well
prepared.
Women entrepreneurs
Women may find it difficult to access loans. Many women do not have assets, such
as land, registered in their names and thus they cannot use these assets as collateral.
Complicated loan application procedures often discourage less educated women from
applying.
Microfinance institutions often specifically target women and disabled entrepreneurs.
Microfinance institutions usually offer small loans for start-up or working capital.
Women and disabled entrepreneurs who need large loans often find it difficult to deal
with formal financial institutions.
SLIDE 2
The 5 Cs of credit
Character: the entrepreneur’s character
SLIDE 3
SLIDE 4
WORKSHEET 2
EQUITY FINANCING
(Personal savings,
investment from
family, friends, venture
capitals, etc.)
DEBT FINANCING
(All forms of
borrowing)
SLIDE 5
Relatively easy to
Interest and fees
obtain
need to be paid
DEBT FINANCING Control and
Risk that future
(All forms of ownership of the
profits will not cover
borrowing) business
repayment
maintained
…
…
3 Entrepreneurial qualities
7 Next steps
Facilitator’s Guide
Learner’s Workbook
ISBN XX-XXXX-XXX-X
Illustrations: Gianmaria Roccia – Photographs: ............