EED 116: INTRODUCTION TO ENTREPRENEURSHIP

AND BASIC BUSINESS FUNCTIONS

Course Objective: The objective of this course is to introduce the learner to

entrepreneurship and basic business functions. The content is deliberately
simplified as not to distract from the objective of ‘introducing the learner…’

At the end of the course, the learner will be able to:

I. Define entrepreneurship and explain the relationship between

entrepreneurship and opportunities and innovation.
II. Identify and explain the business functions and how the management of
the functions add up to the management of the enterprise.

There are six chapters in this course EED 116

Chapter One: Introduction to Entrepreneurship

Chapter Two: Business Opportunities and Functions

Chapter Three: Production Management

Chapter Four: Marketing Management

Chapter Five: Personnel Management

Chapter Six: Financial Management

 CHAPTER ONE

INTRODUCTION TO ENTREPRENEURSHIP

Entrepreneurship is an interesting subject and so it has many definitions.

Let us start by defining entrepreneurship as activities involved in starting and

running a business. The objective of a business is to create values in form of
goods and services offered to others in exchange for money. Value is created
when somebody is willing to pay for the product or service.

In every community people have different needs. Entrepreneurship involves

finding out what the needs of the people are, and starting and operating a business
to satisfy those needs. Entrepreneurs start and operate businesses to provide the
needs of people and make profit.

Entrepreneurship and Self-Employment

Entrepreneurs are self-employed people. They usually produce goods and

services for a profit. An entrepreneurs may be a manufacturer of goods in small
or big factory or he may distribute goods manufactured by another entrepreneur
or he may provide services.

Manufacturing Businesses and their products

a) Food processing examples cassava, maize, plantain,

b) Textiles processing in mills example Adire, Ankara, Batik
c) Dress making in fashion shops example ……..
d) Wood processing in saw mills example………
e) Furniture making with wood or metal example……..
f) Metal works in welding and fabrications example…….
g) Paper processing in paper mills example…………
h) Printing and publishing example…..
i) Chemical and allied products………….
j) Cement and concrete products
k) Petroleum processing………….
l) Rubber processing………..
m) Leather processing………
n) Leather products…….
 o) Stone processing………
p) Arts and crafts…….
q) Clay……
r) Water…..
s) Paint…….

Distribution of goods

Wholesalers and retailers distribute goods. For example

a) Agricultural products (Give examples)

b) Wholesalers of non-durable goods (Give examples)
c) Building materials……..
d) Food shops……….
e) Automobile shops……
f) Furniture shops….
g) Drinks……
h) Books……
i) Games…..
j) Cloth……….
k) Shoes……..
Services Businesses
a) Hotels and lodging……
b) Motor vehicle repair……
c) Amusement and recreation……
d) Entertainment…….
e) Motion picture…….
f) Business services…….
g) Health services………
h) Legal services………
i) Educational services……..
j) Museums and monuments……..
k) Banking and financial services…….
l) Brokerage services……..
m) Beauty services……..
n) Computer services……..
o) Security services………
p) Events management services……..
q) Dancing services………
 r) Tourism……
s) Burial……
t) Transportation…..
u) Building…….

Entrepreneurs are self-employed because they produce and add value to the
quality of life in society. They do this by answering the following questions:

a) What is needed? The entrepreneur finds out what is needed and what it
will take to produce it or source it in terms of efforts and resources and
takes a decision to either produce or source them if it promises to give him
good profit.
b) For whom is it to be produced? The entrepreneur has to find out who
has money to buy the goods or service at a price that will give him profit.
c) How will it be produced or sourced? The entrepreneur may decide to
set up a business to produce the needed item, that is if he can assemble the
human and material resources needed to do it and make profit.
Alternatively, the entrepreneur may choose to find people who are already
producing the needed item and assemble their products to meet the needs.

Competences needed for success in Entrepreneurship

Competences are made up of knowledge, skills, traits, experiences and networks.

 Knowledge is possession of information or familiarity with a business

opportunity, a market, a better production technique, or sources of
resources.
 Skills may be of technical or managerial nature. Technical skills is ability
to use tools to carry produce goods or services in Computing, Tailoring,
Catering, Carpentry, Automobile, Electrical, mechanical, surveying.
Managerial skills is ability to carry out management and business functions
which includes, marketing and selling, financial management, planning,
leadership
 Traits are in-born characteristics commonly found in successful
entrepreneurs. This includes ability to take initiates or to discover
opportunities, plan very well, innovativeness, to be persuasive, to take
calculated risks.
 Experiences are competences acquired through working in an industry for
a long time. Knowledge and skills may be acquired in schools or in
apprenticeship training but the only way to get experience is to work in that
business, hence it is said that experience is the best teacher.
 Networks are connections or links to information about a product or
industry which makes the difference between success and failure.
 CHAPTER TWO

BUSINESS OPPORTUNITIES AND FUNCTIONS

Some people define entrepreneurship as what entrepreneurs do. So what do

entrepreneurs do?

Entrepreneurs search for opportunities to add values to goods or services by

increasing the satisfaction given to customers. One of the ways to create
opportunities is through innovation.

A business opportunity is a need for a proposed good or service in sufficient

volume and high enough price to operate at a profit. A good opportunity must
pass the test of Volume, Cost and Price.

Beginners complain that business opportunities are scarce. Business

Opportunities camouflage as problem. The ability to provide a good solution to
any identified problems in society is a business opportunity. A country like
Nigeria is full of problems but Philip Kotler sees problems as opportunities and
said the world is too full of opportunities’.

One of the common problems in Nigeria is graduate unemployment. Many

graduates cannot find paid employment after school. Some say it is graduate
‘unemployability’ meaning that job vacancies exist but graduates did not acquire
relevant employment skill from school. Whatever you call it, it is a problem.
Jobberman saw this problem and converted to opportunity.

In 2009, Olalekan Elude, Ayodeji Adewunmi and Opeyemi Awoyemi, then

students of Obafemi Awolowo University, Ife, started a site called JOBBERMAN
to help connect people looking for job with companies looking for people to
employ. Jobberman gets about 5000 applications every day. To get the full story
of jobberman, Google it!

The first step to identification of business opportunity is observation. Start by

observing your environment. What problems can you see?

Any problem you see is a gap or an opportunity. A gap is a need without a product
or service to satisfy it.
Opportunity Indicators

These are opportunity indicators so look out for them

(a) Complaints of a poorly delivered product or service. Are there complaints

by students or businessmen or house wives of a poorly delivered product
or service and you think you can tackle it efficiently? Complain about poor
teaching quality in public schools and continuous strike action lead to
private schools.
(b) Overpriced product or service. Can you provide a substitute at a lower price
and still sell enough volume to make profit? When Nokia handsets became
very expensive, Techno came and took over the market.
(c) Newer and more efficient technology. Can you find a more efficient way
of doing something? The introduction of GSM made Postal Services and
post offices irrelevant. Can you imagine living without your handset now?
(d) Expanding demand for a product or service. Can you find a product in high
demand around you? In the past, motorcycles were used only for private
transportation. Expanding bad roads made use of ‘okada’ an important
means of transportation in Nigeria and Africa.
(e) A latent Need. A need may exist without being recognized. In Ado Ekiti,
private car parks make sense now. Can you think of more?

Innovation

Innovation is the second and action-hand of entrepreneurship.

Innovation is developing a new product or improvement of existing ones.

Innovation is the ability to change the value obtained by customers from a product
or service. A thing only acquires value when man finds use for it and so endures
it with economic utility.

For instance, a few years ago in Nigeria if thirsty, you had three options

a) Drink water from a local source and take your chances with typhoid etc!
b) Drink a bottle of soft which does not really quench thirst and take your
chances with diabetics!
c) Go without
In 1981, Spring Water Nigerian Ltd bottled water for the first time in Nigeria and
sold it as SWAN Water. Ragolis Nig, Ltd and Cocoa Cola copied SWAN. Today
we have a long list of water bottling companies in Nigeria.

Bottled water is expensive and all of us cannot pay for bottled water so
another entrepreneur took the task further and put water in a sachet to create ‘pure
water’ or ‘packed water’. NAFDAC added value by increasing consumers’
confidence through education, registration and regulation of the water industry.
What is the full meaning of NAFDAC?

To be effective, innovations follow some principles:

(a) effective innovations often start small in a limited scope. FACEBOOK

started as a project in school.
(b) effective innovations are simple and ‘commonsensical’. Linda Ikeji is said
to have more people reading her blog than any Nigerian newspaper. What
does Linda Ikeji sell?
(c) effective innovations satisfy a need. It looks at the customer to see what
they need. Nairaland creates no content of its own yet it assembles
interesting contents that made it a site to visit

Types of Innovation

One way of looking at innovation is by looking at it from two dimensions of

market and technology as in the figure below:
 (a) Incremental Innovation is the most common form of innovation. It uses
existing technology and increases value to customers in the existing
market. Companies engage in incremental innovation such as adding new
features to existing products or services. Automatic Break System (ABS)
in cars.
(b) Disruptive Innovation involves applying new technology process to
company’s current market. The new technology disrupts the old by then it
is too late to adapt or compete. Hand held devices is disrupting the hard
copy bible in churches.
(c) Architectural innovation is taking the lessons, skills and overall technology
and applying them within a new market.
(d) Radical innovation gives birth to new industries and involves creating
revolutionary technology. Online banking and shopping are revolutions.

Innovation works by disrupting existing assumptions and creating new

opportunities and new markets for themselves. Have you heard of Jason Njoku,
proprietor of Iroko TV. He is not a film producer or actor. He started Iroko TV
by collecting over 5,000 Nollywood films and songs. Today Iroko has attracted
$20million dollars in equity capital.

Hey! Google Nigerian entrepreneurs to see what young people like you are doing.

Basic Business Functions

It is not enough to discover an opportunity or introduce an innovation. An

arrangement has to be put up to translate innovation into a goods or services that
solve a problem. That arrangement is a business organization. Like the human
organism, the organization will be made up of parts. These component parts are
the basic business functions. The management of these basic business functions
determines the success or otherwise of the new business. So we take time off to
examine these basic business functions. There are four of them namely:
Production Management, Marketing Management, Personnel Management and
Financial Management.

Let us look at these four basic business functions like a tree – let us call it
Business Functions Tree.
 CHAPTER THREE

PRODUCTION MANAGEMENT

Production management is the process of transforming raw materials into finished

products. If it is service delivery, it is called operations management but the rules
are almost the same. We shall discuss the following aspects of production
management.

i. Factory Site and Building

ii. Factory Layout, Machines and Equipment
iii. Production Processes, Planning and Control
iv. Maintenance and Working Conditions

3.1(a) Factory is the place where production takes place, so we start discussion
with

Factory Site.

Factors to consider in choosing a factory site are: -

(i) Raw materials

(ii) Transport facility for goods and personnel
(iii) Availability of personnel
(iv) Availability of facilities as water, power, lighting,
(v) Availability of fire, waste disposal and hospital facilities.
(vi) Site must be large enough for expansion
(vii) Local bye-laws on buildings, disturbances of underground of overhead
services must be investigated

3.1(b) Factory Building

Having selected a suitable site, the next problem is to make good use of the land
and to choose the right type and size of building. Four major considerations in
factory building are:-

(i) Function- Is the building suitable for the intended purpose? Bakeries,
gas work, refineries. Is it accessible to customers and suppliers? What
about internal traffic; movement of materials is of particular importance
in manufacturing. What about layout? The flow of materials, workers
is directly related to layout.
 (ii) Construction- Your primary concern here should be the safety.
Condition of the roof, floor supporting columns, foundation should
receive special attention.
(iii) Appearance- The external appearance of your factory building serves
as an advertisement medium. It gives your business an image, which
may be positive or negative.
(iv) Lighting- The lighting should be functional and decorative. Use natural
light were possible. Artificial light must be not only of sufficient
intensity, but it must be uniform and properly diffused.

3.2 Factory Layout, Machines and Equipment

Layout is arrangement of machineries, fixtures and other equipment according to

a plan. The factory layout is very important because it can affect many factors as
speed of production, general communication, morale of workers, cost of handling
materials, uses of machine. The best layout is one, which makes effective use of
space for the particular business. General factors to be considered in planning
factory layout are:-

(i) The type of production.

(ii) Smooth flow of work while achieving minimum movement of worker
and material.
(iii) Adequate floor area
(iv) Sufficient allowance for storage of raw material, as well as work in
progress and manufactured goods.
(v) Room for material handling.
(vi) To assist supervision.

Machines and Equipment

Choosing of machines, equipment, fixtures and tools is an important part of

production management. Simple as it sounds, mistakes at this stage can be very
far reaching. Why buy a Toyota at a higher price instead of a Nissan at a lower
price?

Choosing of items of machines and equipment covers acquisition, installation,

financing, operating, maintaining and servicing etc. Do you acquire by lease or
outright purchase? If by lease what are the terms?
3.3 Production Processes, Planning and Control

(a) Production Process

There are three types of production processes- Job, Batch and Flow.

(i) Job Production Process- single products are made to customer’s

specification. e.g. making a dress, building a house or ship of furniture.
Labour must be versatile and a wide, range of tools is needed. The unit
cost of production is high.
(ii) Batch Production Process- Many products are products in groups called
batches. e.g. Baking bread, teaching a class, moulding blocks.
(iii) Flow Production Process- production is continuous. As each item
receives treatment it is transported by the conveyor belt to new work
station and another one replaces.

(b) Production Planning and Control

The department is concerned with the whole sequence of operations involved

in manufacturing from designing the product, planning production,
purchasing, storing materials, management of personnel, inspection and
maintenance. The objectives of the department are:-

(i) to meet delivery date

(ii) to ensure smooth continuous production.
(iii) to use manpower and equipment to the best advantages.
(iv) to see that raw materials, work in progress and finished goods are kept
to the optimum levels.
(v) to prevent bottle-necks in production and avoid delays.

3.4 Maintenance and Working Conditions

(a) Maintenance of machines means the giving of attention to all those things
which help machines to run smoothly, preventing its wearing out, and preventing
its breaking down. This may consist of a periodic service to tighten nuts, check
some moving parts, check springs, and safety guards. In some factories, workers
are encouraged to carry out maintenance by themselves to reduce cost and time
wasting, and to give workers a greater interest in their work and equipment.
 Importance of maintenance are:-

(i) to minimize the possibility of breakdown

(ii) to ensure that the machines are not damaged
(iii) to reduce operating cost
(iv) to reduce wastage
(v) to motivate the machine operators
(vi) to reduce accident.

(b) Working Conditions is the condition, which surrounds the worker as he does
his job. These are conditions which affect his physical well-being and thus his
efficiency as a producer. Indeed, it is because the worker is a human being first
and then a producer that his working efficiency is too much affected by the
environment.

(i) Cleanliness- This first requirement for health of workers and one which
usually cost the least. It is necessary to health that all factory
accumulation of dirt should be removed daily from workrooms and
passages. Receptacles for waste and refuse should be constructed so that
they cannot leak and can be cleaned. Sweepings and waste should be
removed. Care must be taken to ride workrooms of rats and insects that
carry diseases.
(ii) Ventilation- General Ventilation is required for the health and
comfort of workers and is thus a factor in their efficiency. Ventilation
may be natural or artificial or a combination of the two. Clean fresh air
should be supplied to enclosed work places. All dusts, fumes, gas
vapour, mist generated in industrial processes should be removed at
their point of origin and not permitted to spread in the workroom.
(iii) Accident Prevention - Apart from the human suffering caused by
accidents, the total loss in production is much more than the loss of
earnings by the operative involved. The time lost by foremen and other
workers in giving assistance to accident victims is very large. In
addition, huge costs are incurred for spoilt materials and medical aid
and compensation.

References EEd 416/426 pp 28 -34

 CHAPTER FOUR

MARKETING MANAGEMENT

Marketing is defined as the process of getting goods to the consumer. Marketing

management is the processes of managing the marketing activities to ensure
customer satisfaction. It includes finding out what the customer wants, making
sure that the correct product is delivered to the customer and on time, and using
the appropriate marketing tools to reach the customer effectively. We shall look
at marketing mix in detail.

The Marketing Mix

The marketing mix consists of those elements which marketers use to influence
consumers towards a product. The elements are Products, Price, Place and
Promotion (otherwise known as 4Ps of Marketing).

A good marketing mix is one that presents the right product, in the right way, at
the right price, at the right place.

4.1 Product

A product is a set of tangible and intangible attributes that leads to customer

satisfaction. Management must plan, develop and manage both the tangible and
intangible aspects of the product. This includes product size, packaging, colour,
manufacturer’s prestige, retailers’ prestige, manufacturers and retailers services
etc.

Management must also manage the product, in relation to other product in the
company’s product mix. The product Mix is the complete list of all products
being offered by a named company. The product mix has width and depth. The
width is the number of product lines the company carries. For instance, a car
dealer may stock Mercedes, Vox Wagon, Peugeot, and Toyota Cars. The depth is
the different sizes, colours and models offered within each line. Among the
Toyota cars in stock we may find Camry, Corolla, Avensis, highlander etc.

Product line is a group of products intended essentially for similar uses and
possessing similar physical characteristics.

Product differentiation – This is creating awareness of differences (real or

imagined) between one company’s product and those of competitors. Two
products identical in all characteristics, may be perceived differently by customer
because of price, packaging, manufacturer’s prestige, distribution outlet etc. The
producer attempts to establish that his product is different and better than that of
his competitors. Product differentiation is a powerful tool in the hands of a small
business with established reputation.

4.2 Price

Price is value expressed in terms of money. However, price has so many aspects
to it because value is a vague concept. For instance, if two identical products are
sold two different prices, does it not mean that they are two different values? The
riddle is, does price express value always?

In fixing price for his goods, or services, the businessman must first define his
pricing objectives. These objectives must be clearly stated to serve as a guide not
only in formulating pricing policies and other related policies but to serve as a
basis for assessing if the pricing was appropriate or inappropriate. For instance,
do you adopt a low price to sell more and make small profit per unit sold? Or do
you adopt a high price to make higher unit profit, sell less and position as a
prestige product.

4.2 Place (Distribution)

This involves making product available at the right place at the right time to
satisfy demand. Closely related to distribution is transportation and storage.
Inventory management is also important since many businesses maintain large
quantity of goods to be sold at future dates. The business owners must balance
cost of being out of stock when a customer wants something against the cost of
having too much inventory.

Channels of Distribution

In considering distribution, the emphasis will be on the various roles of the

intermediaries between the producer and the final consumer. In this area, we are
focusing on the intermediary.

We may note the following channels of distribution:

Manufacturer- Wholesaler – Retailer – Customer
Manufacturer –Importer – Wholesaler – Retailer – Customer
Manufacturer – Large Retailer – Customer
Manufacturer – Customer.

Since we are concerned with the transportation and storage of the goods after
production until they reach the final consumer, the following points need to be
considered,

 Location of factories and warehouse

 Single factory per market or single factory for several markets.
 Shipping/transportation and storage costs.

The channel of distribution has been described as channel of conflicts and co-
operation between the channel members. This usually occurs because there are
some conflicts between the various members. E.g., the manufacturer wants to
shift storage costs to intermediaries do not want any of these extra costs.

There is also cooperation because all of them are in the same boat. As an
entrepreneur who will probably start on a small scale, you may consider the use
of those various channels and their attendant peculiarities. As a manufacturer, you
should manufacture for the big firms or sell to the smaller intermediaries or to the
large retailers. If you sell to large retailers, your products may not have good shelf
space. If you sell to the smaller businesses, your distribution costs may be higher,
revenue may be regular or irregular but you may enjoy larger shelf and display
space. If you want to do direct marketing then you will have to perform all the
usual intermediaries’ tasks. There is also a struggle for channel leadership. Who
is the most important in the channels? What role would you like to play in the
channel of distribution?

4.3 Promotion

This deals with informing buyers and potential buyers about a product. The
promotional aspects go along with distribution in that it markets what you have
to offer.

The most effective media should be selected that will reach the target group e.g.

(1) Small provision store should advert in local dailies and signs on windows
emphasizing ‘special’
(2) Appliance repair shop use telephone directory plus direct mail or handouts
in surrounding areas.
(3) Record store – Sport advert on radio cabinet market shop, business cards,
announcement, letter of reference to contractors.
Advertising

Here we are interested in non-personnel presentation and promotion of the

product. We are to consider the most effective media.

(a) Newspapers (which?

(b) Magazines (which?)
(c) Radio and Television (which and when?)
(d) Bill Boards (where?)

Personal selling

This is on oral presentation in a conversation with prospective customers. Here

we are interested in what sales pitch the salespersons must make to be effective
in actual selling the products.

Traditionally, entrepreneurs are very good salespersons of their products.

Although selling approach is usually more expensive per unit sold, it may be the
most viable for a new entrepreneur.

Sales Promotion

This involves giving out samples of your products as incentive to encourage

purchase of a product, e. g. samples given out for new products at supermarkets.
New entrepreneurs may actually use this to test market acceptance of the new
product.

Publicity

Planting of news of products, e. g. the launching of new products and having

either radio or television presentations on them or a product profile in the
newspapers.

It should be noted that all these are methods, which can be used in combination
with each other with the objective of shifting the demand upwards and to the
right.

Reference EEd 416/426 pp 41 -43

 CHAPTER FIVE

PERSONNEL MANAGEMENT

Introduction

Personnel Management is the art of employing and managing people to produce

good results. Except in the smallest enterprises without employees, the owner-
manager normally employs others to assist him in running his business. We shall
examine the following aspects of personnel management

(i) Employment
(ii) Training and Development
(iii) Compensation
(iv) Discipline and Discharge

5.1 Employment

Employment includes recruitment, selection and placement.

Recruiting is the process of attracting job applicants with the qualifications,

skills, knowledge, and abilities needed to achieve enterprise’s objectives.

Recruitment is done through advertisement in newspapers, radio, bill boards,

word of mouth, posters, and online. Two major sources of recruiting are internal
and external. Recruitment is internal if the organization wants to fill vacancies
from existing staff and external if the organization wants to fill vacancies from
outside.

Selection involves making decisions about many applicants who have

applied for a job vacancy; the employer uses one or many methods to decide on
which applicant to select. Small business often uses an informal approach. Larger
enterprises go through aptitude tests, interview, employment test, reference
checks, physical/medical examinations before arriving at selection decision.

Placement is the process of assigning employees to jobs. Employees should

be assigned on the basis of ability and interest. Profit is lost whenever the wrong
employee is assigned to the wrong tasks. The job will not be properly performed,
and the employee is likely to be discontented. Induction is the process of
introducing new employees to fellow workers, shown the location of facilities,
informed of any regulations, and encouraged to ask additional information.
5.2 Training and Development

Training is the process of developing an individual’s skills, knowledge and

abilities to improve performance in the present job. Development is preparation
for future jobs. Almost all organizations undertake training. Training may on-the-
job or off-the-job. The reasons for training are:

(i) To increase productivity

(ii) To improve quality
(iii) To reduce wastage
(iv) To reduce accident
(v) To reduce turnover and absenteeism
(vi) To prevent employee obsolescence

5.3 Compensation

Compensation comes in inform of salary and wages, allowances, commission,

bonuses etc paid to employees.

Some businesses are notorious for paying low wages. The reason often given is
that that is all the enterprise can afford and remain solvent. In other cases, the
intention may be to maximize short-run profits. Every business should try to pay
a competitive wage, if they cannot pay “above market rate”, because “those who
pay peanuts receive the services of monkey”. In a state of unemployment, some
businesses treat their workers as being replaceable. They often ignore the hidden
costs of employing new workers only to lose them.

4.4 Discipline and Discharge

Discipline is action taken against an employee for violating rules. Many business
managers do not recognize that the best discipline is self-discipline. Make the
rules clear. Once employees understand what is expected of them, and what
punishment may follow, they will perform. Be fair in punishment. The
punishment should be corrective rather than punitive. To provide for effective
discipline, an enterprise must establish a well-publicized and clear disciplinary
procedure. The procedure must specify what individuals may or not do in a given
situation. E.g. “No eating on work stations”. Disciplinary procedures are warning,
suspension then discharge.
Warnings are intended to inform employees of rule violation. Suspension without
pay is a forewarning of the economic consequences of discharge. It provides a
final opportunity for an employee to comply with enterprise rules.

If various warnings and penalties fail, discharge may be the only alternative.
Some small business managers are often in a hurry to use the big stick of
discharge. Discharge is not the best option especially for slight offences. It should
also be realized that discharge or wrongful dismissal could become a subject of
legal action.
 CHAPTER SIX

FINANCIAL MANAGEMENT

Financial management covers Sources of Finances, Uses of Finance, Keeping

proper Accounting Records, as well as Banking.

Sources of Finance

There are basically two sources of finance – namely Internal and External
Sources.

Internal Sources of finance is made up of entrepreneur’s personal savings,

inheritances, donations and borrowings from friends and relations. Though
generally small in quantity, it is good starting point, besides, research report
showed that internal sources is the commonest source of finance for beginners.

Other internal sources are investors called Business Angels who support young
entrepreneurs in new ventures. Business angels are usually wealthy and
sometimes retired people that partner with young entrepreneurs. One of such,
Paul Allen, invested in Micro- soft Incorp with Bill Gates. The rest is history.

External Finance is obtained from sources other than internal and is categorized
into conventional and concessionary sources.

Conventional sources of finance include Loans and overdraft from commercial

banks, Trade Credits, Private Placement, Share capital etc.

Concessionary sources are often government agencies established to promote and

support development. They include the Development Banks such as the Nigerian
Development Bank, the Bank of Industries, State investment Companies,
Cooperative societies.

All concessionary sources grant financial facilities at single digit rate of interest.

Uses of Finance

After the entrepreneur has sourced finance, how does he invest it? What
percentage goes for fixed assets and current assets? What type of compensation
package is best for the organization? What stock level is best for the organization?
What types of investment/ projects do you go into? What happens to profit when
made?
Banking

Under this sub-heading we discuss banks and banking. Although it is proper for
entrepreneurs to keep their money in banks, however, there are many things to
consider before an entrepreneur opens an account with a bank. One of them is
does the bank support entrepreneurs? What types of assistance can the bank
provide for you? What types of account are available to you in that bank –
savings, current, hybrid? What type of account should you open?

After opening the account what are your banking practices? How often do you
pay into or withdraw from your account? Where do you have surplus fund - In
your savings or current accounts?

What other services are you enjoying from your bank?

Record Keeping

Accounting has been described as a road map by which the owners and managers
determine “where they have been, where they are, where they are going and how
to get there”. Knowledge of accounting is required for every business. Adequate
management of costing, pricing, inventory (stock), credit is impossible without
proper accounting records.

A proper accounting system will either provide the required information or assist
the businessman in answering these basic questions.

(i) What was my income last year?

(ii) What was my total expense last year?
(iii) How does my income and expenses pattern compare with my
competitors? How does sales compare to my expenses?
(iv) In what way can I cut or eliminate some of my last year’s expenses?
(v) What are my assets, liabilities, and net worth? How much money do I
have in the business? What rate of profit am I earning on my investment
(vi) Am I carrying too larger or too small a stock?
(vii) How much cash business do I have? How much credit business?
(viii) How much ready cash do I have with which to meet my obligations?
Will my cash in-flow be enough to meet these obligations as they
become due?
(ix) How much is outstanding on credit?
 (x) How much is overdue and for how long?
(xi) When does the rest become due?
(xii) Am I extending too much credit?
(xiii) How much was written-off last year as bad debts?

Record Keeping Basics

How well you can answer the questions above depends on your record keeping
practice. Record–keeping is a way of writing down all exchange of money in your
business including:

 Money coming into your business

 Money going out of your business
 Money owed to you by customers
 Money you owe others

Accounting Records

Most businesses, no matter the size, will need the following accounting records:

(i) Purchases journal

(ii) Sales journal
(iii) Expenses journal
(iv) Cash book
(v) Petty cash book
(vi) General ledger.

Purchase journal is used to record all items purchased on credit for re-sale. The
source documents for making these entries are purchases invoices from suppliers.

Sales journal is used to record all items sold on credit. The source documents for
making these entries are sales invoices issued to customers.

Expenses journal is used to record business expenses, e.g. wages, electricity, etc.
The source documents for making these entries are payment receipt for the
expenses.

Cash Book is used to record all cash transactions - sales, purchases or expenses.
The cashbook is a ledger with credit and debit sides.
General Ledger is used to bring together the balance in the subsidiary ledgers. A
trial balance is then extracted to ascertain the equality of the debit and credit sides
of the General Ledger. If the two sides are equal, the preparation of the financial
statement follows.

How to use records to improve your business

If you have kept you accurate records, you can use your records to analyse your
sales, cost and profit between two or more months or two or more years.

(a) You can use your records to analyse your sales by comparing your
sales for two months to know if your sales is increasing or decreasing.
Why? Is the product losing market or is it a seasonal product.
Compare your sales to same month last year. Make plans to improve
your sales.
(b) You can use records to analyse your costs by comparing costs across
months or years. Find out which costs are rising or falling between
months or between years and why.
(c) Use your records to prepare Statement of Profit and Loss
Total sales – total material cost – total direct labour cost =gross profit.
Gross profit is the amount of money left after you subtract direct
material and direct labour cost. The gross profit must be enough to
cover all indirect costs and leave a profit.

Gross profit – total indirect cost = net profit.

Net profit shows the amount of money left after you subtract indirect
costs from gross profit. This is your real profit.

(d) Analyse your Statement of Profit and Loss across years to find out if:
 Your gross profit is higher or lower and why
 You can increase your gross profit by increasing your sales or
by lowering your direct labour cost or direct material cost.
 If your net profit is higher or lower than previous years, you can
improve your net profit by lowering your indirect costs.

Reference EEd 216 pp51 -54