Entrepreneurship Notes

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Chapter 8 - 14 Notes (Test)

CHAPTER 8 - BUSINESS ETHICS &
SOCIAL RESPONSIBILITY
Learning Outcomes
Define The Terms Ethics And Business Ethics.
List Ethical Issues With Which A Business May Be Confronted.
Distinguish Between Strategic, Work, & Ethical Values.
Understand The Function And Importance Of A Code Of Ethics.
Introduction
Any business venture is part of the community in which it operates and The More
Successful You Are As An Entrepreneur, The Greater Your Contribution &
Responsibility To The Community And The Economy. Therefore, it is important
for any entrepreneur to realize that ethical risks are just as real as any other
business risk.
Business Ethics
💡 BUSINESS ETHICS CAN BE DEFINED AS BEING ABOUT

IDENTIFYING & IMPLEMENTING STANDARDS OF CONDUCT THAT
WILL ENSURE THAT, AT MINIMUM LEVEL, BUSINESS DOES NOT
DETRIMENTALLY IMPACT THE INTERESTS OF ITS STAKEHOLDERS
(ROSSOUW & VAN VUUREN, 2006).
Values
Chapter 8 - 14 Notes (Test) 1

Businesses Should Formulate Values Or Standards To Tailor Organisational
Behavior (Rossouw & Van Vuuren, 2006).
The 3 Types Of Values
1. Ethical Values
2. Strategic Values
3. Work Values
These Values can are often defined in the company’s Value Statement/Vision &
Mission Statement.
The Personal Ethics Of The Entrepreneur

The Integrity Or Human Character Of The Entrepreneur Often Has A Lasting
Impact On The Character & Reputation Of The Business. Therefore, the
entrepreneur plays a major role in establishing the initial code of ethics that has to be
implemented within the venture. An entrepreneur is regarded as someone with
Integrity when he/she Adheres To A Set Of Ethical Standards And Uses These
Standards As A Basis For Making Decisions.
Operating The Venture & Ethical Dilemmas

The daily operation of the venture often brings an entrepreneur face to face with
ethical dilemmas. This means that the entrepreneur has to Balance His/Her Needs
With The Needs & Interests Of The Other Stakeholders. These dilemmas relate
to The Products & Services Rendered By The Business and other aspects such
as Advertising, Personnel, Natural Resources & Community Interests.
Ethical Culture In A Small Business

Large companies formally manage ethics through ethics officers, formal ethics
programs & various policies and procedures. Ethics In A Small Business Can Be
Implemented & Monitored In A Simple, Practical Manner Because There Is
Much Less Bureaucracy.
Developing A Code Of Ethics

The first decision that the entrepreneur should make is whether to make a distinction
between the business’s Code Of Conduct & Its Code Of Ethics.
Ethics Is About What Is Good For The Company, As Well As For The
Stakeholders.
Ethics Resources
Businesses Should Inform Staff Members About The Resources & Mechanisms
Available To Them To Deal With Ethical Risks.
Ethics Officer (Ombudsman)

Large Businesses Appoint An Ethics Officer Who Monitors & Reports On The
Business’s Compliance With The Ethics Code. In Small Businesses, An Ethics
Officer Is Not Usually Required. The Role Of Creating An Ethical Culture And
Ensuring Ethical Compliance Falls On The Entrepreneur, Who Can Delegate
That Responsibility To Someone In Human Resources Or Finance.
Ethic Hotline (Whistle-Blower’s Hotline)

Larger businesses may find it necessary to obtain the services of an external
supplier to provide an anonymous reporting line for more serious cases of wrong
doing.
Ethics Advice Line

It is also advisable to make provision for a confidential ethics advice line where
employees who are faced with ethical dilemma can send an email or make a phone
call to get advice about how to deal with such a dilemma.
Line Managers
Line managers & supervisors are key role players in dealing with ethical dilemmas.
When employees are faced with an ethical dilemma, the often approach their first
line supervisors for advice. Supervisors Need To Ensure That Their Advice Is
Legal & Based On Company Policies And Procedures.
The Social Responsibilities Of An Entrepreneur

Business Activities Have An Impact On Society & Entrepreneurs Should Use
Their Resources To Benefit People Outside The Business Context. An
organisation’s social responsibility program can help to improve relations with
employees and the community.
Stakeholders
Entrepreneurs have a social responsibility towards the business’s internal & external
stakeholders.
The Environment
The natural environment is one of the critical areas of social responsibility.
Responsibility in this area includes issues such as Waste Disposal, Water
Pollution, Air Pollution & Any Other Natural Resources.
Customers
The entrepreneur should know that there are basic customer rights such as The
Right To Privacy, The Right To Fair & Honest Dealing, Right To Fair &
Reasonable Marketing, Right To Accountability By Suppliers, Right To Fair,
Just & Reasonable Terms And Conditions, Right To Equality In The Consumer
Market And Protection Against Discriminatory Marketing.
Employees
Entrepreneurs’ social responsibility towards their employees should extend to their
employees’ families and the communities from which they come. Treating employees
fairly, respecting their dignity & basic human needs and making them part of the
team could go a long way towards creating a satisfied workforce.
Investors
Investors could be co-owners of the entrepreneur’s venture or other persons who
have provided financial backing to the entrepreneur. Maintaining A Proper
Accounting System, Providing Information About The Venture’s Financial
Situation & Re-Investing Any Profits Addresses The Entrepreneur’s
Responsibility To Their Investors.

Suppliers
The venture can also put in place A Preferential Procurement Policy to support
local suppliers. The “global village” means that social responsibility extends beyond
the borders of the country for the simple reason that most businesses are
multinational & benefit from interaction with other countries.
The General Social Welfare Of A Community

Involvement in Health & Education, Contributions To Charities And Other
Related Associations, And Even Contributions To Sport Development could put
the company in good stead with customers.d
Different Approaches To Social Responsibility

The level of commitment to social responsibility differs from organisation to
organisation. While some companies dedicate a significant amount of time and
resources to corporate citizenship, other companies barely scratch the surface with
minimal compliance.
The King Reports On Corporate Governance
💡 THE KING REPORTS ARE A SERIES OF REPORTS THAT SPECIFY

HOW SOUTH AFRICAN BUSINESSES NEED TO APPLY
INTERNATIONAL STANDARDS ON CORPORATE GOVERNANCE.
KING I (1994) Was Published By The Institute Of Directors In Southern Africa

(IoDSA). It Covered Effective & Ethical Corporate Governance.
Due To Local & Economic Environment Changes, KING II (2002) Was

Developed & Shifted Companies Away From Profits Alone. It Focused On The
Triple Bottom Line, Requiring Businesses To Focus On Environmental, Social
& Economic Impacts Of Their Operations. As Such, Businesses Need To Make
Socially, Environmentally & Economically Ethical Decisions.
A The New Companies Act Was Being Formulated, KING III (2009) Replaced
KING II. However, Non-Profit Organisations & Public Sector Companies Found
It Hard To Implement KING III.

As A Result, KING IV (2016) Was Published, Making Corporate Governance
More Inclusive Of All Business Types. Steyn (2018) States That, “KING IV Is
The Simplest, And Seemingly The Most Practical Report In The Family Of 4
Reports.”
Conclusion
The ethics of entrepreneurship is essentially about behavior that is honest, fair &
transparent. If the entrepreneur is a person with integrity, his/her personal values will
set the tone for the ethical climate in the business. As the business grows and
assumes a more complex business model, it becomes necessary to also draw up
various policies and procedures and a code of ethics based on the business risks &
the values as identified by the entrepreneur.
CHAPTER 9 - ENTREPRENEURIAL
MANAGEMENT
Learning Outcomes
Identify The Various Business Functions That Could Exist Within A Venture
& Briefly Discuss Each Of These.
Describe The Concept Of Entrepreneurial Leadership In A Business.
Discuss The Entrepreneurial Management Process.
Explain The Various Managerial Tasks & Processes And Their Importance
To The Entrepreneur.
Introduction
Any venture has to perform certain activities and functions to enable it to achieve its
objectives.
The 7 Business Functions
1. Purchasing
2. Manufacturing/Production

3. Marketing
4. Finance
5. Human Resources
6. Administration
7. Public Relations
The management functions are performed by both the owner and the managers of
the venture.
The Level One Functional Areas
💡 LEVEL 1 FUNCTIONAL AREAS ARE THOSE THAT ARE TYPICAL IN

ANY BUSINESS ORGANISATION.
The Purchasing Function

The purchasing function revolves around Acquiring & Providing Material
Resources For Commencing And Continuing The Activities Of The Venture.
The Most Important Activities In The Purchasing Function
Determining Purchasing Needs.
Identifying Suppliers.
Negotiating With Suppliers.
Placing & Following Up Orders.
Reviewing & Expecting Items.
Stock Keeping.
The Manufacturing Function

The manufacturing function is critical in that it provides the products or services that
are sold, from which the venture earns revenue. These products and or services
could address the specific needs of consumers.
The Activities In The Manufacturing Function

Obtaining Information About The Types, Quantities And Quality Of The
Goods Or Services To Be Made.
Production Planning For The Short Terms & Long Term.
Production Control To Ensure That The Predetermined Production

Objectives Are Achieved.
Maintaining & Replacing Production Equipment.
The Financial Function

During the planning & start up phase of the venture, the entrepreneur is involved in
activities linked to forecasting and financial provision for the venture.
The 3 Categories Of The Activities Of The Financial Function

During The Pre-Start Up Phases
1. Activities Related To The Capital Requirements & Sources.
2. Activities Related To The Protection Of Investment Capital Or Risk

Management.
3. Activities Related To The Preparation & Analysis Of Pro Forma Financial

Statements.
The Level Two Functional Areas
💡 THE LEVEL 2 FUNCTIONAL AREAS ARE THOSE THAT ARE

CLASSIFIED AS THE MORE GENERIC MANAGEMENT FUNCTIONS.
The Human Resource Function

The human resource function consists of those activities concerned with human
resource planning & with the procurement, development and maintenance of
sufficient and capable employees, who will be able to carry out the activities of the
venture as efficiently as possible.
The Administrative Function

The administrative function consists of three activities concerned with the
Collection, Processing, Storage & Dissemination Of Information That Is

Essential For The Achievement Of The Goals Of The Venture.
The Public Relations Function

The public relations function forms part of the marketing function. Public relations is
the professional maintenance of a positive image of the business through two way
communication between the business & its public and stakeholders.
Entrepreneurial Leadership & Teams In The

Workplace
Building a high potential venture without leadership and without a team is extremely
difficult. Entrepreneurial leadership and a team culture create energy and
excitement, and transform ideas and dreams into tangible visions that people believe
they can achieve.
Entrepreneurial Management
To manage a new venture effectively, the entrepreneur has to develop & perform
certain managing tasks, such as planning, decision-making, organizing, leading &
controlling.
Conclusion
In all types of ventures, management functions and tasks are essential for the
venture’s efficient functioning. The size of the venture and other circumstances may
result in one or more functions and or tasks becoming more important than the
others. It is nevertheless essential that all functions should exist and that they should
co-operate and co-ordinate their activities in such a manner that the overall
objectives of the venture will be achieved and have a higher priority than the
achievement of the functional or divisional objectives.
CHAPTER 10 - MARKETING
Learning Outcomes
Contextualize The Marketing Process.
Describe The Element Of The Marketing Mix.

Differentiate Between Services Marketing & Product Marketing
Introduction
Frequently, when people talk about “marketing”, they mean selling or advertising.
These two concepts form part of marketing, but marketing entails substantially more
than selling or advertising.
Marketing Contextualized
To understand marketing, you need to accept that Marketing Is A Process That
Can Be Illustrated By A 5 Step Model.
Step 1 Is To Understand Customers.

Step 2 & 3 Are Where You Create & Deliver Customer Value.
Step 4 Is Where You Build Mutually Beneficial Customer Relationships.
Step 5 Is Where The Company Benefits As It Profits From Increased Sales &
Long Term Customer Equity.
The Target Market (The Customer)

When an entrepreneur decides to start a business, the first question should be
“Who Will Benefit From My Product/My Service?”
Other Questions Should Be
How Can My Products/Service Satisfy Customers’ Needs & Wants (The

Need/Want Is The Opportunity)?
Which Opportunities Exist, Or Are Likely To Exist, Or Can Be Created In

The Current & Future Markets?
The Marketing Strategy

A marketing strategy is an integral part of a company’s strategic plan & contributes to
the company’s vision, mission & objectives. Through this, the company develops a
plan to create customer value & generate profits for the company through a
customer driven relationship.
The Marketing Mix

A set of 4 Marketing Tools, Instruments Or Elements (Product, Price, Promotion
& Place), which the company designs and combines in a such a way that the target
market would purchase the offering.
The company uses The 4 P’s To Influence Demand For Its Products & Services,
Developing A Strategy For Each Of The 4 Tools To Attain A Desired Customer
Value Proposition.
Services Marketing
The types of services that businesses offer differ from services that governments,
non-profit organisations and business organisations offer.
Business Organisations Offer Services Such As Airlines, Banks, Consulting

Firms, Hairdressers, Insurance Companies, Lawyers, Medical Practitioners,
Real Estate Companies, Retailers, Telecommunications Companies & Many
More.
Conclusion

As business is centered on the customer, we discussed the target market &
customers’ needs, wants & demands. The chapter detailed the activities involved in
a marketing strategy, and explained the 4 instruments of the marketing mix (product,
price, promotion & place). We also explored services marketing, owing to the growth
in service industries, in a discussion that focused on the characteristics of services,
the service marketing mix & attributes of quality service.
CHAPTER 11 - OPERATIONS
Learning Outcomes
Define The Terms “Operations Management”, “Capacity” & “Capacity
Planning”.
Indicate The Number And Type Of Employees Required By An

Entrepreneur.
Identify The Elements Of Planning Pertaining To Manufacturing &

Inventory.
Describe The Importance Of The Operating Cycle In Business

Management.
Introduction
The Operational Plan is the entrepreneur’s formulation of plans for running the
business. An effective operational plan, when successfully implemented, can assure
a smooth-functioning and productive organisation. It is therefore extremely important
that the operational plan should be well formulated & well implemented.
Operations Management
Operations Management Deals With The Planning & Management Of
Producing A Product/Service. It is important to indicate how the business will be
structured as an organisation and what the reporting relationships will be. E.g. If a
fast food outlet has three workers who report to the store manager, it will be
necessary to indicate who will attend to the administrative functions such as taking
stock, bookkeeping & purchasing stock.

Once the product and or service is delivered, feedback will be received either via
quality measures that have been put in place or via customer feedback.
Operations Strategy
An Operations Strategy Is A Plan Specifying How An Organisation Will
Allocate Resources To Meet Long-Term Goals, & Is Designed To Maximize The
Effectiveness Of Production And Support Elements While Minimizing Costs
(Business Directory, 2014; Hartman, 2014).
The Operational Plan

The Operational Plan Is A Highly Detailed Plan To Achieve Short Term
Objectives & Consists Of Both A Workflow Plan And A Structure For How The
Business Is To Be Managed (Business Directory, 2014).
The Key Components Of An Operational Plan
The Business Location.
The entrepreneur needs to specify the location of the business and the
results of any location analysis that he or she may have conducted.
The Facilities.
The entrepreneur or venture team needs to indicate which facilities will be

required for plant, warehousing, shop & office space. Having done so, he or
she needs to indicate where & when the required facilities will be acquired.
The Machinery & Equipment.
This is a costly aspect of the business, but can give the entrepreneur a
competitive advantage. The entrepreneur should carefully plan & consider
the various options available before selecting the equipment and machinery
needed to carry out the business operations.
Staff.
Personnel who are capable, correctly skilled, & well trained are required for
the smooth operation of the business. The entrepreneur needs to determine
his or her staff requirements and, on that basis, formulate a staff plan
indicating how many how many employees will be required, what their
responsibilities will be, whether their employment is full time or part time, the

salaries and benefits will have to be paid to them, and what training they
should undergo (Wright, 1995).
The Layout Of The Business.
The entrepreneur should also indicate the layout of the business. In the case
of a retail business, it is important to remember that first impressions are
important to a customer, which implies that the layout should project an
image of professionalism and efficiency (Wright, 1995).
Inventory & Stock Management.
Companies keep inventory to ensure that they have enough stock to

produce their products & or provide their services. They also need to ensure
that they have what they need to maintain their equipment & prevent
breakdowns.
Purchasing.
Purchasing has to do with obtaining the required materials, machines,

equipment & services from outside sources to enable your new venture to
deliver its product & or services.
Total Quality Management.
This requires a management system that looks at all quality aspects of the
company in terms of the products and or services that it provides.
Maintenance.
The regular use of machinery & equipment causes wear & tear that will lead
to breakage and ultimately increased cost. Breakdowns are normally
handled in a rush to get the machines back up & running. As a result, there
is no time to find the best prices and repairs cost more than they should.
The Operating Cycle.
The lead & lag times that characterize a business should be described when
planning the operating cycle. Usually, when the first activity finishes, a
second activity starts. When the first activity is still running and the second
activity starts, this is called lead & the balance of time for the first activity is
known as lead time.
Capacity & Capacity Planning.
Capacity is expressed in output units. For example, the number of

customers that can be served per hour. The entrepreneur needs to know

how long it will take to make a product (from the time it is ordered to the time
when it is delivered) or provide a service.
Capacity Planning is based on the output of products/services required

within a specific period of time as well as the available staff, working hours
and equipment. Capacity planning is important as it links directly to product
and service delivery times. The optimal operating level for a business is the
one for which the operating process was designed and the output at which
average cost is minimized (Chase & Jacobs, 2010). Expanding existing
capacity is challenging as it may increase running costs or require the
relocation of the business.
Information Technology & Operations Management

The use of technology in operations management has ensured that organisations
are able to reduce costs, improve the delivery, standardize and improve quality, and
focus on customization, thereby creating value for customers.
Operations Management Checklist

Summary

This chapter gave a basic description of operations management, which is essential
to setting up and growing a new venture. The chapter also dealt with the key
concepts associated with operations management; location, facilities, machinery and
equipment, staff, layout of the business, stock, purchasing, total equity management,
maintenance, the operating cycle & capacity planning.
CHAPTER 12 - MANAGING HUMAN

RESOURCES
Learning Outcomes
Describe Human Resources Concepts & Functions.
Understand The Relationship Of The Human Resources Strategy To The

Business Entity.
Introduction
Businesses are managed and staffed by people. Without people, businesses cannot
exist. To manage the business effectively, the entrepreneur needs to be familiar with
the following human resources (HR) & people related concepts & functions.
Human Resources
💡 EMPLOYEES REPRESENT A VENTURE’S HUMAN RESOURCES &

ARE PERHAPS THE MOST VITAL OF ALL ITS OPERATIONS.
To build a competitive business, you need to think carefully about how to find & hire
the best people available and then consider how to retain them. Honest, competent,
motivated employees are the lifeblood of the small business, so it is critical for
entrepreneurs to manage them competently & efficiently.
Human Resource Management

💡 HUMAN RESOURCE MANAGEMENT (HRM) CONSISTS OF THE
PEOPLE IN THE ORGANISATION WHO ARE RESPONSIBLE FOR
HOW SUCCESSFUL THE OTHER MEANS OF PRODUCTION (NON-
HUMAN INPUTS SUCH AS PHYSICAL AND NON-FINANCIAL INPUTS
ARE USED IN THE PRODUCTION OF ECONOMIC VALUE) WILL BE
APPLIED.
Human Resource Management (HRM) is a purposeful action of the Human

Resource (HR) Department, which aims to assist functional managers in the
optimal application and utilization of HR under their control, in accordance with
official organisational policy as well as general HRM theory & practice to achieve the
goals of the organisation.
Human Resource Functions Figure
Relationship Of The Human Resource Strategy To

The Business Strategy
The HR Strategy Contains A Set Of Priorities That An Organisation Uses To
Align Its Resources, Policies, & Programs With Its Strategic Business Plan.

The Relationship Of The HR Strategy To The Broader Business
Strategy
Human Resource Provisioning

For a small business to grow, it requires The Right Numbers Of Employees With
Appropriate Skills, Experience, Values & Attitudes. The Activities For Ensuring
This Are Referred To As Human Resource Provisioning (Job Analysis,
Recruitment & Selection).
Orientation
A person should be made to feel at home in an organisation. Many new employees
feel lost or nervous during their first few days on the job. To help them overcome
this, managers should show them around, introduce them to people with whom they
will be working, and show them that their job fits into the overall mission of the
business.
Recent Developments In Human Resources

Change, growth & sometimes displacement (retrenchment/restructuring) are facts of
modern organisational life. Employees must realize that lifelong learning is a current
and valid phenomenon that is here to stay, and it will be important for employees to

stay up to date and to contribute positively to the overall functioning of an
organisation.
Future Trends & Implications For Human Resources

To remain competitive, the entrepreneur should consider future trends that might
impact on the working environment.
Other Emerging Human Resource Trends
A Quality Workforce.
Regardless of the size of the small business, the owner(s) and or

manager(s) need to source, employ & retain a quality workforce. For the new
millennium, the adequate availability of quality employees seems to be a
challenge.
Employee Morale.
Are the workers doing what they should be doing? Is their morale good? Are
the personnel content? Do they feel they are being treated properly?
Improving Employee Performance.
Two control related areas warrant the owner or manager’s special attention
because they are related to employee morale; The Pay-Performance Link
& Teamwork.
New Competitive Realities

In today’s world of fast moving global markets & fierce competition, the windows of
opportunity are often frustratingly brief. However, the shift towards new forms of
organisation in the 21st century is accelerated by trends such as:
1. Smaller Companies That Employ Fewer People.
2. The Shift From Vertically Integrated Hierarchies To Networks Of

Specialists.
3. The Decline Of Routine Work, Coupled With The Expansion Of Complex

Jobs That Require Flexibility, Creativity And The Ability To Work Well With
People (Managers, Software Applications, Engineers, Artists, Designers,
Etc).

4. Pay Tied Less To A Person’s Position Or Tenure In An Organisation & More
To The Market Value Of His/Her Skills.
5. A Change In The Paradigm Of Doing Business From Making A Product To

Providing A Service, Often By Part-Time Or Temporary Employees.
6. The Outsourcing Of Activities That Are Not Core Competencies Of A

Business (Such As Payroll).
HIV/AIDS In South Africa

In 2016, South Africa had the biggest HIV epidemic in the world (UNAIDS Data,
2017) with 7.1 million people living with HIVE, 18.9% adult HIV prevalence, 270,000
new HIV infections, 110,000 adults on anti-retro-viral treatment & 55% of children on
anti-retro-viral treatment. It could mean the loss of skilled labor, which would imply
additional recruitment, selection & training costs.
Human Resources Technology
💡 HR TECHNOLOGY REFERS TO SOFTWARE ASSOCIATED

HARDWARE FOR AUTOMATING THE HUMAN RESOURCES
FUNCTIONS.
Organisations can use information technology in human resources management for

Recruitment, Talent Acquisition, Employee Payroll & Compensation, Work
Time (The Period Of Time A Person Spends At Paid Labor), Training &
Development, Management Workforce Analysis, Performance Management,
Benefits Administration And Data Storage & Recovery. It enables a human
resources information system.
Conclusion
People are a major component of any business, and the management of human
resources is a major part of every manager’s job. HRM describes a network of
interrelated components. Therefore, the HR function is responsible for maximizing
productivity, the quality of worklife & profits through the improved management of the
workforce.

CHAPTER 13 - BASIC FINANCIAL
CONCEPTS
Learning Outcomes
Describe The Purpose Of Accounting.
Explain The Basic Accounting Cycle.
Understand What A Financial Statement Consists Of.
Introduction
The purpose of this chapter is to provide information explaining certain financial
concepts that an entrepreneur will use, not only to complete the financial plan, but
also in making certain financially oriented decisions.
Accounting
💡 ACCOUNTING IS A SCIENCE BECAUSE EVERY TRANSACTION THAT

IS RECORDED CAN BE ANALYSED.
Accounting is a continuous process because once the accounting cycle is

completed, it starts all over again.
There are two dimensions of Accounting, Financial Accounting & Management
Accounting.
Financial Accounting Is A Medium Through Which The Business Entity
Communicates Financial Information To Interested Parties By Means Of 3
Primary Statements:
1. The Statement Of Comprehensive Income (Income Statement).
2. The Statement Of Financial Position (Balance Sheet).
3. The Statement Of Cash Flows (Cash Flow Statement).
Management Accounting Is Concerned With Reporting On Specific Activities

Inside The Business & Caters Mainly For Internal Users Of Financial

Information. These users are primarily the internal management & operational
personnel of the business entity. They require a variety of financial information in
order to manage the entity on a day-to-day basis.
A Basic Accounting Cycle

1. Occurrence Of A Transaction.
2. Recording A Transaction In Relevant Journal.
3. Summarizing Information From Journal Into General Ledger.
4. Preparing A Trial Balance.
5. Preparing And Presenting Financial Statements.
Financial Statements
The information in financial statements is useful for economic decision-making by a
broad range of users who are not able to demand reports tailored to meet their
particular information needs.
The 3 Primary Financial Statements For Reporting

Purposes
1. Statement Of Profit/Loss & Other Comprehensive Income (Income
Statement).
2. Statement Of Financial Position (Balance Sheet).
3. Statement Of Cash Flows (Cash Flow Statement).
Financing Capital Requirements

Every type of business will need money, whether it is to start up or for capital
expenditure. An important lesson to remember is not to ask for more money than
you can afford to repay. An entrepreneur will have to plan how financing will take
place, therefore, this will form part of the financial plan.
Sources Of Finance

💡 AN ENTREPRENEUR CAN OBTAIN FINANCES INTERNALLY OR
EXTERNALLY.
Internal Sources Of Finance
💡 INTERNAL SOURCES OF FINANCE ARE FINANCES THAT CAN BE

SOURCED WITHIN THE ENTITY ITSELF.
Own Equity/Capital Contributions To Be Applied Within The Entity.
Profits/Earnings Of A Current Going Concern At The End Of An

Accounting Period That Are Retained In The Business.
Speeding Up Collections From Customers Can Become A Source Of

Additional Capital & More Money Will Be Available For The Business’s
Needs.
Credit From Suppliers, Who May Be Willing To Extend Interest Free Credit
On Purchases Of Goods Or Services To Well-Established Customers. This
Implies That You May Be Able To Order, Obtain Delivery Of & Sell Items
Before You Must Pay For Them.
External Sources Of Finance

An entrepreneur can use sources outside of the enterprise, and use these finances
elsewhere within the enterprise. External finances can be divided into long-term
finance, intermediate (mid-term) finance & short term finance.
Sources Of Start Up Finances For Entrepreneurs

Obtaining start up finance is a matter of Doing Your Research, Having A Good
Business Plan & Being Prepared To Sell Yourself.
Institutions That May Be Prepared To Finance Prospective

Entrepreneurs
1. Business Partners Limited
2. Commercial Banks

3. The Industrial Development Corporation Of South Africa (IDC)
Conclusion
It is of vital importance for an entrepreneur to familiarize yourself with these basic
financial concepts to complete the financial section of a business plan.
CHAPTER 14 - FINANCIAL PLANNING &

BUDGETING
Learning Outcomes
Define Financial Plan & Factors To Be Considered When Developing The
Plan.
Determine A Break-Even Point.
Introduction
💡 A BUDGET IS A DOCUMENT CONTAINING FINANCIAL INFORMATION

THAT AN ENTITY USES TO PROJECT FUTURE ECONOMIC
DECISIONS.
The word “Budget” is derived from the french word “bougette”, meaning “little bag”,
presumably because one’s entire wealth could be contained within it.
Financial Planning
Planning involves thinking what a required outcome, result or objective is and how it
should be obtained. As there are a number of people operating and managing an
entity, planning is necessary to co-ordinate everyone’s co-operation to achieve entity
goals and to ensure the effective & efficient use of scarce resources. Budgeting
provides a framework that specifies measurable periodic objectives for each phase
of planning. Budgets Guide Operations & Serve As A Standard For Comparing
Planned Activities With Actual Results. However, they do not ensure instant
success and must be executed effectively as well.

The entrepreneur should also investigate which financial institution will have the best
deal on interest rates, not only for borrowing purposes but also for saving or
investment purposes.
The Financial Policy

To achieve his/her financial objectives within a certain period, an entrepreneur has to
set financial guidelines.
Components That Should Be Included In The Financial Policy
Budgeting & Planning.
Major Investment & Policy Decisions.
Co-Ordination & Control.
The 4 Steps Of Financial Control
1. Setting Standards
2. Comparing Actual Results With The Set Standards
3. Evaluating Any Deviations
4. Taking Corrective Action When Necessary.
The Financial Plan

Financial Planning is an important aspect of an entrepreneur’s operations. It
provides road maps for Guiding, Co-Ordinating & Controlling An Enterprise’s
Actions To Achieve Its Objectives.
Financial Planning involves the effective Acquisition, Use & Control Of Financial
Resources As Well As An Investigation Into Current & Future Needs.
Financial planning provides the specific outcomes of future activities in monetary

terms & the necessary figures to support the various choices that the entrepreneur
makes.

Factors To Consider When Developing A Financial
Plan
The Industry.
Industry refers to the kind of business activity upon which the entrepreneur is
going to embark. An entrepreneur should investigate which other businesses
are involved in the same kind of business activities (e.g. buying & selling
furniture or providing an electrical service) to see what they are doing & how
they are performing.
Competition.
An entrepreneur must investigate whether there are any other businesses

against which he/she will have to compete, ensuring that he/she can afford
to compete with them as well. Competition is healthy for a business as it
leads to more realistic price settings & prevents the formation of monopolies.
The Market.

If an entrepreneur knows what kind of an industry they are in, he/she needs
to make certain that there is a genuine need for his/her product or service. If
there is no need, then no income will be received from it.
Current Economic Circumstances.
A business’s life cycle is dependent on a country’s economic cycle.
The Economic Cycle

An Expansion Phase Means That Economic Growth Is In The Order Of The
Day, Meaning That More Money Is Available & Consumers Have Purchasing
Power.
A Recession Phase Sees Economic Growth Decreasing. As A Result, Less
Money Is Available, Implying That Consumers Have Less Purchasing Power.
A Depression Phase Occurs When There Is Little/No Economic Growth Whilst
Funds Are Also Scarce In Availability, Leading To Very Little Purchasing Power
Among Consumers.
The Recovery Phase, Which Follows The Depression Phase, Occurs When
Economic Growth Is Positive Again. More Money Is Available & Consumers
Have More Purchasing Power.

Setting Prices & The Break-Even Analysis
The financial plan should include a pricing strategy, as some entrepreneurs and new
venture managers find it difficult to set the right price for their products.
Break-Even Analysis Helps The Entrepreneur To Establish A Point At Which
His/Her Entity Will Either Make A Profit Nor A Loss (Earnings Before Interest &
Tax Are Equal To Zero/EBIT = 0).
The break-even analysis is a vital tool for short term planning as it will enable an
entrepreneur to determine:
The Level Of Operations Necessary To Cover All Operating Costs.
The Profitability Associated With The Various Levels Of Sales.
Calculating The Break-Even Point

The Break-Even Point Is Calculated Using An Algebraic Formula/A Scale
Graph.
ALGEBRAIC FORMULA FOR BREAK-EVEN POINT:

SALES QUANTITY IN UNITS(Q) = FIXED COSTS PER UNIT(FC) / (SELLING
PRICE PER UNIT(P) - VARIABLE COSTS PER UNIT(VC)
The Sales Revenue/Selling Price Per Unit(P) reflects the costs associated with
getting the product into the store & into the hands of the customer + profit.
Fixed Costs (FC) are costs that are unaffected by increases/decreases in volume of
output. These are independent costs as they remain the same irregardless of
whether or not more units are produced (purchased). However, fixed costs are
determined by Time, Meaning That An Increase In The Time Taken To Produce A
Product Will Result In An Increase In Fixed Costs.
Variable Costs (VC) are costs that tend to increase with an increase in volume of
output/sales.
Variable Costs (VC) Are Added To Fixed Costs (FC) To Determine Total Costs
(TC).
Calculating The Break-Even Point Graphically (Taking Sales Per

Unit (P) Into Account)
1. Determine The Scale Of Each Axis

2. Determine & Plot The Fixed Costs (FC)
3. Determine & Plot The Total Costs (FC + VC = TC)
4. Determine & Plot The Selling Price Per Unit (P)
5. Find The Break-Even Point (At The Intersection Of Total Costs & The Sales
Revenue).
💡 REMEMBER THAT THE EBIT IS EARNINGS BEFORE INTEREST &

TAX.
Below The BE Point, EBIT Is Less Than 0 & The Business Makes A Financial
Loss.
Above The BE Point, EBIT Is Greater Than 0 & The Business Makes A
Financial Profit.
Budgeting
Financial planning provides and formulates guidelines for how the business can
achieve financial goals. Financial plans form an entity’s statement of what is to be
done in the future.
Two Key Aspects Of The Financial Planning Process Are Cash Planning &
Profit Planning.

Cash Planning involves the preparation of an entity’s cash budget, while profit
planning is usually done by means of pro forma financial statements. These financial
statements are also required by existing & prospective lenders.
The Master Budget

Profit Planning is the set of steps that an entity takes to achieve a desired level of
profit. Entities do this type of planning by preparing & integrating a number of
operational budgets to form an integrated plan known as The Master Budget.
The Master Budget is an essential management tool that communicates the
organisation’s management’s plan throughout the organisation, allocates resources
& co-ordinates activities.
Budgets For A Service Entity

Based on the sales budget for its services, a service entity develops a set of
operational budgets that show how the demand for those services will be met.
Capital Budgets
Capital Budgeting is the planning process used to determine whether an
entity’s long-term investments, such as new products & research and
development, new machinery, replacement machinery & new factories are
worth purchasing. Capital investment decisions are long-term finance
decisions relating to non-current assets & the capital structure.
Alternative Methods Of Budgeting

1. Flexible Budgets - Designed To Allow Cost Levels To Change To Suit The
Actual Activity Level. These Are “Flexed” Or Adjusted To Correspond With
The Actual Activity Level.
2. Rolling Budgets - As Each Month Passes, An Additional Budgeted Month

In Added So That There Is Always A 12 Month Budget. The Benefit Is That
Management Will Always Have A Budget That Projects For One Year.
3. Zero-Based Budget - Zero Based Budgeting Starts With A “Zero Base” For
Every Department In An Entity. Every Year, Each Department Compiles A
New Budget From Scratch (Kagan,2018).

4. Activity Based Budgeting - When “The Activities That Incur Costs In Every
Department Are Recorded & Their Relationships Are Defined & Analysed.”
Activities Are Then Tied To Strategic Goals, After Which The Costs Of The
Activities Needed Are Used To Create The Budget.
5. Variance Analysis - Budgets Are Controlled By A Process Called Variance

Analysis. Actual Performance Figures Are Compared With The Budgeted
Figures & The Resulting Difference Is Evaluated. This Difference Is Called
The Variance.
6. The Personal Budget - A Finance Plan That Allocates Future Personal

Income Towards Expected Expenses, Savings & Debt Repayment. Without
A Personal Budget, It Is Difficult To Ensure That Your Income Will Cover
Your Expenses.
Steps Involved In Budgeting

1. Calculate Your Income - Understanding How Much You Are Making Is The
First Step To Knowing How Much You Can Spend.
2. Define Your Expenses - You Need To Understand What You Currently

Spend Your Money On. You Can Use This Information To Plan How To
Allocate Your Money In The Future.
3. Track Your Spending - To Make Sure You Are Within Your Budget, You
Need To Keep Track Of Your Spending.
4. Compare Your Actual Expenses To Your Personal Budget - Do This At The

End Of Each Month.
Conclusion
When planning your venture, it is essential to draw up a financial plan. For business
plan purposes, it is recommended that entrepreneurs provide figures for at least five
years in advance. All of this is necessary to ensure that they financial management
of the new venture is based on sound practice, and will ensure the survival of the
entity.

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Chapter 8 - 14 Notes (Test)

List Ethical Issues With Which A Business May Be Confronted.

Distinguish Between Strategic, Work, & Ethical Values.

Understand The Function And Importance Of A Code Of Ethics.

💡 BUSINESS ETHICS CAN BE DEFINED AS BEING ABOUT

Chapter 8 - 14 Notes (Test) 1

The 3 Types Of Values

The Personal Ethics Of The Entrepreneur

Operating The Venture & Ethical Dilemmas

Ethical Culture In A Small Business

Developing A Code Of Ethics

Chapter 8 - 14 Notes (Test) 2

Ethics Officer (Ombudsman)

Ethic Hotline (Whistle-Blower’s Hotline)

Ethics Advice Line

The Social Responsibilities Of An Entrepreneur

Chapter 8 - 14 Notes (Test) 3

Chapter 8 - 14 Notes (Test) 4

The General Social Welfare Of A Community

Different Approaches To Social Responsibility

The King Reports On Corporate Governance

💡 THE KING REPORTS ARE A SERIES OF REPORTS THAT SPECIFY

KING I (1994) Was Published By The Institute Of Directors In Southern Africa

Due To Local & Economic Environment Changes, KING II (2002) Was

Chapter 8 - 14 Notes (Test) 5

Describe The Concept Of Entrepreneurial Leadership In A Business.

Discuss The Entrepreneurial Management Process.

The 7 Business Functions

Chapter 8 - 14 Notes (Test) 6

The Level One Functional Areas

💡 LEVEL 1 FUNCTIONAL AREAS ARE THOSE THAT ARE TYPICAL IN

The Purchasing Function

The Most Important Activities In The Purchasing Function

Determining Purchasing Needs.

Negotiating With Suppliers.

Placing & Following Up Orders.

Reviewing & Expecting Items.

The Manufacturing Function

The Activities In The Manufacturing Function

Chapter 8 - 14 Notes (Test) 7

Production Planning For The Short Terms & Long Term.

Production Control To Ensure That The Predetermined Production

Maintaining & Replacing Production Equipment.

The Financial Function

The 3 Categories Of The Activities Of The Financial Function

1. Activities Related To The Capital Requirements & Sources.

2. Activities Related To The Protection Of Investment Capital Or Risk

3. Activities Related To The Preparation & Analysis Of Pro Forma Financial

The Level Two Functional Areas

💡 THE LEVEL 2 FUNCTIONAL AREAS ARE THOSE THAT ARE

The Human Resource Function

The Administrative Function

Chapter 8 - 14 Notes (Test) 8

The Public Relations Function

Entrepreneurial Leadership & Teams In The

Describe The Element Of The Marketing Mix.

Chapter 8 - 14 Notes (Test) 9

Step 1 Is To Understand Customers.

Step 4 Is Where You Build Mutually Beneficial Customer Relationships.

The Target Market (The Customer)

Chapter 8 - 14 Notes (Test) 10

Other Questions Should Be

How Can My Products/Service Satisfy Customers’ Needs & Wants (The