1.

INTRODUCTION TO ENTREPRENEURSHIP
1.1. DEFINITION OF AN ENTREPRENEUR AND ENTREPRENEURSHIP

ENTREPRENEUR

· International labor organization (ILO) defines entrepreneurs as those people who have the ability
to see and evaluate business opportunities, together with the necessary resources to take
advantage of them and to initiate appropriate action to ensure success.

· An entrepreneur is a person who identifies a business opportunity, harnesses and obtains the
resources necessary to initiate a successful business activity.

· An entrepreneur is therefore a central key individual in the society who makes things happens for
economic development.

ENTREPRENEURSHIP

· Entrepreneurship refers to the means of stimulating innovative and creative undertakings for a better
business community or world.

· The act or process of identifying business opportunities and gathering the necessary resources to
initiate a successful business activity.

· Entrepreneurship is a French word meaning to undertake and focuses on a business enterprise

· Entrepreneurship can exist in any situation – therefore it is the creation of values through establishing
a business enterprise.

· Entrepreneurship means having an idea of one’s own and trying to implement the idea to create values
on it.
 Creativity is “the ability to bring something new into existence.” This definition emphasizes the
“ability,” not the’ “activity,” of bringing something new into existence. A person may therefore conceive
of something new and envision how it will be useful, but not necessarily take the necessary action to
make it a reality.

1.2. HISTORICAL DEVELOPMENT OF ENTREPRENEURSHIP

· Earliest Period

An example of an earliest definition of an entrepreneur as a go-between is Marco polo, who attempted

to establish trade routes to the Far East. As a go-between Marco Polo would sign a contract with a
money person (forerunner of today’s venture capitalists) to sell his goods. While the capitalist was a
passive risk bearer, the merchant adventurer took the active role in trading, bearing all the physical and
emotional risks. When the merchant adventurer successfully sold the goods and completed the trip, the
profits were divided with the capitalist

Middle Ages

In the middle ages, the term entrepreneur was used to describe both an actor and a person who
managed large production projects. This individual did not take any risks, but merely managed the
project using the resources provided, usually by the government of the country. A typical entrepreneur
in the middle ages was the cleric the person in charge of great architectural works such as castled and
fortifications, Public buildings, Abbeys and cathedrals.

17th Century

The re-emergent connection of risk with entrepreneurship developed in the 17th Century, with an
entrepreneur being a person who entered into a contractual arrangement with the government to
perform a service or to supply stipulated products.
· 18th Century

In the 18th century, the person with capital was differentiated from the one who needed capital. In
other words, the entrepreneur was distinguished from the capital provider (The present day venture
capitalist) . One reason for this differentiation was the industrialization occurring thought the world.

· 19th and 20th Centuries

In the 19th and early 20th centuries entrepreneurs were frequently not distinguished from managers
and were viewed mostly from an economic perspective. In the middle of the 20th century the notion of
an entrepreneur as an innovator was established. The ability to innovate can be observed through
history, from the Egyptians who designed and built pyramids out of stone blocks weighing many tons
each, to the Apollo Lunar module, to laser surgery, to wireless communication.

· Today

Many principles and terms from business, managerial are applied to refine the concept of entrepreneur.
Entrepreneur refers to behavior that includes initiative taking, organizing and reorganizing of social and
economic mechanisms to turn resources and situations to practical use and the acceptance of risk or
failure.

HISTORICAL OF ENTREPRENURSHIP IN KENYA

The Evolution of Entrepreneurship in Kenya

· Interest in the development of entrepreneurship and small enterprise in Kenya gained momentum as a
possible remedy to the stagnation of economic development and the escalating unemployment problem
between the early 1960 and 1970s

· Although there were attempts by the government to develop entrepreneurship, the main impetus
came from the international labor organization (ILO) report.

· The report centered on the potential of the informal sector and suggested that the bulk of Kenya’s
urban workers were self –employed in small enterprises.

· The report proposed that the development of this sector could;

i. Promote employment

ii. Facilitate development

iii. Facilitate equitable distribution of resources.

Based on this report the government responded with a seasonal paper in 1973 which recognized the
role of entrepreneurship in employment creation not just in the informal sector but also in the formal
sector.

Subsequent development plans have devoted time to the development of strategies and to promote
small-scale enterprises and entrepreneurs which include.

· The industrial estate programme o Establishment of development agents e.g ICDC and KIE

· Policy and institutional framework to promote entrepreneurs.

· Promoting indigenous Kenyan enterprises.

1.3. SOME MYTHS ABOUT ENTREPRENEURSHIP:

Over the years, a few myths about entrepreneurship have developed. These are as under:

(i) Entrepreneurs, like leaders, are born, not made:

The fact does not hold true for the simple reason that entrepreneurship is a discipline comprising of
models, processes and case studies.

One can learn about entrepreneurship by studying the discipline.

(ii) Entrepreneurs are academic and socially misfits:

Dhirubai Ambani had no formal education. Bill Gates has been a School drop-out. Therefore, this
description does not apply to everyone. Education makes an entrepreneur a true entrepreneur. Mr
Anand Mahindra, Mr Kumar Mangalam Birla, for example, is educated entrepreneurs and that is why
they are heroes.

(iii) To be an entrepreneur, one needs money only:

Finance is the life-blood of an enterprise to survive and grow. But for a good idea whose time has come,
money is not a problem.

(iv) To be an entrepreneur, a great idea is the only ingredient:

A good or great idea shall remain an idea unless there is proper combination of all the resources
including management.

(v) One wants to be an entrepreneur as having no boss is great fun:

It is not only the boss who is demanding; even an entrepreneur faces demanding vendors, investors,
bankers and above all customers.

An entrepreneur’s life will be much simpler, since he works for himself. The truth is working for others
are simpler than working for oneself. One thinks 24 hours a day to make his venture successful and thus,
there would be a punishing schedule

1.4. MAJOR MISTAKES OF ENTREPRENEURS

Managerial mistakes whereby they don’t delegate or plan

Lack of experience in a certain business line

Poor financial control

Weak marketing effort

Failure to develop a strategic plan

Uncontrolled growth

Incorrect inventory control

Poor location

Inability to make the entrepreneurial transition

1.5. CONTRIBUTION OF ENTREPRENEURS

Entrepreneurs contribute to the economic development of the Kenyan economy in the following ways:

1) Employment creation -Entrepreneurs are employment creators by employing

themselves and others in the business.

2)Promotion of National productivity - This is through production of goods and services within the
country and therefore they contribute to the Gross Domestic Product (GDP)

3)Standard of living - Its measured by the capacity of people of a country to buy goods and services.
Entrepreneurs contribute by employing people and giving them salaries or wages to buy their
necessities.

4) Conservation of foreign exchange - Entrepreneurs produce goods and services that are needed by
people and reduction in importing those goods and hence the government saves its foreign exchange.

1. NATURE OF ENTREPRENUERSHIP:

1.1. CHARACTERISTICS OF AN ENTREPRENEUR

Some of the characteristics that are exhibited by the successful entrepreneur are listed below, however
it's important to draw a distinction between personality 'characteristics' and the character someone
displays when working. The former are regarded as innate and a permanent part of their personality.
The latter is just the way they approach a particular set of tasks. This is just as much a product of theory
commitment, interest and motivation to the tasks at hand as it is a predisposition.

Hard work

Entrepreneurs put a lot of physical and mental effort into developing their ventures. They often work
long and antisocial hours.

Drive to achieve

Entrepreneurs do not need to be told what to do. They identify tasks for themselves and then follow
them through without looking for encouragement or direction from others.
Goal oriented

They set high but attainable goals that enable them to focus their energies. Their goals orientation helps
them to define priorities and provide them with measures of how well they are performing.

Resilience

Entrepreneurs must not only pick themselves up after things have gone wrong but also learn positively
from the experience and use that learning to increase the chances of success the next time round.

Initiative and Responsibility

Successful entrepreneurs actively seek and take the initiative. They like to take the initiative in solving a
problem or in filling a vacuum where no leadership exists.

Creative and innovativeness

Creativity was once regarded as an exclusively inherited trait although it can be learned.

Self- confidence

Entrepreneurs must not demonstrate that they do not only believe in themselves but also in the venture
they are pursuing.

Vision

Entrepreneurs know where they want to go. They have a vision or concept of what their firms can be.

9. Independence

The desire for independence is a driving force behind entrepreneurs. Their frustration with rigid
bureaucratic systems coupled with a sincere commitment to make a 'difference adds up to an
independent personality trying to accomplish tasks in their own way.

10.Internal locus of control

Successful entrepreneurs believe in themselves. They do not believe the success or failure of a venture
will be governed by fate, luck or similar forces. They believe their accomplishments and setbacks are
within their own control and influence and they can affect the outcome of their action

11.Persistent problem solving

Entrepreneurs are not intimidated by difficult situations, their self-confidence and general optimism
seem to translate into a view that the impossible just take a little longer.

12.Risk taking propensity

Successful entrepreneurs are not gamblers .When they decide to take to participate in a venture, they
do so in a very calculated, careful thought manner. They are also characterized as risk takers who
instinctively know that gains do not accrue to those who always play safe

13.Self-efficacy

It is an individual's belief in their ability to undertake and accomplish some particular tasks or activity

14.Opportunity orientation.

The entrepreneurs focus more on opportunity.

1.2. FUNCTIONS/TASKS OF AN ENTREPRENEUR

Entrepreneurs are recognized by what they actually do-by the tasks they undertake in the business.

1. Idea Generation
It's the most important function of an entrepreneur. It's the function of the entrepreneur to generate as
many ideas as he can for the purpose of selecting the best business opportunities which can
subsequently be taken by him as commercially viable business venture.

2. Determination of Objectives

The objectives of the business should be spelt out on clear terms. Entrepreneur should be clear about
the nature of business and the type of business.

3. Raising of Funds

All the activities of a business depend upon the finance and its proper management.

4. Founding new organizations

The entrepreneur is recognized as the person who undertakes the task of bringing together the different
elements of the organization and giving them a separate legal identity.

5. Bringing innovation to market

Innovation is a crucial part of the entrepreneurial process. The idea of innovation encompasses any new
way of doing something so that value is created.

6. Identification of market opportunity

An opportunity is a gap in the market where the potential exist to do something better and thereby to
create value. New opportunities exist all the time, but they do not necessarily present themselves. If
they are to be exploited, they must be actively sought out. The identification of new opportunities is one
of the key tasks of entrepreneurs.

7. Provision of leadership
Leadership is increasingly recognized as a crucial part of managerial process.

8. Application of expertise

This is thought to lie in their ability to innovate or to spot new opportunities

9. Owning organizations

A key element in this task is that an entrepreneur owns an organization.

10. Procurement of Raw Materials

An entrepreneur has to identify the cheap and regular sources of supply of raw materials which will help
him to reduce the cost of production and face the competition boldly.

11. Determination of Form of Enterprise

Entrepreneur has to decide the form of enterprise based upon the nature of the product, volume of
investment, type of the product, quality of product.

12.Market Research

Entrepreneur has to undertake market research persistently in order to know the details of the intended
product that is the demand for the product, supply of the product, price, size of the customer

13. Recruitment of Manpower

Entrepreneur has to perform the following activities while undertaking this functions; estimating
manpower need of the organization, laying down the selection procedure, devising scheme of
compensation, laying down the rule of training and development.
14. Implementation of the Project

An entrepreneur has to work on the implementation schedule or the action plan for the project. The
identified project is to be implemented in time bound manner

1.3. TYPES OF ENTREPRENEURS

1) Craft-Exploits and utilizes personal skills to start a business without thinking of growth or expansion
objectives that is, Craft entrepreneur is not business expansion oriented. He provide technical and
professional skills.

2) Opportunistic-This is situation whereby a person starts a business, acts as a manager with view to
expand the business to the maximum. He might not have the professional skills but he has the
opportunity to start and direct others. He sees beyond and he has the abilities to initiate and venture
into business that will expand and grow

3) Social entrepreneur- recognizes a social problem and uses entrepreneurial principles to organize,
create and manage a venture to achieve social change.

4) Political entrepreneur- is a business person who utilizes political systems or seeks support from
political bodies in order to promote, expand and profit from their own commercial ventures. A political
entrepreneur refers to a political player who seeks to gain certain political and social benefits in return
for providing the common goods that can be shared by an unorganized general public.

5) High tech -a New technological developments have created opportunities for those with the right
technical expertise e.g. in computer and internet developments.
6) Concept multipliers - Some who identifies a successful concept that can be duplicated by others for
example through franchising or licensing arrangements.

7) Acquirer - Those who take over a business started by another and use their own ideas to make it
successful. This often happens when there is a financial problem in the current operation.

8 Buy/Sell artists - those who buy a company for the purpose of improving it before selling it for a profit.

9) Economy of scale exploiters - Those who benefit from a large volume of sales by offering discount
prices and operating with very low overheads.

10) Inventors - Those with particular inventive abilities who design a better product and then create
companies to develop, produce and sell the item.

11) Self employed - Individuals who perform all the work and keep all the profit.

12) Speculator/Value - Those individuals who buy property at a low price with the anticipation that
prices will go up and sell at a higher price.

13) Turn about artist - An acquirer who buys small businesses with problems but which have potential
for profit.

14) Conglomerator - An entrepreneur who builds up a portfolio of ownership in small businesses,

sometimes using shares or assets of one company to provide the financial base to acquire another.

15) Going public - Entrepreneurs who start up in business with the clear aim of achieving a quotation on
the stock exchange usually via an unlisted securities market in the first instance.

16) Soloist - A self-employed person operating alone for example in a specific trade or profession.

17) Grouper - those who prefer working in small groups with other partners who share the decision
making for example craftsmen working in their own firms as equals.
18) Matriarch or Patriarch - The head of a family owned business which often employs several members
of the family.

1.4. SELF-EMPLOYMENT VERSUS SALARIED EMPLOYMENT

Self- Employment- This is a situation where an individual invests his own capital, uses his own skills and
intelligence in management of a business with an aim of getting income or making profit.

Salaried Employment-This is a situation where an individual offers his services to an organization or an

individual with an aim of getting payment (salary) at the end of every month. The person is referred to
as an employee of that organization or that individual (employer)

Advantages of Self Employment

i) The person is independent as one can make all the decisions

ii) Unlimited income - The more one works the higher the earnings

iii) Create job opportunities for the others

iv) One can exploit his potential

v) Provide goods and services to the members of the society

vi) Improve the living standards of the people that depend on him

vii) Personal satisfaction because of doing what one likes doing

viii) Control over working conditions- being one boss means controlling the working surroundings.
You cannot be fired or transferred

ix) Prestige- seeing your name on the business card

x) Freedom-relative freedom from control of employers, freedom to make personal decisions

Disadvantages of Self Employment

i) One may not have enough capital for starting the business

ii) One may have limited skills in terms of management

iii) When the business suffers losses, the entrepreneur bears all of them

iv) There is no assurance of income

v) Self-employment lead to specialization which at times leads to boredom

vi) Self- employment people are accorded low social status considered to salaried employed people,
who are accorded higher social status

Advantages of Salaried Employment

i) There is an assurance of income (being paid monthly)

ii) One enjoys certain allowances that come with salaried employment for example medical and
house allowances

iii) Salaried employed people are accorded high social status compared to self-employment people
iv) Salaried employed provides room for specialization among the employees

v) There is room for growth especially through the promotions

vi) It creates a sense of belonging to an individual because a person will feel he/she belong to a
certain organization

vii) Some organizations provide training facilities to their workers through seminars and workshops
organized by the companies

viii) Some organizations also provide sponsorship opportunities for their employees who wish to
further their studies

Disadvantages of Salaried Employment

i) One has to adhere to the rules and regulations set by the organization he or she works for.

ii) There is no opportunities to make more money to supplement your current earning

iii) The organization may not adequately recognize ones abilities

iv) There is no independence (you have to follow orders and bosses around)

v) One may not be accorded adequate and challenging responsibilities that adds up to their
qualifications

vi) Ones ideas may not easily or readily be implemented by the employer

vii) There is no job security (the employer can demote one of his duties at will
1.5. Factors Affecting Emergence of Growth of Entrepreneurship.

An Individual’s decision to pursue an entrepreneurial career is dependent on various factors, these

include:

1 Background Factors

• Education training and experience - The type of education, training and experience an individual has
acquired influences his choice of setting up an enterprise. Technologically qualified persons normally set
up their ventures in the field of their specialization.

• Family Role Models - If an individual has a supportive family and has a role model they add vigor in
his desire to venture into such businesses.

• Financial conditions -if an individual is able to meet the family demands and has surplus funds he
may start looking for a business venture.

2. Motivational Factors

• Need for achievement - It means the drive to achieve a goal compels entrepreneurs to work hard.

• Personal motives/expectations - Those individuals who have an internal locus of control, they
consider themselves responsible for their growth and development.

• Business environment - Supportive environment like low rate of competition, high profit margins,
good economic conditions, high demand all contribute towards motivating an individual to set up a
venture.

3. Economic Factors
• Supportive government policies - The policies formulated by the government and programmes
promote entrepreneurship e.g. reduction of tax and tax holidays.

• Availability of financial assistance, government and other agencies normally provide financial
assistance to the entrepreneurs for example through the constituency development fund, youth fund
and women fund.

• Ancillary support - From suppliers, distributors and other distributors can act as a great
encouragement to entrepreneurs.

• Infrastructure e.g. availability of electricity, water, transport, and communication will encourage
entrepreneurs to set up their own businesses.

4. Reward

• Recognition - The success of a venture give an entrepreneur recognition to enhance his self-esteem.

• Social status - If the business is successful, it raises the social status of an individual.

Factors Impending the Growth of Entrepreneurship

1. High Taxation Levels (for business and personal incomes)-Such taxation reduces the profits earned
from enterprises thereby making it unattractive to engage in business. Taxation on raw materials
increases the cost of production

2. Corruption and Official Harassment

In some countries, prospective entrepreneurs are forced to bribe officials in various government offices
to be allowed to start and operate their own businesses. Also small businesses are harassed by the
county councils askaris and therefore discouraging them from venturing in business.

3. Unregulated Competition from Outside Countries-Due to the liberalization of many economies, there
has been importation of products into the countries which has flooded the local market and this has
discouraged many people from venturing into businesses.

4. Decline in Personal Incomes-Due to ever increasing cost of living, the real earnings of most employed
people has been declining. The number of unemployed people has also been rising for various reasons.
As a result, the shrinking progressively tending to hinder entrepreneurial development.

5. The High Cost of Finance

The cost of borrowing money has become very high due to high interest rates charged on such loans.
Very few businesses would be able to generate enough revenue to enable them repay the loans as well
as to make profits. This factor has limited the development of entrepreneurship.

6. Lack of Entrepreneurial Culture- This is because many people still seek formal employment where
they have been assured of a regular income. They fear the risks associated with self-employment

7. Poor Transport and Communication Networks- For a business enterprise to succeed, it needs to
transport its products to the market efficiently i.e. at low cost and in good time. It also needs to
communicate to other businesses and other people. However, in some countries, transport and
communication is poor making it very difficult for business enterprise to strive.

8. Lack of Skills and Knowledge - This arises due to lack of opportunities. Where training is available, the
cost is usually too high for most people to afford.

CREATIVITY AND INNOVATION IN ENTREPRENEURSHIP

1. Creativity

Creativity is generation of ideas that results in the improved effectiveness of a system. Creativity is an
abstract and general process of bringing something new into existence through innovative skills

Types of creativity

i. Discovery

This means finding something that already exist but is not yet perceived or not known for example a
graduate finding a booming business in newspaper or when Isaac Newton disc

ii. Invention

This means creation or designing of something which did not exist before

It is also a process by which new ideas are created for example Bell Graham who invented telephone.

iii. Innovation

Innovation means.

a. To improve on something that is already there

b Innovation comes from the Latin word meaning innovate i.e. to make something new.

c. Innovation also means commercialization of an idea or turning an idea into an opportunity. Innovation
builds on creativity when something new, tangible and value-creating is developed from the ideas.
Innovation can be focused on the theme of being ‘better-incremental improvement as well as the theme
of being radically different.
d. Innovative is about seeing the creative new idea through to completion, to final application but, of
course this will not be necessarily a business.

Creativity is the talent of invention and innovation is the talent of the project champion who turns ideas
into reality. The entrepreneur does both these things but he does more. He does not just complete the
successful application of an idea; he builds something of value in the process.

1.1. Techniques for Improving Creativity

Techniques for improving creativity are also known as creative problems –solving techniques and
include.

1. Brain Storming

It's widely used for both creative problem solving and idea generation. All ideas no matter how illogical
must be recorded with participants prohibited from criticizing or evaluating during the brainstorming
session.

Brainstorming is also whereby there is a free flow of ideas and in every session start with a problem
statement i.e. not too broad and allow participants to give solutions to it whereby every point is taken
without any criticism which can be done later.

Brainstorming is based on the fact that people can be stimulated to grater creativity by participating in
organizing groups exercises.

To use this Method, the following rules apply

i. No criticism is allowed
ii. Free wheeling is encourage

iii. Quantity of ideas is desired

iv. Combinations and improvements of ideas are encouraged.

2. Reverse Brainstorming

It can be effectively used before other creative techniques to stimulate innovative thinking; the process
usually involves the identification of everything wrong an idea by asking the question in our many ways
can this idea fail, following by a discussion of ways to overcome those problems. Since the focus is on
the negative care must be taken to maintain group morale

3. Gordon Method

It begins with the group members not knowing the exact nature of the problem. This ensures that the
solution is not clouded by preconceived ideas and behavioural patters. The entrepreneur start by
mentoring a general concept associated with the problem. The group responded by expressing a
number of ideas. Then a concept is developed, followed by related concepts, through guidance by the
entrepreneur. The actual problem is then revealed, enabling the group to make suggestions for
implementation or retirement of the final solution.

4. Free association

One of the simplest yet most effective methods that entrepreneurs can use to generate new ideas is
free association. This technique is helpful in developing an entirely new slant to a problem. First, a word
or phrase related to the problem is written down, then another and another with each new word
attempting to add something new to the ongoing throughout processes, thereby creating a chain of
ideas ending with a new product ideas emerging.
5. Forced relationships

It’s the process of forcing relationship among some products combinations. It is techniques that ask
questions about objects or ideas in an effort to develop a new idea. The new combination and eventual
concept is developed through a five –step process.

i. Isolated the elements of a problem

ii. Find the relationship between those elements

iii. Record the relationship in an orderly form

iv. Analyze the resulting relationship to find ideas or patterns

v. Develop new ideas from these patterns.

6. Collective Notebook Method

This is whereby, a small notebook that easily fits in a pocket containing a statement of the problem,
blank pages and any pertinent background data is distributed. Participants consider the problem and its
possible solutions, recording ideas at least once, but preferably three times a day. At the end of the
week, a list of the best ideas is developed, along with any suggestions.

7. Brain Writing

It’s a form of written brainstorming whereby the participants are given more time to think than in
brainstorming sessions. It is silent, written, generation of ideas by a group of people. The participants
write the idea on special forms or cards that circulate within the group which usually consists of six
members. Group member generated and writes down three new ideas during a five minute period. The
form is passed on to the adjacent persons, who write down three new ideas and so on, until each form is
written by all participants. A leader monitors the time intervals and can reduce or lengthen the time
given to participants.

8. Attributes listing

It’s an idea finding techniques that requires the entrepreneur to list the attributes of an item problem
and then look at from a variety of view of points. Through this process originally unrelated objects can
be bought together to form a new combination and possibility new uses that can better satisfy a need.

9. Big –Dream Approach

This approach requires that the entrepreneur dream about the problem and its solution i.e “Think big”
Every possibility should be recorded and investigated without regard to all negatives involved or the
resources required.

10. Checklist Method

In the checklist method, a new idea is developed through a list of related issues or suggestion or
statements to guide the direction of developing entirely new ideas or concentrating on specific idea
areas.

1.2. Creativity Thinking Process

Many psychologist and scientist who have studied the creative process have approached it as a case of
“problem solving”. While others have analyzed it but identifying a typical sequence of phases through
which people pass when they solve problems.

The following are systematic steps that are followed.

1. Vague feeling – experiences of doubt uneasiness and wonder e.g. for an entrepreneur, this might
mean recognizing an unexploited opportunity because a need is not being met, a resource is not well
used or a product is poorly marketed. Vague feeling –arise when some discrepancy or opportunity is first
recognized.
2. Problem finding – for the vague feeling, the creative challenge is to find or formulate a problem
that can be solved. For the entrepreneur, the problem is finding a good way to exploit opportunity.

3. Information search – Gathering of information pertaining to the problem cause. Once creative
people’s interest has been aroused and they have a fixed idea of what they want to do, they start
seeking answers in conscious fashion. If they want to solve a problem they set off on an intellectual
voyage of discovery. Seeking information about the problem itself and attempts made on other to try to
solve it.

4. Incubation – when rational, conscious activity is stopped and the unconscious is allowed to work on
the problem. The important feature is that problems are being addressed without our conscious
involvement.

5. Illumination or insight – it’s the stage where the person realizes that his idea could be turned into
something. It is a breakthrough in the creative problem solving process result from their earlier stages of
problem finding, information search and incubation and can be delayed if these stages are by –passed.
The experience of a breakthrough or “aha” involves an often sudden, usually complete picture of a
solution that comes to us, sometimes even in a dream. Frequently we cannot explain the cause of the
insight nor explain how we drive it.

6. Expression invention – in order for the breakthrough to add value to anyone else, there must be
some expression of the insight. There is an output – a proposal, a plan, a prototype that can be
experienced by important stakeholders (e.g. customers, banker, suppliers, and employees). The
expressed solution is concrete, objective perceived and no longer in the entrepreneur’s head.

7. Verification or evaluation – prototype and plan are evaluated by others. The prototype is tested by
others engineering, subjected to marketing and production criteria and its commercial potential is
evaluated. The business plan is scrutinized by bankers, consultants, venture capitalist, supplier and their
evaluation and actions help or hinder the implementation of the idea. In this stage, other seeks to
support or refute the idea. Eventually, markets either support or fail to support the new product the
new product or services.

1.3. Qualities of Creative Person

i. They are open minded

ii. They are adventurous and want to discover

iii. Analytical, curious and also they are not contented i.e. not satisfied with their current situation

iv. They are purposeful

v. Decisive

vi. Courageous

vii. Self –motivated

viii. Persistent, active etc.

Hindrances to Creativity

i) Searching for one right answer (not diversifying)

ii) Focusing on being logical – or systematic way

iii) Blindly following the rules – not thinking beyond them

iv) Fearing to appear foolish

v) Fearing to fail or make mistakes for example going to university

vi) Believing that you are not creative

vii) Education – is it not be theoretical

viii) Regulations for business which must be followed may hinder creativity

ix) Organization factors

x) Constantly being practical

1.4. Goals of Innovation

Programmes of organizational innovation are typically, tightly to organizational goals and objectives to
the business plan and to market competitive positing. For example one driver for innovation programs in
corporations is to achieve growth objectives. As Davila et. al, 2006 noted “companies cannot grow
through cost reduction and re-engineering alone. Innovation is the key element in providing aggressive
top-line growth and for increasing bottom line results.

The goals of innovation include;

i) Improved quality

ii) Creation of new markets

iii) Extension of the product range

iv) Reduced labour costs

v) Improved production process

vi) Reduced materials.

vii) Reduced environmental damage

viii) Reduced energy consumption

ix) Conformance of regulations

These goals vary between improvement to products, processes and services and dispel a popular myth
that innovation deals mainly with new products development. Most of the goals could apply to any
organization be it a manufacturing facility marketing firm, hospital or local government.

1.5. Principles of innovation /enhancing enterprise creativity

Potential entrepreneur need to realize that innovation principles exist and those these principles can be
learned, when combined with opportunity can enable individuals to innovate. The major innovative
principles are as follows:-

i) Be action oriented – innovators always must be active and searching for new ideas opportunities or
source of innovation

ii) Make the product process or services simple and understandable – in this case, people must really
understand how the innovation works

iii) Make the product, process or services customer based – innovator’s always keep the customer in
mind the more an innovator has the customer in mind, the greater the chance that the concept will be
accepted and used.

iv) Start small – innovators should not start a project or develop on a large scale, they should begin small
and then build and develop, allowing for planned growth and proper expansion in the right manner at
the right time.

v) Aim higher –innovators should aim high for success by seeking a segment in the market place

vi) Learn from failure – innovators does not guarantee success and more important failure often give
rise to innovation
vii) Follow a planned schedule – every innovator should follow a schedule that indicate is still important
to have schedule in order to plan and evaluate the project

viii) Reward heroic Activity – this principle applies more to those involved in seeking and motivating
other to innovate. Innovative activity should be rewarded and given the proper amount of respect.

ix) Try/test/revise innovators always should follow the rule of try, test and revise. This helps work out
any flaws in the product, process or services.

Diagram 5: Adopter’s categories

Scale

21/2% 131/2% 34% 34% 16%

i ii iii iv v Time
The adopter categories are explained

i) Innovators – This is the venture group in the market. They are the first to adopt a product

ii) Early adopter – They adopt a product during its early stages. It constitutes the opinion leaders within
the society e.g. politician, chief executive officer pastor

iii) Early majority – They rely so much on advertisement and sales people. They need to be convinced
first before they make a decision

iv) Late majority – They adopt innovation due to social pressure or economic conditions

v) Laggards – They are conservatives. They adopt a product after the innovator has dropped it or not
being produced. A person who is an innovator with respect to clothing may not be so with books.

1.6. Factors that make an Innovator to be adopted easily

Factors that make an Innovator to be adopted easily

i) Relative Advantage – this means the degree to which it is superior to competitive products (better
than existing products)

ii) Compatibility – this means how consistent the innovation is with the values and experiences of
potential adaptors.

iii) Divisibility – this means the degree to which it can be tried on limited basis

iv) Communicability – this means the relative ease of observing and describing the benefits to others.
v) Perceived risk – it means the risk of adopting an innovation

vi) Income

vii) Education level – makes one to adopt an innovation easily

viii) Product knowledge – easier to buy a product you have knowledge about

ix) Peer pressure

1. STARTING OF AN ENTERPRISE:

1.1. ENTREPRENEURSHIP OPPORTUNITIES

Business Ideas and Opportunity

What is a Business idea?

A business idea is the response of a person(s) or an organization to solving an identified problem or to

meeting perceived needs in the environment (market, community) etc

Meaning of Business Opportunity;

An opportunity is an attractive investment idea or proposition that provides the possibility of a

monetary return for the person taking the risk. Such opportunities are represented by customer
requirements and lead to the provision of a product or service which creates or adds value for the buyer
or end-users.
A business opprotunity may also be defined as a need for a proposed product or service in sufficient
volume at a high enough price and a low enough cost to allow a business owner to operate at a profit.

It is important to justify why the new business should be started. Justification shows entrepreneurs how
best to meet the needs of the people they propose to serve, and whether they are likely to do so at a
profit.

Justification of a new business may be provided by market analysis, consumer surveys, and other types
of studies and research. Often, a genuine business opportunity is uncovered as a result of making a
location study. Some businesses can be justified in one location, but not in another.

Introducing a new idea is the best way to start a new business. Ideas that meet a widespread basic need,
or solve a recognized consumer problem are almost certain to succeed. Such ideas occur most often to
the alert observer with a creative mind. Many products that we take for granted today originated
because alert and sympathetic individuals recognized a need for them . For example, in 1851, Gail
Borden while on a ship observed that milk supply was not refrigerated, and this led to the death of many
babies on the ship. This led him to develop canned condensed milk, which did not require low
temperatures for preservation.

Apart from the new idea, business similar to those already existing can be justified. There are two
situations in this case:

· Where an expanding market can support additional enterprises of the same type

· Where the market is not being adequately served because of the inefficient management of the
existing firms.

An Idea is not an Opportunity

The core problem is not the lack of ideas, entrepreneurs and innovators seem to have many ideas.
Unsuccessful entrepreneurs usually equate an idea with an opportunity. Successful entrepreneurs know
the difference. A skilful entrepreneur can shape and create an opportunity where others see little or
nothing.

Factors for Identification of Business Opportunity;

To succeed in business, one needs to identify the right opportunity in the right place and at the right
time. In order to describe your business accurately and develop a sound entry and growth strategy, you
need a clear vision and conception of the opportunity. Furthermore, your understanding of the market,
production, distribution service and financial aspects of the opportunity needs to be concrete enough to
determine whether it is sufficiently attractive to pursue.

There are two groups of venture opportunities. Those that are profitable and can be harvested and all
the rest. The most successful entrepreneurs work hard to sort out good opportunities among many
business ideas they have. They are opportunity focused. They know that there is a difference between a
good idea and a good opportunity, and they can spot it.

Many entrepreneurs who start a business especially if it is their first venture, run out of cash faster than
they bring in customers and profitable sales. There are lots of reasons why this happens. Often, the
problem is lack of experience in a specific market areas and in business. As a result, they lack knowledge
of the rules that can guide them in recognizing a good opportunity, and saying no to the rest. The other
part of the problem is that there are too many ideas and opportunities for one to choose from.

What factors should entrepreneurs pay particular attention to in order to sport and seize and
opportunity at the right time? The opportunity depends on many considerations such as:

Ø Is there vacuum

Ø What are the underlying reasons for the opportunity

Ø Can they be tackled

Ø How long is the problem likely to last

Ø Is there a real need for the product or service

Ø Have the customers been identified, are they reachable, (is there market)

Ø What are the economics of the of the opportunity? Are the gross margins and profits sufficient and
durable

Ø How long will it take to reach a positive cash flow and break even

Ø How much capital will be required

Ø Do the risk/reward work in your favour

What is important here is the opportunity and implicitly the customer, the market place and the
industry. The fundamental viewpoint is what is the opportunity you are seeking to seize or create, and
why does it exist. What are the prevailing conditions with the customer, market trends, competitors
technologies, location, the economies, capital gains that lead up to a compelling opportunity.

1.2. Generation of a Business Idea

We now know why people go into self employment, the advantages and disadvantages of going into self
employment. What we need to know is how people going into self employment get business ideas.
Many simply copy others the "me too" syndrome type. The path to successful entry is that of creativity.
Creativity is a major tool for entry and survival in the business world. Creativity makes one to recognize
needs and generate winning business ideas.

For an entrepreneur, creativity may start with the search for a marketable business idea. In the business
sense, it is finding a need and filling it. Indeed needs are opportunities waiting to be taken. You may
already have a business idea, but does it match your personal requirements and resources? Or you may
have no idea of what business to start. Either way, the following examples will help you generate
business ideas and consider them in good detail before deciding which one to go ahead with, and which
one to drop. It is important to note that entrepreneurs are not only born, and that there is no magic
formula for generating business ideas. Anybody can generate a business idea on their own. The
following are some ways of generating business ideas:

a) Building on your Skills, Hobbies or Interests;

Generating a business idea based on skills, hobbies or interests, entails listing as many of your interests,
skills and hobbies as you can think of.

b) Copying and Improving an Existing Business

It is true that many successful businesses are based on innovative and original ideas. It is also true that a
completely new untried and untested idea may be risky. That means that one could eliminate the risk of
failure by copying and improving on somebody's idea.

Another approach to this method is to analyze the weaknesses of existing businesses and look for
solutions for the weaknesses. For example bad customer care.

c) Combining Two Existing Business Ideas

Think of two or more existing business ideas and combine them to produce a new concept.

Example:

A Diet Food Restaurant.

Diet foods are sold mainly in shops and supermarkets. Existing restaurants offer normal food menus.
You can start a new restaurant offering only diet foods.

d) Spotting a Market Niche

Entrepreneurs usually look for "gaps" in the growing markets. They try to identify needs of sections of
markets which are not being met by existing businesses. However, spotting a gap in the existing market
may not be easy. One way is to identify trends and translate them into business ideas by identifying a
possible need associated with the trend.

The following trend should provoke you to think about trends both in your locality and countrywide.
Regional trends should help you identify export opportunities. The trends may be economic, social,
cultural or technological.

Trend

Need

Business Idea

1. Increased crime against particular people

Personal security

Home security services

Personal security services

2. Increased sex abuse e.g. rape

Personal security

Anti rape gadgets

Self defense classes

3. Increased single parents, both parents working

Freedom from child care

Baby sitting services

School children shuttle

Home delivery services

4. Increased consumer sophistication

Long distance shopping

Mail order shop

Home delivery service

5. Trends towards greater fitness

Desire to look good

Keep fit classes

Diet food stores

e) Listening to What People Say

If you are a good listener, you will hear people say.

If enough people say the same thing, then that could be a market niche to exploit. Listening to what
people say could be enhanced by actual interviewing of people to collect their complaints and desires.
E.g. a questionnaire could be circulated in the estate to find out the residents unmet needs. It is
important to jot down all the complaints you hear from people. An analysis of what is jotted down could
easily point to a business idea for you.

f) Others ways of generating business ideas include;

— Personal skills/experience

— Use of Mass media: newspapers, TV, Radio, Magazines

— Franchising (copying)

— Attending Business exhibitions

— Surveys (interviews, observations, questionnaires)

— Customer complaints (listening to these)

— Changes in society (analyzing trends)

— Brainstorming
1.3. Evaluating/Screening a Business Idea

After generating a number of business ideas, you need to decide which ones to pursue for a business.
You need to do some evaluations or screening to make this decision. This means that you systematically
evaluate the ideas in order to select the most suitable and profitable idea for business and drop those
that are not suitable and profitable. Screening must be done carefully, soberly and without emotions.
Business idea screening is required even if there is only one idea to consider. This is because there is the
danger of starting a business that may not be profitable, or that may be difficult to run due to a variety
of reasons. Two broad categories of considerations affect the choice of business to start: personal and
business considerations.

Personal Considerations

This is broken down into six different categories:

Your objectives of going into business

Your skills

Your interests

Your financial status

Your commitments

Your personal swot Analysis

Your Objectives of Going into Business;

Good entrepreneurs normally sets personal objectives of going into business. They then answer the
question: does the business idea agree with my business objectives? There are very many business
objectives, of which some common ones include the following:

Profitability or Return on Investment;

One goes into business to try to maximize profits. This is usually the ultimate goal for many businesses.
It is therefore advisable that you screen the ideas and see which is the most profitable one. This may call
for some financial analysis, producing basic financial statements such as profit and loss statement, sales
forecasting, e.t.c. It is important to note that some businesses are more profitable than others.

Survival;

Profit has to be earned, meaning that one has to work for it. During the start-up period, the business
may not be able to sustain itself. The objective of survival means that you plan for remedial measures
e.g. where to get money to pay employees, buy supplies before the business start financing itself. You
therefore need to select an idea which you can be able to manage during the teething stages without
strain. An idea which is likely to exist for long e.g. one whose technology is not likely to become obsolete
too soon. There may be little sense in selecting an idea which requires you to borrow heavily to start yet
its promise for profitability and survival is suspect.

Growth;

Every rational entrepreneur aims at growth, be it via expansion or diversification. They want to see the
business grow from strength to strength. It is a good idea to select a business that has good growth
potential, one that has more opportunities for diversification. For example a butchery could diversify
into a business selling hides and skins, bar and "nyama choma" roast meat, cattle rearing e.t.c.

Prestige;

Entrepreneurs who advance this objective aim at making and maintaining an image: of being famous or
remaining on top. If this is your objective, then you should be prepared to sacrifice initial profits for the
sake of investing in quality of the product or service. In this case you may be advised to select an idea
that promises good profits soon. An idea whose break even point comes quickly.
Society;

Society is your customer. You need to put the interest of society high on your business agenda. This may
mean charging fair prices, taking care of the environment, e.t.c. If you have society at heart, then
selecting a business idea that heavily pollutes the environment will require you to heavily invest in
expensive treatment plants, which might affect your profits.

It is possible to have other objectives. It is also possible to have all the above five objectives or a
combination of any of them and then to prioritize them. For example survival may be a major objective
until the business breaks even then the objective of profit may set in, and so on. Whichever set of
objectives you have, you will need to see which idea is most compatible with them.

Your Skills; - Can You Do It?

Some businesses require certain specialized skills to start and run. The idea should be screened in
relation to whether they require you to have such specialized skills. A medical clinic, accountancy firm,
law firm. These are some of the businesses not just run by anybody. If you have no skills, you may be
advised to obtain them through training. You may also want to seek temporary employment in a similar
business to gain the skills and knowledge first hand. Talking to people in similar business may also help.

Your Interests;

The finally chosen business should be consistent with your personal interests, objectives and
capabilities. In other words, the business idea should be of your interest. Therefore you should do a self
analysis vis-a vis the idea being chosen. A very important question to ask yourself is will I like the work
this business involves? There is no point choosing a business idea which involves work you do not or
cannot enjoy doing. Therefore for each of the ideas you generate, try to identify what activities they will
involve. Talk to people in similar businesses. Observe existing businesses. Alternatively, take up
temporary or part time work in similar businesses and learn what the business involves first hand.

Your Financial Status;

It is important to know the amount of capital required to start the business. It is also important to have
an idea of the amount of personal capital that you can raise and select a business idea that can be
started with that amount . More often than not, people complain that the biggest "roadblock" to
starting a business is lack of capital.

Your Commitments;

It is important to think of what commitments you have, which could be to your family or friends. Will
the business interfere with these commitments? It may be very important to have the support of your
family and friends. For example if your family is not prepared to put up with your spending every
evening and weekends helping your bar business to grow, then it may not be a good idea to choose such
a business. You may want to choose a less demanding type of business.

Your Personal SWOT;

SWOT refers to Strengths, Weaknesses, Opportunities and Threats. A personal SWOT is a summary of
personal factors that may affect a business. The strengths and weaknesses are subjective factors while
the opportunities and threats are objective factors, and may not necessarily be personal. Therefore you
can manipulate the S and W and not the O and T.

Example:

STRENGTHS

Personal Skills

Knowledge of Business

Supportive Family

Personal Capital

WEAKNESS
Lack of Relevant Skills

Lack of Experience

Unsupportive Family

Fear

OPPORTUNITIES

Available Credit Facilities

Availability of Market

Weak Competition

Supportive Regulations

THREATS

Strong Competition

Adverse Laws/Regulations

Obsolete Technology

Political Instability
A business idea that depicts more of the weaknesses and threats than the strengths and opportunities
or one for which it may be difficult to turn weaknesses into strengths and threats into opportunities may
not be desirable.

1.4. Business Considerations

There are several issues to consider including:

· Availability of market

· Availability of raw materials

Availability of technology

·Availability of skills

· Government policy

a) Availability of Market;

If there is no assurance of an adequate market, there is no sense in starting the business. The market
must be large enough to allow you to capture a good market share and hence make an attractive profit.
Indications of the availability of market include:

· The existing demand is not at present adequately served by existing businesses.

· Existing demand is presently served by imports only.

· Existing demand is presently not served at all.

· Your business idea has significant uniqueness or unique selling feature such as more desirable
features, better quality, more durability, better taste, superior after sales service e.t.c

· Supply of the product/service is currently not reliable

· Demand of the product/service is expected to increase significantly in the future.

b) Availability of Raw Materials;

Are the raw materials for the business available? This may be indicated by:

Raw materials are available in adequate quantity and quality locally.

There is reliable supply-whether locally or from imported sources.

Seasonality, perishability, quality and variety of the raw materials are satisfactory.

Prices of the raw materials are perceived to be reasonable and predictable.

c) Availability of Technology;

Is the required technology available? This can be evaluated in terms of the following factors:

· The technology to be used is proven

· Reasonably priced technologies are available

· Available technologies are appropriate for the level of production, investment and product quality.

· The business will not suffer from technology obsolescence

d) Availability of Skills;

Are the required skills available? Availability of skills can be gauged by the following:

Different skills needed by the business are available

The supply of skills is steady

The cost of hiring the skills is reasonable

e) Government Policy;

Is the government policy conducive? This is indicated by the following considerations:

The area of business is a government priority

Businesses in this area receive government incentives

Future government plans stress this area of business.

Qualities of a Good Business Opportunity

An opportunity is considered as a viable business idea which the entrepreneur selects from several ideas
to take up as an investment proposition. A good business opportunity should possess the following
qualities:-

Legality

The opportunity should be capable of operating within the rules and regulations of a particular country,

Growth

A good opportunity should have growth potential to guarantee the business increase in customer base
operations, market share and profits.

Uniqueness

The opportunity should stand out in the industry and market to capture the attention of all
stakeholders.

Marketability

The opportunity should appeal to the intended market. The target market should also have the ability
to buy the goods/services.

Competitiveness

An entrepreneur should be guaranteed a position among his peers (competitors) or be ahead of them in
order for the business to survive.

Protect ability

It should provide the owner with the capability to own the intellectual property rights of the products
and services developed.

Financial feasibility

The opportunity should be within the economic means of the entrepreneur.

Social acceptability
A viable business opportunity should be acceptable within the social norms and common practices of
the society.

Operational feasibility

A good opportunity should not find difficulties in implementation and should be compatible with the
existing reinforcing infrastructure.

Legal Aspects of a Business

Laws and governmental regulations have a significant impact on enterprise formation and operation.
Entrepreneurs must be aware of such laws and regulation for the smooth running of their enterprises.
These aspect influence commercial decision-making, from business registration, employment and
dismissal decisions, to workplace safety, product quality, insurance, commercial agreements, marketing
and financing.

Business enterprises also have an interest in protecting their investments and commercial rights. It is
therefore important for entrepreneurs to not only comply with the laws and regulations but to also
defend their properties – merchandise, products and services, share capital, trademarks, copyrights, as
well as patents against unlawful infringement.

Operations of an enterprise can be influenced by legislation, court decisions and administrative rules or
regulation imposed by many government agencies, both at county and national government levels.
Some of the common laws that may impact the enterprise include;

· Financial law ;– financial laws require businesses to follow certain guidelines when it comes to
banking, insurance, bankruptcy and securities.

For example, certain businesses e.g. construction sites, factories, transport industry, etc. are required to
procure insurance to protect their customers. In case of accident, the entrepreneur is relieved of
excessive liabilities if the customers/workers are insured.

Licensing;
All businesses are required to have certain operating licenses. These can be obtained from the central
Government officers and local authority. An entrepreneur should be aware of what licenses are
required for his/her type of business.

· Employment law/labour law; – These ensure fairness in operating of business in relation

employer/employee relations. In Kenya, the specific Acts dealing with these issues include the
employment Act and the Work Injury and Benefits Act. They include laws affecting hiring and firing of
employees, overtime pay, child-labor, disability, worker’s compensation, unemployment, employee
rights, employee safety and discrimination, among other employment related issues.

· Tax law; – these include laws pertaining to the filing of tax returns and payment of: sales tax,
withholding taxes, corporation taxes, pass through taxes and both national and local government taxes.

· Business formation laws; – these include laws pertaining to specific business structures, sole
proprietorship, partnership, and limited companies.

· Environmental law; – these include laws pertaining to environmental impact and the discharge of
hazardous waste material.

· Trademark and patent law; – this include laws pertaining to ownership, inventions and/or
intellectual property rights.

· Consumer protection law ;– against fraud or unfair business

· Zoning law ;– this typically include local ordinances that regulate: building, parking, advertising and
signage, use of the land surrounding the business and even the type of business allowed to be
conducted in a specific area.

Building laws;

These are enacted to ensure safety and suitability of the business premises. These laws are contained in
the factories Act and the Local Authorities by-laws

Health Regulations;
Businesses such as hotels, hospitals, boarding facilities etc, are expected to obtain a certificate of
compliance with health regulations from the local health inspection office.

· Others include criminal law, which is concerned with breach of public duty and is punishable by
the state on behalf of society. Torts – which covers negligence, nuisance, the law of defamation and
trespass. Administrative law which covers regulation by government agencies.

1. FORMS OF BUSINESS OWNERSHIP

1.1. sole proprietorship

Some of the important definitions of sole proprietorship are as follows:-

1. “A sole proprietorship is a business unit whose ownership and management are vested in one person.
The individual assumes all risks or loss or failure of the enterprise and receives all profit from its
successful operation.” Peterson plowman.

2. “A sole trader is a person who carries all business exclusively by and for himself. He is not only the
owner of the capital of the undertaking but it is usually the organizer and the manager and takes all the
profits or responsibilities for losses.” -James Stephenson.

Proprietorship is the simplest and easiest to form. It does not require legal recognition and lengthy
formalities. This form is the most popular form in Kenya due to distinct advantages it offers. William R.
basset opines that “the one man control is the best in the world if that man is big enough to manage
everything.

Formation of Sole Proprietorship

ü It is simple and easy to form since legally only licensed from the government is required

ü If the name of the business is different from that of the owner the business name should be
Circumstances under which the Sole Proprietorship ideal

1 When customers show preference to specialized services

2 Where small capital is required to start up a business

3 Where returns are low and may not warrantee existence of a large business.

4 Where the market experiences frequent demand changes 5 Where locations are remote and the
population may be small.

Characteristics of sole proprietorship

The main characteristics of sole proprietorship are as under:-

1. Ownership: The business is owned by a single individual. A person can undertake any lawful
business activity for profit motive.

2. Management and control: Being small in size, it is managed by the owner himself. However, he may
have some paid workers to assist him. In any case, the ultimate control rests in his hands.

3. Finance: The necessary capital to run the business is provided by the sole owner. However, he may
borrow from other sources such as friends, relatives, or a bank as needs arises.

4. No separation between ownership and management: in proprietorship, management rests with the
proprietor himself. The proprietor is also a manager.

5. Risk: The proprietor himself bears all the risk. Nobody else has any stake in the business.
6. Personal incentive: A sole proprietor takes personal interest for the success of a business. In this
way, he can maximize his profits.

7. Close supervision: A sole proprietorship can supervise his business closely as he has direct contact
with his employees.

8. Need for small capital: it is the easiest business to set up since it does not require a lot of capita and
formal procedures like registration and consequently little or no costs of organization involved.

9. Independence: The owner is independence and so can put his plans into action quickly since he does
not have to consult any other person. He may, for example, change the nature of his business as he
wishes to adopt it to the changing market situation.

10. Legal status: In law, the sole trader and his business are considered as one. In other words, all the
assets and liabilities of the business are the personal assets and liabilities of the proprietor. We can say
that the owner and the business exist together. In other words, the two are considered one in the eyes
of law.

11. Unlimited liability: unlimited liability means that in case in case the enterprise incurs losses, the
private property can also be utilized for meeting the business obligation to outside parties. The sole
trader is personally liable for debts of the business. The creditors can lay claim not on his business
assets but also his personal property such as cars, houses, furniture etc to recover the loan.

12. All profits or losses to the proprietor: Being the sole owner of the enterprise, the proprietor enjoys
all the profits earned and bears the full brunt of all losses incurred by the enterprise.

13. Relationship with customers: The sole trader tries to keep good relationship with his customers.
The customers are generally personally known to the proprietor and their orders are highly valued. He
knows the tastes of his customers and provides them the necessary goods which they need. This
creates his goodwill in the market because he can give them personal attention, attend to their personal
complaints and understand their needs better.

14. Less Formalities: A proprietorship business can be started without completing many legal
formalities. The sole trader can set up or close the lawful business as and when he likes. The operation
of his business is not governed by any special Act of ordinance. There are some businesses that too can
be started simply after obtaining necessary manufacturing licence and permits.

Advantages of Sole Proprietorship.

1. Ease of formation: A person can undertake any lawful business activity for profit motive easily.
The person has to develop an idea, set the goals and then develop it into a profitable operation.
According to J.L.Lundy, becoming a sole proprietor is as simple as buying newspaper and selling them on
the street. It is therefore attractive for its low startup cost.

2. Sole Authority: The proprietor, being the sole authority, takes decision of planning, organizing,
staffing coordinating, controlling and directing of the business unit. He has full authority to manage his
business as he likes. He prepares the plan, invests his money, supervises the business and enjoys the
profits.

3. Owner’s Freedom to take decisions: The owner, ie the proprietor is free to make all decisions
and reap all the fruits of his labour. There is no other person who can interfere or weigh him down.

4. Sole claim on profit: The sole trader receive full profits of the business

5. Flexible and inexpensive management: The full authority rests with the single proprietor in this
business. He can make prompt decisions in carrying out policies, changing the methods of production,
reducing or increasing the prices of the commodities, delegating responsibilities, etc. He can also take
quick action for increasing the production activities of the workers by giving them incentives. The
operational expenses are kept at the minimum. He can make decisions in time and control the situation
more effectively.

6. Credit standing: If the proprietor has a sound good will and personal assets, he enjoys an
excellent credit rating among the creditors. He establishes his credit worthiness in the market.

7. Minimum Legal Registration: As long as the proposed business is legal, anyone can organize it
without going through any special formality. An individual enterprise is easy to form and simple to run
as minimum legal restrictions are imposed on it. The government gives preferential treatment in the
establishment of small enterprises. The single proprietors are not required to submit charter,
partnership agreement, special reports to the state etc.
8. Legal status: Legally, the sole trader and his business are not separate from each other. The
proprietor and his business have one personality. All assets are his assets. Loss in business is his loss.
Liabilities of his business are his liabilities.

9. High Secrecy: Secrecy is another major advantage offered by proprietorship. This is because the
whole business is handled by the proprietor himself and as such the business secrets are known to him
only. A sole trader, being the organizer himself, maintains a high standard of secrecy of profits, special
technique of production, special technique, etc. Added to it, the proprietor is not bound to reveal or
publish his accounts.

In present day business atmosphere, the fewer competitors knows about one’s business, the
better off one is.

10. Benefit of inherited Goodwill: The ownership of sole trading business passes on from generation
to generation. The sole trader ship, thus, enables the son to reap the benefits of good will of his father.

11. Reducing Concentration of wealth: The sole proprietorship helps in reducing concentration of
wealth in a few hands. It gives wider distribution of business ownership in the county.

12. Self-Employment: The sole trading business provides business careers to a large number of
persons with small means.

13. Development of personal qualities: In sole trading business, the personal qualities of a proprietor
like initiative, self-reliance, self-esteem have full scope for development.

14. Tax Advantage: As compared to other forms of ownership, the proprietorship form of ownership
enjoys certain tax advantages. For example, the sole proprietorship’s profits are taxed as personal
income of the owner. Thus proprietor’s income is taxed only once while corporate income is at
occasions, taxed twice i.e. double taxation.

15. Easy and low cost organization: The sole proprietorship is easy to form. Any person who has the
capital can go into business without red tape and special legal procedures. He has also not to pay legal
fees in drawing up a partnership agreement as is done in partnership nor incorporate fees as is
required in the case of companies.
16. Special Benefits of Sole proprietorship: Sole proprietorship besides being useful to the
individual owner, is also beneficial to the society. For instance (i) it makes an individual financially
independent who becomes an asset and not a burden to the society; (ii) it develops social virtues like
initiative, strong will independent thinking, courage to face odds, (iii) the single proprietorship helps in
avoiding concentration of wealth in few hands. There is no sharp division, class rift and hatred between
the “haves” and “have notes”, in the society.

17. Management lies with the owner. In sole tradership, management of the business lies with the
owner. As the owner receives 100% of the profit earned in the business, he therefore takes direct
personal interest in increasing productivity and maximizing profit.

18. Easy dissolution: In proprietorship business, the entrepreneur is all in all. As there are no co-
owners or partners, therefore, there is no scope for the difference of opinion in case the
proprietorship/entrepreneur wants to dissolve the business. It is due to the easy formation and
dissolution. The Sole trader can start any lawful business. He has also the right to close the business as
and when he likes. Satisfaction of the creditors is the only claim in winding up the business.

Disadvantages or limitations of Sole Proprietorship

There are certain serious disadvantages which a sole trader has to face in operating the business. These
limitations in brief are as follows:-

1. Unlimited liability: Every business involves risk. If a firm suffers losses and the assets of the
business are not sufficient to cover claims against the business, the personal property of the
proprietor can be sold under the Court Order to satisfy the claimants. The Proprietor in case of loss,
thus, faces the risk of unlimited liability. Therefore, the most serious drawback of sole proprietorship is
the burden of unlimited liability.

2. Limited Resources: A proprietor has limited resources at his/her command. The proprietor
mainly relies on his/her funds and savings and to limited extent, borrowings from relative and
friends. Thus, the scope for raising funds is highly limited in proprietorship. This in turn, deters the
expansion and development of an enterprise.

3. Lack of continuity: The continuity or permanence of a sole proprietorship is normally difficult to

maintain. If the proprietor dies, falls sick, gets imprisonment, it is disabled and there is no suitable
successor to him, the business is adversely affected. The business may be closed, sold or liquidated.
Say, enterprise also dies with its proprietor.

4. Difficulties of expansion: An individual proprietor faces difficulty in expanding the sole trading
business. Most of the capital which is invested in the business comes from the personal savings of the
proprietor. The financial institutions are reluctant to advance long term loans to the owner of a sole
proprietorship. As a result, the single owner of a business, however rich he/she may be, finds it difficult
to expand the business and avail the economies of large scale production.

5. Limited managerial Ability: In managing the business, the sole trader has to rely upon his own
skill and judgment for operating the business. Most of the proprietors do not possess all the
management skills required for financing, marketing, purchasing, producing, and supervising of the
business. Some of them may be production minded, others may be qualified for selling of the product
while some are good at handling finances but are not good administrators. The sole proprietor being
unable to perform all the duties and functions of management efficiently limits the size of the business
according to his capacity. Also, due to lack of adequate and relevant knowledge, the decisions
taken by him may be imbalanced.

6. Operational disadvantages: - As the sole proprietor normally faces difficulty in acquiring capital,
he has to face operational problems which are not so acute in other forms of business ownership. For
instance, sole proprietors usually have inadequate buildings, substandard machinery, poor location and
lay out of factory, inability to purchase raw material in large quantity to avail the discount etc.

7. Overworked: The owner being the organizer performs a wide range of activities some of which
he may have no experience in. He is, therefore, very much overworked.

8. Unable to carryout research: The smallness of his capital and the fear of risks of which would
prove more paying in the long run.

9. Loss in absence: A sole proprietorship has to suffer from the long illness of the proprietor. The
business in his absence almost comes to a standstill.

10. Absence of specialization: - The sole trader is not in a position to hire the services of experts like
qualified accountants, Salesmen, etc. The sole trading business, therefore is deprived of the services of
experts.
11. Weak Bargaining position: The sole trader both as a buyer and seller has well bargaining position
compared to big business men units.

12. Unsuitable for a developing business: When a business grows in size, these forms of organization
cannot meet the needs of expanding business.

N/B There are some areas where this form of business is more suitable.

Dissolution of a Sole Proprietorship

ü Dissolution refers to the termination of the legal existence of the business.

This may be caused by;

i) The death of the owner

ii) The transfer of the business to another person

1.2. Partnership

· According to the partnership Act. A partnership is referred to as a relationship which subsists between
persons carrying on a business in common with view of making profits.

· A partnership is thus an extension of sole proprietorship and is in fact necessitated by the fact that a
sole trader may for several reasons fail to carry out his business efficiently and profitability.

· Partners pull the financial and managerial skills together in order to make profit.
Formation

According to the partnership Act (934) a partnership business may come into existence through any of
the following ways.

· Orally

· By actions of persons concerned

· By a simple put in written

· By a partnership deed

NB the above ways of forming a partnership are allowed by the partnership Act, However it’s better to
remember that it may be made illegal under the following circumstances.

Circumstances under which the Partnership is illegal

If the partnership has been formed for an illegal purpose e.g. theft.

If is formed and the partners do not meet the minimum qualifications e.g. auditing

Where the partnership contains more than 20 members

Where the partnership wants to run their business with the name which does not disclose the true
names of all the partners or the name had not been registered under the registration of the business Act
under which it is deemed illegal.

Requirements for the Registration of a Business Name.

Under the partnership Act , the partners must furnish the registrar of business names for the following

a) The business name

b) The general nature of the business

c) The principle place of location of the business

d) The present Christian and sir names together with their usual residential address.

e) The nationality of each partners

f) Any other occupation of the partners

g) The date of commencement of their business.

Types of Partners

a) General partners

These are the real partners in new sense of the partners which refers to those partners who are the
most active partners in the partnership

In most cases the general partner is a reliable of the debts of the partnership.

b) Limited partners

This is a partner whose liabilities are limited to the amount of capital contributed to the partnership
business

This type of partners do not usually participate in the management of the partnership because if they do
they loose their limited liability in respect to the transaction and decisions participated in.

c) Active partner

This is the type of partner who takes the active part in the running of the business.

In most cases such a partner may be employed somewhere or may be in another business all together

The partner contributes capital to the partnership business and the profits or losses at lower
proportions.

Articles of Partnership/ Partnership Deed.

Although it is not a statutory requirement the partnership can be formed by a written agreement, it is
usual for the partnership business in particular those involved in huge commitments to write articles of
a partnership also known as a partnership deed.

The aim of this document is to safeguard the interest of each partner and it constitutes a legal contract
among the partners.

Contents of a Partnership Deed

1. The nature of the business to be carried out

2. The capital and property of the firm together with the respective capital contributions of each
partner.

3. The sharing of profits or losses by partners.

4. The rules as to the case of interest on capital and drawings by partners. 5. Provision for proper
accounts and their audit

6. The power of each partner.

7. The drowns for the resolution of the partnership

8. The method of determining the value of good will on retirement of drafting in of a new partner.

9. The method of determining the amount payable to a deceased partner.

10. No partners may should carry on a competing business

11. Any changes in partnership composition must be agreed upon by all partners.
Circumstances under which the Partnership Deed is ideal.

1. In a business where the amount of capital required is reasonably large.

2. If professional were pulling together effort for efficiency and better performance.

3. If professional areas where the law prohibits a couple of days.

Advantages of Operating a Business under a Partnership

1. A partnership business benefits from the talents of individual ensuring almost efficiency and
acceptance.

2. Since a partnership would be owned by a no. of partners it sets a basis of pulling together saving
to raise large capital for investments

3. Sound decision making through consultative processes

4. A higher growth rate as a result of combining ambitious from different partners.

5. Partnerships have a good will and financial influence enabling it to raise finance easily.

6. Collateral or security of loans can be easily be raised.

7. Formation of partnership business requires minimal government interventions.

Disadvantages of Operating a Business under a Partnership

 i. Slow decision making due to long discussion processes

ii. Sharing of profits tends to disregard hard working partners.

iii. Partnership business have limited life in case of retirement or dead of one partner.

iv. Disagreements make partnerships business vulnerable to disputes among partners.

v. The partners have unlimited liability which lead to loosing personal property in the event the
partnership business cannot settle its debts.

vi. The agency burden where every partner is an agent of the partnership and one’s partner’s
mistake may affect the rest.

vii. Limited managerial skill may lead to mismanagement of the business.

Sources of Capital of a Partnership

1. contributions from partners

2. Loans from commercial banks and other financial institutions

3. Stock from hire purchase firms

4. Credit facilities from suppliers

5. Loans from government institutions

6. Plough backs from retained profits

Classification of Partnerships

There are five ways through which partnership are classified.

1. By trading

A partnership may be classified as

a) Non-trading partnerships- these partnerships whose activities are to offer services e.g. legal,
medical, accountancy, teaching e.t.c.

b) Trading partnerships – these are partnerships whose main activities are manufacturing, purchasing
or sales of goods.

2. By liability

a) General partnerships – are partnerships in which all partners may publicity act on behalf of the firm
and each partner individually be held responsible for the debts of the firm. Their properties may be
attached to clear the debts of their partnership.

b) Limited partnerships – a partnership whose activities of certain partners are limited. The personal
liabilities of such partners (limited partners) are limited to a certain amount stated. These amounts are
normally equivalent to the amount of their contributions.

NB the following conditions must be fulfilled for a limited partnership to be formed.

1. The partnership should not consist more than 20 partners.

2. The partnership must consist one or more general partners.

3. The limited partners are not liable to the partnership debts beyond his capital contribution.

NB Restrictions of the limited partners.

1. Is entitled to inspect the books of the firm and examine the partnership state at any time.

2. The death, withdrawal bankruptcy of a partner shall not cause dissolution of a partnership or the
partnership can not be dissolved by a court order because of lunacy of the partner.

3. A limited partnership is only dissolved by the general partners unless brought through a court
order.

4. Any differences on partnership matters can only be decided by a majority of the general partners.

5. With the consent of the general partners a limited partner may assign his/her shares in the
partnership to another person.

6. A person may be introduced into the partnership without the consent of the limited partners.

3. By time duration

A temporally partnership ( joint venture partnership) – this is a partnership formed for a specified
period of time

Termination of the stated period or accomplishment of the purpose may cause the partnership to
come to an end.

a permanent partnership (partnership at will) – This is a partnership formed to carry the business
indefinitely

It does not have a fixed life of fulfilling its purpose

4. By activity

ü a) Active partner – this is a partner who is actively involved in the day to day management of the
partnership and may be paid a salary for these services. And the partner is held liable for the debts of
the firm.

b) A dormant /sleeping partner – does not take part of the day to day management of the partnership
but contributes capital, shares profits and is liable for the business debts

5. By capital contributed

a) Real partner – a partner who contributes capital into the business and whose name may be used in
relation to transactions of the business and enjoys the profits of the partnerships.

b) Nominal partner – is a partner who has not contributed any capital to the business but allows his or
her name to be used in the business. They are usually influential persons whose names can be used.

c) Quinsy-partners – a partner who has retired from the partnership but has left his capital in the
partnership business which is treated as a loan, he earns interest

6. By age

a) Majority partner – A partner who has attained the age of 18 years and above. Such a partner unless
stated to the centrally can be held liable for the partner.

i) Partner shares only profits and not losses since he didn’t participate in decision making that may have
caused such losses.

ii) The liability of the minor is limited only to the amount of capital contributed to the business since any
liabilities arising may not be part his decision making.
iii) The minor partners can act on behalf the partnership and such acts shall be binding on the other
partnership iv) When the minor partner attains the age of majority he/she has up to six months to
decide whether or not to continue with the partnership. If he/she decides to stay, he has full
responsibilities and rights of a major partner.

Termination/ Dissolution of Partnership

Although the partnership deed or articles of partnership will contain regulations of terminating the
partnership, nevertheless in the absence of our subject these regulations, a partnership may be
dissolved in the following ways.

1. When the fixed time if any are stated in the articles of the partnership expires.

2. If the partnership was specifically entered into for a given venture, transactions or undertakings
the completion of which or achievement will automatically dissolve the partnership.

3. If the partnership is a partnership at will, it can be dissolved by any partner giving notice of his
intention to dissolve the partnership.

4. By mutual consent of all partners

5. By bankruptcy or death of one the partners.

6. By one partner’s shares in the partnership being changed or attached by a court order for private
debts.

7. If any events occur which will make the partnership business illegal, the partnership will stand
dissolved irrespective of the content of the partnership deed.

8. Automatic or compulsory dissolution as it is provided section 39 of the partnership Act which lay
the following grounds under which a partnership may be dissolved by a court order.
a. If any one of the partners becomes insane

b. If any of one partner becomes permanently in case of performing his/her duties through in
capabilities, accidents or disabilities

c. Where a partner has acted in a manner which is pre-judicial to the carrying out firm’s business and
may bring the name of the business to its disables.

d. Where a partner was found guilty of breach the partnership contract.

e. Where the firm has been operating in losses.

Management of Partnership

Members of a partnership are correctively responsible for the management of the business.

The members may share responsibilities and duties according to their respective skills and availability in
order to ensure effectiveness in management of the partnership.

The partners may decide to hire skilled or non-skilled labour to assist the management of the partner

1. BUSINESS PLANNING

1.1. Reasons for writing a Business Plan?

a) To obtain financing

b) It guides in operating a business

c) It guides in managing a business

d) It communicates clearly to the interested parties

1.2. Importance of a business plan

i. It’s a financial tool that provides information if one wants to obtain a loan.

ii. It enables potential entrepreneurs to assess the viability of their business opportunities on paper.

iii. It forces entrepreneurs to establish written goals and objectives for the proposed business.

iv. It establishes the financial need of a business and suggests the possible sources of financing.

v. A business plan tests ideas on paper.

vi. It indicates the owner’s ability and commitment.

vii. A business plan is a blueprint or guidelines

1.3. Qualities of a good business plan

1. Simple and clear- in order to be attracted and motivating to the reader, the business
plan should be:

· Be simple

· Sentences should flow logically

· Each sentence should have one idea

2. Brief– one should be brief and straight to the point.

3. Logic – ideas should follow one another in a logical sequence. Paragraphs should be
connected.

4. Truth – one needs to be frank and not overstating the facts.

5. Use of figures – words should be baked by figures especially in financial plan

1.4. Components of a business plan

01. An executive summary

02. Business description

03. Marketing plan

04. Organization and management plan

05. Production/ operational plan

06. Financial plan

07. Risk plan (not necessary if included in every chapter)

6.6.1 Executive Summary

Summary of important points in each chapter and should not be less than 5 – 8 lines for
each component.

It should be one and a half to two pages. It should include summary of:

· Business description

· Marketing plan

· Management and organizational plan

· Production and operational plan

· Financial plan

6.6.2 Business description

Background of the owner.

a. Business name

b. Business location and address

c. Form of ownership

d. Type of business

e. Products and services- What product(s) are you going to offer?

f. Justification of opportunity -The reasons for choosing that kind of business.

g. Industry -Which industry does your proposed business belong to

h. Goals of business/objectives - what does the business want to achieve in the long
term.

i. Entry and growth strategy

6.6.3 Marketing Plan

· Customer -Understanding potential customers or current customers is important for any

business

· Market share/size

· Competition -Need to consider what they’re doing and Plans to capitalize on the
weaknesses of the competitors

· Methods of promotion and advertisement -Media to use which can be electronic

and print media

· Pricing strategy -The methods of calculating the selling price for your products or
services

· Sales tactics- Selling tactics you will employ selling

· Distribution strategy-How will you get your products to reach your customers? E.g.
through sales

6.6.4 Organization and Management Plan

· Management team;-Describe each of the managers stated -Duties and

responsibilities, Qualifications and Experience.

· Other Personnel: These include other employees who are not in management team:

· Organisational structure

· Recruitment Need to describe how managers and other personnel will be recruited;

· Training

· Promotion Criteria of promoting personnel

· Remuneration and incentives - Indicate firm policy on remuneration e.g to offer

attractive salaries to employees so as to motivate and retain them

· Licenses, permits and by-laws

· Support Services - The business will require support services to enable it carry out
its operations effectively. These services will include;-Banking Services, Insurance
Services, Consulting Services, Legal Services

6.6.5 Production/Operation Plan

· Production facilities and capacity

· Firm layout

· Production strategy. This means the methods used to produce the product

· Production process

· Factors affecting production/ operation

· Health regulations

· Safety
· Environmental regulations

6.6. 6 Financial Plan

The main reason of preparing a business plan is to receive funds. The financial plan
comprises analyzing financial requirements or business and developing financial plans.

· Pre-operational costs -Pre-operational means the cost incurred before the start of the
business

· Pro-forma Balance Sheet. A balance sheet is a financial statement that shows the
financial position of the business for a certain period of time (usually one year)

· Working capital Working capital. It is the current assets- current liabilities

· Cash flow projection- It is the financial statement that shows cash in and cash out of
the business.

· Pro-forma income Statement (Trading, Profit and Loss Account)

· Break Even Analysis. Break even analysis is where the total revenue is equal to the
total costs.

· Desired financing Item

· Capitalization

· Profitability ratios

2. DEFINITION OF A BUSINESS PLAN

Definition: a business plan is a document that convincingly demonstrate that your business
idea can sell enough of its products and services so as to make products and services so
as to make satisfactory profit and attractable to potential financiers.

In other words a business plan in a road map you can follow to start and manage a
successful business. It shows step by step on how to start, fund, manage, monitor, and
evaluate a successful business
1. ENTREPRENEURIAL COMPETENCE
1.1. LEADERSHIP

LEADERSHIP

 Leadership is the ability to inspire, influence, and persuade others to give maximum
effort and cooperation willingly and voluntarily towards the attainment of the
unplanned goals.
 Good leadership is a necessity in any business organization. It is important your
portray appropriate leadership qualities such as leadership behavior, leading and
motivating others, leadership responsibilities, leaders influence and activities;

7.2.1. Important Leadership Traits

i) Treat other more like people than numbers

ii) Tactful relations with others

iii) Fair and honest in dealing with others

iv) Sets good example for others

v) Cooperative

vi) Dependable

vii) Good listener and respects others' point of view

viii) Cheerful and optimistic

ix) Helpful in assisting others to do a better job

x) Receptive and accepts new ideas

xi) Emotionally stable in dealing with people

xii) Hard worker

xiii) Loyal to employees

xiv) Consistent in relations with others

xv) Accepts responsibilities

xvi) Admits mistakes

xvii) Obtains good work results

xviii) Good work habits

xix) Promotes wellbeing and belongingness among employees.

7.2.2 Leadership Power

The leadership influence is dependent upon the type of power that the leader can exercise
of the followers. The exercise of power is a social process which helps to explain how
different people can influence the behavior /actions of others.

The Sources of Power include:

i. Reward Power

Is based on the subordinate’s perception that the leader has the ability and resources to
obtain rewards for those who comply with directives, such as; pay, promotion, recognition,
praise, and granting of privileges. )

ii. Coercive Power

Is based on fear and the subordinates perception that the leader has the ability to punish or
bring about undesirable outcome for those who do not comply with the directives for
example withholding pay rise, promotion or privileges, formal reprimands or possibly
dismissal,

iii. Legitimate Power

Is based on the subordinates perception that the leader has the right to exercise influence
because of the leaders' role or position in the organization. Legitimate power is based on
authority, for example that of managers and supervisors, within the hierarchical structure of
the organization. )

iv. Reference Power

Is based on the subordinate’s identification with the leader. The leader exercises influence
because of perceived attractiveness, ^personal character, reputation or what is called
"charisma"

v. Expert Power
Is based on the subordinates’ perception of the leader as someone who is competent and
who has some special knowledge or expertise in a given area.

7.2. 3. Theories of Leadership

1. Trait Theory

This theory assumes that leaders are born not made. Leadership consists of certain
inherited characteristics, or personality traits which distinguish leaders from followers. For
example need for achievement, focus , assertiveness, optimism, self confidence,
intelligence and creativity. The leadership traits are the same qualities that entrepreneurs
possess. Drucker (1955) noted that leadership is of outmost importance; there is no
substitute for it. Leadership cannot be created or promoted. It cannot be taught or learned.

2. Situational Theory

Under the situational theory, leadership is considered to be a function of the situation in

which a leader emerges and works. It is based on the assumption that leadership is
basically situational. A variety of people with differing personalities and from different
backgrounds have emerged as effective leaders in different situations. The person who
becomes the leader of the work group is thought to be the person who knows best what to
do and seen by the group as the most suitable leader in the particular situation.

3. Behavioural Theory

It is based on the assumption that leadership effectiveness depends upon what the leader
does. The leadership behaviour is the product of the leader and the followers. A leader uses
his skills to exercise influence and modify behaviour of his subordinates.

7.2.4 STYLES OF LEADERSHIP

1. Authoritative Style

It's also known as "iron fisted", autocratic or dictatorship leadership. The leader makes
decisions and gives orders without asking the group members what they want. Authority
and responsibility in an organization and communication moves from top to bottom. A
manager can use force.

2. Democratic Style

A leader obtains ideas and opinions from workers and gives them a chance to explain their
feelings about how things should be done. Communication is both upward and downwards

3. Free-Reign or Laissez-faire Style

A leader allows subordinates to work as they choose with minimum interference. The
employees are given the authority to make a decision or to determine a course of action, i
Communication flows horizontally among, group members.

Theory X and Theory Y

ü According to MC Gregory each manager will manage his employees according to his own
attitudes and ideas about people, their needs and their motivations.

ü If an appointed a manager believes that individuals are naturally lazy, then he or she will
treat subordinate employees in a certain way, such as issuing precise orders and exercising
tight control over their work.

ü For purposes of comparison he stated that the extremes in contrasting attitudes among
managers could be classified as Theory X and Theory Y

Theory X Theory Y
1. Inert, lazy, prodded Naturally active, striving
2. Work for threat of hunger, loss of job Work to achieve goals, find satisfaction, build
good life
3. Pay is almost the only motive Many motives, achievement, recognition, service
4. Dependent, must be directed, push, needs Independent capable of self-directing, setting own
leader to inspire goal
5. Irresponsible, immature, must be closely Mature, responsible, capable of self-correction
supervised and carefully checked
6. Conformists-needs prescribed routine and Inventive, adaptive, creative needs to device new
resist change ways
7. Satisfied with good pay Seeks broader meaning in work life
8. Not to be trusted Usually trusted
9. Individualistic, selfish Social, naturally concerned with affiliation and
cooperation

1.2. Entrepreneurial Skills

A skill is simply knowledge which is demonstrated by action. It is an ability to perform in .a

certain way. Turning an idea into a reality calls upon important skills.

Some important: general management business skills include:

1. Strategy Skills - an ability to consider the business as a whole, to understand how it fits
within its marketplace, how it can organize itself to deliver value to its customers, and the
ways in which it does this better than its competitors;

2.Planning Skills - an ability to consider what the future might offer, how it will impact on
the business and what needs to be done to prepare for it now;

3. Marketing Skills - an ability to see past the firm's offerings and their features, to be able
to see how they satisfy the customer's needs and why the customer finds them attractive;

4.Financial Skills - an ability to manage money; to be able not only to keep track of
expenditure and to monitor cash flow, but also to assess investments in terms of their
potential and their risks;

5. Project management Skills - an ability to organize projects, to set specific objectives, to

set schedules and. to ensure that the necessary resources are in the right place at the right
time:

6. Time management Skills - an ability to use time productively, to be able not only to
prioritize important jobs and to get things done to schedule. Businesses are made by
people. A business can only be successful if the people who make it up are properly
directed and are committed to make an effort on its behalf,

7. Leadership skills - an ability to inspire people to work in a specific way and to undertake
the tasks that are necessary for the success of the venture. Leadership is about more than
merely directing people; it is also about supporting them and helping them to achieve the
goals they have been set.

7.Motivation skills - an ability to enthuse people and get them to give their full commitment
to the tasks in hand. Being able to motivate demands an understanding of what drives
people and what they expect from their jobs. It should not be forgotten that, for the
entrepreneur, an ability to motivate oneself is as importance as an ability to motivate others.

9. Communication skills - an ability to use spoken and written language to express ideas
and
inform others. Good communication is about more than just passing information. It is about
using language to influence people's actions.

10. Negotiation skills - an ability to understand what is wanted from a situation, what is
motivating others in that situation and recognizes the possibilities or maximizing the
outcomes
for all parties. Being a good negotiator is more about being able to identify win-win
scenarios
and communicate them, than it is about being able to bargain hard.
1.3. Coping with Competition

In any business environment competition is inevitable. You need to be prepared by

identifying your competitors and analyzing the strengths and weaknesses of your enterprise
and of the competitors then developing a strategy to cope with the competition.

Identification

You need to identify and list out the names, location and activities of all your competitors,

Analysis

You analyse yourself and your competitors on the basis of yourself and your competitors on
the basis of:

a. Market: What is your /their market? What share of the market do you/they have? What
segment of the total market do you/they cater for? What advantages do you/they have in
servicing your/their market segments?

Is the total demand satisfied? Could your market be expanded? Could you identify new
markets? How do you/they promote yourself/themselves? Are there unmet need in your
present market?

b. Product: How does your product quality compare with the competitors? What special
services do you/they offer?

Do you/they have a programme to improve your/their products? Is there a possibility of

developing a new/or improved product to satisfy new needs?

c. Production: How do you compare your technology with the competitors? How do you
compare your sources of raw materials with those of your competitors?

How do your skills (and those of your workers) compare with the competitors? What
advantages/disadvantages does your /their location have?

d. Finance: How do you compare your financial resources with your competitors?

e. Government policy: Have you identified any opportunities or threats resulting from new
or existing government policies (for example relaxation of import restrictions, introducing of
VAT).

f. Environment: Do changes in the general environment including the local communities

offer any opportunities or threats to you for example there is a large number of young
people whose tastes are different from the rest of society.)
Are there organizations or associations that could be of use in assisting your enterprise (for
example with market information?).

After obtaining answers to these and any other questions you develop arrange them in a
strength/weaknesses/opportunities and threats table (SWOT) for yourself and each
competitor.

Strategies to Cope with Competition

Strategy refers to the way you mobilize your resources to achieve a given objective. Often
you

must keep adjusting your strategies to take account of changing circumstances.

In coping with competition, you may seek to simply stay in business or to expand your
business.

In each case the presence of the competitor has a different influence on your ability to
survive or

grow.

i) Market expansion: this is done by winning more customers in the same locality by
promotion and advertisement, as well as offering better products and services.

ii) Market development: in this case you seek new customers in new localities such as
our provinces or other countries.

iii) Product development: you may also choose to develop or introduce an

improved product or service, meet the needs of your customers better hence increase their
satisfaction.

iv) Market segmentation: means that you understand your potential total market and
select that segment of the market that is best suited for you considering your strengths. This
is a very powerful strategy when there is competition in the market.

v) More appropriate technology: You may need to use technology that is more
effective in coping with your competitors. This could be the technology that gives rise to a
lower cost of production or higher volume of production or better quality.

vi) Improving cost effectiveness: This strategy deals with those factors that affect the
cost of your products such as cost of materials, productivity of labour and machines.

The objective is to apply the same resources (people, machines and materials) to produce
more hence lower the cost of your products
vii) Training : It is recognized that you can improve the effectiveness of your business
by training yourself and your personnel in a wide variety of area for example quality control,
customer relations, costing and pricing and production management.

You must identify those areas that can be improved by training and identify organization or
individuals that can carry out this training.

viii) Implementation and evaluation ; After laying out your strategies, decide when
and how you will implement them and how you will judge the effectiveness of these
strategies . Having done all this proceed to implement the strategies , then monitor closely
to find out if they have the desired objective.

1.4. Risk

Risk is a condition in which there is possibility of an adverse deviation from a desired

outcome that is expected or hoped for, "in other words uncertainty of loss.

Risk results to economic loss or an involuntary parting of forms, for instance loss of property
by physical perils such as fire or earthquake. It could also take the form of premature
disablement or death of a key person in a business firm. It could also result from a law suit
to recover damages for some negligent act.

Causes of Business Risks

The various causes of business risks may be classified into the following categories

1. Economic Causes: Economic factors are the most common causes of business risks.
Economic causes refer to changes in market conditions. Market fluctuation may lead to a
fall in demand, price, fluctuations, severe competition

2. Technological Causes; Unforeseen changes in the techniques of production or

distribution may result in technological absolescence and business risks, Introduction of
synthetic fibre affected the cotton textile industry.

3. Human Causes: Human activities are an important cause of business risks. Negligence
and dishonesty of employees, death of a key executive, failure of suppliers to supply the
materials or tools on time ,bad debts due to bankruptcy, accidents and riots are some of the
examples of human causes.
4. Natural Causes: Natural calamities give rise to severe risks in business. Unforeseen
natural events like earthquakes, floods, famine, heavy rain, excessive heat or cold cause a
heavy loss of life and property.

5. Physical Causes; Physical causes imply the failure of machinery and equipment used
in business. For instance, breakdown of cooling machine may result in the damage of
perishable goods. There may be destruction of equipment or injuries to employees due to
explosion in a boiler

6. Political Causes; change in government policies, hostility in the country may affect the
operations of business.

Types of Business Risk

1. Pure and Speculative Risks

i) Pure risks refers to a chance of loss without any possibility of gain. For instance when
fire breaks out, there is a chance of loss only, no gain.

ii) A speculative risk implies a situation which involves not only the chance of loss out
but a possibility of gain. A businessman assumes speculative risks in his quest for profits.

2. Insurable and Non-insurance Risks

i) Insurable risks are those risks which can be shifted through various types of
insurance policies. Such risks can be forecasted and the probability of their occurrence can
be determined.

ii) Non-insurable risks cannot be insured against because the probability of their
occurrence cannot be determined.

3. Internal and External Risks

i) Internal risks are those risks which arise from events within the business enterprise;
examples include fire, breakdown of machinery, negligence and dishonesty of employees.

ii) External risks involve those losses which result from forces outside the particular
business undertakings.

4. Static and Dynamic Risks

i) Static risks result from factors other than changes in the economy, human factors,
dishonesty of employees and natural calamities.
ii) Dynamic risks are caused by changes in the economy for example price level
fluctuations, changes in income and output, technological changes and changes in
consumer tests.

1.5. Change

Change is the need to make or become different, to replace or improve, to reform or

reorganize to fit to the current situation which results in higher productivity or performance. 
Is a systematic planned effort to improve effectiveness of the business. Change is risky,
uncertain  As an entrepreneur you play a key role of managing change in your business.

Need for Change

a) There is need to adopt / adapt

b) To remain viable (economically)

c) We want growth (sales + profit), employees, customers (increase market share),

diversify

d) Enhance chances of survival (Change before Change changes you).

Reasons for change

a) People change because they are dissatisfied with the status quo.

b) Interdepartmental conflicts – conflicts in departments

c) The need to cut costs

d) To need to improve efficiency

e) Need for company or personal security

f) Existence of a new demand in the market

g) Tough international and national competition

h) Change in technology etc

These conditions create threats and present opportunities in an organization

Factors that influence change in your business

a) Economic activities: e.g. changes in the prices of some input

b) Competition: The competitors activities; be watchful on competition to respond in

good time

e.g. by aggressive advertising, reducing the price

c) The government and political environment: New policies, regulations relating to

taxation and remuneration policies

d) Technology: For adaptability and business growth. Go for the new technology

e) Educational and social factors: e.g. your customers changes in education status,
taste, family size, status, age, sex and population distribution.

The above call for change in terms of quality, price, promptness in delivery, packaging,
labeling of your product, etc.

Types of change:

a) Change of Product: e.g. you change your products labeling, size, packaging, color,
taste, quality, smell

b) Change of service: change in terms of promptness (quick/fastness) and quality

service

c) Change of technology: e.g. Tools and equipment, material, technical skills,

procedures, production methods

d) Change of policy:. Change of objectives, goals and policies to follow to meet

government policies.

Why People Resist Change

1. Fear of the unknown (don’t know what next)

2. Misinformation (false information), no information at all, no communication

3. Threat to status quo

4. Threat to power base – Most want to retain their normal ways of life. Fear of no one
recognizing business in foreign places, location/town

5. Miss-trust or distrust of change agents. Eg some people don’t take change because of
the people who bring about or initiate that particular change.
6. Fear of possible failure:- either social or economic failures

7. No perceived tangible benefits – people want immediate returns / gains managing

change

5 basic steps in the process of change management / implementation

1. Precise definition of the operational changes needed

2. Define how the new working methods will affect particular people and groups

3. Identification of attitudes and perspectives currently held by employees and how this
support current practice

4. Outline statement of attitudes and perspectives necessary to enable people too adapt
successfully to new environments and new working methods

5. Implementation of measure designed to change existing attitudes.

1. THE ENTREPRENEURIAL ENVIRONMENT

1.1. Introduction

Business environment can be defined as the surrounding of a business. It includes all those
things that lie inside and outside the business but can greatly affect its operations and
people’s decision to buy or not to buy products.

The three key environments that influence the development of an organization include:-

i. The macro environment

ii. The micro environment

iii. The organizations immediate environment

1.2. MACRO ENVIRONMENT

THE MACRO ENVIRONMENT

Consist of the larger societal forces that affect the whole micro environment. These include
political, economic, social-cultural, technological, ecological/ethical and legal factors
(PESTEL).

8.3.1 LEGAL ENVIRONMENT

It comprises of laws used by the government to regulate the business activities and
behavior as well as the process by which the laws are enforced. The law of the country
regulates the business practice in a country, the manner in which business transactions are
executed and regulations involved in any between parties.

Element of legal environment

i. The law of contracts

ii. The law of employment

iii. The law for property rights .e.g. intellectual property

iv. The permit to trade in particular business

v. The building laws

vi. Reporting requirement related to taxation

vii. The local government policies and by-laws

viii. The company’s act

ix. The co-operatives act

Problems on laws and regulations affecting the MSE

i. Discriminatory regulations

ii. Too many regulations to observe

iii. Harassment by local officials and regulations enforces

iv. Too many licenses

v. Regulations impose excessive paper work

 vi. Enforces and entrepreneurs not knowledgeable on applicable regulations

vii. Business contracts cannot be enforced

viii. Many fees and taxes to pay

ix. It gets too long to get the registration and licenses to operate

Coping with legal environment

i. The entrepreneurs have formed their own their own associations to lobby to
the government in order to address their problems

ii. Attending workshops and seminars to familiarize both the laws and regulations

iii. Some entrepreneurs comply

iv. Evading taxes and licenses

v. They charge high prices for their products

vi. Others can sell low quality products

vii. They engage in unethical practices

viii. Others engage in corruption

ix. Some entrepreneurs buy in large quantities from the manufacturer in order to
reduce costs

8.3.2 ETHICAL ENVIRONMENT

Ethics is considered with the moral principles and values which govern out beliefs, actions
and decisions.

Manifestations of ethical behavior

i. High stand of integrity

ii. Highest stand of confidence

iii. Confidentially and accuracy of the information

iv. Modest hospitality

 v. The business gift taken/given should be of small value for example calendars ,
pens, diary e.t.c

vi. Selling of quality product

vii. Concern of the environment

Benefits of ethical business conduct

i. Maintains or retain customers

ii. Improvement of the image of the business

iii. Reputation is enhanced

iv. Consumers get quality products consistently

v. It gives a business a competitive edge over the competitors

vi. A firm is able to comply with the laws of the country

vii. This leads to proper use of resources

viii. There is a sure continuity of the business because the business follows the laws

ix. Increases in the sales and growth of the enterprise

Ø Unethical practice s in business

· Supplying inferior quality goods to customers

· Charging high prices by creating artificial scarcity for profit maximization

· Giving false, confusing and misleading advertisements of the products/services

· Adulteration/defilement and short weights and measures

· Misbranding, hoarding and black marketing

· Supplying inadequate information on the packages

· Using unfair sales promotion techniques

· Providing inefficient services to bank depositors/customers

· Paying low wages, providing inferior quality welfare facilities and indecent treatment
to employees

· Disregard to labour laws and other rights of employees including right to form trade
union

· Lack of safety measures to workers and not giving them the benefit of permanent
services

· Exploitation of child labour and women workers

Ø Principles of good business ethics (code of business ethics)

· Avoid exploitation of consumers: do not cheat/exploit consumers through business

malpractices such as artificial, price rise and adulteration/corruption

· Avoid profiteering: do not result to hoarding, black marketing, profiteering (taking

advantage) and sale of harmful goods

· Encourage healthy competition: this offers certain benefits to consumers

· Ensure accuracy in weighing, packaging and quality while supplying goods to

consumers

· Ensure regular tax payments, ie being honest

· Proper accounts keeping: maintaining accurate business records, accounts and

make them available to all authorized persons and authorities

· Fair treatment of employees

· Keep shareholders informed: supply reliable information to shareholders regarding

financial position and other policy decision of the company

· No discrimination among employees

· No bribe; refrain from secret commissions, kickbacks/payoffs to consumers,

suppliers, administration and politicians

· Discourage secret agreement: do not make secret agreements with fellow

businessman for controlling pricing, production or any other activity harmful to consumers

· Service before profit; accept the principle of service first and profit next

· Practice fair business-make your business efficient and dynamic

· Avoid monopoly- avoid formation of private monopolies and concentration of
economic powers

· Fulfill customer expectations: adjust your business activities as per the needs and
expectations of customers

· Respect consumer rights: give due respect and honour to the basic rights of
consumer.

· Accept social responsibility towards different social groups on voluntary basis and not
by force

8.3.3 ECONOMIC ENVIRONMENT

Consists of factors that affects consumers purchasing power and spending patterns

Elements of economic environment

i. Inflation – means an increase in prices of goods and services without a

corresponding increase in output

ii. Money supply – quantity of money in circulation which is controlled by central

bank

iii. Interests rates – the rate charged by commercial banks on the money that it
lends

iv. Exchange rates and controls – concerned with the exchange of one’s
country’s currency with another. Determined by supply and demand for currency

v. Import and export control

vi. Taxes and subsidies – a tax is a compulsory payment by individuals to the

state so that the state can provide the necessary services

vii. Subsidies – incentives which are given to encourage production of a good or a

service

viii. Gross Domestic Product (GDP) – total value of goods and services produced
in a country in one year

ix. Income levels – per capital income and the distribution. Spending habits of the
people.

Factors influencing economic environment

 i. State of economy

ii. Government policies

iii. Climatic condition – good weather may lead to good harvest hence economic
growth

iv. Good infrastructure development – good infrastructure attracts foreign and

local investment

v. Good laws and regulations

vi. Distribution of income in the country

vii. Government incentives, those given to entrepreneurs

viii. Taste and preferences

ix. Political stability

x. Security

xi. Income of the people – they affect the purchasing power

xii. Social cultural factors

Measures to cope with economic environment (strategies)

i. Looking for new markets

ii. Entrepreneurs forming cartels

iii. Form trade associations for example jua Cali association

iv. Reducing cost of raw materials by sourcing from cheaper sources

v. Employ technology in production, distribution and marketing

vi. To lobby the government to reduce some of the controls to streamline the
business environment

vii. Producing as per the taste of the people

viii. Minimize wastages

ix. Merger of companies

 x. Laying off employees

8.3.4 SOCIAL CULTURAL ENVIRONMENT

The cultural environment is made up of institutions and other forces that affect a society’s
basic values, perceptions, preferences and behaviors. People grow up in a particular
society that shapes their basic beliefs and values. They observe a world view that defines
their relationship with others.

Elements of social cultural environment

i. Social factors e.g. family, religion, social roles and status, reference groups

ii. Cultural factors, like values ,beliefs, customs, lifestyle

iii. Social-class, the class that one belongs to

Importance of social cultural environment

i. To determine the needs of customers

ii. Determine whether one will set up a permanent or temporary business

depending on the lifestyle of the people

iii. Change in lifestyle determines customer lifestyle or needs

iv. The social roles and status affects one’s behavior

v. The entrepreneurs need to know who makes the buying decision within the
family so as to target that person with marketing efforts

vi. The status of people will determine the type of enterprise to start

vii. The status of the people will affect the pricing strategies

Cultural habits that promote entrepreneurial development

1. Money orientation

A person who is money oriented is the one who knows the value of money and has an
infection of making it. A person who is money oriented can use the need for money as a
motivating factor. He knows where he can get money to provide for his capital if he gets
involved in entrepreneurship activity, he will make more capital

2. Future orientation
A society that has foresight to know about future business environment is likely to have
more entrepreneurs. This is because the entrepreneur will learn to visualize the likely
changes to take place in market, consumer attitude, technological developments etc. and
take actions accordingly. Thus entrepreneurs are future oriented and usually belong to
cultures that appreciate the value of foregoing immediate profit or satisfaction in favor of
large future awards. Cultures which tend to view the present in terms of the future are
conducive to the growth of the entrepreneurial spirit

3. Time consciousness

This is the knowledge that time exists and its importance. Knowing the right time to start an
entrepreneurial activity is very important. Time is a resource and should be utilized well. An
aspiring entrepreneur should group the market conditions and wait for the correct time to
establish his/her enterprise.

4. Work ethics

Another very important cultural source of entrepreneurship is work ethics. The culture that
looks at work as a duty and it must value honest, productive labor while punishing laziness
promotes entrepreneurship. Trust and honesty is very important in entrepreneurship.
Consumers will buy an entrepreneur products or services because of the trust that they
have with their products. Entrepreneurs should reciprocate this trust by ensuring that they
maintain honesty to their consumers through maintaining the standards of their products at
all times.

5. Hard work

Willingness to work hard distinguishes a successful entrepreneurial even activity when other
people who do not think they can achieve much.

6. Social status

A culture that promotes entrepreneurship is one that confers social ranks in terms of actual
achievement rather than circumstances of birth. One can get rich by honest; hard work even
if he was born to be a beggar.

7. Ideals of competition

Entrepreneurship flourishes under a climate of competition that stimulates the competing

parties to find ways of using and managing their resources more efficiently and more
productively rather than one that encourages unfair trade practices like under pricing, low
quality products, etc.

8. Reward

A culture that’s desires to develop more entrepreneurs must reward people who try to earn
money from these humble ventures like peddlers and vendors. This is because studies
have shown that many of the current successful businessmen started as vendors. Thus,
such trade practices should be viewed with admiration and praise.

Cultural factors inhibiting entrepreneurial development

1. Religion – it plays a major role in limiting the entrepreneurial development. Religious

beliefs are regarded by others and the society as control of behavior. For example strong
Christian believers will not engage in an entrepreneurial activity that is against their beliefs
for example setting of a night club or a bar. this limits entrepreneurial development because
even if an opportunity arises and they have resources, they will not establish the business,
they will not dare do so because of their Christian faith

2. Language – A business enterprise in an area where he sees an opportunity to do so

but, he may not have the knowledge of the people in that particular area. Communication
will therefore be a barrier. People also tend to appreciate or to identify people who speak
their language and therefore this will deny the entrepreneur the opportunity to establish a
relationship with his/her customer.

3. Personal – personal relationships also play a major role in limiting the development of
entrepreneurship. Married people for example will not want to get involved in business
activities that will not spare them time to be with their families even if opportunities arises. A
person who has effective interpersonal relationship skills is likely to be successful
entrepreneur.

4. Attitude towards innovation – innovations are necessary for entrepreneurial growth;

many cultural practices are opposed to innovations. People are not aware of the importance
of innovation towards development. People will always resist change because it is new and
they fear that new things will interfere with their beliefs and customs. When people have
poor attitudes towards innovations, then development of entrepreneurship becomes difficult.

5. Networks – this is a way through which a person is able to meet people and get
information concerning the available business opportunities. Establishing good networks
(people who can give information) is very important entrepreneur without proper information
one cannot establish a business enterprise.

6. Technology –the advances that have taken place in the society and business can be
attributed to acquired technology. Technology. Limits entrepreneurship development
because many people have not acquired technical skills and knowledge required.

7. Beliefs – beliefs in the existence of all powerful forces that control destines tend to
hinder entrepreneurship development.

8. Mentality – the mentality we have that anything imported is better. this kills the
creativity of our entrepreneurs and also reduces the market for the locally produced goods
9. Extended family issue – this is where the extended family may want to be given free
things, unlimited credit. This makes them lazy and hinders their entrepreneurial initiatives.

10. Child rearing practices – the traditional child rearing practices may inhibit the
development of an independent spirit. If parents insists on traditional, authoritative way of
bringing up children, they are discouraged from:

· Taking initiatives

· Exploring their surroundings

· Asking questions

Such upbringing kills the independent spirit which is the first mark of a successful
entrepreneur

Ways of managing factors that inhibit the development of entrepreneurial culture.

i). Working development of entrepreneurial culture the necessary skills required

before one starts his own business.

ii). Setting policies that ensure that entrepreneurship training is established in the
school syllabus.

iii). Young people to be encouraged to read articles from newspaper, television,

documentaries and also gets various business contacts to enable them select products
which are demanded

iv). Aspiring entrepreneurs should seek guidance in selection of machinery and

facilities from those already in business

v). Youth as well as aspiring adults entrepreneurs should be encouraged to get

better and faster access to knowledge, information related to business, competition and
internet and other information providing gadgets

8.3.5 TECHNOLOGICAL ENVIRONMENT

Technology is found in its various forms in small and large businesses, the service sector,
state institutions, manufacturing companies, educational establishments, multinational
organization.

i). Technology is the ways and means of production

ii). Application of scientific knowledge in production

Trends of technology

Small businesses are adopting/using technology in carrying out their own business

Impacts of technological environment

Positive effects

i). Assist in marketing

ii). Using in pricing

iii). Used in selling or buying the product

iv). Reduction of workforce

v). People can buy products at their own convenient time

vi). Make firms to be innovative and to be able to use better strategies

vii). Reduction of transport costs

viii). Faster production

ix). Reduced working requirement

x). Reduced fixed capital and requirements

xi). Improved product consistency and liability

xii). Better packing technology

Negative effects

i). Selling of inferior products or low quality

ii). Use of genetically modified products(GMO)

iii). Retrenchment of employees

iv). Increased of piracy in music

Strategies to cope with technology environment

i). Selling the inferior products at lower prices

ii). The mergers and takeovers

 iii). Reduction of labor force

iv). Reduction of capital investment

v). Employment of skilled labor

vi). Training of employees in emerging technology

8.3.6 POLITICAL ENVIRONMENT

Political environment is concerned with the policies pursued by the government

Components of political environment

1) Political stability

2) Political system e.g. the capitalism, socialist and market economy.

i). Capitalism – is whereby the means of production are owned by

individuals.

ii). Socialist – means of production are owned by the government.

iii). Market economy – where the means of production are owned by

the government and individuals.

3) Political climate being favorable

4) Policies pursued by the government.

i). Changes in monetary and fiscal policy.

ii). Policies concerning price and wage control.

iii). Policies concerning nationalization.

iv). Trade union being legalized.

5) Political risk – which assess the instability of political regimes

6) The act of parliament and by laws.

Significance of political environment to a business

i). Can determine whether to locate a permanent business or whether to sell

through the agent in a given country.
 ii). The financial assistance that is given to entrepreneurs will be determined by
political environment.

iii). Good political environment will lead to more investment in the country

iv). Trade unions can influence government policies, terms and conditions of
employment, wages, and salaries

v). Can influence taste and preferences of people for instance on the importation
of certain products.

vi). Political stability may lead to increased production and the GDP of the country
will increase.

vii). Restrictions of importation for some goods may reduce competition in the local
market hence local enterprises are able to get

1.3. MICRO ENVIROMENT

Consist of the forces close to the company that affects its ability to serve its customers. The
major components of this environment include the customers, competition, labour, suppliers
and international issues.

1. The customer-components reflect the characteristics and behavior of those who buy
the firms products provided by the organization. Developing such profiles help the
management generates ideas on how to improve acceptance of organizational goods and
services.

2. Competitive component-consist of those with whom an organization must do battle in

order to obtain resources.

3. The labour component- It is made of factors that influence the supply of workers
available to perform needed organizational tasks. The area focuses are: skills levels,
trainability, desired wage rates and average age of potential workers are important to the
operation of the organization.

4. The supplier component- includes all variable related to those who provide resources
for the organization. The main focuses are: how many vendors offer specific resources for
sale, the relative quality of materials offered by vendors, the reliability of vendor deliveries,
and the credit terms offered by vendors-are important in managing an organization
effectively and efficiently.

5. The international component-comprises all factors related to the international

implications of organizational operations. Aspects of the international include the laws,
political practices, culture and economic environment that prevail in the foreign countries.
1.4. INTERNAL ENVIRONMENT

INTERNAL ENVIRONMENT

The level of an organization’s environment which exists inside the organization has
immediate implication for managing the organization.

The important components of internal environment include:

-Organization aspect: e.g. communication network, organization structure, record of

success, objectives, polices, procedures, rules and ability of management team

-Personal aspect: includes labour relations, recruitment practices, training programs,

performance appraisal systems, incentives systems, labour turnover

-Marketing aspect-includes market segmentation, product strategy, pricing strategy,

promotion strategy and distribution strategy

-Production aspect-includes plant facility layout, research and development, use of

technology, purchasing of raw materials, inventory control and use of subcontracting

-Financial aspects-includes liquidity, profitability and investment opportunity

Significance of internal environment

-Enhances efficiency within the firm

-Enhances profitability of the firm

-The firm is able to achieve the stipulated goals and objectives

-On marketing aspect, the firm can diversify to other markets which can increase its sales

-Increases of sales turnover

-Workers are motivated

-Increase commitment and working hard by the staff

-The firm is able to recruit the best personnel

-Decreases labour turnover

-It gives the firms a competitive advantage

Through segmentation a firm can improve its sales by focusing on a particular market
segment

Ø Manipulating internal environment tom achieve business goals

- Train its personnel

- Motivating the workers

- Establishing good training programs and performance appraisal systems. Workers

are evaluated

- Locating in a convenient place

- Giving incentives to reduce turnover and absenteeism

- Use of inventory control systems

- Use of appropriate technology to reduce cost

- Purchase of raw materials in large quantities

1. THEORIES OF ENTREPRENEURSHIP
1.1. Introduction

The theories that explain entrepreneurship include:

a) Psychological Theory

b) Motivational Theory

c) Sociological Theory

1.2. Psychological theory

• The focus is that entrepreneurs have unique values, attitudes and need which drive
them.

• People’s behavior results from their attempts to satisfy their unique needs and values.

• The psychological school focuses on personality factors believing that entrepreneurs

have unique values and attitudes towards work and life.
• Among the most frequent traits of entrepreneurs include the Need for achievement,
Locus of Control and Risk taking propensity.

1.3. Motivational Theory

• Motivation is that which causes you to behave in the way you behave i.e. the why of
behavior

• Entrepreneurial motivation is those factors and forces or events that energizes an

individual, his desires and the needs to go into and sustain a business venture.

• Types of motivation; i) Internal Motivation Factors ii) External Motivation Factors

• Internal Motivations and Drives

ü Refers to those personal traits and desires that induce a person to become an
entrepreneur. Such motivations are;

i. Employment Creation Need.

ii. Need for independence or self-Reliance: iii. Need for Power:

iv. Need for Recognition: v. Need for Security:

vi. Self-actualization need:

External Motivations and Drives

i. Infrastructure:.

ii. Credit Facilities:

iii. Information Support

iv. Pricing Policy

v. Tax Policy

vi. Legal Control

vii. Political Climate

viii. Technical Technology Assistance

ix. Training Consultancy Assistance

x. Friends Motivation

9.2.3 Maslow’s Need Theory

Theory of human needs is identified with the psychologist Abraham Maslow. This theory is
based on three specific assumptions:

1. The human beings are never satisfied. Their wants are determined by what they have.
When people are hungry or thirsty, the quest for food or water influences how they behave.
However if food and water is acquired, the same person will want something else, perhaps
a safe place to live in or a social status.

2. A satisfied need does not cause behavior. Once people satisfy their need for safety,
they are motivated by yet unsatisfied needs, not the ones – that are satisfied,

3. Human needs are arranged in hierarchy of importance. These needs range from low
level biological (physiological) needs to such high level needs as self-actualization.
1. Physiological Needs

· Food

· Clothing

· Shelter

They are required for survival. We require money if at all we do not have in order to get the
basic needs. If we do not have any source of income and cannot get wage employment,
despite our qualifications, we may be motivated to entrepreneurial venture.

2. Safety or Security Needs

Once our basic needs are satisfied, our behaviour is no longer motivated by them. At this
point, we begin to worry about the security or safety of our families i.e. the need to be free
from physical danger and the fear of loss of job. For entrepreneurs, since their ability to
cater for these needs depend on how hard they work, these needs will motivate their
behaviour. They need to save money to use in the case of illness and perhaps the purchase
of some insurance policies.

3. Belongingness Need (Affiliation or acceptance needs)

Once the safety needs are satisfied, they no longer motivate us to work harder. Since we
are social beings, we need to belong, to be accepted by others, For those on wage
employment, most organizations have work groups hence need to belong is nota serious
problem. What of an entrepreneur? He can interact with the following:

The family if it is a family business. He can still interact with the family even if it is not a
family business, Mentors-who are role models and from whom they can learn a lot and get
good ideas (if they are good mentors). However, entrepreneurs are; to be secretive about
their internal business issues.

4. Esteem Needs

This level of needs begin to move into a more complex area that is high order needs . They
are more abstract than physiological, safety and belonging needs. This kind of need
produces such satisfaction as:

· Power

· prestige

• Status

• Self confidence

It is important to recognize that esteem needs may be internal or external to us.

Entrepreneurs are known to possess some of these need which is inherent in the way they
control the outcome of their business (locus of control) and the degree of achievement
motivate that they possess.

5. Self-Actualization Needs

At the very top of the need hierarchy are the self-actualization needs. Self-actualization
means making the most of what we have to maximize our potential. Entrepreneurs are
motivated to work harder because of the self-actualization needs. Thus they possess what
is called achievement motivation which is aroused by the internal factors. They want to
achieve the best and believe that no one is better than them. They aspire for a standard of
excellence.

1.4. SOCIOLOGICAL THEORY

It tries to explain the social conditions from which entrepreneurs emerge and the social factors
that influence the decision. The following depicts the decision to become an entrepreneur which
is a function of two factors. The impetus of momentum factors and the situational factors,

Impetus for Entrepreneurship

There are four factors that propel people to self-employment

i) Negative displacement

It's the marginalization of individuals or groups of individuals from the core of society.

ii) Between Things'

People who are between things are also more likely to seek entrepreneurial outlets than those
who are in the "middle of things" like immigrants, people who are between things are sometimes
outsiders e.g. between 'military and civilian life, between student life and career and between
prison and freedom.

iii) Positive Pull

Are called Positive pull influence, can come from potential partner, a mentor, a parent, an
investor or a customer. The potential parties encourage the individual with the offer of sharing
the experience, helping with the work and spreading the risk. The mentor raises self-esteem and
confidence.
iv) Positive Push

It includes such things as a career path that offers entrepreneurial opportunities or an education
that gives the individual the appropriate knowledge and opportunity.

Situational Characteristics

Once the individual's inclination for entrepreneurship has been activated, situational
characteristics help determine if the sew venture will take place. The two situational factors are
perceptions of desirability and perception of feasibility.

i) Perception of Desirability

Entrepreneurship must be seen desirable to be pursued .The factors that affect the perceptions of
desirability can come from the individual’s culture, family, peers, colleagues, or mentor.

ii) Perception of Feasibility

Entrepreneurship must be seen as feasible if the process is to continue. Entrepreneurs require

support from others interim of: emotional, financial and physical support.

1. MANAGEMENT OF HUMAN RESOURCE

1.1. Meaning and Concept of Human Resource Management

 People make up organizations, and people are what make them work. Organizations
cannot survive without people, hence people are the most important resource in any
organization.
 The complete workforce's knowledge, skills, creative prowess, talents, and aptitudes
are referred to as human resources.
 The term "human resources" (HR) can also be used to describe the people, who
work there, as well as staff, employees, manpower, human capital, and human
assets

The Concept of Human Resource Management

 Personnel management has been largely supplanted by the phrases "human

resource management" (HRM) and "human resources" (HR) as a description of the
procedures involved in managing people in organizations.
 However, in reality, what is today referred to as HRM is frequently the same as what
was once known as people management. Personnel management was the starting
point for the development of HRM
 In terms of scope and orientation, human resource management (HRM) is different
from personnel management (PM). As shown in the evolution of human resource
 management, it is asserted that HRM is more comprehensive than conventional
personnel management. HRM has a broader reach than personnel management.

Features of HRM

i. Widespread force: HRM is by its very nature pervasive. All businesses have it, and
it infects every department.

ii. Action-oriented: It makes sure that the objectives of the organization and the
individuals are met. Action is prioritized over record-keeping, rules, and written procedures

iii. Individual-focused: It aims to support staff members in realizing their full potential. It
motivates them to give the organization their all.

iv. People-centered: Both as an individual and as a group, people are the focus of the
workplace. In an effort to get good results, it seeks to assign people to certain occupations.

v. Future-focused: By offering qualified and engaged personnel, it helps an

organization achieve its long-term objectives.

vi. Integrating mechanism: It aims to create and preserve friendly relationships

amongst employees at various organizational levels.

vii. It is a multidisciplinary activity that draws information and input from a variety of fields,
including psychology, economics, sociology, and others. A manager must rely on such
information to successfully handle human issues.

viii. Continuous operation: HRM is not a one-time thing. It cannot be done only once a week
or for an hour each day. It necessitates ongoing attention during routine activities.

ix. It is a science since it has an organized body of knowledge made up of concepts and
processes, but it is also an art. As it entails applying theoretical knowledge to the issues, it
also qualifies as an art.

Scope of HRM

The scope of HRM is categorized into three aspects:

1. Personnel aspect

Planning for human resources includes hiring, screening, placing, transferring, promoting,
training, and developing employees. It also includes compensation, incentives, productivity,
layoffs and retrenchments.

2. Welfare aspect

It covers things like housing, transportation, medical aid, education, health and safety,
recreation facilities, canteens, crèches, rest and lunch rooms, etc.
3. Industrial relations aspect

This includes things like joint consultation, collective bargaining, grievance and disciplinary
processes, dispute resolution, and union-management relations.

Objectives of Human Resource Management

a. To provide highly skilled, highly motivated people who will aid the firm in achieving its
objectives.

b. To effectively and efficiently employ employees' abilities and knowledge, or to make

good use of human resources.

c. To maximize human resource development by offering opportunities for learning and

growth.

d. To develop and uphold effective, self-respecting, and internally fulfilling working

relationships among all organization members.

e. Ensuring the integration of all persons and groups with the organization in order to
ensure the alignment of personal aspirations with organizational ones.

f. To foster and preserve positive interpersonal relationships among all organization

personnel.

g. To encourage and support each employee in reaching their full potential in order to
maximize job happiness and self-actualization.

h. To create and uphold a standard of living at work that makes joining the company a
desirable social and personal circumstance.

i. To foster a sense of camaraderie, teamwork, and cross-team cooperation.

1.2. Activities of Human Resource Management

Activities of Human Resource Management

In order to achieve the above objectives, human resource management undertakes the
following activities:

(i) Human resource planning, which entails figuring out how many people and what kind of
people are needed to fill the organization's numerous job openings.
(ii) The employment function, which includes the hiring, selecting, and assigning of
workers.

(iii) Employee development and training for effective performance and growth.

(iv) Evaluating employee performance and taking corrective action, such as switching
jobs.

(v) Employee motivation through the provision of cash incentives and opportunities for
advancement.

(vi) Employee compensation. To reach a higher standard of living and to encourage

higher production, the employees must receive enough pay and benefits.

(vii) Employee welfare and social security.

1.3. Human Resource Management Functions

v The management of human resources involves a number of interconnected tasks, and

managers fulfill these tasks on behalf of the organization.

v In general, the managerial and operational functions carried out by human resource
management can be divided into two groups.

1. Managerial Functions

i. Planning: This entails developing a plan of action. It involves choosing the

objectives and creating the policies and programs necessary to carry them out. Planning in
the field of human resource management entails making decisions about human resource
objectives, creating human resource policies and initiatives, etc. As a result, during this
process, organizational goals are identified along with the creation of policies and programs
to help them be achieved. A carefully thought-out plan ensures flawless execution.

ii. Organizing: A strong organizational structure is needed to carry out the plans.
Thus, organizing is the process by which the organization and distribution of tasks are
decided. Organizing entails assigning each subordinate a defined duty, creating
departments, giving subordinates’ responsibility, creating channels of authority and
communication, and coordinating the activities of the subordinates.

iii. Staffing is the process by which managers choose, onboard, develop, and let
go of their employees. This include choosing the kind of people to hire, locating potential
employees, selecting them, establishing performance requirements, paying them, assessing
their performance, offering them counseling, and training and developing them.
 iv. Directing: Activating group efforts to accomplish the desired goals is the
process of directing. It is the act of inspiring, energizing, guiding, and overseeing others. It
comprises all of the acts a manager takes to direct a subordinate's behavior.

v. Controlling is the process of establishing performance criteria, assessing how

those standards have been met, and taking the necessary remedial action. Control
consequently entails making sure that everything happens by checking, confirming, and
regulating

2. Operative Functions

The operative/service functions listed are divided into the precise tasks associated with
finding, training, compensating, integrating, counseling, and keeping an effective workforce.
They make up the complete range of day-to-day HRM activities. These are what they
include:

1. Procurement function

· It is concerned with finding and hiring the appropriate individuals who will help the
organization reach its goals. It explicitly addresses issues such;

· Job analysis is the practice of carefully examining the duties and tasks associated
with a job in order to determine the kind and quantity of human resources needed to carry
out the position successfully. Job specifications and job descriptions are the outputs of a job
analysis.

· Human resource planning is the process of determining an organization's present

and future manpower needs, creating an inventory of its current workforce, and creating
action plans to fill any gaps in its personnel.

· Recruitment: This is the process of locating the necessary human resources and
encouraging them to submit applications.

· Selection entails evaluating each candidate's appropriateness for a position inside

the business and selecting the best applicants.

· Placement: This refers to giving the chosen applicants suitable jobs in order to match
employee skills with job requirements.

· Induction or orientation: This involves introducing the new employee to the business,
the workplace, and the current staff members so that they feel at home and can begin
working with confidence.

2. Development function

 · The process of enhancing an employee's knowledge, skills, aptitudes, and values

so they can carry out their current and future employment more effectively is known
as human resource development. The following activities make up this function.
  · Performance appraisal: This refers to the systematic review of workers' work
performance and development opportunities.
 · Training is the process by which staff members acquire the knowledge, abilities,
and attitudes necessary to advance both corporate and individual objectives.
 · Executive development: This is the process of fostering managerial skill through
suitable initiatives.
 · Career planning and development: This entails organizing employees' careers and
putting such plans into action in order to help people achieve their professional
goals.

3. Compensation function

 · This refers to paying workers fairly and equitably for the contribution they made to
achieving corporate goals. It includes the following pursuits:
 · Job evaluation is the process of figuring out how valuable a job is in comparison to
other jobs.
 · Payroll administration: This involves creating and maintaining an appropriate wage
and salary structure.

4. Integration function

 · It involves motivating employees through various financial and non-financial

incentives, providing job satisfaction, handling employee grievances through formal
grievance procedures, collective bargaining, workers' participation in management,
conflict resolution, employee counseling, developing sound human relations,
improving quality of work life, etc.
 · This process seeks to reconcile the organization's goals with those of its members.

· Maintenance function

 · This focuses on defending and advancing the workers' physical and mental
wellbeing. For this reason, employees receive a variety of fringe benefits, including
housing, medical care, educational opportunities, and transportation services.
 · There are also social security arrangements made, including provident funds,
pensions, gratuities, maternity benefits, injury/disability allowances, group insurance,
etc.
 · Measures for health, safety, and welfare are intended to protect the organization's
human resources (all the above mentioned measures).
 ·The maintenance function also includes important components like research and
records of human resources.

· Advisory functions

 · On issues involving the organization's human resources, an HR manager can offer

guidance. The following people are given this advice:
 · Top management: He assists them in developing and assessing personnel
programs, policies, and procedures. He can also offer guidance on establishing and
sustaining positive interpersonal relationships and strong employee morale.
  · Departmental heads: He provides guidance on issues such as manpower planning,
job analysis and design, recruitment and selection, placement, training, and
performance evaluation, among other things.

Qualities of a Human Resource Manager

1. Intellectual: The ability to communicate, articulate, understand, and above all, to be an

expert when it comes to formulating policies and agreements is the basic competence in the
human resource area as contrasted to technologists or financial specialists. He should also
be able to develop concepts and anticipate organizational issues. This indicates that he
would need the mental capacity to deal with his people wisely and comprehend what they
are trying to communicate.

2. A teacher: He should have a strong desire to improve and learn new things. A personnel
administrator must not only offer his staff opportunity to learn, obtain experience, and grow
in order to balance their growth with that of the firm.

3. Administrator of human resources must be able to distinguish between right and wrong,
between what is just and what is unjust, and between merit and non-merit. In other words,
he should be a fair judge when he advises on disciplinary concerns, a good observer of
proper behavior in an organization, and a good judgment when he serves on a selection
board.

4. Put decisions into action: The human resource manager must quickly, precisely, and
impartially put the management's choices and policies into action. He needs to set
performance goals, tighten up the administration, and streamline the office. He must work
with the many other divisions to coordinate the control functions, and in doing so, he should
be able to foster unity.

5. Leader: This refers to someone who is situated in the group dynamics of various political
and social activities of an organization and who is concerned with individuals or groups of
individuals. A human resource manager shouldn't avoid taking on a leadership position in a
business. He must lead by example and work toward the goals of good personnel
management techniques in order to inspire and motivate his team members to perform at a
higher level. He needs to settle disputes amongst various groups and foster teamwork
inside the company.

6. Humanist: A human resource professional must have a strong belief in human values and
sensitivity for human difficulties. He should handle issues with people in a humane manner.
He must perform his functions with sensitivity.

7. Visionary: While every top-level position within an organization is required to build a

vision for the future, it is the people manager who is primarily responsible for guiding social
organization toward meaningful and forward-moving action. In a company, he should be a
policy-setting thinker who gradually develops new human relations management practices
that are in line with the demands of the business and the broader community.

Roles of a Human Resource Manager

 1. Policy formulation: He assists top management with the creation of policies
pertaining to the administration of wages and salaries, transfer appraisals, welfare
initiatives, personnel records, working conditions, etc.
2. Advisory role: The HR is in a position to provide advice on matters like promotion,
disciplinary action, grievances management, etc. because he is quite conversant
with personnel regulations and labor laws.
3. Role as a representative: He represents the workers by bringing up their concerns
to management and also acts as a spokesperson for the top management by
communicating management decisions and policies.
4. Participates in the formulation and creation of goals, policies, and programs
for HRM. For example, he selects the content of training programs.
5. Mediator: He serves as a mediator when there are disputes between coworkers or
between coworkers and management.
6. Leadership: He serves as a mentor and leader for the employees.
7. Welfare: He serves as a welfare officer by making sure that canteen, transportation,
hospital, and other welfare services are available.
8. Linking pin: He is in charge of establishing communications on safety, discipline,
grievances, etc. in order to maintain positive workplace relations in the company.
9. Change Agent: He is in charge of proposing and carrying out institutional
modifications as well as setting up organizational development initiatives.
10. He should remind employees of their moral and ethical obligations as part of his
humanitarian role.

1. TRENDS IN ENTREPRENEUSHIP
1.1. Business Ethics

1. Ethics: this is a set of moral principal that govern the action of an individual or group

2. The principal should play a significant role in guiding the conduct of manager’s
entrepreneurs and employees in the operation of the business.

3. Business ethics is concerned the right and wrong in the practice of entrepreneurs
( business)

4. It addresses both the body of principals governing business practice with emphasis
on the product the consumers and the entrepreneur’s moral concepts.

Sources of Moral Principles

i) Doctrines:
Primarily religion & politics that have been there over years since the beginning of the
history

ii) Value and norms

Values and norms of a given society are related to religious tendencies, customs and
traditions that vary from society to society.

iii) Code and standards

· Codes and standards formulated by a particular professional groups and business
organizations.

· The entrepreneur needs to be critical in all his dealings i.e conduct and his dealings
with others should be within acceptable business limits as established by business
principals, manners and values.

Important Aspects of Business Ethics

1. Competition

Competition is regarded as healthy and fair when carried on within acceptable business
limits as established by business principals, manners and values.

Unfair competitive aspects

i) Reduction of prices of goods and services to very low levels with the object of putting
competitors out of business.

ii) Explaining the ignorance or the consumers as on quality and quantity.

iii) Grouping together with a view of lowering the prices in order to push other out of
business.

iv) Bribing – in order to get business contracts prevents fair competition.

v) Gaining control over the supply of any commodity in order to create an artificial
scarcity.

2. Pricing

· An entrepreneur it is necessary to give fair prices of goods and services

· Over pricing is likely to put customers away while under pricing might not be good for
competitors.

3. Customer/Supply relations
· Ethical business owners treat customers and suppliers with fairness and consideration.

· Honestly and courtesy is required in dealing with customers e.g Preferential

treatment.

4. Goods & service

The products and services offered by customers must meet the quality and quantity
requirements

5. Employee treatment

 Employees should be treated ethnically e.g

 Working for reasonable number of hours
 Pleasant working conditions
 Listen to their complaints and give satisfactory answers
 No discrimination

6. Product promotions

The entrepreneurs should make sure that all promotional activities are ethnically presented
i.e

 No mis- representation
 Packaging of the right products
 Fair promotional method which confirm to good morals.

Role of an Organization (entrepreneurs) to Stakeholders

Stakeholders include the society, employees and the government.

i) The role of the business enterprise to society

· To provide employment

· Conservation of the environment

· Develop social amenities e.g schools

ii) Role of the society to the organization

· A source of labour
· Raw materials to the organization

· Market for the products and services

· Capital to invest in the business.

iii) Organization role to employees

· Good compensation ( wages and salaries)

· Good working conditions

· Training programmes

· Recreation facilities iv) Role of employees to organization

· Creativity and innovation

· Time management

· Working to set goals

o Following rates and regulations

o Respecting other co-working and management.

o Working to set goals

o Following roles / instructions

o Roles of organization

o Job creation

o Infrastructure

o Tax

o Foreign exchange through exports

Tools of Ethics
Ethical language

ü The key terms of ethical language are values, rights, duties and roles
ü Values are permanent desires that seem to be good in themselves e.g peace

ü Values are answers to answers to questions of why? E.g why should managers behave
ethically?

Rights
ü It’s a claim that entails a person to do something. While a duty is an obligation to take
responsibility e.g to pay tax.

How Companies/ Organizations improve their Ethical Standards Having codes of

conduct

ü Forming ethical committees

ü Social audience/ judicial courts

ü Enhancing control measures i.e rewarding, punishment. This will motivate people to work
Training ethics to people Using role models.

Discipline
ü The term discipline simply means that members of a group confirm to the rules and
regulations framed by an organization

ü Discipline is the orderly conduct of affairs by the members of an organization who

adheres to its regulations because they desire to corporate harmoniously in forwarding the
end which the group has in view, and willingly recognized that, to do this, either wishes
must be bought into a reasonable union with the requirements of the group in action.

Ethical principles that guide behaviour

1. honesty; which refers to being truthful, sincere, forthright forward and frank

2. integrity – that is being principled, honorable, upright and courageous

3. act with convictions

4. do not be two faced

5. do not adopt an “ End justifies means philosophy

6. Promise keeping; being worth of trusting, keep promises, fulfill commitments and
abide by the spirit as well as the intent or aim of an agreement.

7. fidelity- being faithful and loyal to family, friends, employees and the country, being
confidential
Ways of maintaining respectful conduct by office employees

i) Respect seniors by adhering to their requirements in terms of duty, social life.

ii) Respect of colleagues – recognize other employees and respect then to create a
friendly working environment

iii) Respect your work simply because it sustains you and do what is expected of you.

iv) Respect visitors so as to get a positive image of the organization, treat them with a lot
of respect.

v) Respect customers and clients.

1.2. Business Ethics

1. Ethics: this is a set of moral principal that govern the action of an individual or group

2. The principal should play a significant role in guiding the conduct of manager’s
entrepreneurs and employees in the operation of the business.

3. Business ethics is concerned the right and wrong in the practice of entrepreneurs
( business)

4. It addresses both the body of principals governing business practice with emphasis
on the product the consumers and the entrepreneur’s moral concepts.

Sources of Moral Principles

i) Doctrines:

Primarily religion & politics that have been there over years since the beginning of the
history

ii) Value and norms

Values and norms of a given society are related to religious tendencies, customs and
traditions that vary from society to society.
iii) Code and standards
· Codes and standards formulated by a particular professional groups and business
organizations.

· The entrepreneur needs to be critical in all his dealings i.e conduct and his dealings
with others should be within acceptable business limits as established by business
principals, manners and values.

Important Aspects of Business Ethics

1. Competition

Competition is regarded as healthy and fair when carried on within acceptable business
limits as established by business principals, manners and values.

Unfair competitive aspects

i) Reduction of prices of goods and services to very low levels with the object of putting
competitors out of business.

ii) Explaining the ignorance or the consumers as on quality and quantity.

iii) Grouping together with a view of lowering the prices in order to push other out of
business.

iv) Bribing – in order to get business contracts prevents fair competition.

v) Gaining control over the supply of any commodity in order to create an artificial
scarcity.

2. Pricing

· An entrepreneur it is necessary to give fair prices of goods and services

· Over pricing is likely to put customers away while under pricing might not be good for
competitors.

3. Customer/Supply relations

· Ethical business owners treat customers and suppliers with fairness and consideration.

· Honestly and courtesy is required in dealing with customers e.g Preferential

treatment.

4. Goods & service

The products and services offered by customers must meet the quality and quantity
requirements

5. Employee treatment

 Employees should be treated ethnically e.g

 Working for reasonable number of hours
 Pleasant working conditions
 Listen to their complaints and give satisfactory answers
 No discrimination

6. Product promotions

The entrepreneurs should make sure that all promotional activities are ethnically presented
i.e

 No mis- representation
 Packaging of the right products
 Fair promotional method which confirm to good morals.

Role of an Organization (entrepreneurs) to Stakeholders

Stakeholders include the society, employees and the government.

i) The role of the business enterprise to society

· To provide employment

· Conservation of the environment

· Develop social amenities e.g schools

ii) Role of the society to the organization

· A source of labour

· Raw materials to the organization

· Market for the products and services

· Capital to invest in the business.

iii) Organization role to employees

· Good compensation ( wages and salaries)

· Good working conditions

· Training programmes

· Recreation facilities iv) Role of employees to organization

· Creativity and innovation

· Time management

· Working to set goals

o Following rates and regulations

o Respecting other co-working and management.

o Working to set goals

o Following roles / instructions

o Roles of organization

o Job creation

o Infrastructure

o Tax

o Foreign exchange through exports

Tools of Ethics
Ethical language

ü The key terms of ethical language are values, rights, duties and roles

ü Values are permanent desires that seem to be good in themselves e.g peace

ü Values are answers to answers to questions of why? E.g why should managers behave
ethically?
Rights
ü It’s a claim that entails a person to do something. While a duty is an obligation to take
responsibility e.g to pay tax.

How Companies/ Organizations improve their Ethical Standards Having codes of

conduct

ü Forming ethical committees

ü Social audience/ judicial courts

ü Enhancing control measures i.e rewarding, punishment. This will motivate people to work
Training ethics to people Using role models.

Discipline
ü The term discipline simply means that members of a group confirm to the rules and
regulations framed by an organization

ü Discipline is the orderly conduct of affairs by the members of an organization who

adheres to its regulations because they desire to corporate harmoniously in forwarding the
end which the group has in view, and willingly recognized that, to do this, either wishes
must be bought into a reasonable union with the requirements of the group in action.

Ethical principles that guide behaviour

1. honesty; which refers to being truthful, sincere, forthright forward and frank

2. integrity – that is being principled, honorable, upright and courageous

3. act with convictions

4. do not be two faced

5. do not adopt an “ End justifies means philosophy

6. Promise keeping; being worth of trusting, keep promises, fulfill commitments and
abide by the spirit as well as the intent or aim of an agreement.

7. fidelity- being faithful and loyal to family, friends, employees and the country, being
confidential

Ways of maintaining respectful conduct by office employees

i) Respect seniors by adhering to their requirements in terms of duty, social life.

ii) Respect of colleagues – recognize other employees and respect then to create a
friendly working environment

iii) Respect your work simply because it sustains you and do what is expected of you.

iv) Respect visitors so as to get a positive image of the organization, treat them with a lot
of respect.

v) Respect customers and clients.

1.3. Social Responsibility

Refers to the roles undertaken by business organization on the surrounding environment.

It is the liability the organization undertakes to be called upon to account for the conduct
that affects communities or the society at large

Organizations are constraint in their conduct by legislation which in essence affects their
relationship with stake-holders, employee’s suppliers, customers the society at large and
the environment.

The Stakeholders
· Therefore business organizations have social responsibility to a number of groups
(stakeholders) who include the society, employees and the government.

Importance of Enterprise social Responsibility

1. Enhance business relations with the society. Just as a society depends on business
organization for goods and services, so business depends on society.

2. When business participate in social responsibility. It creates acceptance by the society

as a whole and as such; it will create a good working conditions that will enable them to
work for the benefits of their organization.

3. Recognition of the society’s good will. By engaging in social responsibility, the

business organization is appreciating is appreciating the fact that it is the society as a whole
that has enabled their continual existence.
4. Supplement governments effort in development organization also have a relationships
with the government at the local, state and federal levels. By participating in socially
responsible activities that relates to national development such as buildings of schools or
providing training activities to members of a society, the business organization are helping
in the government’s efforts in development.

5. Means of waste management- business organization also acts as means of waste

management because they ensure that they participate in a clean environment,.

6. They ensure that they keep the environment safe for all in the society hence they act
as a means of waste management. They also help in waste management by recycling
waste products

Ethical Business Practices

Ethics is a major factor in the social responsibility of business. Ethical philosophy if a
branch of philosophy that is concerned with the judgments of the rightness or wrongness of
an act. The aim of professional or business ethics in the protection of professionalism,
human rights, integrity of character, and good service. In general, the issues considered in
such code of ethics consists of;

 Honest – in this respect, it is necessary that facts are presented fairly and
accurately.
 Claims made about products or services, even in the
 Fairness – every one whom you deal with should be given appropriate
consideration. This includes workers, customers, suppliers and others with whom the
organization interacts.
 Loyalty- this is in terms of loyalty to other stakeholders i.e customers,
 Workers, n suppliers’ e.g.
 Confidentially – this is especially important for service industries such as banks. It is
important that transactions with customers are respected and protected so that they
are not disclosed to third parties.
 Trust- there should be a mutual trust where the owners of a business should have
proper trust in their customers, while the customers should also have enough trust in
the organization. Without trust, no meanigl and lasting relationship can develop.
 Courage- this refers to the need to treat others with respect, be incorruptible in
business operations, even when it means losing the business

1.4. Technology issues

Benefits of ICT to a Business Enterprise

· We make use of information to such a great extent in our daily lives that we probably
do not realize how much we are relying on it. Although information is itself invisible and
intangible, the information may have to use repeatedly will have been recorded in a paper
or prepare for display on a computer screen; though we can also find whether forecast on
radio, convenient at times
· Turning to the world of business, we can see that obtaining and using information
effectively is vital. Business makes decisions, at all levels, more or less continuously; and
the quality of those decisions depends almost entirely on the quality of the information on
which they are based. Businesses complete with one another and thrive or wither according
to how sound their decisions have been.

· Business thus needs accessible information that is accurate, up-to- date and
sufficient. ICT (Information and Communication Technology) refers to the developed
knowledge, skills and ideas that pertain to human communication process and the
information they handle.

· It is the new science of collecting, storing, processing and transmitting of information.

· Although ICT is important in all organizations, there is a difference in how important it

is. In some organization it is part of the infrastructure; in some the delivery of goods and
services depends on it; in some, it is a major areas for strategic

i) improved accuracy, internally and externally

ii) services to customers that are more comprehensive than before

iii) faster processing, leading to prompter responses to customers

iv) Information for management, not previously available, or available too late to
be useful; and tighter financial control.

v) New customer services previously not possible

vi) New sources of information to allow improved product design and marketing

vii) New customer services previously not possible

viii) New sources of information to allow improved product design and marketing

ix) Reduced costs arising from the greater productivity of staff who supported and
assisted by appropriate computer services

x) A more attractive, cleaner working environment in some cases, helping

recruitment and retention of staff.

Uses of e- business, E, government, e, procurement in small enterprises E-

Business
E- Business

It is the use of the internet and other networks and information technology to support
electronic commerce, enterprise communication and collaboration, E, business can also be
defined as web-enabled business process both within an internet worked enterprise and
with its customers and business partners.

Benefits of E-Business
i)consumers have a much wider choice available on the cyber market

ii)consumers can compare products, features, prices and even look up reviews before they
select what they want

iii) Consumers also have the convenience of having their orders delivered right to the door
step

iv) Consumers are driven to e-shopping in holders as even branded goods cost less on the
net.

v) It minimizes inventory costs to the organization. They do this by adopting just in time-
system enhancing the firm’s ability to forecast demand more accurately.

vi) It improves customer services vii)It reduces distribution costs

vii) It helps business globalize. This is done through the interest by making information
about certain products available on the net.

viii)It helps market products move quickly.

E-Government
ü E- Government is a new term that finds wide applicability. While the term still, means
different things to different people, available evidence suggests that it had been undergoing
progressive conceptual development. So for the three generations their conceptual
developments that have been identified are discussed below.

1.First Generation Conceptualization

In this conceptual generation, e-government is conceived as the government equivalent of
e-commerce, and used to mean the application of advanced ICT to deliver government
services. This conceptualization emerged from the relative success of “ e- commerce”
applications resulting in pressure being placed on government organization were doing. As
a public sector equivalent of e-commerce, e-government is viewed primarily as a tool for
electronic delivery of public services. The government transfers a range of services into
electronic formats so as to make them more conveniently accessible over the internet.
Features of E-Government
a) It is smart government in the sense that it selectively used of variety if ICT in ways
and areas to add value.

b) It is customer- driver in that, customer needs and conveniences drive its organizing
structures and business processes.

c) It is responsive, transparent and accountable, responds to the needs of its

customers, and employs ICT to support continuous engagement with customers.

d) It is available on a 24* 7 basis ( 24 hours a day and seven days a week.) thus it does
not kept its customers waiting for office hours and working days.

e) It is accessible from anywhere since it is ICT – enabled.

E-Procurement

 E-procurement has been defined by the as;

 The combined use of information and communication technology through electronic
means to enhance external and internal purchasing and supply management
process alternating a shooter definition is;
 E-procurement is the business –to – business purchase and sale of suppliers and
services over the internet.

The key enabler of e-procurement is the ability for systems to communicate across
organization boundaries. While technology for e-procurement provides the basic means, the
main benefits derive from the resultant change in business procedures, process and
perspectives. E-procurement is made possible by the open standards of XML (extensive
mark-up language), a structured language that allows easy identification of data types in
multiple formats and can be understood across all standard internet technologies. Adoption
of XML will help organizations to integrate policies seamlessly and exchange information
with trading partners.

1.5. Globalization Trends

· Globalization is an international phenomena which sweeping across all continents

and every sector of business. The political barriers to business are being eliminated. The
electronic media and communication have reduced the distances putting the customer at
the center of business.

· Business is going global due to the reasons of globalization and development of state
of art technologies, infrastructural facilities and reducing time and every for transaction.

· Entrepreneurs are taking up new ventures in their quest fro global size organization,
profit and large markets beyond the national boundaries of the entrepreneur. With the
result, entrepreneur is also going global size organizations; result entrepreneurship is also
going global thus making manufacturing, marketing and management that are represented
by different nationalities. The situation calls for different strategies in countries not as
diverse as South Asia countries, USA, Kazakhstan, Uzbek or Kenya.

· The globalization process started worldwide in 80s, the entrepreneurs are moving to
different countries and starting new ventures,. Many organizations are founded, organized
and operated one the principle that the globe is their field of operations. Modern
communication and transport systems are helping to go global; initially small business
ventures were based on local domestic markets. International business was consideration
domain of large organizations. This perception is fast changing. Trade has been conducted
on international scale for many years. Establishment of manufacturing organizations, and
development of business by licensing, arrangements management contracts, joint ventures,
mergers, acquisitions, subsidiaries and strategic partnerships

· The availability of cheaper inputs for the production such as raw materials,
infrastructure, trained labour force are taking entrepreneurs to different counties to give
global competitive advantage to their proposed ventures. Large markets

· Going global can generate greater revenue and greater operating margins. With large
funds, it is possible to purchase sophisticated equipments, update designs and adopt global
manufacturing qualities. An international entrepreneur would like to go to the countries
where there are economic developments and where the scale of economies can be
attained.

Factors Restraining Entrepreneurs from going Global

1. Government controls and barriers

· To protect the local industries, existing industries and employment, every country
tries to protect them. This is done by two ways.

· One, by fiscal regulatory measures like, high taxation, inspection, monitoring controls,
quantitative restrictions and foreign exchange controls. Second through non- monitoring
barriers like introduction of controllers and inspectors, large documentation, legal insecurity,
social and cultural barriers and treatment of outsiders in a different way as compared to
insiders.

2. Entrepreneurial culture

An entrepreneur should be open to consider dispassionately the business opportunities that

are coming in other countries. The entrepreneur should have a wide vision to expand
geographically.

Advantages of an entrepreneur going global.

· Large markets beyond home country borders

· Greater motivation in new opportunities

· Improvements in the technologies, quality and operations

· Extending life of product cycle

· Challenges in doing business in competitive environment

· Earning foreign exchange for the organization and home country.

1.6. Social Cultural Trends

 The social cultural environment of a business consists of class

structure, social mobility nature of social organization, social
institutions, customers and taboos. People’s basic beliefs, values
and norms are largely shaped by their society.
 The social setting consists of among other things, people and their
characteristics, their real or apparent roles and their interpersonal
relationships, culture has been defined as “ that complex whole
which includes knowledge, beliefs, art, law, morals, customs and any
other capabilities and habits acquired by people as members of a
society. Thus culture consists of common habits like people
behaviors in their daily lives, and common interest in entrainment,
sports, news advertising e.t.c
 Culture serves the needs of people within a society. For instance,
culture provides standards and rules regarding when to eat and what
is appropriate to, eat fro
 People‘s behaviors, particularly their consumption patterns and life
styles are influenced to great extent by the social classes to which
they belong. The most commonly used measures of social status are
income, education, occupation and area of residence. Entrepreneurs
should consider their consumers social status before introducing a
product the Kenyan slum area of Kibera.
 Another dimension to social and cultural life is the manner in which
social relationships manifest themselves in business, operations,
and operations. Obligations to immediate and extended family
members, kismen, friends and quittances are carried over to reach of
considerations in most business dealings such as those involving
recruitment of personnel and credit sales
 The social –cultural dimensions has been identified as one of the
factors contributing to the failure in most African countries.
1.7. Economic Trends

Some of the economic factors which promote and hinder entrepreneurship include.

1, Capital:

Capital is the most important perquisite to establish an entrepreneur one, machine of

another to create his business enterprise.

The stage of economic development in a country plays and important role while considering
establishment of new venture. To some capital refers to funds available for investment; to
others it refers to equipment and machinery used by entrepreneurs and managers to
produce goods and services; and others still, it refers to postponed consumption. All these
refer to the term capital.

2, Land:

According to economies the term land refers to all farm land and all natural resources
provided by nature. Therefore agricultural land, forests, rivers lakes, seas and all natural
resources are according to economists, land, forests, rivers, lakes, seas and all natural
resources area according to economies to economists land. It should be realized that the
amount of land is finite and can, therefore, not be appreciably increased.. Land as a factor
of economic production explains the existence of a variety of business including furniture
business and food business.

3, Labour:

This refers to all the physical and mental effort exerted in the production of goods and
services. Unlike land, labour can be substantially expanded by increasing both its quantity
and or improving its quality. Quantity of labour can be increased by higher birthrates and or/
improving its quality its quality. Quantity of labour can be increased by higher birthrates
and / or from inflow of people from other countries. The quantity on other had can be
improved through better health of laborers, better education and vocational training of
people or combining labour with more and better quantities of the other factors of
production.

4, Entrepreneurship: –

The process of combining land, labour and capital in some one way in order to produce
pertinent goods and services is called entrepreneurship .One factor that bothers many
potential business owners is how to determine in advance whether one has the qualities of
a successful entrepreneur. Although it is difficult to predict to whether a particular individual
will succeed or not if he ventures into business.
1.8. Consumer Trends

A consumer is the end user of a product offered by an organization.

Understanding consumer behaviour is of paramount importance because
and entrepreneur first have to identify consumer needs and then develop a
product that will satisfy those needs if the firm to succeed in the long –
term. There are certain factors that influence consumer behaviour that the
present and future entrepreneurs have to consider.
These factors are divided into;

 · Internal influences
 · External influences

Internal influences

 Needs and motives- a need is simply a deprivation of something of value. When a

need is sufficiently aroused it becomes a motive. That is, a motive is an inner state
that directs and individual towards the goals of satisfying a felt need.
 Perception- perception refers to the way an individual vies the world around him. An
individual’s perception of an object will determine how he or she will react towards
that object or event. Entrepreneurs acquire the purchase and consumption
experience they apply to the future related behaviour.
 Attributes – an attitude is a leaned tendency to respond to product, brand of
company in a way that is consistently favourable or unfavorable. The more favorable
a consumer’s attitude towards a product, the higher the usage rate and vice-versa
 Personality- personality refers to rather enduring traits or factors that affect t he
manner in which an individual deals with hi immediate environment.
 Entrepreneurs are interested in personality because they believe it affects consumer
behaviors

External factors
i) Culture- culture is a learned behaviour and results of behaviour whose component
elements are shared and transmitted by members of a particular society. The entrepreneurs
who hope to avoid costly mistakes should familiarize.

Themselves with the culture and sub-cultures of people they plan to market their products
to.
i) Social class- a social class is defined as an open aggregate of people with similar
social ranking. Class differences are important to entrepreneurs because certain product is
more likely to appeal to one class that another.

ii) Family- the family has an important influence on the consumption behaviour of an
individual. Quite often each consumption family member has specific roles in the buying
process.

iv) Purchasing power- this is people’s ability to buy goods and services according to
economists whether people buy a product or not largely depends on their incomes. Price of
the present product and prices of substitute products and complimentary goods among
others.

Challenges Posed by Emerging Trends

 There is a challenge in changing the type of business activity to engage in.

 It is also difficult to attract additional capital especially for those who want to venture
in small businesses due to the preference accorded to large enterprise owners by
the loaning institutions
 Entrepreneurs also have the challenge of sustaining and maintaining their
businesses
 Human resource is the one who can make best use of other resource to convert
raw materials into finished products. If no proper resource to convert raw materials
into finished products. If not properly managed, the enterprise may not be able to
realize its objectives
 Marketing is also a challenge because if no proper marketing strategy is not
formulated, then the business enterprise may collapse. Marketing is the lifeline of
any firm.
 Developing and entrepreneur culture is also very difficult due to difficult of many
cultural activities that inhibit entrepreneurship.

Management of the Challenges

 One should identify a business opportunity and develop a business idea and do
several evaluation of the business idea before engaging into business
 To sustain the business avoid excessive optimism, prepare good marketing plans,
make good cash projection, keep familiar with the market and be sensitive to stress
points in the business
 To attract an additional capital ensures you have a proper business plan that can
enable the lenders to lend you money.
 An entrepreneur should ensure that there are effective measures to develop,
maintain and motivate his employees in order to manage his human resource
effective
 The entrepreneur should find it necessary to update the technology processes and
product as per the need of that time.
 An entrepreneur should ensure he/she consider all the factors that affect consumer
consumption before establishing which marketing strategy to use
1. MANAGING FINANCIAL RESOURCES
1.1. Sources of Business Finance

The entrepreneur may obtain finance from the following main sources.

· Debt financing

· Equity financing

· External and internal sources.

Ø Debt financing requires a borrowing system and the entrepreneur is bound to pay back
the funds borrowed together with interest payable.

Ø Debt financing can be long term or short term. Depending on the lender collateral, amy
be required.

Ø Equity financing does not require collateral and offers the investor some form of
ownership position in the business.

Ø Internal financing are funds generated from several sources within the company, they
include profits sale of Assets, reduction in the working capital accounts receivable, retained
profits e.t.c

Ø External sources of finance may come from family members, credit suppliers,
government programmes, grants e.t.c.

1.2. Equity Finance

Equity Finance
· It the largest source of finance to a business organization and usually forms the base
of which other finances are raised.

· Equity is the total sum of the business ordinary shares plus the retained earnings also
known as revenue reserves.
a) Ordinary share-capital

 It that finance contributed by ordinary shareholders of a business. It is raised

through the sale of the company’s ordinary shares- who are the real owners of the
business.
 The finance type is only raised by limited companies and is permanent in nature
and can only be refunded in the event of liquidation.
 It earns ordinary dividends as a return to the investments.
 The investors carry voting rights and usually each share is equal to one vote.
 The ordinary shares are quoted at the stock exchange where they are sold and
bought.
 The finance carriers the highest risks in the company because it gets its return after
other finances have got their and also in the event of liquidation is it paid last.
 The ordinary dividends are not a legal obligation on the part of the company to pay.
 Where the profits are good ordinary shareholders get the highest return because
their dividends are varied.
 This type of finance grows with time and this growth is equity which basically is
facilitated by retention earnings.

Advantages of Ordinary Share Capital to Shareholders

v Ordinary shares have a right to vote and their votes influence the company’s activities.

v Ordinary shareholders can use their shares to secure loan.

v Ordinary shares are easily transferable.

v The owners of the ordinary shareholders earn dividends in perpetuity.

v The fluctuating nature of dividends is earned.

v The ordinary shareholders benefit from the residual claim in the event of liquidation.

Disadvantages of Ordinary Shareholders.

v Carry variable returns in case of low or non-profit dividends are not paid..

v Incase of liquidation an ordinary shareholder may lose everything.

v The sale of more ordinary shares dilutes ownership of the existing shareholders.

v The dividends of an ordinary shareholder are double taxed.

b) Retained earnings (revenue reserves)

 This is a source part of equity finance which arises out of undistributed profits over
and above dividends paid to shareholders
  It is a cost free source of finance and its cost is opportunity cost in terms of foregone
dividends to ordinary shareholders.
 The retained earnings constitute growth in equity which is a cost of equity because
the company may declare retained earnings as extra dividends or inform of bonus
issues.

Arguments in Favour of Retention

1 Acts as a stabilizer to future dividends (ordinary dividends) especially when profits
perform poorly.

2 No cost are incurred for it’s acquisition

3 It is able to be raised at no notice especially during unforeseen events e,.g

 Abrupt increases in the prices of raw materials

 Fire hazards e.t.c

4 Promotes savings promoting investments and growth.

5 Large volumes of retained earnings influence the company’s shares positively.

6 A good source of finance to those very urgent short-term ventures whose returns are
immediate

7 The boost the company’s creditability to the company’s creditors.

The advantages of using retained earnings as a source of finance to the

company.
1. It is the largest internal source of finance which the business will use without paying any
costs.

2. The use increases the equity base of the company making it possible to generate more
debt finance.

3. Retained earnings are used to finance new fixed assets whose value cannot be met by
other sources

4. It is used without pre-conditions or restrictions making it the most flexible source of

finance.

5. It boosts confidence among the company’s creditors

6. It is a permanent source of finance to the company to be used on long –term

investments.
The disadvantages of using retained earnings as a source of finance to the
company.
1 Easily misused by the management as it may be invested in areas which are prejudicial
to majority shareholders.

2. Retained earnings once used will leave not shield to take care of contingencies exposing
the company.

3. The finance can easily be mis-invested in areas of quite low returns.

4. The source involves a lot of sacrifice to the ordinary shareholders inform of opportunity
cost

5. Easily invested in high risk investments

1.3. Debt Finance – Loan

This is the type of finance which is obtained from persons other those actual owners of the
company i.e creditors to the company. The finance can be in any of the following forms;

· Loans

· Debentures

· Bank overdrafts

· Lease finance

· Mortgage finance

· Hire purchase finance

All the above finances have a legal claim or change against the company’s resources or
assets.

Requirements a Company must meet before raising Debt Finance.

1. The company must provide a summary of history of the business and its
nature. This is used to assess the risk of the company’s business line.

2. Details of management – names, ages, qualification and experience of

managers and directors. If these are of questionable integrity, such as a company may not
get debt finance.
3. To produce five years audited accounts which will reflect the company’s
financial ability to service debt finance.

4. the purpose of the loan must be;

i) within the lender’s priority

ii)Within the government areas of priority for development purposes.

5. Furnish lenders with cash flow forecast and proposed trend of repayment.

6. Major shareholders of the company must give consent to the loan.

Reasons why Commercial Banks prefer to lend short-term

1. Majority of deposits with these banks are subject to withdrawal on demand
and shortterm notice these cannot be lent long term. The violation of this principle led to the
downfall of a number of financial institutions in 1986/87 in Kenya.

2. Commercial banks are subject to sudden credit squeeze imposed by the

central Bank and as such they have to keep their investments in short-term investments to
meet the requirements of the central bank.

3. Short-term forecasts are usually accurate and also short-term investments are
less risky which is thus preferable to commercial banks.

4. Short-term investments are usually more profitable to the banks e.g overdrafts
which carry higher rates of interest than long-term loans.

5. Usually short-term investments are not secured e.g overdrafts and thus are
easier ad more flexible go giv

Limitations of debt finance/ disadvantages of using debt finance to the

company.
1. Interest is a legal obligation and failure to pay it may lead to company into
receivership and consequently liquidation.

2. Using debt finance entails conditions and restrictions as to its use and this makes it
nonflexible finance which can only be invested in those ventures approved by the lenders.

3. Its use on large scale increases the company’s gearing level which exposes the
company to incidences of receivership and thus liquidation.

4. It is not usually long-term finance and the payment of principal leaves the company in
financial strain and may cause liquidity problems to the company.
5. the use of excessive debt finance i.e beyond 67% level puts the company at the
mercy of the lenders because they can come in to control their interests which dilutes the
control of owners and this may lead to lower share prices. Moreover,

6. This finance calls for a security i.e it is usually secured against a collateral security
which may be rare or lenders may be rare or lenders may restrict the use of such asset thus
reducing the company’s operations and thus its profit.

7. The lenders usually insist that the security be compressively insured which will
compound the cost of this finance as it will entail an implicit cost to the company.

8. This finance is available only in big businesses which are known to lenders and as
such small companies will not be able to raise it easily as they are assumed to be risky and
are in most cases unknown to lenders.

Advantages of using Debt Financing.

1. Most debt financing is short-term and as such it will not burden the company‘s
cost of financing for long i.e cost is short-lived.

2. Interest on debt is a tax-allowable expense and thus the effective/real cost of

debt will be equal to interest less tax on interest I,e interest is less by the much of tax on it. (
refer to cost of finance)

3. the principal is later reduced in real monetary values by much of inflation on it

I.e the company pays less on long- term loans by virtue of inflation reducing the real
monetary value of the principal and interest.

4. The use of debt finance does not necessarily entail dilution of control to
existing shareholders are these shareholders may only lose the control if the company has
used 67% of debt finance in its financing i.e in its total capital employed.

5. it is usually invested in viable ventures whose return is higher than its cost,
thus it is used with a good investment policy

6. This finance does not call for a lot of formalities in its use in as much as it
does not involve a lot of floatation costs.

Circumstances under which a company should use short-term debt

finance.

1. Under situations when the company has identified a venture which calls for finance
on short-term notice and will pay back early enough to facilitate repayment of the loan.
2. Under situations where the company’s venture promises higher returns that the cost
of debt finances.

3. Under high debtor’s turnover where the company wants to boost sales through further
investment in stock.

4. Under boom conditions when the company’s cost of debt is relatively lower as profits
will increase relatively and the company can be able to service debt finance. This will raise
the earning per share of the company’s shares.

Characteristics of Debt Finance

1. It is a fixed return finance i.e interest on debt is fixed regarding less of the
profits made by the company.

2. Interest of debt finance is a legal obligation on the part of company to pay and
failure to pay it may lead the company into receivership in the extreme.

3. It is usually given on conditions and restrictions except for overdrafts.

4. It carries a first claim on profits and assets before other finances.

5. It does not carry voting rights and as such it does not participate in the
decision making process of the company.

6. Its use rises the company’s gearing level.

7. It is always refundable except for irredeemable debentures.

8. it is usually a secured type of finance

9. Interest on debt finance is a tax-allowable expense.

Classifications of debt Finance.

1. short-term finance

This ranges from 1 month up to 4 years and is given to customers known to the bank or to
lenders. The agreement of this loan will mention both the repayment of principal and
interest, and must identify whether it is simple or compound interest. For principal, it has to
be paid over some time. This finance usually secured and the terms of the loan will be
restrictive. Usually be invested in an area acceptable to the bank or lender. Usually this
finance should be used to solve short-term liquidity problems.
2. Medium –term finance.

This finance will be in the business for a period ranging between 4-7 years. This term is
relative and will depend upon the nature of the business. This type of loan is used for
investment purpose and is usually secured but the security should not be sensitive to the
company’s operations. The finance obtained must be investigated while respecting the
matching approach to financing i.e the term and pay back period must be matched. This
type of finance if the most popular of all debt financing because most of the business will
need it both in their growing stages and also their mature stages of development.

3. Long-term finance
This is a rare finance and is only raised by financially strong companies. It will be in
business for a period of 7 yeas and above. This finance is used to purchase fixed assets in
particular during the early stages of a company’s development. It is always secured with a
long-term fixed asset. Usually land or buildings. Its investment, however must obey the
matching approach. In all, the companies needing such finance do not have to be known to
the lenders.

Reasons why long term loans are difficult to raise on Kenya’s financial
markets/ limitations of using long-term debts.
1. This finance calls for long-term securities such as land and buildings which
most businesses in Kenya may not have.

2. There are no long –term savings to back-up these loans due to low income of
average Kenyans and as much most of the savings are short-term and cannot be made
available on long-term basis.

3. Most business in Kenya are agro-based and these are risky and as such
lenders cannot avail their finance to such businesses of long-term.

4. The central bank has tended to stimulate the development of money markets
that capital markets which have not been fully developed to avail such finance to meet the
development needs of industry and commercial sectors of the economy.

5. Long-term loans are not usually profitable because interest and principal
repayment are eroded by the by the impact of inflation and thus banks may be reluctant to
give such.

6. The size of the businesses in Kenya is small and such businesses are not
going concerns so as to be able to attract this finance on long term basis.
7. A number of companies in Kenya are multinational companies which obtain
long-term finances from parent companies abroad and this has limited the development of
capital markets in Kenya as demand by such companies is low.

8. there are been a tendency by the financial institutions to avail long term debt
for building purposes and little attention has been paid to long-term finances for businesses.

9. This finance is given on conditions and restrictions to avail long-term debt for
building purposes and little attention has been paid to long-term finances for businesses.

10. This finance is given on conditions and restrictions which make it less ideal for
profitable ventures as such restriction may reduce profitability of companies concerned.

11. Long-term forecasts by commercial banks are inaccurate and filled with a lot of
uncertainties thus the banks are very reluctant to shield such potential risks and prefer to
lend short term which they can forecast with some degree of accuracy and certainty.

General Limitations of Debt Financing

1. The economic life of the asset to be used a security act as an outer limit to debt
financing both the terms of principal and the term.

2. If the balance of debt outstanding in the company’s capital structure is high it means t
hat the company is highly geared and this cannot allow lenders to give further finance to
such a company as it will be viewed as risky.

3. Debt financing may be expensive because it carries both implicit and explicit costs.
These may out-weigh the returns from the investments.

4. Ordinary shareholders may limit the much a company can use in debt financing as the
level of the gearing is influenced by this finance thus putting them at risk.

5. The size of the company may influence its ability to raise debt finance this size works
better for quoted companies and unquoted companies usually find it difficult to raise such
finance.

6. General economic conditions may limit the availability of debt finance because in
recession it is quite dangerous to use large sums of debt finance as these may not be
serviced under conditions of low profits and may lead to the company’s receivership in
extreme.

7. The management for the company may also limit the availability of this finance either by
virtue of its nature (if its integrity is questionable) or if it is conservative in the use of debt

Advantages of using an Overdraft

 it can be used to bail the company out of short-term financial liquidity problems
  Usually it is not secured as the company’s goodwill is all that matters in obtaining
this finance as long as the company is known to lenders.
 It is used without pre-conditions or restrictions which makes it a flexible source
 It can be raised fast thus very useful in emergency financing endeavors.
 It is not expensive to raise i.e there are no costs paid to obtain it.
 Its cost and financial constraints are short lived.
 it can assist the company to meet its obligations in particular short term
obligations thus sustaining the goodwill from creditors.
 Overdraft finance does not increase the company’s gearing level, at least in the
long run.
 Overdraft finance is used without consent of shareholders thus it is flexible as it
can be used as and when it is needed.

Disadvantages of using Overdrafts

1. It is very expensive finance and its lending rate is usually 1-2 % higher than
the usual lending rates.

2. Its constant use of a sign of bad/poor financial management policy and this
may endanger the company’s ability to raise long-term finance as longterm lenders view
constant use of overdrafts as a sign of lack of overdrafts as a sign of lack of cash forecasts
and budgeting policies on the part of the economy.

3. It is not easily available to every business thus it is obtained by companies

know better to the bankers,.

4. In some cases this finance may be used in a manner flexible to the

management which most cases may not be in the interest of shareholders it may be used in
areas which may not directly benefit shareholders i.e it

5. It is only available is small quantities and as such may not be useful for bigger
ventures.

6. The bank may recall this overdraft in part or in whole at any time and this may
inconvenience the Company affected.

7. Overdraft finance may only be used to finance non-profitable operations e.g

working capital and cannot be used to finance fixed assets which are the most important
ingredients in the company’s production and profitable operations.

Accrued Expenses

Examples of these are;

i) accrued electricity bills

ii) accrued telephone bills

iii) accrued water bills

iv) accrued rent

v) Accrued rates.

These are a short-term source of finance and can be big sources if the company has a
number of these outstanding expenses. However, a company should use these in as much
as they cannot affect its future operations and only pay such on the last date when these
are due.

Credit Card buying (plastic money)

These are arrangements whereby a company or an individual enters into an agreement with
a credit card organization to use their card to purchase a number of goods and services and
pay after agreed period of time. Usually repayment carries interest charges. These cards
are used to obtain such goods and services as:

o fuel expenses in particular for tour companies

o stationery

o Medical expenses for employees and their families.

o Vehicle maintenance

o Air transport

o Purchase of inputs such as oils, spare parts e.t.c.

Reasons why Plastic Money has Developed Fast in Kenya of late

1. Due to high incidences of frauds by dishonest employees these cards e.g in tour
companies.

2. They minimize the use of liquid cash thus reduces chances of petty cash frauds and
also solves the company’s liquidity problems and those of individuals.

3. Kenyan society has developed fast (in sophistication) and the use of these cards is a
sign of high social and economic status.

4. There is a lot of awareness amongst Kenya’s elite community as regards credit

facilities and as such have responded to the introduction of this type of money fast.

5. There is a lot of risk associated with carrying lots of cash which is open to theft and
as such people prefer to carry finance in card form.
6. A number of companies and establishments have quickly recognized these cards as
a means of settling bills and some even give discounting to card holders which has boosted
their popularity.

7. It is a source of finance to individuals who depend on monthly earnings who settle

their bills using the credit cards and later pay at the end of the month when their liquidity
position warrants it.

Disadvantages/ limitations of using credit cards as a source of finance.

1. It is expensive to obtain (because the bolder has to deposit some amount of
money with credit card

2. Organizations) and later pay interest on all his expenditure.

3. It may lead to unwarranted spending which may lead to financial strain on the
part of the holder when it comes to settling his bills.

4. The majority of Kenyans are unaware of these credit card facilities in

particular the rural Kenyans who form the majority of Kenyans.

5. The card is limited only to those establishments which have formal

arrangements with credit card

Advantages of using Debenture Finance to Ordinary Shareholders.

1. The use of debenture finance does not dilute the shareholders control of the
company unless they are convertible and are converted.

2. Under boom conditions ordinary shareholders may benefit from higher dividends due
to fixed charges on debentures which is paid under conditions of high profits.

3. Interest on debentures is tax-allowable expense and as such this may allow the
company to retain more and even pay higher ordinary dividends to its shareholders.

4. In case the company issues irredeemable debentures, these will be invested in long-
term ventures with not only have the effect of raising the shares pieces of the company’s
ordinary shares but will also increase the company’s future ordinary dividends.

5. After debentures are redeemed, the company will benefit from the asset/ investment
they had financed which will increase the net worth of shareholders.

Trade Credit
This finance is obtained by companies by which purchase goods on credit and pay for such
goods later. This “kind” and is available to companies which can pay bills on time as and
when they fall due. It the largest source of finance to sole traders and wholesalers in Kenya.
This is cheap source of finance and it does not entail any explicit cost except discounts
foregone. This finance may be long-term in particular if the company meets its bills regularly
such that after settling a given bill the same company obtains further credit immediately,
thus may become a continuous source of finance. In order to be a source of finance, credit
received must exceed credit given.

Advantages of using trade credit in Kenya a source of finance (reasons

why trade credit is popular in Kenya)
1. Most businesses in Kenya lack collateral securities which are necessary to raise
other forms of debt finance thus resort to trade credit.

2. it is cheap source of finance because the only cost involved is discounts lost I,e no
implicit or explicit costs.

3. most other finances need the borrower to maintain healthy accounts which small
businesses in Kenya may not have thus resort to trade credit.

4. The fact that small businesses in Kenya are not known to lenders makes trade credit
the best source of finance as they may not qualify for other finances which require that the
borrower be known to the lender.

Disadvantages (limitations) of using Trade Credit.

1. The debtor company will undergo the opportunity cost of the discount foregone by
the very buying company.

2. This finance is not reliable because in the event of default on the buyer’s side the
seller cannot give it and this way cut the buyer’s credit line which may lead a lot of
inconveniences and in some cases stoppages in production or sales of the debtor.

3. It is usually restricted to working capital items and as such may not be available for
fixed assets which are important for profitability reasons.

Promissory Note
ü A promissory note is a bill wherein one party promises to pay another party on a specific
date and conditions, a specific sum of money. It is a short term source of finance to the
company, usually up to 3 months. This type of finance is used when the two parties know
each other well. It acts as a source of finance in as much as it can be discounted or
endorsed. It can also used as security for loans.

Advantage and disadvantage of promissory note

Advantages of promissory note

1. It does not involve a lot of formalities and as such will allow the drawer to obtain
finance faster.

2. It is highly negotiable making it a liquid investment which the company can liquidate
fast ( if the drawee is of high credit rating)
3. Since it is unconditional the drawer will use the same finance obtained on the
strength of the bill without preconditions and restrictions.

4. It does not affect the company’s gearing level.

Disadvantages of promissory note

1. It is a very short-term source of finance and as such it may not be profitable

as its duration cannot warrant any profitable ventures i.e finance from the bill cannot be
invested in profit table ventures.

2. There are possibilities that the bills may be dishonored by the drawee and
drawer may have to settle any liabilities incurred thereon.

3. It is a foreign bill of exchange this may delay the finance in that it may require
the approval of the central bank before discounting it.

Invoice Dis counting (confidential factoring)

This is an arrangement where the selling company discounts its invoices usually with a
bank or financial institution and will receive a large percentage of its invoices in cash in
advance. Usually it is expensive source of finance and should only be used if the company
cannot obtain overdraft finance from commercial banks. The invoice discounter analyse
which invoices to discount and in this case he will request the selling company to send
original invoices to the customer and a copy to the discounter. The invoice discounter has
not only lien on the debts but also recourse to the borrower in which case the seller or
borrower will have to pay the discounter should any debtor default to pay his bills on the due
date.

Advantages of using invoice discounting as a source of finance

1. it is useful as a solution to short term liquidity problems

2. it does not call for a collateral security and as such it is a flexible of finance to raise.

3. it is easy to raise as it does not entail a lot of formalities

4. Normal credit will be extended to customers as the discounting of invoices does not
affect the relationship between the selling company and its customers.
Disadvantages of using Invoice discounting as a source of finance.
1. The discounter has resource to the borrower and in case may debtor fails to honour
his obligation then the discounter can turn to the seller to pay such debt and interest on
finance advanced to him.

2. It may be an expensive source of finance in particular if the invoices are small and
numerous in which case the costs of collecting these may be too high.

3. This type of finance is usually available to those companies whose debtors are highly
rated in credit payment point of view thus may be discriminative if a given company has
unknown debtors in which case they cannot be discounted.

Similarities between invoice discounting and factoring

1. Both are raised on the account of the company’s debtors or invoices.

2. both are expensive sources of finance to the company because discount rates in
both case will be higher than the bank rate on borrowed funds

3. both fall in the family ( group) of short term sources of finance to the company, thus
are aimed at solving the company’s liquidity problems

Differences between invoice discounting and factoring Invoice discounting

1. the bank has recourse to the borrower

2. the borrower keeps the debtor’s ledger

3. Chances of bad debts are high and this may increase the cost of the company of
using such finance.

4. invoices act more or less as securities for a short term loan

5. the discount rate is usually low

Factoring
1. the factor has no recourse to the borrower

2. The factor takes over the debtor’s ledger.

3. The chances of bad debts are minimal and even then these are borne by the factor.

4. The invoices are sold outright to the factors and cannot act as securities for loans.

5. The discount rate is relatively high.

Advantages of leasing as a source of finance
1. It may be a long –term source of finance e.g for land leased for a period of 99 years

2. In case the lease agreement gives the option to purchase the asset after the expiry
of the lease term then

Such a company will have known which asset it is taking over, and thus make a good
investment decision based on experience.

3. Lease charges are tax-allowable expenses thus will reduce the company’s tax
liability.

4. The lessee enjoys the benefits of wear and tear which reduce his tax liability.

5. The company does not risk holding assets which may turn to be technologically
obsolete.

Disadvantages of leasing as a source of finance.

1. This type of finance is available for fixed assets and as such does not have provision
for working capital which is important in generating sales.

2. the periodic rental charges may outweigh the cost of the same asset in the long-term
i.e in the long run the leasee may pay more in rental charges that the cost of this asset.

3. The lessor may not renew the lease agreement and this may put the lessee out of
business.

4. It is limited only to those assets which are available from the lessor’s business thus is
not useful in all financial requirements of the company.

5. Lease finance entails implicit costs e.g maintenance and insurance of the same
asset leased which may compound the cost of this finance.
Sale and Lease –Back
This is an arrangement whereby a company which owns some assets arranges to sell the
same assets and at the same time agrees with the buyer to lease the same asset back at
an agreed rental charge. This type of arrangement is possible if the asset back at an agreed
rental charge.

This type of arrangement is possible if the asset is fixed asset whose return must outweigh
the cost of the same finance. Also the parties involved must have had an intimate
relationship before i.e. they should be acquitted to one another.

Advantages of using Sale and Lease Back

1. The company gets finance in cash and finance in kind which boost its
operations tremendously

2. Since the lessor and the lessee are known to each other, this finance may not
entail any conditions or restrictions on the part of the lessee.

3. This arrangement does not involve tedious formalities, thus is flexible to raise
for financing reasons.

4. The risks of obsolescence shifts from the lessee to he lessor thus will entail
less risk of capital loss the lessee.

5. It is easily available i.e faster because the two parties are known to each
other.

Disadvantages of using sale and lease back.

1. The company’s asset will be removed from the balance sheet which will in essence
affect its financial position i.e reflect a bad financial picture.

2. The lessee may not enjoy the benefits of wear and tear as such this will increase his
tax liability.

3. The finance is limited to the cost of the asset leased, and cannot be versatile.

4. If it is an operating lease, then it will be used for short-term purpose.

5. It entails implicit costs such as repairs and maintenance costs of the asset leased.

Conditions under which sale and lease back is ideal as a source of finance
1. If the asset is required for seasonal purpose
2. If the asset is technologically sensitive i.e may soon be technologically obsolete.

3. If the asset cannot meet the company’s contemplated expansion programmes

4. Where the asset has a tendency of depreciating fast

5. If the asset is not sensitive or central to the company’s operations.

Sale of an asset
For companies with assets which are not very necessary for their operations, such assets
can be sold to raise finance for the company. These assets should only be sold if the funds
from the sale of assets can be invested in ventures which can generate returns higher than
those the asset sold was generating.

Hire Purchase
This is an agreement whereby a company acquires an asset on hire by paying an initial
installment usually 40% of the cost of the asset and repays the other part of the cost of the
asset over a period of time. The source is more expensive than bank loans. Companies that
use this source of finance need guarantors as it does not call for collateral securities to
raise. The company hiring the asset will be required to honour all the terms of the
agreement which means that if any term is violated then the hiree may repossess the
asset e.g in Kenya if the hirer fails to pay any installment before he clears 2/3 of the value
of the assert the hiree may reposes it. Companies that offer this finance in Kenya are;

i. National industries E.A ltd

ii. Diamond trust (K) ltd.

iii. Kenya Finance Corporation

iv. Credit Finance Co. Ltd.

They avail hire purchase facilities for such assets as;
1. plant and machineries

2. vehicles

3. tractors

4. heavy transport machines

5. aircrafts

6. Agricultural equipments.

Conditions under which Hire Purchase is an ideal source of finance.

1. If the asset is so expensive that there is no single source of finance that can finance
it e.g aircrafts.

2. Under conditions of credit squeeze or restrictive credit control.

3. If the company cannot obtain securities to cover a loan to finance this type of asset.

4. if the asset will meet the company’s future expansion programmes

5. If the asset is not very sensitive to technology.

6. If the company is highly geared and cannot borrow to finance such an asset.

Advantages of using hire purchase as a source of finance.

1. It does not call for securities in acquiring it an as such it is a flexible source of
finance.

2. this finance is a long-term finance and as such it can be used to acquire fixed assets
which are very essential for the company’s profitability

3. It is useful under conditions where the company cannot raise finance due to the
amount involved i,e if it is substantial.
Disadvantages of using hire purchase as a source of finance
1. it is an expensive source of finance and in most case the interest on it may outweigh
bank rates and at the end of the hire purchase contract the total installments paid may
double the cost of the asset.

2. it involves a lot of formalities to obtain e.g legal implications and accounting

formalities prior to

Signing Hire Purchase Agreement.

1. the hiree has a lien over the asset until the final installment is cleared in which
case if the hirer defaults the hiree may repossess the asset in particular if the hirer has not
paid 2/3 of the value of the asset this will entail a capital loss to the hirer once the asset is
repossessed by the hiree.

2. It may be difficult to get a guarantor for expensive purchases e.g huge

machinery as their value may be beyond the financial capabilities of a number of guarantors
making it difficult to acquire heavy fixed assets necessary for the company’s operations.

3. By not purchasing the asset outright, the hirer foregoes discounts which will be
an opportunity cost as a result of hire purchase.

4. Hire purchase is limited to those assets which are available with the hiree and as
such may not cover all areas of the company’s financing needs e,g for working capital.

5.

Institutional Investors
ü These are body corporates which avail finance for long term use, and avail their finances
though purchase of shares in the stock exchange, debentures and through mortgage
finance to deserving financially strong companies. Companies that avail this finance include
trustee companies, pension organizations, insurance companies, and investment
companies’ e.t.c. these avail finance in large quantities and usually do this to earn a return
on the same finance or to acquire ownership in those companies so as to safeguard their
investments. Companies which are financially strong will attract institutional investors.

Advantages of using finance from institutional investors.

1. it is cheaper to raise this finance because it will be available in large sums and from
a few companies i.e flotation costs will be low.
2. These institutions using their financial experience can advise the company in its
investment activities so as to utilize such finance more profitably.

3. the cost of servicing their finance is low as these will be paid with a few cheques
unlike the case with

a company having a large number of shareholders with will issue many cheques this
increasing the cost of servicing this finance.

4. These investors will come to the rescue of the company permanent finance if they
purchase ordinary shares and this will be used in long term ventures.

5. Being major shareholders they will contribute valuable ideas during the annual
general meetings and such ideas may improve the running of the company benefiting from
such finance.

Disadvantages of raising finance from institutional investors.

ü They may disrupt the company’s running through the various ideas they would want the
company to implement which may not be in the interest of other shareholders.

ü They influence the company’s dividend policy and as such this may be to the detriment of
small shareholders.

ü In case they decide to sell their shares this will lead over supply of shares which will
lower the price of the company’s shares in the stock exchange; this may erode the
company’s credibility.

Factors affecting the type of finance sought.

Finance to be raised by accompany should be at a cost than the return expected from the
project where such finance has to be invested , for this reason two types of costs should be
considered before raising any finance:

1. Explicit costs

These are costs that the company has to pay directly to the lenders for using their money
this could be either interest payable for using debt finance or dividends payable for using
share capital; these two costs are paid to retain such finance in the business.
2. Implicit costs
These are costs which are not necessarily paid to lenders directly but which must be paid to
obtain finance these include such costs as; insurance of the security, its maintenance costs
and floatation costs for raising share capital. These two costs should be weighed against
benefits to be derived from the use of such finance. a) Need for finance.

i) A company may raise finance to finance its working capital needs, this finance is
known as bringing finance such as finance will be raised form such sources as overdraft
and short-term loans.

ii) To acquire a fixed asset this will be raised from long-term sources of finance

d) ordinary share capital

e) preference shares capital

f) long term debt financed or sell of debenture

g) hire purchase finance

h) lease finance et.c

3. The company’s gearing level.

ü The gearing level will influence the company’s ability to raise further finance in as much as
highly geared companies are viewed as highly risky as they have used more debt finance
than equity finance. This exposes it to chances of receivership and consequently liquidation
as creditors can recall their money at short – notice. This means that high gearing will not
allow the company to raise debt finance as creditors will be reluctant to lend to a highly
geared company. Also such a company cannot raise equity finance as the demand for its
shares will be low due to such indebtedness.

4. The size of the company

The size of the company will determine which finance it can raise. This is so because small
companies may not be able to raise difference finances due to the following reasons;

a) such companies will find it difficult to have access to different finances because:

i) They may be unknown to the lenders and as such their credibility will be
questionable.
ii) Such companies may not have the necessary securities to pledge in order to raise
various finances available in the financial market.

b) They may be ignorant of the various finances available on the financial market.They
may not meet the requirements of the stock exchange so as to float their shares e.g for a
company to go public such a company must have a minimum of shs. 2,000,000 or such £
100,000 which very few companies may have.

c) Lenders also discriminate against small companies in their lending activities in

particular due to ownership of small companies most of which are sole traders whose life
span is equivalent to that of the owner, this means that they viewed as highly risky areas of
investment.

d) Big companies not only are they able to raise share capital, but also can sell their
debentures even under credit squeeze, which condition usually makes it difficult for small
companies to raise finance.

Repayment Patten

These include the repayment of principal and interest. Ideally a company’s repayment of
principal should be spared over such a period as can enable the asset and or the project
financed to pay back. In case of interest the company.