Introduction to Business

Management
11th edition
Ancillary material
ISBN 978 019 07 4576 9
P O Box 12119, N1 City, 7463, Cape Town, Republic of South Africa

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 Chapter 3
Establishing a business
Learning outcomes
• Understand and discuss the key considerations that are applicable when a form of
business has to be chosen
• Distinguish between the different forms of enterprise found in South Africa
• Explain the objectives, importance and need for a business plan
• Evaluate a business plan
• Give an overview of a business plan
• Identify the location factors and the impact of these on a business.
Chapter outline
• Introduction
• The legal forms of ownership
• Developing a business plan for the new business
• The location of the business
• Summary
The legal form of ownership
• There are various forms of enterprises an entrepreneur can choose from to conduct
his/her business.
• The first fundamental issue an entrepreneur is faced with is to choose the type of
enterprise.
• Understanding the features of each enterprise and how it will influence the
entrepreneur’s circumstances is the key to choosing the right form of ownership.
The legal form of ownership (continued)
• Considerations in choosing a form of enterprise:
• Legal (or juristic) personality
• Continuity or perpetual existence
• Limited liability
• Degree of control or management authority
• Potential for capital acquisition
• Compliance with legal formalities and regulations
• Taxation
• Transferability of interests.
Sole proprietorship

• A business that is owned and managed by

one individual.
 The partnership
• A contractual relationship between two or more persons who operate
a lawful business with the objective of making a profit.
The close corporation

• May have one or more members (not more

than 10) that own and control the close
corporation, that exists as a separate legal
person.
The company

• A company is developed to obtain more

capital than they could through a sole
proprietorship or partnership, and
ownership and control is separated.
The company (continued)
• Profit companies
• Public companies
• Private companies
• State-owned companies
• Personal liability
• Non-profit companies
Differences between a public company and
a private company
• Difference in the number of members required and allowed
• Difference in director number requirements
• Difference in transferability of shares
• General public cannot subscribe to the shares of a private company
• (Pty) Ltd versus Ltd
• Private company not as strictly controlled as public company in terms of legal regulations.
The business trust

• Established out of an ordinary trust

• Has objective of conducting business for
profit
• Is not a juristic person
• Regarded as a separate tax payer
• Income tax on income according to the
conduit principle
• Transfer of the interest of a beneficiary done
by a variation of the trust deed.
Co-operative societies

• An autonomous association of persons who unite voluntarily to meet needs by means of

a jointly owned and democratically controlled enterprise.
Co-operative societies (continued)
Advantages
• Co-operatives are juristic persons
• Members benefit from limited liability
• Any person may become a member
• There is no restriction on the maximum
number of members
• The participatory nature contributes to the
achievement of outcomes
• Necessary services may be more
accessible
• The business form is reasonably flexible
• Legislation is less stringent in its
requirements
• Enable legislation facilitates the provision
of support
Disadvantages
• Lack the managerial requisites of
operating a business
• Members need some understanding of
financial management issues
• Require mentorship and support to
become viable and remain sustainable
• Tension can develop in participatory
decision-making
• Business efficiency can be influenced
negatively due to conflicts
• The short-term goals of members may
contrast with the longer-term interests of
the co-operative
Developing a business plan of a new business
• The objectives of a business plan:
• Most important objective is to identify and describe the nature of the new business opportunity or
venture
• Second objective is to present a written plan of how the entrepreneur plans to exploit the
opportunity
• A third objective of the business plan is to attract investors, or to persuade a bank or other
institution or person who provides financial resources, to lend the entrepreneur the money he/she
needs to establish the new business.
Developing a business plan (continued)
• Benefits of a business plan:
• Systematic, realistic evaluation of the new business’s chance of success
• Identification of the key variables that will determine the success of the new venture
• Game plan for managing the business successfully
• Management instrument for comparing actual results against targeted performance
• Primary tool for attracting money.
Developing a business plan (continued)
• Importance and necessity of the business plan (reasons for writing a business plan):
• To sell the business
• To obtain bank financing
• To obtain investment funds
• To arrange strategic alliances
• To obtain large contracts
• To attract key employees
• To complete mergers and acquisitions
• To motivate and focus the management team.
Developing a business plan (continued)
• Stakeholders in a business plan

Internal stakeholders External stakeholders

• Management team • Customers

• Employees • Investors
• Banks
Stakeholders in a business plan
Matrix for evaluation of business plans
Developing a business plan (continued)

• The scope of the business plan

• How much planning is needed?
• Consider the following:
• Style and ability of the entrepreneur
• Preferences of management team
• Complexity of the product or service being offered
• The competitive environment
• The level of uncertainty in business environment.
Components of the business plan

• Format of the business plan:

• Determine who should write the plan
• Identify the necessary skills to write the plan
• There are no rigid rules regarding the format of the business plan
• Appearance is important
• Length depends on the type of business and can vary from 5 to 20 pages.
Components of the business plan (continued)

• The content of the business plan

• The executive summary
• The general description of the venture
• The products-and-services plan
• The marketing plan
• The management plan
• The operating plan
• The financial plan
• The supporting materials.
Overview of a business plan
Outline of a simple business plan
A general description of the new venture

• Some important questions to address:

• Is this a start-up, buy-out or expansion?
• Has this business begun operations?
• What is the firm’s mission statement?
• Where was this business started?
• What is the basic nature and activity of the business?
• What is its primary product or service?
• Which customers are served?
• Is this business in manufacturing, retailing, service or another type of
industry?
A general description of the new venture (continued)
• Important questions continued:
• What are the current and projected states of this industry?
• What is the business’s stage of development?
• What are its objectives?
• What is the history of this company?
• Which achievements have been made to date?
• Which changes have been made in the structure or ownership of the existing business?
• What is the firm’s distinctive competence?
Analysing the market

• Market analysis involves the following key items:

• Concepts
• Identification of the target market/s
• Research and forecasting
• Marketing plan or strategy for the selected market segment/s.
Determining the financial needs
of the new venture
• Essential that the entrepreneur understands financial statements and how to
interpret them
• Entrepreneur must understand how profitability is assessed
• Entrepreneur must have the ability to determine the venture’s financial
requirements.
The location of the business: Location factors
• Sources of raw materials
• Availability of labour
• Proximity of, and access to, the market
• Availability and cost of transport
facilities
• Availability and costs of power and
water
• Availability and costs of a site and
buildings.
• Availability of capital
• Attitude, regulations and tariffs of
local authorities
• The existing business environment
• The social environment
• Climate
• Central government policy
• Personal preference.
Summary

• Legal forms of business

• Characteristics, advantages and disadvantages of different types of entities
• Development of a business plan for a new venture
• Location factors.