MODULE TITLE: Developing Understanding of

Entrepreneurship
LO1: Describe and explain the principles, concept and scope of entrepreneurship
 Entrepreneurship refers to an individual’s ability to turn ideas into action. It
enables people to think creatively and to be an effective problem solver (European
Commission).

Meaning and Scope of enterprising

 Meaning of Enterprising
 On a personal level/in its wider sense, enterprising can be any identified idea that
a person can translate into a planned and satisfactorily implemented activity.
 In the business sense/in its narrower sense, enterprising refers to a business
venturing or undertaking.
 An enterprise is considered to be any entity engaged in an economic activity,
irrespective of its legal form.
 Practically all undertakings can be referred to as enterprising it fulfills the
followings. i.e.
 Idea identification,
 Planning,
 Implementation,
 Successful completion of an activity and
 Receiving the rewards.
 By understanding the enterprising concept, all people have the potential to be
enterprising.
 Some people are enterprising when they own a business.
 Enterprising societies are able to deal positively with the challenges and problems
they face in their daily lives.
 Being enterprising can bring benefits to you and also help you to become a valued
member of your society.
 Enterprising approach can be applied to different circumstances.
 This kind of approach will enable you to appreciate the challenges of life because
you will be able to translate challenges into positive results.
 Enterprising men and women exhibit the following characteristics
 E: Energy
 N: Need to achieve
 T: Task oriented
 E: Empathy
 R: Resourcefulness
 P: Planning
 R: Risk-taking
 I: Innovation
 S: Skills
 I: Independence
 N: Networking
 G:Goal oriented
  Characteristics of an Enterprising Society

 Useful goods and services constantly produced/provided

 Wide distribution of needed goods and services throughout the population
 New ideas continuously infused for revitalization and growth of the economy
 Continuous discovery of unidentified needs of society
 Constant solving of problems experienced in society
 Avoids stagnation through giving individuals a chance to be innovative and
creative
 The present and future availability of natural resources and conservation of
nature are guaranteed

An entrepreneur is any man or woman who:

o Observes the economic environment,

o Identifies opportunities in the business or non-business environment

o Gathers the necessary resources to realize an activity

o Implements the activity, and receives financial or social rewards

Entrepreneurial Functions in Business

 Identify gaps in the market and turn these gaps into business opportunities.

 Finances and mobilizes resources for the business

 Organize and manage the business.

 Bear the uncertainties and risks of the business.

 Encourage competition

 Self-employed and applying entrepreneurship

Economic Principles of Entrepreneurship

 Works best in an open market economy

 Promotes private enterprise

 Adds value to products and services (creates wealth)

 Providing needed products/service

 Developing new markets

Personal efforts to be an Entrepreneur

 Works long hours

 Always concerned about the business

  Needs high energy

 Sacrifices other important aspects of life

 Limited social life

 Not much time with family and friends

 Financial investment

Rewards for Being an Entrepreneur

 Self-actualization/personal fulfillment

 Feeling of freedom and independence

 Providing jobs and benefits to others (investors, suppliers, bankers, subcontractors,

work force, and customers)

 Economic goods (product/service, incomes for workers, profits for

shareholders/partners)

Meaning of goal

The end result or achievement, in which organizational and individual effort is directed, is a
goal.

Goals are essential starting points in planning because they provide direction for all other
managerial activities.

Goal Setting Process

1. Describe long and short-term goals!

2. Relate to what you want to achieve in life!

3. Action plan is outlined including activities, responsibilities and time frame.

4. Performance standards, measurement criteria are defined!

5. Consider environmental and personal obstacles!

6. Identify resources!

GOAL MUST BE:

 S: Specific

 M:Measurable

 A: Achievable

 R: Realistic

 T: Time-bound
Guidelines for Setting Goals

 Your goals should be your own. They should be set for things you really want to
achieve.
 Goals should be specific. They should be clear, concrete and written.
 Goals should be measurable and can be quantified. You need to be able to
know when you have reached a goal.
 Review goals periodically to measure the extent your goals have been achieved.
 Goals should be set for a definite time period. Setting deadlines can be an aid in
attaining goals.
 Goals should include both short-range and long-range goals.

LO2: Discuss how to become entrepreneur

Who are Entrepreneurs?

• An entrepreneur may be defined as a woman or man who is able to scan the

immediate environment, generate ideas, gather resources and take action to take
advantage of an opportunity.

• Entrepreneurs are action oriented, highly motivated individuals who take risk to
achieve goals.

• Entrepreneurs are those who bring resources together in unusual combination to

generate profits (Economists).

• Entrepreneurs are achievement oriented individuals who are driven to seek challenges
and new accomplishment (Psychologists)

• Entrepreneurs are small business owners having the potential needed for corporate
management (Managers).

• An entrepreneur is someone who always searches for change, responds to it, and
exploits it as an opportunity (Drucker).

Entrepreneurial Competencies

 Being an entrepreneur requires specific characteristics that are often achieved through
education, hard work, and planning. These are:

 Opportunity seeking and initiative

 Takes action to extend the business into new areas, products or services
 Does things before being asked or forced by events?
 Seizes unusual opportunities to start a new business, obtain financing,
equipment, land, work space or assistance

 Persistence
 Takes action in the face of significant obstacles and challenges
  Takes persistent actions, or switches to an alternative strategy, to meet a
challenge or to overcome an obstacle
 Takes personal responsibility for the performance necessary to achieve
goals and objectives
 Fulfilling commitments
 Makes a personal sacrifice and extraordinary effort to complete a job
 Pitches in with employees, or takes their place if needed, to get a job
done.
 Strives to keep customers satisfied and places long-term good will over
short-term gain

 Demand for efficiency and quality

 Finds ways to do things better, faster and cheaper
 Acts to do things that meet or exceed standards of excellence
 Develops and uses procedures to ensure that work is completed on time
and that work meets agreed upon standards of quality

 Taking calculated risks

 Deliberately calculates risks and evaluates alternatives
 Takes action to reduce risks and/or control outcomes
 Places oneself in situations involving a challenge or moderate risks

 Goal setting
 Sets goals and objectives which are personally meaningful and
challenging
 Articulates clear and specific long-term goals
 Sets measurable short term objectives (Breaking long-term goals into
small bits, i. e; objectives)
 Information seeking
 Personally seeks information from customers, suppliers and competitors
 Does personal research on how to provide a product or service
 Consults experts for business or technical advice

 Systematic planning and monitoring

 Plans by breaking large tasks down into sub-tasks with clear time-frame
 Revise plans in light of feedback on performance or changing
circumstances
 Keeps financial records and uses them to make informed decisions

 Persuasion and networking

 Uses deliberate strategies to influence and persuade others
 Takes action to develop and maintain a network of business contacts
 Uses key people as agents to achieve own objectives
  Independence and self-confidence
 Seeks autonomy from the rules and/or control of others
 Attributes the causes of successes and failures to oneself and to one’s
own conduct
 Expresses confidence in own ability to complete a difficult task or to face
a challenge

LO3: Elaborate how to organize an enterprise

Meaning of Micro and Small businesses in Ethiopia

 Micro:
• Number of employees: less than or equal to five (owner, family members and
employed employees).
• start-up capital excluding building
 Service: Less than or equal to 50,000
 Industry: Less than or equal to 100,000
 Small:
• Number of employees: 6 to 30 employees (owner, family members and
employed employees).
• start-up capital excluding building
 Service: 50,001 – 500,000
 Industry: 100,001 – 1, 500,000
Small Enterprise Weaknesses
 Financial limitations
 Staffing problems
 Higher direct costs
 Too many eggs in one basket
 Lack of credibility
Small Enterprise Strengths
 Personal touch
 Greater motivation
 Greater flexibility
 Less bureaucracy
 Unobtrusive (less conspicuous)
MONEY NEEDED TO START AN ENTERPRISE

Estimating the Start-up Capital

If someone wants to start a business he/she must be aware that a certain amount of money
is needed during the start-up process of a business for making payments before the business
begins to generate enough sales income. This money is called start-up capital. It serves two
purposes:
1. Pre-operation payments or investment capital
This is money that a person starting a business will have to pay before the business starts
operating. The money needed for these payments is invested in the business as long as the
business is operating. It includes buying land, constructing a workshop, purchasing
machinery, tools, equipment, office furniture, legal fees, utility connections for water,
electricity and telephone, publicity and advertising, etc. However, young people very often do
not realize that a number of other payments have to be made before they can really start
their business. For example:
 the cost for installation of machines and
 the expenses for training of workers to use machines
 fees for licenses and insurance
 costs related to renovation of facilities
Often, potential entrepreneurs underestimate the amount needed because they only take into
account the expenditures for investment items such as premises, machinery, equipment,
vehicles, inventory and so on.
2. Initial operation payments or working capital
It will occur when a new business starts to operate, to cover immediate expenses until
revenues from sales flow back into the business. This time span depends on the nature of the
business. This money is also invested permanently in the business and is working capital.
When the business expands the working capital needs to be increased.
The need for working capital is also often underestimated. People think they will be paid
immediately. This is often the case in trading activities; however, the shop owner has to have
a stock of goods because she/he cannot replace every article sold immediately. In
manufacturing activities working capital has to cover a longer period and that can last
several months. If the working capital is underestimated, an entrepreneur may have a
flourishing business, but may run out of money to pay salaries, buy additional merchandise
for sale, etc. Therefore, a certain percentage for unforeseen items and working capital should
be included in the investment capital. It is recommended that a certain percentage is
included in the investment capital for unforeseen items. Working capital should also include
additional funds for unforeseen expenses.
The start-up capital for a new business is the sum of the expenditures for the investment
items and the working capital. The future entrepreneur needs to have this amount of money
available through using his/her own savings, finding partners and negotiating loans with
banks.
OBTAINING MONEY TO START AN ENTERPRISE
Sources of Business Financing
Many prospective small business owners have good business ideas and plans. However, they
may discover that the capital necessary to initiate their business is not readily available.
Trainees should be aware of the types of funds available to prospective business owners.
Entrepreneurs will almost certainly have to invest their personal money in the business.
However, some of the capital needed to begin business operations can be obtained through
credit. This topic will identify potential sources of initial capital, and offer suggestions
regarding how to prepare for obtaining debt or credit financing.
There are two primary sources of financing to establish a business. These are: (a) owner’s
equity or (b) borrowing from lending institutions.
1. Equity financing
 It is the money the owner puts into the business.
 It is the owner’s investment in the business.
 The main sources of equity financing for most entrepreneurs are:
• personal savings
• Family and friends
• Partners
• corporation
 Financial experts say that one-half of the money needed to start a small business
should come from the owner. This means future owners must work and save to
have enough money to start a business.
2. Borrow from lending institutions
 Borrowing needed capital for the business is called credit or debt financing.
  The lender must sense that the business owner has a personal commitment and
involvement in the business.
 This personal commitment includes the time, energy and money the owner is
willing to contribute to the business.
 Lenders will usually review a business plan very carefully to lend money.
 This plan should describe how the business will be operated, how much money
will be needed and how it will be used, and at what point the business will be
profitable.
 Credit or debt financing obtained from: Banks, finance companies, governments
agencies (with loan schemes), trade credit and microfinance institutions
Considerations in applying for a business loan
Different lending institutions have different procedures which have to be followed by the loan
applicant. It is necessary to understand the following factors that are taken into
consideration when a banker is appraising a loan application.
1. Type of loan
2. Purpose of the loan
3. Credit worthiness and integrity of the borrower
4. Capability
5. Repayment period
6. Security or collateral
7. Guarantors
8. Business plan
9. Customers past financial records
A banker or loan officer will take into consideration the five C’s of credit when evaluating a
loan applicant:
1. Character 4. Conditions
2. Capacity 5. Collateral
3. Capital
How will the capital be used?
To help determine your money needs, three groups of costs and expenses are examined:
start-up costs, operating expenses and personal expenses.
1. Start-up costs: expenses that occur once only when starting the business. Once your
business is started, you may never have these expenses again.
 2. Operating expenses: until there is enough profit to keep the business running, money
will be needed for operating expenses.
3. Personal expenses: these include costs that are necessary for you to live. You need
money for personal expenses such as rent payments, food, transportation, insurance,
clothing, utilities, medical bills and entertainment.
LO4: Discuss how to operate an enterprise
MANAGING SALES
It takes more than a great product or service to make a successful business. It takes
customers to buy that product or service. They will only buy if the features of the products
offered can be turned into customer benefits.
Characteristics of Successful Salespersons:
• Results Oriented
• Highly Motivated
• Self-Confident
• Professional Appearance
• Honest
• Dependable
• Knowledge of Products
• Good Listener
• Enthusiastic
• Pleasing Personality
• Communicator
• Sociable
• Courteous
Qualities of Potential Customers
 To a business, a potential customer is the most important “Very Important Person”.
 A potential customer is not dependent on any business.
 Potential customers do not interrupt business activity they are the purpose of
business.
 Customers are doing business a favor by allowing it to serve them.
 Potential customers are not statistics: they are human beings who have feelings and
emotions like everyone else.
 Businesses never win an argument with a potential customer.
  The job of business is to cater/furnish to the potential customers’ wants and needs.

Selling Requires Communication

When selling, you communicate to prospective clients something about yourself and the
product or service you are selling. This process can be viewed as a series of steps, and each
step involves a higher level of communication.
• Step 1: approach the prospective customer and introduce yourself and your
company
• Step 2: specify your reason for approaching the prospective customer
• Step 3: show or describe the product/service you are selling
• Step 4: demonstrate how the product/service will benefit the prospective
customer
• Step 5: negotiate terms and conditions of the sale
• Step 6: ask the prospective customer to make a decision regarding the purchase
of the product/service.
• Step 7: once customers do start to buy your product or service, develop strategies
to help you to keep your customers. One research study has indicated that
it costs 10 times as much to attract a new customer than it does to keep an
old customer.
• Like effective communication, selling is a two-way process and it is more of an art
than a skill because:
• You have to be good at asking questions and being an active listener to
understand customer needs and interests.
• You have to adapt your message and communication style to the personality
and buying motives of the prospective customer.
Through effective communication, you build a relationship with the customer based on trust
and confidence; this forms the foundation for the present sale transaction and for future
sales as well. Successful selling depends on the entrepreneur’s ability to:
• Attract the buyer’s attention.
• Determine customers’ needs, wants, problems and goals.
• Show how the product or service will satisfy those needs.
• Work out the problems that prevent customers from buying.
• Ask for the customers’ business.
The success of a business depends on the art of selling. If entrepreneurs take advantage of
the opportunity to serve people, to satisfy their needs and to solve their problems, there will
be satisfied customers. Satisfied customers continue doing business with an entrepreneur
and recommend the products and services to others. No matter what type of business, the
entrepreneur must focus not only on producing the product or service, but on selling the
product or service as well. Entrepreneurs are salespersons in the sense that they are always
selling their products/services to the public. They must maintain their sales image wherever
they go and whatever they do in the community.
COSTS OF STARTING AN ENTERPRISE
Cost of an Enterprise
An entrepreneur who runs a business has to pay a lot of bills for goods and services she/he
needs for the business, e.g. raw materials, office furniture, telephone bills, salaries for the
workers, etc. These expenditures are called costs.
A business owner must know exactly the costs for the products or services she/he will sell. If
the costs are higher than what the customer is willing to pay for a product, or higher than
the prices of the competitors, then she/he will not be able to sell her/his products. In such a
situation an entrepreneur has to reduce the costs.
There are different types of costs and knowing these costs will allow better control to keep
these costs low.
Direct and Indirect Costs
Every business generates costs, even if there is no ongoing production, service or trading
activities. To understand this, it is essential to know that there are direct costs and indirect
costs.
A. Direct costs: are those that only arise when an enterprise is manufacturing goods or
producing a service or buying goods to resell. These costs depend directly on the number of
products, services or goods produced. They are composed of two cost sub-groups:
1. Direct material costs:
• Expenditures for all items that become part of a product, or are used to produce
a service, or are bought for resale, enter into the category of direct material costs.
• Costs linked to the acquisition of raw materials, such as transport, are included
in the direct costs
2. Direct labor costs:
 • All wages for workers and helpers that are directly involved in the production or
the delivery of services.
• This also includes costs for social security.
• Staff wages for the retailer and wholesaler are not considered as direct costs
because one person generally sells many different items.
B. Indirect costs (overhead costs): are all other costs generated from business activities
that are not direct costs or costs that cannot directly be attributed to a specific product or
service. For example rent for the office premises, salary for the bookkeeper, interest on the
bank loan, telephone costs, fire and car insurance, etc. In wholesale or retail business, all
staff costs are indirect costs.
Total cost of a product or service:
Sum of Direct Material Costs
+ Sum of Direct Labor Costs
+ Proportion of Indirect Costs
= Total cost per product or service

1.18.3 Classification of Costs by Categories

Entrepreneurs also have to know the total amount of costs their business generates during a
month and during a year. This information is of importance because it shows the cost
structure of the enterprise, and also gives an indication of when particular costs are
unnecessarily high. With this information an entrepreneur can try to reduce costs and
become more competitive.
A business starter has to forecast the total costs of his/her business for at least one year in
order to find out whether the planned sales cover the costs or not. All costs that the
business’ activity creates for the community are called externality costs. All costs that occur
in a business can be put into the following categories: staff costs, material costs, other costs
and capital costs.
Staff Costs
An entrepreneur who employs staff becomes an employer and he/she will have legal and
social responsibility for his/her employees. This responsibility means that he/she has to
fulfill a number of requirements that are imposed by laws and regulations, or by collective
bargaining agreements such as:
• Minimum wages
 • Legal duration of working hours
• Overtime payment
• Annual leave
• Sick leave
• Social security
• Workplace accommodations for employees with disabilities
This enumeration shows that staff costs are not only salaries or wages. The additional costs
that come on top of the salaries are often calculated as a percentage of the salary.
Material costs
All materials that are used for the manufacturing of a product, or to provide a service, fall
under the category “materials”. Materials that are not used for a product, but are necessary
for the functioning of the business, such as office supplies or detergents for office cleaning,
are also counted as material costs. In production, a distinction is made among different
kinds of materials:
 Raw materials, e.g. plywood, metal bars, metal sheets, leather, wool, woven fabrics,
plastics, fluor, butter, etc.
 Standard materials, e.g. nails, screws, bolts, nuts, fittings, electrical appliances,
spare parts, buttons, zipper, etc.
 Auxiliary materials, e.g. glue, paint, welding electrodes, welding gas, saw blades,
grinding paper, yarn, threads, etc.
In wholesale and retail business the costs for acquiring finished goods for reselling are
classed as material costs.
Other costs
All expenditures for items and services that do not fall under the above-mentioned categories
are put into the category “other costs”. These costs are mainly for electricity, water,
telephone, internet, insurance, rent, publicity, administrative fees, etc.
Capital costs
A businessperson, who contracts a loan, has to pay interest for the duration of the loan.
Interest is also due for an overdraft on the entrepreneur’s current account. These payments
are called capital costs. There is a very particular kind of capital cost that is called
depreciation.
Depreciation is the loss of value of machines, equipment or cars that are operating in an
enterprise. This loss of value is a process that can last several years. The duration of this
process depends on the type of machine. At the end of this process the machine, truck or
vehicle needs to be replaced. Therefore the annual loss is considered as capital cost that
allows the money that was paid for the new machine to be recuperated in order to replace it.
How is this depreciation calculated? Quite simply, the price of the newly bought machine, car
or whatever it may be is divided by the expected lifespan of the machine. For example, a new
delivery pick-up is purchased for 12,000 Birr and its calculated lifespan is five years. Its
annual depreciation = 12,000 Birr / 5 = 2,400 Birr/year.
KEEPING RECORDS OF A BUSINESS
Record Keeping

An efficient record keeping system is required for any business. All business transactions
should be fully recorded on paper. Many small businesses fail because of inadequate record
keeping. The business may have an excellent product, a high sales volume and a good profit
margin. However, without proper records the business is inviting disaster. Too often, small
business owners have the attitude that keeping records is not necessary in a small business.
The person who owns a small business is confronted with problems and decisions every day.
Sound decisions require a manager who is informed about all aspects of the business. A
proper record keeping system can provide the financial information necessary to solve
management problems more easily and to make sound business decisions.

Why keep records?

A. The law requires that some form of written records be kept by all businesses.
B. Adequate records can answer the following questions:
 How much profit is the business making?
 How much is the business worth?
 How much do credit customers owe the business?
 How much does the business owe its creditors?
 How much tax should the business pay?
What will others want to know about the finances of a business?
Various people will want to know about the financial conditions of a business. Bankers may
be interested because you have applied for a loan. Tax collectors are interested in your
business profits and sales, as are partners, relatives and others who may have lent you
money. Suppliers will also want to know things about the finances of your firm, because
when they ship you merchandise for which you have not yet paid, it is as though they are
extending a form of credit.
Specific questions they might ask include:
a. How much do you own, how much do you owe, and how much are you worth?
b. What was your income last year?
c. How much of your sales are for cash and how much are for credit?
d. What has been your collection record?
e. What is your total “overhead” and what percentage of gross sales does it represent?
f. What expenses do you have?
g. What is the present value of buildings, equipment, vehicles, fixtures and other
accessories?
h. What items of inventory are the best and worst sellers?
i. What are the most profitable and least profitable departments?
j. Are you taking full advantage of cash discounts, trade discounts, and advertising
and merchandising allowances?
What kinds of records should a small business keep?
A. Payroll. The owner must know the amount paid to himself or herself and to
employees. This information alone requires a mini-accounting system to keep things
accurate and in order.
B. Cash Balance. The owner must know how much cash is available at any given time to
determine if bills can be paid. Money comes into and goes out of the firm every day,
but without records entrepreneurs would not know what they can afford.
C. Accounts Receivable. Under certain conditions, the owner extends credit to some
customers. The money owed is called accounts receivable. They are important records.
Without them, how would the owner know when to bill and for how much? When to
discontinue credit? When to make aggressive efforts to collect overdue bills? When to
charge interest, if any?
D. Accounts Payable. The amount of money owed by a business to others (such as
suppliers) is called accounts payable. These bills need to be paid on time for two
reasons: (1) sometimes by paying a bill on time you will receive a cash discount, and
(2) you must maintain a good reputation in relation to those with whom you do
business. Without accurate records you may make mistakes.
 E. Inventory Records. Even in a small retail business, an owner must have control of
inventory. What products are selling? What products aren’t moving? Is there a good
supply on hand? Entrepreneurs can keep some of this information in their head, but
not enough to do the kind of job necessary to make a profit.
F. Government Requirements. The owner must file financial statements for tax
purposes. Taxes are calculated on the profit a business earns. Even a small retail
business must file certain reports.
G. Financial Statement. At least once a year the owner should have a comprehensive
financial statement on the business prepared – this is similar to an individual having
an annual medical check-up. How well did the business do in terms of total sales?
What were its expenses? What are its profits before and after taxes? What can the
owner do to improve things next year? When borrowing money, entrepreneurs must
present such a statement to a banker; if they want to sell their business, they must
show financial statements to prospective buyers.
Financial Forecast

An entrepreneur that has established a good record keeping system adapted to the size of
his/her business will always know how the business has performed in the past and up to the
present date. However, an entrepreneur needs to make sure that he or she will be able to pay
all obligations that will come up in the future, e.g. salaries, materials, interest, repayments of
credits from suppliers or loans from a bank, etc. Figures from record keeping will be a good
help in making this forecast, particularly when the business has seasonal variations.

A proven instrument for a financial forecast is the cash flow plan. As its name indicates, this
plan is based on the cash that flows into the business and the cash that flows out of the
business. For the purpose of a cash flow plan, money that is paid into the bank accounts of
the business is also considered as cash.

Cash that flows into a business is in most cases cash from sales of products, goods or
services. There are also other inflows of cash that could come from bank credits or
overdrafts, or selling of old equipment, or a tax return, and so on.

Cash that flows out of the business is mainly payment of salaries, operational costs and
capital costs. The entrepreneur will know from the sales plan how much turnover he/she can
expect and what will be the costs to produce or buy the goods.
A monthly cash flow plan is an instrument that allows the entrepreneur to estimate how
much cash is expected to enter the business and how much has to be paid out every month.
It helps a businessperson to avoid her/his business running out of cash.

How to make a cash flow plan

A typical cash flow plan looks like the table shown below. An entrepreneur who wants to
establish a cash flow plan will do this step by step.
1. He/she will check the money available in the cash box and in the firm’s bank account
and mark the amount in the row “Cash at beginning of month” in the first column
“Month 1”. For a business starter this amount of money represents the working
capital.
2. The estimated turnover from the sales plan is then recorded in the next row “Cash in
from sales”. If part of the sales are planned to be on credit, this part is not recorded for
this month. It will be recorded later as input of the month during which the customer
has paid the remaining part.
3. Expected cash in from other operations, such as a loan from a bank or interest paid
for business money deposited with the bank, is recorded in the row “Cash in from
other operations”.
4. 4. The sum of these three rows is the total amount of cash in and is recorded in the
row “Total cash in”.
5. The sum of all staff costs for the month, including all social insurance costs and other
benefits for the staff as well as the owner’s salary, is recorded in the row “Cash out for
staff costs”.
6. The operational costs vary according to the sales plan, particularly for material costs
or for purchases of goods. If it is foreseen that any of the acquisitions planned is to be
bought on credit, the cash out will be recorded when the credit has to be paid.
7. Any other cash that has to be paid out for the business, such as interest on loans,
taxes and licenses, is recorded in the row “Cash out for other costs”. This also
includes payments for investments planned for the month.
8. The sum of the three previous rows is added up and recorded in the row “Total cash
out”.
 9. The last step in the calculation of the cash flow plan for the first month is the
subtraction of the total cash out from the total cash in, which will give the amount of
cash expected at the end of the month. This figure is recorded in the last row.

The cash flow for the other months is calculated in the same way. The amount of cash
recorded at the end of each month will be recorded as cash available at the beginning of the
next month.
Months Total
1 2 3 4 5 6 7 8 9 10 11 12
Transaction Items
Cash at beginning of month
Cash in from sales
Cash in from other operations
Total cash in
Cash out for staff expenses
Cash out for operational
expenses
Cash out for other payments
Total cash out
Cash at end of month

Normally, a cash flow plan covers a period of 12 months in line with the financial year.
However, the forecast has to be made on data that is realistic. The duration depends on the
nature of the business, and therefore a monthly cash flow plan can be worked out for a
shorter period if necessary.

The monthly cash flow plan should be updated each month with data from the record
keeping in order to immediately identifying deviations from the cash flow plan.
If the cash flow plan shows that the business is likely to run out of cash during any of the
subsequent months, the entrepreneur can try taking the following measures:
Increasing cash inflow through: Decreasing cash outflow though:
 increasing sales  reducing operational costs
 giving less customer credit  identifying a cheaper supplier
 using a bank overdraft  negotiating supplier credit
 selling an investment item
 negotiating an extension of the loan
 asking a friend for money period
 making a planned investment later
Business starters are often requested to make a cash flow forecast for 12 months or, when
they want credit from a bank, for a period that corresponds to the duration of the bank loan.
USING FINANCIAL STATEMENTS
Financial Statements

Financial statements help to determine the financial performance of a particular business.

By using financial statements, the business can compare current performance with
performance in previous years. These comparisons are essential for planning the future and
also highlighting the strengths and weaknesses of the business operation.

Understanding financial statements is important because they are the primary means of
determining the financial health of the business. Entrepreneurs need to be able to:

 prepare simple financial statements

 interpret and analyze the information contained in the statements
 identify strengths and weaknesses in the financial condition of the business based on
the statements
 make changes in business operations to improve the financial conditions of the
business
Profit and Loss/Income Statement
A profit and loss statement helps to determine whether a business is operating at a profit or
a loss for a given time period of one month to one year. The more frequently you calculate
your profits and losses, the sooner you will know the financial position of the business.

There are five specific steps to calculating the profit and loss statements:
1. Sales: including sales for cash and credit,
2. Cost of Goods Sold: this is the price paid by the business for merchandise sold; it
can be computed by adding the value of the goods purchased during the period to
the initial stock (the initial stock figure can be obtained from the previous income
statement), and then subtracting the value of the stock on hand at the end of the
period.
3. Gross Profit: calculated by subtracting the cost of goods sold from sales
4. Expenses: this includes labour costs and other costs of operating the business
 5. Net Profit: this is the amount remaining when the expenses are deducted from the
gross profit. This figure will indicate whether you are operating at a profit or a loss.

Figure: Income Statement Format

The Balance Sheet

The balance sheet is a financial statement which indicates what you own and what you owe
on any given day in the life of a business. The financial figures on the balance sheet change
from day to day because money is always coming in and going out of the business. A primary
reason for preparing a balance sheet is to determine if the business is making a profit or a
loss.
The formula used to prepare a balance sheet is:
Assets = Liabilities + Net Worth
Assets: These include everything a business owns, such as cash, equipment, buildings,
accounts receivable and inventory.
 Current assets include cash and anything that can be converted into cash within
twelve months. Current assets include cash, bank accounts, accounts receivable (what
people owe you), and inventory.
 Fixed assets are things that cannot be changed into cash easily (within twelve
months). They are items that the business acquired for long-term use. Fixed assets
include land, buildings, machinery, equipment, and vehicles.
Liabilities: These include anything that the business owes. Liabilities might include loans,
credit notes, taxes and mortgages.
 Current liabilities: a current liability is anything you owe that has to be paid by using
a current asset. Current liabilities are usually items to be paid within twelve months,
including taxes, loans and bills due to creditors.
 Long-term liabilities: any debt that cannot be paid within twelve months, such as a
mortgage.
Net Worth: This is what is actually owned by the business after subtracting liabilities. It
represents the initial investment of the owners and retained earnings.
Figure: Balance Sheet Format
LO5: Develop one’s own business plan

What Is a Business Plan?

• A document which spells out the mission, goals and objectives of a business and
clearly outlines how and when they will be achieved.
• A structured guideline to achieve a business goal.
• A road map to owning and operating a business.
• A proposal that describes a business opportunity for financing agencies or investors.
• A detailed action program outlining every conceivable aspect of the proposed business
venture.
Why Write a Business Plan?

A business plan is written to assist in:

 Keeping you focused on your goals and strategies
 Obtaining financing from outside sources (Banks, Microfinance Institutions, etc)
 Guiding the opening of a business
 Guiding the managing of a business
 Communicating clearly with interested parties
 Showing your business has chances of success
 Showing you have the ability to manage the business
 Showing there is a good market for your product or service
 Comparing how the actual business performance differs from the forecasted
performance
When is a Business Plan Written?
• When thinking of going into business
• Before starting the business
• When updating the business is required
• When new information is obtained
• When new experiences are gained
Which Are the Types of Business Plans?
 For retail businesses
 For wholesale businesses
 For service businesses
 For manufacturing businesses
  For any other type of business
 For the financier
 For the owner/manager
Who Writes the Business Plan?
• Each prospective business owner/manager writes a business plan for the business
he/she wants to start
• An advice/support agency, or a professional figure such as an accountant, may assist
in writing certain areas of the business plan for it to look professional
• A computer program providing a model that can be modified to suit your business can
also be utilized. The internet can also provide examples
How is a Business Plan Written?
 By identifying all the questions that might be asked relating to the business
 By determining what further information needs to be gathered to answer all the
questions
 By obtaining all the necessary information
 By comparing various alternatives
 By making a decision on each question
What is done with a Business Plan?
• The owner refers to it often to see whether actions and plans are consistent
• He/she takes it to the bank when discussing funding
• He/she discusses other sections of it with the relevant interest group
What Does a Business Plan Look Like?
• It is typed and put in a nice folder
• The appearance of the business plan is expected to be good
• There should be an index
 There should be a summary
 Each copy should be numbered
 You should sign it to show who is submitting it
 The length of the business plan will depend on the nature of the business
What is contained in a Business Plan?
Information regarding customers, competitors, suppliers, financiers, employees, products,
locations, equipment and others included in the business plan document.
The Structure of a Business Plan
When developing any business plan it is necessary to be convinced that planning is a key
aspect in the business development process. Planning assists businessmen or women to
articulate both their long-term and short-term goals for the proposed new business.
Specifically a business plan does the following:
• Increases the probabilities of business success.
• Clearly defines the activities for the successful operation of the business.
• Identifies all the resources available to the business and how they will be combined to
obtain maximum benefits.
• Identifies standards of performance for each segment of business operations which
can be compared with actual performances. This serves as a control mechanism to
keep the business operations on course.
Layout of a Business Plan
A. Cover page
B. Table of contents
C. Executive summary
D. Information about the owner or promoter of the business
E. Description of the business idea and market
F. Marketing plan
G. Legal form
H. Start-up capital and resources
I. Organization and management
J. Business operation and costs
K. Financial plan
L. Appendices
 BUSSINESS PLAN FORMAT

Executive Summary

Name of business ______________________________________

______________________________________________________

Legal form_____________________________________________
Contact address_________________________________________
Tel. _____________________E-mail________________________
Fax.____________________
Type of business

􀂉 Manufacturer 􀂉 Service provider 􀂉 Retailer 􀂉 Wholesaler

Brief description of the business idea

Products or services_____________________________________________

___________________________________________________________________________________________
___________________________________________________________________________________________
___

Customers / target group

___________________________________________________________________________________________
___________________________________________________________________________________________
___________________________________________________________________________________________
_________

Owner(s)

(Name, Address, Qualification, Function in the business, relevant experience)

1.________________________________________________

2.________________________________________________

3.________________________________________________

4.________________________________________________
 Business Idea and Market

Description of the business idea

(e.g. identified needs (market gap), who are the customers, type of products or services to
satisfy the needs, how to reach the customers, etc.)

___________________________________________________________________________________________
___________________________________________________________________________________________
___________________________________________________________________________________________
_______

MARKETING PLAN

Description of the market

(e.g. geographical area, town, type of customers, size of total market,

description of competitors, market share for the new business, etc.)

___________________________________________________________________________________________
___________________________________________________________________________________________
___________________________________________________________________________________________
__________________________________________________________________________

Marketing Plan Product

Detailed description of the product or product range or service

Product/service type

___________________________________________________________________________________________
___________________________________________________________________________________________
________________

What is special about the product/ the unique characteristics of the product?

___________________________________________________________________________________________
___________________________________________________________________________________________
__________________________________________________________________________________

Specification of the product (e.g. size, color, quality, Packaging etc.)

___________________________________________________________________________________________
___________________________________________________________________________________________
______________________________________________
After sales service

___________________________________________________________________________________________
___________________________________________________________________________________________
____

Marketing Plan Price

How much are customers willing to pay?

 Highest _____
 Average ____
 Lowest _____
How much are competitors’ price?

 Highest _____
 Average ____
 Lowest _____
How much is your price?

 Highest _____
 Average ____
 Lowest _____
What are the reasons for setting your price?

___________________________________________________________________________________________
___________________________________________________________________________________________
___________________________________________________________________________________________

Product/service Competitors price Your price

Highest ; Highest ;
Average; Average;
Lowest Lowest
Highest ; Highest ;
Average; Average;
Lowest Lowest
Highest ; Highest ;
Average; Average;
Lowest Lowest

Margin for No Yes (_____ %) No Yes (____%)

discount?
Marketing Plan Place
Location of the business

Description of the planned location for the business

___________________________________________________________________________________________
___________________________________________________________________________________________
___________________________________________________________________________________________
_______________________________________

Reason for choosing this location

___________________________________________________________________________________________
___________________________________________________________________________________________
___________________________________________________________________________________________
_

Reaching the customers by selling to

􀂉 Individuals 􀂉 Retailers 􀂉 Wholesalers 􀂉 Others

Reason for choosing this way of distribution

___________________________________________________________________________________________
___________________________________________________________________________________________
___________________________________________________________________________________________
_______________________________________

Marketing Plan Promotion

Description of the planned actions to inform customers about the opening of the new
business (e.g. printed information, brochures, posters, newspaper articles, radio
advertisements, opening ceremony, etc. Also make inquiries about the costs for the different
types of promotion)

___________________________________________________________________________________________
___________________________________________________________________________________________
___________________________________________________________________________________________
____________________________________________________________________

Legal Form

The legal form of the business will be:-

□ Sole proprietorship □ partnership □ limited company □ Corporation

Reason for choosing this legal form

___________________________________________________________________________________________
___________________________________________________________________________________________
________________________________________
Start-Up Capital

Estimation of start-up capital Amount

INVESTMENT
Land

Building

Equipment

Others
Total Investment

WORKING CAPITAL
____ months of staff costs
____ months of operational costs
Others
Total working capital
TOTAL START-UP CAPITAL

List fixed assets needed and their cost

No. Item Quantity Amount

1
2
3
4
5
Total

List of raw materials needed

No Raw materials DIMENSION QUANTITY UNIT TOTAL COST

needed per COST
month
1
2
3
4
Total cost
Sources of Start-Up Capital

Sources of funding

Type Source Conditions Amount

(duration/interest)
Equity capital 􀂉 Own savings
􀂉 Partner
Loan 1 􀂉 Family
􀂉 Friends
􀂉 Money lender
Loan 2 􀂉 Credit cooperative
􀂉 Government scheme
􀂉 Bank loan
TOTAL FUNDING
Information about funding sources
Loan 1

Name and address of creditor or credit institution

___________________________________________________________________________________________
___________________________________________________________________________________________
________________

Credit agreement 􀂉 under discussion 􀂉 finalized

 Money available on (date) ________

Loan 2

Name and address of creditor or credit institution

___________________________________________________________________________________________
___________________________________________________________________________________________
__________________________

Credit agreement 􀂉 under discussion 􀂉 finalized

􀂉 Money available on (date) ________

Debt Service

Repayment 1st 2nd 3rd 4th 5th 6th

period month month month month month month
Loan 1
Installment/principa
l
Interest
Loan 2
Installment/
principal
Interest
Debt service
Sum of Installments

Organization and Staff

Staff costs

Position Qualifications Salary Social Total

Per month security staff cost
1. __________ ___________ _________ ________ ______
2. __________ ___________ _________ ________ ______
3. __________ ___________ _________ ________ ______
4. __________ ___________ _________ ________ ______
5. __________ ___________ _________ ________ ______

Organization of business premises

(Sketch of planned shop, office or workshop)

Business Operation and Costs

Monthly Sales Plan

All products, product range or services

Month 1 2 3 4 5 6 7 8 9 1 11 12
0
Product Price
1 Quantity
Turnover
Product Price
2 Quantity
Turnover
All Turnover
product
s
Monthly Operational Cost Plan

Planning is based on the monthly sales plan

Month 1 2 3 4 5 6 7 8 9 10 11 12
Product 1 Quantity
Materials All costs
Product 2 Quantity
Materials All costs
Materials Total costs
+ Staff Total costs
+ Others Total costs
Operatio Total costs
n
+ Capital Interest
cost Depreciatio
n
= Grand Total
costs

Cash Flow Plan

Monthly Cash Flow Plan

Month Pre 1 2 3 4 5 6 7 8 9 10 11 12
operatio
n
Cash
beginning of
the month
+ Equity
+ Loans
+ Sales
+ Any other
I: Total cash in
+ Investment
+ Operational
cost
+ Principal
+ Interest
+ Any other
II: Total cash
out
I – II Cash
 at the end of
the month

Profit Margin

Monthly Estimation of Net Profit

Month 1 2 3 4 5 6 7 8 9 10 11 12
Product 1 Quantity
Turnover
Product 2 Quantity
Turnover
I. Total Sales
- Operation Total costs
II. Total
Costs
I – II Profit
(before tax)
- Income tax _____%
Net profit
(after tax)

Opening Balance

Opening Balance of My Business (Date)

Assets Value Liabilities Value

Fixed Assets Equity

Land Long-Term Liabilities

Building Mortgage
Equipments Loans
Others Others
Total Fixed Assets Total Long-Term Liabilities

Current Assets Current Liabilities

Accounts payable
Cash and bank Taxes payable
Accounts receivable Others payable
Inventory Total Current Liabilities
Total Current

Total Assets Total Liabilities and Net Worth