STEPS IN STARTING AND OPERATING A NEW BUSINESS

 Crafting a Business Plan

1. The entrepreneur describes her or his business strategy for the new venture and demonstrates how it will
be implemented.
2. A real benefit of a business plan is the would-be entrepreneur when preparing the business idea firm up
his or her thinking about how to launch the business venture before investing time and money.
- Elements of a business plan:
 Setting Goals and Objectives
- A business plan describes the match between the entrepreneur’s abilities and
experiences and the requirements for producing and/or marketing a particular
product.
- It also defines strategies for production and marketing, legal elements and
organization, and accounting and finance.
- In particular, a business plan should answer three questions: (1) What are the
entrepreneur’s goals and objectives? (2) What strategies will be used to obtain them?
(3) How will these strategies be implemented?
 Sales Forecasting
- plans must carefully build an argument for likely business success based on sound
logic and research.
- the entrepreneur must demonstrate an understanding of the: current market, of the
strengths and weaknesses of existing firms, and the means by which the new venture
will compete.
- Without the sales forecast, no one can estimate the required size of a plant, store, or
office or decide how much inventory to carry and how many employees to hire
 Financial Planning
- refers to the entrepreneur’s plan for turning all other activities into cash money.
- includes a
(a) cash budget - shows how much money you need before you open for business and
how much you need to keep the business going before it starts earning a profit.
(b) an income statement,
(c)balance sheets,
(d) a breakeven chart.
- Starting the Small Business
 first step is the individual’s commitment to becoming a business owner
 Buying an Existing Business
- the entrepreneur must decide whether to buy an existing business or start from scratch
- as an existing business, added entrepreneurial vision and business insight, and
produced a multinational giant
 Franchising
- advantages of franchises
i. Franchises can grow rapidly by using the investment money provided by
franchisees.
ii. The franchisee gets to own a business and has access to big-business management
skills.
iii. The franchisee does not have to build a business step by step,
iv. and because each franchise outlet is a carbon copy of every other outlet, failure is
less likely.
 Starting from Scratch
- the risks of starting a business from scratch are greater than those of buying an
existing firm
- To find openings, entrepreneurs must study markets and answer the following
questions:
* Who and where are my customers?
* How much will those customers pay for my product?
* How much of my product can I expect to sell?
* Who are my competitors?
* Why will customers buy my product rather than the product of my competitors?
- Popular Areas of Small Business Enterprise
1. Services
 - ranges from marriage counselling , computer software, management consulting.,
- service providers are the fastest-growing segment of small business.
- comprises about 50.74% of the small business sector
2. Retailing
- Retailers - sell products made by other firms directly to consumers
- comprises about 13% of the small business sector
3. Construction
- comprises about 14.7 % of small business sector
- many construction jobs are small local projects
4. Wholesaling
* Small-business owners often do well in wholesaling,
- comprises for about 5.6 % of businesses with fewer than 20 employees.
* Wholesalers buy products in bulk from manufacturers or other producers and
store them in quantities and locations convenient for selling them to retailers.
5. Finance and Insurance
- Financial and insurance firms comprises about 6.83 %
- Most of these businesses are affiliates of or agents for larger national firms.
6. Manufacturing
* manufacturing lends itself to big  business, and it comprises about 3.46 % of
firms with fewer than 20 employees
* small manufacturers sometimes outperform big ones in such innovation-driven
industries as electronics, equipment and machine parts, and computer software.
- Financing the Small Business
 common sources for funding are family and friends, personal savings, lending
institutions, investors, and governmental agencies
 Individuals starting new businesses will probably have to rely on personal resources
 Other Sources of Investment
1. Venture capital companies
- are groups of small investors seeking to make profits on companies with rapid growth
potential.
- Most of these firms do not lend money.
- They invest it, supplying capital in return for partial ownership
2. Small-business investment companies (SBICs)
- invest in companies with potential for rapid growth.
- They are federally licensed to borrow money from the SBA and to invest it in or lend
it to small businesses,
- and they are themselves investments for their shareholders.
3. SBA Financial Programs
3. they are involved in the financing programs for small businesses that meet standards
in size and independence.
4. Eligible firms must be unable to get private financing at reasonable terms.
5. The most common form of SBA financing are the following
(a) loan programs - allows small businesses to borrow from commercial lenders and
guarantees to repay a maximum of 75 percent.
6. The SBA’s special purpose loans target businesses with specific needs, such as
meeting international demands or implementing pollution control measure
4. Other SBA Programs
7. The SBA also helps entrepreneurs improve their management skills.
 Trends, Successes, and Failures in New Ventures
o Trends in Small-Business Start-Ups (5 factors)
1. Emergence of E-Commerce
- The most significant recent trend is the rapid emergence of electronic commerce -
very existence to the Internet
- Because the Internet provides fundamentally new ways of doing business, savvy
entrepreneurs have created and expanded new businesses faster and easier than ever
before.
- some leading-edge firms are Google, Amazon.com, and eBay
2. Crossovers from Big Business
  More businesses are being started by people who have opted to leave big
corporations and put their experience to work for themselves.
 they see great new ideas that they want to develop.
 Others get burned out in the corporate world.
 Some have lost their jobs, only to discover that working for themselves was a better
idea anyway
3. Opportunities for Minorities and Women
 More small businesses are also being started by minorities
4. Global Opportunities
 Many entrepreneurs are also finding new opportunities in foreign markets.
5. Better Survival Rates
 More people are encouraged to test their skills as entrepreneurs
o REASONS FOR FAILURE
1. Managerial incompetence or inexperience.
- Some entrepreneurs put too much faith in common sense, overestimate their own
managerial skills, or believe that hard work alone ensures success.
- If managers don’t know how to make basic business decisions or don’t understand basic
management principles, they aren’t likely to succeed in the long run
2. Neglect
- Some entrepreneurs try to launch ventures in their spare time, and others devote only
limited time to new businesses.
- But starting a small business demands an overwhelming time commitment.
- If you aren’t willing to put in the time and effort that a business requires, you aren’t likely
to survive
3. Weak control systems.
- Effective control systems keep a business on track and alert managers to potential
trouble.
- If your control systems don’t signal impending problems, you may be in serious trouble
before you spot more obvious difficulties.
Example…anxious to grow, they maybe too liberal in extending credit to their customers
and then end up not being able to collect all the money that is owed them
4. Insufficient capital.
8. Some entrepreneurs are overly optimistic about how soon they’ll start earning profits.
o Reasons for Success
1. Hard work, drive, and dedication.
- Small-business owners must be committed to succeeding and willing to spend the time
and effort to make it happen.
2. Market demand for the products or services being provided.
- Careful analysis of market conditions can help small-business owners assess the probable
reception of their products.
3. Managerial competence.
- Successful owners may acquire competence through training or experience or by drawing
on the expertise of others.
- Most spend time in successful companies or partner with others to bring expertise to a
new business.
4. Luck
 Managing Small Business Finances
o Financial planning
- is the task of determining how a business will afford to achieve its strategic goals and
objectives.
- Usually, a company creates a Financial Plan immediately after the vision and objectives
have been set.
- The Financial Plan describes each of the activities, resources, equipment and materials
that are needed to achieve these objectives, as well as the timeframes involved
- The Financial Planning activity involves the following tasks
a. Assess the business environment
b. Confirm the business vision and objectives
c. Identify the types of resources needed to achieve these objectives
d. Quantify the amount of resource (labor, equipment, materials)
 e. Calculate the total cost of each type of resource
f. Summarize the costs to create a budget
g. Identify any risks and issues with thebudget set

 The role of financial planning includes three categories:

1. Strategic role of financial management
- Strategic Financial Management are those aspect of the overall plan of the organisation that
concerns financial managers. This includes different parts of the business plan, for example
marketing and sales plan, production plan, personnel plan, capital expenditure, etc. These all
have financial implications for the financial managers of an organisation.
2. Objectives of financial management
- Liquidity - to ensure availability of sufficient funds at reasonable cost
- financial control - to ensure effective utilisation of funds
- minimization of risk - to ensure safety of funds by creating reserves, re-investing profits
- profitability - to ensure adequate return on investment
- growth - to generate and build-up surplus for expansion and growth
- economy - to minimise cost of capital by developing a sound and economical combination of
corporate securities
- cooperation - to coordinate the activities of the finance department with the activities of other
departments of the firm
3. The planning cycle
- A planning cycle is the process of combining different aspects of planning into one synthetic
unit. Any plan should be practical and cost-effective. A planning cycle commences by analysing
whether any plan is likely to succeed or not.
 Importance of Financial Planning
1. Adequate funds have to be ensured.
2. Financial Planning helps in ensuring a reasonable balance between outflow and inflow of funds so that
stability is maintained.
3. Financial Planning ensures that the suppliers of funds are easily investing in companies which exercise
financial planning
4. Financial Planning helps in making growth and expansion programmes which helps in long-run
survival of the company.
5. Financial Planning reduces uncertainties with regards to changing market trends which can be faced
easily through enough funds.
6. Financial Planning helps in reducing the uncertainties which can be a hindrance to growth of the
company. This helps in ensuring stability and profitability in concern.
 What is a budget and why is it important?
o Budget
- a budget is an itemized summary of likely income and expenses for a given period.
- it provides a concrete, organized, and easily understood breakdown of how much money
you have coming in and how much you are letting go.
- It’s an invaluable tool to help you prioritize your spending and manage your money—no
matter how much or how little you have
- Importance of Budget
 Planning and monitoring your budget will help you identify wasteful
expenditures, adapt quickly as your financial situation changes, and achieve your
financial goals.
 When you actually see the breakdown of your expenses, you may be surprised by
what you find; this process is essential to fully grasping how things can add up.
 Creating a budget will decrease your stress levels because, with a budget, there
are no surprises.
- Steps for Budget Preparation
1. Obtaining Estimates:
o Obtaining estimates of sales, production levels, expected costs, and
availability of resources from each sub-unit/division/department
  The departmental heads or managers are required to provide estimates
of future conditions and activities that will have an impact on the
company.
 The discussion and participation may be in the form of informal
discussions and/or detailed written reports of plans which will be
submitted to the budget committee for approval.

2. Coordinating estimates
o In many organisations, the budget committee evaluates the different plans
submitted by various organisational units to determine the potentiality of
plans in the overall interest of the company and to estimate what resources are
available and can be fairly allocated among the various units of the
organisation
3. Communicating Budget:
o Budgeting requires effective communication to convince the departmental
manager about changes in the budget.
 After individual budget plans have been approved in the light of
organisational goals and availability of resources, the budgets should be
communicated to departments and responsible managers.
 Changes and modifications incorporated in the final budget should be
made known to managers to obtain their cooperation and support for the
budgets
4. Reporting Interim Progress towards Budgeted Objectives:
o As a feedback in the budgeting process, performance reports are prepared to
inform departmental managers and top management about the performances
achieved in terms of budgeted figures.
o Types of Budgets for Businesses
1. Master Budget
- master budget is an aggregate of a company's individual budgets designed to present a
complete picture of its financial activity and health.
- it combines factors like sales, operating expenses, assets, and income streams to allow
companies to establish goals and evaluate their overall performance, as well as that of
individual cost centers within the organization.
2. Operating Budget
- An operating budget is a forecast and analysis of projected income and expenses over the
course of a specified time period. To create an accurate picture, operating budgets must
account for factors such as sales, production, labor costs, materials costs, overhead,
manufacturing costs, and administrative expenses.
- Operating budgets are generally created on a weekly, monthly, or yearly basis.
- A manager might compare these reports month after month to see if a company is
overspending on supplies
3. Cash Flow Budget
- A cash flow budget is a means of projecting how and when cash comes in and flows out
of a business within a specified time period.
- It can be useful in helping a company determine whether it's managing its cash wisely.
- Cash flow budgets consider factors such as accounts payable and accounts receivable to
assess whether a company has ample cash on hand to continue operating, the extent to
which it is using its cash productively, and its likelihood of generating cash in the near
future.
4. Financial Budget
- financial budget presents a company's strategy for managing its assets, cash flow,
income, and expenses.
- it is used to establish a picture of a company's financial health and present a
comprehensive overview of its spending relative to revenues from core operations.
1. Static Budget
 - A static budget is a fixed budget that remains unaltered regardless of changes in factors
such as sales volume or revenue. A plumbing supply company, for example, might have a
static budget in place each year for warehousing and storage, regardless of how much
inventory it moves in and out due to increased or decreased sales

 Financial Statement Analysis

o Financial Statement
- Are summary of the accounting process, which provides useful information to both
internal and external parties
- Provide a summary of the accounting of a business enterprise whereby:
 The balance sheet reflecting the assets, liabilities and capital as on a certain date
 The income statement showing the results of operation during a certain period.
- Consists of 4 important statements
 the income statement or the profit and loss account
 the balance sheet or the position statement
 statement of changes in owner’s equity
 statement of changes in financial position
- INCOME STATEMENT
 reflects the operational position of the firm during a particular period, normally
one accounting year
 determines the entire performance of the company like total revenue generated
and the expenses incurred for earning the revenues
- POSITION STATEMENT or the BALANCE SHEET
 reflects the financial position of the firm at the end of the financial year
 helps ascertain and understand the total assets, liabilities and capital of the firm
- STATEMENT OF CHANGES IN OWNER’S EQUITY
 also called the statement of retained earnings
 provides information about the changes or position of owner’s equity in the
company
- STATEMENT OF CHANGES IN FINANCIAL POSITION
 helps to understand the changes in financial position from one period to another
period
o Financial Statement Analysis
- is a study of the relationship among the various financial factors in a business as
disclosed by a single set of statements
- Is also a study of the trend of these factors as shown in a series of statements
o 2 important types of Financial Statement Analysis
1. Based on material used
a. External analysis – these are outsiders of the business concern
Example: investors, creditors, government organizations and other credit agencies.
b. Internal Analysis – this analysis is used to understand the operational
performances of each and every department and unit of the business concern.
2. Based on method of operation
a. Horizontal Analysis – under this method, financial statements are compared with
several years and based on that, a firm may take decisions.
b. Vertical Analysis – under this method, financial statements measure the quantities
relationship of the various items in the financial statement on a particular period
o Techniques of Financial Statement Analysis
1. Comparative Statement Analysis
A. Comparative Statement Analysis
- Analysis of financial statement at different period of time.
 - Classified into (a) comparative balance sheet analysis; (b) profit and loss
account analysis
B. Comparative Balance Sheet
- Helps to understand the financial position of the concern business as well as how
the assets, liabilities and capitals are placed during a particular period
2. Trend Analysis
3. Common Size Analysis
4. Fund Flow Statement
5. Cash Flow Statement
6. Ratio Analysis