Gervas' Property

MODULE 6
CODE: GST 05206
NAME: BUSINESS FINANCIAL,
MANAGEMENT AND ACCOUNTING
NTA LEVEL 5
Sub- Enabling Outcome
• Identify business start up pre-operation costs and
state financing strategy
• Prepare profit and loss projection plan and balance
sheet projections
• Prepare the cash flow spreadsheet
• Calculation of financial ratios: calculate the expected
“break even level” and “profitability ratios” of
proposed business
• Describe the critical risks and potential problems for
a proposed business and explain the techniques of
avoiding cash crisis
• Prepare the implementation schedule for a proposed
business
• Describe Leadership in the new business
• Describe ways of hiring the right employees

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 • Describe on customer and employee motivation and
retention
• Describe on business management succession and
exit strategies

BUSINESS FINANCE
SOURCES OF CAPITAL FOR ENTREPRENEURS
1.0 Introduction
In order to start and manage successful ventures
entrepreneurs need to have adequate invest on
resources. Also becoming a successful entrepreneur
requires one to become a skilled fund-raiser. It is
important therefore for entrepreneurs to understand the
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various sources of capital as well as requirements and
expectations of these sources. Without this
understanding the entrepreneur may be frustrated in
attempting to find appropriate start up capital. Common
methods of financing ventures include on owners’ equity
and debts/borrowing funds.
What is capital?
Capital is the money contributed or borrowed by the
owner(s) of a business to start and run the business or
expand it. Capital is used in starting, running and
expanding a business.
1.1 WHY BUSINESSES NEED FINANCE
Finance is the money available to spend on business
needs. Right from the moment someone thinks of a
business idea, there needs to be cash. As the business
grows there are inevitably greater calls for more money
to finance expansion. The day to day running of the
business also needs money.
The main reasons a business needs finance are to:
1.) Start a business
Depending on the type of business, it will need to finance
the purchase of assets, materials and employing people.
There will also need to be money to cover the running
costs. It may be some time before the business
generates enough cash from sales to pay for these costs.
Things for a start-up to consider when raising
finance
Often the hardest part of starting a business is raising
the money to get going.
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An entrepreneur might have a great business idea and
clear plan for how to exploit a market opportunity.
However, unless sufficient finance can be raised, the
entrepreneur will struggle to make the most of the
opportunity.
Raising finance for a start-up requires careful planning.
The entrepreneur needs to decide on:
• How much finance is required? Raising finance is
hard work and expensive – the start-up should avoid
having to go through the process too often!
• When and for how long the finance is
needed? A useful distinction can be made between
long-term, medium-term and short-term finance
• What security (if any) can be provided? This
will affect the ability of the business to raise a bank
or other loan where the lender requires some
security (or “collateral”)
• Whether the entrepreneur is prepared to give
up some control (ownership) of the start-up in
return for investment?
• Whether the cost of the finance (e.g. interest
charged) is justified

The finance needs of a start-up should also take account

of these key areas:
• Set-up costs -the costs that are incurred before the
business starts to trade
• Getting ready to produce - the fixed assets that the
business needs before it can begin to trade

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 • Working capital (the stocks needed by the business
–e.g. raw materials + allowance for amounts that
will be owed by customers once sales begin)
• Growth and development (e.g. extra investment in
capacity)

2.) Finance expansions to production capacity

As a business grows, it needs higher capacity and new
technology to cut unit costs and keep up with
competitors. New technology can be relatively expensive
to the business and is seen as a long term investment,
because the costs will outweigh the money saved or
generated for a considerable period of time. And
remember new technology is not just dealing with
computer systems, but also new machinery and tools to
perform processes quicker, more efficiently and with
greater quality.
3.) To develop and market new products
In fast moving markets, where competitors are
constantly updating their products, a business needs to
spend money on developing and marketing new products
e.g. to do marketing research and test new products in
“pilot” markets. These costs are not normally covered by
sales of the products for some time (if at all), so money
needs to be raised to pay for the research.
4.) To enter new markets
When a business seeks to expand it may look to sell their
products into new markets. These can be new
geographical areas to sell to (e.g. export markets) or
new types of customers. This costs money in terms of
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research and marketing e.g. advertising campaigns and
setting up retail outlets.
5.) Take-over or acquisition
When a business buys another business, it will need to
find money to pay for the acquisition (acquisitions involve
significant investment). This money will be used to pay
owners of the business which is being bought.
6.) Moving to new premises
Finance is needed to pay for simple expenses such as the
cost of renting of removal vans, through to relocation
packages for employees and the installation of
machinery.
7.) To pay for the day to day running of business
A business has many calls on its cash on a day to day
basis, for instance paying a supplier for raw materials,
paying the wages, etc.
Additional finance can help a company keep trading while
it is waiting for it payments for its last sales. It allows a
business to meet on-going costs of operation or help
them to expand.

1.2 CHOOSING THE RIGHT SOURCE OF FINANCE

A business needs to assess the different types of finance
based on the following criteria:
1.) Amount of money required: A large amount of
money is not available through some sources and
the other sources of finance may not offer enough
flexibility for a smaller amount.
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 2.) How quickly the money is needed: The longer a
business can spend trying to raise the money,
normally the cheaper it is. However it may need the
money very quickly (say if had to pay a big wage bill
which if not paid would mean the factory would
close down). The business would then have to
accept a higher cost.
3.) Cost of a Loan/finance: This involves finding the
cheapest option available
The cost of a loan is the money that is paid or used
in getting a loan. The cost of finance is normally
measured in terms of the extra money that needs to be
paid to secure the initial amount and interest
which is paid when the loan is given. Some of the costs
are outlined below:
(i) Loan interest rate: Interest is the money paid
additional to money that is borrowed as
compensation for using someone else’s money.
Interest is expressed as a percent per year.
(ii) Loan application fees: This is money paid when
application for loan is received by bank before
processing. This is sometimes called a loan
appraisal fee.
(iii) Ledger fees: This is the fee charged by the bank
for keeping record of business transactions on
the loan account.
(iv) Commitment fees: This is the money some
lenders demand after approving a loan for a
business.

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NOTE: The typical cost of loan is the interest that has to
be paid on the borrowed amount.
4.) The amount of risk involved in the reason for
the cash: A project which has less chance of leading
to a profit is deemed more risky than one that does.
Potential sources of finance (especially external
sources) take this into account and may not lend
money to higher risk business projects; unless there
is some sort of guarantee that their money will be
returned.
5.) Loan Repayment Period (The length of time of
the requirement for finance): This is the period
within which a loan should be paid. It is expressed in
months or years. Further, a good entrepreneur will
judge whether the finance needed is for a long-term
project or short term and therefore decide what type
of finance they wish to use.
6.) Payment of Loan Instalment: A loan instalment
is the occasional payment of loan and interest in
small amounts regularly over loan repayment period.
If the loan interest rate remains the same per year,
it is cheaper to pay the instalment more frequently
than just once a year. The above is true only if
interest is calculated on remaining balance after
each instalment has been paid. (See an example on
attached sheet).

1.3 SOURCES OF CAPITAL

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There are two major sources of capital for Entrepreneurs.
These are Internal and External sources.
1.3.1 Internal finance
Internal finance comes from the trading of the business.
Internal finance tends to be the cheapest form of finance
since a business does not need to pay interest on the
money. However it may not be able to generate the
sums of money the business is looking for, especially for
larger uses of finance. Before owners go looking for
external funds they need to be sure they have exhausted
all internal sources of funds. This requires a critical
examination of the whole business to look for possibilities
such as:
1.3.1.1 Retained Earnings
Not all profits should be distributed, some being retained
for expansion purposes.
1.3.1.2 Sale of Assets
This may seem a drastic step but sometimes there are
assets no longer in uses, or no longer necessary, these
can be profitably disposed of to reduce the need for
additional funds. Simply this is disposal (sale) of any
surplus assets no longer needed (e.g. selling a company
car).
1.3.1.3 Credit control
Improved collection procedures and tightening of credit
facilities can reduce the amount of working capital tied
up in this way.
1.3.1.4 Inventory Control

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Improved monitoring of inventory can reduce quantities
held, enable more economic ordering, increase stock
turnover rate, provide space for more productive uses, all
increasing the funds available for the firm’s need. This is
reductions in the amount of stock held by the business.
Others are:-
Day to day cash from sales to customers and Money
loaned from trade suppliers through extended credit.

1.3.2 External finance

External finance comes from individuals or organizations
that do not trade directly with the business e.g. banks.
Examples of external finance are:
i) An overdraft from the bank.
ii) A loan from a bank.
iii) The sale of new shares through a share issue.

1.4 METHODS OF FINANCING VENTURES

Common methods of financing ventures include owners’
equity and debts/borrowed funds.

1.4.1 DEBT FINANCING

This is borrowing which involves obligations to an
entrepreneur to pay back the principal sum plus interest
on the use of the money.
Forms of debt financing
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These include:
i) Short term borrowing
ii) Long term borrowing

1.4.1.1 Short Term borrowing (finance)

Short-term finance is the loan that matures within one
year or less. It is needed to cover the day to day running
of the business. It will be paid back in a short period of
time, so less risky for lenders. Thus is often needed for
working capital and repayment is from the proceeds of
sales.
The main types of short-term finance are:
a) Bank overdraft
This is a facility that allows an entrepreneur to withdraw
more than what he/she has in his account. It is an
arrangement between the bank and its customers to
withdraw above the balance in the account. It is
approved from the appropriate authority in the bank. It is
usually for few days or weeks. Micro finance and
commercial banks offer this type of facility which is
subject to renewal.
Advantages and Disadvantages of Bank Overdraft
Advantages Disadvantages
i) An entrepreneur can ii) The bank can cancel the
take overdraft only overdraft facility for an
when necessary and this entrepreneur at short notice
saves interest charge and this might affect the
business/venture.
ii) An entrepreneur pay ii) The amount an
less interest on overdraft entrepreneur allowed by the
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than on loans bank may be too small for a
weak business.
iii) Once granted, iii) It is difficult for new or
overdraft can be used unknown customers of the
immediately bank to get overdraft.
iv) Overdraft is subject
to renewal.
v) There is no need for
security/collateral

b) Suppliers credit (Trade creditors)

This is a source of business capital whereby a business
owner obtains goods without paying in cash and repays
after a certain period. They are given period of credit,
normally around 30-60 days. By trying to extend this
period they can improve their short-term finance
position. Trade credit is practised between two or more
businessmen, e.g. Wholesalers and retailers. Depending
on how fast traded goods are sold, the business can
trade in the goods and pay from money obtained from
sale of the same goods and retain the profit. Trade credit
is an important source of finance for nearly all businesses
– since it is effectively a free source of finance.
Advantages and Disadvantages of Trade Credit
Advantages Disadvantages
No interest is paid on trade The business may be tied
credit. to a supplier with low
quality goods.
The supplier will continue Goods purchased on credit
extending credit to the are usually more
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business as long as the expensive than goods
business continues buying bought for cash.
and paying on time.

c) Working capital
Working capital is the amount of money available for the
day to day running of the business. It is the difference
between current assets and current liabilities.
d) Short-term bank loans
This is the type of loans with repayment period of less
than six calendar months. This is the popular type
offered by micro banks and venture capitalist.
They are usually sourced to finance working capital and
ventures with short term gestation. They usually attract
payment of interest at high rate.
e) Accounts Receivable Financing
This is short term financing which involves either pledge
of receivables as collateral for a loan or sale of
receivables at discounted rate.
1.4.1.2 Long Term Debt borrowing (financing)
Sources
Long-term finance tends to be spent on large projects
that will pay back over a longer period of time (loans that
mature after more than one or five years). These are
usually used for purchases of equipment and other fixed
assets e.g. land, building etc. The assets procured may
serve as collateral. More risky so lenders tend to ask for
some form of insurance or security if the company is

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unable to repay the loan. A mortgage is an example of
secured long-term finance.
The main types of long-term finance that are available
for a business are:
a) Mortgage
A mortgage is a loan specifically for the purchase of
property. Some businesses might buy property through a
mortgage. In many cases, mortgages are used as a
security for a loan. This tends to occur with smaller
businesses. A sole trader, for example, running a florists
shop might want to move to larger premises. They find a
new shop with a price of £200,000. To raise this sort of
money, the bank will want some sort of security - a
guarantee that if the borrower cannot pay the money
back the bank will be able to get their money back
somehow. Most mortgages last for 25 years and the
property you want to buy are usually kept secure.
The borrower can use their own property as security for
the loan which is often called taking out a second
mortgage. Mortgage is a very popular way of raising
finance for small businesses but carries with it a big risk.
This resource is good for entrepreneurs who own the
property.

The disadvantages of this source of finance:

• Monthly repayments- with mortgage you are expected
to make a monthly payment if you are unable to do
this your property can be taken away from you.

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• Variable interest rates-For example most people in the
UK who get a mortgage choose a variable mortgage.
This means that your monthly repayments are
dependent upon changes in the base rate (set by
MPC). This can be a disaster when interest rates
increase
• Lack of flexibility
• Deposits- with mortgages you have to pay a 5%
deposit when you first purchase. It may be a problem
you are unable to do this.
• Profit prices have increased, for instance in the U.K
property prices have increased faster than incomes
and the cots on renting. This means that a mortgage
takes an increasing % of disposable income.

b) Long-term bank loans

A bank loan is an amount of money given to you from
the bank that is usually only given to you for a valuable
reason and for a certain period of time. This method is
suitable for starting up, but it can be used for the
development purpose. Long-term bank loans can be
obtained from commercial banks, which are most
common sources of debt financing. Most banks demand
collateral preferably in the form of landed property.
Machinery and equipment can also be accepted as
collateral. For small business owners, banks are lenders
of first resort. Commercial banks also make a large
number of intermediate term loans with maturities of one
to five years. Also banks offer a number of services to a
new venture including computerized payroll preparation,
letter of credit (this is letter of assurance from bank
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when you buy product outside the country), lease, etc.
However before securing a loan from commercial bank
the entrepreneur has to be clear about the following:-
a) What he plan to do with the money? Do not plan on
using funds for a high risk venture.
b) How much money is needed? Some entrepreneurs
go to their banks with no clear idea of how much money
they need.
c) When is the money needed? Never risk to the bank
with immediate requests of money with no plan.
d) How long will it be needed? The shorter the period
of time that the entrepreneur needs the money, the
more likely he/she is to get the loan.
e) How will the loan be repaid? What if plans go awry?
Is there other income that can be diverted to pay off
the loan? Is there collateral?
f) If he can meet and is comfortable with collateral
requirements and other conditions attached to the loan.

Below are factors considered by banks when lending

money:-
(i)Character: Character refers to how hardworking and
trustworthy the loan applicant is, as well as how
effective his or her management of business is. Also
includes reputation with bankers in relation to
trustworthiness in repaying debts.
(ii) Contribution: When a bank is to lend money to
a business must know how much the business owner
has put in the business. Often banks only give a
percentage of what is required.
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 (iii) Capital standing of the business: Capital in the
business is the assets which the business has
acquired either from savings or borrowing. To know
capital standing of the business, bank must be given
information about all assets owned and debts which
the business owes other people.
(iv) Capacity to pay: This is the ability of the
business to pay borrowed money together with
interest charged when these are demanded.
(v) Collateral for the loans: Collateral is the security
which is put forward by the borrower in good faith
as a guarantee that the borrowed money will get
paid. Some of the securities taken by banks are:
• Land title deeds for ownership of land
• Vehicle log books and vehicle registration books
• Savings account balances, etc.

The disadvantage of getting a loan is if the business

doesn’t do very well the owner/business will not be able
to pay the loan back to the bank. The level of loan
repayments will be calculated by the bank when the loan
has been agreed. Usually the first payment will be a
month after you receive the loan. This could be a
disadvantage because you may not make enough money
in the first month so this could slow down the progress of
the business. But it all depend on how much money you
are expected to pay a month.
c) Debentures
A debenture is a long term loan which is usually secured
against a specific asset (e.g. the factory) or the overall

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assets of a business. A debenture is repayable at a fixed
date and has a fixed rate of interest.
Debentures are different from ordinary shares because:
i) The lender has no voting rights in the company.
ii) The loan attracts interests – whereas holders of
ordinary shares get dividends.
iii) The providers of loans are paid out before ordinary
shareholders in the event that the business fails
(assuming there is some cash left).

d) Hire Purchase
Business hires the equipment for a period of time making
fixed regular payments. Once payments have finished it
then owns the piece of equipment. Hire purchase is
different to leasing in that the business owns the
equipment when it has finished making payments. With
an equipment lease, the equipment is handed back to
the leasing provider.
e) Lease Financing
Lease financing is offered by trading banks and finance
companies on a wide variety of assets. Plant and
equipment, vehicles especially, are purchased by the
financier, then leased to the firm for an agreed period.
Commonly there are set monthly payments and a
residual figure at the end of the term when the firm can
buy the asset.

Financial institutions, including life insurance companies

and pension funds, are involved in purchase and lease-
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back of existing properties where the owner wants to
realise the cash value and use it in the business.
Sometimes the original property-owner is able to
repurchase it at the end of long-term lease. New
buildings also are built on this arrangement.
It costs approximately the same as hire purchase, all
aspects considered, but no deposit is needed and all
payments on the lease normally are tax deductible.
The advantages of leasing are:
a) Cheaper in the short run than buying a piece of
equipment outright.
b) If technology is changing quickly or equipment wears
out quickly it can be regularly updated or replaced.
c) Cash flow management easier because of regular
payments.
The disadvantages of leasing are:
a) More expensive in the long run, because the leasing
company charges fees which make the total cost
greater than the original cost.
b) An entrepreneur can't use a leased asset as collateral
for a future loan,
c) interest rates can be very high (so entrepreneur should
be sure to negotiate it before committing),
d) some lease terms are longer than the life expectancy
of the asset, so entrepreneur should make sure that
he/she don't get stuck making payments on obsolete
equipment,
e) One missed payment can trigger a repossessions,
f) Leases are long term and can be hard to get out of,
g) A thorough examination of entrepreneur credit history,
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h) A requirement for an entrepreneur to pledge additional
collateral to secure the equipment,
i) Requirement for copies of your personal tax returns
f) Insurance Companies
Insurance companies give loans to their customers. They
use the insurance policy as collateral. They can afford to
give long term loans for starting or expanding
businesses.

g) Debt Factoring
A business sells its outstanding customer accounts (those
who have not paid their debts to the business) to a debt
factoring company.
The factoring company pays the business - say 80-90%
of face value of the debts - and then collects the full
amount of the debts. Once it has done this it will pay the
remaining amount to the business less a charge. It is a
good way of raising cash quickly, without the hassle of
chasing payments. BUT it is not so good for profits since
it reduces the total revenue received from those sales.
1.4.1.3 Other forms of Debt Financing
a) Family members, friends and sympathizers
These can mobilize funds and offer them either as loans
or grants to the beneficiaries. This is also common.
Friends and family who are supportive of the business
idea provide money either directly to the entrepreneur or
into the business. This can be quicker and cheaper to
arrange (certainly compared with a bank loan) and the
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interest and repayment terms may be more flexible than
a bank loan. However, borrowing in this way can add to
the stress faced by an entrepreneur, particularly if the
business gets into difficulties.
b) Micro Financing Institutions (MFIs)
These offer credit to individual entrepreneurs and
groups. Their condition could be better (e .g at time they
do not demand collateral) and they are accessible to
disadvantaged group i.e. Women, the youth, the
disabled etc. Who normally require just small amount of
fund for their ventures. Examples of MFIs in Tanzania are
PRIDE, FINCA, and VIKOBA.
c) Community Based Finance Trusts
These are organization created to raise and manage
funds for advancement of specified social groups e.g. the
youth, women, people in a particular area, religion, age
etc. SACCOS (Savings and Credit Cooperatives Society) is
an example of community based finance trust. SACCOS
are self-help savings societies which give loans to
members from member’ savings. Loans and interest are
paid from either salary deduction or payment from
marketed produce. Interest on borrowed money is used
to pay salaries and other expenses for running the
society.
Advantages:
a) They are easy to access and conditions are better for
the targeted groups.
b) They always offer financing and other support service
like training and management consultancy.
c) Loans are given at low interest rate.
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d) Employer and members of society guarantee the
borrower.
e) Rate of loan default is very low.

Disadvantages/pitfalls:
a) They are discriminatory e.g. if you not a women you
cannot access loan facilities designed for women.
b) Their continuity is sometimes uncertain.
c) No loans are given to non-members
d) Loans are small (to some societies). The amount of
loan is limited by the volume of funds in the society.
e) Lack of discipline by management committee may
result in loans which members cannot pay.

d) Financing Companies
These are assets based lenders who lend money against
assets such as equipment, land assets, inventory, and
receivables. They are involved in business finance,
providing personal loans, hire purchase, leasing and
factoring. For example, Tanzania Investment Bank (TIB),
Tanzania Debt Financing Ltd (TDFL)
Their interest rates are higher than banks and loans are
usually comparatively short-term. However finance
companies tend to be more ready to grant finance with
less security.
e) Grant
A grant is given to you by the Leader’s Trust. You will
only receive this if they think you have a good idea for a
business. Grants are similar to loans but grants are better
because you don’t have to pay back. This source of
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finance is good for any business simply for the fact you
don’t have to pay back. Government and non-
government organizations sometimes give grants to
potential entrepreneurs to start small businesses.

The disadvantages of getting a grant are very minimal

it could even be non-existent. One complaint may be the
long application progress however it will no longer be an
issue when you are rewarded with free money.
f) Government Finance (Special Assistance from
Governments)
The government and the European Union provide help to
businesses for the following reasons:
• Protect jobs in failing/declining industries.
• Help create jobs in areas of high unemployment.
• Help start up new businesses.
• Help businesses relocate to areas of high
unemployment.
Some of the main sources of funds are:
• European Structural Fund
• Assisted Areas
• Regional Selective Assistance
• Small Loans Guarantee Scheme
g) Difference between Bank Loans and
Overdrafts

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 • A bank overdraft is a limit on borrowing on a bank
current account. With an overdraft the amount of
borrowing may vary on a daily basis.
• A bank loan is a fixed amount for a fixed term with
regular fixed repayments. The interest on a loan
tends to be lower than an overdraft.
• A fixed term means how many months or years
before the loan has to be repaid in full. Normally a
fixed term loan will be for a greater amount than an
overdraft.

Example of a loan:
A business borrows £12,000 from a bank over 3 years at
an interest rate of 5%. The approximate repayments on
this loan would be £392 a month for 36 months
(£14,112).
Overdrafts Loans
Advantages Flexibility – can Larger amounts can
change the amount be borrowed
borrowed within Lower interest rates
limits than overdrafts
Interest is only paid Regular repayments
on amounts help plan cash flow
borrowed
Disadvantages Cannot be used for Less flexible than an
large borrowing overdraft
Rates of interest Have to pay back in
higher than loans stated time or risk
Bank can change further financial
limit at any time or problems
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 ask for money to be
paid back sooner
than expected

1.4.1.4 Advantage and Disadvantages of Debt

Financing
Advantage
a) The entrepreneur/s does not relinquish a part of
ownership of the venture in exchange for financing.
b) More borrowing allows greater return on equity.
c) When interests are low the cost of borrowing becomes
lower and prospective benefits can be higher.

Disadvantages
a) The entrepreneur is haunted by loan payback
responsibilities.
b) Cash flow problems may occur due to pay back
responsibilities.
c) Heavy indebtedness can be an obstacle to growth.
d) Commercial bank and financial institution always
demand collateral (usually landed property) which
most entrepreneurs do not have.
e) Fear of loss of property surrendered as collateral
always prevent entrepreneur from seeking bank loans.
f) Most entrepreneurs do not have ability to prepare and
submit meaningful business plan (venture profile)
which is an important pre-requisite for loan
processing.
g) Some loan scheme are discriminatory i.e. they cater
for specific groups only e.g. women the disabled etc.
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h) Debt financing requires good skills in financial
management and financial discipline which most
entrepreneurs lack.
i) The entrepreneur faces a burden of regular interest
payment.

1.5 EQUITY FINANCING

Equity capital is money/resources invested in the venture
by the owner(s) with no obligation to repay the principal
sum or interest. It is also called common equity; owner
equity or risk capital.
1.5.1 Personal Funds/Contribution
Personal contribution is money contributed by owner or
owners of the business as investment in the business. It
is obtained from:
i. personal savings
ii. Friends, family members and relatives
iii. Retirement Funds

This is the most reliable source of funding in business.

For it put less pressure on the entrepreneur even if the
business failed. The important thing is that there is no
commitment of repayment on the entrepreneur. This is a
common source of finance for sole traders and
partnerships, especially for start-up.
Apart from the venture owners resources put in the
business, equity capital can be raised through two major
sources namely: - public stock offering and private
placement.
1.5.2 Public Stock Offering/ Share capital
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This is a process of offering shares of the venture to be
sold at a stock exchange e.g. Dar-es-salaam Stock
Exchange (DSE). OR
It refers to a corporation’s raising capital through the sale
of securities/share on the public markets.
OR
Share capital is the money invested in a company by the
shareholders. Share capital is a long-term source of
finance. In return for their investment, shareholders gain
a share of the ownership of the company. An illustration
of an example company share ownership structure is
shown below:
Shareholder Number of Shareholding
Shares
Angela 300 15%
Nicholas 400 20%
Gordon 600 30%
Baraka 700 35%
Total 2,000 100%
Shareholders benefit from the protection offered by
limited liability – they are only liable for the amount
they invest in share capital rather than the overall debts
of the company.

The founding entrepreneur is very likely to invest in the

share capital of the start-up. This is a common method
of financing a start-up. Ideally the founder will try to
provide all the share capital of the company, retaining
100% control over the business.
27
A key point to note is that the entrepreneur may use a
variety of personal sources (e.g. cash, personal
investments) to finance the purchase of shares.
Once the investment has been made, it is the company
that owns the money provided. The shareholder obtains
a return on this investment through dividends
(payments out of profits) and/or increases in the value of
the company when it is eventually sold.
Advantages
a) Much capital can be raised though sale of share/stock.
b) Liquidity of owners improves through sale of shares.
c) Market forces can put more value on the stock of the
venture.
d) The venture may attain a more positive image by
going public.

Disadvantages
a) Public stock offering involves cost for accountants,
lawyers etc to comply with the registration
requirement.
b) Going public involves disclosure of important
information relating to the venture. Some of the
information may be sensitive and advantages to
competitors.
c) It requires complex procedures and lot of paperwork.
d) Hegemony of majority shareholders, this reduces
efficiency.

28
e) The venture is subjected to pressure from a broad
diversity of shareholders some of them do not have
adequate of knowledge about business operations.

1.5.3 Private Stock Placement

This is a process which involves selling stock to private
parties such as employees, friends, customers, relatives
and local professionals.
Advantages
a) Shareholders are close and may have good knowledge
of the venture and its operations.
b) No complex paperwork is involved.

Disadvantages
a) Excessive intimacy may erode effectiveness.

Other sources of Equity Financing

A start-up company can also raise finance by selling
shares to external investors – this is typically to
venture capitalist or business angel.

1.5.4 Venture Capital Markets/ Companies

Venture capital companies are private, for-profit
organizations that purchase equity positions in young
business, they believe have high-growth and high-profit
potential which produce annual returns of 300 to 500
percent over 5 years to 7 years. This is very typical
example in USA (widely applied). Venture capital is
becoming an increasingly important source of finance for
growing companies, especially start-up and early stage
29
businesses as well as businesses in "turn around"
situations. Venture capital investments generally are
relatively high risk investments.
A venture capitalist (who is also called private equity
firms) is a person who invests in a business venture,
providing capital for start-up or expansion. Venture
capitalists are looking for a higher rate of return than
would be given by more traditional investments.
Generally, venture capitalists are looking for returns of 25
percent and up. Venture capitalists are often prepared to
take on projects that might be seen as high risk which
some banks might not want to get involved in. The
advantages of this might be outweighed by the possibility
of the business losing some of its independence in
decision making. Normally, venture capital investors
provide funds to a company in exchange for company
shares. These investors require a business plan that
demonstrates the probability of success.

Venture capitalists invest in business venture as either a

limited partner or a general partner. A limited partner
is a person or organization who invests capital in a
venture capital fund for financial gain. A general
partner is a venture capitalist who manages the fund
and makes investments. Investments by a venture capital
fund can take the form of either equity participation, or a
combination of equity participation and debt obligation.
In most cases, the venture capitalist becomes part owner
of the new venture. VC investment criteria usually include
a planned exit event, normally within three to seven
years.
30
Role of the venture capitalist

Venture capitalists are powerful and effective sources of

equity for new ventures. They constitute experienced
terms of professionals who provide a broad range of
negotiation, management, legal and financial services
required at different stages of a venture, including:
• Start up capital
• Market and marketing research
• Management consultancy
• Contacts with prospective customer, suppliers and
other important people
• Assistance in negotiating technical agreements
• Help in establishing management and accounting
controls
• Help in employee recruitment and development of
employee agreements
• Help in risk management and the establishment of an
effective insurance program
• Counselling and guidance in complying with a
numerous government regulations
• Prepare the company for a potential exit (e.g.
acquisition or initial public offering)

For instance, venture capital firms, which provide about

seven percent of all funding for private companies, have
invested billions of dollars in high potential small
companies over the years, including such notable
businesses as Google, Apple, FedEx, Netscape, Home
Depot, Microsoft, etc. In many of these deals, several
venture capital companies invested money, experience,
31
and advice across several stages of growth, a common
practice in the industry.

1.5.5 Angels/Private Investors

After dipping into their own pockets and convincing
friends and relatives to invest in their business ventures,
many entrepreneurs still find themselves short of the
seed capital they need. Frequently the next step on the
road to business financing is private investors.
Angel investors are individuals who invest in businesses
looking for a higher return than they would see from
more traditional investments. Many are successful
entrepreneurs who want to help other entrepreneurs get
their business off the ground. Usually they are the bridge
from the self-funded stage of the business to the point
that the business needs the level of funding that a
venture capitalist would offer. Funding estimates vary,
but usually range from $150,000 to $1.5 million.
The term "angel" comes from the practice in the early
1900's of wealthy businessmen investing in Broadway
productions. Today "angels" typically offer expertise,
experience and contacts in addition to money. Less is
known about angel investing than venture capital
because of the individuality and privacy of the
investments, but the Small Business Administration in
USA estimates that there are at least 250,000 angels
active in the country, funding about 30,000 small
companies a year. In many cases angels invest in
business for more than purely economic resource
32
(because they have personal interest in the industry) and
they are willing to put money.
Companies on the earliest stages long before venture
capital forms and institutional investors jump in. Angels
are primary sources of start-up capital for companies in
the embryonic stage through to growth stage and their
role in financing small business is significant.

What Does an Angel Investor Expect?

There are almost as many answers to what angels expect
as there are angels. Each has their own criteria and
foibles because they are individuals. Almost all want a
board position and possibly a consulting role. All want
good communication although for some that means
quarterly reports, while for others that means weekly
updates. Return objectives range from a projected
internal rate of return of 30% over five years to sales
projections of $20 million in the first five years to the
potential return of five times investment in the first five
years. Most are looking for anything from a five to 25
percent stake in the business. Some want securities -
either common stock or preferred stock with certain
rights and liquidation preferences over common stock.
Some even ask for convertible debt, or redeemable
preferred stock, which provides a clearer exit strategy for
the investor, but also places the company at the risk of
repaying the investment plus interest. Additionally, the
repayment may imperil future financing since those
sources will not likely want to use their investment to bail
out prior investors.
33
Some angels ask for the right of first refusal to
participate in the next round of financing. While, some
venture capitalists will want their own players only or
certain investment minimums so this strategy may limit
who future participants might be.
Future representation of the board of directors also
needs to be clarified. When a new round of financing
occurs, do they lose their board right? Or should that
could be based on a % ownership - when their
ownership level drops below a certain level, they no
longer have board representation.
In order to protect their investment, angels often ask the
business to agree to not take certain actions without the
angel investors’ approval. These include selling all or
substantially all of the company's assets, issuing
additional stock to existing management, selling stock
below prices paid by the investors or creating classes of
stock with liquidation preferences or other rights senior
to the angel's class of security. Angels also ask for price
protection, which is anti-dilution provisions that will result
in some receiving more stock. The business should ask if
it can issue stock at a lower price than that paid by the
angels.

What's the difference between a venture capitalist

and an angel investor?
A venture capitalist is a professional investor. He or she
manages a fund and is looking for suitable investments
for that fund. An angel investor is an individual who,

34
while also looking for a suitable investment, is also
looking for a personal opportunity.
In other words, the venture capitalist may have no
business experience applicable to the industry the
company is involved in, and is focused on the potential
rate of return your company can provide. An angel
investor has business experience relevant to the
company and is interested in adding value to the
company, as well as making a return on his or her
investment.
Simply, a venture capitalist differs from an angel investor
in terms of wanting greater control of company and
quicker return on investment.

1.6 ARRANGING FOR THE START-UP CAPITAL

Start-up capital is the money needed to start business. It

is absolutely necessary to know how much start-up
capital is needed and where to get it from before starting
to provide services. Start-up capital is needed for:
• Capital investment
• Working capital.

1.6.1 Capital Investment

Capital investment refers to funds used to purchase
assets that have value and last for a long time.
Some service providers can start with a low level of
35
investment while others must invest a lot before they can
start. For example, if one decides to set up a
business offering Solid waste services, he/she will
need to purchase protective gear such as gloves
and boots and a wheel barrow and spades for
collecting waste and transferring it to the
collection points.
So starting business requires making the necessary
investment, it is therefore essential to get hold of
sufficient start-up capital for the purpose. One should
also take into account that it can take several months or
even years before making enough profits to cover the
cost of investment. For a community based waste
collection enterprise, a small amount of capital is needed
thus offering an opportunity of “starting small but
thinking big.”
Capital investment is normally used for:
• Business premises
• Equipment and tools.

Business premises
Businesses need premises for its operations. This can be
a whole building or just a small room. It is necessary to
decide whether to:
• construct premises
• buy premises
• rent premises, or
• Run business from home.
36
Buying an existing building can be faster and simpler if
there is an appropriate one in a suitable location. An
existing building may often have to be renovated to suit
the business needs. Buying a building requires a lot of
capital.
Renting business premises needs less capital than
constructing or buying one. It is also more flexible
because it is easier to change locations when renting, but
it is not as secure as owning own business premises. In
any case, money has to be spent to make changes to
the building to suit business needs.
Running business from home may be the cheapest
option. It can be a good place to start until the business
grows, although separating business from family
concerns can be difficult when working from home.
Equipment
Equipment is all the machines, tools, workshop
fittings, vehicles, office furniture that are needed
to supply the services. It is very important to know
exactly what kind of equipment is needed before starting
and to choose the right type of equipment.
Instead of buying equipment, sometimes it can be leased
from a leasing company for an agreed period. Leasing is
like renting, monthly lease payment has to be made, just
like paying rent.
The disadvantage of leasing is that it is an expensive way
to access equipment. Over time more payment is made
to lease the equipment than it would have cost to buy it.
37
The advantage of leasing is that there is no start-up
capital for the investment in equipment.
Decision to lease equipment can be reached by
calculating capital investment for equipment and adding
the lease payment to the required working capital.

1.6.2 Working Capital

Normally a business can run for some time before any
money comes in from sales. Working capital is the money
needed to pay for expenses. Because money is needed
from the start, it is included in the start-up capital. The
amount of working capital required depends on how long
it will take before money starts coming in from sales and
how much stock is required. Service providers will need
working capital to cover expenses for a specific duration
of time, some three months, others only for one month.
It is important to plan to have more working capital than
needed. The working capital will be needed to cover the
direct labour and material costs as well as indirect costs.

Direct material Indirect Costs

cost
• Rent
• Utilities
• Salaries /
38
 Direct labour cost Wages
• Interest on
loans, if any
• Promotion and
advertising
• Other costs,
such as
registration
fees, insurance,
medical
charges, etc.

Required Start-Up Capital

Capital Investment
• Business premises
Construction or purchase of N/A
building
Conversion/reconstruction of N/A
premises

• Equipment
Small 4 x 100 400,000
pushcarts 000
Big handcarts 2 x 130 360,000
000
39
 Shovels 40 x 4 160,000
000
Rakes 20 x 4 80,000
000
1,000,00
0
Working Capital
Stock of materials N/A
Wages and salaries 1,050,000
Protective clothing 420,000
Promotion 120,000
Other indirect costs 290,646
Registration cost (see Form of 22,750
Business)
Total start-up capital = 2,903,39
6

1.6.3 TANZANIA EXPERIENCE:

Weaknesses of existing sources of finance in Tanzania
and suggestions for improvement
A: Weaknesses
i) High rate of interest
40
ii) It takes long period of time to process loans
iii) Paying bribes in order to obtain loan
iv) Strong conditions such as the need for collateral
makes small scale entrepreneurs fail to qualify
v) Limited capital base
vi) Limited experience on micro enterprise financing or
loan management for micro enterprise.

B: Ways of improving access to finance for small

scale enterprises are:
i.) Formation of credit associations
ii.) Reducing the conditions for obtaining loans
iii.) Anti-corruption moves

41
FINANCIAL MANAGEMENT AND ACCOUNTING
FOR SMALL BUSINESS

2.0 PLANNING BUSINESS FINANCES

What is Financial Planning?
During the first months of business operations, there is a
need to struggle to recover all the costs. It takes some
time before money from sales starts to come in. During
this time, the business is very vulnerable and one must
keep a careful eye on the financial situation.
42
When starting a new business, two things are very
important:
• That the business do not run out of cash, and
• That all the costs are recovered and profit made.
The business can run at a loss for a while due to usage
of start-up capital to pay for costs at the beginning. But
when the start-up capital is finished the business must
have higher sales than costs, otherwise it will run out of
cash.
Before starting a business it is important to plan a cash
flow. After starting up, then the sales and costs as well
as the cash flow should be monitored to make sure that
everything is going on as planned. If anything goes
wrong, there is a need to take action to sort out the
problem immediately.
Follow these two steps to plan and monitor the financial
situation of a business:
• Make a Sales and Cost Plan
• Make a Cash Flow Plan.
i) SALES AND COST PLAN
A Sales and Cost Plan shows the sales, cost and profit a
business is likely to have each month. It is normally
made annually. Since the business will be very vulnerable
in the beginning, it is crucial to be pessimistic when
making a Sales and Cost Plan. This means the cost has to
be forecasted higher and the sales a bit lower than
actual. This is to make sure that the business can still
survive even if things do not go as well as planned.
43
It is important to obtain accurate information and use it
to prepare the financial plan. For example, when
forecasting the cost of materials or goods, there is a
need to ask suppliers about prices instead of guessing.
To make a Sales and Cost Plan for the first year of the
business these steps should be followed:
• Forecast the sales for each month of the first year
• Forecast the costs for each month of the first year
• Complete the Sales and Cost Plan by using the sales
and costs forecasts.
Step 1: Forecasting sales volume for each month
of the first year
Forecasting the sales for each month is the most
important part of making a Sales and Cost Plan. Without
good sales there can be no profit. For the first month of
the year, take the sales volume projection made earlier
while costing the goods or services. Then, work the way
forward from these figures, taking into account the
following considerations:
• Whether the plan is to serve more clients gradually
• Whether the plan is to expand to new types of
clients
• Whether the plan is to increase the price after the
business introductory stage
Step 2: Forecasting the total cost for each month
of the first year
Next forecast the cost of the business i.e. the direct
44
material cost, direct labour cost and indirect cost
separately for each month of the first year.
It must be remembered that the direct cost will
increase or decrease according to the volume of
the sales. If more goods and services are produced and
sold, it is also likely that more material input and more
employees will be needed.
Indirect cost will remain the same, whether or not
more or fewer goods and services are sold. For
example, the salary of a security guard employed to
protect business premises will remain unchanged even
when there are increased sales.
To forecast the total cost in the first month of the year
there is a need to go back to the estimated direct
material cost, direct labour cost and the indirect cost for
the first month in business. The working forward from
these figures, increase or decrease the cost of inputs in
direct relation to the projected sales.
One thing to consider when working forward from the
first month to the subsequent months is whether there
are expected increases in the prices of inputs.
Step 3: Forecasting sales
Sales forecasting is done by taking into account the
total amount of money expected to be collected
from clients to whom waste collection services have
been rendered in addition to the income from the sale of
compost and recyclable materials.

45
Details JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC TOTAL

Sales 375,000 375,000 375,000 1,125,000 1,125,000 2,400,000 2,400,000 2,400,000 2,400,000 2,400,000 2,400,000 2,400,000 20,175,000

Direct
material
cost 0 0 0 0 0 0 0 0 0 0 0 0 0

Direct
labour
cost 270,000 270,000 270,000 270,000 270,000 270,000 300,000 300,000 300,000 300,000 300,000 300,000 3,420,000

Gross
profit
105,000 105,000 105,000 855,000 855,000 2,130,000 2,100,000 2,100,000 2,100,000 2,100,000 2,100,000 2,100,000 16,755,000

Indirect
costs
344,382 344,382 344,382 344,382 344,382 344,382 352,382 352,382 352,382 352,382 352,382 352,382 4,180,584

Net profit -239,382 -239,382 -239,382 510,618 510,618 1,785,618 1,747,618 1,747,618 1,747,618 1,747,618 1,747,618 1,747,618 12,574,416

Step 4: Completing the Sales and Cost Plan

After completing the forecast of sales and cost, then the
information can be filled in the Sales and Cost Plan.
These forecasts are used to calculate the gross and the
net profit of a business during the first year.

Example of a Sales and Cost Plan

46
Sales: Service charges as calculated at Tshs.500 per
household, this will take three months to flow in regularly
because it takes time to win over the customers for solid
waste collection. That is the reason for estimating
enough working capital in the start-up capital to survive
for the first three months in business when there is a
possibility of making losses.
From January to March, it is expected that only half the
households will pay the Tsh500 fee but segregation of
recyclables will not be done systematically. In April and
May, the number of households paying is expected to
increase to 1,000 and serving businesses as well as sales
of recyclable waste to junk shops nearby and middlemen
is expected to yield another Tshs. 625,000.
From June onwards, all 1,500 households are served and
the group is able to collect Tshs. 712,500 as fees at a
default by 5%. Another Tshs. 400,000 is collected from
schools, bars and commercial establishments. An average
of Tsh 280,000 per month is generated from sales of
recyclable and reusable materials.
Costs: Increases in salaries and wages of the group
members are planned for July to take account of
inflation. A 10% increase is projected based on the
official inflation rate, which was the case.
By doing a sales and cost plan, profit is earned from the
operations and there are no surprises, such as
unexpected losses or increases in costs in the course of
business operation.

47
ii) CASH FLOW PLAN
A Cash Flow Plan is a forecast that shows how much
cash is expected to come into and go out of the
business each month. The Cash Flow Plan helps to
make sure that the business does not run out of cash at
any time.
There are many reasons why the business may run out
of cash. For example, materials are bought before
anything. This means that cash goes out before cash
comes in. If credit is given to customers payment is not
immediate. Often more goods or materials are bought
before the credit customers pay.
Cash is needed to buy equipment. The equipment will
help the business to make profit in the future. But cash is
paid for the equipment before earning the profit.

Steps in Preparation of a Cash Flow Plan

Step 1: Cash at the start of the month
• This is the amount of cash in the cash box. This
information is filled in.

Step 2: Cash in from sales

• This is the amount of cash sales during the
month of January. It is obtained from the
Sales and Cost Plan in which there is a forecast
for cash sales in January.

48
Step 3: Any other cash in
• This is the amount of cash forecasted for
January from other sources such as a loan
from a bank or a grant. On agreement with a
Bank, a business can receive part of the working
capital needed as a loan. Depending on the specified
working capital the business can apply for a loan
according to the required start-up capital needed
which can amount for example to
Tshs.2,812,150 .
Step 4: Total cash in
• Add up all the Cash In amounts calculated in
Steps 1, 2, and 3.
Step 5: Cash out for direct material costs
• This is the amount of cash that is estimated for
a business to pay out in January to buy
materials needed to supply solid waste collection
services. There is no incurring of any direct material
cost.
Step 6: Cash out for direct labour cost
• This is the amount of cash expected to be paid
out in January for wages for employees directly
involved in the collection of waste from the
households. The amount is filled in the Sales and
Cost Plan.

Step 7: Cash out for indirect cost

• This is the amount of cash paid out in January
49
 as indirect cost. It is obtained from the Sales
and Cost Plan and the amount of depreciation is
deducted, because it does not represent the actual
cash out.

Step 8: Cash out for planned investment in

equipment
• Cash for equipment is written, it includes the
amount of money that will be spent on buying
equipment. This can be obtained from the Start-Up
Capital.
Step 9: Loan repayment
• The amount of loan repayment is written, it
includes either the principal (or the actual loan
amount) plus loan interest of 17 percent per
annum or 34 percent for two years. The plan is
to pay back the loan in 24 months.
Step 10: Any other cash out
• Any cash spent for various activities ie.
Registration, etc. is written. It is obtained from the
required start-up capital form and the amount is
filled in.
Step 11: Total cash out
• All the cash out amounts from Step 5-10 are
added. This is the total cash amount estimated
to go out of the business during January.
Step 12: Cash at the end of the month
• This the amount obtained by subtracting the
total cash out from the total cash in to get the
50
amount left in the cash box at the end of
January. Cash at the end of the month is cash at
the start of the next month. It is seen in the Cash
Flow Plan that the business will not run out of cash
during its operation.

51
 Example of A Cash Flow Plan
MA
JAN FEB R APR MAY JUN JUL AUG SEP OCT NOV DEC
1 1 3 5 6 10
Cash at the start 250 1 347 075 803 1 281 1 759 512 077 792 8 507 222 11 937
of the month 000 427 454 481 508 535 562 589 616 643 670 697
2 2 2 2
Cash in from 375 375 3750 1 125 1 125 2 400 400 400 400 2 400 2 400 2 400
sales 000 000 00 000 000 000 000 000 000 000 000 000
3 2 812
Any other cash in 150 0 0 0 0 0 0 0 0 0 0 0
1 5 7 9 10 12
4 3 437 1 722 450 1 928 2 406 4 159 912 477 192 907 622 14 337
TOTAL CASH IN 150 427 454 481 508 535 562 589 616 643 670 697
5
Cash out for
direct material 0 0 0 0 0 0 0 0 0 0 0 0

DIT- GST 05206, NTA 5

cost
6
Cash out for 270 270 270 270 270 270 300 300 300 300 300 300
direct labour cost 000 000 000 000 000 000 000 000 000 000 000 000
7
Cash out for 650 230 230 230 230 230 388 238 238 238 238 238
indirect costs 000 000 000 000 000 000 000 000 000 000 000 000
8
Cash out for
investment in 1 000
equipment 000 0 0 0 0 0 0 0 0 0 0 0
9 146 146 146 146 146 146 146 146 146 146 146 146
Loan repayment 973 973 973 973 973 973 973 973 973 973 973 973
10
Any other cash
out
22
Registration 750 0 0 0 0 0 0 0 0 0 0 0
DIT- GST 05206, NTA 5
11 2 089 646 646 646 646 646 834 684 684 684 684 684
TOTAL CASH OUT 723 973 973 973 973 973 973 973 973 973 973 973
12
CASH AT THE 5 6 8 10 11
END OF THE 1 347 1 075 803 1 281 1 759 3 512 077 792 507 222 937 13 652
MONTH 427 454 481 508 535 562 589 616 643 670 697 724

DIT- GST 05206, NTA 5

2.1 MANAGING BUSINESS FINANCE
For better preparation of business operations, there is a
need to acquire financial management skills right from the
start. Without proper management of finances, the
risk of business failure increases. If there is loss of
control over the money going in and out of the business, it
will be very difficult to regain financial control later.
Financial management has many aspects. Three basic
things have to be done for better financial management:
i. Maintaining a record book
ii. Making a monthly profit and loss statement/income
statement
iii. Comparing the profit and loss statement with the Sales
and Cost Plan.

2.1.1 Record Book (CASH BOOK)

The record book is where all business transactions
are written down. A transaction is any exchange of
money for a service. For example, a customer who pays
for the removal of solid waste from his house makes a
transaction involving an exchange of money against a
service.

DIT- GST 05206, NTA 5

Money comes in and goes out of the business through
transactions: money comes in mainly through the sale of
goods or services; money goes out of a business to meet
costs or expenses. It is important to note down in the
record book how much money was received and how
much money was paid out by the business.
Accurate records help to find out if the business is doing
well or badly. The record book is a useful tool since:
• It can help to check from time to time the balance of
cash.
• It allows one to summarize the income, check which
expenses are using up the funds
• It is a basis for making a monthly profit and loss
statement or income statement.

DIT- GST 05206, NTA 5

A simple record book can look like this: Bank: Write all the money
Cash: Write all the money that came into or went out
that came into or went out of your bank account. At
of your cash box. At any any time, the balance
time, the balance column column shows the amount
Date: Write the Details: shows the amount of of money you have in the
date of the Describe the money you should have. bank. You only need these
transaction transaction columns if your business

DATE DETAILS CASH BANK

In Out Balance In Out Balance
11/1 Brought forward 150 000 80 000
12/1 Paid rent 30 000 120 000
12/1 Sales 50 000 170 000

A Solid Waste Service Provision Group recorded the

following transactions during their sixth months of
business.

DIT- GST 05206, NTA 5

01 / 06 Balance brought forward from the 70 000
previous month
100
01 / 06 Transport cost of Mr. Mwasha to
2 000
meet with the community
800
04 / 06 Stationery bought by Ms.
Mkandara 500

14 / 06 Lubricant bought for a small 935 000

pushcart 500 000
14 / 06 Expenses for repairing one small 350 000
pushcart
120 000
27 / 06 Waste Collection fees received
28 / 06 Money transfer from the bank
account to the cash box
29 / 06 Wages and salaries paid for group
members
30 / 06 5 pairs of working gloves bought
for waste collectors
This is how the group filled in these transactions in the
Record Book.

DATE DETAILS CASH BANK

In Out Balance In Out Balance
1/6 70 000 600 000
1/6 Transport
DIT- GST 05206,
100
NTA 5
69 900
4/6 Bought stationery 2 000 67 900
14/6 Bought lubricant 800 67 100
15/6 Money transfer 200 000 267 100 200 000 400000
17/6 Repair of wheelbarrow 500 266 600
Receipt Book

Since there is a need to bill the customers every month, it

is important to make sure that all transactions are
documented in writing and receipts are issued to the
customers.

At the end of each day, when the business is closed, the

Record Book has to be filled in:
• To record money coming into the business: use
copies of the receipts issued.
• To record money paid out to others, use the receipts,
invoices and other vouchers paid for goods or
services. It is important to make sure that a receipt is
obtained each time money is paid out.

2.1.2 The Profit And Loss Statement/Income

Statement
Income statement (commonly known as the profit and
loss statement) is a summary of all activities involving

DIT- GST 05206, NTA 5

income and expenses incurred in the business during a
particular period of time e.g. a month, a quarter or a year.
The most common period is a year. The income statement
matches income against expenditure, the difference is
either a profit (surplus) or a loss (deficit)

Purpose of the income statement

Its main purpose is to see if the business is operating in a

profit or a loss. This helps the owner of the business to
check whether he /she is advancing or not. Since the main
objective of any business is to make profit, a loss on the
income statement means that something is wrong
somewhere, either the business is not viable or the
expenditures are not adequately controlled (there is
overspending). This will give the entrepreneur a chance to
take appropriate action before things get worse.

Elements of income statement

DIT- GST 05206, NTA 5
The income statement has five main sections

1. Operating revenue:

This comprises cash sales and credit sales. It may

comprise also other incomes (e.g an entrepreneur got
dividend from the shares he had bought from another
company)

2. Cost of goods sold (COGS):

This is the price paid by the business for goods during
the period plus opening stock (beginning inventory) and
then subtract the value of closing stock.

3. Gross profit:
This is the difference between Total revenue and Cost
of goods sold

4. Expenses:
These are all costs incurred in the day- to – day running
of the business. These are classified into:

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 • Selling and distribution expenses e.g. advertising,
salesmen, commission, transport to customer’s
premises, bad debt etc.
• Administrative expenses e.g. Salaries, insurance,
rent, stationery etc.
• General expenses e.g. interest on loan,
depreciation, electricity, employer contribution to
P.P.F. etc.
5. Net profit or loss:
This is the difference between gross profit and
expenses. If the difference is surplus (positive), it is a
profit, if it is a deficit (negative), it is a loss.

Format of the Income Statement (Ref. Table 2.0)

Table 2.0 Example of the income statement

Example Corporation
Income Statement
For the year ended December 31, 2010
Revenue/Income/Sales
Sales on cash $200,000

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 Sales on credit $250,000
Other income $50,000
Total Revenue $500,000
Cost of Goods Sold (COGS) $380,000
Gross profit $120,000
Expenses
Selling expenses $35,000
Administrative expenses $45,000
Interest expenses $12,000
Total Expenses $92,000
Gross profit before taxes $28,000
(i.e income before taxes)
Income Tax expenses $5,000
Net income after Taxes $23,000

For Manufacturing Industry

Every manufacturing industry/business should prepare a
Profit and Loss Statement at the end of each financial
year. The profit and loss statement can be

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calculated more often, for example, every month,
every three months, or every six months.
The more often the profit and loss is calculated, the
sooner it will be known if the business has problems.
Then, something can be done about them before it is too
late.
The following are the steps to prepare a Profit and Loss
Statement:
Step 1:
• Open the record book and add up separately the total
sales and the total cost of the business in the chosen
time period.
Step 2:
• Separate the total cost of the business into material
cost, labour cost and indirect cost.

Step 3:
• Fill the information about the sales and cost figures in
a template (refer to the table below).
Subtract material and labour cost from total sales to
obtain the gross profit. Subtract the indirect cost from
the gross profit to calculate the net profit.
Profit and Loss Statement

01/01 – 31/01 2000

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1 Sales ……………………………………
2 Direct material cost ……………………
3 Direct labour cost ………………………
3. Compare the profit and loss statement figures
with the forecast in the Sales and Cost Plan. Do the
figures roughly match?
If the actual net profit is below the projected net profit, it
is important to think about why the business did not
perform as planned. Are the sales lower than what was
expected? Why? Similarly, are the costs higher than
projected? Again, there is a need to enquire which cost
items turned out to be higher and why.

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If the actual profit continues to be below the projected
profit, or if the net profit turns out to be too low, then it is
essential to act decisively and increase the sales or cut
down on the cost.
Thus, another benefit of a profit and loss statement is that
it enables the business owner to see the movement of the
sales and cost items. Since the performance of sales and
costs from one period to another can be compared,
analysis of business performance can be carried out
better.

2.2 FINANCIAL STATEMENTS

Financial statements are basic elements of financial
management that are needed for starting and running a
business profitably. Common financial statements include
the balance sheet, profit and loss statement and
the cash flow statement.

2.2.1. THE BALANCE SHEET

Balance sheet is a statement that shows the list of assets,

liabilities and owner’s equity for a given period of time. A
DIT- GST 05206, NTA 5
balance sheet summarizes an organization or individual's
assets, equity and liabilities at a specific point in time. It
shows the value of assets owned by the business, the
amount of its debts and the equity of the owner. In other
words, it communicates the financial position of the
business as on a specified time.

A balance sheet shows the financial position of the

business on a given date with regard to assets (what the
business owns), liabilities (what it owes) and equity
(owners’ investment).

Purpose of a balance sheet

The balance sheet indicates the relationship between the

total assets, liabilities and owners contribution in the

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business. It depicts the rate of growth of the business
assets and liabilities.

2.2.2 COMPONENTS OF A BALANCE SHEET

The major components of a balance sheet are assets,

liabilities and owner’s equity.

a) Assets:

These are items/resources which owners and investors

posses ie. Cash, stock, land, machinery etc. They are
divided into two groups (i) fixed assets (ii) current assets.

Fixed assets: are items which the business owns and use
in the daily business operations but they remain in the
business for more than one accounting period. They are
long life items for example buildings, machinery, motor
vehicles, furniture etc. In a balance sheet the amount of
depreciation is deducted from the original value of each

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fixed asset except for land whose value appreciates with
time.

There are also intangible assets such as trademarks,

patents designs. The real value of such assets cannot
easily be estimated.

Current assets: are items that are easily converted into

cash within a short period, they are constantly utilized in
the business ie. They are not static in the business for
more than one accounting period. These include:

• Cash – this is money which the business has in the

bank account or in safe deposit.
• Marketable securities-short term investments in
government securities (treasury bills) or in
commercial papers of other firms, these are
promissory notes issued to finance the short-term
credit needs of large institutional buyers).

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 • Debtors/Accounts receivable- Amount of money which
the business expects to be paid from its customers
who have purchased goods/ services on credit.
• Inventory- these are goods ready for sale or still in
manufacturing process, raw materials etc.
b) Liabilities

These are funds provided by outsiders to be used in the

business. Liabilities are classified into two groups ie.
Current liabilities and long term liabilities

Current liabilities: these are funds payable within one

accounting period such as bank overdraft, creditors etc.
These include all debts and obligations that the business
has to pay within a short period of time. They include:

• Credictors/Accounts payable- the debts which the

business has to pay to its suppliers
• Notes payable- promissory (containing promise) notes
which must be paid within year e.g insurance
contract.

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 • Bank overdraft
• Accrued expenses- expenses incurred, but not yet
paid for, during a given accounting period e. wages,
taxes, utility bills.
Long term liabilities: these are funds which are payable
in more than one accounting period such as a bank loan.

c)Owner’s equity or net value

d) This the amount of capital for the business left after

subtraction of liabilities from assets.

2.2.3 PREPARATION OF A BALANCE SHEET

A balance sheet has three parts: assets, liabilities and

owners’ equity. The main categories of assets are usually
listed first and typically in order of liquidity. Assets are also
listed accordingly. The difference between the assets and
the liabilities is known as equity or the net assets or
capital of the business so an asset equals liabilities plus
owner's equity. Balance sheets are usually presented with
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assets in one section and liabilities and net assets in the
other section with the two sections "balancing."

Mathematically, balance sheet satisfies accounting

equation

Assets = Liabilities + Owner’s equity (Capital)

Things that affects owner’s equity (Capital)

• Drawing- Decreases value of capital

• Net profit- Add value of capital
• Net loss – Decreases value of capital

How to prepare a balance sheet:

A balance sheet has four main parts (i) Heading (ii) Assets
(iii) Liabilities
(iv) Owners' Equity.
The heading section includes the name of the business or
person. It will also indicate which financial statement it is
and the period of time the information is for. It is also
important to know which date the information on balance
sheet is for. For instance, a balance sheet can be prepared
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for November 25, 2009 or for May 31, 2009. It makes a
difference because the account balances on the balance
sheet could be different.

The Asset section includes a list of assets in order of

liquidity and the corresponding value of each item. This is
followed by a list of liabilities and their corresponding
values. The last part is owner’s equity which is obtained
by subtracting total liabilities from total assets.

A complete balance sheet put together a complete

equality between the total value of assets and the total
amount of liabilities and equity.

Examples of a balance sheet

1. Balance Sheet of Juma Company as on 30th

June, 2009

ASSETS
Current Assets:
Cash 15,000

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Accounts receivable 5,000
Inventories 10,000
Total current assets 30,000
Fixed Assets:
Machinery 20,000
Building 25,000
Office furniture 5,000
Total fixed Assets 50,000
Total assets 80,000
LIABILITIES
Current Liabilities
Accounts payable 27,000
Accrued expenses (utility 3,000
bills)
Long term Liabilities -
Total liabilities 30,000
OWNERS EQUITY 50,000
Total Liability and 80,000
Equity

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2. Balance Sheet of John’s Company as on 1st
January, 2009

Assets Liabilities and

Owner’s Equity
Liabilities
Cash 8,000 Accounts 3,000
payable
Accounts 6,000 Notes 5,000
Receivable payable
Total 8,000
liabilities
Equipment 10,000 Owner’s 16,000
equity
Total 24,000 Total 24,000

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 3. Balance Sheet of Juma’s Company as on 30th
June, 2010

Assets Liabilities and Owner’s

Equity
Current Assets Current Liabilities
Inventories $1,325 Trade payables $2310
Trade and 4,030 Short –term 350
Other borrowings
receivables
Short term 250 Current tax 800
investments liabilities
Cash and cash 1,340 Wages payable 290
equivalents
Total current 6,945 Total current 3,750
Assets liabilities
Fixed Assets Long term
liabilities
Land 150 Long term bank 1,200
loam

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Property, 2,450 Other long term 140
plant and loan
equipment
Total fixed 2,600 Total long 1,340
assets term liabilities
Total Assets 9,545 Total 5,090
liabilities
Owner’s equity
Share capital 500
Retained 3,955
earnings
Total equity 4,455
Total 9,545
liabilities and
Owner’s
equity

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2.3 FINANCIAL RATIOS ANALYSIS

Definition: Ratio analysis refers to methods of calculating

and interpreting financial ratios to assess a firm’s
performance
Question: Why is ratio analysis useful?
• Provide details for financial planning
• Put details into perspective • Manage expectations
(creditors and investors)
Types of financial ratios:
1. Liquidity
2. Activity
3. Leverage
4. Profitability

2.3.1 ANALYZING LIQUIDITY

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Definition: Liquidity measures a firm’s ability to satisfy its
short-term obligations as they come due. i.e. can the firm
pay its bills?
Types of ratios used for analyzing liquidity
1. Net working capital (not a ratio)
2. Current ratio
3. Quick ratio (acid test)
(Ref: Tables 1.0 for examples):

1. NET WORKING CAPITAL: Dollar amount of current

assets exceeds / falls short of current liabilities
Example: Net working capital = Current Assets – Current
Liabilities
WC = CA – CL
= $ 6,945 - $ 3,750
=$ 3,195
• Interpretation: Current assets exceed current
liabilities by $ 3195 by June 2010. (ie. CA > CL)
• When Working capital is negative, means the
company runs using outside sources which are still
obligated to pay.
DIT- GST 05206, NTA 5
2. CURRENT RATIO: Size of current assets relative to
current liabilities
Example: Current ratio = Current Assets /Current
Liabilities
Cr = CA/CL
= $ 6,945 / $ 3,750
= $ 1.853 ≅ $ 1.85
• Interpretation: For each dollar the firm owes
(short-term liabilities), the firm has $1.85 in its asset.
(Current Assets is able to pay Current liabilities in $ 1.85
for each dollar)

Rule of thumb: current ratio=2, but if cash flow is

predictable, a lower current ratio is acceptable

3. QUICK RATIO (ACID-TEST): Size of most liquid

current assets relative to current liabilities
Note: Inventories is excluded
• Inventories generally take longer to sell, often at
discounted prices

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• Inventories may be accounts receivable before they
can be turned into cash
Example: Quick ratio = (Cash + Account Receivables +
Marketable Securities + Temporary Investments) / Current
Liabilities
= ($ 1,340 + $ 4,030 + $ 250) / $ 3,750
= $ 5,620 / $ 3,750
= $1.498
• Higher ratios means that the firm is in a more liquid
position
2.3.2. ANALYZING LEVERAGE
Definition: Amount of debt used in an attempt to
maximize shareholders’ wealth

2. DEBT RATIO

• Tells the Proportion of total assets financed by creditors

Example:
Debt ratio = Total Liabilities / Total assets
=$ 5,090 / 9,545

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 =0.5
= 50% Interpretation: 50% of assets
have been financed by debt
Financial Ratios Based on the Income Statement

2.3.3 ANALYZING PROFITABILITY

Definition: This is concerned with evaluating a firm’s
earnings with respect to a given level of sales / assets /
owners’ investment or share value

Types

i) Gross margin
ii) Profit margin
Financial How to Calculate It Interpretation
Ratio
Gross Gross Profit ÷ Net Indicates the
Margin Sales percentage of sales
dollars available for
$120,000 ÷ $500,000
expenses and
24.0% profit after the cost of
goods sold (COGS) is
deducted from sales.

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 Profit Net Income after Tax Tells you the profit
Margin ÷ Net Sales per sales dollar after
(after tax all expenses are
$23,000 ÷ $500,000
deducted from sales.
4.6%
Financial Ratios Based on the Income Statement
and Balance Sheet

2.3.4 ANALYZING ACTIVITY

Definition: Activity ratios measure the firm’s effectiveness

at managing accounts receivable, inventory, accounts
payable, fixed assets, and total assets.
It is a supplement to liquidity ratios: but this focus on the
composition of current asset.
Three ratios of the Activity ratio
a) Average age of inventory
b) Average collection period
c) Average payment period

Financial Ratio How to Calculate It Interpretation

AVERAGE AGE Average age of The firm takes, on

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OF INVENTORY inventory = Inventory average, 50.7 days to
/ daily cost of goods sell an “average” item
sold (COGS) of its inventory.
• This is the
average time
inventory is = Inventory / • Too high: Risk of
held by the
(COGS/365) not being able to sell
firm (unsold)
inventory
• Too low: Under-
Example: Average age
investment in
of inventory =
inventory
$289,000 /
($2,088,000 / 365
days)
= 50.7 days

AVERAGE Avg. collection period The firm takes, on

COLLECTION = Accts rec’ble / avg. average, 59.7 days to
PERIOD daily sales collect accounts
receivable
= Accts rec’ble /
• Average time (Annual sales/365)
taken to collect Example: Avg. Note: Important to
accounts collection period = compare with terms

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receivable $503,000 / of credit
($3,074,000 / 365
days) = 59.7 days
AVERAGE Avg. payment period The firm takes, on
PAYMENT = Accts payable / average, 95.4 days to
PERIOD avg. daily purchase pay
= Accts payable / (%
COGS/365)
• Average time Note: Important to
taken to pay its compare with terms
purchases of credit given by
Example: Suppose the
creditors
firm purchases 70%
of its COGS. Avg.
payment period =
$382,000 /
(0.7*$2,088,000 /
365 days)
= 95.4 days

2.4 BREAK EVEN ANALYSIS (B.E.P)

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Definition
Breakeven point is the level of activity, expressed in
terms of units or sales shillings, at which the firm “break
even” i.e. it neither makes a profit nor a loss. It is the
zero profit point, a point at which an enterprise’s
expenses exactly match the sales or service volume.
Purpose of break even analysis
No firm plan to operate at zero profit point. The
knowledge of the break even is vital to the entrepreneur
and provides the necessary insight in the matter of
planning the profit of the enterprise. Break even point
determines the units to be able to cover all the
necessary costs of the enterprise.
Steps in calculating the B.E.P using contribution
margin method
(Is the amount remaining from sales revenues after all
variable expenses have been deducted. i.e. contribution
margin per unit = selling price per unit – variable cost
per unit)
1. Complete a list of all business expenses
2. Separate the list into variable and fixed expenses
3. Subtract the variable expenses from sales to obtain
contribution margin

DIT- GST 05206, NTA 5

 4. Divide the contribution margin obtained in step 3
by sales
5. Divide fixed expenses by the ratio obtained in step
4
6. This will give you break even point in T.Shs
7. Its equation can be derived as follows:

 =


 =
 +

 ∗
=
 +  ∗

 ∗
−  ∗
=


 −  =




=
 − 
Where Q = Quantity per unity
TFC = Total Fixed Cost
P = Selling Price
VC = Variable Cost

CONTRIBUTION MARGIN (CM)

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It is the difference between a product’s price and its
variable costs of production OR is the difference between
revenue and variable cost of production
It refers to the amount remaining from sales revenue after
variable expenses. (Manufacturing and non-manufacturing
have been deducted.) Such contribution margin is used
towards
1. Covering fixed expenses.
2. Profit for the period.
Therefore, CM = sales (S) – variable expenses (VC) Or
Price (P) – Variable Cost (VC)
It is established that
1. When CM = O, Thus
Automatically mean a loss to a company equal to total
fixed cost or expenses (TFC).
2. When CM >O but less than total fixed cost (< TFC),
Then fixed cost (TFC) will be covered partially-this
automatically mean a loss to company but less than
total fixed cost.
3. When fixed cost (FC) is exactly covered by the
contribution margin (CM=TFC) or total revenue = to
total cost (VC=FC) then the company is said to have

DIT- GST 05206, NTA 5

 achieved a breakeven point (BEP) that is neither profit
nor loss to the company.
4. When contribution margin is greater than total fixed
cost (CM > TFC) or revenue > total cost the company
makes profit.
EXAMPLES
1. Calculate the B.E.P. based on the following data given
below
Selling price 4,000 per unit
Variable costs 3,000 per unit
Monthly fixed expenses
Rent 8,000
Salaries 7,000
Others 5,000
Total 20,000

a) Step 1 and 2: Have been simplified by the data given,

since they are already broken down
between variable and fixed cost.
b) Step 3: 4,000 – 3,000 = 1,000 (contribution
margin per unit)

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 c) Step 4: 1,000 / 4,000 (contribution margin
ratio) = 0.25
d) Step 5: 20,000 / 0.25 = T.shs. 80,000

Sales revenue must be T.shs. 80,000 to be able to cover

the costs (break even).
We can express this in units by dividing the Break even
sales by unit price.
= 80,000 / 4000
= 20 bags
Therefore, He/she will have to sell 20 bags to break even.

2. Calculate the break-even output for TFC=$20,000,

P=$7, and AVC=$5

Solution:
20,000 20,000
= = = 10,000
7−5 2
Therefore, the break even output is 10,000 units

DIT- GST 05206, NTA 5

3. ABC Company is contemplating manufacturing a product
which can be sold for $10 per unit on the market. It
knows of two production processes, between which it
has to choose one, and only one. The following data
have been collected for Q=150,000 units.

Production Production
Process 1 process 2
TVC 800,000 950,000
TFC 400,000 250,000

(a) Calculate the break even point for each process

(b) Which process should be used if there was a high
probability of exceeding sales of 150,000 Units? Why?
(c) Which process should be used if there was a high
probability of selling considerably less than 150,000
units? Why?
SOLUTION
a. Break even point for each Process
• Break –even point for process 1:

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  ,

 = == !"",""" = 85,181.82
 %&
#$","""

• Break-even point for process 2:

)*,
Q2 = +$",""" = 68,181.82
 %&
#$","""

b. If sales are going to exceed 150,000 units, the firm

should use process 1 because the average variable cost
(assumed to be constant) for each unit above 150,000
will be only $5.33 for process 1 but will be $6.33 for
process 2.
c. Process 2 should be used if the firm expects to operate
below 150,000 units because the variable cost will fall
more quickly with this process and profits will decline
less slowly than with process 1.

QUESTIONS FOR DISCUSSION

1. The WICO Company sells widgets at $9 each; variable

unit cost is $6, and fixed cost is $60,000 per year.
a) What is the break-even point output quantity?

DIT- GST 05206, NTA 5

 b) How many units must the company sell per year to
achieve a profit of $15,000?
c) What will be the degree of operating leverage at the
quantity sold in part a? in part b?
d) What will be the degree of operating leverage if
30.000 units are sold per year?
2. A manager of a firm facing an ACM (average
contribution margin) equal to $ 5 and total fixed costs
of $10,000 claims that the firm can make a total profit
of $20,000 if it produces 6,000 units. Is he correct?

NB:
1 USD ($) = TSH 1650

3.0 BUSINESS MANAGEMENT

3.1 CASH MANAGEMENT
3.1.1 Cash management involves:
• Record all cash receipt
• One person should be responsible for collecting cash
and making payments

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 • Issue receipts for all cash collected
• Record all credits sales and purchases and
differentiate them from cash transactions

3.1.2 How to avoid problems (Crisis) in your cash

flow

No matter how effective your negotiations with customers

and suppliers, poor business practices can put your cash
flow at risk.
However, there are some practices you could introduce
into your business to reduce the risk of cash flow
problems. For example, you should think about:
• Running credit checks on your customers to ensure
they can pay you on time
• Whether you can fulfil your order - if you don't deliver
on time, or to specification, you might not get paid. You
should measure your production efficiency and the
quantity and quality of the stock you hold and produce to
ensure you can meet all your orders.
• How effective your marketing strategy is, especially
if your sales are stagnating or falling - see our guides on
how to create your marketing strategy and how to reach
your customers effectively.
• How easy it is for your customers to do business
with you. For example, if you could accept orders over
the telephone, email or internet, customers may be able
to pay quicker. You should also ensure catalogues and
DIT- GST 05206, NTA 5
 order forms are clear and easy to use to improve the sales
and payment processes.
• Keeping up-to-date accounting records to help warn
you of any impending cash flow crises or prevent you from
taking orders you can't handle.
• How you work with your suppliers - make sure they
are not be overcharging or taking too long to deliver. See
our guide on how to manage your suppliers.
• Controlling your overheads - you could consider
outsourcing non-core activities such as payroll services or
review your utilities contracts to see whether it would be
cheaper to switch tariff or supplier.
Sometimes after doing all you can, your cash flow forecast
may still suggest potential cash flow problems. You should
consider using temporary finance facilities such as an
overdraft or credit card to see you through. Having a cash
flow forecast to demonstrate the shortfall is temporary
and will reassure finance providers

3.2 DEBT MANAGEMENT

Debt management involves:
• Lending to reliable customers only
• Providing and enforcing a specific credit period
• Recording all debts
• Keeping all debt records
• Making follow ups for repayments

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 • Continually assessing performance of your debts and
striking off bad debts

3.3 STOCK MANAGEMENT AND CONTROL

Why manage stock?
• To make sure you have stock available when you
require them
• To meet the demand of your customers while at the
same time avoiding to hold excess
• To keep to the amount you have budgeted for and
avoid holding your working capital in form of stock
• To help you know which items move slowly and the
ones which move faster

Danger of running out of stock

• You disappoint customers
Danger of holding too much stock
• Tying too much money in stock and this money could
be used to meet other expenses
• There is a danger of some of the stock becoming
what is called dead stock, the stock that customers
are no longer interested in buying
• Some stock might even go beyond the expiry dates
that is allowed

Guidelines for stock control

• Record all the stock received

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 • Stocks should be well displayed and laid out so that
they can be seen and counted well
• Count your stock regularly
• Keep the records of stock

3.4 HUMAN RESOURCE MANAGEMENT

HRM or simply HR is the management of an
organization's workforce, or human resources. It is
responsible for the attraction, selection, training,
assessment, and rewarding of employees, while also
overseeing organizational leadership and culture, and
ensuring compliance with employment and labor laws. In
circumstances where employees desire and are legally
authorized to hold a collective bargaining agreement, HR
will typically also serve as the company's primary liaison
with the employees' representatives (usually a labor
union).
Importance of People / Workers in Business
People are the most important resource in your business
because:
• People manage and use all the other resources i.e.
they determine the performance of other resources
• If the people are not taken care of properly, they
obviously affect the productivity of all the other
resources including abusing or stealing them e.g.
money.
• If people are not managed well they:

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May not come to work everyday

May not meet their targets

Can steal your products/money

Can be lazy

May mistreat customers

Cheat on you

Collude with competitors

May cause other problems...(give examples)

Your business success depends on people. Why?

• People can help you identify and enter new markets
• They deliver products
• They maintain and keep your resources
• They can give you information
• They interact with others and hence are the face of
the business to visitors and to customers
• They can advise you

What is required in managing people?

• Manage and organize yourself first. How?

Identify all important tasks

Group them in order of importance and urgency

Give high priority to important and urgent tasks

Allocate time needed to accomplish your tasks

Prepare to do list

Work through your do list in priority order

Delegate the tasks that can be done by others

When you delegate keep your eyes on execution

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Before you the day assess the work which was
not accomplished and finish it early on the next
day
• Employ or work with the right people
• Employ the people under the terms they understand
• Assign them specific duties and responsibilities
• Give them targets to achieve within specific periods
• Give them the tools to work with
• Provide them with good working environment
• Reward them according to their performance
• Treat them with respect

What is required in managing people?

• Assist, encourage, train and counsel them
• Monitor to ensure the support they need and results
are obtained
• Praise and motivate them appropriately as they
deliver results
Managing workers involves:
• Recruiting the right person. In order to get the
right person ask yourself

What are the main tasks the person is going to
do?

What are the skills and qualities required for the
job?

How much is the business able to pay?

Where can you find the right person?

When do you need a person?

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 • Recruitment and Selection Policy
Recruitment and selection is the process of attracting and
obtaining suitable employees for the organization. This is
a crucial stage in staffing function because it determines
the quality of human resource that the organization will
have. It is usually a long process which starts from
advertising for vacant posts, receiving application, short
listing for the most qualified applicants, and selecting the
best candidates by using various selection techniques.
A clear policy on when and how recruitment and selection
will be conducted is important for the management, staff
and the applicants because of potential dangers of
subjectivity.
Recruitment and selection policy helps the organization to:
• Guide on when and how jobs will be advertised.
• Guide on how selection will be conducted.
• State on how disputes will be handled.
• Indicate the relationship with other policies in the
organization.
These benefits will be attained if specific principles are
used in starting recruitment and selection policy. These
are:
• Defining the key concepts in the policy.
• State the rationale for the policy.
• Adhere to the principal legislations of the country.
• Focus on appointment based on merit.
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 • Fairness on recruitment and selection (equal
opportunity).
• Consider cost effectiveness in recruitment and
selection process.
• Attract and select the most valuable employees.
• The role of the management, human resource
department, selection panel, and the job applicants in
the recruitment and selection process.
Principles for effective recruitment policy could be many
depending on the nature and size of the organization.

3.5 MANAGING CUSTOMERS

Who is a Customer? Discuss.
• Do you agree with the following statement?
• If it weren’t for our customers we wouldn’t have a job
• If service is bad, customers will go elsewhere
• To serve customers is a part of my job and I want to
do a good job

What is the effect of poor customer care?

• Dissatisfied customers have the biggest mouths
• The average person who has a bad service
experience tells at least 9 others about it and 96% of
the customers quit.
• In comparison, people who receive excellent service
tell only 3 or 4 people about it. Do you agree?

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Good customer care/service
• Good customer care/service is how you treat your
customers and how they in turn relate to you and
your business
• A business can only grow if there is a good customer
relations
• This is because all activities in a business are geared
to satisfy the customer’s needs/wants
Examples of customer care commandment
• The customer is the most important person in the
business
• Always wear a smiling face when attending customers
• Save all customers promptly
• Promise what you can do and do all that you promise
to customers
• Be polite and considerate to customers
• Provide personalized attention and service to all
customers
• Attentively listen to and attend to all customers
• Treat customers big or small, rich or poor equally
• Tolerate all customers including difficult ones
• Make all customers your friends
• Keep customers information confidential
• Strive to understand customers’ needs and feelings
• Make serving a customer a duty, not a favour
• The customer is always right

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