Principles of Business

Study Sheet- Units 1 to 10

– Section 3: Establishing a Business

– Section 4: Legal Aspects of Business
– Section 5: Production
– Section 7: Logistics and Supply Chain
– Section 10: Technology and the Global Business
Environment
 Section 3: Establishing a Business
Entrepreneurship and Entrepreneurs
An entrepreneur is an individual who undertakes risks by investing money, time
and energy in establishing a business with the aim of making a profit.
The act or process of establishing a business and managing a business or
enterprise is referred to as entrepreneurship.
The entrepreneur must be willing to risk resources so that the idea for a
business or enterprise can become a reality and grow.
Characteristics of an Entrepreneur
1. Risk-taking: the entrepreneur must be a risk taker. He or she must be
willing to take the risk in investing wealth, time and energy.
2. Hardworking: must be willing to expend energy and work long hours.
3. Creative: Must be innovative and be able to generate ideas and seek to
bring those ideas to life.
4. Flexible: be willing to try new ideas and be adaptable in situations that
require change.
5. Persevering and Persistent: must be determined not to give up because
there may be setbacks from time to time, but the entrepreneur must be
able to handle these setbacks, reconsider their ideas and create a new one
if needs be.
6. Highly Motivated: the entrepreneur needs to work on is or her own
initiative without the need for others to her what to do.
7. Possess strong human relations skills: must be able to manage her team
and have an attitude that encourages others to join.
8. Goal oriented: the entrepreneur must be focused on the vision and keep
the vision and be driven to meet these goals.
9. Knowledgeable about the market and capitalize on opportunities
available: must know when to take advantage of opportunities for
increased profitability or when to get out of a particular market.
Why do people establish businesses?
 A desire for financial independence
 Self-fulfilment
 Self-actualization (reaching a peak goal in entrepreneurial aspirations)
 For increased income
 To have a greater control over work life

Functions of an Entrepreneur
 Conceptualizing: developing a business idea
 Planning: setting out a series of practical steps needed to bring the
business concept to reality
 Accessing funds: raising the capital needed to start the business
 Operating the Business: the running of the business efficiently and
effectively
 Evaluating the performance of the business: keeping watch on the
strengths and weaknesses of the business and dealing with problems
when they arise and taking advantage of the new opportunities.
 Bearing risks: make decisions and be confident in those decisions that
will impact the business
 Entitlement to the profits and losses of the business

The Role of the Entrepreneur in Economic Development

 Collaborating: the entrepreneur has to collaborate with other entities
within the economic environment that the business exists in to build the
economy.
 Providing goods and services: the business should not only focus on
making profit, but on how well it can satisfy citizens
 Creating Jobs
 Contributing to nation building: An entrepreneur must look beyond just
obtaining the objective of the business and also look to see how well the
business can contribute to Nation Building. There are numerous
opportunities that exists and needs that can be fulfilled (giving to charity)
in a nation in which the business is located.
Steps in setting up a business
1. Conceptualization: developing the concept of the business.
2. Research (Market Probe): finding out how many people are likely to want
the product or service, the strengths and weaknesses of the product, and
the difficulty in building a market.
3. Identification of Resources: these include
a. Financial resources: How much financial capital will be needed?
When will it be needed? Where will you get it from?
b. Human resources: how many employees will be needed? What
skills will they have?
c. Material resources: what materials will be needed?
4. Creating a Business Plan
5. Acquisition of Funds: the places where the fund will come from (loans
personal savings or friends and family)
6. Operation of the Business

Advantages and Disadvantages of Being an Entrepreneur

Advantages Disadvantages
– Experience of personal
– The business can be time
satisfaction
consuming
– Greater independence in
– There is no guarantee that there
making decisions
will be sustained demand for
– Experience business
the product offered
advantages, since a small
– There might be insufficient
business usually employs fewer
capital
person if any at all
– The entrepreneur might not be
– Being able to call upon family
able to respond to an increased
and friends when in need of
demand for goods and services.
help
Business Plans
A business plan is a formal document that describes the rationale for starting a
business and the steps involved in starting and operating it successfully.
A business plan will:
o Analyse how the business will operate to be successful.
o Provide a written document that is vital for securing a loan.
o Force the entrepreneur to think more seriously about all facets of the
business.
Reasons for Preparing a Business Plan
– To ensure that careful research was conducted to give validity to the
feasibility of the business.
– To appeal to potential investors.
– To source financing.
– To guide the operations of the business when making decisions.

Elements of a Business Plan

1. Executive Summary: consists of the details of the owners, name and
address of the business, aims and objectives of the business. It should be
enticing and engaging.
2. Operational Plan: this has information on production, purchasing,
selling, costs and prices. It also includes the physical necessities of the
business, such as equipment, facilities, suppliers and the physical
location.
3. Business Opportunity: this is all about the product or service that you
are creating. The goal is to explain why your business is exciting and the
problems that it solves for people.
4. Marketing Plan: a description of the potential customers and their
potential needs.
5. Financial Forecast: this is an estimation, or projection, of likely future
income or revenue and expenses, while a financial plan lays out the
necessary steps to generate future income and cover future expenses.
Feasibility Study
A feasibility study is preliminary research that provides an analysis, backed by
data, to find out if what is planned is really possible.

The provides the opportunity for you to think carefully about likely problems
and opportunities that exists and help you decide if you should continue with
the idea.

A feasibility study answers the following questions

– Should I really proceed with the proposed business idea?

– Is it really possible?
– Is the proposed business idea worth my investment, time and energy?
– Will people buy my product or service?

Why conduct a feasibility study?

 To provide a rationale for going into business.
 To provide an understanding of the main issues related to a business idea.
 It provides a lot of useful information for the business plan.
 It saves, time, money and undue anxieties.

When is feasibility study done?

It is done before the business plan is prepared. Once the feasibility study
confirms that the business idea is viable then the business plan can be
formulated.

It can also be conducted before the launch of a new product.

Sources of Finance
Personal sources of finance
 Family members could give them interest free loans and also not put a
time limit on the pay back of these loans
 Their personal credit card
 Once the business is up and running, they could now use the profits
retained from earnings to put back into the business

Advantages
– The entrepreneur does not
have to worry about paying
interest, as in the case of
loans.
– The funds are available
immediately, without
formalities.
– By investing personal
savings, the entrepreneur
shows confidence in the
business and this may lead
to encourage other investors
Disadvantages
– If the business fails, the
entrepreneur’s personal
savings are lost.
– Personal savings are not
enough to start some
businesses, unless the
entrepreneur is wealthy
– Raising outside forces the
entrepreneur to draw up a
careful business plan. In
using only personal savings
the entrepreneur may
neglect this step.

External sources of finance

 Bank overdraft: overdrawing on the amount in your bank account and the
overdrawn amount will be treated as a loan
 Bank loans: these loans require collateral
 Selling share capital: equity come from other investors. They put money
into the business as shareholders and hope to gain future profits.

Advantages
– Investors may be prepared
to wait for their returns
– Drawing up a business plan
to convince investors and
Disadvantages
– The original entrepreneur
loses some independence, as
there are now other part
owners of the business
 provides a reality check for involved
the business concept – Profits must be shared with
the other investors

Loans
Advantages
– The entrepreneur retains full
control
– If the business is profitable,
the entrepreneur benefits
from extra earnings
– Wit some loans there is a
grace period
– The entrepreneur must draw
full business plan
Disadvantages
– Interest usually should be
paid from the start
– If there is a default in the
payment of the loan, the
lender may seize what is put
up as collateral.

What is Collateral?
This is an item of value that is pledged as security for repayment of a loan, to be
forfeited in the event of a default.

If the entrepreneur does not keep up wit the interest payments or does not repay
the loan, the lender can take possession of the collateral.

There are different types of collateral:

a. Appliances
b. Houses
c. Motor vehicles
d. Money
e. Property
f. Shares
g. Stocks
h. Bonds
i. Cash surrender on life policies

Planning
There are three stages of planning:

a. Short-Term Planning (operational): done daily, weekly and monthly

during a year
 b. Medium-Term Planning (tactical): done to take effect within one to
three years
c. Long-Term Planning: established over the course of three to five years
long term planning will have an effect on both short- and medium-term planning

Government Regulations Regarding Establishing a Business

o Registration of Business
o Zoning: the process of planning for land use by a locality to allocate
certain kinds of structures in certain areas. A variance is an exception to
a zoning restriction which allows use of the land outside the requirements
of the zoning for that area.
o Securing permits to offer entertainment
o Following conditions for the use of billboards and signs
o Paying taxes to government
o Payment of fees to operate businesses
o Fiscal Policy: looks at government spending and tax policy
o Monetary Policy: looks at the measures put in place by the government to
manage the money supply in the economy.
o Consumer Protection Act: an act to provide for the promotion and
protection of consumer interest, in relation to the supply of goods and the
provision of services in order to ensure the protection of life, health and
safety of consumers and others, the establishment of a Consumer Affairs
Commission and for connected purposes.

There are international regulations that affect businesses everywhere, such as:

a. Copyright and intellectual property

b. Restriction in the use of chlorofluorocarbons (CFCs)
c. International transportation of hazardous materials
d. Money laundering

Factors Affecting Location

1. Geographical
2. Availability of raw materials
3. Infrastructure
4. Power and water
5. Telecommunications
6. Transport
7. Health facilities
8. Labour supply
9. Governmental regulation
10.Labour supply
11.Market pull/Closeness to market
12.Social amenities
13.Expansion potential
 Section 4: Legal Aspects of Business
Section 5: Production
Section 7: Logistics and Supply Chain
Section 10: Technology and the Global Business
Environment