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CHAPTER I

CONCEPT OF ENTREPRENEURSHIP

Objectives
By the end of this chapter the student should be able to:
 Clarify the concept of entrepreneurship
 Describe the characteristics of successful entrepreneurs
 Discuss the roles of SMEs in the economy
 Analyse the history of entrepreneurship in Zimbabwe

What is entrepreneurship?
Various authors define entrepreneurship differently, but their definitions somewhat amount
to the same meaning.

Appleby (1989) defines entrepreneurship as the process of bringing together creative and
innovative ideas and coupling these with management and organizational skills in order to
combine people, money and other resources to meet an identified need and thereby
create wealth.

Whereas Appleby defines entrepreneurship as such, Stoner & Freeman (1992) view
entrepreneurship as seemingly a discontinuous process of combining resources to
produce new goods and services.

According to Hisrich & Peters ( 2002), entrepreneurship is the process of creating

something new with value by devoting the necessary time and effort, assuming the
accompanying financial, psychic and social risks, and receiving the resulting rewards of
monetary, personal satisfaction and independence.

4 Major Aspects can be identified:

 The creation process.

 Devotion of the necessary time, resources and effort.
 Assumption of risks.
 Rewards.

Analysis of the first two definitions

Both definitions do not fall short of the fact that entrepreneurship is a systematic and
logical event as shown by the term ‘Process’. That is entrepreneurship is not a haphazard
activity. However, Stoner & Freeman have moved a step further in an attempt to
distinguish entrepreneurship from management as they look at entrepreneurship as a
discontinuous process. That is, it is a discontinuous phenomenon appearing then
disappearing until it reappears to initiate another change, unlike management which is a
continuous event.

The idea of ‘creative and innovative ideas,’ shows that the two definitions are complete. In
business, entrepreneurs should be able to come up with changes or new approaches,
means, processes, machinery, tools or techniques and new products in order to meet the

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needs of turbulent and dynamic market environments. When a new venture is being
contemplated on, risks arise involving uncertainties which require initiativeness and
process innovation.

Whereas Appleby clearly states, the idea of “management and organizational skills” in his
definition, Stoner & Freeman have remained silent about it. Organizational skills and
management are crucial for successful entrepreneurs. These relate to the ability of the
entrepreneur to plan, organize, lead and control the organizational members’ activities and
resources in order to achieve the stated goals of the enterprise. In other words, the
emphasis here is the ability to organize the other factors of production or resources into
creative combination for the purpose of producing goods and services in order to satisfy
human needs and wants profitably. The combination of resources is as follows:

Land Labour Capital

Entrepreneurship

Production of goods and services

For the business to be successful the ‘needs and wants’ should be identified first through
a feasibility study. Identification of needs and wants will indicate whether there is a
potential market or not. Thus, the viability of a business largely depends on an effective
feasibility study to determine the potentiality of the market. In this case, Appleby’s
definition of entrepreneurship is clear about identifying first the needs of customers, unlike
Stoner & Freeman’s. Thus, for Appleby, new goods and services should not just be
produced for unknown customers as this is tantamount to wastage of resources.

Moreover, Appleby’s definition appears to be more comprehensive than that of Stoner &
Freeman as he mentions the idea of ‘wealth creation’. The major aim of any business
entity is to create wealth or increase the owner’s equity by maximizing profit. Without
profit maximization or creation of wealth, the business will not survive.

What is an entrepreneur?

An entrepreneur is the originator (initiator) of an enterprise (economic/business

undertaking) in order to satisfy an identified need or want profitably. That is a person who
organizes and manages a commercial undertaking especially one involving calculated
commercial risks. In other words, an entrepreneur is someone who identifies
opportunities in terms of needs and wants of people and mobilizes resources such as
land, capital and labor to develop profit-making projects to meet the identified needs and
wants.

An entrepreneur can also be defined as a person who starts a new business, taking the
initiative and the risk associated with the new venture, and who does so by creating
something new or by using resources in unusual ways to provide value to his or her
customers.

Successful entrepreneurs are not gamblers but take calculated and moderate risks in
business. It should, however, be noted that entrepreneurs believe so strongly in their

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business ideas that they are willing to take full responsibility for developing them and to
assume most of the risks should they fail.

Some definitions of key terms:

Intrapreneur
“Intra-corporate entrepreneur”,meaning a person who pursues an innovation, becoming a
champion for its development, but does so from within the security of his or her
organisational position.

Innovation
The transformation of creative ideas into useful applications by combining resources in a
new or unusual ways to provide value to society for new or improved products, technology
or services.

Invention
The creation of new products, processes, and technologies not previously known to exist.

Creativity
The ability to bring something new into existence, conceiving the idea and articulating the
new knowledge.

Entrepreneurship distinguished from Intrapreneurship

Investors or entrepreneurs are innovative and creative but not all of them are able to come
up with innovations, and as such they leave innovations to innovative managers or
employees. An employee or manager who is innovative and creative in an existing
organization is known as an entrepreneur. Managers or employees who carry out
entrepreneurial roles are aware of opportunities and they initiate changes to take full
advantage of them.

The fundamental issue about the entrepreneur is that he/she has to have innovative ideas
and transforms them to profitable activities within an existing organization. In other words,
he/she is an initiator or originator of the commercial undertaking.

The word intrapreneurship is attributed to Gordon Pinchott an American who founded a

school for entrepreneurs to help managers from large corporations to take responsibility
for creating innovations and turning ideas into profitable reality.

Intrapreneurship focuses on innovation,creativity, transformation of ideas into profitable

venture while operating within the organizational environment etc

Entrepreneurship and Patriotism

In Zimbabwe, as elsewhere in the world, patriotic entrepreneurs play a pivotal role in

stabilizing and resuscitating the economy. In other words, across the globe, nations
largely depend on the entrepreneurs in both the informal and formal sectors. Statistics, in
Zimbabwe, shows that 3 000 000 (three million) people are employed in the informal
sector (which is about 75% of the employed people in Zimbabwe). This means that the
remaining 25% is shared between the state-owned enterprises and the private enterprises
in the formal sector. Apart from being the largest employer, the informal sector is the
largest foreign currency earner, among other crucial roles it plays to the economy.

Relationship between entrepreneurship and Patriotism

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Patriotism is the spirit of loyally supporting one’s nation. The major thrust of patriotism in
the context of entrepreneurship in an economy is to refrain from corruption and sabotage
or subversion. Thus, the relationship between entrepreneurship and patriotism is reflected
in the following roles that a patriotic entrepreneur plays to the nation that is the
entrepreneur should have the spirit of:

a) Creating jobs without oppressing fellow citizen workers i.e. the entrepreneur will be
expected to provide good working conditions and be worker – centered.
b) Charging fair and affordable prices
c) Producing quality products which compare with international standards
d) Conserving natural resources
e) Practicing good ethics and social responsibility in business and the community
f) Generating foreign currency without externalizing it or taking it to the black or
parallel market for exchange, but to the registered banks for official exchange
g) Generating government revenue through paying corporate tax.
h) Playing supportive role to the giant firms by being subcontracted in construction,
manufacturing and distribution
i) Reducing anti-social activities such as theft, robbery, murder, promiscuity by
creating employment for self and other citizens
j) Reducing rural to urban migration by creating employment opportunities in rural
areas

Entrepreneurial characteristics
In a new business, the entrepreneur is the most important person. The entrepreneur has
the responsibility to initiate, manage and see the success of the business. The success of
a business largely depends on the entrepreneurial or personal characteristics. The
following are some of the characteristics of successful entrepreneurs.

Action oriented
Successful entrepreneurs are action oriented, that is, they want to start producing results
immediately. The critical ingredient is getting off business and doing something. A lot of
people have ideas but they are a few who decide to do something about them now and
not tomorrow.

Success oriented/optimism
Successful entrepreneurs are optimistic, that is successful entrepreneurs do not have ‘ifs’
or ‘buts’ about succeeding. All they think about is how they are going to succeed and not
and not what they are going to do if they fail.

Perception of opportunity or opportunity seeking

Entrepreneurs should be able to see the unfilled areas or gaps in products, process and
application of services. That is successful entrepreneurs are able to see and act on new
business opportunities.
Moderate risk taking
Entrepreneurs are expected to be able to take moderate and calculated risks. This is
contrary to the stereotype that entrepreneurs are gamblers or high-risk takers.

Goal setting
In setting a new business, entrepreneurs are expected to have the ability to set goals
which are specific, measurable, achievable, realistic and time bound (SMART) basing on
their(ENTREPRENEURS) strengths, weaknesses, opportunities and threats (SWOT).

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Moreover, their goals must be consistent with their interests, values and talents in order to
achieve the. Their belief in the reality of their goals is the primary factor in the fulfillment of
those goals. Their plans may seem illogical to others but they are perfectly logical in the
context of their own personal values and desires.
Long-term perspective
Successful entrepreneurs can tolerate considerable amount of frustration and delay in
need gratification and they devote a lot of time and effort in goals that often yield profits at
a distant point in the future. Entrepreneurs should be able to accommodate hurdles,
difficulties and temporary failures in business.
Self-motivation/self esteem/self faith/self confidence
Effective entrepreneurs have solid and stable self-esteem and self-motivation which stem
from healthy feeling of self worth and self-acceptance. Entrepreneurs with a positive self-
image are basically satisfied to be the type of people they are. This self-faith is even
important than self-confidence especially when serious setbacks and failure occur.
Innovativeness/initiative ness/creativeness
Effective entrepreneurs have the ability to come up with new products, methods or
techniques of production and the accompanying machinery and tools.
Adventuresome ness
Successful entrepreneurs are adventuresome i.e. they are interested in testing out and
experimenting phenomena in an endeavor to come up with solutions to the needs and
wants of people.
Commitment
To succeed in business, you must be committed. Commitment means that you are willing
to put your business before almost everything else.
Some of the characteristics of an entrepreneur include; patience, friendliness,
hardworking, reliability, dedicated ness, responsibility, objectivity, rationality, honesty,
determination, courage, flexibility, imaginativeness and knowledge.

In a word, successful entrepreneurs must have appropriate personal characteristics,

business skills where necessary.

Roles of Small and Medium Enterprises

What is a small business?

A small business is generally a business that has low annual sales, few assets such as
buildings, equipment, vehicles, serves local markets rather than national and international
markets, has small number of employees and usually the owner is solely responsible for
the success or failure of the venture.

There are two kinds of small businesses that is survival and growth businesses
 Survival businesses are small businesses which allow owners to make a
living but the focus is on keeping the business alive e.g. backyard
businesses/home based businesses.
 Growth businesses are larger and allow owners to make more money e.g.
manufacturing operations in the industry.

Reasons for continued survival of small firms

 Small businesses are able to be more flexible, innovative and can react
changes much quicker
 Small businesses play a supportive role to the giant firms by being
subcontracted in construction, distribution, service and manufacturing
sectors
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  Small businesses serve small markets (market riches) where large firms do
not have interest
 Small firms receive government support through the Ministry of Small to
Medium Enterprises, ministry of Youth Development Gender and
Employment Creation and Ministry of Higher and Tertiary Education that is
they receive support in form of training and funds. Small firms also pay
lower taxes.
 Small firms supply their goods and services in smallest lots than giant firms
which usually supply in bulk
 Small firms offer specialized and personalized services to customers e.g.
electrical businesses.
 Small firms remain small usually during the initial phases of new technology
or innovation or product introduction as the firms will be studying market
reactions and modifying the products.
Roles played by small firms to the economy
 Small businesses create employment for the business owner as well as the
other fellow citizens (employment creation)
 Small businesses increase the range of goods and services available to the
local community (provision of goods and services) especially in rural areas
where goods and services were previously unavailable.
 Small businesses reduce anti-social activities such as theft, robbery,
promiscuity and burglary
 Small businesses reduce rural-urban migration as more goods and services
and employment opportunities become available in rural areas. This will
help to decrease the pressures on urban in terms of sanitary problems, theft,
robbery and promiscuity.
 Small firms contribute in the improvement of the standard of living of the
community
 Small firms contribute in stabilizing the economy through increased
employment, reduced prices and improved standard of living
 Small businesses help in indigenising the economy. If the economy is in the
hand so indigenous people, resources are not expatriated.
 Small firms help in the generation of foreign currency
 Small firms contribute in the production of quality and affordable products by
being in competition with giant businesses
 Small firms contribute to government revenue through payment of business
and employment taxes
 Small businesses contribute to the national income of the country (GDP –
Gross Domestic Products) and to the improvement of the balance of
payment

Government Entrepreneurship initiatives

Government entrepreneurship initiatives are efforts by the government to promote self-

sustenance, entrepreneurship and indeginisation in order to stabilize the economy. In an
effort to promote entrepreneurship and self-sustenance, the government established the
Ministry responsible for employment creation since 1980 i.e. Ministry of National Affairs
and Employment creation now Ministry of Youth Development, Gender and Employment
Creation. Moreover, the following institutions were introduced by the government to
enable potential entrepreneurs to establish themselves:
a) Small enterprise development corporation (SDECO)
b) Infrastructural Development Bank of Zimbabwe

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 c) Agribank
d) Affirmative Action Group (AAG)
e) Zimbabwe Cross Boarders Association
f) Zimbabwe Tuck shop Association

The government has also introduced the Ministry of Small and Medium Enterprises to
ensure that small businesses succeed. Black empowerment and indigenisation policy
was also put in place to promote entrepreneurship. Land redistribution exercise is a good
example to government entrepreneurship initiatives to promote self-sustenance and the
development of the country.

History of entrepreneurship in Zimbabwe

Introduction

Zimbabwe has, for centuries, had strong entrepreneurial abilities. There has been
evidence of all industries stretching from primary, secondary and tertiary industry.
Agriculture, mining, trade, manufacturing industries were there before the 19 th century.
The only argument could then be the scale and the technology level. In fact, the history of
entrepreneurship in Zimbabwe dates back to the civilization era. In the Mutapa and Rozvi
States, there were successful business initiators/ owners who became very wealthy. By
about 1200 to 1890 AD African Entrepreneurs on the plateau between Limpopo and
Zambezi Rivers became more advanced due to iron technology. The pre-colonial
entrepreneurs included the iron Smiths (boiler makers) or fitting and turning craftsmen
(mhizha), potters, farmers (hurudza), hunters (hombarume), among others. As an
evidence to disagree with the explanation of African history that the pre colonial African
societies were primitive and unchanging, and therefore any important changes were
brought by outsiders, archaeologists have found pottery and iron tools at Great Zimbabwe
and in other different parts of the plateau between Limpopo and Zambezi Rivers
(Zimbabwe).
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Entrepreneurship in the Primary industry

Farming
There were great farmers during the pre-colonial era. These were known, in shona, as
hurudza. These great entrepreneurs produced not only for their consumption, but for
trade and other fellow citizens. Crops like millet, rapoko, ground nuts, round nuts were
grown. That was crop farming. Animal farming was also popular. Great entrepreneurs
could own as many as 500 or more cattle. Goats and sheep were also kept. The cattle
were a form of wealth and could be traded or exchanged for jewellery and other
commodities.

Mining
Zimbabweans have been great miners way before the arrival of the British in the 1880s.
Entrepreneur – miners extracted iron ore from the ground . Mining rights were given by the
King and his advisors. The minerals mined included gold, copper, iron, for instance.

Entrepreneurship in the Manufacturing (secondary) Industry

There was a very successful value adding industry before colonization. The output from
agriculture and mining was processed. Great and useful items were made to serve the
needs of the people then.

Metallurgist and Iron smith (Mhizha)

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Entrepreneur – metallurgists crushed iron ore and smelt it with very hot fire. At Great
Zimbabwe there is still evidence of clay furnace, forge and bellow. This smelting
separated the metal from the stone. As the pure iron cooled, it hardened again, and the
village smiths could hammer it into shape of hoes, axes and knifes. This was a
revolutionary development in the way of life of Africans.

These were the most skillful technicians, engineers, and business people who had the role
of processing, the iron, cooper, gold into useful products. The farmers needed hoes
(mapadza), axes (matemo ) etc. The hunters needed spears (mapfumo), bows and arrows
etc. Jewellery such as golden necklaces were also needed by the wealthy people and the
royal family. These products could be traded to other kingdom for other products. The
ironsmith were usually very wealth. These skilled artisans were entrepreneurs of the time
in metallurgy.. The iron smith entrepreneurs were weapon and tool makers. The
weapons and tools included arrows, axes, knives, and hoes, among others. At first, iron
was used only to make light arrow heads and jewellery. Bigger items such as hoes and
axes took much more time and labour

Entrepreneur – village smiths often paid tributes to their Chief or King with hoes, axe
heads and other items from iron.Hoes were used for special payments such as lobola.

The use of iron made it easier to hunt wild animals, till land and undertake domestic tasks.
People who lived near deposits became entrepreneurs in mining, smelting, and fabrication
(boiler making) and traded their products for other goods.

Entrepreneur-Potter
Some African Entrepreneurs were involved in pottery designing and making clay pots.

Brewing Industry
Millet, rapoko, and sorghum were processed and brewed into different beer flavours. As
it is today, after work villagers would gather and drink. This industry had strong
competition and successful entrepreneurs were known for exceptional brews and good
customer care

Colonisation and its effect on African entrepreneurship

Colonization negatively affected the Zimbabwean entrepreneurs and/or industrialists as

well as their governance.

Wars
When the British arrived, major wars were fought. These are the War of Dispossession or
Anglo-Ndebele War :1893-4;First Chimurenga:1896-7; and the 2 nd Chimurenga:1966-79.
These wars disturbed the smooth running of entrepreneurial activities by blacks in
Zimbabwe in so far as farming , mining, hunting ,among others, were concerned.

Farming

The land Issue

 When the British arrived they introduced the reserve system and translocated the
native Zimbabweans to infertile dry inhospitable areas .

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 In 1894 the first reserves were set up in Shangani and Gwaai and this affected the
entrepreneurs in farming.

 After the defeat of the Ndebele, the settlers seized their 6 000 acres displacing many
natives and those displaced became fulltime labourers or squatters.

 The settlers started ill treating the Ndebele like they were doing the Shona.

 To solve their labour problems, the company introduced forced labour. The chiefs
were instructed to recruit able bodied men and hand them over to the BSAC as
labourers- “chibharo”. The Shona and Ndebele so enslaved ran away into the hills
to escape. The presence of white settlements contrary to the agreements entered into.

 Again this did not please the Ndebele who wanted to claim their ancestral land back as
in the reserves there was food shortage and starvation at times.

CATTLE

 Livestock was seized to force men to go to work for the settler

 Soon after the defeat of the Ndebele in the Anglo Ndebele war, the whites confiscated
the Ndebele cattle numbering about 250 000.

 This drastically reduced the Ndebele herd and the Ndebele wanted their cattle back as
it was a sign of prestige.

TAXATION
For example the Hut Tax of 1903 was enacted to raise revenue for settlers and to force
black men to go and work for the white men leaving their entrepreneurial activities.This
was also imposed to indirectly force the blacks to work in order to pay tax and it was
meant to increase the company income.
The Native Reserve Order In Council: 1898.
The Act created reserves in dry inhospitable areas. This affected the entrepreneurial
activities of blacks in agriculture. The Act also effectively removed all native chiefs who
were anti- settlers and replaced them with puppet settler administrators.
Land Bank acts: 1912.
The land bank act provided new white settler farmers with free tillage for five years and
the same period as grace before commencing to repay loans from the state owned
Land bank.
The Morris Carter Commission:1925.
Divided the whole country into agro-zones based on rainfall patterns from the highest
rainfall region 1 to the lowest rainfall region 5. Natives were trans- located to regions 4
and 5.
The Land Apportionment Act: 1930.In 1930 whites who numbered 50 000 were
allocated 49 000 000 acres of prime land while blacks who numbered 1 000 000 were
allocated 28 000 000
Acres of the worst land in regions 4 and five. The translocation of blacks greatly
affected their farming entrepreneurial activities and was accompanied with untold
violence and starvation and malnutrition became endemic.. The Land Apportionment

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 Act of 1930 confirmed and legalised the displacement of Africans that had been
ongoing earlier.

Up until 1906, ninety percent of Southern Rhodesia’s agricultural produce came from
black farmers and many whites did not like this state of affairs. As a result, the Rhodesia
Native Labour Bureau (RNLB) stopped blacks from competing with whites and between
1908 and 1915, 1.5 million acres of the best land was taken from blacks and given to
whites. New boundaries were created to exclude fertile high rainfall areas from newly
created reserves. The latter were located in semi arid areas. Blacks in regions 1, 2 and 3
were made to pay higher grazing fees and taxes. Since many could not pay they were
removed and settled in reserves which were situated far away from markets and rail and
tarred motor roads. By the 1920s, 65% of the black population had been forced into
reserves. This led to cycle of poverty among Africans which persists up to today -2004.

The Land Husbandry Act: 1951.

The Act barred any African family from owning more than five herd of cattle or eight acres
of land in the communal lands.

The Tribal Trust Land Act:1965.

The Act segregated the ownership of land between white areas and black areas. Natives
could only occupy land in communal lands without holding title to it. In Towns natives
could only lease property and no black man could own a house in town until after 1980.

The Land Tenure Act:1969.

The act divided the land on racial lines and designated the best 45 000 000 acres as
European land and shared among the 250 000 whites and the worst 45 000 000acres was
designated as native land to be shared by the 5 000 000 blacks. The act also barred the
races from encroaching in the other race’s land.
Mining
In mining , pieces of repressive legislation were put in place by the British upon their
arrival. For example Minerals and Mining Rights laws restricted the blacks from carrying
on with their entrepreneurial activities in mining. In fact , one had to secure a prospectus
license for mining of which it was difficult for the blacks.
Hunting
Laws were also put in place in hunting. Wildlife Parks and Game Parks were created. It
became illegal to hunt in the parks. One would be treated as a poacher if found in the
parks. Thus , the blacks’ entrepreneurial activities were affected by such parks.

Post Colonial Era

During the colonial era black entrepreneurs were so limited. The reason being inability by
blacks to access means of production and suppressed talent. Technical Education was
also biased. From 1980 we saw the cropping of great entrepreneurs from the black
populace. There were business Start ups in the transport sector, retailing, manufacturing,
farming, and many industries.

The government supporting schemes has been the major driver facilitating entrepreneurial
activities. Sources of funds be obtained from AGRIBANK, SEDCO, etc
From 2010 the Indigenization and Empowerment Act created a further empowering tool
leading to the starting up of business in areas like mining.
Zimbabwe remains one of the African countries with potential for a vibrant entrepreneurial
activities.
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 CHAPTER 2

BUSINESS ENVIRONMENT IN ZIMBABWE

Objectives
By the end of this unit you should be able to:
 Describe the entrepreneurship environment in Zimbabwe
 Evaluate how the macro and micro environmental factors affect entrepreneurs
 Discuss entrepreneurial survival and growth strategies
Entrepreneurship environment
Entrepreneurship environment relates to the factors or variables which directly or indirectly
affect the activities of the entrepreneur either positively or negatively.

The environment is split into two. That is macro and microenvironments.

Macro – environment
This is also known as external environment. This environment consists of all those
factors, which indirectly affect the business activities of the entrepreneur either positively
or negatively. The external environment involves PEST analysis and natural phenomena.
PEST stands for Political, Economic, Social and Technological environmental variables.
Political Environment
Political factors may provide initiative situations towards the success of the entrepreneur
especially where the political climate is not stable. Political disturbances may result in the
closure of business either permanently or temporarily. Extreme political disturbances or
instability such as tribal or civil conflicts may cause permanent closure of enterprises.
However, this depends on the nature of the business of the entrepreneur. Some political
climates may promote the success of the entrepreneur. At first glance, it would seem that
domestic politics should pose no threat and that a company should have minimal
problems at home. This is often not the case. Although a company’s major political
problems usually derive from political conditions overseas, it must still pay close attention
to political developments at home. Knowledge of the philosophies of all major political
parties within the country is very important since any of them might come to power and
alter prevailing attitudes. It is important to know the direction each is likely to take for
example in Britain the Labour party has traditionally tended to be more restrictive on both
foreign and home trade.
Economic nationalism is another factor which leads to an unfavourable business climate
e.g. Some other organisations are said to be sponsoring foreign media which are said to
be anti-government. If the entrepreneur is not nationalistic in his or her business activities
he/she may lose his/her business license.

Political sanctions form yet another crucial factor that may hinder the entrepreneur’s
progress in business for instance in Zimbabwe there is fuel and foreign currency crisis due
to political sanctions based on the allegations by Britain and America that there is lack of
rule of law, democracy and violation of human rights. South Africa also faced political
sanctions based on allegations that there were apartheid, foreign currency crisis and fuel
shortage can grossly affect the entrepreneur’s business activities negatively.

Economic environment
The macroeconomics focuses on aggregate economic conditions that may affect the
business either positively or negatively e.g. inflation, exchange rates, lending or interest
rates, and unemployment.
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Macro-economic issues set the environment within which a business operates. Because
of this, entrepreneurs should keep abreast with developments in the macro-economic
environment to enable them make informed decisions. Thus, a full understanding of those
issues enhances the ability of an entrepreneur to make sound business decisions and to
avoid surprises.

*For instance, inflation is the general uprise of the prices of commodities. If the prices of
commodities rise it means that the entrepreneur can now afford to buy less supplies or
raw materials or producer goods than he/she used to. That is, his/her business is being
affected negatively. If the inflationary rate drops, it means that the entrepreneur can now
buy more producer goods.

Exchange rates are yet another factor of macroeconomics which may affect the activities
of the entrepreneur. Exchange rate defines the price for getting foreign currency. If the
exchange rate rises, the entrepreneur will afford to buy less of the foreign currency and
vice versa. Foreign currency is essential for the purchase of foreign products such as
spare parts, ingredients, raw materials and fuel.

Lending rates are an important aspect of macroeconomics. Lending rate is the price of
borrowed funds or a loan. This is also known as interest rate. If the loan interest rises, it
means that it is expensive to get a loan for investment and vice-versa.

Thus, given these macro-economic issues, the entrepreneur is expected to have a

predictive mind for efficient management of the enterprise.

Microeconomics is another fact of the economic environment which focuses on the

economic forces that influence the decisions made by individual consumers, firms and
industries. These decisions are often made in an instinctive way, yet consistent economic
forces underlie them. Entrepreneurs are encouraged to keep track of the trends of the
behaviours of individual consumers, firms and industries in business as their
(entrepreneurs) investment activities are based on them.

Social environment
This relates to the cultural values, beliefs and artifacts of a group of people or society.
These determine the consumption patterns of consumers. Social environment also
involves the religious values. Thus, the products that people buy, the attributes they
value, and the opinions they have are based on culture. Food consumption, acquisition
and preparation are interrelated with other aspects of culture such as religious values and
beliefs. For example, Christians consider pork unclean. Thus, to the entrepreneur it is
evident that customer’s actions in the society are shaped by their lifestyles and behaviours
which stem from their society’s culture. That is people of different social classes have
different lifestyles and bahavioural patterns.
Language is another aspect of culture which has influence on the entrepreneur’s activities.
Thus, a successful entrepreneur must achieve expert communication. This requires a
thorough understanding of the language of the customer’s language as well as the ability
to speak or write clearly.

Technological environment
Today, we are living in a global village which requires entrepreneurs to move with
technological breakthroughs and changes. Entrepreneurs are expected to be well versed
with Internet systems for effective communication with suppliers, customers and the
publics in general.

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Technology relates to the processes, techniques, tools and machinery used in business to
produce or offer products to customers. Poor technology results in inefficiency and
ineffectiveness. Thus, the advice to the entrepreneurs is that they should keep tack of the
technological trends in the business if they are afraid of being out-competed by their rivals.

Natural phenomena
These are the situations or conditions which can adversely or positively affect the
entrepreneur’s activities. These may include natural disasters such as road accidents, fire
outbreaks, floods, drought, earthquakes, good rains and natural resources such as
minerals. Entrepreneurs are advised to study the natural phenomenal trends as these
provide threats or opportunities to the business.

Microenvironment
This relates to those conditions which directly affect the entrepreneurial investment
activities either positively or negatively. The microenvironment is made up of employees,
providers of finance, suppliers, customers and government among others.

Employees
These are the people who work for the entrepreneurs and those who are likely to work for
him/her (potential employees). People today have wider expectations of the quality of
working life including: justice in treatment, democratic functioning of the organization and
opportunities for consultation and participation, training in new skills and technologies
effective personnel and industrial relations policies and practices and provision of social
and leisure facilities. Entrepreneurs should give due consideration to the design of work
methods and job satisfaction, make every reasonable effort to give security of
employment. If employees are not treated well, the entrepreneur will lose them to his/her
rivals.
Providers of finance
These are the financial institutions which supply financial services to the entrepreneurs.
Entrepreneurs need to consider the interest or lending rates together with the
accompanying finance changes fixed on them by the financial institutions as these costs
of financial services have adverse effect on their investment activities. Apart from that, the
entrepreneurs also need to consider return on investment in terms of the funds which they
may need to invest with the financial institutions. On the other hand, the entrepreneurs
are expected to prove their credit worthiness and credibility by paying back the borrowed
funds (loans) within the contractual time frame as this will enable the entrepreneurs to
even receive preferential treatment and favour in times of need.

Customers
To many entrepreneurs, responsibilities to customers may be seen as no more than a
natural outcome of good business. Customers are people who make the business
successful. The entrepreneurs need to understand the needs and wants of customers
first before production activities take place in order to avoid wastage of resources by
producing goods and services for unknown customers. Customers must be put first by
providing:
 Good value for money
 The safety and durability of products
 Prompt and courteous attention to queries and complaints
 Long-term satisfaction e.g. serviceability, adequate supply of products and
replacement of parts
 Full and unambiguous information to potential customers
If customers feel that they are ill treated, the entrepreneur loses them to the customer-
driven enterprises.
14
Suppliers
These are firms that supply the entrepreneur with raw materials. These can affect the
entrepreneur’s activities adversely or positively in terms of prices, reliability, quality,
delivery services and convenience among others. Thus, a supplier of competitive prices,
quality, delivery services and convenience must be chosen. On the other hand, the
entrepreneur should also prove creditworthiness by settling accounts within the
contractual time frame if future deferred payment business transactions are to be upheld.

Government
Entrepreneurs should of course, respect and obey the law even where they regard as not
in their best interest. If certain laws are not followed the entrepreneur’s business may be
forced to closedown but what is debatable is the extent to which organizations should co-
operate with actions requested by the government. Some examples are restraint from
trading with certain overseas countries and the acceptance of controls over imports or
exports, price controls designed to combat inflation e.g. limits on the level of wage
settlement and assisting in the control of potential social problems such as advertising and
display of health warnings.

Competitors
These are the rivals of the entrepreneurs who produce substitute products or the same
products. The entrepreneur must keep track of the price levels, technology, quality, and
delivery services, among others of the competitors as these may pose negative impact on
the acceptability of the entrepreneur’s products by customers.

Entrepreneurship Strategies

Growth strategies
A. Intensive Growth Strategies
According to Ansoff’s product market expansion grid, a company is exposed to
growing dimensions under intensive growth

1. Market penetration
- Gaining more market share with the current company market products in their
current markets.
- The strategy can be implemented as follows.
a) promoting more usage of the product
b) attracting competitors’ customers
c) convincing non users to use the existing product

2. Market development strategy

- company efforts to find or develop new markets for its current products
a) This can be done by identifying potential uses in the current sales area
where interests for a product or services can be stimulated.
b) Selling new products to existing or current markets.
c) Seeking additional distribution channels in its present location.

3. Product development
- in addition to penetrating and developing markets management should consider
new product possibilities
- Company develops a product’s new features; different quality levels and also
tries to come up with a technological breakthrough a potential product.

15
B. Integrative Growth
- business sales and profits can be increased through
a) Backward integration
b) Forward integration
c) Horizontal integration

Ansoff’s Growth Strategies Grid:

Current products. New products.

Market penetration Products
Strategy development strategy Current markets.
Market Diversification
Ne development strategy w markets.
strategy

Ansoff’s Growth strategies

1.market penetration
a) market development
b) product development

2. Integrative growth
a) backward integration
b) forward integration
c) horizontal integration

3. Diversification growth
a) Concentric diversification
b) Horizontal
c) Conglomerate
a) Backward Integration – is when a company acquires one or more of its suppliers to
gain more control and generate more profit.

b) Forward Integration – is when a company acquires some wholesalers and retailers

especially when they are they are highly profitable.

c) Horizontal Integration – is when a company acquires one or more competitors

provided the government policies allow e.g. monopoly, oligopoly.

Diversification Growth.
- Is the most favourable growth strategy if good opportunities can be found outside the
present business.
- An opportunity is one in which the industry is highly attractive and company has the
mix of business strength to be successful.

Types of diversification
a) Concentric diversification
- Holds that the company could seek new products that have technological and or
marketing synergies with the existing product lines even though the new products
themselves may appeal to different groups of customers.

b) Horizontal Diversification

16
 - holds that a company can produce totally unrelated products using different
manufacturing methods or processes
c) Conglomerate Diversification
- Holds that a company seeks new business that have no relationship to the
company’s current technology products or market suppose a company is producing
fax machines and now seeks to produce furniture
Other Entrepreneurship strategies
- a strategy is a method used to achieve a goal
1) Franchising
- A system of distributing products/services through associated resellers.
- The franchiser gives rights to the franchisee to perform or use something that is the
property of the franchiser
- The objective is to achieve efficiency or profitable distribution of products/services
within a specific area
- Both parties contribute a trademark reputation, known products, managerial know-
how produces or equipment.

17
Advantages to the franchiser Advantages to the franchisee

- increased distribution
- less risk with market tested
- some operating costs are
products
transferred
- pre established promotion
- marketing/distribution costs
and advertising programs
shared
provided
- production accepted by
- Financial and may be
locals when local franchise
provided.
ownership is held
- Credit available in buying
- Retains quality control of
inventory and supplies
products is a franchise
- Decision making assistance,
agreement
management procedure and
training

Disadvantages to the franchiser Disadvantages to the franchisee

- control of franchisees are far - gives up freedom in

away management decisions
- expenses of training and - obligatory purchases
keeping on travelling for franchiser even if better
supervisor prices elsewhere are
- risk in credit extensions available
- have become expensive

2) Buying an established business

Advantages - inherited clientele may not

- a business with a goodwill
increases the likelihood of
successful operation
- has a proved location for
successful operation
- has an established clientele
- its inventory is already on
the shelves
- Its equipment is already
available and its resources
and capabilities are known.
be the most desirable and
changing the firms image is
usually difficult
- procedures of the former
may be difficult to follow
- renovation expenses
- purchase price may not be
satisfying

Disadvantages
- the buyer inherits any ill will
of the existing firm
- certain employees may be
inherited which are not
assets to the firm

18
 CHAPTER 3

BUSINESS ORGANISATIONS

Objectives
By the end of this unit students should be able to;
 discuss the various types of business organizations in Zimbabwe with
regards to their formation, operations and legal aspects.
 apply the principles of management in running businesses
 describe the procedure for business registration
 outline the advantages and disadvantages of each form of business.
Starting a business
So many people aspire to be business owners, but several questions have to be
considered before deciding to start a new business. This chapter is going to
focus on the various forms of businesses with regards to their formation,
operation and legal aspects in Zimbabwe.
Forms of business
A form of business relates to the legal status of the business. The common forms
of businesses in the private sector are;
 sole proprietorships
 partnerships
 co-operatives
 limited companies
1Sole proprietorship/sole trader
It is a form of business where one person or family provides the permanent
capital and in return retains full control of the business and enjoys all profits. It is
possible that the sole trader employs other people but normally family labour is
provided.
Capital contribution
A sole trader must accept that ultimately source of capital for his business is
himself (personal savings- e.g. from salaries, pensions etc) and or borrow from
friends and relatives. Any loan capital he raises will be repayable by him and the
only security he can offer must of necessity be from his own assets. Thus little
capital may be raised.
Formation
It is simple to form and there are few legal requirements. One needs to develop
the purpose of the business and then apply for a Trading license to the local
authority stating the purpose of the business. Once the trading license is issued,
one needs to get registered with the relevant ministry e.g. if one wishes to start a
tuck-shop, he is required to register with the ministry of Small to Medium
Enterprises and Industry and Commerce.
Liability
The business has no separate existence from its owner. Business property and
personal property are inseparable i.e. if the business fails and the proprietor is
unable to pay its debts (which are his debts) he faces the threat of insolvency
and the loss of his property whether or not it is concerned with the business.
Thus, the liability is unlimited; creditors can go on to sell personal assets of the
owner to cover up for the business debts.
Management and control
The business is managed by the sole trader himself although he may hire
someone. Nevertheless, the owner is responsible for the day to day running of
the business.
Continuity of business
The business lacks perpetual succession i.e. it lacks continuity. The death of the
owner or active person may lead to collapse.
Advantages of setting a sole proprietorship
1. decision making is done quickly as the sole trader does not have to
consult anyone.
2. profits are not shared, thus, the sole trader enjoys all the profits by
himself.
3. there is privacy of business affairs- no need to disclose business affairs.
4. it is simple to set up because there are few legal formalities involved.
5. there is freedom in decision making to the owner.
6. there is personal control of staff and customers.
7. little capital is required to set up as compared to limited companies.
Disadvantages
1. it may be difficult for the sole trader to expand because of lack of capital.
2. most of them cannot raise adequate capital since cannot access loans
because of lack of collateral security (limited sources of finance).
3. decision making and management may be inefficient and ineffective due
to lack of consultations as it is a one man band business.
4. success depends on the owner’s energy and fitness.
5. the owner is fully responsible for decisions and debts of the business.
6. lacks continuity in the death of the owner.
7. it can be difficult for the sole proprietor to leave the business as there is no
one left to run the business in their absence.
8. little capital is raised.
2 Partnerships
It is a commercial undertaking set up and run by at least two people and not
more than twenty, with the object of making profits and share profits and losses.
Capital contribution
The partners who are the owners of the business contribute capital. A
partnership makes it possible to share the risks of the business. (in exchange for
sharing the profit) with one or more people who are prepared to contribute capital
or services. Raising of capital present greater opportunities than for a sole trader
as new partners (bringing new capital with them) may be admitted when
additional capital is required, but it must be appreciated that a partnership does
not offer potential investors the attractions of transferable shares and perpetual
succession.
Formation
Any two people and not more than twenty can form a partnership as long as they
contribute capital towards the project. Persons wishing to form a partnership may
agree verbally or orally. However, it is a good idea to develop a partnership deed
in case of future.
Partnership deed
It is an agreement between partners concerning their business. It contains the
following;
a) nature of businesses
b) date of commencement
c) amount of capital each partner brought into the venture
d) method by which profit and losses are to be shared
e) voting rights
f) the role of each partner in the business
g) duration of the partnerships and methods of dissolving the partnership
h) arbitration procedure if partners cannot reach agreement
i) authority to sign contracts etc
After the partners have agreed, they may proceed to apply to the local authority
for a trading license. Once the business license is issued, the partners need to
register with the relevant ministry e.g. if partners wish to set up a phone shop,
they need to register with the Ministry of Transport and Communication. This
completes the registration process.
Management and control
Partnerships are controlled by an Act of Parliament called The Partnership Act.
Each partner is a manager of the business although the partners may choose a
partner with managerial expertise or hire outsiders to do the job. Partners are
expected to consult each other when it comes to management and decision
making. There are two kinds of partnerships;
i. Active partners
They take active role in the day to day management and decision making in
the business other than just contributing capital.
ii. Sleeping/ Dormant partners
They just contribute capital and do not take an active role in the management
and decision making in the business.
Nevertheless, each partner is the agent of the partnership. For this reason, the
law imposes on partners a duty of the utmost good faith towards each other.
Liability
The sharing of the losses of the business is effective only between the partners
since each partner is jointly and severally liable to third parties for the full debts of
the business and the only way of limiting this liability is by setting up a limited
partnership in which the dormant partner takes no part in the running of the
business. If the business becomes insolvent, the personal property of the partner
is at risk because the sequestration of the partnership estate necessarily involves
the sequestration of the personal estates of all the parties other than the dormant
partners. However, if the dormant partners take active part in the running of the
business, all protection is forfeited or lost and the dormant partner is then liable
to the same extent with the active partners.

The active partners are liable in full to the creditors for the business debts.

Continuity of business
There is lack of continuity if one partner dies or is incapacitated, i.e. a partner,
whether active or dormant who wishes to withdraw cannot simply sell his or her
stake and technically his withdrawal involves a dissolution of the partnership,
although by agreement of all concerned the dissolution can be arranged on the
basis of retiring partner selling his stake to a new partner.
Advantages of partnerships
1. better decisions may be made than the sole trader since partners consult
each other and share experiences and ideas.
2. liability, losses and risks are shared unlike in a sole proprietorship
3. more capital may be contributed.
4. it is easy to form since formalities are few.
5. there may be division of labour due to diversity of expertise.
Disadvantages
1. partners have unlimited liability except for the limited partners or sleeping
partners.
2. decisions may take long before they are implemented as partners need to
consult each other.
3. a partnership lacks continuity.
4. profits have to be shared.
5. one partner can make contracts on behalf of others which may lead to all
partners losing their capital .
6. there may be conflict of interest between partners.
 7. cant appeal to the public for capital, therefore, cant raise huge capital
necessary for a big business concern.
3 Co-operative
Formation under co-operatives act chapter 24:05
This is a form of business where at least ten members have a voluntary
agreement to contribute capital and work together as equals towards the
achievement of a stated common goal.
Capital contribution
Every member contributes capital; therefore, it is possible to raise large amounts
of capital. Membership is open to anyone and every member must each have at
least one share.

Organization and management of registered societies

Members of the co-operative elect a management committee. Subject to the co-
operatives Act, every member has the right to attend and vote at all general
meetings. Notice of general meetings should be given in writing or any other way
decided at the first general meeting or specified in the by-laws.
Objects of societies
Every society shall in its operations have regard to the need to attain the
following objects;
 promoting the economic and social interests of its members in accordance
with government policy
 performing any economic or social activity in the interests of its members
 participating in the overall economic and social development of the nation
by increased production, improvement of supply and marketing channels.
Co-operative principles
Every registered co-operative shall operate in accordance with the following
principles;
 its membership shall be voluntary and open to every person who meets
the requirements for membership in terms of society’s by-laws
 one member one vote in general meetings irrespective of the number of
shares held by a member
 services to be rendered by the society mainly to its members
 surplus shall be allocated to the reserves or subject to the Act, distributed
or credit to members only in proportion to the business done with the
society
 education and training facilities should be provided to members and
prospective members so as to improve their economic well being.
Formation and registration
A register of Co-operative societies is maintained by the Registra of Co-ops,
which shall enter all such particulars in relation to the registration and provisional
registration of societies and their by-laws.
Any society which has as its object the promotion of the economic interests of its
members or other societies in accordance with co-op principles may be
registered with the registrar of co-ops.
Provisional registration process of a co-op
a) enter in the register
i. the name of the society
ii. the economic sector in which it is to operate
iii. the terms and conditions, if any, imposed on registration
b) forward to the society
i. a certificate of provisional registration
ii. a copy of the by-laws of the society provisionally registered by him
iii. a copy of the Co-ops Act and regulations.
 c) direct the society to take all necessary steps to comply with the
requirements for registration within two years.
If the registra is satisfied that the society which applied for registration complies
with the requirements for registration and that its proposed by-laws are in
accordance with the Act, he shall
a. enter in the register
i. the name of the society
ii. the economic sector in which it is to operate
b. forward to the society
i. a certificate of registration
ii. a copy of the by-laws of the society as registered by the registra
iv. a copy of the Act and any regulations made in terms of the Act and
c. cause notice of the registration to be published in the gazette.

Every society shall on registration be a body corporate with perpetual succession

and in the name under which it is registered, be capable of holding property,
entering into contracts, of suing and being sued and subject to the Act, of
performing all other acts that corporate bodies may by law perform
Examples of Co-operative Societies in Zimbabwe
- Mashco
- Farmers co-op
Advantages of co-operatives
1. losses are shared amongst the members unlike in a sole trader
2. enjoys limited liability if formally registered
3. source of living for most people
4. better decisions can be made since members consult each other
5. more capital can be raised because more members are involved
6. benefits of economies of scale, e.g. . bulk buying
7. members can afford assets as a group beyond the reach of
individuals.
Disadvantages
1. conflict of interest between members may arise
2. profits have to be shared between members
3. individual members lose their independence as they are bound by the
rules and decisions of the co-op.
4. slow decision making because of consultations.
5. management is often underpaid and unskilled
6. after the initial enthusiasm has worn off, members may not work hard as
for the co-op as they would for themselves
7. profits are shared in proportion to one’s spending in the venture i.e. the
more you buy the more dividends you may get.
4 LIMITED COMPANIES
Before looking at the different types of companies and their suitability for different
types of business, it will be as well to consider the characteristics that are
common to all companies created under the Companies Act Chapter 24. Section
18(2) of the Act sums up the characteristics by saying that from the date of
incorporation a company becomes a body corporate with perpetual succession.
 As a corporate body accompany is a separate legal person in the eyes of
the law, separate from its shareholders and its directors
 Its assets and liabilities are equally separate from those of its members
and directors;
 So the members may limit their own liability (s8)and
 The company may incur debts which, in the absence of fraud, neither the
shareholders nor the directors are liable to pay.
 This fact alone makes a company particularly suitable for business involving
an element of risk and gives it opportunities for raising capital that are not
open to a sole trader or a partnership, The company can borrow on the
security of its own assets, can borrow from shareholders and directors. It can
attract equity by offering shares on which dividends are payable out of the
business. There is also the element of perpetual succession; a change of
members have no effect on the legal personality of the company. Transfer of
shares is simple, which is an attraction to investors
There are two types of companies
1. Private Limited Company ((Pvt) Ltd)
A (pvt) ltd company is defined by the company’s act as one which by it’s
articles restricts the right to transfer its share, limits the number of its
shareholders to fifty (50) excluding employees and prohibits any invitation
to the public to subscribe for its shares and debentures.

Capital contribution
Capital is raised by selling shares privately e.g. to family and friends. Shares are
not advertised or traded on the Zimbabwe Stock Exchange (ZSE) market.
Liability
Shareholders enjoy limited liability- they do not pay business debts from their
private personal property if the business fails.

Management
Shareholders appoint directors who run the company on their behalf. Thus, the
directors are responsible for the day to day running of the company but are
accountable to the shareholders.

Formation
Any two people and not more than fifty can form a (pvt) ltd company. In order to
become a legally registered (pvt) ltd company, the promoters must prepare the
following legal documents and send them to the registra of companies. The
following should be observed;
1. Lodge an application to the Registra of Companies by way of filling in the
following documents and submit them to the registra of companies.
a. Memorandum of Association
It sets out the company’s constitution i.e. how the firm will relate with
the outside world (external stakeholders). It thus contains the following;
 Company name
 Its registered office and address
 Objectives of the company- the purpose for which the
company has been formed
 Statement of limited liability
 Maximum number and value of shares
b. Articles of Association
Contain the internal rules of the company. These include
 Appointment of directors
 The rights and obligations of directors
 Procedures for calling for a meeting
 Borrowing powers of the company
 Names and addresses of shareholders
 Procedures for selling shares
 Procedure for calling for board meetings
 Distribution of profits
Provided its articles of association comply with s29(1) and it complies with those
articles s(30), the company is entitled to a number of privileges which include;
 Its name must end in (‘private’) limited s9(1) which may be shortened to
(pvt) ltd for business purposes
 It may commence business and exercise its borrowing powers
immediately upon registration without using a prospectus
 Need not file its annual accounts, auditor’s report or directors report with
its annual returns
 Need not hold a statutory meeting or issue a statutory report
 Need not appoint an auditor
 Etc
After the two documents have been complied and send to the registra of
companies, the registra will carry out a name search to find out if
a. The name is not being used by another company
b. The name is not derogatory
c. The name does not provoke others

If satisfied the registra will issue out a Certificate of Incorporation- which

establishes the company as a separate legal entity and the company can
commence business soon after registering with the relevant ministry
Advantages of pvt ltd
i. Enjoys limited liability
ii. Enjoys perpetual succession
iii. More capital can be raised from the shares sold to at least two persons
iv. Limited liability attracts capital since property is safeguarded
v. The company can own assets and properties
vi. Since management and control are separated, experts can be hired to run
the company
vii. The affairs of the company are private and accounts need not be made
public.
Disadvantages
i. Complex legal formalities are involved in the formation
ii. Shareholders have less direct control over the business
iii. Conflict of interest may arise between shareholders and management
iv. The shareholders can only transfer share with the consent of other
shareholders, thus, restricting free share movement.
v. Not allowed by law to advertise shares and so cannot raise a lot more
capital like a plc

2 PUBLIC LIMITED COMPANIES (PLC)

It is formed by at least two people but with no upper limit on the number of
shareholders. Being entitled to none of the privileges of a pvt ltd company, a PLC
is not only more expensive to run than a pvt ltd company, but offers greater
protection to shareholders and is therefore appropriate for a business which
needs to raise capital from the public. By obtaining a stock exchange listing, a
PLC can make its shares more readily transferable and therefore more attractive
to the investing public. It is thus a large corporate body which enjoys limited
liability. The following must be observed in forming a PLC;

1) They must apply to the registra of companies by filling in the memorandum of

association and the articles of association ( of course does not enjoy the
privileges enjoyed by pvt ltd company for filling in the articles)
 The name of the company must end with the words
public limited company (PLC)
  There must be at least two shareholders with no upper
limit
 The authorized capital amount should be stated

2) The registra will carry out a name search and if satisfied with the documents
and application lodged would issue out a certificate ofincorporation (which
gives the PLC a legal persona)
However, unlike a Pvt ltd which can commence business soon after getting a
certificate of incorporation, a PLC should wait to get a Trading Certificate.

After getting the trading certificate, the following document should be filled in;

3) The prospectus- this document invites members of the public to subscribe in

shares and become part owners i.e. it’s the advertisement of shares, the
company lists on the ZSE market and shares can thus be transferred publicly.
The public can monitor company performance through its share movement on
the ZSE.

After raising capital, the company can start operations. It is compelled to publish
its financial accounts and shares are sold at will.

Advantages of PLC
i. Like a Pvt ltd company, the PLC enjoys independent legal
existence, limited liability, continuity of business etc
ii. More capital can be raised through operation through the
ZSE and the limited number of shareholders
iii. No restriction on the transfer of shares
iv. Enjoys large scale production and benefits from economies
of scale
v. Can own assets and properties separate from shareholders,
can enter into and out of contracts

Disadvantages
i. A lot of documentation is involved
ii. May suffer because of diseconomies of scale
iii. There is no privacy or secrecy of business affairs because
they have to publish ed in the public media
iv. Must appoint an auditor
Potential entrepreneurs in Zimbabwe have various business options at their
disposal in as far as types of businesses are concerned. However, in making the
choice, the best and suitable choice should be made taking into cognizance the
fact that businesses have different needs. There is no ‘right’ or ‘wrong’ business,
it all depends on what the entrepreneur wants to do, one’s financial situation and
how large the operations are likely to be. I t is also necessary to consider industry
and market requirements and risks involved.

CHAPTER 4

BUSINESS PLANNING

GENERATION/CREATION OF A BUSINESS IDEA

 Every business emerges from an idea.

 Businesses get started when people (customers) manifest
their needs and wants.
  Entrepreneurs develop business ideas out of the needs and
wants of people.
 Usually entrepreneurs exploit the weakness of the existing
providers of goods and services to start their own ventures.

The term business idea defined:

A business idea is a short and precise description of the basic
operations of the business.

 A business idea must show the following :

a) Product to be offered.
b) Target market/potential customers.
c) Target customers’ needs.
d) Selling approach.

Profitability and Feasibility of the business idea:

 A business idea must be profitable and feasible.
 To determine the profitability and feasibility of a business
idea one needs to carryout a feasibility study and SWOT
analysis.
 Feasibility study relates to a detailed investigation of all
aspects of a business idea in order to determine if it is likely
to be successful.
 Before starting a business, it is essential to research that
business idea to find if it is feasible.
 A business idea should be practical and profitable.

In terms of feasibility, the entrepreneur needs to consider the following:

 Availability of a viable market
 Competition
 Location
 Infrastructure and facilities
 Raw materials
 Machinery and equipment
 Labour and other costs such as electricity insurance, water,
security etc.

DEVELOPING A BUSINESS PLAN

Definitions of A Business Plan
Several definitions of a business plan can be observed.

 A business plan is a written statement setting forth the

business mission and objectives, its operational and
financial details, its ownership and management structure, and
how it hopes to achieve its objectives.

 It is a written document describing all relevant internal and

external elements and strategies for achieving objectives of
a business.

 A business plan is a document designed to provide sufficient

information about a new or existing business to convince
financial backers to invest in the business.
The purpose/importance of a business plan:
 It provides a blueprint, or a plan, to follow in developing and
operating the business. It helps keep one’s creativity on
target and helps one concentrate on taking the actions that
are needed to achieve the business goals and objectives.

 It helps to clarify the business idea. The process involved in

creating a business plan means that the entrepreneur has to
ask a number of key questions about their idea. This should
ensure that before starting up, the business idea would have
been considered with care.

 It can serve as a powerful money-raising tool. The Plan will

often be used as a means of sharing potential investors of
lenders the viability and profitability of the business.
Financial institutions insist on seeing a business plan before
any loan is granted. Private shareholders may invest if they
believe in the entrepreneur. Professional providers ofventure
capital demand evidence of careful planning first.

 It can be an effective communication tool for attracting and

dealing with personnel, suppliers, customers, providers of
capital, etc. It helps them understand your goals and
operations.
 It can help you develop as manager/entrepreneur, because it
provides practice in studying competitive conditions,
promotional opportunities, and situations that can be
advantageous to your business.

 It provides an effective basis for controlling operations so one

can monitor progress over time, to see if your actions are
following your plans.

HOW TO PREPARE A BUSINESS PLAN

You should start by considering your business background, origins,
philosophy, mission and objectives. Then, you should determine the
means for fulfilling the mission and achieving the objectives.

The following is one feasible approach you can use in preparing a

business plan
1. Survey consumer demands for your products and decide how
to satisfy those demands.
2. Ask questions that cover everything from your firm’s target
market to its long-run competitive prospects.
3. Establish a long–range strategic plan for the entire business
and its various parts.
4. Develop short-term detailed plans for every aspect of the
business, involving the owners, managers, and key
employees, if possible.
5. Plan for every facet of the business’ structure, including
finances, operation, sales, distribution, personnel, and
general administrative activities.
6. Prepare a business plan that will use your time and that of
your personnel most effectively.
 COMPONENTS/ELEMENTS/CONTENTS OF A BUSINESS PLAN
 The contents of a business plan vary tremendously, depending
upon the type of business, the expertise of the entrepreneur, who
the plan is aimed at and how much time is spent researching the
plan.
 However, regardless the specific format used an effective plan
should include at least the following

1. Cover sheet
2. Table of contents
3. Executive summary
4. Description of The Business
5. Ownership and Management structure
6. Marketing Plan
7. Production/Operational Plan
8. Financial Plan/Analysis
9. Milestone schedule
10. Risk Assessment
11. Appendix

1. Cover Sheet

On the cover sheet you should include identifying information so that

readers will immediately know the business name, address, phone
numbers, names and titles of the principals (owners), and the date the
Plan was prepared.

2. Table of Contents

Because the table of contents provides the reader an overview of

what is contained in the plan itself, it should be written and
presented concisely in outline form, using numerical and
alphabetical designators for headings and subheadings.

3. Executive Summary

It is the most important part of the business plan. It should be

designed to motivate the reader to go on to the other section of the
plan. It should convey a sense of commitment, challenge,
plausibility, credibility and integrity.

It can include:
 Current business position:
Legal form, when formed, principal owners and key
personnel.

 Major aims and objectives

 Marketing strategy
 Financial projections
 Financial requirements
 Major achievements.
NB Executive summary is written last, after the rest of the plan
has been developed and should just be that – a summary –so
keep it short.
4. Description of the Business
Include the following :
a) Introduction
 Name of business and trading name
 Legal identity/legal form
 Industry that it fall under
 location - business addresses
 Relevant brief history and background of the proposed
business
 How the idea for the business originated and what has
been done to develop the idea up to this point.
 Owners and managers and their experiences
 Products / services
 capitalization/sources of funds
 Brief outline of success and achievement
 Date or proposed date for commencement
 SWOT Analysis
5. Ownership and Management Structure
 Describe the owners including those you identified by name
and title above
 Give more detail about their experience, qualifications
and expertise.
 Describe your management team, along with their abilities,
training and experience.
 Draw an organisation Chart showing organisational
structure.
 Draw a table showing name, position, qualifications and
experiences, duties and responsibilities of managers and
employees.
 Include employee policies and procedures.
6. Marketing Plan
Include information about:
 Marketing objectives
 The target market
 Research – that led to product design – confirmation of
demand and future research planned.
 Competitors analysis
 Sales and marketing mix strategy
7. Production/Operational Plan
This provides the details of converting inputs to outputs valued by
Customers.
Specify:
 Products/services to be produced
 Raw materials and all other material requirements, and
suppliers
 Optional location for production activities
  Operational / production procedures
 Costing and pricing of the products offered.
8. Financial/Plan/Analysis
 Show the Financing of the business.
 Show prospective investors or lenders
 Indicate the expected financial results of your
operations
 Include projected financial statements at least up to
three trading periods i.e. Trading, Profit and Loss
Account; Income and Expenditure Statements; Cash
Flow statements; Balance Sheets etc.
 There should be an analysis of costs/volume/Profits
(CVP) where appropriate.
 Also include budget forecasting for : Production; Sales
and Expenses.
9. Milestone Schedule
 This involves the determination of objectives and the
timing of accomplishments.
 It is like a map of how you will go from one place/stage
in your business to the next.
 Deadlines should be established and monitored.
10. Risk Assessment
Identify possible risks you are likely to encounter and suggest
relevant
risk management strategies
11. Appendix
This section includes supporting documentation for your
Business Plan
e.g.
 Names of References and Advisors and their addresses
and phone numbers
 Bargains, Tables, Charts
 Resumes of officers
 Supportive market research
 Brochures of other published information describing
the products you provide.
 Letters of recommendations or endorsements etc.
 Business Idea.

ACTIVITY:

Generate your own business idea and develop its viable business plan.

CHAPTER 5

BUSINESS MANAGEMENT

Objectives
By the end of this unit you should be able to:
  Define management
 Discuss the management functions
Business
A business is a social and or a commercial entity that thrives to satisfy the needs
and wants of consumers at the same time making more profits. As such,
entrepreneurs have to manage the factors of production, i.e. land, labour and
capital so as to achieve the business objectives. Businesses can be in any of the
following sectors of the economy; farming, mining, retailing, art and craft,
wholesaling etc. Thus, this chapter will focus on the functions of management as
well as the roles of management in an enterprise.
Management
Management has been described as a social process involving responsibility for
economic and effective planning and regulation of operation of an enterprise in
the fulfillment of given purposes. It is a dynamic process consisting of various
elements and activities. These activities are different from operative functions like
marketing, finance, production, purchasing, human resource etc. Rather these
activities are common to each and every manager irrespective of his level or
status. According to Henry Fayol (the father of management) managing means
planning, forecasting, organizing, motivating, leading and controlling activities in
a business so as to achieve common objectives.

 Stoner and Freeman (1995) described management as the art of making

things done through other people.
 They went on to say that it means deciding what to do and getting others
to do it.

Thus, management is a process (and not an event) that entails planning,

leading, organizing and controlling of resources (human resource, capital,
financial resources etc)
Manager
Managers are people who get things done through other people. They make
decisions; allocate resources and direct activities of others to attain goals. A
manager may be the owner, operator or founder of an organisation as well as
hired by an organisation to give it direction. Managers are employed so that the
operations of these organisations become more efficient and effective.
FUNCTIONS OF MANAGEMENT
Different experts have classified functions of management. A manager must
organize these functions in order to reach company goals and maintain a
competitive advantage. There are four fundamental functions of management.
For theoretical purposes, it may be possible to separate the function of
management but practically these functions are overlapping in nature i.e. they
are highly inseparable. Each function blends into the other and each affects the
performance of others. The functions are discussed below;
A. PLANNING
It is the first tool and the basic function of management. The difference
between a successful and an unsuccessful manager lies within the
planning procedure. Planning is the logical thinking through goals and
making the decision as to what needs to be accomplished in order to
reach the organisation’s objectives. It deals with chalking out a future
course of action and deciding in advance the most appropriate course of
actions for achievement of pre-determined goals. Thus, planning is
deciding in advance- what to do, when to do and how to do it. It bridges
the gap from where the organisation is and where it wants to be. Planning
is necessary to ensure proper utilization of human and non-human
 resources and helps in avoiding confusion, uncertainties, risks, wastages
etc.
The following are involved in planning;
 defining objectives and standards to be achieved
 deciding who is going to do it
 determining the actions and activities to be done in order to achieve
the objectives and standards
 determining the resources to use
 determining the time-frame for the activities
 assigning responsibilities
 designing a control procedure
Manager’s questions in planning
1. where are we? -in terms of goals, resources, standards etc
2. where do we want to go? –objectives, markets, customers etc
3. how do we get there? –strategies to reach the intended destination ( time,
resources, marketing mix)
4. are we getting there?
B. LEADING
Leading is the ability to initiate action, guide, supervise and direct others
(subordinates) in pursuit of a common goal. Organisational success is
determined by the quality of leadership that is exhibited. “A leader can be a
manager, but a manager is not necessarily a leader,” said Gemmy Allen (1998).
Those in leadership role must be able to influence/ motivate workers to an
elevated goal and direct themselves to the duties or responsibilities assigned
during the planning process (Allen, G.,(1998). Leadership has the following
elements;

 directing – it is that part of managerial function which actuates the

organizational methods to work efficiently for achievement of
organizational goals, and sets in motion the action of people because
planning ii the mere preparation for doing work.
 staffing-the main purpose is to put the right man on the right job. There
should be proper and effective selection, appraisal and development of
personnel to fill the roles designed on the structure. It thus involves
manpower planning, recruitment, selection, placement, training and
development, remuneration and promotion and transfer.
 supervision- implies overseeing the work of subordinates by their
superiors. It is the act of watching and directing work and others.
 motivation- means inspiring, stimulating or encouraging the subordinates
to work with zeal.
 communication- the process of passing information, experience, opinion
etc from one person to another. It is a bridge of understanding.
C. ORGANISING
It is the process of bringing together physical, financial and human resources and
developing productive relationships amongst them for the achievement of
organizational objectives. According to Henri Fayol, “To organize a business is to
provide it with everything useful for its functioning i.e. raw materials, tools, capital
and personnel. To organize a business involves determining and providing
human and non-human resources to the organizational structure. Thus, a
manager must know his subordinates and what they are capable of in order to
organize the most valuable resource a company has, its employees. This is
achieved through management staffing the work division, setting up the training
for the employees, acquiring resources and organizing the work group into a
productive team. The manager must then go over the plans with the team, break
assignments into units that one person can compete, link related jobs together in
an understandable well organized style and appoint the jobs to individuals.
Organising as a process involves;
 identification of activities
 classification or grouping of activities
 assignment of duties
 delegation of authority and creation of responsibility
 coordinating authority and responsibility relationships
Principles of organising
1. unity of command –an employee must receive commands from one
supervisor only.
2. span of control-refers to the number of employees that report to one
supervisor.
3. full authority and responsibility.
D. CONTROLLING
It implies a measurement of accomplishment against the standards and
correction of deviation if any to ensure achievement of organizational goals. The
purpose of controlling is to ensure that everything occurs in conformities with the
standards. An effective system of control helps to predict deviation before they
actually occur. According to Theo Haimann, “Controlling is the process of
checking whether or not proper progress is being made towards the objectives
and goals and acting if necessary, to correct any deviation.” Controlling depends
on accurate, reliable and enforceable standards and on monitoring of
performance by people, machines and processes. Therefore controlling has the
following steps;
 establishment of standard performance
 measurement of actual performance
 comparison of actual performance with the standards and finding out if
there are any deviations
 taking of corrective action if necessary.

Work performance evaluations are a form of control as it connects performance

assessments to rewards and corrective actions. Evaluating employees is a
continual process that takes place regularly within a company.
Motivation
- Definition
- Managers and entrepreneurs are tasked with ensuring that things are done
through people. For the work to be done efficiently and effectively,
employees need to be motivated. Motivation is concerned with inducing
people to work to the best of their ability. Motivation refers to those schemes
designed to influence and encourage workers to perform outstandingly. It is
therefore very important to take a closer look at theories of motivation and
consider motivation of workers seriously.
- According to Appleby (1994), motivation refers to the way urges, aspirations,
drives and needs of human beings direct or control or explain their behavior.
Maslow (cited in Stoner & Freeman 1989) defines motivation as those inner
and outer factors which cause, channel and sustain the behaviour of a person
in order to achieve specific organizational or personal goals.
Theories of Motivation and their implications to the entrepreneur
There are many theories of motivation and any theory or study which aids an
understanding of how best to motivate people at work must be useful. All
entrepreneurs have a duty to motivate their employees for the success of their
enterprise. Motivated workers take more pride in their jobs and work better. But
many entrepreneurs do not know how to motivate their staff. Entrepreneurs must
know how to apply the theories of motivation in particular work situations. There
are two contrasting approaches that is the content theories and process theories
(cognitive theories)
- Content theories attempt to explain those specific things which actually
motivate the individual at work. These theories are concerned with identifying
people’s needs and their relative strengths and the goals they pursue in order
to satisfy these needs. Content theories place emphasis on the nature of
needs and what motivates.
- Process theories attempt to identify the relationship among the dynamic
variables which make up motivation. These theories are concerned more
with how behaviour is initiated, directed and sustained. Process theories
place emphasis on the actual process of motivation.
Major content theories of motivation include
 Maslow’s hierarchy of needs model
 Herzberg’s two-factor theory
Maslow’s hierarchy of needs theory
Maslow’s theory claims that human motives develop in sequence according to
five levels of need arranged in a hierarchy of importance. Maslow’s basic
proposition is that people want beings, they always want more, and what they
want depends on what they have already. The hierarchy begins with the lowest
level i.e. physiological needs to the need for love (social), esteem needs to the
need for self-actualization at the highest level. Below is the pyramid to show the
hierarchy
Self-actualization
(i.e. realizing one’s potential
for continued self development)

Esteem (i.e.
Status, respect, recognition by others)
achievement, self- confidence,
Social (love) (i.e. to belong, associate with, be
accepted by
Safety (i.e. protection against danger

Physiological i.e. shelter, clothing, food

)

Physiological needs include homeostasis such as satisfaction of hunger, thirst,

shelter deficiency, clothing deficiency and so on. In fact homeostasis relates to
the body’s automatic efforts to retain normal functioning.

Safety needs include safety and security, freedom from plain or threat of physical
attack, protection from danger or deprivation, the need for predictability and
orderliness.

Love needs that is social needs which include affection, sense of belonging,
friendships and both the giving and receiving of love.

Esteem needs are also referred to as ego needs which relate to self-respect
which involves the desire for confidence, strength, independence and freedom,
and achievement. Esteem of others involves reputation or prestige, status,
recognition, attention and appreciation.
Self-actualization needs that is the desire to become more and more what one is
capable of becoming which simply means that one wants to realize his or her
potentialities and capabilities.
IMPLICATIONS OF MASLOW’S HIERARCHY OF NEEDS TO THE
ENTREPRENEUR
Once a lower need has been satisfied, it no longer acts as a strong motivator and
only unsatisfied needs motivate a person.

This hierarchy of needs implies that entrepreneurs need to consider seriously the
lower level needs if workers or staff are to cooperate at work. That is the
remuneration (salary, wage, fringe benefits) should meet decent or exclusive
physiological needs (shelter, food, clothing). Pleasant working conditions must
also be ensured.
Successful entrepreneurs must consider the safety and security issues such as
safe working conditions like danger warning signs, clean work environment and
good healthy facilities. It is also important to employees and social security after
employment i.e. pension and other related company benefits.
Social needs of workers have impact on the performance. Workers need to be
loved and as such entrepreneurs need to instill a sense of belonging in workers.
Entrepreneurs also need to employ friendly supervision, cohesive work group,
and team spirit and general sound relations with employees. Workers also need
professional associations to meet their professional associations to meet their
professional problems.
Another area of concern is self-esteem. In this case entrepreneurs should make
use of social recognition, job title, high status job and feedback from the job itself
if employees are to be motivated in their work.
Self actualization is one aspect that does motivate employees i.e. workers are
motivated by challenging job, opportunities for creativity, achievement in work
and advancement in the organisation and as such entrepreneurs should not that.
Herzberg’s two factor theory
Hygiene theory
He presents his tow factor theory of motivation which elaborates the differences
between higher and lower needs. This theory states that factors which create
satisfaction at work are those stemming from the intrinsic content of job e.g.
recognition and responsibility, meaning and challenge. These satisfy higher
needs. These are called satisfiers or motivators or growth factors. Another set
of factors which entrepreneurs must take cognizance of is dissatisfiers or hygiene
factors. These factors stem from the extrinsic job context e.g. working
conditions, pay, and supervision. These satisfy lower needs. An important point
to note in this theory is that as dissatisfaction stems from lower needs not being
satisfied, when these are satisfied, this only removes dissatisfaction and does not
increase motivation.
If hygiene factors did not reach a certain standard e.g. salary, working conditions,
job security, poor supervision workers feel bad about their jobs and unhappy.
Hygiene factors are also called preventive factors. Positive motivation and a
feeling of well-being could only be achieved, not by just improving these hygiene
factors but by improving genuine motivators such as recognition, achievement
responsibility, advancement and the work itself.

Below is a representation of Herzberg’s two-factor theory

Hygiene or Maintenance factors
Salary, job security, working conditions, Level of quality of supervision, company
Policy and administration, Interpersonal relations, The Dissatisfiers
Motivation & job satisfaction
The satisfiers:
Sense of achievement, Recognition, Responsibility, Nature of work, Growth and
advancement, Opportunity of creativity
Motivators/growth factors
NB: The Motivation – hygiene theory of Herzberg is an extension of Maslow’s
Hierarchy. The emphasis in this theory is that entrepreneurs must consider both
the hygiene factors and the growth factors/motivators.
Importance of motivating employees
- Increased productivity
- Increased efficiency and effectiveness
- Good corporate image building
- Increased sales and profits
- Good customer relations
- Promotes team spirit (team work) or cooperation and support by employees
- Promotes entrepreneurship by employees that is innovativeness, creativity
and initiative ness resulting in the growth or expansion of the enterprise

CHAPTER 6

MARKETING

By the end of the study you must me able to:

 Define marketing
 Describe the marketing mix elements
 Apply the marketing mix to product and service situations
 Prepare a marketing plan
Marketing is the management process responsible for identifying, anticipating
and satisfying customer requirements profitably. (CIM)
There are many other definitions that expand on the CIM's own definition. Here is
what Dibb et al (2001)have to say:

Marketing consists of individual and organisational activities that facilitate

and expedite satisfying exchange relationships in a dynamic environment
through the creation, distribution, promotion and pricing of goods, services
and ideas.

This is a more detailed definition and identifies some specific activities.Marketing

as an activity differs from marketing as a concept. A market orientation can
prevail outside the marketing department.The related term 'marketing concept'
is fundamental to the modern approach to marketing. Kotler (1991)says this:

The marketing concept holds that the key to achieving organisational

goals lies in determining the needs and wants of target markets and
delivering the desired satisfactions more efficiently and effectively than the
competition.

Needs are basic human requirements such as food, clothing, shelter, exercise,
etc. Some people might be able to satisfy their needs for exercise by going for a
run in a public park.
Wants refer to needs directed to specific objectives that might satisfy the need,
For example, people might want to meet their needs for exercise by joining an
exclusive country club to play golf.The marketing manager of an exclusive
country club may carry out various marketing activities to transform the needs of
people for exercise into wants to play golf at a country club.
FAST FORWARD
Kotler (1991) also uses the word demand which refers to the wants being
backed up by an ability to pay,ie can the potential customer afford the
membership fees to join an exclusive country club?It is necessary for us to strike
a clear distinction between marketing as an activity, and marketing as a
concept of how an organisation should go about its business.

The Marketing Mix

The marketing mix refers to a set of marketing variables which a firm can use to
satisfy the needs of its target market.McCarthy calls them the 4Ps of
marketing.They are,namely,price,promotion.product and place.

tMarketing activities
The basic marketing mix offers us a useful framework within which to discuss the
relationship of
marketing activities to other organisational functions.

 Product
(a) Product development and enhancement of physical products is usually
carried out in
conjunction with R&D and production. These often involve technically minded
people who
may have different attitudes and approaches when perceiving and solving
problems. With
regard to service marketing, there may be other kinds of technicality. For
example, if a firm
of solicitors wishes to provide independent financial advice, the very demanding
regulatory
regime governing such services is likely to be a key consideration in the
marketing of the
new service.
(b) Packaging refers to 'all the activities of designing and producing the
container for a
product'. (Kotler, 2003). Packaging serves various purposes and involves several
considerations.
(i) Protection of product eg sturdy boxes for breakable products
(ii) Preservation of the product eg plastic bags to keep bread and cakes fresh
and
hygienic
(iii) Security of product eg small digital camera memory cards packaged in large
plastic
packs to deter shoplifters
(iv) Convenience. Packaging is designed to facilitate storage by supplier or
customer, as
well as convenience of use eg different types of nozzles on drinks and sauce
containers
(v) Branding eg the Coca-Cola bottle is a huge source of promotion for the
company
(vi) Profitability eg larger sized nozzles on tubes and bottles encourage more
use.
Larger sized cans or bottles usually encourage greater consumption.
 Place
Distribution decisions address the question of 'where do our customers want to
receive their goods or services?' This is an aspect where there has been
significant change and development, and there is now much more scope for
market decision making, especially with the advent of e-commerce.Place
decisions may also influence an organisation's globalisation strategy. If clients
and/or customers have overseas locations it may be beneficial to set up
distribution facilities locally. The presence of overseas facilities enables the
organisation to extend its market coverage and global reach.It is important to
understand the structure of the distribution channel and the role of the players
within it. A key concept is channel captaincy, which refers to the organisations
that hold the most power within a channel and can drive changes in it. In the
past, for example, food manufacturers controlled the retail food industry as they
were fewer in number, and bigger in size, than the supermarkets and other
independent retailers. Supermarkets have since become bigger and more
successful, and can usually dictate terms to manufacturers and other
suppliers.Marketers are likely to be involved in activities such as outlet planning,
supply chain management, and route to market decisions. They may be involved
in order-processing, warehousing, logistics,
stockholding and control, transport operations, delivery tracking and IT systems
development. They may also be involved in export operations and the use of
shipping and forwarding skills.
 Promotion
Promotion is, of course, the focus of a great deal of marketing attention and
might, with justification, be regarded as the marketing specialist's home turf.
Nevertheless, it does not take place in a vacuum. It must not promise what
cannot be delivered, it must work within budget (particularly where sales
promotion is concerned) and individual aspects of promotion must not undermine
the overall corporate image. It is important to remember the product or service's
Unique Selling Proposition (USP) or Basic Consumer
Benefit (BCB) and ensure that the message is in alignment with these. The
medium of communicationmust then match the message. Promotional tools
include advertisements, press releases, sales promotions, in-store
demonstrations, exhibitions, trade fairs and public relations.
 Price
Cost is a major consideration in price-setting and here the marketer must utilise
the expertise of the management accountant. Also associated with this aspect of
the mix is the whole topic of terms of sale: expert advice is necessary if
maximum protection is to be obtained against the customer who does not or
cannot pay. Factors influencing price include costs, competition, customer
expectations and business objectives.
Product Life Cycle

The product life cycle is defined as the period that starts with the initial product design (research
and development) and ends with the withdrawal of the product from the marketplace. It is
characterized by specific stages, including research, development, introduction, maturity,
decline, and obsolescence. Each stage is often linked with changes in sales,profits ,objectives and
strategies. Conventionally, four main stages compose a product's life cycle:

 Introduction. This stage mainly concerns the development of a new product, from the
time is was initially conceptualized to the point it is introduced on the market. The great
majority of ideas do not reach to promotion stage. The corporation having an innovative
idea first will often have a period of monopoly until competitors start to copy and/or
improve the product (unless a patent is involved as it is the case in industries such as
pharmaceuticals). Generally, associated freight flows take place within developed
countries and/or close to markets where to product is likely to be adopted.
 Growth. If the new product is successful (many are not), sales will start to grow and new
competitors will enter the market, slowly eroding the market share of the innovative firm.
The product starts to be exported to other markets and substantial efforts are made to
improve its distribution since competition mainly takes place more on the innovative
capabilities of the product than on its price. This phase tends to be associated by high
levels of profits.
 Maturity. At this stage, the product has been standardized, is widely available on the
market and its distribution is well established. Competition increasingly takes place over
cost and a growing share of the production is moved to low cost locations, particularly for
labor intensive parts. Associated freight flows are consequently modified to include a
greater transnational dimension.
 Decline. As the product is becoming obsolete, production essentially takes place in low
costs locations while developing countries become net importers. Production and
distribution economies are actively sought as profit margins decline. Eventually, the
product will be retired, an event that marks the end of its life cycle.he life cycle

For the various stages of the cycle ,different objectives and strategies can adopted.this are
digrammatically shown on the next page:

The purpose and content of the marketing plan

A marketing plan is a specification of all aspects of an organisation's marketing
intentions and activities.It is a summary document, providing a framework that
permits managers and specialists to undertake the detailed work of marketing in
a co-ordinated and effective fashion.
The creation of a good marketing plan is likely to be a time-consuming exercise,
since it should deal with both current circumstances and plans for the future.
(a) It should be based on detailed knowledge of both the target market and the
company
involved.
(b) It should give sufficient detail of intentions to support the design and operation
of all
marketing-related activities

The marketing plan and corporate strategy

It is important to remember how the marketing plan fits into overall
corporate strategy. Students are often confused by the appearance of
environmental analysis in the marketing planning process and assume that this
means that the marketing plan is the same thing as the overall corporate
strategic plan.This may be true in some highly marketing-oriented organisations,
but it is not necessarily so.The marketing plan and the corporate strategic plan
are not the same thing. The difference is largely one of scope: the corporate
plan has to consider all aspects of the organisation's business, while a
marketing plan is principally about marketing activities. The marketing plan is
aligned with the corporate plan and supports it.
T FORWARD
What goes into the marketing plan?
There is no standard template or list of contents for a marketing plan. Different
organisations will find it
appropriate to consider different things at different times in their development.
We will look at one
possible detailed layout for a marketing plan in Section 3. In this section we will
look in general terms at
what is likely to appear in most marketing plans.

The marketing plan – an outline

1 Situation analysis
PESTEL – SWOT – Market analysis and
marketing objectives
2 Marketing strategy
Objectives – tactics – marketing mix
3 Numerical forecasts
Sales – expenses
4 Controls
Marketing organisation – performance measures
These four basic elements constitute a logical sequence of development for the
basic building blocks of the marketing plan.Ensure that you remember this basic
structure. If all else fails in the examination, it should enable you to organise your
thoughts and make a creditable attempt at preparing a marketing plan.

(a) Situation analysis. Any planning process should start with the collection and
analysis of basic data. In the marketing context this is often called situation
analysis. It may be
appropriate for situation analysis to consider the items listed below.
• The wider environmental factors of the PESTEL model
• Strengths, weaknesses, opportunities and threats
• Marketing research data, including demographics data, trends, needs and
growth
• Current and planned products and services
• Critical issues
(b) Marketing strategy. The statement of marketing strategy will describe in
detail all the marketing concepts, practices, activities and aids that will be used. It
will reiterate the
marketing objectives in some form, and will probably give a detailed account of
how the
chosen marketing mix will be applied. This section is likely to be of considerable
size.
(c) Numerical forecasts. The marketing plan must include quantitative data
about required resources and forecast results. Costs must be given in detail and
realistic sales estimates must be provided. In particular, the cost of marketing
activities must be specified.
(d) Controls. Planning is worthless unless control mechanisms are established
to ensure that the plan is properly executed. These may include intermediate
organisational and sales milestones, the design of routine performance
measures, the establishment of an
appropriate marketing organisation, and the development of contingency plans.

The marketing plan in detail

1 Executive summary
It is common practice to place an executive summary at the beginning of the
marketing plan. Executive summaries are provided, as their name implies, for the
convenience of senior executives who require a fast overview in order to avoid
the time involved in detailed study. As a general rule, such summaries should be
confined to a brief exposition of important material.
(a) Background information that helps explain why particular proposals have
been made or decisions taken
(b) A description of proposed action with an indication of timescale
(c) A summary of the aims or targets that are intended to be achieved
(d) An assessment of any wider implications of the proposed action
(e) A statement of the required investment, where appropriate
The executive summary for a marketing plan is likely to include material on the
following specific matters.
• Marketing research
• Target markets and segments
• The proposed marketing mix
• Sales forecasts
2 Situation analysis
Situation analysis involves consideration of both the environment and internal
factors. The environment can be divided into the macro-environment, consisting
of the six PESTEL elements, and the micro- or market environment. Internal and
environmental factors are summarised in a SWOT analysis.
(a) The business environment. The operation of any business implies
interaction with its
environment and the first stage of the detailed planning process is likely to be the
collection and analysis of environmental information. For this purpose, the
business environment is
often split into two parts.
FAST FORWARD
(i) The macro-environment may be analysed into six elements.
• Political • Technological
• Economic • Ecological or 'green'
• Social • Legal
The acronym PESTEL may be used. PEST and STEP are also common, when
the legal environment is included under politics and so-called 'green' issues are
included under the social heading. Your syllabus uses PESTEL, so that is what
we will use in this Study Text. A marketing plan need not include a detailed
PESTEL analysis, but it should explain those aspects of it that have affected its
development.
Action Programme 1

(ii) The micro-environment consists of the markets in which the business

operates or
plans to operate. It includes current and prospective customers and existing and
potential competitors. The micro-environment also includes any distribution
systems
used by the business. Headings such as those below may be appropriate.
• Target markets • Products and services
• Market needs • Competition
• Market geography • Costs
• Market demographics • Suppliers
• Market trends • Critical issues
• Market forecasts
• Market growth
(b) Internal analysis. Like the overall strategic plan it is derived from, a
marketing plan should reflect the characteristics of the business concerned. It will
inevitably refer to current and
planned products and capabilities and be designed to exploit the organisation's
resources to the full. An important aspect of the internal analysis is product-
market background, which
sets the scene for those less familiar with the products and markets involved.
The environmental and internal analyses are traditionally summarised and
entered into the plan under the headings of strengths, weaknesses,
opportunities and threats. This SWOT
analysis highlights aspects of the overall situation that need action by the
business. The
aim is to exploit strengths and opportunities, remedy areas of weakness and
develop
actions which minimise threats. The analysis of SWOT must be prepared
honestly and
objectively as it is a key foundation on which the marketing strategy is built.

3 Marketing strategy
Marketing strategy includes objectives and methods and may deal with such
matters as gap analysis,target markets, the marketing mix and marketing
research.The marketing strategy section of the marketing plan should describe in
detail the organisation's
marketing objectives and methods.

(a) Marketing objectives. The objectives of the marketing plan are derived from
the corporate plan, which is designed to support the overall corporate mission. A
clear statement of
marketing objectives serves a number of purposes.
(i) It provides a focus for activity and a sense of purpose. This should stimulate
activity, particularly when overall objectives are broken down into personal
targets.
(ii) It provides a framework for co-ordination of activity across the organisation.
(iii) IT is fundamental to the control process, since it defines success. Actual
performance is compared with what was intended, and control action taken to
correct any discrepancy.When objectives have been considered in detail, it is
possible to use them to refine a plan bymeans of gap analysis. Objectives will
relate to both market dynamics and financial results, and should beexpressed in
concrete form. Objectives may be set for such business parameters as those
below.
• Revenue growth
• Market share
• Profitability
• Number of outlets
• Customer retention
• Brand recognition
• Marketing expenses
• Staff levels and training
(b) Target markets. It will be appropriate to define clearly just what the target
market is. The nature of this definition will depend partly on the scale of the
marketing operation
envisaged. For example, a company operating nationally in a lifestyle segment
might target prosperous retired people nationwide, while a locally based
professional service business
might target start-ups and small traders within a 20-mile radius of its base.
(c) Products and their positioning. Product positioning is a continuation of the
process of determining the target market. Product positioning is about the way
the target market
perceives the product's characteristics, in relation to those of competing
products.
There are two basic product positioning strategies.
• 'Me too': the product is positioned to meet the competition head-on.
• Gap-filling: the product is positioned to exploit gaps in the market.
(d) The marketing mix. A marketing plan will not necessarily give complete
details of every
component of the marketing mix. Instead, it will concentrate on those parts that
are new or crucial to success. For example, a plan built around a new or
enhanced product that will be distributed through established channels is likely
to give significant product detail, and explain the aim of the new features in
market terms. Place, on the other hand, is unlikely to receive more than a brief
mention.
(e) Marketing research. Early marketing research should have played its part in
supporting the design of the marketing plan. However, it is not confined to this
phase of operations.
Marketing research activities should form part of the marketing plan, so that
continuing
feedback may be obtained upon the degree of success achieved.

4 Numerical forecasts
Numerical forecasts tie down what is to be achieved and form the basis of the
control process.
This section of the marketing plan could also be called a budget.
4.1 Typical forecast quantities
• Turnover
• Market share
• Marketing spend
• Units of sales
• Costs
• Breakeven analysis
Phasing and analysis. It will be appropriate to present numerical forecasts
broken down in two ways.
(a) Phased by time period. A year's total may be broken down into monthly or
quarterly
increments.
(b) Analysed by marketing characteristic. For example, sales and expenses
might be analysed by product type or by market segment.

4.2 Breakeven analysis

Breakeven analysis is a management accounting technique that should be of
interest to marketing
managers. The cumulative sales of a product reach their breakeven point when
the total revenue is high enough to cover both the variable and fixed costs of
producing and selling that quantity of product. The breakeven point is a vital
hurdle that must be cleared if the marketing plan is to be considered
successful,and a profit made on the sale of the product.

4.5 Controls
Control is vital if management is to ensure that planning targets are achieved.
The control process involves three underlying components.
– Setting standards or targets
– Measuring and evaluating actual performance
– Taking corrective action
(a) Performance measures. The data contained within the numerical forecasts
section of the plan provides the raw material for performance measures.
Mechanisms must be put in
place for collecting information on actual results, so that comparisons can be
made and
control action taken. Overall performance is often judged by analysing two main
indicators:
sales and market share.
(i) Sales analysis is based on the comparison of actual with budgeted turnover,
but
this is only the first stage. It is appropriate to delve deeper and consider the
effects
of differences in unit sales and selling price. Further analysis by product, region,
customer and so on may be required.
(ii) Market share analysis. Market share is important to overall profitability, and
the
attainment of a given market share is likely to be an important marketing
objective.
Market share should always be analysed alongside turnover, since the growth or
decline of the market as a whole has implications for the achievement of both
types
of objective.
FAST FORWARDAST FORWARD
(b) Marketing organisation. Individual responsibilities within the overall
marketing plan should be given and the persons responsible named. One
example of a specific responsibility is the
preparation of performance reports. Other roles will include that of overall
responsibility
(probably discharged by the Marketing Manager or Brand Manager),
management of
promotional effort and management of marketing research effort.
(c) Implementation milestones. Progress in implementing a programme can be
monitored by
the establishment of milestones and the dates by which they should be
achieved.
Examples for the launch of a new car might include:
• First delivery to show rooms
• First thousand sold
• Breakeven sales achieved
(a) Contingency planning. Events in the real world very rarely go according to
plan. It is
necessary for planners to consider problems that might arise and make
appropriate
preparations to deal with them. There are several requirements.
(i) The organisation must have the capability to adapt to new circumstances.
This will
almost certainly imply financial reserves, but may require more specific
resources,
such as management and productive capacity.
(ii) There is a range of possible responses to any given contingency. The
organisation
should consider its options in advance of needing to put them into action.
(iii) A prompt response will normally be appropriate. Achieving this depends to
some
extent on having the resources and having done the planning mentioned above,
but
it will also depend on a kind of organisational agility. In particular, decision-
making
processes need to be rapid and effective.

CHAPTER 7

CUSTOMER CARE
Objectives
By the end of the unit you should be able to:
 Define customer care
 Discuss the tips of customer care
 Design a customer programme and charter
Customer care
- is the manner in which customers are treated by the business
- Customer care creates a new orientation in an organisation with and
increasing focus on improving the delivery of the needed services by the
customers.
- This should always be viewed as the clientele having rights and
expectations that must be fulfilled.
- As an entrepreneur one needs to appreciate that customer care should be
part and parcel of his/her business operations if you intend to achieve
success.
- The customer care vision by organisation embraces employees that put its
customers first and that is open transparent, accountable and responsive
- The customer is king and always right as a way of doing business
- The customer is always observed as having a right to demand quality
services from the organisation
- In the modern business world there is an increasing focus on enhancing
service delivery and on ascertaining that the delivered as promised
- An entrepreneur should be responsible, accessible and quick to help
source problems
- Should be reliable and deliver what he/she promises on time
- Should be knowledgeable and courteous
- Should be empathetic and should understand the needs of customers
- Work area should always be clean and organized.

Ten tips for customer care

1. Reliability
- this refers to consistency of performance and dependability
- perform the service right the first time fulfill promises
- be impartial and avoid favouritism
- Be firm with friends and relatives as far as business transactions are
concerned.
2. Responsiveness
- this refers to the willingness as well as readiness of the entrepreneur or
his employees in providing the services within reasonable time
immediately if not sooner
3. Competence
-This refers to the possession of the required skills and knowledge by those
who deliver the services to the customer. This will create confidence.
4. Accessibility
- this refers to the degree of approachability and ease of contact of the
entrepreneur or his employees
- drop what you are doing ignored to greet and serve customer
5. Courtesy
- This refers to politeness, respect, consideration and friendliness of your
organization’s contact such as receptionist, secretaries, telephonist, etc,
they must be polite and courteous at all times – remember, a smile goes a
long way.
6. Communication
- keep your customer well informed in a language and style they understand
- it is important to hear and understand what your customers are saying
- communicate effectively with your suppliers as well
7. Credibility
- this refers to being trustworthy and faithful
- put customers at heart
- they should feel that he/she is given priority and should have the trust that
any order will be executed and received when expected
8. Security
- customer should be protected from danger, risk or doubt within the
premises
9. Knowledge of Customer
- the entrepreneur should know the client specific requirements
- be able to recognize regular clients
- strive to provide individualized attention
- Understand what makes them buy is it need Price?
10. Tangibles
- This could include the physical evidence (i.e. building, good handling,
tools, equipment, packages etc). This could also include the appearance
of your personnel
- employees must be neat, orderly and clean
Benefits/importance of customer care
- If customers are put first, the entrepreneur will be rewarded with new
business and increased profit margins and sales.
- Customer care creates new customers
- Constructive consumer dialogue enables the entrepreneur to know and
understand what the customers needs and wants
- It builds good relationships and loyalty with customers
- Can make passive customers become in violated participants (i.e. loyalty)
- Create corporate excellence
- Build good reputation and good image i.e. it is a tool for good corporate
image building
- Business can become a market driven entity as you get information on
what your customers need and want.

Prerequisites of meeting Customers’ expectations

1) be courteous and tactful

2) be friendly and helpful
3) deal promptly and decisively with customers
4) rectify faults quickly and keep promises
5) listen to customers attentively and respond promptly
6) avoid being sarcastic when dealing with customers
7) present information logically and comprehensively
8) stick to your commitments
9) Always inform your customers on what happens at your business if it may
affect them (i.e. sale, new product? Services
10)be fair and honest when dealing with customers
11)demonstrate the right skills at the right time
12)always give customers professional treatment
13)know the customers business and needs

Who gets to decide if a customer service is good?

1. customer service is a function of your customers perceptions not your
standards in other words, the customers gets to decide if he or she has
received good services
- even though all of your standards may have been met if the customer
does not feel well served, your customer service is poor
- customer satisfaction is ultimately the result of the sum total of the
customer’s experience
2. Customer satisfaction is ultimately the result of the sum total of the
customer’s experience at your establishment.
- Customers come back to a place that has provided a pleasant experience
for them. Thus owners and managers need to focus not on tangible as
ends themselves but on how all the particulars combine to create a certain
experience.
Prime examples of poor customer care
1. poor delivery and accessibility of services
2. poor quality and state of merchandise
3. existence of long queues of customers waiting to be served
4. dirty environment of business
5. failure in meeting client expectations
Dealing with unprincipled customers
- never show that customer is wrong or behaving badly
- always take it that he/she is right
- appreciate and understand at there should be some customer’s who visit
your business with hidden agenda and ulterior motives (i.e. competitors of
those interested in policing I’ve price control monitors
- make very attempt to deter their bad intentions by being upright in your
dealings

You can defeat unprincipled customers by taking the following steps:

1. continue to show a good image of your business
2. smile when talking to customers
3. accept blunders where you can realize them promise to improve and make an
apology
4. avoid arguing with customers
5. always hold your composure and avoid losing your temper in front of your
customer
Building Customer Trust
From a customer’s point of view, there is probably no concept more important
than trust. How can you strengthen customer trust?
1. Keep your promises
 2. Make promises that you can keep
3. do everything to keep the commitments you make
4. if you cannot fulfill the promises let the customer know
5. call back if you promise even if you don’t have the information the
customer is expecting
6. Following up on an order to be sure everything is okay.
7. Properly hold complaints all the time.
8. Make recommendations that are best for the customers.
9. Recommend a competitor when there’s a need that you can’t satisfy.
10. Make yourself available after the sale.
Creating Customer Comfort
Customer care is also defined as meeting needs and creating comfort. Meeting
needs is a given, creating comfort is a function of enabling the customer to feel a
sense of control when he/she is at your business. Customers feel in control when
they know the drill i.e. when they know how things work and how to get things
done
Develop and maintain a customer charter
- Make sure that there is availability and visibility of both a mission
statement and customer charter. The customer’s charter will remind your
workers always to abide by its contents and will assure customers of their
expectations of the services and what move to take if they are not met.
Your customers’ charter should indicate the standards of services to be
delivered and the way in which the worker will perform their duties

1. telephone
- number of rings before the telephone is answered are given
2. Enquires
- short turn around time
- follow up
- courtesy options offered to caller
3. Correspondence
- Correct
- Shorthorn around time
- Acknowledgement of receipt
4. Delivery deadlines met
Delays explained and apology given
5. Outgoing services
- automatic follow up
- customer feedback
- be sure that your customer’s charter informs clients about the availability
of a system of redress in case of grievances

CHAPTER 8

RECORD KEEPING AND STOCK CONTROL

Objectives
By the end of the unit you should be able to:
 differentiate between bookkeeping and accounting
 keep records and control stock in a business
 interpret and apply basic financial statements
What does it mean when someone asks you for an account of something?
 Giving a report of some event/activity that has taken place.
This is the major objective and purpose of this business activity, Accounting.
DIFFERENCE BETWEEN BOOKKEEPING AND ACCOUNTING

Bookkeeping: it is concerned with the recording of data only. This used to be

done in books, thus the name bookkeeping.
 A bookkeeper is responsible for this duty. Nowadays books may be used,
but a lot of accounting data is recorded using computers.

Definition of Accounting
The process of identifying, measuring and communicating economic information
to permit informed judgements and decisions by users of the information.
 An Accountant does the analysis and interpretation of the data which has
been recorded by the bookkeeper.
The accounting process
It involves:
Recording Classifying Summarising Interpreting of

business activities capable of being expressed in monetary terms.

Users of accounting information

(i) Present and Potential Investors :they want to see whether or not the
business is profitable (viability of the business)
(ii) Prospective buyers of the company: where to buy or not to buy
(iii) Lenders : Banks and Financial institutions ,when the owner of a
business wants to borrow money
(iv) Suppliers/Creditors: Whether it is safe to supply on credit and analyse
if they will be paid back their dues.
(v) Customers: they need to know if there will be a constant supply of
products from the business
(vi) Government/Taxman: for calculating tax payable by the business
(vii) Managers of the firm: for internal decision making
(viii) Employees: need to access their job security
(ix) General public
Source documents
Information used in the process of completing financial transactions are called
source documents. These can include invoices, receipts, credit and debit notes,
purchase orders, customer billings, bank statements etc. These are the starting
of any accounting process.
Source document
- Source documents are the documents from which original information to the
books of primary entry is obtained e.g. receipts, invoices, debit note, credit
note and statement of account
- Receipts are used by the entrepreneur or supplier when the transactions
involve cash e.g. where a customer tenders cash, a receipt may be written
out. Below is a sample of a receipt
Books of primary entry is obtained
Receipt 0023
Date: 25/02/04
Gobvu Manufacturing (Pvt) Ltd
P O Box 22

CHEGUTU
Telefax: 703301

Purchases Amount__
5 x 2l Mazoe Orange crush $30 000.00
Sub total$30 000.00
Less discount $ 3 000.00
Signature…………… Total $27 000.00
Invoice is a note given by the supplier or seller to the customer when goods are
bought on credit to show that the customer has not paid for the goods. That is an
invoice is used for credit sales. The invoice should have the following details:

Date of purchase
Invoice number
Seller’s name, address, telephone, fax, email (not all of this information may be
applicable)
Buyer’s name, address, telephone, fax, email (not all of this information may be
applicable)
Goods or services bought
Amount to be paid
Terms of sale
Amount of discount if any
Appreciation message (e.g. Thank You for doing business with us)

The following is a sample of an invoice

Invoice 00214
Date: 26/02/04

Gobvu Manufacturing (Pvt) Ltd

P O Box 39
KWEKWE
Telefax: 055 50221

To: Makayepuva (Pvt) Ltd

Chuma street

MASVINGO

Tel: 039 62043

Item purchased Quantity Unit cost Total______

500ml super stick glue 500 $100.00 $50 000.00

less 5% discount if paid
within 30 days

Total $50 000.00

Debit
DebitNote
Note is used to correct an undercharge on a customer’s account e.g. when
the price shown on the invoice is too lowSupplier’s
or whenname some items have not been
& address
shown. Sometimes a second invoice is issued in this
Supplier Ref:instance rather than a debit
note. Date:
Customer’s Name & Address
Below is anNo
Debit Note example of a debit note

Item description Quantity Unit price Total___________

Total to be debited:
Reasons for debit:
Credit Note is used to correct an overcharge e.g. if 25 items are sent, but only 20
were requested on the order, then a credit note will be prepared to reduce the bill
by the value of those 5 items. The extra 5 items would be returned to the
supplier. A credit note can also be used where goods or services are
unsatisfactory e.g. goods are damaged or wrong price charged.

The following is a layout of a credit note

Credit Note
Customer’s Name & Address
Customer Ref:
Date:
Supplier’s Name & Address
Credit Note No:

Item Description Quantity Unit price Total______

Total to be credited

Reason for credit:

Statement
Statement is a summary of all of the invoices, payments, credit and debit notes
during a period of time. A running balance (total) is used to show the effect of
each transaction i.e. invoices and debit notes increase the total amount which is
owed, and credit notes and payments reduce the amount which is owed. This is
essential as it helps the supplier and the buyer to keep a record of invoices sent
and paid during a period of time.

Below is the layout and a specimen of a statement

Statement
From………/…………/………To……./………/………
Customer’s Name & Address
Customer Ref:
Date:
Supplier’s Name & Address

Date Details Amount Balance_________

Balance remaining
Specimen
Details Amount Balance
5/02/04 Invoice No. 011 $1 000.00 $1 000.00
10/02/04 Credit Note 005 $ 300.00 $ 700.00
20/02/04 Invoice No. 13 $ 800.00 $1 500.00
25/02/04 Payment $ 600.00 $ 900.00
Received
28/02/04 Invoice No. 16 $1 200.00 $2 100.00

Balance remaining $2 100.00

NB: The balance column shows a running total of how much is owed at each
date. Invoices and Debit Notes are added to the balance as they increase the
amount which is owed; credit notes and payments are subtracted from the
balance as they decrease the amount which is owed.
The other documents used by the business are enquiry, quotation, price list,
delivery note and consignment note.

Enquiry letter is a letter from the customer asking about prices, range of goods,
specifications etc
Quotation is a reply to the enquiry giving details about the specific items or
services that the customer has enquired about.

Price list is a list showing all of the items for sale together with their prices.

Order Note is a letter requesting goods from the supplier.

Below is a layout of an order note

Order
Supplier’s Name & Address Customer’s Name & Address
Customer Ref:
Date:
____________________________________________________________
Item Description Quantity Unit price Total________

TOTAL_________________

NB: customer ref maybe used as a special code number given to the customer to
help the supplier identify any previous dealings with that customer. If a letter is
used instead of an order form, these columns should still be used as part of the
body of the letter so that the order is clear and easy to understand.
Delivery Note is a list of items sent and the quantities of each item. It is sent by
the supplier for the customer to check carefully that the correct items and
quantities have been delivered and then sign. The delivery note only shows
items and quantity. The delivery note should be given a special number so that
he or she can find his copy easily.

Below is the layout of Delivery Note

Delivery note
Customer’s Name & Address:
Customer Ref:
Date:
Supplier’s name & Address
Delivery Note No:

Item description Quantity___________

Customer’s signature………………_______________________________

Consignment Note is used with or instead of a delivery note where the goods are
delivered by someone other than the supplier e.g. for goods delivered by sea or
rail.

Entrepreneurs should consider the following. When choosing a supplier: prices,

quality, delivery, customer service, location, terms of payment, discounts and
business hours.
Appreciation of Books of Accounts
In business the entrepreneur should be able to appreciate books of accounts.
These include the books of original entry or prime entry and the ledger book.
The books of prime entry include the cashbook, purchases journal book,
purchases returns book and the sales returns book and the general journal book.
The ledger book is the main book of accounts.

Cashbook
This is the book of original entry used to record all cash transactions that is all
money that comes into and goes out of the business on a daily basis. A
cashbook can be used to determine the amount of money left over at the end of
the month. Below is a layout of a cashbook

Debit side (Receipts side) Dr Credit side (Payments side) Cr

Date Details Cash Bank Date Details Cash Bank
(Receipts) (Payments)

Example
1/02 E Gobvu starts business with capital: Cash $ 5 000.00
Bank $50 000.00
8/02 Sales (cash) $15 000.00
5/02 Buys stock with cheque $10 000.00
15/02 Telephone bill paid by cheque $ 5 000.00
18/02 Pay cash into the bank $10 000.00
20/02 Sales (cheque) $20 000.00
22/02 Pay wages (cash) $10 000.00
23/02 Withdraw from the bank to keep in business $ 5 000.00
28/02 E Gobvu writes cheque for personal use $15 000.00

E Gobvu cash book for the month of February 2011

Date Receipts Cash Bank Date Payments Cash Bank
(Details) (Details)
1/02 Capital 5 000 50 5/02 Purchases 10 000
8/02 Sales 15 000 000 15/02 Telephone bill 5 000
18/02 Deposit 18/02 Deposit 10
20/02 Sales 10 22/02 Wages 000
23/02 Withdrawal 5 000 000 23/02 Withdrawal 10
20 28/02 Drawings 000
25 000 29/02 Balance c/f 5 45 000
000_ 000 80 000
1/03 Balance b/f 15
5 000 80 000
000 5
000
45 25
000 000

Notes
The cash book is divided into two halves that is Debit Side (Dr) or Receipts side
and the Credit Side Payment side (Cr). This means that when money comes into
the business, it is recorded on the left hand side (Receipts) and on the right hand
side (Payment) for money going out of the business.
- Capital refers to the money being invested by the entrepreneur into the
business.
- Purchases refer to goods bought by the business for resale.
- Drawings relates to money taken out of business for personal use.
- Transfer from Bank to Cash refers to money taken out of bank account to be
kept as cash in business. This transaction has to be recorded in the
cashbook to show that the money has been moved from one place to the
other, otherwise the totals for the money left in the bank and in cash at the
end of the month will be incorrect.
- When money is withdrawn from the bank account, money has gone out of the
bank as such there is need to record it I the Bank column on the Payments
side of the Cash Book. This money is added to our supply of cash in the
business and a record has to be made on the cash column on the Receipts
side of the cashbook. The reverse is true when the business transfers cash
from the business into the bank.
- Balance carried forward (c/f) is determined at the end of the month by
subtracting the total payments (money out) from the total receipts are $25 000
and total cash payments are $20 000, therefore $5 000 is left at the end of the
month $25 000 has come in and $20 000 has gone out. $5 000 is the
balance carried forward because it is the amount that will be starting the next
month and will be recorded as balance b/f (balance brought forward)

Purchases journal
This is a book of primary entry where goods on credit for re-sale are recorded.
The transactions are recorded as follows:

Example: Mutsvedu (Pvt) Ltd

10 February bought $5 000 stock on credit from E Gobvu
18 February bought $5 000 stock on credit from T Timothy

Mutsvedu D Purchases journal for the month of February 2011

Date Details Folio Dr Cr
10/02 E Gobvu $10 000.00
18/02 T Timothy $ 5 000.00
Dr Purchases A/C $15 000.00

Sales Journal
- This is a book of primary entry where goods returned by customers are
recorded

Example: Mutsvedu (Pvt) Ltd

Mutsvedu D Sales Returns Journal for the Feb 2004

20/02 B Sali returned goods $2 000.00

22/02 T Tom returned goods $5 000.00

Date Details Folio Dr Cr

20/02 B Sali $2 000.00
22/02 T Tom $5 000.00
Dr Sales Returns $7 000.00

General Journal
This is used to enter all transactions which cannot conveniently be entered into
one of the other subsidiary books e.g. fixed assets bought on credit such as
furniture.

Example; Mutsvedu (Pvt) Ltd

01/02 Received an invoice of $100 000.00 for office furniture bought on credit
form Alice Mabinge
02/02 Bought stationary on credit from Alice Mabinge $10 000.00

Date Details Folio Dr Cr

01/02 Office furniture 100 000.00
Alice Mabinge 100 000.00
02/02 Stationery 10 000.00
Alice Mabinge

The Ledger Book

This is the main book of account. All other books of account are subsidiary to the
ledger and are used to record transactions as they occur, prior to their entry or
posting to the ledger.

The ledger is ruled as follows:

Dr Cr
Date Details Folio Amount Date Details Folio Amount
Notes:
- The ledger is divided into two halves that is the left-hand side called debit side
and the right hand side called credit side. The abbreviations Dr and Cr are
used respectively at the top of each account as shown above.
- The first column is for dates, the second for particulars of the transactions, the
third, a folio column (referred to hereafter) and the fourth, or money column
for the amount of each transaction.
- The two sides of the account (sometimes contained on two pages facing each
other) are numbered alike and are together called a folio.
- The universal rule in entering or posting transactions to the ledger is that
credit the giver and debit the receiver.
ACCOUNTING EQUATION
When an entrepreneur starts a business he supplies part of the resources
(Capital).He seeks assistance from other sources (Liabilities), so as to have
adequate resources .These resources are the assets of the business. At any
point of time the assets of any entity must be equal (in monetary terms) to the
total of equities. This can therefore be expressed as

ASSETS = CAPITAL + LIABILITIES

What are the resources? Who supplies the equities to acquire the
assets?

Account
It is a place where all information referring to a particular asset or liability or
capital is entered.
Business is not entirely carried out on cash basis, many of the things bought
when a company is established are not exhausted straight away e.g. buildings
and machinery. It is necessary therefore to have some method of showing the
financial position of the business from time to time and of calculating the amount
of profit which is available for the entrepreneur. This is the purpose of a system
of accounts.
Asset Accounts
These are the actual resources in a business and can include:
(i) Tangible/Fixed/Non Current assets :
 Buildings, Machinery ,Motor vehicles etc
(ii) Intangible/Current assets:
 Cash: coins and paper currency, money orders
 Bank: bank deposits and withdrawals, cheques
 Stock at hand
 Accounts receivables: goods and services sold on credit to debtors
which are being expected to be paid at an agreed time.
 Prepaid expenses: when an entrepreneur has made a payment in
advance, he has done himself a favour.
Liability Accounts
This is money owing for goods supplied to the business and can include:
(i) Long term /Non Current Liabilities
 Loans
(ii) Short term/Current Liabilities
 Accounts payable :credit purchases/Creditors
  Accruals: Expenses we still have to pay at the end of a financial
period e.g. rent payable, wages payable.
 Unearned revenue: this is when a product or service was paid for in
advance to us before we have supplied it e.g. unearned wages,
unearned rent
Appreciation of Books of Accounts
In business the entrepreneur should be able to appreciate books of accounts.
These include the books of original entry or prime entry and the ledger book.
The books of prime entry include the cashbook, purchases journal book,
purchases returns book and the sales returns book and the general journal book.
The ledger book is the main book of accounts.

Cashbook
This is the book of original entry used to record all cash transactions that is all
money that comes into and goes out of the business on a daily basis. A
cashbook can be used to determine the amount of money left over at the end of
the month. Below is a layout of a cashbook

Debit side (Receipts side) Dr Credit side (Payments side) Cr

Date Details Cash Bank Date Details Cash Bank
(Receipts) (Payments)

Example
1/02 E Gobvu starts business with capital: Cash $ 5 000.00
Bank $50 000.00
8/02 Sales (cash) $15 000.00
5/02 Buys stock with cheque $10 000.00
15/02 Telephone bill paid by cheque $ 5 000.00
18/02 Pay cash into the bank $10 000.00
20/02 Sales (cheque) $20 000.00
22/02 Pay wages (cash) $10 000.00
23/02 Withdraw from the bank to keep in business $ 5 000.00
28/02 E Gobvu writes cheque for personal use $15 000.00

E Gobvu cash book for the month of February 2011

Date Receipts Cash Bank Date Payments Cash Bank
(Details) (Details)
1/02 Capital 5 000 50 5/02 Purchases 10 000
8/02 Sales 15 000 000 15/02 Telephone bill 5 000
18/02 Deposit 18/02 Deposit 10
20/02 Sales 10 22/02 Wages 000
23/02 Withdrawal 5 000 000 23/02 Withdrawal 10
20 28/02 Drawings 000
25 000 29/02 Balance c/f 5 45 000
000_ 000 80 000
1/03 Balance b/f 15
5 000 80 000
000 5
000
45 25
000 000
Notes
The cash book is divided into two halves that is Debit Side (Dr) or Receipts side
and the Credit Side Payment side (Cr). This means that when money comes into
the business, it is recorded on the left hand side (Receipts) and on the right hand
side (Payment) for money going out of the business.
- Capital refers to the money being invested by the entrepreneur into the
business.
- Purchases refer to goods bought by the business for resale.
- Drawings relates to money taken out of business for personal use.
- Transfer from Bank to Cash refers to money taken out of bank account to be
kept as cash in business. This transaction has to be recorded in the
cashbook to show that the money has been moved from one place to the
other, otherwise the totals for the money left in the bank and in cash at the
end of the month will be incorrect.
- When money is withdrawn from the bank account, money has gone out of the
bank as such there is need to record it I the Bank column on the Payments
side of the Cash Book. This money is added to our supply of cash in the
business and a record has to be made on the cash column on the Receipts
side of the cashbook. The reverse is true when the business transfers cash
from the business into the bank.
- Balance carried forward (c/f) is determined at the end of the month by
subtracting the total payments (money out) from the total receipts are $25 000
and total cash payments are $20 000, therefore $5 000 is left at the end of the
month $25 000 has come in and $20 000 has gone out. $5 000 is the
balance carried forward because it is the amount that will be starting the next
month and will be recorded as balance b/f (balance brought forward)
-
Purchases journal
This is a book of primary entry where goods on credit for re-sale are recorded.
The transactions are recorded as follows:

Example: Mutsvedu (Pvt) Ltd

10 February bought $5 000 stock on credit from E Gobvu
18 February bought $5 000 stock on credit from T Timothy

Mutsvedu D Purchases journal for the month of February 2011

Date Details Folio Dr Cr
10/02 E Gobvu $10 000.00
18/02 T Timothy $ 5 000.00
Dr Purchases A/C $15 000.00

Sales Journal
- This is a book of primary entry where goods returned by customers are
recorded

Example: Mutsvedu (Pvt) Ltd

Mutsvedu D Sales Returns Journal for the Feb 2004

20/02 B Sali returned goods $2 000.00

22/02 T Tom returned goods $5 000.00

Date Details Folio Dr Cr

20/02 B Sali $2 000.00
22/02 T Tom $5 000.00
Dr Sales Returns $7 000.00
General Journal
This is used to enter all transactions which cannot conveniently be entered into
one of the other subsidiary books e.g. fixed assets bought on credit such as
furniture.

Example; Mutsvedu (Pvt) Ltd

01/02 Received an invoice of $100 000.00 for office furniture bought on credit
form Alice Mabinge
02/02 Bought stationary on credit from Alice Mabinge $10 000.00

Date Details Folio Dr Cr

01/02 Office furniture 100 000.00
Alice Mabinge 100 000.00
02/02 Stationery 10 000.00
Alice Mabinge

The Ledger Book

This is the main book of account. All other books of account are subsidiary to the
ledger and are used to record transactions as they occur, prior to their entry or
posting to the ledger.

The ledger is ruled as follows:

Dr Cr
Date Details Folio Amount Date Details Folio Amount

Notes:
- The ledger is divided into two halves that is the left-hand side called debit side
and the right hand side called credit side. The abbreviations Dr and Cr are
used respectively at the top of each account as shown above.
- The first column is for dates, the second for particulars of the transactions, the
third, a folio column (referred to hereafter) and the fourth, or money column
for the amount of each transaction.
- The two sides of the account (sometimes contained on two pages facing each
other) are numbered alike and are together called a folio.
- The universal rule in entering or posting transactions to the ledger is that
credit the giver and debit the receiver.

DOUBLE ENTRY SYSTEM

It is based on the Double entry concept which is one of the universally
acknowledges accounting concepts. It says that for every transaction there is a
debit and credit entry.

 Debit the receiver

 Credit the giver

Example 1

2010 Debit (Dr) Credit (Cr)

August 1 Started business with $1000 cash Cash Account Capital Account
Paid $900 of the opening cash into Bank a/c Cash a/c
2 the bank
Bought goods on credit $78 from Purchases a/c S.Holmes a/c
4 S.Holmes
Bought a motor van by cheque Motor Van a/c Bank a/c
5 $500
Bought goods for cash $55 Purchases a/c Cash a/c
7
1 Sold goods on credit $98 to D.Moore a/c Sales a/c
0 D.Moore
1 Returned goods to S.Holmes $18 S.Holmes a/c Purchases
2 Returns
1 Sold goods for cash $28 Cash a/c Sales a/c
9
2 Bought fixtures on credit from Fixtures a/c Kingston a/c
2 Kingston Equipment Company
$150
2 D.Watson lent us $100 paying us Bank a/c Loan-D.Watson
4 the money by cheque
2 We paid S.Holmes his account by S.Holmes a/c Bank a/c
9 cheque $60
3 We paid Kingston Equipment Co. Kingston a/c Bank a/c
1 by cheque $150

Opening up accounts and closing them in the ledger

When transactions transpire within a month/financial period they are posted into
the ledger of the company’s books from subsidiary books. Accounts for related
transactions are recorded in the same accounts and these are balanced off at the
end of a period.

 We are going to used T-Accounts for our ledger to open up accounts

using Example 1 above. We are now practically entering the theoretically
done debits and credits in the example.

Capital a/c Kingston 150

Bal c/d 290
Bal c/d 1000 Cash 1000 1000 1000
1000 1000 Bal b/d 290

Bal b/d 1000

Purchases a/c
S.Holmes 78 Bal c/d 133
Cash a/c Cash 55
Capital 1000 Bank 900
Sales 28 Purchases 55
Bal c/d 73 133 133
1028 1028 Bal b/d 133
Bal b/d 73

Bank a/c
Cash 900M.Van 500
Loan 100 S.Holmes 60 S.Holmes a/c
P.Returns 18 Purchases 78
Bank 60 Bal b/d 126
78 78
D.Moore a/c
Sales 98 Bal c/d 98
Motor Van a/c 98 98
Bank 500 Bal c/d 500 Bal b/d 98
500 500 Purchases Returns a/c
Bal c/d 18 S.Holmes 18
Bal b/d 500 18 18

Bal b/d 18

Fixtures a/c
Bank 150 Bal c/d 150
Sales a/c 150 150
Bal c/d 126 D.Moore 98 Bal b/d 150
Cash 28
126 126

Loan- D.Watson a/c

Bal c/d 100 Bank 100
100 100
Bal b/d 100

Kingston Equipment a/c

Bank 150 Fixtures
TRIAL BALANCE
We have been practising the double entry concept whereby each transaction has
both a debit and credit entry. All items recorded on the credit side should equal in
total those on the debit side of the books. To see if the two totals are equal or
that they balance, a trial balance may be drawn up at the end of a financial
period.

Definition: A trial balance is simply a proof of the equality of debit and credit
balances in the accounts.

 Using Example 1 which we have just balanced off, taking the Bal b/d from
each account, the following is the extracted Trial Balance as at 31 August
2010.

Trial Balance as at 31 August 2010

Dr Cr

Capital 1000
Cash 73
Bank 290
Purchases 133
Motor Van 500
Sales 126
D.Moore 98
Purchases Returns 18
Fixtures 150
Loan-D.Watson 100
1244 1244
The two sides are equal therefore the trial balance has balanced. This shows that
our transactions that we posted into the ledger are correct.
FINAL ACCOUNTS OF A SOLE TRADER
 Income Statement/Trading Profit and Loss Account
 Balance Sheet
Income Statement
The main reason people set up businesses is to make profits. Losses can occur
if the business becomes unsuccessful. The calculation of profit/loss is the most
important objective of the accounting function. The profits are calculated by
drawing up a special account called a Trading Profit and Loss Account. The
account is split into two sections, one in which the Gross Profit is found and in
the other, Net Profit is calculated
 Gross Profit-Calculated in the Trading Account .This is the excess of sales
over the cost of goods sold in the period.
 Net Profit-Calculated in the Profit and Loss Acount.This is what is left of
the gross profit after all other expenses have been deducted.
 Expenses-The value of all the assets that has been used up to supply
goods and services and therefore obtain revenues.
To compile a Trading Profit and Los Account, one needs to have the Trial
Balance first.
Balance Sheet
After compiling the Trading Profit and Loss Account, the balances that remain on
the Trial Balance pertain to the Balance Sheet. These will usually be balances for
Assets, Liabilities and Capital.
A Balance Sheet is a record of the business Assets, Liabilities and Resultant
stockholders equity (Capital + Profit-Drawings) to depict a financial situation on a
specific date.

Example 2
The following is a Trial Balance of R.Graham as at 30 September 2010.
Dr Cr
$ $
Stock 1 October 2009 2368
Carriage outwards 200
Carriage inwards 310
Returns inwards 205
Returns outwards 322
Purchases 11874
Sales 18600
Salaries and wages 3862
Rent 304
Insurance 78
Motor Expenses 664
Office expenses 216
Lighting and Heating 166
General expenses 314
Premises 5000
Motor Vehicle 1800
Fixtures and Fittings 350
Debtors 3896
Creditors 1731
Cash at bank 482
Drawings 1200
Capital 12636
33 289 33 289
Stock at 30 September 2010 was $2946.
Required:
Draw up a:
1. Trading Profit and Loss Account for the year ended 30 September 2010.
2. Balance Sheet as at 30 September 2010.
Trading Profit and Loss Account for the year ended 30 September 2010.
Sales 18 600
Less Returns inwards (205)
18 395
Less Cost of goods sold:
Opening Stock 2 368
Add Purchases 11 874
Less Returns outwards (322)
Add Carriage inwards 310
Less Closing Stock (2 946) 11 284
GROSS PROFIT 7 111
Less Expenses:
Carriage outwards 200
Salaries and Wages 3 862
Rent 304
Insurance 78
Motor Expenses 664
Office Expenses 216
Lighting and Heating 166
General Expenses 314 5 804
NET PROFIT 1 307

Balance Sheet as at 30 September 2010

Non Current Assets

Premises 5 000
Fixtures and Fittings 350
Motor Vehicle 1 800
7 150

Net Current Assets 5 593

Current Assets 7 324

Stock 2 946
Debtors 3 896
Bank 482
Current Liabilities 1 731
Creditors 1 731

Total Assets 12 743

Capital 12 636
Add Net Profit 1 307
Less Drawings (1 200)

12 743

CAPITAL STRUCTURE & CAPITAL GEARING CONCEPT

Capital structure
The capital structure is how a company finances its overall operations and
growth by using different sources of funds. This is also related to the
capitalisation of a company which describes the composition of a company’s
permanent or long term capital which consists of debt and equity.

When people are talking refer to capital structure they are most likely referring to
a company’s debt-to-equity ratio, which provides insight into how risky a
company is. Usually a company more heavily financed by debt (debt capital)
poses greater risk as this company is relatively highly levered. A healthy
proportion of equity capital as opposed to debt capital in a company’s’ capital
structure is an indication of financial fitness.
 Equity Capital: in a company’s’ capital structure, equity consists of
a company’s common and preferred stock plus retained earnings,
which are summed up in the shareholders equity account in the
balance sheet.

 Debt Capital: the debt component of a company’s ’capitalisation

should consist of short term borrowings (notes payable), the current
portion of long term debt (interest), long term debt, 2/3 of the
principal amount of operating leases and redeemable preferred
stock.
Debt-Equity relationship
Shrewd use of leverage (debt) increases the amount of financial resources
available to a company for growth and expansion. The assumption is that
management can earn more on borrowed funds than it pays in interest expense
and fees on these funds.

A company considered too highly leveraged (too much debt versus equity) may
find itself restricted in action by its creditors and /or may have its profitability hurt
because of paying high interest charges.
A company’s’ debt-equity relationship varies according to the industry it falls, line
of business and stage of development. However common sense tells us that
generally no matter what kind of business or level of development it is at, these
companies should have lower debt and higher equity levels. This status reflects a
very positive sign of investment quality.

Capital Ratios and indicators

Three different ratios are used to assess the financial strength of a company’s’
capitalisation structure.

 Debt ratio: total liabilities

total assets.

More of total liabilities means less equity and therefore indicates a more
leveraged position.
 Debt/Equity Ratio: total liabilities
total shareholders equity.

 Capitalisation Ratio: total debt

total capitalisation

(Total debt = the sum of obligations categorised as debt + total

shareholders equity)
Expressed as a percentage, a low number is indicative of a healthy equity
cushion, which is always more desirable than a high percentage of debt.

N.B The first two are popular measurements; however it’s the capitalisation
ratio that delivers the key insights to evaluating a company’s capital position.

Capital gearing concept

Few people have the money to cover all the initial expenses in starting a
business. This is why bank loans are so vitally important to stimulate the
economy. The million dollar question is what percentage should the entrepreneur
contribute and what should come from the bank or finance institution.

The first thing that the banks check is if the entrepreneur’s contribution is in the
form of imaginative cash. The owner should not have made other loans or taken
the money from the house bond, but has the finance available in the form of cash
in the bank. The reason is that banks would often look for surety in the form of an
asset, such as the owner’s primary residence.

Once sufficient capital is raised, the outstanding amount can be borrowed.

This is called a geared deal, with gearing simply being the amount
borrowed in relation to the total set-up amount of the business.
In an ideal world, the business owner is able to contribute enough own capital to
secure a gearing ratio of 50%, ensuring that the repayments are generally
manageable. If a prospective business owner is able to put down 100% of the
cost, he has the option of not having any gearing or perhaps investing in a
business worth twice as much, again with a 50% gearing ratio. Investing in a
larger business creates a possibility of better future returns.

It is also possible to secure gearing ratios of as high as 20% from finance

institutions. These higher ratios are not always advisable, because the higher the
gearing ratio, the higher the chance of business failure becomes because of
higher monthly installments on the repayment of the loan, as well as the effects
of interest on the remaining 80% of the total cost of the business. Obviously, the
financiers expect a rate of return that is higher than the interest rate, with the
ability to pay off the loan within a specified time, usually five years. The higher
the gearing, the more difficult this becomes.

Finance institutions are generally a bit more lenient when it comes to franchise
finance because of these brands’ proven abilities to produce returns on
investment. Most of these institutions use a guideline of expecting gearing of
between 30 and 50%, although when economies are depressed few would
consider a gearing ratio of lower than 40%.Some financial institutions may allow
higher gearing ratios when an existing business is being bought out and there is
a cash flow history, as opposed to starting from scratch.

Unfortunately, not every person buying or starting a business has massive

amounts of capital available, and a highly geared deal is all that is open to them.
In these cases, alternative forms of finance can be considered.

 Capital Gearing ratio: owner's equity (or capital)

Borrowed funds

Gearing is a measure of financial leverage, demonstrating the degree to

which a firm's activities are funded by owner's funds versus creditor's funds.

ACCOUNTING RATIO ANALYSIS

The analysis of Accounting statements help in the diagnosis of trends which
indicate the magnitude , timing, or risk ness of the business’s future cash flows.
Ratios compare accounting variables and they are drawn from both the Income
Statement and Balance Sheet. Ratios need very careful handling. They are very
useful if used correctly and very misleading otherwise.
1. Liquidity Ratios: Indicate a business’s ability to pay its short term
liabilities at the correct time. Failure to do so could result in the shutting
down of the business. When a company is able to pay its debts as they fall
due, that company is said to be liquid.

 Current Ratio = Current Assets

Current Liabilities

This compares assets which will become liquid within 12 months

with liabilities which will be due for payment in the same period.

A current ratio of 2 is standard. Ratio of 1 or less is considered low

and indicative of financial difficulties. Very high rates suggest
excess current assets that are probably having an adverse effect
 on the long term profitability of the business. If it is more than 2 that
means that we are too liquid, so we need to reduce or work on one
of them.

 Quick/Acid Test Ratio = Current Assets - Stock

Current Liabilities

This indicates the business’s ability to meet its current liabilities

without using stock.

A ratio less than 1 is not alarming a very high ratio suggests excess
cash, a credit policy that needs revamping or a change needed in
the composition of current vs. long term assets. A ratio of 1.5
means you are holding up too much stock or too much money. The
ideal ratio should be less than 1.If it is too low then you need loosen
up your credit policies and increase your debtors.

2. Debt Management Ratios: Deal with the amount of debt in the business
capital structure and its ability to service the legal obligations.

High geared means high risk and requires you to acquire more borrowed
money.
Low geared means low risk and requires you to inject more of your
money.

 Total Debt to Total Assets Ratio = Total Debt

Total Assets

Indicates how much of the business funds are being supplied by

creditors. Total debt includes all current + non current debts + lease
obligations.

A high ratio indicates the use of financial leverage to magnify

earnings, while a low ratio indicates relatively low use of creditors’
funds. E.g. manufacturing and mining companies need to use more
of creditors’ funds because can not afford to buy all needed
machinery at once. Their products are high priced and can pay
back their obligations wit time.

 Days Purchases Outstanding = Credit Purchases

Purchases/365

Indicates how prompt a business is at paying its bills.

 Times Interest Earned Ratio = Earnings before Interest(EBIT)

Interest

Indicates the ability to meet the interest requirements on both short

and long term debts. How many times can you pay the interest from
your EBIT?

A high ratio indicates a safe situation but that perhaps not enough
financial leverage is being used. A low ratio may call for immediate
attention; more sales will be needed to generate income.
  Fixed charges coverage Ratio = EBIT + Lease expenses
Interest + Lease expenses

Provides a more comprehensive picture of the business’s ability to

meet it’s legal financial requirements.

A high ratio is more desirable than a low one.

3. Profitability Ratios: Relate income to sales, assets or capital.

 Net Profit Margin = Net Profit

Net Sales

This ratio is used to measure the efficiency of management. A low

margin indicates that not too much sales are guaranteed relative to
expenses or that expenses are out of control or both.

 Return on Investment (ROI) = Net Profit

Total Assets

It indicates the ability of the business to earn satisfactory returns on

all assets it employs. The higher the rate the better because
provides some indication of future growth prospects.

 Return on Equity (ROE) = Net Profit or Net Profit

Capital Market value of
Equity
It indicates return on the owners’ investment in the business. It is
an accounting measure on how well management is performing

4. Asset Management Ratios: They indicate how efficiently the business is

using its assets .They can also be called Activity Ratios. If too much
money is tied up in certain types of assets that could be more productive
elsewhere then the business is not profitable as it should be.

 Days Sales outstanding = Credit Sales

Sales/365

The higher the DSO the higher the cash conversion cycle. This
ratio estimates the number of days it takes on average to collect the
sales. By dividing sales by 365 we are finding the average sales
per day.

The ratio indicates how effective the credit granting and

management activities are. A high DSO probably indicates many
uncollectible receivables. A low ratio indicates that credit granting
policies are very restrictive than granting sales.

 Inventory turnover Ratio = Cost of goods Sold

Average stock

It measures the times in a year the business turns over its

inventory/stock.
 The lower the Inventory turnover the higher the cash conversion
cycle. How many times do you order? If you order more it means
that you are selling more on credit. Other things being equal and
assuming that sales are moving smoothly, a high turnover suggests
efficient Inventory management, a low turnover figure often
indicates obsolete stock or lack of inventory management.

 Long Term Asset Turnover Ratio = Sales

Non current Assets

It provides an indication of a business ability to create sales based

on long term asset base. The ratio provides an indication of how
effective the business in using its assets. The higher the ratio,the
more effective the utilisation of assets. A low ratio indicates that the
marketing effort requires attention.

 Total Asset Turnover Ratio = Sales

Total Assets
It is an indication of the business ability to generate sales in relation
to its total asset base. A high turnover normally reflects good
management, whereas a low ratio suggests the need to reassess
the overall strategy of the business, marketing effort and the capital
expenditure programme.

STOCK CONTROL
Why do we control stock?
 To maintain stock levels that will minimise the Total Stock Cost.
Objectives of Inventory Management
A firm wishing to maximise profits will have the following objectives:
 Maximise customer service
 Low cost plant operation
 Minimum inventory investment
Maximise customer service
It describes the availability of items when needed and it is a measurement of
inventory management effectiveness. The customer in this case can be either
one of the following; a purchaser, distributor, another plant or work station where
the next operation is to be performed. Some measures of customer service are
percentage of orders shipped on schedule, percentage of line items shipped on
schedule and order days out of stock. Safety stock is essential in cases of
uncertainty so as not to disappoint your customers.

Low cost plant operation

Efficient inventory build up allows continuous production to occur resulting in
lower set up costs and an increase in production capacity due to production
resources being used a greater portion of the time for processing as opposed to
set up. Lower ordering costs per unit and quantity discounts can be used to
achieve this objective.

Minimum inventory investment

Batching economies in procurement shipments e.g. truckloads can
reduce/minimise the amount of money you use in inventory transportation and
carrying costs.
METHODS OF STOCK CONTROL
To maintain effective control over stock, it is necessary to determine:
 What should be the maximum and minimum stocks
  What may be regarded as a standard order for a particular commodity
and
 The point at which a further supply should be ordered.
There are several methods for controlling stock; you may opt for one method or a
mixture of two or more if you have various types of stock.

(i) Just in Time (JIT)

It aims to reduce cost by cutting stock to a minimum. Items are
delivered when needed and used immediately. This method carries
the risk of running out of stock, so you need to be confident that
your suppliers can deliver on demand.

(ii) Batch control/2 Bin System

A quantity of an item equal to the order quantity is set aside
(frequently in a separate / 2nd bin), and not touched until all main
stock is used up. When this stock (safety stock) needs to be used,
the purchasing department is notified and a replenishment order is
placed. e.g. Book stores use red –tag system where by a tag is
placed in the stock at a point equal to order point. When a customer
takes that book to the checkout, the store is effectively notified that
it is time to reorder that title.

If your needs are predictable you may order a fixed quantity of

stock every time you place an order/order at a fixed interval.

(iii) Economic Order Quantity(EOQ)

This is the quantity of materials used at each order point that
minimises the total annual stocking cost for a material n a fixed
order quantity inventory system.

It is a standard formula used to arrive at a balance between holding

too much or too little stock.

EOQ formula: Q = 2DS

C

Where Q=Quantity ordered at each order point

D=Annual demand for a material in units
S=Average cost of completing an order
C=Cost of carrying one unit in inventory for one year.

It is secured at the ‘least unit cost’ of stocking a material. The costs

that enter into the unit cost maybe divided into two groups:

 Costs which decrease as the size of the order is increased.

a. Purchase price (quantity discounts)
b. Cost of placing an order
c. Stock-out costs e.g. lost contribution through lost sale
and cost of production stoppages
 Costs which tend to increase as the size of the order is
increased.
a. Cost of storage
b. Charges attributable to storage e.g. interest on
investment, insurance, damage, obsolescence, and
cost of warehouse space.
 (iv) Stock Review
In this method you have regular reviews of stock. At every review
you place an order to return stocks to a predetermined level.

(v) First in First Out(FIFO)

This system ensures that perishable stock is used efficiently so that
it does not deteriorate. Stock is identified by date received and
moves on through each stage of production in strict order
Stock Taking
- Stocktaking is an essential tool in checking that the stock records are
accurate. There are several reasons why the actual amount of items fail to
tally or agree with the stock records.
- Stock taking is simply defined as the physical counting or checking of the
stock items. The physically counted stock items may fail to agree with the
stock records because
(a) The items were stolen or damaged and a record was not made
(b) Goods were bought/sold but a record was to made
(c) Sales or purchases have been recorded incorrectly

How to carry out a stock take

STEPS:
1st Set a date for stock take and inform the publics if business hours are
interrupted
2nd Organize the stock to facilitate easy counting
3rd Develop a stock list
th
4 Physically count every item as per stock list and enter the figure in the
‘stock take’ column
5th Enter the last balance figure from the stock cards in the stock card column
for each item
6th Deduct the stock card figure form the stock take figure and enter this
amount in the Difference column
7th Find out the reasons if there is a difference i.e. if there is more or less
stock than shown on the stock card

Below is a specimen of a stocktaking list

Stock taking list

Item Stock take Stock card Difference

Eversharp pen 1 000 1 150 -150

Pencil sharpener 200 200 0
Ruler 300 350 +50
Exercise book (A4) 1 000 1 000 0

As shown on the stock list, during the stock take there were 150 less of ever-
sharp pens and 50 more than recorded on the stock cards. The anomalies or
differences should be corrected on the stock card.

CHAPTER 9
COSTING AND PRICING

OBJECTIVES
By the end of this unit you should be able to:
Define the following costing terms
 Costing
 Costs
 Direct costs
 Direct labour
 Direct expenses
 Indirect costs
 Calculate total costs per item
 Discuss the importance of costing to the entrepreneur
 Define pricing
 Calculate prices of products
 Discuss the pricing factors
Definition of costing terms
Costing
This is the method or way of calculating the total costs of making or selling a
product or providing a service
Costs
These are all the money that the business spends to make and sell its products
or services
Direct Costs
These relates to all costs that are directly related to the products or services that
the business makes or sells. There are two types of direct costs namely direct
material costs and direct labour costs.
Direct Material costs
- These are all the money that the business/entrepreneur spends on the parts
and materials that become part of or are directly related or linked to the final
product or service that it/he/she makes or sells.
- NB: for a retailer’s or wholesaler’s, the costs of buying goods to resell are the
direct material costs. To be considered or counted as direct material costs,
the amount of material must be easy to calculate and the cost of the material
must be big enough to add a considerable amount to the total direct material
costs.
Direct labour costs
- These are all the money that the business or entrepreneurs spends on
wages, salaries and benefits for the people who are directly involved in the
production of its or his/her products or services
- The time spent on making the product must be easy to calculate and the cost
of the direct labour must be big enough to add a considerable amount to the
total direct labour costs. Retailers and wholesalers do not have employees
working directly in making products, so they do not have any direct labour
costs. For retailers and wholesalers, all salaries and wages are indirect
costs.
Direct expenses
- These are any expenses directly related to the production of the final product
e.g. delivery costs which relate only to delivery or raw materials used in
production of one product, hiring of a machine which is only used on one
product.
Indirect costs
- These are all other costs that the entrepreneur/business incurs in running the
business e.g. rent, interest, electricity, salaries of supervisor, managers,
 accounts clerks, secretary and other administration expenses. Indirect costs
are also known as overheads or expenses.
Calculate total cost per item
- Costing for a manufacturing or service operator. When calculating the cost of
producing an item, the entrepreneur should ensure that all costs are included.
That is direct and indirect costs. The entrepreneur must therefore, calculate
the direct maternal cost, direct labour and direct expenses of producing the
item and then add a proportion of the indirect costs to find the TOTAL COST
of producing the item.
- Formula: Total Cost = Direct Cost + Indirect Cost
- Before we calculate the total cost per item, it is important to have the costing
processes:
- Costing Process Where More Than One Product Is Produced
STEP I
Direct Material Direct labour cost: Direct Direct Cost
Cost: - Add the - (hrs per item x Expense Per Item
cost of raw + number of workers + =
materials used to x money
produce one
product item

STEP II
Indirect Cost per year

Add up all the Indirect costs for the year

Indirect Cost per item:

Total Indirect costs per year
Total number of items per year

STEP III Total cost per item:

Direct cost per item + indirect cost per item

NB: In both costing processes, costs per item may be calculated using a month
as the time factor instead of a year that is “ Instead of Indirect cost per year
divided by Total number of items per year” the Entrepreneur may use, “ Indirect
cost per month divided by number of items per month.
Costing calculations in detail (Manufacturer or service operator)

Stage I: Calculate Direct Material Costs

The entrepreneur should calculate the costs of all material
 That become part of or are directly related to the product or service
 That are easy to calculate and have a big enough cost to be counted
Stage II: Calculate Direct Labour Costs
 That is work out the costs of wages, salaries and benefits for the
employees who work directly in the production of the product or service
Stage III: Calculate Indirect Costs
 These are all other costs that the business incurs per month such as rent,
electricity, insurance, depreciation, water and so on.
Costing calculations where not more than one product is produced.
Exhibit
The entrepreneur – carpenter specializes in the manufacture of tables and has
the following details for costing. Calculate the total cost of one table.
Materials used: Timber 2 000.00
Nails 1 000.00
Varnish 500.00
Glue 500.00
One (1) worker takes 5 hours to produce one item. The carpenter is paid $1 000
per hour.
Other costs per month: Rent $ 5 000.00
Electricity $ 500.00
Other wages $10 000.00
Telephone $ 2 000.00
Transport $ 2 000.00
100 items are produced each month
Answer:
Direct Materials: Timber $2 000.00
Nails $1 000.00
Varnish $ 500.00
Glue $ 500.00
$4 000.00 (Direct Material/Cost)
Direct Labour: 1 x 5 hours/item x $1000/hr = $5000.00

Indirect Cost/item: Rent $ 5 000.00

Electricity $ 500.00
Other wages $10 000.00
Telephone $ 2 000.00
Transport t $ 2 000.00
$19 500.00

Indirect Cost/item: $19 500.00

100 items/month
= $195.00/item
Total cost of one item: Direct material cost + Direct Labour Cost + Direct
Expenses + Indirect Cost = $4 000.00 + $195.00
=$4 195.00

NB: There are not direct expenses

Further Questions
i) The entrepreneur uses the following to make a garment:
Materials: Fabric $2 000.00
Thread $ 500.00
Elastic $ 500.00
A tailor takes 4 hours to produce the garment and charges $500.00 per hour.
Other costs per year are as follows:
Rent $100 000.00
Transport $ 20 000.00
Electricity $ 30 000.00

2000 items are produced each year. Calculate the total cost per item.

ii) The entrepreneur produces desks and uses the following:

Materials: Timber $10 000.00
Nails $ 1 000.00
 Varnish $ 500.00
Paint $ 2 000.00

Direct expenses $5 000.00

Workers take 3 hours to make one desk. They are each paid $1 000.00 per
hour. Other costs of running the business per year are:
Rent $10 000.00
Electricity $ 5 000.00
Water $ 7 000.00
Transport $20 000.00
Other wages $20 000.00

1000 desks are produced each year. Calculate the total cost per item.

iii) The entrepreneur has the following to make a product item:

Materials $50 000/item

Indirect costs $2 000 000/year
40 000 items are produced per year
Workers take 2 hours to produce 1 (one) item. Calculate the total cost of product
item.

Calculation of total cost of 1 (one) item where several different products are
produced

If the entrepreneur produces several different types of products, it is not

appropriate to allocate the same amount of costs as in the case of one product
type. This is because more time may be spent in the making of one product and
little in the other. As such, one product has a greater proportion of the indirect
costs than the other. This is achieved by calculating the Indirect cost per item
and multiplying by the number of hours to produce one item. This enables the
entrepreneur to be able to calculate a different cost for each different product
which reflects the amount of time taken to produce that product.

Exhibit:
The entrepreneur used the following in making the dress and a trouser:

Material Dress Trousers

Fabric $800.00 $1 000.00

Thread $300.00 $ 400.00
Zip $100.00 $ 100.00
Button $100.00 $ 100.00

Two workers are each paid $2 000.00 per hour. Working together, they take 4
hours to produce one dress and 6 hours to produce one pair of trousers. Other
costs each year:
Rent $600 000.00
Electricity $240 000.00
Transport $240 000.00

The two workers each work for 40 hours a week and fifty weeks a year.
Calculate total cost per each item.
Answer:
Direct costs:

1st calculate direct material cost:

Materials Dress Trousers

Fabric $800.00 $1 000.00

Thread $300.00 $ 400.00
Zip $100.00 $ 100.00
Buttons $100.00__ $ 100.00_
$1 300.00 $1 600.00 per item

2nd calculate direct labour cost

Dress: 2 workers x 4hrs x $2 000.00
= $16 000.00 per dress

Trousers 2 workers x 4 hours x $2 000.00

= $24 000.00 per pair of trousers

3rd Total Direct Cost:

Dress: Direct material cost + Direct Labour
= $1 300.00 + $16 000.00
= $17 300.00 per dress

Trousers: $1 600.00 + $24 000

= $25 600.00 per pair of trousers

4th calculate indirect costs: Rent $6 000 000.00

Electricity $ 240 000.00
Transport $ 240 000.00_
$1 080 000/year

5th calculate production hours per year

1 Workers x 40 hrs/week x 50 weeks/year = 4 000hrs/year

6th indirect cost per hour:

Formula: indirect cost/year

Production hrs/yr

= 1 080 000/yr
4 000 hrs/yr

= $270/hr

7th calculate indirect cost per item:

Dress: 2 workers x 4hrs x $270/hr

= $ 1 660.00/dress

Trousers: 2 workers x 6 hrs x $270/hr

= $ 3 240.00/pair
8th Total cost: Dress: $1 300.00 + $16 000.00 + $1 660.00
= $18 960.00

Trousers: $1 600.00 + $24 000.00 + $3 240.00

= $28 840.00
Further Questions

The entrepreneur used the following to make a skirt and a Dress:

Materials Skirt Dress

Fabric $2 000.00 $3 000.00

Elastic $ 50.00 -
Zip - $ 80.00
Lace $ 90.00 $ 100.00

2 three)Workers take 4 hours for the skirt and 5 hours for the dress and are
each paid $2 000.00 per hour.

Indirect costs per year:

Rent $600 000.00

Electricity $360 000.00
Transport $240 000.00

Each worker works for 50 hours/week and 50 weeks/year. Calculate the total
cost per each item.

Costing for a retailer or wholesaler

Retailers and wholesalers have the same types of costs and can normally do
costing in the same manner. Some costs for retailers and wholesalers are
different from the costs of manufacturers and service operators.

To calculate the total cost of an item for the wholesaler or retailer, 3 steps are
followed that is: Step 1 Calculate Direct Material Cost
Step 2 Calculate Indirect Costs
Step 3 Add up Total Costs
Total cost = Direct Material Cost + Indirect cost

NB retailers/wholesalers do not have direct labour as they buy and sell goods
made by other businesses. Their employees do not make products or
manufacture, and as such all wages and salaries are indirect costs.

The direct material costs of retailers and wholesalers take the form costs of
buying goods.
The Indirect costs of the retailers and wholesalers are rent, electricity, insurance,
depreciation and so on.
Pricing
Definition: is the process of calculating an amount of money to charge
customers for goods and services produced or to be provided by the
entrepreneur.
Calculations of prices of product
After costing the next process is to calculate the price for which the products
should be offered
The two major methods of pricing calculation are mark-up and margin.
Mark up is profit expressed as a fraction or percentage of cost
It is calculated as: Profit (P) x 100%
Cost ©

Margin is profit expressed as a fraction or percentage of selling price

It is calculated as: Profit (P)______ x 100%
Selling Price (SP

Note that Profit = Selling Price – Cost

Example: If the selling price is $250.00 and the cost is $200, calculate profit,
mark up and margin.

Solution
Profit = Selling Price – Cost
= $250.00 - $200.00
= $50.00

Mark up = 50 (Profit)
200 (Cost)
= ¼ as a fraction or 25% as percentage

Margin = 50 (Profit)______
250 (Selling Price)
= 1/5 as a fraction /25% as percent
Further Questions
a) The entrepreneur makes Dresses and skirts and uses the following:

Material Dress Skirt

Fabric $2 000.00 $3 000.00
Thread $ 200.00 $ 700.00
Buttons $ 30.00 $ 30.00

Two (2) workers take 3 hrs to make a dress and 4 hours to make a skirt and are
each paid $1 000.00 per hour. The indirect costs per year are:

Rent $600 000.00

Electricity $240 000.00
Other wages $ 30 000.00

The two workers each work for 40 hours a week and so weeks a year.
i) Calculate the profit and selling price, if the Dress is marked up by 10%.
ii) If the profit on skirt is $200, what is its selling price, mark up and margin.

b) The entrepreneur produces two products ‘A’ and ‘B’. The following are
incurred by the business:

Materials Products: A B
Materials $2 000.00 $3 000.00

Two (2) workers take 6 hours to produce product ‘A’ and 10 hours to produce
product ‘B’. The workers are each paid $1 000 per hour. The indirect costs are
200 000 per year. Each worker works for 50 hours a week and 50 weeks a year.
Find the profit and selling price of each product, if the products are marked up
50%.

Pricing factors
When setting prices the entrepreneur must consider the following variables or
factors.

a) Customers
The business is expected to carry out a survey to determine how much
customers are prepared to pay for the product. The selling price should not be
higher than what customers are prepared to pay.
b) Competitors
The entrepreneur should carry out competitor’s analysis to determine the prices
of competitors. If the entrepreneur sets higher prices than its competitors, he/she
will lose customers to competitors.
Customers are economic beings who always choose the cheapest (or best value
for money) products.
As such, the highest selling price should be equal to or less than the price
charged by competitors.
c) Cost and Profit
The entrepreneur must consider the costs incurred in producing the product or
the costs that the business is going to incur in producing the product. For the
business to make a profit the entrepreneur must set his/her selling price higher
than the costs incurred.

NB: For a successful entrepreneur the lowest price = cost + profit need and the
highest price = how much competitors charge or customers will pay, which ever
is lower.
Pricing strategies
A pricing strategy is an approach or means designed to achieve the pricing
objectives. The price the entrepreneur charges will be somewhere between one
that is too low to produce a profit and that is too high to produce any demand.
Product costs set a floor to the price; consumer perceptions of the product’s
value set the ceiling. The entrepreneur must consider competitors’ prices and
other external and internal factors to find the best price between these two
extremes. Entrepreneurs may opt to use the following approaches or strategies
in product pricing: cost based pricing, buyer-based approach and competition-
based approach.

 Cost based pricing includes cost-plus pricing, breakeven pricing and

value-based pricing. Break even pricing and value-based pricing.
 Cost-plus pricing is adding a standard mark to the cost of the product.
Break even pricing (target profit pricing) is setting price to break even on
the costs of making and marketing a product or setting price to make a
target profit. Value based pricing is setting price based on buyer’s
perceptions of value rather than on the seller’s cost.
 Value pricing is offering the right combination of quantity and good
service at a fair price.
 Competition based pricing is setting prices based on the prices that
competitors charge for similar products. Consumers naturally base their
judgements of a product’s value on the prices that competitors charge for
similar products. One form of competition based pricing is going rate
pricing, in which a firm bases it’s price largely on competitors’ prices with
less attention paid to it’s own costs or to demand. The firm might charge
the, more, or less than it’s major competitors.
Another competition based pricing form is sealed-bid pricing where the
entrepreneur bases his/her price on how he/she thinks competitors will price
rather than it’s own costs or on the demand.
 Skimming Pricing comes into being when the entrepreneur sets a high
price for a new product to skim maximum revenues layer by buyer from
the segments willing to pay the high price. The firm makes fewer but more
profitable sales.

 Market penetration pricing is when the entrepreneur sets a low price for a
new product in order to attract a large number of buyers and a large
market share. Discount and allowance pricing includes cash discount,
quantity discount, functional discount (trade discount) and seasonal
discount.

CHAPTER 10

BUSINESS GROWTH
Objectives
By the end of this study unit you must be able to;
 define business growth
 distinguish internal from external growth
 distinguish a merger from an acquisition
 use various business strategic analysis tools and appreciate their
limitations.
Introduction
Business growth means an increase in size of an organization. Size covers
aspects such as operational capacity, number of employees and capital among
other things. Growth is a natural outcome for any positively performing
organization. It can either be organic or external. Organic growth is when a firm
grows on its own efforts, resources and by ploughing back profits. Organic
growth occurs when a business combines its resources with those of another
business. The result will either be a merger or takeover (acquisition).
Important terms
 Merger-This is when two business organizations combine their
shareholding and fixed assets to become one business entity.
 Acquisition-This is when one business takes over the shareholding and
assets of another.
Internal growth
Internal business growth can best be understood by use of the Ansoff
Product/market matrix.

Ansoff Product and Market Matrix

The Ansoff Growth matrix is a tool that helps businesses decide their product and
market growth strategy.

Ansoff’s product/market growth matrix suggests that a business’ attempts to grow

depend on whether it markets new or existing products in new or existing
markets.
The output from the Ansoff product/market matrix is a series of suggested growth
strategies that set the direction for the business strategy. These are described
below:

Market penetration

Market penetration is the name given to a growth strategy where the business
focuses on selling existing products into existing markets.

Market penetration seeks to achieve four main objectives:

• Maintain or increase the market share of current products – this can be

achieved by a combination of competitive pricing strategies, advertising, sales
promotion and perhaps more resources dedicated to personal selling

• Secure dominance of growth markets

• Restructure a mature market by driving out competitors; this would require a

much more aggressive promotional campaign, supported by a pricing strategy
designed to make the market unattractive for competitors

• Increase usage by existing customers – for example by introducing loyalty

schemes
A market penetration marketing strategy is very much about “business as usual”.
The business is focusing on markets and products it knows well. It is likely to
have good information on competitors and on customer needs. It is unlikely,
therefore, that this strategy will require much investment in new market research.

Market development

Market development is the name given to a growth strategy where the business
seeks to sell its existing products into new markets.

There are many possible ways of approaching this strategy, including:

• New geographical markets; for example exporting the product to a new country
• New product dimensions or packaging: for example

• New distribution channels

• Different pricing policies to attract different customers or create new market

segments

Product development

Product development is the name given to a growth strategy where a business

aims to introduce new products into existing markets. This strategy may require
the development of new competencies and requires the business to develop
modified products which can appeal to existing markets.

Diversification

Diversification is the name given to the growth strategy where a business

markets new products in new markets.

This is an inherently more risk strategy because the business is moving into
markets in which it has little or no experience.

For a business to adopt a diversification strategy, therefore, it must have a clear

idea about what it expects to gain from the strategy and an honest assessment of
the risks.

BUSINESS PORTFOLIO ANALYSIS

A business portfolio is a collection of businesses and products that make up a

company. The best business portfolio is one that fits the company's strengths
and helps exploit the most attractive opportunities.

The company must:

(1) Analyse its current business portfolio and decide which businesses should
receive more or less investment, and

(2) Develop growth strategies for adding new products and businesses to the
portfolio, whilst at the same time deciding when products and businesses should
no longer be retained.

The best known tool for business analysis is the Boston Consulting Group(BCG)
model .

The BCG Model

Using the BCG Box (as illustrated above) a company classifies all its
SBU's(Strategic Business Units) according to two dimensions:

On the horizontal axis: relative market share - this serves as a measure of

SBU strength in the market

On the vertical axis: market growth rate - this provides a measure of market
attractiveness

By dividing the matrix into four areas, four types of SBU can be distinguished:

 STARS(high growth and high market share)

High growth rate requires high levels of investments to cope with competitors in
the markets. This can cause significant cash outflows from the business. High
market share should provide cash for these investments. Cash generated from
operations is to be re-invested into the business.

Main challenge for the business is to maintain or even increase its market share
to generate cash for growing needs of the business.
Eventually, at the maturity of the market star will be turned into cash cow
generating cash that could be invested elsewhere.
Is the future of the organization.
Product development and innovation is the key to success as new competitor are
emerging in the market. This will keep the business ahead of others.
Cash generated from cash cows can be utilized on star.

 CASH COW (low growth rate/ high market share)

This is the main cash generating unit for the business.

There is very difficult to sustain growth rate because of market is at the maturity
stage.
Business should focus on maintaining its market share.
Growth is only possible through increase market share probably at the expense
of others.
Competition is robust at this stage; marketing is primarily activity at this stage.
Innovation would not help at this stage because new development can quickly be
copied by competitors.
  QUESTION MARK(high growth rate/low market share)

This is the part of portfolio demanding cash for his growing needs but does not
generated cash because of low market share.
It has potential to become star if market share is increased otherwise as the time
passes it will became dog rather than becoming cash cow.
Marketing and innovation both are useful tools at this stage.
It requires greater management time and resources to prevent the investment
being eroded.
Either heavy investments should be made or it should be sold but this option only
transfers problem to the buyers, it does not solve the problem.
Strategic alliance with other competitor facing the same problem or acquisition by
successful competitor may help resolve the issue.

 DOG (low growth rate/ low market share)

It does not provide any growth to business either way.

It may still generate some cash for the business so it is wise to retain it in
absence of other investment proposal, if not, it should be disposed to realize
cash.
Strategies decided to re-position it to cash cow should be carefully considered
otherwise it will waste money which could be used on star.
Market share can be obtained by selling standard products at relatively low price
as an incentive to buy the product. Cost-efficiency is key to success. Perhaps by
targeting people of a lower – middle class.

Using the BCG Box to determine strategy

Once a company has classified its SBU's, it must decide what to do with them. In
the diagram above, the company has one large cash cow (the size of the circle is
proportional to the SBU's sales), a large dog and two, smaller stars and question
marks.

Conventional strategic thinking suggests there are four possible strategies for
each SBU:

(1) Build Share: here the company can invest to increase market share (for
example turning a "question mark" into a star)

(2) Hold: here the company invests just enough to keep the SBU in its present
position

(3) Harvest: here the company reduces the amount of investment in order to
maximise the short-term cash flows and profits from the SBU. This may have the
effect of turning Stars into Cash Cows.

(4) Divest: the company can divest the SBU by phasing it out or selling it - in
order to use the resources elsewhere (e.g. investing in the more promising
"question marks").

LIMITATIONS OF THE BCG MATRIX

It does not consider profit margin.
It does not take account of any ethical reason for holding an investment e.g.
creation of an employment in the region.
It does not identify any criteria for deciding acceptable growth rate and market
share.
There may be any other strategic reason for holding investment e.g. cross-selling
benefits, strengthening up-side or downside supply chain.

CHAPTER 11

RISK MANAGEMENT

Objectives
By the end of the topic students should be able to:
 Define risk
 Define risk management
 Assess risk
 Identify risk
 Outline principles of risk management

Example of risk management: A NASA model showing areas at high risk from
impact for the International Space Station.

Risk management is the identification, assessment, and prioritization of

risks(defined in ISO 31000 as the effect of uncertainty on objectives, whether
positive or negative) followed by coordinated and economical application of
resources to minimize, monitor, and control the probability and/or impact of
unfortunate events[or to maximize the realization of opportunities.

Risks can come from uncertainty in financial markets, project failures, legal
liabilities, credit risk, accidents, natural causes and disasters as well as
deliberate attacks from an adversary. Several risk management standards have
been developed including the Project Management Institute, the National Institute
of Science and Technology, actuarial societies, and ISO standards.

In ideal risk management, a prioritization process is followed whereby the risks

with the greatest loss and the greatest probability of occurring are handled first,
and risks with lower probability of occurrence and lower loss are handled in
descending order. In practice the process can be very difficult, and balancing
between risks with a high probability of occurrence but lower loss versus a risk
with high loss but lower probability of occurrence can often be mishandled.

Intangible risk management identifies a new type of a risk that has a 100%
probability of occurring but is ignored by the organization due to a lack of
identification ability. For example, when deficient knowledge is applied to a
situation, a knowledge risk materializes. Relationship risk appears when
ineffective collaboration occurs. Process-engagement risk may be an issue when
ineffective operational procedures are applied. These risks directly reduce the
productivity of knowledge workers, decrease cost effectiveness, profitability,
service, quality, reputation, brand value, and earnings quality. Intangible risk
management allows risk management to create immediate value from the
identification and reduction of risks that reduce productivity.

Risk management also faces difficulties in allocating resources. This is the idea
of opportunity cost. Resources spent on risk management could have been spent
on more profitable activities. Again, ideal risk management minimizes spending
and minimizes the negative effects of risks.

Principles of risk management

The International Organization for Standardization (ISO) identifies the following

principles of risk management

Risk management should:

 create value
 be an integral part of organizational processes
 be part of decision making
 explicitly address uncertainty
 be systematic and structured
 be based on the best available information
 be tailored
 take into account human factors
 be transparent and inclusive
 be dynamic, iterative and responsive to change
 be capable of continual improvement and enhancement

Process

According to the standard ISO 31000 "Risk management -- Principles and

guidelines on implementation," the process of risk management consists of
several steps as follows:

Establishing the context

Establishing the context involves:

1. Identification of risk in a selected domain of interest

2. Planning the remainder of the process.
3. Mapping out the following:
o the social scope of risk management
o the identity and objectives of stakeholders
o the basis upon which risks will be evaluated, constraints.
4. Defining a framework for the activity and an agenda for identification.
5. Developing an analysis of risks involved in the process.
6. Mitigation or Solution of risks using available technological, human and
organizational resources.

Identification

 After establishing the context, the next step in the process of managing
risk is to identify potential risks. Risks are about events that, when
triggered, cause problems. Hence, risk identification can start with
 Risk sources may be internal or external to the system that is the target
of risk management.

Examples of risk sources are: stakeholders of a project, employees of a company

or the weather over an airport.
  Problem analysis- Risks are related to identified threats. For example: the
threat of losing money, the threat of abuse of privacy information or the
threat of accidents and casualties. The threats may exist with various
entities, most important with shareholders, customers and legislative
bodies such as the government.

When either source or problem is known, the events that a source may trigger or
the events that can lead to a problem can be investigated. For example:
stakeholders withdrawing during a project may endanger funding of the project;
privacy information may be stolen by employees even within a closed network;
lightning striking an aircraft during takeoff may make all people onboard
immediate casualties.

The chosen method of identifying risks may depend on culture, industry practice
and compliance. The identification methods are formed by templates or the
development of templates for identifying source, problem or event. Common risk
identification methods are:

 Objectives-based risk identification Organizations and project teams

have objectives. Any event that may endanger achieving an objective
partly or completely is identified as risk.
 Scenario-based risk identification In scenario analysis different
scenarios are created. The scenarios may be the alternative ways to
achieve an objective, or an analysis of the interaction of forces in, for
example, a market or battle. Any event that triggers an undesired scenario
alternative is identified as risk.
 Taxonomy-based risk identification The taxonomy in taxonomy-based
risk identification is a breakdown of possible risk sources. Based on the
taxonomy and knowledge of best practices, a questionnaire is compiled.
The answers to the questions reveal risks.
 Common-risk checking In several industries, lists with known risks are
available. Each risk in the list can be checked for application to a particular
situation.
 Risk charting This method combines the above approaches by listing
resources at risk, Threats to those resources Modifying Factors which may
increase or decrease the risk and Consequences it is wished to avoid.
Creating a matrix under these headings enables a variety of approaches.
One can begin with resources and consider the threats they are exposed
to and the consequences of each. Alternatively one can start with the
threats and examine which resources they would affect, or one can begin
with the consequences and determine which combination of threats and
resources would be involved to bring them about.

Assessment

Once risks have been identified, they must then be assessed as to their potential
severity of loss and to the probability of occurrence. These quantities can be
either simple to measure, in the case of the value of a lost building, or impossible
to know for sure in the case of the probability of an unlikely event occurring.
Therefore, in the assessment process it is critical to make the best educated
guesses possible in order to properly prioritize the implementation of the risk
management plan.

The fundamental difficulty in risk assessment is determining the rate of

occurrence since statistical information is not available on all kinds of past
incidents. Furthermore, evaluating the severity of the consequences (impact) is
often quite difficult for immaterial assets. Asset valuation is another question that
needs to be addressed. Thus, best educated opinions and available statistics are
the primary sources of information. Nevertheless, risk assessment should
produce such information for the management of the organization that the
primary risks are easy to understand and that the risk management decisions
may be prioritized. Thus, there have been several theories and attempts to
quantify risks. Numerous different risk formulae exist, but perhaps the most
widely accepted formula for risk quantification is:

Rate of occurrence multiplied by the impact of the event equals risk

Risk Options

Risk mitigation measures are usually formulated according to one or more of the
following major risk options, which are:

1. Design a new business process with adequate built-in risk control and
containment measures from the start.

2. Periodically re-assess risks that are accepted in ongoing processes as a

normal feature of business operations and modify mitigation measures.

3. Transfer risks to an external agency (e.g. an insurance company)

4. Avoid risks altogether (e.g. by closing down a particular high-risk business

area)

Later research has shown that the financial benefits of risk management are less
dependent on the formula used but are more dependent on the frequency and
how risk assessment is performed.

In business it is imperative to be able to present the findings of risk assessments

in financial terms. Robert Courtney Jr. (IBM, 1970) proposed a formula for
presenting risks in financial terms. The Courtney formula was accepted as the
official risk analysis method for the US governmental agencies. The formula
proposes calculation of ALE (annualised loss expectancy) and compares the
expected loss value to the security control implementation costs (cost-benefit
analysis).

Potential risk treatments

Once risks have been identified and assessed, all techniques to manage the risk
fall into one or more of these four major categories

 Avoidance (eliminate, withdraw from or not become involved)

 Reduction (optimize - mitigate)
 Sharing (transfer - outsource or insure)
 Retention (accept and budget)

Risk avoidance
This includes not performing an activity that could carry risk. An example would
be not buying a property or business in order to not take on the legal liability that
comes with it. Another would be not flying in order not to take the risk that the
airplane were to be hijacked. Avoidance may seem the answer to all risks, but
avoiding risks also means losing out on the potential gain that accepting
(retaining) the risk may have allowed. Not entering a business to avoid the risk of
loss also avoids the possibility of earning profits.

Hazard Prevention

Hazard prevention refers to the prevention of risks in an emergency. The first and
most effective stage of hazard prevention is the elimination of hazards. If this
takes too long, is too costly, or is otherwise impractical, the second stage is
mitigation.

Risk reduction

Risk reduction or "optimization" involves reducing the severity of the loss or the
likelihood of the loss from occurring. For example, sprinklers are designed to put
out a fire to reduce the risk of loss by fire. This method may cause a greater loss
by water damage and therefore may not be suitable. Halon fire suppression
systems may mitigate that risk, but the cost may be prohibitive as a strategy.

Acknowledging that risks can be positive or negative, optimising risks means

finding a balance between negative risk and the benefit of the operation or
activity; and between risk reduction and effort applied. By an offshore drilling
contractor effectively applying HSE Management in its organisation, it can
optimise risk to achieve levels of residual risk that are tolerable

Modern software development methodologies reduce risk by developing and

delivering software incrementally. Early methodologies suffered from the fact that
they only delivered software in the final phase of development; any problems
encountered in earlier phases meant costly rework and often jeopardized the
whole project. By developing in iterations, software projects can limit effort
wasted to a single iteration.

Outsourcing could be an example of risk reduction if the outsourcer can

demonstrate higher capability at managing or reducing risks. For example, a
company may outsource only its software development, the manufacturing of
hard goods, or customer support needs to another company, while handling the
business management itself. This way, the company can concentrate more on
business development without having to worry as much about the manufacturing
process, managing the development team, or finding a physical location for a call
center.

Risk sharing

Briefly defined as "sharing with another party the burden of loss or the benefit of
gain, from a risk, and the measures to reduce a risk."

The term of 'risk transfer' is often used in place of risk sharing in the mistaken
belief that you can transfer a risk to a third party through insurance or
outsourcing. In practice if the insurance company or contractor go bankrupt or
end up in court, the original risk is likely to still revert to the first party. As such in
the terminology of practitioners and scholars alike, the purchase of an insurance
contract is often described as a "transfer of risk." However, technically speaking,
the buyer of the contract generally retains legal responsibility for the losses
"transferred", meaning that insurance may be described more accurately as a
post-event compensatory mechanism. For example, a personal injuries
insurance policy does not transfer the risk of a car accident to the insurance
company. The risk still lies with the policy holder namely the person who has
been in the accident. The insurance policy simply provides that if an accident (the
event) occurs involving the policy holder then some compensation may be
payable to the policy holder that is commensurate to the suffering/damage.

Some ways of managing risk fall into multiple categories. Risk retention pools are
technically retaining the risk for the group, but spreading it over the whole group
involves transfer among individual members of the group. This is different from
traditional insurance, in that no premium is exchanged between members of the
group up front, but instead losses are assessed to all members of the group.

Methods of transfering

Partnership and: Joint venture brings client and contractor together to share the
costs and benefits on the project or business.

BOOT CONTRACT ( Build Own Operate and Transfer)

ROT (Refurbish Operate and Tranfer)

PPP ( Public Private Partnership )

Insurance

-A 3rd party accepts insurable risk for the payment of a premium. It covers: Direct
property damange

-Indirect consequential loss

Legal liability

Personal liability.

Risk retention

Involves accepting the loss, or benefit of gain, from a risk when it occurs. True
self insurance falls in this category. Risk retention is a viable strategy for small
risks where the cost of insuring against the risk would be greater over time than
the total losses sustained. All risks that are not avoided or transferred are
retained by default. This includes risks that are so large or catastrophic that they
either cannot be insured against or the premiums would be infeasible. War is an
example since most property and risks are not insured against war, so the loss
attributed by war is retained by the insured. Also any amounts of potential loss
(risk) over the amount insured is retained risk. This may also be acceptable if the
chance of a very large loss is small or if the cost to insure for greater coverage
amounts is so great it would hinder the goals of the organization too much.

Individual Cover
This is usually a response measure undertaken by an individual through such
measures as taking medical aid scheme, Life assurance, employment cover,
e.t.c

Group Cover

This is undertaken mainly when there are several people undertaking business
within the same entity e.g. in a partnership, co-perative e.t.c

Create a risk management plan

Select appropriate controls or countermeasures to measure each risk. Risk

mitigation needs to be approved by the appropriate level of management. For
instance, a risk concerning the image of the organization should have top
management decision behind it whereas IT management would have the
authority to decide on computer virus risks.

The risk management plan should propose applicable and effective security
controls for managing the risks. For example, an observed high risk of computer
viruses could be mitigated by acquiring and implementing antivirus software. A
good risk management plan should contain a schedule for control implementation
and responsible persons for those actions.

According to ISO/IEC 27001, the stage immediately after completion of the risk
assessment phase consists of preparing a Risk Treatment Plan, which should
document the decisions about how each of the identified risks should be handled.
Mitigation of risks often means selection of security controls, which should be
documented in a Statement of Applicability, which identifies which particular
control objectives and controls from the standard have been selected, and why.

Implementation

Implementation follows all of the planned methods for mitigating the effect of the
risks. Purchase insurance policies for the risks that have been decided to be
transferred to an insurer, avoid all risks that can be avoided without sacrificing
the entity's goals, reduce others, and retain the rest.

Review and evaluation of the plan

Initial risk management plans will never be perfect. Practice, experience, and
actual loss results will necessitate changes in the plan and contribute information
to allow possible different decisions to be made in dealing with the risks being
faced.

Risk analysis results and management plans should be updated periodically.

There are two primary reasons for this:

1. to evaluate whether the previously selected security controls are still

applicable and effective, and
2. to evaluate the possible risk level changes in the business environment.
For example, information risks are a good example of rapidly changing
business environment.

Limitations
If risks are improperly assessed and prioritized, time can be wasted in dealing
with risk of losses that are not likely to occur. Spending too much time assessing
and managing unlikely risks can divert resources that could be used more
profitably. Unlikely events do occur but if the risk is unlikely enough to occur it
may be better to simply retain the risk and deal with the result if the loss does in
fact occur. Qualitative risk assessment is subjective and lacks consistency. The
primary justification for a formal risk assessment process is legal and
bureaucratic.

Prioritizing the risk management processes too highly could keep an organization
from ever completing a project or even getting started. This is especially true if
other work is suspended until the risk management process is considered
complete.

It is also important to keep in mind the distinction between risk and uncertainty.
Risk can be measured by impacts x probability.

CHAPTER 12

LEGAL REQUIREMENTS

Objectives
By the end of the unit you should be able to:
Describe the various legal requirements applicable to business in Zimbabwe
including;
 Labour legislation
 Taxation
 Collective bargaining
 Contacts
 Insolvency
Taxation

To tax is to impose a financial charge or other levy upon a taxpayer (an individual
or legal entity) by a state or the functional equivalent of a state such that failure to
pay is punishable by law.

Taxes may be paid in cash or kind (although payments in kind may not always be
allowed or classified as taxes in all systems). The means of taxation, and the
uses to which the funds raised through taxation should be put, are a matter of hot
dispute in politics and economics, so discussions of taxation are frequently
tendentious.

VAT
VAT stands for Value Added Tax. VAT is like a tax on sales and it is always
charged to the ultimate consumer of goods and services.
- Unlike sales tax, however, the value added tax is not collected solely at
the final point of sale.
- - VAT is added and collected at each stage of production and distribution
when goods pass from one firm to another.
- - At each stage, a trader must charge the tax on his customer at the
stipulated rate, but he may deduct from the tax collected any tax which he
himself has on goods and services supplied to him.

Refund of VAT
If a firm liable to VAT but has paid more than it has collected from its customers,
then it may be eligible for a refund of VAT. The entries will be
Debit- cash with refund received
Credit- VAT A/c with tax refund received
This will normally apply to firm which are zero rated for VAT. They apply a zero
rate to their sales but are eligible for refund on their payment for goods and
services.
-All exports are zero rated

Exemption from VAT

Some firms are exempted from VAT. This means they do not need to charge
VAT to their customers but it also means that they cannot claim a refund of the
tax they pay on materials and supplies which they buy. Such firms should include
VAT in the cost of materials and supplies purchased or they may, as above debit
the tax paid in a VAT a/c. the tax is an expense to be debited in P&L

Corporate Tax
Businesses liable for corporate tax under the tax act are called upon to pay tax
on their income in their profits/ income in the year following that in which they
earn it.

The corporation tax on current profits will normally be payable until the following
year, but full provision should be made for the tax when the profit arises.
Due date for corporation tax- apart from the payments in advance, corporate tax
becomes within nine months of the end of company’s year, or one month after
the assessment of the corporation Tax payable is determined.
NB- Corporation tax is assessed and charged on the full amount of company’s
profits arising in its accounting period. Profits are to be computed by aggregating
the company’s income from all sources, together with its long term capital gains.

PAYE
This stands for PAY AS YOU EARN. Income tax is deducted from employees
under The PAYE Scheme.
-The tax due in respect of any pay is deducted from that pay as it is paid. The tax
deducted is remitted periodically to the Tax collector by the employer.

NSSA
This stands for National Social Security Authority. It is responsible for the Health
and safety of all Zimbabweans. It ensures that productivity,

Labour Legislation

The labour legislation is provided for by the labour relations Act, Chapter 28:01.
The purpose of the Act is to advance social justice and democracy in the work
place.
1. Giving effect to the fundamental rights of employees provided for and part
II of the Act.
2. Provide a legal framework within which employees and employers can
bargain collectively for the improvement of conditions of employment.
3. the promotion of fair labour standards
4. the promotion of the participation by employees in decisions affecting
their interest in the work place.
5. Securing the just, effective and expeditious resolution of disputes and
unfair labour practices
Rights of Employees
1) Employees are entitled to membership of trade unions and workers
committees. Any employee as between himself and his employer has
the right to be a member or an officer of a trade union.
2) Prohibition of forced Labour-excludes the
 Any labour required by way of parental discipline
 Any labour required by virtue of an enactment during a
period of public emergency or in the event of any other
emergency or disaster that threatens the wellbeing of the
community
 Any labour

3) Protection against discrimination

- No employer shall discriminate any employee on ground o race, tribe play

of origin, political opinion, colours, creed, gender, pregnancy, HIV/AIDS or
any disability
4) Right to fair labour Standards
6) Right to democracy in the work place-No person shall hinder, obstruct or
prevent any employee from forming or conducting any workers committee for
the purpose of airing any grievance, negotiating any mater or advancement or
protecting the rights or interest of employees.
-No person shall threaten any employee with any reprisal for any lawful action
taken by him in advancing or protecting his rights or interest.

SICK LEAVE
Sick leave shall be granted in terms of this section to an employee who in terms
of section 14 (Labour Relations Act ) is prevented from attending duties because
he is ill or injured or undergo medical treatment which was not occasioned by his
failure to take reasonable precautions.
These are the conditions
a) Ninety days sick leave on full pay
b) Subject to section (3), one hundred and eighty days sick leave on full pay
and half pay.

Maternity Leave
Leave shall be granted for 90 days on full pay to a female who saved for at least
one year.

COLLECTIVE BARGAINING
Formation of Workers Committees
Any employees may appoint or elect a workers committee to represent their
interest.
- No managerial employee shall be appointed or elected to a workers
committee nor shall a workers committee represent the interest of
managerial employees, unless such workers committee is poised sorely of
managerial employees appointed or elected to represent their interest.

Functions of Workers Committee

1) Represent the employees concerned in any matter affecting their rights
and interest
2) Negotiate with employer concerned a collective bargaining agreement of
the employees concerned
3) Recommend collective job action to the employees concerned
 4) Where a works council is or is to be constituted at any work place, elect
some of its members to represent employees on the works council.

EFFECTS OF COLLECTIVE BARGAINING

Every collective bargaining agreement which has been negotiated by a workers
committee shall be referred by the workers to the employees and the trade union
concerned and if approved by the trade union and more than 50% of the
employees, shall become binding on the employer and the employees
concerned.

WORKS COUNCIL
In every establishment in which a workers committee representing employees
other than managerial employees has been elected, there shall be a works
council
- A works council shall be composed of an equal number of members
representing the employer and the workers committee.
- The conditions shall be determined by the employer

FUNCTIONS OF WORKS COUNCIL

- To focus the best interest of the establishment and employees on the best
possible use of it human, capital, equipment and other resources so that
maximum productivity and optimum employment standards may be
maintained.
- To foster, encourage and maintain good relations between employer and
employees at all levels
- To promote the general and common interest including health, safety and
welfare of both establishment and its workers.
- To promote and maintain the effective participation of employees in the
establishment, and to seek mutual corporation and trust of employees and
employer.

TRADE UNIONS
-Any group of employees may form a trade union
-Any group of employers may form an employers organization
- Any trade unions or employers organizations may form a federation.

CONTRACTS
Employment contract
The essentials are simple to state i.e the employee lets his services of a defined
nature to the employer in exchange for a fixed or ascertainable remuneration and
until there is agreement on these two points the contract is not complete
- By entering into the service of the employer the employee subjects himself
to the employer’s control.

GENERAL CONTRACTS-
- A working definition of a contract is an agreement which is or is intended
to be enforceable at law. It is therefore important that an agreement be
there before a contact come into existence. Agreement by consent, true
agreement, a meeting of minds, a coincidence of the wills, consensus ad
idem means the same (R.H. Christie)

SALE CONTRACT
A sale in Roman Dutch Law has been defined as “a contract in which one person
promises to deliver a thing to another, who on his part promises to pay a certain
price”
- It is the exchange of property for a price or, because the equivalent Latin words
are found in Judgments, the exchange of merx for a premium.
The general requirements of the formation of a contract of sale are no different
from those applicable to any contract but identification as noted be an agreement
to exchange property for a price.
-The property must be defined with sufficient and there must be certainty that the
parties are in agreement on what is being bought and sold.
PRICE- According to R.H. Christie (1997) the price must be expressed in money.
If it is expressed in property or services the contract will not be a sale, but if it is
expressed partly in money and partly in goods or services (As with the common
trade agreement) the contract will be a sale only if money is the major
consideration.

LEASE CONTRACTS
The nature of a contract of lease is best seen as a temporary sale, the lessor
corresponding to the seller, the lessee to the buyer and the rent to the price, the
subject- matter of the contract being transferred not permanently but temporarily
( for an agreed period) ( R.H. Christie 1997).
-To qualify for a treatment as a lease rather than an in nominate contract, the
contract must conform to the pattern of giving the use and occupation of
specified property for a specified period time in exchange for a specified rent.
- There is the right to enjoy the benefit of property and take the fruits but not to
destroy or appropriate its substance.

Formalities
- According to Christie, no formalities are required for the formation of a
lease which may be made in writing, orally, tacitly or by combination of
these methods.

INSOLVENCY
The current system is that a debtor who cannot pay his debt may be ordered by
the High Court, own his own application or that of a creditor to hand over his
property to a trustee for sale and distribution among his creditors.

Voluntary Surrender
A debtor may surrender his estate personally or by an agent and an executor,
guardian or curator of an estate for which he is responsible.
- A partnership estate may be surrendered by all the active partners, together
with their own estates.
- The debtor must file a petition with an additional copy of the statement of
affairs.
- The petition must satisfy the court on four matters:
1. That the estate contains sufficient free residue ( i.e. assets which no
creditor has a particular right of Preference) to meet the cost of
sequestration
2. The court must be satisfied that the surrender will be to the benefit of
creditors generally.
3. the court must be satisfied treat the estate is insolvent
4. The debtor must be careful to make a full and honest disclosure of all
relevant facts ( Chpt 24:03 and Christie)

Compulsory Sequestration
A Creditor with a liquidated claim of not less than $ 100 or creditors with
liquidated claims totaling less than $200 or the agent of such a creditor may
petition the court for the compulsory sequestration of a debtor.
- A liquidated claim means one based on an obvious and ascertainable legal
ground and capable of quick ready proof. A creditor whose claim is disputed and
could be established by action has no locus standi
- The creditor has to prove to be insolvent and the acts of insolvency which are:
A) Absenting him to evade payment of debts
B) Failing to satisfy a writ of execution
C) Disposing of property to the prejudice of creditors
D) Removing his property to meet the prejudice of creditors
E) Making offering a non-statutory assignment or arrangement with
creditors( Even if made without prejudice)
F) Giving notice of suspension or suspending payment of his debts

CHAPTER 13

BUSINESS ETHICS
Objectives
By the end of the study unit you must be able to;
 define and appreciate the nature of business ethics
 relate ethics and social responsibility
 identify various business ethical issues
 describe various forms of social responsibility
 outline strategies for dealing with social responsibility issues.
Nature of ethics
Ethics is the study of right and wrong actions and how conduct should be judged
as to be
good or bad. Ethics is about how we should live our lives and, in particular, how
we should behave towards other people. They are the moral principles which
guide thinking, decision making and action. It is therefore relevant to all forms of
human activity. Business ethics is not really separate or different from ideas that
apply in the general context of human life. Professionals of all specialisations,
entrepreneurs included, should be aware of the general principles of ethics and
be capable of applying them in their everyday work. It is important, however, to
note that ethics and law are not the same.
Ethics and Social responsibility
An organisation exercises social responsibility when its acts respect the
general public interest.
Social responsibility requires that organisations do not act in a way which
harms the general public or is socially irresponsible. Business ethics relate to
business morality rather than society's interests. On the other hand, social
responsibility relates to society at large. However, because corporate decisions
subsume marketing decisions the terms ethics and social responsibility are often
used interchangeably.
Ethics and the law
Ethics deal with personal moral principles and values, but laws are the rules that
can actually be enforced in court. Behaviour which is not subject to legal
penalties may still be unethical.
Different cultures view business practices differently. While the idea of intellectual
property is widely accepted in Europe and the USA, in other parts of the world
ethical standards are quite different.Unauthorised use of copyrights, trademarks
and patents is widespread in countries such as Taiwan, Mexico and Korea.
According to a US trade official, the Korean view is that ' ... the thoughts of one
man should benefit all', and this general value means that, in spite of legal
formalities, few infringements of copyright are punished.
ETHICAL ISSUES IN BUSINESS MARKETING
 M Product issues
Ethical issues relating to products usually revolve around safety, quality, and
value and frequently arise from failure to provide adequate information to the
customer. This may range from omission of uncomfortable facts in product
literature to deliberate deception. A typical problem arises when a product
specification is changed to reduce cost. Clearly, it is essential to ensure that
product function is not compromised in any important way, but a decision must
be taken as to just what emphasis, if any, it is necessary to place on the
changes. Another, more serious, problem occurs when product safety is
compromised. Product recall may become necessary.eting at Work
 Promotion issues
Ethical considerations are particularly relevant to promotional practices.
Advertising and personal selling are areas in which the temptation to select,
exaggerate, slant, conceal, distort and falsify information is potentially very great.
Questionable practices here are likely to create cynicism in the customer and
ultimately preclude any trust or respect. Also relevant to this area is the problem
of corrupt selling practices. It is widely accepted that a small gift such as a
diary is a useful way of keeping a supplier's name in front of an industrial
purchaser. Most business people would condemn the payment of substantial
bribes to purchasing officers to induce them to favour a particular supplier. But
where does the dividing line lie between these two extremes?
(a) Extortion. Government officials in some countries have been known to
threaten companieswith the complete closure of their local operations unless
suitable payments are made.
(b) Bribery. Payments may be made to obtain services to which a company is
not legally
entitled.
(c) Grease money. Multinational companies are sometimes unable to obtain
services to which they are legally entitled because of deliberate stalling by local
officials. Cash payments to the right people may then be enough to 'oil the
wheels'.

(d) Gifts. In some cultures (such as Japan) gifts are regarded as an essential
part of civilized negotiation, even in circumstances where to Western eyes they
might appear ethically dubious. Managers operating in such a culture may feel at
liberty to adopt the local custom.
 Pricing issues
There are several pricing practices that have attracted criticism. Not all can be
described as improper, however.
(a) Active collusion among suppliers to fix prices is illegal in most countries,
but the existence of a more or less fixed market price does not necessarily imply
that collusion is taking place. A tendency to compete in areas other than price is
a natural feature of oligopoly markets.
(b) Predatory pricing is an issue when newcomers attempt to break into a
market. Established suppliers utilize their cash reserves and economies of scale
to sell at prices the newcomer cannot match. Withdrawal from the market follows.
(c) Failure to disclose the full price associated with a purchase has been
rightly criticized as unethical. However, it must be recognized that there are
occasions when it is impossible to compute the eventual full price, as when cost
escalation is accepted by both parties to a contract. The measure of propriety is
whether there is any intention to deceive.
 Place issues
Where long and complex distribution channels are used there is potential for
disputes and conflicts of interest. Even where relationships of trust have been
built up over long periods of time, business pressures can lead to hard decisions
and a perception by distributors that they have been treated unfairly. Here are
some examples of conduct by manufacturers that distributors could reasonably
complain of.
• Requiring high levels of stock holding by intermediaries
• Manipulating discount structures to the detriment of distributors
• Ending distribution agreements at short notice
• Dealing direct with end users at Work
Ethical codes
It is now common for businesses to specify their ethical standards. Some have
even published a formal declaration of their principles and rules of conduct.
This would typically cover payments to government officials or political parties,
relations with customers or suppliers, conflicts of interest, and accuracy of
records. Ethical standards may cause individuals to act against the organisation
of which they are a part. More often, business people are likely to adhere to
moral principles which are 'utilitarian', weighing the costs and benefits of the
consequences of behaviour. When benefits exceed costs, the behaviour can be
said to be ethical. This the philosophical position upon which capitalism rests,
and is often cited to justify behaviour which appears to have socially unpleasant
consequences. For example, food production regimes which
appear inhumane are often justified by the claim that they produce cheaper food
for the
majority of the population.

The American Marketing Association has produced a statement of the code of

ethics to which it expects members to adhere. Members of the American
Marketing Association (AMA) are committed to ethical professional conduct.
They have joined together in subscribing to this Code of Ethics embracing the
following topics. Marketers must accept responsibility for the consequence of
their activities and make every effort to ensure that their decisions,
recommendations, and actions function to identify, serve, and satisfy all
relevant publics: customers, organisations and society.
AMA Code of ethics
Marketers' professional conduct must be guided by;
1 The basic rule of professional ethics: not knowingly to do harm.
2 The adherence to all applicable laws and regulations.
3 The accurate representation of their education, training and experience.
4 The active support, practice and promotion of this Code of Ethics.
Honesty and Fairness
Marketers shall uphold and advance the integrity, honor and dignity of the
marketing profession
1 Being honest in serving consumers, clients, employees, suppliers, distributors
and the public.
2 Not knowingly participating in conflict of interest without prior notice to all
parties involved.
3 Establishing equitable fee schedules, including the payment or receipt of usual,
customary and/or legal compensation or marketing exchanges.ights and
Dutiesarketing Exchange Process
Participants in the marketing exchange process should be able to expect
1 Products and services offered are safe and fit for their intended uses.
2 Communications about offered products and services are not deceptive.
3 All parties intend to discharge their obligations, financial and otherwise, in good
faith.
4 Appropriate internal methods exist for equitable adjustment and/or redress of
grievancesconcerning purchases.

It is understood that the above would include, but is not limited to, the following
responsibilities of the marketer; the area of product development and
management
• Disclosure of all substantial risks associated with product or service usage.
• Identification of any product component substitution that might materially
change the product or impact on the buyer's purchase decision.
• Identification of extra-cost added features.
• Avoidance of false and misleading advertising.
• Rejection of high pressure manipulation, or misleading sales tactics.
• Avoidance of sales promotions that use deception or manipulation.I.n the area
tribution
• Not manipulating the availability of a product for purpose of exploitation.
• Not using coercion in the marketing channel.
• Not exerting undue influence over the reseller’s choice to handle the product
the area of
• Not engaging in price fixing.
• Not practicing predatory pricing.
• Disclosing the full price associated with any purchaseIn the area of marketing
research
• Prohibiting selling or fund raising under the guise of conducting research.
• Maintaining research integrity by avoiding misrepresentation and omission of
pertinent research data.
• Treating outside clients and suppliers fairly.
Any AMA members found to be in violation of any provision of this Code of Ethics
may have his or her Association membership suspended or revoked.
(Reprinted by permission of The American Marketing Association)ion Programme
3
Social responsibility
There is a growing feeling that the concerns of the community ought to be the
concerns of business, since businesses exist within society, and depend on it for
continued existence. Business therefore has a moral obligation to assist in the
solution of those problems which it causes. Businesses and businessmen are
also socially prominent, and must be seen to be taking a lead in addressing the
problems of society. Enlightened self-interest is probably beneficial to business.
In the long term, concern over the damage which may result from business
activity will safeguard the interests of the business itself. In the short term,
responsibility is a very valuable addition to the public relations activities within a
company. As pressure for legislation grows, self-regulation can take the heat out
of potentially disadvantageous campaigns. More and more, it is being realised
that it is necessary for organisations to develop a sense of responsibility for the
consequences of their actions within society at large, rather than simply setting
out to provide consumer satisfactions. Social responsibility involves accepting
that the organisation is part
of society and, as such, will be accountable to that society for the consequences
of the actions which it takes. Three concepts of social responsibility are profit
responsibility, stakeholder responsibility and societal responsibility.g at Work
 Profit responsibility
Profit responsibility argues that companies exist to maximize profits for their
proprietors. Milton
Friedman asserts:
'There is one and only one social responsibility of business: to use its resources
and engage in
activities designed to increase its profits so long as it stays within the rules of the
game – which is to say, engages in open and free competition without deception
or fraud.'
Thus, drug companies which retain sole rights to the manufacture of treatments
for dangerous diseases are obeying this principle. The argument is that
intervention, to provide products at affordable prices, will undermine the
motivation of poorer groups to be self-sufficient, or to improve their lot.
Proponents of this view argue that unless the market is allowed to exercise its
disciplines, groups who are artificially cushioned will become victims of a
'dependency culture', with far worse consequences for society at large.
 Stakeholder responsibility
Stakeholder responsibility arises from criticisms of profit responsibility,
concentrating on the obligations of the organisation to those who can affect
achievement of its objectives, for example, customers, employees, suppliers and
distributors.
 Societal responsibility
Societal responsibility focuses on the responsibilities of the organisation towards
the general public. In particular, this includes a responsible approach to
environmental issues and concerns about employment. A socially responsible
posture can be promoted by an organisation via cause related marketing, when
charitable contributions are tied directly to the sales revenues from one of its
products.