PRINCIPLES OF BUSINESS

SECTION 3 - ESTABLISHING A BUSINESS

NAME__________________________________________________________

GRADE_________________________________________________________

OBJECTIVE

i. define the term entrepreneur

ii. explain the functions of an entrepreneur

iii. identify the characteristics of the typical entrepreneur

iv. describe the role of the entrepreneur in the decision-making process

v. outline the role of the entrepreneur in economic development

vi. outline reasons why an individual may want to establish a business

vii. outline the essential steps that should be taken in establishing a business

viii.identify the reasons for preparing a business plan

ix. describe the elements of a business plan

x. identify sources of information for conducting research into the establishment of businesses

xi. discuss the significance of conducting a feasibility study into the establishing of a business

xii. explain the relationship between planning and the operation of a business

xiii.identify regulatory practices instituted by governments for the establishment and conduct of
different types of businesses

xiv. outline the factors that determine the location of a business

xv. explain the significance of collateral in accessing capital to establish a business

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 ESTABLISHING A BUSINESS
3.1 DEFINITION OF AN ENTREPRENEUR
 Enterprise – is another name for a profit making business or a company but it mostly
associated with entrepreneurial ventures.

 An entrepreneur is someone who shows vision and creativity, taking the financial risk
of starting and managing a new business.

 Entrepreneurship is showing enterprise skills of vision and creativity when taking

the risk to set up a new business venture.

3.2. FUNCTIONS/ROLES OF THE ENTREPRENEUR

Conceptualizing

 This is where the entrepreneur comes up with a new idea. It may be a new product,
service or improvement to existing ones or ways to fill a need rather than trying to find an
existing business.
Planning

 The entrepreneur should plan for the formation and operation of the business by stating
his objectives, targets and goals and ways of accomplishing them.

Accessing Funds

 The entrepreneur will find ways to finance the business, he may have to use his own
savings, obtain loans from banks, or obtain government grants.

 Organizing
This is the ability of the entrepreneur to bring people together, material and equipment in
such a way that he gets the work done.

Operating and Evaluating the Performance of a Business

 The entrepreneur must ensure that the day to day activities are carried out effectively.
He/she must assess how the business is performing and determine whether or not it is
achieving its objectives.
Risk Bearing

 The entrepreneur must accept the possible risk of success as well as accept the possible
risk of failure. If profits are made the entrepreneur is entitled to it, but he/she will bear the
loss if the business fails.

3.3 CHARACTERISTICS OF AN ENTREPRENEUR

 Creative- the ability to develop new ideas, or new ways of doing things and satisfying
needs.

 Innovative- developing a new idea or making changes to an existing one, such as

changing the way a product is delivered.

 Flexible and multi-skilled- the ability to react quickly to changes, being able to get on
well with people and being good at handling money at the same time.

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  Goal-oriented- the entrepreneur has a high need for achievement and to accomplish a
specific task or goal.

 Persistent and persevering – the entrepreneur is determined and not easily deterred
from the target, he/she will make things work in spite of the risk.

 A risk taker- having a propensity to take calculated risks, he/she likes challenges, and
they are confident that they can be successful.

 Other characteristics include: humility, honesty, being highly motivated, self-

sacrificing, and sociable.

3.4 ROLES OF THE ENTREPRENEUR IN DECISION MAKING (this is the same as

functions of an entrepreneur)

3.5 ROLES OF THE ENTREPRENEUR IN ECONOMIC DEVELOPMENT

 Providing goods and services – this will satisfy the needs of the customers.

 Creating jobs - individuals can earn an income and improve their standard of living.

 Contributing to nation building- by exporting goods thus earning foreign exchange that
will be used to buy more capital goods needed for further production.

 Collaborating- that is building partnerships with communities by contributing towards

community projects, this will help members of the community to improve their well-
being.

3.6 REASONS FOR WANTING TO START A BUSINESS

 Desire for Financial Independence – the entrepreneur prefers to make his own
decisions in order to create their own wealth, not having to depend on another for limited
resources.

 Self - fulfilment – the belief that he/she will get more rewards i.e. more than if they were
working for someone else.

 Self-actualization- means to fulfil one’s potential and to become the best in the industry.

 Increased income - an individual can start a business to earn more money.

 Increased control of working life – that is, to become your own boss in making all the
decisions without consulting anyone.

3.7 ESSENTIAL STEPS FOR ESTABLISHING A BUSINESS

(i) Conceptualizing

 Identifying a possible business idea based on skills or hobbies or previous employment.

Feasibility study
(ii) Research

 The entrepreneur will have to probe the market to find customer’s wants, who are its
competitors and to offer better customer service to attract customers.

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 (iii) Identification of Resources

 The entrepreneur has to identify his financial, human and material resources.

 Financial resources - the entrepreneur uses his savings or borrow money from
friends/relatives or the bank to finance his business.

 Human resource - the entrepreneur and his workers need the necessary skills that
will make the business successful.

 Material resources- you will need good quality raw materials and the necessary
supplies if you are providing a service.

(iv) Creation of a Business Plan

 A business plan is a written document that describes the rationale for starting a
business and the steps involved in starting and operating it successfully. A business
plan is important when you have to submit it to a lending institution or a prospective
investor.

(v) Acquisition of Funds

 Obtaining finance can be a problem as many entrepreneurs lack sufficient savings or lack
knowledge of financial support available.
(vi) Operation of the Business

 Once all the resources and finance are in place, the business can start trading.

3.8 THE BUSINESS PLAN

 A business plan is a written document that describes the rationale for starting a business
and the steps involved in starting and operating it successfully.

Reasons for Preparing a Business Plan

 To assess the viability/feasibility of starting a business

 To obtain a loan from the bank or any financial institution
 To guide the operations of the business when making decisions i.e. it gives clear
objectives of what the business hopes to achieve.
 It outlines resources needed e.g. machinery, labour, premises

3.9 ELEMENTS OF THE BUSINESS PLAN

The Executive Summary

 The executive summary is the first page of the business plan. It gives a
summary/overview of the business. It is here that you convince the reader about the
credibility of your business. It contains;

 the name and type of business

 aims/ objectives of the business
 location of the business
 the owners
 a brief description of the product/service
 potential market for the product or service

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 The Marketing Plan

 The marketing plan describes your marketing strategy and how you plan to persuade
persons to buy your product/service. It contains;

 target market (to identify the target market conduct a market research)
 promotional strategy ( methods used to inform the customer e.g. advertising)

Operational Plan
 The operational plan describes how the business will be operated. It includes;

 details of the machinery and equipment required and the cost

 labour needed - e.g. number of workers needed
 type of material needed and their source

The Financial Plan

 The financial plan gives a description of your funding requirements that is your
detailed financial statements. It contains three main financial documents;

 cash flow statement

 income statement ( trading and profit and loss account)
 statement of financial position ( the balance sheet)

3.10 SOURCES OF INFORMATION FOR CONDUCTING RESEARCH

 Market research is important to the success of any business. Market research is the
collection and analysis of data about consumer preference.

 There are two main types of market research, these include primary and secondary
research.

(a) Primary Research

 Primary / Field research - refers to first- hand information that does not already exist.
Examples include:

i. Questionnaires – are given to shoppers to complete and hand back or internet

users to fill out online

ii. Interviews – can be street-based or telephoned based

iii. Observation - observe consumer behaviour example by identifying which shop

displays make them shop and buy.

iv. Product testing - is where consumers are asked to try a product or service offered
by the business and fill in a report card on their experience

(b) Secondary Research

 Secondary /Desk research- refers to the use of secondary data, that is, information
that already exists. Examples include:

i. Internet searches - involves searching the web for information on the market size
of the competitor

ii. Government publications – such as publications on import/export data for

industries

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 iii. Brochures – that provide information about competitors

[Read textbook for advantages and disadvantages of each source]

3.11 FEASIBILITY STUDY

 A feasibility study is a report that investigates whether a new business idea is

worthwhile, will the idea work or is it likely to be profitable.
Reasons for Conducting a Feasibility Study
 to determine whether the business idea is viable /profitable
 to determine the possible costs attached to the project.
 to identify possible sources of finance
 to identify target market and demand for the product

3.12 THE NEED FOR PLANNING IN OPERATING A BUSINESS

 Planning is a decision- making process by which an organization decides what it

wants to achieve and how it intends to achieve it and in what manner.
 A business can make short term, medium or long-term plans.

Short Term Planning

 Preparing the business for the day to day activities, these may be for each day, a
week, or 12-24months.

Medium Term Planning

 Preparing business for events that could occur within the next 3years.
 E.g. decisions to use a particular sales promotion to keep up with a competitor.

Long Term Planning

 Preparing the business for events that may occur several years, that is up to 10 years
E.g. decisions to introduce a new product, or to undergo a major expansion.

3.13 LOCAL, REGIONAL AND GLOBAL RULES FOR CONDUCTING BUSINESS

 Government regulatory practices refer to legislative rules that must be followed by

persons who wish to establish a business.

a) Monetary and Fiscal Policies

 A government’s fiscal policy is where a governments’ spending and taxation policies
affects the individual in a nation and consequently a business.

 All businesses are required to pay taxes to the government while individuals are
expected to pay taxes on the items bought. Therefore the government’s taxation
polices can affect the amount consumers spend. E.g. If taxes are high, consumers will
have less money to spend, thus reducing the revenue for a business resulting in
reduced profits.

Cost $2000 X 15% = $300 [tax]

$2000 + $300 = $2300 [total price]

b) Consumer Protection Policies and Agencies

 Consumer protection laws are a form of government regulation that is aimed at
protecting consumers.

 They provide testing facility and publish information to promote consumer awareness
and guidance.

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 c) Government Environment Policies
 The central and local government encourage all businesses to adhere to the following
environmental policies in order to protect the environment. The following is a list of
policies:

 Factories are encouraged to locate outside of city centres

 Builders should use environmentally friendly material

 Businesses should use recyclable materials

 Factories are encouraged to reduce pollution and transport emission

 Food handlers are required to obtain a food handler’s permit

 Trade persons such as electricians must be licensed to ensure that they are
qualified for the job

 Professionals such as doctors, lawyers, accountants, pharmacist and some

engineers must register with their professional association

3.14 FACTORS AFFECTING LOCATION

 A major decision that must be considered when establishing a business is its location.
The following factors should be considered when choosing the location of a business:

Geographical
 A business must be accessible and well positioned, this will have the potential for
high sales.

Availability of Raw Material

 Nearness of the raw material can reduce production cost, as there will be no need for
high transport cost in getting materials.

Power
 A business needs reliable low - cost suppliers of power to operate efficiently.

Water
 Fresh clean water supplies are needed for healthy living and countries with poor
water supply find it difficult to attract investors.

Health Facility
 A business should be located where there are good health facilities to keep the
workforce healthy and capable of effective work.

Transport Cost
 A business should locate near to the supplier of their raw material e.g. service
industries such as hotels and retailing need to be located near to their supplier so that
transport cost will be less.

Labour Supply
 A business should employ the appropriate labour skills where needed, a shortage of
skilled labour may result in the labourer demanding high wages.

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 Government Legislation
 The government may provide grants and tax incentives to attract businesses to locate
in certain areas.

3.15 COLLATERAL

 Collateral is an asset pledged as payment for a loan if the borrower fails to make
regular payments.

 Collateral is security required by a lending institution to act as a safeguard in case the

loan is not repaid.

Different Types of Collateral

 Property – e.g. land, building
 Trucks, drilling rigs, computers, motor vehicle
 Natural resources e.g. gas, oil
 Stock such as shares in a company
 Money

Valuation of Collateral

 The borrower will try to suggest that the value of the collateral is high in order to get
a higher loan, however, it is the lender that puts a value on an asset being used as
collateral in order to decide how much can be lent.

 This value is based on expert advice or past price trends.

Revision Questions

1. Many government throughout the Caribbean region have been encouraging person to
become entrepreneurs

(a) (i) Define the term entrepreneur. (2 marks)

(ii) Identify TWO characteristic of an entrepreneur (2 marks)

(iii) Outline THREE reasons why entrepreneurship is being encouraged in

your country. (6 marks)

(b) (i) State the main purpose of a business plan (2 marks)

(ii) Describe FOUR elements of the business (8 marks)

[TOTAL 20 MARKS]

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2. [CSEC JANUARY 2021]

(a) (i) List FOUR steps that should be taken in establishing a business. (4 marks)

(ii) Identify TWO main sources of information necessary for conducting

research into the establishment of a business. (2 marks)

(b) State FOUR reasons for preparing a business plan. (4 marks)

(c ) Outline two difference between short term planning and long term
planning. (4 marks)

(d) Outline one benefit of collateral to the borrower and one benefit of the

lender in the establishment of a business. (6 marks)

[TOTAL 20 MARKS]

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