NOTES: ENTREPRENEURSHIP SKILLS.

SUB MODULE 1: ENTREPRENEURSHIP DEVELOPMENT.

Entrepreneurship

The concept of Entrepreneurship has a wide range of meanings. Entrepreneurship can be

broadly defined as the practice of initiating, organising and operating a business venture or
enterprise with the aim of making profits. It is also the pursuit for market opportunities to
produce innovative goods and services.

At its core, entrepreneurship is starting a business from scratch, which includes everything
from idea conception to managing the company for the long term. Entrepreneurship centres
on creativity and innovation.

Entrepreneurship is not only doing new things but also about existing things in a new way.

Entrepreneurship is seen as an „engine‟ driving economies of most nations, creating new

industries and wealth.

Entrepreneur

An entrepreneur is one who organises, manages and takes risks of a business or enterprise.
An entrepreneur is an innovative person who identifies and makes use of an opportunity to
create and develop an enterprise.

An entrepreneur takes the risks and organises resources (such as land, labour & capital) to
establish and operate his or her enterprise. An entrepreneur does not fear risks. Entrepreneurs
create innovation within economies.

Entrepreneurs create and add value. They do not destroy or lower value. Entrepreneurs may
not need to start big. You have to clearly understand that there has got to be a starting point
and many factors may not permit a big starting. Entrepreneurs in most cases are very ready
and willing to start with what is available. It is this enterprising sprit, the ability to start with
little and expand over time using a combination of business tactics and strategies which
makes entrepreneurs different from most people.

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Entrepreneurs sacrifice a lot at the initial stages of their enterprises and even during the
formative stage. Besides the financial sacrifices as start-up costs, which are costs to get the
enterprise running, before revenue generation commences, other forms of sacrifice include
time, personal and family programmes, and societal commitments. These sacrifices are made
on the strength of the fact that the expected returns in the long run far outweigh the initial
investment and sacrifices.

There are mainly two types of entrepreneurs, namely; pulled and pushed entrepreneurs. A
pulled entrepreneur is one who sees an opportunity and voluntarily emanating from self-
interest and motivation decides to pursue it as a business. For example a person who resigns
from his or her to start his or her own business is a pulled entrepreneur.

On the other hand, a pushed entrepreneur is one who goes into business because of
circumstances that force him or her to venture into business. For example, a person who has
failed to secure formal job and needs to find means of financial survival.

Objectives of entrepreneurship

The objectives of entrepreneurs include:

 To raise productivity through technical and other forms of innovation.

 To create employment opportunities by establishing new enterprises.
 To facilitates the transfer of technology.
 To facilitate proper utilisation of resources.
 To improve on the standard of living of the people.
 To create new markets and facilitate expansion into international markets.
 To facilitates the production of new products and services.
 To increase government revenue due to increased tax base.

Historical Context

One of the first entrepreneurs was Marco Polo. He had ideas of trading with Asia in the 13 th
century and was sure of how he could get there and the materials he could trade. His
expeditions were financed by venture capitalists in Venice with an assurance that he would
share his profits with them. These loose associations continued to flourish in Europe and
other parts of the world where people with money were willing to back ideas and new
schemes when they were convinced that there was some pecuniary advantage in the end.

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Industrial revolution

The industrial revolution began in Great Britain, spread to Western Europe and the United
States within a few decades. Industrial revolution was the transition to new manufacturing
processes in a period from about 1760 and to sometime between 1820 and 1840. The
transition included going shift from hand production methods to machines.

The most important changes that brought about the industrial revolution were:

 The invention of the machines to do the work of the machine tools.

 The use of steam engine and water and other kinds of power in place of muscles of
human beings & animals.

 The adoption of factory system.

The first industrial revolution evolved into the second industrial revolution in the transition
years from between 1840 and 1870, when technology and economic progress continued with
the increasing adoption of steam transport (steam powered railways, boats and ships), the
large scale manufacture of machine tools and the increasing use of machinery in steam
powered factories.

Second World War

The present development of entrepreneurship started after the Second World War in the
1950‟s when nations were looking to build up their economies from the ravages of the War.
People had new ideas for business or jobs as individuals and started in small ways with
limited capital to form businesses which went on to challenge the well established companies.

The internet

The Internet has led to a virtual explosion of new ventures and entrepreneurs who have found
newer and easier ways to do business are taking advantage of the ease of communication.

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SUB MODULE 2: UGANDA’S EXPERIENCE.

Comparison with other countries

Whereas it was the industrial revolution that spear headed entrepreneurship in Europe. The
circumstances in Africa and East Africa in particular are very different. Historically,
entrepreneurship in East Africa was majorly for the Whites and Asian minority. In Uganda,
the first entrepreneurs were of Asian origin.

Entrepreneurship development in most third world countries is low compared to the European
counties, USA among others. The slow pace of entrepreneurship development is due to
factors such as poor infrastructure (such as roads, railways, air transport and
telecommunication infrastructure), limited markets for goods and services, low purchasing
power among the people in the third world countries, and low levels of creativity and
innovation.

Entrepreneurship development in Kenya is higher than in Uganda and Tanzania. Kenya has
better infrastructure (such as roads, railway system and Air transport), the purchasing power
of the population is high and thus it attracts more investors than Uganda.

Current trends

Local entrepreneurship is now picking up in Uganda. We now have a number of big

enterprises owned by indigenous Ugandans such as in the construction sector, Real estate,
and manufacturing. Indigenous Ugandans have set up powerful businesses. There is also
string of small businesses now owned by Ugandans.

However, most big enterprises are owned by non-Ugandans (such as Asians and Chinese).
The political stability in the country and the government policies on investment (such as
liberalisation of the economy) have fostered entrepreneurial development under the current
government. Entrepreneurship development in Uganda is also being facilitated by the
increasing population and purchasing power of the people.

Barriers to entrepreneurship development in Uganda

There are several barriers to entrepreneurship development in Uganda including the
following.
 Inadequate capital to start and also run an enterprise.
 Expensive and unreliable power supply.
 High interest rates on bank loans.
 Poor infrastructure such as roads and railway network.

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 Poor entrepreneurship skills such as lack of creativity and innovation.
 Fear to undertake risks by many people.
 Limited market for goods and services due to low purchasing power of the people.
 Lack of information on investment opportunities in the country.
 High taxation.
 Unreliable rainfall hinders investment in the agriculture sector.

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SUB MODULE 3: THE ENTREPRENEURIAL PROCESS.

The process of starting a new venture is embodied in the entrepreneurial process. The process
has four distinct phases:
 Identification and evaluation of the opportunity.
 Development of the business plan.
 Determination and acquisition of the required resources.
 Implementation and management of the resulting enterprise.

1. Identify and evaluate the opportunity

Opportunity identification and evaluation is a very difficult task. Most good business
opportunities do not suddenly appear, but rather result from an entrepreneur‟s alertness to
possibilities.
Although most entrepreneurs do not have formal mechanisms of identifying business
opportunities, some sources are often fruitful such as consumers and technical people. Often,
consumers are the best source of ideas for a new venture. How many times have you heard
someone comment, “If only there was a product that would…” This comment can result in
the creation of new business.
Technically oriented individuals often conceptualize business opportunities when working on
other projects.

Whether the opportunity is identified by using input from consumers, technical people etc,
each opportunity must be carefully screened and evaluated. This evaluation of the
opportunity is perhaps the most critical element of the entrepreneurial process, as it allows
the entrepreneur to assess whether the specific product or service has the returns needed
compared to the resources required. This evaluation process involves looking at the length of
the opportunity, its real and perceived value, its risks and returns and its uniqueness or
differential advantage in its competitive environment.

Opportunity analysis, or what is frequently called an opportunity assessment plan, is one

method for evaluating an opportunity. An opportunity assessment plan includes; a description
of the product or service, specifications of all the activities and resources needed to translate
the opportunity into a viable business venture and the source of capital to finance the initial
venture as well as its growth.

The assessment of the opportunity requires answering the following questions:

• What market need does it fill?
• What personal observations have you experienced or recorded with regard to that market
need?
• What competition exists in this market? How would you describe the behaviour of this
competition?

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 2. Developing a business plan
A good business plan must be developed in order to exploit the defined opportunity. This is a
very time-consuming phase of the entrepreneurial process.
A good business plan is essential to developing the opportunity and determining the resources
required, obtaining the resources and successfully managing the resulting venture.
The elements of a business plan include; Executive summary, Business description,
Marketing plan, Operating plan and Financial plan.

3. Determining the resources required.

The resources needed for addressing the opportunity must also be determined and acquired.
This process starts with an appraisal of the entrepreneur‟s present resources. Any resources
that are critical need to be differentiated from those that are just helpful. Care must be taken
not to underestimate the amount of variety of resources needed.

4. Implementation of the business plan and managing the enterprise.

After resources are acquired, the entrepreneur must use them to implement the business plan.
The operational problems of the growing enterprise must also be examined. A control system
must be established, so that any problem areas can be quickly identified and resolved.

Characteristics of entrepreneurship/ Traits of an entrepreneur

1. Creativity and innovation

This is the ability to bring new ideas in an enterprise. Innovation involves the
implementation of the creative ideas. Creativity is a prerequisite for innovation. Ideas have no
purpose until they are converted into products and services. Innovation refers to the process
of doing new things. Entrepreneurship or entrepreneurs tend to tackle the unknown; they do
things in different ways. Innovation becomes vital to the entrepreneur when it is carried out in
the production of goods and services to benefit society.

2. Risk taking

Any enterprise faces various risks and the entrepreneur should be ready to take on the risks.
A wise entrepreneur doesn‟t hesitate to do new things because of the risks that may come up.

3. Self-confidence

An entrepreneur should believe in him or herself. The self-confidence enables you to believe
that you can out do any one in that type of business. A good entrepreneur is one who looks at
challenges as disguised opportunities and not obstacles.

4. Hard work

An entrepreneur should be ready to work for long hours and plan continuously for his or her
enterprise to succeed.

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5. Goal setting

An enterprising entrepreneur should be result oriented, that is, he or she must know where he
or she is taking the business by setting and realising the set goals.

6. Communication and marketing skills

Entrepreneurs should have good communication skills to market and sell their goods and
services. A smile means a lot to a client. Good marketing skills, which result in people
wanting to buy goods or services, are critical to entrepreneurial success.

7. Interpersonal skills

The ability to establish and maintain positive relationships with clients, employees, financial
lenders, investors, lawyers, among others, is crucial to the success of the entrepreneur‟s
business venture.

8. Accountability

Successful entrepreneurs always practice and demand accountability in terms of worthiness

and efficiency of resource allocation. Good accountability involves accounting for the
resources received by the business showing how they have been used and the benefits
realised from their allocation.

9. Flexibility

This involves sensitivity of the entrepreneur to the changes in the business environment and
ability to manage change. Successful entrepreneurs are those who monitor changes in
business situations and environment and make appropriate responses to changes such as
tastes and preferences of the customers, changing technology, changing government policies
etc. flexibility saves entrepreneurs from being thrown out of business by changes in the
environment.

10. Honesty/integrity

An entrepreneur should be honest; he or she should not cheat his clients, suppliers etc.

Spotting a business opportunity

Business opportunity refers to an identified situation or chance that can be turned into real
profitable business.

Spotting a business opportunity can be realised in the following ways:

A business opportunity may be spotted by establishing the quality of products or services

available on the market. In a case you find out that people are not satisfied with the quality of

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the products and services, then you can exploit the opportunity by setting up an enterprise to
provide good quality products or services that meet the needs of the people.

A business opportunity may also be spotted by considering the prices of products and
services available on the market. In case you find out that the prices are too high for many
people and you can offer the same products or services at a low price, you can opt to set up a
business/enterprise.

Under supply of products or services that are on high demand. In case the existing suppliers
cannot fully meet the market demands for certain products and services, then there is an
opportunity for you to also serve the market.

Government policies may also help to identify a business opportunity. For example, one can
take advantage of the UPE, USE Government policies to start Primary and Secondary schools
in areas where government doesn‟t have or has very few schools.

Note: a business opportunity is identified or spotted by carrying out market survey.

Assembling of essential resources

Once the business opportunity has been evaluated, the entrepreneur then gathers the required
resources to implement the opportunity. The resources may include funds, labour, machinery
and equipment among others.

Carrying out a market survey

Market survey refers the systematic gathering, recording and analysing of problems or
opportunities relating to the marketing of goods and services. Market research is carried out
before you start a business and also when you are in production/business.

Aspects to consider when carrying out market survey

 The market size vis-à-vis what you want to supply.

 The type of customers, you need to establish whether they are low, middle or high
income earners.
 The number of competing firms and their image in the public.
 The quality of goods and services offered by the existing/competing firms.
 The anticipated market share.
 Tastes and preference of the clients.
 External and internal forces and their probable effect. You may need to consider
government policies, cultural beliefs, political intervention, technology, attitudes of
the people, your company‟s image etc.
 SWOT analysis. The strength, weaknesses, opportunities and threats. The first two
(SW) are internal to the company and the last two (OT) are within the environment in
which the enterprise operates/intends to operate.

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Importance of market survey

 It helps you to identify you strengths and weaknesses of the competitors.

 It helps someone to predict the future of his or her enterprise.
 It helps in monitoring business performance.
 Market research helps in determining the market share. This helps you to improve on
the quality of your products or services to meet the expectations of your clients.
 It helps you in planning for your enterprise/business.
 Market research helps to recruit appropriate human resource for your business.
 It also helps to discover the needs in terms of new products and services to offer in the
market.
 It helps to determine your SWOT (strength, weaknesses, opportunities and threats).

Challenges faced when conducting market survey

 Insufficient funds to meet transport costs, procurement of stationery, pay research

assistants/data collectors etc.
 Lack of cooperation from the respondents; respondents may not be willing to respond
to your questionnaire, conduct interviews with them, observe them etc.
 Limited time to carry out market research, this affects the quantity and quality of data
collected.
 Language barrier.

Writing a Business Plan

A Business Plan is a written document that sets forth your business‟s mission and objectives
and in detail, how it is going to achieve them.

Writing a business plan forces you to take a deep look at your business idea and how you will
turn it into a business.

The person or persons responsible for implementing the plan should be heavily involved in its
development.

Importance of a business plan

A business plan helps provide direction by making you discuss where you want to take the
venture/business and define what you want out of it.

A business plan provides structure to your thinking and helps you make sure you‟ve covered
all of the important areas.

It prompts you to think about the future. For instance, a business plan might help you
consider what you would do and when, once your venture is developed, it attracts several

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competitors. A good business plan will include ideas for dealing with new competitors in
your market, thus a business plan helps you to prepare for this situation.

A business plan will help you communicate your idea, not only to financers, but also to
employees, potential employees, suppliers and customers. As a communication tool, a
carefully developed plan will provide something that other people can react to. You can use
their insights to help you develop a more successful venture.

It helps in securing finances (loan) from financial institutions such as banks.

Elements of a Business Plan

The elements of a business plan include executive summary, business description, market
analysis, marketing plan, operating plan and financial plan.

1. Executive Summary

Much as the Executive summary appears first in the business plan, it is actually the last part
to be written. It highlights the most important aspects of the business plan. The Executive
summary should be short, about one page. It highlights the following features:
• Your business mission and goals.
• The product(s)/service(s).
• The marketing plan.
• The management team.
• Key elements of your operations.
• Funding requirements, and profit & cash forecasts.

2. Business description

This section addressed the following elements.

 Registered business name.
 Nature of the business, it requires indicating the line of the business such as poultry,
horticulture.
 Business products/services.
 Business owners/directors: indicate the names of the directors of the business.
 Business address: location and contact details.
 Business legal status, such as partnership, limited company.

This section should also provide Vision, mission statement, goals and objectives.

Vision: Refers the future that is hoped for as opposed to the reality that exists. Where do you
want your business to be?

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Mission statement: This explains why your venture/business exists. It answers what your
business seeking to achieve. The mission should be short and memorable.

For Example: To excel in developing sustainable management capacity.

Goal: This refers to the broad expression of the desired outcome. Goals are open ended. For
example: to enhance teaching and learning.

Objectives: These set specific targets. Objectives should be SMART (simple, measurable,
achievable, realistic and time bound. Objectives help you to achieve your Goal.

3. Market Analysis

Under this section, discuss the market and your approach to it. Describe the market‟s
characteristics, your target customer‟s profile, the competition and how you plan to gain an
advantage over them to create a successful business.

Competitor assessment: In your market analysis, include a review of your specific

competitors. All businesses have competitors in some form; some competitors sell similar
products, while others sell a product that serves the same function.

First, define who your competitors are and then profile them. You should assess competitors
with a critical eye on their strengths and weaknesses compared to your own.

When reviewing competitors, consider what they have as far as:

 Market share.
 Relationship with customers.
 Advertising plan.
 Price of products or services.
 Distribution.
 Product/service features.
 Financial strength/cost position.
 Length of time in business.

4. Marketing Plan

Marketing plans usually address four areas: product or service offered, price charged,
distribution system and promotional efforts.

Products and Services

In your business description, you described your product or service in general terms. In this
section, describe your product and how it will be used. Explain your products/services,
identify their features and benefits and discuss what needs or problems they address in the
market.

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Pricing
Pricing strategies are based on the perceived value of your products and services, the cost to
produce your product or service, expected competitive actions etc. You should also think
about what other products similar to your products sell for in the market. Finally, give some
thought to why the price of your product or service should be above or below the “market
price.” Above all, demonstrate that your price will allow you to create a profit.

S/N. Type of product Proposed price

1 A 100
2 B 400

Distribution
Describe how your product will reach the clients, including specific distribution channels and
geographic areas. Distribution decisions concentrate on the methods and channels of delivery
that will optimize your sales and profits.

Promotion
Promotional activities are designed to communicate the value of your products and services
to your customers, ultimately leading them to purchase your product or service.

5. Operating Plan

The operating portion of the plan deals specifically with the internal organizational structure;
operations and equipment you will need to operate your business. You should discuss how
the business will be owned and managed, your personnel and physical resource needs and the
legal issues you will have.

Ownership and Management

Describe the ownership of your business and explain how the business will be managed on a
day-to-day basis. For instance, if your venture will operate as a partnership, then explain who
the partners are and how management decisions will be made and disagreements will be
resolved.

Production Methods
Outline the methods you will use to produce your product (or conduct your service),
especially for a manufacturing venture. Pay attention to how you will you source the inputs
you require.
Facilities and Equipment
Estimate what facilities and equipment you will use. Describe the size and usefulness of the
facilities and any modifications needed to start operations and as your business grows.
Operations

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Describe how your business will be operated in terms of both schedule and procedures. Your
schedule may be part-time or full-time, may only operate in certain seasons, may observe
certain holidays, or may have extended hours at times of the year.
Operationally, describe how you will manage your business. A manufacturer will want to
describe how raw materials will be obtained and transformed into a finished product. A
service provider will want to describe where, when and how the service will be performed.
Your operational description should also include your policies and procedures for billing and
collections, contract management, inventory control, record keeping and how you will
maintain quality.

Legal Issues
Intellectual Property Protection: Protecting your business and its products from imitators
should be a concern early in your venture, particularly if you have innovative products.
Trademarks will protect your company‟s marketing symbols for products and services.
Patents will help protect the products you create.

6. Financial Plan

The financial plan enables you develop an estimate of your profit potential. This section must
present the project sales and cost plan and the cash flow statement for the proposed business.

Before you start your business, you need to plan for both profit and cash flow. When you
have started, you should follow up the sales and costs as well as your cash flow closely to
make sure that everything is going on as you planned, in case anything goes wrong, you
should take action to sort out the problem immediately. Follow the following two steps to
plan and monitor the financial situation of your business.
 Make a sales and cost plan.
 Make a cash flow plan. Cash flow plan is a forecast which shows you how much cash
you expect to come into your business and how much cash you expect to go out of
your business every month. The cash flow plan helps you to ensure that your business
doesn‟t run out of cash at any time.
 Compare records with both plans every month.
 Take action if anything is going wrong.

Note: The components/elements of a business plan cover an array of topics typical to all
ventures. However, what you write in your business plan will depend heavily on how you
intend to use the plan. It may be used for feasibility study, it may be an operating guide, and
it can also be used as a financial proposal. Each use will emphasize different areas.

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SUB-MODULE 4: EMPLOYMENT CREATION.

Self -employment

Self-employment is where an individual starts his or her income generating activity using the
available resources which may either be borrowed or personally owned and gets employed in
it.

It also refers to a situation where someone works for him or herself instead of an employer. In
Uganda, self-employment has risen due to limited employment opportunities. It has also risen
due to the need by the employed people to boost their incomes because many jobs, especially
public service jobs have low remuneration.

Importance of self-employment

 It allows flexible working schedule for the self-employed person.

 It improves on ones earnings. Increased growth and profitability of the business
largely benefits the owner.
 There is job security. The self-employed person is certain of continued employment
until the collapse of the business. He or she can‟t chase him or herself.
 Self-employment encourages creativity and innovation since the self-employed person
has independent decision making power and therefore opportunity to generate and
implement new ideas.
 High degree of independence is enjoyed by the self-employed person since he or she
is a boss of his or her own.
 There is efficient resource utilisation and good accountability since there is personal
attachment to the work and the work situation is entirely under the owner‟s control.
 High quality goods and services are offered due to personal interest and desire for
profits.
 It improves on the standard of living of the self-employed person due to high income
earned from the business which leads to purchase of more and quality goods and
services.

Challenges of self-employment

 Competition may lead to the collapse of the business/enterprise.

 Working for long hours.
 Dissatisfaction among employees may lead to high labour turnover, poor service
delivery.
 The income received by the self-employed person is uncertain and not stable as it
varies with business performance.

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Employment and Business Policies

The following are some of the policies the Government of Uganda has put in place to
promote entrepreneurship.

National Trade Policy

The trade Policy charges Government with the primary role of eliminating barriers to trade,
and providing an enabling environment in which the private sector will thrive and build
capacity to produce quality goods and services competitively, reliably, and on a sustainable
basis. More importantly, the policy identifies the salient relationship and linkage between the
trade sector and the productive sectors such as agriculture and industry for exploitation as
crucial pillars in move towards transformation.

National Employment Policy

Employment creation is central to the national socio-economic development process. It is at

the core of the transformation of Uganda from a poor agrarian economy to a modern,
prosperous and skilled society. The main asset that the poor have is their Labour and if
appropriately harnessed it can be transformed into sustainable and productive employment
and better quality of life.

Sustainable employment is the main source of livelihoods and self-fulfilment for most
women and men.

The National Employment Policy addresses issues concerning decent and remunerative
employment for all women and men, equity, security and human dignity. The consequences
of unemployment and underemployment are damaging and are potential source of industrial
unrest, instability and increased crime rate.

National Land Policy

The vision of the policy is: “Sustainable and optimal use of land and land-based resources for
transformation of Ugandan society and the economy”. The goal of the policy is: “to ensure
efficient, equitable and sustainable utilization and management of Uganda‟s land and land-
based resources for poverty reduction, wealth creation and overall socio-economic
development”.

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  Provision of Tax incentives to investors (especially foreign investors). Uganda is open
to foreign investment and provides tax incentives for medium and long-term foreign
investors. The Heritage Foundation's 2011 Index of Economic Freedom ranked
Uganda's economy 80th of 179 countries, based on ease of doing business, trade
freedom, property rights, and fiscal and monetary policy.
 Liberalisation of the economy to encourage foreign businesses to set up operations in
Uganda.
 Privatization policy: The Government began a privatization program in 1993 that has
resulted in the complete or partial divestiture of the majority of Uganda's public
enterprises, with a number of strategic businesses remaining in State hands. The
program has attracted foreign investors primarily in the agri-business, hotel and
banking sectors.
 Conversion and transfer polices: Uganda keeps open capital accounts, and Ugandan
law imposes no restrictions on capital transfers in and out of Uganda. Investors can
obtain foreign exchange and make transfers at commercial banks without approval
from the Bank of Uganda in order to repatriate profits and dividends, and make
payments for imports and services. Investors have reported no problems with their
ability to perform currency transactions.

Programmes for development

The programmes by the Government of Uganda aimed at achieving economic development in

the country include:

 National Agricultural Advisory Services (NAADS).

 Northern Uganda Social Action Fund (NUSAF).
 Peace Recovery Development Programme (PRDP).
 Skilling Uganda programme.
 Presidential initiative on banana and industrial development.
 Youth Livelihood programme.

Types of Businesses

A business is an organization that uses economic resources or inputs to provide goods or

services to customers in exchange for money or other goods and services.

There are three major types of businesses:

1. Service Business

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A service type of business provides intangible products (products with no physical form).
Service type firms offer professional skills, expertise, advice and other similar products.

Examples of service businesses include schools, repair shops, hair salons, banks, accounting
firms and law firms.

2. Merchandising Business

This type of business buys products at wholesale price and sells the same at retail price. They
are known as "buy and sell" businesses. They make profit by selling the products at prices
higher than their purchase costs. A merchandising business sells a product without changing
its form.

3. Manufacturing Business

Unlike a merchandising business, a manufacturing business buys products with the intention
of using them as materials in making a new product. Thus there is a transformation of the
products purchased.

Manufacturing businesses combine raw materials, labour and factory expenses in production.
The manufactured goods will then be sold to customers.

Legal forms of business

The legal forms of business/forms of business organisation include:

 Sole proprietorship
 Partnership
 Limited Company
 Cooperative

1. Sole proprietorship

Sole proprietorship is often referred to as sole trade and it consists of a single person who
decides to set up a business. He or she does the entire decision making and takes
responsibility for the destiny of the business. He or she is responsible to none, raises the
capital to fund the business on his own, enjoys all the profits and suffers from the losses
alone. Sole proprietorship is the commonest type of enterprise in Uganda. The advantages of
sole trade include:

 Quick decision making. There is no need to consult anybody and so he or she can
make his or her decisions quickly so as to take advantage of an opportunity to may
suddenly appear.
 Retention of all business profits. He or she doesn‟t share business profits with anyone
as the case with partnerships or companies.

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  Ease of starting. There are no strict legal requirements to start the business as the case
is with a company.
 Privacy of business records. Since there are no legal requirements for keeping the
financial records, there is equally no requirement for disclosure of trading results.

However, sole proprietorship has disadvantages which include the following.

 Limited access to funding. Funding of a sole proprietorship is the sole responsibility

of the owner and because he or she doesn‟t keep books of accounts, it is difficult to
attract funding from loan from financial institutions.
 Unlimited liability. In a sole proprietorship, there is no distinction between business
assets and those of the owner. The proprietor may be forced to sell off household
property to pay creditors.
 Limited business skills. The development and success of the business is limited to the
owner‟s entrepreneurial and managerial skills as he or she may have no one to share
ideas with. In case of illness or death by the proprietor, the business may collapse.

2. Partnership

Partnership refers to the coming together of two or more people but not exceeding twenty to
start or carry on an already existing business venture thereby pooling resources together,
sharing responsibilities as well as profits and losses.

Partnership deed refers to the document signed by all partners to protect their interests. It
spells out the amount to be contributed by each partner to form the capital of the business, the
obligations of each member of the partnership, the ratio in which profits and losses are to be
shared etc. Partnership has the following advantages.

 Ease of funding. A partnership has inevitably more sources of funding than a sole
trader as each partner contributes.
 Multi-disciplinary specialisation of the owners. This helps the business to enjoy a
large market share and enables different partners to excel in their different fields of
specialisation. For example in a firm for lawyers, you will find specialists in media
law, business law, building laws etc.
 Any losses are shared among the partners.

Notwithstanding the above advantages, partnerships have disadvantages including the

following.

 Slow decision making. Because more than one person is involved, decision making is
usually slowed down because every partner‟s opinion has to be sought and census
arrived at before action can be taken.
 Limited sources of funding. The source of financing is equally limited to the ability of
the partners unlike companies.
 Sharing of profits. Profits have to be shared amongst partners unlike sole
proprietorship where all the profits go to one person.

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  Unlimited liability. This means that the partners are wholly liable for the losses made
by the partnership. The partners may be forced to sell their properties in order to clear
the debts.

3. Limited Company

There are two categories of limited companies, namely; public limited company and private
limited company. When a company is formed, it is said to be „incorporated‟. The corporation
formed is treated according to the law as a separate entity, independent of its members. The
fact that it is body corporate means that it can sue and be sued.

A Private Limited Company is constituted by at least two people and it is limited to fifty
members. On the other hand, a Public Limited Company is constituted with a minimum of
seven members and the maximum is unlimited.

The private limited liability company cannot offer for sale its shares to the public through the
stock exchange. On the other hand, a public limited liability company offers for sale its
shares to the public through the stock exchange. Shareholders are the investors who put their
money into the company.

Formation of a Limited Company

The following steps are usually involved when forming a limited company.

 Approval of the chosen Company name by the Registrar of Companies.

 After the approval of the name, the Memorandum and Articles of Association for the
Company must be drawn.
 Filling the Memorandum and Articles of Association with the Registrar of
Companies.
 The Registrar of Companies issues a Certificate of Incorporation, which means that
the Company is now formed.

In registering a Limited Company, the legal requirements include; Company name, location
of registered office, objectives of the Company, statement that the liability of members is
limited, the amount of share capital.

The advantages of limited companies include:

 It is easy to raise capital from several shareholders who sell company shares as well
as loan capital from loan credit institutions.
 Shareholders have limited liability. This means that in bad economic times, the
individual shareholder‟s personal assets is not at risk if the company makes a loss.
 Continuity. The ill health or death of a shareholder cannot bring the company‟s
activities to a standstill since the company has hired specialists who manage the
company‟s affairs on a daily basis.

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The disadvantages of Limited companies include:

 Formation and running costs are usually high as there are a number of statutory
obligations that must be met on incorporation and periodically through the life of a
company.
 Decision making tends to be slow as the number of people, and formalities for
decision making are many which might make the company fail to take advantage of
lucrative but temporary opportunities.
 The fact that audited accounts must be filled annually with the Registrar of companies
from which they can be accessed by any member of the public, there is no privacy of
the company‟s transactions.

4. Cooperative

A cooperative is a business organization owned by a group of individuals and is operated for

their mutual benefit. The persons making up the group are called members. Cooperatives may
be incorporated or unincorporated.

It may also be defined as an autonomous association of persons united voluntarily to meet

their common economic, social and cultural needs and aspirations through a jointly owned
and democratically controlled enterprise.

Profits and earnings generated by the cooperative are distributed among the members, also
known as user-owners.

Typically, an elected board of directors and officers run the cooperative while regular
members have voting power to control the direction of the cooperative. Members can become
part of the cooperative by purchasing shares, though the amount of shares they hold does not
affect the weight of their vote. Cooperatives are common in the healthcare, retail, agriculture,
art and restaurant industries.

Forming a Cooperative

Forming a cooperative is different from forming any other business entity. To start up, a
group of potential members must agree on a common need and a strategy on how to meet that
need. An organizing committee then conducts exploratory meetings, surveys, and cost and
feasibility analyses before every member agrees with the business plan. Not all cooperatives
are incorporated, though many choose to do so. If you decide to incorporate your cooperative,
you must complete the following steps:

1. File Articles of Incorporation. The articles of incorporation legitimizes your cooperative

and includes information like the name of the cooperative, business location, purpose,
duration of existence, names of the incorporators and capital structure. Once the charter
members (also known as the incorporators) file with the Registrar of Companies and the
articles are approved, you should create bylaws for your cooperative.

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2. Create Bylaws. While the law does not require bylaws, they do need to comply with state
law and are essential to the success of your cooperative. Bylaws list membership
requirements, duties, responsibilities and other operational procedures that allow your
cooperative to run smoothly. According to most state laws, the majority of your members
must adopt articles of incorporation and bylaws.

3. Create a Membership Application. To recruit members and legally verify that they are part
of the cooperative, you must create and issue a membership application. Membership
applications include names, signatures from the board of directors and member rights and
benefits.

4. Conduct a Charter Member Meeting and Elect Directors. During this meeting, charter
members discuss and amend the proposed bylaws. By the end of the meeting, all of the
charter members should vote to adopt the bylaws. If the board of directors were not named in
the articles of incorporation, you must designate them during the charter meeting.

5. Obtain Licenses and Permits. You must obtain relevant business licenses and permits.

6. Hiring Employees.

Advantages of a Cooperative

 Less Taxation. Cooperatives that are incorporated normally are not taxed on surplus
earnings refunded to members. Therefore, members of a cooperative are only taxed
once on their income from the cooperative and not on both the individual and the
cooperative level.
 Funding Opportunities.
 Reduce Costs and Improve Products and Services. By leveraging their size,
cooperatives can more easily obtain discounts on supplies and other materials and
services. Suppliers are more likely to give better products and services because they
are working with a customer of more substantial size. Consequently, the members of
the cooperative can focus on improving products and services.
 Perpetual Existence. A Cooperative structure brings less disruption and more
continuity to the business. Unlike other business structures, members in a cooperative
can routinely join or leave the business without causing dissolution.
 Democratic Organization. Democracy is a defining element of Cooperatives. The
democratic structure of a cooperative ensures that it serves its members' needs. The
amount of a member's monetary investment in the cooperative does not affect the
weight of each vote, so no member-owner can dominate the decision-making process.

Disadvantages of a Cooperative

 Obtaining Capital through Investors. Cooperatives may suffer from slower cash flow
since a member's incentive to contribute depends on how much they use the
cooperative's services and products. While the "one member-one vote" philosophy is

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 appealing to small investors, larger investors may choose to invest their money
elsewhere because a larger share investment in the cooperative does not translate to
greater decision-making power.
 Lack of Membership and Participation. If members do not fully participate and
perform their duties, whether it be voting or carrying out daily operations, then the
business cannot operate at full capacity. If a lack of participation becomes an on-
going issue for a cooperative, it could risk losing members.

Business registration procedures

1. Making an application for reservation of a business Name; upon payment of the required
fee, the suggested name is subjected to a search in the business registry database. Once the
name passes the similarity, defensive, offensive, desirability test then it is reserved.
Reservation is valid for 30 days.

2. Register your company and obtain a Certificate of Incorporation by submitting a

Memorandum and Articles of Association as well as the following forms: A1 (Statement of
Nominal Capital) and A2 (Declaration of Compliance with Companies Act).

(a)The Memorandum of Association must state the following.

• Name of the Company
• Address
• Object clause
• Share capital
• Class, value and number of shares
• Subscribers, their occupation, postal address and the number of shares subscribed, in
case of the company limited by shares
• Provision for the signature
• Must be dated and witnessed
• Where the subscriber to the Memorandum is a corporate entity, the seal of the company
be appended.

(b)The Articles of Association provide the following information

• Sets down the rules that govern the internal management of the company
• It must be signed by the subscribers
• It must state the subscribers names, occupation and address
• It must be dated and witnessed.

3. Although you could fill in Uganda Revenue Authority (URA) registration forms online,
you will still need to visit a URA office to complete the tax registration process. At URA you
will file an approved Personal Inquiry Form for each of your company directors and a
Corporate Preliminary Inquiry Form. A URA Inspector will then inspect your business
premises and if all is in order, you will receive a Tax Identification Number (TIN). Should
your business annual sales exceed shs.50 million, Value Added Tax (VAT) registration is
also required. All these URA services are free of charge.

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4. The free application form for a trading license may be obtained from relevant authority
such as Municipal Council, Town Council and KCCA. An inspector should then inspect your
premises and determine your licensing fee at no cost.

5. In addition to the above, if your business has five or more employees, it must be NSSF
registered.

Intellectual property and business innovation

Intellectual property refers to new or original creations of the mind such as:

 Literary or artistic works, sound recordings and films.

 Performances of performing artists.
 Inventions in all fields of human endeavour.
 Trademarks, service marks and commercial names.

Intellectual property is divided into two categories, namely; industrial property and copyright.
Industrial property includes patents for inventions, trademarks and industrial designs.
Copyright covers literary works (such as novels, poems and plays), films, music, artistic
works and architectural design. Rights related to copyright include those of performing artists
in their performances, broadcasters in their Radio and TV programs.

Intellectual property rights are like any other property right. They allow creators, or owners
of patents, trademarks, or copyrighted works to benefit from their work or investment in a
creation.

Why promote and promote intellectual property

 The progress and well-being of humanity rest on its capacity to create and invent new
works in the areas of technology and culture.
 The legal protection of new creations encourages commitment of additional resources
for further innovation.
 It spurs economic growth, creates new jobs and industries and enhances the quality
and enjoyment of life.

Intellectual property system strikes a balance between the interests of the innovators and the
public interest, creating an environment in which creativity and invention can flourish for the
benefit of all. Intellectual property rights reward creativity and human endeavour, which fuel
the progress of human kind.

Without rewards provided by the patent system, researchers and inventors wouldn‟t have
incentive to continue producing better and more efficient products for consumers.

Patent is an exclusive right granted for an invention –product or process that provides a new
way of doing some thing or that offers a new technical solution to the problem. A patent

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protection means that an invention can‟t be commercially made, used, distributed or sold
without the patents owners‟ consent. Patent rights are usually enforced by courts of law.

Sources of capital to start-up enterprises

Capital refers to money or other resources invested in a business/enterprise to produce goods

and services.

 Ploughing back profits to expand the enterprise.

 Bank overdraft.
 Bank loans. These may be short term, medium, and long term. Short term may be for
a period less than two years. This can be used to buy raw materials needed in the
enterprise. Medium term loan may range from 2-10 years. This is usually offered by
development banks and used to buy assets such as equipment and vehicles. Long term
loans are offered for a period exceeding ten years. This is usually given to business
with good truck record; the loan may be used to buy assets such as land and
machinery.
 Hire purchase. This refers to buying an item by paying in instalments. This is
advantageous as the business benefits from the property before completing payments.
The enterprise owns the property when payment is completed.
 Leasing. The business may agree with a leasing company to use a capital asset such
as machinery and commercial vehicles for a given period of time at a fee. Under this
arrangement, the business does not own the asset.
 Floating of shares/securities; this is limited to companies that are listed. In developed
countries, this is the most common way of raising capital.
 Through donations/grants. This may be money, equipment, vehicles, machinery etc.
 A business can also get capital through fundraising.
 Sale of assets, which may not be of immediate use in order to raise funds for a
planned venture.
 Non-Governmental Organisations (NGOs), there are some NGOs that support small
businesses in communities.
 Individuals such as family members and friends may be a source of financing.
 Government sponsored agencies; there may be a number of government programs that
provide financing to businesses (especially small businesses).
 Venture capital, these are funds which are provided by wealthy individuals.

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SUB MODULE 5: MAKING NEW VENTURES.

Marketing approaches

Marketing approaches are strategies (courses of action or means) a business adopts in order to
achieve the marketing objectives. There are several strategies a business may adopt to realise
its marketing objectives including the following:

 Trade show exhibitions.

 Public relations (press briefings, feature articles, community activities).
 Print and Broadcast advertising (such as Newspapers, trade journals, consumer
magazines, Television and Radio.
 Discounts for large volume customers.

Choose a few strategies that can effectively help you to achieve the marketing objectives.
Considerations should take into account the product, competitors, clients, budget etc. For
example, much as a TV campaign might increase the visibility of your business, you may not
afford production and air time costs.

Developing a marketing plan

A marketing plan is a business document written for the purpose of describing the current
market position of a business and its marketing strategy for the period covered by the
marketing plan.

A marketing plan includes everything from understanding your target market and your
competitive position in that market, to how you intend to reach that market (your tactics) and
differentiate yourself from your competition in order to make a sale.

The purpose of creating a marketing plan is to clearly show what steps will be undertaken to
achieve the business marketing objectives. Some small business owners include their
marketing plan as part of their overall business plan.

A typical small business marketing plan might include a description of its competitors, the
demand for the product or service, and the strengths and weaknesses from a market
standpoint of both the business and its competitors.

Other elements usually contained in a marketing plan include:

 Description of the product or service, including special features.

 Marketing budget, including the advertising and promotional plan.
 Description of the business location, including advantages and disadvantages for
marketing.

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  Pricing strategy.

Market segmentation (specializing in specific niche markets or, if mass marketing, how
marketing strategy might differ between different segments, such as age groups).

Like a business plan, a marketing plan is an important document that needs to be updated on
a regular basis. Even five year marketing plans should be revisited periodically, at least once
each year to address changes in market conditions, demand, pricing issues, etc.

Elements of a marketing plan

The elements of a marketing plan include Executive summary, Goals/objectives, situational

analysis, marketing strategy, financial projections and implementation plan.

1. Executive summary

This section should be quite extensive; outline your product(s)/service(s), the customers, the
market, the market strategy that you will use and the objectives that the marketing strategy
strives to achieve.

2. Goals/Objectives

This section looks at what the business wants to achieve, both overall and with the marketing
plan.

3. Marketing strategy

The marketing strategy may be very specific especially if the plan pertains to a stable product
in a familiar market, or it may be somewhat open to valid possibilities, such as when the firm
plans to enter a new market with innovative product.

 Target market: Detail the market demographic including the needs, trends.
 Positioning: Where are you in the market and where do you intend to go.
 Marketing mix: Detail the proposed marketing mix through; product strategy,
distribution strategy, promotional strategy and pricing strategy.

4. Financial projections

The marketing plan should provide possible developments and returns on the marketing
investments outlined in the strategy.

5. Implementation and monitoring Plan: Include the timing of promotional activities, when
monitoring will take place.

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Strengths, weaknesses, opportunities and threats (SWOT) analysis

Strengths and weakness: strengths and weaknesses of your business. Without knowing your
weaknesses, you can‟t improve. The strengths help you to exploit the opportunities that exist
in the environment.

Opportunities and threats: Opportunities and threats exist in the environment in which your
business operates. You need to know what is going on in the environment in which you
operate.

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SUB MODULE 6: MANAGING A BUSINESS ENTERPRISE.

Strategic management

Strategy refers to means of achieving intended goals. Strategy includes the determination and
evaluation of alternative paths to an already established mission or objectives and eventually
the choice of alternatives to be adopted. Strategy is designed to ensure that the
goals/objectives of an enterprise are achieved.

Strategic management may be defined as the determination of the basic long term goals and
objectives of an enterprise and adoption of course of action and allocation of resources
necessary to achieve goals and objectives.

Strategic management is concerned with managing for future or competing for future

Approaches to strategy making

On the basis of strategic management process and the nature of relationship between the core
components of strategic management, there are basically two approaches, namely;
prescriptive and emergent approach.

Both approaches recognise three core components of the strategic management process, that
is, strategic analysis (consisting of SWOT analysis and determination of the mission and
objectives), strategic development (evaluation of strategic alternatives and choice of strategy)
and implementation. The difference however, is in the perception of the relationship between
these basic components.

In the prescriptive approach, strategic analysis leads to determination of the long term
strategy which is then implemented.

According to the emergent approach, the long term corporate strategy cannot be
predetermined. The approach holds that the long term being uncertain, it is unrealistic to
prescribe in advance a strategy with long term perspective. The strategy should evolve
responding to emerging developments and therefore to some extent, strategy development
and implementation occur concurrently. The mood for the emergent strategy is ‘let us try this
strategy and continue it or change depending on our experience’. The prescriptive strategy
prescribes „this is our strategy for the next five years, administer it.

Merits of prescriptive approach

The approach provides a clear master plan for development of the entire organisation. It
makes future direction and goals very clear and thus forms the basis for action and
evaluation. It gives advance indication of the major demands on the resources, that is,
technology, human and financial at different points of time.

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Limitations of the prescriptive approach

The future being uncertain, it cannot be predicated accurately. Economic and political
environments some times change very drastically.

Merits of the emergent approach

The major merit of the approach is the constant monitoring of the environment and its
flexibility to adapt to the changing environment.

Strategic Management Process

The strategic management process encompasses three phases, which together involve a
number of systematic steps. The three phases are strategy formulation, implementation and
evaluation & control.

1. Strategy formulation

Strategy formulation involves four important steps, namely; determination of the mission and
objectives, analysis of the strength and weaknesses of the firm and the environmental
opportunities and threats (SWOT), generation of alternative strategies and choosing the most
appropriate strategy.

Determination of the mission and objectives is the first step to strategy formulation. The
mission defines the broad social purpose of the organisation. The mission explains why the
business exists. Objectives are specific and should be SMART. Objectives help to translate
organisational mission into results. Goals set specific targets to be achieved within a time
frame.

For example, a fertiliser company may state its mission as to fight world hunger and its
objectives as to increase agricultural productivity through development and efficient
production of improved fertilisers, generate profits to finance research and development. The
goals will specify the quantity of production or growth rate or market penetration to be
achieved within specified periods.

SWOT analysis

The strengths and weaknesses of a firm and opportunities and threats in the environment will
indicate the strategies it should pursue. An organisation should address questions such as
what are the changes, including possible future changes in the environment which have
implications for us and how we should respond to them, what are the opportunities in the
environment which can be exploited using our strength. What are the threats and do we have
the strength to combat them, how can we a mass our strength, what are the weaknesses, can
we overcome or minimise the weaknesses etc.

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Strategic alternatives

Given the mission and objectives and having analysed the strength and weaknesses of the
firm and environmental opportunities and threats, strategists should proceed to develop
possible alternative strategies. There may be different options for accomplishing a particular
objective.

Evaluation and choice

The purpose of considering different strategic options is to adopt the most appropriate
strategy. This necessitates the evaluation of the strategic alternatives with reference to certain
criteria. The criteria may include suitability, feasibility, and acceptability. Suitability: does
the strategy help to accomplish the mission and objectives. Does it exploit the organisations
strengths and environmental opportunities? Is it capable of combating environmental threats
and overcoming internal weaknesses? Feasibility: this examines whether the strategy is
realistic and workable. Acceptability: does it affect the present employees, does it affect
corporate image, does it affect relationship with stakeholders.

2. Implementation

Operationalizing the strategy requires transcending the various components of the strategy to
different levels, mobilising and allocation of resources, structuring authority, responsibility,
tasks and information flows and establishing policies. Implementation of strategy involves a
number of administrative and operational decisions.

3. Evaluation and control

The objective here is to examine whether the strategy as implemented is meeting its
objectives and if not to take corrective measures. Continuous monitoring of the environment
and implementation of the strategy is essential.

Relevance of strategic management

 It helps to envision an organisation‟s future, formulate mission and make objectives

clear.
 It facilitates better delegation, coordination, monitoring performance, evaluation and
control.
 The identification of the strengths and weaknesses may help an organisation to make
measures to overcome or minimise the weaknesses and reinforce the strengths.
 It helps the firm to meet competition more effectively.
 Strategic management makes management dynamic, and future oriented.

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Communication in business

Good communication skills are essential for the success of a business. An entrepreneur must
have good communication skills in order to attract clients to his or her business. Several
businesses have collapsed due to poor communication skills on the part of the entrepreneur or
the workers.

Effective communication in business

Effective communication refers to a situation where the message is understood by the

receiver as intended by the sender. With effective communication, the sender and the receiver
understand the message in the same way. Effective communication is considered to be the
most important ingredient of the communication process. Effective management is a function
of effective communication.

Importance of effective communication in business

 It creates rapport between the entrepreneur and the clients.
 It improves on entrepreneur-employee relationship.
 It motivates workers to work hard/Increases output.
 It leads to production of quality products.
 It improves on the image of the business.
 It attracts clients to the business.

Barriers to effective communication in businesses

There are several barriers to effective communication including the following.
 Language barrier.
 Wrong choice of the channel.
 Noise from the surrounding.
 Negative attitude on both the side of the sender and recipient.
 Network failure.
 Poor pronunciation.
 Inattention on the part of the receiver.

Building success in an enterprise

An entrepreneur can build success in his/her enterprise through the following ways.

 Being trustworthy to the clients and other people you deal with.
 Offering customers with good quality products/services.
 Ensure availability of the products/services all the time.
 Advertise your products and services through advertising using the print media (such
as Newspapers, journals and magazines), broadcast media (such as Television and
Radio), billboards, website and exhibition in trade shows.
 Offer after sales services to customers.

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  Ensure adequate and convenient parking space.
 Establish and maintain good public relations (such as sponsoring community events-
Corporate social responsibility, writing feature stories).
 Offer credit to trustworthy customers.
 Ensure good interpersonal and communication skills.
 Operate in a clean of the environment.
 Build teamwork among employees of your enterprises.

How the business can fail

There are several causes of business failure including the following.
 Poor management of the business. This includes personal use of business funds,
failure to set business objectives and develop plans and budgets, poor time
management, arrogance to employees and poor resource allocation.
 Insufficient capital
 Poor business location
 Ineffective marketing
 Failure to adapt to the changes in the business environment
 Poor quality goods and services
 Stiff competition leading to low sales
 Poor credit management
 Poor customer care
 Limited experience in the business
 Untrustworthy employees. Many employees cheat businesses they work for.

How to prevent business failure

 Ensuring good customer care, don‟t be arrogant.

 Offering good quality products and services.
 Ensure you have sufficient capital to start and run the business.
 Understand the needs of your customers/clients.
 Ensure effective credit control.
 Set clear objectives for your business.
 Be honest to your clients, suppliers, creditors etc.
 Market your products and services through advertising using the print media,
broadcast media, bill boards, brochures, website among others.
 Be creative and innovative.
 Being patient especially at the early stages of your business.
 Find the right premises/location for your business.

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How to attract customers/clients

The success of your business/enterprise relies greatly on your ability to attract customers.
Attracting customers to your business makes the difference between succeeding and failing.

 Ensure prompt delivery of products or services to clients.

 Ensure availability of the products all the time.
 Ensure good customer care.
 Providing customers with good quality products and services.
 Advertise your products and services through advertising using the print and
broadcast media, billboards, website, brochures etc.
 Offer after sales services to customers.
 Provision of adequate and convenient parking space.
 Participate in trade shows, exhibitions.
 Sponsor community events-Corporate social responsibility.
 Offer credit to trustworthy customers.
 Ensure cleanness of the environment in which you operate and also of the
workers/employees.

Saving and reinvestment

Whenever your business makes profits, you need to reinvest it, don‟ misuse it. The
profits/savings can be used to expand the business by opening new branches in suitable
localities. You can also expand the very business including bringing in new products
(diversifying your business), purchasing more machinery etc.

Business relationship with family and friends

Don‟t mix business with friends and family, it affects accountability. Many businesses
especially in Africa have collapsed as a result of mixing business with friends and family.
Your friends and family ought to respect your business.

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SUB MODULE 7: FINANCIAL MANAGEMENT AND COST ACCOUNTING
SYSTEMS.

Cost Analysis

A cost analysis (also called cost-benefit analysis or CBA) is a detailed outline of the potential
risks and gains of a projected venture. Prior to erecting a new plant or taking on a new
project, prudent managers will conduct a cost-benefit analysis as a means of evaluating all of
the potential costs and revenues that may be generated if the project is completed. The
outcome of the analysis will determine whether the project is financially feasible, or if
another project should be pursued.

A CBA is useful for making many types of business and personal decisions, especially ones
with a potential for profit (though this need not be the case).

1. Define your CBA's unit of cost. Since a CBA's aim is to determine whether a certain
project or venture is worth the cost it would take to enact, it's important to establish
what exactly your CBA measures in terms of "cost" at the outset. Usually, a CBA
measures literal cost in terms of money, but, in cases where money is not an issue,
CBAs can measure cost in terms of time, energy usage, and more.

For the purpose of demonstration, let's design an example CBA in this article. Let's say that
we run a lucrative lemonade stand on weekends in the summer and that we want to perform a
cost analysis to see whether it's worth expanding to a second location on the other side of
town. In this case, we're primarily interested in whether this hypothetical second location
would make us more money in the long run or whether the costs associated with expanding
would be prohibitively high.

 Itemize the tangible costs of the intended project. Almost any project comes with
costs. For instance, business ventures require initial monetary investments to buy
goods and supplies, train staff, and the like. The first step of a CBA is to make a
thorough, exhaustive, itemized list of these costs. You may want to investigate similar
projects to find costs to include on your list that you may not otherwise have
considered. Costs can be one-time events or ongoing expenses. Costs should be based
on actual market prices and/or research when possible, but should be intelligent,
researched estimates when this is not possible.

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Below are the types of costs you'll want to include in your CBA:
 The price of goods or equipment associated with the venture
 Shipping, handling, and transportation costs
 Operating expenses
 Staffing costs (wages, training, etc.)
 Real estate (rented offices, etc.)
 Insurance and taxes.
 Utilities (electricity, water, etc.)
 Let's make a quick itemized list of the costs our hypothetical new lemonade stand will
require to launch:
 Supplies in the form of lemons, ice, and sugar: $20/day
 Wages for 2 stand attendants: $40/day
 Good quality blender (for smoothies): one-time cost of $80
 High-volume cooler: one-time cost of $15
 Wood, cardboard, etc. for stand and sign: one-time cost of $20
Our income from the lemonade stands isn't taxed, the cost of the water used to make the
lemonade is negligible, and we have a policy of setting up our stands in public parks, so we
don't have to account for taxes, utilities, or real estate expenses.

 Itemize any and all intangible costs. It is rare for a project's costs solely to be
composed of tangible, real expenses. Usually, CBAs also take into account a project's
intangible demands - things like the time and energy required to complete the project.
Though these things can't actually be bought and sold, real-world costs can be
assigned to them by determining the amount of money one would hypothetically be
able to make if they were used for another purpose. For instance, though taking a year
off from a job to write a novel is technically free, one must take into account the fact
that doing so means going without wages for a year. Thus, in such a situation, we're
basically exchanging money for time, buying a year for ourselves at the price of a
year's wages.

Below are the types of intangible costs you'll want to consider for your CBA:
 The cost of the time spent on a project - i.e., the money that could be made if this time
was spent doing something else
 The cost of the energy spent on a project
 The cost of adjusting an established routine
 The cost of any possible lost business during the implementation of the projected
venture
 The risk factor value of intangibles like safety and customer loyalty

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  Let's take into account the intangible costs of opening a new lemonade stand. We'll
assume that our current stand generates about $20/hour for 8 hours each day, 2 days
each week (Saturday and Sunday):
 Closing the existing lemonade stand for one day so that the new stand can be built,
signs can be made, and new sites can be scouted: one-time loss of $160 in profits.
 Spending 2 hours each week for the first two weeks working out issues in the supply
chain: one-time loss of $80 in profits over the first two weeks.

 Itemize the projected benefits. The purpose of any CBA is to compare the benefits
of a project to the costs - if the former clearly outweigh the latter, the project will
probably be given the go-ahead. Itemizing the benefits is done in the same way as the
cost portion of the analysis, though you will most likely need to rely on educated
estimates more than you will with the costs. Try to back up your estimates with
evidence from research or similar projects and assign a monetary amount to any
tangible or intangible ways in which you will see a positive return on your venture.

Below are the types of benefits you'll want to consider in your CBA:
 Income produced
 Money saved
 Interest accrued
 Equity built
 Time and effort saved
 Intangibles like referrals, customer satisfaction, happier employees, a safer workplace,
etc.
 Let's calculate the projected benefits of our new lemonade stand and provide a
rationale for each estimate:
 Due to high walking traffic, a competing lemonade stand near the hypothetical site of
our new stand makes a whopping $40/hour. Since our new stand would compete with
this stand for the same customer base and we don't have word-of-mouth recognition in
this area yet, we'll conservatively assume we'll make less than half that - $15/hour or
$120/day - and that this will potentially grow as word of our lower prices spreads.
 Most weeks, we end up throwing out about $5 of lemons which have spoiled. We
project that we'll be able to more efficiently split our supplies between the two stands,
eliminating this loss. Because we're open two days each week (Saturday and Sunday),
these savings are about $2.5/day.
 One of our current stand's attendants happens to live very near to the site of the new
stand. If we allow her to work at the new stand (by hiring someone to replace her at
the old stand), she estimates she would be able to use the reduced commute time to

37
 keep the stand open for an extra half hour each day, which equates to about an extra
$7.5/day, given our estimate of the stand's money-making potential.

 Add up and compare the project's costs and benefits. This is the crux of any CBA.
Finally, we determine whether the benefits of our project outweigh the costs. Subtract
the ongoing costs from the ongoing benefits, then add up all the one-time costs to get
a sense of the size of the initial investment needed to start the project. Using this
information, you should be able to determine whether a project is profitable and
feasible.

 Let's compare the costs and benefits of opening a second lemonade stand:
 Ongoing costs: $20/day (supplies) + $40/day (wages) = $60/day
 Ongoing benefits: $120/day (income) + $7.5/day (extra half hour) + $2.5/day (lemon
savings) = $130/day
 One-time costs: $160 (closing the first stand for a day) + $80 (supply chain issues) +
$80 (blender) + $15 (cooler) + $20 (wood, cardboard) = $355
 So, with an initial investment of $355, we can expect to make about $130-$60 =
$70/day. Not bad.

 Calculate a payback time for the venture. The quicker a project can pay for itself,
the better. Taking the cost and benefit totals into account, determine the amount of
time it will take to recoup the projected costs of your initial investment. In other
words, divide the cost of your initial investment by the projected income per day,
week, month, etc. to determine how many days, weeks, months, etc. it will take to pay
back your initial investment and start generating profit.

Our hypothetical lemonade stand has an initial cost of $355 and is estimated to generate
$70/day. 355/70 = about 5, so we know that, assuming our estimates are correct, our new
stand will pay for itself in about 5 days of operation. Because our stands are open on the
weekends, this equates to about 2-3 weeks.

 Use your CBA to inform your decision about whether to pursue your project. If
the projected benefits of your venture clearly outweigh the costs and the project can
pay for its initial investment in a reasonable amount of time, you may want to

38
 consider putting your project into action. However, if it's not clear that a project can
generate additional profit in the long run or pay for itself in a reasonable amount of
time, you will probably want to reconsider the project or even scrap it all together.

COST CONTROL

Irrespective of the size of the business, every business should cut its costs to make ends
meet. Cost control is mandatory for any business to gain stability in the market.

Ways to Control Business Costs

Improve your book keeping and accounting practices. Right from the start of the business,
ensure that you note down your spending and revenue. This will help you analyze where you
have over spent and also where you can cut down on unnecessary expenditures.

Use the latest appropriate technology to improve on the quantity and quality of your products
and services. Make use of the ICTs in business such as online invoicing, making orders on
the telephone instead of travelling to make orders.

Appraise your employees regularly to retain the most effective and efficient employees in
your business.

Out sourcing of services that are not permanently necessary in the business such as auditors,
electricians and plumbers. Contract/permanent employees may require insurance against
risks, payment of NSSF, office space etc.

Reusing and recycling items/materials in your business can cut down on the costs. These
include plastics, metal scrap, building materials such as used cement.

Reduce energy consumption by switching on lights only when you need them, use energy
saving bulbs, switch off equipment which is not in use. You may also have to use cheap
sources of energy such as charcoal and solar systems.

Establish cost budgets and monitor actual costs against budget as part of a systematic cost-
control process. Compare your budgets with real expenditure. You may need to spend as per
the budget. Any savings on the budget can be reallocated.

Eliminate unnecessary activities, and avoid duplication of effort and unnecessary waste.

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Check invoices against contracts or agreements. This protects you against being over charged
by the suppliers.

Consolidate purchasing with a small number of suppliers and negotiate improved terms and
discounts.

COMMON TERMS USED IN COST ACCOUNTING SYSTEMS.

Business transaction: This refers to the exchange of goods and services for a consideration
usually in terms of money. It also involves exchange of goods and services. There are two
types of business transactions, namely; cash transaction and credit transaction.

Purchases: In accounting, purchases occur when goods for resale are bought. Any other
purchases not intended for resale, for example purchase of a fixed asset like land is not
treated as a purchase and such entries are not made to a purchases account.

Debtor: Refers to a person or organisation that bought goods from the business on credit and
will pay later.

Creditor: Refers to a person or organisation to whom money is owed for goods and services
bought on credit.

Sales: In accounting, a sale is said to occur when goods which were bought for the purpose of
resale are sold and the domain of the business is to sale such goods. In case a business sales
items that had not been bought for the purpose of resale such as disposal of old fixed asset, it
is not treated as a sale and such transaction is not entered in the sales account.

Returns: In some cases, goods which had been bought or sold are returned. Goods which had
been bought and returned are returns inwards or sales returns in the books of the seller. The
purchaser in his/her books calls such returned goods returns outwards or purchases returns. In
an Income statement, returns inwards are subtracted from the sales while returns outwards are
subtracted from the purchases.

Goods or merchandise: These are physical items that a business buys or sells.

Expenses: These are expired or expended costs. In order to run a business, some costs are
incurred such as rent, salaries of workers and electricity. They are called expenses, more
commonly referred to as overhead expenses/overheads.

Stock income: Refers to the money received by the business from its operations. Sales
constitute the main source of income for the businesses.

Payment voucher: This is a document that provides proof of payment of cash/cheque for any
transaction or entry recorded in accounts.

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Assets: These are possessions or properties of a business. Assets include land, buildings,
machinery, vehicles, equipment, cash etc. Assets are divided into two, namely; fixed assets
and current assets.

Fixed assets are those that have a long life span, running from one year and above. They
include land, buildings, machinery, equipment, vehicles etc.

Current assets: These are assets that do not go beyond one year. Examples include cash,
debtors, stock etc.

Liabilities: These are debts that a business or an entrepreneur owes its creditors. They
represent what the business is supposed to pay other parties. Liabilities are divided into two,
that is, short term and long term liabilities.

Long term liabilities are debts to be paid over a long period of time, i.e two years and above.

Short term liabilities are debts to be cleared within one year, such as bank overdrafts.

Capital: This refers to money/resources invested in a business for the production of goods
and services. There are five types of capital, namely:

 Fixed capital
 Working capital
 Loan (borrowed) capital
 Equity capital (owner‟s equity)
 Capital employed.

Fixed capital: This is the total of all fixed assets.

Working capital: This is the difference between current assets over current liabilities.

W.C = C.A- C.L.

Loan/Borrowed capital: This is the amount of money borrowed by the business or

entrepreneur to start and or manage a business effectively and efficiently.

Equity capital: It is the capital invested by the owner of the business plus any profits made
within that year.

Capital Employed: This refers to the total capital employed in a business.

C.E = F.A + W.C.

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COMMERCIAL DOCUMENTS

These are documents that provide evidence that that a transaction has taken place. Examples
of commercial documents include: delivery note, invoice, bank statement, credit note, cash
receipts, debit note, bank statement, Bank deposit slips and goods received note.

Delivery note: This is a document issued by the supplier to the buyer to acknowledge and
confirm that goods have been delivered and the buyer/customer has received them.

Invoice: This is a document issued by the seller/supplier to the buyer/client demanding for
payment for the goods or services that have been supplied or offered.

Bank statement: This is a document issued by the bank to a client for a specified period of
time showing the details of the deposits and withdrawals made on the client‟s account. It also
includes interest and other bank related charges.

Credit note: This is a document issued by the supplier to the client to show that there is
reduction in the amount that is owed. It may happen when some of the goods supplied were
not of the ordered quality, some goods might have been damaged during transit, etc.

Debit note: This is a document issued by the supplier to the buyer to correct an undercharge
in the original invoice. The undercharge in the original invoice may be due to omissions,
arithmetical errors etc.

Cash receipts: This is a document that shows how much cash was received by the business.
It shows the person/organisation that paid the cash and the purpose.

Bank deposit slips: This is a document that acknowledges that cash or cheque was deposited
in a specified account.

Goods received note: This is a document issued by the customer/buyer to the supplier
acknowledging receipt of goods.

Local purchase order: This is a document issued by the customer/buyer to the supplier
ordering for supply of goods/services. It specifies the quantity, quality, rate, and amount.

BOOK KEEPING

This refers to the systematic recording of the financial records of a business/firm. Examples
of records kept by businesses are cash receipts, payment vouchers, requisition forms, etc. The
most common book keeping methods are single entry and double entry.

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Importance of book keeping

 It provides the entrepreneur with relevant information for decision making purposes.
 It helps the business to obtain loans from banks and other financial institutions.
Detailed and accurate books of accounts are important when you want to secure loans
from banks and other financial institutions.
 It also helps the business or entrepreneur in credit management.
 It helps the business to determine and pay its taxes on time.
 Book keeping helps the business in planning. For example what to buy, when, etc.

Book keeping methods/systems

These are systems of recording accounting information. They include single entry system and
double entry system.

Single entry system: This is where information is posted once and marks the end of that
entry.

Double entry system: Here information is posted based on the principle of recording dual
effect of every transaction. It is derived from the double entry principle which is known as
golden rule stating that „every debit entry must have corresponding credit entry and vice
versa. Double entry book keeping requires that the debit amounts must equal to the credit
amounts. Failure to conform to the rule of double entry will mean that accounts including the
balance sheet will not balance.

Advantages of a double entry system

 It facilitates reference to the details of any account and information needed on any set
of transactions.
 It brings into records both aspects of every transaction, that is, every credit must have
corresponding credit.
 It prevents fraud because alteration of records is difficult.
 It helps in the ascertainment of the financial position of a business by preparing a
balance sheet.
 It provides reliable information for the day to day transactions of a business.

Example of double entry system

1. Sold goods for cash 8,000,000/=

Cash A/C

Sales 8,000,000

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Sales A/C

Cash 8,000,000

2. Bought furniture for 5,000,000/= by paying cheque.

Furniture A/C

Bank 5000,000

Bank A/C

Furniture 5,000,000

CASH BOOK

This is where cash transactions (cash inflow and cash outflows) are recorded. Whenever cash
or cheques are received or paid out, the transactions are recorded first in the cash book. Cash
book is a book of original entry. The debit side (left) of the cash book is for income earned by
the business whereas the credit side (right) is for expenditures incurred by the business. Every
individual transaction must be recorded in a new line in the cash book. A cash book is both a
journal and a ledger.

Types of Cash Books

These include single column cash book, two column cash book and three column cash book.

1. Single column cash book

This is a cash book which has only one column on either side for receipts (income) and
payments (expenditure). Below is a format for a single column cash book.

DR CR
Date Details Folio Amount Date Details Folio Amount

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N.B: Folio is the reference number where you can get detailed information about the
transaction either income or expenditure. On the income side, you can quote the receipt
number whereas on the expenditure side, you can quote the invoice number.

Closing or balancing off Accounts

At the end of a specified period most often a month, all ledger accounts including the cash
book are closed or balanced off. The purpose is to obtain the net balances on each account at
the end of the month. After the accounts have been closed, a trial balance is extracted.

Procedure of Balancing/Closing an Account

1. Draw two lines below each side of an account. The upper line should be single and the
bottom lines should be double. Don‟t forget to leave a blank line between the last figure and
the first line losing the account. The blank line is where balance carried forward (C/F) or
carried down (C/D) will be put.

2. Add up all the figures on both the debit and credit sides without inserting totals. Having
ascertained the side with greater total, the total is put on either sides of the account.

3. Determine the difference by which the two sides were not previously agreeing and insert it
on the deficient side and call that difference Balance carried down or carried forward.
Remember that the difference you obtain, i.e Bal. c/d is put on the blank line which you had
reserved. The date to be indicated is the closing date of the month.

4. In order to complete the double entry recording of balances, the balance brought down or
brought forward is put on the opposite side of the account below the totals. The date to be
indicated is the opening date of the following month.

Note: Bal. c/d and Bal. c/d mean the same thing and are used interchangeably. They mean
balances at the end of the period. Similarly, Bal. b/d and Bal. B/f are used interchangeably
and mean opening balances.

Example: Enter the following transactions of Bujjuko Enterprises Limited in a single column
cash book and balance it at the end of March 2013.

1st March sold goods for 100,000

5th March sold goods for 25,000,000
10th March bought a car 5,000,000
13th March sold goods for 1,000,000
20th March Paid salary 600,000
22nd March paid insurance 30,000
28th March sold goods for 2,000,000
30th March bought stationery 15,000

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 DR CR
Date Details Folio Amount Date Details Folio Amount

1stMarch sales 100,000 10th March purchases 5,000,000

2013 2013
5th March sales 25,000,000 20th March salary 600,000
2013 2013
13th March sales 1,000,000 22nd March insurance 30,000
2013 2013
28th March sales 2,000,000 29th March purchases 15,000
2013 2013
30th March Balance 22,455,000
2013 c/d
28,100,000 28,100,000

1st April Balance 22,455,000

2013 b/d

2. Two Column Cash Book

The two column cash book has both a cash and bank account. The cash account records the
receipts and payment of cash while the bank account records receipts and payment of money
by cheque. Below is a format of a two column cash book.

Date Details Folio Cash Bank Date Details Folio Cash Bank

Example: Elgon Technical Enterprises Limited had the following records for the month of
June 2010. Prepare a two column cash book and balance it.

1st June sold goods by cash 3,000,000

3rd sold goods by cash 7,000,000
4th paid insurance by cash 250,000
5th paid rent by cheque 1,000,000
8th cash sale 230,000
10th Cash sale 800,000
15th paid salary by cheque 500,000
20th Bought stationary by cash 100,000
21st sold goods and got a cheque 3,000,000
22nd withdrew cash for office use 250,000

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 24th bought goods by cheque 150,000
30th cash purchases 17,000

Date Details Folio Cash Bank Date Details Folio Cash Bank

1st sales 3,000,000 4th insurance 250,000

June June
3rd sales 7,000,000 5th rent 1,000,000
June June
8th sales 230,000 15th salary 500,000
June June
10th sales 800,000 20th stationary 100,000
June June
21st sales 3,000,000 24th bank 150,000
June June

22nd bank 250,000 30th purchases 17,000

June June
30th Balance 10,663,000 1,600,000
June c/d
11,030,000 3,250,000 11,030,000 3,250,000

1st Balance 10,663,000 1600,000

July b/d

3. Three Column Cash Book

This is made up of three columns on both the debit and credit side. The three columns are for
discount (discount allowed and discount received), the cash, and the bank. Discount allowed
is the discount given by the business to its clients for goods and services purchased. The
discount received refers to the discount the business gets for the purchase of goods and
services.
When balancing a three column cash book, the cash and bank columns are balanced but the
discount columns are not balanced. Their actual total is what is recorded. Discount allowed is
recorded on the debit side whereas discount received is recorded on the credit side. Below is
a format of a three column cash book.

DR CR
Date Details Folio D.A Cash Bank Date Details Folio D.R Cash Bank

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 Example: on 1st September 2011, Sarah commenced business with cash at hand of shs
1,000,000 and cash at bank of shs 2,000,000. During the month September, the following
transactions took place. Prepare Sarah‟s three column cash book and balance it off at the end
of the month.
3rd paid rent in cash shs 500,000
5th bought goods and paid by cheque shs 300,000 less 10% discount
7th received cash from Ronald shs 100,000 and allowed him discount of 7%
20th sold goods by cheque shs 230,000 and allowed a cash discount of 2%
21st bought furniture by cheque shs 30,000
22nd Paid wages by cheque shs 130,000

Date Details Folio D.A Cash Bank Date Details Folio D.R Cash Bank

1Sept Capital 1,000,000 2,000,000 3rd rent 500,000

Sept
7th 7,000 93,000 5th purchases 30,000 270,000

Sept Sept
20th sales 4,600 225,400 21st purchases 30,000

Sept
22nd wages 130,000

Sept
30 Balance 1,430,000 1,795,400

Sept c/d
11,600 1,930,000 2,225,400 30,000 1,930,000 2,225,400

1st Oct Balance 1,430,000 1,795,400

b/d

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JOURNALS AND LEDGERS

JOURNALS

Journals are books of original or prime entry. They are the first books to which transactions
are entered. Information entered in journals is obtained from documents such as invoices,
vouchers, bank paying in slips etc. whenever business transactions occur, they must be
recorded in journals before being posted to the ledgers. The processing of writing transactions
in the journal is called journalising a transaction.

Types of journals

The nature of operations and the volume of transactions in a particular business determine the
number and types of journals needed. The major types of journals include, general journal or
journal proper, sales journal (sales day book), and purchases journal (purchases day book).

GENERAL JOURNAL/JOURNAL PROPER

The general journal has two columns for debits and credits. It follows the principle of double
entry (two accounts are affected: one account gives and another receives).

Format of the general journal/Journal proper

Date Account title & Folio/LP Debit Credit

Explanations (Ledger page)

Date: dates at which the transactions occurred are entered into this column.

Account title and explanations: The name of the account involved in the transaction is
entered in this column plus an explanation/narration of the transaction.

Folio: This column shows the reference where the accounts can be found in the ledger
especially the page number in the ledger. At times, instead of using folio, LP standing for
ledge page is used.

Example

Enter the following transactions of Bujjuko Enterprises Ltd for the month of October 2013 in
a general journal.

October 1: Started business with 20,000,000 cash.

October 2: purchased land for the business at 3,000,000 cash.
October 4: purchased office equipment on credit from Equipment suppliers ltd at 2,000,000/=
October 5: Obtained bank loan of 8,000,000 and it was deposited to bank account.
October 15: Made part payment of 1,500,000 to equipment suppliers ltd by cheque.

49
 October 17: Bought motor vehicle from spear motors at a cost of 15,000,000. Made cash
payment of 10,000,000, paid 3,000,000 by cheque and promised to pay the balance later.
October 20: Sold a portion of land that was unutilised for 500,000 cash.
October 25: Fully settled the balance of 2,000,000 by cheque due to spear motors ltd for the
motor vehicle.
October 30: 800,000 cash was used to entertain relatives from upcountry.

Bujjuko Enterprises LTD general journal for the month of October 2013

Date Account title & Explanations Folio Dr. (Shs) Cr (Shs)

October 1 Cash A/C 01 20,000,000
Capital A/C 02 20,000,000
To record Cash used for starting up a business
October 2 Land A/C 03 3,000,000
Cash A/C 01 3,000,000
Being purchase of land by cash
October 4 Office equipment A/C 04 2,000,000
Equipment suppliers Ltd A/C 05 2,000,000
Being purchase of equipment on credit from
equipment suppliers Ltd
October 5 Bank A/C 06 8,000,000
Loan A/C 07 8,000,000
Being acquisition of bank loan
October 15 Equipment suppliers Ltd A/C 05 1,500,000
Bank A/C 06 1,500,000
To record part payment to equipment suppliers Ltd
by cheque
October 17 Motor Vehicle A/C 08 15,000,000
Cash A/C 01 10,000,000
Bank A/C 06 3,000,000
Spear Motors A/C 09 2,000,000
Being purchase of Motor vehicle from spear
motors, part payment made by cash and cheque and
the balance outstanding
October 20 Cash A/C 01 500,000
Land A/C 500,000
Being sale of land by cash

October 25 Spear Motors A/C 09 2,000,000

Bank A/C 06 2,000,000
Being payment of outstanding amount to spear
motors by cheque
October 30 Drawings A/C 10 800,000
Cash A/C 01 800,000
Being cash used for private affairs (Drawings)

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SALES JOURNAL (SALES DAY BOOK)

It is a book of original entry used for taking records for only credit sales. It is a specialised
journal for only credit sales.

Format of a sales journal

Date Account debited (Debtor‟s Invoice No. Folio Amount

Accounts)

Example

A company sold goods to the following people on credit.

Sept 1: John for 450,000/= Invoice no. 301

Sept 4: Annet for 1,000,000/= Invoice no. 303
Sept 6: Mukasa for 900,000/= Invoice no. Invoice no. 404
Sept 7: Ronald for 500,000/= Invoice no. 305

You are required to record the transactions below into a sales journal/sales day book.

Sales Journal/Sales day book

Date Accounts debited (Debtors‟ Invoice No Folio Amount (Shs)

accounts)
Sept 1 John 301 001 450,000
Sept 4 Annet 303 002 1,000,000
Sept 6 Mukasa 404 003 900,000
Sept 7 Ronald 305 004 500,000
Total posted to sales A/C and 2,850,000
debtors‟ A/C in the general
ledger

PURCHASES JOURNAL (PURCHASES DAY BOOK)

This is a book of original entry for taking record of only credit purchases. It is a specialised
journal for only purchases on credit.

Format of Purchases Journal

Date Accounts credited (Creditors‟/Suppliers Invoice Folio Amount

Accounts) No.

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Example

Record the following transactions into the purchases journal or purchases day book.

February 1: Bought goods on credit from Tom for 2,000,000/= Invoice No. 199
February 2: Bought goods on credit from Musa for 4,000,000/= Invoice No. 200
February 8: Bought goods on credit from Joseph for 5,000,000/= Invoice No. 201
February 10: Bought goods on credit from Joy for 10,000,000/= Invoice No. 202

Purchases Journal
Date Accounts credited (creditors/Suppliers‟ Invoice Folio Amount
accounts No. (Shs)
Feb 1 Tom 199 001 2,000,000
Feb 2 Musa 200 002 4,000,000
Feb 8 Joseph 201 003 5,000,000
Feb 10 Joy 202 004 10,000,000
Total posted to purchases A/C & Creditors 21,000,000
A/C in the general ledger

LEDGER

A ledger is a book which contains a collection of accounts. A business may use many
accounts in recording its transactions. Information that had been entered into the journals is
posted to the ledger. Thus the journal feeds the ledger.

Types of ledgers
Ledgers are broadly categorised into General ledgers and Subsidiary ledgers.

General ledger
The general ledger is the main ledger of an organisation. It is supposed to contain all the
ledger accounts of the organisation. However, for easy of recording and retrieval of accounts,
the general ledger is separated into subsidiary ledgers.

Subsidiary ledgers
In order to avoid crowding the general ledger, with all accounts, subsidiary ledgers are
created. Subsidiary ledgers are subdivisions of the general/main ledger. It is only the major
accounts called control accounts that appear in the general ledger. The types of subsidiary
ledgers are: Debtors or sales ledger, Creditors or purchases ledger, private ledger, cash
book (though also a journal). Sales and purchases ledgers are sometimes referred to as
nominal ledger because they show purchases and sales which are nominal accounts.

52
Debtors subsidiary ledger/Sales ledger
This shows the position of each debtor‟s account. The total of individual debtor‟s account
balances in the debtors or sales subsidiary ledger should reconcile with the balance of the
debtors control account in the general ledger.
Creditors subsidiary ledger
This shows the details of each creditor‟s account. It is not possible to show this in the general
ledger. The total of individual creditor‟s account balances in the creditors‟ ledger should
reconcile with the creditors control account in the general ledger.
Private ledgers
It is a store place for accounts that management may wish to keep secret. The accounts kept
secret vary from one organisation to another. Many organisations keep their capital,
drawings, purchases, turnovers etc accounts private.

The cash book

This is both a journal and a ledger.

Example: Let us post all transactions recorded in Bujjuko Enterprises Ltd General Journal
into its ledger.

Bujjuko Enterprises Ltd Ledger Accounts

Cash A/C
Dr page 1 Cr
Shs. Shs.
Oct 1. Capital 20,000,000 Oct 2. Land 3,000,000
Oct 20. Land 500,000 Oct17.Vehicle 10,000,000
Oct 30. Drawings 800,000
31st Oct. Bal c/d 6,700,000

20,500,000 20,500,000

1st Nov. Bal b/d 6,700,000

Dr Capital A/C Page 2 Cr

Shs. Shs.
st
31 Oct. Bal c/d 20,000,000 Oct 1. Cash 20,000,000

1st Nov. Bal b/d 20,000,000

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 Dr Land A/C page 3 Cr
Shs. Shs.
Oct 2. Cash 3,000,000 Oct. 20 Cash 500,000
31st Oct. Bal c/d 2,500,000

3,000,000 3,000,000

1st Nov Bal b/d 2,500,000

Dr Office Equipment A/C page 4 Cr

Shs. Shs.
Oct 4. Equipment suppliers ltd 2,000,000 31st Oct. Bal c/d 2,000,000

1st Nov. Bal b/d 2,000,000

Dr Equipment suppliers Ltd A/C page 5 Cr

Shs. Shs.
Oct 15. Bank 1,500,000 Oct 4. Office Equipment 2,000,000
31st Oct. Bal c/d 500,000
2,000,000 2,000,000

1st Nov B/d 500,000

Dr Bank A/C page 6 Cr

Shs. Shs.
Oct 5. Loan 8,000,000 Oct 15. Equipt. suppliers Ltd 1,500,000
Oct 17. Vehicle 3,000,000
Oct 25. Spear motors 2,000,000
31st Oct. Bal c/d 1,500,000
8,000,000 8,000,000

1st Nov. Bal b/d 1,500,000

Dr Loan A/C page 7 Cr

Shs. Shs.
st
31 Oct. Bal c/d 8,000,000 Oct 5. Bank 8,000,000

1st Nov. Bal b/d 8,000,000

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Dr Motor Vehicle A/C page 8 Cr
Shs. Shs.
Oct 17. Cash 10,000,000
Bank 3,000,000
Spear motors 2,000,000
15,000,000 31st Oct. Bal c/d 15,000,000

1st Nov. Bal b/d 15,000,000

Dr Spear Motors A/C page 9 Cr

Shs. Shs.
Oct 25. Bank 2,000,000 Oct 17. Vehicle 2,000,000

Dr Drawings A/C page 10 Cr

Shs. Shs.
Oct 30. Cash 800,000 31st Oct. Bal c/d 800,000
800,000

1st Nov. Bal B/d 800,000

TRIAL BALANCE

Trail balance is a list of debit and credit balances extracted from the Ledger and it aims at
ascertaining the accuracy of the accounting process. Accounts with net debit balances, that is,
before closing the account, the total on the debit side was more than the total on the credit
side; meaning Bal c/d is on the credit side and Bal b/d is on the debit side, will appear on the
debit side of the trail balance. Likewise, accounts with net credit balance will appear on the
credit side of the trial balance.

A trial balance checks whether the rules of double entry were observed when transactions
were being entered into books of accounts. If the rules of double entry were not adhered to,
the trial balance will not balance. Trial balance also checks whether no arithmetical errors of
additions or subtractions were made in the ledger, especially at the time of closing off
accounts. In case arithmetic errors were made, the trial balance will not balance.

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 Bujjuko Enterprises Limited

Trail Balance

For the month of October 2013.

Date Details Debit Credit

31st Oct. 2013 Cash 6,700,000
31st Oct. 2013 Capital - 20,000,000
31st Oct. 2013 Land 2,500,000 -
31st Oct. 2013 Office Equipment 2,000,000 -
31st Oct. 2013 Office suppliers Ltd - 500,000
31st Oct. 2013 Bank 1,500,000 -
st
31 Oct. 2013 Loan 8,000,000
31st Oct. 2013 Motor Vehicle 15,000,000 -
31st Oct. 2013 Drawings 800,000 -
28,500,000 28,500,000

Note: Spear Motors account is completely closed, i.e. has a nil balance and therefore doesn‟t
appear in the trial balance.

INCOME STATEMENT

Income statement also called Trading, Profit and Loss Account measures a company's
financial performance over a specific accounting period. It also shows the net profit or loss
incurred over a specific accounting period, typically over a fiscal quarter or year. The
conclusion of an income statement shows the company‟s net income (or net loss).

It shows an Organisation‟s incomes or incomes and expenditures or costs for a particular

period ended. It is important to note that an income statement expresses the financials over a
period of time (as opposed to the balance sheet, which shows just a single moment in time).

The five key lines that make up an income statement are:

 Sales or Revenue: The total amount of money taken in from selling the business‟s
products or services. You calculate this amount by totaling all the sales or revenue
accounts. The top line of the income statement will be either sales or revenues.
 Cost of Goods Sold: How much was spent in order to buy or make the goods or
services that were sold during the accounting period in review.

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  Gross Profit: How much a business made before taking into account operations
expenses; calculated by subtracting the Cost of Goods Sold from the Sales or
Revenue.
 Operating Expenses: How much was spent on operating the business; qualifying
expenses include administrative fees, salaries, advertising, utilities, and other
operations expenses. You add all your expenses accounts on your income statement to
get this total.
 Net Income or Loss: Whether or not the business made a profit or loss during the
accounting period in review; calculated by subtracting total expenses from Gross
Profit.

Only one item affects sales, 1.e returns inwards (they may include items/products which are
returned due to expiry, could be damaged, or those supplied but were not ordered for).
Opening stock is not affected in anyway.
Two items affect purchases:
 Carriage inwards; this is added to purchases thus it increases purchases). This may
include transport costs, loading and offloading expenses. When selling the
items/products, you need to take into account these costs in order to recover the costs.
 Returns outwards; these are subtracted from the purchases.

FORMAT

Sales xx
Less returns inwards xx
Net sales xx
Less Cost of sales
 Opening stock xx
Add purchases xx
Add Carriage inwards (expenses incurred on purchases like transport) xx
Less returns outwards xx
Net purchases xx
Cost of goods available for sale xx (Net purchases +
Opening stock)
Less closing stock xx
Cost of goods sold xx
Gross profit/Loss xx (Net
sales-cost of
goods sold).
Add any other incomes to gross profit (e.g income received from rent) xx
Less administrative expenses (e.g salaries) xx
Net profit/Loss xx

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Income statements for service sector firms such as banks and insurance companies etc are
simple to write. The format is presented below.

Incomes/earnings xx
Less expenditures xx
Less provision for Corporation tax xx
Net profit for the year after tax xx
Add: Retained earnings b/f xx
xx
Less: Appropriations.
Proposed dividends xx
Transfer to reserves xx
Etc xx xx
Cumulative retained earnings at the end of the year C/F xx

BALANCE SHEET

Balance sheet is a financial statement which shows the financial position of an Organisation
at a particular date with regard to its assets, liabilities and owners equity. It shows the assets
of an Organisation and the claims against those assets. When a balance sheet balances, it
means that the accounting equation has been satisfied.
ASSETS = LIABILITIES + OWNERS EQUITY.
If an Organisation used more liabilities than its own funds (Owners Equity) to finance assets,
then it is not solvent and it doesn‟t not have long run financial stability. A strong balance
sheet position is where the assets of the Organisation are largely financed by the owners
(Owners equity).

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FORMAT OF A BALANCE SHEET

Non-Current Assets (Fixed Assets):

Cost Accumulated Net Value
Deprecation
Land xx x xx
Motor Vehicle xx - xx
Equipment xx x xx
Total fixed Assets xx xx xx

Current Assets
Stock xx
Trade debts xx
Less: Prov. for bad debts xx xx
Prepayments xx
Cash at bank xx
xx
Less: Current Liabilities.
Trade Creditors xx
Accruals xx xx
Net current Assets/Working Capital xx
TOTAL NET ASSETS xx
Financed by:
Capital xx
Add: Net profit/retained earning xx
xx
Less: Drawings xx
Owners Equity xx
Long term Liabilities
Creditors in excess of 1 year e.g Bank loan xx
CAPITAL EMPLOYED xx

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 Azam Enterprises Limited
Trial Balance
As at 31st December 2014.

Details Dr (shs. 000) Cr (shs.000)

Cash at Hand 2,000
Cash at Bank 4,000
Land, cost 100,000
Motor Vehicle cost 10,000
Accumulated depreciation-Motor Vehicle 2,000
Equipment Cost 20,000
Accumulated depreciation-Equipment 4,000
Stock 1st January (opening stock) 1,000
Trade debtors 5,000
Provision for bad debts 2,000
Trade creditors 3,000
Sales 200,000
Purchases 110,000
Discount allowed 2,000
Discount received 1,000
Purchases returns (Returns outwards) 5,000
Sales returns (return inwards) 10,000
Carriage inwards 6,000
Salaries 8,000
Salaries payable(accrued salaries) 15,000
Rent 1,800
Electricity 7,000
Bad debts 1,200
Capital 26,000
Long term bank loan - 30,000
288,000 288,000

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 Azam Enterprises Limited
Income statement
For the year endied3 1st December 2014

Particulars (Shs.000) (Shs.000) (Shs.000)

Sales 200,000
Less returns inwards 10,000
Net sales 190,000

Less: Cost of goods sold:

Opening stock 1,000
Add purchases 110,000
Add carriage inwards 6,000
116,000
Less purchase returns 5,000
Net purchases 111,000
Cost of goods available for sale 112,000
Less closing stock 20,000
Cost of goods sold/cost of sales 92,000
Gross profit 98,000

Add miscellaneous
Discount received 1,000
99,000
Less operating expenses (overheads):
Discount allowed 2,000
Salaries 10,000
Rent 900
Electricity 7,000
Bad debts 2,200
Depreciation expenses:
Motor Vehicle 2,000
Equipment 4,000 28,100

Net Profit 70,900

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 Azam Enterprises Limited
Balance sheet
As at 31st December 2014.

FIXED ASSETS Cost Accum. Depreciation Net book Value

(shs.000) (Shs.000) (Shs.000)
Land 100,000 10,000
Motor Vehicle 10,000 4,000 6,000
Equipment 20,000 8,000 12,000
130,000 12,000 118,000
CURRENT ASSETS
Closing stock 20,000
Trade debtors 5,000
Less: prov. for bad debts 3,000 2,000
Prepaid rent 900
Cash at Bank 4,000
Cash at Hand 2,000
28,900
Less: current Liabilities
Trade creditors 3,000
Salaries payable or accrued 17,000 20,000
Working capital/Net current assets 8,900
TOTAL NET ASSETS 126,900

FINANCED BY:
Capital and reserves:
Capital 26,000
Add: Net profit/retained earnings 70,900
Owners Equity 96,900
Long term Liabilities:
Long term Bank loan 30,000
CAPITAL EMPLOYED 126,900

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TAXATION
A tax is a compulsory charge or levy imposed by the Government or any other competent
authority on persons (individuals, corporations or other legal entities) or on businesses in
order to finance Government activities.

Taxes are a general obligation and are not paid in exchange for a specific benefit. There is no
direct relationship between the tax paid and the benefits in terms of public services received
by the persons who have paid tax.

Terms used in taxation

Tax incidence: this is the final resting place of a tax. The person who bears the burden of the
tax.

Taxable income: This refers to income which is subjected to taxation after all exemptions
have been deducted.

Tax avoidance: This is the deliberate refusal by the tax payer to pay tax levied to him or her.

Role/importance of taxation
Taxation has a number of roles as discussed below.

1. To support government activities/programmes, i.e taxation raises revenue used to

finance government recurrent and development expenditure.
2. Taxes can be used to encourage development of local industries and protect them
against foreign competition with a view to providing employment and saving foreign
exchange, for example, by imposing high duties on competing imports.
3. Taxes can be used to encourage export of goods and services in order to make them
more competitive in the world market, by reducing or removing taxes on the exports.
4. Taxes help to protect society from undesirable or harmful products and industries by
imposing high taxes on such products and industries, for example the environment
levy of 20 percent imposed on used vehicles which are eight years old and above.
5. Taxes also discourage dumping, i.e selling of the excess products and services from
foreign countries to strangle the local industries.

Principles of a good tax

The principles of a good tax include:

 The principle of equity/equality.
 The principle of certainty
 The principle of convenience.
 The principle of economy.

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According to the principle of equality, the subjects of every state ought to contribute towards
the support of government in proportion to their respective abilities, i.e in proportion to the
revenues which they respectively enjoy under the protection of the state.

The principle of certainty says that the tax which each individual is bound to pay should be
certain and not arbitrary. For example, the time of payment, manner of payment, amount to
be paid should be clear to the contributor and to every person. The tax should be easy to
understand by the tax payer.

According to the principle of convenience, every tax should be levied at the time which is
most convenient for the contributor to pay. For example, farmers should be taxed after selling
their products.

The principle of economy argues that it should be economical for the government to collect
taxes, that is, the cost of taxation should not exceed the benefits.

Taxes in Uganda are collected by the Uganda Revenue Authority (URA) or Local
Government. URA is responsible for the collection of Central Government Revenue whereas
the Local Government Administration (Districts and Urban authorities) collect Local
Government Revenue.

Categories of taxes in Uganda

Taxes can be divided into two broad categories:
a) Direct taxes
b) Indirect taxes

Direct taxes
Direct taxes are the taxes imposed on the income and property of individuals and business
entities. The burden of tax is directly borne by the individual or business entity. The taxes
can‟t be shifted to the consumer. Examples of direct taxes include; Corporation Tax,
Withholding Tax, Individual Rental Income Tax, Income Tax for Small Business Taxpayers.

Corporation Tax
This is tax charged on the net income earned by a company at a flat rate of 30 percent.
However, the rate for mining companies is either 25 percent or 45 percent depending on the
chargeable income of the company. Under the income tax Act, 1997 rental income earned by
a corporate landlord, i.e a person other than an individual, is part of corporate income and is
also taxed at the corporate tax rate applicable, for example 30 percent.

Individual rental income tax

Tax on rental income derived by an individual is assessed separately from the individual‟s
other business incomes or employment income. The tax is 20 percent of the rental income
amount after deducting, 20 percent as allowable expenses and UGX 2,820,000 as a tax free
threshold.

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Income Tax for Small Business Taxpayers
Resident persons with annual turnover of less than UGX 50M are taxable at presumptive
rates below.

Gross turnover per annum (UGX) Tax

Not exceeding 5M Nil
Exceeding 5M but not exceeding 20M 100,000
Exceeding 20M but not exceeding 30M The lower of 250,000 or 1% of the
gross turnover.
Exceeding 30M but not exceeding 40M The lower of 350,000 or 1% of the
gross turnover.
Exceeding 40M but not exceeding 50M The lower of 450,000 or 1% of the
gross turnover.

Withholding tax
Withholding tax is a method of collecting income tax. Withholding tax is collected either at
the point of payment by the payer (withholding agent) or at the point of importation
(withholding tax is payable by every person who imports goods into the country at a rate of
6% based on the Customs Value) unless the person is exempted from withholding tax. The
threshold is UGX 1,000,000.

Indirect Taxes
These are taxes charged on an individual or business entity and shifted to the final consumer.
These taxes are voluntary in the sense that you can only pay them if you opt to buy the goods
or consume services on which they are imposed. Examples of indirect taxes include; Customs
duty and Excise duty.

Customs duty
This is a duty imposed on goods that cross national boarder points either as imports into the
country or exports leaving the country. Tax on imports is referred to as Import duty whereas
on exports is called export duty.

Excise duty
This is duty imposed on the production or importation of specific goods with a view to
influence their consumption and/or supply in the local market. Essentially, it is a tax on
„luxury items‟. The tax is imposed on the value of the import and in case of locally
manufactured goods, the duty (local excise duty) is payable at the ex-factory price of the
manufactured goods. Exported locally manufactured goods are exempt from excise duty.

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