CSC 506

LECTURE NOTES
 BASIC QUESTIONS TO ASK YOURSELF WHEN
GOING INTO A BUSINESS
• i. Why do I want to go into business?
This has to do with the motivation for the business, is it for profit, social service,
philanthropy, political reasons or purely economic or commercial reasons.

• ii. When do I start the business?

This has to do with the actual commencement of the business, this will in turn
determine the timing of the preparatory work of planning, feasibility study, market
survey, business name registration, search for appropriate location, looking for
finance etc.

• iii. How do I start the business?

This has to do with scale of operation, the target consumers of your product and
services, mode of operation, working hours, area of coverage, marketing strategies to
be adopted, form of ownership (sole proprietorship, partnership, limited liability
company), procedure for registration with Corporate Affairs Commission, renting of
accommodation, etc.
 TYPES OF BUSINESS

• Sole proprietorship

Advantages of sole proprietorship

• It requires little capital investment
• Decisions are faster to make
• You don’t need to share your profit with anybody
• Ease of Entry and Exit
• Operational Flexibility: Because of their small nature, small businesses enjoy
the advantage of operational flexibility. In a small business, decision-making
may be vested in the sole proprietor who acts quickly and without any form
of bureaucracy. The sole proprietor does not need to consult any superior
officer before taking a decision.
• Requirements for registration is less tedious compared to other type of
business.
 TYPES OF BUSINESS

Disadvantages of sole proprietorship

• The operations are limited by the level of finance
• Can not raise money from capital market
• The death of the owner may lead to the death of
the business.
• Because of its nature wrong decision based on the
wisdom of one person may adversely affect the
business.
• The liability is unlimited.
 Why People Engage In Small Business

• i. The Need for Independence

• A major reason why people want to go into small
business is that they want to be independent. They want
to be in charge of affairs. They want to be the boss. They
want to take business risks and also be responsible for
them. You are aware that in the civil service, there are
lots of rules and regulations government imposes on all
employees in addition to the bureaucracy that tends to
deny employees the power to take initiatives. Given this
type of scenario, a lot of people may opt to leave the
service and establish their own business.
Why People Engage In Small Business contd.

• ii. Job Security

• In the private and public sectors of the economy, we hear
such words as right-sizing, down-sizing, retrenchment,
re-organization. No matter how the words are used, they
all point in the same direction – staff strength reduction.
Because of the way and manner most down-sizing are
carried out, it has generated fears in the minds of many
employees in both the private and public sectors of the
economy. The feeling of job insecurity has led a lot of
employees into thinking of setting up their own
businesses so as to gain job security.
 Why People Engage In Small Business contd.

• iii. Family Employment and Community Service

• There exist a lot of reasons why people set up small
businesses. One of the such reasons is the need to create
employment for members of one’s family and also to
employ other members of the community. This aspect is
called the community service aspect of small business. In
choosing the business to establish, the would-be-
entrepreneur might prefer businesses that are more
labour intensive rather than capital intensive. The main
reason behind this is to employ more people.
•
 Why People Engage In Small Business contd.

Advantages of Partnership
• More funds could be made available by contributions from other partners
• In the event of the death of a partner, the business can still continue with
the other partner(s)
• The quality of decisions are enhanced because it involve more than one
person

Disadvantages Partnership
• The size of capital is limited compared to limited liability company
• Decisions are slow to make because all the partners have to be carried along
• Unlimited liability.
• If the one of the partners is not cooperating, it could lead to slowdown or
breakdown of the business.
 Limited Liability Company.

Advantages of Liability Company

• Better access to funding.
• Limited liability.
• Better quality of decision.

Disadvantages Liability Company.

• Decision making is slow.
 STEPS INVOLVED IN REGISTERING A BUSINESS

• Contact a lawyer to assist you in determining the kind of registration

to be done.
• Collection of form at the CAC
• Preparation of necessary documents such as the article of
association, memorandum of association
• Name search at the CAC to ensure that the name of the proposed
business is not in conflict with any existing business in the country or
any name that suggests national patronage e.g. Federal, National,
Chamber of commerce etc.
• Enquiry about professional registration requirements and if
necessary, register with the professional body e.g. CPN, NAFDAC etc.
 Documents required for company registration

i. The Memorandum of Association

• The memorandum of Association is the company’s charter
and it defines the limits to the company’s powers. The
memorandum of Association must contain the following
information.

• a. The name of the company

• b. The objects clause – defining the powers of the company.
• c. The limited liability clause
• d. Capital clause – the amount of its Authorized capital.
• e. Registered office
 Documents required for company registration

ii. The Articles of Association

• The Articles of Association are the regulations governing the
internal management of a company. Usually the articles of
association are subordinate to and controlled by the
memorandum of association. Items to be found in the articles
of association are such matters as transfer of shares, meetings,
rules governing meetings, voting rights etc.

• In the Incorporation of a company, all the necessary

documents including list of directors are lodged with the
Corporate Affairs Commission. If the application is successful
then a Certificate of Incorporation is issued.
 LOCALIZATION OF BUSINESS

Merits of Localization of Business

• Makes it possible for consumers to locate and get serviced in a single location
• Reduces cost of transportation
• Reduces the time used for shopping by consumers
• It attracts other ancillary services such as banking, insurance, etc.
• Make it easier for government to provide social amenities such as electricity,
pipe borne water, telecommunication services etc.
• Make it possible for businesses associations, chambers of commerce to
organize better.
Demerits of Localization of business
• It could lead to unhealthy competition and conflict among operators of
business in a particular location
• Risk of loosing entire type of business in the event of natural disasters such as
fire outbreak, flood, earthquake etc.
SOURCES OF FINANCE FOR BUSINESS START-UP

(i) formal sources of business finance:

– Commercial Banks
– Specialized banks e.g. merchant banks, mortgage
banks etc.
– Micro-credit agencies
– National directorate of employment
– Small and Medium Enterprises Development
Agency of Nigeria (SMEDAN)
– Capital Market (Nigerian Stock Exchange)
SOURCES OF FINANCE FOR BUSINESS START-UP

(ii) Informal sources of business finance

• Personal savings
• Loans/gifts from friends and relations
• Cooperative Societies
• Ajo/Esusu
• Non-Governmental Organizations e.g. COWAN
• Market Associations etc.
 TIME VALUE OF MONEY

Reasons why N1 today may worth more than N1

next year.
• Inflation
• Uncertainty about the future with respect to
government policy, changes in weather, change
in taste and fashion etc.
• Money if invested today is expected to yield
more than money simply kept in savings
account.
 Budgeting

• Budgeting is defined as the detailed

quantitative statement of a business plan or a
change in business plan, and forecast of its
financial result. It sets out the physical aspects
of the plan (what to produce, how much, and
the resources needed), the financial aspects of
the plan (the expected cost, expected returns
and expected profit).
 Types of Budgeting
Complete budgeting
• It is a detailed quantitative statement of business plan normally carried
out at the commencement of a business or when a major re-
organization is to be carried out.

Partial budgeting
• It is carried out carried out whenever there is a minor adjustment or
reorganization in the business.

Break-even budgeting
• It is carried out to estimate the level of production or output required
to provide an exact balance of changes in costs and revenue, so that the
entrepreneur is neither better of nor worse of.
 Cash flow statement

• The cash flow statement is a document showing

the inflow and outflow of cash in a business
enterprise. It shows the details of item of
expenditure and expected revenue over a period
of time. Cash flow statement can be prepared for
a year, two years or even a longer period of time.
It is one of those major documents required by
most formal lending agencies to assess the
suitability of an applicant to benefit from credit
facilities.
 Business Finance, Business Credit etc.

(iii) Business finance: Business finance is the economic study of

the acquisition and use of capital in a business enterprise.

(iv) Business credit: Business credit refers to the process of

obtaining control over the use of money, goods and services in
the present in exchange for a promise to repay at a future date.

(v) Collateral security: Collateral security is the item that a

borrower uses to pledge to the borrower in case he is unable to
repay the loan obtained. Collateral securities are in form of
tangible things such as landed property (land, building,
plantation etc), motor vehicle, etc.
 Opportunities Analysis

• The most important task facing the small scale business

entrepreneur is that of identifying business opportunities in
the larger macroeconomic environment.
• You will realize that the economic landscape is dominated by
such large multinationals
• Given their sheer size and presence, the multinationals
control the market and dictate the operating standards.
• Given this scenario, it is necessary for new entrants analyse
the opportunities available?
 Opportunities Analysis Contd.

• Opportunities analysis is the binocular through which the

total business environment is viewed.
• It reveals the structure of industry (including competition and
dynamics), isolates the key players.
Opportunities analysis is the intellectual tool with which the
entrepreneur looks at the environment with a view to
identifying business opportunities.
 Opportunities Analysis Contd.

Looking into the economic landscape,

understanding competition involves looking at
the following:
• the action of manufacturers,
• the action of suppliers,
• the action of employees,
• Inter-firm rivalry.
 Opportunities Analysis Contd.

• Given the nature and structure of competition in the economy, the key
questions to be asked by would-be entrepreneurs are:
1. Given the competition, what are the products and services that I
could select to provide and why?
2. What is the current level of demand for the chosen product or
service?
3. What is the supply situation for the product or service?
4. Are there barriers to entry?
5. What is the industry likely to look like in the next 2 or 3 years?

Let us now discuss some basic trends that will assist us in conducting
opportunities analysis.
 Basic trends: Demographic Trends

• The first important starting point is to consider the entire

population.
• Understanding the total size of the population is crucial.
• Also various components of a population needs to be critically
examined when attempting to conduct opportunities analysis.
• But apart from the total size of the population, the
demographic trends need to be examined.
• When studying a population, the following needs
to be properly studied and analysed: age distribution, size of
the working population, birth rate and death rate, sex
distribution, mobility trends, ethnic and religious trends
 Basic Trends: Economic Trends

• When trying to search for opportunities in the macro

environment, the would-be entrepreneur needs to
understand economic trends in the economy.
• Economic trends will be seen from the interplay of fiscal
and monetary policies.
• Very critical to our analysis are the following:
 Gross domestic product (GDP) growth rate,
 The rate of inflation and its effect on prices,
 Movements of interest rate and its impact on the level of
investment, and
 Broad directions of fiscal and monetary policies
 Basic Trends: Political And Regulatory Trends

• Would-be entrepreneurs need to properly study the political

environment and predict to a large extent the direction of
Government political thought.
• Apart from politics, entrepreneurs need to understand regulation.
• Most businesses in Nigeria are highly regulated as could be seen
in:
 Business permits,
 Prudential regulation,
 National agency for food and drug administration and control
(NAFDAC),
 Capital market regulations, and
 Foreign exchange regulations.
 Basic Trends: Socio – Cultural Trends

• In the identification and analysis of business

opportunities, it is also important to
understand socio cultural trends in a
population.
• Culture basically is a way of life of a people.
• The people in any given population have their
values and beliefs and it affects the type of
goods and services that they will purchase.
Other things to consider are:
 Other things to consider are:

• Conservative life styles.

• Fashion. Are skirts high or low?
• Living pattern for married couples.
• Educational level of the population