ENTREPRENEURSHIP SKILLS DEVELOPMENT

CHAPTER I

CONCEPT OF ENTREPRENEURSHIP

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

History of entrepreneurship in Zimbabwe

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Introduction

Zimbabwe has for centuries had strong entrepreneurial abilities. There has been
evidence of all industries stretching from primary, secondary and tertiary industry.
Agriculture, mining, trade, manufacturing industries were there before the 19 th
century. The only argument could then be the scale and the technology level. In fact,
the history of entrepreneurship in Zimbabwe dates back to the civilization era. In the
Mutapa and Rozvi States, there were successful business initiators/ owners who
became very wealthy.

By about 1200 to 1890 AD African Entrepreneurs on the plateau between Limpopo

and Zambezi Rivers became more advanced due to iron technology. The pre-
colonial entrepreneurs included the iron Smiths (boiler makers) or fitting and turning
craftsmen (mhizha), potters, farmers (hurudza), hunters (hombarume), among others.

As an evidence to disagree with the explanation of African history that the pre
colonial African societies were primitive and unchanging, and therefore any
important changes were brought by outsiders, archaeologists have found pottery and
iron tools at Great Zimbabwe and in other different parts of the plateau between
Limpopo and Zambezi Rivers (Zimbabwe).
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Entrepreurship in the Primary industry

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

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

Entrepreurship in the Manufacturing (secondary) Industry

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

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

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

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

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

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

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

Colonization and its effect on African entrepreneurship

Colonization negatively affected the Zimbabwean entrepreneurs and/or industrialists

as well as their governance.

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

Farming

The land Issue

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

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

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

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

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

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

CATTLE

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

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

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

TAXATION
For example the Hut Tax of 1903 was enacted to raise revenue for settlers and to
force black men to go and work for the white men leaving their entrepreneurial
activities. This was also imposed to indirectly force the blacks to work in order to
pay tax and it was meant to increase the company income.

The Native Reserve Order in Council: 1898.

The Act created reserves in dry inhospitable areas. This affected the entrepreneurial activities of
blacks in agriculture. The Act also effectively removed all native chiefs who were anti- settlers
and replaced them with puppet settler administrators.
Land Bank acts: 1912.
The land bank act provided new white settler farmers with free tillage for five years and the
same period as grace before commencing to repay loans from the state owned Land bank.
The Morris Carter Commission: 1925.
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 Divided the whole country into agro-zones based on rainfall patterns from the highest rainfall
region 1 to the lowest rainfall region 5. Natives were trans- located to regions 4 and 5.
The Land Apportionment Act: [Link] 1930 whites who numbered 50 000 were allocated 49
000 000 Acres of the worst land in regions 4 and 5. The translocation of blacks greatly affected
their farming entrepreneurial activities and was accompanied with untold violence and
starvation and malnutrition became endemic... The Land Apportionment Act of 1930
confirmed and legalized the displacement of Africans that had been ongoing earlier.

Up until 1906, ninety percent of Southern Rhodesia’s agricultural produce came

from black farmers and many whites did not like this state of affairs. As a result, the
Rhodesia Native Labour Bureau (RNLB) stopped blacks from competing with
whites and between 1908 and 1915, 1.5 million acres of the best land was taken from
blacks and given to whites. New boundaries were created to exclude fertile high
rainfall areas from newly created reserves. The latter were located in semi arid areas.
Blacks in regions 1, 2 and 3 were made to pay higher grazing fees and taxes. Since
many could not pay they were removed and settled in reserves which were situated
far away from markets and rail and tarred motor roads. By the 1920s, 65% of the
black population had been forced into reserves. This led to cycle of poverty among
Africans which persists up to today -2004.
The Land Husbandry Act: 1951.

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

The Tribal Trust Land Act: 1965.

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

The Land Tenure Act: 1969.

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

Post Colonial Era

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

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

Entrepreneurship and Patriotism

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

What is an entrepreneur?
An entrepreneur is the originator (initiator) of an enterprise (economic/business undertaking) in
order to satisfy an identified need or want profitably. That is a person who organizes and manages
a commercial undertaking especially one involving calculated commercial risks. In other words, an
entrepreneur is someone who identifies opportunities in terms of needs and wants of people and
mobilizes resources such as land, capital and labor to develop profit-making projects to meet the
identified needs and wants.
Successful entrepreneurs are not gamblers but take calculated and moderate risks in business. It
should, however, be noted that entrepreneurs believe so strongly in their business ideas that they
are willing to take full responsibility for developing them and to assume most of the risks should
they fail.
What is entrepreneurship?
Various authors define entrepreneurship differently, but their definitions somewhat amount to the
same meaning.
The following are some of the definitions of entrepreneurship:
Appleby (1989) defines entrepreneurship as the process of bringing together creative and
innovative ideas and coupling these with management and organizational skills in order to combine
people, money and other resources to meet an identified need and thereby create wealth.
Whereas Appleby defines entrepreneurship as such, Stoner & Freeman (1992) view
entrepreneurship as seemingly a discontinuous process of combining resources to produce new
goods and services.

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Analysis of definitions
Both definitions do not fall short of the fact that entrepreneurship is a systematic and logical event
as shown by the term ‘Process’. That is entrepreneurship is not a haphazard activity. However,
Stoner & Freeman have moved a step further in an attempt to distinguish entrepreneurship from
management as they look at entrepreneurship as a discontinuous process. That is, it is a
discontinuous phenomenon appearing then disappearing until it reappears to initiate another
change, unlike management which is a continuous event.
The idea of ‘creative and innovative ideas,’ shows that the two definitions are complete. In
business, entrepreneurs should be able to come up with changes or new approaches, means,
processes, machinery, tools or techniques and new products in order to meet the needs of turbulent
and dynamic market environments. When a new venture is being contemplated on, risks arise
involving uncertainties which require initiativeness and process innovation.
Whereas Appleby clearly states, the idea of “management and organizational skills” in his
definition, Stoner & Freeman have remained silent about it. Organizational skills and management
are crucial for successful entrepreneurs. These relate to the ability of the entrepreneur to plan,
organize, lead and control the organizational members’ activities and resources in order to achieve
the stated goals of the enterprise. In other words, the emphasis here is the ability to organize the
other factors of production or resources into creative combination for the purpose of producing
goods and services in order to satisfy human needs and wants profitably. The combination of
resources is as follows:

Land Labour Capital

Entrepreneurship

Production of goods and services

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

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

Entrepreneurship distinguished from Intrapreneurship

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

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

The word intrapreneurship is attributed to Gordon Pinchott an American who founded a school for
entrepreneurs to help managers from large corporations to take responsibility for creating
innovations and turning ideas into profitable reality.

Relationship between entrepreneurship and Patriotism

Patriotism is the spirit of loyally supporting one’s nation. The major thrust of patriotism in the
context of entrepreneurship in an economy is to refrain from corruption and sabotage or subversion.
Thus, the relationship between entrepreneurship and patriotism is reflected in the following roles
that a patriotic entrepreneur plays to the nation that is the entrepreneur should have the spirit of:
a) Creating jobs without oppressing fellow citizen workers i.e. the entrepreneur will be
expected to provide good working conditions and be worker – centered.
b) Charging fair and affordable prices
c) Producing quality products which compare with international standards
d) Conserving natural resources
e) Practicing good ethics and social responsibility in business and the community
f) Generating foreign currency without externalizing it or taking it to the black or parallel
market for exchange, but to the registered banks for official exchange
g) Generating government revenue through paying corporate tax.
h) Playing supportive role to the giant firms by being subcontracted in construction,
manufacturing and distribution
i) Reducing anti-social activities such as theft, robbery, murder, promiscuity by creating
employment for self and other citizens
j) Reducing rural to urban migration by creating employment opportunities in rural areas

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

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

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

Perception of opportunity or opportunity seeking

Entrepreneurs should be able to see the unfilled areas or gaps in products, process and application
of services. That is successful entrepreneurs are able to see and act on new business opportunities.

Moderate risk taking

Entrepreneurs are expected to be able to take moderate and calculated risks. This is contrary to the
stereotype that entrepreneurs are gamblers or high-risk takers.

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Goal setting
In setting a new business, entrepreneurs are expected to have the ability to set goals which are
specific, measurable, achievable, and realistic and time bound (SMART) basing on their
(ENTREPRENEURS) strengths, weaknesses, opportunities and threats (SWOT).
Moreover, their goals must be consistent with their interests, values and talents in order to achieve
them. Their belief in the reality of their goals is the primary factor in the fulfillment of those goals.
Their plans may seem illogical to others but they are perfectly logical in the context of their own
personal values and desires.

Long-term perspective
Successful entrepreneurs can tolerate considerable amount of frustration and delay in need
gratification and they devote a lot of time and effort in goals that often yield profits at a distant
point in the future. Entrepreneurs should be able to accommodate hurdles, difficulties and
temporary failures in business.

Self-motivation/self esteem/self faith/self confidence

Effective entrepreneurs have solid and stable self-esteem and self-motivation which stem from
healthy feeling of self worth and self-acceptance. Entrepreneurs with a positive self-image are
basically satisfied to be the type of people they are. This self-faith is even important than self-
confidence especially when serious setbacks and failure occur.

Innovativeness/initiative ness/creativeness
Effective entrepreneurs have the ability to come up with new products, methods or techniques of
production and the accompanying machinery and tools.

Adventuresome ness
Successful entrepreneurs are adventuresome i.e. they are interested in testing out and experimenting
phenomena in an endeavor to come up with solutions to the needs and wants of people.

Commitment
To succeed in business, you must be committed. Commitment means that you are willing to put
your business before almost everything else.

Some of the characteristics of an entrepreneur include; patience, friendliness, hardworking,

reliability, dedicated ness, responsibility, objectivity, rationality, honesty, determination, courage,
flexibility, imaginativeness and knowledge.

In a word, successful entrepreneurs must have appropriate personal characteristics, business skills
where necessary.

Roles of Small and Medium Enterprises

What is a small business?

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

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

Reasons for continued survival of small firms

 Small businesses are able to be more flexible, innovative and can react to changes
much quicker
 Small businesses play a supportive role to the giant firms by being subcontracted in
construction, distribution, service and manufacturing sectors
 Small businesses serve small markets (market riches) where large firms do not have
interest
 Small firms receive government support through the Ministry of Small to Medium
Enterprises, ministry of Youth Development Gender and Employment Creation and
Ministry of Higher and Tertiary Education that is they receive support in form of
training and funds. Small firms also pay lower taxes.
 Small firms supply their goods and services in smallest lots than giant firms which
usually supply in bulk
 Small firms offer specialized and personalized services to customer’s e.g. electrical
businesses.
 Small firms remain small usually during the initial phases of new technology or
innovation or product introduction as the firms will be studying market reactions and
modifying the products.

Roles played by small firms to the economy

 Small businesses create employment for the business owner as well as the other
fellow citizens (employment creation)
 Small businesses increase the range of goods and services available to the local
community (provision of goods and services) especially in rural areas where goods
and services were previously unavailable.
 Small businesses reduce anti-social activities such as theft, robbery, promiscuity and
burglary
 Small businesses reduce rural-urban migration as more goods and services and
employment opportunities become available in rural areas. This will help to
decrease the pressures on urban in terms of sanitary problems, theft, robbery and
promiscuity.
 Small firms contribute in the improvement of the standard of living of the
community
 Small firms contribute in stabilizing the economy through increased employment,
reduced prices and improved standard of living
 Small businesses help in indigenizing the economy. If the economy is in the hand so
indigenous people, resources are not expatriated.
 Small firms help in the generation of foreign currency
 Small firms contribute in the production of quality and affordable products by being
in competition with giant businesses
 Small firms contribute to government revenue through payment of business and
employment taxes
 Small businesses contribute to the national income of the country (GDP – Gross
Domestic Products) and to the improvement of the balance of payment

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 Government Entrepreneurship initiatives
Government entrepreneurship initiatives are efforts by the government to promote self-sustenance,
entrepreneurship and indigenization in order to stabilize the economy. In an effort to promote
entrepreneurship and self-sustenance, the government established the Ministry responsible for
employment creation since 1980 i.e. Ministry of National Affairs and Employment creation now
Ministry of Youth Development, Gender and Employment Creation. Moreover, the following
institutions were introduced by the government to enable potential entrepreneurs to establish
themselves:
a) Small enterprise development corporation (SDECO)
b) Infrastructural Development Bank of Zimbabwe
c) Agribank
d) Affirmative Action Group (AAG)
e) Zimbabwe Cross Boarders Association
f) Zimbabwe Tuck shop Association

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

Activity
i) Analyze the history of entrepreneurship in Zimbabwe
ii) Examine the effects of colonization on entrepreneurship in Zimbabwe
iii) Analyze the government initiatives to promote entrepreneurship in Zimbabwe since
1980.
iv) Discuss the roles of the following in promoting entrepreneurship in Zimbabwe
a) AAG
b) Ministry of Small and Medium Enterprises
c) Zimbabwe Cross Boarders Association

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 CHAPTER 2

BUSINESS ENVIRONMENT IN ZIMBABWE

Objectives
By the end of this unit you should be able to:
 Describe the entrepreneurship environment in Zimbabwe
 Evaluate how the macro and micro environmental factors affect
entrepreneurs
 Discuss entrepreneurial survival and growth strategies

Entrepreneurship environment
Entrepreneurship environment relates to the factors or variables which directly or indirectly affect
the activities of the entrepreneur either positively or negatively.

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

Macro – environment
This is also known as external environment. This environment consists of all those factors, which
indirectly affect the business activities of the entrepreneur either positively or negatively. The
external environment involves PEST analysis and natural phenomena.

PEST stands for Political, Economic, Social and Technological environmental variables.

Political Environment
Political factors may provide initiative situations towards the success of the entrepreneur especially
where the political climate is not stable. Political disturbances may result in the closure of business
either permanently or temporarily. Extreme political disturbances or instability such as tribal or
civil conflicts may cause permanent closure of enterprises. However, this depends on the nature of
the business of the entrepreneur. Some political climates may promote the success of the
entrepreneur. At first glance, it would seem that domestic politics should pose no threat and that a
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company should have minimal problems at home. This is often not the case. Although a
company’s major political problems usually derive from political conditions overseas, it must still
pay close attention to political developments at home. Knowledge of the philosophies of all major
political parties within the country is very important since any of them might come to power and
alter prevailing attitudes. It is important to know the direction each is likely to take for example in
Britain the Labour party has traditionally tended to be more restrictive on both foreign and home
trade.

Economic nationalism is another factor which leads to an unfavorable business climate e.g. some
other organisations are said to be sponsoring foreign media which are said to be anti-government.
If the entrepreneur is not nationalistic in his or her business activities he/she may lose his/her
business license.

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

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

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

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

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

Thus, given these macro-economic issues, the entrepreneur is expected to have a predictive mind
for efficient management of the enterprise.

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

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

Technological environment
Today, we are living in a global village which requires entrepreneurs to move with technological
breakthroughs and changes. Entrepreneurs are expected to be well versed with Internet systems for
effective communication with suppliers, customers and the publics in general.
Technology relates to the processes, techniques, tools and machinery used in business to produce or
offer products to customers. Poor technology results in inefficiency and ineffectiveness. Thus, the
advice to the entrepreneurs is that they should keep tack of the technological trends in the business
if they are afraid of being out-competed by their rivals.

Natural phenomena
These are the situations or conditions which can adversely or positively affect the entrepreneur’s
activities. These may include natural disasters such as road accidents, fire outbreaks, floods,
drought, earthquakes, good rains and natural resources such as minerals. Entrepreneurs are advised
to study the natural phenomenal trends as these provide threats or opportunities to the business.
Microenvironment
This relates to those conditions which directly affect the entrepreneurial investment activities either
positively or negatively. The microenvironment is made up of employees, providers of finance,
suppliers, customers and government among others.

Employees
These are the people who work for the entrepreneurs and those who are likely to work for him/her
(potential employees). People today have wider expectations of the quality of working life
including: justice in treatment, democratic functioning of the organization and opportunities for
consultation and participation, training in new skills and technologies effective personnel and
industrial relations policies and practices and provision of social and leisure facilities.
Entrepreneurs should give due consideration to the design of work methods and job satisfaction,
make every reasonable effort to give security of employment. If employees are not treated well, the
entrepreneur will lose them to his/her rivals.

Providers of finance
These are the financial institutions which supply financial services to the entrepreneurs.
Entrepreneurs need to consider the interest or lending rates together with the accompanying finance
changes fixed on them by the financial institutions as these costs of financial services have adverse
effect on their investment activities. Apart from that, the entrepreneurs also need to consider return
on investment in terms of the funds which they may need to invest with the financial institutions.
On the other hand, the entrepreneurs are expected to prove their credit worthiness and credibility by

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paying back the borrowed funds (loans) within the contractual time frame as this will enable the
entrepreneurs to even receive preferential treatment and favor in times of need.

Customers
To many entrepreneurs, responsibilities to customers may be seen as no more than a natural
outcome of good business. Customers are people who make the business successful. The
entrepreneurs need to understand the needs and wants of customers first before production
activities take place in order to avoid wastage of resources by producing goods and services for
unknown customers. Customers must be put first by providing:
 Good value for money
 The safety and durability of products
 Prompt and courteous attention to queries and complaints
 Long-term satisfaction e.g. serviceability, adequate supply of products and
replacement of parts
 Full and unambiguous information to potential customers
If customers feel that they are ill treated, the entrepreneur loses them to the customer-driven
enterprises.

Suppliers
These are firms that supply the entrepreneur with raw materials. These can affect the
entrepreneur’s activities adversely or positively in terms of prices, reliability, quality, delivery
services and convenience among others. Thus, a supplier of competitive prices, quality, delivery
services and convenience must be chosen. On the other hand, the entrepreneur should also prove
creditworthiness by settling accounts within the contractual time frame if future deferred payment
business transactions are to be upheld.

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

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

15
Entrepreneurship Strategies

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

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

2. Market development strategy

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

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

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

Ansoff’s Growth Strategies Grid:

Current products. New products.

Market penetration Products development
Strategy strategy Current markets.
Market development Diversification strategy
strategy New markets.

Ansoff’s Growth strategies

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

2. Integrative growth
16
 a) backward integration
b) forward integration
c) horizontal integration

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

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

especially when they are they are highly profitable.

c) Horizontal Integration – is when a company acquires one or more competitors provided the
government policies allow e.g. monopoly, oligopoly.

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

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

b) Horizontal Diversification
- holds that a company can produce totally unrelated products using different manufacturing
methods or processes

c) Conglomerate Diversification
- Holds that a company seeks new business that have no relationship to the company’s
current technology products or market suppose a company is producing fax machines and
now seeks to produce furniture

Other Entrepreneurship strategies

- a strategy is a method used to achieve a goal

1) Franchising
- A system of distributing products/services through associated resellers.
- The franchiser gives rights to the franchisee to perform or use something that is the property
of the franchiser
- The objective is to achieve efficiency or profitable distribution of products/services within a
specific area
- Both parties contribute a trademark reputation, known products, managerial know-how
produces or equipment.

17
Advantages to the franchiser
Advantages to the franchisee
- increased distribution
- some operating costs are
- less risk with market tested
transferred
products
- marketing/distribution costs
- pre established promotion and
shared
advertising programs provided
- production accepted by locals
- Financial and may be provided.
when local franchise ownership
- Credit available in buying
is held
inventory and supplies
- Retains quality control of
- Decision making assistance,
products is a franchise
management procedure and
agreement
training.
-

Disadvantages to the franchiser Disadvantages to the franchisee

- control of franchisees are far - gives up freedom in

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

2) Buying an established business

Advantages - inherited clientele may not be

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

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

18
 CHAPTER 3

DEVELOPING A BUSINESS PLAN

OBJECTIVES

By the end of this unit you should be able to:

 Define a business idea.

 Generate a feasible and profitable business idea.
 Develop a Business Proposal.
 Define a Business Plan
 Discuss the elements/components of a business plan.
 Develop a viable business plan.

GENERATION/CREATION OF A BUSINESS IDEA

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

The term business idea defined:

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

 A business idea must show the following :

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

Profitability and Feasibility of the business idea:

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

In terms of feasibility, the entrepreneur needs to consider the

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

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

 A business plan is a written statement setting forth the

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

 It is a written document describing all relevant internal and

external elements and strategies for achieving objectives of
a business.

 A business plan is a document designed to provide sufficient

information about a new or existing business to convince
financial backers to invest in the business.

The purpose/importance of a business plan:

 It provides a blueprint, or a plan, to follow in developing and
operating the business. It helps keep one’s creativity on
target and helps one concentrate on taking the actions that
are needed to achieve the business goals and objectives.

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

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

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

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

 It can be an effective communication tool for attracting and

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

 It provides an effective basis for controlling operations so one

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

HOW TO PREPARE A BUSINESS PLAN

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

A sound approach is to:

1. Determine where the business is at present (if an ongoing
business) or what is needed to get the business going.
2. Decide where you would like the business to be at some point
in future.
3. Determine how to get there. In other words, determine the
best strategies for accomplishing the objectives in order to
achieve your mission.

The following is one feasible approach you can use in preparing

a business plan
1. Survey consumer demands for your products and decide how
to satisfy those demands.
2. Ask questions that cover everything from you firm’s target
market to its long-run competitive prospects.
3. Establish a long–range strategic plan for the entire business
and it’s various parts.
4. Develop short-term detailed plans for every aspect of the
business, involving the owners, managers, and key
employees, if possible.
5. Plan for every facet of the business’ structure, including
 finances, operation, sales, distribution, personnel, and
general administrative activities.
6. Prepare a business plan that will use your time and that of
your personnel most effectively.

COMPONENTS/ELEMENTS/CONTENTS OF A
BUSINESS PLAN
 The contents of a business plan vary tremendously, depending
upon the type of business, the expertise of the entrepreneur,
who the plan is aimed at and how much time is spent
researching the plan.

 However, regardless the specific format used an effective

plan should include at least the following
1. Cover sheet
2. Table of contents
3. Executive summary
4. Description of The Business
5. Ownership and Management structure
6. Marketing Plan
7. Production/Operational Plan
8. Financial Plan/Analysis
9. Milestone schedule
10. Appendix

1. Cover Sheet

On the cover sheet you should include identifying information so that

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

2. Table of Contents

Because the table of contents provides the reader an overview

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

3. Executive Summary
 It is the most important part of the business plan. It should be
designed to motivate the reader to go on to the other section of
the plan. It should convey a sense of commitment, challenge,
plausibility, credibility and integrity.

It can include:

 Major aims and objectives

 Marketing strategy
 Financial projections
 Financial requirements
 Current business position:
Legal form, when formed, principal owners and key
personnel.
 Major achievements.

NB Executive summary is written last, after the rest of the plan

has been developed and should just be that – a summary –so
keep it short.

4. Description of the Business

Include the following:

a) Introduction

 Relevant brief history and background of the proposed

business
 How the idea for the business original and what has
been done to develop the idea up to this point.
 Owners and manager and their experiences
 Products – capitalization/sources of funds
 Brief outline of success and achievement
 Date or proposed date for commencement
 Name of business and trading name
 Legal identity/legal form
 Industry that it fall under
 location - business addresses
 SWOT Analysis

5. Ownership and Management Structure

 Describe the owners including those you identified by
name and title above
 Give more detail about their experience, qualifications
and expertise.
  Describe your management team, along with their
abilities, training and experience.
 Draw an organisation Chart
 Draw a table showing name, position, qualifications and
experiences, duties and responsibilities of managers and
employees.
 Include organizational structure, including employee
policies and procedures.

6. Marketing Plan

Include information about:

a) Marketing objectives
b) The target market
c) Sales and marketing mix strategy
d) Competitors analysis
e) Research – that leading to product design – confirmation
of demand and future research planned.

7. Product/Operational Plan
 This motives the details of converting inputs to
outputs valued by customers
 Specify products/services to be produced
 Raw materials and suppliers
 Optional location for production activities
 Costing of the products offered.

8. Financial/Plan/Analysis

 Indicate the expected financial results of your

operations
 Show prospective investors or lenders
 Include projected financial statements at least up to
three trading periods i.e. Trading, Profit and Loss
 Account; Income and Expenditure Statements; Cash
 Flow statements; Balance Sheets etc.
 There should be an analysis of costs/volume/Profits
(CVP) where appropriate.
 Also include budget forecasting for : Production; Sales
and Expenses.
 Show the Financing of the business.

9. Milestone Schedule
  This involves the determination of objectives and the
timing of accomplishments.
 It is like a map of how you will go from one place/stage
in your business to the next.
 Deadlines should be established and monitored.

10. Appendix

This section includes supporting documentation for your

Business Plan e.g.

 Names of References and Advisors and their addresses

and phone numbers
 Bargains, Tables, Charts
 Resumes of officers
 Supportive market research
 Brochures of other published information describing
the products you provide.
 Letters of recommendations or endorsements etc.

Generate your own business idea and develop its viable business plan.
 CHAPTER 4

BUSINESS MANAGEMENT

Objectives
By the end of this unit you should be able to:
 Define management
 Discuss the management functions
 Describe the roles of management
 Outline the principles of management

Business
A business is a social or a commercial entity that thrives to satisfy the needs
and wants of consumers at the same time making more profits. As such,
entrepreneurs have to manage the factors of production, i.e. land, labour and
capital so as to achieve the business objectives. Businesses can be in any of
the following sectors of the economy; farming, mining, retailing, art and
craft, wholesaling etc. Thus, this chapter will focus on the functions of
management as well as the roles of management in an enterprise.

Management
Management has been described as a social process involving responsibility
for economic and effective planning and regulation of operation of an
enterprise in the fulfillment of given purposes. It is a dynamic process
consisting of various elements and activities. These activities are different
from operative functions like marketing, finance, production, purchasing,
human resource etc. Rather these activities are common to each and every
manager irrespective of his level or status. According to Henry Fayol (the
father of management) managing means planning, forecasting, organizing,
motivating, leading and controlling activities in a business so as to achieve
common objectives.
  Stoner and Freeman (1995) described management as the art of
making things done through other people.
 They went on to say that it means deciding what to do and getting
others to do it.

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

leading, organizing and controlling of resources (human resource, capital,
financial resources etc)

Manager
Managers are people who get things done through other people. They make
decisions; allocate resources and direct activities of others to attain goals. A
manager may be the owner, operator or founder of an organisation as well as
hired by an organisation to give it direction. Managers are employed so that
the operations of these organisations become more efficient and effective.

FUNCTIONS OF MANAGEMENT
Different experts have classified functions of management. A manager
must organize these functions in order to reach company goals and maintain
a competitive advantage. There are four fundamental functions of
management. For theoretical purposes, it may be possible to separate the
function of management but practically these functions are overlapping in
nature i.e. they are highly inseparable. Each function blends into the other
and each affects the performance of others. The functions are discussed
below;

A. PLANNING

It is the first tool and the basic function of management. The difference
between a successful and an unsuccessful manager lies within the
planning procedure. Planning is the logical thinking through goals and
making the decision as to what needs to be accomplished in order to
reach the organisation’s objectives. It deals with chalking out a future
course of action and deciding in advance the most appropriate course of
actions for achievement of pre-determined goals. Thus, planning is
deciding in advance- what to do, when to do and how to do it. It bridges
the gap from where the organisation is and where it wants to be. Planning
is necessary to ensure proper utilization of human and non-human
resources and helps in avoiding confusion, uncertainties, risks, wastages
etc.

The following are involved in planning;

 defining objectives and standards to be achieved
 deciding who is going to do it
  determining the actions and activities to be done in order to
achieve the objectives and standards
 determining the resources to use
 determining the time-frame for the activities
 assigning responsibilities
 designing a control procedure

Manager’s questions in planning

1. where are we? -in terms of goals, resources, standards etc
2. where do we want to go? –objectives, markets, customers etc
3. how do we get there? –strategies to reach the intended destination
( time, resources, marketing mix)
4. are we getting there?

B. LEADING

Leading is the ability to initiate action, guide, supervise and direct others
(subordinates) in pursuit of a common goal. Organizational success is
determined by the quality of leadership that is exhibited. “A leader can be a
manager, but a manager is not necessarily a leader,” said Gemmy Allen
(1998). Those in leadership role must be able to influence/ motivate workers
to an elevated goal and direct themselves to the duties or responsibilities
assigned during the planning process (Allen, G., (1998). Leadership has the
following elements;

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

organizational methods to work efficiently for achievement of
organizational goals, and sets in motion the action of people because
planning ii the mere preparation for doing work.
 staffing-the main purpose is to put the right man on the right job.
There should be proper and effective selection, appraisal and
development of personnel to fill the roles designed on the structure. It
thus involves manpower planning, recruitment, selection, placement,
training and development, remuneration and promotion and transfer.

 supervision- implies overseeing the work of subordinates by their

superiors. It is the act of watching and directing work and others.

 motivation- means inspiring, stimulating or encouraging the

subordinates to work with zeal.

 communication- the process of passing information, experience,

opinion etc from one person to another. It is a bridge of
understanding.
C. ORGANISING
It is the process of bringing together physical, financial and human resources
and developing productive relationships amongst them for the achievement
of organizational objectives. According to Henri Fayol, “To organize a
business is to provide it with everything useful for its functioning i.e. raw
materials, tools, capital and personnel. To organize a business involves
determining and providing human and non-human resources to the
organizational structure. Thus, a manager must know his subordinates and
what they are capable of in order to organize the most valuable resource a
company has, its employees. This is achieved through management staffing
the work division, setting up the training for the employees, acquiring
resources and organizing the work group into a productive team. The
manager must then go over the plans with the team, break assignments into
units that one person can compete, link related jobs together in an
understandable well organized style and appoint the jobs to individuals.
Organising as a process involves;

 identification of activities
 classification or grouping of activities
 assignment of duties
 delegation of authority and creation of responsibility
 coordinating authority and responsibility relationships

Principles of organising
1. unity of command –an employee must receive commands from one
supervisor only.
2. span of control-refers to the number of employees that report to one
supervisor.
3. full authority and responsibility.

D. CONTROLLING
It implies a measurement of accomplishment against the standards and
correction of deviation if any to ensure achievement of organizational goals.
The purpose of controlling is to ensure that everything occurs in
conformities with the standards. An effective system of control helps to
predict deviation before they actually occur. According to Theo Haimann,
“Controlling is the process of checking whether or not proper progress is
being made towards the objectives and goals and acting if necessary, to
correct any deviation.” Controlling depends on accurate, reliable and
enforceable standards and on monitoring of performance by people,
machines and processes. Therefore controlling has the following steps;
 establishment of standard performance
  measurement of actual performance
 comparison of actual performance with the standards and finding out
if there are any deviations
 taking of corrective action if necessary.

Work performance evaluations are a form of control as it connects

performance assessments to rewards and corrective actions. Evaluating
employees is a continual process that takes place regularly within a
company.

ROLES OF MANAGEMENT

The ten management roles of a manager identified by Mintzberg

Mintzberg intensively studied five CEOs and their organizations, along with
a calendar of their scheduled appointments for a month. Additional data
collected during a week of structured observations included anecdotal data
about specific activities, chronological records of activity patterns, a record
of incoming and outgoing mail, and a record of the executive’s verbal
contacts with others. On the basis of this data, Mintzberg divided managerial
activities into interpersonal, informational and decisional roles.

Mintzberg’s ten management roles are a complete set of behaviors or roles

within a business environment. Each role is different, thus spanning the
variety of all identified management behaviors. When collected together, as
an integrated whole (gestalt), the capabilities and competencies of a manager
can be further in a role specific way. In a sense therefore they act as
evaluation criteria for assessing the performance of a manager in his role.

Mintzberg’s ten managerial roles

ROLES DESCRIPTION EXAMPLES OF

ACTIVITIES
1. INTERPERSONAL

a. Figurehead Symbolic head, Greeting visitors,

obliged to perform a signing documents
number of team
duties of a legal or
social nature
b. Leader Performing all
Responsible for the activities that
motivation of involves
subordinates, subordinates
 staffing and training,
c. Liaison selects and
disciplines.
Acknowledging
Maintains a network mail, external board
of outside contacts work
and informers who
provide favors and
information
2. INFORMATIONAL

a. Monitor -Seeks and receives -reading periodical

wide range of and reports
special information -maintaining
-nerve centre of personal contacts
internal and external -installation and
information about maintenance of
the organisation information systems

b. Disseminator Holding meetings,

Transmits making phone calls
information form to relay
outsiders or from the information,
subordinates to sending memos
members of the
c. Spokesman organisation
Holding board
Transmits meetings and giving
information to information to the
outsiders on media
organizational
policies, actions,
results etc through
speeches and
reports.

3. DECISIONAL

a. Entrepreneur Initiates new Organising strategy

projects, spot review sessions to
opportunities, develop new
identify areas of programmes
b. Disturbance handler business
 developments Resolving conflicts
among staff, adapt
Responsible for to external changes
corrective action and organising
when organization strategies that
c. Resource allocator faces unexpected involves
disturbances and disturbances and
crises conflict

Scheduling,
Responsible for the requesting,
d. Negotiator allocation of authorization and
organizational budgeting activities
resources of all
kinds, setting of
priorities, budgeting
Participating in
Responsible for collective
representing the bargaining
organisation at
major negotiations
with unions,
suppliers and
generally defend
interests

The roles point to managers needing to be organizational generalists and

specialists because of;
 system imperfections and environmental pressures
 their formal authority is needed even for certain basic routines
 in all of this they are still fallible and human

The explanations above justify managerial purposes in terms of;

 designing and maintaining stable and reliable systems for efficient
operations in a changing environments
 ensuring that the organisation satisfies those that own it
 boundary management- maintaining information links between the
organisation and players in the environment.
MANAGEMENT SKILLS

For a manager to carry out the management functions and roles effectively,
some management skills are required at defined levels.

Management skills and levels

1) Technical skills
Include knowledge of and proficiency in a certain specialized area
such as engineering, computers, and finance etc. e.g. an accounting
manager should be proficient and conversant with accounts
receivables and account payable, to enable him to help the accounting
clerks who might have some problems. The first line managers and
middle management are more involved in the technical aspects than
top management.

2) Human skills

Refer to the ability to work with other people both individuals and in
groups. The human skills are important at the top levels of
management, as they are at the lower levels. Subordinates are more
forthcoming and offer their best abilities when working under a
manager with good human skills. These managers are good
communicators; they motivate, lead and inspire enthusiasm and trust
among their subordinates.

3) Conceptual skills

Are defined as the ability to think and conceptualize lines and abstract
situations,
to see the organisation as a whole and the relationships among its
various sub-units and to visualize how the organisation
fits into its environment. Conceptual skills are
needed by all managers at all levels but these skills become more
important as we
move up to the top management positions.
Principles of Management

Managers must observe Fayol’s 14 principles of management when carrying

out their duties;
1. Division of labour-work should be divided into smaller units that
permit specialization.

2. Authority and responsibility-organizational structure should clearly

show levels of authority and responsibility.
3. Discipline-discipline results from good leadership at all levels of the
organization. It is necessary to develop obedience, diligence and
respect.

4. Unity of command- an employee must receive commands from one

supervisor only.

5. Unity of direction-all operations with the same objectives should have

one manager and one plan only.

6. Subordination of individual interest to the common good- the interests

of an individual or group should not take precedence over interests of
the organization.

7. Remuneration-rewards for work should be fair to the worker and

employer.

8. Centralization- the proper degree between centralization and

decentralization should be found.

9. Hierarchy- the line of authority in the organization should run in order

of rank from top management to the lowest level of the organization.

[Link]- resources should be in the right place at the right time.

 [Link]- managers should be fair to the employees and treat the
equally.

[Link] of staff- a low staff turnover rate enhances the attainment of

goals.

[Link]- subordinates should be given the freedom to conceive and

carry out their plans, even though some mistakes may result.

[Link] spirit – team work gives the organization a sense of unity.

Motivation

- Definition
- Managers and entrepreneurs are tasked with ensuring that things are done through
people. For the work to be done efficiently and effectively, employees need to be
motivated. Motivation is concerned with inducing people to work to the best of their
ability. Motivation refers to those schemes designed to influence and encourage
workers to perform outstandingly. It is therefore very important to take a closer look
at theories of motivation and consider motivation of workers seriously.
- According to Appleby (1994), motivation refers to the way urges, aspirations, drives
and needs of human beings direct or control or explain their behavior. Maslow (cited
in Stoner & Freeman 1989) defines motivation as those inner and outer factors which
cause, channel and sustain the behavior of a person in order to achieve specific
organizational or personal goals.

Theories of Motivation and their implications to the

entrepreneur
There are many theories of motivation and any theory or study which aids an
understanding of how best to motivate people at work must be useful. All entrepreneurs
have a duty to motivate their employees for the success of their enterprise. Motivated
workers take more pride in their jobs and work better. But many entrepreneurs do not
know how to motivate their staff. Entrepreneurs must know how to apply the theories of
motivation in particular work situations. There are two contrasting approaches that is the
content theories and process theories (cognitive theories)
- Content theories attempt to explain those specific things which actually motivate the
individual at work. These theories are concerned with identifying people’s needs and
their relative strengths and the goals they pursue in order to satisfy these needs.
Content theories place emphasis on the nature of needs and what motivates.
- Process theories attempt to identify the relationship among the dynamic variables
which make up motivation. These theories are concerned more with how behavior is
initiated, directed and sustained. Process theories place emphasis on the actual
process of motivation.

Major content theories of motivation include

 Maslow’s hierarchy of needs model
 Alderfer’s modified need hierarchy model
 Herzberg’s two-factor theory
 McClelland’s achievement motivation theory

Maslow’s hierarchy of needs theory

Maslow’s theory claims that human motives develop in sequence according to five levels
of need arranged in a hierarchy of importance. Maslow’s basic proposition is that people
want beings, they always want more, and what they want depends on what they have
already. The hierarchy begins with the lowest level i.e. physiological needs to the need
for love (social), esteem needs to the need for self-actualization at the highest level.
Below is the pyramid to show the hierarchy
Self-actualization
(I.e. realizing one’s potential
For continued self development)

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

Physiological i.e. shelter, clothing, food

)

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

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

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

Love needs that is social needs which include affection, sense of belonging, friendships
and both the giving and receiving of love.
Esteem needs are also referred to as ego needs which relate to self-respect which involves
the desire for confidence, strength, independence and freedom, and achievement. Esteem
of others involves reputation or prestige, status, recognition, attention and appreciation.

Self-actualization needs that is the desire to become more and more what one is capable
of becoming which simply means that one wants to realize his or her potentialities and
capabilities.

IMPLICATIONS OF MASLOW’S HIERARCHY OF NEEDS TO THE

ENTREPRENEUR
Once a lower need has been satisfied, it no longer acts as a strong motivator and only
unsatisfied needs motivate a person.

This hierarchy of needs implies that entrepreneurs need to consider seriously the lower
level needs if workers or staff is to cooperate at work. That is the remuneration (salary,
wage, fringe benefits) should meet decent or exclusive physiological needs (shelter, food,
clothing). Pleasant working conditions must also be ensured.

Successful entrepreneurs must consider the safety and security issues such as safe
working conditions like danger warning signs, clean work environment and good healthy
facilities. It is also important to employees and social security after employment i.e.
pension and other related company benefits.

Social needs of workers have impact on the performance. Workers need to be loved and
as such entrepreneurs need to instill a sense of belonging in workers. Entrepreneurs also
need to employ friendly supervision, cohesive work group, and team spirit and general
sound relations with employees. Workers also need professional associations to meet
their professional associations to meet their professional problems.

Another area of concern is self-esteem. In this case entrepreneurs should make use of
social recognition, job title, high status job and feedback from the job itself if employees
are to be motivated in their work.

Self actualization is one aspect that does motivate employees i.e. workers are motivated
by challenging job, opportunities for creativity, achievement in work and advancement in
the organisation and as such entrepreneurs should not that.

Herzberg’s two factor theory

Hygiene theory
He presents his tow factor theory of motivation which elaborates the differences between
higher and lower needs. This theory states that factors which create satisfaction at work
are those stemming from the intrinsic content of job e.g. recognition and responsibility,
meaning and challenge. These satisfy higher needs. These are called satisfiers or
motivators or growth factors. Another set of factors which entrepreneurs must take
cognizance of is dissatisfies or hygiene factors. These factors stem from the extrinsic job
context e.g. working conditions, pay, and supervision. These satisfy lower needs. An
important point to note in this theory is that as dissatisfaction stems from lower needs not
being satisfied, when these are satisfied, this only removes dissatisfaction and does not
increase motivation.

If hygiene factors did not reach a certain standard e.g. salary, working conditions, job
security, and poor supervision workers feel bad about their jobs and unhappy. Hygiene
factors are also called preventive factors. Positive motivation and a feeling of well-being
could only be achieved, not by just improving these hygiene factors but by improving
genuine motivators such as recognition, achievement responsibility, advancement and the
work itself.

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

Hygiene or Maintenance factors
Salary, job security, working conditions, Level of quality of supervision, company
Policy and administration, Interpersonal relations, The Dissatisfies

Motivation & job satisfaction

The satisfiers:
Sense of achievement, Recognition, Responsibility, Nature of work, Growth and
advancement, Opportunity of creativity

Motivators/growth factors

NB: The Motivation – hygiene theory of Herzberg is an extension of Maslow’s

Hierarchy. The emphasis in this theory is that entrepreneurs must consider both the
hygiene factors and the growth factors/motivators.

Importance of motivating employees

- Increased productivity
- Increased efficiency and effectiveness
- Good corporate image building
- Increased sales and profits
- Good customer relations
- Promotes team spirit (team work) or cooperation and support by employees
- Promotes entrepreneurship by employees that is innovativeness, creativity and
initiative ness resulting in the growth or expansion of the enterprise

ACTIVITY

1. List the four management functions.

2. Match the following activities with the appropriate management
function
a. monitoring to check whether a budget is being followed
b. deploying human resources to different departments
c. setting organizational goals and the mission statement
d. giving rewards to staff performing well?

3. State the role that is associated with each of the following statements

a. a manager representing his organisation at a special award

ceremony
b. resolving conflicts between 2 divisions of the same organisation
c. restructuring the organisation so that it becomes more
responsive to clients
d. making a presentation on the organisation
SUMMARY
Management is a process of deciding what to do and getting others to do it.
As such, it is important for the management to perform the management
functions (planning, leading, organising and controlling- PLOC) with
diligence so as to facilitate the accomplishment of set organizational goal.
Entrepreneurs should thus seek knowledge on how to be effective and
efficient in their various areas of operations considering the environments in
which they operate in. Thus management of business works shops, seminars
and other discussion and consultative forums can be organized to encourage
exchange of ideas. Appropriate management style should also be chosen
depending on the environment.
 CHAPTER 5

MARKETING
By the end of the study you must me able to:
 Define marketing
 Describe the marketing mix elements
 Apply the marketing mix to product and service situations
 Prepare a marketing plan

Marketing is the management process responsible for identifying,

anticipating and satisfying customer requirements profitably. (CIM)
There are many other definitions that expand on the CIM's own definition.
Here is what Dibb et al (2001) has to say:

Marketing consists of individual and organizational activities that

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

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

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

The marketing concept holds that the key to achieving organizational

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

Needs are basic human requirements such as food, clothing, shelter,

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

The Marketing Mix

The marketing mix refers to a set of marketing variables which a firm can
use to satisfy the needs of its target market. McCarthy calls them the 4Ps of
marketing. They are: price, promotion, product and place.
Marketing activities
The basic marketing mix offers us a useful framework within which to
discuss the relationship of
Marketing activities to other organizational functions.

 Product
(a) Product development and enhancement of physical products is usually
carried out in
conjunction with R&D and production. These often involve technically
minded people who
may have different attitudes and approaches when perceiving and solving
problems. With
regard to service marketing, there may be other kinds of technicality. For
example, if a firm
of solicitors wishes to provide independent financial advice, the very
demanding regulatory
regime governing such services is likely to be a key consideration in the
marketing of the
new service.
(b) Packaging refers to 'all the activities of designing and producing the
container for a
product'. (Kotler, 2003). Packaging serves various purposes and involves
several
considerations.
(i) Protection of product e.g. sturdy boxes for breakable products
(ii) Preservation of the product e.g. plastic bags to keep bread and cakes
fresh and
hygienic
(iii) Security of product e.g. small digital camera memory cards packaged in
large plastic
packs to deter shoplifters
(iv) Convenience. Packaging is designed to facilitate storage by supplier or
customer, as
Well as convenience of use e.g. different types of nozzles on drinks and
sauce
containers
(v) Branding e.g. the Coca-Cola bottle is a huge source of promotion for the
company
(vi) Profitability e.g. larger sized nozzles on tubes and bottles encourage
more use.
Larger sized cans or bottles usually encourage greater consumption.

 Place
Distribution decisions address the question of 'where do our customers want
to receive their goods or services?' This is an aspect where there has been
significant change and development, and there is now much more scope for
market decision making, especially with the advent of e-commerce. Place
decisions may also influence an organisation's globalization strategy. If
clients and/or customers have overseas locations it may be beneficial to set
up distribution facilities locally. The presence of overseas facilities enables
the organisation to extend its market coverage and global reach. It is
important to understand the structure of the distribution channel and the role
of the players within it. A key concept is channel captaincy, which refers to
the organisations that hold the most power within a channel and can drive
changes in it. In the past, for example, food manufacturers controlled the
retail food industry as they were fewer in number, and bigger in size, than
the supermarkets and other independent retailers. Supermarkets have since
become bigger and more successful, and can usually dictate terms to
manufacturers and other suppliers. Marketers are likely to be involved in
activities such as outlet planning, supply chain management, and route to
market decisions. They may be involved in order-processing, warehousing,
logistics,
stockholding and control, transport operations, delivery tracking and IT
systems development. They may also be involved in export operations and
the use of shipping and forwarding skills.

 Promotion
Promotion is, of course, the focus of a great deal of marketing attention and
might, with justification, be regarded as the marketing specialist's home turf.
Nevertheless, it does not take place in a vacuum. It must not promise what
cannot be delivered, it must work within budget (particularly where sales
promotion is concerned) and individual aspects of promotion must not
undermine the overall corporate image. It is important to remember the
product or service's Unique Selling Proposition (USP) or Basic Consumer
Benefit (BCB) and ensure that the message is in alignment with these. The
medium of communication must then match the message. Promotional tools
include advertisements, press releases, sales promotions, in-store
demonstrations, exhibitions, trade fairs and public relations.

 Price
Cost is a major consideration in price-setting and here the marketer must
utilize the expertise of the management accountant. Also associated with this
aspect of the mix is the whole topic of terms of sale: expert advice is
necessary if maximum protection is to be obtained against the customer who
does not or cannot pay. Factors influencing price include costs, competition,
customer expectations and business objectives.
Product Life Cycle

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

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

For the various stages of the cycle ,different objectives and strategies can [Link] are
digrammatically shown on the next page:

The purpose and content of the marketing plan

A marketing plan is a specification of all aspects of an organisation's
marketing intentions and activities. It is a summary document, providing a
framework that permits managers and specialists to undertake the detailed
work of marketing in a coordinated and effective fashion.
The creation of a good marketing plan is likely to be a time-consuming
exercise, since it should deal with both current circumstances and plans for
the future.
(a) It should be based on detailed knowledge of both the target market and
the company
involved.
(b) It should give sufficient detail of intentions to support the design and
operation of all
marketing-related activities
.
The marketing plan and corporate strategy
It is important to remember how the marketing plan fits into overall
corporate strategy. Students are often confused by the appearance of
environmental analysis in the marketing planning process and assume that
this means that the marketing plan is the same thing as the overall corporate
strategic plan. This may be true in some highly marketing-oriented
organisations, but it is not necessarily hence the marketing plan and the
corporate strategic plan are not the same thing. The difference is largely one
of scope: the corporate plan has to consider all aspects of the organisation's
business, while a marketing plan is principally about marketing activities.
The marketing plan is aligned with the corporate plan and supports it.
T FORWARD
What goes into the marketing plan?
There is no standard template or list of contents for a marketing plan.
Different organisations will find it
appropriate to consider different things at different times in their
development. We will look at one
possible detailed layout for a marketing plan in Section 3. In this section we
will look in general terms at
What is likely to appear in most marketing plans?

The marketing plan – an outline

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

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

The marketing plan in detail

1 Executive summary
It is common practice to place an executive summary at the beginning of the
marketing plan. Executive summaries are provided, as their name implies,
for the convenience of senior executives who require a fast overview in
order to avoid the time involved in detailed study. As a general rule, such
summaries should be confined to a brief exposition of important material.
(a) Background information that helps explain why particular proposals
have been made or
decisions taken
(b) A description of proposed action with an indication of timescale
(c) A summary of the aims or targets that are intended to be achieved
(d) An assessment of any wider implications of the proposed action
(e) A statement of the required investment, where appropriate
The executive summary for a marketing plan is likely to include material on
the following specific matters.
• Marketing research
• Target markets and segments
• The proposed marketing mix
• Sales forecasts

2 Situation analysis
Situation analysis involves consideration of both the environment and
internal factors. The environment can be divided into the macro-
environment, consisting of the six PESTEL elements, and the micro- or
market environment. Internal and environmental factors are summarized in a
SWOT analysis.
(a) The business environment. The operation of any business implies
interaction with its
environment and the first stage of the detailed planning process is likely to
be the collection
and analysis of environmental information. For this purpose, the business
environment is
often split into two parts.
FAST FORWARD
(i) The macro-environment may be analyzed into six elements.
• Political • Technological
• Economic • Ecological or 'green'
• Social • Legal
The acronym PESTEL may be used. PEST and STEP are also common,
when the legal environment is included under politics and so-called 'green'
issues are included under the social heading. Your syllabus uses PESTEL,
so that is what we will use in this Study Text. A marketing plan need not
include a detailed PESTEL analysis, but it should explain those aspects of it
that have affected its development.
Action Programme 1

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

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

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

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

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

4.2 Breakeven analysis

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

4.5 Controls
Control is vital if management is to ensure that planning targets are
achieved. The control process involves three underlying components.
– Setting standards or targets
– Measuring and evaluating actual performance
– Taking corrective action
(a) Performance measures. The data contained within the numerical
forecasts section of the
plan provides the raw material for performance measures. Mechanisms must
be put in
place for collecting information on actual results, so that comparisons can be
made and
control action taken. Overall performance is often judged by analyzing two
main indicators:
sales and market share.
(i) Sales analysis is based on the comparison of actual with budgeted
turnover, but
this is only the first stage. It is appropriate to delve deeper and consider the
effects
of differences in unit sales and selling price. Further analysis by product,
region,
customer and so on may be required.
(ii) Market share analysis. Market share is important to overall
profitability, and the
attainment of a given market share is likely to be an important marketing
objective.
Market share should always be analyzed alongside turnover, since the
growth or
decline of the market as a whole has implications for the achievement of
both types
of objective.
FAST FORWARDAST FORWARD
(b) Marketing organisation. Individual responsibilities within the overall
marketing plan should
be given and the persons responsible named. One example of a specific
responsibility is the
preparation of performance reports. Other roles will include that of overall
responsibility
(probably discharged by the Marketing Manager or Brand Manager),
management of
promotional effort and management of marketing research effort.
(c) Implementation milestones. Progress in implementing a programme can
be monitored by
the establishment of milestones and the dates by which they should be
achieved.
Marketing at Work
Examples for the launch of a new car might include:
• First delivery to show rooms
• First thousand sold
• Breakeven sales achieved
(a) Contingency planning. Events in the real world very rarely go
according to plan. It is
necessary for planners to consider problems that might arise and make
appropriate
preparations to deal with them. There are several requirements.
(i) The organisation must have the capability to adapt to new
circumstances. This will
almost certainly imply financial reserves, but may require more specific
resources,
such as management and productive capacity.
(ii) There is a range of possible responses to any given contingency. The
organisation
should consider its options in advance of needing to put them into action.
(iii) A prompt response will normally be appropriate. Achieving this
depends to some
extent on having the resources and having done the planning mentioned
above, but
It will also depend on a kind of organizational agility. In particular, decision-
making
processes need to be rapid and effective.
 CHAPTER 6

CUSTOMER CARE

Objectives
By the end of the unit you should be able to:
 Define customer care
 Discuss the tips of customer care
 Design a customer programme and charter

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

Ten tips for customer care

1. Reliability
- this refers to consistency of performance and dependability
- perform the service right the first time fulfill promises
- be impartial and avoid favouritism
- Be firm with friends and relatives as far as business transactions are concerned.

2. Responsiveness
- this refers to the willingness as well as readiness of the entrepreneur or his
employees in providing the services within reasonable time immediately if not
sooner

3. Competence
-This refers to the possession of the required skills and knowledge by those who
deliver the services to the customer. This will create confidence.

4. Accessibility
- this refers to the degree of approachability and ease of contact of the entrepreneur
or his employees
- drop what you are doing ignored to greet and serve customer

5. Courtesy
- This refers to politeness, respect, consideration and friendliness of your
organization’s contact such as receptionist, secretaries, telephonist, etc, they must
be polite and courteous at all times – remember, a smile goes a long way.

6. Communication
- keep your customer well informed in a language and style they understand
- it is important to hear and understand what your customers are saying
- communicate effectively with your suppliers as well

7. Credibility
- this refers to being trustworthy and faithful
- put customers at heart
- they should feel that he/she is given priority and should have the trust that any
order will be executed and received when expected

8. Security
- customer should be protected from danger, risk or doubt within the premises

9. Knowledge of Customer
- the entrepreneur should know the client specific requirements
- be able to recognize regular clients
- strive to provide individualized attention
- Understand what makes them buy is it need Price?

10. Tangibles
 - This could include the physical evidence (i.e. building, good handling, tools,
equipment, packages etc). This could also include the appearance of your
personnel
- employees must be neat, orderly and clean

Benefits/importance of customer care

- If customers are put first, the entrepreneur will be rewarded with new business
and increased profit margins and sales.
- Customer care creates new customers
- Constructive consumer dialogue enables the entrepreneur to know and understand
what the customers needs and wants
- It builds good relationships and loyalty with customers
- Can make passive customers become in violated participants (i.e. loyalty)
- Create corporate excellence
- Build good reputation and good image i.e. it is a tool for good corporate image
building
- Business can become a market driven entity as you get information on what your
customers need and want.

Perquisites of meeting Customers expectations

1) be courteous and tactful

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

Who gets to decide if a customer service is good?

1. customer service is a function of your customers perceptions not your standards in
other words, the customers gets to decide if he or she has received good services
- even though all of your standards may have been met if the customer does not feel
well served, your customer service is poor
- customer satisfaction is ultimately the result of the sum total of the customer’s
experience

2. Customer satisfaction is ultimately the result of the sum total of the customer’s
experience at your establishment.
- Customers come back to a place that has provided a pleasant experience for them.
Thus owners and managers need to focus not on tangible as ends themselves but
on how all the particulars combine to create a certain experience.
Prime examples of poor customer care
1. poor delivery and accessibility of services
2. poor quality and state of merchandise
3. existence of long queues of customers waiting to be served
4. dirty environment of business
5. failure in meeting client expectations

Dealing with unprincipled customers

- never show that customer is wrong or behaving badly
- always take it that he/she is right
- appreciate and understand at there should be some customer’s who visit your
business with hidden agenda and ulterior motives (i.e. competitors of those
interested in policing I’ve price control monitors
- make very attempt to deter their bad intentions by being upright in your dealings

You can defeat unprincipled customers by taking the following steps:

1. continue to show a good image of your business
2. smile when talking to customers
3. accept blunders where you can realize them promise to improve and make an apology
4. avoid arguing with customers
5. always hold your composure and avoid losing your temper in front of your customer

Building Customer Trust

From a customer’s point of view, there is probably no concept more important than trust.
How can you strengthen customer trust?
1. Keep your promises
2. Make promises that you can keep
3. do everything to keep the commitments you make
4. if you cannot fulfill the promises let the customer know
5. call back if you promise even if you don’t have the information the customer
is expecting
6. Following up on an order to be sure everything is okay.
7. Properly hold complaints all the time.
8. Make recommendations that are best for the customers.
9. Recommend a competitor when there’s a need that you can’t satisfy.
10. Make yourself available after the sale.

Creating Customer Comfort

Customer care is also defined as meeting needs and creating comfort. Meeting needs is a
given, creating comfort is a function of enabling the customer to feel a sense of control
when he/she is at your business. Customers feel in control when they know the drill i.e.
when they know how things work and how to get things done

Develop and maintain a customer charter

- Make sure that there is availability and visibility of both a mission statement and
customer charter. The customer’s charter will remind your workers always to
abide by its contents and will assure customers of their expectations of the
services and what move to take if they are not met. Your customers’ charter
 should indicate the standards of services to be delivered and the way in which the
worker will perform their duties

1. telephone
- number of rings before the telephone is answered are given
-

2. Enquires
- short turn around time
- follow up
- courtesy options offered to caller

3. Correspondence
- Correct
- Shorthorn around time
- Acknowledgement of receipt

4. Delivery deadlines met

Delays explained and apology given

5. Outgoing services
- automatic follow up
- customer feedback
- be sure that your customer’s charter informs clients about the availability of a
system of redress in case of grievances
 CHAPTER 7

RECORD KEEPING AND STOCK CONTROL

Objectives
By the end of the unit you should be able to:
 differentiate between bookkeeping and accounting
 keep records and control stock in a business
 interpret and apply basic financial statements

What does it mean when someone asks you for an account of something?
 Giving a report of some event/activity that has taken place.
This is the major objective and purpose of this business activity,
Accounting.

DIFFERENCE BETWEEN BOOKKEEPING AND

ACCOUNTING

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

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

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

The accounting process

It involves:
Recording Classifying Summarising Interpreting of

business activities capable of being expressed in monetary terms.

Users of accounting information

(i) Present and Potential Investors :they want to see whether or not
the business is profitable (viability of the business)
 (ii) Prospective buyers of the company: where to buy or not to buy
(iii) Lenders : Banks and Financial institutions ,when the owner of a
business wants to borrow money
(iv) Suppliers/Creditors: Whether it is safe to supply on credit and
analyse if they will be paid back their dues.
(v) Customers: they need to know if there will be a constant supply of
products from the business
(vi) Government/Taxman: for calculating tax payable by the business
(vii) Managers of the firm: for internal decision making
(viii) Employees: need to access their job security
(ix) General public

Source documents

Information used in the process of completing financial transactions is called

source documents. These can include invoices, receipts, credit and debit
notes, purchase orders, customer billings, bank statements etc. These are the
starting of any accounting process.

Source document

- Source documents are the documents from which original information to the books of
primary entry is obtained e.g. receipts, invoices, debit note, credit note and statement
of account
- Receipts are used by the entrepreneur or supplier when the transactions involve cash
e.g. where a customer tenders cash, a receipt may be written out. Below is a sample
of a receipt

Books of primary entry is obtained

Receipt 0023
Date: 25/02/04
Gobvu Manufacturing (Pvt) Ltd
P O Box 22

CHEGUTU
Telefax: 703301

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

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

The following is a sample of an invoice

Invoice 00214
Date: 26/02/04

Gobvu Manufacturing (Pvt) Ltd

P O Box 39
KWEKWE
Telefax: 055 50221

To: Makayepuva (Pvt) Ltd

Chuma street

MASVINGO

Tel: 039 62043

Item purchased Quantity Unit cost Total______

500ml super stick glue 500 $100.00 $50 000.00

less 5% discount if paid
within 30 days

Total $50 000.00

Debit Note is used to correct an undercharge on a customer’s account e.g. when the price
shown on the invoice is too low or when some items have not been shown. Sometimes a
second invoice is issued in this instance rather than a debit note.

Below is an example of a debit note

Debit Note
Supplier’s name & address
Supplier Ref:
Date:
Customer’s Name & Address
Debit Note No

Item description Quantity Unit price Total___________

Total to be debited:
Reasons for debit:

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

The following is a layout of a credit note

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

Item Description Quantity Unit price Total______

Total to be credited

Reason for credit:

Statement

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

Below are the layout and a specimen of a statement

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

Date Details Amount Balance_________

Balance remaining

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

Balance remaining $2 100.00

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

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

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

Order Note is a letter requesting goods from the supplier.

Below is a layout of an order note

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

TOTAL_________________

NB: customer ref maybe used as a special code number given to the customer to help the
supplier identify any previous dealings with that customer. If a letter is used instead of
an order form, these columns should still be used as part of the body of the letter so that
the order is clear and easy to understand.

Delivery Note is a list of items sent and the quantities of each item. It is sent by the
supplier for the customer to check carefully that the correct items and quantities have
been delivered and then sign. The delivery note only shows items and quantity. The
delivery note should be given a special number so that he or she can find his copy easily.

Below is the layout of Delivery Note

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

Item description Quantity___________

Customer’s signature………………_______________________________

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

Entrepreneurs should consider the following. When choosing a supplier: prices, quality,
delivery, customer service, location, terms of payment, discounts and business hours.

Appreciation of Books of Accounts

In business the entrepreneur should be able to appreciate books of accounts. These
include the books of original entry or prime entry and the ledger book. The books of
prime entry include the cashbook, purchases journal book, purchases returns book and the
sales returns book and the general journal book. The ledger book is the main book of
accounts.

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

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

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

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

E Gobvu cash book for the month of February 2011

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

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

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

Example: Mutsvedu (Pvt) Ltd

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

Mutsvedu D Purchase’s journal for the month of February 2011

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

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

Example: Mutsvedu (Pvt) Ltd

Mutsvedu D Sales Returns Journal for the Feb 2004

20/02 B Sali returned goods $2 000.00

22/02 T Tom returned goods $5 000.00

Date Details Folio Dr Cr

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

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

Example; Mutsvedu (Pvt) Ltd

01/02 Received an invoice of $100 000.00 for office furniture bought on credit form
Alice Mabinge
02/02 Bought stationary on credit from Alice Mabinge $10 000.00
 Date Details Folio Dr Cr
01/02 Office furniture 100 000.00
Alice Mabinge 100 000.00
02/02 Stationery 10 000.00
Alice Mabinge

The Ledger Book

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

The ledger is ruled as follows:

Dr Cr
Date Details Folio Amount Date Details Folio Amount

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

ACCOUNTING EQUATION
When an entrepreneur starts a business he supplies part of the resources
(Capital).He seeks assistance from other sources (Liabilities), so as to have
adequate resources .These resources are the assets of the business. At any
point of time the assets of any entity must be equal (in monetary terms) to
the total of equities. This can therefore be expressed as

ASSETS = CAPITAL + LIABILITIES

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

Account
It is a place where all information referring to a particular asset or liability or
capital is entered.
Business is not entirely carried out on cash basis, many of the things bought
when a company is established are not exhausted straight away e.g.
buildings and machinery. It is necessary therefore to have some method of
showing the financial position of the business from time to time and of
calculating the amount of profit which is available for the entrepreneur. This
is the purpose of a system of accounts.

Asset Accounts
These are the actual resources in a business and can include:
(i) Tangible/Fixed/Non Current assets :
 Buildings, Machinery ,Motor vehicles etc
(ii) Intangible/Current assets:
 Cash: coins and paper currency, money orders
 Bank: bank deposits and withdrawals, cheques
 Stock at hand
 Accounts receivables: goods and services sold on credit to
debtors which are being expected to be paid at an agreed time.
 Prepaid expenses: when an entrepreneur has made a payment in
advance, he has done himself a favour.

Liability Accounts
This is money owing for goods supplied to the business and can include:
(i) Long term /Non Current Liabilities
 Loans
(ii) Short term/Current Liabilities
 Accounts payable :credit purchases/Creditors
 Accruals: Expenses we still have to pay at the end of a financial
period e.g. rent payable, wages payable.
 Unearned revenue: this is when a product or service was paid
for in advance to us before we have supplied it e.g. unearned
wages, unearned rent
Appreciation of Books of Accounts
In business the entrepreneur should be able to appreciate books of accounts. These
include the books of original entry or prime entry and the ledger book. The books of
prime entry include the cashbook, purchases journal book, purchases returns book and the
sales returns book and the general journal book. The ledger book is the main book of
accounts.

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

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

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

E Gobvu cash book for the month of February 2011

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

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

Example: Mutsvedu (Pvt) Ltd

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

Mutsvedu D Purchases journal for the month of February 2011

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

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

Example: Mutsvedu (Pvt) Ltd

Mutsvedu D Sales Returns Journal for the Feb 2004

20/02 B Sali returned goods $2 000.00

22/02 T Tom returned goods $5 000.00

Date Details Folio Dr Cr

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

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

Example; Mutsvedu (Pvt) Ltd

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

Date Details Folio Dr Cr

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

The Ledger Book

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

The ledger is ruled as follows:

Dr Cr
Date Details Folio Amount Date Details Folio Amount

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

DOUBLE ENTRY SYSTEM

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

 Debit the receiver

 Credit the giver

Example 1

2010 Debit (Dr) Credit (Cr)

August Started business with $1000 cash Cash Account Capital Account
1
Paid $900 of the opening cash Bank a/c Cash a/c
2 into the bank
Bought goods on credit $78 from Purchases a/c [Link] a/c
4 [Link]
Bought a motor van by cheque Motor Van Bank a/c
5 $500 a/c
Bought goods for cash $55 Purchases a/c Cash a/c
7
Sold goods on credit $98 to [Link] a/c Sales a/c
10 [Link]
Returned goods to [Link] $18 [Link] a/c Purchases
12 Returns
Sold goods for cash $28 Cash a/c Sales a/c
19
Bought fixtures on credit from Fixtures a/c Kingston a/c
22 Kingston Equipment Company
 $150
[Link] lent us $100 paying us Bank a/c [Link]
24 the money by cheque
We paid [Link] his account [Link] a/c Bank a/c
29 by cheque $60
We paid Kingston Equipment Kingston a/c Bank a/c
31 Co. by cheque $150

Opening up accounts and closing them in the ledger

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

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

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

Capital a/c Cash 55

Bal c/d 1000Cash 1000

1000 1000 133 133
Bal b/d 133
Bal b/d 1000

Cash a/c
Capital 1000Bank 900
Sales 28Purchases 55 [Link] a/c
Bal c/d 73 [Link] 18 Purchases 78
1028 1028 Bank 60
Bal b/d 73 78 78

Bank a/c Motor Van a/c

Cash 900 [Link] 500 Bank 500 Bal c/d 500
Loan 100 [Link] 60 500 500
Kingston 150
Bal c/d 290 Bal b/d 500
1000 1000
Bal b/d 290

Purchases a/c
[Link] 78 Bal c/d 133 Sales a/c
Bal c/d 126 [Link] 98 Bal c/d 18 [Link] 18
Cash 28 18 18
126 126
Bal b/d 18
Bal b/d 126
Fixtures a/c
[Link] a/c Bank 150 Bal c/d 150
Sales 98 Bal c/d 98 150 150
98 98 Bal b/d 150
Bal b/d 98
Purchases Returns a/c

Loan- [Link] a/c

Bal c/d 100 Bank 100
100 100
Bal b/d 100
 Kingston Equipment a/c
Bank 150 Fixtures 150

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

Definition: A trial balance is simply a proof of the equality of debit and

credit balances in the accounts.

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

Trial Balance as at 31 August 2010

Dr Cr

Capital 1000
Cash 73
Bank 290
Purchases 133
Motor Van 500
Sales 126
[Link] 98
Purchases Returns 18
Fixtures 150
[Link] 100
1244 1244

The two sides are equal therefore the trial balance has balanced. This shows
that our transactions that we posted into the ledger are correct.

FINAL ACCOUNTS OF A SOLE TRADER

 Income Statement/Trading Profit and Loss Account

 Balance Sheet
Income Statement
The main reason people set up businesses is to make profits. Losses can
occur if the business becomes unsuccessful. The calculation of profit/loss is
the most important objective of the accounting function. The profits are
calculated by drawing up a special account called a Trading Profit and Loss
Account. The account is split into two sections, one in which the Gross
Profit is found and in the other, Net Profit is calculated
 Gross Profit-Calculated in the Trading Account .This is the excess of
sales over the cost of goods sold in the period.
 Net Profit-Calculated in the Profit and Loss Account. This is what is
left of the gross profit after all other expenses have been deducted.
 Expenses-The value of all the assets that has been used up to supply
goods and services and therefore obtain revenues.

To compile a Trading Profit and Los Account, one needs to have the Trial
Balance first.

Balance Sheet
After compiling the Trading Profit and Loss Account, the balances that
remain on the Trial Balance pertain to the Balance Sheet. These will usually
be balances for Assets, Liabilities and Capital.

A Balance Sheet is a record of the business Assets, Liabilities and Resultant

stockholders equity (Capital + Profit-Drawings) to depict a financial
situation on a specific date.

Example 2
The following is a Trial Balance of [Link] as at 30 September 2010.
Dr Cr
$ $
Stock 1 October 2009 2368
Carriage outwards 200
Carriage inwards 310
Returns inwards 205
Returns outwards 322
Purchases 11874
Sales 18600
Salaries and wages 3862
Rent 304
Insurance 78
Motor Expenses 664
Office expenses 216
Lighting and Heating 166
General expenses 314
Premises 5000
Motor Vehicle 1800
Fixtures and Fittings 350
Debtors 3896
Creditors 1731
Cash at bank 482
Drawings 1200
Capital 12636
33 289 33 289

Stock at 30 September 2010 was $2946.

Required:
Draw up a:
1. Trading Profit and Loss Account for the year ended 30 September
2010.
2. Balance Sheet as at 30 September 2010.

Trading Profit and Loss Account for the year ended 30 September 2010.

Sales 18 600
Less Returns inwards (205)
18 395

Less Cost of goods sold:

Opening Stock 2 368
Add Purchases 11 874
Less Returns outwards (322)
Add Carriage inwards 310
Less Closing Stock (2 946) 11 284
GROSS PROFIT 7 111

Less Expenses:
Carriage outwards 200
Salaries and Wages 3 862
Rent 304
Insurance 78
Motor Expenses 664
Office Expenses 216
Lighting and Heating 166
General Expenses 314 5 804
NET PROFIT 1 307

Balance Sheet as at 30 September 2010

Non Current Assets

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

Net Current Assets 5 593

Current Assets 7 324

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

Total Assets 12 743

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

12 743

CAPITAL STRUCTURE & CAPITAL GEARING CONCEPT

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

When people are talking refer to capital structure they are most likely
referring to a company’s debt-to-equity ratio, which provides insight into
how risky a company is. Usually a company more heavily financed by debt
(debt capital) poses greater risk as this company is relatively highly levered.
A healthy proportion of equity capital as opposed to debt capital in a
company’s’ capital structure is an indication of financial fitness.

 Equity Capital: in a company’s’ capital structure, equity

consists of a company’s common and preferred stock plus
retained earnings, which are summed up in the shareholders
equity account in the balance sheet.

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

’capitalisation should consist of short term borrowings (notes
payable), the current portion of long term debt (interest), long
term debt, 2/3 of the principal amount of operating leases and
redeemable preferred stock.

Debt-Equity relationship
Shrewd use of leverage (debt) increases the amount of financial resources
available to a company for growth and expansion. The assumption is that
management can earn more on borrowed funds than it pays in interest
expense and fees on these funds.

A company considered too highly leveraged (too much debt versus equity)
may find itself restricted in action by its creditors and /or may have its
profitability hurt because of paying high interest charges.

A company’s’ debt-equity relationship varies according to the industry it

falls, line of business and stage of development. However common sense
tells us that generally no matter what kind of business or level of
development it is at, these companies should have lower debt and higher
equity levels. This status reflects a very positive sign of investment quality.

Capital Ratios and indicators

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

 Debt ratio: total liabilities

Total assets.

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

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

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

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

Capital gearing concept

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

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

Once sufficient capital is raised, the outstanding amount can be

borrowed. This is called a geared deal, with gearing simply being the
amount borrowed in relation to the total set-up amount of the business.

In an ideal world, the business owner is able to contribute enough own

capital to secure a gearing ratio of 50%, ensuring that the repayments are
generally manageable. If a prospective business owner is able to put down
100% of the cost, he has the option of not having any gearing or perhaps
investing in a business worth twice as much, again with a 50% gearing ratio.
Investing in a larger business creates a possibility of better future returns.

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

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

Finance institutions are generally a bit more lenient when it comes to

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

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

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

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

Borrowed funds

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

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

ACCOUNTING RATIO ANALYSIS

The analysis of Accounting statements help in the diagnosis of trends which
indicate the magnitude , timing, or risk ness of the business’s future cash
flows. Ratios compare accounting variables and they are drawn from both
the Income Statement and Balance Sheet. Ratios need very careful handling.
They are very useful if used correctly and very misleading otherwise.

1. Liquidity Ratios: Indicate a business’s ability to pay its short term

liabilities at the correct time. Failure to do so could result in the
shutting down of the business. When a company is able to pay its
debts as they fall due, that company is said to be liquid.

 Current Ratio = Current Assets

Current Liabilities

This compares assets which will become liquid within 12

months with liabilities which will be due for payment in the
same period.
 A current ratio of 2 is standard. Ratio of 1 or less is considered
low and indicative of financial difficulties. Very high rates
suggest excess current assets that are probably having an
adverse effect on the long term profitability of the business. If it
is more than 2 that means that we are too liquid, so we need to
reduce or work on one of them.

 Quick/Acid Test Ratio = Current Assets - Stock

Current Liabilities

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

without using stock.

A ratio less than 1 is not alarming a very high ratio suggests

excess cash, a credit policy that needs revamping or a change
needed in the composition of current vs. long term assets. A
ratio of 1.5 means you are holding up too much stock or too
much money. The ideal ratio should be less than [Link] it is too
low then you need loosen up your credit policies and increase
your debtors.

2. Debt Management Ratios: Deal with the amount of debt in the

business capital structure and its ability to service the legal
obligations.

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

 Total Debt to Total Assets Ratio = Total Debt

Total Assets

Indicates how much of the business funds are being supplied by

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

A high ratio indicates the use of financial leverage to magnify

earnings, while a low ratio indicates relatively low use of
creditors’ funds. E.g. manufacturing and mining companies
need to use more of creditors’ funds because can not afford to
buy all needed machinery at once. Their products are high
priced and can pay back their obligations wit time.
  Days Purchases Outstanding = Credit Purchases
Purchases/365

Indicates how prompt a business is at paying its bills.

 Times Interest Earned Ratio = Earnings before

Interest(EBIT)
Interest

Indicates the ability to meet the interest requirements on both

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

A high ratio indicates a safe situation but that perhaps not

enough financial leverage is being used. A low ratio may call
for immediate attention; more sales will be needed to generate
income.

 Fixed charges coverage Ratio = EBIT + Lease expenses

Interest + Lease expenses

Provides a more comprehensive picture of the business’s ability

to meet its legal financial requirements.

A high ratio is more desirable than a low one.

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

 Net Profit Margin = Net Profit

Net Sales

This ratio is used to measure the efficiency of management.

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

 Return on Investment (ROI) = Net Profit

Total Assets

It indicates the ability of the business to earn satisfactory

returns on all assets it employs. The higher the rate the better
because provides some indication of future growth prospects.
  Return on Equity (ROE) = Net Profit or Net Profit
Capital Market value of
Equity

It indicates return on the owners’ investment in the business. It

is an accounting measure on how well management is
performing

4. Asset Management Ratios: They indicate how efficiently the

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

 Days Sales outstanding = Credit Sales

Sales/365

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

The ratio indicates how effective the credit granting and

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

 Inventory turnover Ratio = Cost of goods Sold

Average stock

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

inventory/stock.

The lower the Inventory turnover the higher the cash

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

 Long Term Asset Turnover Ratio = Sales

Non current Assets
 It provides an indication of a business ability to create sales
based on long term asset base. The ratio provides an indication
of how effective the business in using its assets. The higher the
ratio, the more effective the utilisation of assets. A low ratio
indicates that the marketing effort requires attention.

 Total Asset Turnover Ratio = Sales

Total Assets

It is an indication of the business ability to generate sales in

relation to its total asset base. A high turnover normally reflects
good management, whereas a low ratio suggests the need to
reassess the overall strategy of the business, marketing effort
and the capital expenditure programme.

STOCK CONTROL

Why do we control stock?

 To maintain stock levels that will minimise the Total Stock Cost.

Objectives of Inventory Management

A firm wishing to maximise profits will have the following objectives:
 Maximise customer service
 Low cost plant operation
 Minimum inventory investment

Maximise customer service

It describes the availability of items when needed and it is a measurement of
inventory management effectiveness. The customer in this case can be either
one of the following; a purchaser, distributor, another plant or work station
where the next operation is to be performed. Some measures of customer
service are percentage of orders shipped on schedule, percentage of line
items shipped on schedule and order days out of stock. Safety stock is
essential in cases of uncertainty so as not to disappoint your customers.

Low cost plant operation

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

Minimum inventory investment

Batching economies in procurement shipments e.g. truckloads can
reduce/minimise the amount of money you use in inventory transportation
and carrying costs.

METHODS OF STOCK CONTROL

To maintain effective control over stock, it is necessary to determine:
 What should be the maximum and minimum stocks
 What may be regarded as a standard order for a particular commodity
and
 The point at which a further supply should be ordered.

There are several methods for controlling stock; you may opt for one method
or a mixture of two or more if you have various types of stock.

(i) Just in Time (JIT)

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

(ii) Batch control/2 Bin System

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

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

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

(iii) Economic Order Quantity(EOQ)

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

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

holding too much or too little stock.

EOQ formula: Q = 2DS

C

Where Q=Quantity ordered at each order point

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

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

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

 Costs which decrease as the size of the order are

increased.
a. Purchase price (quantity discounts)
b. Cost of placing an order
c. Stock-out costs e.g. lost contribution through lost
sale and cost of production stoppages

 Costs which tend to increase as the size of the order is

increased.
a. Cost of storage
b. Charges attributable to storage e.g. interest on
investment, insurance, damage, obsolescence, and
cost of warehouse space.

(iv) Stock Review

In this method you have regular reviews of stock. At every
review you place an order to return stocks to a predetermined
level.

(v) First in First Out(FIFO)

This system ensures that perishable stock is used efficiently so
that it does not deteriorate. Stock is identified by date received
and moves on through each stage of production in strict order

Stock Taking

- Stocktaking is an essential tool in checking that the stock records are accurate. There
are several reasons why the actual amount of items fails to tally or agree with the
stock records.
- Stock taking is simply defined as the physical counting or checking of the stock
items. The physically counted stock items may fail to agree with the stock records
because
(a) The items were stolen or damaged and a record was not made
(b) Goods were bought/sold but a record was to made
(c) Sales or purchases have been recorded incorrectly

How to carry out a stock take

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

Below is a specimen of a stocktaking list

Stock taking list

Item Stock take Stock card Difference

Eversharp pen 1 000 1 150 -150

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

As shown on the stock list, during the stock take there were 150 less of ever-sharp pens
and 50 more than recorded on the stock cards. The anomalies or differences should be
corrected on the stock card.
 CHAPTER 8

COSTING AND PRICING

OBJECTIVES
By the end of this unit you should be able to:

Define the following costing terms

 Costing
 Costs
 Direct costs
 Direct labour
 Direct expenses
 Indirect costs

 Calculate total costs per item

 Discuss the importance of costing to the entrepreneur
 Define pricing
 Calculate prices of products
 Discuss the pricing factors

Definition of costing terms

Costing
This is the method or way of calculating the total costs of making or selling a product or
providing a service

Costs
These are all the money that the business spends to make and sell its products or services

Direct Costs
These relates to all costs that are directly related to the products or services that the
business makes or sells. There are two types of direct costs namely direct material costs
and direct labour costs.

Direct Material costs

- These are all the money that the business/entrepreneur spends on the parts and
materials that become part of or are directly related or linked to the final product or
service that it/he/she makes or sells.
- NB: for a retailer’s or wholesalers, the costs of buying goods to resell are the direct
material costs. To be considered or counted as direct material costs, the amount of
material must be easy to calculate and the cost of the material must be big enough to
add a considerable amount to the total direct material costs.
 Direct labour costs
- These are all the money that the business or entrepreneurs spends on wages, salaries
and benefits for the people who are directly involved in the production of its or
his/her products or services
- The time spent on making the product must be easy to calculate and the cost of the
direct labour must be big enough to add a considerable amount to the total direct
labour costs. Retailers and wholesalers do not have employees working directly in
making products, so they do not have any direct labour costs. For retailers and
wholesalers, all salaries and wages are indirect costs.

Direct expenses
- These are any expenses directly related to the production of the final product e.g.
delivery costs which relate only to delivery or raw materials used in production of one
product, hiring of a machine which is only used on one product.

Indirect costs
- These are all other costs that the entrepreneur/business incurs in running the business
e.g. rent, interest, electricity, and salaries of supervisor, managers, accounts clerks,
secretary and other administration expenses. Indirect costs are also known as
overheads or expenses.

Calculate total cost per item

- Costing for a manufacturing or service operator. When calculating the cost of
producing an item, the entrepreneur should ensure that all costs are included. That is
direct and indirect costs. The entrepreneur must therefore, calculate the direct
maternal cost, direct labour and direct expenses of producing the item and then add a
proportion of the indirect costs to find the TOTAL COST of producing the item.
- Formula: Total Cost = Direct Cost + Indirect Cost
- Before we calculate the total cost per item, it is important to have the costing
processes:
- Costing Process Where More Than One Product Is Produced

STEP I
Direct Material Direct labour cost: Direct Direct Cost
Cost: - Add the - (hrs per item x Expense per Item
cost of raw + number of workers + =
materials used to x money
produce one
product item

STEP II
Indirect Cost per year

Add up all the indirect costs for the year

Indirect Cost per item:

Total Indirect costs per year
Total number of items per year
STEP III Total cost per item:

Direct cost per item + indirect cost per item

NB: In both costing processes, costs per item may be calculated using a month as the
time factor instead of a year that is “Instead of Indirect cost per year divided by Total
number of items per year” the Entrepreneur may use, “Indirect cost per month divided by
number of items per month.

Costing calculations in detail (Manufacturer or service operator)

Stage I: Calculate Direct Material Costs

The entrepreneur should calculate the costs of all material
 That become part of or are directly related to the product or service
 That are easy to calculate and have a big enough cost to be counted

Stage II: Calculate Direct Labour Costs

 That is work out the costs of wages, salaries and benefits for the employees who
work directly in the production of the product or service

Stage III: Calculate Indirect Costs

 These are all other costs that the business incurs per month such as rent,
electricity, insurance, depreciation, water and so on.

Costing calculations where not more than one product is produced.

Exhibit
The entrepreneur – carpenter specializes in the manufacture of tables and has the
following details for costing. Calculate the total cost of one table.
Materials used: Timber 2 000.00
Nails 1 000.00
Varnish 500.00
Glue 500.00

One (1) worker takes 5 hours to produce one item. The carpenter is paid $1 000 per hour.
Other costs per month: Rent $ 5 000.00
Electricity $ 500.00
Other wages $10 000.00
Telephone $ 2 000.00
Transport $ 2 000.00

100 items are produced each month

Answer:
Direct Materials: Timber $2 000.00
Nails $1 000.00
 Varnish $ 500.00
Glue $ 500.00
$4 000.00 (Direct Material/Cost)

Direct Labour: 1 x 5 hours/item x $1000/hr = $5000.00

Indirect Cost/item: Rent $ 5 000.00

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

Indirect Cost/item: $19 500.00

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

NB: There are not direct expenses

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

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

ii) The entrepreneur produces desks and uses the following:

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

Direct expenses $5 000.00

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

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

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

Materials $50 000/item
Indirect costs $2 000 000/year
40 000 items are produced per year
Workers take 2 hours to produce 1 (one) item. Calculate the total cost of product item.

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

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

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

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

Material Dress Trousers

Fabric $800.00 $1 000.00

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

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

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

Answer:
Direct costs:

1st calculate direct material cost:

Materials Dress Trousers

Fabric $800.00 $1 000.00

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

2nd calculate direct labour cost

Dress: 2 workers x 4hrs x $2 000.00
= $16 000.00 per dress
Trousers 2 workers x 4 hours x $2 000.00
= $24 000.00 per pair of trousers

3rd Total Direct Cost:

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

Trousers: $1 600.00 + $24 000

= $25 600.00 per pair of trousers

4th calculate indirect costs: Rent $6 000 000.00

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

5th calculate production hours per year

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

6th indirect cost per hour:

Formula: indirect cost/year

Production hrs/yr

= 1 080 000/yr
4 000 hrs/yr

= $270/hr

7th calculate indirect cost per item:

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

= $ 1 660.00/dress

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

= $ 3 240.00/pair

8th Total cost: Dress: $1 300.00 + $16 000.00 + $1 660.00

= $18 960.00

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

= $28 840.00

Further Questions

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

Materials Skirt Dress

Fabric $2 000.00 $3 000.00

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

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

Indirect costs per year:

Rent $600 000.00

Electricity $360 000.00
Transport $240 000.00

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

Costing for a retailer or wholesaler

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

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

Total cost = Direct Material Cost + Indirect cost

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

The direct material costs of retailers and wholesalers take the form costs of buying goods.
The Indirect costs of the retailers and wholesalers are rent, electricity, insurance,
depreciation and so on.

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

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

It is calculated as: Profit (P)______ x 100%
Selling Price (SP
Note that Profit = Selling Price – Cost

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

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

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

Margin = 50 (Profit)______
250 (Selling Price)
= 1/5 as a fraction /25% as percent

Further Questions
a) The entrepreneur makes Dresses and skirts and uses the following:

Material Dress Skirt

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

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

Rent $600 000.00

Electricity $240 000.00
Other wages $ 30 000.00

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

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

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

Two (2) workers take 6 hours to produce product ‘A’ and 10 hours to produce product
‘B’. The workers are each paid $1 000 per hour. The indirect costs are 200 000 per year.
Each worker works for 50 hours a week and 50 weeks a year.

Find the profit and selling price of each product, if the products are marked up 50%.

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

a) Customers

The business is expected to carry out a survey to determine how much customers are
prepared to pay for the product. The selling price should not be higher than what
customers are prepared to pay.

b) Competitors
The entrepreneur should carry out competitor’s analysis to determine the prices of
competitors. If the entrepreneur sets higher prices than its competitors, he/she will lose
customers to competitors.
Customers are economic beings who always choose the cheapest (or best value for
money) products.
As such, the highest selling price should be equal to or less than the price charged by
competitors.

c) Cost and Profit

The entrepreneur must consider the costs incurred in producing the product or the costs
that the business is going to incur in producing the product. For the business to make a
profit the entrepreneur must set his/her selling price higher than the costs incurred.

NB: For a successful entrepreneur the lowest price = cost + profit need and the highest
price = how much competitors charge or customers will pay, which ever is lower.

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

 Cost based pricing includes cost-plus pricing, breakeven pricing and value-based
pricing. Break even pricing and value-based pricing.

 Cost-plus pricing is adding a standard mark to the cost of the product. Break
even pricing (target profit pricing) is setting price to break even on the costs of
making and marketing a product or setting price to make a target profit. Value
based pricing is setting price based on buyer’s perceptions of value rather than on
the seller’s cost.

 Value pricing is offering the right combination of quantity and good service at a
fair price.
  Competition based pricing is setting prices based on the prices that competitors
charge for similar products. Consumers naturally base their judgments of a
product’s value on the prices that competitors charge for similar products. One
form of competition based pricing is going rate pricing, in which a firm bases it’s
price largely on competitors’ prices with less attention paid to it’s own costs or to
demand. The firm might charge the, more, or less than its major competitors.
Another competition based pricing form is sealed-bid pricing where the entrepreneur
bases his/her price on how he/she thinks competitors will price rather than it’s own costs
or on the demand.

 Skimming Pricing comes into being when the entrepreneur sets a high price for a
new product to skim maximum revenues layer by buyer from the segments
willing to pay the high price. The firm makes fewer but more profitable sales.

 Market penetration pricing is when the entrepreneur sets a low price for a new
product in order to attract a large number of buyers and a large market share.
Discount and allowance pricing includes cash discount, quantity discount,
functional discount (trade discount) and seasonal discount.
 CHAPTER 9

BUSINESS GROWTH
Objectives
By the end of this study unit you must be able to;
 define business growth
 distinguish internal from external growth
 distinguish a merger from an acquisition
 Use various business strategic analysis tools and appreciate their
limitations.

Introduction
Business growth means an increase in size of an organization. Size covers
aspects such as operational capacity, number of employees and capital
among other things. Growth is a natural outcome for any positively
performing organization. It can either be organic or external. Organic growth
is when a firm grows on its own efforts, resources and by ploughing back
profits. Organic growth occurs when a business combines its resources with
those of another business. The result will either be a merger or takeover
(acquisition).

Important terms
  Merger-This is when two business organizations combine their
shareholding and fixed assets to become one business entity.
 Acquisition-This is when one business takes over the shareholding
and assets of another.

Internal growth
Internal business growth can best be understood by use of the Ansoff
Product/market matrix.

Ansoff Product and M ar ke t M atr i x

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

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

grow depend on whether it markets new or existing products in new or
existing markets.

The output from the Ansoff product/market matrix is a series of suggested

growth strategies that set the direction for the business strategy. These are
described below:

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

Market penetration seeks to achieve four main objectives:

• Maintain or increase the market share of current products – this can be
achieved by a combination of competitive pricing strategies, advertising,
sales promotion and perhaps more resources dedicated to personal selling

• Secure dominance of growth markets

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

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

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

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

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

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

• New geographical markets; for example exporting the product to a new

country

• New product dimensions or packaging: for example

• New distribution channels

• Different pricing policies to attract different customers or create new

market segments

Product development
Product development is the name given to a growth strategy where a
business aims to introduce new products into existing markets. This strategy
may require the development of new competencies and requires the business
to develop modified products which can appeal to existing markets.

Diversification
Diversification is the name given to the growth strategy where a business
markets new products in new markets.
This is an inherently more risk strategy because the business is moving into
markets in which it has little or no experience.

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

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

BUSINESS PORTFOLIO ANALYSIS

A business portfolio is a collection of businesses and products that make up
a company. The best business portfolio is one that fits the company's
strengths and helps exploit the most attractive opportunities.

The company must:

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

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

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

The BCG Model

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

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

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

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

 STARS(high growth and high market share)

High growth rate requires high levels of investments to cope with

competitors in the markets. This can cause significant cash outflows from
the business. High market share should provide cash for these investments.
Cash generated from operations is to be re-invested into the business.

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

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

This is the main cash generating unit for the business.

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

 QUESTION MARK(high growth rate/low market share)

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

 DOG (low growth rate/ low market share)

It does not provide any growth to business either way.

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

Using the BCG Box to determine strategy

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

Conventional strategic thinking suggests there are four possible strategies

for each SBU:

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

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

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

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

LIMITATIONS OF THE BCG MATRIX

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

CHAPTER 10

RISK MANAGEMENT

Objectives
By the end of the topic students should be able to:
 Define risk
 Define risk management
 Assess risk
 Identify risk
 Outline principles of risk management
Example of risk management: A NASA model showing areas at high risk
from impact for the International Space Station.

Risk management is the identification, assessment, and prioritization of

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

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

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

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

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

Risk management also faces difficulties in allocating resources. This is the

idea of opportunity cost. Resources spent on risk management could have
been spent on more profitable activities. Again, ideal risk management
minimizes spending and minimizes the negative effects of risks.

Method
For the most part, these methods consist of the following elements,
performed, more or less, in the following order.

1. identify, characterize, and assess threats

2. assess the vulnerability of critical assets to specific threats
3. determine the risk (i.e. the expected consequences of specific types of
attacks on specific assets)
4. identify ways to reduce those risks
5. prioritize risk reduction measures based on a strategy

Principles of risk management

The International Organization for Standardization (ISO) identifies the
following principles of risk management

Risk management should:

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

Process
According to the standard ISO 31000 "Risk management -- Principles and
guidelines on implementation," the process of risk management consists of
several steps as follows:

Establishing the context

Establishing the context involves:

1. Identification of risk in a selected domain of interest

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

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

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

company or the weather over an airport.

 Problem analysis- Risks are related to identified threats. For example:

the threat of losing money, the threat of abuse of privacy information
or the threat of accidents and casualties. The threats may exist with
various entities, most important with shareholders, customers and
legislative bodies such as the government.

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

The chosen method of identifying risks may depend on culture, industry

practice and compliance. The identification methods are formed by
templates or the development of templates for identifying source, problem or
event. Common risk identification methods are:

 Objectives-based risk identification Organizations and project

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

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

The fundamental difficulty in risk assessment is determining the rate of

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

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

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

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

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

normal feature of business operations and modify mitigation measures.

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

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

business area)

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

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

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

Potential risk treatments

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

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

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

Risk avoidance

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

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

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

Acknowledging that risks can be positive or negative, optimizing risks

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

Modern software development methodologies reduce risk by developing and

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

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

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

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

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

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

Methods of transferring

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

BOOT CONTRACT ( Build Own Operate and Transfer)

ROT (Refurbish Operate and Transfer)

PPP ( Public Private Partnership )

Insurance

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

-Indirect consequential loss

Legal liability

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

Individual Cover

This is usually a response measure undertaken by an individual through such

measures as taking medical aid scheme, Life assurance, employment cover,
e.t.c

Group Cover

This is undertaken mainly when there are several people undertaking

business within the same entity e.g. in a partnership, cooperative e.t.c

Create a risk management plan

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

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

According to ISO/IEC 27001, the stage immediately after completion of the

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

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

Review and evaluation of the plan

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

Risk analysis results and management plans should be updated periodically.

There are two primary reasons for this:

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

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

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

Prioritizing the risk management processes too highly could keep an

organization from ever completing a project or even getting started. This is
especially true if other work is suspended until the risk management process
is considered complete.

It is also important to keep in mind the distinction between risk and

uncertainty. Risk can be measured by impacts x probability.
Areas of risk management
Enterprise risk management

In enterprise risk management, a risk is defined as a possible event or

circumstance that can have negative influences on the enterprise in question.
Its impact can be on the very existence, the resources (human and capital),
the products and services, or the customers of the enterprise, as well as
external impacts on society, markets, or the environment. In a financial
institution, enterprise risk management is normally thought of as the
combination of credit risk, interest rate risk or asset liability management,
market risk, and operational risk.

In the more general case, every probable risk can have a pre-formulated plan
to deal with its possible consequences (to ensure contingency if the risk
becomes a liability).

From the information above and the average cost per employee over time, or
cost accrual ratio, a project manager can estimate:

 The cost associated with the risk if it arises, estimated by multiplying

employee costs per unit time by the estimated time lost (cost impact,
C where C = cost accrual ratio * S).
 the probable increase in time associated with a risk (schedule variance
due to risk, Rs where Rs = P * S):
o Sorting on this value puts the highest risks to the schedule first.
This is intended to cause the greatest risks to the project to be
attempted first so that risk is minimized as quickly as possible.
o This is slightly misleading as schedule variances with a large P
and small S and vice versa are not equivalent. (The risk of the
RMS Titanic sinking vs. the passengers' meals being served at
slightly the wrong time).
 the probable increase in cost associated with a risk (cost variance due
to risk, Rc where Rc = P*C = P*CAR*S = P*S*CAR)
o Sorting on this value puts the highest risks to the budget first.
o See concerns about schedule variance as this is a function of it,
as illustrated in the equation above.

Risk in a project or process can be due either to Special Cause Variation or

Common Cause Variation and requires appropriate treatment. That is to re-
iterate the concern about external cases not being equivalent in the list
immediately above.

Risk management activities as applied to project management

In project management, risk management includes the following activities:
  Planning how risk will be managed in the particular project. Plans
should include risk management tasks, responsibilities, activities and
budget.
 Assigning a risk officer - a team member other than a project manager
who is responsible for foreseeing potential project problems. Typical
characteristic of risk officer is a healthy skepticism.
 Maintaining live project risk database. Each risk should have the
following attributes: opening date, title, short description, probability
and importance. Optionally a risk may have an assigned person
responsible for its resolution and a date by which the risk must be
resolved.
 Creating anonymous risk reporting channel. Each team member
should have possibility to report risk that he/she foresees in the
project.
 Preparing mitigation plans for risks that are chosen to be mitigated.
The purpose of the mitigation plan is to describe how this particular
risk will be handled – what, when, by who and how will it be done to
avoid it or minimize consequences if it becomes a liability.
 Summarizing planned and faced risks, effectiveness of mitigation
activities, and effort spent for the risk management.

Risk management for megaprojects

Megaprojects (sometimes also called "major programs") are extremely

large-scale investment projects, typically costing more than US$1 billion per
project. Megaprojects include bridges, tunnels, highways, railways, airports,
seaports, power plants, dams, wastewater projects, coastal flood protection
schemes, oil and natural gas extraction projects, public buildings,
information technology systems, aerospace projects, and defence systems.
Megaprojects have been shown to be particularly risky in terms of finance,
safety, and social and environmental impacts. Risk management is therefore
particularly pertinent for megaprojects and special methods and special
education have been developed for such risk management.

Risk management of Information Technology

Information technology is increasing pervasive in modern life in every

sector.

IT risk is a risk related to information technology. This relatively new term

due to an increasing awareness that information security is simply one facet
of a multitude of risks that are relevant to IT and the real world processes it
supports.

A number of methodologies have been developed to deal with this kind of

risk.
Risk management and business continuity
Risk management is simply a practice of systematically selecting cost
effective approaches for minimizing the effect of threat realization to the
organization. All risks can never be fully avoided or mitigated simply
because of financial and practical limitations. Therefore all organizations
have to accept some level of residual risks.

Whereas risk management tends to be preemptive, business continuity

planning (BCP) was invented to deal with the consequences of realized
residual risks. The necessity to have BCP in place arises because even very
unlikely events will occur if given enough time. Risk management and BCP
are often mistakenly seen as rivals or overlapping practices. In fact these
processes are so tightly tied together that such separation seems artificial.
For example, the risk management process creates important inputs for the
BCP (assets, impact assessments, cost estimates etc.). Risk management also
proposes applicable controls for the observed risks. Therefore, risk
management covers several areas that are vital for the BCP process.
However, the BCP process goes beyond risk management's preemptive
approach and assumes that the disaster will happen at some point.

Risk communication
Risk communication is a complex cross-disciplinary academic field.
Problems for risk communicators involve how to reach the intended
audience, to make the risk comprehensible and relatable to other risks, how
to pay appropriate respect to the audience's values related to the risk, how to
predict the audience's response to the communication, etc. A main goal of
risk communication is to improve collective and individual decision making.
Risk communication is somewhat related to crisis communication.

Bow tie diagrams

A popular solution to the quest to communicate risks and their treatments

effectively is to use bow tie diagrams. These have been effective, for
example, in a public forum to model perceived risks and communicate
precautions, during the planning stage of offshore oil and gas facilities in
Scotland. Equally, the technique is used for HAZID (Hazard Identification)
workshops of all types, and results in a high level of engagement. For this
reason (amongst others) an increasing number of government regulators for
major hazard facilities (MHFs), offshore oil & gas, aviation, etc. welcome
safety case submissions which use diagrammatic representation of risks at
their core.

Communication advantages of bow tie diagrams:

  Visual illustration of the hazard, its causes, consequences, controls,
and how controls fail.
 The bow tie diagram can be readily understood at all personnel levels.
 "A picture paints a thousand words."

Seven cardinal rules for the practice of risk communication

(As first expressed by the U.S. Environmental Protection Agency and
several of the field's founders

 Accept and involve the public/other consumers as legitimate partners.

 Plan carefully and evaluate your efforts with a focus on your
strengths, weaknesses, opportunities, and threats.
 Listen to the public's specific concerns.
 Be honest, frank, and open.
 Coordinate and collaborate with other credible sources.

CHAPTER 11

LEGAL REQUIREMENTS

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

Taxation

To tax is to impose a financial charge or other levy upon a taxpayer (an

individual or legal entity) by a state or the functional equivalent of a state
such that failure to pay is punishable by law.

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

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

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

Exemption from VAT

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

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

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

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

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

Labour Legislation

The labour legislation is provided for by the labour relations Act, Chapter
28:01. The purpose of the Act is to advance social justice and democracy in
the work place.
1. Giving effect to the fundamental rights of employees provided for and
part II of the Act.
2. Provide a legal framework within which employees and employers
can bargain collectively for the improvement of conditions of
employment.
3. the promotion of fair labour standards
4. The promotion of the participation by employees in decisions
affecting their interest in the work place.
5. Securing the just, effective and expeditious resolution of disputes and
unfair labour practices

Rights of Employees
1) Employees are entitled to membership of trade unions and
workers committees. Any employee as between himself and his
employer has the right to be a member or an officer of a trade
union.
2) Prohibition of forced Labour-excludes the
 Any labour required by way of parental discipline
 Any labour required by virtue of an enactment during a
period of public emergency or in the event of any other
emergency or disaster that threatens the wellbeing of
the community
 Any labour

3) Protection against discrimination

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

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

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

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

Functions of Workers Committee

1) Represent the employees concerned in any matter affecting their
rights and interest
2) Negotiate with employer concerned a collective bargaining agreement
of the employees concerned
3) Recommend collective job action to the employees concerned
4) Where a works council is or is to be constituted at any work place,
elect some of its members to represent employees on the works
council.
EFFECTS OF COLLECTIVE BARGAINING
Every collective bargaining agreement which has been negotiated by a
workers committee shall be referred by the workers to the employees and the
trade union concerned and if approved by the trade union and more than
50% of the employees, shall become binding on the employer and the
employees concerned.

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

FUNCTIONS OF WORKS COUNCIL

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

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

CONTRACTS
Employment contract
The essentials are simple to state i.e. the employee lets his services of a
defined nature to the employer in exchange for a fixed or ascertainable
remuneration and until there is agreement on these two points the contract is
not complete
- By entering into the service of the employer the employee subjects
himself to the employer’s control.
GENERAL CONTRACTS-
- A working definition of a contract is an agreement which is or is
intended to be enforceable at law. It is therefore important that an
agreement be there before a contact come into existence. Agreement
by consent, true agreement, a meeting of minds, a coincidence of the
wills, consensus ad idem means the same (R.H. Christie)
-
SALE CONTRACT
A sale in Roman Dutch Law has been defined as “a contract in which one
person promises to deliver a thing to another, who on his part promises to
pay a certain price”
- It is the exchange of property for a price or, because the equivalent Latin
words are found in Judgments, the exchange of merx for a premium.
The general requirements of the formation of a contract of sale are no
different from those applicable to any contract but identification as noted be
an agreement to exchange property for a price.
-The property must be defined with sufficient and there must be certainty
that the parties are in agreement on what is being bought and sold.
PRICE- According to R.H. Christie (1997) the price must be expressed in
money. If it is expressed in property or services the contract will not be a
sale, but if it is expressed partly in money and partly in goods or services
(As with the common trade agreement) the contract will be a sale only if
money is the major consideration.

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

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

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

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

Compulsory Sequestration
A Creditor with a liquidated claim of not less than $ 100 or creditors with
liquidated claims totaling less than $200 or the agent of such a creditor may
petition the court for the compulsory sequestration of a debtor.
- A liquidated claim means one based on an obvious and ascertainable legal
ground and capable of quick ready proof. A creditor whose claim is disputed
and could be established by action has no locus standi
- The creditor has to prove to be insolvent and the acts of insolvency which
are:
A) Absenting him to evade payment of debts
B) Failing to satisfy a writ of execution
C) Disposing of property to the prejudice of creditors
D) Removing his property to meet the prejudice of creditors
E) Making offering a non-statutory assignment or arrangement with
creditors( Even if made without prejudice)
F) Giving notice of suspension or suspending payment of his debts
 CHAPTER 12

BUSINESS ETHICS
Objectives
By the end of the study unit you must be able to;
 define and appreciate the nature of business ethics
 relate ethics and social responsibility
 identify various business ethical issues
 describe various forms of social responsibility
 Outline strategies for dealing with social responsibility issues.
Nature of ethics
Ethics is the study of right and wrong actions and how conduct should be
judged as to be
Good or bad. Ethics is about how we should live our lives and, in particular,
how we should behave towards other people. They are the moral principles
which guide thinking, decision making and action. It is therefore relevant to
all forms of human activity. Business ethics is not really separate or different
from ideas that apply in the general context of human life. Professionals of
all specialisations, entrepreneurs included, should be aware of the general
principles of ethics and be capable of applying them in their everyday work.
It is important, however, to note that ethics and law are not the same.
Ethics and Social responsibility
An organisation exercises social responsibility when its acts respect the
general public interest.

Social responsibility requires that organisations do not act in a way which

harms the general public or is socially irresponsible. Business ethics relate
to business morality rather than society's interests. On the other hand, social
responsibility relates to society at large. However, because corporate
decisions subsume marketing decisions the terms ethics and social
responsibility are often used interchangeably.

Ethics and the law

Ethics deal with personal moral principles and values, but laws are the rules
that can actually be enforced in court. Behavior which is not subject to legal
penalties may still be unethical.
Different cultures view business practices differently. While the idea of
intellectual property is widely accepted in Europe and the USA, in other
parts of the world ethical standards are quite [Link] use of
copyrights, trademarks and patents is widespread in countries such as
Taiwan, Mexico and Korea. According to a US trade official, the Korean
view is that ' ... the thoughts of one man should benefit all', and this general
value means that, in spite of legal formalities, few infringements of
copyright are punished.
ETHICAL ISSUES IN BUSINESS MARKETING
 M Product issues
Ethical issues relating to products usually revolve around safety, quality,
and value and frequently arise from failure to provide adequate information
to the customer. This may range from omission of uncomfortable facts in
product literature to deliberate deception. A typical problem arises when a
product specification is changed to reduce cost. Clearly, it is essential to
ensure that product function is not compromised in any important way, but a
decision must be taken as to just what emphasis, if any, it is necessary to
place on the changes. Another, more serious, problem occurs when product
safety is compromised. Product recall may become necessary. At Work
 Promotion issues
Ethical considerations are particularly relevant to promotional practices.
Advertising and personal selling are areas in which the temptation to select,
exaggerate, slant, conceal, distort and falsify information is potentially very
great. Questionable practices here are likely to create cynicism in the
customer and ultimately preclude any trust or respect. Also relevant to this
area is the problem of corrupt selling practices. It is widely accepted that a
small gift such as a diary is a useful way of keeping a supplier's name in
front of an industrial purchaser. Most business people would condemn the
payment of substantial bribes to purchasing officers to induce them to favor
a particular supplier. But where does the dividing line lie between these two
extremes?

(a) Extortion. Government officials in some countries have been known to

threaten companies with the complete closure of their local operations unless
suitable payments are made.
(b) Bribery. Payments may be made to obtain services to which a company
is not legally
Entitled.
(c) Grease money. Multinational companies are sometimes unable to obtain
services to which they are legally entitled because of deliberate stalling by
local officials. Cash payments to the right people may then be enough to 'oil
the wheels'.

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

The American Marketing Association has produced a statement of the code

of ethics to which it expects members to adhere. Members of the American
Marketing Association (AMA) are committed to ethical professional
conduct. They have joined together in subscribing to this Code of Ethics
embracing the following topics. Marketers must accept responsibility for the
consequence of their activities and make every effort to ensure that their
decisions, recommendations, and actions function to identify, serve, and
satisfy all
Relevant publics: customers, organisations and society.

AMA Code of ethics

Marketers' professional conduct must be guided by;
1 The basic rule of professional ethics: not knowingly to do harm.
2 The adherence to all applicable laws and regulations.
3 The accurate representation of their education, training and experience.
4 The active support, practice and promotion of this Code of Ethics.
Honesty and Fairness
Marketers shall uphold and advance the integrity, honor and dignity of the
marketing profession
1 Being honest in serving consumers, clients, employees, suppliers,
distributors and the public.
2 Not knowingly participating in conflict of interest without prior notice to
all parties involved.
3 Establishing equitable fee schedules, including the payment or receipt of
usual, customary and/or legal compensation or marketing [Link]
and Dutiesarketing Exchange Process
Participants in the marketing exchange process should be able to expect
1 Products and services offered are safe and fit for their intended uses.
2 Communications about offered products and services are not deceptive.
3 All parties intend to discharge their obligations, financial and otherwise, in
good faith.
4 Appropriate internal methods exist for equitable adjustment and/or redress
of grievances concerning purchases.

It is understood that the above would include, but is not limited to, the
following responsibilities of the marketer; the area of product development
and management
• Disclosure of all substantial risks associated with product or service usage.
• Identification of any product component substitution that might materially
change the product or impact on the buyer's purchase decision.
• Identification of extra-cost added features.
• Avoidance of false and misleading advertising.
• Rejection of high pressure manipulation, or misleading sales tactics.
• Avoidance of sales promotions that use deception or manipulation.I.n the
area attribution
• Not manipulating the availability of a product for purpose of exploitation.
• Not using coercion in the marketing channel.
• Not exerting undue influence over the reseller’s choice to handle the
product the area of
• Not engaging in price fixing.
• Not practicing predatory pricing.
• Disclosing the full price associated with any purchase in the area of
marketing research
• Prohibiting selling or fund raising under the guise of conducting research.
• Maintaining research integrity by avoiding misrepresentation and omission
of pertinent research data.
• Treating outside clients and suppliers fairly.
Any AMA members found to be in violation of any provision of this Code
of Ethics may have his or her Association membership suspended or
revoked.
(Reprinted by permission of The American Marketing Association)ion
Programme 3
Social responsibility
There is a growing feeling that the concerns of the community ought to be
the concerns of business, since businesses exist within society, and depend
on it for continued existence. Business therefore has a moral obligation to
assist in the solution of those problems which it causes. Businesses and
businessmen are also socially prominent, and must be seen to be taking a
lead in addressing the problems of society. Enlightened self-interest is
probably beneficial to business. In the long term, concern over the damage
which may result from business activity will safeguard the interests of the
business itself. In the short term, responsibility is a very valuable addition to
the public relations activities within a company. As pressure for legislation
grows, self-regulation can take the heat out of potentially disadvantageous
campaigns. More and more, it is being realized that it is necessary for
organisations to develop a sense of responsibility for the consequences of
their actions within society at large, rather than simply setting out to provide
consumer satisfactions. Social responsibility involves accepting that the
organisation is part
Of society and, as such, will be accountable to that society for the
consequences of the actions which it takes. Three concepts of social
responsibility are profit responsibility, stakeholder responsibility and
societal responsibilities at Work
 Profit responsibility
Profit responsibility argues that companies exist to maximize profits for their
proprietors. Milton
Friedman asserts:
'There is one and only one social responsibility of business: to use its
resources and engage in
activities designed to increase its profits so long as it stays within the rules
of the game – which is to say, engages in open and free competition without
deception or fraud.'
Thus, drug companies which retain sole rights to the manufacture of
treatments for dangerous diseases are obeying this principle. The argument
is that intervention, to provide products at affordable prices, will undermine
the motivation of poorer groups to be self-sufficient, or to improve their lot.
Proponents of this view argue that unless the market is allowed to exercise
its disciplines, groups who are artificially cushioned will become victims of
a 'dependency culture', with far worse consequences for society at large.
 Stakeholder responsibility
Stakeholder responsibility arises from criticisms of profit responsibility,
concentrating on the obligations of the organisation to those who can affect
achievement of its objectives, for example, customers, employees, suppliers
and distributors.
 Societal responsibility
Societal responsibility focuses on the responsibilities of the organisation
towards the general public. In particular, this includes a responsible
approach to environmental issues and concerns about employment. A
socially responsible posture can be promoted by an organisation via cause
related marketing, when charitable contributions are tied directly to the sales
revenues from one of its products.
Strategies for social responsibility
An organisation can adopt one of four types of strategy for dealing with
social responsibility issues.
  Proactive strategy
A proactive strategy implies taking action before there is any outside
pressure to do so and without the need for government or other regulatory
intervention. A company which discovers a fault in a product and recalls the
product without being forced to, before any injury or damage is caused, acts
in a proactive way.
 Reactive strategy
A reactive strategy involves allowing a situation to continue unresolved
until the public, government or consumer groups find out about it. The
company might already know about the problem. When challenged, it will
deny responsibility, while at the same time attempting to resolve the
problem. In this way, it seeks to minimise any detrimental impact.
 Defensive strategy
A defensive strategy involves minimising or attempting to avoid additional
obligations arising from a particular problem. There are several defense
tactics.
• Legal maneuvering
• Obtaining support from trade unions
• Lobbying government ting at Work
During 2001, a group of large pharmaceutical companies initiated
proceedings in the South African courts against the South African
government. They wished to prevent the government from importing cheap,
private copies of their anti-AIDS drugs. The pharmaceutical companies
suffered predictable abuse for 'putting profits before people' and worldwide
negative publicity. The companies were following a defense strategy in that
they were attempting to prevent the financial damage that would follow the
South African government's taking the 'moral high ground'. This is also an
excellent example of the tough dilemmas that ethical considerations can
induce.
 Accommodation strategy
An accommodation strategy involves acknowledging responsibility for
actions, probably when one of the following circumstances pertains.
(a) There is encouragement from special interest groups
(b) There is a perception that a failure to act will result in government
intervention
The essence of the strategy is action to forestall more harmful pressure.
This approach sits somewhere between a proactive and a reactive strategy.

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 References
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organisation start Your [Link]
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new business East Leigh Management services .London
3. Zimmerer T W and Scaborough, N M (2005) Essentials of
Entrepreneurship and small business Management Prentice
[Link]
4. Hisrich.R.D and Peters M P (2002) Entrepreneurship Tatq McGraw Hill
New Delphi
5. Holt,D T (1992) Entrepreneurship Prentice Hall London
6. Marcouse, I, Gillspie ,A, Martin , B Malcolm S and Wall N (2003)
Business studies 2nd Ed Hodder Arnold .London
7. Need Harm D and Dransfield R (2000) Advanced Business and Dexel
Oxford
8. Moyana H & Sibanda M (2001) African Heritage Revised Edition.
Zimbabwe Publishing House :Harare
9. Stoner J.A.F; Freeman. R.E. and [Link](1995) Management 6 th Edition Prentice Hall
International Englenwood Cliffs. New Jersey.

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