ENTREPRENEURSHIP SKILLS DEVELOPMENT

CHAPTER I
CONCEPT OF ENTREPRENEURSHIP

Objectives
By the end of the unit you should be able to:
 Define entrepreneurship
 Describe the characteristics of successful entrepreneurs
 Discuss the roles of SMEs in the economy

History of entrepreneurship in Zimbabwe

The history of entrepreneurship in Zimbabwe dates back to the civilization era. In the Mutapa and Rozvi state there
were successful business initiators/ owners who became very wealth. It however follows that like today, as recognized
by Alfred Marshal in 1890 in the book Principles of Economics was affected by the ability to combine factors of
production: Land , labour, capital, and organization
For over two (2) centuries great products like farming equipment, military equipment was made. It is from these that
successful and powerful states were created.
During the colonial era black entrepreneurs were so limited. The reason, being inability by blacks to access means of
production and suppressed talent. Technical Education was also biased. From 1980 we saw the cropping of great
entrepreneurs from the black populace. There were business Start ups in the transport sector, retailing, manufacturing,
farming, and many industries.

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

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 entrepreneur. Managers or employees who carry out entrepreneurial
roles are aware of opportunities and they initiate changes to take full advantage of them.

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

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

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
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 f) Generating foreign currency without externalizing it or taking it to the black or parallel market for exchange,
but to the registered banks for official exchange
g) Generating government revenue through paying corporate tax.
h) Playing supportive role to the giant firms by being subcontracted in construction, manufacturing and
distribution
i) Reducing anti-social activities such as theft, robbery, murder, promiscuity by creating employment for self and
other citizens
j) Reducing rural to urban migration by creating employment opportunities in rural areas

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

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

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

Perception of opportunity or opportunity seeking

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

Moderate risk taking

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

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

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

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

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

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

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

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

Some of the characteristics of an entrepreneur include; patience, friendliness, hardworking, reliability, dedicated ness,
responsibility, objectivity, rationality, honesty, determination, courage, flexibility, imaginativeness and knowledge.

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

Roles of Small and Medium Enterprises

What is a small business?

A small business is generally a business that has low annual sales, few assets such as buildings, equipment, vehicles,
serves local markets rather than national and international markets, has small number of employees and usually the
owner is solely responsible for the success or failure of the venture.
There are two kinds of small businesses that is survival and growth businesses
 Survival businesses are small businesses which allow owners to make a living but the focus is on
keeping the business alive e.g. backyard businesses/home based businesses.
 Growth businesses are larger and allow owners to make more money e.g. manufacturing operations
in the industry.

Reasons for continued survival of small firms

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

Roles played by small firms to the economy

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

Government Entrepreneurship initiatives

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

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

Activity
i) Analyze the government initiatives to promote entrepreneurship in Zimbabwe since 1980.
ii) 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

CHAPTER 2

BUSINESS ENVIRONMENT IN ZIMBABWE

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

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

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

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

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

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

Economic nationalism is another factor which leads to an 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
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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 upraise 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.

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
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and technologies effective personnel and industrial relations policies and practices and provision of social and leisure
facilities. Entrepreneurs should give due consideration to the design of work methods and job satisfaction, make every
reasonable effort to give security of employment. If employees are not treated well, the entrepreneur will lose them to
his/her rivals.

Providers of finance
These are the financial institutions which supply financial services to the entrepreneurs. Entrepreneurs need to consider
the interest or lending rates together with the accompanying finance changes fixed on them by the financial institutions
as these costs of financial services have adverse effect on their investment activities. Apart from that, the entrepreneurs
also need to consider return on investment in terms of the funds which they may need to invest with the financial
institutions. On the other hand, the entrepreneurs are expected to prove their credit worthiness and credibility by
paying back the borrowed funds (loans) within the contractual time frame as this will enable the entrepreneurs to even
receive preferential treatment and favour in times of need.

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

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

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

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

Entrepreneurship Strategies

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

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

2. Market development strategy

- company efforts to find or develop new markets for its current products
a) This can be done by identifying potential uses in the current sales area where interests for a product
or services can be stimulated.
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 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
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

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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.

Advantages to the franchiser Advantages to the franchisee

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

Disadvantages to the franchiser Disadvantages to the franchisee

- control of franchisees are far away - gives up freedom in management

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

2) Buying an established business

Advantages

- a business with a goodwill increases

the likelihood of successful operation
- has a proved location for successful
operation
- has an established clientele
- its inventory is already on the shelves
- Its equipment is already available and
its resources and capabilities are
known.

Disadvantages
- the buyer inherits any ill will of the
existing firm
- certain employees may be inherited
which are not assets to the firm
- inherited clientele may not be the
most desirable and changing the firms
image is usually difficult
- procedures of the former may be
difficult to follow
- renovation expenses
- purchase price may not be satisfying

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 CHAPTER 3

BUSINESS ORGANISATIONS

Objectives

By the end of this unit students should be able to;

 Discuss the various types of business organizations in Zimbabwe with regards to their formation,
operations and legal aspects.
 apply the principles of management in running businesses
 describe the procedure for business registration
 Outline the advantages and disadvantages of each form of business.

Starting a business

So many people aspire to be business owners, but several questions have to be considered before
deciding to start a new business. This chapter is going to focus on the various forms of businesses with
regards to their formation, operation and legal aspects in Zimbabwe.

Forms of business
A form of business relates to the legal status of the business. The common forms of businesses in the
private sector are;
 sole proprietorships
 partnerships
 co-operatives
 limited companies

1 Sole proprietorship/sole trader

It is a form of business where one person or family provides the permanent capital and in return retains full
control of the business and enjoys all profits. It is possible that the sole trader employs other people but
normally family labour is provided.

Capital contribution
A sole trader must accept that ultimately source of capital for his business is himself (personal savings- e.g.
from salaries, pensions etc) and or borrow from friends and relatives. Any loan capital he raises will be
repayable by him and the only security he can offer must of necessity be from his own assets. Thus little
capital may be raised.

Formation
It is simple to form and there are few legal requirements. One needs to develop the purpose of the business
and then apply for a Trading license to the local authority stating the purpose of the business. Once the
trading license is issued, one needs to get registered with the relevant ministry e.g. if one wishes to start a
tuck-shop, he is required to register with the ministry of Small to Medium Enterprises and Industry and
Commerce.

Liability
The business has no separate existence from its owner. Business property and personal property are
inseparable i.e. if the business fails and the proprietor is unable to pay its debts (which are his debts) he
faces the threat of insolvency and the loss of his property whether or not it is concerned with the business.
Thus, the liability is unlimited; creditors can go on to sell personal assets of the owner to cover up for the
business debts.

Management and control

The business is managed by the sole trader himself although he may hire someone. Nevertheless, the owner
is responsible for the day to day running of the business.

Continuity of business

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The business lacks perpetual succession i.e. it lacks continuity. The death of the owner or active person
may lead to collapse.

Advantages of setting a sole proprietorship

1. Decision making is done quickly as the sole trader does not have to consult anyone.
2. Profits are not shared, thus, the sole trader enjoys all the profits by himself.
3. There is privacy of business affairs- no need to disclose business affairs.
4. It is simple to set up because there are few legal formalities involved.
5. There is freedom in decision making to the owner.
6. There is personal control of staff and customers.
7. Little capital is required to set up as compared to limited companies.

Disadvantages
1. It may be difficult for the sole trader to expand because of lack of capital.
2. Most of them cannot raise adequate capital since cannot access loans because of lack of collateral
security (limited sources of finance).
3. Decision making and management may be inefficient and ineffective due to lack of consultations
as it is a one man band business.
4. Success depends on the owner‟s energy and fitness.
5. The owner is fully responsible for decisions and debts of the business.
6. Lacks continuity in the death of the owner.
7. It can be difficult for the sole proprietor to leave the business as there is no one left to run the
business in their absence.
8. Little capital is raised.

2 Partnerships
It is a commercial undertaking set up and run by at least two people and not more than twenty, with the
object of making profits and share profits and losses.

Capital contribution
The partners who are the owners of the business contribute capital. A partnership makes it possible to share
the risks of the business. (In exchange for sharing the profit) with one or more people who are prepared to
contribute capital or services. Raising of capital present greater opportunities than for a sole trader as new
partners (bringing new capital with them) may be admitted when additional capital is required, but it must
be appreciated that a partnership does not offer potential investors the attractions of transferable shares and
perpetual succession.

Formation
Any two people and not more than twenty can form a partnership as long as they contribute capital towards
the project. Persons wishing to form a partnership may agree verbally or orally. However, it is a good idea
to develop a partnership deed in case of future.

Partnership deed
It is an agreement between partners concerning their business. It contains the following;
a) nature of businesses
b) date of commencement
c) amount of capital each partner brought into the venture
d) method by which profit and losses are to be shared
e) voting rights
f) the role of each partner in the business
g) duration of the partnerships and methods of dissolving the partnership
h) arbitration procedure if partners cannot reach agreement
i) authority to sign contracts etc

After the partners have agreed, they may proceed to apply to the local authority for a trading license. Once
the business license is issued, the partners need to register with the relevant ministry e.g. if partners wish to
set up a phone shop, they need to register with the Ministry of Transport and Communication. This
completes the registration process.

Management and control

Partnerships are controlled by an Act of Parliament called The Partnership Act. Each partner is a manager
of the business although the partners may choose a partner with managerial expertise or hire outsiders to do

11
the job. Partners are expected to consult each other when it comes to management and decision making.
There are two kinds of partnerships;

i. Active partners
They take active role in the day to day management and decision making in the business other than just
contributing capital.

ii. Sleeping/ Dormant partners

They just contribute capital and do not take an active role in the management and decision making in
the business.

Nevertheless, each partner is the agent of the partnership. For this reason, the law imposes on partners a
duty of the utmost good faith towards each other.

Liability
The sharing of the losses of the business is effective only between the partners since each partner is jointly
and severally liable to third parties for the full debts of the business and the only way of limiting this
liability is by setting up a limited partnership in which the dormant partner takes no part in the running of
the business. If the business becomes insolvent, the personal property of the partner is at risk because the
sequestration of the partnership estate necessarily involves the sequestration of the personal estates of all
the parties other than the dormant partners. However, if the dormant partners take active part in the running
of the business, all protection is forfeited or lost and the dormant partner is then liable to the same extent
with the active partners.

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

Continuity of business
There is lack of continuity if one partner dies or is incapacitated, i.e. a partner, whether active or dormant
who wishes to withdraw cannot simply sell his or her stake and technically his withdrawal involves a
dissolution of the partnership, although by agreement of all concerned the dissolution can be arranged on
the basis of retiring partner selling his stake to a new partner.

Advantages of partnerships
1. Better decisions may be made than the sole trader since partners consult each other and share
experiences and ideas.
2. liability, losses and risks are shared unlike in a sole proprietorship
3. More capital may be contributed.
4. It is easy to form since formalities are few.
5. There may be division of labour due to diversity of expertise.

Disadvantages
1. Partners have unlimited liability except for the limited partners or sleeping partners.
2. Decisions may take long before they are implemented as partners need to consult each other.
3. A partnership lacks continuity.
4. Profits have to be shared.
5. One partner can make contracts on behalf of others which may lead to all partners losing their
capital.
6. There may be conflict of interest between partners.
7. Can‟t appeal to the public for capital, therefore, cant raise huge capital necessary for a big business
concern.

3 Co-operative
Formation under co-operatives act chapter 24:05
This is a form of business where at least ten members have a voluntary agreement to contribute capital and
work together as equals towards the achievement of a stated common goal.

Capital contribution
12
Every member contributes capital; therefore, it is possible to raise large amounts of capital. Membership is
open to anyone and every member must each have at least one share.

Organization and management of registered societies

Members of the co-operative elect a management committee. Subject to the co-operatives Act, every
member has the right to attend and vote at all general meetings. Notice of general meetings should be given
in writing or any other way decided at the first general meeting or specified in the by-laws.

Objects of societies
Every society shall in its operations have regard to the need to attain the following objects;
 promoting the economic and social interests of its members in accordance with government policy
 performing any economic or social activity in the interests of its members
 Participating in the overall economic and social development of the nation by increased
production, improvement of supply and marketing channels.

Co-operative principles
Every registered co-operative shall operate in accordance with the following principles;
 its membership shall be voluntary and open to every person who meets the requirements for
membership in terms of society‟s by-laws
 one member one vote in general meetings irrespective of the number of shares held by a member
 services to be rendered by the society mainly to its members
 surplus shall be allocated to the reserves or subject to the Act, distributed or credit to members
only in proportion to the business done with the society
 Education and training facilities should be provided to members and prospective members so as to
improve their economic well being.

Formation and registration

A register of Co-operative societies is maintained by the Registra of Co-ops, which shall enter all such
particulars in relation to the registration and provisional registration of societies and their by-laws.
Any society which has as its object the promotion of the economic interests of its members or other
societies in accordance with co-op principles may be registered with the registrar of co-ops.

Provisional registration process of a co-op

a) enter in the register
i. the name of the society
ii. the economic sector in which it is to operate
iii. the terms and conditions, if any, imposed on registration

b) forward to the society

i. a certificate of provisional registration
ii. a copy of the by-laws of the society provisionally registered by him
iii. A copy of the Co-ops Act and regulations.

c) Direct the society to take all necessary steps to comply with the requirements for registration
within two years.

If the registrar is satisfied that the society which applied for registration complies with the requirements for
registration and that its proposed by-laws are in accordance with the Act, he shall
a. enter in the register
i. the name of the society
ii. the economic sector in which it is to operate

b. forward to the society

i. a certificate of registration
ii. a copy of the by-laws of the society as registered by the registrar
iv. a copy of the Act and any regulations made in terms of the Act and

c. Cause notice of the registration to be published in the gazette.

Every society shall on registration be a body corporate with perpetual succession and in the name under
which it is registered, be capable of holding property, entering into contracts, of suing and being sued and
subject to the Act, of performing all other acts that corporate bodies may by law perform

13
Examples of Co-operative Societies in Zimbabwe
- Mashco
- Farmers co-op

Advantages of co-operatives

1. losses are shared amongst the members unlike in a sole trader

2. enjoys limited liability if formally registered
3. source of living for most people
4. better decisions can be made since members consult each other
5. more capital can be raised because more members are involved
6. benefits of economies of scale, e.g. . bulk buying
7. members can afford assets as a group beyond the reach of individuals.

Disadvantages
1. conflict of interest between members may arise
2. profits have to be shared between members
3. Individual members lose their independence as they are bound by the rules and decisions of the
co-op.
4. Slow decision making because of consultations.
5. management is often underpaid and unskilled
6. after the initial enthusiasm has worn off, members may not work hard as for the co-op as they
would for themselves
7. Profits are shared in proportion to one‟s spending in the venture i.e. the more you buy the more
dividends you may get.

4 LIMITED COMPANIES

Before looking at the different types of companies and their suitability for different types of business, it
will be as well to consider the characteristics that are common to all companies created under the
Companies Act Chapter 24. Section 18(2) of the Act sums up the characteristics by saying that from the
date of incorporation a company becomes a body corporate with perpetual succession.
 As a corporate body accompany is a separate legal person in the eyes of the law, separate from its
shareholders and its directors
 Its assets and liabilities are equally separate from those of its members and directors;
 So the members may limit their own liability (s8)and
 The company may incur debts which, in the absence of fraud, neither the shareholders nor the
directors are liable to pay.

This fact alone makes a company particularly suitable for business involving an element of risk and
gives it opportunities for raising capital that are not open to a sole trader or a partnership, The company
can borrow on the security of its own assets, can borrow from shareholders and directors. It can attract
equity by offering shares on which dividends are payable out of the business. There is also the element
of perpetual succession; a change of members have no effect on the legal personality of the company.
Transfer of shares is simple, which is an attraction to investors

There are two types of companies

1. Private Limited Company ((Pvt) Ltd)

A (pvt) ltd company id defined by the company‟s act as one which by it‟s articles restricts the
right to transfer its share, limits the number of its shareholders to fifty (50) excluding employees
and prohibits any invitation to the public to subscribe for its shares and debentures.

Capital contribution
Capital is raised by selling shares privately e.g. to family and friends. Shares are not advertised or
traded on the Zimbabwe Stock Exchange (ZSE) market.

Liability
Shareholders enjoy limited liability- they do not pay business debts from their private personal
property if the business fails.

Management
14
 Shareholders appoint directors who run the company on their behalf. Thus, the directors are
responsible for the day to day running of the company but are accountable to the shareholders.

Formation
Any two people and not more than fifty can form a (pvt) ltd company. In order to become a legally
registered (pvt) ltd company, the promoters must prepare the following legal documents and send
them to the registrar of companies. The following should be observed;
1. Lodge an application to the Registrar of Companies by way of filling in the following
documents and submit them to the registra of companies.

a. Memorandum of Association
It sets out the company‟s constitution i.e. how the firm will relate with the outside world
(external stakeholders). It thus contains the following;
 Company name
 Its registered office and address
 Objectives of the company- the purpose for which the company has been formed
 Statement of limited liability
 Maximum number and value of shares

b. Articles of Association
Contain the internal rules of the company. These include
 Appointment of directors
 The rights and obligations of directors
 Procedures for calling for a meeting
 Borrowing powers of the company
 Names and addresses of shareholders
 Procedures for selling shares
 Procedure for calling for board meetings
 Distribution of profits

Provided its articles of association comply with s29(1) and it complies with those articles s(30), the
company is entitled to a number of privileges which include;
 Its name must end in („private‟) limited s9(1) which may be shortened to (pvt) ltd for business
purposes
 It may commence business and exercise its borrowing powers immediately upon registration
without using a prospectus
 Need not file its annual accounts, auditor‟s report or directors report with its annual returns
 Need not hold a statutory meeting or issue a statutory report
 Need not appoint an auditor
 Etc

After the two documents have been complied and send to the registra of companies, the registra will carry
out a name search to find out if
a. The name is not being used by another company
b. The name is not derogatory
c. The name does not provoke others

If satisfied the registra will issue out a Certificate of Incorporation- which establishes the company as a
separate legal entity and the company can commence business soon after registering with the relevant
ministry

Advantages of pvt ltd

i. Enjoys limited liability
ii. Enjoys perpetual succession
iii. More capital can be raised from the shares sold to at least two persons
iv. Limited liability attracts capital since property is safeguarded
v. The company can own assets and properties
vi. Since management and control are separated, experts can be hired to run the company
vii. The affairs of the company are private and accounts need not be made public.

Disadvantages
15
 i. Complex legal formalities are involved in the formation
ii. Shareholders have less direct control over the business
iii. Conflict of interest may arise between shareholders and management
iv. The shareholders can only transfer share with the consent of other shareholders, thus, restricting
free share movement.
v. Not allowed by law to advertise shares and so cannot raise a lot more capital like a plc

2. PUBLIC LIMITED COMPANIES (PLC)

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

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

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

2) The registra will carry out a name search and if satisfied with the documents and
application lodged would issue out a certificate of incorporation (which gives the
PLC a legal persona)

3) However, unlike a Pvt ltd which can commence business soon after getting a
certificate of incorporation, a PLC should wait to get a Trading Certificate.

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

4) The prospectus- this document invites members of the public to subscribe in shares
and become part owners i.e. it‟s the advertisement of shares, the company lists on the
ZSE market and shares can thus be transferred publicly. The public can monitor
company performance through its share movement on the ZSE.

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

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

Disadvantages
i. A lot of documentation is involved
ii. May suffer because of diseconomies of scale

16
 iii. There is no privacy or secrecy of business affairs because they have to publish
ed in the public media
iv. Must appoint an auditor

Potential entrepreneurs in Zimbabwe have various business options at their disposal in as far as
types of businesses are concerned. However, in making the choice, the best and suitable choice
should be made taking into cognizance the fact that businesses have different needs. There is no
„right‟ or „wrong‟ business, it all depends on what the entrepreneur wants to do, one‟s financial
situation and how large the operations are likely to be. I t is also necessary to consider industry
and market requirements and risks involved.

ACTIVITY
i. Compare and contrast between a Pvt Ltd company and a Ltd company
ii. “A limited company is a separate legal persona with limited liability”, what is the
meaning and significance of the underlined phrases?
iii. Which form of business would you recommend to a new Poltechnic graduate to venture
into? Justify your recommendation.

CHAPTER 4
17
 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

18
 Several definitions of a business plan can be observed.

 A business plan is a written statement setting forth the

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

 It is a written document describing all relevant internal and

external elements and strategies for achieving objectives of
a business.

 A business plan is a document designed to provide sufficient

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

The purpose/importance of a business plan:

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

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

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

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

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

 It can be an effective communication tool for attracting and

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

 It provides an effective basis for controlling operations so one

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

HOW TO PREPARE A BUSINESS PLAN

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

19
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 its various parts.
4. Develop short-term detailed plans for every aspect of the
business, involving the owners, managers, and key
employees, if possible.
5. Plan for every facet of the business‟ structure, including
finances, operation, sales, distribution, personnel, and
general administrative activities.
6. Prepare a business plan that will use your time and that of
your personnel most effectively.

COMPONENTS/ELEMENTS/CONTENTS OF A BUSINESS PLAN

 The contents of a business plan vary tremendously, depending upon the type of business,
the expertise of the entrepreneur, who the plan is aimed at and how much time is spent
researching the plan.

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

20
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.

21
  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 5

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

Management
Management has been described as a social process involving responsibility for economic and effective
planning and regulation of operation of an enterprise in the fulfillment of given purposes. It is a dynamic
process consisting of various elements and activities. These activities are different from operative functions
like marketing, finance, production, purchasing, human resource etc. Rather these activities are common to
each and every manager irrespective of his level or status. According to Henry Fayol (the father of
management) managing means planning, forecasting, organizing, motivating, leading and controlling
activities in a business so as to achieve common objectives.

22
  Stoner and Freeman (1995) described management as the art of making things done through other
people.
 They went on to say that it means deciding what to do and getting others to do it.

Thus, management is a process (and not an event) that entails planning, leading, organizing and
controlling of resources (human resource, capital, financial resources etc)

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

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

A. PLANNING

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

The following are involved in planning;

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

Manager’s questions in planning

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

B. LEADING

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

 directing – it is that part of managerial function which actuates the organizational methods to work
efficiently for achievement of organizational goals, and sets in motion the action of people
because planning ii the mere preparation for doing work.

23
  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

24
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 behaviours or roles within a business environment.
Each role is different, thus spanning the variety of all identified management behaviours. 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, obliged to Greeting visitors, signing

perform a number of team duties documents
of a legal or social nature

Responsible for the motivation

b. Leader of subordinates, staffing and Performing all activities that
training, selects and disciplines. involves subordinates

Maintains a network of outside

contacts and informers who
c. Liaison provide favours and information Acknowledging mail, external
board work

2. INFORMATIONAL

a. Monitor -Seeks and receives wide range -reading periodical and reports
of special information -maintaining personal contacts
-nerve centre of internal and -installation and maintenance of
external information about the information systems
organisation

Holding meetings, making phone

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

3. DECISIONAL

a. Entrepreneur Initiates new projects, spot Organising strategy review

opportunities, identify areas of sessions to develop new
business developments programmes

b. Disturbance handler Responsible for corrective action Resolving conflicts among staff,
when organization faces adapt to external changes and
unexpected disturbances and organising strategies that
crises involves disturbances and
conflict

25
 c. Resource allocator Responsible for the allocation of Scheduling, requesting,
organizational resources of all authorization and budgeting
kinds, setting of priorities, activities
budgeting

Responsible for representing the

d. Negotiator organisation at major Participating in collective
negotiations with unions, bargaining
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 conceptualise 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;
26
 1. Division of labour-work should be divided into smaller units that permit specialization.

2. Authority and responsibility-organisational 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.

10. Order- resources should be in the right place at the right time.

11. Equity- managers should be fair to the employees and treat the equally.

12. Stability of staff- a low staff turnover rate enhances the attainment of goals.

13. Initiative- subordinates should be given the freedom to conceive and carry out their plans, even
though some mistakes may result.

14. Team 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 behaviour of a
person in order to achieve specific organizational or personal goals.

Theories of Motivation and their implications to the entrepreneur

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

Major content theories of motivation include

 Maslow‟s hierarchy of needs model
 Alderfer‟s modified need hierarchy model
 Herzberg‟s two-factor theory
27
  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,
achievement,recognition
respect, by others)
self- confidence,

Social (love) (i.e. to belong, associate with, be

accepted by
Safety (i.e. protection
) against danger

Physiological i.e. shelter, clothing, food

Physiological needs include homeostasis such as satisfaction of hunger, thirst, shelter deficiency, clothing
deficiency and so on. In fact homeostasis relates to the body‟s automatic efforts to retain normal
functioning.

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

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

Esteem needs are also referred to as ego needs which relate to self-respect which involves the desire for
confidence, strength, independence and freedom, and achievement. Esteem of others involves reputation or
prestige, status, recognition, attention and appreciation.

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

IMPLICATIONS OF MASLOW’S HIERARCHY OF NEEDS TO THE ENTREPRENEUR

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

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

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

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

28
Another area of concern is self-esteem. In this case entrepreneurs should make use of social recognition,
job title, high status job and feedback from the job itself if employees are to be motivated in their work.

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

Herzberg’s two factor theory

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

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

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

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

Motivation & job satisfaction

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

Motivators/growth factors

NB: The Motivation – hygiene theory of Herzberg is an extension of Maslow‟s Hierarchy. The emphasis
in this theory is that entrepreneurs must consider both the hygiene factors and the growth factors/motivators

Importance of motivating employees

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

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
29
 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 organisational 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 6

MARKETING

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

 Define marketing
 Describe the marketing mix elements
 Apply the marketing mix to product and service situations
 Prepare a marketing plan

Marketing is the management process responsible for identifying, anticipating and satisfying
customerrequirements profitably. (CIM)
There are many other definitions that expand on the CIM's own definition. Here is what Dibb et al
(2001)have to say:

Marketing consists of individual and organisational activities that facilitate and expedite
satisfying exchange relationships in a dynamic environment through the creation, distribution,
promotion and pricing of goods, services and ideas.

This is a more detailed definition and identifies some specific [Link] as an activity differs
from marketing as a concept. A market orientation can prevail outside the marketing [Link]
related term 'marketing concept' is fundamental to the modern approach to marketing. Kotler (1991)says
this:

The marketing concept holds that the key to achieving organisational goals lies in determining the
needs and wants of target markets and delivering the desired satisfactions more efficiently and
effectively than the competition.

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

30
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 [Link] calls them the 4Ps of [Link] are,namely,price,[Link] and
place.

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

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

 Place
Distribution decisions address the question of 'where do our customers want to receive their goods or
services?' This is an aspect where there has been significant change and development, and there is now
much more scope for market decision making, especially with the advent of [Link] decisions
may also influence an organisation's globalisation strategy. If clients and/or customers have overseas
locations it may be beneficial to set up distribution facilities locally. The presence of overseas facilities
enables the organisation to extend its market coverage and global [Link] 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
[Link] are likely to be involved in activities such as outlet planning, supply chain
management, and route to market decisions. They may be involved in order-processing, warehousing,
logistics,
stockholding and control, transport operations, delivery tracking and IT systems development. They may
also be involved in export operations and the use of shipping and forwarding skills.

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

31
  Price
Cost is a major consideration in price-setting and here the marketer must utilise the expertise of the
management accountant. Also associated with this aspect of the mix is the whole topic of terms of sale:
expert advice is necessary if maximum protection is to be obtained against the customer who does not or
cannot pay. Factors influencing price include costs, competition, customer expectations and business
objectives.

Product Life Cycle

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

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

For the various stages of the cycle ,different objectives and strategies can [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 [Link]
is a summary document, providing a framework that permits managers and specialists to undertake the
detailed work of marketing in a co-ordinated and effective fashion.
32
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 [Link] may be
true in some highly marketing-oriented organisations, but it is not necessarily [Link] 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.

FAST 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 [Link] that you remember this basic structure. If all else fails in the examination, it
should enable you to organise your thoughts and make a creditable attempt at preparing a marketing plan.

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

The marketing plan in detail

1 Executive summary
It is common practice to place an executive summary at the beginning of the marketing plan. Executive
summaries are provided, as their name implies, for the convenience of senior executives who require a fast
overview in order to avoid the time involved in detailed study. As a general rule, such summaries should be
confined to a brief exposition of important material.
(a) Background information that helps explain why particular proposals have been made or
33
decisions taken
(b) A description of proposed action with an indication of timescale
(c) A summary of the aims or targets that are intended to be achieved
(d) An assessment of any wider implications of the proposed action
(e) A statement of the required investment, where appropriate
The executive summary for a marketing plan is likely to include material on the following specific matters.
• Marketing research
• Target markets and segments
• The proposed marketing mix
• Sales forecasts

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

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

3 Marketing strategy
Marketing strategy includes objectives and methods and may deal with such matters as gap analysis,target
markets, the marketing mix and marketing [Link] 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.
34
(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 [Link] objectives have been considered in detail, it is possible to use them to refine
a plan bymeans of gap analysis. Objectives will relate to both market dynamics and financial results, and
should beexpressed in concrete form. Objectives may be set for such business parameters as those
below.
• Revenue growth
• Market share
• Profitability
• Number of outlets
• Customer retention
• Brand recognition
• Marketing expenses
• Staff levels and training
(b) Target markets. It will be appropriate to define clearly just what the target market is. The
nature of this definition will depend partly on the scale of the marketing operation
envisaged. For example, a company operating nationally in a lifestyle segment might target
prosperous retired people nationwide, while a locally based professional service business
might target start-ups and small traders within a 20-mile radius of its base.
(c) Products and their positioning. Product positioning is a continuation of the process of
determining the target market. Product positioning is about the way the target market
perceives the product's characteristics, in relation to those of competing products.
There are two basic product positioning strategies.
• 'Me too': the product is positioned to meet the competition head-on.
• Gap-filling: the product is positioned to exploit gaps in the market.
(d) The marketing mix. A marketing plan will not necessarily give complete details of every
component of the marketing mix. Instead, it will concentrate on those parts that are new or
crucial to success. For example, a plan built around a new or enhanced product that will be
distributed through established channels is likely to give significant product detail, and
explain the aim of the new features in market terms. Place, on the other hand, is unlikely to
receive more than a brief mention.
(e) Marketing research. Early marketing research should have played its part in supporting the
design of the marketing plan. However, it is not confined to this phase of operations.
Marketing research activities should form part of the marketing plan, so that continuing
feedback may be obtained upon the degree of success achieved.

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

4.2 Breakeven analysis

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

4.5 Controls
Control is vital if management is to ensure that planning targets are achieved. The control process involves
three underlying components.
35
– Setting standards or targets
– Measuring and evaluating actual performance
– Taking corrective action
(a) Performance measures. The data contained within the numerical forecasts section of the
plan provides the raw material for performance measures. Mechanisms must be put in
place for collecting information on actual results, so that comparisons can be made and
control action taken. Overall performance is often judged by analysing two main indicators:
sales and market share.
(i) Sales analysis is based on the comparison of actual with budgeted turnover, but
this is only the first stage. It is appropriate to delve deeper and consider the effects
of differences in unit sales and selling price. Further analysis by product, region,
customer and so on may be required.
(ii) Market share analysis. Market share is important to overall profitability, and the
attainment of a given market share is likely to be an important marketing objective.
Market share should always be analysed alongside turnover, since the growth or
decline of the market as a whole has implications for the achievement of both types
of objective.
FAST FORWARD
FAST 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 organisational agility. In particular, decision-making
processes need to be rapid and effective.

36
 CHAPTER 7

CUSTOMER CARE

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

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

Ten tips for customer care

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

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

3. Competence
-This refers to the possession of the required skills and knowledge by those who deliver the services to
the customer. This will create confidence.
37
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

38
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

39
 - Make sure that there is availability and visibility of both a mission statement and customer charter.
The customer‟s charter will remind your workers always to abide by its contents and will assure
customers of their expectations of the services and what move to take if they are not met. Your
customers‟ charter should indicate the standards of services to be delivered and the way in which
the worker will perform their duties

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

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

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

4. Delivery deadlines met

Delays explained and apology given

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

CHAPTER 8

RECORD KEEPING AND STOCK CONTROL

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

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

DIFFERENCE BETWEEN BOOKKEEPING AND ACCOUNTING

Bookkeeping: it is concerned with the recording of data only. This used to be done in books, thus the name
bookkeeping.
 A bookkeeper is responsible for this duty. Nowadays books may be used, but a lot of accounting
data is recorded using computers.

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

40
The accounting process
It involves:
Recording Classifying Summarising Interpreting of

business activities capable of being expressed in monetary terms.

Users of accounting information

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

Source documents

Information used in the process of completing financial transactions are called source documents. These
can include invoices, receipts, credit and debit notes, purchase orders, customer billings, bank statements
etc. These are the starting of any accounting process.

Source document

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

Books of primary entry is obtained

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

CHEGUTU
Telefax: 703301

Purchases Amount__
5 x 2l Mazoe Orange crush $30 000.00
Sub total$30 000.00
Less discount $ 3 000.00
Signature…………… Total $27 000.00
Invoice is a note given by the supplier or seller to the customer when goods are bought on credit to show
Thank
that You
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
41
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

Debit
TotalNote is used to correct an undercharge on a customer‟s
$50 000.00
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 42 Unit price Total______

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

Below is the layout and a specimen of a statement

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

Date Details Amount Balance_________

Balance remaining

Specimen
Date 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

43
 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

44
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 (Details) Cash Bank Date Payments (Details) Cash Bank
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 stock on credit from E Gobvu
18 February bought $5 000 stock on credit from T Timothy

Mutsvedu D Purchases journal for the month of February 2011

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

45
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.

46
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

47
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 (Details) Cash Bank Date Payments (Details) Cash Bank
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 stock on credit from E Gobvu
18 February bought $5 000 stock on credit from T Timothy

Mutsvedu D Purchases journal for the month of February 2011

48
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.
49
  Debit the receiver
 Credit the giver

Example 1

2010 Debit (Dr) Credit (Cr)

August 1 Started business with $1000 cash Cash Account Capital Account
2 Paid $900 of the opening cash into the bank Bank a/c Cash a/c
4 Bought goods on credit $78 from [Link] Purchases a/c [Link] a/c
5 Bought a motor van by cheque $500 Motor Van a/c Bank a/c
7 Bought goods for cash $55 Purchases a/c Cash a/c
10 Sold goods on credit $98 to [Link] [Link] a/c Sales a/c
12 Returned goods to [Link] $18 [Link] a/c Purchases Returns
19 Sold goods for cash $28 Cash a/c Sales a/c
22 Bought fixtures on credit from Kingston Fixtures a/c Kingston a/c
Equipment Company $150
24 [Link] lent us $100 paying us the money Bank a/c [Link]
by cheque
29 We paid [Link] his account by cheque $60 [Link] a/c Bank a/c
31 We paid Kingston Equipment Co. by cheque Kingston a/c Bank a/c
$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 Bal b/d 133

Bal c/d 1000 Cash 1000

1000 1000

Bal b/d 1000

[Link] a/c
[Link] 18 Purchases 78
Cash a/c Bank 60
Capital 1000 Bank 900 78 78
Sales 28 Purchases 55
Bal c/d 73
1028 1028 Motor Van a/c
Bal b/d 73 Bank 500 Bal c/d 500
500 500

Bank a/c Bal b/d 500

Cash 900 [Link] 500
Loan 100 [Link] 60
Kingston 150
Bal c/d 290
1000 1000
Bal b/d 290 Sales a/c
Bal c/d 126 [Link] 98
Cash 28
Purchases a/c 126 126
[Link] 78 Bal c/d 133
Cash 55 Bal b/d 126

[Link] a/c
133 133 Sales 98 Bal c/d 98

50
 98 98
Bal b/d 98 Fixtures a/c
Purchases Returns a/c Bank 150 Bal c/d 150
Bal c/d 18 [Link] 18 150 150
18 18 Bal b/d 150
Bal b/d 18

Loan- [Link] a/c

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

51
 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 [Link] 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.
52
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
53
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.

54
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.

55
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
56
 machinery at once. Their products are high priced and can pay back their obligations wit
time.

 Days Purchases Outstanding = Credit Purchases

Purchases/365

Indicates how prompt a business is at paying its bills.

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

Interest

Indicates the ability to meet the interest requirements on both short and long term debts.
How many times can you pay the interest from your EBIT?

A high ratio indicates a safe situation but that perhaps not enough financial leverage is
being used. A low ratio may call for immediate attention; more sales will be needed to
generate income.

 Fixed charges coverage Ratio = EBIT + Lease expenses

Interest + Lease expenses

Provides a more comprehensive picture of the business‟s ability to meet it‟s legal
financial requirements.

A high ratio is more desirable than a low one.

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

 Net Profit Margin = Net Profit

Net Sales

This ratio is used to measure the efficiency of management. A low margin indicates
that not too much sales are guaranteed relative to expenses or that expenses are out of
control or both.

 Return on Investment (ROI) = Net Profit

Total Assets

It indicates the ability of the business to earn satisfactory returns on all assets it employs.
The higher the rate the better because provides some indication of future growth
prospects.

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

Capital Market value of Equity

It indicates return on the owners‟ investment in the business. It is an accounting measure

on how well management is performing

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

 Days Sales outstanding = Credit Sales

Sales/365

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

57
 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.

58
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 / 2 nd
bin), and not touched until all main stock is used up. When this stock (safety stock) needs
to be used, the purchasing department is notified and a replenishment order is placed. e.g.
Book stores use red –tag system where by a tag is placed in the stock at a point equal to
order point. When a customer takes that book to the checkout, the store is effectively
notified that it is time to reorder that title.

If your needs are predictable you may order a fixed quantity of stock every time you
place an order/order at a fixed interval.

(iii) Economic Order Quantity(EOQ)

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

It is a standard formula used to arrive at a balance between holding too much or too little
stock.

EOQ formula: Q = 2DS

C

Where Q=Quantity ordered at each order point

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

It is secured at the „least unit cost‟ of stocking a material. The costs that enter into the
unit cost maybe divided into two groups:

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

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

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

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

(iv) Stock Review

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

(v) First in First Out(FIFO)

This system ensures that perishable stock is used efficiently so that it does not deteriorate.
Stock is identified by date received and moves on through each stage of production in
strict order
59
Stock Taking

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

How to carry out a stock take

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

Below is a specimen of a stocktaking list

Stock taking list

Item Stock take Stock card Difference

Eversharp pen 1 000 1 150 -150

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

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

CHAPTER 9

COSTING AND PRICING

60
OBJECTIVES
By the end of this unit you should be able to:

Define the following costing terms

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

 Calculate total costs per item

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

Definition of costing terms

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

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

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

Direct Material costs

- These are all the money that the business/entrepreneur spends on the parts and materials that become
part of or are directly related or linked to the final product or service that it/he/she makes or sells.
- NB: for a retailer‟s or wholesaler‟s, the costs of buying goods to resell are the direct material costs. To
be considered or counted as direct material costs, the amount of material must be easy to calculate and
the cost of the material must be big enough to add a considerable amount to the total direct material
costs.

Direct labour costs

- These are all the money that the business or entrepreneurs spends on wages, salaries and benefits for
the people who are directly involved in the production of its or his/her products or services
- The time spent on making the product must be easy to calculate and the cost of the direct labour must
be big enough to add a considerable amount to the total direct labour costs. Retailers and wholesalers
do not have employees working directly in making products, so they do not have any direct labour
costs. For retailers and wholesalers, all salaries and wages are indirect costs.

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

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

Calculate total cost per item

- Costing for a manufacturing or service operator. When calculating the cost of producing an item, the
entrepreneur should ensure that all costs are included. That is direct and indirect costs. The
entrepreneur must therefore, calculate the direct maternal cost, direct labour and direct expenses of
producing the item and then add a proportion of the indirect costs to find the TOTAL COST of
producing the item.
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- 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
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 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

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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
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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

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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

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

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

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

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

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

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

a) Customers

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

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

c) Cost and Profit

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

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

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

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

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

 Value pricing is offering the right combination of quantity and good service at a fair price.

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

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

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

CHAPTER 10

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

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

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

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

Ansoff Product and Market Matrix

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

Ansoff‟s product/market growth matrix suggests that a business‟ attempts to grow depend on whether it
markets new or existing products in new or existing markets.

The output from the Ansoff product/market matrix is a series of suggested growth strategies that set the
direction for the business strategy. These are described below:

Market penetration

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

Market penetration seeks to achieve four main objectives:

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

• Secure dominance of growth markets

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• 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 experi

For a business to adopt a diversification strategy, therefore, it must have a clear idea about what it expects
to gain from the strategy and an honest assessment of the risks.

BUSINESS PORTFOLIO ANALYSIS

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

The company must:

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

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

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

The BCG Model

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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.
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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 12

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

72
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

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Process

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

Establishing the context

Establishing the context involves:

1. Identification of risk in a selected domain of interest

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

Identification

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

Examples of risk sources are: stakeholders of a project, employees of a company or the weather over an
airport.

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

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

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

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

Assessment

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

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

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

Risk Options

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

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

2. Periodically re-assess risks that are accepted in ongoing processes as a normal feature of business
operations and modify mitigation measures.

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

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

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

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

Potential risk treatments

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

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  Avoidance (eliminate, withdraw from or not become involved)
 Reduction (optimize - mitigate)
 Sharing (transfer - outsource or insure)
 Retention (accept and budget)

Risk avoidance

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

Hazard Prevention

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

Risk reduction

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

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

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

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

Risk sharing

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

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

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

Methods of transfering

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

BOOT CONTRACT ( Build Own Operate and Transfer)

ROT (Refurbish Operate and Tranfer)

PPP ( Public Private Partnership )

Insurance

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

-Indirect consequential loss

Legal liability

Personal liability.

Risk retention

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

Individual Cover

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

Group Cover

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

Create a risk management plan

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

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

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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:

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  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 extremal 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

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Risk management is simply a practice of systematically selecting cost effective approaches for minimising
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 realised 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 13

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;
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  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,

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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

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

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

FUNCTIONS OF WORKS COUNCIL

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

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

CONTRACTS

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

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

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

LEASE CONTRACTS
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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

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 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

85
other hand, social responsibility relates to society at large. However, because corporate decisions subsume
marketing decisions the terms ethics and social responsibility are often used interchangeably.

Ethics and the law

Ethics deal with personal moral principles and values, but laws are the rules that can actually be enforced in
court. Behaviour which is not subject to legal penalties may still be unethical.
Different cultures view business practices differently. While the idea of intellectual property is widely
accepted in Europe and the USA, in other parts of the world ethical standards are quite
[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.
Marketing at Work
 Promotion issues
Ethical considerations are particularly relevant to promotional practices. Advertising and personal selling
are areas in which the temptation to select, exaggerate, slant, conceal, distort and falsify information is
potentially very great. Questionable practices here are likely to create cynicism in the customer and
ultimately preclude any trust or respect. Also relevant to this area is the problem of corrupt selling
practices. It is widely accepted that a small gift such as a diary is a useful way of keeping a supplier's name
in front of an industrial purchaser. Most business people would condemn the payment of substantial bribes
to purchasing officers to induce them to favour a particular supplier. But where does the dividing line lie
between these two extremes?

(a) Extortion. Government officials in some countries have been known to threaten companieswith the
complete closure of their local operations unless suitable payments are made.
(b) Bribery. Payments may be made to obtain services to which a company is not legally
entitled.
(c) Grease money. Multinational companies are sometimes unable to obtain services to whichthey are
legally entitled because of deliberate stalling by local officials. Cash payments to theright people may then
be enough to 'oil the wheels'.

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(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 behaviour. When benefits exceed costs, the behaviour can be said
to be ethical. This the philosophical position upon which capitalism rests, and is often cited to justify
behaviour which appears to have socially unpleasant consequences. For example, food production regimes
which
appear inhumane are often justified by the claim that they produce cheaper food for the
majority of the population.

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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 Duties of Parties in the Marketing Exchange Process
Participants in the marketing exchange process should be able to expect
1 Products and services offered are safe and fit for their intended uses.
2 Communications about offered products and services are not deceptive.
3 All parties intend to discharge their obligations, financial and otherwise, in good faith.
4 Appropriate internal methods exist for equitable adjustment and/or redress of grievancesconcerning
purchases.

It is understood that the above would include, but is not limited to, the following responsibilities of the
marketer;
In 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 of distribution
• 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 pricin
• Not engaging in price fixing.
• Not practicing predatory pricing.
• Disclosing the full price associated with any purchaseIn the area of marketing research
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• 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.
Organisational relationshi
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)
Action Programme 3
Social responsibility
There is a growing feeling that the concerns of the community ought to be the concerns of business, since
businesses exist within society, and depend on it for continued existence. Business therefore has a moral
obligation to assist in the solution of those problems which it causes. Businesses and businessmen are also
socially prominent, and must be seen to be taking a lead in addressing the problems of society. Enlightened
self-interest is probably beneficial to business. In the long term, concern over the damage which may result
from business activity will safeguard the interests of the business itself. In the short term, responsibility is a
very valuable addition to the public relations activities within a company. As pressure for legislation grows,
self-regulation can take the heat out of potentially disadvantageous campaigns. More and more, it is being
realised that it is necessary for organisations to develop a sense of responsibility for the consequences of
their actions within society at large, rather than simply setting out to provide consumer satisfactions. Social
responsibility involves accepting that the organisation is part
of society and, as such, will be accountable to that society for the consequences of the actions which it
takes. Three concepts of social responsibility are profit responsibility, stakeholder responsibility and
societal responsibility.
Marketing 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.

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  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 manoeuvering
• Obtaining support from trade unions
• Lobbying government
Marketing 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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