4.

Setting a Business enterprise

Outline
4.1 Small Business as Basic components of Economy
4.2 What is basic business idea
4.3 Steps in business setting
4.4 Developing a Business Plan
 What is small business?

To provide a clear image of the small firms, the following general

criteria for defining a small business are suggested:

A). Financing of the business is supplied by one individual or a

small group.

b) Except for its marketing function, the firm’s operations are

geographically localized.

c) Compared to the biggest firms in the industry is small

d) The number of employees in the business is usually fewer

than 100
 Con’t
There are two approaches to define small Business. They are:
1. By some measure of size
2. using an economic /control definitions.
1. Size Criteria
Examples of criteria used to measure size are:
1. Number of employees 2. Sales volume
3. Asset size 4. Insurance enforce
5. Volume of deposits

• Although the first criteria located above, employee, is the

most widely used yardstick; the best criteria in any given case
depends upon the user’s purpose.
 Economic /Control Criteria

The economic /control definition cover:

a)Market share:- The characteristics of a small firm’s share of

the market is that it is not large enough to enable it to influence
the prices of national quantities of goods sold to any significant
extent.
b)Independence:- Means that the owner has control of the
business himself.
c)Personalized management:- Is the most characteristics factor
of all. It implies that the owner activity participates in all
aspects of the managements of the business, and in all major
decisions-making processes. There is no delegation of authority.
All three of these characteristics must be satisfied if the business is
to rank as a small business.
 Types of small business
1. Family Enterprises
• Family owned business varies widely and can include retail stores,
contracting businesses, small manufacturing firms, and restaurants
among others. In the absence of a successor, the life of a venture
is limited to the working life of its founder. Succession is a serious
problem.
2. Personal service Firms(PSF)
3. Franchise:-The franchisee may receive Francis help, training, a
protected market, and technical assistance with matters such as
site selections, purchasing, accounting, and operations
 Why are small business important to economy?

They make exceptional contributions as they provide

a. New jobs as populations and economy grow, small business
provide new job opportunity.
b. Introducing innovations-many scientific breakthrough originated
with small organization. Photocopies, etc
c. Stimulating Economic competitions.
 Con’t

Reasons for the more rapid growth of small firms in most developed
countries.

1. New technologies, such as numerically controlled machine tools,

may permit efficient production on a smaller scale

2. Greater flexibility is required as a result of increased global

competitions

3. Consumers may be coming to prefer personalized products over

mass produced goods.
• Discussion

what about in developing countries like Ethiopia?

 Causes for small business failure
• Incompetence- The owners simply do not know how to run the enterprise.

• Unbalanced experience- do not have rounded experience in the major

activities of business production.

• Lack of managerial experience. Do not know how to manage production.

• Lack of experience in the line- the owner has entered a business field in

which he or she has very little knowledge.

• Neglect- the owner does not pay sufficient attention to the enterprise.

• Fraud- involves intentional misrepresentations or deception (purchasing

materials or goods for him/her self with the company’s money)

• Disaster- refers to some unforeseen happening or ‘act of God’ (eg. Robberies

and extended strikes.)

 Con’t
The following are specific managerial causes of small business
failure
• Inadequate records- unable to establish an adequate record
keeping system.
• Expansion beyond resources
• Lack of information about customer
• Failure to diversify market
• Lack of marketing research.
• Legal problems
• Nepotism- favoritism toward family members
• One person management
• Lack of technical competence
• Absentee management the owner stayed away for long period
 Strength and weakness of small business

Strength

1. Independence
• Most small business owners enjoy being their own boss, they like
the freedom to do things than way.

2. Financial opportunities
• Many small business owners make more money running their own
company than they would be working for someone else.

3. Community services
• if the person has reason to believe the public will pay for such
output, he/she will start a company to provide it.
 Con’t

4. Job security
• when one owns a business, job security is ensured.

5. Family employment (benefits)

• create the employment in the family
• higher moral and trust occur in family-run business
• is times of server economic downturn

6. Challenge.
• They want to win or lose on their own abilities the challenge
gives them psychological satisfaction
 Weaknesses
1. Sales fluctuations

in some months sales are very high, while in other they drop off
dramatically. The individual must balance cash inflows with cash
outflows.
2. Competition- Owning a business is the risk of competition (eg.
Restaurants)
3. Increased responsibilities- owner is often a bookkeeper, accountant
sales person, personnel manager.
4. Financial loses- when the owner makes all major decisions
6. Risk of failure- the ultimate risk the small business owner manger faces
is failure.
 What is basic business idea?

• It is logical to think of a goal for the unit in long run rather than to
look for the immediate tomorrow. This long-term thinking is called
basic business idea
• Businessmen/businesswomen should think of long-term goal and
the profit when they start a business.
• The basic business idea, which is at the top of the hierarchy, is to
meet the broadest needs of the customers, and has the long life
perhaps from 5-50 years.
• The basic business idea facilitates choice of product under an
overall plan.
• Thus, entrepreneur may think of being in the entertainment film,
in automobiles, in medicines, in services, in industries,
etc.
 Con’t

• The product line is relatively narrow and has a shorter life.

The product line consists of different families of product.
• A unit with a basic business idea for example packaging can
manufacture any of the following groups of the products:
• Glass bottles,

• Plastic packages,

• Metal packages,

• Aluminum packages,

• Paper or wood packages.

 Con’t

• The product range includes different size of the product with in the
product line, in the examples given above different size of glass
bottles can be manufactured for varied applications.
• The product is one item of the product range having different
specifications like
• size,
• material used and
• weight, etc.
 What project an entrepreneur should have?

• A project is a complex of economic activities in which the key players

commit scarce/limited resources in the expectation that the benefits gained
will exceed these resources.

• Also, a project, broadly defined, in a way of using resources: a decision

between undertaking and not undertaking a project is a choice between
attentive ways of using resources.

• The project should have to consider the SWOT and should be designed
accordingly.

• The SWOT approach compels individuals to think or reason out

systematically and analytically the important factors strengths, weakness,
opportunities, and threats.
 Con’t

• Strength: is an inherent capacity, which an organization can use to

gain strategic advantage over its competitors.
• Weakness: is an inherent limitation or constraint, which creates a
strategic disadvantage
• Opportunity: refers to any factor that offer promise or potential
for moving closer or more quickly towards the firms goal
• Threat: is any factor that may limit or impede the business in the
pursuit of its goals
 Con’t

To be a successful entrepreneur, one major determinant factor is the

choice of a good business idea. To select the best business idea, the
following general steps needs to be pursued.
*Define objective, identify problem, select best alternative, analyze
the possible alternatives
a. Identify your problem

b. Define your objectives

c. Identify, develop and analyze the possible alternative

d. Select the best alternative in light of the specific criteria set to the
better fulfillment of the objective.
 Steps in business setting

1. The first key to success in any manufacturing activity is

to select the right product. These must be examined
with a view to assess:
…
[Link] marketing aspects
[Link] aspects
c. Financial aspects
 Con’t
2. Having selected a product, a detailed project report to be prepared. This
will cover the following aspects.
…
a. A detailed estimate of demand is to be made.

b. Technical specifications of the process should be carefully studied.

c. The equipment required and their sources are to be specified

d. Requirement of space.

e. The total cost of the project to be worked out, the means for
financing it identified
f. The economics of the entire scheme at projected operating level is to
be assessed.
 Con’t
3. Implementation of the detailed project report. Includes:
a. Deciding on form of ownership and registration
b. Obtaining finance ,Obtaining license
c. Establishing necessary infrastructures
4. Once all the required authorizations and sanctions have been
obtained, simultaneous action is to be taken for the following. Pre-
commissioning requirement
…
a. Ordering machinery from suppliers
b. Obtaining utilities like power and water connections after
constructions of shed, if necessary.
c. Recruitment of staff,
d. Arranging supplies of materials
e. Arranging for distribution of the products
 Con’t

5. Once these are complete, the plant is ready for commissioning trial
run may be made. Commissioning of plant, Includes:
a. Trial run of machineries
b. Promotional activity for the product
c. Introduce the product to the market and obtain feedback
6. The unit is then ready for commercial production.
a. Commercial production