Manage and Maintain Small /medium business operations/ .pptx

this learning module is used for tvet colleges trainees and other ineterpruener person

1. 1 Manage and Maintain Small /medium business operations/ Asendabo TVET Colleges Hardware and Networking Services Level_ IV Prepared By Instructor:- Kedir _T September/8/2023

2. 2.1 Creativity and innovation Creativity is the ability to develop new ideas and to discover new ways of looking at problems and opportunities. Creativity is thinking new things, I nnovation is the ability to apply creative solutions to those problems and opportunities in order to enhance people’s lives or to enrich society innovation is doing new things Entrepreneurship is the result of a disciplined, systematic process of applying creativity and innovation to needs and opportunities in the marketplace. Entrepreneurship = creativity + innovation 2 Prepared By Instructor:-Kedir _T September/8/2023

3. What is Creativity? Creativity is the ability to design , form, make something in a new or different way. The ability to come up with creative solutions to needs/problems and to market them often marks the difference between success and failure in business. Real, successful entrepreneurs are creative in identifying a new product , service or business idea and turning it into a business opportunity. 3 Prepared By Instructor:-Kedir _T September/8/2023

4. Con’t There are three phases which can help to remove ‘idea blocks’ to and enhance creative thinking. background or knowledge accumulation e.g. reading, professional conferences, talking, visit to library idea or eureka( sadden discovery) experience , evaluation and implementation e.g. prototypes, advice. Characteristics of successful entrepreneurs generally include a positive self-image , being motivated by challenging problems, being sensitive to th e world around them , and being good at gathering different ideas in a short amount of time. Developing creativity is a process of changing the way you look at things. To do this you must look for different or unusual relationships between people and things. 4 Prepared By Instructor:-Kedir _T September/8/2023

5. The following questions are designed to incite the imagination and can help develop creativity: Is there a new way to do it? Can you borrow or adapt it? Is there a substitute? Can the parts be rearranged? What if we do just the opposite? Can ideas be combined? What else could we make from this? Are there other markets for it? 5 Prepared By Instructor:-Kedir _T September/8/2023

6. Be aware that there are numerous barriers to creativity, including: Searching for the one ‘right’ answer Focusing on being logical(rational) Blindly following the rules Avoiding ambiguity fearing looking foolish fearing mistakes and failure 6 Prepared By Instructor:-Kedir _T September/8/2023

7. Innovation Schumpeter (1934) was first to point out the importance of new value created by entrepreneurs. More recently, Carland, Hoy, Boulton and Carland (1984) extended and specified Schumpeter’s idea, saying that entrepreneurs:  introduce new goods introduce new services introduce new methods of production open new markets open new sources of supply re-organise industry. 7 Prepared By Instructor:-Kedir _T September/8/2023

8. Con’t There are four distinct types of innovation, these are as follows: Invention - described as the creation of a new product, service or process Extension - the expansion of a product, service or process Duplication - defined as replication of an already existing product, service or process Synthesis - the combination of existing concepts and factors into a new formulation 8 Prepared By Instructor:-Kedir _T September/8/2023

9. Con’t Principles of innovation Action-oriented : The entrepreneur must always be looking for new ideas. Making the product, process or service simple and understandable 9 Prepared By Instructor:-Kedir _T September/8/2023

10. 2.2 GENERATING AND SCREENING BUSINESS IDEAS What is a Business Idea? A business idea is the response of a person or persons, or an organization to solving an identified problem or to meeting perceived needs in the environment (markets, community, etc.). Finding a good idea is the first step in transforming the entrepreneur’s desire and creativity into a business opportunity. 10 Prepared By Instructor:-Kedir _T September/8/2023

11. Why Should you Generate Business Ideas? There are many reasons why entrepreneurs or would-be generate business ideas. Here are just a few: A good idea is essential for a successful business venture – both when starting a business and to stay competitive afterwards . To respond to market needs. Changing fashions and requirements Respond to demand with new ideas, products and services. 11 Prepared By Instructor:-Kedir _T September/8/2023

12. Con’t To stay ahead of the competition . The challenge is to be different or better than others. To exploit technology – do things better. Technology has become a major competitive tool in today’s markets, with the rate of change forcing many firms to innovate . Because of product life cycle . All products have a finite life . As even new products eventually become obsolete or outmoded. To spread risk and allow for failure . - It is therefore necessary for firms to try to spread their risk and allow for failures that may occur from time to time by constantly generating new ideas . 12 Prepared By Instructor:-Kedir _T September/8/2023

13. Sources of Business Ideas Out of 30 business ideas, there may be only one good business opportunity. Hobbies/Personal Interests If, for example, you enjoy playing with computers, cooking, music, traveling, sport or performing (to name but a few), you may be able to develop this hobby/interest into a business. Personal Skills and Experience Franchises A franchise is an arrangement whereby the manufacturer or sole distributor of a trademark, product or service gives exclusive rights for local distribution to independent retailers in return for their payment of royalties and their willingness to conform to standardized operating procedures 13 Prepared By Instructor:-Kedir _T September/8/2023

14. Mass Media (newspapers, magazines, TV, Internet) Take a careful look, for example, at the commercial advertisements in a newspaper or magazine and you may well find businesses for sale Business Exhibitions Surveys Customer Complaints Complaints and frustrations on the part of customers have led to many a new product or service. Changes in Society The world is constantly changing 14 Prepared By Instructor:-Kedir _T September/8/2023

15. 2.1. 3 Identifying and Assessing Business Opportunities What is a Business Opportunity? A business opportunity may be defined simply as an attractive investment of idea or proposition that provides the possibility of a monetary return for the person taking the risk. - Such opportunities are represented by customer requirements and lead to the provision of a product or service which creates or adds value for the buyers or end-users. 15 Prepared By Instructor:-Kedir _T September/8/2023

16. Identifying Business Opportunities Seeing, seeking and acting on opportunities is one of the characteristics of successful entrepreneurs. It is also the basis for starting and maintaining successful ventures . It involves not only generating ideas and recognizing opportunities, but also screening and evaluating them to determine the most viable, attractive propositions to be pursued . 16 Prepared By Instructor:-Kedir _T September/8/2023

17. Characteristics of a good business opportunity To be a good business opportunity, it must fulfill, or be capable of meeting, the following criteria: Real demand: responds to unsatisfied needs or requirements of customers who have the ability to purchase and who are willing to buy Return on investment , provides acceptable returns or rewards for the risk and effort required Be competitive: be equal to or better (from the viewpoint of the customer) than other available products or services Meet objectives: meet the goals and aspirations of the person or organization taking the risk Availability of resources and skills: the entrepreneur is able to obtain the necessary resources. 17 Prepared By Instructor:-Kedir _T September/8/2023

18. Identifying and Assessing Business Opportunities Ideas and opportunities need to be screened and assessed for viability once they have been identified . A good business opportunity should take into account: Industry and market Length of the ‘window of opportunity’ Timing is therefore important. The issue then is to determine the length of time the window will be open , and whether the opportunity can be created or seized before the window closes . Personal goals and competencies of the entrepreneur Management team Competition Capital, technology and other resource requirements Business environment (political, economic, legal, government regulations etc.) 18 Prepared By Instructor:-Kedir _T September/8/2023

19. 2.1.4 Key Success Factors in Setting up a Small Business Key success factors in setting up a small business Motivation and determination Idea and market Resources Ability Plan Organization and Management 19 Prepared By Instructor:-Kedir _T September/8/2023

20. 2.3 Market Selection 2.3.1. Meaning of Market and Marketing A market for a business consists of all the potential customers within a specific geographical area , who need or want a specific product or service and are willing and able to engage in exchange to satisfy the need or want. Potential customers can be described as: People who need or want the product or service. People who are able to buy the product or service. People who are willing to buy the product or service . 20 Prepared By Instructor:-Kedir _T September/8/2023

21. Defining Marketing marketing is the process of planning and executing the conception , pricing , promotion , and distribution of ideas , goods, and services to create exchanges that satisfy individual and organizational goals . The definition of marketing rests on the following core concepts: needs , wants , and demands; products ; value and satisfaction ; exchange and transactions; relationships and networks . 21 Prepared By Instructor:-Kedir _T September/8/2023

22. Con’t Needs describe basic human requirements such as food, air, water, clothing and shelter. People also have strong needs for recreation, education, and entertainment. These needs become wants when they are directed to specific objects/services that might satisfy the need. Wants are specific satisfiers which become demands when backed up by purchasing power. Demands are wants for specific products that are backed by ability to pay and willingness to buy them. 22 Prepared By Instructor:-Kedir _T September/8/2023

23. Value and Satisfaction In terms of marketing, the product or offering will be successful if it delivers value and satisfaction to the target buyer. The buyer chooses between different offerings on the basis of which is perceived to deliver the most value. We define value as a ratio between what the customer gets and what he gives. The customer gets benefits and assumes costs. 23 Prepared By Instructor:-Kedir _T September/8/2023

24. Exchange and Transactions Exchange, the core of marketing, involves obtaining a desired product from someone by offering something in return. For exchange potential to exist, five conditions must be satisfied: There are at least two parties. Each party has something that might be of value to the other party. Each party is capable of communication and delivery. Each party is free to accept or reject the exchange offer. Each party believes it is appropriate or desirable to deal with the other party. 24 Prepared By Instructor:-Kedir _T September/8/2023

25. 2.3.2. Marketing Mix Marketing mix : is the set of marketing tools that the firm uses to pursue its marketing objectives in the target market. Marketing-Mix decisions must be made to influence the trade channels as well as the final consumers. 25 Prepared By Instructor:-Kedir _T September/8/2023

26. Con’t Product: is any combination of goods and services offered to satisfy the needs and wants of consumers. Thus, a product is anything tangible or intangible that can be offered for purchase or use by consumers. Price: Price is simply the amount of money that consumers are willing to pay for a product or service . In modern times, pricing methods and strategies have taken a number of forms. Promotion: Promotion is a communication process that takes place between a business and its various publics. There are four basic promotion tools: advertising, sales promotion, public relations, and personal selling. Place: Place refers to having the right product, in the right location , at the right time to be purchased by consumers . This proper placement of products is done through middle people called the channel of distribution. 26 Prepared By Instructor:-Kedir _T September/8/2023

27. 2.3.3. Marketing Research Marketing research is a s ystematic design, collection, analysis, and reporting of data and findings relevant to a specific marketing situation facing the organization . A marketer before committing his/her resources to the business, he/she should measure whether there is a sufficiently large unsatisfied market through conducting market survey. Market research should also identify trends that may affect sales and profitably levels like population shifts, legal developments, local economic situation, competitors’ activity, etc. 27 Prepared By Instructor:-Kedir _T September/8/2023

28. Con’t The process of conducting a market research involves the following steps: 1. Define the problem define the problem define market research objectives specify what information is required 2 . Develop research plan data sources research approach research instrument sampling plan contact methods time and cost of conducting the research 28 Prepared By Instructor:-Kedir _T September/8/2023

29. Con’t 3. Collect data questionnaire interview focus group discussion observation 4. Analyze data quantitative qualitative 5 . Present findings when the survey is completed, a detailed report on your findings should be prepared in written form. The survey report will help you to assess the feasibility of marketing your product. 6. Make decision based on the findings of the research the marketer will decide whether start or not to start the business. 29 Prepared By Instructor:-Kedir _T September/8/2023

30. 2.3.4. Knowing Potential Customers Entrepreneurs know about potential customers Know the customers: The market can be segmented either by dividing it into meaningful buyer groups using geographic, demographic, psychographic and behavioral variables or dividing it according to characteristics such as age, sex, marital and family status, employment, income and trends regarding any of these characteristics. Know what different customer groups want: By segmenting the marketing into groups, it is easier for entrepreneurs to determine what products or services each group wants or needs. Know where the customer buys: Entrepreneurs need to find out where the customers in their market are presently buying , and determine what factors will cause them to switch and buy from their new businesses . 30 Prepared By Instructor:-Kedir _T September/8/2023

31. Con’t Know when the customer buys: By knowing when customers buy ( daily, weekly, monthly, yearly, or seasonally ), entrepreneurs will be able to determine such things as possible hours of operation, when to advertise and what quantity of merchandise to have on hand at specific times of the year. Know how the customer buys: Knowing how the customer pays for products and services can help the entrepreneur to determine a credit policy as well as a pricing policy for the business. Customers with disabilities : - For example, easy access to buildings benefits people with disabilities, plus others with baby strollers, or doing deliveries, etc... 31 Prepared By Instructor:-Kedir _T September/8/2023

32. Factors Affecting Consumer Market Many of the following factors have contributed to the changing of consumer market: Population changes , such as shift in age, distribution of income, including increases in total purchasing power and the amount spent for “luxuries”. Changes in life-style and attitudes More leisure time. More credit purchases. An increase in the number of white-collar and skilled workers. Higher overall educational level of the population. High rate of inflation. Changes in technology, example mobile phones . 32 Prepared By Instructor:-Kedir _T September/8/2023

33. 2.3.6. Nature of Competition/competitiveness Competition is simply a situation in which organizations compete with each other for something that not everyone can have . In case of business, the things over which companies are competing are profits and market shares. This competitive environment often affects a company’s marketing efforts and its success in reaching a target market. Thus, a firm should assess its industry structure and examine competitors in terms of marketing strategies, domestic or foreign firms , size , and channel competition . 33 Prepared By Instructor:-Kedir _T September/8/2023

34. Competition Structures A company could operate under one of four possible competitive structures: monopoly, oligopoly, monopolistic competition and pure computation. Monopoly It is a type of market structure which can be characterized by the following assumptions: There is a Single supplier (seller) of a given products (good/ service), in which there are no close substitute A seller is a price maker rather than a price taker. There are barriers to entry There can be non price competition through advertising to influence the demand for the product. This type of competition is rare in operation There is price discrimination Example: Regulated public utilities such as natural gas, cable television, etc. 34 Prepared By Instructor:-Kedir _T September/8/2023

35. B. Oligopoly It is a type of market structure which can be characterized by the following assumptions: The market consists of a few sellers (firms) which also known as competition among the few. Sellers are highly sensitive to each other’s pricing and marketing strategies Products may be uniform (standardized) or non uniform (differentiated). An oligopoly which produces homogeneous product is known as pure or perfect oligopoly. It is difficult for entry because of economies of scale or ownership and control over raw materials Example: Industries of aluminum, cement, copper, steel, zinc, etc An oligopoly which produces heterogeneous product is also called as imperfect oligopoly. Example: Producers of consumer goods such as automobiles, cigarettes, rubber tires, beer, refrigerators, etc. 35 Prepared By Instructor:-Kedir _T September/8/2023

36. C. Monopolistic competition It is a type of market structure which can be characterized by the following assumptions: There are many numbers of buyers and sellers in an industry. Firms (sellers) compete with substitute products . Products have close substitutes Each firm has an independent price policy. Competition may be in price or non- price There is free entry and exit Example: Competition of tea and coffee, fast food industries, beauty salons, etc 36 Prepared By Instructor:-Kedir _T September/8/2023

37. D. Pure competition It is a type of market structure which can be characterized by the following assumptions: There are many numbers of sellers and buyers . Many firms sell identical (homogeneous ) goods or services. Firms are unable to create differential advantages. Firms are price takers rather than price makers. There is free entry and exit. There is perfect knowledge and complete market information among the buyers and sellers. Example: Agribusiness (ex. wheat, rice, and grain, etc) 37 Prepared By Instructor:-Kedir _T September/8/2023

38. 2.3.7. Model of Competition (Porter Model) Even though competitive pressures in various industries are never precisely the same, the competitive process works similarly enough to use a common analytical framework in gauging the nature and intensity of competitive forces. Michael Porter has convincingly demonstrated, the state of competition in an industry is a composite of five competitive forces: The Rivalry among competing sellers The Competitive force of potential entry (Threat of Entry) Competitive pressures from substitute products (Threat of Substitute Products) The power of suppliers The power of buyers (customers) 38 Prepared By Instructor:-Kedir _T September/8/2023

39. 39 Prepared By Instructor:-Kedir _T September/8/2023

40. 1. The Rivalry among competing sellers In some industries, rivalry is centered around price competition -sometimes resulting in prices below the level of unit costs and forcing losses on most rivals. In other industries, price competition is minimal and rivalry is focused on such factors as performance feature , new product innovation , quality and durability , warranties , after the sale service , and brand image . Rivalry can range from friendly to cutthroat , depending on how frequently and how aggressively companies undertake fresh moves that threaten rivals profitability 40 Prepared By Instructor:-Kedir _T September/8/2023

41. 2. The Competitive Force of Potential Entry There are several types of entry barriers: Economic of scale -scale economies deter entry because they force potential competitors either to enter on a large-scale basis (a costly and perhaps risky move) or to accept a cost disadvantage (and lower profitability). Entrants may encounter scale- related barriers not just in production , but in advertising, marketing and distribution , financing, after-sale customer service , raw materials purchasing, and R&D as well. 41 Prepared By Instructor:-Kedir _T September/8/2023

42. Inability to gain access to technology and specialized know- how Brand preferences and customer loyalty -buyers are often attached to established brands. Cost disadvantages independent of size -These advantages can include access to the best and the cheapest raw materials, patents and proprietary technology , the benefits of learning and experience curve effects, existing plants built and equipped years earlier at lower costs , favorable locations, and lower borrowing costs. Lack of access to distribution channels - in the case of customer goods, potential entrants may face the barrier of gaining access to product that lacks buyer recognitions. Regulatory policies - government agencies can limit or even entry by requiring licenses and permits. Tariffs and international trade restrictions -national governments commonly use tariffs and trade restriction to raise entry barriers for foreign firms. 42 Prepared By Instructor:-Kedir _T September/8/2023

43. 3. Competitive Pressures from Substitute Products Just how strong the competitive pressures are from substitute products depends on three factors: When the attractively priced substitutes are available, How satisfactory the substitutes are in terms of quality, performance, and other relevant attributes , and The ease with which buyers can switch to substitutes. 43 Prepared By Instructor:-Kedir _T September/8/2023

44. 4. The Power of Suppliers (producer suppliers) Who will be your company's potential suppliers and how powerful are they (i.e. business partners, suppliers of capital, employees, etc.)? Are there good substitute inputs? What are the costs of the inputs relative to the economics of the business? 5. The Power of Buyers (Customers) Buyers can exert bargaining power over a supplier’s industry by forcing its prices down , by reducing the amount of goods they purchase from the industry, or by demanding better quality for the same price. 44 Prepared By Instructor:-Kedir _T September/8/2023

45. 2.4. Selecting Suitable Business Location Location is an important factor influencing the profitability of an enterprise. No business firm can prosper unless it is suited at a place chosen the viewpoint of maximum possible efficiency of operations . Choice of location is a strategic long-term decision that cannot be changed except at considerable loss. Therefore, great care and planning is required to select the most appropriate location. The small scale entrepreneur can use location analysis for this purpose. Location analysis is the dynamic process of analyzing and comparing the appropriateness or otherwise of alternative sites with the aim of selecting the best site for a given enterprise. 45 Prepared By Instructor:-Kedir _T September/8/2023

46. 2.4. Selecting Suitable Business Location It consists of the following: Trade area analysis : It is an analysis of geographic area that provides continued client or customer to the firm . Demographic Analysis : It involves study of population in the area in terms of total population, age composition , perception income , education level , occupation structure, etc. Competitive Analysis : It helps to judge the nature, location, size and quality of competition in a given area . Site Economics : It is necessary to judge and compare the cost of establishment and operation at various sites under consideration . Establishment cost depends on land rent, building, utilities, etc. 46 Prepared By Instructor:-Kedir _T September/8/2023

47. Factor influencing location of a business Raw materials Markets Man power Infrastructure Government policy Ecology and environment Laws & regulation 47 Prepared By Instructor:-Kedir _T September/8/2023

48. Legal Forms of Business Ownership Sole proprietorship/Sole trader It is a business concern owned and operated by one person. The sole proprietor is a person who carries on business exclusively by and for him/herself. It is the most common and the easiest business to start and the initial costs are usually lower than those for other legal forms. the owner is the business and the business is the owner. They're inseparable. 48 Prepared By Instructor:-Kedir _T September/8/2023

49. Legal Forms of Business Ownership Sole proprietorship/Sole trader (Cont’d) Characteristics of sole proprietorship Single ownership One man control/owner manager Undivided risk Unlimited liability: A sole proprietor is personally liable for all the debts of the business . If necessary, this liability includes all of the proprietor’s personal property and assets. No separate entity of the business Minimum government regulations (Since they have few legal requirements, sole proprietorships are easy to form and operate) 49 Prepared By Instructor:-Kedir _T September/8/2023

50. Legal Forms of Business Ownership Sole proprietorship/Sole trader (Cont’d) Advantages of sole proprietorship Simplicity: it is very easy to establish and dissolve the business. Quick decision High privacy Low costs to start Minimum regulations Direct control of business/ personal touch: the owner can maintain personal contact with his employees & clients. Low working capital requirements Tax advantages Owner receives all profits/ direct motivation Flexibility 50 Prepared By Instructor:-Kedir _T September/8/2023

51. Legal Forms of Business Ownership Sole proprietorship/Sole trader (Cont’d) Disdvantages of sole proprietorship Unlimited liability Limited skills Lack of continuity/uncertain life: The business is terminated upon the death or incapacity of the owner. Difficulty in raising capital/limited financial sources The sole proprietor is responsible for all decisions 51 Prepared By Instructor:-Kedir _T September/8/2023

52. Legal Forms of Business Ownership 2. Partnership It is formed through an agreement among two or more persons to carry on jointly a legalized business as co-owners . Like the sole proprietorship, it is not a separate legal entity from its owners.   It is recommended that a partnership agreement, called the Articles of Co-partnership or Memorandum of Association , be prepared in writing by a competent attorney. 52 Prepared By Instructor:-Kedir _T September/8/2023

53. Legal Forms of Business Ownership 2. Partnership The Memorandum of Association should contain at least the following provisions: division of profit or loss compensation to each partner distribution of assets in the event of dissolution duration of the partnership duties of each partner Persons who enter into such agreement are partners. 53 Prepared By Instructor:-Kedir _T September/8/2023

54. Legal Forms of Business Ownership 2. Partnership (Cont’d) Characteristics of Partnership Association of two or more persons Contractual relationship/ mutual agreement Existence of lawful business Sharing of profit and loss Mutual agency among partners: Each partner is responsible and liable for the faults and wrongful acts of a co-partners with regard to business obligations. No separate legal entity of the business Unlimited liability Restriction on transfer of interest Utmost good faith 54 Prepared By Instructor:-Kedir _T September/8/2023

55. Legal Forms of Business Ownership 2. Partnership (Cont’d) Advantages of Partnership Easy to form Low costs to start Larger/added capital sources Shared management/specialization Protection of minority interest: each partner has an equal role in management of firm’s affair. Capacity for survival: the partnership is terminated upon the death, incapacity or withdrawal of any one of the partners, unless the remaining business partners buy the deceased, incapacitated or withdrawn partner’s interest. Business privacy 55 Prepared By Instructor:-Kedir _T September/8/2023

56. Legal Forms of Business Ownership 2. Partnership (Cont’d) Disadvantages of Partnership Unlimited liability Lack of continuity Lack of harmony Risk of implied agency Shared authority Difficulty in raising additional capital/limited financial sources Non-transferability of interest Difficulty in finding suitable partners 56 Prepared By Instructor:-Kedir _T September/8/2023

57. Legal Forms of Business Ownership 3. Share Company (Corporation) It is an association of stockholders that has been established to allow a group of entrepreneurs to act as one. The officials of the share company must file a special document, called the Articles of Incorporation/Charter. It is essentially an "artificial person" created and operated with the permission of the state where it is incorporated. It's a person like you, but only "on paper.’’ It has a separate legal entity, this allows the corporation to actually owns and operates the business on behalf of the shareholder, under the shareholder's total control . 57 Prepared By Instructor:-Kedir _T September/8/2023

58. Legal Forms of Business Ownership 3. Share Company (Cont’d…) The separation between the owners and the business provides a legal distinction between them and provides three important benefits: It allows you, the owner, to hire yourself as an employee (typically as president) and then participate in company-funded employee benefit plans like medical insurance and retirement plans. Since you and your company are now two separate legal entities , lawsuits can be brought against your company instead of you personally . When debt is incurred in the company name, a separate legal entity, you are not personally liable and your assets cannot be taken to settle company obligations. 58 Prepared By Instructor:-Kedir _T September/8/2023

59. Legal Forms of Business Ownership 3. Share Company (Cont’d…) It is more difficult to form a share company than the other two types of business given above, and it is usually more costly. It is usually in the best position to obtain additional capital . In addition to pledging corporate assets as collateral, a limited company may sell additional stock in the company to raise funds. 59 Prepared By Instructor:-Kedir _T September/8/2023

60. Legal Forms of Business Ownership 3. Share Company (Cont’d) Characteristics of share company Artificial personality: separate legal personality distinct from owners. Limited liability Continuity: it has a separate and continuous life of its own, and does not dissolve if a stockholder dies or the stock is sold to another person. Double taxation/taxed twice: first there is tax on the amount of the business profits. Then the owners are also taxed on any dividends they may receive. Managed by professional managers 60 Prepared By Instructor:-Kedir _T September/8/2023

61. Legal Forms of Business Ownership 3. Share Company (Cont’d) Advantages of share company Limited liability Management can specialize Transferable of ownership Continuous existence/perpetuity Separate legal entity Easier to raise capital Separation of ownership and management 61 Prepared By Instructor:-Kedir _T September/8/2023

62. Legal Forms of Business Ownership 3. Share Company (Cont’d) Disadvantages of share company Closely regulated by state Most expensive form to organize (cost, time and paperwork) Red-tape Charter restrictions Extensive record keeping required Double taxation (company and stockholders) 62 Prepared By Instructor:-Kedir _T September/8/2023

63. Legal Forms of Business Ownership 4. Cooperative It is a group of ten or more people operating a business through a jointly owned and democratically run organization. The cost of registering a cooperative is usually lower than the cost for registering a share company . A written cooperative agreement is required and must be filed with the appropriate government authorities. The management of a cooperative is elected by the members of the cooperative. The cooperative has a life of its own. Each member of the cooperative is liable for the debts of the cooperative but only in accordance with cooperative laws & regulations. 63 Prepared By Instructor:-Kedir _T September/8/2023

64. Legal Forms of Business Ownership 4. Cooperative (Cont’d) Advantages of cooperative Means to empower poor women, disabled persons and other groups who often lack a voice Joint self-help Organizational structure helps all members Shared risk-taking Easier to raise capital Combines individual skills 64 Prepared By Instructor:-Kedir _T September/8/2023

65. Legal Forms of Business Ownership 4. Cooperative (Cont’d) Disadvantages of cooperative Hard to keep qualified members Members contributing to cooperative unequally Shared authority Gender issues Governance challenges 65 Prepared By Instructor:-Kedir _T September/8/2023

66. 66 Basic Concepts Setting up a business requires a certain amount of money that has to be spent before the business activities can start to generate income through sales . Most of the time potential entrepreneurs underestimate the amount needed because they only take into account the expenditures for investment items such as premises, machinery, equipment , vehicles , inventory and so on. Prepared By Instructor:-Kedir _T September/8/2023

67. 67 Basic Concepts In case, working capital is underestimated, the business may not have money to pay salaries, renew stock or (in the worst cases) make loan repayments. To reduce such problems, it is important to include a certain percentage for unforeseen items and working capital in the investment capital. Prepared By Instructor:-Kedir _T September/8/2023

68. 68 Estimating the Start-up Capital A person who wants to start a business must be aware that a certain amount of money is needed during the start-up process of a business for making payments before the business begins to generate enough sales income . This money is called start-up capital. Start-up capital serves two purposes. Pre-operation payments Initial operation payments Prepared By Instructor:-Kedir _T September/8/2023

69. 69 1. Pre-operation payments or investment capital This is money that a person starting a business will have to pay before the business starts operating . The money needed for these payments is invested in the business as long as the business is operating. It includes buying land , constructing a workshop , purchasing machineries , tools , equipment and office furniture, utility connections for water , electricity and telephone, legal fees , publicity and advertising, etc. Prepared By Instructor:-Kedir _T September/8/2023

70. 70 1. Pre-operation payments (Cont’d) People very often do not realize that a number of other payments have to be made before they can really start their business. For example: Cost of installing machines, Training expenses to train workers to use machines Fees for licenses and insurance Costs related to renovation of facilities Prepared By Instructor:-Kedir _T September/8/2023

71. 71 2. Initial operation payments or working capital It will occur after a new business started to operate, to cover immediate expenses until revenues from sales flow back into the business . It is invested permanently in the business and is called working capital. When the business expands the working capital needs to be increased Prepared By Instructor:-Kedir _T September/8/2023

72. 72 2. Initial operation payments (Cont’d) The need for working capital is also often underestimated. Business starters think they will be paid immediately. Even if the working capital is underestimated, an entrepreneur may have a flourishing business, but may run out of money to pay salaries , buy additional merchandise for sale, etc. It is recommended that a certain percentage is included in the investment capital for unforeseen items. Working capital should also include additional funds for unforeseen expenses. Prepared By Instructor:-Kedir _T September/8/2023

73. 73 Obtaining Money to Start an Enterprise Prepared By Instructor:-Kedir _T September/8/2023

74. 74 Sources of Business Financing There are two common primary sources of business financing: Equity capital/equity financing or Borrowing capital/credit or debt financing. Prepared By Instructor:-Kedir _T September/8/2023

75. 75 Equity financing It is the money the owner puts or invests into the business. The main sources of equity financing are: Personal savings Family, relatives and friends Partners Corporation ( sell stock to raise equity capital ) Financial experts state that 30% of the money needed to start a small business should come from the owner. Potential/future entrepreneurs must work and save to have enough money to start a business . Prepared By Instructor:-Kedir _T September/8/2023

76. 76 Credit or debt financing Borrowing needed capital for the business. Lending institutions must sense that the business owner has a personal commitment and involvement in the business in terms of the time, energy and money the owner is willing to contribute to the business. The main sources of credit or debt financing are: Banks, Finance companies, Governments agencies (with loan schemes), Trade credit and Microfinance institutions Prepared By Instructor:-Kedir _T September/8/2023

77. 77 Factors to be considered by a banker when evaluating a loan applicant The five C’s of credit: Character Credit history ,borrowers reputation or track record for repaying debts 2. Capacity Borrowers ability to repay loan 3. Capital applicant’s personal worth (wealth) will be examined, including savings and any other personal or real property (land, buildings, etc.). 4. Conditions Term of the loan ,economic conditions that might affect the borrower 5. Collateral Personal asset pledged borrower as a security as aloan A well-researched and realistic business plan that shows viability of the business Business strategy or plan of action which clearly describe how the business will be operated , how much money will be needed and how it will be used, and at what point the business will be profitable. Experience or knowledge of perspective business owner in the area of the proposed business. Prepared By Instructor:-Kedir _T September/8/2023

78. 78 Considerations in applying for a business loan Different lending institutions have different procedures which have to be followed by the loan applicant. It is necessary to understand the following factors that are taken into consideration when a banker is appraising a loan application. Type of loan Purpose of the loan Credit worthiness and integrity of the borrower Capability Repayment period Security or collateral Guarantors Business plan Customers past financial records Prepared By Instructor:-Kedir _T September/8/2023

79. 79 Prepared By Instructor:-Kedir _T September/8/2023