The below articles originate from the micro,small and medium enterprises manuals ( in Both English & Kiswahili ) also accessible on this portal.Each article is centered around a specific topic as per developed manuals. The MSMEs information portal project publish English business articles on Daily News every Tuesday. This list is updated whenever a new article is published.
Basics to creating your own business
Tanzania economy has been creating fewer and fewer jobs, worsening the country’s labour force which experiences pressure from youths graduating from colleges every year.
Figures from the National Bureau of Statics indicates that in 2014 the country created as low as 282,382 formal jobs against more than 400,000 graduates who left colleges.
If the 2014 formal employment figures is anything to go by Tanzania needs to do a lot to increase employment opportunities.
Probably, the only remaining solutions to unemployment is through self employment (entrepreneurship). But worse enough even youth who want to venture into businesses don’t know how to do it because the education system does little or no training on entrepreneurship.
Even as the Fifth Government is at the forefront of promoting industrialization as a strategy to achieve middle income state by 2025, lack of entrepreneurial skills may act like a stumbling block to achieving this target.
This column will be offering you with basic tips on how to start businesses, how to manage businesses and how to obtain finance for your businesses.
Let us start by understanding the business concept and some basics of starting a business.
Definition of “Business”
A business may be defined as an activity of buying and selling goods and services for profit. Business can be done by exchanging goods for goods, goods for services or by exchanging goods for money.
Purpose of doing business
Any business undertaking aims at making profit.
Profit is the amount that remains after subtracting the cost of providing the service or product from what one gets after selling. When production cost is higher than sales it should alarm the owner because the business is making losses.
What is entrepreneurship
Entrepreneurship is recognized as the ability to create and build something from practically nothing. It is initiating, doing, achieving and building an enterprise or organization, rather than just watching, analyzing or describing one. It is the knack of sensing an opportunity where others see chaos, contradiction and confusion. It is the ability to build a founding team to complement your own skills and talents. It is the know-how to find, marshal and control resources and to make sure you don’t run out of money when you need it most. Finally, it is the willingness to take calculated risks, both personal and financial, and then to do everything possible to get the odds in your favor.
Definition of an “entrepreneur”
A kind of person who organizes, operates and assumes the risks for a business venture; a person who rather than working as employee runs his /her own business and assume all the risks and reward of given business venture, idea or good or service offered for sale.
Key roles and functions of an entrepreneur
- A business leader
- Innovator: An innovator of new process
- Profit maker: Maker of profitable ideas
- Visionary: Deliver of potential economic profit (visionary)
- Promoter: Promoter of new idea, business concept or system (sales person)
- Mobilizer: Mobilize of factors of production (resources)
- Organizer & planner: Organizer and planner of factors of production
- Manager: Manager of factor of production
What are qualities of entrepreneurs?
- Self Disciplined: These individuals are focused on making their businesses work, and eliminate any hindrances or distractions to their goals. They have overarching strategies and outline the tactics to accomplish them. Successful entrepreneurs are disciplined enough to take steps every day toward the achievement of their objectives.
- Self Confidence: The entrepreneur does not ask questions about whether they can succeed or whether they are worthy of success. They are confident with the knowledge that they will make their businesses succeed. They exude that confidence in everything they do.
- Open Minded: Entrepreneurs realize that every event and situation is a business opportunity. Ideas are constantly being generated about workflows and efficiency, people skills and potential new businesses. They have the ability to look at everything around them and focus it toward their goals.
- Self Starter: Entrepreneurs know that if something needs to be done, they should start it themselves. They set the parameters and make sure that projects follow that path. They are proactive, not waiting for someone to give them permission.
- Competitive: Many companies are formed because an entrepreneur knows that they can do a job better than another. They need to win at the sports they play and need to win at the businesses that they create. An entrepreneur will highlight their own company’s track record of success.
- Creativity: One facet of creativity is being able to make connections between seemingly unrelated events or situations. Entrepreneurs often come up with solutions which are the synthesis of other items. They will re-purpose products to market them to new industries.
- Determination: Entrepreneurs are not thwarted by their defeats. They look at defeat as an opportunity for success. They are determined to make all of their endeavors succeed, so will try and try again until it does. Successful entrepreneurs do not believe that something cannot be done.
- Strong people skills: The entrepreneur has strong communication skills to sell the product and motivate employees. Most successful entrepreneurs know how to motivate their employees so the business grows overall. They are very good at highlighting the benefits of any situation and coaching others to their success.
- Strong work ethic: The successful entrepreneur will often be the first person to arrive at the office and the last one to leave. They will come in on their days off to make sure that an outcome meets their expectations. Their mind is constantly on their work, whether they are in or out of the workplace.
- Passion: Passion is the most important trait of the successful entrepreneur. They genuinely love their work. They are willing to put in those extra hours to make the business succeed because there is a joy their business gives which goes beyond the money. The successful entrepreneur will always be reading and researching ways to make the business better.
Successful entrepreneurs want to see what the view is like at the top of the business mountain. Once they see it, they want to go further. They know how to talk to their employees, and their businesses soar as a result.
Starting your own Business
Last Week we discussed about different business concepts. We discussed the meaning of a Business, purpose of doing business, what are business activities, meaning of entrepreneurship and qualities of an entrepreneur.
Today we will continue with “How to actually start your own business”. As already discussed last week, an entrepreneur needs to have self discipline, self confidence, open mind, creativity, self determination among others to run their own business. Below are simple techniques that will guide you to start your own business.
Starting a Business
Any business starts out as an idea, but it should be transformed into action. This is where many individuals begin to feel overwhelmed. It is understandable to freeze up at the load of things that are required to get a business started, but getting going is actually easier than you might think. Like any big goal, if you start by breaking it down into smaller tasks, you’ll be able to tackle enough of the actions necessary to get started.
How to Start a Small Business
Starting and managing a business requires motivation, desire and talent. It also takes research and planning. Like a “Draft Board game”, success in a small business starts with decisive and correct opening moves. And, although initial mistakes will not destroy your business, it takes skill, discipline, hard work and at times additional resources such as time, labor or funds to fix them.
To increase your chances for success, take time up front to explore and evaluate your business and personal goals. Then use this information to build a comprehensive and well thought business plan that will help you reach these goals.
The process of developing a business plan will help you think through some important issues, that you may not have considered yet. Your plan will become a valuable tool as you try to raise money for your business. It should also provide milestones to keep track of your success.
There are four factors that are required in any given business endeavor. Before starting, list your reasons for wanting to go into business. Some of the most common reasons for starting a business are:
- You want to be your own boss.
- You want financial independence.
- You want creative freedom.
- You want to fully use your skills and knowledge
What type of business is right for you?
To determine what business is “right for you.” Ask yourself these questions:
- What do I like to do with my time?
- What technical skills have I learned or developed?
- What do others say I am good at?
- How much time do I have to run a successful business?
- Do I have any hobbies or interests that are marketable?
- What niche will your business fill?
- Is my idea practical and will it fill a need?
- Who are my competitors? What is my competitive advantage?
- Can I deliver a better quality of service?
- Can I create demand for my business?
Based on your response to the above questions, you can clearly start to see through the noise of many business ideas.
Before starting a business, it is always important to think of how your business is going to turn out. Below is a summary of some of the questions to help you start preparing by considering most of the requirements.
- What business am I interested in starting?
- What services or products will I sell? Where will I be located?
- What skills and experience do I bring to the business?
- What will be my legal structure?
- What will I name my business?
- What equipment or supplies will I need?
- What insurance coverage will be needed?
- What financing will I need?
- What are my resources and how will I compensate myself?
Your answers will help you create a focused, well researched business plan that should serve as a blueprint and provide details on how the business will be operated, managed and capitalized.
What business structure, do I want?
When organizing a new business, one of the most important decisions to be made is choosing the structure of a business. Factors influencing your decision about your business organization include:
- Legal restrictions requirements
- Liabilities assumed
- Type of business operation
- Earnings distribution
- Capital needs
- Number of employees and management
- Accounting/Tax advantages or disadvantages
- Length of business operation (business cycle)
Types of business structure
One of the first decisions you will need to make for your new business is choosing the type of legal organization that is best for you. The choice you make is important because it will determine what your business can and cannot do, what will happen if someone sues you, and how both you and your business are taxed.
Today we are going to talk about four of the most common business structures namely; Sole Proprietorship, Partnership ,Corporation and franchising
This is the easiest and least costly way of starting a business. A sole proprietorship can be formed by finding a location and opening the door for your business.
There are likely to be fees to register your business name and other necessary licenses. The Business Registrations and Licensing Agency requires that when starting a business one needs at least Sh20,000 to register a business name.
A sole proprietorship can operate under the name of its owner or it can do business under a fictitious name, such as Nancy’s Nail Salon. The fictitious name is simply a trade name–it does not create a legal entity separate from the sole proprietor owner.
The sole proprietorship is a popular business form due to its simplicity, ease of setup, and nominal cost. A sole proprietor need only to register his or her name and secure local licenses to start operation.
A distinct disadvantage, however, is that the owner of a sole proprietorship remains personally liable for all the business’s debts. So, if a sole proprietor business runs into financial trouble, creditors can bring lawsuits against the business owner. If such suits are successful, the owner will have to pay the business debts with his or her own money. Below are some of the pros and cons of sole proprietorship
- Registration is instant, easy and inexpensive.
- Carry little, if any, ongoing formalities.
- Owners may freely mix business with their personal assets.
- Owners are subject to unlimited personal liability for the debts and losses of the business.
- Owners cannot raise capital by selling an interest in the business.
- Sole proprietorships rarely survive the death or incapacity of their owners and so do not retain value.
Partnership is the most common type of business structure for businesses with more than one owner. There are several types of partnerships. The two most common types are general and limited partnerships. A general partnership can be formed simply by an oral agreement between two or more persons, and each person is full responsible for the business. A limited partnership is where at least one owner is a general partner and at least one owner is a limited partner. The general partners make everyday business decisions and are personally liable for business debts. However, limited partners simply invest in the business and have little control over business operations.
If you opt to have a limited partnership, it is highly recommended to have an agreement drawn up by an attorney.
A partnership agreement drawn up by an attorney could be helpful in solving any arising disputes. However, partners are responsible for the other partner’s business actions, as well as their own. Based on best practices, a Partnership Agreement should include the following:
- Type of business
- Amount of equity invested by each partner
- Division of profit or loss
- Partner compensation
- Distribution of assets on dissolution
- Duration of partnership
- Provisions for changes or dissolving the partnership
- Dispute settlement clause
- Restrictions of authority and expenditures
- Settlement in case of death or incapacitation
A business may incorporate without an attorney, but legal advice is highly recommended. The corporate structure is usually the most complex and more costly to organize than the other three business formations. Control depends on stock ownership. Persons with the largest stock ownership, not the total number of shareholders, control the corporation. With control of stock shares or 51 percent of stock, a person or group is able to make policy decisions. Control is exercised through regular board of directors’ meetings and annual stockholders’ meetings.
Franchising is a type of business ownership where an entity is authorized to distribute or sell goods and services for another company in a certain area. An example of franchising is on Pepsi products. Generally , Pepsi Company produce syrup concentrate only and sold to bottles around the world who finish the product and distribute to retail stores.
In addition to a well-known brand name, buying a franchise offers many other advantages that aren’t available to the entrepreneur who is starting a business from scratch. Perhaps the most significant is that you get a proven system of operation and training in how to use it. New franchisees can avoid a lot of the mistakes startup entrepreneurs typically make because the franchisor has already perfected daily operations through trial and error. It is recommended to find out the following before entering into franchising business;
- If the franchisor–as well as the current franchisees–are profitable
- How well-organized the franchise is
- If it has national adaptability
- Whether it has good public acceptance
- What its unique selling proposition is
- How good the financial controls of the business are
- If the franchise is credible
- If the cash requirements are reasonable
- What the integrity and commitment of the franchisor are
- If the franchisor has a monitoring system
- Which goods are proprietary and must be purchased from the franchisor
- What the success ratio is in the industry
Finding a Niche Market
A niche market is the division of the market on which a specific product is focused.
A market in its entirety is too broad in scope for any but the largest companies to tackle successfully. The best strategy for a smaller business is to divide demand into manageable market niches, or areas of special focus.
Small operations can then offer specialized goods and services attractive to a specific group of prospective buyers. There are undoubtedly some particular products or services you are especially suited to provide. Study the market carefully and you will find opportunities.
While researching your own company’s niche, consider the results of your market survey and the areas in which your competitors already have strong businesses.
Put this information into a table or a graph to show where an opening might be for your product or service. Try to find the right combination of products, services, quality, and price that will ensure the least direct competition. Unfortunately, there is no universally effective way to make these comparisons. Not only will the desired attributes vary from industry to industry, but it also takes imagination, which cannot be learned from a book.
A well-designed database can help you sort through your market information and reveal particular segments you might not see otherwise. For example, do customers in a certain geographic area tend to purchase products that combine high quality and high price more frequently? Do your individual clients take advantage of your customer service more often than large groups from hotels? If so, consider focusing on being a local provider of high quality goods and services, or a service-oriented company that pays extra attention to individuals.
If you do target a new niche market, make sure that this niche does not conflict with your overall business plan. For example, a small tour guide shop that focuses on individual clients go after the market for cruise ship tourists.
What you need before establishing your business
In this topic entrepreneurs will learn how to identify needs in their local community using their skills. Knowing customer needs is very crucial in ensuring that your business grows and generates revenue. Here entrepreneurs are required to use their own skills and talents to assess the market needs. The skills needed are mostly those we use in our daily lives to mingle with the community. Proper identification of market needs provides a powerful force to launch a viable business enterprise. Below are key items to consider
- Assess demand
The first step in starting a business is to identify a need in the community. Establishing the size of that need is called assessing demand. It is a waste of time to jump into developing a business plan before undergoing a thorough and proper demand assessment first.
Demand refers to the willingness to go out and buy a certain product/service. Hence, market demand is the total of what everybody in the market wants.
How can an entrepreneur assess demand of a product/services?
There are several ways to assess the demand of a product / service in the community. Some of the most common ways include;
- Listening to peoples’ complaints about a specific need in the community
- Conducting informal survey especially at the market place
- Sending out questionnaires to sample population
- Scoping by reading and listening for highlights of needs in local newspapers or radio programs as well as other sources of information.
- Complaints or demands highlighted on social platforms.
Accessing demand is amongst the biggest milestone you will make before establishing your business. This will help you establish the right business for the right people.
Assessing your target market
Before you are able to sell anything, you have to understand who you are selling to. You have to create a complete portrait of your customer and know why they want your product and how they will use it. By determining who will buy your products, you can fine tune the various aspects of your marketing message to appeal to this group and to avoid wasting time, money and other resources on non-customers. One needs to assess the kind of customer attracted in buying their products /service and from which demographic segment they come from such as their age, gender, occupation, education level, location and socioeconomic status amongst others.
Assess your market size
The starting point for estimating the market size is to understand the problem you solve for customers and the potential value your product generates for them . You need to analyze whether the market is growing in numbers or declining and how to reach them? In addition to this you need to examine trends which are relevant to the target market.
You need to demonstrate how your product/service differs from that of your competitors. Here you may try to ensure that the quality of your products is superior to that of your competitors. You may also want to package your goods in a more attractive package and brand it better than your competitors.
2. Sizing up the market
Sizing the market is a necessary task for business planning and budgeting for all start ups. If you wish to invest in a certain business then you need to understand the potential market size. In order to determine the market size for your start up, you need to ask yourself the following questions.
- What problem are you solving?
- Who is your target customer?
- What competitors’ products/services exist in your space? And
- What is the estimate number of target customers?
Customers must be made aware of availability of a new product or service and should be able to obtain it. Helping customers to understand the product and service and how they can obtain it is referred to as a marketing strategy. It is very crucial for any business to have an effective marketing strategy.
Any marketing strategy must take into consideration the following factors:
The location of the business – The business must be located at a place easy to reach, it must have enough space to accommodate many customers at once, and with enough car parking lots.
Advertising – A special budget can be set aside for advertising your new business. The advertisement can be done through social media, blogs, local newspapers or placing posters to road junctions and at areas where people meet.
Packaging – Make sure that your products are well packaged and branded. The package must make it comfortable for customers to carry and needs to be neat and attractive.
The need for good relationship with other businesses – Establishing your business doesn’t mean that you don’t talk with your competitors. You need to be close to them and have a good relationship, competitors are members of your community hence having a good relationship is key for your social wellbeing.
Reputation in the community (word of mouth) – In normal circumstances it is not easy to please everyone, but try as much as you can to be close to members of your community. Talk nicely and set time to participate in social activities.
Competitor’s price – You need to examine clearly prices for the same goods as yours, which are present in the market. This will guide you to set competitive prices for your products.
All in all any entrepreneur should be willing to adapt products or services to customer preference, taking into consideration local safety and security regulations. A new product may have an initial period of high demand. However, a saturation point may be reached and demand may stay stable or even decrease. A sustainable market is one in which demand price keeps on increasing or stays stable with a steady rate of replacement.
3. Estimating cost and setting a price
A product or service may be exchanged for money or for another product or service. Most businesses will want to make profit on product or services sold. Profit is the difference between cost price and selling price. A part of the profit can be reinvested or used for expansion of the business. A reasonable margin of profit enables the business to continue and even expand.
Definition of “Costs”
An amount that has to be paid or given up in order to get something. All expenses are costs, but not all costs are expenses.
Types of Costs
There are two types of costs;
Direct costs: These are costs directly related to the product or services that business produce or sell. E.g. the money we pay people who work in making or selling product; transport of materials or product; and consumable bills.
Indirect costs: These are all other costs for running the business. They include; rent, license, security, utility among others. Indirect costs are also known as overhead costs as they are paid whether the business is producing or not.
Factors to consider in setting a price and formulating an effective price strategy
When setting a price for product or service one needs to consider the following:
- Total production cost (direct and indirect)
- How much customers are willing to pay
- Competitors price
- Short supply of product /service “Scarcity”
- Product/ service demand
- Government policies
It is therefore important to accurately calculate each of these, so that the ﬁnal selling price is realistic. Selling price can be established using the below formula
Cost of production + overheads + profits = selling price
The entrepreneur should be careful in setting the level of proﬁt intended to be made on the sale of a product or service, by also taking into account the relationship between demand of the product and the available supply. If demand is higher than the available supply, the price (and thus the proﬁt) may be increased. If there is a large supply, but few people want to buy, then prices may drop. An excessively high price due to a big margin of proﬁt will dissuade customers. When sales increase, proﬁt margins may be reduced. This can enable the entrepreneur to lower the selling price, therefore allowing the business to ‘capture’ the market and even expand it.
Introduction to Business Management
Good Business Management is key to a Successful Business
Last week we discussed on how to identify needs in the local community before starting a business. We found out that knowing customer needs is very crucial in ensuring that your business grows and generate revenue. An entrepreneur is required to use own skills and talents to access market needs. Proper identification of need becomes a powerful force to launch a viable business enterprise.
Now, as you have established your business, you need to put efforts and hard work for it to prosper. Without that, planning and efforts invested in establishing your business will be futile. In today’s topic we discuss various aspects of good business management.
Managing your business
Owning a business comes up with number of challenges which are unique to the size and functions of the business itself. The business owner is obliged to handle all emerging challenges, ranging from selling, delivering, financing and ensuring business growth. For smaller businesses, the owner usually deal with these challenges alone or with few staff while trying to make her business successful.
Experience have shown that managerial function is amongst the biggest challenge facing entrepreneurs. The fact is that proper business management is the backbone of every successful business and any startup business ought to survive should embrace this norm.
Good business management therefore means organizing your business in such a way that you make as much profit as possible.
Built Good Relationship with Key Stakeholders
For your business to prosper any entrepreneur need to build good relationship with the following stakeholders;
Experience shows that without having good relationship with the above stakeholders, prosperity of your business is at risk. So, nurturing relationships with your customers, suppliers and workers is a crucial part of growing a successful business.
Apart from building good relationship an entrepreneur need to possess/acquire several qualities that will help one succeed in business.
Among those qualities includes:
- Effective Communication Skills
- Employees recruitment and management skills
- Supervision Skills
- Financial Management Skills
Any entrepreneur need to understand that good business management comprises of many aspect of business in general, including; keeping records of income and expenditure, buying and selling on credit, calculating your profit or loss, setting a good price, good planning and many others. Although not exhaustive, possessing/ acquiring the above qualities and using them have proved to help success of many business. Below is a detailed explanation on each of the above qualities;
- Effective Communication Skills
Business communication is any form of communication being verbal or non verbal that is used to relay a massage, promote a product or service or share information. Communication is essential for success in any business. The type of communication vary given the circumstances and business needs.
The role of business communication is to inform, persuade and build good relationship both in and outside the business environment.
Creating good business relationship especially with your customers is a business opportunity that should not be overlooked. Most businesses are failing when it comes to the customer experience.
Types of communication
Communication can be divided between verbal and non-verbal communication. Verbal communication is communication using speech that is understood by all parties to the communication. In other word written communication falls under its own category.
Non-verbal communication is a bit more complicated. It is sending a massage without using words to convey meaning. Non –verbal communication can include many different elements. such as vocal clue, body movement, facial expression, space, touch, clothing and artifacts
Formal and informal communication
Entrepreneurs need to communicate effectively. Without good business communication, the internal and external structure of a business can face numerous challenges that can ultimately lead to its downfall.
Formal communication is mostly used by big entrepreneurs where personal interaction may not be practical. Formal communication involves utilizing the formal communication channels through well written guidelines such as memo and letters.
Informal communication on the other hand is between entrepreneurs outside the formal communication structure. Here entrepreneurs use informal means such as advertisements on billboards, door to door communication about the product and many others.
It should be known that when communication lines are open between a business and its customers, it can ultimately boosts the performance of a business.
- Employees recruitment and management Skills
- Basing on United Republic of Tanzania, employing workers must adhere to the already established guidelines. In this, there are basic three laws that guide the process and one need to adhere to; Empowerment and Labor Relation Act, Occupational Health and Safety Act and, Vocational Education and Training Act
Guideline for employees recruitment
You must have the required standard for employees in terms of
- Education level
NB: the government in the country sets Age and Minimum salary for employees
As an entrepreneur you need to have an actual number of employees that suit your business needs. You need also to plan the overall benefits and incentives that will be offered to the employees to attract them. These may include paid vacation, transport allowance and health benefits. Make sure to crosscheck all the necessary documents before hiring.
Maintaining employees in an organization solely depends on the overall working environment that the workers are subjected to. There are many strategies that can be employed in order to maintain employees for longer time. In some business creating good working environment and provision on incentives to hard worker are usually among the strategies that are used.
Basic ways to keep employees
Arguably, making an employee comfortable in their roles within the business is a contributing factor to keep him/her. This can be done through;
- Regular review and addressing received suggestions and recommendations. .
- Provision of incentives or rewards for extra efforts. This can save as motivation for employees.
- Regular verbal praise for good performers. This can also be a form of motivation which doesn’t involve any financial costs for the business.
- Having in place a mechanism to control office misunderstandings for reducing burnouts is also a good way of maintaining your employees.
As in the recruitment of employment, termination of employees is in most case a legal matter. Terminating a contract usually requires reviewing of the necessary clause present in the contract so as to avoid legal actions against your business.
Things to consider when firing employees
- Understand the legal issues associated with employee’s termination
- Put in place the benefits that one will receive after termination
- Collect all the company accessories that the employee had in their possession
- Make sure to have a lawyer in place to oversee the whole process
Next Week we will continue discussing qualities of a good entrepreneur. We will get details of supervision skills and Financial Management skills.
Financial Management skills
Last week we discussed that owning a business comes with numerous challenges which are unique to the size and functions of every business. Business owners are obliged to operate their businesses and handle all emerging challenges. Challenges that can be expected may range from the actual selling, delivery, financing and other activities in the undertaking to grow the business. In the case of smaller businesses, the owner usually deals with these challenges alone or with few staff, while trying to make their business successful.
We saw that building a good relationship with stakeholders is key to the success of any business. Without having good relations with your customers, employees and suppliers, the prosperity of your business is at risk. So, nurturing relationships with your key stakeholders is a crucial part of growing a successful business.
In today’s topic we focus our discussion on how to manage the finances your business generates.
It should be understood that every business, big or small, is always concerned about finance management. Proper financial management is very important in surviving a volatile economy and competition from other businesses. Effective management of finances is also essential, as it provides people with options for savings, that later on can be used for further business expansion.
Small businesses in particular, need to be careful about their financial decisions from the very beginning. They need to have a proper financial structure that gives them detailed information on income and expenditure. By stating clearly income and expenses, entrepreneurs will be able to turn their ventures into success stories.
The following tips will greatly contribute to effective finance management if taken into consideration in all your business undertaking;
Having multiple sources of income
I guess many of us have heard the phrase ‘Don’t put all your eggs in one basket’, and most of us would arrive at the literal meaning, that if you put all your eggs in one basket, and happen to drop the basket, all the eggs would break, and you’d be left with no eggs.
Experts are using the same logic to recommend entrepreneurs diversify their investment portfolio by having multiple sources of income. This way, if one of your investments or income streams goes dry, you can still stay afloat.
Although it might be difficult for beginning entrepreneurs, it is very crucial for one to have multiple sources of income. This is good in the sense that failure from one source will not result in the complete failure of the business, as other sources will be available to cover for the incurred losses.
Savings for bad/under-performing months
Another issue which entrepreneurs need to be aware of is that there will be months where the business is under-performing and therefore it is important to have, saving for those months. Here, an entrepreneur needs to have at least 6 months expenditure amount as savings to avoid instant failure in case of sudden under-performance of the business. This is essential to allow other functions to continue while an entrepreneur is searching for alternative options to reduce the impact that was caused by the under-performance.
Having some savings will help you to get out of debt at times when your business is performing low. Maintaining a “reserve fund” will also help you to notice if your spending is getting out of hand.
So, if you haven’t started saving start today., You may start today, by setting aside a little money each day. If you receive unexpected cash from your work or other investments use that amount to get you started or to add to what you’ve already got set aside. As life goes about you might need to take some money from your savings, remember to build back your reserves. It takes a bit of work and commitment, but it’s a habit worth getting in to.
Separate Business Funds from personal Funds
This is also a very important item that entrepreneurs need to understand. When operating a business, an entrepreneur needs to separate business funds from personal funds. They also need to separate business expenditures from personal expenditures.
Keeping personal funds and expenditures separate from those of the business is very crucial, because combining the two can result into business failure. Even if you’re just getting started, it’s essential to separate these two parts of your fund. Treat your business, big or small, like a separate viable entity.
Here’s how you can peel your business away from your personal finances
1. Maintain separate Bank accounts
Despite the fact that you may have your personal bank account before venturing into business, make sure that you open a special account for your business.
This, in one way or another will help you track your revenue and expenses much more easily, because they will both be in one place. b) Renting a Location
If you are using part of your home for business, you could rent that space to your business.
Create paperwork to show this rental agreement, including all the terms and conditions.
2. Always negotiate for better offer
Negotiating when purchasing goods or services is another way that can be used in overall managing business finances.
Negotiating is a part of everyday life, but in business it’s absolutely critical to your success. Poor negotiations can cripple a company just as quickly as losing key customers.
If you are a buyer, make sure you are thoroughly familiar with the product or service that will be the subject of the negotiations. If the other party senses you are weak on details, you may be a prime target for a bluff or another technique designed to create anxiety and uncertainty.
So before purchasing anything make sure you always ask for better prices for the provided goods or services. This in the long run, will provide savings for the business.
3.Always be in control of the business income and expenditures
MSMEs are supposed to be in control of all financial matters related to their businesses. They need to personally control both income and expenditure streams. Never allow any unauthorized person(s) to manage your income or spending,as this may potentially lead to confusion which may in a long run lead to losses.
It is important that entrepreneurs stay tight-fasted to keep their expenses in check without hampering customer satisfaction. This, especially holds true for small businesses.
Every business endures 2 basic types of costs – fixed and variable. While fixed costs have to be borne irrespective of whether your business is making money or not, there is a scope for savings in variable costs.
For example, instead of traveling to different places to purchase raw materials or goods for your business, encourage suppliers to deliver them to your office. This will cut traveling costs and save time for you.
While owning and running your own business can be exciting, it can also be nerve-wracking, especially when it comes to handling finances in a lucrative manner. Don’t let your business suffer due to poor financial management. Keep the above tips in mind and give your venture a bright future.
You came very early to your office and after having a very busy day it is time to go back home. Even though you came early and left late, you don’t feel of doing anything significant. This happen to many people therefore calling for proper time management.
Proper and effective time management will not only help you set enough time for business development but also set aside enough time for personal development including time for your family and friends.
In this article, we will offer tips on time management and various steps you can take to improve effectiveness..
Making the best use of your time
In order to achieve desired goals and priorities, every entrepreneur need to manage and align daily activities properly within available time slots .
Time is one resource that we do not buy, but we often waste it or use it ineffectively. Scheduling helps you think about what you want to achieve in a day, week or month, and keeps you on track to accomplish desired goals.
Time management works well when it is treated as an integral part of overall plan in the business enterprise and by each individual, rather than as an isolated and often a by-the-way activity that has to be done as and when we find time.
We all have exactly equal hours available to us – it is the use of these hours that makes the different between effective people and those ineffective.
Those who always do the most important things they are supposed to be doing at a certain time, are the most effective people.
Many successful people and business enterprises budget money for business operations and they further budget time (scheduling) as well.
Three steps of time management
To manage time properly you have to do the following three steps:
- Identify the things that waste your time and not productive
- Make a list of all your tasks and prioritize the most important ones
- Draw up a daily to-do list to make sure that all tasks are completed in time.
Example: Hassan is an entrepreneur, is a trader of goods at major a market in Dar es Salaam. He normally works seven days a week. Among many of his business activities are to trade, and he is a member of MSHIKAMANO VICOBA in which they meet every Monday. In the last few months his business is not doing quite well. Leaders of MSHIKAMANO VICOBA have required him to attend an urgent meeting on Monday at 14:30 hrs. On the same day and time he expects to meet his long time client from Comoro at his office. What should Hassan do?
Though both meetings are important, Hassan needs to make a wise decision. As a person who depend on business to earn a living, he will naturally be forced to attend the meeting which will in one way or another bring positive impact to his business and reschedule the one that aims to discuss issues which have little or no impact to his business.
As entrepreneurs we need to identify things that consume our time and they are less productive. This does not mean that we ignore them but we attend them in a manner that doesn’t impact the operations of our businesses.
How to identify time wasters
Time wasters are all those things which are not essential to your core tasks. You may do them because you are used to doing them, or because they are easier to do or because of other people and demands they make or problem they cause. These time wasters can either be caused by your business enterprise or by yourself.
Practice the following techniques to become the master of your own time:
- Carry a schedule and record all your thinking, conversations and activities for a week. This will help you understand how much you can get done during the course of a day and where your precious moments are going. You’ll see how much time is actually spent producing results and how much time is wasted on unproductive thoughts, conversations and actions.
- Any activity or conversation that’s important to your success should have a time assigned to it. Schedule appointments with yourself and create time blocks for high-priority thoughts, conversations, and actions. Schedule when they will begin and end. Have the discipline to keep these appointments.
- Plan to spend at least 50 percent of your time engaged in the thoughts, activities and conversations that produce most of your results.
- Schedule time for interruptions. Plan time to be pulled away from what you’re doing. Take, for instance, the concept of having “office hours.” Isn’t “office hours” another way of saying “planned interruptions?”
- Take the first 30 minutes of every day to plan your day. Don’t start your day until you complete your time plan.
- Take five minutes before every call and task to decide what result you want to attain. This will help you know what success looks like before you start. And it will also slow time down. Take five minutes after each call and activity to determine whether your desired result was achieved. If not, what was missing? How do you put what’s missing in your next call or activity?
- Practice not answering the phone just because it’s ringing. Don’t instantly give people your attention unless it’s absolutely crucial in your business to offer an immediate human response. Instead, schedule a time to answer and return phone calls.
Importance of having supervision skills
After getting some basics of time management, the next step is to have an operational plan. Operation supervision is very essential as it provide a business with a means to oversee the intended activities of the business and make sure that they are done in proper standards.
A supervisor is a manager at the first level of management. She is tasked to ensure that the business is meeting the intended goals. She also ensures that employees are performing their jobs. Operational Supervisor oversees daily business problems and goals.
A supervisor should possess the following skills:
- Management Skills
- Technical Skills
- Human Relation Skills
- Idea developing Skills
- Decision Making Skills
General Function of a supervisor includes the following
- Planning – this involves drawing up plans of actions that combine unity, continuity, flexibility and accuracy given the organization’s resources.
- Leading – this involves the social and informal sources of influence that you use to inspire action taken by others. It helps supervisors understand their subordinates’ personalities, values, attitudes, and emotions.
- Controlling – this involves identifying performance weaknesses and errors by controlling feedback, and conforming activities to plans and instructions.
- Supervisors must be prepared for change as fast as their employees do.
- Supervisor must be accountable to business practice by imposing penalties for employees who fail to adequately carry out responsibilities and provide rewards for meeting expectations.
Tips for supervisors
- Supervisor must be prepared for change as fast as their employees do.
- Supervisor must be accountable to business practice by imposing penalties for employees who fail to adequately carry out responsibilities and provide rewards for meeting expectations.
- Set limits on your behavior! No gossip.
- Do not be a “rescuer”. Train employees to improve performance, do not do it for them.
- Figure out how to measure success. Know when people are not on track to meet goals.
- Communicate with everyone. Talk with each subordinate regularly.
- Be firm. You will be tested on rules and standards.
- Learn from others. Find other bosses who will share their wisdom. Seek people inside and outside the organization. Create a business network.
A successful supervisor is one who;
- Brings a positive attitude to the workplace.
- Be interested in hearing about work related problems.
- Be loyal to the organization. Listen to employees and discuss problems.
- Develop good communication skills. Your time will not shift from task to people orientation.
- Be able to delegate and give up control.
- Must accept the challenge and seize the opportunity for success.
Practicing business ethics
When entrepreneurs do business, to a large extent they care about making profit. Most of them forget that profit is not the end of everything rather efforts should be made to ensure sustainable development.
Ethical practices is among the key component that will lead to success of your business.
It should be known that, every business need to function according to established laws, rules, regulations as well as prevailing ethical standards. Business investors, money lenders and customers pay close attention to the standards and practices of any business before making any decision. But most importantly entrepreneurs are free to set their own higher ethical standards as they wish.
Various groups and businesses have set their own ethical standards for their specific businesses. These standards of practice are a core values, developed to govern the relationship between their business and customers. Although they are not legally binding, these values help to provide level of service that distinguish the best performing businesses and building confidence among clients.
What is business ethics?
Business ethics are moral principles that guide the way a business behave. The same principles that determine an individual’s action also apply to business. Business ethics relate to the way you act to keep customer’s trust, the way you treat customers as your friends, and the way you advise customers to get the best options and benefits for them.
So for business prosperity, every entrepreneur need to treat people and companies with respect in order to establish a positive working environment. The effects of ethical practices in business can benefit a company financially and they can also help a company gain the elements it needs to grow.
Business owners need to be role models to champion ethical practices as employees and customers generally take their cue regarding the behaviors that are acceptable based on how they see the company’s leaders acting and the behaviors that they see being rewarded by their peers. Businesses that are managed by leaders who conduct themselves in an ethical manner and who reward employees for doing what is right are much more likely to be characterized by a positive ethical culture.
Good manners should be an integral of employees in engaging with each other, with customers, shareholders, and with the community. Having such manners will strengthen your organization and is one of major ingredient for your organization growth.
Individuals who work for businesses make decisions every day, and their actions can impact the lives of many other people. When employees make decisions which are unethical, many people can be hurt – including other employees, customers, and members of the general population — as well as the business itself.
Sources of business ethics
Laws and rules set by community : Laws and rules are the code of conduct formulated by the legal system of Tanzania and is to be followed by an individual to respect the societal interest. These are strict rules and procedures that every business should abide by. For instance, to practice engineering, you need to follow engineering ethics established by Engineering Registration Board of Tanzania. Similarly, a Medical practitioner should follow codes of conduct established by the Medical Association of Tanzania and so forth. Laws and rules are reactive in nature and cannot cover all the cultural ethics as they are created when a new wrong doing emerges.
Culture : Culture is a pattern of behaviors and values that are transferred from one generation to another and it is considered as ideal within the acceptable limits. No wonder therefore that it is the culture that predominantly determines what is wrong and what is right. It is the culture that defines certain behavior as acceptable and others as unacceptable.
Human civilization in fact has passed through various cultures, wherein the moral code was redrafted depending upon the epoch that was. What was immoral or unacceptable in certain culture became acceptable later on and vice versa.
Other sources of business ethics includes Business practices & various groups of business networks.
Thus business ethics are influenced by an array of sources which vary from company to company and practice to practice
Tips to Promote Workplace Ethics
The best way to promote workplace ethics is to be very specific and careful while recruiting potential employees who would be representing the top level positions especially the human resource department.
It is rightly said that human resource professionals are the faces of an organization. They need to understand the psychology of individual employees as they are the one who are responsible in formulating policies, rules and regulations of the organization.
Remember, policies should neither be too flexible nor too rigid. If policies are too flexible, no one actually follows them and if policies are too rigid, again employees would depend on excuses and lies to escape them. You must understand your nature of business. An organization which works primarily for clients can’t necessarily ask employees to report early in the morning as in most cases such employees work till late or probably the whole night.
Human resource professionals ought to communicate the organization policies and code of conduct clearly to the employees the very first day. They need to clearly introduce the organization including office timings, hierarchy, dress code, salary structure, leave procedure, reporting structure and so on. When such information is provided at the beginning, employees would not use such excuses on wrong doing and unethical behavior.
Listen to what your employees problems and opinions. Superiors need to interact with employees on a regular basis and address their grievances. Management needs to make employees feel comfortable. They might come up with lots of issues and as a a business leader it is your responsibility to guide them and help them with a solution. Even if the problem is illogical, do not be harsh to them, rather make them realize as to where they are wrong. Open communication is the best way to promote workplace ethics. Constant mentoring plays an important role in motivating the employees to adhere to the organization policies.
No employee should be given special treatments. Bonuses and hikes must be proportional to the employee’s performance over a period of time. Appreciating the employee who really deserve it is essential. Do not favour anyone just because you like him/her.
Fair judgment is of utmost importance. You have nothing to do with his/her personal life. There should be absolutely no problem if an employee goes out to meet his girlfriend after office hours.
Organization needs to support its employees always, even at the hours of crisis. Job security and constant career growth are two most important factors which ensure employees stick around for a long time and also are satisfied with their current assignment. If employees are happy and contended and feel respected, they would also strive hard to deliver their level best every time.
Issues surrounding business ethics
In your business practice, you will encounter business ethic issues from time to time. Those issues may arise out of conflict of interest, corruption and bribery, environment responsibility, after sales service, truthful advertising, fair treatment of staff, refusal to deal with illegal partner and non-discriminatory against others, for instance women, a people living with HIV/AIDS and so forth
It is always important to follow ethic principles in resolving ethical dilemmas. The choice lies within Owners/ Managers and organization value clarity.
Benefits of practicing business ethics
There is a lot of benefit when your organization practice ethical business standards. Such benefits includes;
- Attracting more customers to your business hence boosting sales and profits.
- Making employees want to stay with your organization and
- Attracting talented human resources ,recognition and respect within the community
Disadvantages of lacking business ethics
Unethical behavior may damage an organization reputation and make it less appealing to stakeholders. Profits could fall as a result.
Marketing your business
Market is explained as a place where buyers and sellers meet to exchange commodities. In business development terms, a market is explained as those people or customers where sellers and entrepreneurs expect to sell their goods or services. Marketing on the other side is that process of searching and creating a market for the commodity either goods or services that an entrepreneur expect to sell.
To succeed in any business, entrepreneurs must attract and retain a growing base of satisfied customers. Marketing programs, though widely varied, are all aimed at convincing people to try out or keep using particular products or services. Business owners should carefully plan their marketing strategies and performance to keep their market presence strong.
Hence as an entrepreneur, you need to keep in mind that success of your business lies in its marketing. For people to come to your business they must first be told about what you are offering and be convinced to come.
Searching and creating a market for commodity is very key and should be embraced by MSMEs. Below are some of the reasons why you should market your product;
- Provide a better way to retain and attract new customers.
Regular marketing of products and services is very essential as it has an impact on either retaining the existing or attracting new customers. Use of different marketing strategies helps to make your products known to the daily targeted costumers and also attracts new ones to start using products/services provided by your business.
- Provides a means to showcase products and services available/offered by your business.
Marketing provides a platform to showcase business products to customers with the aim of increasing awareness. This is very important because before people start to buy your products they need to be aware of its existence.
- Promotes growth of business income
The goal of marketing a product or service is usually to increase the overall number of people consuming or utilizing services or product offered. If the number of product or services users increases, your sales will increases resulting in the improvement of business income. Proper marketing usually brings benefits to the company including an increase of income.
Ways to Market your product
Different companies use different ways to market their products. The following are some of the most commonly used ways by many businesses.
- Quality of the product and services positioning
Without doubt one of the best marketing strategy for either a commodity or service is usually the quality of the supplied product. Before thinking of any other expensive way to attract customer to consume your product or services provided, an entrepreneur must make sure the quality of the supplied items is of reasonable standards.
The produced products must be of better quality than those of competitors hence giving your business a niche over other businesses supplying similar goods or services.
Developing a new product is easier. But developing a great product that people actually want to buy and use is another story. Building a better product needs incorporation of strategies, empathy, design and analytics in the development process. Below are some of known tips which can guide you into developing a great product.
Know your customers and their needs: Pay attention to your customers and learn as much about them as you can – where did they come from, who are they, and what do they expect from you?
Know what your customer expects from you or your business: Do you know how they define desired or delighted product/service? If you don’t know, it’s hit or miss as to whether you’ll deliver it or not. What you may think is quality, may not be “quality” to someone else. Again, give your customers a way to express their voice and be aggressive in your desire to listen to them.
Correct different views from customer expectations: Your employees have to held accountable to meet customer expectations on service delivery and should receive training and decision making skills to meet performance expectations. Giving customers as many avenues as possible for communication will help you gather information needed before they able vent their disappointments to the public through online forums such as Facebook, Whatsapp, YouTube as many are become accustomed to nowadays, or other conventional means..
Strengthen customer loyalty and service: This requires a calm head and fast response to quickly resolve customer complaints and grievances. Successfully resolve of a customers’ issues is the fastest way to build customer loyalty.
Maximize satisfaction and retention: Gaining feedback at various moments of the customer experience will tell you where you stand. Use dashboards or scoreboards to let your workers know what the customer has to say about your work environment or product or service.
This is usually a created means of letting customers see your product in terms of appearance, use and the benefits. In marketing your product,, you need an advertisement strategy that will focus on changing people’s purchasing habits or perceptions concerning their everyday products so as to start utilizing products your are providing. A good advertisement strategy should be;
Sensitive: Not offensive or attacking a particular group
Appealing: it should easily capture people attention or interests
Reaching large masses at short period of time: It should be effective in reaching large number of targeted customers over a short period of time, hence little resources will be employed for large population.
Packaging can be applied as another basic way to market your product for those products requiring it.. Human consumptions pattern tend to divide people into certain preference in terms of the overall outlook, colors and the design of the product. .An entrepreneur can thus market a product by packaging it in a format that meets customer preference.
One can use regular promotions as means to boost demand for the provided good or service. With an assured quality of the products, an entrepreneur can use promotions as a means to let customers test the products at affordable prices so that they can start consuming it. Promotions can include pitches like “buy 5 get one for free” or “Get two for the price of one” stimulate trial among your targeted customers for your product. The aforementioned pitches and many others are amongst the best product promotion strategies.
The right price is very important for getting the most total revenue. When setting a price for your product or service one needs to consider the following factors ;Total production cost (direct and indirect),How much customers are willing to pay, Competitors price,
Short supply of product /service “Scarcity”,
Product/ service demand, and Government policies.
It is therefore important to accurately calculate each of these, so that the ﬁnal selling price is realistic.
The entrepreneur should be careful in setting the level of proﬁt intended to be made on the sale of a product or service, by also taking into account the relationship between demand of the product and the available supply. If demand is higher than the available supply, the price (and thus the proﬁt) may be increased. Likewise, if there is a large supply, but few people want to buy, then prices may drop. An excessively high price due to the need of a big proﬁt margin will dissuade customers. When sales increase, proﬁt margins may be reduced., This enables the entrepreneur to lower the selling price, and allow the business to ‘capture’ the market and even expand it.
The manufacturer and wholesaler must decide how to distribute their products. Working through established sellers is generally the easiest distribution channel for small businesses. Small retailers should consider cost and traffic flow during site selection, especially since advertising and rent can be reciprocal: A low-cost, low-traffic location means spending more on advertising to build traffic.
All in all the named above are the fundamentals of a true marketing mindset. Entrepreneurs needs to understand that, customer wants should be the focus of their business operations and planning.
Customer service for your business prosperity
In today’s world it has been normal for entrepreneurs to improve their products to attract customers. To achieve this, many come with different and attractive products, forgetting that improving products alone cannot lead to business success, rather effort is needed to always be in touch with customers.
It is crucial for entrepreneurs to reach out to their customers and build meaningful relationships with them. This will help to improve the reputation of your brand hence increase sales. Customer service can make or break your business. If customers find your employees are rude or don’t know what they’re talking about they’ll go elsewhere to make their purchases.
As a business owner, you should not allow customers to run away from your business and therefore it is important to teach your employees / self handling customers to their satisfaction to promote business prosperity.
It is important to choose words careful when attending customers.
For example, if a customer walks through your door and say, do you have this product? If you don’t, but you have another product similar to the one requested, you need to say, I’m sorry we don’t, but we do have this product and it’ll serve the same purpose. That’s customer service.
The Golden Rule, “do unto others as you would have them do unto you,” may seem self-evident in the way we try to conduct our personal lives. Yet this saying is assuming new importance as a guiding principle in the world of business. The growing significance of meeting customer demands for quality service has special implications for small business. For it is in this arena that small companies can, in the least expensive way, set themselves apart from the competition. Exercise the following golden rules to help you meet customer demands.
Golden Rule number 1: Put your Customer First
Quality customer service begins with your employees. The first person that a customer will see is you and your employees. You all should be good ambassadors. If you take care of your employees then they are more likely to take care of your customers. Try offering service bonuses to increase employee morale and make them pay attention to customers.
Golden Rule number 2: Stay Close To Your Customer
Asking questions and listening carefully to answers is an important part of customer service. You lose money when you lose customers, so keeping them is going to make your business run. You can see the evidence in these facts:
- 65 per cent of a company’s business comes from existing customers
- It costs 5 times as much to attract a new customer as it does to keep an existing customer happy
- 91 per cent of customers will never use a company who has disappointed, failed, or offended them
- The best business owners are not only committed to staying close to their clientele, but also identify them. They give their customers the level of service they themselves would expect to receive.
Golden Rule number 3: Pay Attention to Little Details
Some of the most effective “extras” are really very basic adages of conducting good business, although customers are often surprised when they take place. These include:
- Answering the phone by the third ring;
- Treating customers respectfully and courteously at all times;
- Greeting them by name;
- Promptly answering their questions and, if you can’t, getting back to them with an answers as quickly as possible;
Golden rule number 4: Understanding customers and the way they think
Understanding customers and the way they think is critical to keeping them. For example, customers do business on the basis of emotional desire: they want what they want — when they want it. Customers also tend to gravitate toward a company or group of people they like. Plus, most customers have a strong tendency to stick with businesses with which they are familiar, and are slow to change buying habits unless given a very good reason. However, when they are displeased, even by a small disappointment or discourteous word, various surveys have revealed that customers tell from seven to 11 people about their dissatisfaction. An important key to serving customers well is this: don’t try to change them.
Customer service can also be used on the phone. No matter what type of business you run, customers call on the phone. They may want to know your hours of operation or they may have a question about a purchase they recently made. No matter what the reason is for the call it’s important that the person answering the phone knows how to do it properly and is kind at all times. People will continue to do business with you if they’re treated fairly and with respect. Rude and inconsiderate people will drive people away faster than anything else.
Following up with customers is another form of customer service. When you show your customers that you care about them and you want to make sure they have everything they need and that the products are working properly, they’ll remember that. They won’t be afraid to come to you when there’s a problem and they won’t think twice about recommending your business to their friends and family.
One last form of customer service is helping your customers. No matter if they’re young or old; helping them to the car when they have an arm load of products is a good way to show them you care. Helping them decide which products to purchase and helping them to understand which ones will work well together is another way.
It’s important to remember that your customers are what will keep you in business. If they’re not happy they’ll leave and go to your competition. When you have good customer service each and every time a customer comes through the door, they’ll be happy to come back to you and they’ll invite their friends and family as well.
Business model: A roadmap for small business success
In marketing products or services, it is vital to have the most appropriate business model. A business model describes the various aspects, approaches and values that an enterprise offers to one or more segment of customers.
Creating a small business model means planning – on paper – the fundamentals of your business. It helps you, as an entrepreneur, to put aside the excitement and make a realistic evaluation of the potential success of your business idea.
A proper business model helps you to figure out elements such as: Your business concept – what problem are you solving for whom; how will you create customer value; how will you get customers for your product or service; how your business will stay competitive; and all revenue and costs you can anticipate.
All in all every entrepreneur need to keep in mind that having an appropriate business model is very important as it helps to identify the right implementation strategies which will lead to business prosperity.
In the absence of a business model, an entrepreneur may find difficulties to take the right decision at a given time. This may lead to inefficient operations and in turn a Non-viable business.
Parameters of a business model
As you embark on making a proper model for your business consider the below four key components;
- Your business goal
Knowing the business goal is important. The entrepreneur need to clearly lay out objectives of her business such as:
Is it a profit making business/ service?
Is it a charity based organization?
Once the objective is clear, the performance of the business can be measured against the goals. For profit oriented entrepreneurs, any profit can be reinvested in growth and expansion. The goals of the enterprise also determine other aspects of the business model.
- Products and Services.
To create the business model, each entrepreneur need to determine the main product of her business. It is important that the entrepreneur know various sections and technologies which are key to her business success. Once this is understood, the entrepreneur can determine the appropriate devices/equipment, products or services to start or expand a particular business. In this process, the entrepreneur must be able to identify clearly the following:
- Product or service; here an entrepreneur need to clearly define the kind of business intended. She needs to tell whether her business will base on products, focus on services or deal with both products and services. Also an entrepreneur need to tell if her business will further provide a wider range of related services or products that will enable the business to be more sustainable. For example, supplying complimentary products, providing repair and maintenance services, providing credits to consumers, providing training for use and maintenance and others.
- Uses; here an entrepreneur need to tell the use of the offered products or services.
- Supply chain; it is important to establish the supply chain. How will the entrepreneur obtain products and then provide them to the customers. Will the products be manufactured or assembled?
- Standardization; will the product be standardized or customized per user?
An entrepreneur must understand the markets that she will be serving. It is therefore important to understand the ability of customers to pay for the service or product, the income stream of the customers and the current demand spending of the targeted customers.
Demand encompasses having a good understanding of;
- End user of the product – is it an individual, a household, an organization or a community
- The geographic coverage area and its demographics where the enterprise will operate and sell its product
- The socioeconomic level of the society that will be the users of the offered products or services including the income level – are they willing or capable to pay for the product or service?
- Presence of formal and informal groups and leadership structures that will impact local practices.
- The current levels of spending on products
Once the market, in particular the demand is understood, appropriate delivery models can be designed. This is the fourth dimension of designing an appropriate business model for the enterprise.
- Delivery Model
The delivery model includes the approach that the enterprise will follow to provide products or services to the customers in a way that it fulfills its goals. Few key aspects are;
Financing mechanism: It is important to know where the finance for setting up or expanding your business is coming from. How will the business make profit? Understanding the costing and revenue model is important. Will the entrepreneur be able to provide credit to the customer or how will products or services be affordable?
Ownership and Management: One of the most important components of the business model is to determine the ownership and management structure. Is the enterprise a co-operative, private or public one? What is the right of ownership of the products or services?
Delivery: This is very important to be determined as it includes the way the product or services are made available to the customers. The delivery model is dependent on the other factors particularly demand.
The delivery should look at the following in detail;
- Distribution: will the product be delivered through a decentralized mechanism or will there be centrally provided product/services where several units can use it
- Sales model: The mechanism through which the product / service will be sold. It can be through cash, lease or credit.
- Sales channels: what sales channels will be used e.g. franchise
- Marketing: what will be the marketing approach
Expanding the Delivery Model
Once an entrepreneur understands step by step of a business model, the actual delivery of goods and services can be designed. In this section, some key sales model and sales channels are being introduced. Some of the common model are elaborated below:
The cash sale model is straightforward and is commonly used among entrepreneurs. This is probably the only model that applies to almost all businesses. It is common for entrepreneurs to make products and sell directly to customers.
Cash sales can also be:
- Direct sales: whereby a product or service is sold directly to customers
- Decentralized sales: a product is sold via dealer to customers
To many entrepreneurs cash sales usually works well. The success of a cash sales delivery model also rests on the quality of the products, and particular the warranty period, which the entrepreneur should honor to keep his/her clients. Despite demands, sometimes entrepreneurs cannot expand or start a business because of the ‘initial investment barrier’ especially if it is a larger businesses like industrial products e.g. building material, hardware, or spare parts. However, local made parts are starting to be alternatives for micro entrepreneurs to initiate business for example metal fabrications.
The suppliers are also coming up with credit for micro entrepreneurs who can be their dealers. If the purchasing power of the consumer is strong, the cash model works in a perfect condition. It must be noted that in rural areas, seasonal fluctuations of harvesting, festivals etc may determine the best time period for cash sales.
Business model: A roadmap for small business success (2)
Last week we discussed on the importance of a Business model. We saw that in marketing products or services, it is vital to have the most appropriate business model. A business model describes the various aspects, approaches and values that an enterprise offers to one or more segment of customers.
We discussed that once an entrepreneur understands step by step of a business model, the actual delivery of goods and services can be designed. In this section we will continue to discuss some key sales model and sales channels that are key for your business growth:
Lease and hire purchase.
This model is not commonly used, but there are a few cases especially in the industrial sector particularly on products like garments, solar equipments, and agricultural products. In this model, the entrepreneur leases the product to the customer for a limited period of time in return for a fee. During this leasing or hiring period, the entrepreneur has to be responsible for the maintenance of the products or systems hired. If the customer does not pay for the services, the entrepreneur retains and withdraws the system.
The model works best if the entrepreneur has up front financial investment to buy the products for leasing, and also the capacity to administer the process. It requires good management skills and payment collection systems, as well as customers who are disciplined to pay fees each month or whatever time period payment is set by the entrepreneur. Again, the demand for a particular service needs to be high for this model to work. It may not be a good idea to lease out products that do not have a long lifespan such as cook stoves, perishable materials etc. You may want to lease things like solar PV systems, Garments and furniture
This model is mostly used by medium or large scale suppliers and dealers who provide products to customers by credit. Some form of agreement is made between the two parties. Often, the customer owns the product and repays the credit in installments to the supplier. There may be a clause in the agreement whereby inability to pay may lead to the ownership reverting to the supplier.
The supplier credit works particularly if the product is expensive. Conditions for credit need to be well suited as defaults may occur. A supplier can be faced with shortage of working capital and dealing with consumer credit may not be his/her specialty. Unless a supplier/dealer has the capacity to administer a credit scheme, this model is not recommended.
In this credit model, the supplier/dealer sells products to the customer who obtains consumer credit from a third party credit institution such as a Bank, a micro finance or SACCO. The entrepreneur is not directly involved in the credit scheme and thus valuable working capital remains available for the entrepreneur. Often, the customer can own the product but often full ownership needs to wait after paying back the financing institutions. The financial institution can in turn also have a lending deal with the supplier or dealer.
The entrepreneur remains responsible for the sales and distribution. The end-user pays a down- payment (either directly to the company or to the financial institution), and the remaining payments are collected by the financial institution. The financial institution usually takes responsibility for the loan. The product is usually used as collateral because it is easy to remove and reuse. The supplier/dealer needs to work with financial institutions that have regional reach and experience with credit particularly in rural areas.
End user credit is advantageous as it lowers the high cost of buying a product. Also, the supplier/dealer does not have to worry about the credit management but rather focus on providing good products and services, particularly maintenance. As a dealer, one can always approach local credit or savings group to start a small end user credit model even in rural areas.
Community/ Co-operative/ Utility (Fee for service).
This model applies usually when community/co-operatives or small private utility delivers services and products to customers, usually at a fee. If community is well organized and structured, a Company can be formed. The Company invests (borrows from a Financial Institution) and owns the project (example, micro hydro, wind, large solar installations) and provides a service such as lighting to the customer. A monthly fee is usually charged by the Company or Co-operative. Although this model is common in many parts of Asia, Bangladesh, South Africa it is still new in East Africa specifically Tanzania. Often, the Company needs sound financial and technical advice to establish such a venture and often, is a long term. This model is common for bigger entrepreneurship businesses.
For this model to succeed, the members forming the Company must be well versed in financial management as well as stay committed for a long duration of time. If well managed, more people could benefit from the services. Management of service delivery is important as well and often a good technical maintenance person is an absolute must to be trained or hired. Collection of fees from customers can be time consuming and such issues needs to be sorted out at the initial phases. Customer care is very important as if they do not pay fees, the Company could lose out. If installation size of the project is large, then it can also be connected to the grid once there is a government policy to buy power from decentralized sources.
Franchise dealership model
In a Franchise dealership model, the business processes, products and marketing are standardized and a number of ‘franchisee’ is set up by a parent Company to deliver the energy goods and services. In a way, the Company depends on the franchisees to link to other levels of supply chain. The franchisee has the right to sell or rent the parent Company’s products and use its name. In a franchise model, a successful dealer network can potentially be set up; each franchisee/dealer will need to adhere to the standards that are set up, often with the same operating and marketing business strategy set by parent company.
Franchises are often set up when the parent company (franchisee) succeeds in the retailing of energy products or service to a customer base. In a typical franchise model, anyone has the right to own and operate an outlet. For the franchise model to succeed, dealers must have similar drive and determination to promote and sell the products or services. The parent company may assist in the initial setting up but dealers must be entrepreneurial and innovative to sustain it. They can further take loans from financial institutions and establish their business further. Franchise models in East Africa are mostly in the solar sector.
Why Managers are so important for business success
Having someone to manage your small business is very crucial for its prosperity. The manager can be the owner or an employed person. A full dedicated manager for your business will help in decision- making on different matters including profitability, investment, cash management, pricing and other aspects of business performance.
Every entrepreneur need to remember that the cost of making wrong decisions is high and in many cases leads to business failure. Having the right manager helps to reduce mistakes in decision-making and enhances management effectiveness.
Your business need to mobilize resources, combine and coordinate the resources effectively to help you meet the goals of the business. To be able to do this, the manager performs the functions of planning, organizing, leading, staffing and controlling.
Duties and responsibilities of owners/managers
Most micro and small business are owned and managed by the same person. Therefore, he/she can be called an owner/ manager. Because of this the owner/ manager carries out the following duties and responsibilities:
- Plans the business resources and activities.
- Organizes work, recruits staff and allocates work to himself/herself and workers
- Leads and communicates with those who work in the business
- Controls resources – materials, machines, buildings, finances et
- Markets his / her business
- Seeks for investment in the business
- Communicates and works with others outside the business including handling public relations.
- Customer care
- Gathers information on matters that affect the business.
Let us discuss one element after the other
- Planning Activities
Planning is a process of coming up with a sketch of actions to achieve a set target for operational activities. This may involve forecasting events, scheduling and re-scheduling of activities and tasks that affect the attainment of a target or goal. Planning is thinking ahead of time. Planning affects all the activities that the business undertakes.
The entrepreneur should plan for everything in the business including and not limited to finance, marketing, buying of stock and even the people he/she employs in the business.
Planning for the business involves the following:
Setting goals, objectives and targets. This involves:
Making a decision on what target to achieve after a certain period of time.
Developing long term and short term plans for the business
Deciding on the activities that will be undertaken to help achieve the goals, objectives and targets.
Developing ways of finding out whether the business is achieving its desired targets
This is the process of identifying activities and tasks which will be carried out in the business and deciding the order in which the activities will be implemented and the people responsible for the activities.
There are many activities that could be involved in a particular business such as purchasing of goods or materials, banking and selling. The complexity and intensity of these activities will depend on the size of the energy enterprise.
The entrepreneur would need to involve members of his/her family or employ workers to help in carrying out some routine activities. The entrepreneur should identify the tasks and allocate duties and responsibilities to others. This is organizing.
The following are the main functions in organizing:
Listing or writing down all the activities that must be carried out in the business. Such activities include accounting, marketing, transport and production
Grouping all the activities that are related together. For example for accounting:
Planning finances (budgeting)
Deciding which activities must done by the owner/manager and those that others allowing the manager to focus on the core business activity of selling.
Delegating i.e. allocating duties and responsibility to others. When delegating, the entrepreneur should make sure that others know their full responsibilities.
This is the function of providing strategic direction in the business. In a business there may be people working for or assisting the owner in one way or another. But it is the owner who knows the direction he/she wants to take the business. The business vision may be written or not. To have a successful business, the owner must be prepared to be a leader.
A leader/manager is the one who :-
- Shows direction and helps in decision making
- coordinate all activities carried out in the business
- Communicate with workers and also the outside world.
- Customer and public relations.
- Inter-personal relations. How people work together with others.
- Making sure others remain motivated to do their best for the goal of the business.
- Staffing or Resource Mobilization
Staffing or resource mobilization involves looking for required resources to implement the activities identified in the business plan. These resources could be people, money, raw materials, equipment and so on. It is the responsibility of the manager/owner to look for these resources and ensure that employees are retained and business assets are maintained.
Controlling is one of the most important role for any manager. Controlling involves knowing whether what has been planned or invested in the business is going according to plan. The owner/manager should take pro-active measures to prevent damages to the business. The following are some of the main control activities:
- Control the budget. This involves ensuring that spending does not exceed what was budgeted.
- Controlling cash movement and the way it is spent (used). It involves making sure that there is enough cash to meet daily business activities.
- Controlling credit sales – reduce the number of debtors.
- Controlling stock held so that the business doesn’t have too much or too little.
- Controlling performance of workers so that they are able to meet the targets and that they stick to the work that has been planned.
Communication may be one of the most important responsibilities of a manager to keep the workplace running efficiently. Employees need to know the mission and goals of the business and what is expected of them to achieve those results. Managers must have the ability to comprehend directives from upper management and to then translate them to staff so that everyone is on the same page. A manager’s communication responsibilities may also entail resolving conflicts, motivating employees, speaking to the public on behalf of the company and preserving customer relationships.
- Business Growth
A manager’s prime responsibility is to the success of the company. His actions should all be poised toward business growth. Companies hire managers to run daily operations, coach employees, maintain quality control and ensure that its products and services are fulfilling customer needs. Managers must constantly review the company’s financial, budgetary and production goals. If the company is falling short of its goals, it is up to the manager to make the necessary adjustments to get back on track. A manager’s duty is to lead the organization to success.
Importance of Record Keeping for your Business
Everyone in business regardless whether it is a micro, small or medium business must keep records. Accurate record keeping is essential to the success of a business. It allows you to manage stock and raw materials, calculate and monitor profit and loss, plan for the future and also helps you in filing tax returns.
Every single transaction must be recorded daily – both purchases (cash out) and sales (cash in). The process of recording purchases and sales is called cash flow.
Cash flow is important for predicting how much money will be needed and when it will be needed. Cash flow also helps to predict cash surplus (profit) and plan investment. Cash flow is recorded in a book which is called a cash book.
How to keep a Cash Book:
The cash book shows the situation of the business at any given time. It includes all sales and all costs over time. It is important to record every single sale and expenditure. This allows the owner to track sales and expenditures month by month. In addition, knowing the average monthly sales means that one can plan for the future.
To work out the cash flow for the month, add up all the Cash In (Revenue) records for that month. Then add up all the Cash Out (Expenses) records for that month. Subtract the Cash Out total from the Cash In total to find out the balance (profit or loss).
To work out Cash balance, Cash Out is subtracted from Cash In (revenue) into the business.
|Number||Date||Description||Cash In||Cash Out||Balance|
Though it may reduce the speed of working and serving the customer, the use of a receipt book minimizes errors and keeps a hard copy of all past transactions carried out. The risk of not recording could be very high especially when the business has employees handling cash transactions. Cash is very sensitive and easy to steal.
An ideal receipt book should have at least two copies for each transaction, one for the customer and one for the business. Usually one copy remains in the book (book copy) while the other is given to the customer. The book copies are left in the receipt book until it is time for computing sales.
Record keeping to businesses earning Sh14 million and above per annum can easily keep their records and provide receipt using Electronic Fiscal Devices (EFDs).
TRA introduced the first phase of EFDs to VAT registered traders in 2010, later in June 2013 EFDs were also introduced to non VAT registered traders targeting 200,000 small and midsized traders who earns at least Sh14 million per annum.
Though majority businessmen refrain from using the EFDs but they are very important in helping you keep records for your business transactions particularly sales.
Sales on Credit
Selling on credit has the advantages of retaining royal customers or improving sales during low period. Caution has to be taken when selling on credit. Many businesses have collapsed due to non collection of debts.
It is important to assess the credit worthiness of the customer and put in place some control measures for the credit levels. It is advisable for the owner to limit credit to those long term customers that can be trusted.
the table below shows how to keep a record of sales on credit. It is a good practice to inform the customer when the payment must be done. It is also good to send reminders on or before the due date. This same information should be recorded and tracked in the records as shown in the table below. If the customer does not pay the balance by the agreed date, the owner/manager should pursue the client for payment.
Sample record for Sales on credit
SALES ON CREDIT
|No.||Date||Client||Product /Service||Unit Value||Advance Paid||Cash to be Paid||Final payment due date||Actual date of final payment||Signature of customer|
Preparing Financial Reports
In the course of doing business, many transactions take place and the owner may not trace each and every activity in mind. With record keeping in place a summary could be prepared on what has been happening. From time to time, the owner of a business would want to know exactly what is happening in the business.
In accounting, there are set procedures and guidelines on how this is done. There are three main reports that could be prepared that provide a full picture of financial performance by a business. These reports are
- profit and loss statement
- balance sheet and
- cash flow statement as discussed below.
Preparing a Profit and Loss Statement.
Profit and loss statement is prepared to provide information on whether a profit or loss was made for that particular period. More often the owner calculates the profit or loss of her business.
When preparing the profit and loss statement the owner gets on the driver’s seat of the business. The Benefits are:
- Helps the owner to assess business performance and can therefore make good decisions
- Reference and comparison purpose
- Help in assessing one’s tax liability
- Sourcing funds
- Detection of fraud
- Budgeting for future needs
- Cost control
- Credit control
A profit and loss statement is prepared as follows:
Step 1: Computing sales
Sales are cash receipts (or promise to be paid later) for goods sold or services rendered to customers. Computation of sales should include all what was sold and is treated as gross income into the business. Where few items are involved and the selling price is fixed, sales could be determined by multiplying units sold to selling price. This could also be determined by adding all cash sales and credit sales.
Step 2: Calculation of Gross Profit
After computing sales the next item to estimate are the costs of those sales. For example if the business is that of selling solar panels, they must have been bought or made them by owner. The cost of getting these panels ready for sell is what is called cost of sales. These costs are deducted from sales to get Gross Profit.
Gross Profit = Sales – Cost of sales
Step 3: Calculation of expenses
In the course of doing business, the owner pays for services like transport, rent, electricity and wages. She may also withdraw money for own use at home. All these expenses drain cash or resources from the business and that the money never comes back. They are deducted from gross profit. The table below shows some workings.
Computation of Expenses Salaries/Wages
|Other Indirect costs| Tax, etc|||TZS|
Balance Sheet Preparation , Stock management, Costing and Pricing
Last week we discussed the importance of record keeping. We saw that every business person, regardless whether his/her business is a micro, small or medium business must keep records.
Accurate record keeping is essential to the success of a business. It allows you to manage stock and raw materials, calculate and monitor profit and loss, plan for the future and also helps you in filing tax returns.
We discussed on how to keep a cash book, how to keep a sales book and how to manage sales on credit. We also touch based on preparation of financial reports. In discussing financial reports, we also looked at the importance of preparing a profit and loss account as a tool that help to guide you in determining whether you are losing or gaining.
Today we are discussing on how to prepare a balance sheet
Balance sheet is a statement of wealth; a statement showing assets held and how they were acquired. A Balance Sheet therefore is a statement of all assets of the business, liabilities and capital.
An asset is a resource with economic value that a business own or controls with expectation that it will provide benefit in the future.. Any business is a separate entity from the owner and therefore it can own assets.
Business assets are acquired using capital injected into the business by owners. Capital can be in the form of money or asset. Also included into the capital is a profit retained into the business for purpose of expansion.
Assets are held for purpose of resale while wealth is created by transacting in or using these assets. Examples of assets are cash in hand and at the bank, stock/inventory, debtors, furniture, machinery, vehicles, buildings and rent deposit.
On the other hand, money borrowed or goods received from other people or banks are referred as liabilities. Liabilities are incurred in the process of doing business especially when the owner does not have enough cash to pay for goods or services received. When the enterprise borrows from a bank, MFI, SACCO or a friend of the owner the borrowed fund becomes a liability as well. Liabilities are settled over time based on the established agreement.
The general principle applied in preparing a balance sheet is that all assets must equal capital plus liabilities. Hence the following balance sheet equation:
Assets = Capital + Liabilities
To prepare a balance sheet, follow the below best practice
- List all assets of the business with their values on one side
- List all liabilities on the other side. This list includes all debts that have been acquired over the period and not paid.
- List down money brought into the business by the owner.
- Add total on each side and get the difference. This difference is the retained or accumulated profit or loss over the period.
Costing and pricing of products and services
Costing is the process of assigning costs to an element of a business. It is typically used to develop costs for products, customers, distribution channels so as to learn about the cost of operations and assigning costs to products.
We have Direct and Indirect costs. A direct cost is a cost that can be completely attributed to the production of specific good or service. For instance, the cost of materials used to create a product are direct costs. Indirect costs are those costs which are not directly accountable to a cost object. An example of indirect cost includes administration, personnel.
Pricing is the method or system used in setting up the price of a particular product or service. So price is the worth (value) of a product or service expressed in monetary terms.
Once the production cost has been established, the next step is working out a reasonable price to charge customers for the product. The price set should be fair and affordable to your customers at the same time guaranteeing some profit margin to an entrepreneur.
When setting product price, it is important to ensure that the price is low enough to attract sales , high enough to cover all production cost and profitable.
Factors to Consider in Pricing
Before setting a price for the product, it is important to know direct and indirect cost associated with the product, competitors price, purchasing power of your potential customers and so forth. The following are detailed factors which you need to put into consideration while setting a price for your product.
- The competition – Prices charged by competitors. Some competitors are able to obtain their raw materials cheaply and are able to charge a reasonable price. The only remedy is to reduce costs and charge the same as competitors. If there is no competition, one should charge reasonably but should not exploit customers.
- Business costs – i.e. direct and indirect costs. The retail price should cover all of these costs, as well as make a reasonable profit. The trap is that most people consider only direct costs and forget to include the indirect costs like telephone airtime, own salaries and rent.
- Substitute products – The prices of those goods that can take the place of own goods and serve the same purpose. They may not be the same quality but will affect the price of goods offered by your business.
- Customer elasticity and demand – If your product is on demand then it can be easy for you to set a price. Likewise, if your product is not on demand you will have to set a fair price to attract customers.
- Own capacity and strategy – This depends on whether an entrepreneur is introducing a new product to penetrate the market or selling cheaply to clear stocks (market skimming) or increasing the price to cover a profit margin. Your strategy will determine how to set fairly product price.
- Distribution channels – if an entrepreneur sells a product to distributors, they will set a markup price to gain a profit.. Similarly, if an entrepreneur is the distributor, then she/he will need to set a markup as well. The markup price depends on your position in the distribution chain e.g. manufacturer, wholesaler or retailer. The manufacturer has to charge less and leave a profit margin for the wholesaler and retailer.
- Sales turnover – If items are moving faster, an entrepreneur can do with a moderate price and generate enough profit.
Stock Management and Control
Stock refers to all the goods owned and held for sale in form of merchandise and includes goods both on the shelves and in the stores. Entrepreneurs are advised to have a proper stock management systems to be able to ;
- To make sure that there is enough stock for customers
- To meet the demand of the customers while at the same time avoiding having excess because it ties up money.
- To keep to the amount budgeted for and avoid holding too much working capital inform of stocks.
- To help calculating business costs i.e. tracking stock movement.
- To help in planning and control.
- To help identify slow and fast moving goods/ items.
- To help in deciding items to stock.
- To help in checking against losses.
An example of important component in stock management is raw material.
If your business requires maintaining a stock of raw material, you might sometimes feel like you’re walking a tightrope. Not having enough stock means you run the risk of losing sales, while having too much in stock is costly in more ways than one. That’s why having an efficient stock control system is so important.
One of the worst things you can do in business is to turn away customers — people who are ready to give you their money — because you’ve run out of the item they want .”Stockouts” not only cost you money from missed sales, they can also make you lose customers for good, as people resolve to find somewhere else to satisfy their needs. An efficient stock management system tracks how much product you have and forecast how long your supplies will last based on sales activity. This allows you to place orders far enough ahead of time to prevent stock outs.
Also keep in mind that, when stock isn’t managed well, you can also wind up with overstock — too much of certain items. Overstock comes with its own set of problems. The longer an item sits unsold in stock, the greater the chance it will never sell at all, meaning you’ll have to write it off, or at least discount it deeply. Products go out of style or become obsolete. Perishable items spoil. Items that linger in storage get damaged or stolen. And excessive stock has to be stored, counted and handled, which can add ongoing costs.
Basics to growing your business
Efficient running of business is considered as an essential requirement before embarking on any business growth strategies. In this and upcoming articles, we will provide tips for running your business smoothly and explore on what is required for one to grow her business.
Usually, the focus of the business changes as it moves through various stages in the business growth cycle. Small and Medium Enterprises (SMEs) should continuously identify opportunities for growth and innovation to ensure sustainability and expansion of the enterprises.
Growth can be measured by looking at statistical parameters such as turnover, market share, profit and human resource. However, it depends on the type of business and the stage of the business life-cycle to determine the parameter which delivers the most accurate picture of the business performance
Every entrepreneur uses different methods to expand her business, usually the used techniques are contingent upon the businesses’ financial situation, the competition and even government regulation.
Most businesses use either internal or external growth strategies. Others use a combination of both. Below are elaborations of each growth strategy
Internal growth is achieved through bringing new resources together in an innovative combination to create new value. This means growing the business through increasing market share, developing new products and entering new markets.
Strategies used in internal growth are:
- Increasing market share: this includes adopting aggressive marketing which will lead to selling more improved products. One way to increase market share is by lowering prices. For example, in markets where there is little differentiation among products, a low price may help a company increase its share of the market. This strategy is applied when marketing a product to existing customers.
- Expansion and growth in turnover, volume, income or profit and increasing efficiency in delivery: This entails selling current products in a new market. There are several reasons why a company may consider a market expansion strategy. First, the competition may be such that there is no room for growth within the current market. If a business does not find new markets for its products, it cannot increase sales or profits. A small company may also use a market expansion strategy if it finds new uses for its product. For example, a small soap distributor that sells to retail stores may discover that factory workers also use its product.
- Growth strategies in business can also includes an acquisition: In acquisition, a company purchases another company to expand its operations. A small company may use this type of strategy to expand its product line and enter new markets. An acquisition growth strategy can be risky, but not as risky as a diversification strategy. One reason is that the products and market are already established. A company must know exactly what it wants to achieve when using an acquisition strategy, mainly because of the significant investment required to implement it.
- Expansion into new market areas and niches through differentiating existing products or creating new: A small company may also expand its product line or add new features to increase its sales and profits. When small companies employ a product expansion strategy, also known as product development, they continue selling within the existing market. A product expansion growth strategy often works well when technology starts to change. A small company may also be forced to add new products as older ones become outdated.
- Expanding into new locations: ‘Physical expansion isn’t always the best growth answer without careful research, planning and number-planning,” says small-business speaker, writer and consultant Frances McGuckin , who offers the following tips for anyone considering another location:
- Make sure you’re maintaining a consistent bottom-line profit and that you’ve shown steady growth over the past few years.
- Look at the trends, both economic and consumer, for indications on your company’s staying power.
- Make sure your administrative systems and management team are extraordinary-you’ll need them to get a new location up and running.
- Prepare a complete business plan for a new location.
- Choose your location based on what’s best for your business, not your wallet.
2. External growth
The external growth strategies with factors outside the SME and market environment – i.e., beyond the boundaries of existing business. The options are:
- Vertical integration: this is attained when an SME venture into business above or below current one in the value addition chain: e.g., a briquettes retailer starts making them or merging his/her retail business with a manufacturer of the same product.
- Horizontal integration: this happens when an SME integrates business that is in the same level: e.g., two SMEs dealing with production of charcoal stoves combine their business to form one.
- Lateral integration: this occurs when an SME diversifies to another slightly different sector or line of business; e.g., Used clothes dealer starting to sell agricultural products
Managing growth in business
Any business need to grow and to achieve the required growth , a forward looking growth strategy must be established. It is obvious that growth puts a tremendous strain on resources of the business. Therefore this growth must be planned, additional resources required raised and managed effectively to lead to the desired outcome.
In order to achieve the goals of growth two key things must be done; developing and implementing a business plan and sourcing for funding for growth activities. The above two things are discussed below are discussed below.
Business planning is the process of systematically thinking about ones business, setting business goals and objectives and planning for resources which will help to achieve the desired goals and objectives.
In business planning the entrepreneur should:
- Clarify his/her vision and purpose of getting to this business
- Set goals and objectives for the business.
- Define his/her business.
- Assess business environment such as level of competition, socio-economic, political and technological.
- Assess the potential risks e.g. Inability to secure raw materials for your products if it’s production. After identifying some of the risks, one should draw up a risk mitigation plan
- Develop a strategy of satisfying his/her target customers
- Assess resources requirements and availability
- Raw materials that are needed in the production process e.g.
- Finance that is required for the purchase of resources
- Human skills needed to manage and run the production process
A good business planning model is circular. One step links to another in a continuous chain.
Last week we discussed about basics required to grow your business. We saw that efficient running of business is considered as an essential requirement before embarking on any business growth strategies. In this article, we will continue discussion about business growth by looking at the importance of having a financial plan.
Most of you have heard of the benefits of personal and business financial planning and everyone might want to try managing their finances. Yet it can seem so overwhelming. In this article we provide financial planning basics which if practiced well can help to transform your business..
In business terms, financial planning is basically a plan about money and is used to establish financial goals. It is presented in a form of cash flow or projected income and expenses or both. For a business, both cash flow and, projected income and expenses are important. A balance sheet is sometimes included as well as a break-even analysis. The financial plan is important, because it establishes the financial goals of the business.
The following are the common important aspects to consider in financial planning.
Projected income and expense ( Budget)
Projected income and expense statement is also called a budget. In basic terms, a small business budget estimates both your revenue and expenses for a particular period of time. It shows how you plan to allocate your resources in the future.
Revenue can come from sales, accounts receivable, interest and other sources. Expenses are what you pay out for materials, rent, utilities, payroll, marketing and other fixed and variable costs.
Remember that your small business budget is one of the most powerful financial planning tools you have, as long as you use it well.
We do budgeting in order to;
- State clearly what entrepreneurs expect to earn or get and what he/she will use or spend for each period in future.
- State the expected business goals in clear, formal terms to avoid confusion and make sure they are attainable.
- Communicate expectations to all concerned so that they are supported, understood and implemented.
- Help coordinate the activities and efforts in such a way that the resources are properly used.
- Provide a means of measuring and controlling performance
In addition to the above budgeting purposes, a budget also helps business owners to carefully monitor their input and output by comparing it with their budget and l allow entrepreneurs to assess cash flow. Having a budget is almost mandatory if you plan to secure finance from financial institutions.
Banks and other lenders will want to examine your budget before they agree to give you a loan.
In preparing a budget, it is important to include the following components;
- Estimate the expected incomes from sales, services and other sources. These estimates are based on expected activity level as described in your business plan. The planner should indicate assumptions made when making the projections, for example, that sales will grow by 5 per cent.
- Estimate the cost of goods sold. This estimate could be based on average margin made per unit of stock sold.
- Compute the projected gross profit by deducting cost of sales from sales for each month.
- Estimate the expected expenses for each period. These include salaries and wages, transport, rent, telephone, electricity etc. Sum all the expenses per period.
- Compute projected net profit by deducting total expenses from gross profit.
Budgetary control refers to investigating whether there are differences between actual performance and budgets, finding out the causes and taking corrective action. Budgetary control does not limit expenditure but ensures that expenses incurred are justified and brings the desired results. An entrepreneur should carry out a budgetary control analysis often so as to keep within the cost estimates and remain on track with the business plan. Failure to track budget expenses may lead to cost over runs or spending more money in one area and leaving others without knowing.
Cash flow Management
Cash is the most liquid asset. It is also referred as the life-blood in the business. All assets are acquired through paying cash now or later. Similarly expenses and debts are settled through cash. Cash runs the risk of being lost through theft by employees and other people.
The cash position is affected by the way business transactions take place. Cash balance at the end of the day in a business does not necessarily represent profit but net of cash in and out of business. Therefore cash flow statement should not be confused with profit and loss though they are related.
Projected cash statement represents a plan of cash to be received from various sources into the business (inflow) and how that cash will be used or applied in the business (outflow).
At time projected cash flow is referred to as a cash budget and is a projection of how an entrepreneur expects cash to come in or go-out within a specified time, but usually month by month.
To be able to prepare a cash flow statement it is important to know cash at the beginning ( opening balance). This include cash in the office safe, money at the bank, money on transit, expected receipts(money expected to come in ) and expected payments for expenses and assets. Here you should start cash flow projection by adding cash on hand at the beginning of the period with other cash to be received from various sources.
The following steps have proved useful and should be taken into consideration when preparing a cash flow statement.
Step I: Preparing a schedule of cash balances e.g. money in the office, money in bank and cash in transit
Step II: Preparing a schedule of expected sources of cash. In business cash is expected to come from sales and fees from any services. Other sources could be loans or grants. A total of all inflows is then computed.
Step III: Preparing a schedule of expected cash payments. Payments are made for stock supplies, salaries and wages, rent, transport, motor vehicle office expenses, insurances, telephone and other expenses. Payments are also made for assets like furniture and equipment. Compute the total cash outflow
Step IV: Deducting cash outflow from cash inflow to get net cash flow for each month.
Step V: Adding this net cash balance for the month to the opening cash balance to get cash balance to be carried forward to the next month.
Step VI: Repeating the same exercise for the each month that follows.
Let us end here for today. We will discuss other aspects of business management next week.