ENTERPRISE DEVELOPMENT

Learning objectives
By the end of this chapter, a student is expected to;
• Know what an enterprise is.
• understand the importance of small enterprises in an economy
• understand what factors underlie the success of an enterprise
• Know how to manage the growth and success of a business enterprise
• Know what role the government can play in promoting enterprise development

ENTERPRISE DEVELOPEMNT
What is an enterprise?
An enterprise is a well-organized business set up that is constituted by a manager along with a team
who work together to pursue a business goal, which essentially is to improve the economic
environment in the surrounding in addition to the major objective of making profit.

Importance of SMEs development

Job creation: Small and medium sized enterprises are major contributors to job creation. An increase
in their number can provide decent employment to the many people around the world now toiling
under poor working conditions and trapped in poverty. This idea is further supported by the fact that
most small business enterprises are labor-intensive and could use the large numbers of available
cheap labor.

Promotes utilization of local resources: Small enterprises tend to be more effective in the utilization of
local resources using simple and affordable technology. small enterprises play a fundamental role in
utilizing and adding value to local resources.
Promotes income distribution: development of small enterprises facilitates distribution of economic
activities within the economy and thus fosters equitable income distribution. Furthermore, small
enterprises technologies are easier to acquire transfer and adopt.
Small enterprises are better positioned to satisfy limited demands brought about by small and localized
markets due to their lower overheads and fixed costs.
Owners tend to show greater resilience in the face of recessions by holding on to their businesses, as they
are prepared to temporarily accept lower compensation.
Through business networks, partnerships and subcontracting relationships, small enterprises have great
potential to complement large industries requirements. A strong and productive industrial structure can
only be achieved where small enterprises and large enterprises not only coexist but also function in a
symbiotic relationship

Business Life Cycles and How To Manage Growth

The Phases In The Growth Of A Firm
Pre - Start Phase
This is the preliminary stage for the business. Here, the entrepreneur does a lot of ground work to assess
the viability of the venture he is about to get in to. He will carry out due diligence to ensure he has taken
all important factors into account before setting off the business. He will incur expenses to execute some
of these important activities. He may for instance require the services of a legal representative to acquire
land. He may also hire the services of a surveyor if he wants to build his own premise. If he will hire
personnel to assist in running the business, he should ensure that he has sufficient funds to pay them for
at least 6 months. He may need to get a loan to do this.
Start - up Stage
At this stage, the entrepreneur has already set the business up. The business is operational despite the set
backs that befall all businesses that start up at the initial stages. The entrepreneur realizes that he may
need to make adjustments in order to survive. He may see the need to insure the property in case he
hadn't, he may also realize that he does not need an extra staff hence he may cut down on that, sales may
be slow in picking up, so he may decide to come up with new marketing strategies, he may see the need
to have proper records for tax purposes e.t.c
Early Growth Phase
During this phase, the business will experience rapid growth as customer needs become the main focus
for the entrepreneur. it is at this stage that he will realize there is need to gain a competitive edge in order
to make more sales. The entrepreneur at this stage may think seriously about automating his operations,
hiring professionals like accountants, perhaps even expanding the business. The signs that these
requirements are necessary will be felt by the growing need to meet the increasing and dynamic needs of
the customers.
Later growth phase
this is the phase that determines whether the business has managed to meet its long term objectives and a
period to assess how successful the short term objectives have been met. At this stage, the entrepreneur is
more concerned about corporate governance issues and how this impacts on customer needs. He will also
be concerned with the management of the business in various departments such as finance, sales and
marketing e.t.c. The entrepreneur will have his sights on a higher level of competition with other firms
that belong to a higher circle, hence he see the need of turning the business into a public limited company
in order to compete as such levels
This model can be applied to the growth or otherwise of a firm. The entrepreneur thus needs to ensure
that the business opportunity he has before him has a road map charted in advance and based on due
diligence. This does not mean that every firm will follow the above model. the entrepreneur needs to be
aware of the possible outcomes. What he needs to do to ensure that the growth of the business is well
managed by a clearly defined strategy is what we shall be looking at in the next section;

We have already mentioned that the entrepreneur will need to assess the economy in which he intends to
settle his business before embarking on anything serious. this entails doing a research into the economic
variables that are likely to play a major role in the future of the firm. Over and above this, he will need to
lay out a strategy for development of the firm.
3.2.2 Managing Growth
A strategy follows the research and ground work and is based on the idea that has been determined to be
the driver of the business venture. in developing a strategy, the entrepreneur will need to do the
following;
Assess the likely demand for the product
this entails doing a survey in a particular targeted section of the market where very important variables
can be collected. the entrepreneur will need to see whether there have been other products and services
that have been or are still there in the industry
Identify a specific customer need that has been ignored
Even where similar products or services have existed in the industry, the entrepreneur may identify a
specific need that has not been fully met. Here, the entrepreneur will assess whether by meeting this
need, his firm will pull away customers from other firms

Consider the added value to the customer

The entrepreneur will also need to assess whether the customer will experience an added value by using
the new product. this will come out as a result of a survey.
assess the company image enhancement as a result of the new product
The entrepreneur will also be looking at the interest of the firm. Will the introduction of a new product
likely to boost the image of the business and to what extent?
With this in mind the entrepreneur will come up with a clear chart of where he wants his business to be
in future and how it will get there. the business strategy can be looked at in the following ways;
Market Penetration
here, the entrepreneur is asking himself, ‘HOW can i take up a bigger share of the market?’ he will have to
think of ways through which he can establish his presence and exert himself through his product or
service. He may have the objective of controlling a certain percentage of the market. This in itself is a
strategy and the entrepreneur will need to devise ways of achieving this. Some of the means he could use
to attain this objective are;
• Investing on advertisement
• Encouraging customers to buy his products through customer incentives for instance special
deal if a sale reaches a certain value, discounts e.t.c
• Offering better customer care
All these may pay off if the results are tangible. This will be realized through increased revenues and a
larger client base.
Geographical Expansion
This strategy will be a result of a well thought out plan to introduce a product or a service to a wide
region all at once and capture the entire market in one single attempt. The success or failure of this move
will depend on how much due diligence the entrepreneur will have done. If the initial survey tells him
that customers from diverse backgrounds and from different walks of life will respond positively to the
new product or service then he has a good chance of succeeding.
Product/ Service diversification
This strategy will mitigate against the risk of losing market share when the product reaches the final
stage of its life cycle. As we saw earlier, the lifecycle of a business will necessarily follow that of the
product if there is no backup plan. Through product diversification, the entrepreneur will ensure that
even though the product is squeezed out of the market as a result of fierce competition, others will still
come up to replace it in terms of market share.
The entrepreneur should be careful not to diversify into unrelated products or services. He should choose
a product or a service that can be used instead of the mainstream product or service. At the end of it all,
he should not do away with the original product all together
Limitations of enterprise development
Limitations/challenges facing enterprise development
There are inherent limitations in setting up a small business which the entrepreneur should be well aware of.
These include:
a) Unfavorable legal and regulatory framework
The absence of policies governing the growth of small enterprises could hamper the growth of small
enterprises. This would mean that the small firms are not protected in the harsh markets and the law does
not complement their activities. it thus becomes very hard for an entrepreneur to set his toehold in the
economy. The high cost of compliance to regulations may discourage potential entrepreneurs from
formally setting up their businesses, while driving some existing enterprises out of business and those
working for them into unemployment
b) Undeveloped infrastructure
This could be a drawback in the sense that the entrepreneur may not have access to facilities that will
enable him pursue the objectives of his business on a larger scale. most institutions are cautious to lend
money to small businesses because of the risks involved. at the same time some of these institutions may
require the businesses to pay high interest rates for loans acquired
c) Poor business development services
Lack of training may be a setback in the industry for the small businesses. Most NGOS that come up with
the plans lack support from the government and mostly operate on good will from the potential investors.
The entrepreneurs lacking in skills need to be imparted with knowledge that will set them at par with the
other accomplished businesses, giving them a chance to provide healthy competition
d) Poor entrepreneurial Culture
it has become a trend for most school leavers to look for employment. While it serves as the most
convenient route to earn a living, most young people have shied away from engaging in entrepreneurial
initiatives because of the high risks involved in setting a business. most of these young people find it a
big struggle that is laden with disappointments.
e) Lack of Skills and competence
most entrepreneurs lack the relevant skills to engage in meaningful business enterprises. Those that
manage get the support of strategic investors and managers who mobilize resources on their behalf. On
his own a potential entrepreneur will find he is limited if he has not undergone some basic
entrepreneurial training.
The government`s role in enterprise development

The Government has a huge role to play in creating a conducive environment for the growth and
development of enterprises. There are things that the entrepreneur will not be able to accomplish without
the support of the government. On this note, it is imperative that supportive institutions and structures are
set up for this. We shall look at the government’s role through the following salient headings.
a) Policy Formulation
The Government through an Act of Parliament stands in a very strategic position in directing the growth
of small businesses. Policies that will enhance the creation and establishment of small businesses need to
be set and discussed at length in parliament. This should be done while putting the interest of the small
business owners first. Policy documents that address various areas and even geographical locations
should be designed with the objective of ensuring equitable chances to all stake holders.
b) Supporting N.G.Os
in recent years, the country has witnessed the mushrooming of Non- Government Organizations that are
doing a commendable job in promoting entrepreneurial initiatives. Most of the NGOs are mainly
involved in credit delivery, business training, providing general consultancy, and providing short term
loans. However, most of the institutions supporting small businesses are rather weak, fragmented,
concentrated in urban areas and uncoordinated. This calls for the need to strengthen the institutions
supporting small and medium enterprises. This is where the government comes in with its wealth of
influence.
c) Establishing Linkages/ Networks
Networks are so important for the entrepreneur who is just starting out. He needs all the support he can
get from other entrepreneurs and strategic investors looking for franchises. The business linkages are
also critical because networking is crucial in the business world. This is clearly demonstrated by the
chain of supply of goods and services between firms in an industry and even between industries. The
government can establish organs that will specialize in bringing entrepreneurs with good proposals and
strategic investors together in a common forum. Entrepreneurs also benefit through access to information
on financial assistance, materials and suppliers, pricing, training, workshops sub-contracting
opportunities and potential joint venture.
d) Political Stability
ideally a world where the politics of the government do not interfere with the economic climate
would be the best for any kind of business to establish itself. Unfortunately this is not the case
and any change doesn’t seem forthcoming. There is always bound to be political interference
where the business environment is concerned raising questions as to the main issue that needs to
be addressed. The government can ally fears of political interference in small enterprise
development by setting aside an organ that will strictly concern itself with these matters, while
ensuring little or no political interference in small enterprise development
e) Economic Stability
The government can regulate the economic down turns in the country through the fiscal policies
that are enacted and revised from time to time. These can cushion the small businesses against
the adverse effects of economic cycles

Sources of finance
Businesses can acquire finances from various sources. These include;
Owner's Capital
This is often the only source of capital available for the sole trader starting in business. The same
often applies with partnerships, but in this case there are more people involved, so there should
be more capital available. This type of capital though, when invested is often quickly turned into
long term, fixed assets, which cannot be readily converted into cash. If there is a shortfall on a
Cash Flow Forecast, the business owners could invest more money in the business. For many
small businesses the owner may already have all his or her capital invested, or may not be
willing to risk further investment, so this may not be the most likely source of funding for cash
flow problems.
Ploughed back profits
Firms make profit by selling a product for more than it costs to produce. This is the most basic
source of funds for any company and hopefully the method that brings in the most money.
Borrowings
Like individuals, companies can borrow money. This can be done privately through bank loans,
or it can be done publicly through a debt issue. the drawback of borrowing money is the interest
that must be paid to the lender.
Issue of Shares
A company can generate money by selling part of itself in the form of shares to investors, which
is known as equity funding. The benefit of this is that investors do not require interest payments
like bondholders do. The drawback is that further profits are divided among all the shareholders
Overdraft
this is a form of loan from a bank. A business becomes overdrawn when it withdraws more
money out of its account than there is in it. this leaves a negative balance on the account. this is
often a cheap way of borrowing money as once an overdraft has been agreed with the bank the
business can use as much as it needs at any time, up to the agreed overdraft limit. But, the bank
will of course, charge interest on the amount overdrawn, and will only allow an overdraft if they
believe the business is credit worthy i.e. is very likely to pay the money back. A bank can
demand the repayment of an overdraft at any time. Many businesses have been forced to cease
trading because of the withdrawal of overdraft facilities by a bank. Even so for short term
borrowing, an overdraft is often the ideal solution, and many businesses often have a rolling (on
going) overdraft agreement with the bank. this then is often the ideal solution for overcoming
short term cash flow problems, e.g. funding purchase of raw materials, whilst waiting payment
on goods produced.
Bank Loan
This is lending by a bank to a business. A fixed amount is lent e.g. Kshs.10,000 for a fixed
period of time, e.g. 3 years. the bank will charge interest on this, and the interest plus part of the
capital, (the amount borrowed), will have to be paid back each month. Again the bank will only
lend if the business is credit worthy, and it may require security. if security is required, this
means the loan is secured against an asset of the borrower, e.g. his house if a sole trader, or an
asset of the business. if the loan is not repaid, then the bank can take possession of the asset and
sell the asset to get its money back. Loans are normally made for capital investment, so they are
unlikely to be used to solve short-term cash flow problems. But if a loan is obtained, then this
frees up other capital held by the business, which can then be used for other purposes.
Leasing
With leasing a business has the use of an asset, but pays a monthly fee for its use and will never
own it. think, of, someone setting up business as a parcel Delivery service, he could lease the van
he needs from a leasing company. He will have to pay a monthly leasing fee, say Kshs.50,000,
which is very useful if he does not wish to spend Ksh.800,000 on buying a van. this will free up
capital, which can now be used for other purposes. A business looking to purchase equipment
may decide to lease if it wishes to improve its immediate cash flow. In the example above, if the
van had been purchased, the flow of cash out of the business would have been Ksh 800,000, but
by leasing the flow out of the business over the first year would be Ksh 600,000, leaving a
possible Ksh 200,000 for other assets and investment in the business. Leasing also allows
equipment to be updated on a regular basis, but it does cost more than outright purchase in the
long run In an ideal world, a company would bring in all of its cash simply by selling goods and
services for a profit. At some point the company may need to invest in big investment that will
yield returns in the near future. For this reason, a time will eventually come when the company
will need to acquire funds from any of the above mentioned.
When evaluating companies, it is most important to look at the balance of the major sources
of funding. For example, too much debt can get a company into trouble. on the other hand, a
company might be missing growth prospects if it doesn't use money that it can borrow.

3.5 AWARENESS AND MOTIVATION

First forward: There are technical issues the entrepreneur should take some time to understand before he
3.5.1 Starting a business
embarks in a major investment.

An entrepreneur needs to be well versant with the law of the land, at least to the extent to which
his firm will be affected. Ignorance of the law can be very detrimental to the survival of the firm
and could prove costly in the end. When starting up a business, there are some important legal
matters that the entrepreneur will have to deal with, no matter how much he would love to just
dive in and get started. If he neglects these legal steps, he will find that maintaining the business
down the road becomes much more difficult, and in some cases, impossible. It’s in his best
interest to take these legal aspects seriously and get them sorted out as soon as possible when
starting a business. The emphasis on this section is to bring out the salient legal aspects that
affect the running of a business and what the entrepreneur needs to know. The legal aspects the
entrepreneur needs to be aware of are;
1. Laws that can affect the business
By looking at the legal documents which are usually available for all to see, the entrepreneur will
be in a position to assess the effect of each law that is relevant to his kind of business venture.
One important thing that he should be interested in, for instance is the issue of taxes. The
entrepreneur should assess how the Government will tax him and his business under the various
forms of business ownership. On the same note, he may also be interested in knowing the tax
incentives available for his type of business. it may work in his favor in subsequent periods.

2. Laws concerning capitalization

The firm cannot survive as a business without proper capitalization, and this will include both
matters of equity and debt. Equity is gained through sales of business ownership interest, such as
stock shares while debt is acquired through financial loans from lending institutions. Before the
entrepreneur even thinks about starting the business, he’ll need to have a good relationship with
his bank or an established financial institution. If he doesn’t have adequate capital, the business
will fail, regardless of how thorough his business plan was.
3. Law concerning the various forms of businesses
This will determine whether the entrepreneur can be sued for issues arising between the business
and his customers. It is extremely important, and often neglected when starting a business, but
this can actually make or break the entrepreneur during those crucial first years when the
business is trying to be established and grow. The entrepreneur would not want to be left with
liability issues, debt problems, or unnecessary obligations. The kind of legal entity will also
determine the tax strategy that the government applies to the business. The entrepreneur should
protect himself from liability issues, and he should ensure that he is not personally held
responsible for any unfortunate happenings.
4. The nature of business contracts
A business contract is a legally binding agreement between two parties for an exchange of
services that are of value. For a contract to be valid, an offer must be made and accepted. Using a
contract in business dealings helps ensure an agreement is acted on, insofar as a broken contract
could result in a lawsuit or out-of-court settlement and the payment of damages caused by the
breach. The best way the entrepreneur can avoid a dispute or potential litigation, however, is to
prepare a solid agreement in which he is confident he has negotiated the best terms for his
business.

Sources of finance
Businesses can acquire finances from various sources. These include;
Owner's Capital
This is often the only source of capital available for the sole trader starting in business. The same
often applies with partnerships, but in this case there are more people involved, so there should
be more capital available. This type of capital though, when invested is often quickly turned into
long term, fixed assets, which cannot be readily converted into cash. If there is a shortfall on a
Cash Flow Forecast, the business owners could invest more money in the business. For many
small businesses the owner may already have all his or her capital invested, or may not be
willing to risk further investment, so this may not be the most likely source of funding for cash
flow problems.
Ploughed back profits
Firms make profit by selling a product for more than it costs to produce. This is the most basic
source of funds for any company and hopefully the method that brings in the most money.
Borrowings
Like individuals, companies can borrow money. This can be done privately through bank loans,
or it can be done publicly through a debt issue. the drawback of borrowing money is the interest
that must be paid to the lender.
Issue of Shares
A company can generate money by selling part of itself in the form of shares to investors, which
is known as equity funding. The benefit of this is that investors do not require interest payments
like bondholders do. The drawback is that further profits are divided among all the shareholders
Overdraft
this is a form of loan from a bank. A business becomes overdrawn when it withdraws more
money out of its account than there is in it. this leaves a negative balance on the account. this is
often a cheap way of borrowing money as once an overdraft has been agreed with the bank the
business can use as much as it needs at any time, up to the agreed overdraft limit. But, the bank
will of course, charge interest on the amount overdrawn, and will only allow an overdraft if they
believe the business is credit worthy i.e. is very likely to pay the money back. A bank can
demand the repayment of an overdraft at any time. Many businesses have been forced to cease
trading because of the withdrawal of overdraft facilities by a bank. Even so for short term
borrowing, an overdraft is often the ideal solution, and many businesses often have a rolling (on
going) overdraft agreement with the bank. this then is often the ideal solution for overcoming
short term cash flow problems, e.g. funding purchase of raw materials, whilst waiting payment
on goods produced.
Bank Loan
This is lending by a bank to a business. A fixed amount is lent e.g. Kshs.10,000 for a fixed
period of time, e.g. 3 years. the bank will charge interest on this, and the interest plus part of the
capital, (the amount borrowed), will have to be paid back each month. Again the bank will only
lend if the business is credit worthy, and it may require security. if security is required, this
means the loan is secured against an asset of the borrower, e.g. his house if a sole trader, or an
asset of the business. if the loan is not repaid, then the bank can take possession of the asset and
sell the asset to get its money back. Loans are normally made for capital investment, so they are
unlikely to be used to solve short-term cash flow problems. But if a loan is obtained, then this
frees up other capital held by the business, which can then be used for other purposes.
Leasing
With leasing a business has the use of an asset, but pays a monthly fee for its use and will never
own it. think, of, someone setting up business as a parcel Delivery service, he could lease the van
he needs from a leasing company. He will have to pay a monthly leasing fee, say Kshs.50,000,
which is very useful if he does not wish to spend Ksh.800,000 on buying a van. this will free up
capital, which can now be used for other purposes. A business looking to purchase equipment
may decide to lease if it wishes to improve its immediate cash flow. In the example above, if the
van had been purchased, the flow of cash out of the business would have been Ksh 800,000, but
by leasing the flow out of the business over the first year would be Ksh 600,000, leaving a
possible Ksh 200,000 for other assets and investment in the business. Leasing also allows
equipment to be updated on a regular basis, but it does cost more than outright purchase in the
long run In an ideal world, a company would bring in all of its cash simply by selling goods and
services for a profit. At some point the company may need to invest in big investment that will
yield returns in the near future. For this reason, a time will eventually come when the company
will need to acquire funds from any of the above mentioned.
When evaluating companies, it is most important to look at the balance of the major sources
of funding. For example, too much debt can get a company into trouble. on the other hand, a
company might be missing growth prospects if it doesn't use money that it can borrow.
if a person is considering starting a small business, he may be trying to sort out the different
types of businesses

3.5.3 Legal forms of ownership