Chapter 6 SETTING UP A BUSINESS

CONTENTS PAGE
1131
6.1 LEARNING OUTCOMES

6.2 KEY CONCEPTS

1133
6.3 A MIND MAP FOR CHAPTER 6
1134
6.4 OVERVIEW
1135
6.5 THE FORMS OF ENTERPRISE
6.5.1 Different forms of enterprise
6.5.2 Characteristics of the forms of enterprise 1138
6.5.3 Factors that influence the choice of a form of enterprise 139
6.5.4 Procedures for registering (setting up) the forms of enterprise
1140
6.6 THE DUTIES AND LEGAL REQUIREMENTS
1141
6.7 LABOUR LEGISLATION
1142 6.7.1 Employment contracts
1143 6.7.2 Acts
1144
6.8 FACTORS THAT PLAY A ROLE IN CHOOSING THE PLACE OF
STABLISHMENT
1145 6.8.1 Establishment factors for commercial and service enterprises
6.8.2 Establishment factors for manufacturing enterprises 1147

6.9 SETTING-UP FACTORS RELATED TO THE FUNCTIONS OF THE

ENTERPRISE
1148 6.9.1 The marketing function1149
6.9.2 The public relations function
1150 6.9.3 The information management function 151
6.9.4 The financial function 1152
6.9.5 The human resources function
6.9.6 The purchasing function 1154
6.9.7 The operations function 1155
6.9.8 The general management function

6.10 SUMMARY
1157
6.11 SELF-ASSESSMENT
1158
6.12 SUGGESTED SOLUTIONS TO THE SELF-ASSESSMENT QUESTIONS
 6.1 LEARNING OUTCOMES

When you have worked through chapter 6, you should be able to

 list and discuss the different forms of enterprise

 list and explain the legal requirements that all enterprises must meet
 explain the different employment contracts
 list the different labour laws and give a brief discussion of the purpose or
aim of each of them
 list and explain the establishment factors applicable to commercial,
service and manufacturing enterprises
 define the marketing function and explain the marketing strategy
 define the public relations function and explain how the entrepreneur can
use this function to promote the enterprise
 define the information management function and explain how
administration and record-keeping should be developed
 define the financial function and explain the financing of different capital
needs
 define the human resources function and explain the steps that the
entrepreneur has to take to plan staff appointments
 define the purchasing function and explain the tasks of this function
 define the operations function and explain the transformation process
 define the general management function and explain the four elements of
general management

6.2 KEY CONCEPTS

You will need to master the following key concepts to achieve the learning outcomes
for this chapter:

 legal personality
 limited and unlimited liability
 limited and unlimited continuity
 Registrar of Companies
 full legal capacity
 VAT
 service levies
 tax
 employment contracts

1159
6.3 A MIND MAP FOR CHAPTER 6

THE IMPLEMENTATION STAGE

* Marketing function
* Public relations function
* Information management function
* Financial function
* Human resources function * Sole proprietorship
* Purchasing function * Partnership
* Operations function * Close corporation
* General management function * Private company

Functions of the Forms of

enterprise enterprise

SETTING UP OF
A BUSINESS

Establishment
Labour legislation
Legal requirements factors

Employment Commercial
Acts Manufacturing
contracts and service
enterprises
enterprises
 6.4 OVERVIEW

So far in this module, you, as the potential entrepreneur, have learned several
important aspects, such as the following:
 how to analyse yourself critically by determining your own strengths and
weaknesses?
 how to turn a business idea into an opportunity for a new business?
 how to test the feasibility and viability of the business idea?
 how to draw up a business plan?

These activities all cover the idea and planning stages in creating an enterprise.
When we discussed the character of a business plan in chapter 5, we established
that a business plan is useless unless it is implemented. We have now reached the
implementation stage, the final stage in the creation of an enterprise. This is the
stage where the real action begins – where we have to put the idea into practice.

In chapter 6 we will discuss the practical factors to which the entrepreneur must pay
attention in setting up a business. We are going to explain the different forms of
enterprise that you can choose from and we will discuss the duties and legal
requirements you have to comply with before you can start the enterprise. We are
also going to discuss the labour legislation briefly, as well as the establishment
factors that you have to consider before you decide on the location of your
enterprise. Finally, we are going to explain how the eight functions of the enterprise
should be implemented so that your enterprise can function as a unit.

6.5 THE FORMS OF ENTERPRISE

6.5.1 Different forms of enterprise (business forms or business structures)

Choosing the right form of enterprise can be quite complicated. The entrepreneur
has to consider important factors such as the size of the enterprise, the extent of the
capital need, legal personality, legal requirements and the procedures that must be
followed to register the form of enterprise.

Although there are various forms of enterprise, we are only going to concentrate on
those that are applicable to small businesses.

Forms of enterprise that are applicable to small businesses:

* sole proprietorship
* partnership
* close corporation
* private company
 Important: You must study the information on forms of enterprise together with
the information on business structures in chapter 4.

6.5.1.1 Sole proprietorship

A sole proprietorship is usually a small enterprise which is owned by one owner.
The name of the enterprise may be any legal name and this form of enterprise is
easy and simple to establish. The owner is responsible for supplying the capital and
managing the enterprise.

6.5.1.2 Partnership
A partnership is formed by two to twenty partners. The name of the enterprise
must end with “& Co”. A partnership agreement is formed by means of a written or
verbal agreement between the partners and a partnership is quite simple to
establish. The partners are responsible for supplying the capital and managing the
enterprise.

6.5.1.4 The private company

A private company consists of one to fifty shareholders. The name of the
enterprise must end with “(Pty) Ltd”. It is much more complicated to establish than
a partnership and prescribed formal documents have to be submitted to the
Registrar of Companies. Capital is obtained by making shares available to the
shareholders. A private company is managed by at least one director.

6.5.2 Characteristics of the forms of enterprise

Study the table in during lectures that indicates the characteristics,

advantages and disadvantages of each form of enterprise carefully.

6.5.3 Factors that influence the choice of a form of enterprise

Activity

Using a table, indicates the characteristics, can you identify the factors that
influence the choice of a form of enterprise?

Feedback

When choosing a form of enterprise, the entrepreneur has to keep the following
factors in mind:

 the nature of the product or service

 legal personality
 the liability of the owners
 the continuity of the enterprise
  tax obligations
 the specific legal requirements
 the need to involve third parties financially

6.5.3.1 The nature of the product or service

The nature of the product or service will determine the size of the enterprise. The
bigger the enterprise, the more formal the form of enterprise has to be.

6.5.3.2 Legal personality

Legal personality means that the enterprise can exist independently of its owners,
which means the enterprise can act in its own name. Enterprises with legal
personality, such as close corporations and private companies, can therefore
conclude contracts, sue and apply for finance in the name of the enterprise.
Enterprises without legal personality, such as sole proprietorships and partnerships,
do not exist independently of their owners and all transactions are made in the name
of the owners. Legal personality provides unlimited continuity to the enterprise and
limited liability to the owners.

6.5.3.3 The liability of the owners

Liability refers to the degree to which the owners are responsible for the debts of the
enterprise. If an enterprise has legal personality, the assets and liabilities of the
enterprise are completely separated from those of the owners. The owners have
limited liability for the debts incurred by the enterprise. This means they can only
lose the money they have invested in the enterprise, in other words, their personal
assets are separated from those of the enterprise. If an enterprise does not have
legal personality, the owners have unlimited liability for the debts of the enterprise.
This means they can lose their private assets if the enterprise becomes bankrupt,
because there is no distinction between their private assets and those of the
enterprise.

6.5.3.4 The continuity of the enterprise

If an enterprise has legal personality, it does not cease to exist if an owner dies,
withdraws or when a new owner joins the enterprise. It has unlimited continuity or an
indefinite lifespan. If an enterprise does not have legal personality, it has limited
continuity, which means that the enterprise ceases to exist if an owner dies,
withdraws or when a new owner joins the enterprise.

6.5.3.5 Tax obligations

The owner of a sole proprietorship and the partners of a partnership pay tax in their
personal capacities. Since close corporations and private companies have legal
personality, the enterprises are taxed according to a fixed rate.

6.5.3.6 The specific legal requirements

This refers to the legal requirements applicable to the establishment of the
enterprise, as well as the provision, auditing and publishing of financial statements.
Certain types of businesses also have to renew their licences annually.
 6.5.3.7 The need to involve third parties financially
The capital need and the size of the enterprise will determine how many owners are
needed. For example, a private company can issue shares to 50 shareholders and
therefore can accumulate much more capital than a partnership with 20 partners or a
sole proprietorship with one owner. In addition to the above factors, the
entrepreneur must also keep the name of the enterprise, the number of members
and the distribution of profit in mind.

6.5.4 Procedures for registering (setting up) the forms of enterprise

Companies are registered by the Registrar of Companies and Intellectual Property
(ROCIP):
Plot 181, Kgale Mews, P.O. Box 102, Gaborone, Botswana.
ROCIP also has offices in Francistown, Serowe and Maun. There are two steps to
incorporate a company and register a business: reservation of company/business
name, and submission of incorporation documents as described below:

Reservation of Company or Business Name

ROCIP requires a reservation fee of P20.00 is payable upon submission of Form 1
for company name and Form RBN 1A for business name. The expected turnaround
time is five days. An online database of company names can be accessed to prevent
duplicates (http://www.mtinamesearch.gov.bw/search/) subject to verification by
ROCIP.

Requirements for Company Registration

Upon confirmation that the proposed company/business name is available, Company
registration forms should be submitted. They are available for download on the
Ministry of Trade and Industry’s website (www.mti.gov.bw).
Forms require:

 Directors’ personal details

 Residential address – plot number, location, ward, village or town; and
 Full postal address.
 If a representative is applying on behalf of the applicant, a letter authorizing the
representative should be submitted.

The following documents should be submitted:

a. Form 2 and Form 3 for a company limited by shares;

b. Form 2A and Form 3 for a closed company;
c. Form 2B and Form 3 for a company limited by guarantee;
d. Form 3 (declaration) to be filled by a qualified Company Secretary recognized by the
Act or a Director/member of a company;
e. The person presenting the application should provide their address, telephone or
mobile numbers in the spaces provided;
f. The person presenting the application should attach certified copies of their identity
card or passport
g. Certified copies of identity documents for the proposed directors and shareholders
and a practising certificate for the Company Secretary;
h. Two (2) original bound sets of all documents are required
i. P360.00 registration fee of payable upon submission and acceptance of registration
documents
j. In case of a business, name registration form RBN 2 should be completed and
submitted with a copy of the applicant’s identity document and P150.00 registration
fee.

It should be noted that reservations business/company names are only valid for 30
days and only valid reservations are accepted for business/company registrations. If
more than 30 days have elapsed, the business/company must be reserved again
through the process listed above.

6.5.4.1 Sole proprietorship

Setting up a sole proprietorship entails only a few legal requirements, such as
obtaining a trading name and a trading licence.

6.5.4.2 Partnership
Establishment procedures of a partnership entail only a few legal requirements, such
as obtaining a trading licence. A partnership agreement, in the form of a written or
verbal agreement, must be formed.

6.5.4.3 Close corporation

Since no new close corporations are allowed, we are not going to discuss the
establishment procedures.

6.5.4.4 Private company

Setting up a private company entails the following:
i. Reserve a name for the company.
ii. A Memorandum of Association and Statutes/Articles must be drawn up.
iii. Various documents and information must be submitted to the Registrar of
Companies, such as information on the name and location of the company,
copies of the Memorandum of Association and the Statutes and written proof
that a chartered accountant will audit the annual financial statements.
iv. The Registrar of Companies will issue a Certificate of Incorporation, which
indicates that the company has received a legal personality.
6.6 THE DUTIES AND LEGAL REQUIREMENTS

Activity

Can you simply start your enterprise after choosing a suitable form of enterprise?

Feedback

No, unfortunately not. There are still quite a few duties and legal
requirements which you have to meet before you can start your enterprise.

The duties and legal requirements that apply to all forms of enterprise include the
following:
 full legal capacity
 the type of economic activity
 naming the business
 registration of patents, trade marks and designs
 testing of products
 licensing
 registration with the Botswana Unified Revenue Service (BURS)
(previously called the Receiver of Revenue) as an employer, a taxpayer
and for VAT
 registration with the Unemployment Insurance Fund
 registration with the Compensation Commissioner (previously called the
Workmen’s Compensation Commissioner)
 registration with local authorities
 registration with the Department of Trade and Industry
 general industrial and commercial legislation

Study the above duties and legal requirements. .

6.7 LABOUR LEGISLATION

Activity

What is the purpose of labour legislation?

 Feedback

Labour legislation balances the power between employers and employees and is intended
protect both parties in the employment relationship.
to

6.7.1 Employment contracts

It is important to understand that an employee makes himself or herself available to
an employer in an employment contract. This relationship between the employer and
the employee comprises certain rights and obligations that have to be mutually
agreed upon. For example, in the contract the employer describes the duties to be
performed by the employee, and the employee agrees on a wage or salary. The
contract also defines whether employment is for a fixed or indefinite period.

Study the following forms of employment contracts:

o written contracts
o verbal contracts
o tacit contracts

Activity

Which type of contract would you use when you appoint your employees?

6.7.2 Acts

You must study the following Acts in the prescribed

textbook:
* Labour Relations Act
* Employment Act
* Compensation Act
* Trade Dispute Act

Labour Relations Act

You must study the aim and the objectives of this Act.

Basic Conditions of Employment Act

You must study the purpose and the provisions of this Act.
Employment Act, Labour Relations Act, Compensation Act, Trade
Dispute Act.
You must study the purpose or aims of these Acts.
 Important: You do NOT have to study the sections in which the information
appears.

6.8 FACTORS THAT PLAY A ROLE IN CHOOSING THE PLACE OF

ESTABLISHMENT

There are many factors that play a role in identifying a suitable location or place of
establishment for the enterprise. The location of your enterprise will have a huge
influence on your sales and your ability to compete with other enterprises.

Activity

Would the type of enterprise (manufacturing, commercial or service

enterprise) influence the factors that you have to consider when you have
to decide on a place of establishment for your enterprise?

Feedback

Yes, you have to consider different factors. If you start a manufacturing

enterprise, you will establish near the source of raw materials and if you
start a commercial or service enterprise, you will establish as close as
possible to your target market. However, if you plan to manufacture your
products and to sell them directly to your consumers, you will have to
decide whether you are going to establish the enterprise near the source of
raw materials or near the target market.

6.8.1 Establishment factors for commercial and service enterprises

The market
The enterprise must be visible and near the target market.

Accessibility
It must be easy for the consumers to reach the enterprise.

Cumulative attraction
Other shops in the area, especially shopping centres, attract consumers.
1194
Growth potential
The growth potential of the area where the enterprise plans to establish is important.
For example, a newly developed residential area implies that further development
can be expected.
Suitability of premises
Factors such as sufficient parking space, the availability of water, electricity and
public transport, and the cost of rent must be considered.

Limited risk of competition

You have to determine how many competitors there are and how likely it is that other
competitors will establish in the same area.

Interception of consumers
Consumers must be intercepted on their way to their traditional place of purchase.

6.8.2 Establishment factors for manufacturing enterprises

Raw materials
The enterprise must be near the source of raw materials to save transport costs.

Labour
The availability, skills and cost of labour are important.

Transport
Infrastructure, reliability and cost of transport must be considered, such as the
availability of roads, rail, airports and harbours.

Energy and water

Electricity is needed to use machinery in the production process and water in the
right quantities is also important.
Climate
The influence that the climate exerts depends on the type of product. For example,
agricultural products are dependent on the climate of a certain region.

Nature of end product

If the end product is made up of different kinds of raw materials from different outlet
points, it may be more beneficial to establish near the market or at a central point.
1215
Incentives
Government or local authorities can offer incentives to persuade enterprises to
establish in certain regions or in industrial areas.
 6.9 SETTING-UP FACTORS RELATED TO THE FUNCTIONS OF THE
ENTERPRISE

Activity

In chapter 2 we briefly discussed the eight functions of the enterprise. Can you still
remember them?

In this section we are going to explain the functions in more detail and we are going
to concentrate on how the functions must be implemented during the setting up of
the enterprise. Although we are going to discuss these functions separately, there is
a degree of overlap between them. It is extremely important to remember that all
these functions occur in every enterprise, regardless of the size of the enterprise.
There should be constant interaction between these functions to enable the
enterprise to function as a unit or a system.

6.9.1 The marketing function

Definition

The marketing function is responsible for the transfer of the

products from the manufacturer to the consumer and includes
the activities that make this transfer possible. These activities include doing
market research and market segmentation, deciding on the target market
and the marketing strategy and compiling a marketing plan.

6.9.1.1 Initial marketing

Before you can sell your products or services, you must plan a marketing campaign
by compiling a marketing plan which is based on your specific target market. The
core of this marketing plan will consist of your marketing strategy – the products or
services that you are going to sell, your selling price and the distribution channel and
form of marketing communication that you are going to use. You must also decide on
the name, logo and motto of your enterprise.

In chapter 2 we discussed the rights of consumers. Can you still remember them?
Activity
Feedback

The rights of consumers are protected by legislation.

6.9.1.2 The marketing strategy

Product

Price
The elements of the
marketing strategy
Distribution

Marketing communication

The elements of marketing

communication
* Advertising
* Sales promotions
* Personal sales
* Publicity
1220a) The product
This represents the products or services that you are going to offer and includes the
colour, size, packaging, quality, guarantees and after-sales service of the products or
services.

1222b) The price

This is your selling price which you have determined when you have calculated the
profit potential of your idea. As we indicated in chapter 4, the selling price should be
profitable, affordable and competitive.

1224c) Distribution
Distribution entails the physical transfer of the products or services to the
consumers, or the way in which your products or services will reach the market. If
you sell the products or services directly to the consumers, you will use a direct
distribution channel. If you use wholesalers, retailers or agents to sell your products
to the consumers, you will use an indirect distribution channel.
1226
1227d) Marketing communication
This entails the methods that you are going to use to make the consumers aware
of your products or services. It is extremely important to keep the type of product
or service, the size of the enterprise and the location of the target market in mind
when you decide which method or element of marketing communication you are
going to use. Marketing communication consists of four elements, namely
advertising, sales promotions, personal sales and publicity.

1229Advertising
This includes the use of pamphlets, radio and newspaper advertisements, as
well as advertisements on billboards.
1231
 Sales promotions
1232These include special offers, discounts, gifts and trade-ins.
1233
Personal sales
These include the use of sales staff such as tele-sales, door-to-door sales and
catalogues.

1235Publicity
1236This includes sponsorships, donations and articles in newspapers or
magazines.

6.9.2 The public relations function

Definition

The public relations or external relations function is

responsible for promoting the image of the enterprise to
ensure positive support from all the interest groups of the enterprise. It
strives to create goodwill, cooperation, mutual understanding and
acceptance from all the relevant interest groups, such as the
consumers, community, capital providers, employees and authorities.

6.9.2.1 The difference between marketing and public relations

Although the public relations and marketing functions work closely together, they are
not the same. The marketing function sells the products or services to the
consumers to make a profit for the enterprise. The public relations function sells the
enterprise (making it known) to the public (interest groups) to promote the image of
the enterprise.

6.9.2.2 The use of public relations

As an entrepreneur, you can use public relations successfully to make the public
aware of your new enterprise.
The following methods (or hints) can be used to promote public relations:
 Use the network of friends and acquaintances to make your business known
or join organisations and associations such as the local Chamber of
Commerce. This is known as networking.
 Invite journalists from the local newspaper to the opening of your business.
 Write an article yourself and send photographs with it for publication.
 Ask for an article to be written about your enterprise when you place
advertisements.
 Testimonials from satisfied clients are also an excellent form of public
relations.
6.9.3 The information management function

Definition

The information management function (or the information and

record systems function) is responsible for collecting,
processing, storing and distributing information, as well as developing
record-keeping and filing systems. This function enables management to
make informed decisions.

6.9.3.1 Record-keeping systems that must be developed for the new

enterprise  a system for keeping information on clients  an accounting
system that is simple and effective  a stock control system  a system for
the control of cash

y a system for keeping records of marketing, enquiries and sales

y a system for keeping record of turnover and profit for tax purposes and levies
to local authorities

Read the discussion in the prescribed textbook on how the kind of

information you must record will determine which filing system you must
use.
6.9.4 The financial function

Definition

The financial function is responsible for determining the capital

need of the enterprise and for deciding how the capital need
will be financed. This includes decisions on the effective application of
funds and the best possible use of the sources of finance, as well as the
development of a basic accounting system.

6.9.4.1 Financing your enterprise

The capital need of your enterprise can be financed by means of internal and
external capital sources. Although we have already discussed the importance of own
capital in chapter 5 of the study guide, the importance of investing your own funds in
the enterprise cannot be over-emphasised. Financing institutions generally require a
certain amount of own capital to show that you, as the entrepreneur, are committed
to the enterprise.
6.9.4.2 Financing of different financial requirements
As an entrepreneur, it is important to know how to obtain the right finance for your
different capital requirements.
 To buy property, you will need a large amount and have to apply for long-term
financing.
 To buy expensive machinery and equipment, you have to apply for medium-
term financing.
 To buy computer equipment or raw materials, you have to apply for short-term
financing.

6.9.4.3 Managing your finances

Study the information on managing your finances during lectures. .

6.9.5 The human resources function

Definition

The human resources function is responsible for the effective

use of a competent, motivated labour force. The activities of this
function include compiling job descriptions and job specifications, as well
as the recruitment, selection, employment, induction, training and
development of personnel.

6.9.5.1 Staff planning and making sound appointments

Steps to plan your staff requirements and to ensure the right appointments:

 Draw up a list of all the tasks that must be performed in the enterprise.
 Compile a job description by grouping the tasks so that tasks that can be
performed by a specific person can be combined.
 Compile a job specification by determining what qualifications and skills the
person must have to perform the tasks.
 Recruit the right people. Since you do not have any employees yet, you will
have to use external recruitment sources, such as placing advertisements, using
recruitment agencies or approaching training institutions.
 From the applicants, you then have to select the best candidate.
 An employment contract must be signed and a written job description must be
given to the new employee.
 The training and development needs of the employees must be addressed
regularly.
6.9.6 The purchasing function

Definition

The purchasing function is responsible for ensuring that

production means of the right quality are supplied to the
enterprise in the right quantities, at the right time, to the right place, from
the right supplier, at the right price.

In chapter 4 we explained how to calculate the cost per unit for the different types of
enterprises and how the cost per unit influences the selling price and profit of the
enterprise. The price of production means, such as raw materials or stock, plays an
extremely important role in the profitability of the enterprise. Therefore, it is of the
utmost importance that from the start, you find the right supplier that can deliver the
right quality production means at the right price.

Starting the purchasing function

 Find suitable suppliers of raw materials or stock.
 Negotiate with suppliers for better prices for cash payments.
 Compare suppliers in terms of prices, quality and the services they provide.
 Find alternative suppliers so that you are not dependent on one supplier.
 Maintain good relations with suppliers.
 Maintain good relations with other functions of the enterprise.
 Exercise effective stock control.
 Exercise quality control.

6.9.7 The operations function

Definition

The operations function is responsible for transforming inputs

(raw materials) into outputs (final products), by using the four
factors of production to manufacture products or to provide services.

It is important to remember that all types of enterprises (manufacturing, commercial

and service) have operations functions. In a manufacturing enterprise, the operations
function is the place where the products are manufactured. Commercial and service
enterprises also need inputs that must undergo some kind of transformation in order
to deliver an output.
6.9.7.1. The transformation process

The transformation process for the manufacturing of a product can be

illustrated as follows:
Inputs Outputs
Transformation
Production factors: Finished products
Inputs processed
* Entrepreneurship ready for delivery
into outputs
* Capital
* Natural resources
* Labour

An example of the transformation process for the manufacturing of wooden

furniture:

Wood Wood processed into furniture Furniture

1247

6.9.8 The general management function

Definition

The general management function is responsible for the

overall management of the enterprise. This includes all the
activities (planning, organising, leading and control) that are
performed in the enterprise to enable the enterprise to achieve its
goals. The general management function is found in all the other
functions of the enterprise.

An illustration of the general management function

The elements of general management

Planning Organising Leading Control

As an entrepreneur, you will act as the manager of your enterprise. You will thus be
responsible for the planning, organising, leading and control of all the activities of the
enterprise.
 i. Planning: Planning involves formulating objectives for the enterprise and
working out a systematic plan to achieve these objectives. Management
should determine in advance what the enterprise wants to achieve and how
these objectives can be attained.

ii. Organising: Organising entails grouping and coordinating activities,

creating posts and allocating duties, authority and responsibilities to
subordinates. Organising includes providing resources such as labour, capital
and raw materials (or stock) and dividing and distributing tasks. It means you
must determine in advance how, where, by whom, when and with what
resources jobs must be carried out.

iii. Leading: Leading refers to the way in which a manager motivates

subordinates to work together voluntarily to achieve the objectives of the
enterprise.

iv. Control: Control means determining realistic standards against which the
actual performance of the employees and the enterprise can be measured, so
that deviations can be identified and corrective steps can be taken. The
manager ensures that employees carry out instructions according to plan so
that the objectives of the enterprise can be achieved.

You have now reached the end of chapter 6.

6.10 SUMMARY

The setting-up and establishment factors are not equal for all businesses. It is vital that
you, as the entrepreneur, realise this important fact in order to determine which factors
are critical for the success of your enterprise. The emphasis of the enterprise often
shifts, and growth makes different demands on the enterprise. Where you may have
started with few or no staff, you have to appoint more staff members as the need
grows. You must take note of the critical success factors in the implementation stage
but must also be aware that the situation is not static. To ensure competitiveness and
survival, provision for change must be made in time.

We have now covered all the stages in the creation of an enterprise. We trust that you
have learned how to come up with creative ideas, how to test the feasibility and viability
of your idea, how to compile a business plan and how to implement your idea into a
real enterprise.
 .

6.11 SELF-ASSESSMENT

To test and assess your knowledge of this chapter, Complete the self-
assessment questions on chapter 2 below. Remember: The only way you can test
your knowledge is by answering the questions.

Read the case study below and answer all the questions that follow.

Case study: Leather for Africa

Oudtshoorn is a town in the Little Karoo that is well known for its ostrich farms.
Freddy Fredericks was the owner of a small sole proprietorship that manufactured
purses and handbags from ostrich leather. Freddy bought the leather from a local
tannery, manufactured the products with the help of his two employees, Tom and
Jerry, and sold them to local shops and hawkers. Freddy experienced a serious cash
flow problem, because he sold his products on credit to the local shops, while he had
to pay his supplier in cash. To make matters worse, the price of leather also
increased due to a drought in the area and the outbreak of bird flu. His sales figures
started to show a drastic decline, as he had to compete with several bigger
enterprises that manufactured the same types of products in bulk at lower costs, and
therefore could afford to sell them at lower prices. Freddy decided to retire and
asked his son, Leon, to take over the business.
1262
Leon took over the business, realising that the business would not survive unless he
made some drastic changes. He decided to involve six of his friends in the enterprise
to accumulate more capital and expertise. The new owners registered the enterprise,
Leather for Africa, as a private company with Leon as the director. Leon invested
R40 000 of his savings in the business and his friends each contributed R10 000.
However, they still had to apply for financing of R150 000 to purchase more
industrial sewing machines, cutters, workbenches and office equipment.
1263
The new owners decided to add more products to the existing range. They included
a bigger variety of purses and handbags, as well as belts, cellphone covers, book
covers and attaché cases of various shapes and sizes for men and women. They
also decided to rent a larger factory in an industrial area to increase the capacity of
the enterprise. They employed more staff to manufacture the products and Tom and
Jerry were promoted to supervisors of the manufacturing division. Heidi was
appointed to handle the administration of the new enterprise.
1264
Leon and the other owners realised that they would not survive if they concentrated
only on the local market and tourists. They decided to launch a marketing campaign,
starting off with personal visits to owners of clothing shops in George and Mossel
Bay, showing them samples of their products. Three of these shop owners agreed to
sell the products. Leather for Africa also advertised their products in a regional
newspaper, offering to sell them to the public on an order basis.
1265
Leather for Africa could now also afford to sell their products at more competitive
prices. Since they were now buying the leather in bulk, they qualified for discount
prices. The supplier also agreed to sell the leather on credit to them, which resulted
in a tremendous difference in their cash flow figures.
1266
MULTIPLE-CHOICE QUESTIONS
12681. One of the factors that Leon and the other owners had to keep in mind
when they had to choose a form of enterprise is legal personality. They
decided to register the enterprise as a private company, which means that
Leather for Africa …
1269 a) can exist independently of Leon and the other shareholders.
1270 b) cannot exist independently of Leon and the other shareholders.
1271 c) can act in its own name. 1272
1272 d) can own its own assets.
1273

1273 Choose correct option:

1274 1) a, b
1275 2) a, b, c, d
1276 3) b, c, d 1277
1277 4) a, c, d
1278

12782. Because Leon and the other owners have registered the enterprise as a
private company, their liability would be …
1279 1) unlimited, which means that they could lose their private assets if the
enterprise goes bankrupt.
1280 2) limited to their own personal debts.
1281 3) limited to the debts of the enterprise.
1282 4) limited to the capital they have invested in the enterprise.
1283

12833. Leon and the other owners also had to keep the continuity of the
enterprise in mind. Leather for Africa would …
1284 1) have limited continuity.
1285 2) have an indefinite lifespan.
1286 3) cease to exist if one of the shareholders withdrew from the enterprise.
4) cease to exist if they decided to involve more shareholders.
1287

12884. Because Leather for Africa is a private company, the prospects of

financing would be ...
1289 1) limited to Leon’s creditworthiness.
1290 2) worse than that of a sole proprietorship.
1291 3) limited to the enterprise’s creditworthiness.
1292 4) limited to the shareholders’ creditworthiness.

12935. To be allowed to set up a business, Leon and the other owners should
have full legal capacity. This means that they ...
1294 1) may be insolvent.
1295 2) have to comply with the rules and regulations of the local authorities.
1296 3) may not be under judicial management.
1297 4) do not need to have the capacity to pay their bills.
1298

12986. Working with industrial sewing machines and cutters could be dangerous.
Therefore Leather for Africa had to take out insurance for their employees
before they could start to work. If an accident happens, the employees can
claim compensation from the …
1299 1) local authorities.
1300 2) South African Revenue Service.
1301 3) Unemployment Insurance Fund. 1302
1302 4) Compensation Commissioner.
1303

13037. The owners of Leather for Africa decided to rent a larger factory to
increase the capacity of the enterprise. The most important establishment
factors that Leather for Africa had to consider were …
1304 a) the availability of raw materials.
1305 b) the market.
1306 c) cumulative attraction. 1307
1307 d) energy and water.
1308

1308 Choose the correct option:

1309 1) a, c 1310
1310 2) b, d
1311 3) a, b, c
1312 4) a, d
1313

13138. To manufacture the leather products without interruptions, the operations

function should determine how much leather they would need and notify the
… function in advance so that the leather can be bought in time from the
local tannery.
1314 1) marketing
1315 2) public relations
1316 3) purchasing
1317 4) information management
1318

13189. Showing samples of their products to the clothing shops in George and
Mossel Bay and placing advertisements in the regional newspaper is the
responsibility of the … function of Leather for Africa.
1319 1) marketing
1320 2) public relations
1321 3) operations
1322 4) information management
1323

132310. Leather for Africa employed more staff to manufacture the products and
Tom and Jerry were promoted to supervisors of the manufacturing division.
The division of tasks forms part of the … element of the general
management function of Leather for Africa.
1324 1) planning
1325 2) organising
1326 3) leading
1327 4) control
1328

6.12 SUGGESTED SOLUTIONS TO THE SELF-ASSESSMENT QUESTIONS 1328

1. 4
1329Legal personality means that the enterprise is regarded as an entity on its own.
This implies that the enterprise exists independently of its owners and can act in its
own name. The assets and liabilities of the enterprise are completely separate from
those of the owners. Option b) is incorrect, as it refers to an enterprise without legal
personality.
1330
2. 4
1331If an enterprise has legal personality, the enterprise is liable for its own debts
and the owners can only lose the capital they have invested in the enterprise. Option
1 is incorrect, as this refers to an enterprise without legal personality. Option 2 is
incorrect, because the personal debts of the owners do not form part of the debts of
the enterprise. Option 3 is also incorrect – if the amount of debt exceeds the capital
contribution of the owners, their private assets cannot be attached to settle the debts
of the enterprise.
1332
3. 2
1333Because a private company has legal personality, its existence is not
dependent on its members. This means that a private company has unlimited
continuity or an indefinite lifespan. Options 1, 3 and 4 relate to an enterprise without
legal personality.
1334
4. 3
1335Options 1 and 4 are incorrect, because a private company is regarded as a
person on its own. The owners apply for a business loan in the name of the
enterprise, not in their personal capacity. Option 2 is incorrect, as a sole
proprietorship can only have one owner and the enterprise cannot exist
independently of its owner. This means that the prospect of financing is limited to
one person’s ability to accumulate capital.
1336
5. 3
1337Full legal capacity means that an insolvent person or a person under judicial
management may not start an enterprise. Therefore, options 1 and 4 are incorrect.
Option 2 is also incorrect, as this relates to registration with the local authorities.
1338
6. 4
1339Option 1 is incorrect, as this relates to the payment of service and turnover
levies to the local authorities. Option 2 is incorrect, as this relates to the fact that all
enterprises must register with SARS as taxpayers, as employers, as well as for VAT.
Option 3 is also incorrect, as this relates to the compensation of employees in the
lower income groups if they are dismissed or have to take maternity leave.
1340
7. 4
1341Leather for Africa is a manufacturing enterprise because they do not sell the
leather products directly to the consumers. They would therefore establish near the
source of raw materials (the local tannery) to save transport costs and they would
also need energy and water to manufacture their products. Options b) and c) relate
to establishment factors for commercial enterprises and they cannot be classified as
a commercial enterprise.
1342
8. 3
1343The purchasing function is responsible for buying production means of the right
quality, in the right quantities, at the right time, so that the operations function can
continue its activities without interruptions. The marketing function is responsible for
selling the products to the consumers, the public relations function is responsible for
improving the image of the enterprise and the information management function is
responsible for distributing information.
1344
9. 1
1345The marketing function is responsible for selling the products of the enterprise
and includes activities such as personal sales and advertising. The public relations
function is responsible for improving the image of the enterprise, the operations
function is responsible for transforming inputs into outputs and the information
management function is responsible for distributing information.
1346
10. 2
1347Organising entails the provision of capital, resources and labour, as well as the
division of tasks. Option 1 relates to setting objectives, option 3 relates to motivating
employees so that they will perform their tasks willingly and option 4 relates to
setting performance and quality standards and ensuring that employees comply with
these standards.