ENTREPRENEURSHIP SKILLS

COURSE OUTLINE

Course Description

This course unit is intended to equip the trainee with the necessary knowledge, skills and attitudes
that will enable them to start, operate and manage a personal or group enterprise. It is intended to
instill the drive necessary for any of them to venture into profit making attitudes.

General objectives:

At the end of this course unit the trainee should be able to:

a) Demonstrate positive attitudes towards self- employment

b) Identify viable business opportunity
c) Understand factors likely to affect the success of a business
d) Portray a desire to venture into business
e) Acquire management skills necessary for running a successful enterprise.

Course Content

1. The meaning and importance of entrepreneurship:

Definition of terms
Entrepreneurship
Entrepreneur
Characteristics of an entrepreneur
2. Theories of entrepreneurship:
Sociological theories
Economic theories
Financial theories
3. Role of entrepreneurship in economic growth and development:
Entrepreneurship and national development
Different economic systems
Role of entrepreneur in different economic systems
Positive and negative role of entrepreneurship in economic development.
4. Preparing for start-up of a business
Steps in preparation for start-up
Generation of business idea.
Stages of starting a business
5. Legal aspects in starting and operating business enterprise
Registration process
Licensing matters
Permits and taxes
Government policy on small enterprises
6. Coping with competition:

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 Financing small enterprises
Selecting the business location
Reaching the customers
7. Record keeping
Uses of a business plan
Steps in business planning

References

1. Rhoda Abrams; A stp-by-step program for starting your business

2. Patrick .R. Liles; New Business Ventures and The Entrepreneur; Homewood, Illions.
3. Robert D. Hisrich; Entrepreneurship African Editor, McGraw Hill Education
4. Sara Carter; Enterprise and Small Business, Principles, Practice and Policy, Prentice Hall.

Grading

CATs 30%

Assignments 20%

Main Exam 70%

Total 100%

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LECTURE 1.0: INTRODUCTION TO ENTREPRENEURSHIP SKILLS

INTRODUCTION

The lecture should help you to understand the meaning of entrepreneurship and the
rationale for studying the discipline. It should also help you to appreciate the role played by
entrepreneurship in the country.

1.2 LEARNING OUTCOMES

By the end of this lecture you should be able to:-

 Define and explain the meaning of the concept Entrepreneur, entrepreneurship and
intrapreneurship.
 Explain the rationale of learning entrepreneurship.
 Analyze the role of entrepreneurship in the economy

Definition of entrepreneurship: A way of thinking, reasoning and acting that is opportunistically

balanced.

The concept of entrepreneurship has a wide range of meanings.

 It is the process of constantly scanning one’s environment and creatively responding to it

through identification of business opportunities, organizing resources to implement the
opportunities and launching enterprise, which thrones and grows through making profit.
 According to Schumpeter, “Entrepreneurship is based on purposeful and systematic
innovation.”
 Entrepreneurship is the attempt to create value through recognition of business opportunity,
the management of risk-taking appropriate to the opportunity, and through the communicative
and management skills to mobilize human, financial and material resources necessary to bring a
project to fruition.

ENTREPRENEUR

 Is a person who has the ability to identify and evaluate business opportunities in the
environment, gather resources to take advantage of the business opportunities and initiate
appropriate action to ensure success.
 An entrepreneur is a person who has possession of an enterprise, or venture, and assumes
significant accountability for the inherent risks and the outcome. He is an ambitious leader who
combines land, labour and capital to often create and market new goods or services.

Creativity - Discovery Entrepreneurship

- Invention process
- innovation

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Intrapreneurship

Is also known as corporate entrepreneurship. It occurs when managers of large organizations

practice entrepreneurship in those organizations, being more concerned with innovations and
turning round those organizations. Although these managers do not risk their resources or gain any
profits they risk their jobs, embarrassment and they may gain promotion, and bonuses

FUNCTIONS OF AN ENTREPRENEUR

 He is the prime mover of the business enterprise; without the entrepreneur, there will be no
business in the first place.
 Entrepreneur identifies the gaps in the market and then turns these gaps into business
opportunities.
 Entrepreneur is involved in financing the business and availing the capital.
 The entrepreneur manages the business (though he may delegate to others but he has the
responsibility.)
 Entrepreneur bears the risks and uncertainties of the business.
 He provides the necessary leadership to the people working for the business.
 Marketing of products and responding to the competition.
 Determination of those objectives of the enterprise and change of the objectives as conditions,
require.
 Development of an organization including efficient relations with subordinates and all
employees.
 Development of a market for products and devising of new products to meet or anticipate
consumers demand.
 Maintenance of good relations with public authorities and with the society at large.

CHARACTERISTICS OF AN ENTREPRENEUR
 Initiative and risk taker:-
- He takes actions that go beyond job requirements or demand
of the situations.
- He sees and acts on business opportunities.
 Innovative:-
- Innovation involves problem solving and an entrepreneur is a
problem solver. According to Schumpeter, entrepreneurship is
a creative activity. An entrepreneur is basically an innovator
who introduces something new in the economy.
 Persistent and Patient;-

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 - An entrepreneur takes repeated action to overcome obstacles
that get in way of getting goals.
- Does personal research on the best way to provide products or
services
- He consults experts for business or technical advice.
 High achievement:-
- People having high need for achievement are more likely to
succeed as entrepreneurs.
- Entrepreneur has a concern for high quality work.
- He acts to do things that meet or beat existing standards of
excellence.
- He desires to produce or sell top quality products/services.
 Opportunity seeking:-
- Searching for business opportunity is a constant pre-
occupation of entrepreneurs.
- They will go into any length to get what they want.
- Entrepreneurs use a variety of methods to acquire information
around.
 Future oriented:-
- Entrepreneurs have a great foresight.
- They can sense opportunities in the future by just observing
world trends. This makes them different from other people.
- They act with little hesitation on what they perceive about the
future.
- This may be based on trends in demand, supply, technology,
etc.
- The trend could also be I n demography, socio-political
changes or even climate.
 Imaginative:-
- Entrepreneurs tend to be people with a lot of ideas.

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 - They also want to put their ideas into practice. Its for this
reason that they are said to be creative, resourceful and
innovative.
 Efficient and quality conscious:-
- Entrepreneurs believe a lot in their own abilities to do things
and succeed. There is usually nothing that they think they
cannot accomplish when their mind is set to it.
- They work independently.
- They spare no energy or resources to achieve the objectives of
the business.

LECTURE 2.0: WAYS OF BECOMING AN ENTREPRENEUR/TYPES

OF ENTREPRENEURS
- 2.1 INTRODUCTION
In the last lecture, we discussed the meaning of entrepreneurship,
entrepreneur and intrapreneurship. In this lecture we will learn
different classifications of entrepreneurs. We shall also discuss
the role played by entrepreneurs in economic development
2.3 LEARNING OUTCOMES

By the end of this lecture, you should be able to:-

 Analyze different classification of entrepreneurs
 Explain who entrepreneurs are and what makes them
different from managers
2.4 content
There are different classifications of entrepreneurs. In one of
the classifications, entrepreneurs are classified as:-

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1. Craft entrepreneurs :
These are entrepreneurs who exploit or rely on their personal
skills to start and operate their business. For example, when a
person trained in Information Technology (IT) starts a
business related IT such as a cyber café, web design, etc. These
types of entrepreneurs rarely expand because they may be
limited by the skills and are not keen to hire the skills they
lack.
2. Lifestyle Entrepreneurs
These are people who enter business because they have little
else to do. Their objective could be survival or to maintain a
lifestyle they may have been used to when they were
employed. These include many that start business after
retrenchment or retirement. They are mostly sole traders or
employ only a few people. Their businesses rarely grow or
expand. As long as the business can maintain them they may
not be interested in expansion.
3. Opportunistic Entrepreneurs
These are entrepreneurs who rely on opportunities to start
and run their businesses more than their skills. They can start
businesses in areas where they have no skills and employ
skilled labor. They are more of coordinators who are
interested in having the business grow and expand, delegating
responsibilities to others and increasing the number of
employees working in the business. They are more concerned
with the growth of the firm and their firms are usually
entrepreneurial. They are few in number. These entrepreneurs
may own more than one firm (Deakins and Freel,2003). They
start business and expand as far as possible in order to be able

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 to hire other employees. Most of these other employees have
needed expertise that the owners does not have.
NB: The owner is not limited by his skills because he/she can
hire the lacking skills.
Entrepreneurs may also be classified as:-
1) Self-Employed Entrepreneurs
These are individuals who perform all the work and keep all
the profit, e.g, family run store, agents, repair persons,
accountants, physicians, lawyers etc. The business could be
full time because no one else is involved.
2. Inventors
Have particular inventive abilities to help them design
better products, create companies to develop, produce and
sell the item e.g high technology companies such as
computer hard wear or software production.
3. Pattern Multipliers
These look for an idea someone else has already created and
then create their own businesses based on it.e.g franchises,
chain stores etc.
4 .Economy of scale exploiters
Refers to entrepreneurs who benefit from a large volume of sales
by offering discount prices and operating at very low overheads
5 .Acquirers:
Those who take over a business started by another and use their
own ideas to make it successful eg, buying an on-going concern
(business on sale). Sometimes, it happens when a business has
financial problems forcing the owner to sell it to new owners or
managers.
6. Buy and sell artists:

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Are those who buy a company for the purpose of improving it
before selling it for a profit
7. Speculators
Those who purchase commodities hopping the prices will
increase and they sell them at a profit .eg real estate, arts food
stuff, shares, etc.
8. Internal entrepreneurs/intrapreneurs
Those who create new ideas and make them into a successful
project within an existing business. Although they earn no profit
nor take personal financial risks, they need the same methods of
operations as an entrepreneur who is running his/her own
business.
9. Social entrepreneurs
Is someone who recognizes social problems and uses
entrepreneurial principles to organize, create and manage a
venture to make change. He/she is driven by social mission to
produce goods and services for social purpose. These are
entrepreneurs whose main objective is not to make profits but to
produce or offer service that would help the society for example,
NGOs that are started to help the disadvantaged such as the
destitute, refugees, etc.
Whereas business entrepreneurs typically measure performance
in profit and return, social entrepreneurs assess their success in
terms of the impact they have on society. While social
entrepreneurs often work through non-profits and citizen groups,
other entrepreneurs work in the private and governmental
sectors. They may not make any profits but gain satisfaction
when the people they serve benefit eg starting a community
library to help the people in the community access information
easily.

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 10. Political entrepreneur:
The term political entrepreneur may refer to any of the
following:-
Someone (usually active in the field of either politics or
business), who founds a new political project, group, or
political party.
A business person who seeks to gain profit through subsidies,
protectionism, government contracts, or other such favorable
arrangements with government through political influence
A politician who seeks to further his own political career and
popularity by pursuing the creation of policy that pleases the
populace
Uses a political system to further a commercial venture or their
own career

THE ROLE OF ENTREPRENEURSHIP IN NATIONAL

DEVELOPMENT
(ECONOMIC DEVELOPMENT AND ENTREPRENEURSHIP)
INTRODUCTION
 Economic development essentially means a process of upward
change whereby the real per capita income of a country increases
over a long period of time.
The economic history of the presently developed countries for
example, America, Russia and Japan tend to support the fact that
the economy is an effect for which entrepreneurship is the cause.

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 Generally speaking, economic growth is regarded as a good thing.
It brings wealth, improved health, better education lower rates of
child mortality, longevity (long life span), more democracy,
greater sexual equality, enriched prospects for personal
development etc.
 The crucial role played by entrepreneurs in the development of
western countries has made people in the under – developed
countries too much conscious of the significance of
entrepreneurship for economic development. Entrepreneurship
is considered as a catalyst for economic development.
 Several scholars of socio-economic development have supported
the development of entrepreneurship.
 For achieving the goal of economic development, it is necessary to
increase entrepreneurship both qualitatively and quantitatively
in the country.
 Schumpeter visualized the entrepreneur as the key figure in
economic development because of his role in introducing
innovations.
 Parson and Smelser described entrepreneurship as one of the two
necessary conditions for economic development, the other being
increased output of capital.
 Entrepreneurs are considered to be the prime movers of
innovations and entrepreneurship is a necessary dynamic force.
 The entrepreneur has an ability to perceive opportunities which
either others do not see or care about.
 Essentially, the entrepreneur searches for change, sees need and
then brings together the manpower, material and capital required
to respond to the opportunity that he sees.
 The role of entrepreneurship in economic development varies
from economy to economy depending upon its material

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resources, industrial climate and the responsiveness of the
political system to the entrepreneurial function. Thus,
entrepreneurs contribute more in favorable opportunity
conditions than in economies with relatively less favorable
opportunity conditions.

CAUSES OF ECONOMIC GROWTH

Economic growth is envisioned as function of inputs of land, labor
and capital.
 Economic growth is as a result of wealth creation process.
 Potential for economic growth is limited by availability of
economic resources.
 As Kirztner sees it, entrepreneurial insights are profit
opportunities that have previously gone unnoticed.
Entrepreneurs act upon these insights and the economy
becomes more productive because it is able to produce more
consumer satisfaction at lower cost.
 The connection between entrepreneurship and economic
growth is that these previously unnoticed profit opportunities
must come from somewhere, and the most common source of
profit opportunities is the insight of other entrepreneurs.
 Entrepreneurial ideas arise when an entrepreneur sees that
the idea developed by earlier entrepreneurs can be combined
to produce a new process or output.
 Entrepreneurial opportunities tend to appear within the
context of a specific time and place. Therefore, a decentralized
economy that allows individuals to act on their entrepreneurial
insights, and rewards them for doing so, produces an
environment where additional entrepreneurial insights are
likely to be produced.

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 Entrepreneurial insights lay the foundation for additional
entrepreneurial insights, which drive the growth process.
ECONOMIC SYSTEMS AND THE ENTREPRENEUR
Economic systems are broadly grouped into three:
 Capitalism – free market economy
 Socialism – planned / centralized
 Mixed economy.

1. ROLE OF ENTREPRENEUR IN FREE MARKET ECONOMY

(Capitalism)
- In capitalist economy, the entrepreneur enjoys considerable
degree of freedom in decision-making. Capitalist economy is
characterized by;
 Free enterprise
 Freedom to invest
 Healthy competition
 Lack of government interference
 Consumers sovereignty (consumer power)
- In capitalist economy, the price factor is determined by market
dynamics i.e. the interplay of demand and supply factors.
- There is no interference on the part of government in respect
of price fixation.
- The entrepreneur has complete control over price and market
mechanism. Therefore the entrepreneur determines:
 How much to be produced
 Where to produce
 How and where to distribute
 How to promote and the price

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- In capitalist economy, business is driven by profit objectives.
(not exploitation)
- The price is determined by market situation. Capitalism
encourages healthy competition and in competitive
environment, one cannot change high prices to exploit the
customers.
- Also the professional firms in a capitalist economy understand
their social responsibility and therefore, they try to balance
profit maximization and social responsibility.
o NB: small entrepreneurs do not enjoy protection in a
capitalist economy. The principle is survival for the fittest.
o Small entrepreneurs concentrate on the business areas
which large firms find it difficult to concentrate.
o Small firms may also concentrate in a small local areas
rather than marketing their products in the whole
country.

2. ROLE OF ENTRPRENEUR SOCIALISM

 In a socialist economy, the governments play an important role
in economic activities.
 Almost all industries are owned by the government.
The central government appoints experts to frame business
policies to plan for resources, to set up business units and to
manage them.
 The enterprises are run for national interest or social interest
rather than for profit motive.
 Entrepreneurs have role in large enterprises, especially of
national importance. (e.g Soviet Union, China and East
European countries). Currently these economic systems are
only found in few countries like Cuba and North Korea.

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 3. MIXED ECONOMY: ROLE OF ENTREPRENEUR
It has both characteristics of centralized and free market
economy.
 The ownership and management of some industries,
especially of national importance is with the government.
 Certain industries are reserved for public sectors and other
industries are open for private sector. E.g Industries
reserved for public sector include defense, energy, railway,
mining etc.

Thus entrepreneurs have the role of:

Regional development, general employment, social
development, technology development, research and
development, contribution of revenue through paying of
taxes
ROLE OF ENTREPRENEURSHIP IN ECONOMIC
DEVELOPMENT OF ANY ECONOMY
(Summary)
1. Entrepreneurship promotes capital formulation by mobilizing
the idle saving of the public.
2. It provides immediate large- scale employment – thus helping
to reduce unemployment which is the cause of most social
economic problems.
3. It promotes balanced regional development by reducing rural –
urban migration.
4. It helps reduce the concentration of economic power to urban
areas.
5. It stimulates the equitable redistribution of wealth, income and
even political power in the interest of the country.

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6. It encourages effective resource mobilization of capital and
skill, which might otherwise remain unutilized and idle.
7. It increases backward and forward linkages, which stimulate
the process of economic development in the country.
8. It promotes countries export trade, which is very essential to
economic development.
Their inputs should be sought – their suggestions could be
supportive
Allow them to share some of their fears or concerns as you get a
realistic idea of what’s on their minds.
Discuss ways to make certain that your family responsibilities are
met even while you build your business.
Make them feel part of your new, exciting adventure.
However, be careful on loans or investment from family or close
friends. This is because you may risk both the business and
personal relationship.

ENTREPRENEURIAL MOTIVATION
Motivation is the inner drive or desire to achieve or
fulfil certain entrepreneurial needs. These drives and
needs can come from internal or external motivation
Entrepreneur Motivation-These are factors that propel
individuals to be called an entrepreneur. They can be
classified as Intrinsic factors and extrinsic factors.

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Internal motivation factors: (intrinsic)
This is the undertaking of an activity as a hobby
without external incentive. This motivation comes from
within the entrepreneur and personal satisfaction is
derived through self-initiated achievement. They
include
Need for achievement or service
Risk taking propensity/craving/yearning to take risks
regardless of outcome
Tolerance for ambiguity: This is the ability to withstand
the ever changing market trends.
Locus of control: This is the extent to which an
entrepreneur believes in fate and ability to control his
purpose or fate or destiny
Self-efficacy: This is the belief in one’s ability to master
and implement the necessary personal resources, skills
and competencies to attain a certain level of
achievement on a given task.
Desire for independence: This is the desire of being
your own boss and running your own business using
your own ideas.

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Drive: This includes ambitions, goals, persistency and
energy.
Egoistic passion: Rationalizes one’s ego towards
achievement of a given task thus propelling him to
become an entrepreneur.

a) Need for security- we all strive to be free from

anxiety about our very survival. Its for this reason
that we strive to maximize on our own returns, our
earnings which depend on diligence, hard work and
commitment
b)Need for adventure- this is the need for challenging
activities that carry responsibilities with them. It the
need for entering new frontiers. It is a situation of
make or break by shouldering all the responsibilities
of the business.
c) Need for self- actualization- this is need for personal
success. It is the need to feel that you are unique; it is
the feeling that you have been able accomplish that
which you are capable of
d)Competition- this is wanting to prove that you can do
it; due to achievements of either your peers, your
friends or even other family members who may have

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 made it as entrepreneurs and therefore pose a
challenge to you. Competition provides good
stimulus and standards that may have been set. Man
is generally competitive in nature and in most cases
try to prove that whatever others can do, he can do
better
e) Need for recognition- this is striving to get
recognition about our achievements in life by our
peers, family and society. It is success in a personal
business venture; to become role model by
contributing a lot towards the improvement of the
society in terms of employment, provision of
essential goods and services or participation in
community development activities. Entrepreneurs
want to become a pillar of the society, a symbol and a
role model, a person whose opinion will be sought
and appreciated
f) Employment creation test- the concern to create
employment for others; starting business even in old
age for purposes of ensuring children are employed
g)Self-reliance/independence needs- this is feeling too
strongly that you cannot take orders. It’s wanting to
feel that you are in control of your own destiny; its
having a great flexibility in utilization of own time.

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 Natural alternative to this need could be the need for
power i.e need to exercise power on others
EXTERNAL MOTIVATION FACTORS (extrinsic
factors)
These are the external or environmental factors that drive
an individual to become an entrepreneur.
These are the factors that expose you to the available
public resources and facilities which would encourage
you to start a business. These factors include:
Motivation from biographies or successful stories:
Success stories from previous entrepreneurs may motivate
individuals to become entrepreneurs with hope of success
Influence by culture, community and family background:
When there has been a family background or culture of
individuals involving themselves in entrepreneurship,
other members of the community might be motivated to
become entrepreneurs as well.
a) Credit facilities- these are the facilities which would
help you acquire the necessary capital outlay to be
able to set up an enterprise

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b)Infrastructure- includes buildings, communication,
transportation, auxiliary services and other utilities.
Lack of adequate infrastructure creates physical
constraints when implementing your ideas therefore
they act as an incentive
c) Export and import incentive schemes- these are
government schemes used to provide concessions
when you are involved in import and export
activities. These are concessions on taxes, customs
and duties, speedy licensing with regard to exports
and importation of machinery, equipment and raw
materials by the government will reduce your
operating cost if you are involved in import and
export activities. This will reduce your cost of
imported machinery, raw materials, and encourage
you to set up an enterprise or expand an existing one
d)Pricing policy- this is part of government policy
which assists or encourages you to produce and sell
more to the market. It is important that pricing
system must take into account the total cost required
in producing a product or service whereby you are
able to recover production cost and be left with a
reasonable profit margin which you could use to
improve or expand your business. The availability of

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 a steady market for your products or services depends
very much on a suitable pricing system which makes
your products or services competitive
e) Export processing zones-this is a government scheme
to assist investors manufacture internationally
competitive goods aimed entirely for the export
market. As a local investor you will benefit from not
paying heavy freight costs, additional fees on
insurance in transit, no delays from lengthy shipping
duration when you purchase from EPZ. If you invest
in EPZ, you would benefit from exemption from
export earnings, raw materials, capital transactions,
inputs relating to manufacturing activities
f) Legal incentives-you will benefit from legal
incentives if the law is changed to encourage you to
operate a business. Such legal incentives are
government privatization, government policy on
promotion of small enterprises, tax reliefs, price
decontrol and deregulation, etc
g)Economic incentives- these are available through
expansion of both governmental and non-
governmental agencies and international agencies.
Such programs include the development of small
business centers, vocational and technical training

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 institutions, entrepreneurship education training
project which is a joint venture between the Kenya
government, International Labor Organization and
United Nations Development Programme, which is a
joint venture between the Kenya government and the
World Bank, etc
h)Market gaps and product demand: The need or
demand for a product in a market may encourage an
individual to get into entrepreneurship so as to satisfy
market gaps.
i) Availability of information facilities, research and
innovation of a value added product: Acquired
information from research gives people ideas on
running new business ideas and ensuring their
success rates. More entrepreneurs can get into
businesses when provided with this information.
IMPORTANCE OF ENTREPRENEURSHIP EDUCATION
(a) Importance to the trainees

(1) Career planning

 Trainees are able to understand the unlimited options of starting a business or
becoming self-employed.
(2) Business Understanding
 Trainees will understand all the functions and have a strong business base.
(3) Application of Skills
 Entrepreneurship education serves as a vehicle for trainees to see ways to become
self-employed with the skills they have acquired.
(4) Community understanding
 Trainees may use entrepreneurship education content to study. Entrepreneurs in
their communities to discover opportunities for new business in their areas, to gain

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 understanding of suppliers available, and to analyze the demographic that would
contribute to the success of their ventures.
(5) Self -Understanding.
 Entrepreneurship education will enable the trainees analyze their strength and
weaknesses. It is important to look at both the positive and negative factors in a
persona make-up and how they are likely to influence success in business.
(6) Orientation to change.
 Entrepreneurship education encourages trainees to look for changes that may lead to
business.
 Opportunities of the future.
 Entrepreneurs have a single-minded divine to try the “new” and stay ahead of others.
(7) Creativity
 Entrepreneurship education encouraged all kinds of innovative thinking related to new
products quality, product diversification, efficiency, new technology, etc.
(b) Benefits to the country/Nation
1) Employment creation
Own employment and hiring assistants.
2) Rural – Urban balance
Small entrepreneurs who are able to establish and operate “Jua Kali” enterprises in small
towns and villages are developed.
3) Industrializations
Accelerated industrialization particularly through small-scale and jua kali enterprises
requires an increased supply of individuals with entrepreneurial capabilities especially in
manufacturing and technology based – businesses.
4) Capital formulation
Capital is a scarce national resource and care should be taken to ensure that individuals receiving
loans are prepared technically and entrepreneurially.
The high mortality rate of new enterprises and the limited growth of those that survive is a clear
indication that the availability and utilization of loan capital needs to be examined.
5) Labour Utilization
Productivity is improved through better organization and use of labour by entrepreneurs.
Human resources are very important for development; therefore, by orienting entrepreneurs to
importance of efficiency, human resources will be used more productively.
ADVANTAGES
 Financial gains
 Self-employment which leads to job satisfaction and flexibility.
 Provide job opportunities to the unemployed or those seeking better jobs.
 A means of opening up new industries especially in the rural areas.
 A source of generating income and increased economic growth.
 Facilitates competition hence encouraging high quality products
 Facilitates production of more goods and services.
 Leads to development of newer markets
 Promotes use of modern technology hence enhancing higher productivity.

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Draw backs of Entrepreneurship
(a) Challenges to the entrepreneur
 Long working hours
 Unclear/unguaranteed income
 Poor pay
 Fear of loosing all the investment
 Bankruptcies and closure.
Others
 Fear of delegating
 Competition by established businesses
 Lack of funds

ENTREPRENEURSHIP AND SELF- EMPLOYMENT

INTRODUCTION

As an entrepreneur one wants to make sure he /she gets what he/she wants and
deserves. He must exploit his full potential in order to realize economic benefits
and personal satisfaction.

He must do this by organizing, operating his own small business from which he
will deprive the following benefits:

Engaging in self- employment- employment is normally associated with hiring

out one’s services for wage employment. In wage employment one sells his
labor to an employer. The employer pays wages or salaries for the labor
provided. Such a person therefore depends on employer for his or her income
and means of earning a livelihood .Such employer is referred to as “other
employment”

Self- employment on the other hand refers to a situation where a person creates
his/her own employment by starting an income generating activity (enterprise).
Such a person works for himself/herself. He/she depends on his self- created
income/ income generating activity (I.G.A) for income and livelihood. This
person is literally employed by the enterprise he has created and thus self-
employed.

Implications of self-employment

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  You own the IGA i.e the enterprise and therefore you will bear all the
risks and provide the finance to be invested.
 You must be ready to manage the enterprise. You will be the owner
manager.
 You will depend on the business for your income and means of
livelihood. The business is your employer

Advantages of being self-employed

 One becomes independent and no longer depends on another person

called the employer
 One gets a chance to try one’s own ideas
 Financial rewards are no longer limited by another person. What one
gets depends on:
-the business opportunity/how good the choice of business is
-one’s own hard work and effort
-success of the business/how well the business is managed
 Recognition and prestige especially if the business succeeds
 One can create business network without being accountable to anybody else
 Self- image and self- worth may be boosted

Disadvantages

 Increases responsibilities being the owner manager

 One may need to work long and irregular hours
 Income may not be guaranteed
 One takes all the risks of failure

PREPARING FOR START-UP OF A BUSINESS

GENERATION OF BUSINESS IDEAS:

A good business idea is a prerequisite for successful business venture. Good
ideas do not just appear but are as a result of hard work, effort and creativity.
Finding a good idea is the first step in transforming the entrepreneur’s
desires and creativity into a business opportunity.
SOURCES OF BUSINESS IDEAS

26
1. Unmet need in the community:
One can identify a need for a given product/service in the community e.g a
school, a health facility, a petro station, etc, whereby people travel long
distances to get that facility.
2. Hobbies and interests:
Many people turn their hobbies to successful business ideas.
3. Personal skills and experiences:
Having a certain skill can lead one to deciding to start so as to utilize that
skill or experience.
4. Mass media:
These include newspapers, magazines, TV, internet, etc. these are used to
advertise business and so highlight problems.
5. Shows and exhibitions:
One can look for new technologies that can be traded by discussing with
exhibitors.
6. Surveys/Research:
One can identify market needs not met by the existing business,
shortcomings or weaknesses of existing business that give an opportunity to
open a new business. This can be by a way of attributive listening (keen
listening, which is able to identify problems from complaints very quickly).
7. Government policies, plans and priorities:
Some people develop ideas out of the pronounced government policies,
priorities and plans. E.g. policy on fixing safety belts and speed governers on
all public vehicles, phasing out 14-seater matatus, etc.
8. Brainstorming:
It is a creative technique of solving problems as well as for generating ideas.
It facilitates creativity. Many ideas are thought of and listed down. The list is
then examined systematically and finally one idea can be pursued which
looks more profitable.

3.2.1 IDENTIFYING A BUSINESS OPPORTUNITY

A good idea is not necessarily a good business opportunity.
 A business opportunity is an attractive investment idea or proposition that
provides an entrepreneur with the possibility of good return on the
investment.

27
  Not all business ideas turn into good business opportunities.
 A business becomes a good opportunity when it is viable, and feasible.
Viable means it can give the owner good/reasonable returns and is able to
expand/grow.
Feasible means it is able to start and is workable.
An idea is an opportunity only if it has a chance to success.
NB: Kenyan marketing environment is complex, turbulent (changing
constantly) and subject to rapid changes on demographics, consumer
attitudes, social values, availability of raw materials, economic slumps
(reduction) and recessions caused by drought, clashes, changes in exchange
rates, inflation, technological change etc.

Trends, Implications And Business Opportunities

Trends- are occurrences in a place (eg increased accident rates)

Implications- are based on trend. They could be positive or negative

outcomes(death)

Business opportunities- are entrepreneurial activities resulting due to these

implications (sell of coffins, flowers, transport/ hearse)

FACTORS TO CONSIDER WHEN IDENTIFYING OPPORTUNITIES

1. Environment:
Assess the basic features and resources in the environment e.g raw materials,
infrastructure, population – size, composition, occupation, socio – economic
background.

2. Target customers:
Assess the people you intend to target as your customers in great detail e.g.
the children, youth, elderly, men, women, farmers, learning institutions,
health facilities etc.
Know their specific needs, expectations, income levels, tastes, buying
behavior etc.
3. Current business scene:

28
 Assess the present pattern/trends in the area to understand the needs, flow of
commodities, local consumption etc.
Assess the emerging trends and patterns of trading and business activities in
terms of new demand, products/services, competition, etc e.g growing need
for computer literacy information technology etc.
4. Technology change:
Assess whether there are any changes or anticipated changes in technology
that may make some products obsolete while creating new opportunities e.g.
changing from manual to computerized systems which indicates more
opportunities in the area of IT.
QUALITIES/CHARACTERISTICS OF GOOD OPPORTUNITIES
A good opportunity occurs where there is:-
i. Real demand for the products/services i.e there are people with need for
the product, money and will to buy them. Good market scope.
ii. Attractive returns on investments / sufficiently profitable.
iii. The business is competitive – is able to compete effectively and cope
with the competition.
iv. The business meets the objectives of the entrepreneur who is taking the
risk.
v. There is availability of resources e.g raw materials, equipment, premises.
vi. Income exceed the cost of production i.e it is profitable.
vii. The required infrastructure is available e.g water, transport, electricity,
security etc.
viii. Enough skilled people i.e. technical and managerial skills.

FEASIBILITY STUDY
Identifying the business opportunities requires that one conduct a pre-
feasibility and feasibility study.
Feasibility study is an examination, analysis and an investigation of all
the factors surrounding the following aspects of business: production,
marketing and financial. It involves determining the risks and
rewards/returns reflecting on the following factors;
a) Industry and market-

29
Environmental Trends Suggesting A Business Or Product
Opportunity.
1. Economic Forces:-
State of the economy level of disposable income, consumer
spending patterns.
2. Social forces:-
Social and cultural, trends, demographic changes and what people
think is in fashion.
3. Technological advances;-
New technologies, emerging technologies, new uses of old
technologies.
4. Political and regulatory changes;-
New changes in political arena, new laws and regulations

VALIDATING THE BUSINESS OPPORTUNITY

The first step in selecting business opportunities is to do some
screening. In screening ask yourself the following questions:
 What are the benefits and how large are they?
 What are the assumptions?
 What are the likely problems?
 Do you like and understand the customers?
 Do you have any experience in this area?
 Do you have relevant skills and resources?

ENCOURAGING AND PROTECTING NEW IDEAS

In many firms, idea generation is an haphazard process. However,
entrepreneurial ventures can take certain concrete steps to build an
organization that encourages and protects new ideas.
The following are some of the steps to be followed to encourage
and protect new ideas.

30
1. Establish a focal point for ideas:-
Some firms meet the challenge of encouraging, collecting, and
evaluating ideas by designating a specific person to screen and
tract them. (if it is everybody’s job, it may be nobody’s
responsibility.)
2. Establishing an idea bank (or vault).
This could be a physical or digital repository (storage store/library)
for storing ideas.
3. Encouraging creativity at the firm level:
Innovation refers to the successful introduction of new outcomes
by a firm. In contrast, creativity is the process of generating a
novel or useful idea but does not require implementation.
Creativity is the raw material that goes into innovation.
4. Protecting ideas from being stolen:-
Intellectual property right is a body that protects human intellect
that is intangible but has value in the market place. It can be
protected through patents, trademarks, copyrights and trade secrets.

ENTREPRENEURIAL AWARENESS
Business information needed before starting a business
Various type of information needed in business include the
following:
a) Technical information
This gives information about:
 Nature of products/services you would like to engage in
 Tools and equipment you require
 Materials needed for your production process
 Technology choice, etc
Sources of technical information

31
  Kenya bureau of standards (KEBS)
 Kenya Association of Manufacturer (KAM)
 Kenya Industrial Research Development
Institute(KIRDI)
 Kenya Industrial Estate (KIE)
 Industrial and Commercial Development
Corporation(ICDC)
 Magazines
b) Marketing information
This gives information about the following:
o Customers- their buying power
o Competition from other businesses
o Distribution channel of the products
o Pricing of goods and services
o Promotional strategies e.g advertising

Sources of marketing information

 Customers
 Suppliers
 Business journals and catalogues
 Libraries
 Business associations e.g Chambers of Commerce and Industry
c) Financial information: gives information concerning the
following
 Sources of business finance
 Economic conditions and trends
 Management and financial advice

Sources of financial information

 Banks and other financial institutions

32
  Small enterprise finance company
 Kenya industrial Estate
 Kenya Women Finance Trust
 Kenya Small Traders Society
 Family members and friends
 Suppliers and other business owners

d) Legal information: this is information on how to obtain

licenses for the business, business registration, the zones where
particular business could be located, etc
Sources
 Law firms
 Relative government departments
 Libraries
ENTREPRENEURIAL COMPETENCES
Leadership and decision making
Many people use the term problem solving and decision making
interchangeably. Decision making can therefore be defined as the
conscious process of making choices among one or more alternatives.
Decision making is a responsibility of all administrators where decisions
are made and implemented.
As an entrepreneur, one needs to make decisions every now and then.
One may face many problems which will require him/her to make quick
and wise decisions. The ability to make quick and accurate decisions is
the back- borne for business growth and profit maximization. There are
three categories of business problems that prompt an entrepreneur to
make a decision:

33
a) Inadequacy of resources such as raw materials to produce products,
skilled man power, etc
b) Organizational problems such as poor delegation of duties,
undefined roles, etc
c) Environmental problems such as poor business location, poor or
unsafe working conditions, etc
General approach to decision making
The following seven-step approach to better management of decision
making can be used to solve nearly all the problems that are faced in
business.
1. State the problem- a problem must exist and must be recognized i.e
what is the problem and why is it a problem?
2. Define the objective- how has the problem affected business
objectives? Which objectives are the most crucial? Objectives are
usually stated by an action verb like “to reduce”, ‘to increase’, ‘to
improve’, ‘to streamline’, etc
3. Develop a diagnostic framework- decide which methods you are
going to use, what kind of information you need, how and where
the information will be found i.e whether customer survey, a
review of company documents, etc, what are the assumptions of
the study, i.e the facts assumed correct, what kind of quantitative
or other specific techniques are you going to use to analyze the
data? Diagnostic framework establishes the scope and methods for
solving the problem
4. Collect and analyze data- tabulate and organize raw data to
facilitate analysis. This can be done by tables, charts, graphs,
matrices, etc. Analysis is a critical prerequisite for sound business
decision making. What does the data reveal? What trends can you

34
 see in the data? Many quantitative techniques covered can be used
during this step
5. Generate alternative solution- after analysis has been finished,
some specific conclusions about the nature of the problem and its
resolution should have been reached. The next step is develop
alternative solutions to the problem and rank them in order of their
net benefits
6. Develop and implement action plan- you need to select the best
solution to the problem but be certain to understand clearly why it
is the best i.e how does it achieve the objectives established in step
2 better than the other alternatives; then develop an effective
method (action plan) to implement the solution
At this point, an important organizational consideration arises: who
is going to be responsible for seeing the implementation through
and what authority does he/she have? The selected person should
be responsible for seeing all tasks, deadlines and reports are
performed, met and written respectively
7. Evaluate, obtain feedback and monitor-after the action plan has
been implemented to solve a problem, you must evaluate its
effectiveness. Evaluation standards must be determined, feedback
channels developed and monitoring performed.
METHODS OF DECISION MAKING
a) Rule of the thumb: where a decision is made based on existing
established procedure eg based on laws, customs, religion, etc. eg a
woman leader in some religions is rejected
b) Committee approach: using selected number of people from the
main group to make a decision which will be accepted by all
c) Critical path analysis: making the decision stage by stage until the
final decision has been reached

35
d) Brain storming/group decision making: is where all members of a
group develop ideas for a solution. It is appropriate:
 When there is need for various points of view especially
disciplinary action
 When the decision directly affect the group
 When the group has to implement the decision eg making
policies
 When the group has effectively learned to work together
 When group members share leadership function
Advantages
 Generally guarantees understanding and acceptance of
decision and in less time
 Strengthens communication with workers
 Employees voice their needs openly and honestly
 Improve workers motivation and commitment to carry
out or implement the decision
 Employees are more likely to help leaders with
problems and ideas as a result of reinforcing
environment
Disadvantages
 Requires learning decision making skills by the
workers
 Takes long time to make decisions especially during
emergencies
 Limited to specific kind of problems where
participants are knowledgeable and have interest in
the solution
 Some workers consider leaders as indecisive

36
e) Individual decision making: where one individual in the group
determines the course of action e.g leaders, experts, advisors, etc.
It is appropriate in emergencies, when there is no time for
discussion, when there is no one else in the group with
competence, there is pressure of time (limited time) the type of
decision is very confidential, etc
Advantages of individual decision making
 Speed in reaching decisions especially in emergencies
 The leader has full control
 Responsibility is more defined
 Leaders are able to distance themselves from the workers
 Decisions are of high quality because they are made by an
expert
 Decision will be consistent with organizational policy
 Irrelevant matters are kept out of the table
Disadvantages
 Requires more time to gain understanding and
acceptance by workers
 May develop resentment of feelings of unfairness
among workers
 Since knowledge is limited less innovative solutions
arise and negative consequences can result

COPING WITH CHANGE IN BUSINESS

Change is a systematic planned effort to improve effectiveness of
the business. It is a risky, uncertain and worrying thing in a
business.
The manager of change

37
Organization faces both external and internal change and survival of
the business demands change. Organizational change means changes
at group level or individual level hence the manager plays a key role
in the management of change.
Reasons for change
 To increase the effectiveness and efficiency of a business
 To ensure efficient utilization of resources including
human resources
 To reflect change in management, in ownership or
policy direction
 To cater for changes in social, economic and
political situations
 To cater for changes in current and future
consumer preferences
 Dissatisfaction with status quo
 Changes in technology
 Supplier forces and customer demands
 Discovery of new materials
Factors influencing change
1)Economic Activities: this affects business
differently e.g price of some inputs forces
adjustments to end products
2)Competition: include competitors activities
such as aggressive advertising, price reduction
of some products, etc

38
3)Government/political environment: these are
the new policies or new legal laws eg
imposition of new taxes, states’ new investment
polices, etc
4)Technology: this is for adaptability and
business growth i.e introduction of new
technology so as to- reduce manufacturing
costs, produce quality products
5)Education and social factors: factors that
determine change here include education,
tastes, family size, status, age, sex, population
distribution, etc. these may call for change in
product in terms of:
 Quality
 Promptness of delivery
 Pack size
 Labelling
Need for change
 To improve or replace existing product
 Expand and make profit
 Adopt new trends
 Change for survival
 Make a difference
 Remain viable

39
Types of changes
a) Product change: a product can change in
terms of:
Labelling
Size
Packaging
Coloring
Taste
Quality
Smell
b)Service change: services can change in
terms of:
Promptness
Quality of service
c) Technology change: technology can
change in terms of:
Tools and equipment
Materials
Technical skills
Production method, etc
d)Policy change: these include
international conventions eg ISO
standards, government policies,
organizational policies, etc

40
 HOSTILITY TOWARDS CHANGE
Reasons for resistance to change

STAGES OF BUSINESS GROWTH

Life cycle growth Model

Growth

Sales
Volume




Start-up Survival Growth Maturity Decline Age

 revival

 Organizations are said to pass through a

recognizable life cycle which are fundamentally

41
 impacted by external environmental circumstances
as well as internal factors.
 This explains the rise and fall of some
organizations and even entire industries.
 In a summary of OLC models, the changes that
occur in organizations follow a predictable pattern
that can be characterized by developmental stages.
These stages are sequential in nature, occur as a
hierarchical progression that is not easily reversed,
and involve a broad range of organizational
activities and structures.
 There are five stages of organizational life cycle.
They include:
1.Start – up/inception stages
 Is the most challenging and critical stage and
many businesses (over 50%) close down
within this time.
 A lot of effort is required to help business
move from this stage to the next.
 It is characterized by:
 Lack of information
 Few products/single product

42
  High production cost
 Limited market /few customers
 Low sales and profits if any
 Little capital and other resources
 No specific division of labour.
 Unstructured (does not have normal
departments and processes; no complete
management system.
 The enterprise has not formed its core
competence and the entrepreneur remains
the central human resource – he does most
of the work.
2.Survival Stage :At this stage, the major goal is
survival.
Just like in the start – up stage there are very
many challenges:
 Although the business has already started the
customers are too few to support it.
 Cost of operation are still high
 Ability to compete is a challenge.
 Sales are still low.
3.Growth/expansion stage:

43
 Is also called maintenance stage. The
enterprise is fast-growing.
 It is transiting from non-planning to planning
enterprise.
 It is running on functional departments.
 This stage is characterized by rapid growth,
increased production and product lines,
reduced cost of production.
 It is enjoying economies of scale.
 The market starts expanding as the number of
customers increase. This leads to increased
sales, improved cash flow and profits. The
workload increases and this brings the
challenges of need for more personnel, more
structures and extra more funding.
 This growth normally raises the need for more
structures and more finances.
 The expansion marks critical turning point and
the entrepreneur must be willing to take
leadership roles quite different from their
founding roles.

44
  They will be required to delegate more, have
leadership vision and aggressiveness I and
setting the pace through strategic planning and
implementation of those plans.
4.Maturity/consolidation stage:
 In this stage, the entrepreneurs are expected to
have mastered the product and production,
market, and basic managerial skills.
 The business is generating enough profit and
the challenges include:
 Control of expenses,
 Competition
 Monitoring the market changes
 Developing new products
 At a certain level of maturity more expansion
could be seen as threatening as it would mean
losing control.
 The entrepreneur is more eager for status,
prestige, respect, trust and high appraisal.
This may lead to reduced growth and the firm
may start declining as the entrepreneurs start

45
 prioritizing to spend more on activities that
bring in more.
 There may be need for more formal structure,
more delegation, because the enterprise could
be employing more people and thus becoming
more complex.
5.(a) Revival stage/regeneration
 Theory has it that after this consolidation or
maturity stage the businesses should be
assisted to re-engineer failure to which they
decline and sometimes fizzle out (disappear
gradually)
 This may involve:
 Development of higher skills i.e. staff
training.
 Broadening the marketing strategies
 Introducing modern technologies.
 Pursuing creativity and innovation
 Introduce operational strategy to new field
of investment, production and marketing,
diversification, management etc.

46
 More financing will be required. Holt (2004)
referred to this stage as one of rekindling
organizational growth during which rapid
growth could be achieved by clever
repositioning of product lines and services
through purposeful market segmentation
(creation of new markets.)

47
 (b) Decline stage/degeneration
 This occurs if the business does not re-
engineer itself by being more innovative and
creative to developing new products,
venturing into other markets, diversifying,
reorganizing the management and even
sometimes the form of business.
 Degeneration may occur because:
 Demand has changed
 The market competition has intensified.
 The enterprise has not met emergency in
time
 The domestic markets become saturated.
 Decrease of resources availability
 Improper choice of lead manner.
 Upswing of self-satisfaction.
 Competitors with advanced technology.
 If the firm does not respond swiftly its
growth will continue to decline.
 Sales will go down as the product life may
have started to decline. Profits also drop and

48
 some products become uneconomical to
produce. However, if the entrepreneur is
able to re-engineer the firm, it may start the
growth cycle all over again and instead of
declining, it will go through a revival or
renewal but at a higher level.
 Some business at this level develop new
products, venture into partnerships,
mergers, take- over, amalgamation
acquisition or employ other growth
strategies to keep them afloat.
 Organizational life cycle is an important
model because of its premise and its
prescription.
 The models premise is that, requirements,
opportunities and threats both inside and
outside the business firm will vary
depending on the stage of development in
which the firm finds itself. For example,
threats in the start – up stage differ from
those in the maturity stage.

49
 As the firm moves through the
developmental stages, changes in the nature
and number of requirements, opportunities
and threats exert pressure from change on
the business firm.
 Organizations move from one stage to
another because the fit between the
organization and its environment is so
inadequate that the organization’s efficiency
and /or effectiveness is seriously impaired
or the organization’s survival is threatened.
 The models prescription is that the firms
managers must change the goals, strategies
and strategy implementation devices of the
business to fit the new set of issues.
 Thus, different stages of the company’s life
cycle require alterations in the firm’s
objectives, strategies, managerial processes
(planning, organizing, staffing, directing,
controlling), technology, culture and
decision – making. For example at the start-

50
 up stage firms exhibited a very simple
organizational structure with authority
centralized at the top of the hierarchy. As the
firms grow, they adapt more sophisticated
structures and decentralized authority to
middle and lower level managers.
At maturity, the firms demonstrate a
significantly more concern for internal
efficiency and installed more control
mechanisms and processes.

SOURCES OF ENTREPRENEURIAL FINANCE

Types/uses of entrepreneurial finance
a) Fixed capital.

b) Working capital.

c) Growth capital.

Fixed Capital Fixed capital is needed to purchase a company’s

permanent assets such as building, Land, Computers and equipment.
Money invested in these fixed assets tends to be frozen because it cannot
be used for other purposes. The money involved in purchase of fixed
assets is normally substantial and credit terms usually are lengthy.

51
Lenders of fixed capital expect the assets purchased to improve the
efficiency and thus the profitability of the business and to create
improved cash flow that ensures payment.
Working Capital
To borrow a leaf from accountants we shall define working capital as
current assets less current liabilities. Current assets refer to the resources
of the business that represent cash or can be converted into cash easily or
are cash. While as current liabilities refers to debts that ought to be
cleared in the near future normally one year. The need for working
capital arises because of the uneven flow of cash into and out of the
business due to normal seasonal fluctuations these may include, credit
sales, seasonal sales swings or unforeseeable changes in demand.
Let’s now look at how working capital can be used in an organization:
a) Buy inventory

b) Pay bills

c) Finance credit sales

d) Pay wages and salaries

e) Take care of unexpected emergencies.

Lenders of working capital expect it to produce higher cash flows to

ensure repayment at the end of the production or sales cycle

52
Growth Capital Unlike working capital growth capital is not related to
the seasonal fluctuations of a business. Growth capital is meant for
expanding or for changing the primary direction of a business.
Lenders of growth capital expect the funds to improve a company’s
profitability and cash flow position thus ensuring repayment.
SOURCES OF FINANCE

 Can be classified into:

1. Financial vs Non-financial institutions
2. External Vs internal
3. Formal Vs informal
4. Debt vs equity
5. Others.
Often, small business will need to use a combination of
financing sources, depending on the sector, and the stage in
their growth and development.
 A key consideration in choosing the source of new business
finance will be to strike a balance between equity and debt
to ensure the funding structure suits the business’s needs.

EQUITY FINANCING
Definition:
Equity is the term commonly used to describe the ordinary
share capital of a business. It represents your personal
investment.
The main source of Equity Finance capital are:
• Ownership equity/personal savings

53
  Family and friends contributions
• Retained profits - through retaining profits rather than
paying them out as dividends. This is the most important
source of equity for new start-ups.
• Rights issues- is an issue of new shares.
• New issues of shares to the public an issue of new shares
to new shareholders. This is uncommon to SMEs.
DEBT FINANCING
Definition: Capital is money borrowed to be paid later.
Forms /Types of Debt capital :
1. Loans
A loan is a type of debt.
A loan entails the redistribution of financial assets over
time, between the lender and the borrower.
The borrower initially receives or borrows an amount of
money, called the principle, from the lender, and is obligated
to pay back or repay an equal amount of money to the
lender at a later date.
Money is paid back at regular installments, or partial
repayments, installments, in an annuity, each installments
being the same amount.
Loan is generally provided at a cost, referred to as
interest, which provides an incentive for the lender.
A loan obligation is enforced by contract.
Four Types of Loans:
1. Secured loan – a loan in which the borrowers pledge
some assets as collateral.
2. Subsidized loan – a loan that will not gain interest before
you begin to pay it.

54
 3. Unsubsidized loan – a loan that gains interest the day of
disbursement.
4. Mortgage loan – used to purchase or build a house.
Trade Credit:
Traditionally supplier credit is an important way of
financing stock inventory held by SMEs.
By using trade credit, SMEs are able to post pone
payments for goods and services purchased, which is useful
in managing cash flow.
Trade credit is often an important aspect of business – to
–business relationship, substituting financing for short –
term bank credit or other more formal arrangements.
Trade credit is the second most important source of
external financing for SMEs, although it is generally
considered to be more costly than bank loans.
Consumer Credit:
This is money, goods or services provided in lieu of
payment.
Common form of consumer credit include credit cards, store
cards, motor finance, personal loans, retail, loans and
mortgages.
The cost of credit is the additional amount, over and above
the amount borrowed, that the borrower has to pay.
It includes interest, negotiation arrangement fees and any other
charges.
Leasing and Hire Purchase
• It is also called asset financing.
• Hire purchase or leasing represents secured financing
based on the existence of a tangible asset.

55
 • By its nature, the finance is secured on the leased asset so
it can provide an effective source of finance to an SME.
• Leasing improves cash flow and is easier to finance than
purchases.

Person-To-Person Lending
 It is also known as peer-to-peer lending/investing or social
lending.
 It is a certain breed of financial transaction (primarily lending
and borrowing) which occurs directly between individuals or
“peers” without the intermediation of a traditional financial
institution.
 Peer-to-peer lending websites connect borrowers directly to
lenders, known as investors, who loan money to qualified
applicants. It’s an alternative to borrowing money from a bank or
a more traditional online lender. Each website sets the rates and
the terms (sometimes with investor input) and enables the
transaction.

 The best peer-to-peer lending websites offer multiple types of

loans and have competitive interest rates and low fees. They have
varying minimum and maximum loan amounts and lend money
for a variety of different reasons. The best sites have a
streamlined application process and highlight their borrower
qualifications upfront.
Crowd funding
 Crowdfunding is the practice of collecting money from multiple
individuals or sources in order to finance a new project. Often,
crowd funders turn to social media to share their platform or idea

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 with the purpose of inspiring others to contribute to the
crowdfunding campaign.

What crowdfunding essentially does is eliminate the back-and-forth

between entrepreneurs and investors. Instead of waiting for an
opportunity to pitch their product idea to a team of investors,
entrepreneurs can take their offer directly to the public to seek
financial support from people who are interested. In other words,
the waiting period between having an idea and raising the funds to
make it a reality is significantly reduced.
Other forms of debt finance:
Bank Overdraft:
This means overdrawing from a bank account.
An overdraft occurs when withdrawals from a bank
account exceed the available balance, which gives the
account a negative balance.
Bills of exchange (promissory note)- a written order to a
person requiring them to make a specified payment to the
signatory or to a named payee; a promissory note
A bill of exchange is a written order binding one party to pay
a fixed sum of money to another party on demand or at a
predetermined date.
 Debenture – is a document that is evidence of a debt which is long
term in nature, and confirms that a company has borrowed a
specific sum of money from the bearer or person named in the
debenture certificate. A debenture is a type of debt instrument
that is not backed by any collateral and usually has a term
greater than 10 years.

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 Debentures are backed only by the creditworthiness and
reputation of the issuer.
 Both corporations and governments frequently issue
debentures to raise capital or funds.

1. Financial Vs Non-financial institutions.

These institutions provide financial services for its clients or
members.
 They act as financial intermediaries.
 Most financial institutions are highly regulated by the
government.
 Broadly speaking, there are three major types of
financial institutions.
i. Deposit – taking institutions that accept and
manage deposits and make loans, including
banks, building societies, credit unions, trust
companies and mortgage loan companies.
ii. Insurance companies and pension funds
iii. Brokers and investment funds.
FUNCTIONS OF FINANCIAL INSTITUTIONS
 Financial institutions provide service as intermediaries of
the capital and debt markets.
 They are responsible for transferring funds from investors
to borrow in need of those funds.
 They facilitate the flow of money through the economy.
 Financial institutions provide financing services in the
following forms;

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 1. Credit
2. Debt
3. Loan
4. Equity
CREDIT
Credit is the trust, which allows one party to provide resources
to another party where that second party does not reimburse
the first party immediately (or other materials of equal value) at
a later date. Credit can be formal or informal depending on the
sources.
 The resources provided may be financial (loan), or they may
consist of goods and services (consumer credit).
 Credit encompasses any form of deferred payment.
 Credit is extended by a creditor/lender to a debtor/borrower.
 Credit does not necessarily require money. The credit concept can
also be applied in barter economies based on the credit exchange
of goods and services.
 Credit is depended on the reputation or credit worthiness of the
entity, which takes responsibility for the funds.

3. DEBT CAPITAL:
Definition: Capital is money borrowed to be paid later.
 Debt capital has two parts:
 Short-term liabilities/current liabilities. This is money
payable within 12 months.
 Long – term debt: loans from banks or other sources that is
or payable until after 12 months.

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Debt Finance by Banks:
 Bank lending is the largest source of external SME finance.
 Bank loans are used for financing investments, working capital
and stock financing.
 Bank lending to SME whether secured or unsecured will depend
on the credit rating of an SME.
Bank Overdraft:
 This means overdrawing from a bank account.
 An overdraft occurs when withdrawals from a bank account
exceed the available balance, which gives the account a negative
balance.
Working capital:
 Firms need cash to pay for all their day – to – day activities.
 They have to pay wages, pay for raw materials, pay bills, etc.
 The money available to meet all these activities is called working
capital.
 The main sources of working capital are the current assets as
these are the short-term assets that the firm can use to generate
cash.
 It is vital to a business to have sufficient working capital to meet
all its requirements.
 Many businesses have undergone bankruptcy, not because they
were unprofitable, but because they suffered from a shortage of
working capital.
4 LEASING AND HIRE PURCHASE
 It is also called asset financing.

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 Hire purchase or leasing represents secured financing based on
the existence of a tangible asset.
 By its nature, the finance is secured on the leased asset so it can
provide an effective source of finance to an SME.
 Leasing improves cash flow and is easier to finance than
purchases.
1. SELF-FINANCING
 Either on your own, friends or family members.
 It is a relatively easy and quick method of providing. Short-term
financing.
 However, personal relationship can get entangled with the
business and hence compromising business success.

CRITERIA FOR EVALUATING SOURCE OF BUSINESS FINANCE

SELECTION
 One of the most important decisions is to select the right
source of financing.
 The choice affects the future of your business activities.
PRIMARY EVALUATION FACTORS
1) COST
 Consider which source exposes your business to the lowest
degree of risk. The cost of your capital source is measured
by the impact on your earnings and not increase of expenses
incurred by the business.
 You should be able to know that each capital source has its
own cost.
 Internal sources such as the sale or liquidation of assets
could lead to loss of revenue following inventory disposal or

61
 added operation costs if machinery were sold to generate
costs.
 If you use trade credit, discount is forfeited. In reaching a
decision, it is important that you consider all relevant costs
for each source.
2) RISK
 You take general risks when raising capital. Use of trade
credit could lead to supplier dissatisfaction and possible
damage to your credit worthiness.
 Since borrowed money must be repaid with interest, debt
capital imposes obligations upon the cash flow of your
business, which must be paid to avoid defaulters.
 A default could cause you a number of actions such as
forfeiture of collateral or forced bankruptcy.
 The only capital source that frees your business from risk is
own savings equity capital because the equity investor is the
key risk taker but not the business.
3) FLEXIBILITY
 If you rely upon asset management to meet, your capital
needs then you deny your business credit extensions or
inventory purchases which leads to lost sales.
 Use of trade credit as a major capital source makes your
business to depend on a few suppliers, which denies you the
chance to buy from other suppliers who may be charging
low prices.
4) CONTROL
 The use of internal financing and trade credit is unlikely to
have any impact upon the control of the business exercised
by you.

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  If you are equity investors, you are entitled to some degree
of control in the company operations.
 Shares issued to your partners usually carry voting rights in
proportion to the number of shares purchased.
 Lenders are interested in controlling corporate affairs.
5) AVAILABILITY
 Your business may be restricted in to raise capital due to
non-availability of preferred resources. Regardless to the
source considered most feasible, your business only has
access to whatever is available.
 6) ACCESSIBILITY- there may be certain cheap sources of
finance which may not be accessible e.g certain funding
agencies specify that they can only assist women
entrepreneurs or people living with disabilities or they
serve specific region/area
7)BORROWING CONDITIONS- if you choose debt financing for
your business, you need to thoroughly understand and consider
the borrowing conditions and terms that the financier may put
across. These conditions may include:
a) Repayment terms as to whether periodic(monthly or
quarterly, etc) and whether in lump sum or by instalments
b) Security or collateral requirements
c) Personal guarantee in addition to security charged
d) Periodic reporting of your business performance
e) Maintaining a well run account with the lending institution
(especially banks) for a specific minimum period
8)ASSISTANCE PACKAGE – you should consider the whole
assistance package being offered by the source of business

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 finance. A source of finance could give more than money by for
example providing contract management assistance, legal advice,
entrepreneurial counselling, etc
BUSINESS PLANNING
• A business plan is a statement that guides either a new business
venture or an on going business in terms of the products and services
offered or to be offered, the market justification, financing plan as well
as the overall resource planning.
• It is a document that describes the goals and objectives of the
business and lists the steps that will be taken to achieve those goals and
objectives. It is a document that convincingly demonstrates that your
business idea can sell enough of its products and services so as to make
satisfactorily profits and it attractive to potential financiers.
In other words a business plan is a roadmap you can follow to start and
manage a successful business. It shows step by step on how to start,
fund, manage, monitor and evaluate a successful business
• It gives a projection of the expected returns to the business and
justifies the viability of the business ventures.
Planning is a predetermined cause of action. It is a statement outlining
an organizational mission and future direction, short and long term
performance, targets and strategies
Planning as a formal document contains a mission statement description
of the firm’s goods and services, a market analysis, financial projections
and description of management strategies together with policies for
attaining the goals
Planning is the process of determining the goals and objectives of the
enterprise for a future period of time, developing the strategies guiding
the firms operational and utilizing the available resources towards
achieving the set goals and objectives.
Planning involves:

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  Predicting into the future by defining the enterprises’ mission
statement
 Determining the organizational goals and objectives
 Formulating strategies towards achieving the goals and objectives
 Assigning of responsibilities and functions
 Allocating resources
 Monitoring and evaluation
 Taking corrective action or re-designing the original

Benefits of a business plan

 Planning is the cornerstone and backbone of management
 Planning covers all the functional levels and activities of the
entrepreneurs/enterprise
 It involves predicting and projecting the future and making
adequate arrangements on how to achieve the goals

COMPONENTS OF A BUSINESS PLAN

(A) Cover Page
This is the title page of the business plan document and simply gives the
name and the address of the business, the period covered by the plan and
sometimes the author and date of the document.
(B) Table of Contents
Is normally the second part of the second part of the business plan
It is the reference point for all the headings and sub-headings covered in
the business plan and helps a reader to peruse through the document to
any specific section as it gives the page reference for each section.
(C) The Executive Summary
This is normally a brief write-up of not more than two pages to capture
all aspects of the plan in summary form. It should be done last

65
It gives the reader a feel of everything that is contained in the plan
document. It captures the following aspects of the business:
 Type of venture
 Products/ services to be offered
 Is there a major opportunity for products/services
 The business status/stage
 Legal form of business
 Location of the business
 Target market
 % share of the market
 Competitor strengths and weaknesses
 Strategy of entering the market
 Managing staff and their qualifications and experiences
 Time frame for accomplishing your goals
 How much money needed for starting and running the business
 What type of financing you are seeking: loan or grant
 The strength of the business that will make it succeed
 Future plans of the business
BUSINESS DESCRIPTION
This describes the business in detail including the mission and vision of
the business. For a new start up business it will include following
aspects of the business.
 Objectives, vision, mission statement and goals
 Specific objective (SMART):
i)Service objective( quality of service)
ii)Profit objective (actual % and amount targeted)
iii)Growth objective
iv)Social objectives(corporate responsibility)
 Type/form of business venture

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  Date of commencement
 physical location
 advantages of the location
 postal address, physical address, street/building/road
 telephone contact/email/website
 brief history of the business
 experiences of the owner(s)

MARKETING PLAN
Capture the following aspects of the business:
 Description of the target market (customer segmentation)
 Description of products/services
 Prices of products/services
 Distribution of products/services
 Promotion strategy
 Show a SWOT analysis which emphasizes on;
 Strengths to exploit the opportunities.
 Strengths to counter the threats in the environment
 Strategies to address the weaknesses within the organization.
4P strategies analysis – to be supported by factual market survey
 Product strategy
 Promotion strategy
 Pricing strategy
 Placing/distribution strategy.
What is the market niche for the business?

OPERATIONS/PRODUCTION PLAN
This should describe complete product i.e
 Product/service development design and facilities
 Description of premises

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  Ownership status
 Renovations, facelifts, modifications
 Products and services to be offered
 Machinery, tools, equipment and other facilities required
 Implementation:
a)Procurement
b)Repairs and maintenance
c)Future expansion
 legal requirements- name, tax compliance, labor laws, by-laws, etc
 monthly overhead expenses
 professional and support services
………………
 What processes are in place for the identification of new business
opportunities?
 What arrangements do we have for supply chain management?
 What policies and procedures are in place?
 How do we ensure governance and regulatory compliance?
MANAGEMENT AND ORGANIZATION PLAN
Deals with human resource strategy
It addresses the following aspects:
 Organization chart
 Current establishment
 Senior staff qualifications
 HR gaps in the organization and plans in place to bridge the gaps
 Recruitment process
 Orientation, training and development.

FINANCIAL PLAN
 This quantifies all the above plans reducing them into figures.
 It includes budgeting both summary and detailed.

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 Includes the following projections for the next 3-4 years.
 Profit and loss
 Balance sheet
 Cash flow forecasts.
 Pre-operational costs
 Working capital
 Profoma income statement

IMPORTANCE OF BUSINESS PLAN

Planning helps the entrepreneur in the following ways:
 To develop the most effective way of achieving maximum growth
 To be properly well informed about the competitors and be able to
predict their next course of action
 To meet up with the frequent changes in the market
 To be acquitted with the market changes of fluctuations
 To have adequate knowledge of the financial requirements of the
business
 Helps in fund raising
 Used in decision making
 Helps to build profile to would-be investors.
Reasons why some Entrepreneurs do not do Business
Planning
 Lack of technical know-how and managerial skills
 Lack of financial resources.
 Lack of entrepreneurial culture
 Ignorance.

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ESSENTIALS OF A GOOD PLAN
Any plan must have certain features that make it a good plan. Thus,
Saleemi (2009) has identified the following essential features of a good
plan.
1. Simplicity
A plan must be simple and easy to understand. Facts, figures and other
data must be well presented. A plan must be simple so that those who
are implementing it must clearly understand it.
2. Flexibility
Plans must not be rigid. They must offer flexibility to change as and

when the situation so, demands. For instance, a company may plan to
produce 20,000 units during a given period. However, if there is a strike
or some other unforeseen event in the factory, then it would not be
possible to produce the planned units.
3. Sustainability
A plan must be suitable to a particular unit or department depending
upon the resources and capabilities, and the targets set.
4. Acceptance
The plan must be acceptable to the subordinates. It is therefore important
that targets set must be discussed with subordinates and for them to be
convinced to accept them.
5. Facilitate Organizing

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A good plan should enable proper organization of resources. The
manager should find no difficulty in making arrangement of resources –
physical and human resources in order to achieve the targets. Depending
upon the targets, the manager will make proper arrangements of
resources.
6. Provide Purpose and Direction
A good plan acts as a road map. It should provide proper direction so
that the activities can be conducted smoothly. Depending upon the
planned schedules, the manager can give the right directions to complete
the work on time.
7. Facilitate Control
If the targets are planned clearly, it will enable a manager to monitor the
performance. This is because the actual performance can be easily
compared with the planned targets. If there are any deviations, the
manager should be in a position to take the right corrective steps at the
right time.
8. Generate Harmony
A plan should generate team spirit among the different sections or
departments of an organization. This would be possible if the plans of
the concerned departments are integrated or coordinated.
9. Generate Efficiency

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A good plan must make optimum use of the available resources.
Maximum possible returns must be achieved with minimum possible
costs.
10. Motivate Personnel
A good plan should be realistic and challenging. The plan prepared by
the manager should motivate the subordinates to put in their best efforts
and experience in achieving the set targets.

LEGAL ASPECTS OF BUSINESS/BUSINESS AND THE LAW

 All government regulations on business require companies to comply
with national, regional, and local statues and regulations administered
by legislative bodies and carried out by regulatory agencies. Some
regulations impact the ways in which businesses report income and pay
taxes; others regulate how they dispose of their excess materials or
waste. For just about any kind of industry and transaction, there are
government regulations on business.

cont
Introduction
The central government has enacted several legislations whereby rules have
been prescribed for governing and controlling the conduct of a business.
Besides municipal corporations and state governments have also added
numerous other norms and orders to control business activities within their
jurisdictions
These regulations, imposed by the local authorities are also legally binding on
business establishments.

Legal Requirements.

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Business formation
There are no major requirements for the formation of sole proprietorship and
partnership except registration of the business name with the registrar of
companies, and preparing a partnership agreement in the case of a
partnership. For a limited liability company specific formalities need to be
satisfied. Registration is normally done by a lawyer, who drafts the
memorandum and article of association and receives a certificate of
incorporation after registering the company.

(1) Form of Ownership

In any business one of the basic procedural needs is to make the final decision
on the form of ownership to be adopted.
In case the choice is partnership form of ownership, a partnership agreement
has to be drawn up and duly registered as required by partnership Act.
If it is to be run as cooperative society, necessary formalities are to be
completed and the firm duly registered with Registrar of Cooperative
Societies.
For a Joint Stock Company, the Major prerequisite includes preparation of
Memorandum of Articles of Association and the firm’s registration with
Registrar of Companies in terms of the companies Act.
(2) Project Registration
Newly set- up small-scale units can be registered in two phases/ first,
provisionally and next, permanently. Both provisional and permanent
registrations are documented by the concerned district industries centre in
the district where a new unit will be located.
For provisional registration; a firm has to submit its application supported by
the details and documents as may be required by the registering authority.
The particulars required include:
 Name and address of the business.
 Bio-data of the entrepreneur.
 Copy of partnership Agreement or Memorandum and Articles of
Association.
 Copy of registration certificate.

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Trade licensing and permits
This is regulated by the trade licensing act of the laws of Kenya which
stipulates that no person may conduct any business in Kenya except under
and in accordance with the terms of a current licensing. Obtaining a trade
license is a necessary pre-condition for conducting business and you should
apply to your district trade officer in the ministry of commerce and industry.

Regulatory laws governing small business:

a) Labor laws
These include the employment Act, workman’s compensation Act and
National Social Security Fund. These regulations are administered by
the ministry of labor and deal with such matters as regulation of wages
and conditions for employment, compulsory compensation for injury or
loss of limb while undertaking work and providing for a retirement
benefit as social security.
Here are the most common labor laws:
Wages and hours- This act affects most private and public
employment, and requires employers to pay covered employees at least
the federal minimum wage and overtime pay of one-and-one-half-times
the regular rate of pay (unless they are exempt employees).
Equal opportunity: Most employers with at least 15 employees must
comply with equal opportunity laws enforced by the Equal Employment
Opportunity Commission (EEOC). The EEOC mandates that certain
hiring practices, such as gender, race, religion, age, disability, and other
elements are not allowed to influence hiring practices.

b) Taxation
For most small business owners, government regulation questions
almost always begin with taxes. But there’s more to taxes than merely
paying them. But the kinds of taxes you’ll pay depends on how you
formed your business. In this regard, not all businesses are treated the
same. Sole proprietorships pay taxes differently than, say, corporations.

74
 Income tax: Most businesses file an annual income tax return.
Businesses must pay income tax as they earn and receive income, and
then file a tax return at the end of the year.
Employment tax: Companies that have employees are expected to pay
taxes related to having staff on their payroll. These include Social
Security

Forms of taxation that affects your business include Value Added Tax,
income tax and customs duty. You must register your business with
relevant taxation authority if you must qualify so as to act as tax
collection agency for the government.
c) Business insurance
Include regulations pertaining to business insurance, public liability
insurance for public service vehicle, National Hospital Insurance Fund,
which gives hospitalization cost relief for members against the services.
As soon as you hire your first employee, you’re legally obligated to
purchase workers compensation insurance. Workers compensation
insurance protects both you and your employee in the case of an
accident on the job. The employee will receive medical care and
compensation for some of the income they lose while injured, while the
insurance company will defray the costs of any lawsuit filed by the
injured worker. Other types of insurance generally aren’t required, but
it depends on the circumstances. For example, if your business contracts
with the government or gets a government-guaranteed loan, then you’ll
need to show proof of certain types of business insurance.
d) Public Health
Workplace safety and health- The Occupational Safety and Health
Administration (OSHA) requires that employers, under the OSH Act,
“provide their employees with work and a workplace free from
recognized, serious hazards.” The OSH Act is enforced through
workplace inspections and investigations.
The public health act relates to the sanitation and the hygienic
conditions of buildings (ventilation, cleanliness, drainage, toilets, e.t.c.),
as well as food production and handling to maintain good public health.

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 e) Environmental Regulations
You might need to acquaint yourself with various environmental
protection laws, depending on your industry or business. This is
especially pertinent if you’re marketing, say, cleaning products, food, or
anything with claims to be natural, organic, or eco-friendly. You’ll find
dozens of environmental rules and regulations that might affect your
small business both at the national and county level.

Aim of Laws and Regulations

1) Ensuring fair trade practices and fair competition.
2) Protecting employee interests, consumer rights and the environment.
3) Effecting collection of revenues from business concerns.
 These rules and regulations are altered quite often.
 Depending on their business nature, size and location, different types of
enterprises will have differing rules and norms to follow.
 The business owners are personally responsible for ensuring that their
firms strictly comply with the prescribed rules and laws; failure to
which they are liable to meet with unpleasant consequences.
 Entrepreneurs are expected to remain watchful and keep themselves
informed of latest standing orders that serve to control, regulate and
guide business activities.
 Generally, a business concern must conduct itself as regulated by rules
and laws.
 It is only after satisfying the elementary requirements, fundamental to
the structure and function of an enterprise, that the final thrust for the
launch of a unit can be undertaken.
 In this context, emphasis must be placed upon such fundamental issues
as form of ownership, industrial license, project registration,
environmental protection, trade license, employee welfare, consumer
rights, etc.

BUSINESS LOCATION/SITE/PREMISES

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 Introduction
Location indicates the general area of a region, state or city. Many
business owners select location by a chance, the most common reason
being ‘noticed vacancy’
Location is instrumental to business success and growth and also its
stability. An appropriate site and premises helps to reduce the total
costs of the business and facilitates contact with customers spelling out
the difference between success and failure. Locations do have an impact
or influence on marketing the product or service.
Sales come from customers who find it advantageous to buy from you
rather than someone else. These advantages include:
 Convenience
 Cost
 Reliability
 Good services, all of which are influenced by location

Selecting the business location is one of the several factors which determine
the success or failure of a small business. Good location will enhance
survival and success of the business while bad location may spell doom even
for the best planned business.

Information Needed In Choosing A Business Location

 The number of people living in the area (demographic)

 The kind of people living in the area (where buyers live)
 The kind of businesses in the area (where competition is, because
of ease to get in)
 The conditions /history of the area (how others have been
performing)
 The conditions and cost of the building (space, size, right place)

General Factors In Selecting Location

Evaluate the following:
a) Social characteristics

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- The population of people willing to spend their money
- The attitudes and progressiveness promoting and attracting more
people and thus increasing purchasing power
-buying habits or shopping habits /patterns of potential customers
- special features which are considered to be assets in attracting
customers to the business.
b) Economic considerations

Consider income that will be available for buying goods and services.
Competition should be surveyed and analyzed for quality, quantity and
extend of aggressiveness in the type of business present.

c)The population and its mobility-

Consider whether there are planned regional centers
Neighboring shopping centers - that serves immediate needs of the
people located within that area eg supermarkets
Isolated enterprise sites- convenient enterprises such as local grocery,
kiosks and restaurants
e)Traffic flow and its analysis:-
The volume of customers/ the traffic passing a particular site. The
number of potential customers for specific types of goods and services

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