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INTRODUCTION TO ENTREPRENEURSHIP
Introduction
Small scale enterprises play a major role in the development of a country’ economy. Small
enterprises create many jobs, provide a variety of goods and services, contribute a lot of revenue
and promote the use of locally available resources.
Self employment
Self employment is a situation in which a person starts and operates a business enterprise. Since
entrepreneurial skills drive people into self employment, entrepreneurship training is therefore
expected to prepare trainees for starting and operating their enterprises effectively.
Self employment does not only improve the standard of living of an entrepreneur, but also
enables him/her to become an active contributor to the social and economic activities a nation.
Self employment is a situation in which individuals create and run/operate their own income
generating activities.
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Advantages of entrepreneurs in self employment
There are several benefits an entrepreneur may derive from self employment. These include the
following:
i) Personal satisfaction
Personal satisfaction is the feeling of accomplishment that one derives from self employment
ii) Independence:
This means freedom from the control of others. One is able to use one’s knowledge, skills and
abilities. There are no external pressures, interference and orders, which one must follow. Self
employed people have more freedom of action compared to employed people.
iii) Income
This is the amount of money left after all expenses have been paid. By being self employed, one
is able to generate an income for oneself.
iv) Job security
This is the assurance of continued employment and income. It does not have the mechanism of
separation such as lying off, firing or retiring.
v) Status:
This is a person’s social rank or position in society. One earns recognition from members of the
society.
Disadvantages
i) Possible loss of invested capital.
Invested capital refers to the entrepreneurs’ money used in starting and operating the enterprise.
If a business succeeds the profits are high, if it fails, the invested capital is lost.
ii) Uncertain income
Earnings from the business are unpredictable therefore there is no guaranteed amount of income
from the business.
iii) Long working hours
Entrepreneurs shoulder all the responsibilities of the business thus spending most of their time
attending to the business requirements.
iv) Competition
Entrepreneurs commonly operate small scale businesses that are unable to compete favourably
with large enterprises.
v) Lack of skilled personnel
Small businesses are unable to employ and retain qualified personnel due to their limited income.
Salaried employment
Salaried employment is a process in which an individual is hired for a period of time, which may
range from a few months to a few years, and is paid a given amount of money as salary or wages
for the work done.
The merits and demerits of salaried employment are varied and largely depend on a person’s
qualification, experience and specialisation area. The merits and demerits are also determined by
the magnitude of growth, investment ability, and profit and government support of a given
organisation.
Defined working hours, guaranteed income, delegation of duties and specialisation are some of
the main advantages of being in salaried employment. However, salaried employment is affected
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largely by organisational elements such as change of management, especially where new
management introduces new policies, rules, conditions of employment and other statutory
requirements to the organisation. Job security is not guaranteed and personal satisfaction and
motivation is not wholly experienced.
i) Creation of employment: An entrepreneur does not only create employment for himself
but also for others. Most jobs in many economies come from the entrepreneurial
activities.
ii) Utilisation of resources; These include proper and adequate utilisation of local labour
iii) Improvement of standard of living. Entrepreneurship raises the standards of living of the
people of a nation by providing goods and services. Similarly, it helps in provision of the
basic needs of society in areas which large firms cannot reach.
iv) Generation of government revenue – This is revenue for the government in form of
licence fees, taxes and through promotion of national productivity by contributing to the
gross domestic product (GDP). They do this by selling products and services thus
reducing the expenditure for imports.
v) Innovation of technological development – This is done through utilisation of technology
which is locally available.
vi) Conservation of foreign exchange: The use of foreign exchange can be minimised by
offering goods produced locally in place of imported goods.
ii) Demonstrate various ways in which the employer and the employee benefit from
entrepreneurship development.
iii) Identify different entrepreneurial activities within your locality and explain their benefits to
the community
EVOLUTION OF ENTREPRENEURSHIP
History of entrepreneurship globally and in Kenya
Entrepreneur is a French word meaning “between – taker” or “go-between”, or “under taker”.
The evolution of entrepreneurship is discussed in several stages:
Earliest period
Earliest definition was by Marco polo, he attempted to establish trade routes to the Far East. As a
go- between, Marco polo would sign a contract with a money person to sell his goods. While the
capitalist was a passive risk bearer, the merchant adventurer took the active role in trading,
bearing all the physical and emotional risks. The profit would be divided between the two of
them with the capitalist taking 75% while the merchant – adventurer settled for the remaining
25%
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Middle ages
As time went by the term entrepreneur changed to describe both an actor and a person who
managed large production projects. This individual did not take any risks but merely managed
the project using the resources provided, usually by the government of the country. A typical
entrepreneur in the middle ages was the person in charge of great architectural works.
17th century
The person associated with this period is Richard Cantillion an economist. He development the
early theories of entrepreneurship and is regarded as the one who developed the term risk taker.
The emergent connection of risk with entrepreneurship developed in this century with an
entrepreneur being a person who entered into a contractual arrangement with the government to
perform a service or to supply stipulated products. Since the contract price was fixed, any
resulting profits or losses were the entrepreneurs.
18th century
This is the period in which an entrepreneur was distinguished from the capital provider. One
reason for this differentiation was the industrialisation occurring throughout the world. Most
inventions developed during this time were reactions to the changing world.
19th and 20th century
In this era entrepreneurs were viewed as managers and mainly from an economic perspective. An
entrepreneur was seen as one who organises and operates an enterprise for personal gain. He
contributes his own initiative, skills, and ingenuity in planning, organising and administering the
enterprise. He also assumes the chance of loss and gain consequent to unforeseen and
uncontrollable circumstances.
In the 20th century, the understanding of entrepreneurship owes much to the work of the
economist Joseph Schumpeter .Schumpeter defines an entrepreneur as a person who is willing
and able to convert a new idea or invention into a successful innovation. Entrepreneurship
employs what Schumpeter called "the gale of creative destruction" to replace in whole or in part
inferior innovations across markets and industries, simultaneously creating new products
including new business models.
In this era entrepreneurs were viewed as managers and mainly from an economic perspective. An
entrepreneur was seen as one who organises and operates an enterprise for personal gain.
For Schumpeter, entrepreneurship resulted not only to new industries but also to new
combinations of currently existing inputs. Schumpeter's initial example of this was the
combination of a steam engine and then current wagon making technologies to produce the
horseless carriage. In this case, the car innovation was transformational, but did not require the
development of a new technology. Different scholars have described entrepreneurs as, among
other things, baring risk. For Schumpeter, the entrepreneur did not bare risk: the capitalist did.
To him an entrepreneur is more of an innovator.
The ability to innovate can be observed throughout history from Egyptians who designed and
built great pyramids out of stone blocks, to laser surgery then wireless communication. Although
the tools have changed with advances in technology, the ability to innovate has been present in
every civilisation.
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i) Entrepreneurs take wild risks at the start of their business. Even though risk is an
integral part of business, the start of business is not considered the highest risk. An
entrepreneur is more likely to face bigger risks at the latter stage of the business.
ii) Entrepreneurs introduce break-through inventions in their start-up business. It would
be easy to assume that entrepreneurs introduce new inventions, usually technological
inventions. This is not true. Innovation may be important, but what makes entrepreneurship
successful is the ability to execute an ordinary idea exceptionally.
iii) Most successful entrepreneurs have years of experience in their chosen line of business.
Bill Gates was still a student when he started Microsoft with Paul Allen. This story of several
inexperienced entrepreneurs starting out a new business venture is replicated over and over
again in the lives of millions of other successful entrepreneurs.
iv) One needs a lot of money to start a business. This is not so. Money is not always an
important prerequisite to be able to start a business. What sets the successful entrepreneur
apart from the not-so-successful is the ability to make do with what little he or she has. For
instance, they look for other sources of money such as borrowing to grow their business.
v) Start-ups use equity, not debt money. Entrepreneurs who put up equity coming from their
own pocket only comprise less than 50% of the total start-ups. The majority of the companies
are financed by debt.
Theories of entrepreneurship
These refer to the various approaches, which have been advanced to give an explanation as to
why entrepreneurs behave the way they do. They are also known as the perspectives of
entrepreneurship.
The theories try to explain whether entrepreneurs are born or made. The born entrepreneurs
inherit the entrepreneurial behaviour from their parents and grandparents while made
entrepreneurs acquire entrepreneurial behaviour from the behaviour in which they live in.
Economic theory
The theory holds that entrepreneurial behaviour is determined by economic factors. Thus
entrepreneurs are greatly influenced by economic activities. From an economic point of view an
entrepreneur is a person who brings together the factors of production into a combination to
make their value greater than before.
According to Schumpeter, entrepreneurs are innovators who bring together the various resources
to produce a new product/service through new ways/methods of production, finding new
markets, finding new sources of materials to create a new business.
The economic theory provides basic data in the economic environment – activities for business
start-ups. Thus entrepreneurial activities take place where conditions are supportive/conducive to
investment. This theory revolves around an entrepreneur being an innovator, combining the
various resources/ factors of production to create new products/wealth.
Psychological theory
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The theory holds that entrepreneurs possess unique needs, values and attributes, which drive
them into entrepreneurial behaviour. It holds that people have personal traits and attributes,
mental desires to be independent.
The main proponent of this theory is McClelland who attributed entrepreneurial behaviour to the
high need for achievement. Entrepreneurs are characterised by high need for achievement, which
tends to give them high desire to take personal responsibility in risks. They have little interest in
routine activities, which are not challenging. According to this theory, entrepreneurial behaviour
is environmentally determined and is inherent during childhood, where parents have certain high
standards achievement.
Sociological theory
The sociological theory maintains that environmental factors such as values and beliefs influence
entrepreneurial behaviour. (Max Weber, 1904). According too this theory, beliefs and societal
aspects such as social status and recognition influence entrepreneurial behaviour.
THE ENTREPRENEUR
Introduction
Entrepreneurs are people who are able to identify opportunities where others are unable to.
Entrepreneurs possess unique characteristics that make them stand out as different from other
business people.
Types of entrepreneurs
There are three main categories of entrepreneurs: craft, opportunistic and ego oriented
entrepreneurs
i) Craft Entrepreneur:
This is a person who exploits and utilises their personal skills to start a business without thinking
of growth or expansion. Craft entrepreneurs are not growth- oriented but try to maximise on
profits. A craft entrepreneur has skills, which they utilise to start and run a business.
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iii) Ego oriented
These are entrepreneurs who are keen on achieving higher status, recognition and a feeling of
superiority. Their main focus is on business evaluation i.e. a shift to higher levels.
Qualities of an entrepreneur
The following are some of the characteristics/ traits of an entrepreneur
1. High need to achieve: an entrepreneur always wants to excel in all he does and has strong
desire for success.
2. Risk – taking: Entrepreneurs like pursuing new and challenging tasks. They carefully
make a choice for success. They take moderate calculated risks which have high potential
for success.
3. Independence: Entrepreneurs like doing things without consulting anybody. He does
things in his own ways in terms of which business to start, how to manage and improve
it. They believe in their own abilities to do things and succeed.
4. Creative and innovative: entrepreneurs have the ability to generate new ideas and
implement them ahead of others.
5. Problem- solving ability: entrepreneurs have the ability to totally recognise and solve day
to day problems in business operation. They recognize the fact that they operate in an
environment with problems and are always ready to solve them to the advantage of their
businesses.
6. Time Consciousness: an entrepreneur believes that time is money and that the available
time must be used effectively for business. H e manages his time well and does things at
the right time.
7. High need to control: an entrepreneur always wants to control his destiny. He starts a
business and keeps at a level that he can easily control and manage based on his abilities.
8. Leadership ability: Entrepreneurs are pioneers in terms of visions and business ideas.
They are able to mobilise and make use of others to assist in achieving their business
goals.
9. Positive Self- concept: Entrepreneurs have self- confidence and believe in what they do.
They are always optimistic and have positive attitude towards certain opportunities for
success. They approach opportunities with success in mind.
The bearing of uncertainty is regarded as the primary function of an entrepreneur. This is the
willingness and ability to deal with uncertainty. Other functions relate to risk – taking and
management of the business. Therefore, as an entrepreneur, one is expected to perform the
following functions.
i) The entrepreneur is the prime mover in the business enterprise. He is the one who
identifies gaps in the market and turns the gaps into business opportunities. Thus an
entrepreneur initiates the business.
ii) The entrepreneur finances the business. After identifying a business opportunity the
entrepreneur raises and mobilises the necessary resources to exploit the opportunity.
iii) The entrepreneur manages the business. He can either do it himself or delegate to other
people.
iv) The entrepreneur bears the business uncertainties or risks of the business. This arises due
to the fact that he is the one who finances the business.
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Hence as a key figure and prime mover of the business, it is his responsibility to:
• Search for business opportunities
• Evaluate the business opportunities to assess their viability
• Mobilise resources needed to start and run the business.
• Manage the business
• Provide the necessary leadership for the people working for the business and,
• Bear the uncertainties or risk of the business
This is the process of entrepreneurship which encompasses the activities undertaken by the
entrepreneur.
Introduction
Since customers’ tastes and needs are continually changing, the entrepreneurs must think of new
ideas and better methods of running their businesses in order to satisfy the customer.
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v) Illumination. This occurs when all the previous stages start getting clear.
vi) Verification. Involves testing if the idea will work, is practical to implement and is a
better solution to a particular problem or opportunity. Experiments, test marketing and
piloting are some of the methods that can be used.
(vii) Implementation. Transforming the idea into reality by bringing it to the market. This is
what distinguishes the entrepreneur from the inventor.
ENTREPRENEURIAL CULTURE
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transmitted by social organisations, developed and then reinforced through social pressure.
Culture is learned behaviour and the identity of an individual and society.
Culture encompasses a wide variety of elements, including language, social situations, religion,
political philosophy, economic philosophy, education and manners and customs.
Language is sometimes thought of as the mirror of culture. It is composed of verbal and non
verbal components. Messages and ideas are transmitted by spoken words used, the voice tone
and non verbal actions such as body positions, eye contact, and gestures.
An entrepreneur must have command of the language in the country in which business is being
done.
Dealing with language almost always requires local assistance e.g. use of a local translator when
negotiating a business transaction.
Equally important to the verbal is the non verbal or hidden language of the culture e.g. space.
How much room exists between individuals when they talk? For instance the Germans prefer
more space than Americans who prefer to stand close when talking to people.
An entrepreneur is thus expected to know the local and the national language of the community
where he intends to have his business.
Social structure
Social structure and institutions are also aspects of the culture facing the global entrepreneur.
Social stratification can be very strong in some cultures, significantly affecting the way people in
one social stratum behave and purchase.
India, for example is known for its hierarchical and relatively rigid social class system.
Religion
Religion in a culture defines the ideas for life that are reflected in the values and attitudes of
individuals and the overall society. The impact of religion on entrepreneurship, consumption and
business in general will vary depending on the strengths of the dominant religious tenets.
For example, in some Arabian countries women are not expected to conduct business.
Education
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Both formal and informal education affects the culture and, the way culture is passed on. A
global entrepreneur not only needs to be aware of the education level, as indicated by the
literacy rate of a culture, but also the degree of emphasis on particular skills or career paths.
The technology level of the firm’s products may be too sophisticated depending on the
educational level of the culture. This also influences whether customers are able to use the good
or service properly and whether they are able to understand the firm’s advertising or other
promotional messages.
ENTREPRENEURIAL OPPORTUNITIES
Introduction
Starting a business requires knowledge, skills, abilities and values. It is therefore important for
entrepreneurs to develop viable business ideas by identifying community needs for products and
services.
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Ways of generating business ideas
There are various ways through which business ideas can be generated. These include:
i) Identifying a need in the community: people usually have many unsatisfied needs. By
carrying out a market survey on the location where you need to establish your business and
talking to the potential customer may reveal gaps in that market.
iii) Market research: Conduct a market survey and try to identify business opportunities
existing in the market. People may be requiring new product/services or the ones existing could
be having several weaknesses. These are good opportunities for you.
v) Listening to complaints of customers so that you improve an existing
business.
vi) Brainstorming- this involves sitting in a group and trying to think of as many possible
businesses as possible using the ‘freewheel ’policy. Take time and digest all the suggested ideas
as a basis for making the final decision on the one most suitable for you.
v) Creativity – By looking at things in a new way and combining two or more ideas in a new
way, such as, one stop shopping spots for customers e.g. a restaurant and a salon combination.
Business ideas can also be generated through developing personal hobbies and discussions with
friends
Guidelines for Business Idea Generation Process:
• Think of as many ideas as possible
• Go out, look and listen.
• Always analyse ideas carefully before finally selecting which ones to implement.
• Be simple
• Start small. “If you want to go somewhere start small” Schummacer
ENTREPRENEURIAL MOTIVATION
Definition
A motive or a drive is a need that is sufficiently pressing to direct the person to seek satisfaction
of the need while a need becomes a motive when it is aroused to a sufficient level of intensity.
For a person to venture into entrepreneurship there must be the necessary motivations, the drives
that will enable him/ her to persist in their entrepreneurial practices.
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Entrepreneurial motivation factors
Although the motivations for venturing out alone vary greatly, the following are some of the
reasons cited for becoming an entrepreneur:
a) Employment creation need: This arises in a situation where one fails to get any form of
salaried employment creating a need for being gainfully employed. This acts as
motivation for a person to become an entrepreneur, to start and run his own business.
b) Self-reliance/ need for independence: A self employed person has greater flexibility in
utilisation of their time and have greater independence. This could act as a strong
motivation to make one desire to become an entrepreneur. A corollary to this need for
independence could be the need for power i.e. to exercise power over other, or to be a
boss rather than to be bossed.
c) Competition. “Anything you can do, I can do better”: This may be in response to the
achievements of peers, friends, or family members who have already made it as an
entrepreneurial business person.
d) Need for recognition: Human beings strive to get recognition about their achievements
in life, by their peers, family and society. This need for recognition could be a motivation
for one to go into self employment. Similarly, members of a certain family may have
been in the past entrepreneurial pillars in the community therefore acting as a motivation
for other generations of the family.
e) Need for adventure: In salaried employment, a person’s duties are well specified and the
boundaries well defined. Work may become routine posing no challenges and involving
very few responsibilities. This may create a feeling that one needs challenging activities,
activities that carry responsibilities with them. This sort of scenario acts as a strong
motivation for people to go into business on their own.
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• The amount that is required
• The period of the loan
• The viability of the proposed business
• The collateral( security) that is required
• The repayment term ( debt-servicing)
ENTREPRENEURIAL COMPETENCIES
i) Initiative – refers to acting out of choice rather than compulsion ; taking the lead rather than
waiting for others to start
ii) Persistence – an entrepreneur should have a “never say die” attitude, not give up easily, and
strive to seek information continuously until success is achieved.
iii) Integrity - the entrepreneur should have a clear sense of values and beliefs that underpin the
creative and business decisions that they make to influence the actions they take, particularly
when in difficult or challenging circumstances
iv) Risk taking - an entrepreneur should understand that risk taking means trying something
new, and possibly better, in the sense of stretching beyond what has been done in the past;
and that the constant challenge is to learn how to assess choices responsibly, weighing the
possible outcomes against his/her values and responsibilities
vi) Decisiveness - the entrepreneur should have skills to resolve issues as they arise and should
respond in a flexible manner to deal with changing priorities
vii) Concern for high quality of work – attention to details and observance of established
standards and norms.
viii) Concern for employee welfare – Believing in employee well being as the key to
competitiveness and success in initiating programmes of employee welfare
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Identifying and assessing the viability of business ideas and translating them into business
opportunities.
Ideas and opportunities need to be screened and assessed for viability once they have been
identified or generated. This is not an easy task though important because it makes the difference
between success and failure.
The exercise certainly helps in minimising the risks and thus the odds of failure.
Identifying and assessing business opportunities involves determining risks and rewards/ returns
reflecting the following factors.
Introduction
When starting a business the entrepreneur must comply with certain requirements and
regulations.
This sub-module unit looks at the procedure to be followed in starting a business, factors to be
considered in starting a business including support services required and available for the
entrepreneur.
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iv) Resource mobilization.
v) Business registration.
vi) Licensing.
Advantages.
• Ease of formation: this is the easiest form of business organization to establish. There are no
complex forms to complete and no documentation required between you and any other party.
It involves registering your choice of business with the registrar of companies by filling in a
simple form and paying a small registration fee.
• Easy to raise capital.
• Owner makes independent decisions: the business owner has complete control over the
business is solely responsible for all decisions in the business.
• Owner has personal contact with employees and customers.
• Owner enjoys all the profits.
• Flexibility: the business owner is able to respond quickly to business needs in day-to-day
management decisions of the business. One can easily take advantage of an attractive
business opportunity.
Disadvantages
• Bears all the losses.
• Capital base may be limited: This kind of business has less financing capacity. The
amount of funds a sole proprietor can raise is limited to their assets and their credit
worthiness.
• Has unlimited liability: The business owner has little or no protection against personal
liability in the event of bankruptcy or adverse legal judgement. Personal assets such as the
owners house, land, car and investments are liable to be seized if necessary to pay
outstanding debts.
• Success of the business depends on the entrepreneur’s hard work.
• Business operations can be affected by death of the owner.
ii) Partnerships
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A partnership is an association of two or more persons who come together to carry on a business
with a view to making profit. Although it is possible to establish a valid partnership without a
formal agreement, it is advisable to sign an agreement first. The agreement will state:
• The effective date of the partnership.
• The business name of the partnership.
• The contributions of capital by each partner
• How the business profits and losses will be shared.
• How a partner may withdraw from the partnership
• How the business assets and liabilities will be shared in the event of a dissolution.
Advantages
• Capacity for more capital; partners can raise more capital than a sole trader. The asset
base is much higher.
• Work is divided among partners.
• Better combination of skills and talents: for example, a mechanic and driver could
successfully combine resources and talents to start a driving school.
• Losses and liabilities are shared among partners.
• Business can easily expand.
• Formation of the business is simple: the registration and legal formalities are easy and
simple.
Disadvantages
• The liability of partners is unlimited.
• Partners are likely to disagree on various matters affecting the business.
• If one partner makes a mistake, all other partners suffer the consequences.
• Some partners may work harder than others, yet the profits are shared. This may
discourage a hard working partner.
• If the business relies heavily on one partner and the partner leaves or dies, the firm can
easily collapse.
iii) Private limited company – It is formed by a minimum of two shareholders
and a maximum of fifty.
Advantages
- Can raise more capital through sale of shares.
- It has limited liability.
- Death of a shareholder does not affect its operations.
- They are managed by professionals.
Disadvantages
- Shareholders can only transfer their shares with the consent of other shareholders.
- The company is not allowed to appeal to the public for extra capital, so it may find it
difficult to raise money for expansion.
- Accounts of the company must be filed annually with the registrar of companies.
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Advantages
- Shareholders liability is limited to the amount contributed.
- It can raise more funds through sale of shares.
- There is no restriction on the transfer of shares.
- Public companies can easily expand due to large capital base.
Disadvantages
- The procedure of forming the company is long and complicated.
- Raising capital can be expensive due to the cost involved.
- As the company grows it may be difficult to manage.
- Once established it has to comply with many regulations.
- The accounts of a public company must be published, so there is no secrecy or privacy
about its affairs.
- Owners exercise little control over the business.
v) Co-operative - It is formed by people with a common interest such as those in the same trade
or dealing in similar commodities.
1. Limited markets: small enterprises do not have adequate markets for their products
and services. They have little or no access to market information and lack the necessary
resources and expertise to conduct any market research.
2. Inaccessibility to modern and advanced technology; small business do not have the
necessary capital to purchase and gain from the benefits of modern technology, thus they
cannot compete favorably in the market.
3. Poor access to capital: Very few banks have special credit facilities to small scale
entrepreneurs and the few that have established such facilities emphasize on high
collateral requirements and high interest rates which make the credit unavailable to many.
4. Poor managerial skills: most small-scale entrepreneurs lack the necessary managerial
skills required for successful operation of their enterprises.
5. Inability to recruit highly qualified employees they usually pay only minimum wages,
have few fringe benefits, offer low job security and therefore cannot attract high calibre
employees
Other challenges include; unfair competition from well established big enterprises, and
lack of coherent policy guidelines among others.
The Small Business Life Cycle: The 7 Stages of the Business Life Cycle
Stage 1: Seed
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This is the stage when your business is just a thought or an idea. It refers to the conception or
birth of a new business idea. At this stage the company will have to overcome the challenge of
market acceptance. The main focus is on matching the business opportunity with your skills,
experience and passions. Other focal points include: deciding on a business ownership structure,
finding professional advisors, and business planning.
Early in the business life cycle with no proven market or customers the business will rely on cash
from owners, friends and family. Other potential sources include suppliers, customers,
government grants and banks.
Stage 2: Start-Up
At this stage the business is born and exists legally. Products or services are in production and
you have your first customers. In the start-up life cycle stage, it is likely you have overestimated
money needs and the time to market. Start-ups require establishing a customer base and market
presence along with tracking and conserving cash flow. Money Sources: Owner, friends, family,
suppliers, customers, grants, and banks.
Stage 3 : Growth
At this stage revenues and customers are increasing with many new opportunities and issues.
Profits are strong, but competition is surfacing. The biggest challenge growth companies face is
dealing with the constant range of issues bidding for more time and money. Effective
management is required and a possible new business plan. The main focus is on running the
business to deal with the increased sales and customers. Better accounting and management
systems should be set-up. New employees will have to be hired to deal with the influx of
business. Money Sources: Banks, profits, partnerships, grants and leasing options.
Stage 4: Established
At this stage the business has now matured into a thriving company with a place in the market
and loyal customers. Sales growth is not explosive but manageable. The main focus is on
improvement and productivity. Money Sources: Profits, banks, investors and government.
Stage 5: Expansion
The expansion stage is characterized by a new period of growth into new markets and
distribution channels. This stage is often the choice of the business owner to gain a larger market
share and find new revenue and profit channels.
Moving into new markets requires the planning and research of a seed or start-up stage business.
Focus should be on businesses that complement your existing experience and capabilities. Add
new products or services to existing markets or expand existing business into new markets and
customer types.
Money Sources: Joint ventures, banks, licensing, new investors and partners.
Stage 6: Mature
Businesses in the mature stage of the life cycle will be challenged with dropping sales, profits,
and negative cash flow. Search for new opportunities and business ventures. Cutting costs and
finding ways to sustain cash flow are vital for the mature stage.
Money Sources: Suppliers, customers, owners, and banks.
Stage 7: Exit
This is the big opportunity for your business to cash out on all the effort and years of hard work.
Or it can mean shutting down the business.
Selling a business requires your realistic valuation. It may have been years of hard work to build
the company, but what is its real value in the current market place. If you decide to close your
business, the challenge is to deal with the financial and psychological aspects of a business loss.
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Get a proper valuation on your company. Look at your business operations, management and
competitive barriers to make the company worth more to the buyer.
Money Sources: Find a business valuation partner. Consult with your accountant and financial
advisors for the best tax strategy to sell or close-out down business.
i) Training services
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ii) Marketing services
iii) Banking services
iv) Insurance services
v) Postal services
vi) Management – business mentors
vii) Technology provision
viii) Business incubators
BUSINESS INCUBATORS
Business incubation centers provide the necessary facilities and support services for business
success at reasonable cost.
The facilities include:
- Premises
- Machines
- Equipment
- Tools
The services include:
- Internet services.
- Business training.
- Business counseling.
- Book-keeping and accounting services.
- Marketing assistance.
- Networking.
Examples of incubators in Kenya include:
- Export Processing Zones (E.P.Z’s)
- Kenya Industrial Estates
- Kenya Industrial Research Development Institute (KIRDI)
- Agricultural Technology Centers, among others.
- Kenya Kountry Business Incubator. (KeKoBI)
NB: The Business Incubation Association of Kenya (BIAK) is the umbrella organization
of incubators in the country.
Introduction
Any business large or small must apply managerial skills in order to come up with decisions that
are practical. These decisions involve the utilisation of business resources so as to achieve
organisational goals.
This chapter will introduce to the trainees the basic functions of management such as planning,
organising and controlling for effective and efficient utilisation of business resources.
Management is the process of solving problems in a creative and innovative way. Management
functions involve planning, organizing, leading, controlling and directing business activities to
achieve their goals. Management is necessary because factors such as employees, technology,
competition and costs keep changing.
i) Planning
Planning as a function of management means deciding in advance what actions to take, when and
how to take them.
Planning is necessary for committing and allocating the organization’s limited resources towards
achieving its objectives in the most effective way.
Planning is also a process of determining what the business wants to accomplish (goals) and
deciding which activities can be applied to achieve them.
ii) Organizing
Organising refers to the formal grouping of people and activities in a manner that facilitates
achievement of organisation’s objectives.
iii) Directing
Directing is influencing other people towards achieving organisation goals. It involves
coordinating, delegating and motivating others to achieve the set objectives.
iv) Controlling.
Controlling involves checking the progress of the activities and correcting deviations that may
occur along the way.
Inventory management
In any business, there is need to keep sufficient stocks of raw materials, and finished products in
order to meet the production and sales target. This is called inventory management. Inventory
control ensures the inventory items in a business are not overstocked or under stocked.
Overstocking leads to tying of capital unnecessarily while under stocking may lead to stock outs
due to sudden increases in sales (demand) or lead to slowing down of production if it involves
raw materials.
An entrepreneur should be able to know:
- When to order re-order level.
- How often to order
- How much to order
When to order re-order level.
An entrepreneur needs to know how long it takes between sending an order and delivery, ( lead
time). One needs to estimate how many units they expect to sell during that time (reserve stock
or reorder level) e.g. lead time in days = 30 days average usage per day=100 units reorder level =
30* 100 = 3000 units. A safety margin should be provided in case some delays are anticipated. It
is advisable to provide 50% of the reorder level
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This is determined by the sales behaviour of each item. Orders can be made as frequently as it is
necessary to avoid stock outs.
How much to order
An entrepreneur should order as much as they will sell in time until another order is made.
Generally, goods are cheaper when purchased in large quantities because of quantity discounts
and bargains.
2.) CAPITAL
Sourcing and effective management of financial resources is one of the critical aspects of
managing an enterprise successfully. Capital is required to establish the business, pay rent,
purchase stock and pay water and electricity bills.
Managing of business financial resources entail s maintaining proper business records( book
keeping and accountancy) to avoid mismanagement of the business funds. Basic accounting
books and documents include purchase journals, cash books, and balance sheets.
3.) LABOUR
Labour refers to human factor as a business resource. The management of human factor in a
business is called human resource management.
Human resource management involves matching the jobs in an organisation with qualified and
capable individuals. It is the process by which the business positions are filed with the right
people at the right time.
The process involves manpower planning, recruitment and selection, training and development
of personnel to suit the needs of the business and provision of services related to the welfare of
the personnel.
Human resource management also deals with handling grievances and the resolution of conflicts
of personnel in their performance of duties.
FINANCIAL MANAGEMENT
Meaning of financial management
This is the process of controlling the financial resources within a business enterprise. To
achieve this objective, the entrepreneur must come up with formal plans called budgets and
cash flow statements.
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Sources of business finance
Business finance refers to the funds necessary to start, run and expand a business.
When looking for business finance it is important to realize that some sources of finance may be
appropriate while others may not. There are various sources of business funds available to the
entrepreneur some of which are:
i) Personal finance- personal savings are a major source of capital during the start-up stage.
The personal savings may be obtained from former employment, money saved in savings/
fixed deposit accounts, sale of personal assets such as land.
ii) Family and friends contributions – The family may provide funds and/or free without
necessarily taking up a share of the business. Sometimes, it is possible to ask for financial
assistance from friends. If they do not require to be paid back, then this would be a form of
equity capital
Advantages:
- Funds can be made available to the entrepreneur without conditions.
- The funds may carry little or no risk to the business
- Re-payment period may not be fixed.
- Family and friends may contribute to the management of the business.
Disadvantages:
- They might interfere in the business management.
- They might claim part of the profits.
- It may result in differences which may lead to serious consequences.
Venture capital
Venture capital is a type of private funding mainly provided for start-ups with a high potential
for profitability and growth. Venture capital typically comes from institutional investors and
high-net worth individuals.
The following are some of the advantages and disadvantages of venture capital:
Advantages:
i) Entrepreneurs can enjoy value addition activities that come with the capital e.g.
mentoring, business alliances, management assistance.
ii) Entrepreneurs planning to source venture capital must embrace creativity and
innovation.
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Disadvantage:
i) Venture capital ties the borrower to the lenders condition thus limiting the
entrepreneur from making certain personal decision.
The government, micro finance institutions and commercial banks offer funds to small and
medium businesses. Some loans require security (collateral) while others do not. Interest rates on
loans vary from one lender to another. Such funds are available from the following institutions;
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Advantages of these institutions are:
Disadvantages:
- May not operate in all regions of the country
- May limit the entrepreneur to operate as a group.
- Some of the institutions may target specific groups e.g. women/men/orphans/the challenged.
- There is a limit to the funds they lend.
- Regulations of getting funds are rigid.
Disadvantages:
- The collateral required is higher in value than the borrowed amount.
- High interest rates are charged.
- The amount to be borrowed is restricted to the ability to repay.
- Some costs on the borrowed loan may be hidden.
- Some loan conditions are ambiguous.
Business records are essential for survival of any business. Records are important for various
reasons such as taxation, decision making among others.
The following are some of the basic records that an entrepreneur should use :
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The cash book is a record in which cash received and paid are recorded. It is divided into two
sides. The left side is used for recording cash received while the right side is used for recording
cash payments.
Format of a cash book
Date Particulars Fo Cash Bank Date Particulars Fo Cash Bank
BOOK KEEPING
This involves recording all the transactions, which can be expressed in money, arising from the
business activities as they occur and entering them in the appropriate books.
Systems of bookkeeping
There are two systems: the single entry and the double entry. The double entry is most
commonly used in industry and commerce.
The double entry system is based on two principles.
1. The principle that every transaction has two parts, therefore two entries are made in the
books of account in respect of each transaction.
- One entry to record the item coming into the business
- One entry to record the item leaving the business
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2. The principle that the value of the item(s) coming in is equal to the value of item(s) going
out.
Value coming in =value going out
Thus, a transaction involves an exchange of items and the items exchanged have the same
value i.e. Assets= liabilities and owner’s funds.
The two most important statements an entrepreneur requires for sound financial decisions are :
i) profit and loss account
ii) balance sheet
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iii) Gross profit- This is determined by subtracting the cost of goods sold from sales.
iv) Expenses- These include labor cost and other cost of operating the business.
v) Net profit- This is the amount remaining when the expenses are deducted from the gross
profit.
An example of a profit and loss account is shown below:
KOSKE’S PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDING 31ST
DECEMBER 2009-10-15
Therefore Koske’s net profit of ksh 24,700 is the return on capital invested in the business. In
order to make his financial decisions he has to compare one year’s profit with those realised in
other years.
If Koske had invested Ksh. 100,000 in the business, he could calculate his profit turn-over as
follows;
This would guide Koske whether it is profitable to continue with the business or re-invest
elsewhere.
It is also important for koskei to calculate the net profit to gross profit.
ii) Balance Sheet
The balance sheet is a financial statement which indicates what the business owns and what it
owes on any day of the business life.
The financial figures on the balance sheet change from day to day because money is always
coming in and going out of the business.
The formula used to prepare a balance sheet is
Assets = liabilities + capital (Net worth)
Assets
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These refer to everything a business owns e.g. cash, buildings, equipment, stock. Assets can be
current or fixed.
Liabilities
These refer to anything that the business owes e.g. loans, credit notes, taxes. Liabilities can be
current or long term.
Networth
This is what a business owes after subtracting liabilities. It represents the owners claim in the
business.
A budget is a plan that outlines an organizations financial or operational goal. It is an action plan.
It helps a business allocate resources, evaluate performance, and formulate plans. Understanding
the importance of budgeting is the first step in successful financial planning.
A regularly reviewed budget enables an entrepreneur to compare actual performance and quickly
identify losses and take remedial action.
Budgets are intended to provide a basis for evaluating expenditures that will impact the business
for more than one year.
MARKETING
Introduction
For any business to grow there must be an exchange process. This exchange process is realised
when business owners are able to sell their goods/services to the customers.
This sub-module unit will deal with definition of the terms market and marketing, components of
marketing and methods of gathering market information
Definition of terms
i) Market.
A market is any place where sellers exhibit or show their goods for the buyers to see and
purchase/ buy. A market can also be defined as the existing and potential customers who are
willing and able to buy a product/service.
ii) Marketing.
Marketing is the process of making known what products/ services an entrepreneur is selling or
wants to sell.
Components of marketing
There are components of marketing generally referred to as the marketing mix or the 4Ps of
marketing as outlined below:
i) Product
This is the good/item or service the entrepreneur
intends to sell in order to satisfy customer’s needs.
ii) Place
This is the location where the product is to be sold. The
product must be in the right location or site, at the
right time for the customers. Place also refers to the
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channels used for the product to reach the consumer.
iii) Price:
This is the monetary value of a product. The price
should be able to cover the cost incurred and earn some
profits.
iv) Promotion:
This is the process of communicating with customers to
influence them towards buying the product.
MARKETING MIX
TARGET MARKET
Market research involves obtaining information about the market. This is necessary in order to
manage the marketing functions successfully. A market research programme based on a
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questionnaire can disclose problems and areas of dissatisfaction that can be remedied or new
products and services that could be offered successfully.
Marketing Strategy includes identifying customers groups (target markets) which a small
business can serve better than its competitors. The strategy should try and address customer
needs which are currently not being met in the market place.
Market segment involves dividing the heterogeneous market into several submarket or segments.
The major ways to segment a market are:
a) Geographical segmentation – involves specialising in serving customers in a particular
geographical area.
b) Customer segmentation e.g. identifying groups of people who are likely to buy the
product or services i.e. securing heavy users before trying to secure new users.
c) Demographical segmentation e.g. age , occupation, religion , lifestyle or income
d) Psychographic e.g. social class, lifestyle or personality
Social responsibility consists of those obligations a business has to society. The small business
has certain social obligations, responsibilities and responsiveness to society. This regards the
intensity or to what extent the small business should be involved to society issues.
However, an enterprise also has social concerns that should be recognised. These include:
protection of the environment to avoid creating health hazards to the people, provision of goods
and services coupled with equitable distribution of resources, gender sensitivity issues, and
coverage of ethical business practices to promote economic development of a country.
Some businesses simply react to social issues through obedience of the laws, others make a more
active response, taking, and accepting responsibility for various programmes. Others are more
proactive and are even willing to be evaluated by the public for various activities.
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Types of enterprise social responsibility
Generally, small businesses have a social duty and obligation to develop and enhance the quality
of the society in which they operate
Enterprise social responsibility forces people to be responsible for their actions and makes it
difficult for them to “exploit” other people for either selfish or unselfish reasons. Consequently it
allows a business to use its resources and engage in activities designed to increase its profits with
the laid rules and regulations thus engage in open and free competition without deception or
fraud. It also helps in improving the living conditions of citizens.
It provides for increased competitive advantage of an enterprise and nation in general through
good performance of “Corporate Social Responsibility” (commitment by the enterprise to make
contributions to sustainable economic development, co-operation with the community and
society to improve their lives for the mutual benefit of the employees.)
- To promote sustainably their reputation; expand the market and price advantages;
- To be engaged in investment programs and plans for the purpose of social responsibility;
BUSINESS PLAN
Introduction
A business plan is an important document for an entrepreneur because it acts as a guide and
reference point in regard to overall business management.
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A business plan shows a clear picture of what the business is, where it is going and how the
entrepreneur proposes to get there.
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This section outlines the financial needs of the business and sources of raising the
finances and also gives the projections of income and expenditure through such key
statements as:
- Cash flow statement
- Income statements (trading, profit and loss account statements) among others.
Introduction
All businesses, small or large need information. Information is data that is relevant for a specific
purpose. Businesses require information on new products, technological changes and competitors
to be able to cope. The information must be communicated accurately and timely. It must also
be complete and relevant to meet the demands of today’s business environment.
i) The Phone
The phone is used to communicate verbally with customers and suppliers. This includes both the
fixed line and mobile phones Other than verbal communication, the mobile phone is also used
for sending and receiving messages, sending and receiving money e.g. MPesa.
Benefits of a mobile phone
- It is affordable
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- It is easy to use and any one can understand its functions
- It is portable and therefore can be used anywhere at any time
- It is efficient because feedback is immediate
- It can be used in extreme remote areas as long as the network coverage is available
ii) Radio
- This is a very effective way to advertise a business
- It is quite inexpensive and can reach a wide audience
- Some communities have local radio service stations and the small business may use this
service to advertise its products or services where the entrepreneur may be interviewed
during a programme. Examples of such radio service stations are; Inooro FM, Murembe
FM and Ramogi FM.
iii) Television
A small business may use the television as a tool for sourcing technological information,
new products/services, market trends and general information that will assist the
entrepreneur to run his business.
iv) Print Media
Examples of such are; newspapers, advertising papers/magazines and business
directories.
Newspapers e.g. the local dailies(The Nation) which the business enterprise can use to ;
- Advertise their products/services
- Get information on market trends
- Access information on new technology, new products/services
- Access information on political and economic trends in the country
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- Generating advertising leaflets, posters or flyers
- Generating financial statements
- E-business – this is publicizing the business through the Internet
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