BBME/BAAIS/BMPR/BMIS YEAR 1

ENTREPRENEURSHIP FUNDAMENTALS
(ENF123)
COURSE LECTURER: MS FAITH KACHOKA
TITLE: SENIOR LECTURER
COMPILED BY: MS FAITH KACHOKA
SEMESTER: APRIL TO SEPTEMBER 2022
 Unit Six: Business Start-up &
Planning
BARRIERS TO STARTING AND GROWING A NEW BUSINESS
◦ The typical barriers to entry for start-up businesses fall into five main categories as follows:
 The high cost of capital investment for some sectors, industries or technologies.
 Accessing finance for start-up.
 The strength and attitudes of competitors within the market.
 The staff skills or expertise and networks and contacts required.
 Compliance with regulatory requirements.
 We will now look at each of these five barriers individually.
 High Investment Costs
I. The cost of capital equipment and machinery for manufacturing. This can be one of the biggest barriers to start-
ups, particularly where it is necessary to purchase specialist or high-cost equipment for production purposes, or to
develop prototypes and subsequent mouldings for components or products to be produced by third parties.
II. Staff time or costs of pre-start-up stage. The longer the pre-revenue development stages of a business, the more funding is needed to
pay for the staff involved in that development, particularly where highly specialist technical staff have to be employed. One remedy is to
offer those staff “sweat-equity”, which is where they may work for nothing initially, or accept a lower than normal level of pay in return
for some equity in the business. Typically, this will be non-voting shares that will not affect the voting-share equity that is available to
attract investor funding.

III. Cost of sales and marketing to achieve market penetration. Essentially where those barriers are high, the pre- revenue financial
costs of penetrating the target market can also be high and must be considered when estimating the start-up capital requirements.

 Finance
o This includes the following:
I. Access to funds for investment. In the past few years it has become progressively harder for start-up businesses to acquire the funds
they need; they have become more reliant on friends and family and boot-strapping to move the business forward to a point where a
sufficient customer base is established to enable them to access business angel or bank funding.
II. Borrowing capacity or availability of security. Typically lending banks do not expect to lend any more than the sum of investment
made by the entrepreneur(s) or other investors. However, the capacity to borrow more than that may be available where the entrepreneur
(or his or her family) are able to offer security, usually in the form of a charge on private property or a guarantee by a person who owns
property or some other form of equity.
III. Perceived risk to lenders or investors. Lenders are typically more risk averse than investors, as an investor will balance the risk against
the potential return on investment, whereas a lender’s return is the interest paid on the borrowing which would normally be lower.
Lenders are more concerned with the perceived risk of not getting their loan repaid, whilst the investors accept that risk against the
prospect of high capital growth.
IV. High cost of borrowing. Large established companies can usually arrange medium-to long-term loans at low interest above base rate.
Small firms can arrange facilities with higher percentage points above base rate.
 Competition
 Numbers of direct competitors in the market, or competitors with substitute products.
 Size and resources of competitors compared with the proposed business.
 Competitors’ strengths within the market and control in terms of influence and market share.
 Competitors’ attitudes to new entrants (aggressive/neutral/dismissive).
 Customer brand loyalty and willingness to consider new or alternative products.
 Staff Skills/Expertise/Networks
 The extent of the entrepreneur’s own business skills, experience of launching new enterprises, and ability to manage staff and other
resources.
 The problems of sourcing staff with specialist technological expertise and/or market knowledge.
 The problems of attracting staff to work in a small business environment. This used to be more significant when larger companies were
regarded as more stable sources of employment, but when national levels of unemployment are high, small firms become equally
attractive as potential employers.
 The ability of the entrepreneur to use existing contacts and networks; and to establish and develop new networks that can assist or support
the establishment and development of the business.
 Legal and Regulatory Compliance
 Sector-specific regulations. Most sectors of business have some form of specialist regulatory compliance, e.g. food hygiene and storage
in the catering industry, regulations for financial advisers in the investment sector, and pesticide regulations in agriculture.
 On the whole, these regulations are well known within each of the sectors; new entrants to those sectors are well aware of them and their
associated costs which, if known, can be factored in along with other start-up costs. However, there are some sectors in which the
regulatory compliance can have much more substantial financial implications.
 Generic compliance, such as health and safety and employment law. These are universal regulations affecting all businesses,
irrespective of sector. They do not usually form a barrier to start-up but they do present a substantial burden of red tape that can be
disproportionately heavy on small firms because of their size and lack of resources.
 BARRIERS TO GROWING AN EARLY STAGE OR SMALL BUSINESS
 Issues for the Entrepreneur/ Non-entrepreneurial Owner-Manager
• These include factors such as:
 Too much operational focus resulting in a lack of strategic thinking or planning.
 No desire for growth for reasons which may include the following:
o Perhaps due to a deliberate choice of lifestyle business, or
o Because the entrepreneur/owner-manager is satisfied with the current size and profits of the firm.
 No desire for further risk or personal financial exposure once the firm is stabilised and profitable.
 Lack of necessary strategic/managerial/sales and marketing skills.
 Wariness of employing other managers because of:
o The fear of loss of direct control/own investment in the hands of others; and/or
o A dislike of delegation or inability to delegate.
 The implicit role change from entrepreneur to manager as a business grows.

 Market and Customer Issues

 These barriers may be summarized as follows:
• The market has limited or no potential for growth – which suggests the growth strategy of the business needs to be refocused on options
for diversification or new product development.
• The cost of further market penetration is prohibitive – where the cost or effort involved in gaining additional market share is
disproportionate to the profit or benefits it will generate.
• An unstable or depressed market environment – where the return on investment cannot easily be verified or may be too risky.
• A lack of knowledge/experience of alternative markets – further in-depth market research and analysis are required to evaluate options.
• The implications for quality of service to current and/or loyal customers – rapid growth may stretch the business resources and become
disruptive to product or service delivery, causing a negative impact on customers.
 Financial Barriers

 The problems of accessing finance for growth, such as:

I. No reserves from previous profits.

II. Limited borrowing capacity, e.g. up to existing limits.
III. No security is available for (further) borrowing.

 The high cost of borrowing large sums and servicing interest payments.
 The risks of borrowing, for example to finance growth for a single large customer. This has proved to be a common problem for small
firms supplying large corporations, particularly supermarkets, where the buyers have no loyalty to the small suppliers beyond the duration
of their current contract.
 The risk of over-trading - the growth may be highly profitable but the rapid rate of growth outstrips available working capital and causes
cash flow problems, and potential insolvency.

 Resource Implications

 Growth may necessitate bigger and more expensive premises, with the associated capital investment requirements.

 Extra staff may be needed, along with the associated overheads, administration and payroll costs; in some cases, there may be aggravation
and disputes too, where owners and managers do not have experience of managing large numbers of staff.

 There may be a need for major capital investment in production plant and equipment to match the increased demand resulting from
growth.
 Organisational Issues
 The additional administration burden from red tape and legal compliance.
 The need to start to employ functional managers or specialists – human resources, accounting, sales and marketing, production
distribution or service delivery.
 Possible changes to the structure and culture of the firm:

I. Growing from a small and friendly firm to a larger and more impersonal one; and/or
II. With less influence from the entrepreneur’s own character/attitudes.

THE IMPORTANCE OF PROPER BUSINESS PLANNING

 Who reads a business plan?

INVESTOR
S

STAKEHO NEW
LDERS STAFF

START-UP
BUSINESS
SUPPORT
PARTNER
AGENCIE
S
S
 A business plan is a written document that describes all the steps necessary to open and operate a successful business.

 The question that is often asked by people who are starting a business is: “Why do I need to bother with a business plan?”

 Apart from the obvious response – “If you don’t have one, nobody will lend you money”, other reasons are as follows:
 
 Once you have worked out the details of your business, you need to put everything down on paper.
 Writing out these details will help you visualize all the aspects of your business.
 It will also help you convince banks and other people to invest in your business idea.

 
 Writing a business plan is one of the most difficult and important things you will do as an entrepreneur.

 Writing a solid business plan is critical because the plan can make or break your business.

 The business plan:

 Describes what your business will produce, how you will produce it, and who will buy your product or service.
 Explains who will run your business and who will supply it with goods and services.
 States how your business will win over customers from competitors and what your business will do to keep its customers.
 Provides detailed financial information that shows how your business will succeed in earning a profit.
 
 SECTIONS OF A TYPICAL BUSINESS PLAN

 The size of the business being set up will determine the sections included in the business plan. For large businesses, all 12 sections are
likely to be included. For small businesses, the plan is likely to include the following 5 sections: *Introduction, *Marketing, *Financial
Management, *Operations and a *Concluding Statement.

Executive Owners and Products and

Introduction Summary Background Services

Market Marketing Competitor

The Market
Research Strategy Analysis

Costs and
Operations and Sales
Pricing Plan B
Logistics Forecasting
Strategy
 PURPOSES OF A BUSINESS PLAN
• A business plan explains the idea behind your business and spells out how your product or service will be produced or sold. To
convince investors that your business idea is solid, you will need a completely new product or service or one that is better or less
expensive than products or services that already exist. You will need to identify who your target customer is and show how your company
will be able to obtain and keep customers.
• A business plan sets specific objectives and describes how your business expects to achieve them. A good business plan includes sales
projections for the short term (the first year), the medium term (two to five years after startup), and the long term (five years in the future).
It describes what products and services will be introduced over the next five years and sets forth future business plans, such as expansion
of the business.
• A business plan describes the backgrounds and experience of the people who will be running the business. Banks and other lenders
make financing decisions based on how well they think a company can meet its objectives. If you provide information on the background
and experience of the people who will be running your company, the bank or investor will be more likely to invest money in your
business.
 
 JUSTIFICATIONS FOR DEVELOPING A BUSINESS PLAN
 To focus the mind on the purpose of the business and what the business will offer.
 To clarify for the business proposers just what they want and expect from the business.
 To research and identify the target markets and customers.
 To identify the resources (staff, skills, physical, and financial) that will be needed for the business.
 To quantify financially the costs and funding of those resources.
 To plan the implementation of the business and the budget implications of this.
 
 It must be remembered that business plans are not just used by start-ups.
 They are a valuable management tool for planning and monitoring the successful operation of a business.
 IMPORTANCE OF A BUSINESS PLAN
• Every new business must have a business plan.
• When comparing businesses that succeed to those that fail, there is often one important difference—the business plan.
• Business owners that develop and follow a business plan are more likely to succeed than business owners who do not have a business
plan.
• The business plan is important for several reasons as follows:
 
1. A business plan makes you think about all aspects of your business. It guides the making of sales and profit projections, the
development of a staff recruitment plan if the business grows too large for an entrepreneur to handle alone. Drafting a business plan
gives an individual more confidence in the business idea. It shows that building a successful business based on the created concept is
possible. Working on a business plan also helps one to think through business strategies, recognize limits, and identify problems one
might encounter.

2. A business plan may help you secure financing for your business. Lenders require a business plan before they will consider financing
a business. Without a business plan you will not be able to obtain a business loan. Lenders will review the financial section of the
business plan, which will state how much money is needed to operate the business and how the money will be used. Lenders will also be
interested in the financial projections showing estimated revenue, expenses, and profit.

3. A business plan helps you communicate your ideas to others. By the time you write your business plan, you will have given much
thought to the business that you want to establish. You will also believe that your business will succeed. If you communicate your ideas
well on paper, you will convince the reader that your business will succeed. This can help you get a loan from a bank. It also may
convince suppliers to extend credit to your business.
 
4. A business plan can serve as a tool for managing your business. Once your business is up and running, you can use the business plan
in your decision making. It acts as a guide for business operations. It can also be used to track whether your business is developing
according to plan.

 BASIC ELEMENTS OF A BUSINESS PLAN

• Every new business should have a business plan, but not all business plans are alike.
• The content of a business plan for a small, home-based, sole-owner business will differ from a business plan for a large corporation. But,
regardless of the business, all business plans serve the same basic purposes.
• They should also contain the same three basic components— introductory elements, the main body, and the appendix.
• The main body of the business plan will contain the bulk of the information about the business idea. It provides details on how the
business will succeed.
• A lot of time and effort will go into writing the main body of the business plan, and it should be compiled first. Then, details from the
main body will be used to compile the other components in the business plan.
• The main body of the business plan will cover many areas. It should be organized into sections as follows:
 Introduction
 Executive Summary
 Owners and Background
 Products and/or Services
 The Market
 Market Research
 Marketing Strategy
 Competitor Analysis
 Operations and Logistics
 Costs and Pricing Strategy
 Sales Forecasting
 Plan B
 THE INTRODUCTION

o The introduction section of a business plan contains many important details about the proposed business idea.
o The following information should be included in the introduction section.

 A detailed description of the business and its goals

• Something inspired the idea for your business.
• Describing how you came up with your idea can help lenders, investors, and others understand what your business is about.
• Your business plan should also outline your short-term (three months to one year), medium-term (two to five years), and long-term (more
than five years) goals.
• This section describes your vision for the company’s future.
• Stating goals will help provide you with direction and focus for your business activities.
 The ownership of the business and the legal structure
• In your business, you should have a section detailing your form of ownership. Will it be a sole proprietorship (one owner), a partnership
(two or more owners), or a corporation (many owners that hold shares of stock in the business)?
• Provide information relevant to your form of business, such as who your partners are or how many shareholders you have.
• This section of the business plan is important because each legal form of business has an effect on how the business works and makes
profits.
 The skills and experience you bring to the business
• A written summary of your experience is an essential part of your business plan.
• This summary should emphasize all the experience you have that relates to the business, including paid work experience, volunteer
experience, and any hobbies you have that relate to your proposed business.
• The skills and experience of any managers or professional employees who will be hired will also be relevant.
 The advantages you and your business have over your competitors
• You should list your company’s advantages over the competition. These advantages may include the following:
 Performance
 Price
 Quality
 Promotion
 Reliability
 Public Image or Reputation

 MARKETING
The marketing section of your business plan should describe the products and/or services you will offer, the market, the industry, and your
location.
 Products and Services
• Describe the products and/or services and explain how they differ from those already on the market.
• Highlight any unique features of your products and/ or services, and explain the benefits customers will receive by purchasing from your
company.
 Market
• You will explain who your prospective customers are, how large the market is for your product or service, and how you plan to enter that
market. You should also explain how you plan to deal with competition.  
 Industry
• You should describe the industry in which you will operate. To find this information, you will need to conduct research. Things you
should include in this section are:
 External factors affecting your business, such as high competition or a lack of certain suppliers.
 Growth potential of the industry, including growth forecasts.
 Economic trends of the industry.
 Technological trends that may affect the industry.
 FINANCIAL MANAGEMENT
• The finance section of your business plan will help determine your financial needs.
• It forces you to look at financial risks and the costs and expenses of running your business.
• It consists of three elements.
 Identification of Risks
o Prospective lenders and investors will want to know what risks your business faces and how you plan to deal with them.
o Do not be afraid to list potential problems.
o Lenders know that every business faces risks. They will be reassured to see that you have clearly thought through the potential problems
and have a plan for dealing with them.
o Risks typically faced by new businesses include competitors cutting prices, costs exceeding projections, and demand for your product or
service declining.
 Financial Statements
o A new business must include projected financial statements in its business plan.
o An existing business must include current as well as projected statements.
o A financial statement based on projected revenues and expenses is called a pro forma financial statement.
 Funding Request and Return on Investment
o You must indicate how much you need to borrow and how you plan to use the money.
o You should give investors an idea of how much money they could expect to earn on their investment in your business.
o You should state how much money you are personally investing and provide a personal financial statement.
 OPERATIONS
The operation of your company is critical to its success. In this section of your business plan, you should explain how the business will be
managed on a day-to-day basis and discuss hiring and personnel procedures. You should also include information on insurance and lease or
rental agreements. Describe the equipment that will be necessary for production of your products or services and how the products or
services will be produced and delivered.

 
 CONCLUDING STATEMENT
In this section, you should summarize the goals and objectives you have for your business. You should also emphasize your commitment to
the success of the business.
 
 COMPLETE THE BUSINESS PLAN
After you have completed the main body of your business plan, you will need to focus your efforts on the other components - the
introductory elements and the appendix. Then you must pull all the components together into a well-organized, attractive document.
 
 Introductory Elements
o Every business plan should begin with a cover letter, a title page, a table of contents, a statement of purpose, and an executive summary.
These elements help set the tone for the body of your business plan.
 
 Cover Letter
o A letter that introduces and explains an accompanying document or set of documents is called a cover letter.
o The cover letter for your business plan should include your name, the name of your business, and your address and telephone number.
o It should briefly describe your business and its potential for success.
o It also needs to tell the reader how much capital you need.
 Title Page
o Your business plan should have a title page that indicates the name of your company, the current date, the owner of the company, the title
of the owner, and the address and phone number of the company.
 Table of Contents
o A table of contents is a listing of the material included in a publication. It shows the reader what each page covers. It is similar to a table
of contents in a textbook. It is important that your table of contents is accurate, so make sure the sections are listed in the proper order
and the given page numbers are correct.
 Statement of Purpose
o A brief explanation of why you are asking for a loan and what you plan to do with the money is called a statement of purpose. It should
be no more than one or two paragraphs.
 
 Executive Summary
o Before getting into the detail of the main body of the business plan, readers will want to read an executive summary.
o An executive summary is a short restatement of the report.
o It should capture the interest of its readers and make them want to read more.
o If the executive summary is unconvincing, a lender may decide not to read your entire business plan. This makes a strong executive
summary critical to the success of your business.
o The executive summary should be no longer than one or two pages, and it should be written in a clear, simple style.
o Your executive summary should do all of the following.
 Describe your business concept and communicate what is unique about your idea.
 Include your projections for sales, costs, and profits.
 Identify your needs (inventory, land, building, equipment, etc.)
 State the amount you are interested in borrowing.
o Although the executive summary appears before the body of the business plan, it should be written after the business plan has been
completed.
o To write the executive summary, go through the business plan and find the most important and persuasive points you have made. Then
draft an outline of an executive summary based on these points.
o Once you have created a draft of your executive summary, ask people who do and do not understand your business to read the summary.
o If readers do not come away with a clear sense of what you plan to do and why you will succeed in doing it, your executive summary
needs more work.
 
 Appendix
o The appendix to the business plan includes supporting documents that provide additional information and back up statements made in
the body of the report.
o To help you determine what supporting documents to include, you should ask yourself what you would want to know about a business
before you would lend it money.
o Documents that might be included in the appendix are shown in the following list:
• Tax returns of the business owner for the past three years.
• Personal financial statement of the owner.
• Copy of proposed lease or purchase agreement for the building space.
• Copy of business license and other legal documents.
• Copy of the business owner’s curriculum vitae.
• Letters of recommendation.
• Copies of letters of intent from suppliers.
• Copies of any large sales contracts you have already negotiated.
 
 Put It All Together
o Your business plan is your best opportunity to let other people know what you want to do with your company.
o It gives you the chance to convince them that your idea is sound and that you have the talent and resources to make your idea a
successful business venture.
o To make the best of this opportunity, you will want to create an attractive document that is neat, well organized, and inviting to read.
o Handwritten business plans are not acceptable. All business plans must be word processed and printed on standard-sized white paper.
o In addition, your business plan should follow a standard format containing the introductory elements, the main body, and the appendix.
END OF UNIT