Management of Business Past Paper PDF

Management of Business Small Business Management (Module 3) UNIT 2 The Entrepreneur An entrepreneur is somebody who sets up an enterprise. He or she takes a risk that the business may not be successful and that the time and effort and money put in may be lost. An entrepreneur is an action-oriented...

Management of Business Small Business Management (Module 3) UNIT 2 The Entrepreneur An entrepreneur is somebody who sets up an enterprise. He or she takes a risk that the business may not be successful and that the time and effort and money put in may be lost. An entrepreneur is an action-oriented highly motivated person who sees and makes the most of opportunities that other individuals do not see. Entrepreneur Seeks to develop imaginative business ideas primarily for his or her own interest. Makes profit (or loss) Raises revenue from sales Characteristics of an successful entrepreneur They depends on the nature of the enterprise with which they are involved Someone who establishes a social enterprise will focus all their attention on creating a better social environment. Another entrepreneur, for example one won establishes a business, will have profit maximisation as their prime focus Characteristic of an Entrepreneur A risk taker: willing to take calculated risk and have the confidence he or she will be successful. Goal-oriented: sets their goal and combines the factors of production to achieve this, so they are therefore very focused and profit-oriented Persistent: optimistic individual who has the confidence that regardless of the situation, they will never give up Flexible: has the ability to react quickly to changes in the external environment, eg, a change in the rate of interest Innovative: constantly developing new ideas Characteristics of an entrepreneur cont’d Creative: finds a new way of doing things and is open-minded and resourceful Sociable: able to relate to the people around them Hardworking: has the capacity to work for long hours, committed to the task at hand Move past failure: has the capacity to deal with failure i.e. never give up Good communication skills: has a good command of language. Ability to communicate with groups and individuals easily and to get along with others How management can foster spirit of entrepreneur Provide workers with the resources necessary to develop their ideas Management style should be more democratic. This means having open communication with workers and then giving them the forum to develop new ideas Motivating workers so that they are comfortable to voice their ideas, while reminding them that not all their ideas could be entertained by the firm. Corporate Entrepreneurship The term ‘intrapreneurship’ can be used to describe the qualities of someone working for an organisation who shows flexibility and imagination, and has a willingness to take risks and to be innovative. Such individuals can be an asset to the organisation and management should create an environment in which they can flourish. In order for entrepreneurial abilities to further develop, management must give entrepreneurs the freedoms to try out new ideas and to take risks Management must listen to ideas that may be presented to them. Management must implement creative ideas quickly. This will motivate workers. Social enterprise A social enterprise can be described as an organisation that has been set up to cater to the needs of the society. These organisations obtain the revenue needed for their operations from donations and the various commercial activities they organise during the year. Their main objective is to improve the society and the environment in which they operate. Their goal is to enable society to function better by assisting members in the society who are deprived in some way. Social entrepreneur Seeks to develop imaginative ideas for the good of society and environment Makes a surplus (or deficit) Raises revenue from donations and some commercial activities (e.g selling items Economic systems The free economy The mixed economy The planned economy Free economy Enterprises run by entrepreneurs who are able to make their own decisions about how to run their business. Entrepreneurs make their own decisions about price, product, place promotion They can choose how to compete with rivals Advantages and disadvantages of free Advantages: There is no government intervention There is consumer sovereignty in the market Consumer maximise satisfaction, producers maximise profits and the owner of the factors of production. Disadvantages: There is unequal distribution of income Wasteful competition exist and essential service are not adequately produced Planned economy Government interference and planning by government officials Many state-run enterprises and decision-making is the responsibility of the state The state makes all business decisions in the interest of the public’s welfare The state decides: what to produce, when to produce, how much to produce, for whom to produce. There is no private sector. Advantages of a planned economy Advantages: There is economic stability as the state controls and plans, wasteful competition does not exist in the market Production and the allocation of resources are efficient as the government is better able to allocate resources efficiently Wages are determined by the state, so there is less inequality of income The welfare of citizens is maximised Disadvantages of Planned economy There is a loss of consumer sovereignty There is a disincentive to work and innovate It is difficult to predict consumers’ demand Bureaucracy and red tape Mixed economy An economy in which decisions are made by a combination of government decision making and the market. The public sector and private sector co-exist Efficient use of resources A wider variety of goods are provided The advantages of the mixed economy are essentially the advantages of the free enterprises market economy Size and growth of business a. Criteria for measuring size and growth: i. Output ii. Labour force iii. Market share iv. Capital structure b. Advantages and disadvantages of small firms vs. large firms: i. Size and financial requirements ii. The economies of scale iii. Management and control iv. Lack of record keeping v. Working capital deficiencies vi. Poor management skills vii. Regulation and Legislation The importance of small firms Create employment: small firms are eventually labour intensive, this means they create employment especial for individuals that are unskilled or semi-skilled Opportunity for development of entrepreneur talents: ○ Small firms provide an opportunity for the development of entrepreneurial talents ○ Individuals who like working for themselves may develop and convert their talents into a profitable enterprise In rural areas: ○ Small firms are found mainly in rural areas, where it would not be economical for large firms to operate and survive. ○ They therefore satisfy the demand for goods and services in these rural areas The importance of small firms cont’d Improve the standard of living and quality of life: small firms therefore improve the standard of living and quality of life of workers Provides input for larger firms: ○ Small firms provide inputs for larger firms ○ They create that valuable backward link that allows production to be free of possible bottlenecks, eg small farmers that provide sorrel for the large manufacturing plant Gross national product: small firms make a valuable contribution to the economy’s gross national product Potential to grow into larger business: small business have potential to grow into larger businesses, reap the benefits of economies of scale and be able to compete with other firms on the international market. Measuring the growth of the firm Small firms can grow into larger firms through internal growth. Here the firms gain the benefits of economies of scale The firm can also grow externally by integration, i.e. merging with other firms (where two or more firms are joined) or taking over other firms (where the shares of one firm are bought by another firm) Growth can be classified on four ways: ○ Horizontal growth: this occurs when the firm takes over or merge ○ Lateral growth: this occurs where firms take over another firm which does not provide it inputs ○ Vertical growth: this is where the firm expands within the same industry with other firms, either through backward linkage or forward linkage ○ Conglomerate: this occurs where the firm expands with other firms in a different industry that is not connected to the original line of the firm Advantages of small firms Serve the local communities in rural areas Provide specialist services Provide inputs for longer firms Subcontracting: many small businesses survive by subcontracting to larger firms Can come together and purchase in bulk and gain the benefits of economies of scale Offer personal contact with customers Being one’s own ‘boss’, to make all decisions Disadvantages of small firms Face competition from larger firms Cannot reap the benefits to economies of scale Problems in obtaining capital Poor management skills Limited by government regulations, eg. minimum wage For a very small firm, the cost maybe too high If firm produces only one product, a change in demand may lead to a heavy financial burden Loans are expensive to finance Advantages of large firms Reap the benefits of economies of scale: these can be internal or external Internal economies of scale: these are the benefits a firm gains as it increases the size of its operations these include: ○ Technical ○ Marketing ○ Financial ○ Risk-bearing External economies are the benefits to the firm because of its location, or by virtue of being part of an industry these include: ○ Specialised workers, research and development, support from other firms in terms of training for workers, specialized services: banks, insurance, cleaning, catering become established to near industrial area Disadvantages of large firms Do not offer personal services May grow too large and experience diseconomies of scale Criteria for measuring size of a firm Output: output can be calculated in two ways: ○ Volume of output (how many units of production are made and sold by the company ○ Value of output (the value of company sales in a given period). Sales revenue is often used as a measure of output in money terms. Labour force: (a firm grows when it employs more people) the number of employees: a ‘small’ firm might employ fewer than 50 people Criteria for measuring size of the firm cont’d Market share: market share is the percentage of sales in a particular market made by a specific business. Growing a firm would increase its market share. Capital structure: firms can grow by changing the way they are structured in order to have access to larger pools of capital. The most obvious way of doing this is to become a company and to issue shares. Capital employed refers to the total amount of financial capital that a business is able to access from all sources, including owners’ capital and shares Market capitalisation Market capitalisation: this measures the value of the firm on the stock exchange. It represents what people are prepared to pay for shares It analyses the firm’s present position and expected future position The problem with this measure is that it can vary daily; share value can change based on perception However, the measure cannot be used to measure size of firms generally, as most firms are not listed on the stock exchange Total profits Profit maximisation is the main objective of private sector firms Profitability is important to current and prospective shareholders Profits can be used to measure the size of firms However profits depend on more than just the size of the firm. They depend on: ○ The level of efficiency of the firm ○ How motivated workers are ○ The effectiveness of management style Profits really determine how successful the firm is, not necessarily the size Opportunity for growth Business growth: businesses can gain advantages over competitors by growing. They may be able to cut costs and win greater share of the market, develop new products or sell to new markets Internal growth: is often called ‘organic’ growth. Many businesses grow organically in their early years, financing expansion by ploughing back profits, putting in more capital themselves or borrowing from a financial institution such as a bank External growth: usually involves a merger with another business. When a merger takes place, two or more enterprises cease to be distinct. This can occur in two ways: They are brought under common ownership and control There is an agreement between the enterprises that one of them ceases to trade A takeover is a form of merger. It occurs when one company buys a majority shareholding in another Acquisition: refers to the process where one business gains control of part of another. Major Challenges and Opportunities faced by SB a. Identifying successful business opportunities b. Sourcing capital (finances) c. Selection of business types (sole trader, partnership, company) d. Determining a location e. Globalisation and trade liberalisation f. E-commerce g. Intellectual property Identifying business opportunity There are a number of areas that can create an opportunity for an entrepreneur to start a business: Purchasing a franchise Identifying a gap in the market: the entrepreneur can identify a gap in the market (missing market) and produce a product that satisfies that demand Using existing skills: entrepreneurs are more likely to be successful if they use their existing skills to start their business. Invention: entrepreneurs can start their business if they have invented a product. This allows the entrepreneurs to benefit from a niche market. Sourcing finance One of the major problems facing the entrepreneur is the availability of finance. The principal sources of finance for a small business are: Owner’s own funds, usually in the form of savings Bank finance Venture capital Hire purchase and leasing Trading credit: businesses can buy supplies on credit if it can convince a supplier that it will be able to make payments when they fall due Government funding Selecting a business type Sole trader Partnership Franchise Cooperative Small company Determining the location This is another challenge for the entrepreneur. The business needs to be located close to consumers. Such a location will normally be expensive for the entrepreneur, in terms of purchase or rent. Operating the business from home is the most likely option; this decision, however, presents additional challenges as follows: ○ It may be difficult to separate working life from private life ○ It may not be attractive enough for customers ○ It may be too far from the target market Globalisation and trade liberalisation Globalisation this is the trend for markets to become established worldwide. It is the trend towards free international trade and the free movement of capital between countries. Benefits to small firms: New markets: small businesses in T&T can do their market research and cater for the international markets, e.g. markets in South America Cheaper inputs: small firms are now able to fund cheaper sources of new materials. Globalisation and trade liberalisation cont’d Competition: small firms are now forced to become more efficient if they are to survive in the face of competition Learning by doing: small firms are able to learn the production process and marketing strategies of larger firms and in the long run to compete with them for market share Challenges to small firms Competition: small businesses, e.g the local garment producer in T&T, will find it difficult to compete with the more established brand-named items that are imported Contraction of the domestic industry: domestic producer would reallocate resources out of the garment industry E-commerce Opportunities to small firms Niche market: small business may be able to identify a niche in the international markets for their products Inputs: small businesses may be able to obtain inputs at a lower price. This reduces their cost of production and selling price Economies of scale: small businesses may be able to experience some measure of economies of scale as demand for their output increases Intellectual property This is a legal term that refers the creations of the mind, for example literature, music, etc It includes: Patents: this offers protection to investors. It gives them exclusive rights to manufacture a given product. Copyright: this applies to all printed materials e.g. books. It offers protection to workers that their work will not be copied without their permission. Trademark: these may be a symbol used by a producer to distinguish its product from it rival product. Types and Nature of Assistance Available to SB a. Agencies that Assist Small Businesses: i. Government Agencies ii. Non-governmental Agencies iii. Financial Institutions b. Types of Assistance Offered to Small Businesses: i. Financial ii. Technical iii. Education and training Financial assistance One of the major problems facing small businesses is obtaining the necessary finance. Financial assistance for small businesses can take the form of: Loan guarantees: this enables the firm to purchase assets necessary for production. Venture capital: this is capital that private investors put into the business Working capital finance: this is money needed to finance the daily expenses of the business Debt factoring: this allows the business to improve its cash flow Technical assistance This is needed to ensure the success of the business The assistance will include: ○ Information in relation to stock holding ○ Information on how to set up and use machinery ○ Information on how to control pollution ○ Specialist advice can be obtain from organisations (eg hairdresser association, association of craft entrepreneur) ○ There are a number of educational institutions that provide training in the technical field eg University of the West Indies Educational and training Government agencies, non-governmental agencies and financial institutions provide education and training facilities for entrepreneurs Training in: ○ Marketing and promoting the business ○ Legal issues, e.g employment laws ○ Keeping accurate financial records The University of the West Indies offer degree programs in business management NEDCO has established it Entrepreneurial Training Institute and Incubation Centre (ETHC) Business plan A business plan is a complete description of a business and its plans for the next 1-3 years. It explains what the business does (or will do, if it is a new business); it suggests who will buy the product or service and why, it provides financial forecasts demonstrating overall viability; and it indicates the finance available and explains financial requirements: A business plan: It tells what the business plan is to do How the business plan is to do it It represents all aspect of the business Who uses the plan? The plan is meant for two main parties: The business owner and his or her advisers: it shows that they have a clear understanding of their business and how it is going to generate profit for the owners Lenders: any suppliers of funds to the business will want to know that it is sound and well structured Value of the business plan Owners of small business will be required to present business plan when they are seeking financial assistance from any lending institution It is useful for helping the entrepreneur to look at current operations of the business. The act of planning helps to clarify the objectives and strategies of the business in the mind of the entrepreneur It is a working document that helps the entrepreneur to look at the current operations of the business and to plan for the future of the business Sections of the business plan A business plan can be divided into the following sections: Executive summary Business description Business environment Industry background Competitor analysis Market analysis Marketing plan Operations plan Managerial plan Financial plan Executive summary It gives a clear picture of the main points of the business plan The amount of external finance needed The objectives of the business The product being produced Forms of ownership, e.g sole trader, partnership, etc The main strength of the business It should be written in order to persuade potential investors to invest money in the business Business description Legal establishment Start-up plans ○ Is it sole trader or partnership company ○ State the name of the business ○ Description of the product or service ○ Give an overview of start-up plan Business environment analysis Target market Customer needs Location ○ What segment of the market is the firm catering for? ○ What the customer needs? E.g high-quality goods at a low price ○ Why is the location suitable Industry background Give a concise account of the background to the industry How big is the market? Competitor analysis Who are the firm’s competitors? Name the competitors Give a broad account about the firm’s target market; this should include age, gender and income of persons Market analysis Customer needs Where are they How to reach them ○ The size of the market ○ Market trends identified ○ Share of market intended to gain ○ Any anticipated market threats ○ Degree of competition ○ How to gain customer loyalty ○ Customer awareness in the form of advertising and sales promotion ○ Where product will be sold Market plan Pricing strategy Promotion strategy Distribution strategy ○ Give, in detail, marketing strategies to be followed ○ This will include Pricing policy to be used Advertising and other forms of promotion Selling and distribution of product Launching the product Developing the product Operational plan Cost of production Machinery ○ This section deals with the cost of the goods or services ○ Location of production facility ○ Techniques and capital equipment needed for production Managerial summary Management personnel Staffing ○ It deals with management personnel; number of employees ○ Who will manage the business? ○ What are their qualifications? (skills/training) Financial plan Profit and loss Cash flows Break-even analysis Source of funds Business ratios Assumptions This plan will depend upon whether the firm is existing business or start-up. If it is an existing business, it must include the balance sheet, profit & loss accounts, cash statements Financial plan For start-up and existing businesses include: ○ Budget for the main functional areas ○ Cash flow forecasts ○ Costing and break-even ○ Budgeted profit and loss accounts ○ Budgeted balance sheet ○ Total borrowing requirements ○ Total working capital requirements ○ Proposal of payment ○ Business ratios ○ Source of funds ○ Who will provide them?, give calculation of the capital needed to break even ○ What will be the profit and loss account look at the end of the first year Activity # 1 Eric has been a well-respected chef for some years and now wishes to set up a small business. a. Identify FIVE factors that Eric must consider if his business is to succeed. (5 marks) b. Discuss the impact of EACH of the factors identified in 5 (a) above on the success of Eric’s business (20 marks) Total 25 marks Activity# 2 1. Discuss TWO main contributions of small businesses to the development of your country’s economy. (10 marks) 2. (i) discuss THREE difficulties faced by small business in the Caribbean. (ii) Suggest ONE way in which EACH difficulty identified in 6 (b) (i) above May be overcome. (15 marks) Activity #3 In August 2002, Mary Welbrave decided to leave her job as a Teacher at the Learn-Brite Elementary School in Rockyville. She had accumulated a fund of $200,000 to start a business as a Reading Specialist. In September 2002, Mary set up her Reading Lab in a vacant room at her home, targeting children between the ages of five and ten with reading disabilities. Mary bought two computers, reading software and other reading accessories amounting to approximately $150,000. She had selected this area of specialisation because her friend’s son had serious reading disabilities. She had designed a number of programmes to assist him in reading, and these had proven to be very successful. Activity # 3 cont’d Within six months, Mary had approximately thirty-five students and generated a very attractive profit from her venture. She had regular one-to-one information sessions with parents to inform them of their children’s progress. The children called her “Auntie Mary” because of her kind and gentle way with them. As a result of the rising demand, Mary is thinking of moving to a location with larger facilities and including the teaching of mathematics Identify ONE piece of evidence from the case that suggests that Mary is an entrepreneur. ( 1 mark) Outline TWO risks that Mary faced when she decided to become an entrepreneur. ( 2 marks) Activity # 3 cont’d Identify TWO clues from the case which provide evidence that Mary displays human relations skills in the management of her business. ( 2 marks) Discuss THREE factors in the Micro-environment which might affect Mary’s business (9 marks) Discuss THREE factors in the Macro-environment which might affect Mary’s business. (9 marks) Explain TWO ways in which Mary’s role as an entrepreneur may change should the business continue to grow (2 marks) Total 25 marks Activity # 4 State TWO characteristics of a successful entrepreneur. (2 marks) Explain ONE way in which EACH characteristic you stated in (a) above helps the entrepreneur to succeed. (2 marks) Financial institution