EBD Ch 4 Lecture Notes - Start-Up Considerations PDF

CHAPTER FOUR START-UP CONSIDERATIONS 4.1. MARKETING 4.1.1. The Marketing Mixes (The 7Ps of Marketing) The 7 Ps Marketing Mix gives entrepreneurs a framework to plan their marketing strategy and effectively market their products to their target group. The "7 Ps of Marketing" are: Product, Price, Promotion, Place, People, Process and Physical evidences. This marketing mix is an expansion of the classic "4Ps Marketing Mix" (Product, Price, Placement, and Promotion) that was established by Prof. James Culliton in 1948 and expanded upon by Jerome McCarthy. Today, we refer to these interchangeably as the "7 Ps of Marketing" or as the "Marketing Mix". Marketing mix is a selection of marketing tools that include several areas of focus that can be combined to create a comprehensive plan. The term refers to a classification that began as the 4 Ps: product, price, placement, and promotion, and has been expanded to product, pricing, place (channel), promotion, people, process and physical evidences. 1) PRODUCT MARKETING MIX: refers to goods/services produced for sale, the product /service should relate to the needs and wants of the customers. Product refers to what the company produces (whether it is product or service, or a combination of both) and is developed to meet the core need of the customer. Some important questions you need to ask yourself include: What products/services do I sell?; Why did I decide to sell these products?; Do I have the products customers want?; Do any of my products not sell well?; Do I stock products that do not sell well? ASTU, SoHSS, SSU, Entrepreneurship and Business Development (SOSC5003) (Ch-4, Lecture notes) 1 Always listen to what your customers like and don’t like. When their needs change, change your products and services to satisfy the new needs. Do more market research in order to provide those products or services and increase your sales. And if your product is not selling well, think of new ideas like finding new customers. 2. PRICING MARKETING MIX: refers to the process of setting a price for a product/service. Your prices must be low enough to attract customers to buy and high enough to earn your business a profit. To set your price you need to know your costs, how much customers are willing to pay, your competitor’s price and how to make your prices more attractive. Pricing Strategy Price is the value placed on what is exchanged. Something of value is exchanged for satisfaction and utility, includes tangible (functional) and intangible (prestige) factors. It can even be barter. Price is often the only element the marketer can change quickly in response to demand shifts. It relates directly to total revenue TR = Price * Quantity Profit = TR – TC Where, TR=Total Revenue, TC=Total Cost Pricing strategies are subject to incredibly complex environmental and competitive forces. A company sets no single price, but rather a pricing structure that covers different items in its line. This pricing structure changes through time as products pass through their life cycles. To come up with this situation’s marketers use dynamic pricing strategies. The following are some of pricing strategies mostly applicable in the real-world scenario. i) Price Skimming: this is a type of marketing strategy that firms use by charging the highest possible price that buyers who most desire the product will pay. It attracts a market segment that is more interested in quality, status, uniqueness etc. In this case, consumers’ demand must be inelastic. ii) Penetration Pricing: In this strategy, prices of products are reduced compared to competitors’ price for the same product to penetrate into markets and to increase sales. However, the quality of the product should not be lower as compared to other competitors’ product. It should be again noted that the cost of production should be lower to the extent that can enable the firm to get the desired profit. This is appropriate when the demand is elastic. iii) Cost-plus pricing: Any amount that is above unit cost may be considered. iv) Mark-up pricing: A certain percentage of the selling price is added to unit cost. ASTU, SoHSS, SSU, Entrepreneurship and Business Development (SOSC5003) (Ch-4, Lecture notes) 2 v) Competition Oriented Pricing: Considers competitors prices primarily; but the market type matters. vi) Odd-even pricing: This is psychological pricing method based on the belief that certain prices or price ranges are more appealing to buyers. This method involves setting a price in odd numbers (just under round even numbers) such as 49.95 ETB instead of 50.00 ETB. Although not supported by any research findings, its proponents claim that the consumers see a 49.95 ETB price as 'just in the price range of 40’ETB rather than in the 50 ETB. 3. PLACE (DISTRIBUTION) MARKETING MIX: means the different ways of getting your products or services to your customers. It is also referred to as distribution. If your business is not located near your customers, you must find ways to get your products/services to where it is easy for customers to buy. One can distribute your products to his/her customers through: Selling directly to the consumers of the products. Retail distribution and wholesale distribution. Distribution Strategies A successful product or service means nothing unless the benefit of such a service can be communicated clearly to the target market. For product-focused companies, establishing the most appropriate distribution strategies is a major key to success, defined as maximizing sales and profits. Unfortunately, many of these companies often fail to establish or maintain the most effective distribution strategies. Problems that researchers identified include:  Unwillingness to establish different distribution channels for different products,  Fear of utilizing multiple channels, especially including direct or semi-direct sales, due to concerns about erosion of distributor loyalty or inter-channel cannibalization  Failure to periodically re-visit and update distribution strategies.  Lack of creativity, and  Resistance to change. As can be noted from the above points marketing channels are the most important actors for the effective and efficient distribution of products. Marketing Channels are individuals/organizations involved in the process of making the product available for use or consumption by consumers. Channels are used to improve exchange efficiency. It is divided into direct and indirect channels. ASTU, SoHSS, SSU, Entrepreneurship and Business Development (SOSC5003) (Ch-4, Lecture notes) 3  Direct channels: In this type of channel, producers and end users directly interact.  Indirect channels: In this type of channel intermediaries are inserted between seller and buyer. Intermediaries include Merchant Wholesalers, retailers, dealers, agents, brokers; and manufacturer’s branches and offices. Decisions about marketing channels, which help producers deliver goods and services to their target markets, are among the most critical tasks facing management-because the channels that are chosen intimately affect all of the other marketing decisions. For example, the company’s pricing depends on whether it uses a direct channel, discount merchants, or high-quality boutiques. Also, the firm’s sales force and advertising decisions depend on how much training and motivation its dealers need. The following factors should be considered to select the best channel under the condition of using best distribution strategy.  Company Factors: financial, human and technological capabilities of a company to do its business activities.  Market Characteristics: Geography, market density, market size, target market  Product Attributes: perishability, value and sophistication of the product  Environmental Forces: those forces that affect the business-like competition, technology and culture. 4. PROMOTION MARKETING MIX: Refers informing your customers of your products and services and attracting them to buy them. Promotion includes advertising, sales promotion, publicity (non-paid promotion) and personal selling. Use advertising to make customers more interested in buying your products or services. Some useful ways of advertising include signs, boards, posters, handouts, business cards, pricelists, photos and newspapers. One can use sales promotion (short term incentives) to make customers buy more when they come to your business, you could also ensure you maintain attractive displays, let customers try new products, have competitions, give demonstrations and sell complementary products (products that go together). Promotion Strategies Promotion is the communication of the company and its products to customers. Promotional strategy is choosing a target market and formulating the most appropriate promotion mix to influence it. ASTU, SoHSS, SSU, Entrepreneurship and Business Development (SOSC5003) (Ch-4, Lecture notes) 4 An organization’s promotional strategy can consist: i) Advertising: It is any paid form of non-personal, one-way, mass communication about an organization, good, service, or idea by an identified sponsor. ii) Personal selling: This is the two-way flow of communication between a buyer and seller, often in a face-to-face encounter, designed to influence a person’s or group’s purchase decision. iii) Public relations: Public relation is a form of communication that seeks to change the perceptions of customers, shareholders, suppliers, employees and other publics about a company and its products. iv) Sales promotion: This promotion type involves short term incentives of value such as discounts, free samples, and prizes to be offered to arouse interest of customers in buying the good/service. Businesses may use one of the above promotional mix elements to arouse the interest of customers and make them take action by informing, persuading and reminding about the goods and services that they provide to the market. 5. PEOPLE MARKETING MIX People refer to anyone who comes in contact with your customer, even indirectly. Everyone who comes into contact with your customers will make an impression. Many customers cannot separate the product or service from the staff member who provides it, so your people will have a profound effect — positive or negative — on customer satisfaction.  The reputation of your brand rests in the hands of your staff. They must be appropriately trained, well-motivated and have the right attitude.  All employees who have contact with customers should be well-suited to the role.  In the age of social media, every employee can potentially reach a mass audience. Formulate a policy for online interaction and make sure everyone stays on message.  Likewise, happy customers are excellent advocates for your business. Curate good opinion on review sites.  Superior after-sales support and advice adds value to your offering, and can give you a competitive edge. These services will probably become more important than price for many customers over time.  Look regularly at the products that account for the highest percentage of your sales. Do these products have adequate after-sales support, or are you being complacent with them? Could you enhance your support without too much additional cost? ASTU, SoHSS, SSU, Entrepreneurship and Business Development (SOSC5003) (Ch-4, Lecture notes) 5 6. PROCESS MARKETING MIX Many customers no longer simply buy a product or service - they invest in an entire experience that starts from the moment they discover your company and lasts through to purchase and beyond. That means the process of delivering the product or service, and the behavior of those who deliver it, are crucial to customer satisfaction. A user-friendly internet experience, waiting times, the information given to customers and the helpfulness of staff are vital to keep customers happy. Customers are not interested in the detail of how your business runs, just that the system works. However, they may want reassurance they are buying from a reputable or ‘authentic’ supplier. Remember the value of a good first impression. Identify where most customers initially come into contact with your company - whether online or offline - and ensure the process there, from encounter to purchase, is seamless. Ensure that your systems are designed for the customer’s benefit, not the company’s convenience. o Do customers have to wait? o Are they kept informed? o Is your website fast enough and available on the right devices? o Are your people helpful? o Is your service efficiently carried out? o Do your staff interact in a manner appropriate to your pricing? Customers trying to reach your company by phone are a vital source of income and returning value, but all too often they're left on hold. Many will give up, go elsewhere and tell their friends not to use your company - just because of the poor process. 7. PHYSICAL EVIDENCE MARKETING MIX Choosing an unfamiliar product or service is risky for the consumer, because they don’t know how good it will be until after purchase. You can reduce this uncertainty by helping potential customers ‘see’ what they are buying.  A clean, tidy and well-decorated reception area – or homepage - is reassuring. If your digital or physical premises aren’t up to scratch, why would the customer think your service is?  The physical evidence demonstrated by an organization must confirm the assumptions of the customer — a financial services product will need to be delivered in a formal setting, while a children’s birthday entertainment company should adopt a more relaxed approach. ASTU, SoHSS, SSU, Entrepreneurship and Business Development (SOSC5003) (Ch-4, Lecture notes) 6  Some companies engage customers and ask for their feedback, so that they can develop reference materials. New customers can then see these testimonials and are more likely to purchase with confidence.  Although the customer cannot experience the service before purchase, he or she can talk to other people with experience of the service. Their testimony is credible, because their views do not come from the company. Alternatively, well-shot video testimonials and reviews on independent websites will add authenticity. Each of the ‘ingredients’ of the marketing mix is key to success. No element can be considered in isolation — you cannot, for example, develop a product without considering a price, or how it will reach the customer. The process of considering the seven Ps and pulling them together to form a cohesive strategy is called marketing planning. 4.1.2. MARKETING STRATEGIES: SEGMENTING, TARGETING, AND POSITIONING  Market Segmentation: identify and profile distinct groups of buyers who might require separate products or marketing mixes  Market Targeting: evaluate each market segment’s attractiveness and select one or more market segments to enter  Market Positioning: establish and communicate the products’ key distinctive benefits in the market a) MARKET SEGMENTATION Market segmentation is dividing a market into smaller groups of buyers with distinct needs, or behaviours who might require separate marketing mixes. This can be done by identifying bases for segmenting the market and develop segment profiles. Segmenting Consumer markets: consumer market includes all the individuals and households who buy or acquire goods and services for personal consumption. Variables/bases for segmenting consumer markets include: Geographic, Demographic, Psychographic, and Behavioural segmentation. ASTU, SoHSS, SSU, Entrepreneurship and Business Development (SOSC5003) (Ch-4, Lecture notes) 7 Variable Typical Breakdowns A. Geographic Regions North, South, West North, Regions, City Size Under 5,000; 5,000 – 20,000; 20,000- 50,0000; 50,000- 100,000; etc. Density Urban, Sub urban, rural Climate Kolla, Dega, Weina Dega etc B. Demographics Typical Breakdowns Age Under 6, 6-11, 12 – 19, 20 – 34, 35 -49, 50 – 64, 65+ Gender Male, Female Family Size 1-2, 3-4, 5 – 7, 8- 10, 11+ Family Lifecycle Young, single; young, married, no children; young, married, youngest child under 6; young, married, youngest child under 6 or over; older, married with children; older, married, no children under 18; older, single; other Income Under 500, 501 – 1000, 1001 – 2000, 2001 – 4000, 40001 – 5000, above 5,0000 Occupation Professional and technical; managers; officials and proprietors; clerical, sales; craftsmen, foremen; operative; farmers; retired; students; homemakers; unemployed Education Grade school or less; high school graduate; college graduate; post graduate Religion Orthodox, Catholic, Protestant, Muslim, Others Race White, Blacks, Asians, etc. Nationality Ethiopian, Nigerian, Chinese, Indian C. Psychographic Typical Breakdowns Social class Lower lowers, upper lowers, working class, middleclass, upper middles, lower uppers, upper uppers ASTU, SoHSS, SSU, Entrepreneurship and Business Development (SOSC5003) (Ch-4, Lecture notes) 8 Lifestyle Achievers, believers, strivers Personality Compulsive, gregarious, authoritarian, ambitious D. Behavioral Purchase occasions Regular occasion, special occasion Benefits sought Quality, service, economy User status Non-user, ex-user, first-time user, regular user Usage rate Light user, medium user, heavy user Loyalty Status None, medium, strong, absolute Readiness state Unaware, aware, informed, interested, desirous, intending to buy Attitude towards Enthusiastic, positive, indifferent, negative, hostile product A segment must fulfil the following requirements if it is to be successfully exploited:  It must be measurable, or definable: there must be some way of identifying the members of the segment and knowing how many of them there are.  It must be accessible: This means it must be possible to communicate with the segment as a group, and to get the product to them as a group.  It must be substantial: big enough to be worth aiming for.  It must be congruent: the members must have a close agreement on their needs.  It must be stable. The nature and membership of the segment must be reasonably constant. There are three basic strategic options open to marketers:  Concentrated marketing (single segment): This is also known as niche marketing; Tie Rack, Sock Shop and Knicker box follow this approach. The niche marketer concentrates on being the very best within a single tiny segment.  Differentiated marketing (multi-segmented): means concentrating on two or more segments, offering a differentiated marketing mix for each. Holiday Inn aims to attract business travellers during the week, but aims for the leisure market at the weekend, and promotes to families. At the weekend, the hotels often have events for children and special room rates for families. ASTU, SoHSS, SSU, Entrepreneurship and Business Development (SOSC5003) (Ch-4, Lecture notes) 9  Undifferentiated marketing: is about using a “scattergun' approach. The producers who do this are usually offering a basic product that would be used by almost all age groups and lifestyles. The assumptions underlying segmentation are:  Not all buyers are alike.  Sub-groups of people with similar behaviour, backgrounds, values and needs can be identified.  The sub-groups will be smaller and more homogeneous than the market as a whole.  It is easier to satisfy a small group of similar customers than to try to satisfy large groups of dissimilar customers b) MARKET TARGETING Market targeting is the process of evaluating each market segment’s attractiveness and company's objectives and resources; and selecting one or more segment to enter the market.  Target Marketing Strategies/levels 1) Mass/Undifferentiated Marketing: ignore market segment differences and target the whole market with one offer. It focuses on what is common in the needs of consumers rather than on what is different. 2) Segmented/differentiated/marketing: Segmented marketing is a market coverage strategy in which a firm decides to target several groups of market segments and designs separate offers for each 3) Niche (sub-segments) marketing: a strategy in which a firm goes after a large share of one or few niches/segments. Niching lets smaller companies focus their limited resources on serving niches that may be unimportant to or overlooked by larger competitors. 4) Micro marketing: is the practice of tailoring products and marketing programs to suit the tastes of specific individuals and locations. It has two types: Local marketing: cities, neighborhoods, and even specific stores (E.g. Fish T-Shirt in Adama X boutique); and Individual marketing: needs and preferences of individual customers. Individual marketing has also been labeled one -to-one marketing (customized marketing and market of one marketing.) ASTU, SoHSS, SSU, Entrepreneurship and Business Development (SOSC5003) (Ch-4, Lecture notes) 10 c) MARKET POSITIONING It is the battle for mind. It is concerned with the brand's relationship with other brands aimed at the same segment. Positioning is about the place the brand occupies in the minds of the consumers, relative to other brands. It is the way the product is defined by the consumers on important attributes-the place the product occupies in consumers’ minds relative to competing products. It is the act of designing the company’s offering and image to occupy distinctive place in the target market’s mind. Positioning Strategy  Product attributes strategy: focus on their superiority to competitive products based on one or more attributes. E.g. Car: less expensive, prestigious, safer, higher quality, etc.  Benefit positioning: based on the benefit offered. E.g. toothpaste: fighting cavity, good taste, etc.  Use/Application positioning: positioning a product as best for some use or application. E.g. soup: a lunch item, as a sauce, as a dip, etc.  User positioning: as benefit some user group. E.g. Shampoo for swimmers, for children, etc.  Competitor positioning: against competitors. E.g. 7-Up positioned itself as the “un-Cola” the fresh and thirst-quenching alternative to Coke and Pepsi  Product Category positioning: as a leader in a certain product category. E.g. Leader in powder soap, liquid soap or bar soap  Quality/Price Positioning: offering the best value 4.2. OPERATIONS 4.2.1 What is an Operations Management System (OMS)? An operations management system is a collection of processes and procedures that enables a company to effectively manage business practices and achieve the highest level of efficiency with day-to-day operations. Operations management systems are geared towards improving team performance and encouraging them to focus on tasks that are instrumental to their organization's growth. There are different departments in an organization, and each of them has its responsibilities and goals. An OMS generally serves as a guide that ensures these various departments work together to achieve common business goals. An OMS is commonly used in the non-production aspects of a business as well. You can also use it for the management of information systems, administrative processes, enterprise resource planning, supply chain management, inventory management, and so on. ASTU, SoHSS, SSU, Entrepreneurship and Business Development (SOSC5003) (Ch-4, Lecture notes) 11 Why do businesses rely on operations management systems? Businesses rely on operations management systems to run, monitor, and schedule day-to-day activities for many reasons. Using an OMS, a business can examine how its procedures and performance align with its KPIs and make adjustments where necessary.  Service operations management Service means many different things in many different contexts. When we talk to managers it is clear that the word service conjures up many different images. For some it is synonymous with complaints or customer care, for others it is the equivalent of the logistics function, or internal services such as accounting or personnel. From the customers' perspective, service is the combination of the customers' experience and their perception of the outcome of the service. The experience at a theme park, for example, includes the experience of the rides and the restaurants, and the outcomes will include the food and drink, the emotions of enjoyment and their view of value for money at the end of the day. It is important to note that customers also have to make an input to the service. These customer inputs include their time and effort plus the financial cost (i.e. the price they pay for the service). A customer can only receive the “theme park service” (and have a good day out) if they give up some time, go to the theme park, pay to get in and make the effort to use the rides and enjoy themselves. Service operations management is the term that is used to cover the activities, decisions and responsibilities of operations managers in service organizations. These managers are often called operations managers but many other titles are used, such as managing partners in consultancy firms, nursing managers in hospitals, head teachers in schools, fleet managers in transport companies, call center managers, customer service managers, and restaurant managers. Operations management for service and manufacturing ASTU, SoHSS, SSU, Entrepreneurship and Business Development (SOSC5003) (Ch-4, Lecture notes) 12 All manufacturers set out to perform the same basic function: to transform resources into finished goods. To perform this function in today's business environment, manufacturers must continually strive to improve operational efficiency. They must fine-tune their production processes to focus on quality, to hold down the costs of materials and labor, and to eliminate all costs that add no value to the finished product. Making the decisions involved in the effort to attain these goals is the job of the operations manager. That person's responsibilities can be grouped as follows:  Production planning. During production planning, managers determine how goods will be produced, where production will take place, and how manufacturing facilities will be laid out.  Production control. Once the production process is under way, managers must continually schedule and monitor the activities that make up that process. They must solicit and respond to feedback and make adjustments where needed. At this stage, they also oversee the purchasing of raw materials and the handling of inventories.  Quality control. Finally, the operations manager is directly involved in efforts to ensure that goods are produced according to specifications and that quality standards are maintained. ASTU, SoHSS, SSU, Entrepreneurship and Business Development (SOSC5003) (Ch-4, Lecture notes) 13  Human resource: Human resource manager manages the people in your company. HR meets employee needs in a variety of administrative areas, offering support and guidance on things like career development, conflict resolution and job performance. Since HR handles the bulk of a company's administrative duties, other employees can focus on completing their specific job duties and responsibilities. 4.3 FINANCE 4.3.1. Financing new venture (Types of finance) Financing is needed to start a business and ramp it up to profitability. There are several sources to consider when looking for start-up financing. But first you need to consider how much money you need and when you will need it. The financial needs of a business will vary according to the type and size of the business. For example, processing businesses are usually capital intensive, requiring large amounts of capital. Retail businesses usually require less capital. Debt and equity are the two major sources of financing. 1) Permanent Capital The permanent capital base of a small firm usually comes from equity investment in shares in a limited company or share company, or personal loans to form partners or to invest in sole proprietorship. It is used to finance the start - up costs of an enterprise, or major developments and expansions in its life - cycle. It may be required for a significant innovation, such as a new product development. Equity from private investors may also be sought to take a small firm into the medium or large size category or as an exit route for the original investors. Ideally, permanent capital is only serviced when the firm can afford it; investment in equity is rewarded by dividends from profits, or a capital gain when shares are sold. It is not therefore a continual drain from the cash flow of a company, such as a loan, which needs interest and capital repayments on a regular basis. Equity capital usually provides a stake in the ownership of the business, and therefore the investor accepts some element of risk in that returns are not automatic, but only made when the small firm has generated surpluses. ASTU, SoHSS, SSU, Entrepreneurship and Business Development (SOSC5003) (Ch-4, Lecture notes) 14 2) Working Capital It is short-term finance. Most small firms need working capital to bridge the gap between when they get paid, and when they have to pay their suppliers and their overhead costs. Requirements for this kind of short-term finance will vary considerably by business type. For example, a manufacturer or small firm selling to other businesses will have to offer credit terms, and the resulting debtors will need to be financed; the faster the growth, the more the debtors, and the larger the financial requirement. A retailer, a restaurant, a public house, or other types of outlets selling directly to the public will often collect cash with the sale, however, earns the cash flow will be advantageous. In some cases, this will be sufficient to finance the start - up of a small firm, so that suppliers are effectively financing the business. However, even these types of business may need working capital to fund temporary loses, caused by seasonal fluctuations, or to cope with prepayment of expenses such as rent payable in advance. Although short-term finance is normally used to fund the trading of a business, it is also sometimes needed to purchase assets, which are short-lived such as company vehicles, which may be changed every 4 or 5 years. 3) Asset Finance It is medium to long term finance. The purchase of tangible assets is usually financed on a longer-term basis, from 3 to 10 years, or more depending on the useful life of the asset. Plant, machinery, equipment, fixtures, and fittings, company vehicles and buildings may all be financed by medium or long-term loans from a variety of lending bodies. 4.3.2 Sources and use of finance Managing assets effectively is crucial because underwriting assets creates liabilities that, if uncontrolled, can devastate a business. Cash is the most important asset to manage, and to generate cash, business must generate sales. In order to generate sales, most businesses must have inventory and facilities. Service enterprises need offices and staff, and manufacturers face more extensive requirements, including plant and equipment. Assets management for the start-up entrepreneur is a matter of determining what is needed to support sales, and then gaining access to those assets at the optimum cost. The term “gaining access” is used because there are alternatives other than a cash purchase of assets. Equipment can be leased, for example, and office furniture can be rented. ASTU, SoHSS, SSU, Entrepreneurship and Business Development (SOSC5003) (Ch-4, Lecture notes) 15 Manufactured products initially can be subcontracted rather than made, thereby avoiding the expense of procuring materials, equipment, and plant facilities. Entrepreneurs, therefore, have choices about what assets to obtain, when they must be obtained, and how to gain access to them. The critical issue in financing is to assure sufficient cash flow for operations, as well as to plan financing that coincides with changes in the enterprise. Businesses obtain cash through two general sources, equity or debt, and both can be obtained from literally hundreds of different sources. The two commonly known sources of finance may be classified into two as follows: i) EQUITY FINANCING (INTERNAL SOURCES) Equity financing represents the personal investment of the owner (or owners) in a business, and it is sometimes called risk capital because these investors assume the primary risk of losing their funds if the business fails. However, if the venture succeeds, they also share in the benefits, which can be quite substantial. The use of equity capital thus requires no repayment in the form of debt. It does, however, require entrepreneurs’ earnings (if there are any) and usually to have a voice in the business ‘s future directions. In short, it requires sharing the ownership and profits with the funding sources. Since no repayment is required, equity capital can be much safer for new ventures than debt financing. Yet the entrepreneur must consciously decide to give up part of the ownership in return for funding. Owner’s capital or owner’s equity represents the personal investment of the owner(s) in a business and it is sometimes called risk capital because these investors assume the primary risk of losing their funds if the business fails. However, if the venture succeeds, they also share in the benefit. Sources of equity finance (capital) 1. Personal saving: The first-place entrepreneurs should take for startup money is in their own pockets. As a general rule, entrepreneurs should provide at least half of the start- up funds in the form of equity capital. Savings can be done through:  Small but regular deposits – this happen when someone has decided to sacrifice current consumption (use of assets, e.g. of money and goods) in order to increase the availability of assets for future consumption. It therefore involves postponing expenditures in order to accumulate a sizeable number of resources for future use.  Automatic deductions from salaries, wages or income - this type of saving is not voluntary. It is a system used by most employers under the labor law. ASTU, SoHSS, SSU, Entrepreneurship and Business Development (SOSC5003) (Ch-4, Lecture notes) 16 Advantage of saving  To provide for specific needs in the future  To have access to monetary or other assets whenever needed  To ensure financial independence  To make one’s own resources inaccessible for others without one’s approval  To safely store surplus  To acquire skills for proper money management and self-discipline  To qualify for certain types of loans 2. Friends and relatives: After emptying their own pockets, entrepreneurs should turn to friends and relatives who might be willing to invest in the business. The entrepreneur is expected to describe the opportunities and threats of the business. 3. Partners: An entrepreneur can choose to take on a partner to expand the capital formation of the proposed business. 4. Public stock sale (going public): In some case, entrepreneurs can go public by selling share of stock in their corporation to outsiders. This is an effective method of raising large amounts of capital. 5. Angels: These are private investors (or angles) who are wealthy individuals, often entrepreneurs, who invest in the startup business in exchange for equity stake in these businesses. 6. Venture capital companies: Are private, for-profit organizations that purchase equity positions in young business expecting high return and high growth potential opportunity. They provide start - up capital, development funds or expansion funds Comparison of Angles and Venture Capitalist Angels Venture Capitalists (VCs) Individuals who wish to assist others in their Finance, small scale new technology and business venture any risky idea. Usually found through networks, Funds are more specialized versus Reasonable expectations on equity position homogeneous and ROI High expectations of equity position and Often passive, but realistic perspective ROI about business venture ASTU, SoHSS, SSU, Entrepreneurship and Business Development (SOSC5003) (Ch-4, Lecture notes) 17 ii) DEBT FINANCING (EXTERNAL SOURCES) Debt financing involves borrowing funds from creditors with the stipulation of repaying the borrowed funds plus interest at a specified future time. For the creditors (those lending the funds to the business), the reward for providing the debt financing is the interest on the amount lent to the borrower. Debt financing may be secured or unsecured. Secured debt has collateral (a valuable asset which the lender can attach to satisfy the loan in case of default by the borrower). Conversely, unsecured debt does not have collateral and places the lender in a less secure position relative to repayment in case of default. Debt financing (loans) may be short-term or long-term in their repayment schedules. Generally, short-term debt is used to finance current activities such as operations while long-term debt is used to finance assets such as buildings and equipment. Borrowed capital or debt capital is the external financing that small business owner has borrowed and must repay with interest. There are different sources as discussed here below: a) Commercial banks: Commercial banks are by far the most frequently used source for short term debt by the entrepreneur. In most cases, commercial banks give short term loans (repayable within one year or less) and medium-term loan (maturing in above one year but less than five years), long term loans (maturing in more than five years). To secure a bank loan, an entrepreneur typically will have to answer a number of questions, together with descriptive commentaries.  What do you plan to do with the money?  When do you need it?  How much do you need?  For how long do you need it?  How will you repay the loan? Bank Lending Decision: -The small business owner needs to be aware of the criteria bankers use in evaluating the credit worthiness of loan applications. Most bankers refer to the five Cs of credit in making lending decision. The five Cs are capital, capacity, collateral, character, and conditions. 1. Capital: A small business must have a stable capital base before a bank will grant a loan. 2. Capacity: The bank must be convinced of the firm’s ability to meet its regular financial obligations and to repay the bank loan. ASTU, SoHSS, SSU, Entrepreneurship and Business Development (SOSC5003) (Ch-4, Lecture notes) 18 3. Collateral: The collateral includes any assets the owner pledges to the bank as security for repayment of the loan. 4. Character: Before approving a loan to a small business, the banker must be satisfied with the owner’s character. The evaluation of character frequently is based on intangible factors such as honesty, competence, willingness to negotiate with the bank. 5. Conditions: The conditions surrounding a loan request also affect the owner’s chance of receiving funds. Banks consider the factors relating to the business operation such as potential growth in the market, competition, location, and loan purpose. Another important condition influencing the banker’s decision is the shape of the overall economy including interest rate levels, inflation rate, and demand for money. The higher a small business scores on these five Cs, the greater its chance will be of receiving a loan. In the Ethiopian context, collateral is very critical. b) Micro Finance Institutions (MFIs): provide financial services mainly to the poor, micro and small enterprises. c) Trade Credit: It is credit given by suppliers who sell goods on account. This credit is reflected on the entrepreneur’s balance sheet as account payable and in most cases, it must be paid in 30 to 90 or more days. d) Equipment Suppliers: Most equipment vendors encourage business owners to purchase their equipment by offering to finance the purchase. e) Account receivable financing: It is a short-term financing that involves either the pledge of receivables as collateral for a loan. f) Credit unions: Credit unions are non-profit cooperatives that promote savings and provide credit to their members. But credit unions do not make loans to just any one; to qualify for a loan an entrepreneur must be a member. g) Bonds: A bond is a long-term contract in which the issuer, who is the borrower, agrees to make principal and interest payments on specific date to the holder of the bond. Bonds have always been a popular source of debt financing for large companies in the western world. h) Traditional Sources of Finance: “Idir”, “Iquib” ASTU, SoHSS, SSU, Entrepreneurship and Business Development (SOSC5003) (Ch-4, Lecture notes) 19 4.4 HUMAN RESOURCE 4.4.1 Human resource planning Human resource planning (HRP) is the continuous process of systematic planning to achieve optimum use of an organization's most valuable asset—quality employees. It’s a process used to ensure that businesses have employees with the right skills, at the right time, and with the appropriate capacity to meet strategic goals. HRP ensures the best fit between employees and jobs while avoiding manpower shortages or surpluses. It is an important investment for any business as it allows companies to remain both productive and profitable. HRP allows companies to plan ahead so they can maintain a steady supply of skilled employees. The process is used to help companies evaluate their needs and to plan ahead to meet those needs. It needs to be flexible enough to meet short-term staffing challenges while adapting to changing conditions in the business environment over the longer term. To help prevent future obstructions and satisfy their objectives, HR managers have to make plans to do the following:  Find and attract skilled employees  Select, train, and reward the best candidates  Keep employees motivated  Cope with absences and deal with conflicts  Succession planning  Promote employees or let some of them go  Keep tabs on trends that could impact future supply and demand Identifying a company's skill set and targeting the skills a venture needs enables it to strategically reach business goals and be equipped for future challenges. The goal of HR planning is to have the optimal number of staff to make the most money for the company. Staying on top of this and achieving effective HRP can ensure that the company:  Gets the best out of current employees and increases their value  Has a competitive advantage in its industry  Is better placed to respond to challenges and adapt to changes There are four general, broad steps involved in the HRP process. Each step needs to be taken in sequence in order to arrive at the end goal, which is to develop a strategy that enables the company to successfully find and retain enough qualified employees to meet its needs. ASTU, SoHSS, SSU, Entrepreneurship and Business Development (SOSC5003) (Ch-4, Lecture notes) 20 1st Analyzing labor supply (Current workforce analysis) The first step of HRP is to identify the company's current human resources supply. In this step, the HR department studies the strength of the organization based on the number of employees, their skills, qualifications, positions, benefits, and performance levels. Here workforce analysis involves a comprehensive evaluation of the current workforce’s size, skills, and capabilities. It assesses aspects such as employee productivity, job satisfaction, skill sets, including technical and soft skills, seniority and turnover rates. 2nd Forecasting Labor Demand (Projecting future demand) The second step requires the company to outline the future of its workforce. Here, the HR department can consider anything that factors into the future needs of the company, including promotions, retirements, layoffs, and transfers. The HR department can also look at external conditions impacting labor demand, such as new technology that might increase or decrease the need for workers. Projecting future demand involves estimating the human resource requirements needed for an organization to meet its future goals. This forecast considers factors such as business growth, market expansion, technological advancements, and changes in operational processes. 3rd Balancing labor demand with supply (Gap analysis) The third step in the HRP process is forecasting the employment demand. HR creates a gap analysis that lays out specific needs to narrow the supply of the company's labor versus future demand. Gap analysis compares future human resource needs against the current workforce’s capabilities to identify discrepancies or gaps. A way to conduct gap analysis is to monitor where previous projects went wrong to pinpoint inefficiencies in your workflows, such as miscommunication or a deficit of specific skills. This analysis will often generate a series of questions, such as:  Should employees learn new skills?  Does the company need more managers?  Do all employees play to their strengths in their current roles? 4th Developing and implementing a plan The answers to questions from the gap analysis help HR determine how to proceed, which is the final phase of the HRP process. HR must now take practical steps to integrate its plan with the rest of the company. The department needs a budget, the ability to implement the plan, and a collaborative effort with all departments to execute that plan. The final step is developing and implementing HR plan (strategies) to cover your company’s specific needs and requirements. ASTU, SoHSS, SSU, Entrepreneurship and Business Development (SOSC5003) (Ch-4, Lecture notes) 21 These strategies may include creating a resource plan (i.e. an in-depth document that contains information on your employees, their availability, and their scheduled time); Employee engagement and retention strategies (e.g. drafting career development plans, introducing new benefits packages and competitive compensation, and promoting a healthy organizational mindset); and implementing modern software (i.e. resource planning tools such as ERP which can support various steps of the HRP process, with features such as time off management, billable hours tracking, financial forecasting, real- time reporting, workflow automations, and more). 4.4.2 Employee handling One of the crucial ingredients of running a successful business. By developing and improving your leadership skills, you can create an efficient and functional environment in the workplace. Employees are the source of power in your organization. They accelerate its growth on a daily basis. Hardworking and productive employees will increase the chances of business success while lazy and unhappy employees will bring harm to your business. When employees are demotivated and unproductive, the turnover rate will be high and extra costs will be spent on hiring. It's quite unfortunate to spend tons of money and time hiring and training employees only for them to leave and force you to start the process again. Managing your employees effectively and practicing active listening will help them achieve their goals in the long run. Simple steps to establishing highly engaged people taking self-inspired action … for results in your workforce include:  Helping your people to understand something about how your business works;  Helping them to understand where their job fits into the business and how it adds value – the purpose of my work;  Encouraging your people to hold themselves accountable and take responsibility, as adults;  Letting people know how the business is doing, reinforce their role in achieving business success; and  Recognizing and rewarding performance using a properly designed approach (encouraging entrepreneurial behavior) In addition to the above techniques, there are ways of managing employee effectively such as hiring the best, measuring the performance of employees regularly, communicating openly, encourage employees to share their opinions, setting clear goals, rewarding high performers, and ensuring that employees enjoy working. ASTU, SoHSS, SSU, Entrepreneurship and Business Development (SOSC5003) (Ch-4, Lecture notes) 22 4.5 LEGAL ISSUES FOR THE ENTREPRENEUR In establishing a new venture, the entrepreneur should deal with various legal issues. Understanding the legal issues involved inentrepreneurship and taking appropriate measures protect the entrepreneur from later legal complications which might hinder the smooth running of the new business. In this regard, the entrepreneur must seek the assistance of a competent attorney who is in a better position to understand all possible circumstances and outcomes related to any legal action. Some of the legal issues the entrepreneur should address in starting a new business are discussed below. 4.5.1 FORMS OF BUSINESS OWNERSHIP From point of view of organization or ownership, there are five main forms of organizations. A business may be organized by an individual as sole proprietorship; by mutual agreement of two or more persons as partnership; by an association of persons who form a cooperative society or by a number of persons as a joint stock company or corporation or else it may be organized by a government as a public enterprise. For entrepreneurship purposes, however, the chief forms of ownership or organization are: sole proprietorship, partnership, corporation, and co-operative society. A) SOLE PROPRIETORSHIP A form of business organization in which an individual introduces his/her own capital, skill and intelligence in the management of its affairs and is solely responsible for the results of its operation known as Sole proprietorship. This form is also known as individual or single proprietorship, sole ownership or individual enterprise. This business is a very common form of ownership carried out in different areas where the capital required is small and the risk is not heavy. In such form of ownership, speed of decision is very important and special regard has to be shown to the needs, tastes and fashions of customers. Examples can be photo studios, bookshops, bakeries, small restaurants, grocery and retail stores, and other elementary business where a personal service is important.  Advantages of Sole Proprietorship  Ease and low cost of formation and dissolution: It is easy to form a sole proprietorship; the legal formalities or other complicated procedures required are less. Anyone with limited means can start independent business and gets him/herself employed.  Direct motivation and personal care: In this form of organization, all the profits of the business belong to one person who also faces every loss. This gives greater incentive to the owner to take personal interest in the business and manage it efficiently. ASTU, SoHSS, SSU, Entrepreneurship and Business Development (SOSC5003) (Ch-4, Lecture notes) 23 As only one person is dealing with the business, the proprietor can come into close contact with the customers; and earn goodwill by attending the customers' demands promptly and satisfactorily.  Freedom and promptness in action: In matters of business dealing, the sole proprietor can take his/her own decision and there is no question to his/her authority. This type of freedom of action promotes initiative and self-reliance. As there is no need to consult other persons, the sole proprietor can take prompt decision.  Business secrecy: In this type of business, it is easy to maintain the secrecy of business. Since confidential information is a key to success for a competitive business, it is unlikely that the owner will leak the information. Thus, any change he/she wants to make regarding business methods or policies can be done without the knowledge of others.  Social desirability: From the social point of view, the sole proprietorship is desirable as it ensures that too much wealth does not concentrate in the hands of few. It may be one of the ways in which equitable distribution of wealth is ensured. In addition, the unlimited liability of the proprietor ensures members of the society involving in these forms of business organization to put forth their maximum effort, which indirectly helps the society to prosper.  Disadvantages of Sole Proprietorship  Limited resource and size: In this type of concerns, the resources, that is, the capital and skill are very limited. As only one person is responsible for the business, capital is limited to his/her capacity. Lending institutions may hesitate to lend large sum of money, and suppliers may be unwilling to make credit sales in large quantities to such a business because it is neither safe nor dependable, which makes the business to remain limited in size.  Unlimited liability: The sole proprietor will be legally liable for all debts of the business. At times of loss and bankruptcy, if the business asset is not sufficient to satisfy the obligations or debts of creditors, her personal and real property may be required to pay off. This concept of unlimited liability is on the one hand a source of courage and real devotion. On the other hand, it makes the owner to be fearful and averse to risk.  Limited management skill: While running a business many complex and difficult problems may arise requiring wide array of knowledge in management. This makes the possibility of solving the problems difficult for the sole proprietor in such form of business. ASTU, SoHSS, SSU, Entrepreneurship and Business Development (SOSC5003) (Ch-4, Lecture notes) 24  Uncertain future: This kind of business suffers from instability or lack of continuity. This business may come to end if the owner cannot continue to run the business due to death, insanity, imprisonment or bankruptcy. B) PARTNERSHIP When it will be difficult to find a single person possessing adequate capital, technical skill, knowledge, and managerial experience; there arises a need for a formation of business where two or more persons join together, contribute their capital and skills. This form of association of two or more persons to carry on a business as co-owners for profit whereby the relationship is based on agreement is known as partnership. The following are general characteristics of a partnership: a. Formation: This form of business requires the existence of two or more persons entering into a contract. b. Capital contribution: In this form of business, every partner shall make a contribution which may be in money, debts, other property or skill. c. Management: Every partner has the right to take an active part in the management of the firm's affair. But the partnership agreement may provide the pattern of managing by indicating how the management activity is shared among the different partners according to their experience and knowledge. d. Duration: The partnership firm legally comes to an end if any of the partners withdraws or is no longer able to be a partner under the law or declared bankrupt. However, if the remaining partners agree to work together under the original firm name and style, the firm will not be dissolved and will continue its business after settling the claims of the outgoing partner. Under some conditions, the business organization can be dissolved if the purpose has been achieved or cannot be achieved and where the partners agree to dissolution prior to the expiry of the term for which the business was formed. e. Other legal characters  Unlimited liability: The liability of each partner of the firm is unlimited in respect of the firm's debts. The liability of partners is joint; in a sense that the creditors can recover their dues from the property of any or all partners in case the firm's assets are insufficient.  Implied agency: The partner will be liable for the faults and wrongful acts of a co-partner while acting for the business. Since every partner has the right to take part in the management activity, when acting on his/her given a specified area, every partner has an authority to act on behalf of ASTU, SoHSS, SSU, Entrepreneurship and Business Development (SOSC5003) (Ch-4, Lecture notes) 25 his/her fellow partners and the firm in the ordinary course of business. Thus, he/she is an agent of the firm and that of the other partners. This indicates that the firm is responsible for every mistake or fraud committed by the partner in the course of business and the partner's knowledge will be treated as knowledge of the firm because he/ she is an agent of the firm and that of other partners. Outside parties which enter into a contract with a partner are entitled to believe that the firm also agrees to the contact.  Utmost good faith: there must be the highest standard of honest among partners. Partnership agreement is based on mutual confidence and trust of partners.  No separate legal entity: the partnership firm has no independent legal existence apart from the persons who constitute it. In the eyes of the law, there is no distinction between the partners and the firm.  Restriction on transfer of interest: A partner cannot transfer his/her share or give his/her ownership to outsiders without the consent of other partners.  Unanimity of consent: No change may be made in the nature of business and no partner can act out of the specified way or make major and special decision without the consent of all the partners. Types of Partnership  General Partnership: This form of partnership consists of partners who are jointly, severally, partially and fully liable as between themselves and to the partnership undertaking. Under this form, all the parties who are named as the general partners have unlimited liability that is, if the business asset is insufficient, debt coverage goes to the extent of the partners' personal assets. The partners also face the risk of implied authority in a sense that the partners will be liable for the wrongful acts of a co-partner in the course of the firm's business. More importantly, the general partners have the right to actively participate in the management affair of the business. Therefore, the ongoing discussion about partnership basically refers to this type of partnership.  Limited Partnership: This type of partnership is a firm that necessarily consists of two classes of partners: the general partners who are liable jointly, severally and who retain all the rights and obligations and limited partners who are only liable to the extent of their contribution in the business. In other words, a limited partnership has at least one general partner and at least one limited partner. The limited partners are basically required to increase the capital of the business. Since their liability is limited, their rights are also restricted and they cannot take part in the management of the business and their act does not bind the firm. ASTU, SoHSS, SSU, Entrepreneurship and Business Development (SOSC5003) (Ch-4, Lecture notes) 26 The limited partners have the right to inspect the books of the firm for their information and may advise the general partners. Again, the retirement, death, insanity or bankruptcy of these special partners does not dissolve the partnership. The limited partner cannot assign her share to an outsider without the consent of the general partners. A limited partner should be registered under the law. It is necessary to provide information to the public about the capital contribution of the limited partners and the extent of their liability. The firm should make public who are the limited partners and general partners so that outsiders could specifically know whose personal assets they can claim at times when business assets are not sufficient to cover debts and other obligations. Non-registration or no publicity makes the limited partners to be treated as general partners and the liability will be unlimited.  Advantages of Partnership  Ease of organization: Except some formality, partnership is quiet easily formed. All that is required is an agreement among partners. The initial expenses are less and legal formalities are simple.  Large financial and managerial resources: compared sole proprietorship, in this form of organization the capital to be raised will be more because the financial resources of two or more persons will be available and this will make the business to enjoy high credit standing and get more credit. Moreover, because the talents and management of two or more persons are combined, the venture will be better managed.  Personal supervision: partners look after the business personally and guard against wastage and other inefficiencies because they are initially interested in the success of the business  Reduced risk: The loss incurred by the firm will be shared by all partners and hence the share of lose each partner will be less than the one in the case of sole proprietorship.  Disadvantage of partnership  Unlimited liability: if the assets of the partnership are not sufficient to meet the obligation creditors may choose to sue any or all to satisfy the debts.  Risk of implied authority: a dishonest or incompetent partner, by his/her acts, misjudgment or fault, may put the firm in difficulties because his/her acts would bind the firm and the remaining partners.  Lack of harmony: As every partner has equal voice in the management, everyone would try to promote his/her personal interest, which may lead to internal frictions and misunderstandings. ASTU, SoHSS, SSU, Entrepreneurship and Business Development (SOSC5003) (Ch-4, Lecture notes) 27  Lack of continuity: partnerships may come to an end, even though not in all cases, due to death, retirement, or withdrawal of a partner for any reasons like dissatisfaction, bankruptcy, or any serious disagreement among partners or by court order. C) CORPORATION Corporation is defined as an artificial person recognized by law, with distinctive name, a common seal comprising transferable shares of fixed values, carrying limited liability, and having a perpetual existence.  Features of corporation a. Separate legal entity: The rights and privileges are given to the corporation by its charter (charter is an instrument granting the corporation the right to operate and defines the restrictions and procedures under which it may do so), which is granted by the state in which it is incorporated. Thus, the corporation becomes a legal entity and is granted the right to manage its own affairs, the right to sue and be sued, and the right to own and dispose property. b. Limited liability: Since the company is a separate legal entity, its debts are its own. Shareholders of the corporation cannot be held liable to pay more than the face value of the share standing in their names or the contribution made. In other words, personal assets will not be required to cover debts and other obligations in case the business fails to settle. c. Transferability of shares: Shareholders can transfer their share to others without consulting other shareholders. The owners can sell their shares or give freely for anyone as they wish without the consent of other shareholders. d. Perpetual existence: A corporation can be dissolved in only three ways; by court order, by the approval of the majority of the stockholders or by expiration of the corporate charter. Corporation is not affected' or interrupted by the death, insolvency or retirement of any shareholder or director. e. Common seal: A company, not being a natural person, cannot sign documents for itself. Therefore, the common seal with the name of the company engraved on it is used as a substitute for its signature. f. Separation of ownership from management: Here all owners, large in number, do not have the opportunity of managing the day-to-day working of the company. The shareholders who own the capital are kind of absentee owners who are engaged in their respective locations or activities while holding shares of the company. ASTU, SoHSS, SSU, Entrepreneurship and Business Development (SOSC5003) (Ch-4, Lecture notes) 28 Corporate Structure: There are three groups that comprise the corporate structure: the shareholders, the board of directors and the officers of the corporation. Stockholders: The stockholders are owners of the corporation. They are individuals who buy shares of stock that show proof of ownership. Stockholders do not own property in same legal sense that the proprietor or partners do in the other forms of ownership. Besides, the corporation must have a charter. A corporate charter is the written by law of the company and usually contains:  Name and address of the corporation  Names and addresses of the directors  The purposes for which the corporation is formed  Amount and kind of stock to be authorized (common/preferred stock)  Privileges and voting power of each stock  Duration of life of the corporation On approval, the charter becomes a three-way contact between the state and the stockholders, the stockholders and the corporation, and the incorporators and the state. By electing a board of directors, stakeholders delegate their authority and usually exercise only indirect control over the affairs of the business. The board of directors, which consists of three to twelve individuals in Ethiopia, is the chief governing body of the corporation. Because they hold a position of great trust, directors may be held personally liable to the stockholders for gross negligence, fraud, or the use of corporate assets for their personal gains. They cannot be liable for mistakes in business judgment. The board of directors is responsible for the following activities.  Declaration of dividends: the board has the sole responsibility of declaring dividends. This involves such decisions as the percentage of the earnings to be retained and the method of dividend payment (cash and/or stock).  Major decision making: the board decides on major areas including expansion, withdrawal, change of product, and the selection of the corporate officers. The board of directors elects the officers of the corporation who are directly responsible for running the corporation. The board usually appoints a president, executive vice president and a number of additional vice presidents who are responsible for various divisions of the firm. These officers act as agents of the firm because they have the power to bind the corporation in contracts. ASTU, SoHSS, SSU, Entrepreneurship and Business Development (SOSC5003) (Ch-4, Lecture notes) 29 Advantages of Corporation i. Financial strength: Corporations can raise a large amount of capital by issuing shares to the general public. They can also expand as long as investors are willing to purchase additional shares of stock. Corporations find it easier to borrow large sums of money because the amount pays large interests to those agencies that market securities. ii. Limited liability: The shareholder's liability is limited to the extent of the face value of her share in the corporation. Thus, the organization can attract more investors who do not want to take more risk. The creditors cannot look beyond the assets of the corporation to settle their debts because the corporation is a separate legal entity that owes all the debt. iii. Scope of expansion: As large capital is invested, it would be possible to use up-to-date equipment and expensive machinery and carryout operation at large scale. This will make the cost of production less resulting in a higher profit and creating the possibility to have big reserve that can be used for the expansion of the company. iv. Stability: Corporations enjoy perpetual succession. That is bankruptcy, insanity or death of a shareholder, change in management, or dispute over the ownership cannot affect the continuity of a corporation. Thus, corporations are well suited for business which requires a long period to establish and consolidate. v. Efficient and bolder management: There is availability of managerial talent because the most efficient persons may be chosen as directors and if found unsatisfactory, they can be fired. Since the persons who manage the company have relatively smaller financial stake, they will have an adventurous spirit to take big risks and bring success to the business. vi. Diffused risk: The risk is spread over several members of the company and is reduced for each member, which helps the business to attract more investors and to venture on new opportunities. vii. Voting: Normally, each share of stocks carries with it one vote. If a shareholder can be present at the meeting, they may cast their votes in person. If, as is more likely, they cannot attend the meeting, they may send their proxy, which is a written authorization for someone else to cast their votes for them. ASTU, SoHSS, SSU, Entrepreneurship and Business Development (SOSC5003) (Ch-4, Lecture notes) 30 Disadvantages of Corporation i. Difficulty of formation: Before a company can start functioning there are numerous requirements of law to be complied with. Generally, the legal procedures required to establish corporations are very complicated and lengthy. In addition, establishing corporations requires huge sum of money, and thus large number of people have to be approached for raising the required capital. ii. Lack of owner's personal interest: these forms of organizations are managed by directors and paid officials and employees who may not be expected to have such an intense interest in the success of the business. Besides, the owners who usually own a very small of the business will not put forth their maximum effort on the total success of the business like the previous forms of organizations. iii. Delay in decision-making: Corporations do not enjoy the same amount of flexibility and promptness of decisions as the other forms of business do. Decisions, specially, on key issues requiring general meeting of shareholders may be delayed because of the time interval between meeting, difficulty of getting the required number of members to pass decisions and the presence of diverse interests which may lead to disagreements. iv. Oligarchic fraudulent management: Though in theory, it is said democratic principles are followed in the management of corporations, in practice the concentration of managing power is in the few hands of the managing directors thus leading to oligarchy of managing or rule- by few. Many times dishonest persons at the top succeed in cleverly misleading and cheating the shareholders and as a result leading the companies to be managed by cheating and fraudulent hands. v. Double tax: on the average, not less than forty percent of the profit is taxed as federal income tax. Corporate profit tax and personal income tax on shareholders’ dividends by states are common taxes imposed on corporations. vi. Lack of secrecy: Corporations are required by law to report their financial performance annually to the general public. Therefore, the large corporation is unable to keep confidential certain areas such as profits or dividends. This allows competitors to alter their plans based on the corporation’s open books. ASTU, SoHSS, SSU, Entrepreneurship and Business Development (SOSC5003) (Ch-4, Lecture notes) 31 D) COOPERATIVES Co-operatives can be defined in the widest sense as voluntary organization of economic units, based on equity, carrying out an allocated or self-given economic objective.  Features of cooperatives i. Open membership: a co-operatives society is a voluntary association of persons and not of capital, therefore; any person can join a co-operatives society of his/her free will and can leave it at any time after giving due notice to the society. While leaving, he/she can withdraw his/her capital from the society but, cannot transfer his/her share to another person. ii. Equality of voting rights: in a cooperative society, each one of the members has only one vote no matter what proportion the capital he/she has contributed. One man, one vote, is the basic principle. iii. Democratic control: In this form of organization, there is self-administration of the society based on the equality of all members. The influence on decision-making is not related to capital invested but to the participation of the person. The supreme power in the co-operative society is the assembly of its members, the general meeting that is usually well attended by members as they are from the same local area. It is also the members that approve the policy and by-laws of the co- operatives. iv. Disposal of profit or surplus: In co-operative societies, any excess income is divided between allocations for reserve fund and distribution for members. The amount allocated as a reserve fund is used for covering any contingencies and for expansion of the business. The reserve fund is also used for improving the quality of life of the community. The actual distribution of income to members takes two forms.  Return paid on the capital invested by members is considered as form of interest rather than dividends.  Patronage refunds or rebates method profit, which is distributed in relation to the members' contribution to the society. v. Service motto: A co-operative society is organized primarily with the objective of rendering maximum service to its members in a certain field. It does not aim at profit at the cost of its members, for it is formed basically to provide certain essential facilities to its members. This does not mean that a co-operative society will never work for profit. It is quite usual to such societies to make profits by extending services to non-members. ASTU, SoHSS, SSU, Entrepreneurship and Business Development (SOSC5003) (Ch-4, Lecture notes) 32 vi. The capital for the enterprise is subscribed only by members. TYPES OF COOPERATIVES The principal types of cooperatives are the following. A. Consumers’ Cooperatives: These societies are formed by ordinary people for their day-to-day requirements of goods at cheap prices. These societies make their purchases in bulk from wholesalers at whole sale rates and sell the goods to members and sometimes even to non- members. B. Producers' Cooperatives (industrial Cooperatives): These are business enterprises organized by small producers for securing some of the benefits of large producers. The objective is to assist the small producers that suffer from lack of capital and other equipment. C. Marketing Cooperatives: marketing co-operatives are voluntary associations of independent producers organized to arrange for the sale of their output. D. Housing Cooperatives: These are associations of persons who are interested either in securing the ownership of a house or in obtaining accommodation at fair and reasonable rents. E. Credit Cooperatives: These are voluntary associations of persons with moderate means formed with the objective of extending and developing short-term financial accommodation and the habit of saving among the members. F. Cooperative farming societies: The co-operative farming societies are basically agricultural co- operatives formed with the objective of achieving the benefits of large-scale farming and maximizing agricultural output. Such societies are advocated for those agricultural countries that" suffer from fragmentation and sub-division of agricultural holdings of farmers. G. Processing cooperatives H. Labor and construction co-operatives Advantages of Cooperatives i. Democratic management: The management of a co-operative society is based on the basic democratic principle of one-man-one-vote. A small group of members cannot dominate its affairs even if it happens to command more capital than the other members do. ii. Limited liability: The liability of the members of a co-operative is limited to a certain proportion of their capital contribution mentioned in the by-laws. iii. Continuity: The life of a co-operative society is not affected by the death, insolvency or conviction of a member. ASTU, SoHSS, SSU, Entrepreneurship and Business Development (SOSC5003) (Ch-4, Lecture notes) 33 iv. Tax concessions: The law may give a preferential treatment to cooperatives in the form of concessions and exemptions below a specified amount of income. v. State assistance: Since a co-operation is an instrument of the economic policy of the government, the state offers many types of assistance including cheap loan assistance to co-operatives. Disadvantages of Cooperatives i. Insufficient motivation to the members: Cooperatives lack the profit-making incentive common to other forms of business, which appears to be a serious problem. This will result in insufficient motivation to the members. ii. The tendency to depend on volunteers: Normally, members of the executive committee are not paid for their services, and the salary scales for employees are frequently on the low side. This will result in inefficiency of management. iii. Excessive state regulation: Excessive state regulation causes lack of flexibility in the cooperatives affairs. iv. Limitation of capital: Often co-operatives face shortage of capital as most members come from limited areas and means. Table 4.1: Comparison of sole proprietorship, partnership and corporations Characteristics Most advantageous form Least advantageous form Availability of capital Corporation Sole proprietorship Cost of organization Sole proprietorship Corporation Ease of organization Sole proprietorship Corporation Ease of expansion Corporation Sole proprietorship Ease of dissolution Sole proprietorship Corporation Ease to transfer ownership Corporation Sole proprietorship Ease of withdrawing from ownership Corporation Sole proprietorship Efficiency of management Corporation Sole proprietorship Government controls Partnership Corporation Length of life Corporation Sole proprietorship Liability of owners Corporation Sole proprietorship Secrecy of operation Sole proprietorship Corporation Tax position of owners Sole proprietorship Corporation Tax position of operations Sole proprietorship Corporation ASTU, SoHSS, SSU, Entrepreneurship and Business Development (SOSC5003) (Ch-4, Lecture notes) 34 4.5.2 LICENSING AND REGISTRATION All businesses in Ethiopia must undergo several essential registration steps to operate legally:  Business Name Registration: Register your business name with the Ministry of Trade and Industry to ensure it is unique and compliant with Ethiopian naming conventions.  Legal Incorporation: Choose an appropriate legal structure (e.g., sole proprietorship, Limited Liability Company) and incorporate your business with the Ministry of Trade and Industry.  Tax Registration: Register with the Ethiopian Revenue and Customs Authority (ERCA) to obtain a tax identification number (TIN) and a value-added tax (VAT) number if applicable.  Social Security Registration: Register with the Social Security Agency if you plan to hire employees. Again, depending on the nature of your business, you may need additional specific licenses:  Food and Beverage: A health and safety certificate from the Ethiopian Food and Drug Authority (EFDA) is required for businesses involved in food production or sales.  Construction: Obtain a construction permit from the local municipal planning department if your business involves construction activities.  Healthcare: Licenses from the Ministry of Health for businesses providing medical services or products.  Financial Services: Licenses from the National Bank of Ethiopia for businesses involved in banking, insurance, and finance.  Tourism and Hospitality: Licenses from the Ministry of Culture and Tourism for businesses operating in the tourism and hospitality sector. Businesses that impact the environment must secure relevant permits:  Environmental Impact Assessment (EIA): Required for projects that may have significant environmental impacts, issued by the Ministry of Environment, Forest and Climate Change.  Waste Management Permits: Necessary for businesses involved in waste management and recycling, issued by local environmental agencies. In addition to national regulations, businesses must comply with regional and local requirements:  Municipal Business License: Most municipalities require a local business license to operate within their jurisdiction.  Zoning Permits: Necessary for businesses that require specific use of land or premises, issued by local municipal authorities. ASTU, SoHSS, SSU, Entrepreneurship and Business Development (SOSC5003) (Ch-4, Lecture notes) 35  Signage Permits: Local governments regulate business signage, requiring permits to ensure compliance with urban standards. In Ethiopia, the Commercial Registration and Business Licensing (Amendments) Proclamation No. 461/2020 was issued to make the registration and licensing process more accessible, modern, and fast. 4.5.3. INTELLECTUAL PROPERTY RIGHTS Intellectual property refers to exclusive right given to the entrepreneur to benefit from his/her innovations and creations; and this includes: patents, trademarks, copy rights, and trademarks. These are very important assets to the entrepreneur and must be understood even before engaging the services of an attorney. Too often entrepreneurs, because of the lack of understanding of intellectual property, ignore the important steps to take in order to protect these assets. Intellectual property is a legal definition of ideas, inventions, artistic works and other commercially viable products created out of one's own mental processes (patents, copyrights, and trademark registrations) A) PATENTS: protects inventions or discoveries; A patent is a contract between an inventor and the government in which the government, in exchange for disclosure of the invention, grants the inventor the, exclusive right to enjoy the benefits resulting' from the possession of the patent.  Utility Patent: A utility patent protects any new invention or functional improvements on existing inventions.  Design Patent: it protects the appearance of an object and covers new, original, ornamental, and unobvious designs for articles of manufacture. Patents are particularly important to companies such as shoe producers and product package design firms that need to protect their ornamental designs.  A patent provides the owner with exclusive rights to hold, transfer, license the production and sale of a product/process and at times used as collateral. What can be patented? 1. Processes: Methods of production, research, testing, analysis, technologies with new applications. 2. Machines: Products, instruments, physical objects. 3. Manufactures: Combinations of physical matter not naturally found. 4. Composition of matter: Chemical compounds, medicines, etc. ASTU, SoHSS, SSU, Entrepreneurship and Business Development (SOSC5003) (Ch-4, Lecture notes) 36 B) TRADEMARKS ®: distinctive names, marks, symbols or motto identified with a company’s product or service and registered by government offices. Trademarks unlike patents are periodically renewed unless invalidated by cancellations, abandonment, or other technical registration/renewal issues. C) COPYRIGHTS ©: Copyrights provide exclusive rights to creative individuals for the protection of literary or artistic productions. It protects original works of authorship including literary, dramatic, musical, and artistic works, such as poetry, novels, movies, songs, computer software, and architecture. Copyright is different from a patent or a trademark in these dimensions: ©- protects original works of authorship; patent protects inventions or discoveries; A trademark protects words, phrases, symbols, or designs identifying the source of the goods or services of one party and distinguishing them from those of others. Our country Ethiopia became member of World Intellectual Property Organization (WIPO) in February 1998. The government established the Ethiopian Intellectual Property Office (EIPO currently renamed as Ethiopian Intellectual Property Authority) in 2003 in having the understated objectives:  To facilitate the provision of adequate legal protection for and exploitation of intellectual property in the country;  To collect, organize and disseminate technological information contained in patent documents and encourage its utilization;  To study, analyze and recommend policies and legislation on intellectual property to the government;  To promote knowledge and understanding of intellectual property among the general public. Three of intellectual property rights (IP) were listed in Ethiopia include Patent, Copyright and Trademark.  Patent: According to the proclamation in order to be granted a patent, an invention must fulfill three conditions:  It must be new- It should never have been published or publicly used before.  It should be capable of industrial application -It must be something which can be industrially manufactured or used.  It must be "non-obvious”: It should not be an invention which would have occurred to any specialist working in the relevant field. The duration of a patent is 15 years which may be extended for a further period of five years if proof is furnished that the invention is properly worked in Ethiopia. Currently, the Ministry of innovation and Technology (MinT) is the central government office responsible for the determination of the validity of patents. ASTU, SoHSS, SSU, Entrepreneurship and Business Development (SOSC5003) (Ch-4, Lecture notes) 37  Trademark Directive (1986) with the following objectives in that it helps:  To centrally deposit trademarks which are used by local and foreign enterprises to distinguish their goods or services.  To distinguish the products or services of one enterprise from those of other enterprises and prevent consumers from being victims of unfair trade practices.  To provide information on trademark ownership and right of use when disputes arise between parties;  To provide required information on trademarks to government and individuals.  Copyright (2004): The proclamation gives protection to literary, artistic and scientific works which include:  Books, pamphlets, articles, computer programmers and other writings;  Speeches, lectures, addresses, sermons, and other oral works;  Dramatic, dramatic-musical works, pantomimes, choreographic works, and other works created for stage production;  Musical works, with or without accompanying words;  Audiovisual works and sound recordings  Works of architecture;  Works of drawing, painting, sculpture, engraving, lithography, tapestry, and other works of fine arts;  Photographic and cinematographic works;  Illustrations, maps, plans, sketches, and three-dimensional (3D) works related to geography, topography, architecture or science;  Derivative works;  Collection of works, collection of mere data (databases) whether readable by machine or other form. The rights of performers, producers of phonograms and broadcasting organizations are protected by law. Copyright is protected for the life of the author plus fifty years. Fifty years for the rights of performers and producers of sound recordings and 20 years for the rights of broadcasting organizations ASTU, SoHSS, SSU, Entrepreneurship and Business Development (SOSC5003) (Ch-4, Lecture notes) 38 SUPPLEMENTARY READING MATERIALS  SOURCES OF FINANCE: LEASE, TRADITIONAL SOURCES AND CROWD FUNDING In addition to equity financing and debt financing the followings are also another alternative sources of finance: i) Lease Financing Lease financing is one of the important sources of medium- and long-term financing where the owner of an asset gives another person, the right to use that asset against periodical payments. The owner of the asset is known as lessor and the user is called lessee. The periodical payment made by the lessee to the lessor is known as lease rental. Under lease financing, lessee is given the right to use the asset but the ownership lies with the lessor and at the end of the lease contract, the asset is returned to the lessor or an option is given to the lessee either to purchase the asset or to renew the lease agreement. Types of Leases Depending upon the transfer of risk and rewards to the lessee, the period of lease and the number of parties to the transaction, lease financing can be classified into two categories. Finance lease and operating lease. 1) Finance Lease It is the lease where the lessor transfers substantially all the risks and rewards of ownership of assets to the lessee for lease rentals. In other words, it puts the lessee in the same condition as he/she would have been if he/she had purchased the asset. Finance lease has two phases: The first one is called primary period. This is non-cancellable period and, in this period, the lessor recovers his total investment through lease rental. The primary period may last for indefinite period of time. The lease rental for the secondary period is much smaller than that of primary period. From the above discussion, following features can be derived for finance lease:  A finance lease is a device that gives the lessee a right to use an asset.  The lease rental charged by the lessor during the primary period of lease is sufficient to recover his/her investment.  The lease rental for the secondary period is much smaller. This is often known as peppercorn rental.  Lessee is responsible for the maintenance of asset.  No asset-based risk and rewards are taken by lessor. ASTU, SoHSS, SSU, Entrepreneurship and Business Development (SOSC5003) (Ch-4, Lecture notes) 39  Such type of lease is non-cancellable; the lessor’s investment is assured. 2) Operating Lease Lease other than finance lease is called operating lease. Here risks and rewards incidental to the ownership of asset are not transferred by the lessor to the lessee. The term of such lease is much less than the economic life of the asset and thus the total investment of the lessor is not recovered through lease rental during the primary period of lease. In case of operating lease, the lessor usually provides advice to the lessee for repair, maintenance and technical knowhow of the leased asset and that is why this type of lease is also known as service lease. Operating lease has the following features:  The lease term is much lower than the economic life of the asset.  The lessee has the right to terminate the lease by giving a short notice and no penalty is charged for that.  The lessor provides the technical knowhow of the leased asset to the lessee.  Risks and rewards incidental to the ownership of asset are borne by the lessor.  Lessor has to depend on leasing of an asset to different lessee for recovery of his/her investment. Advantages and Disadvantages of Lease Financing At present leasing activity shows an increasing trend. Leasing appears to be a cost-effective alternative for using an asset. However, it has certain advantages as well as disadvantages. The advantages of lease financing from the point of view of lessor are summarized below:  Assured Regular Income: Lessor gets lease rental by leasing an asset during the period of lease which is an assured and regular income.  Preservation of Ownership: In case of finance lease, the lessor transfers all the risk and rewards incidental to ownership to the lessee without the transfer of ownership of asset. Hence the owner- ship lies with the lessor.  Benefit of Tax: As ownership lies with the lessor, tax benefit is enjoyed by the lessor by way of depreciation in respect of leased asset.  High Profitability: The business of leasing is highly profitable since the rate of return based on lease rental, is much higher than the interest payable on financing the asset.  High Potentiality of Growth: The demand for leasing is steadily increasing because it is one of the cost-efficient forms of financing. Economic growth can be maintained even during the period of depression. Thus, the growth potentiality of leasing is much higher as compared to other forms of business. ASTU, SoHSS, SSU, Entrepreneurship and Business Development (SOSC5003) (Ch-4, Lecture notes) 40  Recovery of Investment: In case of finance lease, the lessor can recover the total investment through lease rentals. Lessor suffers from certain limitations which are discussed below:  Unprofitable in Case of Inflation: Lessor gets fixed amount of lease rental every year and they cannot increase this even if the cost of asset goes up.  Double Taxation: Sales tax may be charged twice. First at the time of purchase of asset and second at the time of leasing the asset.  Greater Chance of Damage of Asset: As ownership is not transferred, the lessee uses the asset carelessly and there is a great chance that asset cannot be useable after the expiry of primary period of lease. ii) Traditional Financing in Ethiopian (Iquib/Edir, Etc.) While Ethiopia has one of the least-developed formal financial sectors in the world, it possessed a rich tradition in indigenous, community-based groups such as savings and credit associations and insurance like societies. These "Iquib" and "Idir" groups provide a source of credit and insurance outside the formal sector but much rooted in Ethiopian society. The contributions of these groups, especially Iquib, to economic growth is difficult to quantify but can be assumed to play an important role. Iquib is a traditional means of saving in Ethiopia and exists completely outside the formal financial system. An Iquib is a form of savings. People voluntarily join a group and make a mandatory contribution (every week, pay period or month or example). The "pot" is distributed on a rotating basis determined by a drawing at the beginning of the Iquib. Amounts contributed vary according to the ability of the participants. Iquib is widespread, especially in urban areas. Iquib offers a savings mechanism for the "unbanked" group in Ethiopia, both urban dwellers who do not have access to a traditional bank within a reasonable distance from their dwelling. Ethiopia has one of the lowest bank penetration rates in the world, with less than one bank branch for every 100,000 residents. Currently, real interest rates are significantly negative -- at least negative 12% so Iquib has advantages over the formal financial system for participants. Ethiopian banks have been paying negative real interest rate for more than 25 years. Additionally, the social and communal aspects of Iquib give participants a confidence that they may not have in Ethiopia's shaky financial system. Most formal banks require a high level of collateral and/or a guarantor for loans, which discourages start-up borrowers and does not allow fo

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