Entrepreneurship

An entrepreneur is a person who organizes, operates and takes risks for a

new business venture. The entrepreneur brings together the various factors of
production to produce goods or services. Check below to see whether you have
what it takes to be a successful entrepreneur!
 Risk taker
 Creative
 Optimistic
 Self-confident
 Innovative
 Independent
 Effective communicator
 Hard working

Business plan
A business plan is a document containing the business objectives and
important details about the operations, finance and owners of the new
business.
It provides a complete description of a business and its plans for the first few
years; explains what the business does, who will buy the product or service and
why; provides financial forecasts demonstrating overall viability; indicates the
finance available and explains the financial requirements to start and operate the
business.

Some of the content of a regular business plan are:

 Executive summary: brief summary of the key features of the business

and the business plan
 The owner: educational background and what any previous experience in
doing previously
 The business: name and address of the business and detailed description
of the product or service being produced and sold; how and where it will
be produced, who is likely to buy it, and in what quantities
 The market: describe the market research that has been carried out, what
it has revealed and details of prospective customers and competitors
 Advertising and promotion: how the business will be advertised to
potential customers and details of estimated costs of marketing
 Premises and equipment: details of planning regulations, costs of
premises and the need for equipment and buildings
 Business organisation: whether the enterprise will take the form of sole
trader, partnership, company or cooperative
  Costs: indication of the cost of producing the product or service, the
prices it proposes to charge for the products
 Finance: how much of the capital will come from savings and how much
will come from borrowings
 Cash flow: forecast income (revenue) and outgoings (expenditures) over
the first year
 Expansion: brief explanation of future plans

Making a business plan before actually starting the business can be very helpful.
By documenting the various details about the business, the owners will find it
much easier to run it. There is a lesser chance of losing sight of the
mission and vision of the business as the objectives have been written down.
Moreover, having the objectives of the business set down clearly will help
motivate the employees. A new entrepreneur will find it easier to get a loan
or overdraft from the bank if they have a business plan.

Government support for business start-ups

According to start up.com, “a start-up is a company typically in the early

stages of its development. These entrepreneurial ventures are typically started
by 1-3 founders who focus on capitalizing upon a perceived market demand by
developing a viable product, service, or platform”.

Why do governments want to help new start-ups?

 They provide employment to a lot of people

 They contribute to the growth of the economy
 They can also, if they grow to be successful, contribute to the exports of
the country
 Start-ups often introduce fresh ideas and technologies into business and
industry

How do governments support businesses?

 Organise advice: provide business advice to potential entrepreneurs,

giving them information useful in staring a venture, including legal and
bureaucratic ones
 Provide low cost premises: provide land at low cost or low rent for new
firms
 Provide loans at low interest rates
 Give grants for capital: provide financial aid to new firms for
investment
  Give grants for training: provide financial aid for workforce training
 Give tax breaks/ holidays: high taxes are a disincentive for new firms to
set up. Governments can thus withdraw or lower taxation for new firms
for a certain period of time

Measuring business size

Businesses come in many sizes. They can be owned by a single individual or

have up to 50 shareholders. They can employ thousands of workers or have a
mere handful. But how can we classify a business as big or small?

Business size can be measured in the following ways:

 Number of employees: larger firms have larger workforce employed

 Value of output: larger firms are likely to produce more than smaller
ones
 Value of capital employed: larger businesses are likely to employ much
more capital than smaller ones
However, these methods have their limitations and are not always accurate.
Example: When using the ‘number of employees’ method to compare business
size is not accurate as a capital intensive firm ( one that employs a large amount
of capital equipment) can produce large output by employing very little labour
(workers). Similarly, value of capital employed is not a reliable measure when
comparing a capital-intensive firm with a labour-intensive firm. Output value is
also unreliable because some different types of products are valued differently,
and the size of the firm doesn’t depend on this.

Business growth

Businesses want to grow because growth helps reduce their average costs in the
long-run, help develop increased market share, and helps them produce and sell
to them to new markets.

There are two ways in which a business can grow- internally and externally.
Internal growth

This occurs when a business expands its existing operations. For example,
when a fast-food chain opens a new branch in another country. This is a slow
means of growth but easier to manage than external growth.

External growth

This is when a business takes over or merges with another business. It is

sometimes called integration as one firm is ‘integrated’ into the other.
A merger is when the owner of two businesses agree to join their firms together
to make one business.
A takeover occurs when one business buys out the owners of another business ,
which then becomes a part of the ‘predator’ business.
External growth can largely be classified into three types:

 Horizontal merger/integration: This is when one firm merges with or

takes over another one in the same industry at the same stage of
production. For example, when a firm that manufactures furniture
merges with another firm that also manufacturers furniture.
Benefits:
 Reduces number of competitors in the market, since
two firms become one.
 Opportunities of economies of scale.
 Merging will allow the businesses to have a bigger
share of the total market.

 Vertical merger/integration: This is when one firm merges with or

takes over another firm in the same industry but at a different stage of
production. Therefore, vertical integration can be of two types:

a) Backward vertical integration: When one firm merges with or takes

over another firm in the same industry but at a stage of production that
is behind the ‘predator’ firm. For example, when a firm that
manufactures furniture merges with a firm that supplies wood for
manufacturing furniture.
Benefits:
 Merger gives assured supply of essential components.
 The profit margin of the supplying firm is now absorbed
by the expanded firm.
 The supplying firm can be prevented from supplying to
competitors.
 b) Forward vertical integration: When one firm merges with or takes over
another firm in the same industry but at a stage of production that is
ahead of the ‘predator’ firm. For example, when a firm that
manufactures furniture merges with a furniture retail store.
Benefits:
 Merger gives assured outlet for their product.
 The profit margin of the retailer is now absorbed by the
expanded firm.
 The retailer can be prevented from selling the goods of
competitors.

 Conglomerate merger/integration: This is when one firm merges with

or takes over a firm in a completely different industry. This is also
known as ‘diversification’. For example, when a firm that manufactures
furniture merges with a firm that produces clothing.
Benefits:
 Conglomerate integration allows businesses to have activities in
more than one country. This allows the firms to spread its risks.
 There could be a transfer of ideas between the two businesses
even though they are in different industries. This transfer o
ideas could help improve the quality and demand for the two
products.

Drawbacks of growth

 Difficult to control staff: as a business grows, the business organisation in

terms of departments and divisions will grow, along with the number of
employees, making it harder to control, co-ordinate and communicate
with everyone
 Lack of funds: growth requires a lot of capital.
 Lack of expertise: growth is a long and difficult process that will require
people with expertise in the field to manage and coordinate activities
 Diseconomies of scale: this is the term used to describe how average
costs of a firm tends to increase as it grows beyond a point, reducing
profitability. This is explored more deeply in a later section.

Why businesses stay small

Not all businesses grow. Some stay small, employ a handful of workers and
have little output. Here are the reasons why.
  Type of industry: some firms remain small due to the industry they
operate in. Examples of these are hairdressers, car repairs, catering, etc,
which give personal services and therefore cannot grow.
 Market size: if the firm operates in areas where the total number of
customers is small, such as in rural areas, there is no need for the firm to
grow and thus stays small.
 Owners’ objectives: not all owners want to increase the size of their
firms and profits. Some of them prefer keeping their businesses small
and having a personal contact with all of their employees and
customers, having flexibility in controlling and running the business,
having more control over decision-making, and to keep it less stressful.


Why businesses fail

Not all businesses are successful. The main reasons why they fail are:

 Poor management: this is a common cause of business failure for new

firms. The main reason is lack of experience and planning which could
lead to bad decision making. New entrepreneurs could make mistakes
when choosing the location of the firm, the raw materials to be used for
production, etc, all resulting in failure
 Over-expansion: this could lead to diseconomies of scale and greatly
increase costs, if a firms expands too quickly or over their optimum level
 Failure to plan for change: the demands of customers keep changing
with change in tastes and fashion. Due to this, firms must always be ready
to change their products to meet the demand of their customers. Failure
to do so could result in losing customers and loss. They also won’t be
ready to quickly keep up with changes the competitors are making,
and changes in laws and regulations
 Poor financial management: if the owner of the firm does not manage
his finances properly, it could result in cash shortages. This will mean
that the employees cannot be paid and enough goods cannot be produced.
Poor cash flow can therefore also cause businesses to fail

Why new businesses are at a greater risk of failure

 Less experience: a lack of experience in the market or in business gets a

lot of firms easily pushed out of the market
 New to the market: they may still not understand the nuances and trends
of the market, that existing competitors will have mastered
 Don’t a lot of sales yet: only by increasing sales, can new firms grow
and find their foothold in the market. At a stage when they’re not selling
much, they are at a greater risk of failing
 Don’t have a lot of money to support the business yet: financial issues
can quickly get the better of new firms if they aren’t very careful with
their cash flows. It is only after they make considerable sales and start
making a profit, can they reinvest in the business and support it