Chapter 4 Business Start-up Process

Introduction

After conducting a market survey for the selected business opportunity, the entrepreneur is ready to start the business by putting together the resources needed for the business such as the raw materials, buildings, labour, machinery and the required amount of money.

After studying this chapter, you should be able to follow the steps involved in starting up a business, saving money and investing in a profitable venture. Just like a seedling growing into a plant as in germination, businesses also start step by step till they grow big.

4.1:Steps in Starting a Business

Key words business plan record keeping budget business development income expenditure

By the end of this sub topic, you should be able to;

(a) know the factors that enable an individual to start up a business, including some basic principles of effective record keeping.

(b) follow the correct steps in starting up a business which will eventually lead to developing a business plan.

(c) prepare a budget, recognising its value to business development. Business start-up does not happen in one day but rather it’s a process.

Activity 4.1.1 In the previous chapter, you carried out a market survey for a business opportunity;

1. List down what you need to start a business.

2. When should it be started and why? 3. Where should it be located and why?

Factors that enable an Individual to Start up a Business

The potential to start-up a business is represented by two groups of factors:

1. Individuals who intend to start a business and are goal oriented.

EK: I am Esteeri Kabonero, 27, a Ugandan-American because I grew up in the United States of America. I hold a Bachelors Degree in Business from Boston University, which I attained in 2013. After graduating, I went to Rwanda and did some projects in the energy sector. I met many entrepreneurs in Rwanda’s Klab, an open space for IT entrepreneurs to collaborate and innovate.

BF: What inspired you to start Powah Ltd?

EK: I developed the idea to go into solar energy business when I was in Rwanda. I wanted to do something that pushes development and this was energy. This is because almost 80% of Ugandan homesteads don’t have access to electricity energy. I also realised that many solar and energy companies in Uganda are not locally owned. And in August 2017, my idea came to bear fruit; Powah Ltd was born. We are a team of six.

BF: What specific products and services do you offer?

EK: We are a solar solutions company with many products including solar for productive use. Power hub is one of the unique products we have. This is aimed at creating development among people with no access to energy. It’s made locally here. Our first power hub will go to Nakivale Refugee Settlement. We provide solar installations; we do back-ups for schools, offices, hospitals and homes. We also do product distribution; solar lights, solar radios, solar phone chargers and the cheapest go for as low as Shs30, 000. We work with different companies in US, China and Germany, especially for solar panels.

BF: Why are you targeting vulnerable communities like refugees?

EK: In the refugee settlements, access to power, information, and basic necessities are inadequate. There are numerous entrepreneurs, students, and farmers who can create opportunities for themselves. However, lack of basic infrastructure hinders many people in these camps. With access to internet and energy, we can raise the standard of living for many in this community.

BF: There are many fake solar products on market. How do you ensure that you have genuine products?

EK: One of the ways to determine fake solar products is to look at the prices. Many customers tend to go for lowly priced products, but most times they are fake. Solar panels are supposed to last 20 years. We want to be a quality company, so we don’t entertain fake products. To reduce on prices of solar products, government should offer subsidies.

BF: What key challenges are solar companies facing in Uganda?

EK: Some people think solar doesn’t work, but it does. Solar upfront payment is also still expensive, explaining why government should come in and offer subsidies. We also need positive solar policies in place.

BF: What advice do you have for your fellow young entrepreneurs?

EK: Have a vision and follow it. Create a product or a service and test it with one customer or a few customers and see the outcome. It’s also important to take one step at a time. BF: Your last word.

EK: Uganda has the best location for solar energy in the world. So, Uganda can be the leader in solar energy and Powah Ltd hopes to be a leader in it.

Source: https://businessfocus.co.ug/

In groups, referring to the case study (A reality business focus) above, answer the following questions;

1. Identify the factors that Esteeri Kabonero considered to start up Powah solar limited. (classify them into personal and environmental factors).

2. Explain how her business has improved the lives of people in Uganda.

3. Share your work with the rest of the class.

Correct Steps in Starting a Business

After conducting a market survey, it tells you if there’s an opportunity to turn your idea into a successful business. The steps taken before starting up a business are illustrated in the figure 4.1.3 below.

Fig 4.1.2: Steps taken before starting up a Business Steps in starting a business

Activity 4.1.3 Listen to a presentation from a prominent entrepreneur in your community explaining how he/she started his/her business. Ask questions to help you answer the following questions. Task:

1. Explain the correct steps that should be taken to start a business.

2. What would happen if some of the steps are skipped?

3. Discuss your findings with the rest of the class.

However, after taking all the steps, you need to keep the information. This process is known as record keeping. It is important to keep information for all the activities carried out like the survey, the business plan, and others which can be stored for future reference.

Effective Record Keeping as a Step in Starting a Business

Think of the reasons why you write notes in class. Similarly, entrepreneurs keep a record for every information from the moment it is created or received, until it is stored for historical reference or destroyed.

Essentially, if it’s not written down, it didn’t happen. The 107 W T e basic principles of effective record keeping include;

Authentic: The quality of the information should be real or true.

Accurate Records must be correct, exact, and without any mistakes.

Accessible: Records must be readily available when needed.

Complete : Records must have all the necessary information.

Compliant: Records must comply with any record keeping requirements resulting from legislation, audit rules and other relevant regulations.

Effective Records must be maintained for specific purposes and the information contained in them must meet those purposes.

Secure: Records must be safe to restrict access, damage or removal.

Entrepreneurs carry out this to ensure that information is available when and where it is needed, in an organized, efficient manner, and in a well-maintained environment.

Preparing a Budget in Business

A budget is an estimation of revenue and expenses over a specified future period of time. After following all the steps for starting a business, you need to finance your business. To operate smoothly, you must plan on how to spend the amount of money available. This process is termed as budgeting.

Activity 4.1.4

How to make a budget in business

Read the case study below and answer the questions that follow. Kyanda wanted to start a crafts business in his home area with Uganda shs.500000. He made his budget as follows.

Task:

(a) Identify the most expensive and least expensive item.

(b) Draw a pie chart showing the items shown on the table above.

(c) Share your findings with the rest of the class for further discussions.

Activity 4.1.5

Preparing a budget

In groups, read the scenario below and answer the questions that follow. Imagine you have won Uganda 300,000shs from the inter-school debate competition as the best debater. You have been advised by your parents to start a business around your school.

Task:

1. Identify any business opportunity around your school.

2. Prepare a budget you will use to operate your business.

3. Describe the advantages of a budget to your business development.

4. Display your budget to other groups and comment where necessary.

Budgeting involves identifying the areas where to spend the money responsibly as an entrepreneur starts his/her business.

4.2:Sources of Business Finance

Figure 4.2.1:A savings group sharing their savings

Keywords

finances

savings

funds

By the end of this sub topic, you should be able to;

(a) know the different sources of business finance.

(b) assess the benefits and challenges of each source of business finance.

In the previous chapter, you learnt about the various steps of starting a business. You must have seen many businesses in your community start and grow over time. Think of ways how these obtain the money required to run.

In this section, you are going to know the various sources of business finance, with their benefits and challenges. Just like plants cannot survive without water, business cannot survive without finances.

Different Sources of Business Finance

When you are looking to start or expand a business, there is always one major barrier: money. So, the question is, how would you finance your business? The need for finance may be for long-term, medium-term or for short-term. To meet out these requirements, funds need to be raised from various sources.

Activity 4.2.1

Identifying the different sources of business finance Read the following case studies and answer the questions that follow;

Case study 1

In 2019, 29-year-old Joseph wanted to set up a stationery shop in his own village after identifying an opportunity of existing schools. He had worked as a driver for 9 years saving his money with the village Savings and Credit Co-operative (SACCO).

He also sold his goats to top up on the money he had saved and started. He stocked his business with stationary materials; for example, books, calculators and pens.

Figure 4.2.2: Joseph receiving money from his savings group

Case study 2

Peter needed some finance to start up his own business. He then heard an advert of an institution that provided financial assistance on the radio. He decided to try his luck. When there, he was told to fill some forms. Peter completed the necessary paper work for getting money from the financial institution. He was told to pay back the money in instalments.

However, he presented his house as security in case he failed to pay back the money. As soon as he got the money, he decided to put up rentals.

Task:

Figure 4.2.3: Peter applying for a loan in the bank.

1. Describe the various sources of business finance from the case studies above.

2. Considering the sources in the case studies, use the internet or library research to find out;

(a) differences between the sources of business finance.

(b) similarities between the sources of business finance.

(c) which of the above sources would you prefer to finance your business? Give two reasons to support your answer.

3. Discuss your answers with the rest of the class.

Other sources of business finance

Venture capital: this is a type of financing that investors provide to start-up companies and small businesses that are believed to have long-term growth potential. Venture capital generally comes from well-off investors, investment banks and any other financial institutions.

Trade credit is the credit a seller offers to a business customer so that goods or services can be paid for at a later date usually 30, 60 or 90 days after delivery. Businesses commonly use trade credit as a source of short-term financing, that is, it becomes an alternative to borrowing money from the bank.

We all know that starting or growing a small business takes money. You have explored various sources of financing, from your own pockets for fast, short-term loans to bank-approved lines of credit that offer longer term financing.

Activity 4.2.3: Task:

1. In groups, carry out a library research or internet search to find out other sources of business finances.

2. Share your findings with the rest of the class for further discussions.

Challenges and Benefits of Different Sources of Business Finance

There are several advantages and disadvantages to consider when explorin sources of finance to meet short-term or long-term needs in business.

Owners’ Investment

Your personal finances, and the finances of your business partners, are or source of funding. These include not only ready cash at hand in savings b non liquid finances, such as land.

Advantage

You will know exactly how much money is available to run your business.

No time spent trying to secure other forms of funding from investors / banks.

Self-financing your business gives you much more control than other finance options.

You will retain full ownership of the business, which in turn means that you will receive 100 percent of future profits. Funds from Banks Advantages of Bank Loans

Disadvantage

It may put a strain on your family an personal life

You may not have enough money le over to cover your living costs.

If your business was not to be funde or fail you could lose your home an other personal possessions.

If you fund your business alone, you w have to develop your own contacts a mentoring opportunities.

Funds from Banks

Advantages

Low Interest Rates: Generally, bank loans have the cheapest interest ra The rates you pay will be cheaper than other sources of business finam such as venture capital.

Flexibility: When you receive a bank loan, the bank will not provide a of rules dictating how you spend the money. Bank loans can the flexibility to spend the money where you see fit. Whether provide you need capital to purchase new equipment or enter a new market, you can use the money from a bank loan.

Maintain Control: Banks loan money to a business based on the value of the business and its perceived ability to service the loan by making payments on time and in full.

Disadvantages of a Bank Loan

Requires Profitability: To be eligible, your business must be consistently profitable, which disqualifies the majority of start-ups.

Complicated: Obtaining a bank loan is extremely time consuming. You will be required to fill out excessive paperwork, and the terms of interest will be quite complicated. The process will not be quick either, often, it takes several months to qualify and obtain capital from a bank.

Collateral: Banks need some form of collateral. A collateral is something pledged as security for repayment of a loan. Banks need to protect themselves in the case that you can not make your payments.

Activity 4.2.3:

Exploring the challenges and benefits of sources of business finance In groups, use the internet or library research to:

Task:

1. Identify any three sources of business finance.

2. Identify the benefits of each source.

3. Explain the challenges of each source.

4. Present your work to class for discussion.

4.3:Savings and Investment

Key words

saving investment interest rate wealth assets funds

By the end of this sub topic, you should be able to;

(a) know the factors that determine saving and investment.

(a) appreciate the reasons and forms of saving.

(a) understand how to prepare a saving plan, including how spreadsheets, books and calculators are used.

(a) know the factors to consider before taking investment decision. an

Having learnt about the various sources of business finances including donation= gifts, loan and many others in this section, you are going to look at the factors th= influence, and reasons for savings and investment. This will enable you set financial goals and know how to draw a savings and investme plan.

Think of what you would do with your extra money. You may decide to take a trip somewhere far away, go for shopping or keep it wi your parents or friends.

Meaning of Saving

People always say that youthful age works for the old age. What does this mean to you How do you spend your pocket money? Do you always keep aside some money before spending it? If Yes or No, why?

Activity 4.3.1

The meaning of saving Business Startup Process In groups, study the scenario below and complete the task that follows; During the lock down due to corona virus pandemic, only those Ugandans who had kept some money were able to afford a decent quality life in terms of what to eat. With time, there was fear that all the money people would use to create more income had been consumed.

Task:

1. Which term can be used to describe the act of keeping some money as seen in the scenario?

2. Explain the benefits enjoyed by the people who had kept part of their money aside.

3. Share your findings with the class.

Each time you get money rightly, it is wise to save and invest part of it. Even as a student, you can save and invest your money to generate more income. Saving therefore, is the act of setting aside a portion of current income for future use.

Factors that Determine Savings

We have already learnt that savings is the money that is not consumed. Savings can be kept in cash form, saved in a bank or kept in long lasting assets like buying land, a building.

There are various factors that influence saving which include; interest rates, income levels, age of individuals, culture, confidence, among others. Sometimes, the hardest thing about saving money is just getting started.

This step-by- step guide for how to save money can help you develop a simple and realistic strategy;

STEP 1: Make a budget. here you have to take a look at how much money you have coming in and out. You therefore need to record your income and expenditure.

STEP 2: Trim your budget. After making your budget, you can start perfecting it. You may realise that you are paying for things that are unnecessary and therefore try to remove them.

STEP 3: Spend on essentials. save on the things you must buy and those expenses that cannot be cut entirely. You may order online instead of going to the market to buy it yourself, thereby saving time and transport.

STEP 4: Add new income. Look for other ways to start bringing in extra money. Get a part time job.

Interest rates: Higher interest rates mean that individuals will gain a h rate of return on depositing savings in a bank and the reverse is tr

Income levels/economic growth: Rising income levels will lead to a total saving levels. As individuals gain more disposable income, th- have the ability to save more.

Confidence: Confidence and expectations of the future have a bearing on saving. If individuals are optimistic about the future, the more willing to borrow and run-down savings.

Demographics/ age distribution: Life cycle theories of consumption that individuals try to smooth consumption over a lifetime. During a pe student years, they will typically borrow (student loans), then in the and 50s, with high income, they will save. Then during retirement, th run down their savings.

Activity 4.3.2

Understanding the factors that determine savings Chapter 4: Business Startup Process In groups, attempt the following questions to help you get more knowledge on factors that determine savings.

Task: 1. Discuss how the following factors determine savings.

2.Prepare a saving plan on how you can raise resources to start up a business.

(a) Consumer preferences (b) wealth (c) availability of credit

3. Start a savings group/SACCO to be monitored by your teacher of entrepreneurship.

Note: A saving group is comprised of 15-25 self-selected individuals who save together and take small loans from those savings. Saving groups provide members the opportunity to save frequently in small amounts, access to credit on flexible terms, and a basic form of insurance. They are owned, managed and operated by their members.

Meaning of Investment

When you keep your money, you have saved it and when you use the money kept to create income, you have invested it. Investing is the act of allocating resources, usually money, with the expectation of generating an income or profit.

People save part of their income that is not meant for current consumption, but to be used in the future. Even as a student, you can invest your money for a profit. When a seed of a bean is planted, you will not get one seed but several. This explains investment. Investment options that can help us grow wealth may include; starting your own business, buying productive resources like animals, buying shares in other businesses, depositing money to earn interest, and many others. However, before any investment, you need to prepare an investment plan.

Making an investment plan involves the following steps;

STEP 1: Assess your current financial situation. You need to figure out how much money you have to invest.

STEP 2: Define your goals. Why are you investing?

STEP 3: Determine your risk tolerance. Decide how much risk you are willing to take.

STEP 4: Decide on what to invest in. From starting your own business, buying productive resources like vehicles to depositing money to earn interest.

STEP 5: Monitor your investments. Once you have made your investments, it’s not wise to just leave them alone. You should check in to see how your investments are performing and decide if you need to make some changes.

Factors that Determine Investment

The factors that determine investment include; the level of saving; availability of investment opportunities and finance, favourable government policies, confidence among others.

Interest rates: Investment is financed either out of current savings or by borrowing. Therefore, investment is strongly influenced by interest rates. High interest rates make it more expensive to borrow.

Economic growth: Firms invest to meet future demand. If demand is falling then firms will cut back on investment. Firms will increase investment as they expect future demand to rise.

Government policies: Some government regulations can make investmen more difficult. For example, strict planning legislation can discourage investment On the other hand, government subsidies/tax breaks can encourage investment

Confidence: Investment is riskier than saving. Individuals or firms will inves more if they are confident about future costs and demand.

Activity 4.3.3

Factors that determine investment In the previous activity, you started a savings group; in groups, Task:

1. Define the term investment.

2. Decide the possible investment for the savings in your savings group.

3. Explain reasons why you have chosen that investment.

4. Make an investment plan for your business.

Activity 4.3.4

Factors to consider before taking an investment decision

In pairs, read the case study below and answer the questions that follow; After finishing secondary school, Monica had saved 500,000 Uganda shilling she decided to invest in maize farming in her village. She used the money clear the bush, buy seedlings and pay for some labour. After one season, s realised that the demand for maize was high; she decided to expand her gard by planting on a bigger piece of land using more money for more benefits.

After the second yea aged to sponsor herself to the University for Skills and competences in crop farming. She is now a farming entrepreneur Agricultural Entrepreneurship and Farm Management studies, to acquire more in the district where she lives.

Task

Fig 4.3.1: Monica in her maize plantation

1. What moral lessons do you learn from the story?

2. Identify factors that Monica could have followed to invest in maize planting.

3. Share your work with the rest of the class.

The future is uncertain and one must invest wisely to avoid financial crisis at any point in time. An individual must plan his/ her future well to ensure happiness for him/herself, as well as his / her immediate family members. Not every day is a bed of roses; you never know what your future has in store for you.

Saving and investing can help accomplish things as small as being able to pay for expenses, or things as big as becoming financially independent. Sudden of course, becoming financially independent or being able to retire at a decent age with plenty of money is the ultimate goal. All of the other benefits of being financi us reach those goals.

4.4:Location of a Business

Key words location ideal

By the end of this sub topic, you should be able to:

(a) know the factors that are considered for locating a business.

In this section, you are going to explore the various factors that influence the location of a business. This will enable you to make a careful assessment of where to locate your business. Businesses take up different locations. Some locate near schools, air ports, roads, recreation centres or even busy towns.

Factors that Affect Location of a Business

Whether setting up an office or a shop for the first time, or looking to expand int new areas. There are many things to consider when choosing a location for you business, which are illustrated in the figure below;

Availability of raw materials: If you intend running a manufacturin production business, then the nearness or availability of raw mate is a factor you must consider when choosing your business location your business is not sited close to these raw materials, then sourcing transportation will reduce your profit margin.

Nearness to market: The next important factor to consider is the nearness of your business to its customers. Are your customers re-sellers or end users? Answering this question will help you determine the best area to locate your business. Remember that for your business to succeed, you must make it easy for customers to find your product.

Availability of basic infrastructure: Availability of basic infrastructure can affect your choice of small business location. Amenities and infrastructure such as water supply, power supply, good road network, and security, are things to consider when locating your business.

Activity 4.4.1

Discussing the factors that influence location of a business.

In groups, study the photographs A, B, C and D, showing different business activities, and answer the questions that follow.

Task:

1. Explain the factors that influenced the location of the business activities in photographs A, B, C and D.

2. Discuss other factors that influence the location of a business as shown in figure 4.4.1.

3. Present your work to the class.

The ideal location would be one where costs are minimised. The entrepreneur Would need to look at the benefits which each area has to offer, as well as any government help which might be available.

Selecting the correct site for a business is a decision that shouldn’t be taken lightly. Here are the five key steps to getting it right; Develop a detailed list of selection choices. Analyse qualitative & quantitative factors. Research about competing communities and evaluate the data. Consider incentives and bonuses. Finalise the decision, the deal.

Chapter summary

In this chapter, you have learnt about the factors that enable an individual start up a business, the correct steps in starting a business, how to prepare budget, the different sources of finance, benefits and challenges of differe sources of finance, factors that determine saving and investment, and t factors considered for locating a business.