FET FIRST New Venture Creation

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2 FET FIRST New Venture Creation NQF Level 2 Student s Book B. Brown

3 FET FIRST New Venture Creations NQF Level 2 Student s Book B. Brown, 2008 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, photocopying, recording, or otherwise, without the prior written permission of the copyright holder or in accordance with the provisions of the Copyright Act, 1978 [as amended]. Any person who does any unauthorized act in relation to this publication may be liable for criminal prosecution and civil claims for damages. First published 2008 by Troupant Publishers [Pty] Ltd P O Box 4532 Northcliff 2115 Distributed by Macmillan South Africa [Pty] Ltd Cover design by René de Wet ISBN: It is illegal to photocopy any page of this book without written permission from the publishers. Printed by To order any of these books contact Macmillan Customer Services at: Tel:(011) Fax:(011) pieterses@macmillan.co.za

4 Contents Topic 1 Demonstrating an understanding of a selected business environment...1 Module 1: Explaining the structure and roles of different types of organisations within their own industry in South Africa... 3 Unit 1.1: Types of organisations...3 Unit 1.2: The roles of different types of organisations in the context of the business environment...6 Unit 1.3: Business activities common to all organisations...8 Unit 1.4: Companies and major role-players in business sub-sectors...10 Unit 1.5: Products and services offered by each organisation in the field...11 Module 2: Demonstrating an understanding of the concept of a market as applied to a selected business sector Unit 2.1: The basic principles of trade that define markets...15 Unit 2.2: The differences between marketing products and marketing services...16 Unit 2.3: Contributing to the national economy...18 Unit 2.4: Value chains...19 Module 3: Identify and describe the role of professional bodies, associations and regulatory authorities in a selected business sector Unit 3.1: Statutory authorities and professional bodies, associations and regulatory authorities...22 Unit 3.2: Regulatory authorities, professional bodies and associations in the professional services industry sector...25 Unit 3.3: The benefits of belonging to a selected professional organisation...26 Module 4: The market position of a selected organisation in the relevant sub-sector Unit 4.1: Marketing products in competition with other businesses...29 Unit 4.2: Describe the organisation s current competitive position, based on available audited data...31 Unit 4.3: Strengths, weaknesses, opportunities and threats...32 Topic 2 Investigate the markets and needs for a new business venture...37 Module 5: Explain the concept of a market as applied to services or products Unit 5.1: The basic principles of trade for services and products...39 Unit 5.2: Supply and demand in a new venture business...39 Unit 5.3: Identifying a market for a new venture business...40 Unit 5.4: Identify the product to be marketed by the new venture business...41 Module 6: Identify potential clients for the new venture Unit 6.1: Basic needs common to all people...43 Unit 6.2: The basic needs of people from different socio-economic groups...45 Unit 6.3: Possibilities for new products...46 Unit 6.4: Attitudes, values and other factors that could prevent people from buying from you...46 Module 7: Survey opinions on the need for products or services of the new venture Unit 7.1: Implementing customer surveys...48 Unit 7.2: Creating a customer survey questionnaire...49 Unit 7.3: Interviewing people and completing the questionnaire...51 Unit 7.4: Presenting information from a survey in a bar graph...51 Unit 7.5: Estimating the potential success of a new product...53 Module 8: Use statistical information to determine the type of product/service most valued by different communities Unit 8.1: Interpreting basic information...54 Unit 8.2: Using statistics to identify values and preferences...56 Unit 8.3: Suggest reasons for trends indicated by statistical data...58 Unit 8.4: Implications of identifying trends...59 Module 9: Benefits of various products Unit 9.1: Identify three products for a company...61 Unit 9.2: The purpose and main benefits of each product to the business...62

5 Unit 9.3: Identifying future product opportunities...64 Topic 3 Determine financial requirements of a new business venture...67 Module 10: Determining the financial and cash flow requirements of a new venture Unit 10.1: Financial and cash flow requirements for starting a new venture business...69 Unit 10.2: The costs of starting a business...70 Unit 10.3: A financial model for a new venture business...73 Unit 10.4: Cash flow and working capital...76 Unit 10.5: Managing cash flow requirements for a new venture business...78 Unit 10.6: The business plan...80 Module 11: Determining income and expenditure of a new venture Unit 11.1: Budgeting for a new venture business.82 Unit 11.2: Estimating your budgeted income...84 Unit 11.3: Estimating your budgeted expenditure 85 Unit 11.4: Compiling and controlling a budget...89 Module 12: Implementing pricing and costing principles Unit 12.1: Costing principles...91 Unit 12.2: Costing for break-even...93 Unit 12.3: Calculating selling price with mark-up 94 Unit 12.4: Factors influencing pricing...94 Unit 12.5: Product price calculations...96 Unit 12.6: Revising budgets to reflect changing prices...97 Module 13:Identifying resources to obtain start-up capital Unit 13.1 Identifying start-up capital requirements and resources for funding...99 Unit 13.2: The costs associated with borrowing..103 Unit 13.3: Applying for loan funding Unit 13.4: Completing documents for funding applications Glossary PoE Guidelines...112

6 Topic 1 Demonstrating an understanding of a selected business environment

7 Introduction The start of a new year is almost like the start of a new business. It is an exciting time, full of promise and creativity to plan new ventures. Creating a new business venture is always exciting, whether you are creating your own business or helping to manage a new business. It is a time when your creativity and experience can generate great ideas for products or services and ways to get them into your chosen marketplace. In this topic, we will explore different types of organisational structures and what the advantages and disadvantages are of each type of organisation, with a view to being able to identify the best structure for one s own business. We will also look at business subsectors and products, and services within the sub-sectors to clearly understand the business environment in which organisations operate. To exist in a very competitive market place, the new business owner needs to understand the link between trade and markets, including looking at how to market different things, like products and services. We will explore how to get the right match between a market and a product or service. Following that, we will also learn how to compare a business with its major competitors, in order to be able to position the business with a competitive edge. We wil also analyse a business in terms of its internal and external standing in the market by conducting an intensive SWOT analysis. We will also place business in the bigger picture by looking at how business impacts on the well-being of a country by contributing to the national economy. Another factor to consider when starting a new venture business is the legal and professional regulations to which one might have to adhere. We will therefore look at a number of different professional bodies and how these bodies affect the business sector in which they operate. We will also explore the various benefits for both an individual and an organisation belonging to such bodies. 2

8 Module 1: Explaining the structure and roles of different types of organisations within their own industry in South Africa Overview The aim of this module is to create an understanding of different types of organisation and why we need different types of organisations. At the end of this module, you should be able to: name and explain the various types of organisations, using terminology accepted within their own industry explain the roles of different types of organisations in the context of the business environment identify and list business activities common to all organisations within the sector identify two examples of companies in each business subsector from advertisements in the media identify four of the main role-players in the field identify, list and categorise the kind of products or services offered by each organisation in the field. Unit 1.1: Types of organisations There are a number of different types of businesses. An entrepreneur who wants to start a new business has to choose the type of business structures that would be most suitable for the new venture. The choice will depend on both the type of business and how quickly the business will grow. Module 1: Structure and roles of different types of organisations 3

9 Example Think about a business idea in which you are interested and how fast that business might grow in the first year. Do you think it will double in size or grow much more slowly? For example, if you intend to offer your services as a bookkeeper, you might choose a simple structure for your business. If you intend to start a manufacturing business, making clothing to sell through your own shops, you will probably want a much more robust business structure. These are the business structures from which you can choose: A sole trader or sole proprietor business, which is owned and managed by one person. A partnership, which is owned and managed by several people. A private limited company ((Pty) Ltd), which is owned by a number of shareholders who may or may not manage the company. A close corporation (CC), which can be owned and managed by up to ten people. Each of these business types, or structures, has advantages and disadvantages. This table summarises the advantages and disadvantages of each structure. Advantages and disadvantages of business structures robust: strong Words & Terms Structure Advantages Disadvantages Sole trader Partnership Business registration is not required. Business operation can start immediately. The sole proprietor receives all profits. Accounts do not have to be professionally audited. Business registration is not required. Business operation can start immediately. Two or more owners share the business management. The partners share profits between them. Accounts do not have to be professionally audited. The owner is self-reliant. The owner is personally liable for business debts. The owner s personal assets can be claimed against business debts. The business ceases on the death of the owner. The business name is not registered or protected. The partners are personally liable for business debts. The partners personal assets can be claimed against business debts. The business name is not registered or protected. 4 Module 1: Structure and roles of different types of organisations

10 Private limited company ((Pty) Ltd) Close corporation (CC) Shareholders liability for business debts is limited to the amount paid for shares. Shareholders can employ managers to run the company. Companies tend to be perceived as having a higher status. Companies have easier access to loan capital. Registration is relatively straightforward. Member liability is limited to a member s investment in the business. Accounts do not have to be professionally audited. Ownership can be easily transferred. The CC continues after the death of a member. Companies must be formally registered. Accounts must be professionally audited. Business information must be circulated to shareholders at specific times. A maximum of 50 shareholders applies. Shares cannot be sold generally to the public. Ownership is limited to ten people. Dividends can only be paid if the business is solvent. Accounts have to be more formally audited and presented to members. Limited liability results in creditors demanding more financial information. Partners shaking hands on their new partnership agreement In the workplace A business is solvent when its assets have a greater value that its current liabilities. This includes any future commitments. Module 1: Structure and roles of different types of organisations 5

11 Unit 1.2: The roles of different types of organisations in the context of the business environment These different structures are often applied to businesses in different industries. This is, however, not legally necessary. Sole proprietors are usually people who offer their own personal services, such as plumbers, electricians, bookkeepers, accountants and financial services advisers. These businesses do not need to buy expensive materials in order to meet customer demands. They charge for the personal services they offer. However, as the business grows, sole proprietor businesses often register as private limited companies ((Pty) Ltd) or close corporations (CC). Partnerships are similar to sole proprietor businesses, except that people join together to offer similar or complementary services. Private limited companies are usually formed for businesses in the retail, building and manufacturing sectors. They often have to buy substantial quantities of materials in order to complete customer jobs and are not paid until the jobs are completed. Close corporations are usually formed for family businesses that have similar requirements to private limited companies, but are run on a smaller, family-controlled basis. There is no reason why you cannot form your new venture business under any of the above structures, irrespective of the type of industry sector in which you operate. However, it is important that you choose the structure that is most appropriate for your business, taking into account the advantages and disadvantages of each structure. It is also possible to change the structure of your business as it grows. Therefore, you may decide to start as a sole trader, and then convert the business to a private limited company when you want to substantially expand your operations. Did you know? Limited liability means that the owners of a business are responsible for business debt only to the extent of the investment they have made in the business. Limited liability applies to companies and close corporations only. It does not apply to sole trader and partnership businesses. Think about it If different types of structure often apply to businesses in particular industry sectors, there are probably very good reasons for the pattern. Example This example illustrates how the choice of business structure might apply to a new business startup and how it might relate to the industry sector(s) in which you operate. Let s imagine that you decide that you are going to offer a freelance bookkeeping service to small businesses. You have a room at home from which you can work, and you have a personal computer that is good enough to cope with several sets of business accounts. Having talked with friends about your idea, you have been introduced to several small shopkeepers, who say that they would find your service very useful. You now have to decide on the business structure that you want to set up. Your decision would probably be based on the following considerations: You might want to use your own name for the business to reflect your personal commitment and reputation. 6 Module 1: Structure and roles of different types of organisations

12 As a new business, with no previous trading experience, you probably have little idea about how large or fast the business could grow, but you do not expect it to become very large. Therefore, you might not want to become involved in expensive business registration processes at this stage. You probably want to start your business as quickly as possible in order to start producing income. Therefore, you do not want to wait for lengthy registration processes before commencing your operations. Because you have the tools necessary to start your business, you are not likely to incur much debt at this stage, and your existing assets will not be at risk for the time being. Therefore, you probably do not need the protection of limited liability at the moment. Taking all these factors into account, you would probably start your business as a sole proprietor, and ensure that you do not incur any large Starting a bookkeeping service as sole proprietor debt for the time being. This means that you can get your first client today and start work on their accounts immediately! Assessment activity 1.1 (Peer-assessed and marked) Work on your own. Write a brief description of a new venture business that you might want to start. (TIP: Activities relating to your new venture business will appear through this book. Therefore, if you do not have a specific business idea in mind, discuss the possibilities with friends and relatives and decide on a business idea that you will use for this and future activities.) Think about the factors covered in the module so far and choose the business structure that would be most appropriate for your business. Explain the reasons for your choice. Keep your completed project in your Portfolio of Evidence. Write your name and today s date on your project. The South African business environment, like that of most developed countries, is made up of a large pyramid structure that looks like this: As businesses get larger, they tend to become private limited companies or close corporations in order to protect the personal assets of the owners and investors. Did you know? Very large businesses usually become public limited companies which means that their shares are listed on the Johannesburg Securities Exchange (JSE) and can be bought and sold publicly by anyone. Very large business organisations Large number of medium-sized businesses that provide goods and services to larger businesses Very large number of small sole proprieter and partnership businesses that provide goods and services to households and small businesses The South African business environment. Words & Terms investors: people who lend money to businesses Module 1: Structure and roles of different types of organisations 7

13 Very small, sole proprietor and partnership businesses support larger businesses, which support medium-sized businesses which, in turn, support very large businesses. Together, all businesses, support the South African economy. Words & Terms economy: the total money flowing through South Africa Did you know? Unit 1.3 Business activities common to all organisations Even though different sizes, types and structures of business support each other, they all have some business activities in common, which are: purchasing materials and services applying labour to convert the materials and services into a new product selling the product to customers making a profit from the sales of the product. Let s look at these activities in more detail. profit: the difference between income and expenses. Purchasing Businesses purchase goods and services that they use in their business operations. These purchases are usually solid materials, but might also be materials, such as electricity, water and telephone facilities. Applying labour Applying labour is usually called working and covers every activity that an individual contributes to a business, for example: changing purchased materials into a different product using purchased services, such as telephone facilities, to make your service work. Small and medium-sized businesses are often referred to in business circles as SMMEs, meaning Small, Medium and Micro Enterprises. Micro enterprises are extremely small businesses, often with one person making craft items to sell at the local market. Business has been defined as Turning inputs into outputs at a profit. This means using materials and labour to produce something that you can sell for a profit. Think about it Think about your proposed new venture and list all the materials and services that you would need to purchase so that your business can operate. Think about your proposed new business and list all the ways in which you would need to apply labour in order to produce your product for sale. In the workplace In business, goods and services are often called products or offerings. This is why we use the term products in this book, even when it includes services. Selling Selling means any activity that you use to persuade people (customers) to buy your product. This can include: standing at your local market, holding out your products for people to buy 8 Module 1: Structure and roles of different types of organisations

14 packaging your product for multiple sale in retail outlets making telephone calls to persuade customers to buy your product advertising your products for sale in newspapers and magazines creating literature describing your product in order to persuade people to buy from you. Selling at a flea market at a shopping mall multiple: large quantities outlets: shops Words & Terms In the workplace In larger organisations, the last two activities in the list (advertising and producing literature) are called marketing. Profiting The reason why people start a business is normally to make a profit. There is little point in buying materials and services, applying labour and getting involved in selling activities, if you do not make a profit. (There are organisations that carry out all the usual business activities without intending to make a profit, such as charities, government offices and other non-profit organisations. However, these are not businesses in the sense that we use in this book.) A business makes a profit when it sells its products for more than it has cost it in materials, labour and services to produce. In other words, once a business has paid all its bills and labour costs, it is left with money. While businesses of all sizes have common activities, the businesses that make up the South African economy also tend to form into similar, or common, structures called sectors. The economy of the country comprises a large number of business sectors, some of which are: retail manufacturing financial services mining agriculture education transport. Within each industry sector, businesses tend to belong to a particular sub-sector that more closely describes its core, or main, activities and products. For example, the retail business sector has the following subsectors: food clothing household appliances and electrical goods furniture Module 1: Structure and roles of different types of organisations 9

15 luxury goods books and magazines cosmetics. We can even take this division further and say that the retail industry food sub-sector has the following sub-sub-sectors: fresh foods prepared and packaged foods tinned foods restaurant and café foods. Clothing is a retail sub-sector (It is not the usual practice to consider breakdowns beyond the subsector level.) Unit 1.4: Companies and major roleplayers in business sub-sectors The retail industry sub-sectors in South Africa are often dominated by large organisations that have branches situated all over the country, including smaller towns and even villages. It is therefore easy to identify key players in every sub-sector. These are examples from the retail sub-sector: Food sub-sector Within the food sub-sector of the retail industry, these are some wellknown companies that have branches in many towns and cities: OK Checkers Shoprite Pick n Pay Spar Woolworths Game. Bookselling is also part of the retail sub-sector Think about it Think about the businesses in your area. Make a few notes of the industry sectors that are represented in your area, as well as the sub-sectors you can identify in each industry. Words & Terms key players: large businesses in an industry sector Some of these businesses cover other sub-sectors of the industry as well. Pick n Pay also sells clothing and stationery. Woolworths also sells clothing and cosmetics. Game also sells furniture and electronics. Clothing sub-sector In a similar way to the food sub-sector, the clothing sub-sector also has a number of dominant key players, such as: Pep Stores Ackermans Jet Edgars Foschini Truworths. 10 Module 1: Structure and roles of different types of organisations

16 \ In the workplace Large retail organisations employ extensive marketing techniques in order to sell their products. These include: advertising in the media (newspapers, magazines, radio, television, billboards, etc.) hosting special events (e.g. fashion show, popular sales periods) competitions. The aim of the marketing function in the retail industry is to persuade customers to visit stores and shops in order to look at and buy the products for sale. Assessment activity 1.2 (Peer-assessed and marked) Work with a partner. Choose a sub-sector in an industry of your choice. (This could be the retail industry.) 1. Identify and list the range of stores and shops in your area that work in that sub-sector. 2. Collect advertisements from newspapers or magazines for at least two of the businesses on your list. 3. Visit the largest outlet on your list and obtain one of the company s leaflets that describes a product for sale. 4. Compare the advertisements you have collected and write a few short notes on how effective you think they are in attracting customers to the stores. 5. Take your information to the next class session and be prepared to discuss your views and conclusions with other members of your group. Keep your completed project in your Portfolio of Evidence. Write your name and today s date on your project. Unit 1.5: Products and services offered by each organisation in the field Sub-sectors in an industry are often identified by the range of products that they sell. Larger organisations often expand their activities to address more than one sub-sector. When we look at the food and clothing sub-sectors in the retail industry, the ranges of products and services could be classified as follows: Module 1: Structure and roles of different types of organisations 11

17 Products and services in the food sub-sector Businesses in the food sub-sector normally sell these products: fresh fruit and vegetables milk and other dairy products (cheese, yoghurt, cream, amasi, etc.) bread and confectionery meat, fish and chicken prepared meals frozen foods water and other soft drinks alcoholic drinks, such as wine, spirits and beer canned and bottled foods grains, sugar, flour and other dry foods beverages, such as coffee and tea. Words & Terms confectionery: ca kes and biscuits catering: prepar ing food on behalf of someone else hosiery: items lik e stockings and so cks, to be worn with shoes Smaller businesses in the food sub-sector may sell only one of these products, such as alcoholic drinks. Major stores can also sell other complementary or supporting products, such as household cleaning products and equipment. Frozen food section in a supermarket Bread display in a supermarket Fresh fish in a supermarket Some businesses in the food sub-sector also offer additional services, for example: Catering services Delivery services. Products and services in the clothing sub-sector Businesses in the clothing sub-sector normally sell these products: women s clothing men s clothing children s clothing baby clothing oversized clothing underwear shoes and hosiery sports clothing swimwear hats. Men s clothing Shoes 12 Module 1: Structure and roles of different types of organisations Children s clothing