New Venture Creation Student s Book NQF Level 4 B. Brown
FET FIRST New Venture Creation NQF Level 4 Student s Book FET First B. Brown 2008 Illustrations and design: Troupant Publishers (Pty) Ltd 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 unauthorised act in relation to this publication may be liable for criminal prosecution and civil claims for damages. First published 2008 Published by Troupant Publishers (Pty) Ltd P O Box 4532 Northcliff 2115 Distributed by Macmillan South Africa (Pty) Ltd Cover design by René de Wet Typesetting by Hand-off design & publishing services Edited by Gillian Jordan ISBN 978-1-920311-53-7; eisbn: 978-1-430801-46-7 It is illegal to photocopy any page of this book without written permission from the publishers.
Contents Topic 1: Establishing and running a small business enterprise 1 Introduction 2 Module 1: Determining your potential 3 Overview 3 Unit 1.1 Your personal profile 4 Unit 1.2 How to match your personal profile to a business opportunity 5 Unit 1.3 Training for success 6 Unit 1.4 When and where to get training 8 Unit 1.5 Market research 10 Unit 1.6 The right distribution channel 13 Unit 1.7 The right location 14 Unit 1.8 Restrictions on trade 18 Unit 1.9 Networking 20 Summary 22 Module 2: Identifying the risks 23 Overview 23 Unit 2.1 What are the risks? 23 Unit 2.2 Managing the risks 28 Unit 2.3 Are marketing, advertising and insurance costs worth the expense? 31 Summary 35 Module 3: Identifying the financial aspects 36 Overview 36 Unit 3.1 Start-up and working capital 36 Unit 3.2 The relationship between cash flow and profit 37 Unit 3.3 Financial controls for business viability 39 Unit 3.4 Business contracts 45 Unit 3.5 Interpreting business contracts 47 Unit 3.6 Tax responsibilities and liabilities 48 Summary 51 Module 4: Making your decision 52 Overview 52 Unit 4.1 What is an entrepreneur? 52 Unit 4.2 Marketplace success factors 53 Unit 4.3 Do you have what it takes? 56 Summary 57 Summative assessment activity for Topic 1 57 Topic 2: Financing a new venture 59 Introduction 60 Module 5: Determining your capital requirements 61 Overview 61 Unit 5.1 Funding requirements and capital structure 61 Unit 5.2 Pre-operating costs 63 Unit 5.3 Monthly operating costs 64 Unit 5.4 Financial viability 67 Unit 5.5 The break-even point 68 Summary 70 Module 6: Investigating your funding options 71 Overview 71 Unit 6.1 Financial institutions 71 Unit 6.2 How to select your lender 75 Unit 6.3 The good and the bad about funding options 79 Unit 6.4 How to decide on a funding option 80 Summary 80 Module 7: Compiling your personal financial statements 81 Overview 81 Unit 7.1 The income and expenditure statement 81 Unit 7.2 The assets and liabilities statement 83 Unit 7.3 Usefulness of a personal assets and liabilities statement 87 Summary 88 Module 8: Obtaining your finance 89 Overview 89 Unit 8.1 How to determine your collateral requirements 89 Unit 8.2 What documentation do you need? 91 Unit 8.3 Consistency between finance option and business plan 92 Unit 8.4 How to obey the finance laws 93 Summary 94 Module 9: Identifying alternative funding sources 95 Overview 95 Unit 9.1 Loan debt and owner s equity 95 Unit 9.2 Other sources of equity 96 Unit 9.3 Leasing 100 Unit 9.4 Comparing your options 101 Summary 101 Summative assessment activity for Topic 2 102 Topic 3: Complying with organisational ethics 103 Introduction 104 Module 10: Addressing ethical issues 105 Overview 105
Unit 10.1 The code of conduct 105 Unit 10.2 The code of conduct and successful marketing 107 Unit 10.3 Ethical behaviour and the organisation 108 Summary 109 Module 11: Applying ethical standards of behaviour 110 Overview 110 Unit 11.1 How to implement a code of conduct 110 Unit 11.2 How to handle deviant behaviour 111 Summary 112 Summative assessment activity for Topic 3 113 Topic 4: South African law and the regulation of risk management 115 Introduction 116 Module 12: Identifying legislation that affects risk management 117 Overview 117 Unit 12.1 Regulatory legislation 117 Unit 12.2 How the Acts apply 125 Summary 126 Module 13: Understanding the risks of non-compliance 127 Overview 127 Unit 13.1 Compliance aspects of legislation 127 Unit 13.2 Legal consequences of non-compliance 128 Unit 13.3 Risks to your business of non-compliance 129 Summary 131 Module 14: Using legal terminology in business 132 Overview 132 Unit 14.1 Legal concepts explained 133 Summary 136 Module 15: Applying regulatory legislation 137 Overview 137 Unit 15.1 Legislation and risk management 137 Unit 15.2 Categories of legislation risks 138 Unit 15.3 Making your business practices compliant 139 Summary 141 Summative assessment activity for Topic 4 141 Topic 5: Applying the principles of costing and pricing to a business venture 143 Introduction 144 Module 16: Implementing a price-setting policy 145 Overview 145 Unit 16.1 The trading cycle 145 Unit 16.2 Capital, revenue, costs and profit 146 Unit 16.3 Costing, pricing and tendering 148 Unit 16.4 Fixed costs, variable costs and total costs 152 Summary 153 Module 17: Analysing the factors that affect pricing decisions 154 Overview 154 Unit 17.1 Factors that influence profitability 154 Unit 17.2 Pricing decisions and the break-even point 157 Summary 160 Module 18: Understanding costs, revenue and profits 161 Overview 161 Unit 18.1 Methods of costing 161 Unit 18.2 Product costs and selling prices 163 Unit 18.3 Profit 165 Unit 18.4 Review your costing and pricing calculations 166 Unit 18.5 Revenues and expenses 167 Unit 18.6 Competitive markets 169 Unit 18.7 Assessment of suppliers and new products or services 170 Unit 18.8 Opportunities for development or improvement 171 Summary 171 Summative assessment activity for Topic 5 172 Glossary 173 PoE Guideline 175
Topic 1 Establishing and running a small business enterprise
The first Topic in this New Venture Creation Student Book looks at the starting point of any new small business and the influence that the owner has on the business through his or her background and experience. We consider personal development and the research required to identify marketplace factors and the suitable location for the business. We also explore how you can develop business contacts through networking. Any business activity has risks attached to it and we look at the various risks to a new business venture and consider how to avoid, or reduce, the effects of risks. We also explore the use of insurance for identified risks. Inevitably, we cannot think about starting a new business without considering how that business will be financed, and we approach the issue of finance by looking at start-up capital, cash flow and the generation of profit. We also investigate the financial controls that you have to observe to ensure that your business is profitable and successful. This means that we also have to look at the contracts that business owners have to negotiate and the need to comply with South African tax regulations. Throughout this Student Book, we will give examples of various factors and calculations using a fictitious new venture business called Paradise Gardens CC. These examples should help you to understand how the subjects in this Student Book apply to real life businesses. We hope that you will enjoy your reading!
The aim of this Module is to show you how to prepare yourself for the role of a small business owner by exploring the potential of your business idea in relation to personal characteristics, training needs, product market, location and possible business constraints. When you have completed this Module, you should be able to: or service that has potential as an SME specific location When starting a new business venture, most people begin with either the concept of I want to work for myself or an idea that they think they can turn into a successful business. This is a time of great excitement and enthusiasm but also a time of danger. Danger, because there are a number of processes that the entrepreneur needs to progress through in order to make sure that he or she can convert the idea and the enthusiasm into a viable business. Throughout this Student Book, we will invite you to apply the knowledge you are gaining to a business idea. This can be the business that you have already decided to operate or an idea that up to now you have only talked about with close friends and family. The process of applying your new knowledge to the idea will give you a deeper understanding of the issues as we discuss them. One of the first actions you need to take is to identify whether your personal characteristics are suited to the entrepreneurial life. To do this, you have to analyse your areas of strength and weakness.
Did you know? Fig.1.1 Small businesses vary in size. Unit 1.1: Your personal profile We are all different personalities. That is why some individuals prefer the safer, more secure existence of being an employee and receiving regular wage or salary payments to being self-employed and facing the potential uncertainty of an irregular income pattern. However, being an entrepreneur is more than being able to accept financial insecurity it is also having the ability to harness your personal strengths, weaknesses, abilities and passions to drive your business idea successfully. Therefore, a good place to start your journey towards being a successful new venture owner is by analysing your personal characteristics. You can do this using a SWOT Analysis, which is an analysis of your strengths, weaknesses, opportunities and threats. The last two, opportunities and threats, relate to the business itself and we will consider them in the next Unit. Here we will examine just strengths and weaknesses. You analyse your strengths and weaknesses by listing each group on a separate sheet of paper. When you do so, use the following guidelines: Small businesses can vary in size from a single-person operation to a business that employs several people. The larger of these businesses tend to be labelled SMEs, meaning that they belong to the group of small and medium-sized enterprises, while the very small businesses are called SMMEs, which are small, medium and microsized enterprises. To avoid confusion, throughout this Student Book we will refer to both groups collectively as SMEs. Strengths Factors you have now, such as experience and qualifications, not ones that you will acquire in the future Factors that will help you to achieve your objectives Weaknesses Adverse factors you have now, such as lack of qualifications or cash, but that you want to address in the future Factors that could prevent you from achieving your objectives SWOT Analysis Here are some typical examples of strengths and weaknesses: Strengths: Sound experience in the chosen industry; business qualifications; availability of start-up finance; family support; enjoyment of challenges; available business location; customers waiting for your products; creativity. Weaknesses: Little industry experience; no qualifications; not comfortable in stressful situations; insufficient start-up cash. By listing your personal characteristics, you identify issues that you might need to address before developing your business idea, or need to work on at the earliest opportunity. Therefore, do not see weaknesses as demotivating and certainly do not avoid listing them because they do not look good. The more you know about yourself, Fig.1.2 Use a SWOT analysis to analyse your personal characteristics. 4 Topic 1: Establishing and running a small business enterprise
the more likely you are to succeed as a new business owner. Another thing you should consider is whether any of your strengths could also be weaknesses, and whether any of your weaknesses could also be strengths or opportunities for change. For example: A common strength-plus-weakness is the family. Family support can be a great strength, but if family members try to intervene in your business decisions, then that strength can disappear. Therefore, you need to recognise family characteristics to determine what longterm behaviour you are likely to experience from family members. A common weakness-plus-strength is the ability to handle stress. If you do not like stressful situations, you are more likely to take the necessary steps to avoid them. Being more careful in the way that you make decisions can be advantageous. Therefore, if you feel that any factor could also appear in the other category, you should list it accordingly. Assessment activity 1.1 Fig.1.3 The ability to handle stress is a weakness-plus-strength. Work in pairs. Create lists of your strengths and weaknesses in as much detail as possible. When you have completed your list, ask a friend or family member to add any other characteristics that he or she considers are applicable to you. Keep your completed project in your Portfolio of Evidence. Write your name and today s date on your project. Unit 1.2: How to match your personal profile to a business opportunity The other part of a SWOT Analysis is to list opportunities and threats related to your business. Again, you do this by using separate sheets of paper for each category and applying the following guidelines: Opportunities Factors that will be available to your business in the future, such as new products, advertising and business growth Factors that you can grasp to help you to achieve your objectives Threats Adverse factors that might arise in the future, such as price increases, lack of skilled labour or new competitors Factors that, in the future, could threaten your business Here are some typical examples of opportunities and threats: Opportunities: The ability to introduce new products into the marketplace; a sound economy means that customers have more money to spend; new equipment could help to reduce costs. Module 1: Determining your potential 5
Threats: Existing suppliers might have tied up the market and undercut your prices; government policies might not be favourable to your business; competitors might be more able to afford newer and more efficient equipment. Again, you need to cross-check whether any of the items you have listed could also be written in another category of the SWOT Analysis. You will probably find that some of your weaknesses are also opportunities to address the adverse tendencies, and that some of your strengths might identify potential threats, for instance if a strength loses its power for some reason. Assessment activity 1.2 Fig.1.4 Identify business opportunities. Work in pairs. Create, in as much detail as possible, lists of the opportunities and threats that your business idea might face. When you have completed your list, ask a friend or family member to add any other characteristics that he or she considers might be applicable. Keep your completed project in your Portfolio of Evidence. Write your name and today s date on your project. When you have completed your SWOT Analysis, you will have matched your personal strengths and weaknesses with the opportunities and threats faced by your business. At this point, you should go through your complete SWOT Analysis and add any business strengths and weaknesses, and any personal opportunities and threats that you can think of. This will give you a complete personal outline for starting and working in your new SME. In the workplace Many very successful organisations use a SWOT Analysis, which they regularly update, as a guide to business decisions. Managers continuously check that their actions are aimed at reinforcing strengths, and addressing weaknesses, opportunities and threats. This is a realistic way of making sure that the business keeps in touch with the changes going on around it. For many organisations, a factor that appears regularly in SWOT Analyses (and often in every category) is that of training and development. Let s look at this aspect in a little more detail. Unit 1.3: Training for success You might have included training in your personal SWOT Analysis, not necessarily for yourself but for people that you employ in your 6 Topic 1: Establishing and running a small business enterprise
business. For example, you could have identified training weaknesses, opportunities and threats in a similar way to that done in the following case study. Fig.1.5 Employees may require training. Fig.1.6
As you can see from this case study, Nono and Max have identified that, in order for their business to be accepted by customers and become successful, they need to train employees in the required gardening and plant skills. They have also acknowledged that they personally need to learn business skills. Work in pairs. Think about any training and development factors that could apply to your business and add them to your SWOT analysis. Keep your completed project in your Portfolio of Evidence. Write your name and today s date on your project. Once you ve identified that training of one sort or another is required, you need to know when the training is needed and where to get it. The timing of training is very important, as is where you get it. Let s see why.
When to access training As an SME owner, you need to ensure that you have all the skills necessary to protect and stimulate your business, so you need to ask yourself the following questions: Do I have the skills that I need for my business? Do my employees have the necessary skills to do their jobs effectively? How can I get the necessary skills? How long will it take to acquire those skills? Where can I access the skills? At what point will those skills be vital for my business? What ongoing skills development should I consider in relation to the anticipated growth in my business? The answers to these questions will guide you in deciding: the training required the best time to implement the training to make the business effective which organisations deliver the required training what plans you should put in place now for future skills development. Where to access training Local colleges will provide information about their training and education courses. You can also get information from distancelearning organisations, such as Intec, and from your local Chamber of Commerce. Further, your industry SETA (Sector Education and Training Authority) will tell you about specialist courses related to your business. Assessment activity 1.4 Fig.1.7 Find a training institution that will match your training needs. Work on your own. Contact the following: a local college, Intec and the SETA that deals with your business industry sector, or access the appropriate websites for those organisations. Collect information related to the training courses that would address the factors that you identified in Assessment activity 1.3. Write a brief report identifying the courses that you consider most appropriate, and why. Attach the details you have collected to your answer. Keep your completed project in your Portfolio of Evidence. Write your name and today s date on your project. Module 1: Determining your potential 9
Unit 1.5: Market research In the workplace Some organisations produce goods for sale, while others offer services for which they charge a fee. It is common commercial practice to include both goods and services under the heading of products and throughout this Student Book the word products will refer to both goods and services. In some industries, particularly marketing and advertising, products are also referred to as offerings. Fig.1.8 To run a successful business you must be able to sell your products to customers and so it is important to identify what opportunities are available for selling them. This process is called market research. Specialist businesses exist that can carry out market research for you. However, it is possible for you to carry out your own market research. You can do so by using the following techniques to determine the level of interest in your product(s): Stand in front of the location where you would like to establish your business and question passers-by. 10 Topic 1: Establishing and running a small business enterprise
the day and week, and question a number of potential customers. When you do this, you need to select the type of people who are likely to buy your product. For example, middle-aged, well-dressed individuals are more likely to be interested in gardening services than are teenagers. call at various industry locations and question the owners or managers about your products. You can also attend a Chamber of Commerce meeting where you are likely to meet a number of different business owners. similar products. demographic statistics. These are details of the type of people who live in different residential locations in your area, including their levels of disposable income, the number of children in a household and the types of cars they drive. You can then match this information to the people who are more likely to buy your products. You need to get responses from at least 100 appropriate people in order for your research to be reasonably accurate. Appropriate people are people who are likely to buy your products, taking into account age, sex and disposable income level. Once you have this information, you will have a good idea of your customer potential and the likely volume of sales of your products. Fig.1.9 Research the Internet as part of your market research. Work on your own. Think about the people who are likely to buy your business products and identify their characteristics (age, sex, residential location and disposable income). Research Internet demographic statistics to identify the potential number of customers in your area and copy out the information you find. Summarise the information by calculating the potential sales volume of your products. Keep your completed project in your Portfolio of Evidence. Write your name and today s date on your project. When carrying out market research, it is a good idea to list the questions you will ask beforehand. The following questions are the sort you might want to ask:
Where would it be more convenient for you to buy this product? What do you like about the brand that you buy? What do you NOT like about the brand that you buy? Would you change brands to a different product if it was better, cheaper, more expensive? Would you like me to send you information about a new product? These questions give you information about the potential success of a new product in the marketplace and the price that you might be able to charge. However, you should remember that other suppliers in the marketplace will also try to get similar information, so you also need to have a good knowledge of your competitors. Understanding competitors Within your area of operation, you might already know of competitors that offer similar products. A good way to start assessing your competitors is to make a list of all the competitors you know of, including the prices they charge for products. Then obtain samples of their sales leaflets, advertising and other marketing literature. This will give you a good idea of how your competitors run their businesses. In addition, you can again access the Internet and research other businesses who supply similar products to yours. These websites often give information about the business and again you will get useful information about your competitors. Remember that, if your business is going to be successful, you have to be able to at least equal all the positive characteristics of your competitors, and make sure that your products do not contain the negative characteristics of your competitors. Fig.1.10 Meet with potential customers to discuss your products. Assessment activity 1.6 Work on your own. List the businesses in your area that supply similar products to yours. Write down the products that each one supplies and the prices charged. Also, access the Internet and get information about any other suppliers of your products. Summarise the information you collect and write a short report identifying the positive characteristics that your products must include, and the negative characteristics that you have the opportunity to counter. Keep your completed project in your Portfolio of Evidence. Write your name and today s date on your project. Once you have all the information you can find about customers and competitors, you can decide how best to distribute your products to the marketplace. 12 Topic 1: Establishing and running a small business enterprise
Unit 1.6: The right distribution channel Two of the questions we recommended you to use during your market research were: Where do you buy this product? Where would it be more convenient for you to buy this product? The answers not only tell you where customers normally buy that product but also, and more importantly, what sales location they would find more convenient. This gives you the opportunity, and a potential competitive advantage, to locate the point of sale of your product in a place where customers are likely to look for it and buy it. After deciding on your point of sale, you are left with the decision regarding the best way to distribute your products from the point of production to the point of sale. This means that you have to decide the most effective, and cost efficient, way of delivering products to the point where they are used by the customer. These methods might include: delivering products in bulk to retail or wholesale organisations, possibly in several geographic locations packing products for export and arranging delivery to docks or airports Fig.1.11 Choose the right distribution channels. Fig.1.12 Packing products for export. Module 1: Determining your potential 13
delivering products directly to commercial customers who consume your products in their production processes delivering services in a way that is convenient to your customers. In the workplace In the marketplace, the customer to whom you sell your products might not be the consumer that finally uses the products. For example, farmers sell fruit and vegetables to their customer Pick n Pay, who sells them to Pick n Pay customers who are the final consumers. Therefore, when you come across the words customers and consumers, make sure that you understand the real identity of the group. Assessment activity 1.7 Work in groups. Think about your business products and make short notes on the following, explaining your reasoning: 1. The point of sale that you think customers would find most convenient. 2. The delivery and distribution processes that you would need to arrange to get products or services from the point of production to the point of sale. Form groups of five and as a group, assess and mark each group member s work. Keep your completed project in your Portfolio of Evidence. Write your name and today s date on your project. We ve been discussing how to get your product from the point of production to the point of sale, but of course your small business might not involve production. Your SME might actually be the consumer outlet, or retail shop. Whichever type of business you propose, you will want to know how to choose the best location for it. Unit 1.7: The right location Your choice of the best location from which to offer your products or services depends on a number of factors, including: convenience and security for customers and staff sufficient usable space for the business convenience for distribution channels convenient travelling distance from home an affordable price. Let s look at these factors in a little more detail. 14 Topic 1: Establishing and running a small business enterprise
Convenience and security for customers and staff The first consideration for any business premises is its convenience and security for customers. Customers are the people who buy goods directly from you or access your services at your place of work. If customers cannot find your premises, or cannot park their cars securely, or do not feel safe in your premises, they will not come. Fig.1.13 Consider staff and customer safety when choosing your premises. Therefore, when you look for new premises you have to make sure that you address these vital factors. Any staff you employ will also want to be reassured about their safety while working. It s also a good idea to consider, if possible, how conveniently your premises are positioned for probable staff transport, such as buses or trains. Sufficient usable space for the business Usable space means space that you can actually use for your business. The specifications produced by property agents often state the total floor space of commercial premises, omitting to tell you that half of the space is taken up with toilets, a kitchen and an upstairs office. Make sure you check out the exact usable floor space. Fig.1.14 Check the exact usable floor space for your business. Module 1: Determining your potential 15
When you look for business premises, you need to consider the following factors, depending on whether you are a producer or retailer: bought-in goods? or lathes? for delivery? for customers? for staff? and staff? different level? over the next two to three years? Once you have defined exactly what space you need for each of your business processes, you are in a good position to look for and acquire suitable premises. Fig.1.15 Consider the space needed for receiving and storing goods. If you have to consider regular deliveries to and from your business premises, it is a good idea to consider a location that is convenient to major roads. This enables delivery vehicles to access your premises more easily and can mean that you pay lower delivery costs than if you are located in an out-of-town remote area. If your business attracts large delivery vehicles, another consideration is the type of road leading to your premises. For example, a scenic restaurant located in a pretty country lane sounds wonderful but consider the driver of a large vehicle delivering Coca Cola. He might have to park several hundred meters away and deliver by hand over that distance. You would be charged extra delivery costs for the time and delivery staff required. When you set up a small business away from home, you will probably need to spend long hours at the business premises. This means that you should try to avoid Fig.1.16 Choose a convenient location for receiving deliveries to your premises.
having a one-hour journey between your home and business at the beginning and end of each working day. Therefore, when you are looking for business premises away from your home base, it is worth considering the following: the volume of traffic on the roads you use at the times you travel the safety of your route, especially if business hours require you to travel at night alternative safe routes for times when there are blockages, accidents or special events holding up traffic flow. It is a good idea to actually travel a proposed route, at the times and on the days you would normally travel, to determine the likely travelling time and any problems associated with the proposed journey. It is then up to you to decide whether you are willing to accept that journey, bearing in mind that you will probably repeat it at least five days, and perhaps six or seven days, every week. An affordable price Fig.1.17 When choosing premises, consider how much time you will spend in traffic. You have to consider the price that you are willing or able to pay for the desired premises. Of course, the money that you pay out for rent must be within the budgeted expenses of your business, both when you initially negotiate a rental agreement and later when the rent increases. Some rental contracts contain a turnover clause, often in fine print, which binds the tenant to paying a higher rent (per square metre) when the business reaches a specified turnover. If you are buying your premises, you have to take into account factors such as rates and possible levies, maintenance, insurance and monthly bond repayments. Assessment activity 1.8 Work in pairs. 1. List all your business processes and calculate the space you will need for each one. 2. Visit a commercial property agent and ask for details of premises that might meet your requirements, remembering the issues of convenience and security. (TIP: If you want to get the most information from a property agent, arrange to visit him or her at a less busy time so that he or she will have time to talk to you.) 3. Write a short report about how a particular property meets your requirements and any adverse issues that might apply. Keep your completed project in your Portfolio of Evidence. Write your name and today s date on your project. There is one further factor that you need to consider in relation to your business and the premises that you choose, and that is the by-laws and constraints imposed by the local municipality that might impact on your business. Module 1: Determining your potential 17