Steps in establishing a business

Steps in establishing a business

As usual, it is a pleasure to be with you all again. I am sure you will all agree that in establishing a business, it is important to do things in the right order. Therefore, today we will look at the logical order that should be followed in setting up a business to ensure its success.

Let us begin with step number one. Conceptualisation. The person who desires to set up the business must come up with ideas regarding the product, type of business, size of business, etc.

Step number two is market research (market probe). This is done in order to be aware of customers’ needs, which the business will attempt to satisfy, with the aim of making a profit. Market research is a systematic approach to collecting information, recording and analysing the information collected and adopting it to fit the marketing plan of the business. The aims of market research are:

• to find out what the public wants
• to assess the likely volume of demand
• to discuss what will influence consumers, for example product name, style and colour of packaging, price, etc.

Identification of resources

Step number three is identification of resources. Resources refer to the factors that will be utilised in producing the good or service. A decision must be taken as to the type of resources and where they will come from. These resources include the financial resources, man-made resources (capital) human resources (labour and enterprise) and the natural resource (land). Time is also a resource that must be considered.

Step number four is the very important step of creating a business plan. A business plan is a written summary of an entrepreneur’s proposed business venture. It includes its operational and financial details, its marketing strategies, its management skills and abilities, etc.

The plan serves as an entrepreneur’s road map on a journey towards building a successful business. It describes the direction the business is taking, what its goals are, where it wants to be and how it is going to get there.

A business plan is also used to attract lenders and investors and serves as a sales tool.

Step number five is the acquisition of funds. Having already decided how much funds will be required for the business, the future business owner must decide how the funds will be obtained. Will it be by public means or from a financial institution? If it will be from a financial institution, the financial requirements and the terms of repayment for the loan must be taken into consideration

Finally, step number six, operation of the business. You are now ready to begin producing or selling your goods and services. For this to happen, an organisational structure must be in place and each department of the business must realise its role in the successful operation of the business.

In establishing your business, you must ensure that you have the required functional areas of the business. These refer to specialised departments within a business. These departments carry out specific functions that assist the business overall.

Businesses can vary greatly in size. When a business is small, there are no definite functional areas evident. This is so because the owner usually produces and markets his own products and does his own accounting and personnel work. As the business expands, however, specialised (functional areas) departments become necessary. Most large businesses have four functional areas: production, finance, marketing and personnel. In very large businesses, there are two additional functional areas: research and development and social.

We will now take a brief look at what takes place in these specialised departments.

The production function

In this department, raw materials are combined to produce goods, and services are also provided. Designers make specifications which are fully developed and tested. Sample products are also made. There will be no production department, however, if the business is only engaged in retailing or wholesaling, since they are buying and selling already-manufactured goods or they are in the service industry.

The finance function

This department is responsible for the accounting procedures and processes of the business. Its staff are also involved in the investment of funds in plant and machinery, as well as in the purchasing of the needs of other departments of the business. Where shareholders are paid dividends, this department will make it a reality for them.

The marketing function

The marketing function includes market research, publicity, distribution, selling, merchandising and after-sales services, advertising and sales promotion.

The personnel function

This department is sometimes referred to as the human resource department. The functions and duties of this department concern mainly the employees of the business. Primary concerns are: planning and forecasting manpower requirements; recruitment and selection of employees; job analysis and job description; job specifications and employee training, etc.

Having looked at the four main areas, let us spend a few minutes on the additional functional areas that may exist if the business is large.

The research and development function

The work of this department includes many types of research, for example consumer research, product research and motivation research. Feasibility studies and pilot projects are carried out and communication with research institutes, such as the Department of Statistics, takes place.

The social function

This may include trade union negotiations, efforts to reduce pollution and dumping of waste products, provision of health facilities and provision of clean working environments and the initiation of social groups in the business, for example clubs and credit unions.

That’s it for the functional areas of the business. Next week we will be looking at the sources of information for conducting research into the establishment of businesses. Take care.

The link between planning and operating a business

Hello friends. It is a pleasure to once again present another lesson to you. The specific objective of this lesson is to help you to be able to identify sources of information for conducting research into the establishment of businesses. Also, to help you explain the relationship between planning and the operation of a business.

Sources of information

The research plan can call for the gathering of primary data, secondary data or both.

Primary data, also known as field research, is research that collects original or new data using various techniques. These techniques include:

• Questionnaires. The questionnaire is the most common survey method. It may be written or orally administered. It is designed specifically for the task and is normally completed face to face, by telephone or through the post or email.
• Test marketing. A potential new product is marketed on a small scale regionally to gauge people’s reaction to it, before committing the firm to production and national launch.
• Consumer panels. A panel consisting of a small number of consumers is set up. They receive the product and comment on it.
• Interviews. These may be formal or casual. They may be conducted on an individual or a group basis.
• Observation. People’s reactions are quietly watched or noticed while they shop. This provides information from the marketplace.

Sampling in primary or field research

If primary research is to provide relevant information, it must use a representative sample, that is, consumers forming the sample must represent the market as a whole. The researcher must also decide how the respondent will be chosen and how large the sample will be.

Sampling methods

(a) Random – This is where everyone in the population has an equal chance of selection, since no special criteria for selection are used.

(b) Stratified – A subgroup of the population is selected, for example using age, sex, occupation, etc. Only those in the subgroup will be in the sample.

(c) Where a quota is set. Data is collected until the target quota is met.

The larger the sample size, the more expensive and time consuming it is to collect the data.

Desk or secondary research

This type of research uses existing information, such as information in the firm’s own records. This may include:

• sales records
• official publications
• statistical and newspaper reports
• government publications
• trade association studies
• university journals
• websites
• textbooks, etc.
  The major advantage of this type of research is that the information is readily available and can be stored for the future. Among the disadvantages is the fact that it is sometimes out of date and the research is more time consuming than the primary type of research.

Planning and operation of a business

The link between the planning and operation of a business is that the planning stage is the first stage and the operation stage is the last stage. Between these two important steps there are a number of other steps which include research and the acquisition of funds for the business. The plans are short term, medium term and long term. The long-term plans are the overall plans of the business.

However, in order to achieve these plans, interim or short-term plans and medium-term plans must be established in line with the long-term or overall plans. In other words, once the interim or short-term plans and the medium- term plans have been achieved, the long-term or overall plans would have been achieved.

The short-term and medium-term plans are the stepping stones to the long-term plans. If the entrepreneur tries to achieve long-term plans without short-term and medium-term plans, he is likely to fail in the achievement of such plans. Without proper planning, operation of any business is not likely to succeed.

Next week we will outline some of the regulatory practices required by the Government in establishing a business and also look at sources of capital for setting up of a business. See you then.

The business plan 1

We are still on section three of the syllabus: Establishing a Business. This week we will discuss the business plan. For the examination, you should be able to outline the various features of the business plan, including the executive summary. In addition, those of you doing the school-based assessment (SBA) will find the information very useful, since you are required to do a part of the business plan, that is, the production plan, the marketing plan or the financial plan.

A business plan is a written document indicating an entrepreneur’s proposed venture. It shows its proposed production, marketing and finance. The business plan is the entrepreneur’s ‘road map’ on the journey towards building a successful business. It describes the direction the business intends to take, its goals, where it wants to be in the future and how it is going to get there. Some regard the business plan as a document that tells the entrepreneur’s story by looking at the vision, current status, expected needs, defined markets and projected results of the business.

Functions of the business plan

1. It guards the operations of the business by charting its future course and devising a strategy to get to the end of that course. It gives managers and employees a sense of direction.

2. It is used to attract lenders and investors.

3. It is used as a sales tool.

Who are the users of the business plan?

1. Lending institutions. Commercial banks, for example, may require the business plan as part of the processing of loan applications.

2. Strategic partners or investors. Such persons would want to assess the viability of the business of which they will be stakeholders.

3. Landlords. They need to ensure that the activities of the business will be viable so that tenants will be able to make their regular monthly rent payments.

Sections of the business plan

A business plan usually has four main sections:

1. The executive summary

2. The production plan

3. The marketing plan

4. The financial plan

The executive summary

This is the first part of the business plan, but it is usually done last. It summarises all the necessary points of the proposed venture. If there is a financial request, it should explain the purpose of the financial request, the dollar amount required, how the funds will be used and how the money (loan) will be repaid.

The executive summary is useful in instances where individuals are too busy to read the whole business plan, but need some vital information about the proposed business.

The executive summary includes:

1. The name of the business

2. The type of business

3. Information about the owners, for example, their names, addresses, qualifications and work experience

4. A description of the product (detailed)

5. A statement of the financial needs. This includes how much is needed, what the funds will be used for and what will be the proposed means of repayment.

6. An overview of the planned strategic actions to ensure that the business is a success.

The production plan

Information that may be included in the production plan:

• The production process
• Type of production (primary, secondary, tertiary, etc)
• The level of production (subsistence, domestic or export/surplus level)
• Use of technology (state the processes that the machines will be used for (sewing, cutting, dyeing, etc)
• Whether the fixed assets will be rented, leased or bought
• The expected life of the fixed assets if they will be bought
• Maintenance of the fixed assets (for example how much will it cost per year)
• Sources of equipment (places where they can be obtained and the costs)
• Planned capacity (how much they will be able to produce)
• Terms of purchase of assets (cash or hire purchase)
• Location and layout of machinery (time may be lost if machines are far apart)
• A list of the raw materials needed
• Labour – number needed, cost (wages), statement of availability, skills and experiences needed
• Overheads – all expenses
• Production cost (this plus mark-up [profit] equals final price)

I will stop here for today. I hope that those of you who will be doing the SBA have already decided on the plan that you will be doing. Next week I will continue with the business plan by looking at the marketing plan and the financial plan.

The business plan (part II)

As promised, this week we will complete our look at the business plan. The final two sections are the marketing plan and the financial plan. In addition, there are some ethical issues to be considered when one is about to embark on any type of business.

The marketing plan

This plan may include:

• A description of the good or service and a statement of what makes it different from others already on the market
• Justification of the location of the business
• Market area
• Main customers
• Total demand
• Market share
• Selling price (note current price (competitors), customers’ ability to pay and advertising costs)
• Sales forecast over a set period of time
• Promotional activities
• Marketing strategies, including advertising, sales promotions, etc.
• Potential buyers – who they are, what their motivation to buy will be, expected annual purchase, whether the product will be seasonal and, if so, what times of the year the product will be purchased.

The financial plan

This part of the business plan may include:

• A statement of how much capital is required, how it will be obtained and the terms of repayment, if any
• Security for loan if one will be sought
• How the funds obtained will be used (a budget can be created)
• Cash-flow statement
• Projection of operation costs
• Profit-and-loss statement
• Balance sheet
• Break-even point (estimate about how long it will take to reach there)
• Return on investment (percentage projected)

Ethical issues

Ethics has to do with right and wrong, good and bad. The ethical issues include:

• Ensuring that if a licence, permit or registration is required for the operation of the business, everything is taken care of. If there is no proof of the legality of the business or if the business has not been given approval to proceed, the Government can shut it down.
• Refraining from money laundering. This is when money from illegal or underground economy is used in the legal business, for example to purchase assets. When this is done, it distorts the national economy.
• Steering clear of cartels, example wine and drug cartels and OPEC. These restrict quantity and increase prices.
• Reporting extortion, which is illegal.
• Making sure there is no document falsification, in terms of figures or information
• Avoiding of poor labeling
• Resisting price gouging. This is the practice of increasing prices when the supply is low and the demand is high, for example in times of natural disaster. At such times, the supplier has the upper hand.
• Using standard accounting procedures.
• Paying all required taxes. Tax evasion is illegal and cheats the Government of much-needed revenue.
• Disposing of waste properly. Dumping waste in rivers and seas causes pollution and ill-health.
• Providing quality materials. Inferior raw materials must not be used as they can result in poor quality and, perhaps, dangerous goods that may shorten lifespan or cause accidents.
• Adhering to business standards set by the Bureau of Standards Jamaica and the Government
• Broadcasting misleading advertisements. They should be fair, truthful and should not prejudice any group of persons.
• Making truthful declarations. False declarations must be avoided, for example saying juice is 100 per cent natural, contains 100 per cent vitamin C, with no preservatives, when this is not so.
• Avoiding double ticketing, that is, putting new, higher price tags on products already priced.
• Falsely writing cheques for money not in the bank. These cheques will be dishonoured and the business’ credibility will be lessened.

Consequences of unethical and illegal practices

Misleading advertisements – Unfair and fraudulent practices on the population.

Withholding of tax – Cheating the Government of revenue

Unethical disposal of waste – Pollution and ill-health, even death

Money laundering – Distortions in the national economy

Make a list of some of the other unethical and illegal practices and the possible consequences, as done above.

See you all next week, when we will outline the regulatory practices instituted by the Government for the establishment of different types of businesses.