Complete Guide: Small Business Startups in Africa and Beyond (Local & Global)
Entrepreneurship is a way of life. Being entrepreneurial means being able to identify, start, and maintain a viable and profitable business, particularly a small enterprise.
People spend most of their lives working for someone else. Some people eventually rise to positions of wealth and power, while the rest languish in unchallenging and low-paying jobs. On the other hand, there are a select few who strike it out on their own; rather than work for others, they put up their own enterprise.
You may ask: “Why should I risk my resources in an unpredictable business when I could hold a stable job with a permanent tenure and an assurance of a regular monthly income, without any risk?” In other words, why be an entrepreneur rather than an employee?
Entrepreneurship has its own rewards, as well as its risks. Having your own business has tremendous rewards, but be sure to weigh prospective returns against the potential risks and losses.
Rewards of Entrepreneurship
· Have Unlimited Opportunity to Make Money – When you have your own business, you will most certainly have unlimited potential to earn money. How much money you earn depends on the time and effort you put into your enterprise. Successful entrepreneurs have earned their wealth and prestige through hard work and by having the right product for the right market at the right time.
· Be Your Own Boss – As sole proprietor of your business, you make the decisions for your enterprise and take full responsibility for them. The quality of these decisions will translate into either gain or loss for your business. Being your own boss means you are in control of your future. You have a better grasp of what you want to be.
· Tap Your Creativity – A business usually starts out as an idea. You will have the opportunity to harness this creativity and turn your idea into products and processes.
· Overcome Challenges and Feel Fulfilled – Starting a business is by itself an accomplishment. Running a business tests an entrepreneur’s capability in securing and managing resources. How well a business turns out depends on the owner’s ability to face challenges and overcome them.
Risks of Entrepreneurship
· Risk of Failure – Small businesses are prone to risks and the possibility of failure – a single wrong business decision can bring a business to bankruptcy.
· Unpredictable Business Conditions – A small business is vulnerable to sudden changes in the business environment. In a fast-paced industry, a small firm may not possess the financial capability nor the organizational capacity to respond adequately to new opportunities and their concomitant problems.
· Long Hours of Work – A prospective entrepreneur must be ready to spend most if not all his waking hours immersed in the business. Also, family time and personal affairs may be jeopardized.
· Unwanted or Unexpected Responsibilities – The entrepreneur may eventually find himself saddled with management responsibilities he did not bargain for.
Process Flow: Starting A Small Enterprise
Self-Analysis: Are You Entrepreneurial?
Considering Other Factors
Determining Your Product/ Service Line and Type of Business
Writing a Business Plan
Determining Your Financial Requirements
Seeking Sources of Capital
Choosing the Site/Location of Your Business
Registering Your Business
Getting Your Business Started
Are You Entrepreneurial?
A successful entrepreneur possesses key characteristics that help his business grow and thrive. Extensive research by the Small Enterprise Research and Development Foundation reveals 10 Personal Entrepreneurial Characteristics (PECs) that lead to success. These are grouped into what are called the Achievement Cluster, the Planning Cluster, and the Power Cluster. Take a look at what they are and try to identify your entrepreneurial strengths and weaknesses.
· Perceives and acts on new business opportunities
· Seizes unusual opportunities to obtain financing, equipment, land, work, space, or assistance
· Takes repeated or different actions to overcome obstacles
· Makes sacrifices or expends extraordinary effort to complete a task
· Sticks to own judgment in the face of opposition or disappointments
· Accepts full responsibility for problems encountered
· Helps own employees to get the job done
· Seeks to satisfy the customer
· Takes moderate risks
· Prefers situations involving moderate risks
5. Values Efficiency and Quality
· Always strives to raise standards and aims for excellence
· Strives to do things better, faster, and at lower cost
· Sets clear and specific short-term objectives
· Sets clear and long-term goals
· Personally seeks information on clients, suppliers, and competitors
· Seeks experts to render business or technical advice
· Uses contacts or information networks to obtain information
8. Systematic Planning and Monitoring
· Develops logical, step-by-step plans to reach goals
· Looks into alternatives
· Monitors progress and switches to alternative strategies when necessary to achieve goals
9. Persuasion and Networking
· Uses deliberate strategies to influence or persuade others
· Uses business and personal contacts to accomplish objectives
· Believes in self
· Expresses confidence in own ability to complete a difficult task or to meet a challenge
Additional Factors to Consider
You were able to pinpoint the entrepreneurial characteristics you possess as well as those areas you need to improve on to be able to run your business smoothly. Tapping your entrepreneurial skills are well and good, but you also have other factors to consider:
1. Personal Interest – you must be genuinely interested in getting into business
2. Knowledge/Talents – your skills and knowledge should be attuned to your chosen line of business
3. Training/Work Experience – you must have at least background training or work experience to help you run a business
4. Government Support/Assistance Programs – find out the possible assistance and support you can get from the government such as incentives, financing
5. Rate of Growth of Business – consider market trends, business growth, and market share
6. Other Considerations – also consider the return in terms of income, employment generation, services, and the like
Decision-Making / Planning
Determining Your Product/Service Line
You can now focus on what specific type of product or service you want to sell. Some of the factors given for consideration will help you come up with a great idea for a product – what specific field are you interested in? Can you apply your skills or background work experience to this field? Provided below are the different types of product/service lines:
Product Industries – You may choose to manufacture your own product, either for
the mass market or for specialized or individual demands. Canned goods, wooden or plastic toys, and ready-to-wear garments are examples of goods produced for the mass market, while precision instruments for industrial use of made-to-order furniture are examples of specialized products.
Process Industries – You may decide to perform only one or two operations in the total manufacturing process. If so, you are not, strictly speaking, a “manufacturer” but rather a “process” enterprise. The activities you perform can be initial operations on raw materials (milling, corrugating, sawing, or cutting), final operations (fishing, assembly, packing, or binding), or skilled or precision operations (embroidery, testing, woodcarving).
Subcontracting Industries – If you choose to be a subcontractor, you will undertake subcontracting work for other industries, usually bigger ones. Bigger industries sometimes subcontract the manufacture of components, supplies, or other specialized operations to smaller shops because the quality required is not viable for their high-capacity operations. Many big companies also find subcontracting a more low-cost and faster way of manufacturing products. Also, you are assured of a market for your products. You can also avail of technical and financial assistance from the big companies. One drawback of subcontracting, though, is that you rely on only one firm or two for your survival.
Service Industries – You could choose to sell services. Service enterprises include repair and maintenance shops, printing and machine shops, and food catering establishments. Beauty parlors, dress and tailoring shops, recreation establishments (bowling alleys and billiard halls), and entertainment enterprises (theaters, discos, and pub houses) are also considered service businesses.
Although falling under the broad classification of a service enterprise, you may consider the trading business a fifth option. The most common type of trading enterprise is retailing.
Types of Business According to Ownership
Would you want to run the business on your own, with a partner, or with more people? Weigh the odds:
Forms of Business
1. Single Proprietorship (one party) – Advantages: Easy to set up, Decision-making left entirely to owner. Disadvantages: Demanding on owner’s personal time, Growth limited by owner’s financial means.
2. Partnership (at least two parties)- Advantages: Relatively easy to set up, Check and balance maintained with two parties around. Disadvantages: Any personal rifts between partners may dissolve partnership, Equal profit sharing despite unequal attention and time given by partners to business.
3. Corporation (at least five parties)- Advantages: Maximum flexibility for growth, Limited liability of individual shareholders, Greater room for professionalism in management, Is least likely to dissolve. Disadvantages: Complicated setting-up process, Individual stockholders may have limited influence on management, Tendency to institutionalize a bureaucracy.
Writing a Business Plan
After you have made the preliminary decisions, you can proceed to formulate a business plan. There is no such thing as an all-purpose business plan. You should write your business plan according to the unique factors and conditions of your enterprise. However, you will find it useful to write and use a business plan along the broad guidelines suggested below:
1. State Your Objectives. This section comes first in a business plan. You tell your reader who you are, what your business goals are, and when you expect these goals to be accomplished. If you are submitting your plan to a bank, you may indicate how much you want to borrow and what you plan to do with the funds.
Example of Stating Your Objectives:
“Pretty in Pink” is an enterprise involved in the manufacturing and retailing of ready-to-wear ladies’ dresses. Its goals are:
1. To start manufacturing and retailing by January 2000
2. To achieve profitability by January 2001
3. To seek adequate financing for the first 18 months of operation
2. Describe the Business. This section gives background information on your business and how it is currently doing:
For a new business. Instead of a brief history, explain what the business will be, how the idea for your business was conceived, and how the business is expected to develop.
For an existing business. Provide the following information: business name, date and place of registration, when actual operations began, a brief history of your business, and names of owners, partners, or major investors
3. Describe Your Products or Services. Give a detailed description of your products or services so the reader gets a clear idea of what you are selling. Also give any applications or uses of your products that may not be apparent.
In this portion of your plan, you should also note the competitive advantages your product has over other similar products, as well as identify the products you will be competing with. You should be able to state your product’s advantages and disadvantages.
4. Identify Your Potential Market- Determine who are your present or projected customers and how many. Be as specific as possible. Are you selling to bookstores? A grocery store? A small ladies’ boutique? If you are selling to the general public, you may need to group potential customers according to age, gender, income, education, and other demographic factors. You then ask yourself how you can make use of the information. If, for example, you know that your potential customers will likely be children between three to ten, what does this tell you about your location? Your advertising? Your prices?
5. Identify Your Competitors – Rather than pose as threats to you, your competition should drive you to do your best. Learn as much as you can about them. Include the following information in your plan:
- Description of competitors – Identify businesses likely to become your competitors. Name them.
- Size of Competitors – Determine your competitors’ assets and sales volume.
- Profitability of Competitors – Which of your competitors are making money? Which are losing, and by how much?
- Operating Methods – Determine the operating methods of each of your major competitors in terms of pricing strategy; quality of products and services; servicing, warranties, and packaging; methods of selling and distribution channels; credit terms; location; advertising and promotion; reputation; and inventory levels. Discuss only the items relevant to your business.
6. Consider Your Pricing Policy – In pricing your goods and services, all relevant factors should be considered, like cost of production and distribution as well as the degree of acceptance by the market. Another factor to consider is the pricing structure of your competitors. Of course, the aim of your pricing policy should be to set the price at a level that maximizes profit in the long run.
7. Determine Your Marketing Methods – Having a good product at a reasonable price
is not enough. Your business plan must answer the following questions:
- How will you promote or advertise your business?
- How will you sell your product? Will you employ salespeople?
- What channels of distribution will you use to reach your customers?
- What do your customers think of your product? How can you improve your image as an enterprise?
8. Determine Your Key Personnel – Identify the key people in your business, including
you as the owner and manager. If your business is a corporation, list the names and addresses of all directors. If your business is a partnership, list the names and addresses of all the partners.
9. Identify Your Material Requirements and Sources of Supply - List down what
materials you will need and where you will get them. Include only direct materials; office supplies and other indirect materials should not be included in the list.
You should prepare a table for the materials. For each of them, state how many suppliers there are, who your main supplier is, and why. Your readers will see that you have carefully thought out who your best supplier will be.
10. Determine the Process and Equipment You Will Use to Manufacture Your
Product – Give a detailed explanation of your production process. For each step, explain the work done, as well as the equipment and materials used. If you are presenting a complex process, include a diagram showing your work-flow. Assign positions for the jobs that need to be done and estimate how many people you need to employ for each position. Set salary rates, too.
11. Prepare a Sales Forecast – Include a sales forecast that covers at least two years of operation. For the first year, present your sales on a monthly basis. Present the forecast of the succeeding years on a yearly basis, and explain how you arrived at the figures and at the assumptions on which they are based.
12. Prepare a Budget – In manufacturing, production costs of materials, labor, service,
manufacturing overhead, and other components should be budgeted. A service business should budget operational costs. Sales costs should include selling and distribution, storage, discounts, advertising, and promotion. General and administrative expenses include salaries, as well as legal and accounting costs. Projections should be prepared every month during the first year of operation and every quarter for the second and third years.
13. Set Your Plan to Work – You are ready to set your plan to work. It is time to raise
funds, obtain a license, purchase facilities and supplies, hire and train people, and start operating. Remember that if you are to succeed, you must be prepared to work long hours and must be totally committed to your business.
Determining Your Financial Requirements
You must now determine your financial needs and raise funds to meet these needs. You can begin a sari-sari store from your own personal savings. A garment factory, on the other hand, will require more elaborate arrangements for fund sourcing.
Generally speaking, the financial requirements of a business may be classified into Fixed Capital, Working Capital, and Pre-operating Capital.
· Fixed Capital includes cost of land and building, or lease deposits of them; cost of improving the land or remodeling the building; machinery and equipment; furniture, furnishings, and fixtures. These are usually one-time expenses, meaning they are generally good for the duration of your business.
· Working Capital is the reserve money you need to run the business until it becomes self-supporting. This may take about one to six months or even longer. You need working capital to purchase your raw materials, pay your workers, pay for transportation, telephone, electricity, and water bills.
· Pre-Operating Capital includes money that you spend to register your business, acquire licenses for franchises, or pay a lawyer or a consultant. In other words, this is money you spend before your business begins to operate.
It is advisable to prepare a forecast that outlines all these capital requirements. Be sure that no significant item has been overlooked. Be realistic and do not underestimate your requirements. Provide for contingencies and a margin of safety in estimating your capital requirements to avoid cost overruns later. Your capital should be enough to cover unexpected expenses. Observe the equipment and manpower requirements of other business establishments. If in doubt, ask a knowledgeable friend, an accountant or consultant to see if your estimates are realistic or not.
For simple business activities like small-scale trading or home-based industries, simple estimates or financial requirements, income and profit would be sufficient. However, larger, more complex undertakings require a more in-depth study; this is called the project feasibility study. Banks usually require this for long-term loans.
Seeking Sources of Capital
The small businessman usually meets his initial requirements by dipping into his own savings or investing his other assets. Loans from relatives and friends sometimes supplement his initial capital. Some of these loans are extended interest-free.
External sources of funds are available if you know where to look. Organizations such as banks, venture capital corporations, and savings and loan associations make lending money their business. In addition, some government institutions provide credit to small start-up enterprises at subsidized interest rates and liberal terms.
If you are looking for capital, you may first consider looking into your own resources and the loan offerings of possible creditors:
· Equity Capital is the amount of personal resources you – and possibly your partner put in, plus the portion of the profits you plow back into the business. It also includes resources invested by other people into your company.
Equity is a permanent part of your capital structure. As such, it does not have to be paid back. Nevertheless, as your company grows, you will need to put in more equity or permanent capital.
The small businessman may exhaust his own personal resources to get more equity funds for the business. Personal life insurance policies or other properties of value may be used in times of urgency. Friends, relatives, or other members of the community may also be persuaded to invest in the business.
· Creditors’ Equity. If you require financing from outside sources, you can avail of the loan packages of financial institutions. These are:
· Short-term loans. These loans are short-term financial obligations, usually lasting less than a year and normally self-liquidating. They are used to buy things that will generate funds for repayment of the loan. Some short-term loans (“clean loans”) are issued on an unsecured basis, which means they are made without collateral, since the bank relies on your credit reputation.
· Individual money lenders. Friends or relatives extend loans in the spirit of
pakikisama or camaraderie. There are also unlicensed money lenders but beware of those who charge usurious rates of interest, like the so-called “five-six operators”.
· Non Government Organizations (NGOs). NGOs are fast becoming popular sources of credit. Through enterprise development projects implemented by private and government finance institutions, these NGOs act as intermediary agents in various lending programs. Lending packages are available depending on the specific target beneficiaries of the individual programs. Their interest rates are usually lower than what banks offer. A review of your feasibility study and a credit investigation are customarily conducted. Most programs offer character loans and require minimum equity participation with little or no collateral. The organization closely monitors and evaluates each business project. Beneficiaries of these PVOs are commonly micro and small entrepreneurs.
· Special Lending Programs. Public and private agencies are confident of the strength of small entrepreneurs, and have thus created programs that would uplift their status.
Rules for Sound Financing
· A small businessman should know exactly what type of capital he needs and how he can obtain it at the best possible terms. If he borrows the capital, he must know exactly how to repay it. An entrepreneur must also know when to require financial expansion.
· The ideal debt-equity ratio of one’s capital structure must be 40:60. This means that the debt or borrowed portion of the total capital should be contributed by the owners’ equity.
A 40:60 ratio is considered ideal because it will allow the firm to acquire more credit in the future when it is ready to expand. Most banks and other financial institutions lend money only if the resulting debt-equity is 60:40 when the new (borrowed) money is infused into the business. Therefore, it makes sense to limit borrowing. Otherwise, one may be saddled with a heavy repayment burden.
· Fixed assets and working capital requirements during normal operations must be financed from long-term sources (one year or longer). These sources are the owner’s equity and long-term loans or long-term liabilities.
· Short-term requirements, like additional working capital needed during peak seasons (Christmas, rainy season, school opening, etc.) should come from short-term sources, such as: trade credit (30 – 90 days); short-term bank loans (from two to three months); pawnshops (three months); and friends and relatives.
Choosing the Site/Location of Your Business
Finding a site for your business is crucial. In the retail business, your sales potential depends on your location. Like a tree, a store draws its nourishment from the area around it. A store owner is already half-successful if he sets up shop in a good place.
You must also be able to recognize factors in some sites that are detrimental to your business. Among these are: smoke, dust, disagreeable odors and noises, proximity to garages, hospitals, drinking places and similar establishments, poor sidewalks, and old, run-down buildings.
Some guidelines to help you find a good location:
a. Know the population of the trading area. Is the neighborhood starting to be run down? Is the population moving away? Or is it new and on the way up? Determine the purchasing power of the population. Do they own cars?