4_277175787461804047.ppt

RE 445: BUSINESS PLANNING AND ENTREPRENEURSHIP

(BSc. LMV, REFI &PFM) Year IV Semester I

TOPIC ONE: INTRODUCTION

1.1 Definition of entrepreneurship

1.1 Definition of Entrepreneurship

• Before defining the term entrepreneurship it is important to define a key word forming part of this terminology. This term is an “entrepreneur”. The word entrepreneur derives from the French words, entre, meaning "between"' and prendrem, meaning to "to take". The word was originally used to describe people who take on the risk"' between buyers and sellers or who "undertake" a task such as starting a new venture.


• Entrepreneur is a therefore defined as the person who tries to do something new, visualizes a business opportunity, organizes the necessary resources for setting up the business and bears the risk involved. Thus, an entrepreneur may be termed as an innovator, an organizer and a risk bearer.


• The term entrepreneur may be properly applied to those who incubate new ideas, start enterprises based on those ideas, and provide added value to society based on their independent initiative.

• After understanding who is an entrepreneur, now let us define the term entrepreneurship.


• Entrepreneurship is the process where individuals or a group of individuals risk time and money in pursuit of opportunities to create value and grow through innovation regardless of the resources they currently control. The term ‘entrepreneurship’ can also refers to the functions performed by an entrepreneur.


• In not quite different perspective, entrepreneurship can be defined as the process of creating something new with value by devoting the necessary time and effort, assuming the accompanying financial, psychic, and social risks, and receiving the resulting rewards of monetary and personal satisfaction and independence.

1.2 Characteristics of Entrepreneurs

• In the definitions of who is entrepreneur and what is entrepreneurship, we met common and re-occuring terms such as value, independence, initiative, risk and resources to mention few. These give a rough picture of how entrepreneurs look like. To be very specific, the following are the characteristics that many people who are known as entrepreneur shares.


i. Initiative- an entrepreneur must have an innovative aptitude, pick the right opportunity, and initiate action. If he/she does not initiate action at the right time the opportunity may be lost. Hence, the ability of an entrepreneur to take initiative is the key to the success of the venture to a great extent.


ii. Wide Knowledge- an entrepreneur should have wide knowledge of the economic and non-economic environment of business like the market, consumer attitudes, technology, etc. In the absence of such adequate knowledge, the decisions taken by him may be poor and will not contribute to the profitability of his business in the long run.


iii. Willingness to assume risk- entering any venture is full of risks and uncertainties. In order to deal with various kinds of risks and uncertainties efficiently, the entrepreneur should have willingness and necessary foresightedness to assume risks. The quantity and quality of risk taking would determine the quality of business decisions.


iv. Open mind and optimistic outlook- an entrepreneur should have an open mind. He/she must possess a dynamic and optimistic outlook so as to predict changes in the business environment and respond effectively without delay. Being optimistic enable the entrepreneur to take initiative in relation to his business idea.


v. Adaptability/flexibility- the entrepreneur must be prepared to adapt to the changes taking place in the system. Any resistance to change and delay in responding thereto, shall lead to losing the opportunity of taking advantage thereof.

vi. Self-confidence- for achieving success in life, one should have confidence in himself/ herself. A person who lacks confidence can neither do any work himself/herself nor inspire others to work.


vii. Leadership Qualities- an entrepreneur should possess the qualities of a good leader. He/she should have the traits of self-discipline, presence of mind, sense of justice, honor and dignity and above all, a high moral character.


viii. Orientation towards hard work-while running a business, one problem or the other may occur. The businessmen has to be vigilant about these and find solutions thereof as early as possible. This requires hard work on the part of the entrepreneur. He has to put in extra efforts to ensure success of the enterprise started by him.

1.3 Functions of Entrepreneur

The functions of an entrepreneur can be summarized as follows.

i. Conception of an idea: An entrepreneur is the person with a creative mind who can identify business opportunities and take steps for the conversion of ideas into successful business ventures, and give them a concrete shape.

ii. Promotion: It is felt that generally an entrepreneur undertakes the risk of setting up


a small enterprise as a sole proprietor. But, now-a-days many entrepreneurs have assumed the role of promoters of large companies. In fact, promotion may be undertaken for setting up a new business, small or large expansion of an existing business or for combining two or more business firms. As a promoter, the entrepreneur has to conduct feasibility studies, decide to the form of organization,


assemble the required funds and people, and give a concrete shape to the business proposition.

iii. Innovation: An entrepreneur is also seen as an innovator who tries to develop new technology, products and markets. The entrepreneur uses his creative abilities to do new things and exploit opportunities in the market.


iv. Bearer of risks and uncertainty: You know that starting of a new business venture involves good amount of risk and uncertainty. To start with, it is the entrepreneur who assumes risks and is prepared for the losses that may arise because of unforeseen situations in future. In fact, it is his willingness to take risks that helps him to take initiatives in doing new things or trying new methods of production.


v. Arranging necessary capital: Arranging funds is one of the biggest hurdles in setting up a new entrepreneur. It is he/she, himself/herself who has to provide the initial capital (otherwise known as ‘risk capital’ or ‘seed capital’) for starting the ventures.

1.4 Role of Entrepreneurship in the Economy

• It is beyond reasonable doubt that entrepreneurship is essential for economic development in a country like Tanzania and anywhere in the world. Entrepreneurs are regarded as the prime movers of innovations and act as key figures in economic development of a country. Specifically entrepreneurship serve the following roles in the economy.


i. Helps the formation of capital by bringing together the savings and investments of people;

ii. Provides large-scale employment opportunities and increases the purchasing power of the people;

iii. Promotes balanced regional development in the country;

iv. Helps in reducing concentration of economic power (power to own the factor of production in a few hands).


v. Helps availability of new products and services at higher quality.

vi. Helps introduction of new technology,vii. Improvement in the standard of living- by

adopting latest innovations in the production of wide variety of goods and services in large scale that too are at lower cost.

viii. Promotes country's export trade- Entrepreneurs produce goods and services in large scale for the purpose of earning huge amount of foreign exchange from export.


ix. Induces backward and forward Linkages- this is due to the fact some entrepreneurs demand raw materials from other firms (backwards linkages) and others supply firms to other firms (forwards linkages) hence creation of revenues and growth among firms.

x. Facilitates overall development- The total effects of various roles of entrepreneurship is overall economic development of a country.

1.4 Challenges facing entrepreneurship in a country like Tanzania

i. Limited source of funds- most of financial institutions offers loans to those already have a business. Some demand colaterals which may not be available to entreprenuer.

ii. High cost of capital-microcredit institutions the major source of financing entrepreneurs offer loans at very higher interest rates.

iii. Lack of enterprising culture-many people prefer to save their money in foreign banks rather than investing in income generating activities.

1.4 Challenges facing entrepreneurship in a country like Tanzania

iv. Competition from big companiesv. Stringent conditions imposed by foreign

markets on products coming from third world countries.

vi. Limited production capacityvii. Lack of enough support

1.4 Small Business/ Small To Medium Enterprises (SMES)

1.4.1 Definition of SMES


• SME’s is any acronym used to represent different types of business, namely small and medium enterprises. Below and above small and medium enterprises, are micro and large enterprises respectively.

• The SMEs/MSEs cover non-farm economic activities mainly manufacturing, mining, commerce and services. There is no universally accepted definition of SME. Different countries use various measures of size depending on their level of development


• The commonly used yardsticks are total number of employees, total investment and sales turnover.

• In the context of Tanzania, micro enterprises are those engaging up to 4 people, in most cases family members or employing capital amounting up to Tshs.5.0 million. The majority of micro enterprises fall under the informal sector.


• Small enterprises are mostly formalized undertakings engaging between 5 and 49 employees or with capital investment from Tshs.5 million to Tshs.200 million.

• Medium enterprises employ between 50 and 99 people or use capital investment from Tshs.200 million to Tshs.800 million.


• This definition should not only be based on quantitative characteristics of the enterprises, but should also take into account the difference between sectors.


• Small business in one sector does not mean small in another sector. For example 200 million in construction sector can be very small level of investments, however the same amount of investment in Poultry farming can be seen as a very large business. From the above facts, then a small business is the one which is independently owned and operated for profit and it is not dominant in its field.

1.4.2 Profile of SMES

i. Distribution of Small Business Sector in Tanzania

Distribution by Size-the Tanzanian economy is characterized by a relatively small “large firm segment” and a very large “small firm segment”. The large firm segment is made up mainly of subsidiaries or franchisees of multinational companies and a few formerly state-owned companies.


Distribution of Small firms by Sub-Sector, Gender and Geographical Area-Research shows that the size of each sector is growing each after year. For example wholesale, retail trade, repair of motor vehicles (55.4%), (26.4), Accommodation and food service activities (26.4) and Manufacturing (13.6). This number and distribution is changing year after year. See the table in the next slide for distribution by sector and by gender.

1.4.2 Profile of SMES distribution by sector

1.4.2 Profile of SMES distribution by gender

1.4.2 Profile of SMES-regional distribution

• The regional distribution of small business sectors indicated that the numbers of trade, manufacturing, and service enterprises are higher in rural areas than in Dar es Salaam, other urban areas, and Zanzibar. The highest business densities were found in Mbeya (46%) and Dar es Salaam (45%), and the lowest in Kagera (14%) and Manyara (17%).


• The regional distribution of small business sectors indicated that the numbers of trade, manufacturing, and service enterprises are higher in rural areas than in Dar es Salaam, other urban areas, and Zanzibar. The highest business densities were found in Mbeya (46%) and Dar es Salaam (45%), and the lowest in Kagera (14%) and Manyara (17%).


ii. Salient Characteristics• Specifically the SMEs in Tanzania can be divided into

relatively homogeneous categories that have the following characteristics.

1.4.2 Profile of SMESMicro/subsistence Micro 1 Micro2 Small

Cashewnuts processing, detergent making

Informal catering Batik making

Flour processing, Tour agencies

1.4.3 The Role and Significance of the SME Sector in Tanzania

• The MSE sector is one of the leading employers (next only to peasant agriculture) in Tanzania. It is estimated that there are over three million enterprises in the sector, employing more than 5.2 million people. The SME sector is considered to have the brightest potential for making the highest contributions to employment growth and increased incomes.

1.4.3 The Role and Significance of the MSE Sector in Tanzania

• Employment in the sector is growing at 10 per cent per annum.

• Operators are able to generate between 2.5 and 10 times the minimum earnings of civil servants. The MSEs have also shown great potential for creating wealth. Their aggregate contribution to national income is estimated at between 35 per cent and 40 per cent of GDP.

1.4.3 The Role and Significance of the MSE Sector in Tanzania

• The MSE sector is an arena where the poor may not only make out a living, but also get most of their goods and services at prices they can afford.

• Over 90 per cent of operators get credit, training, information, water and sanitation from the sector. In Dar es Salaam, the capital city, over 90 per cent of poor communities get water and sanitation services from the MSE sector.

1.4.3 Enabling Environment for Micro and Small Enterprise

• The factors for enabling environment for enterprise can be divided into the macro environment, micro environment and the immediate MSE facilitation (meso) environment.

a. Macro EnvironmentTax policies and regulations• Good tax regime-the tax regime which is

oriented to SME rather than the current


• situation where they are oriented to the large-scale sector. Existence of provisions for tax exemptions not only for large businesses but also for SME’s.

• Provision of knowledge on the tax system. This is due to the fact that here are a large number of taxes and levies. For example there are 27 different taxes and levies that apply to various businesses and a certain level of knowledge is required.


• Abolishing weakness on tax assessment. The tax assessment and collection system lacks transparency and predictability, creating opportunities for tax officials to exhort bribes from small business operators. Some business people report that they have to conceal or even worse, avoid growth, because otherwise tax officials may demand unrealistically high taxes and bribes and will harass.


Economic trends• Absence of Inflation- this is due to the fact

that inflation has huge impact on entrepreneurship as in inflation period, the value of wealth decreases and the purchase power of people declines. Therefore, consumers tighten their belts and there are fewer opportunities for entrepreneurs. So the absence of inflation is a grace to the entrepreneur.


• Low interest rates-this is due to the fact that high interest rates limits the amount of capital that a company can raise. Especially for SMEs, if they can not receive adequate working capital, they are likely to die off quickly during the start time.

• Employment related issues-Employment impacts on the entrepreneurship process. High employment rates mean that there are less people opting for self-employment,


as a result, the competition between these SMEs will become less. At the same time because of this high unemployment and limited earnings, markets are naturally limited.

Good Business Registration and Licensing• Absence of business registration and licensing

process which is unduly complicated and time-consuming because of excessive bureaucracy and in some cases because of demands for bribes by officials.


• The government has started taking some initiatives to improve the situation. Various agencies have been set up to facilitate the process of investing in businesses. These include the Business Registration and Licensing Authority (BRELA) and Tanzania Investment Centre (TIC). Unfortunately however, these organizations mainly target large enterprises. Furthermore these are centralized in Dar es Salaam.


• Availability of enough information on these agencies. The current situation is that most of SME’s lack information about the existence of these agencies and, in any case, most women’s businesses are just too small to be served by these agencies.

Development of Enterprise Culture-providing entrepreneurship knowledge and training. Encouraging people to start small business and invest in different sector.


b. MICRO ISSUES• Owners/managers/ employees capabilities-

attitudes, knowledge, skills/exposure.• Strategies for and management for growth

such as diversification, product differentiation, etc.

• Networking both locally and internationally, • SUPPORT AND DEVELOPMENT SERVICES FOR

MSE PROMOTION---Read!!!!!!!!!!!!!!!!!!!

1.4.4 Issues in Starting and Developing Business in Tanzania

a. Initiative for starting and growing business• There are wide ranges of reasons as to why

people choose to engage in business. For example in the case of women entrepreneurs, the following are motives for starting and growing new businesses. These are categorized into push and pull factors.


b. Incidence of Growth• Growth from the micro to medium scale is

extremely rare. Data on growth rates in Tanzania is not available. However, in neighboring Kenya it has been reported that this type of enterprise growth is mostly limited to the transition from employing 1-3 person to employing 10 persons. Growth to above 10 employees is quite rare.


• The situation is likely to be worse in Tanzania where, due to historical reasons, the private sector is at a much lower level of development compared to Kenya. By contrast, many small business operators run multiple enterprises simultaneously. Some people run over 10 different types of businesses at a very small scale. The sector is dominated by informal micro enterprises with an extremely low incidence of


• graduation to formal small and medium size. The enterprises remain marginal players, creating and sustaining low quality jobs and unable to effectively contribute to economic competitiveness, exports, tax revenue and economic growth’.


c. Factors associated with fast growth• Better macro economics situation• Favorable market environment• Experience and high management skills,• Innovation and • Good management

TOPIC 2: COMPANY FORMATION AND INCORPORATION2.1 Meaning of company

2.1 Meaning of Company• A company can be defined as an association of

two or more persons for any lawful purpose, by subscribing their names to a memorandum of association and otherwise complying with the requirements of the Act in respect of registration.

• Company is among the forms of business units carried out in different parts of the world, other forms being sole trade/proprietorships, partnerships and co-operatives.

2.1 Meaning of Company

• A company is corporate body i.e it is created under law and has an entity of its own, quite separate from the members that comprise it.

• It is a legal entity which can enter into contracts, incur liabilities, sue others, be sued by others and do anything for which it has been formed.

2.2 Types of Companies We have major two types of companies. These are:-i. Statutory Companies- which are companies whose

formation and control is vested under parliamentary control.

ii. Registered Companies- which is a company registered by the registrar of companies for example Business Registration and Licensing Agency (BRELA) in Tanzania and Registrar of Companies-Kenya, or The Uganda Registration Services Bureau in Uganda.

There are different types of registered companies. These includes:-

i. Limited Companies-These are companies whose liability of members is

2.2 Types of Companies • limited (i.e each shareholder is only liable to the

extent of the value of shares he holds. This means that in case of business failure, the members are not required by the law to contribute fully to the assets of the firm (business estate) from the property of their private estates. These types of companies are further classified as:

• A company limited by shares- where the liability for members is limited to the nominal amount of the shares they take, as stated by the memorandum. This applies to companies formed for trade or gain.

2.2 Types of Companies • A company limited by guarantees- where the

liability for members is limited to the amount they have agreed to contribute to the assets of the company in the event of the winding up of the company as stated by the memorandum. Companies formed for purposes other than trade e.g charitable organizations and professional institutions may form this type.

2.2 Types of Companies ii. Unlimited Companies• The liability of the members is not limited which

imply that in case of business failure, the members are required by the law to contribute fully to the assets of the firm (business estate) from the property of their own (private estate) in order to meet company’s obligations.

2..2 Types of Companies iii. Again, registered company may be a public or a private

company. • A ''public company'' is a company limited by shares or

limited by guarantee and having a share capital, being a company the memorandum of which states that it is to be a public company.

• Public companies are formed when it is desired to go to the public for funds to expand an existing business.

• They have at least 7 members and unlimited maximum number. The shares are transferable and can be offered to the public for subscription. Any person may subscribe and buy shares in the company, which may be listed in the stock market and traded in shares.

2.2 Types of Companies • A “private company” A ''private company'' means a

company which by its articles restricts the right to transfer its shares; and limits the number of its members from two to fifty (shareholders only not others like employee), and

• Prohibits any invitation to the public to subscribe for any shares or debentures of the company.

• A private company may be converted to a public one by merely amending its Articles of Association, increasing the minimum number to seven and issuing a prospectus.

2.3 Formation of a company• Formation of the company start when any two or

more persons, associated for any lawful purpose subscribe their names to their memorandum of association (one of key documents) and otherwise complying with the requirements of the laws in respect of registration to form an incorporated company with or without limited liability.

• Another important documents for this exercise, is the article of association.

• The documents must be signed by the members.• The company must also have a seal.

2.1.3.3 Formation of a company• The documents are to be delivered to the office of

the registrar of companies (for example in Tanzania is BRELA which registers companies, among other things) together with the prescribed fee.

• Since the documents have to include the company’s name, it is prudent to check in advance that proposed name is likely to be available. No name will be available for your use if it:-

a. is the same as a name appearing in the index of company names;.

2.3 Formation of a company• Take note that the similarity which is being referred to

here includes similarities in appearance, semantic and phonetic.

i. eg. (semantic) - Simba Investment Limited can not be registered if there is Lion Investment Limited.

ii. eg. (phonetic) - Wills Transport Company Limited can not be registered if there is already Wheels Transport Company Limited.

b. Too like a name appearing in the index of company or business names; eg. Tasmania Company Limited can not be registered if there is already Tasman Limited.

2.3 Formation of a company(c) is undesirable.• Undesirability encompasses many things. These include

if the name:-(i)connotes an insult or bad language to the society;(ii) Suggests a connection with the Government or its

Authorities; Ikulu Company Ltd.?????? (iii) Is offensive or its use will be a criminal offence;(iv) Consists of a Registered Trade or Service Mark;(v) Is misleading, that is containing a word which is

contrary to activities of the company, eg. “International” while it operates locally only;

2.3 Formation of a company(vi) Is suggesting to monopolize a generic name or

name of a country or place, eg. “Tanzania Company Limited” or Tanzania Limited can not be registered.

(vii) Consist of purely personal names only.(d) has already been reserved in the Companies

Registry by another person

2.3 Formation of a company• Once a business has been registered with BRELA, it

is required to register with the nearest office of the Tanzania Revenue Authority (TRA). A File Number is established after registration formalities have been completed.

• At this stage the applicant is also required to apply for TIN (Tax Payers' Identification Number) with the Tanzania Revenue Authority

• The applicant is required also to order a Common Seal which is to be affixed in different documents.

2.3 Formation of a company• If the documents are in order, the registrar issues a

certificate of incorporation and the company there upon comes into existence.

• In order for the company to start its activities, it is necessary to have a Trading License, which is issued by Ministry of Industry and Trade or the local government’ granted after having the respective permits

• Other things need to be taken into account either before or after incorporation including:-

2.3 Formation of a company• Income tax officials to inspect the office site of the

new company • Apply for PAYE with the Tanzania Revenue

Authority if you have employees. • Have the land and town-planning officer inspect the

premises and obtain his signature • Have the health officer inspect the premises and

obtain his signature• Apply for VAT certificate with the Tanzania Revenue

Authority.• VAT/Stamp Duty Inspection

2.3 Formation of a company• Register for the workmen's compensation insurance

at the National Insurance Corporation or other alternative insurance policy

• Obtain registration number at any Social Security Fund.

• Comply with various taxes for example those in Local Government Authorities,

• Have a bank account.• Obtain the necessary permits and licenses.

2.3 Formation of a company• Acquire rights towards various utilities providers

(Water, Electricity, telecommunications, internet, posts) in relation to installation procedure, usage and bills and related issues).

2.3 Formation of a company

2.3 Formation of a companySome of the necessary documents for company

formation are discussed below.a. Memorandum of Association- This is the document

that defines the constitution of the undertaking in its relation to the outside world. It lays down powers and limitations of the company and establishes the company’s individual identity. It gives the following details.

i. Name Clause- This states the name of the company, with ''public limited company'' as the last words of the name in the case of a public company, or with

2.3 Formation of a companyall the main and secondary activities intended to be

undertaken are registered. The statement of a company’s objects in its memorandum serves double purposes:

It protects the shareholders, who learn from it the purposes to which their money can be applied.

It protects persons dealing with company, who can discover from it the extent of the company’s power.

• Any act done by the company beyond the powers indicated in the object clause, is utra vires that is, beyond the powers of the company and therefore

2.3 Formation of a companyinvalid. iii. Situation Clause- this gives the name of the

country which the office is situated. It also indicates other details necessary for locating the office. The company is governed by the laws of that country.

iv. Capital Clause- This states the share capital the company wishes to have. It includes- total amount of the share capital, the units into which the capital is divided, types of shares whether ordinary or preferences, the value of each share. The total value of all the shares is called nominal share capital.

2.3 Formation of a companyOnce the memorandum is registered a company

becomes empowered to raise this amount by selling share. It then referred to as authorized or registered share capital. The registration fee is calculated according to this amount.

v. Liability Clause- there must be a clear statement that the liability of the company is limited by its shares or otherwise in the event of its being wound up

vi. Declaration- This must be signed by not less than two members in the case of private company and

2.3 Formation of a companyseven in the case of a public company, who declare

that they intend to take and pay for at least one share each.

• All companies must prepare a memorandum of association.

• The memorandum must be in English

2.3 Formation of a companyb. Articles of Association• This govern the internal structure of the company.

In Tanzania and other East African countries, the Articles shall be:

(a)in the English language;(b) printed; ( c) Divided into paragraphs numbered consecutively;

and signed by each subscriber to the memorandum of association in the presence of at least one witness, who shall attest the signature and add his occupation and postal address.

2.3 Formation of a companyThe articles of association include the following:- i. Members- numbers of members with which the

company proposes to be registered,ii. Procedures for calling company meeting e.g general

meetings whereby a company for example shall in each year hold a general meeting as its annual general meeting in addition to any other meetings (extraordinary general meetings) in that year.

2.3 Formation of a companyNotice of general meetings,Proceedings at general meetings, such as :-• To have laid before the members the annual

accounts; the directors' report; the auditors' report; the appointment of auditors for the period up till the next general meeting at which accounts are laid; the re-election of any directors retiring and seeking re-election in accordance with any requirement in the company's articles.

2.1.3.3 Formation of a company(iii) Voting rights of shareholders-e.g every member

shall have one vote or no member shall be entitled to vote at any general meeting unless all moneys presently payable by him to the company have been paid.

(iv) The number and powers of directors-not less than two, appointment of attorney by power of attorney, signing, drawing, accepting, endorsing; of cheques, promissory notes, drafts, bills of exchange, or other negotiable instruments.

2.1.3.3 Formation of a company(v) Disqualifications of directors e.g without the

consent of the company in general meetings holds any other office of profit under the company; or becomes of unsound mind; or resigns his office by notice in writing to the company.

(vi) Proceedings of directors e.g calling of directors meeting, appointment of chairman of board of directors, delegation of powers, remuneration- the method of deciding the level of payment of directors, retirement, e.t.c.

2.1.3.3 Formation of a company(vii) Appointment of secretary, remuneration, power,

termination of contracts,(viii) The seal of the company-limit on signing

documents/instruments to which the seal is affixed especially by a director, secretary or second director.

(ix) Borrowing powers of the company,(x) Company’s accounts- types of transactions (e.g all

sums of money received and expended, all sales and purchases of goods by the company; and all assets and liabilities of the company), where books

2.1.3.3 Formation of a companyto be kept (especially at the registered office of the

company, or other place or places as the directors think fit), types of accounts (especially profit and loss accounts, balance sheets, group accounts), inspection of the company, presentation of accounts (in general meetings), destruction of books of accounts, e.t.c.

(xi) Auditing of Company books, appointment of auditors and their duties,

2.1.3.3 Formation of a company• Alteration may be fairly simple. A meeting of all

shareholders is called and the majority passes a resolution seeking alteration. The resolution is then forwarded to the registrar of companies and the alteration effected.

• Read also personally –Share Capital

2.1.3.4 Termination of a Company• A company may come to an end in the following

ways:-i. By the court (involuntary or forced) ; orii. Voluntarya. Winding up by the Court• A company may be wound up by the court if,The company has by special resolution resolved

that the company be wound up by the court;The company does not commence its business

within a year from its incorporation or suspends its business for a whole year;

2.1.3.4 Termination of a CompanyThe number of members falls below two;The company is unable to pay its debts;The court is of the opinion that it is just and

equitable that the company should be wound up;NB: A body corporate may also be wound up by the

court if incorporated outside Tanzania and carrying on business in Tanzania and winding up proceedings have been commenced in respect of it in the country of its incorporation or in any other country in which it has established a place of business.

2.1.3.4 Termination of a CompanyA company shall be deemed to be unable to pay its

debts -(a) failure to pay a creditor a sum exceeding fifty

thousand shillings or such other amount as may from time to time be prescribed in regulations made by the Minister,

(b) if execution or other process issued on a judgment, decree or order of any court in favour of a creditor of the company is returned unsatisfied in whole or in part; or

2.1.3.4 Termination of a Company(c) if it is proved to the satisfaction of the court that

the company is unable to pay its debts as they fall due; or

(d) if it is proved to the satisfaction of the court that the value of the company's assets is less than the amount of its liabilities, taking into account the contingent and prospective liabilities of the company.

2.1.3.4 Termination of a CompanyWinding up Procedures1.Petition against the company filed by a competent

creditor or member of the company,2.Once the petition is received the court appoint

Provisional Liquidator and the company become under administration,

3.Should the performance improve then the company will continue with operations as before,

4.Should the performance worsen, then the company shall be wound up.

2.1.3.4 Termination of a CompanyEffects of Winding up OrderIf deemed that the company is unable to meet its

obligations or by members resolution the court shall make a winding up order on the company. The effect is:-

• All employment in the company is terminated• All contracts with the company are terminated• All legal proceedings against the company stopped• No alteration in the member register• No transfer of company property

2.1.3.4 Termination of a Company• No charges or encumbrances can be placed on

company property. b. Voluntary Winding UpA voluntary winding up shall be deemed to

commence at the time of the passing of the resolution for voluntary winding up. A company may be wound up voluntarily,

i. When the period, if any, fixed for the duration of the company by the articles expires, or the event, if any, occurs, on the occurrence of which the articles provide that the company is to be

2.1.3.4 Termination of a Company• dissolved, and the company in general meeting has

a resolution requiring the company to be wound up voluntarily;

ii. If the company resolves by special resolution that the company be wound up voluntarily;

iii. If the company resolves by special resolution to the effect that it cannot by reason of its liabilities continue its business, and that it is advisable to wind up.

2.1.3.4 Termination of a CompanyConsequences of Voluntary Winding Up -ReadStriking Defunct Company off Register• Where the Registrar has reasonable cause to

believe that a company is not carrying on business or in operation, he or she may send to the company by post a letter inquiring whether the company is carrying on business or in operation.

• If, within 30 days of sending the letter, the Registrar does not receive any answer thereto, he or she shall within 14 days after the expiration of that period send to the company by

2.1.3.4 Termination of a Companyregistered post a letter referring to the first letter,

and stating that no answer thereto has been received. If an answer is not received to the second letter within 30 days from the date thereof, a notice will be published in the Gazette with a view to striking the name of the company off the register.

LECTURE THREE: COMPANY MANAGEMENT

3.1 Introduction

3.1 Introduction• Company management is a set of activities

under which managers to the company create, direct, maintain and operate purposive organization through systematic, coordinated, co- operative human efforts. It includes various activities such as Planning, Organizing, directing, and controlling. The following are some of the issues related with company management.

3.2 Designing an Organogram• An organogram or an organizational chart

refers to the way that an organization arranges people and jobs so that its works can be performed and its goals be met. The concept of organogram can well be understood through the concept of departmentalization as one of the elements of organizational structure (other being span of control, centralization, formalization).

3.2 Designing an Organogram• Departmentalization is the clustering of

individuals into units and units into departments and larger units in order to facilitate achieving organizational goals. It specifies how employees and their activities are grouped together.

Determinants of Organogram• Organization’s resources• Size of the organization,• Nature of the products,

3.2 Designing an Organogram Type of departmentalizationi. Departmentalization by Numbers• Departmentalization by number is grouping of

persons who are to perform the same duties and putting them under the superior of a manager in terms of number. This method is rapidly applying in army.

• Disadvantages or declines reasons• There are many reason of decline of

departmentalization by numbers.

3.2 Designing an Organogram i. It has declined due to advance technology

and demand of specialized and different skills.

ii. Groups composed of specialized personnel are more efficient than those based on number.

iii. Departmentalization by number is useful only at the lowest level of the organization. Departmentalization by number fails to produce good results.

3.2 Designing an Organogram ii. Departmentalization by Time • It is grouping activities on the basis of time. It

is oldest form of departmentalization and it is generally used in low level of departmentalization. It is particularly applied in hospitals and steel manufacturing enterprise where continue process of service and manufacturing is used.

• Advantagesi. It is process of working and services

throughout 24 hours.

3.2 Designing an Organogram ii. It is continuing service process.iii. Students can work evening or at night.Disadvantages i. There is lacking supervision at night.ii. Exhaustion factor.

3.2 Designing an Organogram iii. Departmentalization by Function • It is grouping activities on the basis on

function of an enterprise. The basic enterprise functions are production, selling, and financing. Functional departmentalization is bases for organizing activities in an organizational structure. It organizes by function to be performed. The function reflects the nature of the business.

3.2 Designing an Organogram • The advantage of this type of grouping is

obtaining efficiencies from consolidating similar specialties and people with common skills, knowledge and orientations together in common units.

Advantages i. It is logical reflection of function. ii. Maintains power of major functions.iii.Simplifies training.

3.2 Designing an Organogram Disadvantages i. De-emphasis of overall company objectives.ii. Reduces coordination between function. iii.Slow adoption to change in environment.

3.2 Designing an Organogram

3.2 Designing an Organogram vi. Departmentalization by geography is

followed where geography marked appear to offer advantages. Geographic department most often use in sales and production, it is not use in finance. Departmentalization by geographical regions groups jobs on the basis of territory or geography. Below is an example of such kind of structure.

3.2 Designing an Organogram Advantages i. It emphasis on local markets and problems.ii. Improves coordination in a region.iii.Better face to face communication.Disadvantages i. Increases problem of top management

control. ii. Requires more persons with general manager

abilities.

3.2 Designing an Organogram v. Departmentalization by Customer• Departmentalization by customer groups jobs

on the basis of a common set of needs or problems of specific customers. For instance, a plumbing firm may group its work according to whether it is serving private sector, public sector, government, or not-for-profit organizations. A current departmentalization trend is to structure work according to customer, using cross-functional teams.

3.2 Designing an Organogram • This group is chosen from different functions

to work together across various departments to interdependently create new products or services. For example, a cross-functional team consisting of managers from accounting, finance and marketing is created to prepare a technology plan.

Advantages i. Departmentalization by customer emphasis

on customer needs. ii. It develops experience in customer area

3.2 Designing an Organogram Disadvantagesi. It may be difficult to analysis customer

demands. ii. It requires managers and staff expert in

customer problems.iii.Customer groups may not always be clearly

defined.

3.2 Designing an Organogram vi. Departmentalization by Process • This type of departmentalization is found in

production and operative levels. Departmentalization by process groups jobs on the basis of product or customer flow. Each process requires particular skills and offers a basis for homogeneous categorizing of work activities. A patient preparing for an operation would first engage in preliminary diagnostic tests, and then go through the admitting process, undergo a procedure in surgery

3.2 Designing an Organogram • receive post operative care, be discharged and

perhaps receive out-patient attention. These services are each administered by different departments. The structure is shown below


Advantages i. It simplifies training.ii. Utilizes special skills.iii. Uses specialized technology.

Disadvantagesi. Coordination of departments is difficult.ii. Responsibility for profit is at the top.


vii. Departmentalization by Product • This type of departmentalization used in

organization where more than one product is producing. In this department all the sources and authority are placed under the control of one manager. Departmentalization by product assembles all functions needed to make and market a particular product are placed under one executive.


• For instance, major department stores are structured around product groups such as home accessories, appliances woman’s clothing, men’s clothing and children clothing.

Advantages i. Places attention on production. ii. Increase growth of product.iii.Places responsibility for profit at division level.


Disadvantages i. Requires more persons with general manager

abilities. ii. Presents problems of top management

control.

3.3 STAFFING-meaning

• After an organization's structural design is in place, it needs people with the right skills, knowledge, and abilities to fill in that structure. People are an organization's most important resource, because people either create or undermine an organization's reputation for quality in both products and service.

• Staffing is defined is therefore “filling and keeping filled, positions in the organization structure”

3.3 Staffing-Nature1. Staffing is an important managerial function-

Staffing function is the most important managerial act along with planning, organizing, directing and controlling. The operations of these four functions depend upon the manpower which is available through staffing function.

2. Staffing is a pervasive activity- As staffing function is carried out by all managers and in all types of concerns where business activities are carried out.

3.3 Staffing-nature 3. Staffing is a continuous activity- This is because

staffing function continues throughout the life of an organization due to the transfers and promotions that take place.

4. The basis of staffing function is efficient management of personnel- Human resources can be efficiently managed by a system or proper procedure, that is, recruitment, selection, placement, training and development, providing remuneration, etc.

3.3 Staffing-nature

5. Staffing helps in placing right men at the right job. It can be done effectively through proper recruitment procedures and then finally selecting the most suitable candidate as per the job requirements.

6. Staffing is performed by all managers depending upon the nature of business, size of the company, qualifications and skills of managers,

3.3 Staffing-purpose

• Firstly, the main purpose of staffing is to put right man on right job. The objective and purpose of managerial staffing is to ensure that organizational positions are filled by the qualified personnel, who are able to willing to occupy them.

3.3 Staffing

• Secondly, the purpose / objective of managerial staffing is to define job, performance appraisal, training and development of people.

• Thirdly, the purpose/objective of managerial staffing is matching the people with job, identifying job requirement, job design etc.

3.3 Staffing• Situational Factors Affecting Staffing • EXTERNAL FACTORS- Factors in external

environment do affect staffing to various degrees. These influences can be grouped into educational (education vs job position), social cultural (women do not work, maternity), legal political (do not employ below 18) and economic opportunities (demand and supply of labour).

• INTERNAL FACTORS- Internal factors includes, Personal policies (employee development? humanity), Organizational climate and Reward system (leadership style? incentives?).

3.3 Staffing-Process 1. Manpower requirements- The very first step in

staffing is to plan the manpower inventory required by a concern in order to match them with the job requirements and demands. Therefore, it involves forecasting and determining the future manpower needs of the concern.

2. Recruitment- Once the requirements are notified, the concern invites and solicits applications according to the invitations made to the desirable candidates. Recruiting is process of generating a pool of qualified applicants for organizational jobs. Recruitment sources are both internal and external; internal include promoting from within the organization

3.3 Staffing-Processwhile external sources include labor markets, e-recruiting means, media sources, competitive recruiting sources, employment agencies, labor unions, job fairs and creative recruiting, educational institutions.

3. Selection- This is the screening step of staffing in which the solicited applications are screened out and suitable candidates are appointed as per the requirements. Selection is the process of choosing from among the candidates, from within the organization or from the outside organization the most suitable person for the current position or for future positions.

3.3 Staffing-Process4. Orientation and Placement- Once screening takes

place, the appointed candidates are made familiar to the work units and work environment through the orientation programmes. Placement takes place by putting right man on the right job.

• In short, during orientation employees are made aware about the mission and vision of the organization, the nature of operation of the organization, policies and programmes of the organization.

3.3 Staffing-Process

5. Training and Development- Training is the process of enhancing the skills, capabilities and knowledge of employees for doing a particular job. Training process moulds the thinking of employees and leads to quality performance of employees. It is continuous and never ending in nature.

• Training is a part of incentives given to the workers in order to develop and grow them within the concern.

3.3 Staffing-ProcessTraining is generally given according to the nature

of activities and scope of expansion in it. Training is generally imparted in two ways:-

i. On the job training- On the job training methods are those which are given to the employees within the everyday working of a concern.

ii. Off the job training- Off the job training methods are those in which training is provided away from the actual working condition. It is generally used in case of new employees.


• Along with it, the workers are developed by providing them extra benefits of in depth knowledge of their functional areas

• Development also includes giving them key and important jobs as a test or examination in order to analyze their performances.

3.3 Staffing-ProcessImportance of training• Training is crucial for organizational development

and success. It is fruitful to both employers and employees of an organization. An employee will become more efficient and productive if he is trained well. Training is given on four basic grounds:

i. New candidates who join an organization are given training. This training familiarize them with the organizational mission, vision, rules and regulations and the working conditions.


ii. The existing employees are trained to refresh and enhance their knowledge.

iii. If any updations and amendments take place in technology, training is given to cope up with those changes. For instance, purchasing a new equipment, changes in technique of production, computer impartment. The employees are trained about use of new equipments and work methods.


iv. When promotion and career growth becomes important. Training is given so that employees are prepared to share the responsibilities of the higher level job.

The benefits of training can be summed up as:i. Improves morale of employees- Training

helps the employee to get job security and job satisfaction.


• The more satisfied the employee is and the greater is his morale, the more he will contribute to organizational success and the lesser will be employee absenteeism and turnover.

• Less supervision- A well trained employee will be well acquainted with the job and will need less of supervision. Thus, there will be less wastage of time and efforts


• Fewer accidents- Errors are likely to occur if the employees lack knowledge and skills required for doing a particular job. The more trained an employee is, the less are the chances of committing accidents in job and the more proficient the employee becomes.

• Chances of promotion- Employees acquire skills and efficiency during training. They become more eligible for promotion. They become an asset for the organization


• Increased productivity- Training improves efficiency and productivity of employees. Well trained employees show both quantity and quality performance. There is less wastage of time, money and resources if employees are properly trained.


iv. When promotion and career growth becomes important. Training is given so that employees are prepared to share the responsibilities of the higher level job.


6. Remuneration- It is a kind of compensation provided monetarily to the employees for their work performances. This is given according to the nature of job- skilled or unskilled, physical or mental, etc. Remuneration forms an important monetary incentive for the employees.

3.3 Staffing-Process• There are two methods of employee

remuneration:-• Time Rate Method: Under time rate system,

remuneration is directly linked with the time spent or devoted by an employee on the job. The employees are paid a fixed pre-decided amount hourly, daily, weekly or monthly irrespective of their output.

• Piece Rate Method: It is a method of compensation in which remuneration is paid on the basis of units or pieces produced by an employee. In this system emphasis is more on quantity output rather than quality output.

3.3 Staffing-Process7. Performance Evaluation- In order to keep a track

or record of the behaviour, attitudes as well as opinions of the workers towards their jobs. For this regular assessment is done to evaluate and supervise different work units in a concern. It is basically concerning to know the development cycle and growth patterns of the employees in a concern.


8. Promotion and transfer- Promotion is said to be a non- monetary incentive in which the worker is shifted from a higher job demanding bigger responsibilities as well as shifting the workers and transferring them to different work units and branches of the same organization.

3.3 Staffing-Selection Process

• Selection is the process of choosing from among the candidates, from within the organization or from the outside organization the most suitable person for the current position or for future positions. It is the process of putting right men on right job. It is a procedure of matching organizational requirements with the skills and qualifications of people. Effective selection can be done only when there is effective matching. By selecting best candidate for the required job, the organization will get quality performance of employees.

3.3 Staffing-Selection Process• Moreover, organization will face less of

absenteeism and employee turnover problems. By selecting right candidate for the required job, organization will also save time and money. Proper screening of candidates takes place during selection procedure. All the potential candidates who apply for the given job are tested.

• But selection must be differentiated from recruitment, though these are two phases of employment process. Recruitment is considered to be a positive process as it motivates more of candidates to apply for the job.

3.3 Staffing-Selection Processi. Preliminary Interviews- It is used to eliminate

those candidates who do not meet the minimum eligibility criteria laid down by the organization. The skills, academic and family background, competencies and interests of the candidate are examined during preliminary interview. Preliminary interviews are less formalized and planned than the final interviews. The candidates are given a brief up about the company and the job profile; and it is also examined how much the candidate knows about the company. Preliminary interviews are also called screening interviews.

3.3 Staffing-Selection Processii. Application blanks- The candidates who clear the

preliminary interview are required to fill application blank. It contains data record of the candidates such as details about age, qualifications, reason for leaving previous job, experience, etc.

ii. Written Tests- Various written tests conducted during selection procedure are aptitude test, intelligence test, reasoning test, personality test, etc. These tests are used to objectively assess the potential candidate. They should not be biased.

3.3 Staffing-Selection Processiii. Employment Interviews- It is a one to one

interaction between the interviewer and the potential candidate. It is used to find whether the candidate is best suited for the required job or not. But such interviews consume time and money both. Moreover the competencies of the candidate cannot be judged. Such interviews may be biased at times. Such interviews should be conducted properly. No distractions should be there in room. There should be an honest communication between candidate and interviewer.

3.3 Staffing-Selection Process

v. Medical examination- Medical tests are conducted to ensure physical fitness of the potential employee. It will decrease chances of employee absenteeism.

vi. Appointment Letter- A reference check is made about the candidate selected and then finally he is appointed by giving a formal appointment letter.

3.3 Staffing Process• There are two methods of employee

remuneration:-• Time Rate Method: Under time rate system,

remuneration is directly linked with the time spent or devoted by an employee on the job. The employees are paid a fixed pre-decided amount hourly, daily, weekly or monthly irrespective of their output.

• Piece Rate Method: It is a method of compensation in which remuneration is paid on the basis of units or pieces produced by an employee. In this system emphasis is more on quantity output rather than quality output.

3.3 Staffing-Principles • There are six principles of staffing

1. Principle of job definition2. Principle of managerial appraisal3. Principle of open competition4. Principle of management training &

development5. Principle of training objectives6. Principle of continuing development

3.4 DIRECTING-Read

3.5 Controlling-meaning• Controlling is measuring and correcting

individuals and organizational performance. It involves measuring performance against goals and plans, showing where the deviations from standards exist and helping to correct them. In short controlling facilitates the accomplishment of plans. Control activity generally relate to the measurement of achievement. Some means of controlling like the budget for expenses, inspection, record of labors-hours lost, are generally familiar.

3.5 Controlling-Typesi. Preliminary • Sometimes called the feed forward controls,

they are accomplished before a work activity begins. They make sure that proper directions are set and that the right resources are available to accomplish them.

ii. Concurrent • Focus on what happens during the work process.

Sometimes called steering controls, they monitor ongoing operations and activities to make sure that things are being done correctly.

3.5 Controlling-Typesiii. Post-action• Sometimes called feedback controls, they take place

after an action is completed. They focus on end results, as opposed to inputs and activities.

3.5 Controlling-The processThe basic control process involves three steps.i. Establishing standards.ii. Measuring performance against these

standards.iii.Correcting variations from standard and plans

correction of deviations. i. Establishing Standard • Standards are by definition is simply criteria of

performance.

3.5 Controlling-The process• Standards are the selected points in a

planning performance at which performance is measured, so that managers can receive signals about how things are going.

There are many kinds of standard a:- • PHYSICAL STANDARDS • Physical standards are non monetary

measurements and common at operating level where material is used, labor is employed, services are rendered and goods-

3.5 Controlling-The process• are produce-they may-reflect quantities such

as labor hours per unit of output, unit of production per machine hour etc. Physical standards may also reflect quality such as hardness , durability , fastness of color etc.

COST STANDARDS • Cost standards are monetary measurements

and common at the operating level. Cost standards are widely used to measure direct and indirect costs per unit produced, labor cost per unit or per hour material cost per unit, machine cost per hour etc.

3.5 Controlling-The processCAPITAL STANDARDS • There are varieties of capital standards. These

standards are primarily related to the balance sheet rather than to the income statements. Capital standards range from monetary measurements to physical items. These standards may be indifferent ratios such as the ratio of current assets to current liabilities etc.

REVENUE STANDARDS • Revenue standards arise from attaching

monetary values to sales.

3.5 Controlling-The process• They may include such standards as average sales

per customer or per sales rep etc. PROGRAME STANDARDS • Such standards are determined for installing a

variable budget program, for example program for improving the quality of a sale force.

INTANGIBLE STANDARDS• Sometime it is difficult to establish standards for

quantitative and qualitative measurement, especially when human relationships count in performance.

3.5 Controlling-The process• It is very difficult to measure human attitudes, in

connection with individual’s loyalty, efficiency, etc. All this need to be based on intangible standards.

GOALS AS STANDARDS • Goal can be used as performance standards. Both

in simple in complex operations quantitative and qualitative goals represents an important development in the area of standards.

3.5 Controlling-The processii. Measurement of Performance • It is the second step of control process.

Although such measurement is not always predictable, but if standard are appropriately drown and if means are available for determining exactly what subordinates are doing then measurement of performance is fairly easy.

3.5 Controlling-The processiii. Correction of Deviations • It is third and last step of control process. If

performance is measured accurately, it is easier to correct deviations. Manage must know exactly where the corrective measure must be applied. Correction of deviations is the point at which contact can be related to the other managerial factions. Managers may correct deviations by redrawing their plans or by modifying their goals or they may correct deviations by clarification of duties.

3.6 Motivation

• This is among the major parts of directing activities. Motivation is a general term applying to the entire class of drives, desire needs similar forces. To say that managers motivate their subordinates is to say that they do those things which they hope will satisfy these drives and desire and induce the subordinates to act in a desired manner.

3.6 Motivation

Special Motivational techniquesi. Money- Money is important in form of wages,

stock options, bonuses, company paid, insurance etc. Money are often more than monetary value. It can also mean status or power. If money is to be kind of motivator then managers must remember several things. First, money, as money is likely to be more important to people who are raising and family. Second, it is quite true that in most kinds of business and other enterprises, money is used as mean of keeping an organization staffed.

3.6 Motivation

• Third money becomes dull if salaries of many managers in a company are similar. Fourth, if is to be an effective motivator, people in various positions must be given salaries and bonuses that reflect their individual performance. It is almost certainly true the money can motivate only if payment is large relative to persons income.

3.6 Motivation

ii. Participations- The second motivational technique is increase of awareness and use of participation. Participation is necessary for the solution of problems; participation is a means of recognition. It produces need for affiliation and acceptance. It gives people a sense of accomplishment/achievement, but encouraging participation should not mean that managers weaken their position. They should encourage participation of subordinates on matter and they should listen carefully but they should make decision on matters themselves.

3.6 Motivation

3. Quality of Working Life (QWL) - An approach of improving working conditions and productivity and as a mean of justifying higher pay.

• QWL is defined as the favorable conditions and environments of a workplace that support and promote employee satisfaction by providing them with rewards, job security, and growth opportunities.

3.6 Motivation

• The continuous effort to bring increased labor-management cooperation through joint problem solving to improve organizational performance and employee satisfaction are key aspects of QWL.

3.6 Motivation-Job Design Practices That Motivate

i. JOB ROTATION- Job rotation is the practice of moving employees from one job to another. The whole idea of job rotation makes a big difference.

ii. JOB ENLARGEMENT- Job enlargement adds tasks to an existing job. This might involve combining two or more complete jobs into one, or just adding one or two more tasks to an existing job


3. JOB ENRICHMENT- includes the following.i. Giving workers more freedom in deciding

about such things as work methods sequences and acceptance or rejection of materials’

ii. Encouraging participation of subordinates and interaction between workers.


iii. Taking steps to see and solve problems of workers and the welfare of the enterprise.

vi. Giving workers a feeling of personal responsibility for their work.

v. Giving people feedback on their job performance.vi. Involving workers in the analysis and change of

physical aspects of the work environment such as the layout of the office or plant, temperature lighting and cleanliness.

3.6 Motivation-Motivation Theoryi. An Early Behavioral Model: "Theory X" and

"Theory Y"• The nature of people has been expressed in two

sets of assumptions developed by Dauglas McGregor and commonly known as "Theory X" and "Theory Y" McGregor chose these terms because he wanted natural terminology. Without any connotation of being "good or bad".

• THEORY X ASSUMPTIONS: The traditional assumptions about the nature of people in theory X are:-

3.6 Motivation-Motivation Theoryi. Average human beings have an inherent dislike

of work and will avoid it if they can. ii. Because of this human nature or characteristic

of dislike work most people must be coerced, controlled, directed and threatened with punishment to get them to put forth adequate effort toward the achievement of organizational objectives

iii. Average human beings prefer to be directed wish to avoid responsibility have relatively little ambition and want security above all.

3.6 Motivation-Motivation Theory• THEORY Y ASSUMPTIONS: The assumption of

theory Y of Mcgregor as follows:i. The expenditure of physical effort and mental

effort in work is as natural as play or rest.ii. External control and the threat of punishment

are not the only means for producing effort toward organizational objectives. People will exercise self direction and self control in the service of objectives to which they are committed.

iii.The degree of commitment to objective is in proportion to the size of the rewards associated with their achievements.

3.6 Motivation-Motivation Theoryiv. The capacity to exercise high degree of imagination,

ingenuity and creativity in solution of organizational problem is widely distributed in the population.

v. Average human being learns under proper conditions not only to accept responsibility but also to seek it.

vi. Under the conditions of modern industrial life, the intellectual potentialities of the average human being are only partially utilized.

• These two sets of assumptions are fundamentally different theory x is pessimistic, static and rigid. Theory y is optimistic, dynamic and flexible with an emphasis on self directions. There is little doubt that each set of assumption will effect managerial functions and activities of managers.

3.6 Motivation-Motivation Theoryii. The Hierarchy of Need Theory• The hierarchy of need theory was presented by

Maslow. Abraham Maslow saw human needs in the form of hierarchy, ascending from the lowest to the highest. He concluded that when one set of needs is satisfied, this kind of need ceases to be motivators.

• The needs placed by Maslow in an ascending order are these;

• Physiological Needs-These are the basic need necessary for human life. Such as food, water, warmth, shelter and sleep Maslow said that until these needs are satisfied to the degree necessary to maintain life their needs, will not motivate people.

3.6 Motivation-Motivation Theory• Security or Safety Needs-These are the needs to

be free of physical danger and of the fear of losing of job, property, food and shelter.

• Affiliation or Acceptance Needs-Since people are social beings, they need to belong to be accepted by other.

• Esteem Needs-According to Maslow, once people begin to satisfy their need to belong they tend to want to be held in esteem both by themselves and by others. Esteem need produces such satisfactions as power, prestige, status and self confidence.

3.6 Motivation-Motivation Theory• Need for Self Actualization-Maslow regards

this as the highest need in his hierarchy. It is desire to become what one is capable of becoming.

3.6 Motivation-Motivation Theory

3.6 Motivation-Motivation Theoryiii. Hygiene Approach to Motivation-Frederick

Herzberg Theory Of Motivation • Needs theory of Maslow’s has been

considerably modified by Frederick Herzberg and his associates. He grouped the concept into two factor theory of motivation. In one group of needs are such things as company policy and administration, supervision, working conditions, interpersonal relation, salary, status, job security and personal life.

3.6 Motivation-Motivation Theory• This group referred to as dis-satisfiers, and not

motivators. In other words if they exist in a work environment in high quantity and quality they yield no-satisfaction. In second group, Herzberg listed certain satisfier and therefore motivators all related to job content. They include achievement, recognition, challenging work , advancement and growth in the job. There existence will yield feeling of satisfaction or no satisfaction

3.6 Motivation-Motivation Theory• The first group of factors (the dis-satisfiers)

will not motivate people in an organization, dis-satisfaction will arise. The second group or the job content factors by Herzberg is real motivators because they have the potential of yielding a sense of satisfaction. Clearly if this theory of motivation is sound, managers must give considerable attention to upgrading job content.

3.7 FINANCIAL RESOURCES• Companies often need financial

resources/funding for starting or continuing business operations. These may include cash money, loan from banks, trading arrangements or government grants. Small businesses typically need start-up funds, while medium and larger companies may need funding to expand operations or purchase competitors. Different types of funding are usually available based on the company's size and needs.

3.7 FINANCIAL RESOURCES• Companies may choose to use traditional

funding sources such as banks and equity investors or apply for government grants or venture capital funds. These different forms of financial resources will be discussed in the coming sessions especially topic 4”Raising capital to finance company operations”.

3.8 COMPANY LIQUIDITY • The term liquidity refers to the ability and degree

to which current assets (stock, debtors, cash at bank, cash on hand) can be used to meet company’s financial/cash obligations. Also the ability of an asset to be converted into cash without a significant price concession. People dealing with financial related matters within companies need to make sure that they maintain appropriate mix of currents assets. This is due to the fact that the mix is essential to both the companies and the outsiders such as lenders.

3.8 COMPANY LIQUIDITY • To the company cash as the most liquid

though non-earning current assets, is regarded as the “lifeblood” of the business as its availability is quite essential to enable the firm to be liquid, that is, to enable the firm to carry out its operations and to meet its obligations. Inadequacy of cash or illiquidity may constrain or hinder the activities of the firm and make it unable to honour its financial obligations, which may have adverse consequences to the firm such as limited

3.8 COMPANY LIQUIDITY • access to lenders who believe that cash form a

cushion against default. • Proper liquidity decision therefore involve

making sure that the firm has “adequate liquidity” to meet its transaction, precautionary, opportunity and compensatory needs. But at the same time to ensure that unnecessary large amounts are not kept as idle cash balance without being invested in interest-earning investments.

3.8 COMPANY LIQUIDITY • The following are guiding factors that need to

be taken into consideration while attempting to determine the appropriate or optimum cash balance:-

i. The desired liquidity or safety level (one should consider transaction, contingency and opportunity needs).

ii. The magnitude, stability and predictability of cash flows. The more unstable and unpredictable are the cash flows, the more will be the cash balance and vice versa.

3.8 COMPANY LIQUIDITY iii. The availability of other liquid assets,

including marketable securities that can be liquidated or “shifted” to meet cash requirements.

iv. The availability and possibility (or ability) of the company to arrange for line of credit/overdrafts or getting other short-term loans/credits.

v. The nature of economic environment, for instance whether monetary policies by central bank are easy or tight.

3.8 COMPANY LIQUIDITY • As a result during credit squeeze, banks may

not be ready to extend credit easily and therefore firms may need to maintain a relatively high cash balance and vice versa. Another situation is related to the level of interest rate prevailing in money markets, the higher the interest rates the more the firms will invest in marketable securities and banks’ fixed deposits, other things remain constant.

3.8 COMPANY LIQUIDITY vi. The level of compensating balances, and cash

and liquidity ratios required by banks and other creditors in loan/credit (and other obligations) agreements.

vii. The maturity structure of company’s obligations and schedule of major expenditures.

viii. The efficiency of the firm in its cash management operations.

3.8 COMPANY LIQUIDITY • In line with those guides are various tools

used in cash management to assist in determining the cash balance including Cash Budget, Cash Flow Statements, Turnover Analysis, and some Liquidity Ratios (Current Ratio and Acid-Test Ratio).

3.8 COMPANY LIQUIDITY i. Liquidity Ratio• It is also called as short-term ratio. This ratio

helps to understand the liquidity in a business which is the potential ability to meet current obligations. This ratio expresses the relationship between current assets and current liabilities of the business concern during a particular period.

3.8 COMPANY LIQUIDITY


ii. Profitability Ratio• Profitability ratio helps to measure the

profitability position of the business concern. Some of the major profitability ratios are given below.


iii. Activity Ratios• It is also called as turnover ratio. This ratio

measures the efficiency of the current assets and liabilities in the business concern during a particular period. This ratio is helpful to understand the performance of the business concern. Some of the activity ratios are given below:

3.9 Company Accounts And Auditing

Of Companies3.9.1 COMPANY ACCOUNTS• In Tanzania’s Company Act, No 12 of 2002 this

is stated in Section 151-169. The following are some of important issues in relation to company accounts.

1. Every company shall keep in English or Swahili proper books of account which are sufficient to show and explain the company's transactions and are such as to:-


Of Companies• Disclose with reasonable accuracy at any time,

the financial position of the company, at that time;

• Enable the directors to ensure that any balance sheet, profit and loss account and cash flow statement prepared complies with the requirements of the company’s act.


Of Companies2. The books of account shall in particular

contain:-• entries from day to day of all sums of money

received and expended by the company and the matters in respect of which the receipt and expenditure takes place;

• all sales and purchases of goods by the company;

• The assets and liabilities of the company.


Of Companies3. The books of account shall be kept at the

registered office of the company or at such other place in Tanzania as the directors think fit, and shall at all times be open to inspection by the directors.

4. The books of account which a company is required to keep shall be preserved for six years from the date on which they are made up.


Of Companies5. A company's first accounting period shall be

the period of more than six months, but not more than eighteen months, beginning with the date of its incorporation. Its subsequent accounting periods shall be successive periods of twelve months beginning immediately after the end of the previous accounting period.


Of Companies6. The directors of every company shall prepare

individual accounts (in case of individual company, section 153-154) and group accounts (in case of parent company having subsidiaries, section 155-156) for each accounting period and lay before the company in general meeting.


Of Companies7. A parent company is exempt from the

requirement to prepare group accounts in respect of an accounting period if it is itself a subsidiary of another company that does prepare group accounts. Other issues can be found in the proceeding sections.

8. Failure to execute most of above requirements imply offences and hence liability on conviction to imprisonment or to a fine or to both


Of Companies3.9.2 Auditing of Companies• In Tanzania’s Company Act, No 12 of 2002 this

is stated in Sections 161-164 and 170-179. The following are some of important issues in relation to auditing of company accounts.

1. Every company shall at each general meeting at which accounts are laid, appoint an auditor or auditors to hold office from the conclusion of that general meeting until the conclusion of the next general meeting at which accounts are laid.


Of Companies2. A private company shall be exempt from the

requirement to appoint an Auditor in relation to an accounting period (Read section 171). However a company is not entitled to the exemption unless its balance sheet contains a statement by the Directors (a) that for the accounting period in question, the company satisfied the qualifying conditions in relation to turnover and gross assets. (b) that the directors acknowledge their responsibilities for - (i)


Of Companies(i) ensuring that the company keeps books of

account which comply with the law and (ii) preparing accounts which give a true and fair

view of the state of affairs of the company as at the end of the accounting period and of its profit and loss for the accounting period in accordance with the requirements of law.

3. Shareholders have the rights to request for audit (section 173).


Of Companies4. A person or firm shall not be qualified for

appointment as Auditor of a company unless he, or, in the case of a firm, every partner in the firm is a certified public accountant. Also none of the following persons shall be qualified for appointment as auditor of a company; an officer or employee of the company or a person who is a partner of or in the employment of an officer or employee of the company.


Of Companies5. Every Auditor of a company shall have a right of

access at all times to the books and accounts and vouchers of the company, and shall be entitled to require from the officers of the company such information and explanation as he thinks necessary for the performance of the duties of the Auditors.

6. If the auditors fail to obtain all the information and explanations which, to the best of their knowledge and belief, are necessary for the purposes of their audit, they shall state that fact in their report.


Of Companies7. A company's auditors shall, in preparing their

report, carry out such investigations as will enable them to form an opinion as to – (a) whether proper accounting records have been kept by the company and proper returns adequate for their audit have been received from branches not visited by them, and (b) whether the company's individual accounts are in agreement with the accounting records and returns.


Of Companies• If the auditors are of opinion that proper

accounting records have not been kept, or that proper returns adequate for their audit have not been received from branches not visited by them, or if the company's individual accounts are not in agreement with the accounting records and returns, the auditors shall state that fact in their report.


Of Companies8. A company's Auditors shall make a report to

the company's members on all annual accounts of the company of which copies are to be laid before the company in general meeting during their tenure of office. The Auditors 'Report shall state whether in the Auditors' opinion the annual accounts have been properly prepared in accordance with the law, and in particular whether a true and fair view is given.


Of Companies9. The Auditors shall consider whether the

information given in the Directors' Report for the accounting period for which the annual accounts are prepared is consistent with those accounts; and if they are of opinion that it is not, they shall state that fact in their Report.

10. The Auditors' Report shall be read before the company in general meeting and shall be open to inspection by any member.

11. The Auditors' Report shall state the names of the Auditors and be signed by them.


Of Companies12. An Auditor of a company may resign his

office by depositing a notice in writing to that effect at the company's registered office. The notice is not effective unless it is accompanied by the statement of any circumstances connected with his ceasing to hold office which he considers should be brought to the attention of the members or creditors of the company or, if he considers that there are no such circumstances, a statement that there are none.

LECTURE FOUR: RAISING CAPITAL/FUNDS TO FINANCE

COMPANY OPERATIONS4.1 Introduction

4.1 Introduction• Once a person has decided on the form of

business to engage on, whether he/she is having a start up fund or not, thinking or considering different sources of financing the business is very crucial and intelligent decisions. Various stages in the business’s life cycle may pose different needs for financing your business.

• Funds can be a start up capital• Working Capital- payment to creditors, salary

paid to workers, purchase of raw materials etc.

4.1 Introduction• For Machinery & equipment• Leasehold improvements• Fixed Assets building, vehicles etc.• Expansion Expenses.

4.2 Forms of Financing1. Equity Financing• Equity finance is provided by the sale of

ordinary shares to investors. Also known as security financing. This may be a sale of shares to new owners, perhaps through the stock market as a part of a company seeking a quotation, or it may be a sale of shares to existing shareholders, for example by means of a right issue. It involve the sale of equity shares (ordinary shares) or preference shares.

4.2 Forms of Financing

Equity Shares- equity Shares also known as ordinary shares, which means, other than preference shares. Equity shareholders are the real owners of the company.

Preference Shares- it is the shares, which have preferential right to get dividend and get back the initial investment at the time of winding up of the company.


Advantages• Doesn’t have to be repaid• No interest is payable• Ability to raise large amounts of capital• Improved corporate image• Improved access to future financing• Attracting and retaining key employees


Disadvantages• Profits will be paid out as dividends to more

shareholders• Dilution of founder’s ownership• Loss of control• Loss of privacy• Filing expenses• Accountability to shareholders

4.2 Forms of Financingii. Bank Loan-Debt Financing • Usually in the form of a loan where the principal

amount borrowed and interest accumulated on the loan needs to be paid.

• There are also a range of opportunities to secure debt financing such as:

i. Bank loans-borrowings from banks are an important source of finance to companies. When a bank makes an advance in lump sum against some security it is termed as loan. Bank lending can be both for short term and long term basis.


• Short term lending may be in the form of: a)An overdraft- overdraft is an arrangement

with a bank by which a current account holder is allowed to withdraw more than the balance to his credit up to a certain limit without any securities.

b)Cash credit: is an arrangement by which a bank allows his customer to borrow money up to certain limit against the security of the commodity over a short period.


• Long-term lending: When the finance mobilized with large amount and the repayable over the period will be more than five years, it may be considered as long-term sources. Long-term loans from financial institutions and commercial banks including mortgage come under this kind of source of finance. Long-term source of finance needs to meet the capital expenditure of the firms such as purchase of fixed assets,


Other forms of loans• Commercial Bills: short term loans/advances

with or without securities where the amount must be paid in full upon reaching expiry.

• Loan Programs: short term loans set up to assist small business with initial start up expenses.

• Trade Credit: deferred payment of goods and services purchased from a supplier.

4.2 Forms of FinancingAdvantage of debt financingi. Enables you to keep your cash on hand to use as

operating capital or for personal survival during a down period in your business.

ii. It allows the founders to retain ownership and control of the company.

iii. Debt financing provides business owners with a greater degree of financial freedom than equity financing.

iv. Debt obligations are limited to the loan repayment period, after which the lender has no further claim on the business.

4.2 Forms of Financingiv. Is also easy to administer, as it generally lacks

the complex reporting requirements that accompany some forms of equity financing.

v. Debt financing tends to be less expensive for small businesses over the long term, though more expensive over the short term, than equity financing.


Disadvantage of debt financingi. Some lenders require collateral which may

not be available.ii. Higher interest ratesiii. Short repayment periodsiv. It requires a business to make regular

monthly payments of principal and interest. Very young companies often experience shortages in cash flow that may make such regular payments difficult.


v. Most lenders provide severe penalties for late or missed payments, which may include charging late fees, taking possession of collateral, or calling the loan due early. Failure to make payments on a loan, even temporarily, can adversely affect a business's credit rating and its ability to obtain future financing.

4.2 Forms of Financingvi. Its availability is often limited to established

businesses. Since lenders primarily seek security for their funds, it can be difficult for unproven businesses to obtain loans.

vii. The amount of money small businesses may be able to obtain via debt financing is likely to be limited, so they may need to use other sources of financing as well.

4.2 Forms of Financingiii. Sale of assets• A company may decide to sell its assets in

order to raise funds for its operations. These assets may include those which are unutilized or those whose value is low compared to the requirements. The assets are such as building, motor vehicles, debtors or land. The company must take into consideration if there are any rules and regulations governing the sale of such properties.

4.2 Forms of Financingiv. Dividend-refers to cash distribution made by

the company to its shareholders. Than being distributed to the shareholders, the company may decide to use the dividends for financing its operations or for further investment. This is done mainly through the use of Dividend Reinvestment Plans (DRIPS). With a new-stock DRIPs the shares come directly from the company, so there are no brokerage costs involved.DRIPs allow shareholders to automatically reinvest dividend payments in additional shares of the company’s stock.

4.2 Forms of Financingv. Partnership• Through partnering with another company, a

firm may be in a position to secure additional money to finance its operations or further investments. Among the form of these partnerships is “Venture capital”. Venture capital is money put into an enterprise which may all be lost if the enterprise fails. In some countries there are established institutions referred as “Venture Capital Institutions”.

•

4.2 Forms of Financing• In this arrangement, a businessman/company

starting up a new business will invest venture capital of his own, but he will probably need extra funding from a source other than his own pocket.

• The institution that puts in the money recognises the gamble inherent in the funding. There is a serious risk of losing the entire investment, and it might take a long time before any profits and returns materialise.

4.2 Forms of Financing• But there is also the prospect of very high

profits and a substantial return on the investment. When a company's directors look for help from a venture capital institution, they must recognise that:

i. the institution will want an equity stake in the company,

ii. it will need convincing that the company can be successful,

iii.it may want to have a representative appointed to the company's board, to look after its interests.

4.2 Forms of Financing• A venture capital organisation will only give

funds to a company that it believes can succeed, and before it will make any definite offer, it will want from the company management: a business plan, details of how much finance is needed and how it will be used, the most recent trading figures of the company, a balance sheet, a cash flow forecast and a profit forecast, details of the management team, with evidence of a wide range of management skills and details of major shareholders, etc.

4.2 Forms of FinancingAdvantage of Venture capitalists• Venture capitalists usually invest other

people’s money and are professional investors.

• Possibility for getting large amounts of money• Possibility for high success in your business.Disadvantage• Sharing of profits• Less control over the business


• Sometimes these investors will not want to retain its investment in a business indefinitely, and when it considers putting money into a business venture, it will also consider its “exit”.

• Examples of Venture Capitalist in Tanzania are Fanisi Venture Capital Fund and proposed Tanzania Venture Capital and Private Equity Association (TAVCA).


vi. Personal savings/finance: money that you personally invest into the business.

Sources for personal finance • Increase your income - For instance you can get

a part-time job, ask for more hours at work or ask for a raise, or rent out a room in your house.

• Sell non-essential personal assets- think of high value assets such as your second vehicle, property, recreation equipment, land, furniture and artwork/collectibles.


• Cut expenses or save money- budget accordingly and reduce expenses/debt by sacrificing premium products for budget products or lessen the frequency of luxury or incidental purchases. Daily changes can make a big difference.


Advantages of personal finance• Cheapest source of funds• Comes with the least amount of strings• Makes your business more appealing to

potential investors.• Strengthen your ownership in the business• Give you more incentive to make your

business work• Secrecy


• All profit belong to single owner• Capital expansion• Provide you with the freedom and flexibility to

operate your business as you choose Disadvantage of Personal Saving/finance• Time consuming • Interfere with family matters• Limited amount can be raised


• Limited expansion• Limited business skills


vii. Friends and Relatives- people that you personally know can also invest into your business as an assistance or lend you some money.

Advantage• Absence of impact on your credit history• No service fees• No interest or very low interest rates


Disadvantage• Funding option which can be a potential

source of conflict within relationships.• Few individual have such culture of financing

others.• It create a sense of interdependence to others• It may make you have less control over your

business.

4.2 Forms of Financingviii. Angel Investors: Angels are private

investors that provide financing to eligible early-stage start-up businesses. In addition to their goal of recovering their investment, angel investors are interested in helping new ventures to get off ground and succeed. Angel investors use different approaches to minimize the risk of failure: they mostly invest in businesses they have previous experience working with and require some equity control in terms of ownership;

4.2 Forms of FinancingAdvantages• They bring their expertise and network of

contacts on the service of the businesses • They finance, and provide them with advice to

help them succeed.Disadvantage• Less control over the business• Mostly invest in businesses they have previous

experience working with

4.2 Forms of Financingix. Lease Financing - is one of the popular and

common methods of assets based finance, which is the alternative to the loan finance. Lease is a contract. A contract under which one party, the leaser (owner) of an asset agrees to grant the use of that asset to another leaser, in exchange for periodic rental payments. Lease is contractual agreement between the owner of the assets and user of the assets for a specific period by a periodical rent.

4.2 Forms of Financingx. Hire Purchase- this method allows a business

to obtain assets without the need to pay a large lump sum up front

• Involves paying an initial deposit and regular payments for a set period of time

• The main difference between hire purchase and leasing is that with hire purchase after all repayments have been made the business owns the asset.

• This is a medium-term source of finance.

4.2 Forms of FinancingAdvantages• Businesses can have the use of up to date

equipment immediately• Payments are spread over a period of time

which is good for budgeting• Once all repayments are made the business

will own the assetDisadvantages• This is an expensive method compared to

buying with cash

4.2 Forms of Financingxi. Mortgage-This is a loan secured on property• Repaid in instalments over a period of time

typically 25 years• The business will own the property once the

final payment has been made• This is a long-term source of financeAdvantages• Business has the use of the property• Payments are spread over a period of time

which is good for budgeting

4.2 Forms of Financing• Once all repayments are made the business

will own the assetDisadvantages• This is an expensive method compared to

buying with cash• If business does not keep up with repayments

the property could be repossessed

4. 3 Internal vs External FinancingSources of funds can also be classified as

internal and external to the organization.• There are five internal sources of finance:– Owner’s investment (start up or additional capital)– Retained profits– Sale of stock– Sale of fixed assets– Debt collection

4.3 Internal vs External Financing• There are five internal sources of finance:– Bank Loan or Overdraft– Additional Partners– Share Issue– Leasing– Hire Purchase– Mortgage– Trade Credit– Government Grants

4.3 Factors Affecting Choice of Source of Finance

• The source of finance chosen will depend on a number of factors:– Purpose – what the finance is to be used for– Time Period – how long the finance will be needed

for– Amount – how much money the business needs– Ownership and Size of the business

TOPIC FIVE: TOPIC FIVE: COMPANY GROWTH/EXPANSION

5.1 Introduction

5.1 Introduction

• Company or firm growth/expansion is the increase in the size of a firm over time. Firm growth/expansion is typically measured by growth of assets or capital employed turnover, profits and number of employees. Some firms remain small either by choice or circumstances; others expand to become large either in the national or international context (example Multinationals) through either/or internal/organic growth and external growth

5.1 Introduction

(Mergers and Acquisitions - M&As, Takeovers and Strategic Alliances, franchising e.g. Coca Cola/McDonald). This discussion will concentrate on Mergers and Acquisitions (M&As) as among the means under which companies can grow. Before going to the details of M&As let us see some forms of growth.

5.2 Types of Growth

a. Natural/Organic/Internal Growth: Is a mode of business growth that is self-generated (expansion from within) rather than achieved externally through M&As and takeovers. Organic growth typically involves a firm improving its market share by developing new products and generally outperforming its competitors (horizontal integration) and through markets development (finding new markets for existing products).

5.2 Types of Growth

• It may also involve firms expanding vertically into supply sources and market outlets (vertical integration) as well as diversification into new product areas.

Advantage

i. The advantage of organic growth include the ability to capitalize on firm’s existing core skills and knowledge, use up spare production capacities and more closely match available resources to the firm’s expansion rate over time.

5.2 Types of Growth

ii. Internal growth may be the only suitable alternative where M&As is not possible or where the product is in the early phase of product life cycle.

Disadvantagei. The disadvantages of organic growth is that on

relying too extensively on internally generated resources, firms may fail to develop acceptable products to sustain its position in existing markets, while existing skills and know

5.2 Types of Growth

-how may be too limited to support a broader-based expansion programme.

• Firms therefore, often rely on a combination of internal and external growth modes to internationalize their operations and undertake product/market diversification.

5.2 Types of Growth

b. External Growth: Is a mode of business growth that involves firms expanding its activities by Mergers, takeovers/acquisitions, strategic alliances such as franchising or joint venture rather than through internal growth. External growth may take the form of horizontal, vertical or diversification expansion.

5.2 Types of GrowthMerger and Acquisitions (M&As)• An acquisition is the purchase of some

portion/total of one company by another, whereas a merger represents the absorption of one company by another.

• Mergers may be a statutory merger, a subsidiary merger, or a consolidation.

• It can also be horizontal or vertical merger. Horizontal mergers occur among peer companies engaged in the same kind of business, vertical mergers occur among

5.2 Types of Growth• companies along a given value chain-think of a

cone supplier merging with an ice cream maker, and conglomerates are formed by companies in unrelated businesses for example telecommunication company buying media coy.

a. Classification of mergersi. Classified based on endorsement/support of

parties’ management:• A hostile takeover is when the target company

board of directors objects to a takeover offer-they may decide to be merged.

5.2 Types of Growth• A friendly transaction is when the target

company board of directors endorses the merger or acquisition offer-more of acquisition.

5.2 Types of Growth

5.2 Types of Growth

• In a statutory merger, often referred to as an acquisition, one company ceases to exist. All of its assets and liabilities are subsumed in the acquiring party (Company X in diagram).

• In a subsidiary merger, the acquired party becomes a subsidiary of the acquiring party (not diagrammed). Serengeti Breweries acquisition by East Africa Breweries.

5.2 Types of GrowthThere are various forms of acquisition• In a stock purchase, the acquirer provides cash,

stock, or combination of cash and stock in exchange for the stock of the target firm. A stock purchase needs shareholder approval. Target shareholders are taxed on any gain. Acquirer assumes target’s liabilities.

• In an asset purchase, the acquirer buys the assets of the target firm, paying the target firm directly. An asset purchase may not need shareholder approval. Acquirer likely avoids assumption of liabilities.

5.2 Types of Growthc. Motives for M&A There are various motives. These are summarized

here below.

5.2 Types of Growthc. Advantage and disadvantage• Advantage• Generally, external growth allows firms to

expand more rapidly and in more cost-effective way than internal growth, while augmenting and widening firms’ resource base.

5.2 Types of Growth• Disadvantage• Complications associated with this growth

mode include: Merged or acquired firms have to be integrated into one controlling organisation, which may require a major streamlining of operations and creation of new management structures. Mergers create value for the target company shareholders in the short run. Acquirers tend to underperform in the long run. Unemployment problems,

5.3 Growth Directions• Firms may expand in their original lines of

business (horizontal integration), become vertically integrated or they may expand into new business activities (diversification).

• The process of growth is initiated and facilitated by a combination of managerial, economic, financial and chance factors.

• Managerial: Most entrepreneurs’ ambition is to grow from small to large business is a key factor here.

5.3 Growth Directions• One may start alone, but as the firm grows,

one needs assistance of others, professionals or otherwise, depending on the nature and size of the business.

• Economic: The key here is creating competitive advantages that are needed in the competitive market. The advantages include economies of scale and experience. These help firms to lower costs and maximize profits, ceteris paribus.

5.3 Growth Directions• Also innovations and product differentiation

by way of developing new products is essential for firm growth and expansion.

• Financial: Additional financial resources are essential for growth. This may be obtained though various ways of financing a business, including borrowing from the financial institutions and inter-and intra-firm financing.

• Chance or luck factors: This is all about being in the right place at the right time.

5.3 Growth Directions• It is about discovering and making most out of

emerging/unfolding growth opportunities.• The different rates of growth in different

industries/firms affect the market structure because growth determines the number of firms, which in turn determines the market structure.

TOPIC SIX: THE BUSINESS PLAN

6.1 Introduction

6.1 Meaning• A business plan is a document analysing the

objectives, opportunities, strategies, activities, key players and outcome of business in an integrated and comprehensive manner. It is in principle, a reflection of the entrepreneur and his or her ability to organize, to think, to manage and to communicate. In the eyes of a banker or venture capitalist, one who may invest his money in the new enterprise, the Business plan demonstrates on paper the potential ability of the entrepreneur to compete in the business arena.

6.2 Why Does One Need a Business Plan

• A business plan serves the following important objectives:

i. It forces the entrepreneur to look at his/her business in its entirety and in this process it is possible to evaluate the feasibility of business idea. By analysing every aspect of the business and projecting financial results, the business plan provides the promoter entrepreneur with a basis for deciding whether or not to proceed with the idea.


ii. In the course of conducting the background studies and assessment as inputs into the business plan, the promoter entrepreneur learns a lot about products, customers, competition, regulations, taxes, constraints, etc. This can compensate for lack of experience.

iii. Because business planning encourages one to be specific in thinking about operations, the business plan becomes an important tool in the course of managing the business.


iv. The Business Plan provides a basis for the financing proposal submitted to financiers. A well-developed business plan can be used to solicit funds from banks, venture capitalists, individuals, etc. The plan provides an opportunity for the promoter to display his/her entrepreneurial flair/talency and managerial talent and to communicate his/her ideas in a way that is easy for financiers to understand.


v. Creates a yardstick by which you may measure and evaluate changes. In this regard proper use of a business plan improves decision making, efficiency and control and eventually improves the chances of success of a business venture.

6.3 When is it usefuli. When starting a business, it is useful to have a

plan of action and an estimate of profit to show that the idea is feasible and to minimise mistakes and wastage of time and resources.

ii. When deciding a strategy to grow a business, a plan is useful for showing the financial targets, the actions to be taken to attain them, the costs that will be incurred, and how they will be met.

6.3 When is it usefuliii. When seeking financial assistance at any time

from formal sources such as banks and from equity investors such as partners. Then a plan is useful for demonstrating the viability of the business idea.

6.4 Contents of BPThe business plan would normally contain the

following basic information in various formats:i. The owners’ goal for the enterprise, both short

and long term (vision, mission, goals and objectives).

ii. A description of products or services to be offered;

iii. History to date, if existing business or background to the business idea if a new business;

6.4 Contents of BPiv. Description of the market opportunities

identified, how they have been identified/validated/confirmed and analysis of the competitive situation in the sector;

v. Description of the marketing strategies to be used to release the objectives in light of the identified opportunities and competition;

vi. Description of how the business will be organized, managed and staffed;

• Description of the operations(facilities, inputs, processes, output) envisaged ; and;

6.4 Contents of BPProjections of financial results (income, cash

flows, balance sheets, key ratios, etc).

6.4 Selection of a Business Idea• In order to get a best idea which may fulfill

the objectives of the business plan, the following issues and steps are crucial.

i. State your business idea, here list 5 ideas in order of interest

ii. Check Your Skills- to what extent do you have the skills unique to each business? Rate each on a scale of 0-3 based on the following criteria (0=none, 1=limited skills, 2 =some skills, 3=extensive skills).

6.4 Selection of a Business Ideaiii. Check Your knowledge of the business- how

much do you know about the area? Will you have to spend extra time and money teaching yourself the business? Will you have to team with another person or agency because you do not know the business well enough? Rate each on a scale of 0-3 based on the following criteria (0=no knowledge, 1= indirect knowledge, 2 = limited knowledge, 3= working knowledge).

6.4 Selection of a Business Ideaiii. Your knowledge of the business- how much

do you know about the area? Will you have to spend extra time and money teaching yourself the business? Will you have to team with another person or agency because you do not know the business well enough? Rate each on a scale of 0-3 based on the following criteria (0=no knowledge, 1= indirect knowledge, 2 = limited knowledge, 3= working knowledge.

6.4 Selection of a Business Ideaiv. Check Your experience in the field- have you

ever worked in this type of business before? To what extent is experience on hands crucial? (0=no experience, 1= indirect experience, 2 = limited experience, 3= familiar with business).

v. Easy of Entry- think both of the costs of entering the business and of the competitive barriers that might exist.

6.4 Selection of a Business Idea• For example, a service business that you can

run from your home might be inexpensive to start, but if several others are already providing that service, entry in the field may be difficult ( 0=crowded field, 1=limited entry, 2=mix of large and small competitors, 3=unrestricted entry).

vi. Uniqueness-uniqueness does not necessarily mean that no one else is providing the same product or service.

6.4 Selection of a Business Idea• It may be that no one is providing it the way

you are, or in your area or packaged in quite the same way. You are looking for some way to distinguish your product or service from others who are already in the business (0=widely available, 1=few to several competitors, 2=one to two competitors, 3=no competitors).

6.4 Selection of a Business Ideavii. Total up the numbers– Eliminate any of you ideas that scored less than a

total of 10.– Eliminate any of your ideas that did not score at

least a 2 in every category.– Eliminate any of your ideas that did not score at

least a 3 in the uniqueness category

6.4 Selection of a Business Idea• The table below can be used for the above

exercises.

6.4 Selection of a Business IdeaHow many ideas are left?• If the answer is “none”, then you need to use

the list to identify where you need to improve and you need to develop a strategy for raising “1s” to“2s” or “3s”

• If the answer is “more than one”, you have a pleasant dilemma; a choice of which business to start.

• If the answer is one, you may have just found the business idea/plan that is perfect for you.

6.5 Contents of a BP• As said earlier the contents of business plan

may be organized in various format. Among the accepted format is the one below which will guide us throughout the discussion.

i. EXECUTIVE SUMMARY• The executive summary should be no longer

than two pages. Prepare it after the plan is complete, as it summarizes the whole plan in a nutshell. Make it dynamic and exciting to generate the reader’s interest.

6.5 Contents of a BP• Loans officers or investors have read copious

plans and tend to skip through them if they get bored.

ii. VISION, MISSION, OBJECTIVES, VALUES• Clearly state your Vision, Mission, Objectives

and Values if any. Mission statement describes your company philosophy in a few sentences. A vision statement describes how you see your company in the future. Your objectives need to meet SMART criteria

6.5 Contents of a BP• Think carefully about each one. Study other

mission statements and design one that is uniquely yours. A mission statement shows your commitment to the business and its customers and gives you a written promise to uphold.

iii. BUSINESS DESCRIPTION• Introduce the business in more detail, outlining

your type of business, giving its history (if you are purchasing an existing business) or an outline of the new business’s products or services.

6.5 Contents of a BP• With an existing business, highlight any recent

special achievements. Include the general business overview especially where it fits into the marketplace, what needs it will fill, and how it will fill those needs.

iv. LEGALITY AND RISKS• Explain the legal framework which support your

business or the legal context in which the business will operate. This is done in order to show that your business is legal and your not going contrary to any legislation.

6.5 Contents of a BPv. ENVIRONMENT ANALYSIS

• Conduct both internal and external analysis in order to understand yourself and the external environment. You can do this through SWOT and PESDT tools which will give a picture of your Strength, Weakness, Opportunity and Threats. State them in this section.

6.5 Contents of a BPvii. ESTIMATE OF THE MARKET SIZE• The expectation is that when you prepare a

business plan you had already carried out some sorts of a research in relation to your market. In this section state the size of the market, if you do not have actual size provide the estimated size.

viii. MARKET TREND AND SALES FORECAST• What is the current situation in relation to this

type of business? Is there any competitor that threatens you? How is the competitive situation? Its future?

6.5 Contents of a BP• How do customers behave in this market? Is

there any expectations for the increased number of customers in the future?

• SALES FORECAST• Sales forecast can be made in various ways.

These includes surveys of buyers intentions, composite of sales force opinions, expert opinion (dealers, distributors, suppliers, consultants), market test method (direct market test for a product), time series analysis, leading indicators, and statistical demand analysis.

6.5 Contents of a BP• From these ways you can get information which

can help you to get a picture of the future sales.

ix. MARKET SHARE• Your market share is the portion of the total

available market that is being serviced by your business, but this may depend if the business is new or old. If you have an existing business, it may become easier to have a grasp of your market share. If you intend to establish a new business, it is also possible to have a picture of your potential market share.

6.5 Contents of a BP• Market Share can be calculated by using the

formula below:Market Share= Your Sales/Estimated X 100

Total Industrial Sales• Where no actual market shares, a general

statement can be given giving a picture of your market share.

• So the answer you will obtain in these calculations will give a picture of your expected profitability which may also have a positive impacts to financial providers/lenders, partners or venture capitalists.

6.5 Contents of a BPx. TARGET MARKET

• This refers to a well-defined set of customers whose needs the company plans to satisfy. Here state your target market and what is so special in them.

• Students? Workers? Farmers?, businesses?• This part is among the most difficult section

and needs real research. You may allow even about 3-6 pages for this important section

6.5 Contents of a BPxi. CUSTOMERS CHARACTERISTICS

• Here define the characteristics of your customers. This part may also indicate the extent to which you have innovative idea. However by defining the customers characteristics will indicates the extent to which you are focused and your intent to solve specific customer problems. Than these characteristics, explain how/why they will buy your products/services in preferences to those of competitors.

6.5 Contents of a BPxii. COMPETITION

• In this part introduce the main competitors (or near-competitors) and profile them. Show how their market shares have evolved and are likely to move in the future after your entry/growth. Assess their SWOTs, place detailed information in appendices.

6.5 Contents of a BPxiii. OPERATIONAL/PRODUCTION PLAN• Plan how you will operate your business, from

overhead costs to distribution channels. You may also state the inputs, facilities and location of the business.

xiv. MANAGEMENT/ORGANIZATION PLAN• Here indicates how your business will be

managed or organized. Indicates the type of people who are necessary to run the business, their number, skills and qualifications.

6.5 Contents of a BP• State who will constitute the management, division

of responsibilities between personnel, organization structure, line of authority and reporting. Create a table which summarize all the necessary costs.

xv. FINANCIAL PLAN• The viability of your new venture will culminate

when you prepare projections of income, expenses, and cash flow, and when you review how much money you may require. Even if you are not borrowing money, projections and cash flows facilitate making many future decisions.

6.5 Contents of a BP• Present key financial projections of Income and

Expenses (e.g Income Statement), Cash flow projections, Balance sheets and key accounting ratios. Work on monthly basis for the first year’s projections.

• It is essential that all the financial statements be fully integrated and linked. Keep this section within four to eight pages by ensuring that only high-level financial projections are included in summary tables. You can place all detail in Appendices

6.5 Contents of a BP• KEY ASSUMPTIONs• About sales-its expected growth, cost of sales, days

of credit, suppliers payment days, debtors, owners capital etc.

Important Issues in the Financial Sectioni. Income Statementii. Projected Balance Sheetiii.Cash Flow Projectionsiv.Break Even Analysisv. Sensitivity Analysisvi.Ratio analysis

TOPIC SEVEN: ELEMENTS OF LABOUR LAW

7.1 Introduction

7.1 Introduction• Labour law defines your rights and obligations

as workers and employers. The basic subject matter of labour law can be considered under nine broad heads: employment; individual employment relationships; wages and remuneration; conditions of work; health, safety, and welfare; social security; trade unions and industrial relations; the administration of labour law; and special provisions for particular occupational or other groups.

7.1 IntroductionIn Tanzania, the key labour laws are:i. EMPLOYMENT AND LABOUR RELATIONS ACT,

2004 (ERA).• This is an act to make provisions for core

labour rights, to establish basic employment standards to provide a framework for collective bargaining, to provide for the prevention and settlements of disputes, and to provide for related matters.

7.1 Introductionii. LABOUR INSTITUTIONS ACT, 2004.• An Act to make provide for the establishment

of Labour Institutions to provide for their functions, powers and duties, and to provide for other matters related to them.

iii. EMPLOYMENT AND LABOUR RELATIONS (CODE OF GOOD PRACTICE) RULES, G.N. NO. 42 OF 2007 and other ERA regulations.

7.1 Introduction• The focus of this discussion will be the mother

act, Employment and Labour Relations Act. The discussion will base on a number of selected issues including those mentioned in your course outline.

7.2 Fundamental Rights and Protections

• These rights are outlined in the second part of this act. These relates with:-

i. Child Labour• No person shall employ a child under the age

of fourteen.• A child of fourteen years of age may only be

employed to do light work, which is not likely to be harmful to the child's health and development; and does not prejudice the child's attendance at school,


• participation in vocational orientation or training programmes approved by the competent authority or the child's capacity to benefit from the instruction received.

• A child under eighteen years of age shall not be employed in a mine, factory or as crew on a ship or in any other worksite including non-formal settings and agriculture, where work conditions may be considered hazardous by the Minister.


• For the purpose of this subsection, ''ship'' includes a vessel of any description used for navigation.

• Other issues in relation to child labour are discussed in Section 5 Subsection 4-8.

ii. Forced Labour• Any person who procures, demands or

imposes forced labour, commits an offence.


• For the purposes of this section, forced labour includes bonded labour or any work exacted from a person under the threat of a penalty and to which that person has not consented but does not include-

(a) Any work exacted under the National Defence Act, 1966 for work of a purely military character; Act No. 24 of 1966

(b) Any work that forms part of the normal civic obligations of a citizen of the United Republic of Tanzania;


(c) Any work exacted from any person as a consequence of a conviction in a court of law, provided that the work is carried out under the supervision and control of a public authority and that the person is not hired to, or placed at, the disposal of private persons;

(d) Any work exacted in cases of an emergency or a circumstance that would endanger the existence or the well-being of the whole or part of the population;


(e) Minor communal services performed by the members of a community in the direct interest of that community after consultation with them or their direct representatives on the need for the services.

iii. Discrimination• Every employer shall ensure that he promotes

an equal opportunity in employment and strives to eliminate discrimination in any employment policy or practice.


• An employer shall register, with the Labour Commissioner, a plan to promote equal opportunity and to eliminate discrimination in the work place.

• No employer shall discriminate, directly or indirectly, against an employee, in any employment policy or practice, on any of the following grounds: (a) colour; (b) nationality; (c) tribe or place of origin; (d) race; (c) national extraction; (f) social origin; (g) political opinion or religion; (h) sex; (i) gender; (j) pregnancy; (k)


• marital status or family responsibility; (1) disability; (m) HIV/Aids; (n) Age; or (o) station of life.

• Harassment of an employee shall be a form of discrimination and shall be prohibited on any one, or combination, of the grounds prescribed in subsection 4 of the ERA (2002).

• For the avoidance of doubt every employer shall take positive steps to guarantee equal remuneration for men and women for work of equal value.


iv. Freedom of Association• Every employee shall have the right (a) to form

and join a trade union; and (b) to participate in the lawful activities of the trade union.

• No person shall discriminate against an employee on the grounds that the employee- (a) exercises or has exercised any right under this Act or any other written law administered by the Minister; (b) belongs to or has belonged to a trade union; or


(c) participates or has participated in the lawful activities of a trade union.

• No person shall discriminate against an official of an office bearer of a trade union or federation for representing it or participating in its lawful activities.

• Every employer shall have the right (a) to form and join an employer's association; (b) to participate in the lawful activities of an employers' association,


• No person shall discriminate against an employer on the grounds that the employer- (a) exercises or has exercised a right under the Act; (b) belongs or has belonged to an employees Association; (c) participates or has participated in the lawful activities of an employers' association.

• As the rights of trade and unions employers' associations, every organisation has the right to-(a) determine its own constitution;


(b) plan and organise its administration and lawful activities; c) join and form a federation; (d) participate in the lawful activities of a federation, (e) affiliate with, and participate in the affairs of any international workers' organisation or international employers' organisation or the International Labour 0rganisation, and to contribute to, or receive financial assistance from those organisations.

7.3 Employment Standard

i. Employment Contract• A contract with an employee shall be of the

following type a) a contract for an unspecified period of time; (b) a contract for a specified period of time for professionals and managerial cadre, (c) a contract for a specific task.

• A contract with an employee shall be in writing if the contract provides that the employee is to work outside the United Republic of Tanzania.


• Any employer shall supply an employee, when the employee commences employment, with the following particulars in writing, namely (a) name, age, permanent address and sex of the employee; (b) place of recruitment; (c) job description; (d) date of commencement; (e) form and duration of the contract; (f) place of work; (g) hours of work; (h) remuneration, the method of its calculation, and details of any benefits or payments in kind, and (i) any other prescribed matter.


• Where there are changes in relation to any of the above, the employer shall, in consultation with the employee, revise the written particulars to reflect the change and notify the employee of the change in writing.

ii. Hours of Work• An employer shall not require or permit an

employee to work more than 12 hours in any day.


• The maximum number of ordinary days or hours that an employee may be permitted or required to work are- (a) six days in any week; (b) 45 hours in any week; and (c) nine hours in any day.

• An employer shall not require or permit an employee to work overtime- (a) except in accordance with an agreement; and (b) more than 50 overtime hours in any four week cycle.

7.3 Employment Standard• An employer shall pay an employee not less

than one and one half times the employee's basic wage for any overtime worked.

• It is prohibited for an employer to require or permit -(a) pregnant employees to work at night - i) two months before the expected date of confinement; or (ii) before that date if the employee produces a medical certificate that she is no longer fit to perform night work; (b) mothers to work at night -(i) for a period of 2 months after the date of birth;


(ii) before that date if the mother requests to work and produces a medical certificate.

7.4Unfair termination of employment

• Termination of employment includes (i) a lawful termination of employment under the common law (ii) a termination by an employee because the employer made continued employment intolerable for the employee; and (iii) a failure to renew a fixed term contract on the same or similar terms if there was a reasonable expectation of renewal; (iv) a failure to allow an employee to resume work after taking maternity leave granted under this Act or any agreed maternity leave;


(v) a failure to re-employ an employee if the employer has terminated the employment of a number of employees for the same or similar reasons and has offered to re-employ one or more of them;

• “Terminate employment'' has a meaning corresponding to 'termination of employment'.

• It shall be unlawful for an employer to terminate the employment of an employee unfairly.


• A termination of employment by an employer is unfair if employer fails to prove- (a) that the reason for the termination is valid; (b) that the reason is a fair reason

• For more issues related with termination read sub part e and f of this Act.

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