Table of Contents€¦ · make lots of money in SA, such as MacDonalds, Kentucky Fried Chicken,...

Table of Contents How to use this guide………………2 Find a Business Idea……………….3 Test the Viability…………………….6 Costing and pricing……………......16 Selling and advertising………..…..20 Organise and Manage………...…..22 Financial Tools………………..…... 25 The Business Plan…………………31

Acknowledgements Project Manager: Jerome Gordon, Senior Curriculum planner: GET Economic and management Sciences Learning Area, Western Cape Education Department Many thanks to the following contributors: All Economic and management Sciences Learning Area curriculum Advisers Author: L Zeeman Printing: Edumedia (WCED) All Business Studies teachers who will be facilitating the booklets/material The City of Cape Town Department of Economic Development and Tourism, RED Door, Cape Regional Chamber of Commerce, and other partners in the World of Business, who all participate in developing Entrepreneurial skills in schoolgoing youth.

MY BUSINESS Grade 8 & 9 Learner Guide 1 Copyright reserved WCED

How to use this Guide

This guide is written for you, the learner to help you in the entrepreneurial process of coming up with a business idea and taking the idea forward to create a profitable business. All the important aspects of starting and running a business are discussed and explained to guide you through the market research, the organisational requirements, effective advertising, costing and pricing and the financial planning that needs to happen. This guide contains a comprehensive section that provides a step-by-step explanation of how to write your Business plan and all the information that should be included in your Business Plan. Use this guide together with your workbook to successfully engage in a business venture of your choice .


Find a business idea A great idea is the start of any business. Great ideas are not always brand new ideas. It may be an idea for a better way of doing something. It may also be an existing product that with some changes becomes a great new invention. The concept of franchising – where a business venture gets duplicated in exactly the same way, but in a different place; has proved to be very successful in the business world and there are many franchises that make lots of money in SA, such as MacDonalds, Kentucky Fried Chicken, Spur etc.

The ability to generate ideas is a key requirement of a successful entrepreneur Everyone can generate a good idea. The more you practice the better you will become. Creativity is a way of thinking. Creative thinking in business refers to the mental attitude of always trying to improve on

existing products and services. Always listening to customers and being aware of what they need helps the entrepreneur to think creatively There are also many idea generation techniques, such as brainstorming, where you allow yourself to think freely and try to think of as many ideas as possible, the wilder the better. No time is initially allowed for discussion; only once all the ideas are written down will each one be discussed and investigated.


There are many other techniques besides brainstorming and the following techniques can be used to examine products and identify possible changes in order to find a winning business idea: These techniques could include: • Substitute This means to use one object instead of another. Some products might not always be affordable for customers and then they search for a cheaper alternative, for example instead of having blankets and a bed cover, you might choose to only have a duvet.


• Combine

Combining two or more objects, materials or ideas. Some television sets have a built-in video or dvd player which will save space and sometimes, might even work out cheaper.

+ • Adapt

To adapt is to change in some way. Many products can be changed for the better by adapting some aspect, for example a multi-purpose bottle opener, that has many other functions.

• Magnify or minimize This means to make bigger or smaller, many products over the years have become much smaller such as cameras and cell phones. This might link to the packaging of products, for example 2 litre containers for cold drinks. • Put to another use Asking the question “What else could this product do?” An example of this is the paper clip, which can be used for a number of different things. A paper clip that is “opened up” becomes a perfect hook to hang meat when making biltong.


Test the viability

No matter how unique or creative the business idea, if there is no market – there is no business. The customers that are prepared to buy your product or service are your market.

You have to find out before you invest any time or money into the business idea that there are people who will buy the product or service and that they are prepared to pay the price for your product or service.

To find answers to these questions you will have to do some research, this research is known as a feasibility study. If the product or service is feasible, it has a good chance of success. It is very difficult to decide what to sell; brilliant ideas might not necessarily make money.


The following components make up the feasibility study: • Customer profile A customer profile allows you to have a clear picture of the customer and will include aspects such as, age, sex, income group, occupation and culture.

The more you know about your customer the easier it will be to identify the products that they will spend money on, as well as how to approach them when trying to sell your product or service to them. • Target market

The target market includes all the potential buyers of a product or service. These are the customers who have a need for your product or service and who can afford to buy the product.


Market share

The percentage of total sales that a business can claim in a specific area, whether the area is the immediate community, regionally, nationally or globally is known as the market share.

• SWOT analysis

An examination of the Strengths and Weaknesses of your product or service an a careful study of the Opportunities and Threats which face your proposed business, will enable you to upfront make plans around the weaknesses and threats and concentrate on those areas where the strengths of the business lie as well as the possible opportunities that might arise.

• Viability study

Research into whether you are able to produce and sell enough of your new product or service to make a profit. If the product or service is viable it means that it “can be done” and make enough money ongoingly to warrant the time and effort that went into the production and selling of the product.


• Market research

A planned, organised effort to get new facts and knowledge that will help you to make better decisions about the marketing of your product or service is known as market research. Market research enables you to establish exactly what the customer wants. • Competitor analysis

A detailed examination of the competition which includes the quality and price of the products and services as well as any other strategy, that they have in place that might put their business in a better position.


Let us take a look at some of the components in more detail: • Market research Market research is the research that is done to find out about your potential market. It includes finding out who is buying this type of product or service, how much of this type of product or service is being sold and whether there is a need for your specific product or service. Generally market research can be obtained from two sources, namely primary sources and secondary sources. Primary sources include all those people that you interview speak to, observe or that filled in questionnaires.

The information obtained in such a way, comes directly from the potential customer. Secondary sources include information obtained from all other places, except from the potential customer, such as facts and figures from the library, the local chamber of commerce, the internet, or the local businesses.


Popular methods to do market research:

• Observations Going to a shopping mall or a flea market to observe customers and see how they behave and what they buy.

• Focus groups To form a sample group of people to discuss certain questions specific to the product. • Mail surveys through questionnaires This method involves getting people to fill in the answers to questions about the product or service. This method is also popular on the internet. (It is customary to include an incentive to get people to return the completed questionnaire.


• Personal interviews Personal interviews can be conducted in different formats, such as stopping people at a shopping centre or market and asking a few quick questions or getting them to participate in a formal meeting/tasting/testing of a product or service.

• Telephone interviews •

A telephone interview involves a quick call where you ask people for a few moments of their time to answer a few questions.


• SWOT Analysis

Part of the viability study is to complete a detailed SWOT analysis on the product or service. The business needs to be fully aware of the strengths and weaknesses, of the product or service and the business as a whole.

One also needs to be aware of the opportunities to improve the product and make the business a success and the threats that could impact on the product and cause the business to fail. This is known as SWOT analysis and is an essential aspect of any action. A SWOT analysis should be used as feasibility tool and once the business is up and running a SWOT analysis will help to monitor the business.


Components of a SWOT analysis SWOT stands for Strengths, Weaknesses, Opportunities and Threats. Strengths and Weaknesses refer to the factors that are under control. This could include: • The nature and features of the product • Your own skills, abilities, education, • values and money or resources Opportunities and Threats refer to external factors that are mostly beyond your control. For example: • The nature of the marketplace (Is there a need for this

particular product/service)? • The competitors (What are the strengths of their products or

services? How loyal are their customers)? • The situation in which customers find themselves (Do

customers have money for non-essential items, or are they spending all their money on basic survival)?

• Write down all the strengths of your product or service and then think of ways of adding to these strengths. Strengths for making and selling sandwiches could include, made from freshly baked bread, made with ingredients of your choice, convenient packaging, etc.


• Then write down all the weaknesses and think of how these could be eliminated or overcome.

Examples could be, packaging is very expensive, which makes the final price a bit high, or freshly baked bread loses its freshness after a few hours. Strengths and Weaknesses of your product are under your control, you have the power to change these or to increase and decrease as you think the market needs are.

• Now write down all the Opportunities that could be used to

help your business, such as is there a shopping centre, or a taxi rank nearby where you could run an advertising campaign? Is there a cheaper supplier than the current supplier?

• Finally make a list of all the threats that could impact on your

business, threats could include suppliers that do not deliver on time, or drought, floods, the increase in the petrol price, etc. Unfortunately there is not much that you can do about threats, other than making plans to overcome these threats.


Costing and pricing One of the most important goals of a business is to make money. If a business does not make money it is not a business anymore. Therefore all costs need to be carefully calculated and a market related profit added. If there are too many costs, there will not be a profit. There may even be a loss. A business needs to coverall costs and make a profit if it is going to survive. To make sure that you know what you have to focus on, you have to understand the following components: • Costing

This refers to calculating exactly how much your product or service costs to produce. These costs must include all costs, not only the actual manufacturing costs, but also costs, such as rent, electricity and wages. • Pricing

This means to work out how much to charge for the product or service so that a profit is made, yet at the same time the price is in line with the competition and what customers are prepared to pay.


• Break even

This is the point where all the costs of your product or service is covered by the sales. Once you are at break even, you know that you have made back all the money that you have spent and that all income now becomes profit.

• Profit/Loss

If you sell enough of your product to cover your costs and more, you have made a profit. If you do not sell enough to cover your costs, you have made a loss. • Cash Flow

This is the flow of money (cash) into and out of your business. “Cash in” is the term used for all the money that come in from sales of the product and service. “Cash out” is the term used for cash amounts involved in producing, marketing and selling your product or service. If there is more cash going out than cash coming in, your business will eventually fail. • Start-up or Pre-operating expenses

Start-up or pre-operating expenses are those expenses that are needed in order to plan and to prepare for the project. These include deposit on a stall, buying stationery, registration costs, etc.


Hidden costs These are costs which are not immediately obvious or even unforeseen, hidden costs will include breakages and repairs that were not expected. • Interest

The money that is paid to the bank or another money lender, when money is borrowed. Interest can also be received by the business if money is kept in the bank or another financial institution. • Capital

Money or assets used to start a business. These assets could include buildings and machinery.

New businesses need to list all their start-up or pre-operating expenses. How much money will be needed to get the business going and to survive for the first few months. A business or project may not make any money at first; therefore it is important to know how much money should be borrowed to get going. Then you have to calculate exactly what the product or service will cost to produce.


Every item sold must pay a certain portion of the overhead costs, which includes salaries, rent, electricity, transport and all other costs involved in the production, marketing and selling of the product. Once you know all the costs that are involved, it is time to work out the price of your product or service. Costing and pricing go hand in hand; you can not determine a price without taking careful consideration of the costs.

All businesses seek to make a profit and to survive. To make a profit means that the entrepreneur reached break-even point in the sales and then sold even more of the product or service. However, those people that run at a loss, are not even covering their expenses in the business. Besides the ability to make profit a business also needs to know about the cash that is available, businesses have to know that there is enough cash available to run the business from day to day. Before you start the business, it is important to work out what you think your cash flow will be for the first few months. This will give you a good idea of how much money you need to borrow (unless you have saved enough) in order to finance the business. You have to write down all your projected expenses and sales and then work out if your business will be able to make money.


Selling and advertising Once you have defined your Target Market, done the Market Research and decided that it will have customers, it is time to let people know about the business. This is called marketing or promoting the business. The more people that know about the business and the products or services offered by the business, the more potential customers will be attracted. Advertising is needed to grow the business. The marketing should be planned and conducted very effectively or all the money spent and the effort that goes into the marketing campaign will be wasted.


1. The four P’s of marketing Marketing strategies are of built around the 4Ps (product, Place, Promotion and Price) or a combination of the 4Ps: • Product

The best product is one which fills a need in the market place (at a price customers can afford). The product must have specific benefits for the customer and customers will look at the benefits in different ways. This is why it is important to know your customer; and concentrate on the benefits when trying to sell the product. • Place

Where the product is offered for sale is another important aspect. If the venue is too far for customers or in an unsafe area, customers will find other suppliers. Convenience, safety, accessibility are all aspects that must be considered. • Promotion

Promotion means the way the seller makes people aware of the product. This means skilful use of attractive signs, colour and layout of the products. The display of products is an essential part of successful selling. Promotion includes advertising, special gifts, brochures, pamphlets, posters. It also involves finding potential customers and telling them about the products.


• Price

Price is often considered the most important reason why people buy, but in fact a customers will not buy a product simply because it is cheaper than another product. If a products offers more features or is more appealing or is better value – the customers may well be prepared to pay a little more. 2. Advertising An essential aspect of the marketing campaign is effective advertising. Effective advertising often makes use of the AIDA principles. Any advertisement should cause the following responses in the potential customer:

A Attract – the advertisement should make use of colour, easy to read text and illustrations to attract attention.

I Interest – the advertisement should arouse the interest of the

customer by making promises or asking questions. D Desire – the advertisement should fill the customer with

immediate desire to buy the product or service. Often words like “NOW” or “while stock lasts” will urge customers to buy immediately.

A Action – the advertisement should inspire the customer to

action. Words such as “Because you are special”, “You deserve it” are used to motivate the customer to take action.


Organise and Manage A business must be well organised in order to be successful. A disorganised business results in chaos and frustrated customers. The following aspects need careful consideration: • Planning

Planning is one of the most important skills of any manager. Drawing up job descriptions, goals, objectives and timeframes is all part of planning and will ensure that everyone in the business know exactly what to do, why they are doing it and by when it must be done.

• Organise

Organisational skills will be as important to any business, once the plan is in place the actual work needs to be done. Raw materials must be bought, products must be manufactured and the business must start making money.


Organising a business means that the correct structures must be put in place in order for the plans to happen. A good organiser will also ensure that there is a “Plan B” in place, in case something goes wrong, for example a back up sales person or temporary staff members. • Control •

Any business will always require a certain degree of control. From the production phase right up to the selling to customers, controls must be put in place to make sure that everything happens according to plan. Quality control of the raw materials will happen when the delivery by the supplier takes place, during the production process there will also be quality checks to make sure that the final product meets the requirements of the customer. Controlling the finances will include drawing up budgets and working within these budgets as well as making sure that nobody runs away with the cash. It is always a good idea to have everything in writing, from the planning stage all notes must be put in writing as it serves as guidance and easy reference. A visual organisational chart will help everybody to understand the lines of communication and see an overall picture of the different functions within the business.


Financial Tools A business is only successful if there is enough money to pay all the expenses and when there is enough money for the owner in the form of profit. If this is not the case then the owner will close shop

and rather invest the money in a financial institution and earn interest.

The viability of a business is therefore linked to the potential income that the business can make.

A business will draw up and Income Statement and a Balance Sheet at the end of every financial Period. For a new business, this might happen more regularly to make sure that the business stays within the required budgets and to ensure that the predicted earnings are realised. From the Income Statement and Balance Sheet some very useful and important information can be extracted, which the entrepreneur can use for decision-making.


1. The Income Statement The Income Statement shows whether the business made a profit or a loss for the period in which it operated. In order for you to draw up an Income Statement you have to keep a very accurate record of all the expenses and income of the business. Expenses will not only include the actual production expenses of the product, but all the other overhead expenses, such as rent, wages, electricity, etc. The total income of the business will be the money that was received from the sales of the products or services. Look at the following example of an Income Statement: Income Statement of Bling Designs for the three months ending June 2007 Sales 2 000,00 Less Cost of goods sold* (550,00) Gross Profit 1 450,00 Less expenses (950,00) Advertising 200,00 Rent expense 30,000 Stationery 120,00 Packing material 180,00 Interest paid 70,00 Net profit 500,00 * Calculation of Cost of goods sold: Beads R350,00 Wire R100,00 Clasps R100,00 R550,00


From the Income Statement above we can establish the following: • The total sales for the period is R2 000,00 • The cost of the jewellery that was sold is R550,00 • All other expenses amount to R950,00 • The net profit (which is what the owner is entitled to) is R500,00 From this we can make the following deductions:

• The percentage gross profit to sales is:

1450 x 100 2000 = 72,5%

• The percentage net profit to sales is:

500 x 100 2000 = 25%

• The percentage expenses to sales:

950 x 100

2000 = 47,5%


From the above information:

• it is clear that the gross profit percentage is very high, and the net profit percentage is much lower as a result of the high percentage rate for the expenses.

• What the owner should decide is whether R500,00 is enough profit for the hard work and effort that is required to make and sell the Bling jewellery.

• Another consideration could be to try to cut back on some of the expenses.

• Take note that there is no wage expense, which means the owner is doing all the work and not taking a wage or salary from the business.

• A possibility to consider is to grow the business, if the cost of sales to produce the jewellery is reasonably low and the overhead expenses, such as rent does not increase accordingly, then the net profit could increase. 2. The Balance Sheet

The Balance Sheet shows the financial position of the business at a particular date. It is a summary of the total assets (possessions), the total liabilities (the debts) and exactly what the owner is worth.

If the business sells all the assets and pays all the liabilities then the difference should be what the owner invested in the business plus the profit that has been made.


Look at the following example of a Balance Sheet: Balance Sheet of Bling Designs as at 30 June 2007

ASSETS Non-current assets 3 000,00 Tools 1 200,00 Workbench 1 800,00 Current assets 700,00 Stock 200,00 Cash 500,00 TOTAL ASSETS 3 700,00 OWNER’S EQUITY AND LIABILITIES Owner’s Equity 2 500,00 Capital 2 000,00 Plus Net Profit 500,00 LIABILITIES Non-current liabilities 1 200,00 Loan 1 200,00 TOTAL OWNER’S EQUITY AND LIABILITIES

3 700,00

From the Balance Sheet above we can establish the following:

• The total assets are worth R3 700,00 made up of R3 000,00 fixed assets and R700,00 worth of stock and cash.

• The total liabilities amount to R1 200,00, which is a loan, possibly taken out to start the business.

• The owner is worth R2 500,00 which is the start-capital, plus the profit made in the past 3 months.


From this information we can make the following deductions: • If the owner sells the tools, the workbench and the stock, there

will be R3 700,00 cash, this will allow for the repayment of the loan of R1 200,00 and then the R2 500,00 represents the amount invested by the owner and the profit made for the period.

• The ratio between the assets and liabilities is very good:

3 700 : 1 200 3,08 : 1

This reflects that for every R1,00,00 owed by the business the business can access R3,08,00 to pay the debts.


THE BUSINESS PLAN

A well-drawn up business plan should have the following qualities:


Once you have carefully considered all the above information and you have made decisions around your product, done the necessary market research and completed all the financial planning, you have to complete a Business Plan to keep you on track and ensure that you work towards the goals that you have identified. Your business plan states your business objectives. It is an important document because banks and financial institutions will want to read it before agreeing to give you a loan. It also helps as a reference document for yourself as an entrepreneur because it gets you to clarify your thoughts regarding your business objectives, and gives you a reference guide to keep you on track with your future plans. Drawing up a business plan is not a quick and easy process – it takes a lot of time, research and planning. But with a good business plan you have a much better chance of getting a loan and of succeeding in your business.


1. The components of a business plan 1.1 Cover page

Design a smart-looking, professional cover page with the second page giving the contents of your business plan. It is important for your cover page and your whole business plan to show how serious you are about starting your own business. Your cover page must have: • the name of the business; • the entrepreneur’s name; • the entrepreneur’s addresses and • telephone numbers; • the logo or emblem of your business.

1.2 A Summary of your business idea Your summary should be short, clear and focus on the main points of your business plan. It should make the reader want to continue to read the rest of the document and should explain the following:

• the reason for your financial request; • how much money your need; • how you will use the money • how you will repay the loan.


1.3 Description of your business The next part of your business plan involves giving a full description of your business. In this description, you need to include information about:


1.4 The marketing plan of your business Your marketing plan should include the following:

• a description of your target market; • sales forecasts for the first year of your business; • a description of your main customers; • a description of your potential competitors, their marketing

strategies, and how they can influence the success your business;

• a description of the 4Ps 1.5 The management plan of your business Your management plan should include the following information:

• the type of ownership (sole trader, partnership, Closed Corporation, private company)

• how many people you will employ, the type of training they need, their salaries or wages that will have to paid;

• an organisational structure (This shows the positions of people in the business, for example, a managing director, an operations manager, an administration manager, a secretary.);

• your plan of how you will run your business (operating plan); • a description of your administration system or system of how

you record information about the business; • names of suppliers you want to use.


1.6 The financial plan of your business The financial plan of your business is very important and needs time and attention. This will be the main focus of every money lender before they make decisions about granting the loan.


1.7 Extra Information that could help you to get a loan Include in your business plan the following information:

GOOD LUCK WITH YOUR BUSINESS VENTURE!


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