Starting and Developing a New Venture
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Ms Parker intends to start a sole trading business, which is usually small in size, with a low turnover. It is essential to have a realistic, working business plan when setting up a business Plan for her business “Little Extras”. This will require her to have a realistic business proposal that describes its objectives, strategies, the market segment, and its financial forecasts. Having a realistic business plan assists in securing external funding and measures success within the business. It is necessary for Ms Parker to be creative and possess good planning and have adequate preparation, these ingredients constitutes the key to raising money for the business. Ms Parker has demonstrated that she has an innovative mind. She has been able to define her market niche well and also identified her suppliers: specialist suppliers and trade fairs. Since she would like to get a business loan, it is important to conduct a CAMPARI analysis of her business proposal. Lenders and investors require that an investor meet the 'CAMPARI' challenge. The CAMPARI analysis of Ms Parker’s Business Plan for Little Extras considers the following;
Banks understand that, for the small business to succeed, it depends on the character of the owners and managers. Therefore, a character analysis will reveal how risky the borrower is. According to case study, Ms Parker, has a current account and a savings account with a bank for 10 years. Ms Parker has £2,500 in savings which she is willing to use in the business. Other sources include funds from family or friends. Ms Parker has a very supportive family since her father and uncle run successful businesses; they can provide assistance to her. For Ms Parker to make her plans a reality, she has to convince lenders and investors that there is some money in savings which are committed towards investment. She has been saving for a long period of time-10 years. She is overdrawn regularly at the end of the month. Having an overdraft does not affect the credit rating of Ms. Parker. As she is overdrawn regularly, it means that Ms Parker does not default on her obligations. Ms Parker demonstrates faith in her venture and herself. It might be assumed that after losing her employment, Ms, Parker will be more committed to running the business. In addition she has indicated that she will see the day-to-day running of the business. Therefore, she is a saver, who is committed to running the business.
After analysing the character, the shift moves to the ability of the borrower, that is whether Ms Parker has business acumen and whether she understands the numbers. It is true that Ms. Parker has shown ability in her proposal (Business Solutions Unlimited, 2009). First she has provided a financial summary of the business, costs for starting up the business. More so, she has been able to provide a forecast of the projected profit for the first year. She has also given a hint of the business structure that she will be in charge of day-to-day running of the business. In addition, she has indicated that her mother and sister will be assisting her when the need arises. In addition, she expects to employ other people as the business grows. This shows that she believes in her abilities to manage and supervise the business as it grows.
Margin reflects the amount of money the bank will get from advancing the loan to Ms Parker. A simple mathematics shows that the bank will be getting £7,200 per year. This translates to £720000 for the ten years. If the bank advances her £50,000, it will make an extra £22,000 as profit. Therefore, if things go ell, the bank will be able to get back its money plus the interest.
It is prudent for an investor to prove to the bank that they really need the loan to start or expand their business. This is because some people ask for loans only to use it for a different purpose other than the one stated in the application form. From the estimate provided, the start-up costs are £100,000, while Ms Parker can raise £50,000. The difference can be sourced through the loan. Therefore, it is justifiable that she be advanced a loan. She has also indicated that the extra finance be financed through a bank overdraft of £15,000
A bank would like to know whether the amount a borrower is asking is realistic. It will also look at the projections at the same time challenging the assumptions made by the investor. Ms. Parker is asking for loan of £ 50,000. This amount will be repaid over a period of ten years which is feasible. The business, through the projected earning, will be able to meet the loan repayment obligations.
The money will be paid for a period of ten years. Though the projected profits, the business will be in a position to pay for the loan.
Ms. Parker‘s proposal does not have or propose any security against the loan to be borrowed. This should be provided to act as collateral in case of default.
Considering the proposal presented, I would assist, Ms. Parker to set up her business. This is because the analysis of CAMPARI shows that the business proposal is viable and that the business is able to generate enough returns for the entrepreneur and meet loan obligation. In addition, the business has a growth potential and is in a position to generate more employment, thus contributing to economic growth. In addition, Ms. Parker seems to have realistic and realizable objectives. In addition, she has crafted her vision, which all that befit a successful entrepreneurs. She also has the ability to run the business and her character proves that she can be trusted
Q2. How the Role of the Entrepreneur/Small Business Owner Might Change Over Time
It might be fun to start a business venture, especially when the entrepreneur has done all the necessary research and is satisfied that he/she will be able to meet the needs of a specific market. However, as the business growths, there are necessary adjustments that the entrepreneur must adopt in order to continue growing the business. According to Burns when firms continue to experience growth, the role of the founder needs to change, and metamorphosise into a leader. However, this transition is not an easy one. As small firms expand, they experience instances of growth which are followed by crisis and finally a period of consolidation. When going through each of these stages, the entrepreneur is faced with emotions that might not be easy to handle . There are four challenges that Ms Parker will must be faced with as the business grows include;
- Organization structures
The structure of an entrepreneurial business is a spider’s web, with the entrepreneur at the centre . In most cases, entrepreneurs prefer informal structures and management styles that are based on building personal relationships and influence. However, this might bring about conflicts as it is a recipe for over-control and can only work to a certain size. As the business expands, the entrepreneur might find that formal structures weaken their influence leading to frustration. As more formal structures are introduced as a result of expansion, managers must try as much as possible to avoid bureaucratic tendencies.
According to Timmons , the goal of an entrepreneur is to become an effective leader of a well focused team of employees. By recruiting personnel to help in the daily running of the business, the entrepreneur realizes that he cannot cope with the work load any further. This means the need to transform cannot be wished away. Therefore, the entrepreneur must recruit the right people. This will require that the entrepreneur develops human resource management skills. In order to come up with an effective team, it is important for the founder to have a clear growth strategy and also ensure proper planning so as to recruit the right people for the right positions.
At this stage the entrepreneur has changed to a leader who must make important decisions such as identifying growth strategies and making forecasting, for example, demand and sales. The founder changes to a manager whose challenge now is to manage the cash flow required to sustain company growth. At the same time, the leader must now continue to manage success factors such as flexibility and sense of community. In order to be a good leader, the entrepreneur must lead by example. That is, he must set the vision for the business venture and live accordingly. No employee will follow a leader they have no trust in and when they follow, then the leader must be professional in conduct, dedicated and enthusiastic so as to motivate the workers. In addition, the leader must create an appropriate culture. Culture has a big effect on the way businesses are run. For instance an energized culture will be able to encourage excitement and drive in the employees. As a leader, one has to come up with an ethical work culture that values honesty and integrity .
In summary, it is important for entrepreneurs to recognize the need to change styles of management as their businesses achieve different levels of maturity. However, it is not easy to transform from an entrepreneur to a leader as there are several challenges that must be overcome. These must be confronted in a quite and rational way. Indeed, the entrepreneurial leader must always keep the main objectives in mind and observe the principles and policies of the organization when faced with these challenges. With this approach, the company will grow from a start-up to a mature firm bringing benefits to the founder and stake holders as well.
Various Legal Forms a New Business Start-Up Can Take
The form of a business might not be the first issue in the mind of an entrepreneur. However, it is an important aspect that should be given consideration because of various issues such as tax payments, management, and liability aspects. There are several types of legal forms that a small business can take. The most common are sole proprietorship, general and limited partnerships, Limited Liability Company and corporation.
A great majority of small business ventures start out as sole proprietorships as they are probably easy and cheap to establish. For example, Ms Parker has stated out as a sole trader. Sole proprietorships do not require registration with government, except with the regulatory authorities, for the purposes of paying taxes. The owner has absolute control in running the business and making all the decisions.
Advantages of Proprietorships
- It is easy to form and least expensive as there are no legal restrictions
- Owner is in complete control of the daily running of the business
- Owner gets all the profits
- It is easy to dissolve
- Decision making is easy as no consultations are required.
Disadvantages of Sole Proprietorships
- A sole proprietor has unlimited liability and responsible for all the debts. Even the debts incurred by the employees are the responsibility of the sole proprietor.
- Sole proprietorships do not attract investors and financing the business is a great challenge to the owner.
- Due to limited financing, expansion and growth might not be possible and most of them end up in failure.
- Sole proprietors have a shortage of skilled personnel as employees seek stable employers.
- Due to lack of qualified personnel, the company faces challenges in marketing its products.
A partnership business is undertaken by two or more people with the aim of advancing their common interests. For example Ms Parker can decide to include her mother and sister into the business as partners. It has a set of rules that sets out the modalities of making decisions, sharing profits and losses. In addition, a partnership sets out methods of dealing with dispute resolutions and the admission of new members.
Advantages of Partnerships
- They are easy to establish
- Raising funds is easier
- Skilled employees can be attracted if given a chance to become partners
- The business benefits from complementarily of skills
Disadvantages of partnerships
- Partners are jointly and severally liable for the deed of other partners
- Profits must be shared
- Disagreements are common
- It might have a limited life
A corporation is a business concern that is separate from its owners and it is formed under the laws of the country it is operating in. A corporation sell shares to investors, as such, raising funds is easy. The difference between a partnership and a corporation is liability. In a corporation, the liability of each member is protected, unlike in a sole proprietorship, or partnership. Another advantage is that it is easy to transfer ownership interest by selling shares. In addition, it has continuity, thus it is not affected by the death of shareholder, director, or officers. However, a corporation requires a lot of time and money to start. More paperwork is required as they governed under the laws of each state. In addition, incorporation might result to higher overall taxes.
Limited Liability Companies
A limited liability company (LLC) operates like a partnership, but has members unlike partnerships, which have partners. It has an operating agreement instead of a partnership agreement. Its advantage is that, it has the liability of a member is limited to their investment. In other words, it exists as a separate entity, just like a corporation. According to Miller & Hollowell members of a LLC are never held responsible for debts unless one has signed a guarantee to that effect. When it comes to profit sharing, LLCs can select different forms of sharing profits unlike partnerships where profits are shared on a 50-50 basis. Another feature of a LLC is that it does not require formal minutes or recording of resolutions. However, this form of business entity has several disadvantages. First, LLC is dissolved when a member dies or goes bankrupt. In the case of corporations, death does not affect the operations of the company. Secondly, if the owners want to make their company public, they will be required to choose a corporate business structure.
Various Strategies a Small Firm Can Adopt to Achieve Growth
According to Jones-Evans and Brooksbank, small businesses have an important role to play in the development in any economy. The success of these businesses is based on the ability of the entrepreneurs to identify and exploit any opportunity that might arise. Indeed, the strategies, if applied well and consistently, are able to provide better results than well thought and complex plans that are usually difficult to implement. Therefore, the success of a small business is based on clears and well thought strategies. Michael Porter devised three kinds of strategies that are can help firms gain a competitive advantage in the market place. Numerous research findings have found that small firms must build competitive advantages in order to be successful in the market arena.
A strategy is an action plan put in place to coordinate the resources of a business in order to boost performance. Selecting a business strategy should be guided by the situation of a firm, currents trend sin the industry and what looks rights at the moment. Therefore, selecting a business strategy for any entrepreneur is critical towards superior performance.
The first strategy that Porter identified is focused strategy. Focus strategy requires a firm to puts in efforts on a given market, group of customers, or on a given product or service. This generic strategy provides a competitive advantage in a small and well-determined group or target customers, thus effectively avoiding any direct collision with bigger competitors. This strategy is quite effective for small firms. It helps them to be close to their customers. A focused strategy ensures that a firm is able to respond to customer needs quickly. However, a focused strategy can make a niche market disappear in case of change in technological advancements, in addition to change in customer needs and preferences.
The other generic strategy according to Porter is cost leadership. This means a company wants to be a low-cost producer through economies of scale, proper capacity utilization and experience curve. Cost leadership is an effective strategy if the firm can maintain it over a long period of time. A small business can be a cost leader if it has advantages that favor low costs. Innovation can also greatly help a company to offer cheaper products and services compared to rivals. However, low cost strategy might have the disadvantage of low customer loyalty as customers who are price sensitive might switch if cheaper substitutes are available. In addition, a low cost leader might have a reputation of low quality which can make a firm find it difficult to rebrand itself if decides to pursue a differentiation strategy in the future.
A firm can achieve low cost leadership by having a high turnover. For example, a restaurant that turn tables very fast will have fixed costs spread over a lager number of units of the service or products supplied. The other aspect is having lower operating costs. For instance, locating operating plants in low rent areas will ensure that ensure that wages and rent rates are kept to the minimum. The third aspect of ensuring low costs deals with the management of the supply chain. Bulk buying, for example, ensures that a company enjoys discounts.
The other strategy that a small firm can pursue is differentiation which involves offering a product or service at a premium price. This can be achieved by improvements in product designs, features, reliability, quality, and good after sales service, and durability. A differentiation strategy is effective where customers are not sensitive to prices, and the market is saturated. To small firms, this strategy is as effective as the focus strategy. However, the availability of substitute products and services is a threat to this strategy. In addition, it is not possible to maintain products uniqueness in the customers for a long period of time.
In dealing with these three strategies, Porter stressed the notion that only one should be pursued by a firm at any particular time. Failure to follow this rule means a firm might find itself in the “stuck in the middle scenario”. According to Porter, pursuing more than one strategy will lead to loss of focus for the organization. However, contemporary research evidence show that a mixture of two strategies result in better results for a company that one that is pursuing one generic strategy.
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