BUSINESS STUDIES FORM TWO NOTES

Chapter One: Production

Introduction

Human beings have a wide range of needs and wants to be met through producing goods and services. Imagine being part of this process of creating something valuable that fulfils people's needs and wants. In this chapter, you will learn about the concept and factors of production. The competences developed will enable you to create goods and services that satisfy human needs and wants and make a difference.

I think

A world without the production of goods and services.

Activity 1.1

Read the scenario below and answer the questions that follow.

Janerosa recently completed Form Four from one of the vocational schools in Tanga region, which specialises in food and nutrition. After completing her final exams, she returned home and began helping her parents with small household tasks. Each morning, she would buy a cake as a snack for tea, but she found the cake unsatisfactory due to its small size and low quality. This led her to start making her snacks to meet her needs better.

Figure 1.1: Janerosa making snacks

As she began producing snacks for herself, she got an idea: 'Why not make more snacks to sell to others and earn income while waiting for the Form Four National Examination results?' She turned her idea into a reality. She used the skills acquired from school to bake delicious and healthy snacks by mixing the right ingredients. As she continued making snacks, more customers were attracted to her snacks, and eventually, she became a sole proprietor.

Questions:

1. What motivated Janerosa to start making her snacks?
2. What is the activity that Janerosa was doing?
3. How did Janerosa's decision to make snacks turn into a business?
4. What do you think made Janerosa's snacks attractive to customers?
5. In your own words, explain what a "product" is, using Janerosa's snacks as an example.
6. If you were in Janerosa's position, what other products might you consider creating based on your skills or interests?

The concept of production

The process of cooking snacks, as shown in Activity 1.1, is called production. Production is a process of extracting and transforming inputs into outputs. This involves turning raw materials into finished products, like making clothes from cotton or bread from wheat flour. To produce these things, one requires factors of production such as land, labour, capital, and entrepreneurship with a notion of environmental sustainability in mind.

For businesses, including small businesses, it is important to know that taking care of the environment can be easy and good for businesses. Using less, reusing what you can, and saving energy can lower costs and help keep the planet clean. This way, a business can grow while also doing good for the environment, which customers will appreciate. For example, a packaging small business in Tanzania can start using locally sourced materials like sisal or banana leaves, which are biodegradable and more environmentally friendly. Figure 1.2 shows an example of a production activity of making bricks.

Figure 1.2: Production of bricks

Raw materials and capital → Raw materials mixing → Bricks making → Bricks drying → Bricks distribution

Activity 1.2

Visit a nearby workshop, mill, or small-scale production site in your locality. Pay attention to how products are made, from the materials they start with (inputs) to the finished products (outputs).

(a) Take note of the tools or machines they use and how people work together to make the process smooth.

(b) Observe if the production activities ensure the protection of the environment.

(c) Write a report to explain:

(i) The type of production process used (for example, manual or mechanical).

(ii) The role of technology in the process.

(iii) Suggestions on how the process could be improved.

Types of production

There are two types of production: direct and indirect production. These types are explained as follows:

Direct production:

Direct production refers to creating goods and services for personal consumption. Under this type of production, individuals produce goods and services for consumption. For example, a farmer can grow vegetables, or a carpenter can make a bed for personal use.

Indirect production:

Indirect production refers to producing goods and services for selling. For example, a tailor designs clothes, or a chef cooks meals for sale to earn money.

Note that: A person can create goods and services for personal consumption and selling purposes, similar to Janerosa's scenario.

Exercise 1.1

1. Recall Janerosa's scenario in Activity 1.1 and identify the type of production she was doing. Provide reasons for the answer.
2. Juma is a farmer who grows and sells vegetables to various community members. As an expert in production, briefly explain the type of production Juma conducts and provide reasons for the answer.
3. Assume you are invited to discuss production with your community as a guest speaker. Provide a summary of what you will talk about.

Importance of production

Production is the foundation of any economy. It goes beyond creating goods and services; it includes effectively meeting peoples' needs and wants. The following are the importance of production:

Creation of goods and services to satisfy human needs and wants:

Production removes the distance gaps between producers and consumers by creating goods and services and ensuring they reach the final consumers.

Job creation:

The production of goods and services in various sectors demands a workforce, which leads to job creation. For example, producing maize flour will create jobs for farmers, machinery operators, food processors, warehouse workers, transporters, and traders.

Improves the living standard:

The production of essential goods and services such as clothes, housing, healthcare, and food directly improves people's standard of living. For example, producing affordable housing can reduce people's cost of living.

Increases government revenue:

Businesses involved in various production activities pay taxes to the government. The tax revenue funds public services such as healthcare, education, and infrastructure development in the community.

Boost economic development:

Job creation and increased tax revenues boost the country's economy. When more people have jobs, they earn income, which they spend on goods and services, driving demand and supporting businesses. As businesses grow, they pay more taxes, as do the individuals. These tax revenues fund public services like education, healthcare, and infrastructure, further stimulating economic growth.

Activity 1.3

Walk around your community and look for businesses or individuals engaged in production activities or search from online sources for information about production activities, then:

(a) Identify at least four production activities taking place in your community;

(b) Describe the importance of each production activity; and

(c) Create a summary from your observations.

Factors of production

Resources or inputs used to produce goods and services are known as factors of production. Specifically, for production to occur, inputs or resources (land, labour, capital and entrepreneurship) should be available. Among these, land, labour, and capital are the fundamental factors of production since no production can occur if any of these is missing. On the other hand, entrepreneurship organises all other factors of production. These types of factors of production are explained as follows:

Land

Land refers to all natural resources made available to humankind by nature. It includes many things underneath, on, and above the ground. Examples of resources obtained on land include water, soil, minerals, and trees. Land is considered a fundamental factor of production because all production activities, such as transportation, trade, and manufacturing, take place on it.

It is important to note that land is usually referred to as a gift of nature, which means created by God, but in practice, it is not necessarily free. A payment must be made for land use or to access it for production activities. The payment for land is known as rent. Figure 1.3 shows land uses in farming and carpentry production activities.

Figure 1.3: Production activities on land

Farming activity | Carpentry activity

Features of land

Land as a factor of production includes the following features:

1. It is a fundamental factor of production because all production activities take place on it;
2. It is a gift of nature since no human can create it;
3. It is fixed in supply, meaning that the total amount of land available for use cannot be increased or decreased;
4. It lacks mobility, which means it cannot be transferred from one location to another;
5. It appreciates, which means it increases in value as the days go on;
6. Its productivity can be affected by the improper usage of land, such as overgrazing and poor mining practices, and
7. It is heterogeneous, meaning different plots of land vary in fertility.

Labour

Labour refers to any mental or physical effort a human use in production. Any economic activity requires human efforts to produce goods and services that satisfy human needs and wants. The reward for labour is a wage or salary.

Types of labour

Labour can be categorised into three types: skilled, semi-skilled and unskilled. These types of labour are explained as follows:

Skilled labour: Skilled labour includes all workers who use more mental than physical efforts in production. They are educated, trained, and experienced in performing their tasks. Examples of skilled labour are accountants, lawyers, doctors, teachers and pilots.

Semi-skilled labour: Semi-skilled labour includes all workers who use mental and physical efforts to perform their tasks during production. Under this category, less advanced education or specialised skills are required. Examples of semi-skilled labour are hotel attendants, bus drivers, saloon attendants, machine operators, automotive technicians, and food service workers.

Unskilled labour: Unskilled labour includes all workers who use more physical than mental effort to perform their tasks during production. This type of labour allows workers to perform tasks with no formal training. Examples of unskilled labour are janitors and cleaners, farmworkers, dishwashers, kitchen helpers, and human porters.

Features of labour

The labour as a factor of production includes the following features:

1. The labour cannot be separated from the labourer;
2. Labour can be technologically integrated, for example, Artificial Intelligence, Robots and Automated Teller Machines;
3. Labour cannot be stored for future use;
4. Labour is the most mobile factor; and
5. The skills required for labour can vary; thus, labour can be skilled, semi-skilled, or unskilled.

Capital

Capital refers to all man-made resources used to produce goods and services. This includes buildings, working tools, machines, and cash in hand or at banks. Businesses use capital to pay workers and buy modern technology, thus improving workers' efficiency. The reward for capital is interest.

Features of capital

Capital as a factor of production includes the following features:

1. It is artificial; this means it does not occur naturally but is generated.
2. It can be created through personal savings, funds from family and friends, loans or deferred payment;
3. It can be highly liquid, meaning it can be easily converted into cash or other forms of capital such as stocks, bonds and other forms of securities;
4. It can depreciate, meaning its value can decrease; and
5. It consists of wealth (assets).

Entrepreneurship

Entrepreneurship is the process of identifying a business opportunity and organising other factors of production to produce a product or offer a service to the customer. Entrepreneurship combines, organises, and controls the other three factors of production (land, labour, and capital). The person who organises other factors of production is called an entrepreneur. The reward for entrepreneurship is profit.

Features of entrepreneurship

Entrepreneurship as a factor of production includes the following features: ability to:

1. Plan, organise, manage and allocate other factors of production;
2. Define business objectives clearly;
3. Bear risks and uncertainties for the success of the business; and
4. Innovate and adopt modern production techniques.

To produce goods and services, one needs to use the four factors of production: land, labour, capital, and entrepreneurship. These factors help create products people need to satisfy their demands. By understanding how these factors work together, one can start their own business by creating goods and services.

Activity 1.4

Use reliable sources, including online ones, to identify small business owners in your locality. Visit at least two of them and inquire about what they make and how they make it. Compare their responses with the factors of production you have learned.

Exercise 1.2

1. Ms Makuna works at Kilimanjaro National Park as a porter carrying tourists' items. In which type of labour does Ms Makuna fall and why?
2. Use everyday examples to explain the different types of production to your classmates.
3. Mr Joram wants to start a small furniture business but is unsure what he needs to succeed. Help him understand the fundamental factors of production necessary to start producing furniture and explain how each factor contributes to his business.

Skills lab activity

As a member of the school business club,

(a) Critically evaluate how effectively land, labour, capital, and entrepreneurship are utilised within the club.

(b) What specific recommendations would you make to enhance the use of these resources and improve productivity, sustainability, and environmental responsibility in the club's operations?

Project activity

Based on the knowledge of factors of production you have acquired from this chapter,

(a) Choose any product that you wish to produce;

(b) Explain how you will organise factors of production and how they will help to start the production process; and

(c) Create a summary of the information.

Chapter summary

1. Production transforms raw materials into finished products to satisfy human needs and wants.
2. Production is about creating goods and services, providing employment, improving living standards, increasing government revenue, and boosting economic development.
3. There are two types of production: direct and indirect. Direct production creates goods and services for personal consumption, while indirect production creates goods and services for selling purposes.
4. To engage in any production activity effectively and efficiently, there must be fundamental factors of production, which are land, labour, and capital, while entrepreneurship organises all other factors of production.

Revision exercise

In questions 1 to 5, choose the correct answer among the given alternatives and write its letter in your exercise book.

1. One of the following is a feature of land as a factor of production.

(a) It is manufactured.

(b) It is the most mobile factor.

(c) It lacks mobility.

(d) Ability to organise other factors of production.

2. Ms. Mahosha always cooks food for her family. What type of production does she engage in?

(a) Direct production.

(b) Domestic services.

(c) Indirect production.

(d) Food production.

3. Imagine you want to start making snacks to sell to your teachers and fellow students at school. Which of the following options identifies the type of production you might engage in?

(a) Direct service.

(b) Indirect production.

(c) Direct production.

(d) Productivity.

4. If Maendeleo Company Limited's job advertisement requires a worker with a bachelor's degree and ICT skills, what type of worker is it looking for?

(a) Unskilled worker.

(b) Labourer.

(c) Skilled labour.

(d) Semi-skilled labour.

5. Which of the following refers to making goods and services to satisfy human needs and wants?

(a) Wholesaling

(b) Production

(c) Utility

(d) Capital

6. Match the items from Group A with those in Group B by writing the letter of a correct option in Group B that corresponds to an item in Group A

Group A	Group B
(i) It is one of the factors of production that lacks mobility	A. Land
(ii) Creation of goods and services to satisfy human needs and wants	B. Direct production
(iii) Direct and indirect production	C. Factors of production
(iv) Factor of production that organises other factors of production	D. Land, labour and capital
(v) Physical or mental efforts in the process of production	E. Production
(vi) Are the essential inputs which are used in the production process	F. Productivity
(vii) It is one of the importance of production	G. Utility
(viii) Type of production that deals with the creation of goods and services for selling	H. Types of production
	J. Skilled labour
	J. Provides employment
	K. Indirect production
	L. Entrepreneurship
	M. Labour

7. Describe the concept of production and explain how it satisfies human needs and wants.

8. As an expert in production, briefly explain the factors employed in the production process.

9. 'Production is a waste of time'. One of the Form Two students said. Argue on the statement.

10. Mr. Zuberi is a carpenter who has been making beds for almost nine years to sell to others. What kind of production does Mr. Zuberi do? Provide the reason for your answer.

Student's Book Form Two - Page 10

Chapter Two: Financing Small-Sized Businesses

Introduction

Funds enable small businesses to start, grow operations, enter new markets, and innovate their products or services. Sources of funds are essential for the progress and success of small businesses. In this chapter, you will learn about the concept of small-sized businesses, sources of funds for small businesses and the roles of microfinancing and cooperatives in facilitating business formation and operations. The competences developed will enable you to finance your small business from different sources.

Think

Operating a business without funds.

Activity 2.1

Visit at least three small businesses in your community or search various sources, including online, to learn how the owners get funds for starting and growing their businesses. Write down a small report on your findings.

The concept of small-sized businesses

Globally, there is no single accepted definition of small-sized businesses. However, nations use measures of different sizes to define small businesses depending on their level of development. The Tanzania Small and Medium Enterprise (SME) Development Policy of 2003 recognises small businesses as both micro and small. Hence, the context of small business refers to micro and small businesses.

A micro business is a business that employs 1-4 people and/or has a capital investment of up to TShs 5 million.

A small business has 5-49 employees and/or a capital investment of above TShs 5 million to 200 million.

Note: If a business falls under more than one category, the level of capital invested into a business will be the deciding factor. Small-sized businesses may be owned by individuals, groups of individuals, family members, or the public with a common interest in ensuring that pre-determined goals are achieved. Throughout this textbook, small-sized businesses are termed micro and small businesses.

Importance of small-sized businesses

Small-sized businesses have the following importance:

• Contribution to the economy: Small businesses contribute to the country's economic growth by paying taxes and fees, which can be used to provide public goods.
• Creates employment: Small businesses play a crucial role in job creation by providing employment opportunities to business owners and others. As such, they serve as a solution to reducing unemployment rates in the country.
• Foster equitable income distribution: Most small businesses use locally available resources and simple and affordable technology, thus facilitating the distribution of economic activities within the economy and fostering equitable income distribution.
• Supplier to large businesses: Most small businesses supply materials to large businesses, thus making it easier and cheaper to operate and fulfil their objectives.
• Community development: Small businesses support community development by keeping wealth within local areas and providing services tailored to local needs.
• Product availability in remote areas: Small businesses can supply goods and services not supplied directly by large businesses in remote areas.

The sources of funds for small businesses

Small businesses can access funds from different sources depending on their needs, financial position, or existing status. Several sources of funds for small businesses include loans from lenders, personal savings, deferred payments, and funds from family and friends.

Loan

A loan is money borrowed from a lender/ bank with the agreement to repay it, usually with interest over an agreed time. Interest refers to the monetary cost of borrowed money, mainly expressed as an annual percentage rate of the borrowed amount. Entrepreneurs can use loans as sources of funds to start up their small businesses.

Advantages of loans

There are different advantages to taking a loan. Among those advantages are as follows:

• Availability of funds: Loans allow business owners to access a lump sum of money to start or expand a business.
• Flexibility: Different types of loans offer different conditions and repayment options, allowing borrowers to choose the loan that best suits their needs and financial situation.
• Credit building: Responsible borrowing and timely repayment of loans can help business owners build their credit scores, which can be significant for future financial opportunities.
• Investment opportunities: Loans provide funds required to invest in different opportunities with the potential for high returns.
• Financial leverage: Borrowing money allows business owners to make more significant investments than they can afford through cash.

Disadvantages of loans

Loans come with responsibilities and potential risks like interest payments and possible negative effects on credit if repayments are delayed or not honoured completely. Thus, business owners must consider their financial situation before taking on any loan. Some of the disadvantages of loans are explained as follows:

• High interest rates: Lenders tend to change high interest rates, which may hinder the business owner's access to loans.
• Needs eligibility: This means the borrower must meet all the given conditions and requirements, including collateral, to qualify for the loan, whereas others miss some qualifications and fail to access loans.
• Fees and penalties can be challenging: Some borrowers fail to repay loans because of exceeded fees and penalties resulting from the aggressive repayment schedule, which may be difficult for business owners to comply with on time or other factors related to business operations.
• Limited flexibility: The obligation to meet regular repayments can limit a business's ability to invest in growth opportunities or adapt to changing market conditions.

Activity 2.2

Visit any financial institution around your community, which offers loans to small businesses, or search from various sources, including online. Ask the loan officer or any other person responsible for loans about the conditions necessary for any small business to obtain a loan and the actions that could be taken if the business fails to repay the loan. Write a brief report on your findings.

Personal savings

Personal savings refers to setting aside part of an individual's income or earnings for future usage instead of spending all of it. Developing a saving habit is highly encouraged, as the little money saved later becomes huge and can be used to set up a small business. There are several ways through which an individual can save money. Saving can include money from a savings account, retirement account, or other investments.

Advantages of personal savings

Personal savings is essential for building wealth and securing a financial future. Personal saving protects an individual from the uncertainties of life and provides an opportunity to enjoy a promising future. Saving money systematically helps to prevent many financial challenges. Saving support in a time of need that guarantees the family to have security in case of financial challenges. More importantly, savings can be used as a fund or capital for starting or improving a small business. Here are some of the advantages of savings:

• Long-term security: Saving offers significant long-term security for small businesses. Life's unpredictability means financial emergencies can arise unexpectedly. A business owner creates a financial safety net for future expenses and unforeseen needs by saving. This ensures readiness for potential challenges and contributes to peace of mind and more stable and comfortable business operations.
• Immediate access: Utilising personal savings allows entrepreneurs to quickly access capital without requiring lengthy approval processes (approval time) or complex paperwork associated with traditional loans or investor funding.
• No debt: By funding their business with personal savings, owners avoid taking on loans, which can be crucial for minimising financial obligations.
• Flexibility: Personal savings provide flexibility in how funds are used, enabling business owners to allocate resources according to their specific needs and priorities without external influence.
• Lower financial risk: Personal savings reduce reliance on external financing sources, decreasing the risk of financial strain or default associated with borrowed capital.

Disadvantages of personal savings

Provided that saving is mainly considered a sensible financial practice, there are also possible disadvantages to look at as follows:

• Low returns: Interest rates on savings accounts and other passive investments are often very low. This means that savings income may not keep pace with inflation, leading to a decline in purchasing power over time.
• Opportunity cost: Money saved and held in accounts with low returns may fail to benefit from higher returns in other investment opportunities, such as stocks, bonds, or real estate.
• Risk to personal finances: Using personal savings for business funding puts personal financial stability at risk. Entrepreneurs' assets and savings could be jeopardised if the business fails or encounters financial difficulties.
• Behavioural biases: Some individuals may struggle with spending temptations if they see their savings as an available pool for discretionary purchases rather than long-term financial goals.
• Emergency fund limitations: An emergency fund is essential. However, keeping too much money in a low-interest savings account could prevent you from using those funds effectively to generate more income.

Activity 2.3

From today (the day you read this part), start saving part of any money you get for personal spending. It might be money from your parents, guardians, and relatives for different purposes, such as a transport allowance, meal allowance, or other pocket money. After three months, sum up the amount you saved. Use your saved money to start a small business of your own. After two months, write a report from the time you started saving.

Deferred payment

Deferred payment is an agreement between buyer and seller in which the buyer can pay for goods and services later. Business owners can use this approach to obtain materials for starting or expanding their businesses.

Deferred payment plans are often used in various businesses, such as retail, where customers can purchase products (useful materials for their business) and then pay for them at a future date. For example, if the business is a bread production, the owner can apply this approach to access all the materials required to make the bread and then pay for all the supplies after selling bread to the customer.

Advantages of deferred payment

Deferred payment arrangements can offer several advantages for both buyers and sellers:

For buyers

• Cash flow management: Deferred payments allow buyers to manage their cash flow by delaying payment for goods or services until later. This can benefit flexible individuals or businesses with fluctuating incomes.
• Financial flexibility: By deferring payment, buyers may use the money they receive after the sale for other immediate needs or investment opportunities before paying for the purchased goods.
• Budget: Deferred payments allow buyers to budget and spend more effectively, as they can cover costs over time instead of paying a large lump sum.

For sellers

• Increased sales: Offering deferred payment options can attract many customers who do not have immediate cash to purchase products for sale but are willing and able to pay over time, thereby increasing sales volume.
• Customer retention: Offering deferred payment terms can help sellers gain loyal customers who can buy more products and make payments on time after they sell the products, they picked up without paying for them.
• Competitive advantage: In a competitive market, offering deferred payment options can differentiate a seller from other sellers and attract more customers looking for such convenient payment terms.

Disadvantages of deferred payment

Given that deferred payment offers several advantages, it also has some disadvantages to understand for both buyers and sellers:

For buyers

• Interest: Deferred payment can incur added interest, increasing the purchased products' overall cost over time.
• Impulse purchasing: Delaying payment may lead buyers to purchase goods or services without planning and considering their long-term financial needs.
• Debt accumulation: Depending on deferred payments for various purchases may lead to debt accumulation, which may become awkward if it cannot be managed effectively.

For sellers

• Cash flow concerns: Agreeing deferred payment options can affect seller's cash flow, as they have to wait a long time to receive full payment for the products sold.
• Risk of non-payment: Sellers face non-payment risk when allowing buyers to defer payments, which could potentially lead to financial loss and an administrative burden in pursuing collections.
• Administrative burden: Managing and tracking deferred payment agreements can increase administrative workload for sellers, especially if multiple customers are on varying payment schedules.

Activity 2.4

Extend Activity 2.3 by visiting the supplier of your business items (items you are selling) and asking for deferred payments on some items. Expect to be agreed upon or not agreed upon. If the supplier agrees with your proposal, take the items and ask questions like is it the normal thing he or she does? What are the strategies she or he uses to be paid back? What are the challenges of the method, and how does she or he overcome the challenges? If the supplier disagrees with your proposal, ask why and try to convince her or him to give you deferred payment on some items. Write a short report on your observation.

Funds from family and friends

Funds from family and friends are financial contributions from people close to the business owner in the form of equity investments or loans, sometimes without interest, to help start or run a small business. This form of financing is the most common source for small businesses.

Advantages of funds from family and friends

Advantages of using funds from family and friends as a source of funds for small businesses include:

• Accessibility: Family and friends are sometimes willing to provide funds at a time when official lenders hesitate, which makes these funds easier for small business owners to access.
• Flexibility: Friends and family members may offer more favourable conditions, such as lower interest rates and extended repayment schedules, than formal lenders.
• Non-financial support: In addition to financial assistance, loved ones can provide valuable non-financial support in the form of mentorship, guidance, and emotional encouragement.

Disadvantages of funds from family and friends

Given all the advantages of using funds from family and friends for small businesses, there are also potential disadvantages as follows:

• Personal conflicts: Receiving money from family and friends may result in personal conflicts, especially when the business is underperforming and one fails to repay the money. Furthermore, the lack of formal agreements like the ones in financial institutions and the variation of the repayment schedule may create conflicts among family members and friends.
• Emotional pressure: The business owners may need to work under pressure and tension because they may not want to disappoint loved ones. Working under pressure and stress may result in poor decision-making.
• Limited access to capital: Relying solely on family and friends for funding might restrict access to larger amounts of capital necessary for significant growth opportunities.

Activity 2.5

Extend Activity 2.3 by telling your friends, parents, and guardians what you are doing from the savings you made and the deferred payment items the supplier gave you or if you were not given. Ask them to provide you with some money to extend your business. Write a short report on what you have experienced from this activity.

Exercise 2.1

1. Assume you are doing a business selling groundnuts in your locality. You have reached a point where you have many more customers than what you sell. Describe ways you may use to finance your business.
2. Describe the benefits and disadvantages of saving part of personal earnings rather than spending all of it.
3. Assume you need to start up your preferred business, but currently, you do not have access to funding. However, you shared your business idea with your parents, and they have decided to provide funds to help you start your business. With this information, what kind of funding sources is this? Explain its benefits and disadvantages.

Microfinancing and cooperatives in facilitating business formation and operations

Microfinancing and cooperatives are essential in facilitating the establishment and operation of small businesses, especially for those who lack access to financing.

Microfinancing

Microfinancing refers to financial services offered to low-income individuals, groups or small businesses that may not have access to conventional banking services. Microfinance provides small loans, mostly to unemployed or low-income individuals, including small business owners, without access to regular banking services. The loans can be used to start or expand a business, purchase equipment and materials, or meet other financial needs. By providing these financial supports, microfinancing enables business owners to establish and grow their businesses.

Cooperatives

Cooperatives are organisations owned and operated by people with common interests or needs. They provide various benefits for business formation and operation, allowing members to pool resources when purchasing equipment or marketing products. In addition, cooperatives offer training opportunities and support services that help business owners develop their skills and knowledge in running their businesses.

Moreover, cooperatives provide access to markets that business owners might struggle to reach independently. Working together, small business owners benefit from shared marketing efforts and distribution channels.

In general, microfinance and cooperatives contribute significantly to the development of entrepreneurs by providing appropriate financial assistance, valuable resources, training, and a market for small business products.

Activity 2.6

Visit at least one microfinance institution and one cooperative operating in your locality (if any) or search from various sources, including online, to understand what they do for small business development. Compare the responses of each one and write a short report to show the differences or similarities between the two.

Exercise 2.2

1. How does microfinance support small business start-ups, and what benefits does it offer entrepreneurs in pre-financing and starting their small businesses?
2. Given TShs 300,000 as a loan, develop a plan for utilising the funds to start a small business of your choice. Then, state how you will use the given fund and how you plan to repay it.
3. What benefits can cooperatives provide to entrepreneurs in terms of facilitating small business activities, pooling resources, and accessing markets?

Skills lab activity

Based on the knowledge you have acquired about the sources of funds for small businesses, what source do you think is most common and why?

Project activity

Develop a fundraising plan for your chosen small business at your school business club. The plan should include specific fundraising strategies and goals within your community.

Chapter summary

1. A loan is money borrowed from a lender or bank with the agreement to repay it with interest over an agreed time.
2. Saving refers to setting aside part of an individual's income for future usage instead of spending the whole of it.
3. Deferred payment is an agreement between buyer and seller in which the buyer can pay for goods and services later.
4. Funds from family and friends refer to funds that an entrepreneur is given by his or her family or friends to establish or develop his or her small business, as they can be a normal source of funding for small business development.
5. Microfinancing refers to the financial services offered to individuals or small businesses that do not have access to traditional banking services.
6. Cooperatives are organisations owned and operated by individuals with similar interests or needs.

Revision exercise

In each of the following questions 1 to 5, choose the correct answer and write its letter in your exercise book.

1. Organisations owned and operated by people with similar needs are called……….

(a) microfinance.

(b) corporation.

(c) enterprises.

(d) cooperatives.

2. Interest means……….

(a) profit.

(b) buying and selling.

(c) price of money.

(d) saving.

3. Keeping aside part of personal earnings for future use refers to……….

(a) debt.

(b) saving.

(c) serving.

(d) loan.

4. Borrowing funds from financial institutions with the agreement of repaying them with interest over a specific time refers to……….

(a) financial business.

(b) raising fund.

(c) loan.

(d) deferred payment.

5. The process of making payment for the purchased products at a later date refers to………

(a) purchases.

(b) borrowing.

(c) deferred payment.

(d) cash payment.

6. Match the items from Group A with those in Group B by writing the letter of a correct option in Group B that corresponds to an item in Group A

Group A	Group B
(i) Borrowing money allows business owners to leverage their existing funds for more significant investments than they could afford through their cash	A. Financial flexibility
(ii) It increases the debt load	B. Advantage of saving
(iii) It includes money from savings accounts.	C. Opportunity cost
(iv) Leads to financial independence	D. Behavioural biases
(v) Keeping too much money in a low-interest savings account causes missing opportunities to put those funds to work effectively somewhere else.	E. Disadvantage of saving
	F. Saving
	G. Advantage of loan
	H. Loan

7. George has a friend who made much money from his small business. His friend gave him TShs1,000,000 as a gift to expand his small business. What type of funding for small businesses is this? What are the advantages and disadvantages of this funding type?

8. Veronica borrowed money to start a business selling water. After getting a loan, she changed her mind and bought a mattress she did not have. Explain the impacts that her decision to change the purpose of the money borrowed will have on her.

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Chapter Three: Small Business Management

Introduction

Managing a business is about making intelligent choices, such as what to sell, how much to charge, how to reach your customers, and how to keep records of finances. In this chapter, you will learn about the concept of small business management, financial and other records keeping, profit and loss calculation for a small business, budgeting, control and administration. The competences developed will enable you to create budgets, calculate profit and loss, and effectively manage a small business of your preference.

Think

A small business without control and a plan.

Activity 3.1: The school retail shop

Your school is opening a small retail shop to raise money for a school trip. You have been tasked to manage the shop.

Your role: To manage the shop.

Task: How are you going to run the shop? Consider the following:

(a) How will you keep records of the items you buy and sell and the money you make?

(b) How will you decide which items to buy and how much to spend?

(c) How will you set the selling price of items bought?

(d) How will you know if the shop is making a profit or a loss?

(e) What information do you need to make good decisions about the shop?

The concept of small business management

Activity 3.1, which is about the school retail shop, introduces the key ideas for running a small business. These are essential concepts like business management, budgeting, record keeping and calculating profit and loss to generate an income statement. These concepts are explained as follows:

Management

Management is the administration of an organisation's operations using various effective and efficient methods to achieve its goals. This involves planning, leading, and controlling various resources such as land, labour, capital, and equipment to make decisions, solve problems facing the organisation, and ensure its smooth operation.

Managing small businesses

Managing a small business means monitoring all matters related to the business activities. This includes streamlining various aspects such as decision-making, problem-solving, staff management, and ensuring business profitability. For example, managing a fashion boutique requires handling things like buying, storing, selling clothes and tracking capital and profits.

Remember: Business matters should be kept separate from personal affairs. For example, if the school club owns a small shop, the business income and expenses should be kept separate from the members' finances.

Functions of business management

Business management involves the process of planning, organising, staffing, directing and controlling business operations. Small business owners or supervisors carry out these functions while activities are taking place to enable the business to achieve its pre-determined goals. The following are the functions of business management:

Planning:

Planning involves determining the course of action the business will take to achieve its goals. It involves thinking and forecasting all critical processes before implementation. Small business owners have to plan their businesses well, such as what goods and/or services to produce, where, when, and how to make them.

Organising:

Organising is a systematic process of coordinating, structuring, and integrating goals and activities to ensure business objectives are realised. Small businesses are involved in arranging, coordinating, and controlling factors of production.

Staffing:

Staffing is finding the right people with the right qualifications for the right job. It is a human resource management function that involves recruiting, selecting, placing, training, and retiring personnel in the business venture. Small business owners are responsible for hiring the right personnel who will perform their tasks effectively and efficiently.

Directing:

Directing involves leading, influencing, and motivating employees to work towards predetermined business goals. The process of directing includes creating a good business environment that encourages employees to do their best. It also involves appreciating employees for a job well done and raising criticism to create a supportive work environment around the assigned work.

Controlling:

Controlling involves monitoring, comparing, and correcting the work performed. Given that it is the last management stage, it further links the planning process. It enables small businesses to monitor and assess activities to achieve business goals.

Activity 3.2

Visit a nearby small business and gather information from the business owner about:

(a) Importance of planning when managing a small business.

(b) Any three essential things to take care of when managing a small business.

(c) How do they make sure their small business runs smoothly?

(d) Which strategies do they propose to manage a small business?

(e) Analyse the information you have gathered and develop a simple summary.

Financial and other record-keeping for a small business

Record keeping is the systematic process of collecting, organising, and storing information. Simply, it is about writing down essential information about all business activities. Small business owners have to ensure effective and efficient record-keeping of all business transactions within the business, manually or digitally, for future business reference and analysis.

Record keeping includes tracking and recording all the cash and credit transactions within the business. This includes income and expenses from sales, purchases, electricity bills, transportation costs, workers' records and other financial transactions in the business.

Small business owners must have financial literacy skills to record business transactions effectively. Cash books, sales day books, and purchases day books are some financial books that small businesses may prepare to have proper daily records of business financial transactions.

Cash book

A cash book is a financial book that records all cash transactions related to purchases and sales in a business. This is where a business owner records every single transaction that happens in the business. Simply, it is a diary of money for business owners.

The cash book includes every money the business owner receives in cash receipts from sales and customer payments. It also consists of every money the business owner spends, such as cash payments for purchases of stock, payment for utilities (electricity, water and telecommunication bills), rent and workers' salaries.

CASH BOOK FOR A SMALL RETAIL BUSINESS

Cash receipts			Cash payments
Date	Particulars	Amount (TShs)	Date	Particulars	Amount (TShs)
January 1	Opening balance	70,000	January 2	Rent	50,000
January 3	Sales	20,000	January 5	Electricity and water bill	6,000
January 4	Cash from Lulu	22,000	January 6	Stock	37,000
January 6	Sales	12,000
January 7	Sales	17,000	January 31	Closing balance	48,000
February 1	Opening balance	141,000			141,000

Figure 3.1: A simple cash book for a small retail business

Recording business transactions in a cash book is crucial for a small business owner as it helps to track the business's daily cash flow. Balancing the cash book regularly enables the business owner to develop a financial plan and budget and detect errors that might have mistakenly occurred.

Exercise 3.1

On your birthday, you get a total of TShs 52,000 in cash from your parents, grandparents and some of your relatives as a gift. In the meantime, you got back TShs 4,700 that you had given to your friend as a loan. Assume you spent this money buying clothes, went to the cinema and bought snacks for yourself.

(a) Estimate how much you might have spent buying clothes, snacks and going to the cinema.

(b) List all the cash receipts and payments in your notebook.

(c) Create a cash book for your transactions.

Sales day book

A sales day book is a financial book that records all sales transactions made on credit in a business. In this financial book, a small business owner records every good sold without receiving cash from the customer. This financial book helps the business owner keep track of the business's credit sales.

SALES DAYBOOK FOR A SMALL RETAIL BUSINESS

Date	Particulars	Description of goods	Amount (TShs)
January 1	Credit sales to Johnson	5 kilograms of sugar each at TShs 2,500	12,500
January 3	Credit sales to Farida	1 piece of Khanga	7,000
January 4	Credit sales to Denzel	A half bar of Sungura soap	1,000
January 6	Credit sales to Laureen	4 kilograms of pecs each at TShs 900	3,600
	Total		24,100

Figure 3.2: A simple sales day book for a small retail business

Purchases day book

A purchases day book is a financial book that records purchases on credit. In this book, a small business owner records every good bought from a supplier without a cash payment. Purchases day books enable small business owners to keep track of their business's credit purchases.

PURCHASES DAY BOOK FOR A SMALL RETAIL BUSINESS

Date	Particulars	Description of goods	Amount (TShs)
January 1	Credit purchases from Dafu Mills	25 kilograms of rice each at TShs 2,000	50,000
January 3	Credit purchases from WD Cooking Oil Co. Ltd	10 liters of sunflower cooking oil each at TShs 2,600	26,000
January 4	Credit purchases from DCS Company	20 bars of Sungura soap each at TShs 800	16,000
	Total		92,000

Figure 3.3: A simple purchases day book for a small retail business

Profit and loss calculation for a small business

Activity 3.3

Scenario: Assume you own a small business selling cosmetics. Over the last month, you kept a record of all your income (money you earned from selling cosmetics) and expenditure (money you spent to run the business). It is time to determine whether your business made a profit or a loss. Use the information below to answer the questions that follow.

Business data:

Income:

• Sales of petroleum jellies: TShs 200,000
• Sales of hair shampoos: TShs 300,000
• Sales of perfumes: TShs 200,000
• Sales of lipsticks: TShs 150,000

Expenditure:

• Cost of purchasing petroleum jellies: TShs 120,000
• Cost of purchasing shampoos: TShs 180,000
• Cost of purchasing perfumes: TShs 110,000
• Cost of purchasing lipsticks: TShs 60,000
• Rent for your shop: TShs 50,000
• Electricity and water bills: TShs 20,000
• Own salary: TShs 200,000

Questions:

(a) What is your business's total monthly profit or loss?

(b) If your business made a loss, what changes could you make to make a profit next month?

(c) What have you learned from this exercise about managing a small business?

Steps to determine profit or loss:

1. Calculate total income: Add all the money earned from selling petroleum jellies, shampoos, perfumes, and lipsticks.
2. Calculate total expenses: Add up all the costs, including purchasing stock of cosmetics (petroleum jellies, shampoos, perfumes and lipsticks), rent, utility bills (electricity and water) and own salary expenses.
3. Calculate profit or loss: Subtract the total expenses from the total income. If the result is positive, your business will make a profit. If the result is negative, your business makes a loss.

Preparing an income statement

A small business must prepare an income statement to understand whether it is making a profit or a loss. This financial statement shows a business's income, expenditures, and overall profit or loss over a specific period. It involves comparing a business's income and expenditures. An income statement can also be a simple report showing how much money a business earned (profit) or lost (loss) over a specific time. It helps in assessing the business's financial performance.

Profit

Profit happens when a business makes more money from selling its products than it spends on running it. In other words, the income is higher than the expenditures.

Loss

Loss occurs when a business spends more money than it earns. This means the expenditures are higher than the income. If the business makes a profit, the owner may retain part of the profit to keep it growing. This is called reinvesting.

To decide if one should reinvest, one needs to look at the business records and see if the business made a profit. Moreover, one needs to look at whether there is an increase in demand for the product and the level of competition surrounding the business. This is why knowing about profit and loss is helpful.

Remember: Regular profit and loss calculations help small businesses, such as school business clubs, decide which projects to continue, improve, or stop. Remember this as you consider starting new businesses in your community or managing existing ones. Always aim to find ways for the business to increase profits and minimise losses.

Exercise 3.2

1. Your school business club started a small project selling homemade snacks. After five months, the club earned TShs 770,000 from sales and spent TShs 490,000 to run the project. Calculate the school business club's profit or loss.
2. Ms Johari plans to establish a small business, with projected operating expenses of TShs 700,000 for the year and revenues from sales of TShs 1,000,000 for one year.

   (a) What will be the profit or loss?

   (b) If the business earns TShs 200,000, what will its profit or loss be?

3. Suppose your business club decides to reinvest profits from a successful project into expanding the business. What factors should you consider before deciding to reinvest?

Budgeting, control and administration

Activity 3.4

Imagine you are the head of a family. Like any other family, you earn and spend money. The money you earn is called income, and the money you spend is known as expenses.

(a) List all the possible ways you, as the head of the family, can earn income.

(b) Identify different items a family needs to spend money on. Divide them into two groups: needs and wants.

(c) Imagine your family has a monthly income of TShs 200,000. Decide how much money to allocate for needs and wants.

(d) Create a table with columns for income, needs, and wants, and fill it out with estimated amounts for each category of goods.

(e) How does a budget help a family manage their money?

Budgeting

Budgeting involves preparing a plan for managing money for a particular time. For example, when people plan a birthday party, they list things they need to buy, like food, drinks, and decorations. They also decide how much money they can spend. Budgeting entails allocating funds to meet various expenditures and savings.

In real life, just like when we plan our daily or routine expenses, it is essential to be guided by budgets. Budgets help us plan, while record-keeping helps us track income and expenses accurately. In your student business clubs, whether you are the treasurer or not, it is essential to ensure that the club manages its finances well and reports clearly to all members. These principles will help you become financially responsible and eventually independent.

Understanding the difference between needs and wants in small business is essential for wise spending. Needs are essential expenses to run your small business, while wants are non-essential expenditures. It is advised that your small business needs to take 40 per cent of your net profit while wants to take 20 per cent. The remaining 30 per cent can be saved, and the remaining 10 per cent can be used for personal fulfilment. This approach reduces waste and promotes long-term sustainability by spending money where it will have the most impact.

Needs 40%

• Rent
• Salaries and wages
• Taxes and fees
• Utilities

Wants 20%

• Upgrading technology
• Hiring additional staff
• Marketing and advertising

Savings 30%

• Emergency funding
• Retirement planning
• Debt repayment

Personal use 10%

• Living expenses
• Health and wellness
• Travel for vacations
• Shopping

Figure 3.4: Wise spending for potential and actual small business owners

Budgeting is planning and managing income and expenses to ensure your small business stays financially healthy. It helps you control spending, set financial goals, and make informed decisions by clearly showing your financial situation. By tracking income and expenses, you can identify areas where you may need to cut costs or invest more and plan for savings or emergencies. Regularly reviewing and adjusting your budget allows you to adapt to changes and maintain a stable financial footing, ultimately leading to more sustainable business growth.

Monthly Budget

Items	Budget amount	Actual amount	Budget variance	Notes
Income (TShs)
Sales income	400,000	350,000	-50,000	Fall of unit price
Other income	100,000	150,000	50,000	Contribution from new partner
Total	500,000	500,000	00	Accurate forecasting
Expenses (TShs)
Rent	100,000	100,000	00	Accurate forecasting
Salaries and wages	50,000	50,000	00	Accurate forecasting
Utilities	10,000	10,000	00	Accurate forecasting
Online advertising	10,000	10,000	00	Accurate forecasting
Insurance	20,000	20,000	00	Accurate forecasting
Total operating expenses	190,000	190,000	00	Accurate forecasting
Taxes	30,000	30,000	00	Accurate forecasting
Business License	30,000	30,000	00	Accurate forecasting
Total expenses	440,000	440,000	00	Accurate forecasting
Total income TShs 500,000
Total expenses TShs 440,000
Projected profit TShs 60,000
Savings
Emergency fund	20% of the profit	TShs 12,000	Not applicable	Accurate forecasting
Retirement fund	30% of the profit	TShs 18,000	Not applicable	Accurate forecasting
Further investment	40% of the profit	TShs 24,000	Not applicable	Accurate forecasting
Others (Personal use)	10% of the profit	TShs 6,000	Not applicable	Accurate forecasting

Figure 3.5: A budget sample for a small retail business

Importance of budgeting

Budgeting helps a business to manage its finances better. It is an essential tool for the success of every small business. The following is the importance of budgeting:

• Financial management and stability: Budgeting creates a clear roadmap for the business by forecasting its income and expenses. This helps to ensure adequate cash flow, minimising overspending or unnecessary debts.
• Making an informed choice: Budgeting enables a business to make informed pricing or investment decisions, which helps to prioritise spending.
• Setting financial targets: Budgeting enables a business to set clear financial targets and evaluate the progress towards attaining them by comparing the actual performance to the budget, which reveals opportunities for improvement.
• Growth planning: Budgeting enables small business owners to allocate resources effectively and plan long-term growth strategies.

Control

Control means sticking to the plan. One must check the prices before buying things to avoid spending too much. Financial control is very important when managing a small business. It includes receipts for all expenses and regular budget reviews, which can enhance accountability.

Administration

Administration is like keeping track of everything. It includes writing down what the business has bought, how much it costs, and how much money is left. This helps the business to stay organised and on track.

Like planning a birthday party, when you create a budget for your school, business club or family, you must control your spending and keep good records. Therefore, control is like watching over something to ensure it goes as planned. For example, if you save money to buy a toy, you control your spending by not buying unnecessary things. Administration is about keeping records and organising things. It is like writing down what you spend and what you have left. This helps you keep track of your money.

Exercise 3.3

1. The Mwakipesile family consists of Mr and Mrs Mwakipesile and their three children. Mr Mwakipesile works as a teacher and earns TShs 1,200,000 per month. Mrs Mwakipesile operates a small grocery store from home and earns an average of TShs 800,000 per month. The family faces challenges from rising prices of basic commodities, school fees for their children, unexpected expenses like medical bills and saving for future needs (for example, children's education and retirement).

   Questions:

   (a) How can the Mwakipesile family create a budget to effectively manage their income and expenditures?

   (b) What strategies can they use to save money?

   (c) How can they prioritise their needs and wants within their budget?

2. Shule Yetu Club is a famous business club at Maziwa Secondary School. The business club aims to promote environmental conservation and community development. The business club has a budget of TShs 200,000 per year from school contributions and fundraising activities. However, the club faces challenges in balancing the club's activities with limited funds, making decisions about spending priorities, ensuring transparency and accountability in financial management and generating additional income through fundraising.

   Questions:

   (a) How can the Shule Yetu Club create a detailed budget for a year?

   (b) What strategies can the club use to get funds to implement its budget and achieve its goals?

   (c) How can the club effectively monitor its income and expenses?

   (d) What measures can the club implement to ensure financial accountability?

Skills lab activity

As active members of the business club, create a budget for your business that will be presented to the rest, explaining how it will be implemented and supporting the club's activities moving forward.

Project activity

Create a budget, track your financial records, calculate your profits and losses, and reflect on your experience. Use your business club as a platform to work on this project, and seek feedback from your peers and teacher along the way.

Challenge: Turn your idea into a small business.

Steps:

(i) Choose your product or service by picking something you can sell or do for others.

(ii) Create a simple plan for operating your business. Think about what you will need to get started, how much it will cost, and how much you will charge.

(iii) Set a budget by figuring out how much money you need to start your business. This includes the cost of supplies, materials, or any other expenses.

(iv) Record all the money you earn and spend. Use a notebook or a simple spreadsheet.

(v) Calculate your profit by subtracting your expenses from your income.

(vi) Think about what worked and what did not. How can you improve your business next time?

Remember: Start small and simple. Have fun and be creative. Learn from your experience.

Chapter summary

1. Management is the process of overseeing an organisation's operations using various effective and efficient methods to ensure that the organisation achieves its goals.
2. Good business management enables the owners to achieve their predetermined goals.
3. Planning, organising, staffing, directing, and controlling are the functions of management.
4. Small businesses can calculate their profit and loss by comparing income and expenditures and preparing income statements.
5. Preparation of a budget in the business enables the business to estimate both revenues and expenditures.
6. Efficient record-keeping is essential for accurate financial reporting and decision-making. Organising financial information helps in tax compliance and evaluating business performance.

Revision exercise

Choose the correct answer among the given alternatives in questions 1 to 5 and write its letter in your exercise book.

1. Which of the following functions of management deals with recruiting, placing, training, and terminating employees?

(a) Planning

(b) Directing

(c) Staffing

(d) Organising

2. Mr Moses has been operating his small business of selling fruits for almost two years. He decided to hire one person to assist him. Which function of management did he apply?

(a) Controlling

(b) Recruitment

(c) Staffing

(d) Leading

3. The Form Two business club members at Mwembeni Secondary School have been preparing income statements at the end of each year. What makes them prepare it?

(a) To analyse budget

(b) To calculate profit and loss

(c) To keep daily records

(d) To estimate incomes

4. Mr Joel's business earned TShs 200,000 from sales while he used TShs 20,000 to run the business. What was Mr Joel's profit or loss?

(a) TShs -220,000

(b) TShs -180,000

(c) TShs 220,000

(d) TShs 180,000

5. Latifa owns a small business that deals with horticulture activities. She has been running her business without planning, managing, or controlling its activities. What does her business lack?

(a) Record keeping

(b) Administration

(c) Budget

(d) Income statement

6. Match the items from Group A with those in Group B by writing the letter of a correct option in Group B that corresponds to an item in Group A

Group A	Group B
(i) Making sure one sticks to the budget.	A. Budget
(ii) The process of overseeing and coordinating business activities.	B. Reinvestment
(iii) Money earned from selling goods or services.	C. Expenses
(iv) A plan for managing money by keeping records of income and expenses.	D. Control
(v) Money spent on running a business.	E. Administration
(vi) A business owned and operated by one or a few people.	F. Profit
(vii) The difference between income and expenses when income is more excellent than expenses.	G. Small business
(viii) Using profits to expand or improve a business.	H. Loss
(ix) The difference between income and expenses when expenses exceed income.	I. Revenue
(x) The activities involved in running a business, such as paperwork and record-keeping.	J. Management
	K. Staffing
	L. Organise

7. Form Two business club members at Bondeni Secondary School want to start a small business. They have approached you to assist them in calculating their business's profit and loss. Will you assist them? How?

8. Imagine you own a small business in your community. How will financial and other records keeping, profit and loss calculation and business management help your business thrive?

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Chapter Four: Warehousing and Inventorying for Small Businesses

Introduction

Effective inventory management and warehousing are crucial for small business operations. In this chapter, you will learn about the concept of warehousing, the concept of inventorying, documents for inventory and warehouse management, and methods for inventory management. The competences developed will enable you to manage warehouses and your small business' inventory.

Think

Business without a storage facility.

Activity 4.1

Imagine you are operating a small shop in front of your home. You usually check your stock once a week. When you checked last week, you had 200 pencils, 50 erasers, 100 markers, and 100 notebooks. Your neighbour's friend calls you and asks for 90 pencils, 20 erasers, and 25 notebooks. You tell him it will be ready shortly. When you hang up, your mother's co-worker calls and asks for 5 pencils and 15 notebooks. You also tell her it will be ready shortly. As you prepare the orders, you realise you only have 100 pencils, 20 erasers, 50 makers, and 30 notebooks.

(a) What went wrong?

(b) What will you do to satisfy both customers?

The concept of warehousing

Warehousing is derived from two words: "Ware", which means products, and "house", which means a building. Warehousing is a set of activities that involves receiving, storing and preparing goods for shipment or distribution to traders and customers. Based on the context, these activities occur in a warehouse, godown or storeroom.

A warehouse is a building that stores products (such as raw materials, semi-finished and finished goods) for future use or sale.

Any business may require a place to store its stock to ensure good stock levels and enhance efficient operations and customer satisfaction. For example, an owner of a small business like a grocery store selling various goods such as tomatoes, onions, bottled drinks, fruits and vegetables may require shelves mostly made of wood or metal installed along the walls to place products. For storage of perishable goods like milk and yoghurt, a refrigerator or cooler for the products may be needed, and storage of large quantities such as sacks or plastic containers of sugar, beans, or rice may require a separate room.

The concept of warehousing is crucial for small business owners. Warehousing ensures that goods are sufficient to prevent customer disappointments and properly prevent products from spoilage or damage. It also functions to properly manage perishable goods to maintain food safety and prevent health risks. Finally, it ensures smooth stock tracking to avoid overstocking or stockouts.

Types of warehouses

Warehouses may be classified into six types depending on their ownership and functions. These types are private warehouses, public warehouses, bonded warehouses, distribution centres, climate-controlled warehouses, and smart warehouses.

Private warehouse

Private warehouses are owned and managed by individuals or companies to store their goods. A small business can build, lease, or purchase a warehouse to store goods at a selected location. A private warehouse is a good option for small businesses, as they need time to sort out their market strategy before goods can be sold out.

Public warehouse

Public warehouses are owned by the government, individuals, or companies, but they are open to any public member to store their products in return for a storage fee or charge. Any small business owner or manager can rent a space in a public warehouse to store products. This warehouse type is useful for small businesses without a warehouse or needing extra space temporarily.

Bonded warehouse

Bonded warehouses are owned, managed and controlled by private individuals, joint stock companies or the government for storing imported goods in safe custody while waiting for customs clearance. In bonded warehouses, importers cannot move out their goods until the customs duties are fully paid. The goods stored are tied up in a bond because the owner signs a bond contract with the customs authorities.

Distribution centre

Distribution centres are large centralised warehouses that primarily receive goods directly from factories and suppliers, regroup them into orders, and swiftly ship them to customers. The main focus of distribution centres is on the movement of goods rather than storage. If fast delivery is crucial for a small business, a distribution centre can help get products to customers quickly.

Climate-controlled warehouse

These are warehouses for goods usually affected by weather conditions. They store goods that must be managed at a specific temperature or humidity. The climate-controlled warehouse is ideal for small businesses that deal with perishable goods such as fresh vegetables, flowers, fruits, drugs and chemicals, and frozen seafood and meat products.

Smart warehouse

Globalisation and the current era of automation make smart warehousing a new development. Smart warehouses use Artificial Intelligence (AI) in storage and operations. Under smart warehouses, most processes are fully automated: packing, sorting, and transporting goods to customers. Smart warehouses require minimal supervision as technological algorithms mainly control them.

Exercise 4.1

Imagine you operate a small business selling school supplies. As your business grows, you start receiving more orders from within and outside the country and need a place to store your inventories. Why is having a warehouse essential for your business growth?

Warehouse management

Warehouse management is supervising, controlling, and evaluating various activities in a warehouse to ensure an efficient and reliable supply of stock and, thus, satisfy the customer's demand. The following are warehouse management practices:

• Arrangement of the goods in a warehouse: A warehouse should have enough space to arrange goods according to their types or use. Moreover, the goods should be placed efficiently, allowing easy movement of people or machines in the warehouse.
• Cleaning a warehouse: This includes cleaning different warehouse areas, such as rooms, floors, walls, ceilings, furniture, shelves, and containers in and out. This ensures that goods are stored in a clean and safe environment and that the warehouse has a pleasant appearance.
• Regulation of the atmospheric conditions: Ensure that the warehouse has a conducive condition which allows free and controlled flow of air and sunlight. Depending on the type of goods stored, the warehouse caretakers should ensure that goods are kept in a place with no excessive heat, humidity, sunlight or wind.
• Use of modern facilities: A warehouse needs facilities that smoothen operations such as stock counting and handling. For instance, in large warehouses where heavy materials and mixed goods are kept, mechanised handling, such as using a forklift, may be used to simplify the lifting of the goods. However, computerised systems may also record the received goods after physical verification.
• Physical inventory counting: Regularly counting materials in the warehouse will ensure quality records on ledgers, which are relevant to maintaining physical stock. This will also enable the warehouse management to ensure that materials are well preserved while the spoiled ones are sorted out on time.
• Regular equipment checks: Regular safety and equipment checks are crucial to ensure everything is in good shape. Equipment like machinery and vehicles used in the warehouse need regular checks for repairs and maintenance to operate efficiently.
• Enforce safety regulations: Rules are designed to protect employees from body injuries and prevent the loss of warehouse goods and other properties. Warehouse workers must wear protective equipment like boots, heavy gloves, hard hats, safety goggles, and steel-toed boots. Safety or warning signs are mandatory. Everyone who enters the warehouse should observe safety precautions without exception.
• Training warehouse staff: It is essential to train staff to make them aware of the current safety and operation requirements of laws and regulations to increase their work efficiency. A warehouse manager should prepare a training schedule for every staff member, when necessary, and ensure the employees uphold it.

Activity 4.2

Visit any nearby warehouse and investigate what type of warehouse it is as well as activities conducted, then;

(a) write down the information you have gathered.

(b) compare the information you have gathered with what you have learned.

(c) identify new things you have learned from your visit.

Merits of warehousing

The significance of warehousing relies on the storage process of goods that helps to bridge the gap between producers and consumers of goods in a market. Other merits of warehousing are discussed as follows:

• Availability of raw materials for production: Warehouses facilitate storing raw materials, enabling manufacturing industries to continuously produce without running out of stock. Moreover, the relevance of warehousing is observed in the manufacturing industries that utilise seasonal raw materials. Without a warehouse, many would cease their operations to wait for a season where raw materials are readily available. Therefore, warehouses enable the constant availability of raw materials throughout the year.
• Regular flow of goods: A warehouse enables efficient product distribution in the market. For instance, agricultural products are produced seasonally; thus, after harvests, they are stored in a warehouse to be distributed in different areas when needed, especially in those areas with shortages. Therefore, a warehouse ensures a reliable supply of a particular product over time.
• Price stabilisation: Warehouses ensure stable market prices, as stored products can be supplied during low production or supply. They minimise price fluctuation to a great extent because a constant supply of products avoids over- and under-supply in the market, which helps in regulating prices. Warehousing thus ensures the constant supply of products at more or less uniform prices.
• It reduces the risks of loss: Storing products in a warehouse minimises the risk of loss resulting from theft, unfavourable weather conditions, or product damage. This is because warehouses usually put strong measures in place to ensure the safety of the stored goods. The measures include installing security systems, security alarms, security cameras, and security guards, properly handling products stored, and hiring skilled personnel to handle the products.
• It enables the preparation of goods for sale: A warehouse enables the preparation of goods for sale. Various activities like inspection, grading, sorting, branding, packaging and labelling of the products tend to be pursued in the warehouses.
• Easy access to finance: When people store goods in a warehouse, they receive a legal document called a warehouse keeper's warrant. The warehouse keeper's warrant can be collateral for securing a loan from a bank or other financial institutions like microfinance and the Savings and Credit Cooperative Societies (SACCOS).
• Helps to store seasonal products: Goods produced throughout the year but whose demand depends on weather conditions are stored in warehouses. For example, sweaters, jackets, raincoats, and gumboots demanded during cold and rainy seasons can be kept in a warehouse during summer and hot seasons.

Demerits of warehousing

A warehouse is an essential part of the logistics and supply chain management, providing a central location for storing and distributing products. However, it should be understood that storage has potential losses. Understanding these disadvantages is very important for making the right decisions about using warehouse equipment effectively to reduce potential defects. The following are some of the demerits of warehousing:

• Warehouses require a substantial initial capital investment: Because the initial costs are incredibly high, small-scale businesses and companies with limited capital may be unable to construct and operate them. They can only depend on public warehouses to store their products and incur storage charges.
• Additional administrative costs: When operating a warehouse, a business incurs administrative costs such as salaries and wages of the warehouse caretakers and utility (water and electricity) bills. In small enterprises, such costs may be high enough to reduce their profits.
• Loss of goods or property: Since a warehouse stores large quantities of goods, in the event of problems like fire, theft, and leakage, it leads to enormous losses for the business. In this case, a warehouse must have a particular arrangement of products based on their nature to avoid damage that causes additional costs to a business.
• Expiration of stored products: Due to large quantities of products stored in warehouses, some products may reach their expiration date while they are still in warehouses or before being dispatched to customers. Expired goods are unhealthy and can no longer be sold, thus causing loss to a business.
• Some products lose their quality after being stored for a long time: Some products may lose their qualities in terms of weight, taste or scent when stored for a long time. It also leads to a fall in the value of such products.

The concept of inventorying

Inventories or stocks are mostly kept on warehouse premises, so they are available for sale, distribution or further use. Inventory management is the management of goods to ensure sufficient quantities of goods without holding more or less inventory than the required quantities.

Inventories must be maintained reasonably so the warehouse does not run short of supplies or carry more inventory than needed. To ensure efficient production, distribution, or trading activities, a business may maintain a certain amount of inventory, such as finished goods, raw materials, or unfinished goods (work in progress).

Functions of inventory management

Various activities are conducted in a warehouse when managing goods in stock. The following are some of the most essential functions of inventory management:

• Receiving stock: This involves accepting deliveries of goods from suppliers or other traders, notifying the purchasing department of the receipt, and keeping records of the goods received. It also involves unloading the deliveries and inspecting or checking the condition of the goods against quantity and quality, as well as the type of goods against the order documents.
• Issuing stock: This involves the whole process of releasing the goods from the warehouse. It includes verifying requisitions, releasing the goods, and recording the goods or stocks moved out of the warehouse. Recording is done to ensure proper record keeping and warehouse goods adjustment.
• Care of stock: This involves keeping stored goods in good condition within the warehouse, sorting out spoiled goods, and extraordinary maintenance of fragile goods.
• Placement of stock items: Proper allocation or placement of goods allows convenient separation. Properly arranging goods inside the warehouse allows smooth inspection and ensures their safety. For example, heavy goods should be kept below the light ones, while frequently demanded goods should be placed in areas where they are easily accessible.
• Stock control: Stock control involves checking and keeping proper records of the quantity and value of goods in a warehouse for a particular period. This ensures a reasonable stock level is always maintained to avoid over- or under-stocking. Stock control involves:
  • Stock-taking: Checking and keeping records of the quantity of stocks in a warehouse. It involves physical counting and recording of all the stock in business operations.
  • Re-stocking: Ordering new goods against the replenished ones.
  • Stock valuation: Determines the stock's current value in a given period. Stock may be valued at cost or market (selling) price.

Warehousing and inventory management are interconnected. Effective warehousing ensures proper inventory storage, while accurate inventory control improves warehouse space and resources.

Types of inventories

Identifying inventory types helps businesses to effectively manage their resources and improve their operations. The main inventory types are:

• Raw materials: Raw materials are the primary substances or components used to create a product, such as wood for furniture or cotton for fabric.
• Work-in-progress (WIP): WIPs are partially completed products, such as bicycle frames without handlebars, pedals, or tyres attached.
• Finished goods: Finished goods are products ready to be sold to customers, such as assembled smartphones, clothes, shoes, bags, art crafts, or packaged food items.
• Maintenance, repair, and operations (MRO) inventory: These are items used to maintain and operate a business but are not part of the final product, such as office supplies and tools.
• Cleaning equipment or repair parts: Needles and threads may be needed to make a doll, but they are not sold to the customer buying the baby doll. As businesses grow, merchants can invest in better stock management tools like advanced spreadsheets or software.

Activity 4.3: Fresh juice business

Imagine you are starting a small business selling fresh fruit juice in your neighbourhood or within the business club.

(a) Identify the types of inventories you will need for your business.

(b) What is the most suitable warehouse type for your business? Provide the reason (s).

(c) Create a simple inventory management system to track stock levels.

(d) What challenges might you face in managing inventory and warehousing for your business?

Exercise 4.2

1. Elisha is a small business owner selling traditional crafts in his community.

   (a) What types of inventories would he need?

   (b) Describe the challenges he might face in managing his inventory.

   (c) How can he improve his inventory management to minimise costs, prevent stockouts, or run out of stock?

2. Mwanaisha plans to start a small shop at Kizimkazi in Zanzibar. Analyse the inventory challenges she might face and propose strategies to overcome them. Consider factors such as perishable goods, stockouts, and overstocking.

Essential documents for warehouse and inventory management

Activity 4.4

Visit a local store near your school:

(a) Ask the storekeeper to share the documents they usually receive after completing the purchases of a particular good; and

(b) The documents they use for keeping track of the inventory.

Warehouse and inventory management involve the proper storage and control of goods. Accurate and timely documentation ensures smooth operations, prevents losses, and makes informed business decisions. Many of these documents can be created manually on paper or by using inventory management software so that they can be accessed online.

Key documents small business owners should use for effective inventory management are:

Goods received notes (GRN)

Goods received notes are documents prepared by a business owner upon receipt of goods from a supplier. They provide evidence of goods received and help verify quantities and conditions of goods. This document can be a hard or soft copy and is a basis for paying suppliers.

GOODS RECEIVED NOTE

BUSINESS LOGO
Received Note No: ________
Date: ________
Location received at: ________
Person/Company/Organisation received from: ________
Related to PO No (if applicable): ________
Waybill No: ________
Delivery Method: ________
Total No. packages: ________
Total volume: ________
Total weight: ________

Our Type	Item description	Number of units received	Number received damaged	Lot/batch/P1. No.	Condition

Remarks: ________
Name of Person Receiving: ________ Signature: ________
Name of Person Delivering: ________ Signature: ________

Figure 4.3: Goods received note sample

Bin cards

A bin card is a document that tracks the inventory levels of a specific item in a specific bin. It is used for recording and monitoring the number of items in stock and the dates and quantities of items received, issued, or transferred. The bin card provides a continuous record of item movement and helps to identify stock levels and whether an item needs to be reordered.

BUSINESS NAME - BIN CARD

Material Name: ________
Material Code: ________
Location: ________
Maximum stock level: ________
Minimum stock level: ________
Reorder level: ________

Date	Receipt	Issue	Balance	Name
	GRN No	Qty	Request No	Qty

Figure 4.4: A bin card sample

Delivery note

Delivery notes are documents accompanying goods dispatched to customers. They confirm the items and quantities delivered and serve as proof of delivery. They can help ensure the sales and inventory records are accurate.

DELIVERY NOTE

Business name: ________
Business slogan: ________
Logo
Order Date: ________
Order No: ________
Delivery Note No: ________
Customer ID: ________
Dispatch Date: ________
Delivery Method: ________

Shipping Address
Name: ________
Company Name: ________
Street Address: ________
City, ST ZIP Code: ________
Phone: ________

Item No	Description	Ordered	Delivered	Outstanding
331122	Product 3	12	12
112233	Product 2	5	5

Figure 4.5: A delivery note sample

An inventory ledger

An inventory (stock) ledger (book) records all inventory transactions for a specific item. It provides a complete history of item movement and helps calculate the cost of goods sold, which supports financial reporting.

STOCK LEDGER

DATE	DESCRIPTION	BEGINNING		DISBURSED		BALANCE ONLINE
		QUANTITY	AMOUNT	QUANTITY	AMOUNT	QUANTITY	AMOUNT

Figure 4.6: An inventory ledger sample

Other documents for warehouse and inventory management

Business owners who keep good records will be better able to make decisions in the business's best interest. Other important documents that may be helpful for small businesses are:

• Purchase orders: A formal request to a supplier for goods or services.
• Stock-take sheets: A document that records physical inventory counts.
• Stock valuation reports: A summary of the inventory value.

Exercise 4.3

1. Michael, a small electronics retailer, experiences a sudden increase in demand for headphones. Despite placing a large order from ABC Enterprises, it found that the supplier could not meet customer demand. A physical inventory count from the supplier warehouse reveals a mismatch between the recorded stock levels and the number of headphones in the warehouse. The retailer has relied on manual inventory tracking methods, including handwritten bin cards and a basic spreadsheet system. This system has become increasingly unreliable due to human error, stock theft, and the rapid sales pace. Which document and what aspect of the document could be of help?
2. Bwanamkubwa started a small upcycling furniture shop to address environmental degradation. A customer, excited about supporting sustainability, purchases an upcycled stool from Bwanamkubwa. Upon delivery, the customer discovers a significant scratch on the stool's surface. The customer is disappointed as the stool was a centrepiece for their newly renovated living room. Bwanamkubwa sources unique materials for the upcycled products from various suppliers. Create a document Bwanamkubwa could use to understand the condition of the materials received from suppliers and the condition once it get to customers.

Methods for inventory management

Activity 4.5

You and your business club peers are running a school shop. The list below shares the current inventory and sales made:

Initial inventory

Item Name	Quantity	Price (TShs)
Pencils	50	500
Erasers	30	1,000
Notebooks	20	1,000

Sale 1: 10 pencils sold

Item Name	Quantity	Price (TShs)
Pencils	40	500
Erasers	30	1,000
Notebooks	20	1,000

Sale 2: 10 notebooks sold

Item Name	Quantity	Price (TShs)
Pencils	40	500
Erasers	30	1,000
Notebooks	10	1,000

How will you and your business club peers manage inventory in your store?

Inventory management is crucial to business operations, especially for small businesses. Effective inventory management ensures enough stock to meet customer demands without overstocking or understocking. Some standard inventory management methods include:

• Manual inventory management: The manual inventory management method involves physical counting and recording inventory items. It is widely used by small businesses in the community due to its simplicity. While this method is low-cost and easy to implement, business owners are more likely to make errors in recording items. This method is also time-consuming, making it inefficient for extensive inventories.
• Periodic inventory system: The periodic inventory system method involves counting inventory at regular intervals, such as weekly, monthly or quarterly. It provides a snapshot or quick look at stock levels at specific points in time. While it is less time-consuming than continuous inventory, it is suitable for low-value items. The problem is that this method is not real-time or live, which may cause stockouts or overstocks.
• Perpetual inventory system: The perpetual inventory system continuously tracks inventory levels using software or spreadsheets. It uses technology to provide real-time information on stock availability, accurate stock levels, better decision-making, and reduced stockouts. However, this method requires finding a technology solution or application that may require tools like barcodes and scanners. Many of these can now be downloaded on the phone.
• ABC analysis: The ABC Analysis method categorises inventory items based on their value;
  • A items: High-value items requiring close monitoring.
  • B items: Medium-value items requiring moderate control.
  • C items: Low-value items requiring minimal control.
  This method focuses on high-value items and improves efficiency but requires regular analysis and updates.
• Stock turnover ratio: This method measures inventory management efficiency by calculating the number of items sold and replaced within a specified period. This process may help identify slow-moving items so business owners can better decide what to stock. To use this method, business owners must keep accurate sales and inventory data.

Exercise 4.4

1. A group of women farmers in the village of Kweshamba in Mtwara region suffer crop losses due to unpredictable weather. What kind of warehouse is suitable for these women to store their crops? Why?
2. Mgala has been invited to talk to small business owners who do not know the importance of storing their products in the warehouse. What words would he speak to them to help them understand the importance of storing their products in the warehouse?
3. Small business owners at the Majengo Market face difficulties storing their goods to ensure their safety before selling them.

   (a) What knowledge do these small business owners lack?

   (b) What benefits will they get after acquiring the above knowledge?

Skills lab activity

Explain different documents used to manage inventory and their importance in your business club.

Project activity

Prepare inventory documents for your business club's activities.

Chapter summary

1. Warehousing is a set of activities that involve receiving, storing and preparing goods for shipment or distribution to traders and customers.
2. Warehouse management involves supervising, controlling, and evaluating various activities in a warehouse to ensure an efficient and reliable supply of stocks and thus competitively satisfy the customer's demand.
3. Effective warehousing and inventory management are critical for businesses to operate efficiently and profitably.
4. There are six types of warehouses: public warehouses, private warehouses, bonded warehouses, distribution centres warehouses, climate-controlled warehouses and smart warehouses.
5. Stocks or inventories are goods mostly kept on the premises of a warehouse so that they are available for sale, distribution or further use.
6. Goods received notes, bin cards, and the inventory ledger are essential warehousing and inventory management documents.

Revision exercise

Choose the correct answer among the given alternatives in questions 1 to 5 and write its letter in your exercise book.

1. One of the following is considered a warehouse that stores imported goods waiting for customs clearance.

(a) Public warehouse

(b) Bonded warehouse

(c) Private warehouse

(d) Distribution centre

2. Which of the following is the merit of storing goods in a warehouse?

(a) Compensation for the loss of goods

(b) It is easy for small enterprises to invest

(c) It enables the preparation of goods for sale

(d) Facilitate movement of goods from one place to another

3. ______ refers to the whole process of releasing goods from a warehouse.

(a) Care of stock

(b) Issuing of stock

(c) Placement of stock items

(d) Receiving of stock

4. ______ refers to a set of activities that involve receiving, storing and preparing goods for shipment or distribution to traders and customer

(a) Warehouse

(b) Warehousing

(c) Inventorying

(d) Bonded warehouse

5. Mr. Zuberi always ensures that, in the business, goods are always sufficient without holding more or less stock than the required quantities. This activity done by Mr. Zuberi is known as:

(a) stock checking.

(b) issuing of stock.

(c) stock administration.

(d) stock calculation.

6. Evaluate the benefits and drawbacks of using a warehouse.

7. Your friend runs a milk business recently linked to an outbreak of foodborne illness. What do you think is the reason? What should he/she do?

8. How can you use inventory management to improve customer satisfaction?

9. You are running a small electronics shop experiencing frequent inventory problems. You use a manual system to track stock levels. Discuss how implementing an inventory management system with barcode scanning technology and integrated software can help you to reduce inventory discrepancies and losses.

10. Match the items from Group A with those in Group B by writing the letter of a correct option in Group B that corresponds to an item in Group A

Group A	Group B
(i) Warehouse that stores imported goods until customs duties are cleared.	A. Warehouse
(ii) Public, private, bonded, climate-controlled and distribution centres.	B. Bonded warehouse
(iii) A warehouse owned by manufacturers, wholesalers and retailers.	C. Stock keeping
(iv) Stores goods that usually are affected by weather conditions.	D. Public warehouse
(v) The warehouse is open for rent space and pays storage fees for their goods.	E. Types of warehouses
(vi) Management of goods to ensure sufficient quantities of goods without holding more or less stock than the required quantities.	F. Climate-controlled warehouse
(vii) The process of accepting deliveries of goods from suppliers or other traders, notifying the purchasing department of the receipt and keeping the records of the goods received	J. Stock administration
(viii) Receive goods directly from factories and suppliers, regroup them into orders and ship them to customers swiftly.	K. Private warehouse

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Chapter Five: Business Opportunity Identification

Introduction

Every society faces challenges that can be transformed into business opportunities. However, one must know how business opportunities are identified and determine their potential to be successful businesses. In this chapter, you will learn about the concept of business opportunity and ways of identifying business opportunities. The competences developed will enable you to identify viable business opportunities in your community and turn them into reality.

Think

A world without businesses addressing community needs and wants.

Activity 5.1

Look for challenges in your community and spot opportunities:

(a) List five common daily problems you or your friends and families face.

(b) For each problem, brainstorm one potential solution to address the problem.

The concept of business opportunity

A business opportunity is creating goods or services that people need or want in the community. It is about identifying challenges or gaps in the community or market and finding a way to solve them profitably.

For example, imagine Ms Eline getting hungry, and while looking around for something to eat, she realises there is no nearby seller of the food she needs. This is a business opportunity for Ms Eline to open a food kiosk.

A business opportunity mainly arises from unmet community needs and wants, creating new goods or services or improving existing ones. Business opportunities may also occur due to changes in consumer demand, technological advancement, or the introduction of new markets.

Importance of identifying business opportunities

Identifying small business opportunities is very important and brings many benefits that contribute to the overall economic growth of the country; among those benefits are as follows:

• Job creation: Starting a business can lead to job creation for oneself and others. As the business grows, one might need to employ other people to handle the increased workload, such as inventory, financial and sales management. This contributes to reducing the unemployment rate in the community.
• Problem-solving: Businesses often offer solutions to people's daily problems. For example, a community may lack clean and safe drinking water, leading to health issues. To solve this challenge, an entrepreneur may start a small business of water purification systems in the community. By solving this problem, the business improves community health and overall well-being.
• Promotes creativity: Identifying new opportunities can lead to innovative goods or services. Entrepreneurs constantly seek new and better ways to meet customers' needs and wants. For example, in most rural areas with limited banking services, mobile money platforms emerged, offering services such as money transfers and bill payments. This led to developing new goods or services and improved people's lives.
• Independence: When entrepreneurs own their businesses, they can become bosses and achieve financial liberation. They can decide their business operations, set their working hours, and reap the rewards of their hard work, which can lead to a greater sense of control and satisfaction.
• Social benefit: Identifying new businesses can allow the development of products that provide a social good in the community. For example, businesses that focus on environmental protection and addressing social inequalities can be established.

Exercise 5.1

1. Mwembechai Secondary School is organising a fundraising event to earn money for building a library. Identify which kind of business opportunities a school business club may undertake during this event.
2. Jabari is in the same business club as you; he does not understand how business opportunity identification can lead to job creation and solve community problems. Explain to him how identifying business opportunities can contribute to job creation and solve problems within a community with specific examples to support your answer.

Ways of identifying business opportunities

Identifying a business opportunity is just the first step. Turning it into a successful business involves observing the surroundings, finding one's passion, engaging in market research to understand what potential customers need, studying competitors, and using networks to help understand gaps or what is missing in the market. This requires careful planning, hard work, and perseverance.

Four critical steps, abbreviated as POUR, can be used to identify business opportunities. They are explained below:

Find your passions

What are you good at? What do you enjoy doing? Combining your skills and interests can lead to a successful business.

Observe your surroundings

Pay attention to people's needs and challenges. What problems do you see in your community?

Use your network

Talk to people about their needs and challenges.

Market research

What potential customers like? Study your competitors to identify gaps in the market. Can find potential supplies?

Figure 5.1: Steps of business opportunity identification

Find your passions

Building a business around one's passions increases the chances of success and job satisfaction. When a person's passion matches the need, she/he is more likely to overcome the obstacles that may arise in the business. For example, if people enjoy cooking and need healthier meal options, they may start a small healthy meal business.

Identifying one's passion is an essential step in the entrepreneurial journey. It is about understanding what excites and motivates a person. Here are a few questions to help entrepreneurs find their passions:

1. Hobbies and interest

(a) Which activities do you like to do?

(b) What are you naturally good at doing?

2. Strength or talent

(a) What are your skills and talents?

(b) How can you use them to create value?

3. Values

(a) What is important to you?

(b) What things do you deeply care about?

4. Curiosity

(a) Are there things you want to learn more about?

(b) Which topics fascinate you more?

Observe your surroundings

By closely observing the environment, an individual can identify unmet needs, inefficiencies, or market trends that present potential small business opportunities. For instance, noticing environmental pollution caused by the littering of glass bottles in a rural area can spark an idea for starting an upcycling business. This may be glass upcycling, turning glass jars into decorative items for homes and offices.

Use your network

Networking can be a source of information for identifying potential small business opportunities. Talking to family or the community can gain valuable insights about trends, customer needs, suppliers, competitors, and potential small business partners. Building strong relationships can also lead to collaboration with other entrepreneurs in the community.

Market research

Market research is crucial for identifying and validating viable small business opportunities. By conducting thorough research, an individual can determine customer preferences, buying habits, and the overall market size. This information helps refine one's business idea and tailor it to meet customer needs and wants.

Market research also helps study competitors; this information provides valuable insights into trends, customer behaviour, and potential gaps or challenges in the market. Identifying areas where competitors fall short can help develop a unique business aspect.

Market research requires essential research tools to learn more about entrepreneur ideas. Here are how small business entrepreneurs can use surveys, interviews, and observations to gather valuable information:

1. Use surveys

(a) Make questionnaires or surveys by developing straightforward, concise questions addressing your research objectives.

(b) Distribute surveys to potential customers, existing customers, or a random sample of your target market.

(c) Review the results and use the data collected to identify trends, preferences, and pain points.

2. Conduct interviews

(a) Conduct in-depth conversations with potential customers, industry experts, or competitors to gain insights.

(b) Ask open-ended questions to encourage detailed responses and explore underlying motivations.

(c) Listen actively to what people say, and ask follow-up questions.

3. Observations

(a) Observe customer behaviour by watching how people interact with products or services in stores or online.

(b) Analyse competitors by studying successful businesses in the industry to identify their strengths and weaknesses.

(c) Identify unmet needs and look for opportunities to fill gaps in the market.

Familiarising yourself with potential suppliers and the associated costs is crucial for assessing the feasibility of a small business opportunity. Understanding the market for resources and materials can help small business entrepreneurs make informed decisions about the business's potential.

Activity 5.2

Engage with a diverse group of people in your community, including at least three people who are older than you, younger than you and who usually do not speak with you. Ask them:

(a) What are the major problems facing their community?

(b) Write a report on your findings, stating the potential solutions to the raised problems.

(c) For two solutions stated in (b) above, what steps could you take to see if it would be a good business opportunity?

(d) Which solution would you most like to launch as a business? Why?

Exercise 5.2

1. Rehema worries about the growing piles of plastic bottles in her neighbourhood. She is passionate about protecting the environment. She wants to know if it is possible to make recycled shopping bags from them and if people would be willing to purchase them.

   (a) Which steps should she consider when identifying a business opportunity? Why?

   (b) Rehema decides to conduct interviews in her community to learn more. Who should she interview? What are some interview questions she could craft to learn more about protecting the environment?

2. Imagine you live in a rural village. You have noticed that many people, especially children, spend significant time collecting water from distant sources. This often interferes with their education plan and other essential activities.

   (a) What problem do you notice?

   (b) What are potential solutions and potential benefits to the community?

Skills lab activity

In manageable groups, prepare a business pitch guide (essential items to cover in a business pitch guide include the business opportunity, business ideas and goals, problem identified, solution, target market, competition, amount of money requested, and projected use of funds).

Project activity

In manageable groups, polish the business pitch guide, role play (rehearse) it, and pitch your business ideas in the business club or to a panel of investors.

Chapter summary

1. Business opportunity identification is about identifying challenges or gaps in the community or market and finding a profitably viable way to solve them.
2. Find your passion, observe your surroundings, use your network, and conduct market research to identify a business opportunity.
3. Basic research tools such as surveys, interviews, and observations can help to conduct market research and explore more about business ideas.
4. Job creation, problem-solving, creativity, independence and social benefits are the benefits of identifying business opportunities.
5. Doing a business that an individual is passionate about increases the chances of success and job satisfaction.
6. Conducting market research can help determine customer preference, understand business competitors, and identify potential gaps or unmet needs in the market.

Revision exercise

Choose the correct answer among the given alternatives in questions 1 to 7 and write its letter in your exercise book.

1. Which of the following best defines a business opportunity?

(a) A good idea that has never been implemented before.

(b) A chance to create a product or service meeting market needs.

(c) A government grant to start a new business.

(d) A lucky break that leads to financial success.

2. Neema loves to cook food. She opened a small restaurant in her village. Why did she do this?

(a) Passions

(b) Opportunity

(c) Unmet needs

(d) Profit

3. One of the following steps is identifying business opportunities.

(a) Customers' needs

(b) Business ideas

(c) Market research

(d) Potential competitors

4. Form Two Business Club members want to establish small businesses in their community. They talked to people to learn about their needs, wants, and challenges. What activity did the Form Two Business Club members conduct?

(a) Business opportunity

(b) Market research

(c) Passion determination

(d) Networking

5. The following are the market research methods that can be used to collect information on customer needs, unmet needs, and challenges.

(a) Surveys, interviews and exploring

(b) Surveys, interviews and business opportunity

(c) Surveys, interviews and observations

(d) Surveys, interviews and networking

6. Which market research method is most effective for gathering in-depth information about customers' motivations and preferences?

(a) Surveys

(b) Observations

(c) Interviews

(d) None of the above

7. Which of the following steps in the business opportunity identification process involves understanding the competitive landscape and potential customer needs?

(a) Observing your surroundings

(b) Market research

(c) Finding your passions

(d) Leveraging your network

8. Match the items from Group A with those in Group B by writing the letter of a correct option in Group B that corresponds to an item in Group A

Group A	Group B
(i) Understand your target market, competitors, and suppliers.	A. Observe your surroundings
(ii) Pay attention to people's needs and challenges in your community.	B. Opportunity
(iii) Talk to people about their needs and challenges.	C. Find your passions
(iv) Combine your interest	D. Use your network
	E. Problem-solving
	F. Market research
	G. Business idea

9. Ms. Jackline cannot identify business opportunities; she has approached you to seek help. How can you help her?

10. Why is it important to identify business opportunities?

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Chapter Six: Business Planning and Development

Introduction

A great business idea is only the beginning. To transform that idea into a successful enterprise, careful planning and strategic development are essential. In this chapter, you will learn about the fundamentals of business planning, the components of a comprehensive business plan, and the steps involved in developing and growing a sustainable business. The competences developed will enable you to create effective business plans and guide your entrepreneurial ventures toward long-term success.

Think

Starting a journey without a map or destination in mind.

Activity 6.1: The Business Vision

Imagine you have identified a business opportunity in your community. Before starting, consider the following:

(a) What is your ultimate goal for this business?

(b) Where do you see your business in one year? Five years?

(c) What values will guide your business operations?

(d) How will you measure success?

The Concept of Business Planning

Business planning is the process of outlining the direction and objectives of a business, along with the strategies and actions needed to achieve them. It involves analyzing the current situation, setting goals, and determining the resources and steps required to turn business ideas into reality.

A business plan serves as a roadmap that guides entrepreneurs through the various stages of business development. It helps in securing funding, making informed decisions, and navigating challenges that may arise during business operations.

Importance of Business Planning

Effective business planning provides numerous benefits for entrepreneurs and their ventures:

• Clear Direction: A business plan establishes clear goals and objectives, providing direction for all business activities.
• Resource Management: It helps in identifying and allocating resources efficiently, preventing waste and optimizing utilization.
• Risk Reduction: By anticipating potential challenges and developing contingency plans, business planning minimizes risks.
• Funding Acquisition: Investors and lenders require comprehensive business plans before providing financial support.
• Performance Measurement: It establishes benchmarks against which business performance can be measured and evaluated.
• Strategic Decision-Making: A well-researched plan provides the information needed to make informed business decisions.

Components of a Business Plan

A comprehensive business plan typically includes the following key components:

Executive Summary

An overview of the entire business plan, highlighting key points and objectives. This section is often written last but appears first in the document.

Business Description

Detailed information about the business, including its legal structure, mission statement, and unique value proposition.

Market Analysis

Research on the industry, target market, competition, and market trends that affect the business.

Organization & Management

Details about the business organizational structure, management team, and human resource requirements.

Products or Services

Description of what the business sells, including features, benefits, and lifecycle of products or services.

Marketing & Sales Strategy

Plans for promoting the business, reaching customers, and generating sales.

Financial Projections

Estimates of revenue, expenses, cash flow, and profitability over a specific period.

Funding Request

If seeking financing, details about the amount needed, proposed use of funds, and preferred terms.

Steps in Business Planning

1 Idea Generation

Identify business opportunities based on market needs, personal skills, and available resources.

2 Market Research

Gather information about customers, competitors, and industry trends to validate the business idea.

3 Goal Setting

Establish specific, measurable, achievable, relevant, and time-bound (SMART) objectives.

4 Strategy Development

Create plans for marketing, operations, finance, and human resources to achieve business goals.

5 Resource Planning

Identify and allocate the financial, human, and physical resources needed for business operations.

6 Implementation

Put the plan into action, monitoring progress and making adjustments as needed.

7 Evaluation

Regularly assess business performance against established goals and modify the plan accordingly.

Business Development Strategies

Business development involves activities and initiatives that help grow a business and increase its value. Effective development strategies include:

Strategy	Description	Benefits
Market Penetration	Selling more existing products in current markets	Increased market share, higher brand recognition
Market Development	Introducing existing products to new markets	Expanded customer base, reduced dependency on single market
Product Development	Creating new products for existing markets	Increased revenue streams, competitive advantage
Diversification	Introducing new products to new markets	Risk spreading, opportunities for innovation
Partnerships & Alliances	Collaborating with other businesses	Shared resources, expanded capabilities

Case Study: Mama Nuru's Catering Business

Mama Nuru started a small catering business from her home, specializing in traditional Tanzanian dishes. After one year of operation, she had built a loyal customer base but wanted to expand her business. She developed a business plan that included:

• Renting a commercial kitchen space
• Hiring two assistant cooks
• Developing a catering menu for corporate events
• Creating a marketing strategy targeting offices and event planners
• Securing a small business loan to fund the expansion

Within six months of implementing her plan, Mama Nuru's monthly revenue increased by 150%, and she was able to repay her loan ahead of schedule.

Activity 6.2: Create a Mini Business Plan

Choose a business idea that interests you and develop a simplified business plan including:

(a) Business name and description

(b) Target market and customer profile

(c) Products or services offered

(d) Basic marketing strategy

(e) Startup costs and pricing strategy

(f) Short-term and long-term goals

Financial Planning for Business Development

Financial planning is a critical component of business development. It involves:

• Startup Cost Estimation: Calculating all expenses required to launch the business
• Revenue Forecasting: Projecting income based on market research and pricing strategy
• Expense Budgeting: Planning for ongoing operational costs
• Cash Flow Management: Ensuring adequate cash is available to meet financial obligations
• Profitability Analysis: Determining when the business will become profitable
• Funding Strategy: Identifying sources of capital and terms of financing

Exercise 6.1

1. Explain why a business plan is often called a "roadmap" for entrepreneurs.
2. Compare and contrast market penetration and market development strategies. Provide examples of each.
3. Identify three key components of a business plan that would be most important to potential investors and explain why.

Risk Management in Business Planning

Identifying and managing risks is essential for business sustainability. Common business risks include:

Risk Category	Examples	Mitigation Strategies
Financial Risks	Cash flow problems, unexpected expenses, economic downturns	Maintain emergency fund, diversify income sources, control costs
Operational Risks	Supply chain disruptions, equipment failure, staffing issues	Have backup suppliers, regular maintenance, cross-training staff
Market Risks	Changing customer preferences, new competitors, price wars	Continuous market research, product innovation, customer loyalty programs
Compliance Risks	Regulatory changes, licensing requirements, tax obligations	Stay informed about regulations, consult professionals, maintain accurate records

Skills Lab Activity: Risk Assessment

Select a business idea and identify five potential risks it might face. For each risk, develop a mitigation strategy. Present your findings to the class.

Project Activity: Business Plan Development

In groups, develop a comprehensive business plan for a hypothetical business. Include all key components discussed in this chapter. Present your business plan to a "panel of investors" (your classmates and teacher).

Chapter Summary

1. Business planning is the process of defining business goals and determining the strategies and resources needed to achieve them.
2. A comprehensive business plan includes an executive summary, business description, market analysis, organization details, product information, marketing strategy, financial projections, and funding requests.
3. The business planning process involves idea generation, market research, goal setting, strategy development, resource planning, implementation, and evaluation.
4. Business development strategies include market penetration, market development, product development, diversification, and partnerships.
5. Financial planning encompasses startup cost estimation, revenue forecasting, expense budgeting, cash flow management, profitability analysis, and funding strategy.
6. Effective risk management identifies potential threats to the business and develops strategies to mitigate them.
7. Regular evaluation and adjustment of the business plan are essential for responding to changing market conditions and business performance.

Revision Exercise

Choose the correct answer among the given alternatives in questions 1 to 5 and write its letter in your exercise book.

1. Which component of a business plan provides an overview of the entire document and highlights key points?

(a) Market Analysis

(b) Executive Summary

(c) Financial Projections

(d) Business Description

2. What business development strategy involves selling more existing products in current markets?

(a) Market Development

(b) Product Development

(c) Market Penetration

(d) Diversification

3. Which of the following is NOT typically part of financial planning for a business?

(a) Startup cost estimation

(b) Revenue forecasting

(c) Employee vacation scheduling

(d) Cash flow management

4. The acronym SMART in goal setting stands for:

(a) Specific, Measurable, Achievable, Relevant, Time-bound

(b) Strategic, Manageable, Appropriate, Realistic, Timely

(c) Simple, Meaningful, Actionable, Reliable, Targeted

(d) Systematic, Market-based, Analytical, Responsive, Technical

5. Which risk management strategy would be most appropriate for addressing potential supply chain disruptions?

(a) Maintaining an emergency fund

(b) Having backup suppliers

(c) Cross-training staff

(d) Implementing customer loyalty programs

6. Match the business plan components in Group A with their descriptions in Group B:

Group A	Group B
(i) Executive Summary	A. Research on industry, target market, and competition
(ii) Market Analysis	B. Overview of the entire business plan
(iii) Financial Projections	C. Details about business structure and management team
(iv) Organization & Management	D. Plans for promoting the business and generating sales
(v) Marketing & Sales Strategy	E. Estimates of revenue, expenses, and profitability

7. Explain why regular evaluation and adjustment of a business plan is important for entrepreneurial success.

8. Describe two financial risks that a new business might face and suggest strategies to mitigate each risk.

9. A friend tells you that business planning is a waste of time because "things never go according to plan anyway." How would you respond to this statement?

10. Create a simple outline for a business plan for a small business of your choice, listing the eight main components discussed in this chapter.

Business Studies - Chapter Six