Entrepreneurship Skills Development: Operating a Business

Roles of Management

Management plans, by setting goals and deciding how to reach them; organises, by arranging people, money and equipment; leads, by directing and motivating staff; and controls, by comparing results with plans and correcting problems. Managers also make decisions, communicate with staff, customers and suppliers, and represent the business to banks, government and the community.

Computers as a Management Tool

Computers help management by keeping accurate records with accounting packages, processing data quickly, producing reports for decision making, managing stock with point-of-sale systems, communicating through email and social media, marketing online, accepting electronic payments, and storing information securely with backups. Even a small business can use a spreadsheet to track sales and expenses each day.

Meaning and Importance of Resource Allocation

Resource allocation is the process of assigning the business's human, capital and material resources to the activities that will best achieve its goals.

Proper allocation avoids waste, reduces costs, ensures that priority tasks are done, matches staff skills to jobs, prevents shortages of materials, and improves productivity and profit. For example, a bakery puts its most skilled baker on the early-morning bread production that brings most of its sales.

Costing Terms

Cost is the amount spent to produce or buy a product. Direct costs can be traced to each product, such as flour and the baker's wages per batch. Indirect costs (overheads) cannot be traced directly, such as rent and electricity. Fixed costs stay the same regardless of output, such as rent. Variable costs change with output, such as ingredients. Total cost is fixed plus variable costs, and unit cost is total cost divided by the number of units.

Importance of Costing

Costing helps the business set selling prices that cover costs, know the profit on each product, control costs by showing where money goes, make decisions, such as which products to drop, and prepare budgets and quotations.

The Costing Process

The process is to identify all the costs involved, classify them as direct or indirect and fixed or variable, calculate the cost per unit, add a share of overheads, and review costs regularly as prices change.

Cost, Price and Profit Calculations

Selling price is often found by adding a mark-up to cost, and profit is the difference between selling price and cost.

Here you are finding what each product costs and what to sell it for. Add up all the costs of a batch, including a share of overheads, and divide by the number of units to get the unit cost. Then add the mark-up to find the selling price, and subtract the cost from the price to find the profit per unit. Below, we show you how it is done, step by step.

Pricing Terms and Importance

Price is the amount of money a customer pays for a product. Mark-up is profit as a percentage of cost, and margin is profit as a percentage of selling price. Discount is a reduction from the normal price. Pricing is important because it determines revenue and profit, affects demand, positions the product in customers' minds, and helps the business compete.

The Pricing Process

The business sets its pricing objectives, such as maximising profit or gaining market share; calculates costs; studies demand and what customers will pay; examines competitors' prices; chooses a pricing strategy; sets the price; and reviews it regularly as costs and markets change.

Here you are turning a cost into a selling price, or checking whether a price gives enough profit. Remember that mark-up is worked out on cost, but margin is worked out on the selling price. For a margin, the cost is (100% − margin) of the price, so divide the cost by that percentage to find the price. Below, we show you how it is done, step by step.

Pricing Strategies

Cost-plus pricing adds a fixed mark-up to cost. Penetration pricing sets a low price to enter a market and win customers quickly. Skimming sets a high price for a new or unique product, lowering it later. Competitive pricing sets prices close to those of rivals. Psychological pricing uses prices such as $9.99 that seem cheaper. Promotional pricing offers temporary discounts, such as 'buy two, get one free'. Premium pricing keeps prices high to show quality.

Record Keeping and Source Documents

Record keeping is the systematic recording and safe storage of all information about the business's transactions and activities. It starts with source documents, the first records of transactions, such as receipts, invoices, credit notes, delivery notes, cheque counterfoils, bank statements, payslips and payment vouchers.

Importance of Record Keeping

Good records show the profit or loss made, show what the business owns and owes, help control cash and stock, support tax returns and avoid penalties, support loan applications, help in planning and decision making, and provide evidence in disputes. Many small businesses fail because the owner does not know whether they are making money.

Purposes of the Books of Account

The cash book controls cash and bank and shows the balances available. The day books summarise credit sales, purchases and returns. The ledger classifies all transactions into accounts. The petty cash book controls small expenses. The trial balance checks the arithmetic, and the financial statements report the profit and financial position.

Meaning and Importance of Stock Control

Stock control is the management of the quantity, quality and security of goods held, so that the business always has enough to meet demand without holding too much. It is important because it prevents stock-outs and lost sales, reduces money tied up in stock, reduces theft, damage and expiry, and gives accurate figures for the accounts.

Effective Stock Control Procedures

Effective procedures include setting stock levels (minimum, maximum and reorder levels), recording all receipts and issues on bin cards or a computer system, issuing stock only with authorised requisitions, using FIFO for perishable goods, storing goods securely and in good conditions, carrying out regular stock counts, investigating differences, and disposing of obsolete stock with authority.

Meaning of Marketing

Marketing is the process of identifying, anticipating and satisfying customers' needs profitably, through activities such as market research, product design, pricing, promotion and distribution.

Devising a Marketing Plan

A marketing plan sets out the business's marketing objectives and how it will achieve them. It includes a situation analysis (SWOT and market research), the target market, marketing objectives, such as increasing sales by 20% in a year, the marketing mix strategies, a budget, a timetable of activities, and methods of monitoring results.

The Ps of Marketing

The marketing mix is traditionally made up of the 4 Ps: product (what is sold, its quality, design, packaging and brand), price (what customers pay and the pricing strategy), place (where and how the product reaches customers, such as shops, delivery and online) and promotion (how customers are informed and persuaded, such as advertising and sales promotions). For services, three more Ps are added: people (staff who serve customers), process (how the service is delivered) and physical evidence (the premises and appearance that show quality).

Marketing Mix Strategies

The business combines the Ps into a consistent strategy for its target market. For example, Chiedza's Bakery may offer fresh bread and cakes (product) at competitive prices with a loyalty card (price), sold from a shop at the bus terminus and delivered to schools (place), and advertised on WhatsApp and with free tasting days (promotion). The mix must fit together: a premium product needs premium pricing and promotion.

Meaning of Risk Management

Risk management is the process of identifying, assessing and controlling threats to a business's assets, earnings and operations, such as fire, theft, accidents, bad debts, price changes and loss of key staff.

Importance of Risk Cover

Insurance cover protects the entrepreneur from large unexpected losses, such as fire, theft or injury claims, which could otherwise destroy a small business. It gives peace of mind, protects the owner's personal wealth, satisfies lenders, who often require assets to be insured, and helps the business recover quickly after a loss.

Principles of Risk Management

Risk management should be part of all decision making, systematic and structured, based on the best available information, tailored to the business's size and activities, cost-effective, so the cost of controls does not exceed the benefit, and continually reviewed as conditions change.

Steps in the Risk Management Process

The process follows these steps:

Identify the risks

List what could go wrong, such as fire, theft, power cuts, bad debts or price increases.

Assess the risks

Estimate how likely each risk is and how serious its effect would be, and rank them.

Choose how to treat each risk

Decide whether to avoid, reduce, transfer or accept it.

Implement the controls

Put the chosen measures in place, such as buying insurance or installing alarms.

Monitor and review

Check regularly that the controls work and update the plan as risks change.

Risk Management Strategies

Risk avoidance means not doing the risky activity at all, such as not selling on credit. Risk reduction means lowering the chance or effect of a loss, such as fitting burglar bars and fire extinguishers. Risk transfer means passing the risk to another party, mainly through insurance. Risk acceptance (retention) means bearing small risks oneself, sometimes by setting aside a reserve fund.

Meaning of Growth Strategies

Business growth strategies are plans for increasing the size, sales and profits of a business. The four main strategies, based on Ansoff's matrix, combine existing or new products with existing or new markets.

The Four Growth Strategies

The table explains each strategy with an example from Chiedza's Bakery.

Meaning of Business Ethics and Social Responsibility

Business ethics are the moral principles that guide behaviour in business, such as honesty, fairness and integrity. Social responsibility is the duty of a business to act in the interests of society and the environment, not only its owners.

Importance of Business Ethics to Entrepreneurs

Ethical behaviour builds trust and a good reputation, attracts and keeps customers, attracts good employees and keeps them loyal, reduces legal problems such as fines for unfair practices, improves relationships with suppliers and lenders, and supports long-term success rather than short-term gain.

Social Responsibility Principles

The main principles are accountability for the business's impact on society, transparency in its dealings, ethical behaviour, respect for stakeholders' interests, respect for the law, respect for human rights, and protection of the environment.

Importance of Social Responsibility to the Entrepreneur

Social responsibility improves the business's image, wins community support and customer loyalty, motivates employees, attracts investors and partners, reduces conflict with communities and regulators, and creates a stable environment in which the business can grow.

Acts of Social Responsibility in a Community

An entrepreneur can show social responsibility by employing local people, sponsoring school sports or prizes, donating food to orphanages and old people's homes, supporting clean-up campaigns, disposing of waste properly, buying from local suppliers, paying fair wages, selling safe, good-quality products at fair prices, and paying taxes honestly. For example, Chiedza's Bakery donates unsold bread each evening to a children's home.

Meaning of Customer Care

Customer care is the way a business treats its customers in every interaction, so as to meet or exceed their expectations and build long-term relationships.

Ten Tips of Customer Care

The following tips help a business give excellent customer care:

Greet customers warmly

Welcome every customer with a smile and a friendly greeting.

Listen carefully

Pay attention to what the customer wants and ask questions to understand.

Know your products

Be able to explain features, prices and alternatives accurately.

Be polite and respectful

Treat every customer with courtesy, whatever their age, dress or purchase size.

Serve promptly

Avoid keeping customers waiting, and acknowledge them if you are busy.

Keep promises

Deliver on time and do what you said you would do.

Handle complaints well

Listen, apologise, solve the problem quickly and follow up.

Go the extra mile

Do something extra, such as carrying goods to the customer's car.

Keep the premises clean and attractive

A clean, tidy shop shows respect for customers.

Ask for feedback and thank customers

Ask how service can improve, and always thank customers for their business.

Benefits of Customer Care

Good customer care builds customer loyalty and repeat sales, generates positive word-of-mouth advertising, gives an advantage over competitors, reduces complaints and returns, improves the business's reputation, motivates staff, and ultimately increases sales and profits.

Meaning of Motivation

Motivation is the inner drive that makes a person act to achieve a goal. In business, it is the willingness of employees to put effort into their work to achieve the organisation's objectives.

Theories of Staff Motivation

The main theories are summarised below.

Importance of Motivation

Motivated employees are more productive, give better customer service, produce better quality work, are less often absent, are less likely to leave, which reduces recruitment costs, cooperate better with others, and are more creative. The entrepreneur can motivate staff through fair pay and bonuses, praise and recognition, training, involvement in decisions, good working conditions and opportunities for promotion.