Supporting New Business - Essay Example

Q1. the prerequisites for start-up business (i.e., what should the entrepreneur do in the early stages of starting the business). (20marks) Introduction: Starting a new business, even on a low scale, is not an easy task. A start-up business needs lot of planning and realistic vision for it to flourish. The entrepreneur needs to take calculated risk along with their mitigation plans to overcome possible short term losses in the business. Estimation of capital required for infrastructure and initial few months of operation also needs to be arranged by the entrepreneur. Detailed strategy for starting-up a business: The origin of a start-up is a viable business idea followed by detailed market analysis and feasibility study, production planning, sales and marketing strategy and, above all, the generation of fund for the infrastructure. The steps to be taken by the entrepreneur before actually setting up the business are: Business Conception: There should be a concept behind any business. The budding entrepreneur needs to think about: What should be the business concept- idea that will generate revenue How should the business be run How feasible is the idea for success in the current market situation What should be the product or service to be offered to the market Market Analysis: Market research is very important activity in the process of setting up a new business. Market study enables an entrepreneur to make a robust business plan to survive in the competitive market. Under market research, the activities are: Identification of customers for your product/service - Who would be willing to buy your product How much the customers would be willing to pay for what you are offering Identification of your competitors - Is there any product, similar to your product, available in the market If yes, how different would be your product from them Why will they buy your product when they are using pre-existing products To answer your potential customers, you will have to perform a gap analysis between your product and those available in the market and highlight the key features of your product that will be beneficial to them. In nut shell, prepare plans for beating the competition. Estimation of the sales - What is the potential market for your product What is the expected sales figure Correct estimation of sales and market potential for your product will help you in making a realistic financial plan than simply relying on assumptions. Business Plan: Inputs from market research will enable you making of systematic business plan. Through business plan, entrepreneur will focus on strategies for running the business. Some of the key tasks of a business plan are: Identify the location of the business - How big should be the premises Will it be easily accessible by the targeted customers Is it affordable Identification of sales channel for the product - Are you planning for direct sale Are you planning to sale it through the dealers or online on the internet How will the product be delivered to the customers Estimation of the underlying infrastructure needed to support your business - What kind of machinery will be required for the production How many people will be needed to manufacture your product Do you require human resources for any other function of the business Identification of sales and promotion strategy - How will you promote your products in the market How will you make targeted customers aware of your product Analysis of the possible risk/threats to the new business - Identify, in what ways your business may fail Think about the mitigation plans to tackle those failure modes Financial Investment and Planning: One needs money to start a business and to run every function of the business. Where will the required financial support come from You need to assess your financial capacity against what your business needs and fill this gap by arranging for the additional money. Financial planning refers to: Identification of the source of funding - Do you have enough money to support your business If not, who will invest for your business What is the plan for repayment What will be the rate of interest for the load What will be return of investment (ROI) for you as entrepreneur Which mode of funding you would like to go for What should be the terms and conditions for such financial support from others Estimation and management of cash-flow - How long you can run your business without in-flow of cash How to ensure you have regular cash-flow to smoothly run your business Mitigation financial risks - How the financial profit/loss will be shared How to cope with fluctuations in the production cost/interest rates Prepare annual budgeting for different sub-systems of your business. Example: I plan to open an internet caf where I will offer services like - internet browsing, printing, copying to CD etc. I first think of this feasibility of this business idea - will it work or not I will do a market survey - Is there any other shop offering such facilities in a certain area If there is no competition then I have look for its market - whether people would come for browsing in my caf What kind of customers need to be served Once convinced about the potential market for the business, I will make plans for infrastructure required - premises for the caf, continuous electrical supply, PCs, furniture, internet connection, CDs and printers etc. I will also account for need of a helper (human resource). I need to decide on the rate for browsing, CD making and printing. If there is competition around, I have to ensure I offer my customers similar or better services at lower cost to attract them in my caf. I will also have to estimate the costs involved - rent for the premises, cost of the equipments. Based on the cost estimates and self-funding capacity, I will decide on mode of funding to choose from. I will also have to plan for change in the rates of services I offer (browsing, printing, and CD making), in case the cost of electricity or internet connection goes up. I also need to identify potential risks to my business - competition, failure of electrical supply, failure of PCs, running out of paper or CDs etc. I need to plan for mitigating the risks. For example, I would like to buy UPS/Inverters for continuing electrical power supply in the event of power failure. Conclusion: Start-up businesses require diligent attention and careful planning from the entrepreneur for reaping the fruits of benefits. Complete aspects of the business, such as - product, production, sales, customers, funding, risks mitigation plans, product marketing, and product delivery to the customers, need to be clearly included in the business plan. The more detailed one would think about possible business, the thinner the chances of its failure would be. Q2. What are the key sources of finance for business start-ups (You are expected to mention at least 7 sources of finance for this type of business). (30marks) One needs money for starting a new business. The amount of money needed at the start depends on how big the business is. Setting up the premises, machineries, procurement of raw materials, and collaborating with human resources for production, marketing and sales - all activities require money. Based on the amount of money required, convenience of the entrepreneur and long term vision of the business, one can choose any of the following methods to organize financial support for its business. 1) Self-finance - If the business you are planning to go for is very small. For example, selling of eatable / snacks on a wagon (mobile snacks shop), one many not require huge amount of money. In such a case, the business can be funded by the entrepreneur itself. Self-finance works best for the small start-ups especially when the entrepreneur wants to test the market with small beginning. In most cases, the self-finance acts as a motivation for the entrepreneur to diligently run the business as it means profit to self. In this mode of funding, the profit or loss is entirely of the entrepreneur. 2) Loan from friends and family - If the money required is more that your capacity then you may seek financial support from your friends and relatives. This mode of funding had the advantage that the friends and relatives are less stringent on return on their investment in your business. They may charge you very little interest compared to rate of interests from other financial institutes. Also, it is rather easy to convince them of your business plans to get their support. I remember, one friend of mine starting the business of 'renting comic books' by taking small amount of money of us. Today, his business has expanded to renting of videos and computer games and he has already given free services to all the friends who supported him during start of his business. 3) Credit cards - If you are able to manage the initial cost needed for setting up your business then using credit cards for managing the running cost works out very well. Usually all the bank credit cards give you end of month to pay off the debts. For example, if you are running electronic goods shop then by purchasing the goods at the start of the month using credit card will give you buffer of 25 to 30 days to sell those items without spending anything from your pocket. It is important to not be carried away with such funding and the debt should be paid within stipulated time to avoid unnecessary (and higher rate of) interest. 4) Overdraft - It is quite similar to the credit card where you can spend more than what you have in your account based on agreement with the bank. But unlike credit card, this momentary 'overdraft' or over-expense attracts interest that has to be paid by the account holder. This can be used for emergency situations where getting monetary support from other sources is not possible. 5) Bank loan - Depending upon the repayment capability of the borrower bank can provide loans from small to higher amounts. Getting a loan from the bank can be easier if entrepreneur can show the repayment capability or backup assets (home or business infrastructure). The repayment (includes the principle and interest portion) happens on monthly or quarterly basis over the loan period. This is quite helpful for entrepreneur to decide on the loan amount based on the repayment he can afford on monthly/quarterly basis. 6) Lease - If the cost of the equipments required for running your business is way too high, then instead of purchasing them, you can lease them. This works like taking the equipment on rent and using it for your business and generating revenue. For example, if you wish to open an internet caf, then instead of buying all the computers, you would like to lease them and run the business. This way, you can collect money and later on decide to buy the required infrastructure/equipments. In this mode of funding, you pay more (as rent) but you are free from the liability of maintaining the equipments. 7) Venture capitalist - Funding from venture capitalist is also known as Equity Financing where entrepreneur sells partial ownership of the business to the investors in exchange for the cash they provide. In this way, they get a much better return of their investment (than the interest they would have received) but also share the risks in the business. If the business makes loss, they lose their money and entrepreneur doesn't have liability. 8) Private/Personal loan - If the amount required is not so high, and when bank or other investors reject your business plan, then one can go for loan from private agencies at higher interest rates. Conclusion: The financial need for starting of a business can be fulfilled by getting funded from self or others. Funding from others will have certain flexibility but will cost you more. Depending upon the situation and amount needed one can get funding from different financial organizations. Q3. There are increasing number of organizations, funds & schemes which finance small & medium sized businesses in all the Arab countries. These organizations are financed by governments, private &/or international organizations. You are required to: (a) Name one of these entities which operates in your country & which supports young entrepreneurs who want to start a small business ventures. If you don't know of any then name an entity which supports new entrepreneurs of any age. (b) Give a brief description of the entity (i. e., aims, nature of operations & target group). (c) If you want to start a business would you seek finance from this entity Why (30 marks) Introduction: (a) Name of the funding entity that operate in Saudi Arabia and that supports young entrepreneurs is: Centennial Fund (b) About Centennial Fund: The Centennial Fund is a Saudi Arabian charity establishment for funding the startups. The firm is established to enable young Saudi people to start their own business by mentoring them about business and financing them the required capital. This initiative from Centennial aims at transforming them from job seekers to job providers and helping them achieve financial independence. Objectives of Centennial Fund: Help create jobs for young Saudi men & women Help diversify the economy with small businesses Reduce the failure rate of small start-ups Nurture creative entrepreneurs Core Services Help develop & refine feasibility studies & business plans Provide interest-free loanranging between 50,000 to 200,000 SAR (Saudi Arab Riyal) to fund part or all the cost of starting the business, requiring no outside collateral or guarantor and repayable over 5 years Business mentoring for three years Facilitation of government permits & licenses Targeted Project Sectors: Services Project Commercial Projects Industrial Projects Agricultures Projects (c) If I want to start a business, I would definitely seek finance from this entity because of following reasons: a. There is a possibility of the funding up to 200,000 SAR from this entity. b. Apart from the funding, they provide mentoring to the entrepreneur for up to 3 years to make sure the project is a success. The entrepreneurs are encourages to work with the mentors to get guidance in terms of managing the business and taking decisions while working on the business. The mentors provided by them help development of abilities and skills necessary to run the business. c. They facilitate simplification of government regulations for funding. d. They also provide additional training through workshops to cultivate the business skills. e. They help in marketing of the products through their website. f. They have better history of the successful funded projects. Read More