Starting a Small Business

What is in this guide

This guide provides information and a stage by stage approach on how to start a small successful business. It contains the following sections:

1. Starting a small business
2. Stage 1: Idea and opportunity screening

2.1 Finding new business ideas and opportunities
2.2 Screening the ideas and opportunities
2.3 Checking if the business is financially viable

3. Stage 2: Planning

3.1 Production
3.2 Marketing
3.3 Management
3.4 Financial
3.5 Writing a business plan

4. Stage 3: Start up
5. Stage 4: Monitoring

1. Starting a small busines

There are four stages to setting up of a successful small business:

2. Stage 1: Idea and opportunity screening
3. Stage 2: Planning
4. Stage 3: Start up
5. Stage 4:Monitoring
6. Stage 1: Idea and opportunity screening

This stage is where you work out what small business opportunities exist in your area and decide what kind of business you want to try. This stage involves the following key steps:

2.1 Finding new business ideas and opportunities;

2.2 Screening the ideas and opportunities to make sure:

• They meet a need;
• There are people who want the products - market potential;
• You can make a profit;

2.3 Checking if the business is financially viable

2.1 Finding new business ideas and opportunities

There are many different ways that you can get good ideas. These include:

1. Your previous or current employment
2. Family, friends and relatives
3. Market, social, business or technological trends

1. A product or service need you've identified through personal experience
2. Your hobby or leisure activities, including travel

1. Business publications, including magazines, newsletters, trade publications, internet and books available in the business sections of both libraries and book stores

1. Trade shows and conventions

2.2 Screening the ideas and opportunities

When you have found an idea you should ask a few questions to check if the idea will work. This is called screening. Three important questions are:

1. Does it meet a need?
2. Is there a potential market?
3. Will the business be financially viable?

a) Does it meet a need?

The purpose of any business is to meet a specific need of customers. Customers need services and products. Once business ideas and opportunities have been generated each one has to be evaluated to check what need it will be satisfying and if you have the skills, knowledge and ability to provide the product or service.

A successful business is able to provide customers with a product and service that is seen as good value and provides satisfaction. Good value is usually seen as a combination of quality, quick service/response and the right price. Customers often look for good quality products and services that are delivered promptly at a good price. A business that promptly delivers a service/product at a reasonable price compared to its competitors has competitive advantage.

Each opportunity has to be evaluated to see if customer satisfaction and value for money can be provided.

For example:

Mandla Mkhize believes that manufacturing and fitting burglar bars in a new RDP housing settlement is a good business opportunity. Other prospective business people also see this as an opportunity and Mandla will encounter tough competition in this new market.

Before deciding on starting the business Mandla has to ensure that he can obtain competitive advantage by checking if he could:

1. Manufacture better quality burglar bars that are fitted at a time convenient and flexible for customers, whilst ensuring that there is a balance between price and quality. Most customers do not mind paying more if they get a product that is better in quality with more design options, has additional features (the burglar bars could be galvanised and painted), good after-sales service and guarantees.
2. Offer other products and services to complement the manufacturing and fitting of burglar bars. For example, Mandla could also manufacture gates, fit peep-holes on doors and sell locks.

b) Is there a potential market?

Further information and research to check the feasibility of each idea is needed, once you have narrowed the list down to those that provide value and meet the needs of customers. At this stage research should focus on whether the product and service has a market (people/businesses that will buy) and what price people are willing to pay. Mandla could do the following:

1. Conduct market surveys
2. Conduct focus groups and brain-storming sessions

1. Monitor competitors, including talking to their customers

1. Test the market with your product or service

1. Talk to consultants and advisors
2. Talk to retailers, distributors, agents, and brokers
3. Read market research reports, industry trade books, magazines, and journals
4. Refer to industry associations

2.3 Checking if the business will be financially viable

Once you have found that there is a potential market, you must check that it can generate enough money to sustain the business and show a profit. This requires each idea to be further tested by looking at:

1. Start up costs: What will it cost to start this business?

1. Running Costs: What will it cost to run this business?
2. Income required

For example:

Oupa Moloi was retrenched three years ago from a mine in Johannesburg. Oupa has used his retrenchment package to sustain his family for the past three years. He has R500 left and knows that soon he will not be able to provide for his family.

He has decided to use the R500 and a loan of R1 000 from his brother (repayable at R100 per month) to open a small roadside stall to sell pap and vleis at the taxi rank. This stall has to be rented from the local municipality with monthly payments in advance.

Oupa needs to make a profit of R1 500 per month to adequately provide for his family. A local school teacher assisted Oupa in working out his start up costs, running costs and the income required to pay these costs and make a profit of R1500 per month.

Oupa expects to sell 400 plates of food per month. He believed that at least 20 people will buy from him per day and he expected to work 20 days per month – the busiest days in the taxi rank. The cost of meat and pap to make 1 plate is R5

After working out the start up costs and fixed running costs, Oupa realised that he needed to generate R300 per month to meet his running costs. This included a savings of R50 which could be used to replace any of the equipment bought to start the business. This is a good practice as over time equipment loses its value through “wear and tear”. In bigger businesses this is called depreciation which is an expense.

You will notice that they did not include the costs of buying meat and pap for the month. The teacher explained to Oupa that it would be safer to buy the meat and pap on a weekly basis until he was sure about the number of plates he was going to sell each month.Total number of units needed to achieve profit (unit sales needed)Next, Oupa and the teacher worked out how many plates needed to be sold to meet his monthly expenses and to make the profit he needs of R1500. They used the steps below to work this out:

1. Work out total monthly fixed costs – in this case R300.00;
2. Work out the costs of meat and pap for 1 plate – in this case it is R5.00;
3. Work out how much profit you need to make for your family – in this case it is R1500.00;
4. Now add together the fixed cost and profit expectations (R1800.00) and divide this by the cost per plate (R5.00)

(Fixed costs + Profit expectations) / Cost of meat and pap = (300.00 + 1500.00)/5 = 360 plates per month

This clearly illustrated to Oupa that he needed to sell at least 360 plates per month to make the expected profit

Sales price per plate

Next they had to work out the selling price of each plate. They used the steps below to work this out:

1. Firstly work out the total cost for meat and pap for 360 plates.
No. of plates x cost per plate = 360 x 5 = R1800.00;

2. Next, the minimum sales price to make the profit you want must be worked out. This is done by firstly adding the fixed costs, profit expectations and the cost of making 360 plates and then dividing the total by the unit sales.

(Fixed costs + Profit expectations+ cost of making 360 units) / unit sales needed (R300+R1500+R1800) / 360
= 3600/360
= R10.00

Oupa realised that R10 was a good price to charge people as similar vendors in neighbouring towns were charging R15 per plate and this would make it easy for him to make his sales target. This calculation also illustrated to Oupa that the business will generate R3600 per month.

However, the teacher explained to Oupa that a drop in sales will mean that he will fail to meet his profit expectations and provide for the needs of his family. The key is to set a price that will accommodate any drop in sales.

Impact of a drop or increase in sales on profit

He used the following calculation to illustrate this:

(Fixed costs + Profit expectations + cost of actual units sold)/actual units sold

If 100 units were sold:
(300+1500+500) / 100
= 2300/100
=R23.00

The teacher used the following table and different unit sales based on the above calculations to further illustrate to Oupa the relationship between unit sales and price.

Impact of a difference in sales on profit expectations

The teacher explained to Oupa that if he set the price at R10.00 and the actual unit sales were less than 360 units this would have a serious impact on his business. He used the following calculations to illustrate this:

If 100 units were sold at R10.00 per unit:
Sales - (Fixed running cost + cost of 100 units) = actual profit
R 1000 - (300 + 500) = R200.00

Profit expectations - Actual Profit = Difference in profit
R1500 – 200 = R1300.00

This means that Oupa will make an actual profit of R200 which is R1300 less than what he needs to meet the needs of his family. The teacher used the above calculations and the following table to further illustrate the difference in actual profits based on different number of units sold @ R10.00 per unit.

These calculations will help Oupa decide whether his business will be financially viable.

Once all the business ideas and opportunities are subjected to all these checks the entrepreneur has to make a decision. If none of the ideas proved feasible the entrepreneur will have to go back and generate new ideas.

3. Stage 2: Planning

There are four business areas which need proper planning to make the business successful:

3.1 Production
3.2 Marketing
3.3 Management
3.4 Financial
3.5 Writing a business plan

Proper planning of the first three areas is very important, because this will determine the financial outcome of the business. We will use a small dressmaking business that is owned and co-run by two women as an illustration of what goes into planning in the different areas.

3.1 Production Planning

These guidelines can be used for businesses involved in manufacturing or providing a service.

The area of production is sometimes referred to as operations. It includes all things that the business does to make a final product or service available for its customers. For a mechanic this would involve, diagnosing the fault, ordering the parts, repairing, test driving and delivering the car to the customer. For a dressmaker this would involve taking measurements, ordering the material, sewing, fitting, touching up and delivering the garment to the customer.

The following key questions are designed to provide critical information that is needed to plan the production area of a business.

The information you get by answering these critical questions will provide a starting point for the owners to organise the production process in their business. Once actual operations start the owners will have to adapt the plan to meet their requirements.

3.2 Marketing Planning

This area is as important as planning the production process. To make a profit a business must have a clear plan to reach out and attract potential customers.

The following table is a guideline on how this can be done.

Key Questions	Critical Information
To whom will you sell?	Who are the potential buyers? – Working women and others with access to money 400 women teachers in the 20 local schools, 100 women workers from the government complex, brides, nurses, wives of chiefs, women councillors and officials from the local municipality and our local MPL Mrs. Mngadi who will give us exposure to other women MPLs
At what price?	At least 50% cheaper than Truworths, Foschini and Edgars for a high quality product made to the individual specifications of customers
How will we attract potential buyers and at what cost?	Photographs of 5 different outfits modelled by women from our church group – posted on the notice board at 20 schools, government buildings and local municipality Cost: PhotographsR350, Travel to put up photographs R60 Provide a 5% discount on the next outfit for customers that make referrals
Where will you sell?	As our clothes are custom made, customers will visit us at our shop for measurements and fittings We will take orders from certain shops

3.3 Management Planning

Whether the business employs people or not the entrepreneur has to manage the business. Proper organisation and management is needed to reach the targets and implement the plans made in the other three areas of planning. Important considerations for the entrepreneur in planning the organisation and management of the business are tabled below:

Key questions	Critical information
Do we have the necessary skills to manage the enterprise (e.g. record keeping, production and marketing skills)?	We both can sew and we have a good way with people. Our high quality garments and our clients will be our marketing We will share the responsibility of buying material. We will use a record book to record orders in and out and maintain a simple cash and receipt book We will need the assistance of a bookkeeper to write up our books and calculate our tax obligations

3.4 Financial Planning

The goal of every business is to make a profit for its owners. A business that plans its production, marketing and its overall management of the business will most likely make a profit. This also requires the business to focus on how it manages it finances. The following table provides a guideline on how this can be done.

Key questions	Critical information
Financing the business How much is needed to start the business? What contribution will the owners make? How much is needed from outside funding? What can be used as surety to obtain the outside funding?	R6000.00 R4500.00 R1500.00 The sewing machines belonging to the owners
Bookkeeping Who will do the books How often will records be sent to the bookkeeper? When is our financial year end and who will draw up our statements?	Local bookkeeping teacher Monthly31 March – bookkeeper can perform this task
Banking and cash management What type of account? Who are the signatories? How often do we deposit cash? How much petty cash do we draw? How will we make our business payments?	SMMESpecial Business Account Both owners Whenever cash in hand exceeds R200.00 Maximum R200.00 at any one time By cheque for any amount over R100.00
Payment to owners and profit distribution How much will the owners draw as wages? How much of the profit will be distributed to the two owners? How much will be reinvested in the business?	R800.00 each per month 80% at the end of the financial year20% of profits will be reinvested

3.5 Writing a Business Plan

The information gathered from planning the production, marketing, management and financial areas of the business gives you all the information you need to write a business plan.

The business plan is a document that provides details of the business in relation to its current status, future outlook and plans, costs related to the running of the business and expected profits. It includes a description of the business, its products and services, target market, sales and marketing strategy, financial documents, and management team.

A business plan is used to mobilise finances and resources for the business. A new business writes an overall plan covering all areas of the business. An existing business may write a business plan to raise funding for a specific product or operation, for example to get a bank loan or to access a government grant. Below is a structure for a business plan.

Elements of a business plan

A. Cover Page
B. Executive Summary
C. Business Overview: A business profile and the product or service
D. Management: Information of the entrepreneurs and the management structure
E. The Product / Service
F. Market Analysis
G. Sales and Marketing Strategy
H. Financial Statements and projections
I. Laws and Regulations
J. In-depth analysis and risk/reward assessment
K. Appendices and supporting documentation.

A. Cover Page

Cover page should contain the title, business name, business address and contact details.

B. Executive Summary

This is the most important part of the business plan – it has to sell your strategy for success to your investor (e.g. bank for a loan to start the business). The summary is an overview of the entire plan and summaries of each section. Therefore, although it is at the beginning of the document, it is usually written last to capture the essence of the plan. The summary stands alone and should not refer to other parts of your document.

C. Business Overview

Write a business profile, including the following:

1. Information on the background of the business; list products, assets, experience and location if it is an existing business;
2. Indicate the business form ( close corporation, proprietorship etc);
   • The mission, long and short term objectives in terms of business growth and development. This should include possible existing strategies.

D. Management

1. Include a description of the skills and experience of the entrepreneur / manager/ owner covering the key areas of technology and product development, production, sales, marketing, finance and administration;
2. Attach detailed Curriculum Vitae of entrepreneur / manager / owner;
   • Indicate the financial contribution of each entrepreneur ( if there are partners involved) to the business and the current shareholding structure;
   • The management structure of the business and the number of staff.

E. The Product/Service

1. Describe the product/service offered by the business. Include innovative features and the competitive edge the product/service affords the business over its rivals in the same area;
2. Describe the location, give a description of the premises and, where applicable, production facilities.

F. Market Analysis

1. Describe the existing market and potential growth;
2. List potential and existing customers;
   • Include a detailed list of competitors, the price and quality of their products, service delivery and quality of their products and their reaction to your activities

G. Sales and Marketing Strategy

• Describe your marketing and promotional activities;
• Elaborate on your pricing strategy and how it compares with your competition.

H. Financial statements and projections

1. Include an operating budget and projections of what you expect to earn each month.

I. Laws and Regulations

• Details of any legislation and regulations governing the industry, product and production processes;
• Proof of compliance with tax and labour legislation where applicable.

J. In-depth Analysis and Risk/reward Assessment

1. Discuss definite and possible internal strengths and weaknesses and external opportunities and threats;
2. Give an honest assessment of the risks faced by the business in relation to potential growth and profitability;
   • Discuss strategies that can be implemented to address the risk factors highlighted.

K. Appendices and supporting documentation

4. Contracts, orders, letters of interest;
5. Documentation relating to licenses, copyrights, trademarks and patents;
6. Photographs, brochures and advertisements for your product;
7. Copies of ID documents and marriage certificates of the entrepreneur(s) / manager / owner;
   • Copies of company or close corporation certificates and registration documents;
   • A list of references which can be made to check creditworthiness, product, service quality, skills and integrity of the entrepreneur(s) / manager/ owner.
8. Stage 3: Start up

Once the business has obtained the funding and resources to implement its plan, the owner has to start setting up to get the business operational. Not all new businesses wait for outside funding and resources before setting up. The owner may use her own capital and resources to start some of the operations of a business.

This step entails finding premises, employing and registering workers, obtaining telephone lines, printing stationery, advertising and marketing the business, registering with the Receiver of Revenue etc. Chapter 3 has more details about this.

5. Stage 4: Monitoring

All businesses have to monitor the implementation of their business plans. This has to be done on a continuous basis to prevent the owners from making costly mistakes.

Monitoring must:

• Compare the business’s financial performance with its projected plans and profits;
• Check that the business is making a profit;
• Get feedback from customers on the quality and price of the product;
• Review each area that was planned – production, marketing, management and financial.

Monitoring must enable the owners to make decisions about whether to continue with the existing business or to close down or change operations. In addition, it needs to point to what needs to be done to strengthen the business.