SMALL BUSINESS MANAGEMENT - Past Questions and Answers (Continuation 4)

Question:

Write explanatory notes on each of the followings:

(a)   Planning as tools for Decision making in small business

(b)   Source of funds for Small Business Enterprise in Nigeria

(c)    Cash flow forecast

Answer:

In Nigeria where many of the businessmen are inexperienced and the academic preparation is by no means very impressive, planning to avoid waste of money and other resources is very important and compelling.  The importance of planning is well recognized by the Nigerian government that engages in National Development Plans.  Planning is a blueprint for action.  In Nigeria, a businessman who wishes to enter into any business has to engage in detailed planning in order to identify the sources of raw materials and equipment, determine delivery dates and sources of working capital.  Many projects have failed in this country because adequate plans were not made to identify all the important variables likely to bear on the projects that would determine their failure or success.

Planning is therefore the first and perhaps the most important function of management.  The essence of planning is to prepare for and predict future events. Howard (1976:554)  opines that planning involves the establishment of objectives and a step-by-step determination of the activities and resources necessary to achieve them.  It entails determination of control, direction and methods of accomplishing the overall organizational objectives.

THE PLANNING PROCESS

There are some planning processes an entrepreneur will pass through before taking off in any business endeavour.  These planning processes include:

1.      Setting Organizational Objectives

2.      Analyzing the environment/identification of opportunities

3.      Selection of alternative courses of action

4.      Formulation of specific targets

5.      Implementation

6.      Feedback

1.      Setting Organizational Objectives – it is therefore assumed that if these steps are taken, planning for the future becomes relatively simple.  The first thing to do is determine the organizational goals.  This is very important because it gives a sense of direction.  If a man decides to take bread, this will become the objective and will determine subsequent course of action.

2.      Analyzing the Environment/Identification of Opportunities – After having determined the organizational objectives, the entrepreneur will now analyze the environment, to determine whether or not there is an investment opportunity.  This he can do by determining the type of products/service customers would need; the reasons why such needs are not at present being satisfied: whether he, the entrepreneur can satisfy such needs and whether the gap is large enough for him to invest in.  the planner has to search for opportunities as to key customers, competitors, suppliers and the type of technology required.

The entrepreneur should equally determine or examine the environment in terms of economic, social, political, legal, technological and competitive level or the competitors.  This environmental analysis will help the entrepreneur to identify and analyze the threats to and opportunities for the success of the firm.

3.      Selection of Alternative Courses of Action  - At this stage, the entrepreneur has to take decision in choosing the best plan from the alternatives identified.  The entrepreneur should choose a plan that is not only based on its possibility of being done successfully but also that which would be flexible enough to suit the likely changes in the environment.

4.      Formulation of Specific Targets – In order to be definitive, he must set targets and quotas.  Quantitative measures help to know if the objectives are being realized or not – this may involve the use of budgets and schedules.

5.      Implementation – The next step is the implementation of these measures

6.      Feedback – To complete the planning process, there should be a review of the whole planning process.  These help to take corrective actions and serve as control process.  Any good plan must always have a feedback.

Solution to Cash Flow Forecast:

·         A cash flow budget measures the flow of money in and out of the business.  It is critical to you and your banker.

·         Many businesses operate on a seasonal basis, as there are slow months and busy months.  The cash-flow budget – projection will provide an indication of the times of a cash flow shortage to assist in properly planning and financing your operation.  It will tell you in advance if you have enough cash to get by.

·         A cash flow budget should be prepared a year in advance and contains monthly breakdowns.

Cash Flow Assumptions

When reviewing the cash flow plan, certain assumptions should be made.

·         Sales: Monthly sales (consulting service fees) that are expected to materialize.

·         Receipts: Due for goods sold on credit; rental income is rent that will be collected in advance at the beginning of each year.

·         Disbursements:  Accounts payable to be paid in the month following month of purchase.

·         Accounting and Legal:  To be paid upon the receipt of bill, expected to be paid after your fiscal year end.

·         Financial statements have been completed

·         Advertisement: Anticipated to be the same amount each month and paid for in the month the expense is incurred.

·         Car: Anticipated to be the same amount each month and paid for in the month the expenses is incurred.

·         Bank charges and interest: Anticipated to be the same amount each month and paid for in the month the expenses is incurred

·         Equipment rental: To be paid for in monthly payments.

·         Income tax: Amount for tax of the prior year and to be paid in the next season

·         Insurance annual premium: To be paid quarterly, semi-annually or annually in equal installments.

·         Loan repayment: Amount is the same each month and paid in accordance with the monthly schedule  furnished by the lending institution

·         Office supplies and expenses:  To be paid in month following receipt of invoice and supplies to be purchased on a quarterly basis

·         Licenses: To be paid upon due date

·         Telephone: To be paid for quarterly in month after receipt of bill.  Amount expected to be the same each quarter

·         Utilities:  Expected to fluctuate with weather conditions and to be paid for quarterly.

·         Wages and Benefits: Wages to increase after pay review.  Amount otherwise considered to be the same each month and paid one month in arrears.

·         Miscellaneous: Expected to be the same each month and paid for in the same month the expenses incurred.

Question:

Market  Study/Analysis can help a prospective business owner to determine whether or not there is a demand for a particular product.  Identify and explain all the steps involved in the scientific method of market analysis.

Answer:

Conducting A market Study – market study is one of the most important aspects of a feasibility study since it is herein that the nature and the extent of the problem towards which the project is directed are identified and quantified. 

Market Study involves:

i.                    An assessment of past and present demand and supply conditions and characteristics

ii.                  An assessment of present and future behavious of the demand and supply conditions and characteristics

iii.                An assessment of the resulting demand supply gaps, and

iv.                 A provision of the ground-work for the subsequent assessment of:

(a)   Costs, which depend upon the alternative project sizes, locations and technical processes that flow from the specification of the problem;

(b)   Benefits, their identification and measurement

The Essential Steps in Market Study

The approach to follow in carrying out a market study for a proposed project may consist of the following steps:

Step I

Define the market envisaged for the project output both in the sectoral and geographical contents. From the sectoral viewpoints, the two broad categories are the  consumers demand and the producers demand.  The consumers demand of the project output is determined by the amount of the output needed by buyers who make direct use of the product for consumption purposes.  The producers’ demand is a derived demand derived in the sense that it is demand expressed by the extend and levels or use to which the project output is to make in producing another final product.

From the geographical viewpoint, the territorial boundary terms of regions, provinces, municipalities or some other terms of reference, must be delimited as precisely as possible so as to determine the size of the geographical area in which the project can exercise its influence.  It is within such geographical boundaries that data will be collected for the project study.

Step II

Estimate the total demand (both satisfied and unsatisfied demand) for the project output.  In achieving these objectives, do the following:

Stage 1:

Identify the principal determinants of demand for the particular good service under consideration, which can be used to derive reasonable approximation of the corresponding level of total requirements.  In the case of consumer demand, the strongest determining factors will in general be:

(a)   Population and

(b)   Per capital income – the higher the levels of these two variables, the greater the total, requirements of the project output will tend to be:

(c)    Price of the proposed project output:

(d)   The relative prices of other goods/services, particularly of those performing the same function with the proposed project output.

In the case or producer (investment) demand, the producers will want the goods/services provided by the project only insofar as it is needed in the production/distribution of their output.  Their demand for the output of the proposed project-exists because a demand also exists for their own product.  Their demand for the project output thus depends;

(1)   On the scale of the operations of the producers, buyer of the project output; and

(2)   Ultimately, on the level or demand of their own product

Hence, a consideration of the ultimate source(s) of demand of these producers’ final output is important on achieving a correct assessment of the determinants of producer’s demand of a proposed project output.

Stage 2

Evaluate the determinants of demand identified in stage 1 above.  To aid an evaluation of the determinants of demand for purposes of subsequent projections, we need to study the characteristics of past and present demand for the project output.

Quantitatively, the data to consider include:

i.                    Population in the geographical area of influence of the project

ii.                  Per capita income

iii.                Income distribution levels and growth of influence of past and present demand

iv.                 Competing products and of sources of supply

v.                   Geographical distribution of income levels, past and present demand;

vi.                 For marketed goods, prices of the projects and those of the competing products; and

vii.               Whatever else may be relevant to gain a fuller understanding of the situation

The above should be supplemented by such qualitative data such as:

i.                    Consumer types and behaviours

ii.                  The marketing system

iii.                Trends in government policies and their effects and

iv.                 Other such relevant consideration

Stage 3:

Project the current situation into the project’s life time.  The steps in projections include:

(1)   Forecasting:

The first step in projection is usually that of forecasting.  In making a forecast, future variables are derived under the assumption that the same forces operating on demand for the project will continue to operate and in exactly the same way.

Forecast can be undertaken in at least four ways:

(a)   By a simple extrapolation of the historical trend of demand

(b)   By i) First obtaining the impute co-efficient (in cases where the projects output can reasonably be considered as an input in the production process of the using entity)

ii)   Projecting using entity’s production level; and

iii) Deriving the demand for the project’s output on the basis of the co-efficient.

(c)    By making necessary inter-regional/inter-markets comparison:  In doing this, regions must not only be selected with caution, at a given point in time, but must also be comparable.

(d)   By: i) incorporating into a (set of) demand equation(s), the principal determinants identified in stage 1 above

            ii)  Then projecting the values of the determinants and

            iii) Deriving the corresponding level of demand for the project’s output

(2)   Conversion of Forecasts, derived into projections:

The forecast thus derived above are then converted into projection by bringing in modifications that may result from consideration of the following:

(a)   Possible changes in structural relationships in the demand over the projections period.  Where possible, this would include changes in technical co-efficient arising from Technological change.

(b)   Possible shifts in economic policy and their corresponding effects

(c)    Possible changes that the project itself may include.  If any change is expected from this source, then, two sets of projections would emerge; on under the assumption that the project is non-existent, and the other under the assumed operation of the project.

Step 3

Evaluate the existing supply conditions of the proposed project output.  The approach to adopt may be described in the following stages:

Stage I

Investigate if in the first place there is any supply source at all

Stage II

If so, examine such sources of supply particularly;

i.                    Their combined output

ii.                  Their distribution methods and patterns

iii.                Their capacities and capacity utilization

iv.                 Their costs; and

v.                   Other relevant characteristics

As in the case of the study of demand, have these data on an historical basis.  Have also, some knowledge of the effect of economic policy on these variables.

Stage III

Using the approach and considerations essentially similar to these relating to demand, project the supply of the project’s output into the projects lifetime.  However, in the case of supply, make two sets of projections for each policy assumption one with the project and the other without project.  

Note: in the case of demand, with and without projections are necessary only when the project itself is expected to generate changes in demand.

Step IV:

Measure the extent of the current gap in demand for proposed project output.

The above may be achieved in stages:

Stage 1:

Consolidate the information so far obtained in the past and current demand and supply conditions and obtained a measure of the current gap in the demand for the proposed project output.

Pinpoint, also the underlying reasons for whoever bottlenecks may currently exist, to allow for achieving proper solutions to such problems.

Stage 2

Determine the extent of future need (net demand) and distribution of the project’s output.  This can be achieved by consolidating the projected demand and supply levels without the project.  This serves as starting point for the identification of alternative sizes, location, and specifications of the proposed project.

In  additions to supply provided by project’s operations, narrow down, if not altogether close up, the projected gap between demand and supply (ex project).  Some additions, in turn, generate the benefits that would determine whether or not the costs that the project would involve would be justified.

(3)