Financing your business. Small Scale Business Management. Module 3

Financing your business Small Scale Business Management Module 3

ACKNOWLEDGEMENTS This module is a product of many people who worked hard to see it ready for use by BOCODOL learners. BOCODOL wishes to acknowledge contributions of the following Revision Team Lydia Lapologang Makgoma Tebogo Moagi Lobakeng Eric Setabo Yunobia Segokgo Gaolatlhe Masire Writing Team Kwirirai Zvevhu Eric Simukanga Stanley Tichapondwa Modesto Lobakeng Eric Setabo Frances Combs Annabel Catherine Dunn Yunobia Segokgo Felicity Chitonho 2011 BOCODOL The 2006 Winner of the Commonwealth of Learning Award of Excellence for the Institutional Achievement in Distance Education First Edition Published 2003 Revised Edition Published 2011 Please direct correspondence to: The Executive Director BOCODOL Private Bag BO 187 Tel: 3646100 Fax: 3181473 Gaborone, Botswana ISBN 99912-86 09 4

Contents Page Introduction to Module 3 i Topic 1: What type of finances are available? 1 Topic 2: How much money do I need to start the business? 16

Introduction to Module 3 Financing your business The title of this module is Financing Your Business. It is divided into two topics, and these are: Topic 1; What Type of Finances are Available? and Topic 2; How Much Money Do I Need to Start the Business? As you will notice each of the two topics is presented in question form, so as to stimulate you to think how best to manage your small business as far as sources of finance and the amount to require are concerned. Topic 1 explains the idea of capital. Without capital you might as well forget about running or starting a business. The topic takes through possible sources from which you can borrow money. The interest charged varies from one source to another. This section of the topic thus seeks to provide useful knowledge regarding how best to finance your business. When you have resolved the issue of how much capital you require, it become essential to prepare a Business Plan. Topic 2 explains what a business plan is, and teaches you how to prepare your own plan. A business plan has been likened to a map with different directions to follow on a given journey. Therefore, this topic is necessary for every serious-minded entrepreneur. i BOCODOL

Introduction Topic 1 What Type of Finances are Available This topic is meant to equip you with the knowledge of different sources of finance for the business as well as procedures to be followed when sourcing finance. It also leads you to consider the advantages and disadvantages of each of the sources of finance from which you can borrow. As a starting point, what sources of finance are available to you? Learning Objectives After working through this part 1, you should be able to: identify different sources of finance for the business discuss procedures followed when sourcing finance fill in loan or credit application forms. Contents List 1.1 Your own capital 2 1.2 Borrowed capital 3 1.3 Supplier credit 7 1.4 Instalments buying and leasing 9 1.5 What we have learnt 10 1.6 Glossary 10 1.7 Self- assessment exercise 11 1.8 Answers to activities 11 1.9 Answers to self-assessment exercise 15 1

1.1 Your Own Capital To do any business, you need some money to start with. Money used to start a business is called capital. It is usually brought in at the start of the business by the owner, however, the owner can bring in more capital if necessary when the business is already running to expand the business. The advantage of using own capital is that the owner does not need to pay back the money. The main disadvantage with own capital is that the amount is usually very little, not enough to finance the business. Read the following situation and do the activity that follows: Tumelo has been working as a cashier at one supermarket in the city. Every month she has been saving P100 with Great Five Bank. After five years, Tumelo resigned from work and started a business of selling food at a busy industrial site. She had only P6 000 from the savings plus P1 000 bank interest earned from savings. At first this money seemed to be too small, but she managed to supply a few plates at the beginning, and later on increased the food she was selling. Activity 1A 1. Tumelo started a business from personal savings (True/false) 2. Tumelo used her own capital. ( True/False) 3. Your own capital is money that you saved to start business. (True/False) 4. Tumelo did not have money to start a business. (True/False) 5. Tumelo had only P7000.00 for her business. (True/False) Now compare your answers with the suggested solutions at the end of the topic. You have seen that your own capital can be raised from personal savings over a period of time. State some ways of raising own capital apart from personal savings. 1. 2. Some of the possible ways are: (a) Selling cattle Selling goats etc. 2

1.2 Borrowed Capital As said earlier, capital is money used to start a business. This can be your own money that you have saved over a period of time or the money you get after selling some assets. Borrowed capital on the other hand, is money that does not belong to you, but which you are given by someone, or by the bank for the purpose of starting a business. Let us work on the following activity before we discuss borrowed capital Activity 1B 1. List any three sources from which you can borrow money to start a business. (a) (c) 2. List any two functions of those sources. (a) 3. Do you like borrowing from any of these sources? Yes/No 4. Suggest reasons for your answer and discuss with your friends. (a) Now go at the end of the topic for suggested solutions. Borrowed capital can be looked at in several ways. Let us look at the following ways discussed below (a) Money borrowed from commercial banks (i) Loan This is money borrowed and payable in installments over a specific period of time. This is usually a large amount of money. The lender usually charges the borrower interest on money borrowed; the borrower will therefore pay loan money plus interest. The borrower may be required to pay a certain amount every month. These are called monthly installments. The borrower and lender can make arrangements that suit both of them. (ii) Overdraft This is a situation where the bank allows an accountholder to withdraw more money than he/she actually has in the account. This is usually a small amount of money which the accountholder will repay within a short period of time. 3

Now do the activity below. Activity 1C Below is a Loan application form from a bank. Complete the blank form and discuss with your partner. Now go to page end of the topic to view a filled in form. BANK LOAN APPLICATION FORM 1. MY CREDIT DETAILS Yes, I would like to apply for a: No Mathata loan Other Loan Overdraft Amount required; Pula Period (months) Purpose of loan/ overdraft Full name: Mr/ Mrs/ Miss. (as per I.D card/omang) First name Last name/surname Other name Nationality I.D(Omang)/Passport Date of Birth (see attached copy) Marital status 2. Present residential address-plot no. Street name, ward, village etc) Phone no. No. of dependants Home Mobile Work Length of stay at present address Previous residence address (if less than 3 years at current residence) Permanent address (if differrent from present address foreign nationals, please provide address in home country) Name and Addressses of Relatives/ Family Members Type 1. Full Name Telephone No. Address Occupation Employers 4

2. Full Name Telephone No. Address Occupation Employers 3. MY SPOUSE S DETAILS Full name: Mr./Mrs./ Miss (as per I.D/ Omang) First name Last name/surname Other name Nationality ID (Omang)/Passport Date of Birth Phone no. Employer name Home Mobile Work No. of years with employer Work address 4. MY SECURITY Please list details of all the security offered ( e.g value of security, details, identification, etc) Remember to enclose documentation that evidences the security Value Signature of applicant Refer to the end of the topic for suggested answers. Information given will vary according to different individuals. Money borrowed from other financial institutions These are other lending institutions besides commercial banks; (i) Government owned lending institutions They mainly assist people to start business. Government charges lower interest rates compared to other lending institutions. This is mainly to encourage people to start businesses. Examples of these are Citizen Entrepreneural Development Agency (CEDA), National Development Bank NDB), etc. (ii) Non- governmental lending institutions This includes women clubs, youth clubs, Women Finance House etc. Before we proceed, try Activity 1D 5

Activity 1D 1. List four advantages of getting capital from such organisations as Women Finance House Botswana, CEDA, NDB, etc. Write your answers in the spaces provided and compare with those listed by your colleagues. (a) (c) (d) Refer to the end of the topic for suggested answers. (c) Other sources of finance Money can also be borrowed from friends and relatives to start or run a business. Money from micro-lenders has higher interest rate than from banks and it is not suitable for starting a business since it is repaid in a short period of time and is expensive. Limited companies raise capital through selling shares and debentures. (i) Shares Shares are part ownership of a company. Companies sell shares to raise capital. People who buy shares from a company are called shareholders. They partly own the company they have bought shares in. Shareholders are paid a portion of the company s profits as a reward for investing in the company. This portion of profits is called dividends. (ii) Debentures These are loans to a company. People who buy debentures from a company are called debenture holders. Unlike shareholders, they do not own the company. They have lent money to the company and are therefore owed by the company. Debenture holders earn interest for their dividends. Activity 1E Complete the following table. In each case, the first item is done for you. Capital (a) Own capital Source 1. Selling cattle 2. ------------------------- 3. ------------------------- Borrowed Capital 1, Commercial banks 2. ------------------------- 3. -------------------------- 4. ---------------------------- Discuss the answers with your friends or family members before checking suggested answers at the end of the topic. 6

1.3 Supplier Credit Imagine you do not have enough money to buy your stocks, and you know some suppliers like Trade World, Trans Africa, Metsef, etc sell stocks on credit and can be paid after a month or two. You also know that the stocks will be resold before the end of one month for cash. What will you do? I will Definitely you will apply for credit at that wholesaler. Buying on credit means buying goods and paying for them at a later date. Buying on credit helps businesses to obtain goods even if they do not have cash. However, credit suppliers face a risk of not being paid back by customers. Now try Activity 1F Activity 1F 1. List three suppliers whom you know give credit to customers. (a) (c) 2. State three reasons why you like supplier credit. (a) (c) 3. Attached is a Credit Application form from a Credit Supplier. Complete the form and discuss with your tutor or other interested people. NAME OF CUSTOMER CREDIT APPLICATION FORM NAME OF CUSTOMER TRADING NAME TYPE OF BUSINESS POSTAL ADDRESS TELEPHONE Nos. FOR PRIVATE COMPANY ONLY NAME OF DIRECTOR (S) 1. 2. 3. 4. FAX No. ADDRESS 7

CONTACT PERSON-(PAYMENTS) NAME OF BANK BRANCH ACCOUNT NUMBER TRADE REFERENCES ADDRESS TELEPHONE 1. 2. 3. I/WE terms of Invoicing (a) Acknowledge that unless special arrangements are made, in writing, payment shall be... days of Undertake liability for any cost incurred by you (with interest ) for collection in the event of our failing to make timeous payment to you. (c) Acknowledge that although risk in all goods sold to us shall pass immediately upon delivery, ownership therein shall remain vested in until payment has been made. SIGNED. COMPANY SEAL DATE DESIGNATION I.D NO.... FULL NAME OF SURETY ADDRESS OCCUPATION SIGNATURE Check at the end of the topic for the suggested solutions. Now attempt Activity 1G Activity 1G 1. List three advantages of supplier credit over providing your own capital. (a) (c) 2. From your business, list the items which you think can be bought using supplier credit. (a) (c) 3. Which source of credit do you prefer between supplier credit and micro-lenders? I prefer 8

4. State two reasons for your answer to 3 above. (a) Now turn to the end of the topic for suggested responses. 1.4 Instalment Buying and Leasing If you are having a business or you intend to start one and you do not have the land, buildings or any structures to carry out business on, what two things will you do? (a) Assets are resources owned by the business; eg, motor vehicle, furniture etc. Buying these assets requires a lot of cash. Many small scale business people do not have large sums of money to buy these assets. The only alternative is to buy on installments or lease. (a) Buying on instalments This is similar to supplier credit. The only difference being that the buyer cannot have ownership of the items until they are fully paid for. This is also called Hire Purchase Agreement. The following are its advantages: (a) Business person can quickly obtain assets to use in the business. Payments are spread over a long period. (c) The business person can use the assets to earn more money for the business. Now reflect these issues by doing Activity 1I Activity 1H 1. List three advantages of Hire Purchase over cash buying. (a) (c) Turn to the end of the topic for suggested answers. Leasing If you are staying in town, are you staying in your own house? If you are running a business, are you doing it in your own buildings? If you are having your own house and you are doing business in your own buildings then you are one of the lucky few! 9

Leasing is a situation in which one person uses another person s property by paying rent. This is a form of business finance in that the lessee saves money that he/she was supposed to use for buying the property and uses it to buy goods for resale at a profit. Take a pause and do Activity 1I. Activity 1I 1. What are the advantages of leasing property over buying it? (a) (c) 2. The money paid for leasing a property is called Turn to the end of the topic for suggested answers. 1.5 What we have learnt In this part we have learnt that business can be financed through: (a) personal savings over a period money raised after selling domestic animals like cattle, goats etc. (c) borrowed money from Commercial Banks, Finance Houses, friends and relatives. We have also discovered that borrowing money from micro-lenders is very expensive and cannot finance a new business because the borrowed money is repaid in a short period with higher interest rates. We are now also aware of other sources of business finance like Hire Purchase Agreements, Lease Agreements, Instalments or Credit buying. 1.6 Glossary Hire Purchase Agreement: Credit Buying: Instalments: Finance House: Interest: Overdraft: Capital: Assets: Profit: Surety: a situation in which the buyer takes possession and uses the item but does not own it until paying for it in full a situation in which the buyer takes possession and uses the goods before paying for them periodic payments for a fixed time span an organisation specialising in offering loans to people for the purpose of starting business or buying assets money paid over and above the borrowed sum a situation whereby the bank allows you to withdraw more money from your account than what you actually have. money used to start a business Resources owned by a business e.g.land, buildings etc amount in excess of cost price a person who guarantees to pay the full amount out standing in the event that the debtor defaults payment 10

1.7 Self-assessment Exercise 1. List three sources of Loan (Borrowed) capital. (a) (c) 2. State two disadvantages of Loan capital. (a) 3. Write down two advantages of using your own capital. (a) 4. List any three finance houses that assist business people with low interest finance. (a) (c) 5. What does the abbreviation CEDA mean? CEDA means 6. What are the two major disadvantages of using finance from micro-lenders. (a) Discuss the answers with your tutor before turning to the suggested solutions at the end of the topic. 1.8 Answers to Activities Activity 1A 1. True 2. True 3. True 4. False 5. True 11

Activity 1B 1. (a) Commercial banks Finance houses (c) Friends, relatives etc. 2. (a) Lending money to clients Business advisory services 3. Either Yes or No are correct depending on your answers to question 4. 4. The reasons depend on your answers to 3 above but the following are suggestions Yes. Because it s a quick way of getting business finance. No. Because you pay interest on the borrowed money. Activity 1C BANK LOAN APPLICATION FORM 1. MY CREDIT DETAILS Yes, I would like to apply for a: Personal loan x Other Loan Overdraft Amount required; Pula 10 000 Period (months) 24 Purpose of loan/ overdraft Starting a business Full name: Mr/ Mrs/ Miss Ipotseng Mathaba Gladys (as per I.D card/omang) First name Last name/surname Other name Nationality Motswana I.D(Omang)/Passport 2642001 Date of Birth 15.11.72 (see attached copy) Marital status Single No. of dependants Nil 2. Present residential address-plot no. Plot 24271, Phase 4, Gaborone Street name, ward, village etc) Polokwane close Phone no. 377321 7162928 3181421 Home Mobile Work Length of stay at present address 2 yrs Type Rented Previous residence address Plot 725, Kutlwano Close (if less than 3 years at current Extension 2, Gaborone residence) Permanent address P O Box 241241 (if differrent from present address Gaborone foreign nationals, please provide address in home country) 12

Name and Addressses of Relatives/ Family Members 1. Full Name Boitumelo Masu Telephone No. 241369 Address P O Box 211 Francistown Occupation Driver Employers T T Transport 2. Full Name Portia Tsatsi Telephone No. N/A Address P/Bag Br 402 Occupation Cashier Employers Ms Veg 3. MY SPOUSE S DETAILS Full name: Mr./Mrs./ Miss (as per I.D/ Omang) First name Last name/surname Other name Nationality ID (Omang)/Passport Date of Birth Phone no. Home Mobile Work Employer name No. of years with employer Work address 4. MY SECURITY Please list details of all the security offered ( e.g value of security, details, identification, etc) Remember to enclose documentation that evidences the security Value 20,000 House Activity 1D 1. (a) Low interest rates. Longer repayments periods. (c) Free business advisory services. (d) The schemes do not discriminate against the poor with inadequate property to use as security. This is known as collateral. Ipotseng Signature of applicant 13

Activity 1E Capital Source (a) Own capital 1. Done for you in the activity 2. Personal savings 3. Selling goats etc. Borrowed Capital 1. Done for you in the activity 2. Finance houses 3. Friends and relatives 4. CEDA Activity 1F 1. (a) Trade World Trans Africa (c) Metsef 2. (a) You do not need cash to buy your stock You can pay for your stock after you have sold them. (c) You can use your money for other things instead of buying stocks 3. Your tutor will supply answers to this activity. Activity 1G 1. (a) Cheap source of finance (No interest). (c) You can run your business without cash. You can also sell on a shorter credit period to your approved customers without incurring a loss. 2. The answer here depends on your type of business but usually goods which sell fast are more preferred. Examples include: (a) Soft drinks Tobacco (c) Beer (d) Other food stuffs 3. Supplier Credit 4. (a) It is a cheaper source of finance. It forces you to remain in business rather than liquid cash which you can use for other purposes. Activity 1H 1. (a) You can quickly use the item before you pay for it. You can quickly generate more money for the business from using the hired assets. (c) No need for large sums of money at once. Activity 1I 1. (a) Leasing is cheaper than buying. When you think of changing the business there is no loss of funds committed in fixed assets. (c) Only a small portion of borrowed money can pay rent, the other can be used to earn profit. 2. Rent 14

1.9 Answers to Self-assessment Exercise 1. (a) Commercial Banks Finance Houses (c) Micro-lenders, friends, relatives etc 2. (a) You pay interest every year or over half a year. When the business fails before you pay the loan in full, your personal property may be confiscated. 3. (a) No interest expense When the business fails no one troubles you. 4. (a) CEDA- Citizen Entrepreneurial Development Agency NDB National Development Bank (c) Women Finance House Botswana 5. CEDA - Citizen Entrepreneurial Development Agency 6. (a) High interest rates Shorter repayment period 15

Topic 2 How Much Money Do I Need to Start the Business Introduction In Topic 1 we talked about the types of finance available for business. Having known the different sources of finance, you would like to know how much exactly you need for your particular business. This is the question to be answered in Part 2. Why do you think it is important to be certain how much money you need in order to start? Does this picture remind you anything. Learning Objectives After working through this Topic 2, you should be able to: Decide how much money is required to start a business of your choice Explain how money is allocated to various expenses Specify the different types of expense involved in the business Contents List 2.1 Introduction to business plan 17 2.2 Business plan 18 2.3 Overall cost of the business 19 2.4 Capital expenditure 21 2.5 Current revenue expenditure 22 16

2.6 What we have learnt 23 2.7 Glossary 24 2.8 Self-assessment exercise 23 2.9 Answers to Activities 25 2.10 Answers toself-assessment exercise 27 2.1 Introduction to Business Plan Read the following extract and do the activity below it. Sebetlela, (Assistant Finance and Development Minister), who was addressing a kgotla meeting in Palapye, said applicants for micro and small projects will not be required to make any contribution as it was the case with previous financial assistance schemes. CEDA s prospective beneficiaries will have to show an understanding of the intended business and be able to explain their Business Plan when the agency interviews them. The prospective beneficiaries will also be expected to prove that the intended business is viable; how it will compete with similar existing businesses; and who will be running it. He said CEDA has a grace period, the duration of which (Botswana Daily News August 6, 2001 No. 145 Page 1) Activity 2A 1. Does your business or your intended business fall under micro and small projects? (Yes/No) 2. Who do you intend to run your business or prospective business? (Self/A hired manager) 3. Do you know how much money you need to start or run a business? (Yes/No) 4. Suggest three reasons why the Assistant Minister said that business people must be able to explain their business plan. (a) (c) 5. What do you think are the uses of a business plan? (a) (c) Discuss your answers with friends before turning to the end of the topic for suggested responses. 17

2.2 Business Plan We have mentioned a business plan several times. What do you think it is used for? A Business Plan is also termed a proposal or a prospectus. It is a document written by the entrepreneur setting out goals and objectives of the business along with the steps necessary to achieve them. The functions of a Business Plan are listed below: To set out reasons for starting a business It replaces oral dreams and guess work by facts and figures Can be used for loan application when borrowing money Used as an operational plan to give the business some direction and focus Acts as a standard to measure actual performance. A business without a business plan is most likely to fail because it does not have any direction to follow. However making a business plan requires some time, research and hard work. As a business person you should not spend any of your money before you have completed a business plan. If you do so, any mistake would mean losing sums of money. If you seriously want to develop your business, it is of great value to prepare and use a business plan. A Business Plan contains: Estimated Capital Expenditure e.g. expenses to buy equipment, land etc and the time for doing that: Estimated time and expenditure for the stocks to be sold. Estimated time and expenditure of other business costs like advertising, travelling, fuel etc. Predicted time and amount of money to be received from the sale of stocks. Predicted time and amount of loan repayments and interest payment. Estimated time and value of loan to be received in future. Profit forecasts of the business. Estimated overall cost of the business. Now, you can see that with a business plan you will have the results of a business before it even starts operating and all the expenses will be incurred as per plan. Like a building plan for a house, your business plan will tell what you are going to do and when you are going to do it. Now try Activity 2B Activity 2B 1. Briefly explain what is a business plan? 2. List three contents of a business plan. (a) (c) 3. State two uses of a business plan. (a) 18

4. List three ways in which you can use your business plan to know how much money you need to start a business. Discuss with colleagues or family members. (a) (c) 5. With your partner, discuss why it is always important to draw a business plan before you start to spend money in any business. (a) (c) (d) Now turn to the end of the topic for suggested answers. 2.3 Overall cost of the business Try Activity 2C before we proceed. Activity 2C 1. List three kinds of expenses mentioned in 2.1. above, that a business plan can show. (a) (c) 2. State two forms of income that has been said to be contained in a business plan. (a) 3. A business plan has been said to be like a Building Plan for a house. With your colleagues, discuss how these two plans are similar and write down the similarities. (a) (c) (d) 4. When a builder has a Building Plan for a house, he can know in advance the number of bricks to be used, bags of cement, roofing sheets and time to be spent to finish a house. List the costs that enable a business person to know how much money to start a business with. (a) 19

5. If you are already having a business, discuss with your friends, how you came to know the amount to start with. (a) Discuss the answers with your colleagues before turning to the end of the topic for suggested responses. To know the amount of money needed to start a business, you need to draw up a business plan. A business plan is drawn as follows: First you need to carry out a research on the things that you can sell to customers, at what price and how many of those things you can sell at a given time. (market research) Secondly, you need to know how much money you can spend on buying the stocks, travelling, food, etc. You also need to know the assets which you can use to carry out your business e.g. land, buildings, fixtures, motor van, water taps etc. After that, find out the costs of these assets. Also estimate the business running costs you can incur before your business gives you enough to pay for the costs. (As any kind of business starts by expenses before income). Now add all the expenses (and ignore the income) so as to get the amount of money to start business with. Example Mr Moabi wants to start a Tuck-shop business at a nearby secondary school. His estimated costs are as follows. (a) Cost of buying a Portable Tuck-shop P3000.00 Delivery of the tuck-shop P 100.00 (c) Initial stock P 400.00 (d) Licence from City Council P 50.00 (e) Transport, lunch, etc before starting to sell P 500.00 Amount of money needed to start P4050.00 Now, attempt Activity 2D Activity 2 D Do this Activity in groups. 1. Mrs Moameng intends to start a Poultry Project after seeing that all her chickens will be bought as and when they are due for sale. Her estimated costs are as follows: (a) Annual rental of land and buildings payable in advance P35 000.00 Improvements to land and buildings will cost P2000.00 (c) Electricity is estimated to cost P1500.00 for the first batch P1500.00 (d) Water to be consumed by the first batch is estimated at P 500.00 20

(e) Estimated cost of 5000 chicks to begin with P10000.00 (f) Estimated labour, transport, etc at the beginning of the project P5000.00 (g) Expected income from first batch P20000.00 Calculate the amount of money Mrs Moaneng needs to start her business? 2. List three possible problems one can face if he/she can start a business without a business plan. (a) (c) 3. State two possible reasons for not including the expected income when finding out how much money is needed to start a business. (a) Now turn to the end of the topic for suggested answers 2.4 Capital Expenditure This is money used to buy fixed assets or add value to them. It includes costs of getting the fixed asset ready for use, eg, installment of the asset, etc. Before we proceed, try Activity 2E on your own, then check suggested responses on page33 Activity 2E 1. From your business, list two capital items. (a) 2. State three uses of such assets. (a) (c) 3. Do you think you can run your business successfully without such items? (Yes/No) 21

4. State your reasons for your answer to question 3 above. (a) (c) Now turn to the end of the topic for suggested answers. Now, you have seen that it is necessary to have assets for you to run a business. Those assets do not just come by themselves, they are bought. Money that pays for these assets is called Capital Expenditure. 2.5 Current/Revenue Expenditure We have learnt that Capital expenditure is money paid to acquire assets to use in the business. These assets do not bring direct income as they are not bought for the purpose of reselling. Re-visit section 2.4. and list 3 assets that cause capital expenditure. (a) (c) These assets include buildings, land, machines, etc. Before you read on, work on Activity 2F Activity 2F 1. If you have a business, what things do you sell to earn money?, or if you want to start a business, what things do you intend to sell in order to earn money? List four of them. (a) (c) (d) 2. Do you use the above items (answers to 1 above) for any other purpose except selling? (Yes/No) 3. Give a reason for your answer to question 2 above. Reason: You can now turn to the end of the topic for suggested solutions. Revenue expenditure is money spent on the day to day running of the business, e.g. buying stock and paying for expenses. Expenses are costs of running a business e.g. rent, electricity, repairs of assets etc. 22

Now try Activity 2G. Activity 2G 1. List any three expenses other than the ones mentioned above. (a) (c) Discuss the answers with your partner before turning to the end of the topic for suggested responses. As you can see these expenses are found in every business and are unavoidable. These expenses are often small and they are called Sundry Expenses. Sundry Expenses, like any other expense, are considered in finding out the amount to start business as they can also be incurred before the business starts operating. Examples of such expenses include: (a) Postage stamps Lunch, tea, etc (c) Cleaning materials (d) Fuel (e) Stationery, etc. Often, even in big organisations, these expenses are paid by cash not cheques because they are frequent but small in nature. 2.6 What We Have Learnt In Topic 2, we have learnt that: In order for us to be able to find out how much money we need to start a business, we must first of all draft a business plan. A Business Plan sets out the reasons for starting a business. A business without a plan does not have a clear direction nor does it have a standard. In finding out how much exactly we need to start a business, all the expected costs are included and the expected income ignored. Capital Expenditure and Petty Expenditure help the business to run, but Current/Revenue Expenditure directly brings money into the business. 2.7 Glossary Assets : Resources owned by the business Capital Expenditure : money spent in acquiring long term assets e.g. buildings CEDA : Citizen Entrepreneurial Development Agency Income : Money that we receive after selling something 23

Sundry Expenses Small expenses found in every business e.g. postage stamps, fuel, etc Revenue Expenditure : Money spent on day to day running of the business. Viable : Doing very well or performing to expectations 2.8 Self-assessment Exercise 1. List two examples of each of the following: (a) (i) (ii) (i) (ii) (c) (i) (ii) Capital Expenditure Revenue/ Current Expenditure Sundry Expenses 2. Tebogo wants to start a business of sewing school uniforms for local schools. Her estimated income and expenditure is as follows: 5 sewing machines P15 000.00 Factory rent per month paid in advance P 4000.00 Sewing thread P 600.00 Fabrics P 1400.00 4 Tailors monthly salaries P 2000.00 Estimated income from sale of uniforms per month P22 000.00 Electricity estimated at P600.00/month P 600.00 Petty expenses estimated to be P 400.00 Find how much money Tebogo needs to start her business? 24

2.9 Answers to Activities Activity 2A 1. The answer depends on the nature of your business. 2. Again depends on your choice. 3. Both answers are possible. 4. If you are able to explain your business plan, then you are able to run your business and in the event that the business fails, you will be knowing the cause of failure and corrective action you may take. 5. (a) To know how much money you need to start a business. To set a standard with which actual performance will be measured. (c) To act as an operational plan giving direction and guidelines to the business. Activity 2B 1. A business plan is a written down document by the entrepreneur, setting out goals and objectives of the business, along with steps necessary to achieve them. 2. (a) Estimated Capital Expenditure (c) Predicted amount of money to be received at different times. Predicted current expenditure. 3. (a) Can be used as an instrument for sourcing finance. Sets a standard to be a yardstick for the business. 4. (a) By identifying expenses to be incurred. Separating the expenses into appropriate classes. (c) Totalling up expenses that are to be incurred before any income is earned. (d) Identifying equipment that can be rented and that which can be bought. 5. (a) To know whether or not it is possible to start the business. (c) (d) To know how much money you need to start that business. A mistake on the paper can be corrected with much less money and effort than a mistake made on the market. To know how much money to spend on what and at what time. Activity 2C 1. (a) Capital expenditure. Current or revenue expenditure. (c) Petty expenses. 2. (a) Income from selling stocks. Income from loans. 25

3. (a) They both show steps followed to achieve the ultimate goals. They both tell that each stage has to be evaluated before proceeding to another stage. (c) They both show the time span to achieve some goals. (d) They both help to estimate the total amounts needed for the projects. 4. (a) Capital expenditure. Revenue/Current expenditure. (c) Petty expenses. 5. The answers to this question vary but the ones below can be alternatives (a) By consulting business advisors. By guessing, trial and error etc. Activity 2D 1. Annual rental P35000.00 Improvements P 2000.00 Electricity P 1500.00 Water P 500.00 Cost of chicks P10000.00 Labour, Transport etc P 5000.00 Amount needed to start business P54000.00 2. (a) Difficult to know what amount to start with. Difficult to obtain money from banks. (c) You may do things at wrong times. 3. (a) Expected income is not certain. Expected income comes after the business has already started. Activity 2E 1. Answers vary, but the list below is simply general suggestions. (a) Land Buildings (c) Fixtures, chairs (d) Motorvan, etc. 2. (a) Carrying stocks from suppliers to the business. Shelving my stocks. (c) For my customers to sit. 26

3. No 4. (a) Customers who may want to rest might go to other businesses. Deliveries may delay if I am hiring a vehicle from someone or waiting for the supplier to deliver. (c) Without fixtures, it will be difficult to shelve stocks. Activity 2F 1. (a) Soft drinks Beer (c) Cooked food (d) Groceries 2. No 3. These are bought specifically for re-selling at a profit. Activity 2G 1. (a) Tea Stamps (c) Cleaning materials. 2.10 Answers to Self-assessment Exercise 2 1. (a) (i) Buildings (ii) Motor van (i) Soft drinks (ii) bread, sugar, tea etc. (c) (i) Postage stamps (ii) Milk for staff tea (iii) Transport cost, lunch allowance etc. 2. Sewing machines P 15000.00 Factory rent P 4000.00 Sewing thread P 600.00 Material cloth P 1400.00 First month salaries P 2000.00 Electricity P 600.00 Petty expenses P 400.00 Amount needed to start business P 24000.00 27