TOPIC ONE

CONCEPT OF BUSINESS
1.1 CONCEPT OF BUSINESS
Business is an organized approach to providing customers with the goods and services they
want. The word business also refers to an organization that provides these goods and services.
Most businesses seek to make a profit - that is, they aim to achieve revenues that exceed the
costs of operating the business.
The concept “business” has been defined by different authors in different forms. Most of the
definitions are tending towards the same direction as some key words keep reappearing in the
description. Business means a commercial enterprise or establishment that trades in goods or
services. A business may be defined as an institution organized and operated to provide
goods and services to the society with the objective of earning profit. L.R. Dickson has
defined business as a form of activity pursued primarily with the object of earning profit for
the benefit of those on whose behalf the activity is conducted. “Business involves production
and/or exchange of goods and services to earn profits or in a broader sense, to earn a living.
The term business should be used to convey the same meaning as the term trade simply
denotes purchase and sale of goods whereas ‘business’ includes all activities form production
to distribution of goods and services. It embraces industry, trade and other activities like
banking, transport, Insurance and warehousing which facilitates production and distribution
of goods and services. According to F.C. Hopper “The whole complex field of commerce and
industry which includes the basic industries, processing and manufacturing industries, and the
network of ancillary services: distribution, banking, insurance transport and so on, which
serve and inter penetrate the world of business as a whole” are called business activities.
To a layman, business is the act of buying and selling at least going by the mentality of an
average Nigerian. To others, business may mean any activity that brings profits. But these are
totally incorrect. Buying and selling remain fruitful effort if there is nobody who needs the
things to buy or sell; neither can profit be made at least on a continuous basis. If the final
consumers of goods/services do not get satisfaction from goods/services they buy, there is no
necessity for business activity. What is actually a business must of necessity be determined
from the perspective of the consumers (the market) and not the perspective of the product or
personality of the producer of goods/services. What this translates to is that it is not the
entrepreneur (or his officials) that determines what business is, but the consumers. This is
because the purpose of any business is not to produce goods/services alone but to provide
utility or satisfaction; which is what consumers actually buy in a product or service. It is for
this reason that Peter Drucker (1979) claimed that there is only one valid definition of
business purpose: to create customer.
Business is the sum total of all activities involved in the production and marketing of goods
and services for the purpose of satisfying the need of the people, and for making a profit. Put
in another language, the term ‘business’ can be defined as the planned activities of
individuals or group of people aimed at producing and selling, for a profit, the goods and
services that satisfy the needs of consumers.
In other words, when a person or group of persons engages in a need-satisfying activity, with
a view to making profit, they are said to be in business.
For our purpose therefore, a business will be defined as an enterprise (public or private) that
engages in the production and/or distribution of goods/services that provide satisfaction for
consumers. Business can also be defined as an organization of individual or group providing
“utility”.
Business can be said to be an economic activity which is related with continuous and regular
production and distribution of goods and services for satisfying human wants. Let us consider
a few definitions:
 Brown and Clon (1997) define business as “The activities of an individual or group of
individuals in producing and distributing goods and services to customers.”
 Stephenson defines business as “The regular production or purchase and sale of goods
undertaken with an objective of earning profit and acquiring wealth through the
satisfaction of human wants.”
 According to Dicksee, “Business refers to a form of activity conducted with an
objective of earning profits for the benefit of those on whose behalf the activity is
conducted.”
 Lewis Henry defines business as “Human activity directed towards producing or
acquiring wealth through buying and selling of goods.”
Thus, the term ‘business’ means continuous production and distribution of goods and services
with the aim of earning profits under certain market conditions. It is an economic system in
which goods and services are exchanged for one another or money, on the basis of their
perceived worth. Every business requires some form of investment and a sufficient number of
customers to whom its output can be sold at profit on a consistent basis.
It is important to recognize that the term ‘business’ can be used loosely. It may be used to
describe a wide variety of activities or transactions that an individual or group may engage in.
When business is defined as a commercial activity engaged in as a means of livelihood, a
trade, a profession, occupation or a particular field of endeavour, it is obvious that the term
can be applied as a general term for most human activities. Specifically, however, business is
defined as any lawful human activity which involves the production and distribution of goods
or the rendering of services that satisfies human needs for the purpose of making a profit.
CHARACTERISTICS OF BUSINESS
The essential characteristics of business are as follows:
(i) It deals in goods and services: People in business are engaged in production and
distribution of goods and services. The goods may be consumer goods like bread, butter,
milk, tea, etc. or capital goods like plant, machinery, equipments, etc. The services may be in
the form of transportation, banking, insurance, warehousing, advertising and so on.
(ii) It involves sales or exchange of goods and services: If a person produces or buys a
product for self-consumption or for gifting it to another, he is not engaged in business. But
when he produces or buys goods to sell it to somebody, he is engaged in business. Thus, in
business the goods and services produced or purchased must be exchanged for money or for
goods (under barter system) between the buyers and sellers. Without sale or exchange of
goods the activities cannot be treated as business.
(iii) It involves regular exchange of goods and services: The production or buying and
selling activities must be carried out on a regular basis. Normally, an isolated transaction is
not treated as business. For example, if Mr. A sold his old car to Mr. B, it is not considered as
business, unless Mr. A continues to carry buying and selling of cars on a regular basis.
(iv) It requires investment: Every business activity requires some amount of investment in
terms of land, labour or capital. These resources are utilized to produce a variety of goods and
services for distribution and consumption.
(v) It aims at earning profit: Business activities are performed with the primary objective of
earning income by way of profit. Without profit it is not possible to survive for a long period.
Earning of profit is also required to grow and expand the business.
(vi) Business activities involve risk and uncertainty of income: We know that every
business aims of earning profit. The businessman who invests the various resources expects a
fair amount of return. But, in spite of his/ her best efforts, the reward he/she gets is always
uncertain. Sometimes he/she enjoys profits and also times may come when he suffers heavy
losses. This happens because the future is unpredictable and businessperson has practically
no control over certain factors that affects his/her earnings.
SCOPE OF BUSINESS
The scope of business is very wide. It includes a large number of activities which may be
classified under two broad categories, namely, Industry and Commerce. A description of the
activities which come under these two broad categories is given below.
INDUSTRY: The activities of extraction, production, conversion, processing or fabrication
of products are described as industry. These products of an industry may fall under any one
of the following three categories:
(a) Consumers Goods: Goods used by final consumers are called consumers goods. Example
of consumer goods Edible Oils, Cloth, Jam, Television, Radio, Scooter, Motor Car,
Refrigerator, Cell phone etc. come under this category.
(b) Capital Goods: Goods used in the production of other goods are described as produces’
goods. Steel produced by steel plant is used for fabrication into a variety of products such as
motor cars, scooters, rail Locomotive engines, ships, surgical instruments, blades, etc.
Similarly machine tools and machinery used for manufacturing other products also come
under this heading. These are also called capital goods.
(c) Intermediate Goods: There are certain materials which are the finished products of one
Industry and become the intermediate products of other industries. A few examples of this
kind are the copper industry, the finished products of which are used in manufacturing
Electrical Appliances, Electricity Wires, Toys, Baskets, Containers, and Buckets. Broadly
speaking, industrial activities may be classified into primary and secondary which are
explained in the following lines.
(i) Primary Industries: The following are some of the primary industries:
(a) Extractive Industries: They extract or draw out their products from natural sources such
as earth, sea, air. The products of such industries are generally used by manufacturing and
construction industries for producing finished goods. Farming, mining, lumbering hunting,
fishing, etc., are some of the examples of extractive industries.
(b) Genetic Industries: Genetic means parentage or heredity. Genetic industries are engaged
in breeding plants, and animals for their use in further reproduction. For breeding plants, the
seeds and nursery are typical examples of genetic industries. In addition, the activities of
cattle-breeding farms, poultry farms and the hatchery come under the category of genetic
industries
(ii) Secondary Industries: The following are the elements of secondary industries:
(a) Manufacturing Industries: These are engaged in producing goods through the creation
of what is known as ‘form utility’. Such industries are engaged in the conversion or
transformation of raw materials or semi-finished products into finished products. The
products of extractive industries generally become the raw-materials of manufacturing
industries. Factory production is the outcome of manufacturing industry. Manufacturing
industries may take any one of the following forms.
(i) Analytical: The basic material is analyzed and separated into a number of products. Oil
refining is an example of analytical industry. The crude oil is extracted from beneath the earth
and is processed and separated into petrol, diesel, kerosene, gasoline, lubricating oil, etc.
(ii) Synthetic: Two or more materials are mixed together in the manufacturing operations to
obtain some new products. Products like soap, cement, paints, fertilizers, cosmetics are
derived from this industry.
(iii) Processing: In this case, raw materials are processed through a series of manufacturing
operations making use of analytical and synthetic methods. Textiles, sugar and steel are
examples of this category.
(iv) Assembly Line: In assembly line industry, the finished product can be produced only
after various components have been made and then brought together for final assembly to be
converted into finished products. Production of automobiles, watches, televisions, bicycles,
railway wagons, etc., are the typical examples of the industry.
(b) Construction Industries: They are concerned with the making of constructing of
buildings, bridges, dams, roads, canals, etc. These industries use the products of
manufacturing industries such as Iron and Steel, Cement, Lime, Mortar etc., and also the
products of extractive industry such as stone, marble, etc. The remarkable feature of these
industries is that their products are not sold in the sense of being taken to the markets. They
are constructed and fabricated at fixed sites.
COMMERCE: The term commerce refers to the process of buying and selling-wholesale;
retail, import, export, enter port trade and all those activities which facilitate or assist in such
buying and selling such as storing, grading, packaging, financing, transporting, insuring,
communicating, warehousing, etc. The main functions of commerce is to remove the
hindrance of (i) persons through trade; (ii) place through transportation, insurance and
packaging; (iii) time through warehousing and storage; and (iv) knowledge through
salesmanship, advertising, etc., arising in connection with the distribution of goods and
services until they reach the consumers. The concept of commerce includes two types
namely: (i) Trade and (ii) Aids to trade which are explained in the following paragraphs.
(i) Trade: The term trade refers to the sale, transfer or exchange of goods and services and
constitutes the central activity around which the ancillary functions like Banking,
Transportation, Insurance, Packaging, Warehousing and Advertising cluster. Trade may be
classified into two broad categories as follows:
(a) Internal or Domestic Trade: It consists of buying and selling of goods within the
boundaries of a country and the payment for the same is made in national currency either
directly or through the banking system. Internal trade may be further sub-classified into
wholesale trade and retail trade.
(b) International or Foreign Trade: It refers to the exchange of goods and services between
two or more countries. International trade involves the use of foreign currency (called
foreign exchange) ensuring the payment of the price of the exported goods and services to the
domestic exporters in domestic currency, and for making payment of the price of the
imported goods and services to the foreign exporter in that country’s national currency
(foreign exchange).To facilitate this payment, involving exchange transactions, a highly
developed system of international banking under the overall control and supervision of the
central bank of the concerned country (Reserve Bank of India in our case) is involved.
International trade is carried on mostly in larger quantities both on Government account and
on private account involving both individuals and business houses.
BUSINESS RESOURCES
Business resources are the inputs which are required for effective and efficient running of a
business. These are: (i.) Human resources; (ii.) Financial resources (iii.) Materials resources;
(iv.) Time (v.) Opportunities
Human Resources: Human resources refer to the personnel required to run the business to
achieve the organization’s objectives. Human resources is important because it plans,
controls, organizes and co-ordinates all other resources to achieve maximum efficiency.
Financial Resources: This includes the money to float a business and to purchase other
resources. It is used to finance all aspects of a business such as purchase of machinery,
materials and payment of labour. It can be obtained through borrowing, selling shares,
retained profit etc.
Material Resources: This includes inputs - raw and semi-finished raw materials, equipment,
tools, plant and machinery which are needed for production.
Time: This involves making his right decision at the appropriate time. Individuals and
organization have to manage time properly in order to accomplish the dearly tasks.
Opportunities/Goodwill: These include facilities within the environment which the business
uses. They include water, roads, electricity, etc. the name and reputation of business which is
referred to as goodwill.
 LECTURE TWO
CONCEPT OF BUSINESS ORGANIZATION AND ITS FORMS
2.1 CONCEPT OF BUSINESS ORGANIZATION
Any institution organized and operated to provide goods and services to the society with the
objective of earning profit can be said to be a business organization. Business organisation
can be described as an entity that is both commercial and social, which provides the
necessary structures to achieve the central objective of trades in goods or services. This entity
carries out the activities involved in business. When people (two or more) are engaged
together using other productive factors of production to make goods or and rendering services
for satisfying other people (consumers) which the aim of either making profit or maximizing
wealth; business organization is said to be taken place.
Institutions whose primary goal is profit are generally known as business organizations or
business enterprises. A business enterprise is a decision- making unit concerned with serving
certain needs through the production and distribution of goods and rendering services at a
profit for the owners (Inegbenebor & Osaze, 1999).
A business enterprise is an organization engaged in the trade of goods, services, or both to
consumers. Miller and Farese (1992) refer to business enterprise as “any business
organization set up to exchange goods, services, and money in order to make a profit.” It can
be said to be a decision-making unit concerned with serving certain needs through the
production and distribution of goods and rendering services at a profit for the owners.
The distinguishing feature of business enterprises in relation to other institutions of society is
profit. For example, a government-owned medical laboratory may produce vaccines for
controlling certain animal diseases, but this activity is usually not carried out for the purpose
of making a profit. Similarly, a non-profit and non-government organization may render
services without the aim of making a profit.
2.2 FORMS OF BUSINESS ORGANIZATION
There are several ways to organize businesses in Nigeria, each having advantages and
disadvantages to be weighed against practical needs and goals. Before selecting a form of
organization, the following should be explored with an attorney and/or accountant:
- cost and complexity of formation
- tax and securities law implications for each form
- need for attracting additional capital
- investors' liability for debt and taxes
- the goals and purpose of the enterprise
Forms of Business Organization are as follows: -
(1.) Sole proprietorship
(2.) Partnership
(3.) Company (statutory and registered)
(4.) Co-operative society
SOLE PROPRIETORSHIP
The sole proprietorship is a form of business that is owned, managed and controlled by an
individual. He has to arrange capital for the business and he alone is responsible for its
management. He is therefore, entitled to the profits and has to bear the loss of business;
however, he can take the help of his family members and also make use of the services of
others such as a manager and other employees.
This type of business organization is also called single ownership or single proprietorship. If
the business primarily consists of trade, the organization is a sole trading organization. Small
factories and shops are often found to be sole proprietorship organizations.
It is the simplest and most easily formed business organization. This is because not much
legal formality is required to establish it. For instance to start a factory the permission of the
local authorities is sufficient. Similarly to start a restaurant, it is only necessary to get the
permission of local health authorities.
Features of Sole Proprietorship
The important features of a sole-proprietary organization include the following:
(i) Individual Initiative: One person is the owner in a sole proprietary form of organisation. It
is owned and open by one person
(ii) Risk Bearing: The proprietor is the sole beneficiary of profits in this form organisation. If
there is a loss he alone has to bear it. Thus, the risks of business are borne by the proprietor
himself.
(iii) Management and control: Management and control of this type of organisation is the
responsibility of the sole proprietor. He may, however, employ a manager or other people for
the purpose.
(iv) Minimum government regulations: The government does not interfere with the working
of the sole proprietorship organisation. However, they have to comply with the general laws
and rules laid down by government. It is easy to form.
(v) Unlimited liability: The sole proprietor has to bear the losses and is responsible for the
liabilities of the business. If the business assets are not sufficient to meet the liabilities, he
may also have to sell his personal property for that purpose.
(vi) Secrecy: All important decision taken by the owner himself. He keeps all the business
secrets only to himself.
(vii.) Limited finance: The formation and operation of a sole proprietorship business
does not necessarily requires huge capital. The business owner provides for
every resource that are needed in the organization.
Merits of Sole Proprietorship
A sole proprietary organisation has the following advantages:
(i) Easy formation: A sole proprietorship business is easy to form where no legal formality
involved in setting up this type of organization. It is not governed by any specific law. It is
simply required that the business activity should be lawful and should comply with the rules
and regulations laid down by local authorities.
(ii) Better Control: In sole proprietary organisation, all the decisions relating to business
operations are taken by one person, which makes functioning of business simple and easy.
The sole proprietor can also bring about changes in the size and nature of activity. This gives
better control to business.
(iii) Sole beneficiary of profits: The sole proprietor is the only person to whom the profits
belong. There is a direct relation between effort and reward. This motivates him to work hard
and bear the risks of business.
(iv) Benefits of small-scale operations: The sole proprietorship is generally organized for
small-scale business. This helps the proprietor’s family members to be employed in business.
At the same time such a business is also entitled to certain concessions from the government.
For example, small industrial organizations can get electricity and water supply at
concessional rates on a priority basis.
(v) Inexpensive Management: The sole proprietor does not appoint any specialists for
various functions. He personally supervises various activities and can avoid wastage in the
business.
(vi) Reduced Tax: The owner of a sole proprietorship business only pays personal income
tax which is always less than any other business tax.
(vii) The business does not involve special legal formality.
Limitations of Sole Proprietorship
A sole proprietor generally suffers from the following limitations:
(i) Limitation of management skills: A sole proprietor may not be able to manage the
business efficiently as he is not likely to have necessary skills regarding all aspects of the
business. This poses difficulties in the growth of business also.
(ii) Limitation of Resources: The sole proprietor of a business is generally at a disadvantage
in raising sufficient capital. His own capital may be limited and his personal assets may also
be insufficient for raising loans against their security. This reduces the scope of business
growth.
(iii) Unlimited liability: The sole proprietor is personally liable for all business obligations.
For payment of business debts, his personal property can also be used if the business assets
are insufficient.
(iv) Lack of continuity: A sole proprietary organisation suffers from lack of continuity. If the
proprietor is ill this may cause temporary closure of the business, and if he dies the business
may be permanently closed.
(v) Limited scope of expansion: Expansion is always not easy due to lack of enough funds
to run the business couple with the limited skills possess by the business owner.
PARTNERSHIP
Partnership is an association of persons who agree to combine their financial resources and
managerial abilities to run a business and share profits in an agreed ratio. Since the resources
of a sole proprietor to finance, and his capacity to manage a growing business are limited, he
feels the need for a partnership firm. Partnership business, therefore, usually grows out of the
need for expansion of business with more capital, better supervision and control, division of
work and spreading of risks.
The Partnership Act defines partnership as “Partnership” is the relation between persons who
have agreed to share the profits of a business carried on by all or any one of them acting for
all. The persons who have agreed to join in partnership are individually called “Partners” and
collectively a ‘firm’. A partnership firm can be formed with a minimum of two partners and it
can have a maximum of twenty partners. Partnership may be formed by oral agreement or
by implication or by a written agreement known as deed of partnership.
Features of Partnership
The features of partnership are as follows:
(i) Existence of an agreement: Partnership is formed on the basis of an agreement between
two or more persons to carry on business. It does not arise out of the operation of law as in
the case of joint Hindu family business. The terms and conditions of partnership are laid
down in a document known as Partnership Deed.
(ii) Engagement in business: A partnership can be formed only on the basis of a business
activity. Its business may include any trade, industry or profession. Thus, a partnership can
engage in any occupation – production and/or distribution of goods and services with a view
to earning profits.
(iii) Sharing of profits and losses: In a partnership firm, partners are entitled to share in the
profits and are also to bear the losses, if any.
(iv) Agency relationship: The partnership business may be carried on by all or any of the
partners acting for all. Thus, each partner is a principal and so can act in his own right. At the
same time he can act on behalf of other partners as their agent. Thus, every partner can bind
the firm by his acts.
(v) Unlimited Liability: The liability of partners is unlimited as in the case of sole
proprietorship. In case some obligation arises then not only the partnership assets but also the
private property of the partners can be taken for the payment of liabilities of the firm.
(vi) Common Management: Every partner has a right to take part in the running of the
business. It is not necessary for all partners to participate in the day-to-day activities of the
business but they are entitled to participate. Even if partnership business is run by some
partners, the consent of all other partners is necessary for taking important decisions.
(vii) Restriction on transferability of share: No partner can transfer his share in partnership
to any other person. He may, however, do so with the consent of all other partners.
(viii) Registration: To form a partnership firm, it is not compulsory to register it. However, if
the partners so decide, it may be registered with the Registrar of Firms.
(ix) Duration: The partnership firm continues at the pleasure of the partners. Legally a
partnership comes to an end if any partner dies, retires or becomes insolvent. However, if the
remaining partners agree to work together under the original firm’s name, the firm will not be
dissolved and will continue its business after settling the claim of the outgoing partner.
Partnership Deed
Since partnership rests on an agreement among persons, its formation does not involve any
special legal problems. Generally, the partnership agreement is reduced to preparation of a
detailed Partnership Deed. Partnership Deed is a written document which lays down the terms
and conditions of partnership and the rights, duties and obligations of partners. The following
points are generally covered in the Deed:
(i) The nature of business.
(ii) Name of the firm and the place where its business will be carried on.
(iii) Amount of capital to be contributed by each partner.
(iv) Duties, powers and obligations of all the partners.
(v) Method of preparing accounts and arrangement for audit.
(vi) Whether loans will be accepted from a partner over and above the capital also, if so, at
what rate of interest.
(vii) The amount to be allowed as private drawings by each partner and the interest to be
charged thereon.
(viii) The ratio in which profits are to be shared.
(ix) Whether a partner can be expelled and, if so, the procedure for the same.
(x) Method for the settlement of disputes.
(xi) Circumstances under which the partnership will stand dissolved, and in case of
dissolution, under whose custody the books of accounts will remain.
The Deed has to be stamped and each partner should have a copy of it.
Types of Partnership
There are two types of partnership. They are: General or Ordinary partnership & Limited
partnership
In general partnership, partners are jointly and severally responsible for the liabilities of the
partnership business. The power of control or management of the business shall be divided
equally. The profits and losses will be shared equally whether or not the capital contribution
is the same.
In a limited partnership, there may be one or more general partners while others are limited
partners. The limited partners have their liabilities limited to their investment in the business.
They do not participate in the activities of the business. Their powers in relation to the
business are limited. The general partner(s) has unlimited liability.
Types of Partners
Partners may be classified on the basis of liability, degree of management participation, share
of profit and so on. The following are the various types of partners in practice:
1. Active or general partners: These partners are regarded as the business owners which
has the right to determine the actions of the partnership and are active in the management of
and control of the business organization. This type of partners has unlimited liability to the
business of the partnership.
2. Limited partners: These are individuals who only invest in partnership business and do
not wish to participate in its management. Their liability is limited to the Capital investment.
3. Dormant or sleeping partners: These category of partners contribute to the Capital and
partakes in sharing of profits and the partnership’s indebtedness. These partners only allow
their names to be used in the business, they are neither known as partners by the public nor
participate in the management of the business.
5. Nominal or Quasi partners: Nominal partners only allow their names to be used in the
partnership business. They neither have investment in the business nor partake in the running
of the business; and do not share in its profit.
6. Silent partners: The public knows these partners as owners of the business, but They may
not participate actively in the management of the business. A bank might invest in a business
as a partner but has no time to be actively involved in the management and control of the
business
7. Secret partners: As the name implies, this type of partners take active role in the
management of the partnership business but secretly. Public is not aware of their membership
to the partnership business.
Conditions for Dissolution of a Partnership Business
There are numbers of factors that can warrant the dissolution of a partnership business. Some
of these factors are: -
1. Death or withdrawal of a partner: Partnership business may be dissolved due to the
death of a partner or withdrawal of an active partner.
2. Set Date: At the expiration of a pre-determined period of time by the partners in the
partnership deed, the business can be dissolved.
3. Breach of Agreement: Where there is a breach of the agreement the court may order the
dissolution of a partnership business.
4. By Mutual Agreement: The partners may mutually agree to dissolve the business.
5. Attachment of the partnership objectives.
Merits of Partnership
A partnership form of organisation offers the following advantages:
(i) Ease in formation: A partnership is very easy to form. All that is required is an agreement
among the partners. Even the expenses to be incurred for registration are-not much.
(ii) Pooling of financial resources: A partnership commands more financial resources
compared to sole proprietorship. This helps in expanding business and earning more profits.
As and when a firm requires more money, more partners can be admitted.
(iii) Pooling of managerial stalls: A partnership facilitates pooling of managerial skills of all
its partners. This leads to greater efficiency in business operations. For instance, in a big
partnership firm, one partner can handle production function, another partner can look after
all marketing activity, still another can attend to legal and personnel problems, and so on.
(iv) Balanced business decisions: In a partnership firm, decisions are taken unanimously
after considering all the major aspects of a problem. This ensures not only balanced business
decisions but also removes difficulties in the smooth implementation of those decisions.
(v) Sharing of risks: Unlike sole proprietary organisation, the risks of partnership business
are shared by partners on a predetermined basis. This encourages partners to undertake risky
but profitable business activities.
Limitations of Partnership
A partnership form of organisation suffers from the following major limitations:
(i) Uncertainty of existence: The existence of a partnership firm is very uncertain. The
retirement, death, bankruptcy or lunacy of any partner can put an end to the partnership.
Further, the partnership business can come to a close if any partner demands it.
(ii) Risks of implied authority: It is true that like the sole proprietor each partner has
unlimited liability. But his liability may arise not only from his own acts but also from the
acts and mistakes of co-partners over whom he has no control. This discourages many
persons with money and ability, to join a partnership firm as partner.
(iii) Risks of disharmony: In partnership, since decisions are taken unanimously, it is
essential that all partners reconcile their views for the common good of the organisation. But
there may arise situations when some partners may adopt rigid attitudes and make it
impossible to arrive at a commonly agreed decision. Lack of harmony may paralyze the
business and cause conflict and mutual bickering.
(iv) Difficulty in withdrawal from the firm: Investment in a partnership can be easily made
but cannot be easily withdrawn. This is so because the withdrawal of a partner’s share
requires the consent of all other partners.
(v) Lack of institutional confidence: A partnership business does not enjoy much confidence
of banks and financial institutions. It is because the nature of its activities is not disclosed at
public and the agreement among partners is not regulated by any law. As a result, large
financial resources cannot be raised by partnership and growth of business cannot be ensured.
(vi) Difficulties of expansion: It is difficult for a partnership firm to undertake modernization
of expansion of its operations. This is because of its inability to raise adequate funds for the
purpose. Limited membership (restricted to 20) and their limited personal resources do not
permit large amounts of capital to be raised by the partners.
Therefore, large-scale business cannot generally be organized by partnerships.
It is quite obvious from the discussions that the partnership form of organisation is excellent
when the size of business is medium, i.e. neither too small not too large, and when the
partners can work in full co-operation with one another,
COMPANY
A company is defined as a voluntary association of persons having separate legal existence,
perpetual succession and a common seal. As per the definition, there must be a group of
persons who voluntarily agree to form a company. Once formed, the company becomes a
separate legal entity with a distinct name of its own. Its existence is not affected by change of
members. It must have a seal to be imprinted on documents whenever required. The capital of
a company consists of transferable shares, and members have limited liability.
The company form of organisation is considered to be most suitable for organizing business
activities on a large scale as it does not suffer from the limitations of capital and management
as of other forms of organisation. The sole proprietorship, partnership and co-operative
organisation are not capable of undertaking large scale activity due to lack of adequate capital
and limited managerial abilities. In a company organisation those problems can be easily
overcome. It has the advantage of attracting huge capital from the public due to the limited
liability of members. With adequate capital it can also employ trained and experienced
managers to run the business activities efficiently.
Features of a Company
The following are the chief characteristics of the company form of organisation:
(i) Registered body: A company comes into existence only after its registration. For that
purpose, necessary legal formalities have to be completed as prescribed under the Companies
Act.
(ii) Distinct legal entity: A company is regarded as a legal entity separate from its members.
Thus a company can carry on business in its own name, enter into contracts, sue, and be sued.
(iii) Artificial person: A company is the creation of law and has a distinct entity. It is
therefore, regarded as an artificial person. The business is run in the name of the company.
But because it is an artificial person, its functions are performed by the elected
representatives of members, known as directors.
(iv) Perpetual succession: A company has continuous existence independent of its members.
Death, insolvency, or change of members has no effect on the life of a company. The
common saying in this regard is that members may come, members may go, but the company
goes on forever. The life of the company can come to an end only through the prescribed
legal procedure.
(v) Common seal: Since a company is an artificial person, it has no physical existence. The
activities of the company are carried through a group of natural persons elected by its
members (called directors). Every company must therefore, have a common seal with its
name engraved on it. Anyone acting on behalf of the company must use the common seal to
bind the company.
(vi) Limited liability: The liability of the members of a company is limited. It is limited to
the extent of capital agreed to be contributed. Beyond that amount, the members cannot be
personally held liable for payment of the company’s debts.
(vii) Transferability of shares: The capital of a company is divided into parts called shares.
Normally the shares of a company are freely transferable by its members. However,
transferability is restricted in the case of private company.
Merits of Company
The most important advantages of a company organisation may be stated as follows:
(i) Collection of huge financial resources: The biggest advantage of a company is that it has
the ability to collect large amounts of funds. This is because a company can raise capital by
issuing shares to a large number of persons. Shares of small value can be subscribed even by
people with small savings. In addition, company can also raise loans from the public as well
as different lending institutions. Availability of necessary funds makes it possible for a
company to undertake business activities on a large scale.
(ii) Limited liability: Another advantage of the company form of organisation is the limited
liability of members. With the liability of members limited to the value of their shares,
company is able to attract many people to invest in its shares. It is thus in a position to
undertake business ventures involving risks.
(iii) Free transferability of shares: A company permits its members to transfer their shares.
Free transferability of shares provides liquidity of the member’s investment. Thus, if a
member needs cash he can sell his shares. Or, he can use the same amount to buy shares of
another more profitable company. It enables profitable companies also to attract funds away
from the less profitable ones.
(iv) Durability and stability: A company is the only form of organisation which enjoys
continuous existence and stability. The funds invested in a company by shareholders are not
withdrawal until it is wound up. Also any change in the company’s membership does not
affect its life. As a result of this, a company can undertake projects of long duration and
attract people to invest in the business of the company.
(v) Growth and expansion: With the large resources at its command a company can
organize business on a large scale. Once the business is started on a large scale it gives the
company strength to grow and expand. This is because of high profits, which accrue from the
economies of large-scale organisation and production.
(vi) Efficient management: Since a company undertakes large-scale activities, it requires the
services of expert professional managers. Competent managers can be easily hired by a
company because it commands large financial resources. Thus, efficient management is
ensured in a company organisation.
(vii) Public confidence: A company enjoys great confidence and trust of the general people.
Companies have to disclose the results of their activities and financial position in the annual
reports. The reports are available to the public. It is on the basis of the annual reports and
other information that investment is made in companies.
Disadvantages of Company Organisation
A company organisation suffers from the following limitations:
(i) Lengthy and expensive legal procedure: The registration of a company is a long- drawn
process. A number of documents are to be prepared and filled. For preparing documents
experts are to be hired who charge heavy fees. Besides, registration fees have also to be paid
to the Registrar of Companies.
(ii) Excessive government regulations: A company is subject to government regulations at
every stage of its working. A company has to file regular returns and statements of its
activities with the Registrar. There is a penalty for noncompliance of the legal requirements.
Filing returns and reports involving considerable time and money is the responsibility of a
company. All this reduces flexibility in operations.
(iii) Lack of incentive: The company is not managed by shareholders but by directors and
other paid officials. Officials do not have investment in the company and also do not bear the
risks. As such, they may not be as much motivated to safeguard the interests of the company
as the shareholders.
(iv) Delay in decision-making and action: In large companies, decision making and its
implementation happen to be a time consuming process. This is obviously because individual
managers are unable to take decisions on their own. They may have to consult others which
may take a lot of time. Similarly, after decisions are taken, they have to be communicated to
people working at various levels of the organisation. It also delays the implementation of
already delayed decisions.
(v) Conflict of interest: A company is generally characterized by a large organisation with
many groups operating in it. So long as the interests of these groups do not clash with each
other they work for the good of the organisation. But sometimes, individual and group
interests become difficult to reconcile. For instance, the sales manager may be interested in
the quality of products to satisfy customers and increase sales, but the production manager
may be more concerned with maximum production without regard to the product quality. In
such a situation, the business is bound to suffer in course of time unless there is a
reconciliation of the conflicting view points of the two managers.
(vi) Oligarchic management: The company management may seem to be fully democratic,
but in actual practice, it is the worst form of oligarchy i.e. control by a small group of
persons. People who are once elected as directors of a company adopt various means to get
themselves re-elected over and again. Such individuals often exploit the company for
personal interests instead of working in the interest of shareholders.
(vii) Speculation: In speculation, profit is fought to be made by manipulating prices of shares
without actually holding shares. A company organisation provides scope for speculation in
shares by the directors. Because directors have knowledge of all information about the
functioning of Company, they can use it to their personal advantage. For example, directors
may sell or buy shares knowing that prices will decline or go up because of low or high
profits. As a result of this, innocent shareholders may suffer loss.
(viii) Growth of monopolistic tendencies: A company because of its large size has the
tendency to grow into a monopoly so as to eliminate competition, control the market and
charge unreasonable prices to maximize profits. .
(ix) Influencing government decisions: Big companies are generally in a position to
influence government officials to make decision in their favour. This is because such
companies have large financial resources and are in a position to bribe even high officials.
TYPES OF REGISTERED COMPANY
Registered companies can be classified as follows:
(i) Limited company – (Limited by shares or by guarantee)
(ii) Unlimited company
Limited companies may be limited by shares or guarantee. A company limited by shares is
having the liabilities of its members limited by the memorandum to the amount paid or the
shares respectively held by them. This indicates that in the event of liquidation, members are
only liable to investment on shares held by them.
A company limited by guarantee is one having the liability of its members limited to the
amount members have agreed to respectively contribute to the assets of the company in
meeting the obligation of the creditors in the event of the winding up. This connotes that if
the company’s assets fail to satisfy the claim of its creditors, members may be called upon to
contribute such amount respectively agreed or undertake to contribute to the assets of the
company.
Unlimited company is the one having unlimited liability of its members; this implies that
each member is personally liable for the debt of the company e.g. Joint Stoct Companies
which have now been universally replaced by the corporations.
A company either limited or unlimited may be private or public company.
Private Limited Liability Company: It is defined by the companies and Allied Matters
Decree 1990 as any company, association or partnership consisting of more than two (2) but
not exceeding fifty (50) members coming together in order to carry on any business for profit
gain. This kind of Limited Liability Company cannot sell or buy shares.
Advantages
(i.) It can sue and be sued. It is a legal entity at law.
(ii.) The liability of each member is limited to his investment or shares held in the company.
(iii.) It can raise capital by selling shares to members, this gives tendency of raising better
capital for the business operation..
(iv.) Profit are distributed from dividends according to member’s number of shares
(v.) It enjoys privacy of its operation and account.
Disadvantages
(i.) Shares are not transferrable. This is because the company is not quoted on the floor of
Stock exchange.
(ii.) The limit of 50 imposed on membership also serves as limitation to the capital
accumulation.
(iii.) It cannot invite the public to buy shares and thus limiting the capital.
Public Limited Company: This is a company formed by a minimum number of
Seven (7) persons and a maximum of infinity, and its memorandum shall state that it
is a public company. It can invite the public to buy shares from it.
Advantages
(i.) Ownership is transferable.
(ii.) There is greater possibility of expansion of the business.
(iii.) Greater efficiency is achievable with ease.
(iv.) Public limited liability company enjoys unlimited existence.
(v.) Shareholders’ liability is limited to their contributions numbers of units of shares owned.
Disadvantages
(i.) Double taxation: - Both owners and company are separately taxed.
(ii.) Government restriction: Public Limited Liability Company suffers from Government
regulations from time to time. This most times normally leads to difficulty in the
establishment of Public limited Liability Company.
(iii.) Lack of secrecy: Public Limited Liability Company has no secret, law requires that this
form of business organization should publish their books of account.
Distinction between Private and Public Limited Liability Company
(a.) Number: The minimum number of people to form a private company is two and a
maximum of fifty while, that of public is seven to infinity.
(b.) Appeal for subscription: The public is not allowed to subscribe to shares in private
company while, that is allowed in public company.
(c.) Transferability of Shares: Shares are not transferable in private company without the
consent of members while, it is easily transferable without the consult of any members in
public company.
(d.) Publicity: Private company does not publicize its annual accounts but must lodge a copy
with the registrar of companies while, public companies are bound to publish their account
and as well lodge a copy with the registrar of companies.
(e.) Size: Private companies are small or medium in size while, public companies are usually
large in size.
(f.) Capital: Private companies have limited capital while, public companies have large
capital.
(g.) Ownership & Control: Private Company is owned and controlled by those who
contribute the capital while, public company is owned by the shareholders and controlled by
the board of directors.
(h.) Stock Exchange Market: Shares of the private companies cannot be bought or sold in
the stock exchange market while, shares of public companies can be bought or sold in the
stock exchange market.
Formation of Limited Liability Company
The steps in the formation of a limited liability company can be explained briefly as follows:
Step 1: The promoter(s) devices a scheme of capitalization bearing in mind the cost of
formation, assets to be bought and working capital.
Step 2: The promoter(s) is required to secure the services of a solicitor to prepare certain
documents to be filled with the registrar of company. The documents are:
(i) Memorandum of Association
(ii) Article of Association
(iii.) Statement of Nominal Capital
MEMORANDUM OF ASSOCIATION
This is a document forming the constitution of a company and defining its objectives and
powers with regard to its dealing with outside world. It is the document containing rules and
regulations, which govern the external relationship of a company with outside. It contains the
following information:
1. The name of the company which must end with the word limited
2. The register of free of the company
3. The objectives of the company
4. The amount of authorized capital and the various shares into which it is divided
5. A declaration that the liability of the members is limited
6. The names of the founders of the company and the number of shares taken by them.
ARTICLE OF ASSOCIATION
Article of association is a legal document, secondary in importance of memorandum of
association. The articles of association are the regulations by law which govern the internal
organization and conduct of a company. It is a legal document in which the regulations which
govern the internal management of the company’s affairs, the duties, rights and powers of the
members are stated. It contains the following information:
1. The method of issue of capital
2. The method of holding meeting
3. Defined powers and duties for directors
4. The rights of share holders
5. How directors are to be elected
6. How auditors are to be remunerated
7. Method of sharing dividend
8. Transfer and forfeiture of share.
9. Method of audit.
CO-OPERATIVE ORGANISATION
A co-operative form of business organization is different from other forms of organization. It
is a voluntary association of persons for mutual benefit and its aims are accomplished through
self-help and collective effort. The main principle underlying a cooperative organization is
mutual help, i.e., each for one and all for each. A minimum of 10 persons are required to
form a co-operative society. To be called a co-operative society it must be registered with the
Registrar of Co-operative Societies under the Co-operative Societies Act. The capital of a
cooperative Society is raised from its members by way of share capital. It can also obtain
additional resources by way of loans from the State and Central Co-operative institutions.
A Co-operative society has much in common with partnership, yet there are differences
between the two types of organisation. In partnership, mutual benefit is restricted to partners
only, but in a co-operative society it extends to its members as also the public. For example in
a consumer co-operative store or a co-operative credit society, the benefits are available to
the members as well as the general public. Besides, partnership requires the existence of
some business activity whereas a cooperative may be formed whenever individuals have
common needs, which are difficult to fulfil single-handed. Also, registration is optional in the
case of partnership but it is compulsory for a co-operative society.
Characteristics of Co-operative Organisation
The following are the main characteristics of cooperative societies:
(i) Voluntary association: In co-operatives, the membership is voluntary. Anybody having a
common interest is free to join a co-operative society. The member can also leave the society
any time after giving proper notice.
(ii) Equal voting rights: In a co-operative society, the principle of one-man one vote is
adopted. A member has only one vote irrespective of the number of share(s) held by him.
Thus, a co-operative society is run on democratic principles.
(iii) Separate legal entity: A co-operative society is required to be registered under the Co-
operative Societies Act. Registration provides it a separate legal entity. Its existence is quite
different from its members. The death, insolvency or lunacy of a member does not affect its
existence. It can sue and be sued in its own name. It can make agreements as well as purchase
and sell properly in its own name.
(iv) Service motive: A co-operative society is based on the service motive of its members. Its
main objective is to provide service to the members and not to maximize profits. Earning
profit is the most important objective of other forms of business organisation. It is not so in
the case of co-operatives.
(v) Distribution of surplus: Out of the profits of the cooperative, members are paid dividend
and bonus. The bonus is given according to the volume of business transacted by each
member with the co-operative society. For example, in a consumer co-operative society,
bonus is paid in proportion to the purchases made by members during a year. In producers’
co-operative the valued goods delivered for sale form the basis of distributing bonus.
Merits of Co-operative Organizations
The co-operative form of organisation offers the following advantages:
(i) Easy to form: A co-operative society is voluntary association and may be formed with a
minimum of ten adult members. Its registration is very simple and can be done without much
legal formalities.
(ii) Open membership: Membership in a Co-operative organisation is open to all having a
common interest . A person can become a member at any time he likes and can leave the
society by returning his shares without affecting its continuity.
(iii) Democratic management: A co-operative society is managed in a democratic manner. It
is based on principle of one man one vote. All members have equal rights and can have a
voice in its management.
(iv) Limited liability: The liability of the members of a cooperative society is limited to the
extent of capital contributed by them. They don’t have to bear personal liability for the debts
of the society.
(v) Stability: A co-operative society has a separate legal existence. It is not affected by the
death, insolvency, lunacy or permanent incapacity of any of its members. It has a fairly stable
life and continues to exist for a long period.
(vi) Economical operations: The operation of co-operative society is quite economical due
to elimination of middlemen and the voluntarily services provided by its members.
(vii) Government patronage: Government gives all kind of help to co-operatives, such as
loans at lower rates of interest and relief in taxation.
(viii) Other benefits: Certain non-economic benefits are also derived by members through
cooperatives. Credit cooperatives, for instance, promote habits of thrift and producers’ co-
operative encourage joint activity among members.
Limitations of Co-operative Organizations
As against the above-mentioned advantages of cooperatives the following limitations and
drawbacks of this form of organisation must also be noted:
(i) Limited capital: Co-operatives are usually at a disadvantage in raising capital because of
the low rate of return on capital invested by members.
(ii) Inefficient management: The management of a cooperative society is generally
inefficient because the managing committee consists of part-time and inexperienced people.
Qualified managers are not attracted towards a co-operative on account of its limited capacity
to pay adequate remuneration.
(iii) Absence of motivation: A co-operative society is formed for mutual benefit and the
interests of individual members are not fully satisfied. There is no direct link between effort
and reward. Hence members are not inclined to put in their best efforts in a co-operative
society.
(iv) Differences and factionalism among members: Once the initial enthusiasm about the
co-operative ideal is exhausted, differences and group conflicts arise among members. Then
it becomes very difficult to get full cooperation of the members. The selfish motives of
members begin to dominate and service motive is sometimes forgotten. But the society
continues because it functions in the interest of members.
(v) Rigid rules and regulations: Excessive government regulation and control over Co-
operatives affect their functioning. For example, a Co-operative society is required to get its
accounts audited by the auditors of the co-operative department and submit its accounts
regularly to the Registrar. These regulations and control may adversely affect the flexibility
of operations and the efficiency of management in a co-operative society.
 TOPIC THREE
SMALL SCALE BUSINESS ENTERPRISE
3.1 MEANING OF SMALL BUSINESS
There is no general acceptable definition of small scale business. Small scale businesses have
been defined differently by various individuals and organizations such that an enterprise that
is considered small in one place is seen differently in another. Even within a country, the
definition changes over time, depending on the policy focus per time. The differences in
government policies, economic strength and political ideology lead to different definitions.
The following are the various definitions put forward by individuals and organizations:
a. An industry with total capital employed of over N1.5 million but not more than
N50million, including working capital but excluding cost of land and or a labour size
of 10-100 workers (National Council of Industries July 2001).
b. A company whose annual turnover is not more than N2million or whose net assets
value (net worth) is not more than N1million. (No. 1 of 1990 section 376 sub-section
2 of Companies Allied Matters Decree).
c. Organization having investments (i.e. capital, land, building and equipment up to
N60,000 including (pre-SAP value) and employing not more than fifty persons; Small
Scale Industries Association of Nigeria).
d. Those enterprises that cost not more than N500,000 including working capital, to set
up (Federal Ministry of Industries).
e. The Central Bank of Nigeria in its credit guidelines to banks, states that in the case of
commercial banks, small-scale enterprises are those that that have annual turnover not
exceeding N500,000.
f. In the case of Merchant Banks, they are enterprises with capital investment not
exceeding N2million (excluding cost of land) or with maximum turnover not more
than N5million.
g. In the Federal Ministry of Industry’s guidelines to the Nigeria Bank for Commerce
and Industry (NBCI), small scale enterprises are defined as those with total cost not
more than N500,000 (Excluding cost of land, but including working capital).
h. Enterprises with total assets inn capital equipment, plant and working capital not
exceeding N250,000 and employing not more than 50 full time workers (The Centre
for Industrial Research and Development).
i. Enterprises with project cost (investment and working capital) not exceeding
N750,000 to N3million (NNIDB).
j. Small-scale enterprises are defined as those with fixed assets other than land but
inclusive of the cost of new investment not exceeding N10million (National
Economic Reconstruction Fund NERFUND)).
k. In the new industrial policy for Nigeria, small sale industries are defined as those with
total investment of between N1,00,000 and N2million excluding cost of capital but
including working capital. The new policy recognizes what it refers to as micro
(cottage industries, which are defined as those enterprises with investment cost below
N100,000 cost of land excluded, but with working capital).
l. The University of Ife Industrial Research Units defines small-scale industries as one
whose total assets in capital, equipment, plant and working capital are less than
N250,000 and employing fewer than 50 full-time workers.
m. A business of a turnover of less than 1million or 500,000 as well as fewer than 200 or
500 employees (department of Trade UK)
n. Bolton committee (1971) concluded that a small-scale business is the one with the
following three main characteristics:
* Relatively small share of the market
* Managed by owners and part owners in a personalized way without a formal
management structure.
* Not part of a larger organization (e.g. not owned by another larger company).
3.2 COMMON ATTRIBUTES OF A SMALL-SCALE BUSINESS
According to Obasan (2001) in his effort to analyses the survey of scholars Reports on
small scale business, the following can be deduced as common
attributes of every small scale business:-
a. Personalized management
b. Small market share
c. Independence from outside control
d. Limitation of resources, (management, manpower and power)
e. Limited numbers of total assets.
3.3 IMPORTANCE OF A SMALL BUSINESS
The roles/significance of small business in an economy cannot be over emphasized.
They include:-
 Employment generation for the unemployed
 Increase in the number of indigenous industrialists, which brings about real economic
independence.
  Facilitation of effective mobilization and uses of local resources and skills.
 Sources of innovation by encouraging the use of local technology.
 SB enterprises manufacture parts and components for large scale enterprises
 Provision of good avenue for new entrants into business world and an excellent
ground for young entrepreneurs.
 Sources of competition and challenges to the large firms offering of a wide variety of
choice for consumers.
 Assisting in an equitable redistribution of income.
 Mobilization and utilization of domestic savings
 Helps in migrating rural-urban migration.
 Enhances the standard of living of the populace.
3.4 PROBLEMS ASSOCIATED WITH SMALL BUSINESS OPERATIONS IN
NIGERIA
There are so many problems associated with the operation/management of small business
enterprise in Nigeria. Among these problems/challenges are listed below:-
 Poor management
 Under capitalization
 Indiscipline
 Inaccurate feasibility study
 Inadequate technology
 Poor accounting standards
 Competitions
 High rate business future
 Shortage of skills
 Non- disclosure of information
 Embezzlements
 Low productivity
 Religious discrimination at work.
3.5 TYPES OF SMALL BUSINESS
There are common types of business which could be in small scale as follows:-
a. Manufacturing: This is the conversion of agricultural and mineral raw materials into
finished products; the assembling of parts into whole; and fabrication of machinery and
equipment. Typical manufacturing business include: particle board, non-carbonated fruit
drink, fruit concentrate, school chalks, ceramics, potteries, chemical and allied products,
paper and allied products
b. Wholesaling: In this type of business, the entrepreneur acts as intermediary between
manufacturers and retailers in terms of consumer goods. An entrepreneur is also a wholesaler
if he acts as intermediary between manufacturers and industry, commerce, professional and
other buyers in the context of marketing industrial goods. Typical wholesale business are
machinery and equipment supplies, groceries and related products, motor vehicles and
automotive equipment, petroleum and petroleum products electrical goods, drugs, chemical
and allied products.
c. Agriculture: This is the business of farming on small medium or large scale. The following
are typical farm projects that may be operated on small scale: crop production such as maize,
cassava, vegetables and sap rice on about 10acres of land; livestock production such as
poultry, goat and rabbit.
d. Retailing Businesses: These are store retailing direct (house-to-house), mail order
retailing, selling from wagons or roadside stands. Typical retailing business include: eating
places, grocery stores, women’s clothing, building materials and supply stores, shoe store,
gift, novelty and souvenir.
e. Service Businesses: These include: lawn care, translation bureau, piano instruction,
consulting, flower decorating, tutoring, equipment rental, event centres, organizing
seminar/workshops, appliance repair, home typing, baby sitting etc.
3.6 WHY SMALL BUSINESS FAIL AND SINGS OF FAILURE
a. Reasons for Business Failure
 Inadequate management skills
 Inadequate market research and planning
 Inadequate/ Undercapitalization
 High propensity towards risk
 Psychological and physical stress
 Personal habit
 Inaccurate record keeping
 Inability to cope with growth
b. Signs of Business Failure
 Reduction in size of customers
 Low level of production capacity
 Persistent decline in sales volumes
 Increase in losses
 High debt ratio
 Increase in Labour turnover
 Inability to meet overhead expenses
 Negative attitude of employees to work
 Absenteeism
 TOPIC FOUR
STARTING- UP A SMALL SCALE BUSINESS
4.1 INTRODUCTION
Starting a new business from scratch is what most people think of when they consider
becoming entrepreneurs. But this isn’t the only way to get into business. Here’s a
closer look at various ways of starting a business.:
(a.) Starting a New Business
Advantages
a. You’re not hampered by the previous image or equipment of an existing business.
b. You can choose your own location, name and logo, and build your own business
relationships.
c. You can explore new markets and directions.
Disadvantages
a. You have no existing customer base to build on.
b. You’re taking a bigger risk than if you were buying an existing business.
c. Because your business has no track record, it will be harder to find financing.
(b.) Buying an Existing Business
Advantages
a. You gain an established customer base, location and supplier relationships.
b. The business is a known entity with a proven formula and name recognition.
c. You can review the business’s records before buying to make sure it’s profitable.
d. Since the business has a track record, it may be easier to obtain financing
Disadvantages
a. Hidden problems with the business could come back to haunt you—such as debts,
liens or misrepresentations about profitability.
b. The business has a reputation, but is it always a good one?
c. The business’s inventory could be obsolete; its assets and/or goodwill could be
inflated.
d. Employees may be loyal to the former owner, causing management issues.
e. There’s no guarantee the business’s success will continue under your ownership.
(c.) Buying a Franchise
Advantages
a. As a franchisee you become part of a system with a well-known image and proven
products or services.
b. You have the marketing and sales power of the franchisor behind you.
c. You get training and guidance from the franchisor.
d. You’re part of a network and can turn to other franchisees for help.
Disadvantages
a. You don’t have as much freedom as an independent business owner.
b. You must pay ongoing royalties and other fees.
c. You must sign a binding contract that limits your ability to exit the business.
d. The franchisor’s problems—whether financial, image or otherwise—are your
problems, too.
(d.) Home-Based Business
Advantages
a. Working from home is convenient.
b. You save money on commuting, dry cleaning, lunches out and other daily expenses.
c. You have a flexible schedule and can work when you want.
d. You could gain tax advantages since you could deduct the portion of your home
used for business.
Disadvantages
a. Zoning or deed restrictions may prohibit home-based businesses.
b. Working from home can be isolating and lonely.
c. As a home-based business, you will have more difficulty finding financing.
d. Distractions from family or neighbours may make it hard to work.
e. Home-based businesses are often subject to IRS scrutiny.
(e.) Online Business
Advantages
a. Startup costs are lower than with a brick-and-mortar business.
b. You can do business with customers all over the country—or world.
c. Customers appreciate the convenience of accessing your business 24/7.
d. You have the flexibility to do business from anywhere, anytime.
Disadvantages
a. Low conversion rates—on average, only 2 percent of visitors to an e-commerce site
make purchases.
b. Low barriers to entry for an online business mean there is more competition.
c. Visitors have high expectations for online businesses and less tolerance for
problems.
d. Being unable to touch merchandise can make customers less likely to buy.
4.2 STEPS IN STARTING UP A SMALL BUSINESS
The very first question that normally comes to one’s mind on becoming a self- employed
person is that, how will I start –up my own business? The issue of how to start a business has
kept so many people remained in paid job for so many years. This topic therefore is devoted
to exposing some steps and activities to be carried- out in starting and managing a business
venture or organization.
When starting out in business, there are important things to consider. How do I start a
business? There is no single answer to this question. There are a number of factors that
should be investigated when starting a business.
There are different stages of activities to be carried-out in order to arrive at starting a small business.
These activities are as follows;-
1. Conceive/ Develop a business idea

2. Conduct market survey

Market research will tell you if there’s an opportunity to turn your idea into a successful business.
It’s a way to gather information about potential customers and businesses already operating in your
area. Use that information to find a competitive advantage for your business.
Demand: Is there a desire for your product or service?
Market size: How many people would be interested in your offering?
Economic indicators: What is the income range and employment rate?
Location: Where do your customers live and where can your business reach?
Market saturation: How many similar options are already available to consumers?
Pricing: What do potential customers pay for these alternatives?
3. Draw up a Business Plan
Your business plan is the foundation of your business, It is a written document explaining the
totality of the intention of the entrepreneur about the business. A good business plan guides you
through each stage of starting and managing your business. You’ll use your business plan as a
roadmap for how to structure, run, and grow your new business. This shall be discussed fully in the
subsequent topic.
4. Think of how to fund the business
Your business plan will help you figure out how much money you’ll need to start your business. If
you don’t have that amount on hand, you’ll need to either raise or borrow the capital. Fortunately,
there are more ways than ever to find the capital you need. Once you know how much Startup
funding you’ll need, it’s time to figure out how you’ll get it.
Self-funding
Investors
Loans
5. Determine the business location
The location for the business is one of the crucial decisions to be taken early in Startup process.
Your business location determines the taxes, zoning laws, and regulations your business will be
subject to. You'll need to make a strategic decision about which state, city, and neighbourhood you
choose to start your business in.
6. Choose a business structure
The legal structure you choose for your business will impact your business registration
requirements, how much you pay in taxes, and your personal liability. The business structure you
choose influences everything from day-to-day operations, to taxes, to how much of your personal
assets are at risk. You should choose a business structure that gives you the right balance of legal
protections and benefits.
Your business structure affects how much you pay in taxes, your ability to raise money, the
paperwork you need to file, and your personal liability. Different business structures are the forms
of business earlier discussed in this course.
7. Choose a Business Name

8. Register your business

Entrepreneurs need to find out if they need to register their businesses or not in order for the
business to be a distinct legal entity. How and where you need to register depends on your business
structure and business location. For most small businesses, registering the business is as simple as
registering your business name with state and local governments.
In some cases, you don’t need to register at all. If you conduct business as yourself using your legal
name, you won’t need to register anywhere. But remember, if you don’t register your business, you
could miss out on personal liability protection, legal benefits, and tax benefits.
The agency of the government saddled with the responsibility of business registration in Nigeria is
called Corporate Affair Commission.
9. Get federal and state tax ID numbers
You’ll use your employer identification number (EIN) for important steps to start and grow your
business, like opening a bank account and paying taxes. It’s like a social security number for your
business. Some — but not all — states require you to get a tax ID as well.
10. Apply for licenses and permits
Most small businesses need a combination of licenses and permits from both federal and state
agencies. The requirements — and fees — vary based on your business activities, location, and
government rules.
You'll need to get a federal license or permit if your business activities are regulated by a federal
agency. Check to see if any of your business activities are listed here, and then check with the right
federal agency to see how to apply. Requirements and fees depend on your business activity and the
agency issuing the license or permit. It's best to check with the issuing agency for details on the
business license cost.
 TOPIC FIVE
IDENTIFY NEED FOR KEEPING, AND ANALYSIS OF SIMPLE RECORDS
3.1 INTRODUCTION
The term “record keeping” refers to the orderly and disciplined practice of storing business
records. Record keeping is one of your most important responsibilities as a small business
owner. The success of your business depends on creating and maintaining an effective record
system, whether your business is a sole proprietorship, partnership, or corporation.

Record keeping ranges from simple manila folder filing systems to complex on-line
electronic systems. Whether simple or complex, a record keeping system must be easy to use
and provide adequate storage and retrieval of records. Most importantly, the record keeping
system you choose must be suited to your particular business needs. The type, size, and
complexity of your business, as well as your business’ available resources, will help to
determine the record keeping system best suited to you and your business.

3.2 REASONS FOR KEEPING RECORDS

Record keeping is not solely about fulfilling regulations or legal requirements. Record
keeping is also about understanding your business, now and in the future. Reasons why you
should keep good records include:
• Detail Tracking
• Planning
• Legal compliance
• Tax preparation (federal, state, and local)
1. Detail Tracking
Owning a small business will require you to track a significant amount of information, such
as customers, sales, and inventory. Without a proper record keeping system, you may lose
sight of important business details, leading to problems with serving your customers. If you
do not know details about your customers, such as who your customers are and what your
customers like, your business may not be able to meet buyer demands. You risk disappointing
a customer, maybe losing that customer forever. Staying informed of customers, their orders,
and the inventory to provide for their purchases is challenging. Without a proper record
keeping system, tracking important details of your business may be impossible.
2. Planning
Proper record keeping helps to plan your business’ future. How does a business owner who
fails to track his customers determine inventory needs for the next quarter, year, or longer?
For example, what if you own a clothing store? Clothing store owners must anticipate the
need for inventory throughout the year, due to seasonal cycles. By knowing if and when
inventory will be needed, you can anticipate the need to finance inventory. You also can
avoid carrying too little or too much inventory, such as extra swimsuits into the fall season.
3. Legal Compliance
As an owner, you will likely execute contracts and be required to hold various licenses and
permits. As an employer, you will be required to maintain and report employee payroll for
tax purposes. Contracts, Leases, and Other Agreements Having a good system for
maintaining contracts is critical. Most business owners sign contracts for services, sales,
financing, leasing, or purchasing, to name a few contract types. You may need to refer back
to a contractual obligation. You may also need to refer to activities in contracts as the
activities are executed. For your own protection, keep track of contractual obligations by
always maintaining originally signed copies of all legally executed contracts.
4. Licenses and Permits
Local, state, federal, and international governments require various business licenses and
permits. Some business activities require a license or permit. Licensing and permitting
examples include:
• City business license
• Doing business as (DBA) statement
• Seller’s permit
• Home occupation use permit
• Food preparation permit
Professions such as an accountant, an architect, or a building contractor require state
licensure. Be sure to check with government agencies and professional associations that
govern your line of work. Once you have the required licenses and permits for your business,
you may be required to show these licenses and permits from time to time. Contractors may
be required to show proof of insurance. Establish your business with a good system for
maintaining and regularly renewing licensing and permitting documents to protect the
business from penalties, fines or other legal action. Payroll and Personnel If you hire
employees, your record keeping capacity needs to be advanced enough to comply with
numerous local, state, and federal payroll and personnel legal requirements. Depending on
the number of employees you hire, your business may require a payroll service. Otherwise, if
your record keeping and accounting capacity is still developing, consider hiring independent
contractors or hiring through an employment agency. Here is a brief list of some of the
payroll and personnel legal information your business will be required to track: • Hiring and
evaluation documentation • Basis on which wages are paid • Social Security Numbers
3.3 RECORDS FOR SMALL BUSINESS ENTERPRISE

Stock records
Identify need for stock Identify dangers in stock keeping (Explain why businesses need stock
+ possible disadvantages)
 COURSE OUTLINE SIX
KEEPING SIMPLE FINANCIAL RECORDS
6.1 INTRODUCTIUON

6.2 DIFFERENT FINANCIAL RECORDS FOR SMALL BUSINESS ENTERPRISE

6.2.1 Simple Accounts

(a.) Simple cash in & out

(b.) Simple cash control system

(c.) Simple cashbook

6.2.2 Cashflow
(a.) Prepare cash flow statement

(b.) Predict future cash flow

6.2.3 Profit & Loss Statement

(a.) Prepare P&L statement

(b.) Analyse P&L statement

6.2.4 Balance Sheet

(a.) Prepare Balance Sheet

(b.) Analyse Balance Sheet
 TOPIC SEVEN
BUSINESS PLAN FOR A SMALL-SCALE ENTERPRISE
7.1 CONCEPT OF BUSINESS PLAN
The business plan is simply a document that contains information about the business.
The business plan is otherwise known as feasibility plan. It is a written document that spelt
out where the business is heading to and in detailed how the business will reach its
destination. Business plan can also be defined as a written document describing the nature of
the business, the sales and marketing strategy, the financial background, and containing a
projected profit and loss statement.
The information in the business plan should be current and accurate – supported by facts. It
should be easy to read and use. If used properly, it will be an important tool in guiding the
business. A business plan will provide the business owner and manager with a road map or
path to follow so as to have direction and focus. It will be used as a tool on which to base the
business decisions.
A business plan can help you determine whether the venture will be viable or not. The plan
forces the owner to look at each aspect of the business under a magnifying glass to ensure
you have researched all areas before starting your business.

A business plan is also a road map that provides directions so a business can plan its future
and helps it avoid bumps in the road. The time you spend making your business plan
thorough and accurate, and keeping it up-to-date, is an investment that pays big dividends in
the long term.
The business plan helps the business to focus all its activities in organized matters on
reaching that destination of the objectives. Therefore, a business plan can be looked at as a
written presentation that carefully explains the following:-
1. Business;
2. Its management team;
3. Its products/services as well as;
4. Its goals.
It also includes the strategies that will assist in reaching these goals.

7.2 PURPOSE OF BUSINESS PLAN

Different small business owner or business manager draws business plan for varieties of
reasons. While some embark on this activity in order to have back-up for winning a contract
from other big organizations, other draw up business plan to serve as collateral for picking
loans from finance houses. Let us consider the following reasons why it is essential for
prospective entrepreneurs to have a well written business plan: -
1. Instrument for Direction:-It gives the prospective small scale business owners a
directional focus. It serves as director to the business executors.
2. Entrepreneurs’ Evaluator: - It serves as a document which evaluates the
feasibility of the entrepreneur creative thinking process. Business plan helps the small
scale business owners and executors to ascertain how feasible and viable a proposed
business is.
3. Business Resources Evaluation: - It assists to evaluate the adequacy of the planned
resources for the business and where necessary, where and how to source for additional
resources.
4. Competence of the Management Team: - It shows the competence and the capability of
the proposed management team; most especially when such business plan will be used to
source for capital.
5. Market share determination: - Through a well written business plan, market share can be
determined to a great extent. Small business owners can get to know the share of the market
that their proposed business can control in the target market.
6. The finance structure of the proposed business is seen at a glance: - A well written
business plan will reflect at a glance the proposed possible sources of financing the business,
income and expenditure structure, etc
7. Operational Guide: - During the implementation period, the document still serves
asa guide in ensuring that the prospective entrepreneur has a focus.
7.3 COMPONENTS OF BUSINESS PLAN
There are many specific points that should be included in a successful business plan. A
general outline or standard format and layout of a business plan is given as follows:
1 The Lower Sheet/Page: This will include:-
(a) Full name of the business
(b) Full street addres
(c) Mail address
(d) Phone number/fax and e-mail
(e) Contact name and title
(f) Date of plan
2. Table of Content: This consists of the lists of main headings including graphs,
tables, etc.
3. Summary: Highlighting important aspect of the plan.
4. Products and or Services Plan: This will include:
(a) The business
(b) The product and
(c) The industry.
5. Marketing Plan: This will include:
(a) Outline the 4’ Ps. (product, price, promotion, and place)
(b) Competitive advantage
(c) Customers, market size, competition and market evaluation.
6. Operations’ Plan
(a) Focus on facilities, manufacturing, capability and equipment
7. Management Plan: This includes the management team, list of all directors,
consultants, advisers and key professionals which will be involved in the business.
Please note that there is a need to attach their C.V.s as appendices.
8. Financial Plan: This will include:
(a) Start-up capital
(b) Projected income
(c) Projected balanced sheet
(d) Projected cash flow statement
(e) Projected capital equipment
9. Appendices: Here, all pieces of evidence such as CVs, product brochure,
testimonials and news articles may be attached.

EXPLANATION ON THE ABOVE POINTS

Product or Service Plan: This section should briefly describe the product or service, to
which it will be sold and the current trend of the industry and so on.
Market Plan: This is a critical section should specific the business marketing goals, how
they are going to achieving them. Proper attention should be paid to the 4Ps and they should
be discussed in detail.
Operation Plan: This section focuses on facilities, manufacturing capability as well as
available equipments. If the business is into manufacturing, it will help to include four plans
as well as future space plans. The length of this section will depend on whether it is a service
or product business. If it is the latter, it would depend on how technical the business is.
Management Plan: The quality of the management team often determines the potential
success of the business. List all directors, consultants, advisers and other key professional
who will be involved in the business. Indicate whether the team has worked together in the
past. Detailed resume of the key management should be included of the appendices. The
management plan therefore, must include an organizational structure of the business. Also,
present or current proposed salary structure for those on board and others later coming on
board should be well stated.
Financial Plan: This aspect of the business has to prove above reasonable doubt that the
business has a potential to be operated profitable. It will also explain how much money is
needed to stand and operate the business, how the business will be financed and additional
funds required. Issues such as BEP, pricing policy and cash flow positions have to be
addressed. Also, supporting projected income statement, balance sheet and cash flow
statement for a three years (3yrs) period would have to be provided.
Aside the above stated format for drawing business plan, the under listed can also be of good
help for a start-up venture.
Typical structure for a business plan for a start- up venture
 cover page and table of contents
 executive summary
 business description
 business environment analysis
 industry background
 competitive analysis
 market analysis
 marketing plan
 operations plan
 management summary
 financial plan
 TOPIC EIGHT
RECORD KEEPING IN SMALL SCALE BUSINESS
8.1 INTRODUCTION
Records are very important documents for business transactions. It is essential to keep
records of business operations starting from the beginning to the time that the business has
become operational. Records of business transactions are always kept for future use in
determining the future course of actions.
8.2 KINDS OF RECORDS
(i.) Financial Records
(ii.) Personnel Records
(iii.) Production activities’ Records
(iv.) Purchasing Records
(v.) Marketing & Sales Records etc
The most important of the above listed records is the financial record. This is important
because it assists the business in various ways.
8.3 SIGNIFICANCE OF KEEPING FINANCIAL RECORDS
There are varieties of significant of record keeping to small business enterprises. Records
remain a vital instrument for business growth and development. The following are some of
the importance:
i. To assist in detection of possible employee’s frauds, theft, waste and any error so that costs
can be minimized and remedial measure can be taken promptly.
ii. To identify trade creditors, amount owed and the due date of collection.
iii. To know how much the business is owing and when such debts are due for payment
iv. To permit easy measurement of a business efficiency and profitability
v. To enhance easy comparisons of business efficiency between current period and post or
between two different units e.g. branches of the business.
vi. To permit prompt filing of suppliers and corporate customers information.
vii. To present clear and easily accessible information about employees e.g. their dates of
employment ages, qualifications and other past correspondences.
viii. To provide clear and appropriate reports for management and financers
ix. To show the total worth of a business assets and liabilities at the end of the required period
usually annually.
x. To permit prompt filing of reports and their retrieval when needed especially by the
government.
8.4 TYPES OF FINANCIAL RECORDS FOR SMALL SCALE BUSINESS
(a) Working Capital: This is the capital required for running a business operations from day
to day. This includes cash, account receivables, inventories and marketable. Adequate funds
should be made available to ensure smooth operations of the business. This is because bills
would be settled, supplies would be needed, raw material would be procured and other
regular expenses would be incurred.
(b) Fixed asset Capital: Fixed asset consists of tangible long lasing property of a business
such as machines, equipment, furniture, fixtures and fittings, others include intangible assets
such as goodwill and copyright, while tangible asset are needed to enhance protection and
success in the market place.
(c) Fixed Security Investment: This includes stocks or shares and contingency funds.
Redeemable investment that can be converted into cash through the secondary market (stock
exchange), Dividends from shares can boost capital expansion for small business and cushion
the effect of losses or unexpected expenses.
(d) Promotional Expenses Capital: Promotion is a marketing function involved in
communicating with consumers using tolls such as advertising, sales promotion, personal
selling, publicity and public relations. The application of these tools is very necessary for
achieving marketing objectives. Therefore, a small business owner must make provision for
these expenses.
(e) Fund for Personal expenses: A small business - owner needs to create a purse or account
for personal expenses, whether he operates his business or full time or part time basis. This is
to avoid tampering with the business funds which can obstruct the smooth operations of the
business.
REFERENCES
1. Aderounmu, Ayo (2005): Small Scale Business Enterprises management for
Future Managers Revised Edition, Abeokuta, Ayomi Publications.
2. Aninkan, O. O. & Awoniyi, M. I. (2017). Introduction to Business, Series One,
Forward Ever Prints, Ijebu Ode.
3. Obasan, K. A. (2001): Small Business Management- An Entrpeprenuerial
Approach, Ikeja, Higher Education Books Publishers.
4. Obikoya, J. O. & Ashiru, A. T. (2001): Introduction to Business, Ago iwoye,
CESAP.
5. Inegbenebor & Osaze, (1999). Introduction to Business, Onisha, Pauthouse
6. Simple Steps for Starting Your Own Business, SCORE Association in partnership with
Bank of America.
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