Essay on Starting a New Business | Business Management

After reading this essay you will learn about:- 1. Introduction: Starting a New Business 2. Why do People Enter Into Business ? 3. Ways of Entering into Business 4. Promotion 5. Problems.

Essay on Starting a New Business

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Essay Contents:

1. Essay on the Introduction: Starting a New Business
2. Essay on Why do People Enter Into Business ?
3. Essay on the Ways of Entering into Business
4. Essay on the Promotion of Business Enterprise
5. Essay on the Problems in Starting and Operating a Business Unit

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Essay # 1. Introduction: Starting a New Business:

Starting a business involves the use of resources to achieve a given objective. Every human being engaged in some form of business activity of producing, distributing and exchanging goods and services. This project report is devoted to the discussion of the objective of and problems relating to starting and operating a business by a person or group of persons as a proprietor or co-owners, partners or shareholders in expectation of profit subject to readiness to bear the risks involved.

Business enterprise is concerned with the skilful and careful application of the human, material and monetary resources towards the accomplishment of one’s aspirations and ambitions. Establishing an enterprise is an exercise in resource mobilising and in risk taking with a view to earn income or profit out of the chosen operations.

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Essay # 2. Why do People Enter Into Business?

People enter into business with the purpose of getting profits as return on the capital invested by them. But there are other motives too.

(i) Livelihood:

Small businessmen start some petty shops with their limited capital and ability to earn their livelihood.

(ii) Profit:

Profit, the surplus margin between income and costs, is the substantive stimulating factor underlying starting of a business enterprise. The real enterprising businessman seeks not merely to earn a living or interest on his capital but also to acquire additional return or reward for risk -bearing and for the managerial and organisational ability.

Those who intend to establish their enterprise are primarily lured by prospects of profit but at the same time they have to be ready to face risks, i.e., possible loss in business and, sometimes, of the capital itself.

(iii) Social Recognition:

In the modern society, businessmen are regarded as resourceful and they are honoured by the society. Wealthy and capable businessmen figure prominently in the public estimation. It is, therefore, natural for a person to start a business enterprise that would give him social prestige.

(iv) Public Service:

The desire to promote the welfare of the community may motivate some people to enter into business. As Spriegel said “business provides an excellent opportunity for social and economic service of the highest order.” Attitude of service and social approval may generate greater psychic rewards than monetary gains. Such incentives may result in the manufacture of standard quality of goods leading to higher profits.

(v) Personal Satisfaction:

To some people business is a means of living and to many others it is a way of life-the practical embodiment of their mode of thinking. They enter into business in order to channelise their creative urge. Many people like to be independent and strive to develop their dynamic talents without servings under any masters.

(vi) Power:

Power too is a strong motivation force in entering a business. Business enables the entrepreneur and managers to possess powers over productive resources, employed workers and earned profits. The prospect of becoming a boss lures many people into business.

(vii) Protection of the Family Estate:

Many times individuals inherit a business and they would like to run it in order to protect their family property and tradition and prestige.

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Essay # 3. Ways of Entering into Business:

People desirous of entering a business may acquire ownership of a business unit in the following ways:

(i) By Buying Shares:

They may buy shares of joint-stock companies engaged in or proposed to be engaged in the manufacturing, marketing or any other type of business operations.

(ii) By Starting own Firm:

Some people may start their own firm or acquire an existing firm operating in a particular line of business with their own funds supplemented by borrowed funds. They are owner-cum-managers .

(iii) By Gift or Inheritance:

There are many who assume ownership of business by gift or inheritance.

(iv) By Promotion:

Nowadays, mostly, large-scale enterprises are started by the technical cum financial process of investigation. Every new business is the result of an idea conceived by persons with flair for business. Those who originate the idea of starting a company, follow it up by testing the worth of the idea and finally bring up a company, in its legal structure after completing the formalities and backing it with their efforts to mobilise money, men and materials are called promoters.

Promoters may or may not be interested in seeking powers of management. Their main function is to conceive the idea of worth, while business and “sell the idea” in concrete from to the organisation he builds up.

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Essay # 4. Promotion of Business Enterprise:

Promotion signifies the aggregate of activities designed to bring into being an enterprise to operate a business. It pre supposes the technical processing of a commercial proposition with reference to its potential profitability. The meaning of promotion and the steps to be taken in promoting a business are discussed in brief hour.

Meaning of Promotion:

Promotion of a company refers to the sum total of the activities of all those who participate in the building of the enterprise upto the organisation of the company and completion of the plan to exploit the idea. It begins with the serious consideration given to the ideas on which the business is to be based. Gerestenberg has defined promotion as “the discovery of business opportunities and the subsequent organisation of funds, property and management ability into a business concern for the purpose of making profit therefrom”.

Person or persons who undertake all these activities are known as promoters.

Stages in Promotion of a Company:

Promotion involves following steps:

1. Discovery of Business Opportunities

2. Assembling

3. Preparation of a Financial Plan or Financing the Proposition.

1. Discovery of Business Opportunities:

When a person or persons get an idea that there is the possibility of starting a new business to take advantage of the untapped natural resources or new invention, discovery of some business opportunities begins.

Such an idea may also be to start a business unit to supply the product at a lower price by breaking the monopoly of existing concern in a particular line of business or to expand an existing concern by converting partnership into private limited company or into public limited company or by combining some going concerns. But the promoter cannot go ahead immediately after such an idea strikes him.

Discovery of an idea will mean following steps:

(i) Conception of an idea:

When a person or persons, called promoters, understand that there is a possibility of starting some business concern, the idea is said to have been conceived.

(ii) Investigation:

Before money is invested to exploit the idea conceived thorough and detailed investigation of commercial feasibility of idea with reference to sources of supply, extend of demand, present and potential competition, the amount of capital necessary etc. is absolutely essential.

The idea must be put to “the rigid test of cold fact of costs and inflexible law of experts like engineers, values, accountants, statisticians, marketing experts etc., who prepare a report on the position of the market, present and potential competition, amount required for the fixed assets like land, buildings, machinery, furniture etc.”

The report would also include the survey of supply positions of raw material, labour, transport facilities and other relevant items of expenditure. Such an investigation gives the critical appraisal of the idea conceived and reveals whether the idea is commercially feasible or not.

(iii) Verification:

The report submitted by the investigators must not be accepted without getting it verified by separate team of impartial, disinterested experts. Mistakes are likely to creep into the investigators’ report.

This may be due to the wrong selection of the investigators or because of prejudiced interest or optimistic view of the investigators. Mistakes may also occur because of collection of figures from the non-reliable sources or due to the wrong interpretations of the data collected by the investigators.

Therefore, dispassionate and impartial opinion of the experts of the investigators must be taken to correct any shortcomings in the methods and contents of investigation.

2. Assembling:

After verification of the investigators report if the result of verification is favourable, promoters go ahead with the promotion of the projected company. The next step which promoters have to take is to give their idea a pattern which may look like a going concern.

This involves bringing together or assembling of original idea, property and managerial ability. At this stage wide range of activities such as selection of a site and taking an option for the lease or purchase of land, arrangement for the construction of buildings, purchase of equipment, securing of patent rights and entering into contracts with persons for technical, managerial, office and factory jobs are all to be undertaken by the promoters.

3. Preparation of a Financial Plan or Financing the Proposition:

After assembling or mobilising all the factors required for giving the idea the form of a business concern, promoters have to proceed with the preparation of a financial plan for the proposed concern. While preparing the financial plan promoters have to keep in mind that adequate funds have to be provided for launching the enterprise as going concern with title to the necessary property.

Also, sufficient amount of cash in hand and adequate margin for contingencies must be considered.

For this promoters give a thought to the choice of different kinds of securities such as share and debentures as source of raising the required finance. They may enter into contact with the underwriting houses for the subscription of these securities. They may also come to an agreement with the banks for raising loans for the working capital requirements.

Types of Promoters:

Idea of starting new business undertakings originate from a person or a group of persons whom we call promoters.

There are following types of promoters:

1. Entrepreneurs:

Dynamic persons who are gifted with the business acumen conceive the idea of starting business and continue to carry on the affairs of the business enterprise so promoted are known as entrepreneurs.

A large number of small-scale enterprises are brought into being and managed by the promoters themselves. They discover the idea, find out its worth in commercial perspective, organise the activities connected with the idea, assume risks and strive to earn profits by their own efforts.

2. Professional Promoters:

Large-scale enterprises are the creation of thought­ful actions of independent businessmen. They are the gifted personalities compe­tent to visualise varied opportunities of making profits through business activities.

They conceive the idea, investigate the possible costs, revenue and estimate the potential profit margin and assemble the factors of production needed to put the idea into operation. They bring into existence new enterprises, expand old enter­prises or bring about integration and consolidation of existing undertakings.

These promoters are concerned with giving concrete form to the business opportunity. Once the idea is given practical shape, they sell the proposition to the company formed to exploit the idea. They are not usually interested in assuming managerial powers in the enterprises which they seek to promote.

They are only in the lookout for new opportunities which they nourish into business propositions to be entrusted to firms or companies in return for definite remunerations known as promotional remuneration.

3. Technical or Engineering Firms:

Engineers and technological experts sometimes pick up lucrative idea of business promotion. Patents are evolved for manufacturing equipment or product to be used in the related business.

4. Financial Institutions:

Investment banks or industrial banks very often initiate new enterprises or put in proposals for mergers in the process of investigating the financial viability of different enterprises by whom they are approached for financial assistance. Gerestenberg points out that investment banker becomes active in the field of promotion when the securities market is able to absorb new issues of equity security.

5. Government:

The modern states (governments) in a number of countries have taken abiding interest in pioneering basic, strategic and defence industries with a view to speed up the process of development, expand employment opportunities, ensure economic and social justice etc.

In India, as per Industrial policy Resolution the Government has emerged as the leading promoter of prestigious enterprises ranging from steel, coal, shipping, fertilisers, electronics and aircraft to banking, insurance, tourism, hotels, etc.

6. Specialised Institutions:

The Government has set up special institutions to undertake investigation of probable or potential business opportunities that would benefit the community and fill up the gaps in the industrial structure of the country concerned. Industrial Estates and National Industrial Development Corporation of India are the examples of such institutions.

These institutions survey the field, judge the prospects of new business opportunities and conduct investigations. Subsequently the probed and approved propositions may be handed over to the companies in the private sector for follow-up and actual execution.

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Essay # 5. Problems in Starting and Operating a Business Unit:

It has been noted in the preceding pages that conception of an idea is not enough to launch a business enterprise. Before the enterprise is brought into existence promoters have to assess the commercial feasibility of the idea conceived by them.

For this purpose an economic survey has to be undertaken in a given region, city or location. This survey indicates the clear and comprehensive picture of the business planned and measures the extent of profit-earning capacity of the proposed undertaking.

The aim of the survey is to judge how far the operations of the proposed business would result in profit. Profits depend on the sales potential which in turn depends on the design and utility of the product and the probable demand for it in the competitive market. The surveys would also give an idea about the volume of business that can be expected in the given set of conditions.

The problems that need to be tackled in starting a business are as under:

(i) Choosing the product;

(ii) Marketing the product;

(iii) Deciding about the size of the firm;

(iv) Purchasing the materials;

(v) Employing the needed personnel; and

(vi) Raising adequate funds to start the enterprise.

These problems are studied under the following heads:

(i) Product Analysis:

The type of the product or service intended to be produced or rendered influences all other aspects of business. Quick and wide sale ability is the main criterion of production planning. Product analysis primarily means deciding about the kinds of products to be produced and the different sizes and models in the line. The design of each type of product must be planned after careful study of technical and marketing factors.

Consultation with engineering and marketing experts are necessary to evolve suitable designs of the products that would be consistent with the trends in the market. The size, style, colour, shape, workmanship and the finish of the product have to be determined according to the criteria of technical observation and testing.

All the aspects of a product have direct bearing on the consumers’ likes and tastes and the moods of the market. Consumers’ preferences are to be examined to shape the product or the service so that immediate demand would manifest as soon as the goods are released into the market.

In the words of Shubin: “Each item is to be designed for maximum sale ability in a chosen price-field; the product analysis must be made the viewpoint of the prospective consumers.”

Consumers’ interest are focused on the products or services depending on their durability, utility, size, weight, appearance, style, convenience, competitive price, general performance, etc.

The product analysis should closely study the consumers’ psychology and compile data useful for accurate designing and developing the product.

Product analysis includes the survey of the following:

(i) Raw materials required;

(ii) Trained personnel needed;

(iii) Equipment essential;

(iv) Other products in the competing line; and

(v) Quality and performance of the product expected to meet the needs for which product is designed.

The product and its elements are to be designed to tally with the motivations of the prospective customers. Business promotion will be futile if products fail to fit into the need -pattern of consumers.

Hence the fundamental problem in starting a business is to take a crucial decision about the designs of the product vis-a-vis the temper of and the prevailing fashion in the market as well as the desires tastes and needs of the consumers.

(ii) Market Analysis:

The ultimate goal of every enterprise is to sell the products in the market. Therefore, promoters have to explore the diversity and depth of the market for the products or services proposed to be produced.

The assessment of market potential for the product is a key for ascertaining the probable profitability of the enterprise under formation. Over-enthusiasm for a new product without judging the commercial value may land a new or existing enterprise in a crisis.

Costly plant, expensive equipment and highly paid personnel would be of no avail if the production capacity generated is in excess of the current and potential demand. Enterprises started with high ambition may come to grief if the actual sales are lagging behind the rate in output growth.

In the words of Wheeler “The businessman who neglects to estimate his probable volume of sales is courting financial disaster.”

It is obviously essential for businessman to make a thorough and careful check-up of the market demand before investing his capital in new ventures. Estimating the demand in the market involves the exploratory study of the area to be served and the potential number of buyers within the area. Income and buying habits of customers are analysed with reference to the products in view.

The ‘regularity’ or ‘seasonality’ of sales is ascertained as a guide to production, purchasing and manpower requirements. Market analysis implies calculation of possible sales of products if the industry is established.

It comprises the study of:

(i) Who will buy?

(ii) Where these buyers are?

(iii) What will they buy?

(iv) How much they will buy?

(v) When would they buy?

Forecasting of sales over the given period is the aim of market analysis. Market analysis has to study the current demand and potential demand.

Demand depends on the kinds of products -whether these are necessaries, luxuries, etc. If the products are necessaries demand would be steady, in case the products are luxuries demand would be more elastic and would vary according to price changes. If the products are durable goods and have continuous use over a period of time, the demand may fluctuate frequently over the various phases of the trade cycle.

The number of consumers, their standard of living, buying habits, their status, age, their purchasing power, the overall trends in the market and the characteristics of the market are studied to find out the potential demand. The prevailing competition in the product line has also to be assessed before attempts are made to penetrate the market.

A study of the suitable marketing channels is also essential to plan the sales promotion efforts. The promoters have to choose direct channels of selling to the consumers bypassing the middlemen or indirect channels of distributing the products via wholesalers and retailers to consumers.

Need of advertising, approach in customer relations, product guarantees, etc. have to be anticipated. In forecasting marketing potentials the promoters have to take note of secular factors like population growth, changes in technology, variations in tastes and fashions and cyclical factors reflected in the boom, recession, depression and recovery. Pessimistic or optimistic attitudes of consumers would reveal the cyclical influence on demand.

(iii) Objectives and Policies:

After the completion of product and market analysis promoters have to lay down the fundamental objectives and scope of the proposed business operations. An overall plan and policy framework have to be devised on the basis of conclusions drawn consequent to market surveys and forecasts.

The plans and policies are formulated in order to guide the developmental course of the proposed firm in respect of manufacturing and marketing operations, future expansion, adaptability and stability. Finally, the promoters have to evolve a good design of the product keeping in view the trends and moods of the market and suited to technological requirements of the time.

Consumer utility, market stability, flexibility for growth, economical functioning, reasonable price-range etc. would weigh with the promoters in the choice of the shape, size, style, colour and character of the product.

(iv) Size of the Firm:

Determining the size of the firm is an important decision to be taken by the promoters. The size of the undertaking has to be decided on the basis on the market feasibility, technological possibility and availability of finance.

Realization of internal and external economies also influences the scale of production and the size of the firm’s operations. At the inception of the undertaking its size should be fixed solely on the basis of the correct estimates of sales over a given period. If the size is unduly large, the resources invested would be wasteful and the entire operations would not bring in expected profits.

If the size is very small, the firm may not be able to function efficiently and realise the economies of bulk operations. Therefore, that size which would ensure the fulfilment of realistic sales targets for a reasonable period of time will have to be determined. Fuller and optimum use of resources and the expected sales are the main criteria for deciding the size of any proposed undertaking.

In the words of Shubin, “the initial size of the establishment must be based on judicious sales estimates with accurate sales-estimates the firm can avoid investing in an establishment that is too large and expensive to be profitable at the outset but can select a size sufficiently large to take care of the initial sales and their expected increase during the years immediately ahead.”

(v) Location:

Promoters have to take with utmost care the decision regarding the selection of the region and the site where the proposed enterprise is to be established. Location of the enterprise should be guided by the comparative cost conditions as between different areas with reference to the manufacturing and marketing of the products.

Access to raw materials, nearness to markets, adequacy of cheap means of transport, availability of required labour, existence of other infrastructure facilities are the main factors to be reckoned in the choice of the site for locating the enterprise.

(vi) Layout of the Plant:

After the size is selected, the promoters or the entrepreneurs will have to devise a systematic arrangement of the plant, equipment and other physical facilities in order to secure economical, productive operations.

The building of the factory should be sufficient in size and designed to suit the techniques underlying the manufacturing operations.

The plant, machinery, tools, equipment etc. are to be placed in a scientific sequence so as to bring about smooth, uninterrupted flow of output from one stage to another stage of operations.

(vii) Financial Arrangements:

Assessment of financial needs and arrangements for raising the required finance are the most crucial tasks of the promoters. They have to calculate in detail the fixed costs and recurring expenses of the enterprise. In the absence of proper financial data, the enterprise may be bogged down due to paucity of funds at different stages. It is therefore necessary for the promoters “to set forth their proposed capital structure”.

After the nature of business operations is decided, policies are formulated and layout and equipment plans are finalised, it is possible to compute the costs of land, plant, machinery, building, equipment, inventories and other operational expenses for fulfilling the objectives.

The procedure for financing a new enterprise is summarised as under:

(i) Determination of the immediate and future financial needs.

(ii) Classification of the securities to be issued.

(iii) To acquire the funds through sale of securities.

Financial requirements are estimated by ascertaining the amount essential for fixed capital, working capital and costs of organising and promoting the enterprise. Immediate requirements plus estimates of financial needs for probable expansion in future would constitute the bulk of finance to be raised for starting the enterprise with a promise of stability and prosperity.

Fixed capital requirements refer to costs of land, building, plant, tools, equipment and other basic assets needed for starting an enterprise.

Working capital signifies the funds required to cover the expenses for day-to­day operations of the enterprise, such as costs of inventory- raw materials, semi- processed and finished goods-wages and salary of the personnel, overhead costs of maintenance, fuel and power, services, taxes, insurance, etc. and costs of promotion of sales such as advertising, salesmanship, credit facilities, guarantees, after sale service, etc.

Financial arrangements should also include the estimate of preliminary expenses and losses, if any, to be incurred prior to incorporation. After calculating the aggregate requirements of funds, the entrepreneurs should decide how to raise these funds. They can issue securities of different types- equity and preference shares, debentures.

Promoters of large enterprises sell the securities through investment bankers or directly to investors or through underwriters. After the total investments have been calculated and the sales forecasts made, it is possible to compute the expected rate of profit.

(viii) Organisational Structure:

The next step for the promoters, after ascertaining the commercial feasibility of the business opportunities visualised and having made necessary arrangements for the funds needed, is to build up a competent and coordinated internal structure of organisation.

Organisation of the activities into different departments, staffing them, training the staff, controlling their work, evaluating their performance, motivating the personnel are the vital problems to be solved by the initiator of a business enterprise.

(ix) Launching the Enterprise:

After all the surveys and estimates are conducted and their findings indicate the feasibility of starting the enterprise, the entrepreneurs shall have to take practical steps to put the enterprise into actual operations.

Acquisition of land and building, selection of personnel, installation of plant and machinery, arrangement of tools and equipment, purchases and build-up of raw material inventories, announcing the introduction of new products, advertising their utility through different media, all these constitute the concrete steps in launching the enterprise.

Orders for starting the production processes through standard instructions, models, route sheets, and procedures herald the beginning of the new enterprise.

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